Business context and reporting period
This is Central Federal Corporation’s Form 10-K for the fiscal year ended December 31, 2011. The filing identifies CFBank as its principal operating subsidiary and describes a community bank serving Ohio markets. The company primarily gathers deposits and makes commercial, commercial real estate, multifamily and residential loans. The request metadata names CF Bankshares Inc.; the registrant named in this filing is Central Federal Corporation.
Key financial metrics
| Metric | Reported value |
|---|---|
| Total assets, year-end | $250.9 million |
| Stockholders’ equity, year-end | $9.9 million |
| Gross loans, year-end | $157.3 million |
| Securities, year-end | $18.5 million fair value |
| Allowance for loan losses (ALLL) | $6.1 million; 3.89% of loans |
| Nonperforming assets | $10.7 million; 4.25% of assets |
| FHLB advances | $15.7 million |
| Cash, unpledged securities and deposits at other institutions | $64.0 million |
| CFBank regulatory capital ratios | 5.39% core; 9.02% Tier 1 risk-based; 10.30% total risk-based |
The supplied filing text refers readers to the incorporated 2011 Annual Report for the consolidated income statement, cash-flow statement and MD&A, but does not provide clear values for revenue, net income or loss, operating cash flow, net interest margin, or other profitability margins. It states that the company had not generated profits in three years.
Material changes versus the prior comparable period
- Gross loans fell $43.2 million, or 21.6%, from $200.5 million at year-end 2010, reflecting reduced lending amid weak conditions, capital constraints and regulatory restrictions.
- Nonperforming loans declined to $8.3 million from $10.1 million; nonperforming assets fell to $10.7 million from $14.6 million. The decline in nonperforming loans was primarily attributable to $7.5 million of charge-offs, as well as payments and collateral-sale proceeds, partly offset by new problem loans.
- Net charge-offs rose to $7.0 million from $5.8 million. The provision for loan losses decreased to $3.4 million from $8.5 million, and the ALLL fell from $9.8 million to $6.1 million.
- Troubled debt restructurings (TDRs) were $4.6 million at year-end, versus $0.8 million in 2010. The filing attributes much of the increase to implementation of amended accounting guidance, which resulted in $8.4 million of loans modified during 2011 being identified as TDRs.
- Securities declined to $18.5 million fair value from $28.8 million. Average deposits were broadly stable at $233.1 million versus $233.7 million, while the average deposit rate declined to 1.30% from 1.56%.
Outlook, management commentary, risks and unusual items
- Going concern: The independent auditor expressed substantial doubt about the company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis and do not include adjustments that might be required if operations cannot continue.
- Regulatory orders and capital: Cease-and-desist orders issued in May 2011 require CFBank to maintain 8% core capital and 12% total risk-based capital. It missed the September 30, 2011 deadline and remained below those thresholds at year-end. Management said it did not expect additional material restrictions or penalties if sufficient capital were raised, but that outcome was not assured.
- Proposed equity offering: The company announced an offering of up to $30 million: a rights offering of up to $25 million and a $5 million standby purchase. The standby purchasers’ commitment was conditioned on the rights offering producing at least $16.5 million in net proceeds. The filing describes the offering as pending; it does not establish that it was completed.
- Liquidity: Holding Company cash was $607,000 at year-end, estimated to cover about six months of projected expenses at then-current levels. The company relied on the offering for additional working capital. CFBank was restricted from paying dividends without regulatory approval, and the Holding Company’s projected cash needs were approximately $100,000 per month.
- Funding constraints: CFBank could not accept or renew brokered deposits without FDIC approval; it had $53.9 million of brokered deposits outstanding. The filing reports that available cash, unpledged securities and deposits at other institutions were sufficient to cover brokered-deposit maturities. FHLB advances were limited to maturities of no more than 180 days, and Federal Reserve borrowing was available only through the more restrictive secondary-credit program.
- Loan and market risk: Management expected problem assets to remain high in the near term and said lending balances could continue to decline. Weak Ohio economic conditions, falling real estate values, unemployment, concentrated commercial and real estate exposures, and potential further credit losses could pressure earnings and capital.
- Swap contingency: Because CFBank was not well-capitalized, swap counterparties could demand payment. Based on year-end valuations, an immediate payment of approximately $1.0 million could be required; if swaps were called and not replaced, the filing estimated a net $1.0 million expense over the related loans’ remaining lives, subject to valuation changes.
- Other constraints: Preferred-stock dividends and subordinated-debt interest payments had been deferred to preserve cash. The company also faced Nasdaq minimum-bid-price noncompliance, with a July 9, 2012 deadline to regain compliance, and a possible delisting risk.
Important facts for investors to verify
- Whether the registered stock offering closed, its net proceeds, and whether the proceeds were sufficient to meet regulatory capital and Holding Company liquidity needs.
- Current capital ratios, regulatory compliance status, and any amendments, extensions or enforcement actions related to the orders.
- Current earnings, cash flows and net interest margin from the incorporated annual report, and whether operations returned to profitability.
- Subsequent trends in nonperforming loans, TDRs, charge-offs, foreclosed assets and ALLL adequacy.
- Brokered-deposit renewals and maturities, borrowing availability, and the status and potential cost of the interest-rate swaps.
- Whether Nasdaq listing requirements were regained and the implications of deferred TARP preferred dividends and subordinated-debt interest.