CF Bankshares Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. CF Bankshares is a financial holding company whose principal subsidiary, CFBank, serves commercial, retail, and mortgage customers, primarily in Ohio.
Financial results and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.930 billion | $1.820 billion at December 31, 2022 |
| Total loans and leases, net | $1.616 billion | $1.572 billion at December 31, 2022 |
| Total deposits | $1.604 billion | $1.528 billion at December 31, 2022 |
| Net interest income | $12.7 million | $10.8 million in Q1 2022 |
| Net interest margin | 2.93% | 3.13% in Q1 2022 |
| Net income | $4.448 million | $4.518 million in Q1 2022 |
| Diluted earnings per share | $0.68 | $0.69 in Q1 2022 |
| Provision for credit losses | $237,000 | None in Q1 2022 |
- Revenue and margins: Interest income rose 83.8% to $24.2 million, while interest expense increased 381.2% to $11.4 million. Net interest income grew 18.2%, but margin compressed 20 basis points as funding costs rose faster than asset yields.
- Other income and expenses: Noninterest income declined 31.3% to $719,000, mainly because mortgage loan-sale gains fell. Noninterest expense increased 22.5% to $7.7 million. Management cited higher compensation, FDIC premiums, advertising, and other expense, including a $180,000 increase in customer-account fraud losses and $119,000 more in charitable contributions.
- Cash flow: Operating activities provided $5.8 million, investing activities used $45.0 million, and financing activities provided $101.6 million. Cash and cash equivalents increased $62.5 million to $214.2 million.
- Debt and liquidity: FHLB advances and other debt totaled $137.0 million, up from $109.5 million at year-end; subordinated debentures were $14.9 million. CFBank reported $573.2 million of cash, unpledged securities, and additional borrowing capacity, including $169.3 million at the FHLB, $122.6 million at the FRB, and $65.0 million in unused commercial bank lines. Management said liquidity was sufficient for current operating needs and strategic plans.
- Credit and capital: The allowance for credit losses was $15.9 million, or 0.98% of loans, versus 1.01% at year-end. Nonperforming loans were $718,000, or 0.04% of loans, down from $761,000. CFBank’s total capital ratio was 12.93%, its CET1 ratio was 11.84%, and its leverage ratio was 10.02% at March 31, 2023; each exceeded the filing’s stated well-capitalized thresholds.
Material changes and management commentary
- Assets increased 6.1% from year-end, with growth primarily in cash and loans. Net loans grew 2.8%, including increases in commercial real estate, residential, home equity, multifamily, construction, and commercial balances.
- Deposits grew 5.0%, led by money market and certificate-of-deposit balances; noninterest-bearing deposits fell $39.1 million. Brokered deposits rose to $357.2 million from $291.8 million. Approximately 30.5% of deposits exceeded the $250,000 FDIC insurance limit.
- The bank adopted CECL on January 1, 2023, using an average charge-off method, a historical lookback beginning in 2000, and a one-year reasonable-and-supportable forecast period. The notes describe a $49,000 cumulative-effect adjustment; the MD&A instead states $50,000. The reported opening allowance also reflects a $409,000 net decrease attributable to adoption.
- Management said commercial banking growth has become the primary driver of earnings. The company had previously scaled back residential mortgage operations and exited direct-to-consumer mortgage lending in favor of regional-market lending.
- No specific earnings or financial guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- The filing highlights risks from rising interest rates, inflation and borrower repayment capacity, deposit competition, and recent or future bank failures that could affect customer confidence, funding, liquidity, regulatory costs, and the banking industry’s reputation.
- Interest-only commercial lines totaled $117.5 million, or 27.3% of commercial loans; interest-only home equity lines were $35.9 million, or 98.2% of home equity lines. The company notes collateral-value and repayment risks associated with these loans.
- Available-for-sale securities had $2.851 million of gross unrealized losses, which management attributed to market interest rates rather than credit quality. The company reported no allowance for credit losses on these securities.
- The company reported ordinary-course litigation, but management did not expect pending matters to have a material adverse effect. There were no loans modified during Q1 2023 and no foreclosed assets at quarter-end.
- Q1 included $3,000 of net charge-offs. The filing also reports a $542,000 impairment expense recorded in Q3 2022 on the former headquarters building, which remained classified as held for sale at March 31, 2023.
Important facts for investors to verify
- Reconcile the CECL adoption disclosure: the notes state a $49,000 cumulative-effect adjustment, while MD&A states $50,000; confirm the intended amount and related allowance impacts.
- Track deposit mix and stability, including growth in brokered deposits, the decline in noninterest-bearing balances, and uninsured deposits.
- Assess whether loan yields can continue to outpace deposit and borrowing costs, given the year-over-year increase in funding expense and decline in net interest margin.
- Monitor credit quality, especially commercial real estate exposure, interest-only lending, borrower repayment capacity, and the adequacy of the CECL allowance as economic forecasts change.
- Review the progress of the headquarters sale and the effect of rising FDIC premiums, fraud losses, and other expense growth on profitability.