CF Bankshares Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. CF Bankshares is a bank holding company whose subsidiary, CFBank, serves commercial, retail and mortgage customers primarily in Ohio, with an Indiana market. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 / Sept. 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income | $4.0; diluted EPS $0.62 | Q3 2022: $4.2; diluted EPS $0.65 |
| Net interest income | $11.7 | Q3 2022: $13.3 |
| Net interest margin | 2.50% | Q3 2022: 3.36% |
| Net income, nine months | $12.7; diluted EPS $1.97 | Nine months 2022: $13.5; diluted EPS $2.06 |
| Net interest income, nine months | $35.9 | Nine months 2022: $35.6 |
| Net interest margin, nine months | 2.65% | Nine months 2022: 3.17% |
| Total assets | $1,992.5 | Dec. 31, 2022: $1,820.2 |
| Net loans and leases | $1,659.8 | Dec. 31, 2022: $1,572.3 |
| Deposits | $1,685.0 | Dec. 31, 2022: $1,527.9 |
| Stockholders’ equity | $151.3 | Dec. 31, 2022: $139.2 |
In Q3, interest income rose 56.4% to $28.2 million, but interest expense increased 251.8% to $16.5 million as funding costs and interest-bearing liabilities rose. The resulting 12.4% decline in quarterly net interest income was partly offset by higher noninterest income and lower noninterest expense. Nine-month net interest income was nearly flat year over year, as higher interest income was largely absorbed by higher interest expense.
Provision for credit losses was $1.2 million in Q3 and $1.4 million for the first nine months, versus $0.2 million in each comparable 2022 period. Noninterest income was $1.3 million in Q3 and $3.0 million for nine months. Noninterest expense was $6.8 million in Q3 and $21.6 million for nine months. The nine-month increase in expense was primarily associated with higher FDIC premiums, partly offset by lower data-processing costs.
For the first nine months, operating cash flow was $10.1 million, investing cash outflow was $86.7 million, and financing cash inflow was $154.6 million. Cash and cash equivalents ended the period at $229.8 million, up $78.0 million from year-end 2022. Management reported total cash, unpledged securities and deposits in other institutions of $230.7 million, plus $184.6 million of additional FHLB capacity, $143.6 million of FRB capacity and $65.0 million of unused commercial-bank lines.
Total loans and leases before allowance were $1,676.8 million; the allowance for credit losses was $17.0 million, or 1.02% of loans. Nonperforming loans were $4.6 million, or 0.27% of loans, compared with $0.8 million and 0.05% at year-end 2022. Total liabilities included $110.0 million of FHLB advances and other debt and $15.0 million of subordinated debentures. CFBank reported a 12.22% common equity tier 1 ratio and a 9.83% leverage ratio at September 30, 2023.
Material changes versus prior periods
- Quarterly net interest margin fell 86 basis points year over year; the nine-month margin fell 52 basis points.
- Loans grew 5.6% from year-end, led by construction, multifamily and commercial real estate lending. Deposits grew 10.3%; growth included money-market and certificate-of-deposit balances, while noninterest-bearing deposits declined $48.9 million.
- Brokered deposits increased to $426.9 million from $291.8 million at year-end. About 28.0% of deposits exceeded the $250,000 FDIC insurance limit, down from 31.6%.
- Nonperforming loans rose mainly after two commercial loans totaling approximately $3.6 million became nonaccrual in Q3. Criticized and classified loans increased $4.6 million from year-end; substandard loans rose to $9.5 million.
- The company adopted CECL on January 1, 2023. It reported a one-time $49,000 increase in reserves for loans and unfunded commitments; prior-year credit-loss figures use the incurred-loss model and are not directly comparable.
Outlook, commentary and risks
The filing provides no specific earnings or margin guidance. Management said current liquidity was sufficient for operating needs and strategic plans, and described commercial banking as the primary driver of earnings and performance. The residential mortgage business had been scaled back, with the company favoring portfolio lending in its regional markets; the Worthington headquarters building sale was completed in May 2023.
Key risks include continued deposit repricing and competition for funding, interest-rate and real-estate-market changes, credit deterioration and potential additional provisions. Management highlighted Ohio economic conditions, borrower cash flows and collateral values as relevant to credit quality. The company also noted that borrowing capacity depends on collateral, credit performance and lender policies. Two individually evaluated commercial loans drove higher Q3 provisioning; a separate $2.9 million commercial loan for a financially distressed borrower received a modification allowing principal and interest deferral for up to one year at a higher accruing rate.
Available-for-sale securities had $3.0 million of unrealized losses at September 30, 2023, which the company attributed to interest-rate changes rather than credit quality; it reported no intent or likely requirement to sell before recovery. The company said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than yields on loans and other earning assets, and the resulting effect on net interest margin.
- Developments in the two newly nonaccrual commercial loans, the modified $2.9 million loan, criticized/classified assets and allowance adequacy.
- Deposit composition and stability, including brokered deposits, uninsured balances, and the cost and availability of alternative funding.
- Progress in loan growth and commercial real estate/construction exposures, alongside performance of the Ohio-focused markets.
- Upcoming debt terms: the holding-company credit facility’s revolving period ends May 21, 2024, and the $10 million subordinated notes begin floating-rate resets in December 2023.