CF Bankshares Inc. (Central Federal Corporation) — Q2 2018 Form 10-Q
Business context and reporting period. The filing is by Central Federal Corporation, parent of CFBank, National Association. The unaudited quarter and six-month periods ended June 30, 2018 are compared with the same 2017 periods. CFBank operates primarily in Ohio and focuses on business banking, commercial and real estate lending, and residential mortgage activity.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $4.35 | $3.40 | $8.26 | $6.47 |
| Noninterest income | $0.73 | $0.18 | $1.21 | $0.34 |
| Noninterest expense | $3.67 | $2.75 | $7.08 | $5.37 |
| Net income | $1.13 | $0.56 | $1.92 | $0.96 |
| Net income attributable to common stockholders | $1.12 | $0.34 | $1.88 | $0.53 |
| Diluted earnings per common share | $0.05 | $0.02 | $0.08 | $0.03 |
| Net interest margin | 3.43% | 3.50% | 3.42% | 3.32% |
- At June 30, assets were $558.9 million, up 16.1% from year-end 2017. Net loans and leases were $470.6 million, up 15.8%; loans held for sale were $26.4 million, versus $1.1 million at year-end.
- Deposits were $488.1 million, up 16.5% from year-end. Cash and cash equivalents were $32.7 million, down from $45.5 million.
- FHLB advances and other debt totaled $19.5 million, including a $6.0 million holding-company credit-facility borrowing; subordinated debentures were $5.2 million. Stockholders’ equity was $42.4 million.
- For the six months, operating cash flow was negative $23.3 million and investing cash flow negative $64.4 million; financing cash flow was positive $75.0 million. Ending cash was $32.7 million. Management attributed the cash decline primarily to funding loan growth and mortgage activity.
- The loan-loss allowance was $7.0 million, or 1.46% of loans. Nonperforming loans were $0.388 million, or 0.08% of loans. No loan-loss provision was recorded in either 2018 comparison period.
- CFBank’s regulatory capital ratios at June 30 included total capital of 11.97%, common equity Tier 1 of 10.71%, and leverage of 9.56%; the bank reported that it was well capitalized.
Material changes and management commentary
- Q2 net income rose 103.2% year over year; six-month net income rose 100.2%. Net interest income increased with loan and earning-asset growth, partly offset by higher funding costs. Q2 net interest margin declined 7 basis points year over year, while the six-month margin increased 10 basis points.
- Loan-sale gains were $0.509 million in Q2 and $0.817 million for six months, compared with $0.024 million and $0.047 million, respectively, in 2017. Management linked the increase to mortgage-business expansion. Higher personnel and advertising costs accompanied that expansion.
- The effective tax rate fell to 19.8% for Q2 and 19.5% for six months, from 32.7% and 33.2%, respectively, mainly reflecting the federal corporate tax-rate reduction to 21%.
- Special-mention loans rose to $8.3 million from $6.0 million at year-end, including two commercial real estate loans downgraded in Q1. Management said the allowance was adequate but noted that deterioration in borrower performance, economic conditions, or real estate values could require future additions.
- Brokered deposits, including qualifying CDARS deposits, were $81.4 million, up 73.3% from year-end; management cited short-term funding needs related to mortgage-business balance fluctuations and funding loan growth. Management stated liquidity was sufficient and reported $140.4 million in cash, unpledged securities, and available borrowing capacity.
- In late July, after quarter-end, the holding company increased its credit facility limit from $6 million to $8 million. The company gave no earnings or revenue guidance in the supplied filing text.
Risks, contingencies, and unusual items
- Key exposures include Ohio regional economic conditions, interest-rate movements, deposit competition and funding costs, loan quality, collateral values, and execution of the expanding mortgage business. The filing says market risk had not materially changed from the 2017 Form 10-K and reports no material changes to risk factors.
- The company’s mortgage purchase program held $34.7 million of short-term, pre-sold mortgage participations at quarter-end; CFBank holds a 95% participation and allocates no allowance to these loans, citing their short holding period.
- Adoption of the expected-credit-loss standard (CECL) was expected to have the potential to increase the allowance; management was still assessing the impact, which it said could not then be reasonably determined. No material adverse outcome from ordinary-course litigation was anticipated by management.
- The 2012 ownership change limits use of certain tax-loss carryforwards; management estimated $20.5 million of NOLs would expire unused. The deferred tax asset was $1.6 million, with no valuation allowance at June 30, 2018.
Investor verification priorities
- Verify the sustainability and composition of mortgage-sale gains and the associated growth in loans held for sale, rate-lock commitments, and mortgage-related costs.
- Assess deposit mix and pricing, including the increase in brokered/CDARS funding, and the impact of higher interest costs on future net interest margin.
- Review criticized and classified loan trends, especially commercial real estate exposures, and test allowance adequacy against portfolio growth and CECL adoption.
- Confirm cash-flow demands from loan growth, borrowing capacity and collateral availability, and the terms and post-quarter increase of the holding-company credit facility.
- Monitor regulatory capital buffers, common-share dilution from warrants and equity awards, and the realizability of tax assets subject to NOL limitations.