Business context and reporting period
Unaudited Form 10-Q for the three and six months ended June 30, 2017. The filing identifies the registrant as Central Federal Corporation, parent of CFBank, National Association, an Ohio-focused commercial bank serving businesses and retail customers. The bank converted from a federal savings association to a national bank in December 2016.
Financial performance and position
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $3.402 | $2.835 | $6.468 | $5.501 |
| Provision for loan losses | $0 | $0.160 | $0 | $0.210 |
| Net income | $0.556 | $0.422 | $0.960 | $0.738 |
| Net income attributable to common stockholders | $0.341 | $0.207 | $0.531 | $0.309 |
| Diluted earnings per common share | $0.02 | $0.01 | $0.03 | $0.02 |
| Net interest margin | 3.50% | 3.41% | 3.32% | 3.35% |
- Q2 interest income rose 17.2% to $4.184 million; interest expense increased 6.4% to $0.782 million. Net interest income grew 20.0%.
- Q2 noninterest income declined 39.0% to $0.177 million, mainly due to lower deposit service charges and joint-venture activity. Noninterest expense increased 17.7% to $2.753 million, led by salaries and benefits, FDIC premiums, data processing and occupancy.
- At June 30, total assets were $431.6 million, down 1.0% from year-end 2016. Net loans and leases were $365.8 million, up 5.7%; deposits were $369.3 million, down 1.6%; and stockholders’ equity was $40.0 million, up 1.8%.
- Cash and cash equivalents were $34.2 million, down $23.7 million from year-end, primarily as loan growth used cash. Six-month operating cash flow was $2.6 million; investing cash flow was negative $19.6 million and financing cash flow was negative $6.7 million.
- Debt included $13.5 million of FHLB advances and $5.2 million of subordinated debentures. The debentures bear a variable rate of 3-month LIBOR plus 2.85% (4.00% at quarter-end), creating rate sensitivity.
- CFBank’s actual regulatory capital ratios were 12.60% total capital, 11.35% Tier 1 and common equity Tier 1, and 10.16% leverage; each exceeded the filing’s applicable minimums for well-capitalized status.
Material changes versus comparable periods
- Net income increased 31.8% in Q2 and 30.1% for the first half. Management attributed the improvement primarily to higher net interest income and no loan-loss provision, partly offset by higher operating expenses and lower noninterest income.
- Loan growth supported interest income, while the first-half net interest margin eased to 3.32% from 3.35%, reflecting lower average yield on earning assets.
- Nonperforming loans rose to $1.098 million from $0.704 million at December 31, 2016 (0.29% of loans versus 0.20%). The allowance for loan and lease losses was $6.958 million, or 1.87% of loans, versus 1.96% at year-end.
- Past-due loans increased to $2.175 million from $1.559 million. Criticized and classified loans overall declined by $0.680 million, according to management.
- Deposits shifted toward noninterest-bearing balances: these totaled $85.1 million versus $72.8 million at year-end, while interest-bearing deposits fell to $284.2 million from $302.6 million. Brokered deposits, including CDARS, increased to $35.5 million from $29.7 million.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management said current liquidity was sufficient and planned to open a Glendale, Ohio branch in the third quarter of 2017.
- Management cited loan growth, new customer relationships and staffing investments as priorities. It considered the allowance adequate but noted that future provisions could be needed if borrower performance, economic conditions or real-estate values weaken, or if regulators require adjustments.
- Liquidity resources totaled $116.3 million: $36.5 million in cash, unpledged securities and deposits, plus stated additional FHLB and Federal Reserve borrowing capacity and an unused $8.0 million commercial line. Management cautioned that borrowing capacity depends on collateral, credit performance and lender policies.
- Credit concentration and execution risks include Ohio market exposure, commercial and real-estate lending, and interest-only loans. The filing reports $22.8 million of interest-only commercial lines and $20.7 million of interest-only home-equity lines at quarter-end.
- One commercial real-estate loan of $0.841 million was modified as a troubled debt restructuring (TDR) during Q2. Total TDRs were $3.829 million; no TDRs were in payment default during the first half. A separate real-estate property held as foreclosed assets was sold in Q2.
- The company remains subject to extensive banking supervision, although prior cease-and-desist orders and related commitments had ended. Common dividends are constrained by regulatory rules and the outstanding Series B preferred stock; preferred dividends and discount accretion reduced common earnings by $0.215 million in Q2 and $0.429 million for the first half.
- The company is evaluating the expected-credit-loss standard (CECL); management said the eventual impact could include a higher loan-loss allowance, but it could not reasonably estimate the impact. Management identified interest rates, liquidity, credit quality, economic conditions, regulation, competition and operational/security events among material risks.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. It reported no material change in risk factors from the 2016 Form 10-K and no pending legal matter believed likely to have a material adverse effect.
Important facts for investors to verify
- Confirm the registrant identity: this supplied filing is for Central Federal Corporation, not an entity named CF Bankshares Inc.
- Track whether loan growth continues to convert into earnings and whether deposit outflows, funding costs or lower net interest margin pressure profitability and liquidity.
- Review trends in nonperforming, past-due, criticized and TDR loans, and whether the $6.958 million allowance remains adequate as the portfolio grows.
- Verify the sustainability of earnings given zero provision expense, declining noninterest income, higher personnel costs, and preferred-stock charges to common earnings.
- Monitor brokered deposits, available borrowing capacity, variable-rate subordinated debt, regulatory capital and restrictions on common dividends.
- Assess the actual impact and implementation readiness for CECL, and the costs and results of the planned Glendale branch expansion.