CF Bankshares Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. CF Bankshares is a bank holding company whose subsidiary, CFBank, operates primarily in Ohio. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net interest income | $7.1 | $5.3 | $19.5 | $15.7 |
| Provision for loan losses | $5.8 | $0 | $8.9 | $0 |
| Noninterest income | $23.4 | $3.3 | $46.7 | $7.5 |
| Noninterest expense | $11.9 | $5.3 | $29.3 | $15.0 |
| Net income | $10.2 | $2.6 | $22.3 | $6.6 |
| Diluted earnings per common share | $1.54 | $0.59 | $3.36 | $1.52 |
| Net interest margin | 2.52% | 3.02% | 2.58% | 3.10% |
Mortgage banking drove the increase in noninterest income: net gains on loan sales were $23.1 million in Q3 and $45.6 million for nine months, versus $3.1 million and $6.9 million, respectively, in 2019. Higher mortgage volume also contributed to higher salaries, marketing, and professional fees. Reported earnings growth therefore reflects substantial mortgage-sale activity, alongside higher credit-loss provisioning.
At September 30, total assets were $1.337 billion, up 51.8% from year-end 2019. Net loans and leases were $871.7 million, up 31.4%; loans held for sale were $308.7 million, up 127.5%. Deposits rose 30.5% to $974.0 million. Stockholders’ equity increased 27.7% to $103.0 million.
Cash and cash equivalents were $92.8 million, compared with $45.9 million at year-end. The company reported $287.9 million of liquidity from cash, unpledged securities and deposits, plus available FHLB, FRB and commercial-bank borrowing capacity. Nine-month cash flow was negative $101.8 million from operations and negative $218.6 million from investing, offset by $367.3 million from financing; cash increased $46.9 million.
FHLB advances and other debt totaled $224.5 million, versus $29.0 million at year-end. This included $124.1 million of Federal Reserve PPPLF advances secured by PPP loans, $62.3 million of warehouse borrowing, and $28.5 million of FHLB advances. Subordinated debentures were $14.8 million. CFBank’s regulatory capital ratios were 13.89% total capital, 12.63% Tier 1 and common equity Tier 1, and 10.89% leverage; each exceeded the filing’s stated well-capitalized thresholds.
Material changes and credit developments
- The allowance for loan and lease losses rose to $15.5 million from $7.1 million; the allowance-to-loans ratio was 1.75%, or 2.07% excluding SBA-guaranteed loans. Nine-month net charge-offs were $0.5 million.
- Management attributed the provision increase to pandemic-related economic stress and exposure in certain industries. Nonperforming loans declined to $0.5 million, or 0.06% of loans, from $2.4 million, or 0.36%, at year-end.
- Criticized and classified loans increased $7.0 million during the nine months. Special-mention loans were $10.7 million and substandard loans $7.2 million; no loans were rated doubtful.
- Approximately $24 million of loans remained on temporary payment deferrals at September 30. CFBank reported having modified approximately $100 million since the pandemic began. These CARES Act deferrals were not classified as troubled debt restructurings.
- CFBank originated approximately $126 million of PPP loans to more than 550 borrowers; the filing reports approximately $123 million outstanding in the loan note. PPP loans carry a 1% rate, are SBA-guaranteed and may be forgiven. The company funded nearly all through PPPLF borrowings at 0.35%.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management said uncertainty around COVID-19 could continue to affect credit costs, margins and expenses, and stated it believed the allowance was adequate while warning that further provisions could be needed if economic, borrower or collateral conditions deteriorate. Management also said current liquidity was sufficient for operating needs.
Key disclosed risks include pandemic-related borrower repayment and collateral weakness; PPP processing litigation or SBA denial/recovery of guarantees if origination or servicing deficiencies are found; remote-work, cybersecurity and third-party operational disruption; and interest-rate volatility, including possible negative rates. The company’s concentrated Ohio footprint makes results dependent in part on local economic conditions.
Other notable items: the company changed its name from Central Federal Corporation to CF Bankshares Inc. effective July 2020; Series C preferred shares converted into 1,260,700 non-voting common shares in May 2020; and the board declared a $0.03-per-share quarterly dividend payable in November 2020. The company disclosed $22.5 million of net operating loss carryforwards, with $20.5 million expected to expire unused due to tax limitations. Management reported no pending legal proceeding expected to have a material adverse effect and said disclosure controls were effective.
Important facts for investors to verify
- Whether elevated mortgage-sale gains and the associated expense growth are sustainable, and how mortgage volumes and margins evolve.
- Credit performance of criticized loans, pandemic deferrals and affected industries; adequacy of the allowance under changing economic conditions.
- PPP loan forgiveness and SBA guarantee compliance, and the matching repayment timing and cost of PPPLF funding.
- Funding mix, borrowing availability and liquidity as loans, loans held for sale and deposits continue to change.
- Dividend capacity and capital headroom after considering regulatory restrictions and subordinated-debt terms.