CFBank / Central Federal Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in thousands of dollars unless otherwise noted. The filing identifies the registrant as Central Federal Corporation; the request metadata names CF Bankshares Inc.
Business context and financial performance
The company is a savings and loan holding company whose principal subsidiary, CFBank, serves Ohio communities. Its lending includes commercial, commercial real estate, residential mortgage, construction and home equity loans. Management describes loan growth and expansion of mortgage activity as key operating drivers.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $2,919 | $1,931 | $7,600 | $5,476 |
| Net interest income | $2,437 | $1,393 | $6,241 | $3,873 |
| Net interest margin | 3.49% | 2.53% | 3.26% | 2.46% |
| Provision for loan losses | $75 | $76 | $203 | $726 |
| Noninterest income | $446 | $176 | $1,049 | $578 |
| Noninterest expense | $2,522 | $1,878 | $6,917 | $5,474 |
| Net income (loss) | $286 | $(385) | $170 | $(1,749) |
| Net income (loss) attributable to common stockholders | $112 | $(385) | $(63) | $(1,749) |
| Basic and diluted earnings (loss) per common share | $0.01 | $(0.02) | $0.00* | $(0.11) |
*Reported as less than $0.01 per share for the nine months ended September 30, 2014.
- Quarterly net interest income rose 75%, mainly from growth in average earning assets and improved yields; nine-month net interest income increased 61%. Lower funding costs also contributed.
- Higher noninterest income reflected increased mortgage loan-sale gains. Expense growth reflected mortgage and credit-administration staffing, professional fees, foreclosed-asset costs, occupancy and technology costs.
- No income tax expense or benefit was recorded; the company maintained a full valuation allowance against its net deferred tax asset.
Balance sheet, liquidity and credit
- Total assets were $307.6 million at September 30, up 20.3% from December 31, 2013. Net loans were $248.2 million, up 19.8%; deposits were $251.0 million, up 20.5%.
- Cash and cash equivalents were $30.2 million, versus $19.2 million at year-end. Available liquidity, including unpledged liquid assets and additional FHLB, Federal Reserve and commercial-line borrowing capacity, totaled $71.1 million. This measure includes borrowing capacity and is not cash on hand.
- Cash flows for the nine months were $(1.4) million from operations, $(39.1) million from investing and $51.6 million from financing; ending cash was $30.2 million. Financing included deposit growth and preferred-stock proceeds.
- FHLB advances were $14.5 million; other secured borrowings were zero, versus $6.5 million at year-end. Subordinated debentures remained $5.2 million. Total stockholders’ equity rose to $34.4 million, primarily following the preferred-stock offering.
- The allowance for loan losses was $6.3 million, or 2.46% of loans, compared with 2.69% at year-end. Nonperforming loans were $3.7 million, or 1.5% of loans, down from $5.7 million and 2.7%. Management attributed improvement to repayments and credit-quality efforts; nine-month net recoveries were $324.
- Impaired loans were $6.4 million, down from $8.9 million at year-end. TDRs totaled $5.7 million; no loans were newly modified as TDRs in the 2014 quarter or nine-month period. One $187,000 commercial real estate loan was over 90 days past due and still accruing.
- Interest-only commercial lines were $24.9 million, about 50% of commercial loans; interest-only home equity lines were $14.4 million, about 92% of home equity lines. Management notes that these structures may carry heightened collateral and repayment risks.
Material changes, outlook and risks
- CFBank’s cease-and-desist order was terminated in January 2014 and the holding company’s order in May 2014. CFBank nevertheless must maintain at least an 8% Tier 1 leverage ratio and 12% total risk-based capital ratio, and both entities remain subject to regulatory commitments. CFBank’s reported ratios were 11.14% and 14.33%, respectively.
- Holding-company commitments restrict dividends, stock repurchases, debt and receipt of bank distributions without prior Federal Reserve approval or non-objection. The bank’s dividends to the holding company also require OCC approval; the filing says such distributions are unlikely until the bank generates consistent earnings.
- The company raised $12.0 million gross through 480,000 shares of 6.25% non-cumulative convertible perpetual Series B preferred stock, receiving $11.369 million net. Investors also received warrants to purchase 1,152,125 common shares at $1.85 per share, generally exercisable through July 15, 2019. Preferred dividends reduced common-stockholder earnings by $174 in Q3 and $233 for the nine months.
- Management says liquidity is sufficient for current needs and the holding company has adequate operating cash for the foreseeable future. The filing gives no numerical earnings guidance or specific forecast; interim results are not necessarily indicative of full-year results.
- Key risks include continued or renewed losses, asset-quality deterioration, real estate values and economic conditions, interest-rate and funding pressures, liquidity, regulatory requirements and examinations, and the company’s ability to generate profits. Management notes that losses could weaken capital and prompt further regulatory restrictions. Brokered deposits were $37.8 million, with $29.6 million maturing by September 2015.
- Other notable items: the company’s 2012 ownership change limits use of pre-offering tax-loss carryforwards to $163 per year; management estimated $20.5 million of NOLs may expire unused. Disclosure controls were reported effective, and the filing reported no material change in internal control over financial reporting or risk factors.
Important facts for investors to verify
- Whether loan growth and improved net interest margin persist without weakening underwriting or credit quality; review portfolio concentrations, interest-only exposures, criticized loans and allowance assumptions.
- Whether the improvement in profitability is sustainable after elevated operating expenses and preferred dividends; distinguish net income from earnings attributable to common stockholders.
- How the $37.8 million in brokered deposits and near-term maturities will be funded, and whether reported borrowing capacity remains available under changing collateral, credit and regulatory conditions.
- Ongoing compliance with the bank’s heightened capital requirements and the holding company’s regulatory commitments, including restrictions on dividends, debt and capital distributions.
- The preferred shares’ dividend and conversion terms and the potential dilution from the associated warrants; also verify the practical availability of tax-loss carryforwards.