CFB Bankshares Inc. (filed as Central Federal Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise stated, amounts are in millions; financial statement amounts are in thousands. The filing describes a community bank focused primarily on Ohio lending and deposits.
Financial performance and position
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $2.043; net interest margin 3.24% | Q2 2013: $1.294; margin 2.44% |
| Net income (loss) | Q2: $0.098; six months: $(0.116) | Q2 2013: $(0.554); six months 2013: $(1.364) |
| Common earnings (loss) per share | Q2: $0.00, less than $0.01; six months: $(0.01) | Q2 2013: $(0.04); six months 2013: $(0.09) |
| Net interest income after loan-loss provision | Q2: $1.935; six months: $3.676 | Q2 2013: $0.970; six months 2013: $1.830 |
| Total assets | $294.457 | $255.748 at December 31, 2013 |
| Net loans | $247.675; allowance for loan losses $5.871 | $207.141 net loans; allowance $5.729 |
| Deposits | $242.721 | $208.309 at December 31, 2013 |
| Borrowings and subordinated debt | $13.000 FHLB advances; $5.155 subordinated debentures; no other secured borrowings | $10.000 FHLB advances; $6.526 other secured borrowings; $5.155 subordinated debentures |
| Stockholders’ equity | $29.173 | $22.864 at December 31, 2013 |
For the six months, interest and dividend income was $4.681 versus $3.545 in 2013; noninterest income was $0.603 versus $0.402. Noninterest expense rose to $4.395 from $3.596. No income tax expense or benefit was recorded because the Company maintained a full valuation allowance against its net deferred tax assets.
Six-month cash flow was $2.584 from operating activities, $(39.687) from investing, and $36.824 from financing. Cash and cash equivalents ended at $18.881, down $0.279 from year-end 2013. Management reported $21.422 of cash, unpledged securities, and deposits in other institutions, plus $43.267 of stated additional borrowing capacity, for total available liquidity of $64.689.
Material changes versus comparable periods
- Q2 returned to a small profit from a prior-year loss; the six-month net loss narrowed substantially. Management attributed the improvement mainly to higher net interest income, lower loan-loss provisions, and higher noninterest income.
- Q2 net interest income increased 57.9% year over year, supported by loan growth, a 47-basis-point improvement in average yield on interest-earning assets, and lower funding costs. Six-month net interest margin rose to 3.13% from 2.43%.
- Net loans increased 19.6% from year-end, including growth in commercial, construction, and single-family residential loans. Deposits grew 16.5%. The Company said loan growth was partly funded by deposit growth and cash balances.
- Credit measures improved: nonperforming loans fell to $4.4 from $5.7 at year-end; the nonperforming-loan ratio declined to 1.7% from 2.9%; and criticized and classified loans also decreased. The allowance-to-loans ratio declined to 2.32% from 2.69%, while allowance coverage of nonperforming loans rose to 133.4% from 99.9%.
- Noninterest expense increased 22.4% in Q2 and 22.2% for the six months, particularly due to staffing and costs to expand the mortgage business, professional fees, occupancy costs, and foreclosed-asset expenses.
Outlook, risks, contingencies, and unusual items
- Regulatory status: The OCC terminated the Bank’s cease-and-desist order effective January 23, 2014; the Federal Reserve terminated the holding-company order effective May 9, 2014. Regulatory commitments remain. The Bank must maintain at least an 8% Tier 1 leverage ratio and 12% total risk-based capital ratio; reported ratios were 10.45% and 13.01%, respectively. The holding company remains subject to prior Federal Reserve approval for dividends, share repurchases, certain debt, and other actions.
- Capital raise and potential dilution: By June 30, the Company had issued 270,000 shares of 6.25% Series B convertible preferred stock, netting $6.358. It sold the remaining 210,000 shares on July 15. The full placement raised $12.0 gross and approximately $11.378 net and included warrants to purchase 1,152,125 common shares at $1.85 per share, exercisable through July 15, 2019, subject to limitations. Preferred dividends reduced Q2 common earnings by $0.059.
- Funding and liquidity risk: Management reported $34.7 of brokered deposits at June 30, while the regulatory note reports $36.676; the filing text does not clearly reconcile these values. Disclosed brokered-deposit maturities total $36.676 through June 2017. Continued access to funding depends in part on collateral, credit performance, and regulatory conditions.
- Credit and portfolio risk: Management cautioned that further economic weakness, lower borrower cash flows, or falling real estate values could increase losses and provisions. Interest-only commercial lines totaled $22.9, or 46.0% of commercial loans; interest-only home-equity lines totaled $14.3, or 90.9% of those lines. The Northpointe mortgage-purchase program held $20.0 of loans at quarter-end; these short-duration loans are included in the portfolio and carry no allocated allowance under the Company’s policy.
- Other sensitivities: Interest-rate swaps had $5.812 notional value and $0.554 fair value liability, offset by embedded yield-maintenance provisions. If the swaps were called and could not be replaced, the Company said it could incur a net $0.554 expense, subject to valuation changes. The Company also disclosed a full deferred-tax-asset valuation allowance and Section 382 limits on use of prior net operating losses.
- Management outlook: No quantitative earnings or revenue guidance is provided. Management said liquidity was sufficient for expected needs, but noted the Company had been unprofitable for the prior three years and that continued losses could weaken capital and prompt further regulatory action. It cautioned that interim results are not necessarily indicative of full-year results.
- The filing reports no pending legal proceeding management believes would materially adversely affect the Company and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective for the quarter.
Key facts for investors to verify
- Whether the small Q2 profit and stronger net interest margin persist, given the six-month loss and increased operating costs.
- The exact brokered-deposit balance and maturity schedule, and the Company’s ability to retain diversified funding as loans grow.
- Loan quality trends, especially interest-only exposures, criticized/substandard loans, and performance of Northpointe-program loans; assess whether the allowance remains adequate.
- Compliance with continuing regulatory capital and approval commitments, and the impact of those constraints on dividends, funding, and growth.
- The preferred-stock conversion terms and warrant dilution, along with the effect of preferred dividends on common earnings and future capital.
- Whether liquidity and borrowing capacity remain available under changing collateral, credit, and regulatory conditions.