CF Bankshares Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions unless stated otherwise.
Business context
CF Bankshares is a financial holding company whose wholly owned subsidiary, CFBank, serves businesses, consumers and mortgage customers. Its lending and deposit activity is concentrated in Ohio. During 2021, the bank shifted its mortgage business away from a national, direct-to-consumer model toward a mix including retail and regionally focused originations, and sold two Ohio branches in July.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $10.4 million | $7.1 million | $31.1 million | $19.5 million |
| Net interest margin | 3.21% | 2.52% | 2.94% | 2.58% |
| Provision for loan losses | $0 | $5.8 million | $(1.6) million | $8.9 million |
| Noninterest income | $2.1 million | $23.4 million | $10.3 million | $46.7 million |
| Noninterest expense | $7.4 million | $11.9 million | $25.7 million | $29.3 million |
| Net income | $4.1 million | $10.2 million | $14.0 million | $22.3 million |
| Diluted earnings per share | $0.61 | $1.54 | $2.10 | $3.36 |
- For Q3, net interest income rose 45.8%, supported by loan growth and lower deposit funding costs. Net income fell 60.0%, primarily because mortgage-sale income declined sharply.
- For the first nine months, net income fell 37.2%. Net mortgage-loan sale gains were $5.3 million, versus $45.6 million in the prior-year period; Q3 recorded a net loss of $268,000 on residential mortgage loan sales.
- Q3 noninterest income included a $1.9 million gain on the branch sale. Lower salaries and marketing costs partly offset weaker mortgage-related income.
Financial position, cash flow and capital
- At September 30, total assets were $1.355 billion, down 8.3% from year-end 2020. Net loans and leases were $1.124 billion, up 25.5%; loans held for sale were $77.9 million, down from $283.2 million.
- Deposits totaled $1.157 billion, up 3.9%. Noninterest-bearing deposits increased $44.5 million. Brokered deposits were $269.1 million, up from $168.7 million at year-end.
- Cash and cash equivalents were $68.2 million, compared with $221.6 million at year-end. Management reported total available cash, unpledged securities and borrowing capacity of $289.5 million, including $88.4 million of FHLB capacity, $65.4 million of FRB capacity and $65.0 million of unused commercial bank lines.
- FHLB advances and other debt totaled $41.2 million, down from $214.4 million, largely reflecting repayment of PPPLF and warehouse borrowings. Subordinated debentures were $14.9 million; stockholders’ equity was $123.2 million.
- Nine-month operating cash flow was $198.9 million, investing cash flow was $(223.9) million and financing cash flow was $(128.4) million. Cash declined by $153.4 million over the period.
- CFBank’s regulatory capital ratios were 14.22% total capital, 12.97% common equity tier 1 and 11.04% leverage at September 30; each exceeded the applicable well-capitalized thresholds reported in the filing.
Material changes, outlook and risks
- Loan growth reflected increases in single-family residential, commercial real estate and multifamily lending; commercial loan balances declined partly as PPP loans were repaid. The bank exited its Northpointe mortgage purchase program in Q1.
- The allowance for loan and lease losses declined to $15.5 million from $17.0 million at year-end; allowance to total loans was 1.36%, versus 1.87%. Nonperforming loans were $1.0 million, or 0.09% of loans, compared with $695,000, or 0.08%, at year-end. Management cited improved economic expectations and credit quality for the negative nine-month provision, while noting future provisions could be needed if conditions or collateral values deteriorate.
- Management said mortgage refinancing opportunities and sale margins had weakened and that the shift in mortgage strategy was ongoing. The filing provides no quantified earnings or revenue guidance.
- COVID-19 effects, Ohio economic conditions, borrower credit performance, real estate values, interest rates and competition remain risks. Interest-only commercial lines were $121.5 million (41.4% of commercial loans); interest-only home equity lines were $22.3 million (96.9% of that portfolio).
- The company expected to adopt the CECL credit-loss standard for fiscal years beginning after December 15, 2022; management said the impact was still under evaluation and could not yet be reasonably determined. LIBOR transition planning was also underway.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in risk factors from its prior filings and no pending legal proceeding believed likely to have a material adverse effect.
- After quarter-end, the board declared a $0.04-per-share dividend and authorized an increase in the repurchase program to 350,000 shares, extended through June 30, 2022. The company also purchased an Indianapolis building for approximately $1.8 million on October 29.
Important facts for investors to verify
- Whether mortgage production, sale margins and earnings stabilize as the revised origination strategy progresses.
- Whether rapid loan growth, higher brokered deposits and the decline in cash change the bank’s funding costs or liquidity position.
- Credit quality trends, particularly in commercial and real-estate lending, interest-only exposures, and the adequacy of the allowance as CECL approaches.
- The exact capacity and conditions attached to available borrowing facilities, and the holding company’s ability to fund dividends while servicing debt.
- The effect of the branch sale, share repurchases and subsequent dividend on future earnings, capital and per-share results.