CF BANKSHARES INC. annual report, FY2023

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CF Bankshares Inc. — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This filing reports annual results; standalone fourth-quarter results are not provided in the supplied text. CF Bankshares is a bank holding company whose principal operating subsidiary, CFBank, serves businesses and consumers primarily in Ohio and Indianapolis, Indiana.

Business context and financial performance

  • Scale and growth: Total assets were $2.06 billion, up 13.1% from year-end 2022. Gross loans were $1.71 billion, up 7.7%; commercial, commercial real estate and multifamily lending represented 68.4% of gross loans. Deposits increased 14.2% to $1.74 billion.
  • Revenue and earnings: Net interest income was $47.6 million, down 2.4%. Net income was $16.9 million, down 6.8%, and diluted earnings per share were $2.63 versus $2.78. Noninterest income increased 25.6% to $4.0 million; noninterest expense decreased 0.9% to $28.4 million.
  • Margins: Net interest margin declined to 2.59% from 3.15%. Average yield on interest-earning assets increased to 5.89% from 4.37%, but average cost of interest-bearing liabilities rose to 3.99% from 1.55%; the average interest-rate spread narrowed to 1.90% from 2.82%.
  • Credit and asset quality: Provision for credit losses was $2.3 million versus $787,000. Net charge-offs rose to $646,000 from $233,000. Nonperforming loans increased to $5.7 million, or 0.33% of loans, from $761,000, or 0.05%; seven commercial loans totaling approximately $5.0 million became nonaccrual. The loan allowance was $16.9 million, 0.99% of loans, versus $16.1 million, or 1.01%. The allowance for unfunded commitments was an additional $1.3 million.
  • Cash flow and liquidity: Cash and cash equivalents ended at $261.6 million, up $109.8 million. Cash from operating activities was $18.1 million; investing activities used $121.9 million and financing activities provided $213.6 million. Management reported $262.0 million in cash, unpledged securities and deposits at other institutions, plus $384.9 million of additional FHLB/FRB borrowing capacity and $65.0 million of unused commercial-bank lines.
  • Debt and funding: Deposits included $440.4 million of brokered deposits, up 50.9% year over year. FHLB advances were $76.5 million. Other debt included $33.5 million outstanding on the holding company’s $35 million bank credit facility; $15.0 million of subordinated debentures were also outstanding. The revolving facility was due to convert to a term note on May 21, 2024.
  • Capital and shareholder returns: Stockholders’ equity was $155.4 million, up 11.6%. CFBank’s total risk-based capital ratio was 13.30%, Tier 1 leverage ratio 9.76%, and common equity Tier 1 ratio 12.17%; management said the bank met the “well-capitalized” requirements. Dividends declared were $0.23 per common share for 2023. The company repurchased 9,503 shares during the fourth quarter under a program authorizing up to 250,000 shares through June 30, 2024.

Material changes versus 2022

  • Interest income rose 59.8% to $108.3 million, but interest expense increased 219.6% to $60.6 million, principally reflecting higher funding costs and greater average interest-bearing liabilities. Net interest income and margin consequently declined.
  • Net income decreased despite higher noninterest income and slightly lower operating expenses. Reduced mortgage-related activity remains a major change: mortgage loans originated for sale fell 88.9% to $10.8 million, and net gains on residential mortgage sales fell to $119,000 from $656,000.
  • Loan growth was led by commercial real estate and multifamily loans; commercial real estate and multifamily balances rose to $563.8 million. Brokered deposits increased substantially as the deposit base expanded.
  • Nonperforming loans and classified/substandard commercial exposures increased. The company adopted CECL on January 1, 2023; the filing reports a $49,000 cumulative-effect increase in reserves for loans and unfunded commitments, while the loan allowance rollforward separately shows a $409,000 “Day 1” reduction. These disclosures describe different allowance effects and merit reconciliation.

Outlook, risks and unusual items

  • No quantified earnings or balance-sheet guidance is provided. Management said it expects to continue dividends at similar levels, subject to legal, regulatory, capital, liquidity and debt-payment conditions, and stated that current liquidity is sufficient for anticipated needs.
  • Management identifies interest-rate and funding-cost pressure, regional economic concentration, commercial and real estate credit exposure, collateral values, deposit competition and reliance on brokered deposits as important risks. Higher rates may also increase payments on adjustable-rate loans and borrower default risk.
  • CFBank’s Community Reinvestment Act rating remained “Needs to Improve” following the OCC’s evaluation of 2020–2022. The rating constrains certain activities, including acquisitions, mergers and new activities; the next evaluation is expected to commence in 2026. Management believes actions since 2021 addressed legacy issues but the rating has not yet changed.
  • The bank modified one $2.9 million commercial loan for a financially distressed borrower, deferring principal and interest payments for up to one year at a higher accruing rate. The loan was not past due at year-end. There were no foreclosed assets and management reported no pending legal proceeding expected to materially affect the company.
  • Unrealized losses on available-for-sale securities were $2.9 million, attributed by management to market interest-rate changes rather than credit quality. The portfolio’s fair value was $8.1 million against $11.0 million amortized cost.
  • Net operating loss carryforwards were $21.9 million, but management expects $20.5 million to expire unused because of Section 382 limitations. A February 2024 transaction exchanged 200,000 voting common shares for 2,000 newly issued Series D non-voting convertible perpetual preferred shares.
  • The independent auditor issued an unqualified opinion on the consolidated financial statements and identified the allowance for credit losses as a critical audit matter. Management reported effective internal control over financial reporting; the auditor did not audit that control assessment.

Important facts for investors to verify

  • Whether deposit pricing stabilizes and net interest margin recovers, given the sharp increase in interest expense and the high share of interest-bearing deposits.
  • Trends in brokered and uninsured deposits, deposit maturities, and available borrowing capacity; confirm liquidity after the holding company credit facility’s May 2024 conversion.
  • Performance, collateral and risk ratings of the seven commercial nonaccrual loans and other criticized/classified loans, and whether further provisions or charge-offs are needed.
  • How the $16.9 million loan allowance and $1.3 million unfunded-commitment allowance compare with future credit performance, and reconcile the filing’s CECL adoption adjustment disclosures.
  • Progress toward remediation of the “Needs to Improve” CRA rating and the effect of restrictions on strategic activity.
  • Holding-company capacity to service debt and maintain dividends, particularly as subordinated debt rates reset and regulatory limits may constrain bank dividends.
  • The credit facility’s stated floating-rate floor is inconsistent in the filing text (3.25% in the debt description versus 3.75% in the liquidity discussion); verify the governing agreement.