CF BANKSHARES INC. — 2018 Q1 Form 10-Q Summary
Issuer identification: The supplied filing is for Central Federal Corporation, not CF Bankshares Inc. Confirm the intended registrant. The unaudited quarter ended March 31, 2018; comparative operating results are for Q1 2017. Unless noted, amounts are in thousands of dollars.
Business context and reporting period
Central Federal Corporation is the holding company for CFBank, a commercial bank operating principally in Ohio. Its business includes commercial and real estate lending, residential mortgage activity, and retail and business banking. Mortgage growth included short-term purchases of pre-sold loans through a third-party program.
Financial results and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $529.9 million | $481.4 million at Dec. 31, 2017; up 10.1% |
| Net loans and leases | $422.5 million | $406.4 million at Dec. 31, 2017; up 4.0% |
| Net interest income | $3.911 million | $3.066 million; up 27.6% |
| Net interest margin | 3.41% | 3.14%; up 27 basis points |
| Noninterest income | $481,000 | $166,000; increase mainly from loan-sale gains |
| Noninterest expense | $3.414 million | $2.620 million; up 30.3% |
| Income before taxes | $978,000 | $612,000 |
| Net income | $792,000 | $404,000 |
| Net income attributable to common shareholders | $766,000; diluted EPS $0.03 | $190,000; diluted EPS $0.01 |
| Cash and cash equivalents | $70.4 million | $45.5 million at Dec. 31, 2017 |
| Total deposits | $461.0 million | $419.0 million at Dec. 31, 2017; up 10.0% |
| FHLB advances and other debt | $19.5 million | $13.5 million at Dec. 31, 2017 |
| Subordinated debentures | $5.2 million | Unchanged from Dec. 31, 2017 |
| Operating cash flow | -$7.167 million | +$2.001 million |
| Net change in cash | +$24.898 million | -$33.634 million |
The $7.167 million operating cash outflow included $11.484 million of originations of loans held for sale, partly offset by sale proceeds; cash increased overall with deposit growth and $6 million of new borrowing. The allowance for loan and lease losses was $6.976 million, or 1.62% of loans, versus 1.69% at year-end. No loan-loss provision was recorded in either Q1 2018 or Q1 2017.
At March 31, CFBank’s regulatory capital ratios were 13.05% total capital, 11.80% Tier 1 and common equity Tier 1, and 10.21% leverage. Each exceeded the filing’s applicable “well capitalized” threshold. Reported available liquidity, including cash, unpledged securities and borrowing capacity, was $173.1 million.
Material changes versus comparable periods
- Net interest income rose $845,000, reflecting higher average earning assets and a 50-basis-point increase in their average yield. Interest expense increased $402,000 as deposit and borrowing costs rose; the average cost of interest-bearing liabilities increased 31 basis points.
- Net gains on loan sales increased to $308,000 from $23,000, which management attributed to mortgage-business expansion. Salaries and benefits rose $483,000 and advertising and marketing rose $250,000, also primarily tied to mortgage expansion and deposit-growth efforts.
- Effective tax expense declined to $186,000 from $208,000; the effective tax rate was 19.1% versus 34.0%, reflecting the lower federal corporate tax rate and other items.
- All Series B preferred shares converted to common shares in October 2017. Preferred dividends ceased thereafter, contributing to the increase in income attributable to common shareholders; the comparison also reflects different common-share counts.
- Loans grew, including commercial real estate and multifamily balances, as well as purchased residential mortgages. Deposits rose $42.0 million, including a $37.5 million increase in certificates of deposit.
Outlook, commentary, risks and unusual items
- No specific numerical earnings or growth guidance is provided. Management said current liquidity was sufficient for operating needs and strategic plans, and that it remained focused on growth, capital and credit quality. It cautioned that Q1 results are not necessarily indicative of full-year results.
- Brokered deposits, including CDARS and ICS balances, were $89.1 million, up from $46.9 million at year-end; management said short-term CDARS deposits helped address mortgage-related quarter-end fluctuations. Their availability and cost are potential funding considerations.
- Nonperforming loans declined to $400,000 from $470,000, but criticized and classified loans increased $2.3 million. Special-mention loans rose to $8.5 million, primarily after two commercial real estate loans totaling $2.7 million were downgraded. Management considered the allowance adequate but noted future provisions could be required if credit or collateral conditions deteriorate.
- Interest-only commercial lines of credit totaled $42.1 million, or 41.8% of the commercial portfolio. The filing identifies collateral-value and borrower cash-flow deterioration as credit risks.
- The holding company drew $6 million under a new bank credit facility bearing interest at Prime plus 0.75%; $5 million was contributed to CFBank. The facility is secured by the holding company’s bank shares and expires in February 2020 unless extended or replaced.
- Subordinated debentures carry a variable rate of three-month LIBOR plus 2.85% (5.16% at quarter-end); rising rates could increase debt service. Dividends are subject to regulatory and capital restrictions.
- Management reported no material change in market risk, no material change in risk factors, and no pending legal matter expected to have a material adverse effect. Disclosure controls were assessed as effective.
- The company reported a $1.6 million deferred tax asset and said no valuation allowance was required. Section 382 limits use of certain tax-loss carryforwards; management estimated $20.5 million would expire unused. Adoption of the expected-credit-loss standard could increase the allowance, but the impact was not reasonably estimable.
Important facts for investors to verify
- Confirm the registrant: the filing names Central Federal Corporation, while the request identifies CF Bankshares Inc.
- Assess the composition, pricing, maturity and continued availability of the sharp increase in deposits, particularly brokered and CDARS deposits.
- Review loan growth and underwriting, the mortgage-purchase program’s short holding periods and risk allocation, and the rise in criticized commercial real estate loans.
- Track deposit-cost increases against asset yields, net interest margin, mortgage-sale gains, and elevated mortgage-related staffing and marketing expenses.
- Verify liquidity and capital after the holding-company borrowing and downstream contribution, and monitor the variable-rate debt and dividend constraints.
- Follow allowance adequacy, collateral values, tax-loss utilization and the eventual estimated effect of expected-credit-loss accounting.