CF BANKSHARES INC. / CENTRAL FEDERAL CORPORATION — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing’s registrant is Central Federal Corporation, parent of CFBank, National Association; the supplied text does not include the full financial statements incorporated from the 2018 Annual Report. Accordingly, several income-statement and cash-flow figures are not clear from the filing text provided.
Business context
The company is an Ohio-focused commercial bank serving Columbus, Cleveland, Cincinnati, Akron and Columbiana County, with residential mortgage lending extending nationally. Its lending and deposit gathering are concentrated in Ohio. The business emphasizes commercial, commercial real estate, multifamily, construction and residential lending, alongside business and retail banking.
Key financial and operating metrics
| Metric | FY 2018 / December 31, 2018 | Comparison / context |
|---|---|---|
| Total assets | $665.0 million | Not stated in the supplied text for 2017 |
| Stockholders’ equity | $45.6 million | Not stated in the supplied text for 2017 |
| Gross loans | $557.7 million | Up $144.3 million, or 34.9%, from $413.4 million |
| Commercial, CRE and multifamily loans, including construction | $389.7 million; 69.9% of gross loans | Up $113.5 million, or 41.1% |
| Single-family residential loans | $138.4 million; 24.8% of gross loans | 27.0% of gross loans at year-end 2017 |
| Consumer loans | $29.5 million; 5.3% of gross loans | Up $4.1 million, or 16.2% |
| Allowance for loan and lease losses | $7.0 million; 1.26% of loans | 1.69% at year-end 2017; no provision expense in 2018 |
| Nonperforming assets | $415,000; 0.06% of assets | $470,000; 0.10% of assets in 2017 |
| Available-for-sale securities | $10.1 million fair value | $11.8 million in 2017 |
| Average deposits | $478.3 million; average rate paid 1.59% | $369.1 million and 1.05% in 2017 |
| Cash, unpledged securities and deposits at other institutions | $68.0 million | Year-end liquidity measure |
| Borrowings | $13.5 million FHLB advances; $6.0 million parent-company credit-facility balance | Parent facility limit was increased to $10.0 million; $4.0 million remained available |
Average net interest margin, total revenue, net income, earnings per share, operating expenses, and cash flow from operations are not clearly provided in the supplied filing text. The annual report containing the financial statements and MD&A is incorporated by reference.
Material changes and notable items
- Loan growth was rapid, with gross loans increasing 34.9%. Commercial, commercial real estate, multifamily and construction lending made up a larger share of the portfolio.
- Single-family mortgage originations for sale were $233.9 million, up from $22.8 million in 2017, reflecting expansion of the leads-based mortgage business and increased sales activity. Management noted that higher mortgage rates could reduce production and gains on loan sales.
- Average deposits rose to $478.3 million from $369.1 million, while their average rate increased to 1.59% from 1.05%. Brokered deposits were $101.2 million at year-end. Certificate accounts totaled $273.7 million.
- In December 2018, the parent issued $10 million of 7.0% fixed-to-floating subordinated notes due 2028. It also expanded and converted its third-party credit facility to a revolving line, with $6.0 million outstanding at year-end.
- Credit indicators improved: nonperforming loans declined to $377,000 from $470,000; the allowance was 1,859.9% of nonperforming loans. The filing reports $3.1 million of performing troubled debt restructurings, largely commercial real estate, outside nonperforming loans.
- Management reported no material change in internal control over financial reporting during the fourth quarter and concluded controls were effective as of year-end.
Outlook, risks and contingencies
- The filing provides no specific financial guidance or quantified outlook. Management described continued growth ambitions but cautioned that growth can strain operating systems, controls and management capacity.
- Key exposures include Ohio economic conditions, commercial and commercial real estate concentration, construction lending, borrower repayment capacity, collateral values and rising-rate sensitivity. Adjustable-rate loans may raise borrower payments as rates increase.
- Funding risks include higher deposit costs and reliance on brokered deposits; certificates of deposit represented 46.0% of average deposits. Parent-company liquidity and debt service depend partly on dividends from CFBank, which may require OCC non-objection while the bank has an accumulated deficit.
- Management considered the allowance adequate but warned that deterioration in borrower performance, economic conditions or real estate values could require higher provisions. Regulatory examinations may also result in additional required reserves.
- Other disclosed risks include competition, cybersecurity and third-party service-provider incidents, loan-sale repurchase or indemnification obligations, regulatory changes, and transition away from LIBOR. The company expected to adopt CECL on January 1, 2020; adoption could increase credit-loss allowances and reduce retained earnings and regulatory capital.
- The company reported no pending legal proceeding that management believed would materially adversely affect financial condition or operations. The filing also describes possible recapture of approximately $473,000 related to pre-1988 thrift bad-debt reserves under specified circumstances.
Most important facts for investors to verify
- Review the incorporated annual report for 2018 and 2017 revenue, net income, EPS, net interest margin, detailed cash flows, full deposit balances and regulatory capital ratios.
- Assess whether rapid loan growth and the rising concentration in commercial, real estate and construction lending were matched by underwriting capacity, capital and allowance coverage.
- Examine the mix, maturity and renewal pricing of brokered deposits and certificates, and quantify funding-cost sensitivity against asset repricing.
- Confirm the terms, covenants and repayment obligations of the subordinated notes and parent revolving credit facility, and the availability of bank dividends to service parent obligations.
- Track subsequent credit quality, including performing TDRs, construction and commercial real estate exposures, and any changes in the allowance or nonperforming assets.