Business context and reporting period
Central Federal Corporation, a financial holding company whose wholly owned subsidiary is CFBank, National Association, filed this unaudited Form 10-Q for the three months ended March 31, 2017. CFBank provides commercial and residential lending and retail banking, primarily in Ohio markets including Columbus, Cleveland and Akron. Unless stated otherwise, dollar amounts below are in millions.
Key financial results
| Metric | Q1 2017 / March 31, 2017 | Comparable / prior period |
|---|---|---|
| Net interest income | $3.066 | $2.666 in Q1 2016 |
| Net interest margin | 3.14% | 3.29% in Q1 2016 |
| Provision for loan losses | $0 | $0.050 in Q1 2016 |
| Noninterest income | $0.166 | $0.304 in Q1 2016 |
| Noninterest expense | $2.620 | $2.454 in Q1 2016 |
| Income before taxes | $0.612 | $0.466 in Q1 2016 |
| Net income | $0.404 | $0.316 in Q1 2016 |
| Net income attributable to common stockholders | $0.190; diluted EPS $0.01 | $0.102; diluted EPS $0.01 in Q1 2016 |
| Cash and cash equivalents | $24.307 | $57.941 at December 31, 2016 |
| Net loans and leases | $360.974 | $346.125 at December 31, 2016 |
| Deposits | $348.245 | $375.364 at December 31, 2016 |
| FHLB advances / subordinated debentures | $21.500 / $5.155 | $13.500 / $5.155 at December 31, 2016 |
| Total assets / stockholders’ equity | $416.461 / $39.569 | $436.112 / $39.292 at December 31, 2016 |
Net interest income rose 15.0%, mainly because average interest-earning assets increased 20.6%; the average yield on those assets declined 19 basis points. Interest expense increased 14.3%, while the reported cost of interest-bearing liabilities remained 1.03%. Common earnings remained $0.01 per share, reflecting the preferred-stock dividend and discount accretion of $0.214 million in each quarter.
Operating cash flow was $2.001 million, investing cash outflow was $16.053 million and financing cash outflow was $19.582 million. Cash and equivalents consequently fell $33.634 million during the quarter. Management reported $100.304 million of cash, unpledged securities and deposits plus available borrowing capacity at March 31, compared with $127.578 million at year-end.
Material changes and credit quality
- Net loans grew 4.3% from year-end, with commercial loans up $14.6 million and construction loans up $6.9 million. Single-family residential loans declined $5.4 million.
- Deposits fell 7.2%, primarily due to reductions in money-market accounts and certificates of deposit as promotional rates expired and listing-service and brokered CD balances declined. Brokered deposits, including CDARS, were $26.6 million, down from $29.7 million.
- Nonperforming loans increased to $1.385 million from $0.704 million; the ratio to total loans rose to 0.38% from 0.20%. The increase included $0.749 million in commercial real estate loans newly placed on nonaccrual. Past-due loans were $2.554 million, versus $1.559 million at year-end.
- The allowance for loan and lease losses was $6.942 million, or 1.89% of loans, compared with $6.925 million, or 1.96%, at year-end. The quarter had net recoveries of $17,000 and no provision expense. Management considered the allowance adequate, while noting that future provisions may be required.
- CFBank’s regulatory capital ratios remained above applicable well-capitalized thresholds: total capital 12.47%, Tier 1 capital 11.22%, common equity Tier 1 11.22%, and leverage 9.88% at March 31.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said liquidity was sufficient for operating needs and strategic plans, and that the holding company had adequate operating funds for the foreseeable future.
- Management identifies sensitivity to interest rates, deposit outflows, loan demand and credit losses, Ohio economic and real estate conditions, growth management, regulatory requirements, competition, technology and cybersecurity, and access to capital as key risks. Interest-only commercial lines of credit were $25.6 million; interest-only home equity lines were $20.8 million.
- The allowance for credit losses depends on management estimates and may be affected by borrower performance, collateral values and economic conditions. Nonperforming loans rose during the quarter even as criticized and classified loans overall declined.
- The company’s $2.3 million deferred tax asset had no valuation allowance. Section 382 limits use of certain pre-2012 net operating losses to $163,000 per year; management expects $20.520 million of NOL carryforwards to expire unused. A separate thrift bad-debt reserve tax recapture could arise in specified circumstances; CFBank said it does not intend to make distributions that trigger recapture.
- On April 26, 2017, the board extended the stock repurchase program for six months beginning May 10. No shares were repurchased in Q1; cumulative repurchases since the program began in May 2016 were 21,300 shares for $30,000.
- Management reported no pending legal proceeding it expected to have a material adverse effect, no material change in risk factors from the 2016 Form 10-K, and effective disclosure controls. The former cease-and-desist orders and related commitments had terminated, but regulatory supervision and compliance risks remain.
- The company adopted ASU 2017-08 early; it had no callable debt securities held at a premium and reported no material effect. Management is evaluating the future expected-credit-loss standard and said implementation may increase the allowance.
Most important facts for investors to verify
- Whether the deposit decline and lower cash balance are stabilizing, and how the bank uses FHLB and other borrowing capacity to fund loan growth.
- Whether the increase in nonaccrual, past-due and impaired commercial real estate loans continues, and whether the allowance remains adequate as the portfolio grows.
- Whether loan growth can sustain net interest income despite margin compression and higher funding costs.
- The actual utilization and expiration of NOL carryforwards, realization of the deferred tax asset, and any potential tax consequences related to the thrift bad-debt reserve.
- Future regulatory capital levels, liquidity capacity and any restrictions affecting dividends or repurchases; common dividends are also subject to payment or setting aside of Series B preferred dividends.