CF Bankshares Inc. (filing registrant: Central Federal Corporation) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing covers Central Federal Corporation and its wholly owned bank subsidiary, CFBank. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest and dividend income | $3.113 | $2.478 | $6.131 | $4.681 |
| Net interest income | $2.456 | $2.043 | $4.892 | $3.804 |
| Provision for loan losses | $0.075 | $0.108 | $0.150 | $0.128 |
| Noninterest income | $0.464 | $0.358 | $0.819 | $0.603 |
| Noninterest expense | $2.378 | $2.195 | $4.843 | $4.395 |
| Net income (loss) | $0.467 | $0.098 | $0.718 | $(0.116) |
| Income attributable to common stockholders | $0.252 | $0.039 | $0.289 | $(0.175) |
| Diluted earnings (loss) per common share | $0.02 | $0.00 | $0.02 | $(0.01) |
- Quarterly net interest margin was 3.22%, down 2 basis points year over year; six-month margin was 3.28%, up 15 basis points. The six-month improvement reflected higher average earning assets and yields, while deposit costs also increased.
- At June 30, assets were $339.3 million, up 7.5% from year-end 2014. Net loans were $284.2 million, up $27.1 million; deposits were $282.0 million, up $23.7 million. Stockholders’ equity was $34.9 million.
- Cash and cash equivalents were $28.3 million. Six-month operating cash flow was $3.6 million, investing cash flow was negative $26.7 million, and financing cash flow was positive $23.2 million; cash increased $0.1 million.
- Debt included $14.5 million of FHLB advances and $5.2 million of subordinated debentures, both unchanged from year-end. The debentures bear a variable rate, 3.12% at quarter-end.
- CFBank’s actual regulatory capital ratios were 13.14% total risk-based capital, 11.88% Tier 1 risk-based capital, and 10.85% Tier 1 leverage. It met the heightened OCC commitments of 12% total risk-based capital and 8% leverage.
Changes, outlook, and risks
- Earnings improved: Q2 net income rose $0.369 million year over year; six-month results moved from a $0.116 million loss to $0.718 million income. Higher net interest income and noninterest income were partly offset by higher operating expenses. Preferred dividends and discount accretion reduced six-month earnings available to common shareholders by $0.429 million.
- Loan growth and mix: Net loans grew 10.5% from year-end, led by single-family residential and construction lending. The Northpointe mortgage program accounted for $37.6 million of loans held at June 30; the filing reports the bank purchases 95% participation interests in these short-duration, pre-sold mortgages.
- Credit quality: Nonperforming loans were $1.538 million, or 0.53% of loans, versus $1.548 million and 0.59% at year-end. The allowance for loan losses was $6.480 million, 2.23% of loans, compared with 2.39% at year-end. Special-mention and substandard loan balances declined, but total past-due loans rose to $1.627 million from $1.148 million.
- Management said the allowance was adequate but noted future provisions may be needed if borrower performance, economic conditions, or real estate values deteriorate. A single multifamily property accounted for $1.6 million of foreclosed assets.
- Credit-card portfolio: CFBank began activity and signed an agreement in Q2 with the intent to sell its credit-card portfolio. $0.175 million was transferred to loans held for sale at lower of cost or market; the filing does not establish that the sale was completed.
- Regulatory constraints: The bank and holding-company cease-and-desist orders had been terminated in 2014, but ongoing commitments remain. CFBank cannot pay dividends or make capital distributions without OCC approval; the holding company remains subject to FRB restrictions on dividends, share repurchases, debt, and certain distributions. Preferred dividends require regulatory approval; no common dividends were reported.
- Available liquidity sources totaled $75.5 million, including $27.5 million of cash, unpledged securities and other-bank deposits, $14.9 million of additional FHLB capacity, $32.1 million of FRB capacity, and a $1.0 million unused bank line. Management considered liquidity sufficient, while noting borrowing capacity depends on collateral and financial condition.
- No specific earnings or operating guidance was provided. Management cited interest-rate changes, deposit competition and funding costs, credit losses, liquidity, regulatory requirements, Ohio economic conditions, and the ability to sustain profitability as risks. The full valuation allowance against deferred tax assets remains; use of certain pre-2012 net operating losses is limited.
- Management reported effective disclosure controls at quarter-end and no material second-quarter change in internal control over financial reporting. No material change in market risk was reported; management said pending litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the credit-card portfolio sale closed, its final terms, and any resulting gain, loss, or balance-sheet effect.
- The sustainability and quality of loan growth, especially the Northpointe mortgage participation exposure and its short-term funding and investor-sale process.
- Delinquencies, criticized/classified loans, nonperforming assets, charge-offs, and the adequacy of the allowance as the portfolio expands.
- Deposit mix, cost of funds, brokered/CDARS deposits, and the availability of FHLB and FRB borrowing capacity.
- Ongoing regulatory approvals and capital restrictions, including their implications for dividends, parent-company liquidity, and future growth.
- Common earnings after preferred dividends and accretion, and whether profitability can be maintained without relying on one-off loan-sale gains or other noninterest income.