Business context and reporting period
Central Federal Corporation, parent of CFBank, filed this unaudited Form 10-Q for the quarter ended September 30, 2016. The company is a community-oriented Ohio bank focused on commercial and real estate lending and deposits. The request metadata names CF Bankshares Inc.; the filing itself identifies the registrant as Central Federal Corporation, so investors should confirm the issuer identity.
Financial performance and position
Dollar amounts are in millions except per-share data. Comparisons of balance-sheet amounts are to December 31, 2015; income comparisons are year over year.
- Third quarter: Net interest income was $2.936, up 19.6%; net income was $0.505, up 53.0%; and net income attributable to common stockholders was $0.291, or $0.02 per diluted share, versus $0.116, or $0.01, in Q3 2015. Pre-tax income rose 128.5% to $0.754.
- Nine months: Net interest income was $8.437, up 14.9%; net income was $1.243, up 18.6%; and common-stockholder income was $0.600, or $0.04 per diluted share, versus $0.405, or $0.03, in 2015. Pre-tax income increased 76.1% to $1.846.
- Margin and revenue drivers: Net interest margin was 3.32% for Q3, up 15 basis points, and 3.34% for the first nine months, up 10 basis points. Growth in average interest-earning assets and loan yields supported net interest income; funding costs also rose. Nine-month noninterest income fell 17.4% to $0.944, chiefly because loan-sale gains and joint-venture income declined.
- Expenses and taxes: Q3 noninterest expense increased 4.8% to $2.512; nine-month expense increased 0.9% to $7.305. Income tax expense was $0.249 for Q3 and $0.603 year to date, compared with none in 2015 while a deferred-tax valuation allowance was in place. The company reversed that allowance in Q4 2015, recording a $3.2 tax benefit.
- Balance sheet: Assets were $408.394, up 16.3%; net loans were $329.376, up 10.9%; deposits were $345.854, up 19.1%; cash and cash equivalents were $52.302, up from $25.895. Stockholders’ equity was $39.121, up 2.1%.
- Credit quality: The allowance for loan and lease losses was $6.893, or 2.05% of loans, versus 2.18% at year-end. Nonperforming loans declined to $0.868 from $1.425, equal to 0.26% of loans; allowance coverage was 794.1%. Past-due loans rose to $2.2 from $1.4, mainly due to residential loans. The quarter included $0.260 of net recoveries; the nine-month period included $0.043 of net recoveries.
- Debt, liquidity and capital: FHLB advances were $15.5 and subordinated debentures were $5.155. Available liquidity, including cash, unpledged securities and stated borrowing capacity, totaled $116.169, versus $72.671 at year-end. CFBank reported a 13.11% total risk-based capital ratio, 11.85% Tier 1 and common equity Tier 1 ratios, and a 10.28% leverage ratio; each exceeded the applicable well-capitalized thresholds shown in the filing.
- Cash flow: For the nine months, operating activities provided $1.674, investing activities used $30.744 and financing activities provided $55.477. Cash increased $26.407 to $52.302, principally alongside deposit growth and loan funding.
Material changes and management commentary
- Management attributed loan growth mainly to commercial lending and residential and commercial real estate activity. Commercial loans increased $26.4 from year-end; construction and consumer balances declined.
- Deposit growth was driven in part by certificates of deposit, money-market and checking balances. Brokered deposits, including CDARS balances, reached $30.7, up from $22.1.
- Management said liquidity was sufficient for operating needs and planned activity, and that the allowance was adequate at September 30. It cautioned that future credit deterioration, weaker economic conditions or lower collateral values could require additional provisions.
- The prior cease-and-desist orders and related commitments had ended: CFBank’s order and commitments ended in 2015, and holding-company commitments ended January 8, 2016. The company remains subject to regulatory supervision and noted compliance costs could still be material.
- The board authorized repurchases of up to 3% of common shares and extended the program for another six months beginning November 10, 2016. As of September 30, 21,300 shares had been repurchased for $30,000.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements are subject to risks including Ohio economic conditions, interest-rate and funding-cost changes, loan demand and repayment, real estate values, liquidity, deposit competition, regulatory actions, and the ability to manage growth and credit quality. A large mortgage-purchase program involves short holding periods: CFBank held $43.1 of these loans at September 30, with Northpointe retaining a 5% participation interest.
Other items to note include the February 2016 sale of the credit-card portfolio; the sale of a foreclosed multi-family property in Q2; a $0.339 commercial loan modification classified as a troubled debt restructuring during the nine-month period; and one nonperforming TDR default. The company reported $25.2 of tax net operating loss carryforwards at year-end 2015, but Section 382 limits use of pre-offering carryforwards to $0.163 annually; management estimated $20.5 would expire unused. Management was evaluating the impact of the new expected-credit-loss accounting standard.
Important facts for investors to verify
- Confirm the filing’s legal issuer name—Central Federal Corporation—and its relationship to the company named in the request metadata.
- Review the quality, composition and concentration of loan growth, including rising past-due balances, criticized/substandard loans, TDRs and the mortgage-purchase program.
- Assess whether deposit growth and the $116.169 stated liquidity capacity are sustainable, and monitor deposit pricing, brokered deposits and funding costs.
- Check the sustainability of improved net interest margin and earnings, including the effects of higher operating costs and the return to ordinary income-tax expense after the 2015 valuation-allowance reversal.
- Verify capital ratios, dividend and repurchase capacity, and the limits on use of tax attributes; the filing notes that preferred-stock dividends and discount accretion reduce earnings available to common shareholders.