CFBankshares Inc. (Central Federal Corporation) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is by Central Federal Corporation, the holding company for CFBank, National Association; financial amounts below are consolidated and in U.S. dollars.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $3.50 million | $2.94 million | $9.97 million | $8.44 million |
| Provision for loan losses | $0 | $20,000 | $0 | $230,000 |
| Noninterest income | $195,000 | $350,000 | $538,000 | $944,000 |
| Noninterest expense | $2.68 million | $2.51 million | $8.06 million | $7.31 million |
| Net income | $685,000 | $505,000 | $1.65 million | $1.24 million |
| Net income attributable to common stockholders | $471,000 | $291,000 | $1.00 million | $600,000 |
| Diluted earnings per common share | $0.03 | $0.02 | $0.06 | $0.04 |
| Net interest margin | 3.47% | 3.32% | 3.37% | 3.34% |
- At September 30, 2017, total assets were $448.9 million, up 2.9% from year-end 2016. Net loans and leases were $387.7 million, up 12.0%; total deposits were $381.0 million, up 1.5%.
- Cash and cash equivalents were $28.0 million, down $30.0 million from year-end, principally reflecting loan growth. Securities available for sale were $11.9 million.
- Liabilities included $19.0 million of FHLB advances, up $5.5 million, and $5.2 million of subordinated debentures. Stockholders’ equity was $40.6 million.
- Nine-month operating cash flow was $464,000, versus $1.67 million in 2016. Investing activities used $40.75 million; financing activities provided $10.30 million. Ending cash was $28.0 million.
Changes and management commentary
- Q3 net income rose 35.6%; nine-month net income increased 32.3%. Net interest income grew 19.3% for the quarter and 18.2% year to date, primarily from higher average earning assets and loan growth.
- Expense growth and lower fee income partly offset higher net interest income. Service charges fell, mainly from lower overdraft fees; management cited increased staffing to support commercial lending, operations, credit, technology and growth.
- Credit indicators were mixed: nonperforming loans increased to $1.04 million from $704,000 at year-end, and past-due loans rose to $4.04 million from $1.56 million. However, criticized and classified loans declined by $3.2 million, and the allowance for loan and lease losses was $6.96 million, or 1.76% of loans. No loan-loss provision was recorded in the first nine months; the period included net recoveries of $39,000.
- Management considered the allowance adequate but noted it could need to increase if borrower performance, economic conditions or collateral values deteriorate. The allowance estimate is a critical accounting judgment.
- CFBank reported capital ratios above applicable well-capitalized thresholds: total capital 12.22%, common equity Tier 1 10.97%, and leverage 9.99% at September 30. Liquidity sources, including cash, unpledged securities and borrowing capacity, totaled $113.7 million, down from $127.6 million at year-end. Management said liquidity was sufficient; capacity depends partly on collateral, credit performance and borrowing conditions.
- On October 6, 2017, after quarter-end, all 480,000 Series B preferred shares converted into approximately 6.86 million common shares. This ends preferred dividends beginning in Q4 (about $187,500 quarterly, or $750,000 annually), but increases the common share count. The filing reported 23,137,665 common shares outstanding as of November 1.
- CFBank opened a Glendale branch in the Cincinnati market during Q3. Management provided no specific earnings or growth guidance.
Risks, contingencies and other notable items
- The company operates mainly in Ohio and identifies local economic conditions, interest-rate changes, loan demand and credit quality, real-estate values, deposit competition, liquidity, growth execution, regulatory oversight, technology and cybersecurity, and litigation as risks.
- Brokered deposits, including CDARS balances, were $40.5 million, up $10.7 million from year-end. The company remains subject to extensive regulatory supervision, though prior cease-and-desist orders and related commitments had been terminated.
- Subordinated debentures bear variable interest at three-month LIBOR plus 2.85% (4.15% at quarter-end); rising rates could increase debt service. Management reported no material change in market risk from the 2016 Form 10-K.
- Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect; no material pending legal proceeding was identified. No material risk-factor changes were reported.
- The company is evaluating the expected-credit-loss accounting standard; management said the impact could include a higher allowance, but could not yet reasonably estimate it. No full-year results are assured by the interim results.
Important facts for investors to verify
- Whether loan growth is translating into sustainable earnings while deposits, cash and borrowing needs evolve.
- The causes and trajectory of rising nonperforming and past-due loans, including commercial real-estate exposures, TDRs and concentration risk.
- The adequacy of the allowance given zero provision expense in 2017 to date and management’s judgment-based estimates.
- The post-conversion common share count and resulting per-share effects, weighed against the elimination of preferred dividends.
- Current liquidity availability, brokered-deposit reliance, capital headroom and exposure to rising interest rates.
- Potential effects and implementation costs of the expected-credit-loss standard and other pending accounting requirements.