CFBank / Central Federal Corporation 10-Q Summary
Business context and period: The filing is for the three months ended March 31, 2019, compared with the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2018. The registrant named in the filing is Central Federal Corporation, parent of CFBank, National Association. CFBank is an Ohio-focused commercial bank serving business, real estate, residential lending and retail banking customers. Unless noted otherwise, dollar amounts below are in millions.
Key financial results
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Interest income | $7.941 | $5.104 in Q1 2018 |
| Interest expense | $2.841 | $1.193 in Q1 2018 |
| Net interest income | $5.100 | $3.911 in Q1 2018 |
| Net interest margin | 3.20% | 3.41% in Q1 2018 |
| Noninterest income | $1.694 | $0.481 in Q1 2018 |
| Noninterest expense | $4.694 | $3.414 in Q1 2018 |
| Net income | $1.681 | $0.792 in Q1 2018 |
| Net income attributable to common stockholders | $1.707; $0.39 diluted EPS | $0.766; $0.17 diluted EPS in Q1 2018 |
| Provision for loan losses | None | None in Q1 2018 |
- Net income attributable to common stockholders increased about 123%; reported net income increased 112%. Net interest income grew 30.4%, while noninterest income more than tripled, principally due to increased mortgage loan sales.
- Net interest margin narrowed 21 basis points. Management attributed higher interest income to asset growth and improved yields, but funding costs rose faster: the average cost of interest-bearing liabilities increased to 2.27% from 1.34%.
- At March 31, total assets were $720.5, up 8.3% from year-end; net loans and leases were $564.6, up 2.5%; loans held for sale were $27.9, up from $17.4. Deposits were $631.8, up 9.0%.
- Cash and cash equivalents were $96.0, versus $67.3 at year-end. Q1 operating cash flow was negative $8.4, investing cash flow negative $13.8, and financing cash flow positive $50.9; cash increased $28.7 overall. Mortgage loan originations and sales were significant operating cash-flow items.
- Borrowings included $18.5 of FHLB advances and other debt and $14.8 of subordinated debentures. Stockholders’ equity was $47.6, up from $45.6 at year-end. CFBank’s reported regulatory capital ratios were 12.45% total capital, 11.20% common equity tier 1, and 9.60% leverage.
Material changes, outlook and risks
- Mortgage banking: Net gains on loan sales rose to $1.503 from $0.308, reflecting expanded residential mortgage lending and sales volume. Salaries and benefits increased $0.604 and advertising and marketing increased $0.359, primarily to support that expansion.
- Credit quality weakened on several measures: Nonperforming loans increased to $2.078 from $0.377, largely because a commercial real estate loan became nonaccrual. The allowance was $7.024, or 1.23% of loans, versus 1.26% at year-end. Criticized and classified loans rose 49.5% to approximately $15.4. Management said the allowance was adequate but warned that deterioration in borrowers, economic conditions or real estate values could require additional provisions.
- Liquidity and funding: Management considered liquidity sufficient. Reported cash, unpledged securities and deposits, additional FHLB and FRB borrowing capacity, and unused commercial line capacity totaled $237.4. The parent had $1.5 of cash and $5.0 drawn on a $10.0 revolving credit facility, which expires in February 2020 unless extended or replaced. Brokered deposits were $109.9.
- Capital and dividends: CFBank was well capitalized under regulatory standards. Dividend capacity is constrained by banking rules and debt terms; because CFBank had an accumulated deficit of about $5.2, distributions to the parent require prior OCC non-objection, according to the filing.
- Accounting and contingencies: Adoption of lease accounting added operating lease right-of-use assets and liabilities of about $2.4 at adoption. The company was evaluating the future expected-credit-loss standard and said its impact could not yet be reasonably determined, though it could increase the allowance. Management did not expect ordinary-course litigation to have a material adverse effect; no material changes to previously reported risk factors or market risk were reported. No numerical earnings guidance or specific forward outlook was provided.
Important facts for investors to verify
- Whether elevated nonperforming, impaired, past-due, and criticized/classified commercial real estate exposures continued or required additional reserves after quarter-end.
- How sustainable mortgage-sale gains are, and whether mortgage volume and related staffing and marketing costs support ongoing profitability.
- Whether deposit growth can be maintained at acceptable rates and how rising funding costs affect net interest margin.
- The parent’s credit-facility maturity, subordinated-debt service and dividend restrictions, including the OCC approval requirement for bank distributions.
- Management’s eventual estimate of the expected-credit-loss standard’s effect on the allowance, earnings and capital.