CF Bankshares Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. CF Bankshares is a bank holding company whose subsidiary, CFBank, serves businesses, consumers, and real estate borrowers, primarily in Ohio. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $11.5 million | Up 4.6% from Q2 2021 |
| Net interest margin | 3.04% | 2.95% in Q2 2021 |
| Provision for loan losses | $0 | Q2 2021 included a $1.6 million provision release |
| Noninterest income | $0.8 million | Down 15.0% year over year |
| Noninterest expense | $6.5 million | Down 30.2% year over year |
| Net income | $4.7 million | Up 35.5% from $3.5 million |
| Diluted earnings per share | $0.72 | $0.52 in Q2 2021 |
For the six months, net interest income was $22.3 million, up 8.1%, and net interest margin was 3.08%, versus 2.83%. Net income was $9.2 million, down 6.7% from $9.9 million; diluted EPS was $1.41 versus $1.48. The decline mainly reflected lower residential mortgage loan-sale activity, partly offset by higher net interest income and lower expenses.
At June 30, 2022, assets were $1.62 billion, up 8.3% from year-end 2021. Net loans and leases were $1.38 billion, up 13.5%; deposits were $1.38 billion, up 10.5%. Stockholders’ equity was $132.7 million, up 5.9%. Cash and cash equivalents were $154.9 million, down $11.7 million. FHLB advances and other debt totaled $75.6 million, down from $89.7 million; subordinated debentures were $14.9 million.
Cash flows for the first six months included $32.7 million from operations, $159.5 million used in investing, and $115.1 million from financing. Cash decreased $11.7 million to $154.9 million. Management reported $474.0 million of cash, unpledged securities, and additional borrowing capacity, including unused commercial bank lines.
Credit indicators remained low: nonperforming loans were $0.9 million, or 0.07% of loans, versus 0.08% at year-end; past-due loans were $0.7 million. The allowance for loan and lease losses was $15.5 million, or 1.11% of loans, compared with 1.26% at year-end. CFBank’s reported capital ratios included 13.33% total capital to risk-weighted assets and a 10.09% leverage ratio.
Material changes and management commentary
- The Company exited the saleable-to-investors residential mortgage business during Q2, shifting to portfolio lending with servicing retained. Loans held for sale fell from $28.0 million at year-end to zero. Management identified commercial banking as the primary driver of earnings and growth.
- Q2 expense reductions were led by lower advertising and marketing, employee costs, and professional fees, principally related to scaling down the mortgage business. Mortgage and SBA loan-sale gains also fell substantially in the six-month comparison.
- Loan growth was concentrated in commercial, single-family residential, and construction lending. Deposits rose, mainly from money-market and certificate balances, while noninterest-bearing deposits declined.
- Available-for-sale securities had $1.8 million of gross unrealized losses at June 30, versus $0.2 million at year-end; the resulting six-month after-tax other comprehensive loss was $1.3 million. Management attributed the declines to market conditions rather than credit quality and said it did not expect to be required to sell before recovery.
Outlook, risks, and unusual items
- No specific full-year earnings or revenue guidance is provided. Management said current liquidity was sufficient and the allowance was adequate, while noting that credit losses could rise if economic conditions, borrower cash flows, or real estate values deteriorate.
- Management estimated one-time core-processing conversion costs of approximately $450,000 in Q3 2022 and $50,000 in Q4 2022.
- The filing highlights elevated interest-rate risk, including possible effects on funding costs, loan demand, mortgage activity, asset values, and borrowers with adjustable-rate loans. It also notes recession risk and the Company’s concentration in Ohio markets.
- Interest-only commercial lines totaled $127.7 million; interest-only home-equity lines totaled $26.4 million. Management noted potential collateral-value risk for commercial lines and repayment sensitivity for adjustable-rate borrowers.
- The Company was continuing to evaluate the expected-credit-loss standard (CECL), effective for it beginning after December 15, 2022; management said the financial-statement impact could not yet be reasonably determined. LIBOR transition work was also ongoing.
- The Board declared a $0.05-per-share dividend on July 5, 2022, payable July 26 to shareholders of record July 15. Management reported no pending legal proceeding expected to materially harm financial condition or results.
Important facts for investors to verify
- Whether commercial and portfolio mortgage growth can sustain net interest income as deposit costs respond to rate increases.
- Whether mortgage-business exit benefits persist after lower loan-sale revenue and upcoming processing-conversion costs.
- Credit quality and allowance adequacy as loan balances grow, especially in commercial, construction, and adjustable-rate lending.
- Deposit mix, funding costs, and continued access to the reported borrowing capacity.
- The eventual CECL impact and the market-value recovery, or any need to sell, of securities with unrealized losses.