CF BANKSHARES INC. annual report, FY2012

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Business context and reporting period

Central Federal Corporation’s Form 10-K covers the fiscal year ended December 31, 2012. The filing describes CFBank, an Ohio community-oriented savings institution focused on commercial, commercial real estate, multifamily and residential lending. The supplied filing text identifies the registrant as Central Federal Corporation, not CF Bankshares Inc.

Financial position and key metrics

  • Total assets were $215.0 million and stockholders’ equity was $23.6 million at year-end 2012.
  • Gross loans were $158.3 million, up 0.6% from $157.3 million in 2011; net loans were $153.0 million. Commercial real estate, multifamily and commercial lending balances continued to contract, while single-family mortgage loans increased.
  • The allowance for loan losses was $5.2 million, or 3.31% of gross loans, compared with $6.1 million and 3.89% a year earlier. 2012 net charge-offs were $2.0 million; provision for loan losses was $1.1 million.
  • Nonperforming loans were $6.4 million, or 4.02% of loans, versus $8.3 million, or 5.28%, in 2011. Nonperforming assets were $7.9 million, or 3.66% of assets. Troubled debt restructurings totaled $3.7 million.
  • CFBank’s regulatory capital ratios at year-end were 10.97% core capital, 14.26% Tier 1 risk-based capital and 15.53% total risk-based capital. Despite exceeding the Order’s stated minimums, the Bank was not considered well-capitalized while subject to the Order.
  • Average deposits fell to $193.1 million from $233.1 million in 2011; the average rate paid was 1.20%, down from 1.30%. Certificates of deposit represented 59.1% of average deposits.
  • At year-end, CFBank had $32.1 million in brokered deposits and $10.0 million in FHLB advances. Cash, unpledged securities and deposits at other financial institutions totaled $37.1 million, which management said covered brokered-deposit maturities. FHLB advances were limited to maturities of 30 days or less.
  • The holding company had $4.7 million in cash and cash equivalents and projected cash requirements of about $100,000 per month; management estimated this would cover approximately four years of expenses at projected levels.
  • The filing text provided here does not give clear consolidated revenue, net income or loss, cash-flow totals, net interest margin, or comprehensive debt totals; the financial statements and MD&A are incorporated by reference to the 2012 Annual Report to Stockholders.

Material changes versus the prior comparable period

  • In August 2012, the Company completed a common-stock offering of 15.0 million shares at $1.50 per share, generating $22.5 million gross proceeds. It contributed $13.5 million to CFBank and used proceeds to redeem its TARP obligations in September 2012.
  • Nonperforming loans declined from $8.3 million to $6.4 million, primarily due to $2.6 million in charge-offs, loan payments and collateral-sale proceeds; new nonperforming loans partly offset the improvement.
  • Commercial real estate and multifamily balances fell $21.0 million, or 21.7%, during 2012. Gross loans overall edged higher, partly reflecting a new mortgage purchase program that held $25.4 million of purchased loans at year-end.
  • Average deposits decreased by $40.0 million. The Company reported lower CDARS balances and stated it intended not to renew high-cost certificates as they matured.
  • Single-family mortgage loans originated for sale totaled $30.5 million, down 15.5% from 2011; management attributed part of the decrease to having six fewer mortgage originators.

Outlook, risks, contingencies and unusual items

  • Cease-and-desist Orders issued in 2011 remain in effect. They impose capital, lending, asset-reduction, growth, brokered-deposit and dividend restrictions; deviations from the business plan require regulatory approval. The Company expected additional compliance costs and warned that failure to comply could prompt further restrictions or enforcement action.
  • CFBank could not pay dividends to the holding company without prior regulatory approval. The holding company’s liquidity therefore depends in part on its available cash and any future permitted subsidiary dividends.
  • CFBank’s FDIC waiver allowing renewal of reciprocal CDARS deposits was granted for 90 days, from March 14 through June 12, 2013; continued access to waivers was uncertain.
  • Interest-rate swaps could be called by the counterparty because CFBank was not considered well-capitalized. The potential payment was $1.0 million at year-end 2012 and could rise if rates declined.
  • The Company reported $25.9 million in net operating loss carryforwards but said a 2012 ownership change limited use of pre-offering carryforwards to $163,000 per year. It concluded $20.3 million could expire unused and reduced deferred tax assets and the valuation allowance by $6.9 million. A full valuation allowance remained against net deferred tax assets.
  • Management noted that nonperforming assets could remain historically high in the near term and that further loan-loss provisions may be needed if borrower performance, economic conditions or real estate values deteriorate. Ohio economic conditions, commercial-credit concentration, interest rates, deposit competition and regulatory costs were identified as significant risks.
  • Management said commercial lending activity and balances appeared to be stabilizing in the fourth quarter of 2012; commercial real estate and multifamily activity might also be stabilizing. No quantified forward earnings guidance is provided in the supplied text.

Most important facts for investors to verify

  1. Review the incorporated annual report’s statements and MD&A for revenue, earnings, cash flows, margins, liquidity ratios and full debt details, which are not clear in the supplied text.
  2. Track compliance with the regulatory Orders, progress in reducing criticized and classified assets, and whether regulators modify or terminate the Orders.
  3. Assess credit quality beyond headline nonperforming-loan totals, including charge-offs, troubled debt restructurings, collateral values and allowance adequacy.
  4. Monitor deposit runoff and maturities, brokered/CDARS renewal permissions, available borrowing capacity and the holding company’s cash needs.
  5. Confirm the effect of the stock offering, TARP redemption, tax-attribute limitations and any potential swap call on capital, earnings and shareholder dilution.