CF Bankshares Inc. (filing registrant: Central Federal Corporation) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. The company is a savings and loan holding company whose principal subsidiary, CFBank, is an Ohio community bank focused on commercial and real estate lending and retail and business deposits. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2016 / Mar. 31, 2016 | Comparable / prior date |
|---|---|---|
| Net interest income | $2.666 | $2.436 in Q1 2015 |
| Net interest margin | 3.29% | 3.33% in Q1 2015 |
| Provision for loan losses | $0.050 | $0.075 in Q1 2015 |
| Noninterest income / expense | $0.304 / $2.454 | $0.355 / $2.465 in Q1 2015 |
| Income before taxes / tax expense | $0.466 / $0.150 | $0.251 / $0 in Q1 2015 |
| Net income | $0.316 | $0.251 in Q1 2015 |
| Net income attributable to common stockholders | $0.102; diluted EPS $0.01 | $0.037; diluted EPS reported as $0.00 |
| Total assets / net loans | $353.351 / $300.479 | $351.293 / $297.064 at Dec. 31, 2015 |
| Deposits / FHLB advances | $292.434 / $14.500 | $290.467 / $14.500 at Dec. 31, 2015 |
| Cash and cash equivalents | $24.779 | $25.895 at Dec. 31, 2015 |
| Stockholders’ equity | $38.540 | $38.312 at Dec. 31, 2015 |
Operating cash flow was $0.773 million, investing cash flow was negative $3.363 million, and financing cash flow was $1.474 million. Cash declined $1.116 million during the quarter, ending at $24.779 million. Management reported $79.084 million of available liquidity, including cash, unpledged securities and deposits, borrowing capacity at the FHLB and Federal Reserve, and an unused bank line.
CFBank’s March 31 regulatory capital ratios were 13.69% total capital to risk-weighted assets, 12.43% Tier 1 capital to risk-weighted assets, and 10.89% Tier 1 leverage. The company reported that CFBank was well-capitalized.
Material changes versus comparable periods
- Net income increased 25.9% year over year; common-stockholder income rose from $0.037 million to $0.102 million. Higher net interest income and lower loan-loss provision and noninterest expense contributed, partly offset by higher taxes and lower noninterest income.
- Net interest income grew 9.4%, primarily as average interest-earning assets and loan balances increased. Interest expense rose 18.9%, reflecting higher average interest-bearing deposits and funding costs. Net interest margin narrowed four basis points to 3.29%.
- Noninterest income fell 14.4%, including lower joint-venture-related other income and lower gains on loan sales; deposit service charges increased.
- Net loans grew 1.1% from year-end, with growth in commercial, commercial real estate and multifamily loans partly offset by lower single-family and construction balances. Deposits rose 0.7%; noninterest-bearing deposits declined while interest-bearing deposits increased.
- Nonperforming loans were $1.442 million, up slightly from $1.425 million at year-end. Total past-due loans increased to $2.182 million from $1.390 million. Criticized and classified loans increased $0.440 million, mainly after a commercial/commercial real estate relationship was downgraded.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said the 32.2% Q1 effective tax rate was a reasonable estimate for 2016; full-year results are not assured by the interim results.
- The Q1 tax expense followed the December 2015 reversal of a $3.2 million deferred-tax valuation allowance after seven consecutive quarters of pretax income. Separately, Section 382 limits use of pre-2012 net operating losses; management estimated that $20.520 million of NOL carryforwards would expire unused.
- The company’s cease-and-desist orders had been terminated previously; the remaining specified regulatory commitments ended December 23, 2015 for CFBank and January 8, 2016 for the holding company. The company remains subject to banking supervision and ordinary regulatory restrictions, including limits on bank dividends to the parent.
- Credit risks include deterioration in borrowers’ businesses, collateral values or local economic conditions; management identified the allowance for loan losses as a critical estimate. The allowance was $6.716 million, or 2.19% of loans. Interest-only commercial lines were $17.9 million, and interest-only home equity lines were $20.6 million.
- Other stated risks include interest-rate and funding-cost changes, deposit competition, liquidity and borrowing-capacity constraints, regulatory actions, and the company’s ability to generate profits. Management said liquidity was sufficient for operating needs. It also said the allowance was adequate, while noting future provisions may be needed.
- In May 2016, after quarter-end, the board authorized repurchases of up to 3% of common stock over six months. The filing reports no common-share repurchases during Q1. General litigation was described as ordinary-course and not expected by management to have a material adverse effect.
Key facts for investors to verify
- Whether loan delinquencies, criticized/classified assets and impaired commercial relationships worsen, and whether the allowance remains adequate.
- Whether loan growth can sustain net interest income as deposit costs rise and the net interest margin remains under pressure.
- How much of reported earnings is affected by deferred-tax judgments, NOL limitations and the 2015 valuation-allowance reversal.
- Whether the bank’s reported liquidity and capital remain adequate under changing conditions, and what constraints apply to dividends from CFBank to the holding company.
- Whether the authorized stock repurchase is executed, and its effects on capital and liquidity.