CFBank / Central Federal Corporation — Q1 2015 Form 10-Q
Business context and reporting period
The filing is for the three months ended March 31, 2015. Central Federal Corporation is a savings and loan holding company whose banking business is conducted primarily through CFBank, an Ohio community bank focused on commercial, real estate and consumer lending. Amounts below are in millions unless otherwise noted; the filing presents financial statements in thousands.
Financial results and position
- Profit: Net income was $0.251 million, versus a $0.214 million net loss in Q1 2014. Preferred dividends and discount accretion of $0.214 million left $0.037 million attributable to common shareholders; basic and diluted EPS rounded to $0.00, versus a $0.01 loss per share.
- Interest income and margin: Interest income was $3.018 million, up 37.0%; interest expense was $0.582 million, up 31.7%. Net interest income increased 38.3% to $2.436 million. Net interest margin improved to 3.33% from 3.02%.
- Other income and expenses: Noninterest income rose 44.9% to $0.355 million, including higher loan-sale gains. Noninterest expense rose 12.0% to $2.465 million, notably from increased staffing, data processing, advertising and foreclosed-asset costs. The loan-loss provision was $0.075 million, versus $0.020 million.
- Balance sheet: Total assets were $317.9 million, up 0.7% from year-end. Net loans increased 3.6% to $266.3 million; deposits increased 0.9% to $260.7 million. Cash and equivalents declined to $23.9 million from $28.2 million, primarily to fund loan growth.
- Credit quality: Allowance for loan losses was $6.442 million, or 2.36% of loans, versus 2.39% at year-end. Nonperforming loans increased to $2.007 million from $1.548 million, and were 0.74% of loans versus 0.59%. Past-due loans rose to $2.790 million from $1.148 million. Criticized and substandard balances declined, respectively, to $2.1 million and $11.2 million.
- Cash flow and liquidity: Operating cash flow was $2.167 million, compared with $0.041 million in Q1 2014; investing cash flow was negative $8.982 million and financing cash flow was positive $2.502 million. Cash decreased $4.313 million during the quarter. Management reported total liquid assets and available borrowing capacity of $69.3 million, including $14.7 million of additional FHLB capacity and $30.5 million of FRB capacity.
- Debt and capital: FHLB advances were $14.5 million and subordinated debentures were $5.155 million, both unchanged from year-end. CFBank’s actual total risk-based capital ratio was 13.49% and Tier 1 leverage ratio was 11.17%; it met the OCC’s continuing minimums of 12% and 8%, respectively. Stockholders’ equity was $34.7 million.
Material changes versus the prior comparable period
- Net income improved by $0.465 million from Q1 2014, primarily reflecting $0.675 million higher net interest income and $0.110 million higher noninterest income, partly offset by higher operating expense and loan-loss provision.
- Average interest-earning assets grew, and the average yield on those assets increased; the resulting margin improvement accompanied substantial growth in loan balances.
- Loan growth was concentrated in single-family residential and construction lending. Nonperforming and past-due loans increased, despite reductions in criticized and substandard loan categories.
- Compared with December 31, 2014, interest-bearing deposits increased while noninterest-bearing deposits declined; total deposits rose modestly.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said liquidity was sufficient for operating needs and strategic plans and believed the allowance was adequate, while noting that future provisions may be needed if credit or economic conditions deteriorate.
- Both prior cease-and-desist orders had been terminated, but regulatory commitments remained. CFBank must maintain heightened capital ratios and obtain OCC approval for distributions; the holding company requires FRB approval for dividends, stock actions and certain debt. The holding company paid a $0.187 million Series B preferred dividend for the quarter after receiving approval.
- Management cited risks including Ohio economic conditions, interest-rate and real-estate-value changes, loan losses, funding and liquidity, regulatory requirements and expenses, competition, and operational or technology disruptions. It stated that market risk had not materially changed from the 2014 Form 10-K and that risk factors had not materially changed.
- The company recorded no income tax expense or benefit, maintaining a full valuation allowance against deferred tax assets. Pre-2012 net operating loss utilization is limited; management estimated that $20.520 million of carryforwards would expire unused.
- Management reported effective disclosure controls and no material first-quarter change in internal control over financial reporting. It reported no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether increases in past-due and nonperforming loans persist, and how criticized, substandard and impaired loans evolve.
- Whether loan growth, especially residential, construction and mortgage-purchase-program exposures, generates adequate risk-adjusted returns and remains appropriately reserved.
- Whether net interest margin and deposit costs hold up as funding needs and market rates change.
- Available liquidity and borrowing capacity, including collateral requirements and the effect of credit or regulatory changes on access to facilities.
- Continuing OCC and FRB commitments, capital thresholds and restrictions on bank-to-holding-company distributions and shareholder dividends.
- The effect of preferred dividends, potential conversion of Series B preferred stock and outstanding warrants on common shareholders’ economics and dilution.