CF Bankshares Inc. (filing registrant: Central Federal Corporation) — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. The company is a financial holding company whose wholly owned CFBank operates in Ohio, focusing on business banking, commercial and real estate lending, and residential mortgage banking.
Key financial metrics
| Metric | Q3 2018 / September 30, 2018 | Comparable period / prior date |
|---|---|---|
| Total assets | $606.4 million | $481.4 million at December 31, 2017; up 26.0% |
| Net loans and leases | $493.5 million | $406.4 million at December 31, 2017; up 21.4% |
| Deposits | $532.1 million | $419.0 million at December 31, 2017; up 27.0% |
| Net interest income | $4.7 million for the quarter; $12.9 million for nine months | Quarter: $3.5 million; nine months: $10.0 million |
| Net interest margin | 3.43% for the quarter; 3.42% for nine months | Quarter: 3.47%; nine months: 3.37% |
| Net income | $1.1 million for the quarter; $3.0 million for nine months | Quarter: $0.7 million; nine months: $1.6 million |
| Net income attributable to common shareholders | $1.0 million; diluted EPS $0.24 for the quarter. Nine-month diluted EPS: $0.67 | Quarter: $0.5 million and $0.15 diluted EPS; nine months: $1.0 million and $0.31 diluted EPS |
| Cash and cash equivalents | $59.4 million | $45.5 million at December 31, 2017 |
| Loans held for sale | $24.1 million | $1.1 million at December 31, 2017 |
| FHLB advances and other debt | $21.5 million; subordinated debentures $5.2 million | $13.5 million and $5.2 million, respectively, at December 31, 2017 |
| Stockholders’ equity | $43.6 million | $40.3 million at December 31, 2017 |
For the first nine months, operating cash flow was negative $20.1 million, investing cash flow was negative $87.2 million, and financing cash flow was positive $121.1 million. Cash ended the period at $59.4 million, up $13.9 million from year-end 2017. Negative operating cash flow primarily reflects substantially higher mortgage-loan originations held for sale.
CFBank’s September 30 regulatory capital ratios were 12.05% total capital, 10.80% Tier 1 and common equity Tier 1, and 9.41% leverage. The bank exceeded applicable well-capitalized thresholds.
Material changes versus prior comparable periods
- Quarterly net income rose 54.0%; nine-month net income rose 81.0%. Net interest income grew 33.6% for the quarter and 29.8% year to date, mainly from balance-sheet and loan growth.
- Higher funding costs tempered margin performance: quarterly net interest margin declined 4 basis points to 3.43%, while the nine-month margin increased 5 basis points to 3.42%.
- Mortgage expansion drove net gains on loan sales to $451,000 for the quarter and $1.3 million for nine months, compared with $23,000 and $70,000, respectively, in 2017.
- Noninterest expense increased 50.3% for the quarter and 38.0% for nine months, driven principally by hiring, mortgage-business marketing, and professional fees.
- The allowance for loan and lease losses was $7.0 million, with no provision recorded in either 2018 comparison period. Nonperforming loans declined to $377,000 from $470,000 at year-end; past-due loans were $132,000.
- The 2017 preferred-stock conversion eliminated preferred dividends beginning in Q4 2017, improving earnings attributable to common shareholders. A 1-for-5.5 reverse stock split took effect August 20, 2018; historical share and per-share data were adjusted.
Outlook, management commentary, risks and unusual items
- No numerical earnings or growth guidance was provided. Management said liquidity was sufficient for operating needs, considered the allowance adequate for probable incurred losses, and described continued capital and balance-sheet growth plans.
- Available liquidity was reported at $179.8 million, including $60.6 million of cash, unpledged securities and deposits, FHLB and FRB borrowing capacity, and an unused commercial line. The holding company had drawn the full $8.0 million facility, priced at Prime plus 0.75% and secured by its CFBank stock; it expires in February 2020 unless extended or replaced.
- Brokered deposits, including qualifying CDARS deposits, totaled $89.4 million, up from $46.9 million at year-end. Management attributed much of the rise to short-term funding for expected mortgage-related balance fluctuations.
- Management highlighted credit risks from economic deterioration, weaker borrower cash flows, and falling real-estate values. Interest-only commercial lines increased to $52.4 million; interest-only home-equity lines were $21.7 million. The filing also identifies concentration in Ohio and risks from rising deposit and borrowing costs.
- The company expects the forthcoming expected-credit-loss standard (CECL) could increase its allowance, but its impact was not reasonably determinable. The 2018 adoption of revenue recognition and other accounting updates had no material effect.
- Management reported no material change in risk factors, no pending litigation expected to have a material adverse effect, and effective disclosure controls. The filing gives no clear quantified forecast for future expenses, loan growth, or mortgage-sale gains.
Investor facts to verify
- Whether mortgage banking gains and loan-sale volumes are sustainable, given the sharp increase in loans held for sale and related negative operating cash flow.
- Whether deposit growth can be maintained at acceptable cost, including the mix, duration, and reliance on brokered and CDARS funding.
- Credit trends as the loan portfolio expands, particularly commercial real estate, interest-only lending, criticized loans, and adequacy of the allowance despite no current-period provision.
- Holding-company debt service and refinancing options for the $8.0 million credit facility, alongside the variable-rate subordinated debentures and regulatory limits on upstream dividends.
- Comparability of per-share results after the reverse split and preferred-stock conversion, and the effect of these changes on diluted share counts.