CFB Bankshares / Central Federal Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The filing identifies the registrant as Central Federal Corporation, parent of CFBank, N.A. (Nasdaq: CFBK). Unless noted otherwise, amounts are in thousands of dollars.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable period / December 31, 2019 |
|---|---|---|
| Total assets | $945.4 million | $880.5 million |
| Net interest income | $6.123 million | $5.100 million in Q1 2019 |
| Net interest margin | 2.87% | 3.20% in Q1 2019 |
| Noninterest income | $3.444 million | $1.694 million in Q1 2019 |
| Noninterest expense | $7.044 million | $4.694 million in Q1 2019 |
| Net income | $2.006 million | $1.681 million in Q1 2019 |
| Net income attributable to common stockholders | $1.629 million; diluted EPS $0.30 | $1.707 million; diluted EPS $0.39 |
| Cash and cash equivalents | $75.4 million | $45.9 million |
| Net loans and leases | $707.9 million | $663.3 million |
| Deposits | $748.5 million | $746.3 million |
| FHLB advances and other debt | $82.6 million | $29.0 million |
| Stockholders’ equity | $82.9 million | $80.7 million |
- Profitability and margins: Net income rose 19.3%, while diluted EPS fell because earnings allocated to Series C participating securities reduced common-stockholder earnings. Net interest income increased 20.1%, but margin declined 33 basis points as asset yields fell.
- Cash flow: Operating cash flow was $34.9 million, compared with use of $8.4 million in Q1 2019; investing activities used $47.7 million and financing provided $42.2 million. Ending cash was $75.4 million. Mortgage-loan originations and sales materially affected operating cash flows.
- Credit and capital: No loan-loss provision was recorded in either comparison quarter. The allowance was $7.1 million, or 0.99% of loans, versus 1.06% at year-end. Nonperforming loans were $696,000, or 0.10% of loans, down from $2.4 million and 0.36%. CFBank reported a 13.23% total capital ratio and 10.68% leverage ratio at March 31.
- Liquidity: The company reported $204.5 million in cash, unpledged securities and available borrowing capacity, compared with $204.8 million at year-end. This included $72.6 million in cash, unpledged securities and deposits, plus FHLB, FRB and commercial-bank borrowing capacity.
Material changes versus prior periods
- Assets increased 7.4% from year-end, principally from growth in net loans and cash; loans held for sale declined by $20.5 million.
- Net interest income increased mainly from higher average earning-asset balances, while interest expense also rose. Average earning-asset yield fell to 4.66% from 4.98%.
- Noninterest income more than doubled, primarily from higher residential mortgage loan-sale gains and $393,000 of swap fee income. Net gains on loan sales were $2.844 million versus $1.503 million.
- Noninterest expense rose 50.1%, including higher professional fees, advertising and marketing, and salaries and benefits, largely associated with expansion of the residential mortgage business.
- Borrowings increased substantially, including a $15 million FRB advance and higher warehouse-facility funding for loans held for sale. Deposits increased only 0.3% from year-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said current liquidity was sufficient for operating needs and strategic plans and described continued monitoring of credit quality and capital.
- COVID-19 was identified as a significant uncertainty. Management warned that economic disruption could increase delinquencies, defaults, charge-offs and nonperforming loans, and affect collateral values, customer demand, funding, liquidity, operations and interest-rate risk. The duration and impact were not predictable.
- Management considered the allowance adequate at quarter-end but cautioned that future provisions could be needed, including if the pandemic or related responses weaken borrower performance or real-estate values.
- Management attributed the decline in nonperforming loans and criticized loans chiefly to loan payoffs; these quarter-end improvements do not establish the future effect of COVID-19.
- The company authorized repurchases of up to 3% of outstanding common shares through September 30, 2020. It repurchased 4,753 shares under the program during March; additional shares reported as purchased in February were employee tax-withholding shares.
- CFBank reported capital ratios above stated regulatory minimums. Dividend capacity remains subject to regulatory limits, subsidiary distributions, liquidity and debt-payment conditions.
- Management reported no material adverse effect expected from ordinary-course litigation and no material change in market risk from the prior annual report. The filing also notes that the future impact of adopting the expected-credit-loss standard, effective for the company after December 15, 2022, could not yet be reasonably determined.
Important facts for investors to verify
- Whether mortgage-loan sale gains and elevated mortgage volumes are sustainable, and how associated marketing, staffing and professional costs develop.
- How COVID-19 affects loan delinquencies, criticized assets, the allowance and collateral values after March 31; the reported quarter-end credit metrics predate much of the pandemic’s potential impact.
- The mix, cost and availability of funding as borrowings rose and deposits were nearly flat; confirm the terms and utilization of warehouse, FRB, FHLB and commercial-bank facilities.
- Why common-stockholder earnings and EPS declined despite higher consolidated net income, including the Series C preferred-stock allocation and potential dilution.
- The quality of reported liquidity and capital, including borrowing-capacity assumptions, collateral requirements and restrictions on dividends or repurchases.