CFB Bankshares / Central Federal Corporation — Q3 2015 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as Central Federal Corporation, parent of CFBank. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
CFBank is an Ohio community bank focused on commercial and real-estate lending, residential mortgages, home-equity lines and deposits. Most loans and deposits are sourced from its Ohio markets.
- Quarter: Net income was $0.330 million, up 15.4% year over year; earnings attributable to common shareholders were $0.116 million, or $0.01 per diluted share.
- Nine months: Net income was $1.048 million versus $0.170 million; common earnings were $0.405 million versus a $0.063 million loss. Diluted EPS was $0.03; the prior-period loss per share was less than $0.01.
- Net interest income: $2.454 million for the quarter, up 0.7%, and $7.346 million for nine months, up 17.7%. Net interest margin declined to 3.17% from 3.49% for the quarter and to 3.24% from 3.26% for nine months.
- Other earnings drivers: Quarterly noninterest income declined 27.4% to $0.324 million, mainly on lower loan-sale gains. Noninterest expense fell 4.9% to $2.398 million. Nine-month noninterest expense rose 4.7% to $7.241 million, including higher salaries, data-processing and loan expenses. No income-tax expense was recorded; a full valuation allowance remained against net deferred tax assets.
Financial position, cash flow and credit
- Total assets were $331.4 million, up 5.0% from year-end 2014. Net loans grew 10.2% to $283.4 million; deposits grew 6.0% to $273.8 million. Growth in single-family residential loans included increased participation in the Northpointe mortgage program.
- Cash and cash equivalents fell $8.1 million to $20.1 million, primarily funding loan growth. Nine-month operating cash flow was $5.616 million, investing cash flow was negative $28.549 million, and financing cash flow was positive $14.827 million.
- Borrowings included $14.5 million of FHLB advances and $5.155 million of subordinated debentures. Stockholders’ equity was $35.1 million.
- Allowance for loan losses was $6.522 million, or 2.25% of loans, and covered nonperforming loans by 437.1%. Nonperforming loans were $1.492 million, 0.51% of loans, versus $1.548 million and 0.59% at year-end. Total past-due loans increased to $2.573 million from $1.148 million; management attributed some of the increase to loans being renewed after maturity.
- Special-mention loans rose to $3.472 million from $2.350 million, while substandard loans declined to $9.886 million from $12.868 million. No loans were rated doubtful. Foreclosed assets were $1.636 million.
- Reported bank capital ratios were 13.77% total risk-based capital and 10.82% Tier 1 leverage. CFBank met its ongoing OCC commitments of 12% total risk-based capital and 8% Tier 1 leverage.
Changes, outlook, risks and contingencies
- Quarterly margin pressure reflected higher funding costs: the average cost of interest-bearing liabilities increased to 1.03% from 0.83%. For nine months, higher earning-asset volume and yield lifted interest income, but increased funding costs absorbed part of the gain.
- Management stated that liquidity was sufficient for operating needs. At September 30, available liquidity sources were reported at $70.618 million, including cash, unpledged securities and deposits, borrowing capacity at the FHLB and Federal Reserve, and an unused commercial line.
- Management considered the allowance adequate, but noted that further loan-loss provisions could be needed if borrower performance, economic conditions or real-estate values deteriorate. The filing provides no specific earnings or margin guidance.
- Both cease-and-desist orders had been terminated in 2014, but regulatory commitments continued. CFBank could not pay dividends or make capital distributions without OCC approval; the holding company remained subject to FRB approval restrictions on dividends, stock repurchases, debt and receipt of bank distributions. Series B preferred dividends also required approval. These constraints limit capital flexibility.
- The company reported a full deferred-tax-asset valuation allowance and said Section 382 limits on tax-loss carryforwards could cause some to expire unused. The filing also describes interest-rate, credit, liquidity, regulatory, market and Ohio economic risks.
- A sale process for the credit-card portfolio was underway; the filing reports a September 30 held-for-sale balance of approximately $163,000. Management said ordinary-course legal claims were not expected to have a material adverse effect; no material pending legal proceeding was identified.
Important facts for investors to verify
- Whether past-due and special-mention loan increases persist, and whether the allowance remains adequate as the loan portfolio grows.
- Credit and concentration exposure from the Northpointe program, including the company’s reported $38.850 million participation balance and its 95% share of participating loans.
- Progress and final proceeds from the credit-card portfolio sale; confirm the reported held-for-sale balance and transaction status.
- Liquidity and capital flexibility under ongoing OCC and FRB approval requirements, including the restrictions on bank distributions and shareholder dividends.
- Whether earnings and taxable income support future recognition of deferred tax assets, given the full valuation allowance and limits on use of loss carryforwards.