CFBancorp (filing registrant: Central Federal Corporation) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in thousands of dollars unless noted. The filing describes a community-oriented Ohio savings institution operating primarily through CFBank.
Financial performance and condition
- Q2 earnings: Net income was $422, down 9.6% from $467 a year earlier. Pretax income increased 34.0% to $626, but income tax expense of $204 reduced reported net income. Net income attributable to common shareholders was $207, or $0.01 per diluted share, versus $252, or $0.02.
- First-half earnings: Net income was $738, up 2.8%; pretax income was $1,092, up 52.1%. Common-shareholder income was $309, or $0.02 per diluted share, versus $289, or $0.02.
- Net interest: Q2 net interest income increased 15.4% to $2,835; net interest margin rose to 3.41% from 3.22%. First-half net interest income increased 12.4% to $5,501; margin rose to 3.35% from 3.28%. Higher average loan balances were the main income driver; funding costs also increased.
- Other income and expenses: Q2 noninterest income fell 37.5% to $290, mainly on lower loan-sale gains and joint-venture activity; noninterest expense declined 1.6% to $2,339. First-half noninterest income fell 27.5% to $594, while noninterest expense decreased 1.0% to $4,793.
- Loans and credit: Net loans grew 9.2% from year-end to $324,364. The allowance for loan losses was $6,613, or 2.00% of total loans, versus 2.18% at year-end. Nonperforming loans were $1,397 (0.42% of loans), down from $1,425 (0.47%). Total past-due loans increased to $2,341 from $1,390; management attributed the increase primarily to one large residential loan. First-half net charge-offs were $217, compared with net recoveries of $14 a year earlier.
- Balance sheet and funding: Total assets were $364,753, up 3.8% from year-end; deposits were $296,028, up 1.9%. Cash and cash equivalents declined to $13,007 from $25,895, largely to fund loan growth. FHLB advances rose to $22,500 from $14,500; subordinated debentures remained $5,155. Stockholders’ equity was $38,794.
- Cash flow: First-half operating cash flow was $217, compared with $3,599 in 2015; investing cash use was $25,798, and financing cash provided was $12,693. Cash declined $12,888 to $13,007.
- Capital and liquidity: CFBank reported a 13.23% total risk-based capital ratio, 11.97% Tier 1 risk-based ratio, 11.97% common equity Tier 1 ratio, and 10.92% leverage ratio. Management reported $62,220 in cash, unpledged securities and available borrowing capacity, down from $72,671 at year-end.
Material changes and unusual items
- The 2015 comparison includes no income tax expense because a deferred-tax valuation allowance was then in place. That allowance was reversed in Q4 2015, generating a $3.2 million tax credit in that quarter; 2016 results include tax expense at effective rates of 32.6% for Q2 and 32.4% for the first half. The company reported $25.2 million of year-end 2015 NOL carryforwards, with annual use of pre-2012 carryforwards limited to $163 and $20.5 million expected to expire unused.
- Commercial, single-family, commercial real estate and multifamily loan balances grew; construction and consumer balances declined. The loan portfolio included $44.2 million in short-term mortgage participations through the Northpointe program.
- The company sold its remaining foreclosed multifamily property during Q2; foreclosed assets were zero at June 30, versus $1,636 at year-end.
- In May, the board authorized repurchases of up to 3% of common shares over six months. The company repurchased 20,500 shares for $29 during Q2.
- Regulatory cease-and-desist orders and related commitments had been terminated by January 8, 2016. The bank remained subject to ordinary regulatory supervision and reported capital ratios above applicable minimums.
Outlook, commentary and risks
No specific earnings or revenue guidance was provided. Management said liquidity was sufficient for operating needs and strategic plans, and cited continued loan growth and improved operating results as priorities. Management considered the allowance adequate, but noted that further provisions could be needed if borrower performance, economic conditions or collateral values deteriorate. The filing also identifies interest-rate and funding pressures, deposit competition, Ohio economic concentration, regulatory costs, information-system security, and the ability to manage growth and credit risk as risks. Management stated that pending ordinary-course litigation was not expected to have a material adverse effect. A new expected-credit-loss accounting standard was issued; management was evaluating its effect.
Important facts for investors to verify
- Confirm the filing’s registrant identity: this 10-Q names Central Federal Corporation, while the request metadata names CF Bankshares Inc.
- Assess whether rapid loan growth, increased past-due balances and first-half net charge-offs warrant additional allowance or capital needs.
- Review liquidity after the cash decline, including reliance on FHLB/FRB borrowing capacity and the increase in brokered deposits to $24.8 million.
- Evaluate sustainable earnings excluding the 2015 deferred-tax valuation-allowance reversal and considering preferred-stock dividends and discount accretion of $429 for the first half of 2016.
- Check the performance and risk treatment of the $44.2 million Northpointe mortgage participation balance and the company’s authorized share-repurchase activity.