CF Bankshares Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Unless noted, amounts are in millions of dollars. CF Bankshares is a financial holding company whose subsidiary, CFBank, is an Ohio-focused commercial bank. The company changed its name from Central Federal Corporation effective July 27, 2020.
Financial results and key metrics
- Q2 earnings: Net income was $10.1 million versus $2.3 million a year earlier; diluted earnings per common share were $1.53 versus $0.55. Net income attributable to common stockholders was $8.85 million, after $1.22 million allocated to participating Series C securities.
- First-half earnings: Net income was $12.1 million versus $4.0 million; diluted EPS was $1.82 versus $0.93. Net income attributable to common stockholders was $10.2 million.
- Interest income and margin: Q2 net interest income rose 20% to $6.3 million, but net interest margin fell to 2.42% from 3.08%. For the first half, net interest income rose 20% to $12.4 million while margin declined to 2.62% from 3.14%. Lower yields more than offset lower funding costs.
- Noninterest income: Q2 was $19.9 million versus $2.6 million; first-half was $23.3 million versus $4.3 million. Net gains on loan sales were $19.6 million for Q2 and $22.5 million for the first half, primarily reflecting increased residential mortgage sales activity.
- Expenses and credit provision: Q2 noninterest expense increased to $10.3 million from $4.9 million, including higher mortgage-related staffing, professional fees, and marketing. A $3.1 million loan-loss provision was recorded in Q2 and first-half 2020, versus none in the comparable 2019 periods. First-half net charge-offs were $156,000.
- Balance sheet at June 30: Assets were $1.146 billion, up 30% from year-end 2019. Net loans and leases were $846.5 million, up 28%; loans held for sale were $165.9 million. Deposits were $849.0 million, up 14%. Stockholders’ equity was $92.6 million, up 15%.
- Credit quality: The allowance for loan and lease losses was $10.1 million, or 1.18% of total loans (1.40% excluding SBA-guaranteed loans), compared with $7.1 million and 1.06% at year-end. Nonperforming loans were $581,000, or 0.07% of loans, versus $2.4 million and 0.36% at year-end. Special-mention loans increased to $9.7 million from $5.0 million.
- Debt and liquidity: FHLB advances and other debt totaled $165.8 million versus $29.0 million at year-end, primarily reflecting $125.1 million of Federal Reserve PPPLF funding against PPP loans. Cash and equivalents were $77.4 million. Reported available liquidity, including unpledged liquid assets and additional borrowing capacity, totaled $221.4 million.
- Cash flow, first half: Operating cash flow was negative $25.5 million; investing cash flow was negative $189.2 million; financing cash flow was positive $246.2 million. Cash and equivalents increased $31.5 million to $77.4 million.
- Capital: CFBank reported a 14.01% total risk-based capital ratio, 12.77% CET1 ratio, and 10.44% leverage ratio at June 30, above the filing’s stated well-capitalized thresholds.
Material changes versus comparable periods
- Profit rose sharply, chiefly because mortgage lending produced much higher loan-sale gains. Mortgage rate-lock commitments also expanded substantially, to $668.0 million from $297.5 million at year-end.
- Balance-sheet growth reflected loan growth, PPP originations, higher deposits, and short-term funding. PPP loans were about $123.5 million on the balance sheet at quarter-end; management reported originating approximately $126 million during Q2 to more than 550 borrowers.
- Despite higher net interest income, net interest margin compressed amid lower market rates and a changed mix of assets and funding.
- The company increased its allowance in response to COVID-19 economic uncertainty. It also reported approximately $100 million of temporary loan payment deferrals at June 30, none classified as TDRs under the CARES Act provisions.
Outlook, risks, and unusual items
- Management provided no specific numerical earnings or growth guidance. It said the pandemic’s duration and effects create uncertainty for credit costs, margins, and expenses, and that results for the interim period are not necessarily indicative of full-year results.
- Management considered the allowance adequate at June 30 but cautioned that further provisions may be needed if borrower performance, the economy, or collateral values deteriorate. Credit estimates depend on judgments about uncertain conditions.
- Key stated risks include COVID-19 effects on borrowers and local economic conditions; interest-rate and mortgage-market volatility; PPP-related litigation, processing-compliance exposure, and possible SBA denial or reduction of guarantees; operational, staffing, third-party, and cybersecurity risks from remote work; and regulatory limits on capital distributions.
- Management stated that current liquidity was sufficient for operating needs. The filing also notes that borrowing capacity depends on collateral and financial performance, and that dividends are subject to regulatory, capital, and debt-agreement restrictions.
- The company repurchased 56,247 common shares in Q2 at an average $10.61 per share under a program authorized for up to 3% of outstanding common stock through September 30, 2020. Series C preferred stock converted into 1,260,700 non-voting common shares in May.
- Management reported no pending legal proceeding expected to have a material adverse effect and concluded disclosure controls were effective. The expected effective date for the new credit-loss standard, ASU 2016-13, was fiscal years beginning after December 15, 2022; its impact was not yet reasonably determinable.
Important facts for investors to verify
- How much of the unusually high earnings came from sustainable mortgage origination and sale activity versus fair-value changes and other temporary effects.
- Whether mortgage volumes and gain margins remain strong, and how higher mortgage-related expenses affect profitability.
- Performance of the approximately $100 million of deferred loans, and the effect of COVID-19 on criticized loans, allowance needs, and charge-offs.
- PPP forgiveness, repayment, and SBA guarantee compliance, including any potential exposure to claims or litigation.
- Funding costs, deposit retention, and liquidity as PPPLF borrowings and other short-term funding evolve; also verify remaining borrowing availability and collateral requirements.
- Whether net interest margin stabilizes or declines further, and how interest-rate movements affect earnings and the fair values of assets and liabilities.
- Capital and dividend flexibility after balance-sheet growth, share repurchases, and the conversion of preferred shares.