CF Bankshares Inc. (Central Federal Corporation) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a financial holding company whose wholly owned bank, CFBank, serves Ohio markets and focuses on commercial banking, real estate lending, and residential mortgages. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $5.3 | $4.7 | $15.7 | $12.9 |
| Noninterest income | $3.3 | $0.6 | $7.5 | $1.9 |
| Noninterest expense | $5.3 | $4.0 | $15.0 | $11.1 |
| Net income | $2.6 | $1.1 | $6.6 | $3.0 |
| Diluted earnings per share | $0.59 | $0.24 | $1.52 | $0.67 |
| Net interest margin | 3.02% | 3.43% | 3.10% | 3.42% |
Q3 pretax income was $3.3 million, versus $1.3 million a year earlier. Mortgage loan-sale gains were the principal driver of higher noninterest income: reported net gains on loan sales were $3.1 million in Q3 and $6.9 million for the nine-month period, compared with $0.5 million and $1.3 million, respectively. Management attributed the gains to higher residential mortgage volume. Compensation and marketing costs also rose as the mortgage business expanded. No loan-loss provision was recorded in either comparative period; the company reported net recoveries of $28,000 in Q3 and $45,000 year to date in 2019.
Financial position, liquidity, and credit
- Growth: Total assets were $786.4 million at September 30, up 18.3% from year-end 2018. Net loans and leases were $630.5 million, up 14.5%; loans held for sale were $82.4 million, up from $17.4 million, reflecting higher mortgage activity.
- Funding and debt: Deposits were $685.9 million, up 18.3% since year-end. FHLB advances and other debt totaled $22.5 million, and subordinated debentures were $14.8 million. Interest expense increased substantially as interest-bearing funding grew and its cost rose.
- Cash flow: Cash and cash equivalents declined to $37.3 million from $67.3 million at December 31, 2018. Net cash used by operating activities was $60.5 million for the nine months, reflecting mortgage loan originations and sales activity; investing activities used $79.6 million, while financing activities provided $110.1 million, principally from deposit growth and borrowing activity.
- Liquidity: Management said liquidity was sufficient for operating and strategic needs. The bank reported $186.7 million of cash, unpledged securities, and available borrowing capacity at September 30, compared with $189.2 million at year-end. The holding company separately had $1.0 million cash and $1.0 million available on its revolving credit line.
- Credit quality: The allowance for loan and lease losses was $7.1 million, or 1.11% of loans, versus 1.26% at year-end. Nonperforming loans increased to $2.4 million (0.38% of loans) from $0.4 million (0.07%). Past-due loans rose to $5.5 million from $1.1 million. Management cited a commercial real estate loan that became impaired and nonaccrual during the first quarter. Criticized and classified loans increased overall; substandard loans rose to $6.1 million from $3.3 million.
- Capital: Stockholders’ equity was $53.9 million, up from $45.6 million at year-end. CFBank’s September 30 capital ratios included 12.09% total capital, 11.01% common equity Tier 1, and a 10.03% leverage ratio; each exceeded the filing’s stated well-capitalized thresholds.
Outlook, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management said the nine-month results are not necessarily indicative of full-year results and described continued focus on growth, capital planning, and credit monitoring.
- Key risks include rising funding costs and pressure on net interest margin, credit deterioration and real estate values, reliance on mortgage origination and sale volumes, and the company’s concentration in Ohio. The allowance estimate depends on management judgments and may be affected by economic conditions or regulatory review.
- Brokered deposits totaled $118.8 million. The holding company’s $10 million revolving credit facility had $9.0 million outstanding and was due to expire in February 2020 unless extended or replaced.
- After quarter-end, the company completed a private placement on October 31, 2019, raising approximately $25 million through the sale of 849,615 common shares at $12 each and 12,337 shares of Series C preferred stock at $1,200 each. The preferred shares have specified conversion features.
- The company adopted lease accounting in 2019, recognizing operating lease right-of-use assets of $1.9 million and lease liabilities of $2.1 million at quarter-end. It expected the new credit-loss standard (CECL) to become effective for it in fiscal 2023; management had not determined the financial impact and said adoption could increase the allowance.
- Management did not anticipate material adverse effects from ordinary-course litigation; no material risk-factor changes were reported. Disclosure controls were assessed as effective, with no material third-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether mortgage banking gains and elevated loans held for sale are sustainable, and how sensitive earnings are to mortgage volume and sale margins.
- Whether deposit pricing and other funding costs continue to compress net interest margin.
- The status and resolution of the impaired commercial real estate loan, and subsequent trends in nonperforming, past-due, criticized, and substandard loans.
- The terms, conversion and dilution implications of the October 2019 Series C preferred issuance, alongside the common-stock placement.
- Renewal or replacement of the holding company credit facility due in February 2020, and the eventual CECL allowance impact.