CF Bankshares Inc. — Q1 2022 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. CF Bankshares is the holding company for CFBank, a commercial, retail and mortgage lender focused mainly on Ohio markets. Management says commercial banking has become the primary earnings driver as the company scales back its residential mortgage business.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable / change |
|---|---|---|
| Total assets | $1.544 billion | Up $48.6 million, or 3.3%, from year-end 2021 |
| Loans and leases, net | $1.281 billion | Up $67.2 million, or 5.5%, from year-end 2021 |
| Deposits | $1.299 billion | Up $52.4 million, or 4.2%, from year-end 2021 |
| Net interest income | $10.8 million | Up 12.0% from $9.6 million in Q1 2021 |
| Net interest margin | 3.13% | Up 44 basis points from 2.69% in Q1 2021 |
| Net income / diluted EPS | $4.5 million / $0.69 | Down from $6.4 million / $0.96 in Q1 2021 |
| Noninterest income | $1.0 million | Down from $7.2 million in Q1 2021 |
| Noninterest expense | $6.3 million | Down from $9.0 million in Q1 2021 |
| Cash and cash equivalents | $168.3 million | Up $1.7 million from year-end 2021 |
| FHLB advances and other debt | $83.2 million | Down $6.5 million from year-end 2021; subordinated debentures were $14.9 million |
Cash flow and liquidity. Operating activities provided $20.5 million; investing activities used $63.5 million; financing activities provided $44.6 million. Cash increased $1.7 million during the quarter. The company reported $452.3 million of cash, unpledged securities and additional borrowing capacity at March 31, 2022, including $128.0 million of FHLB capacity, $89.4 million of FRB capacity and $65.0 million of unused commercial bank lines.
Credit and capital. The allowance for loan and lease losses was $15.5 million, or 1.20% of loans, versus 1.26% at year-end. There was no loan-loss provision in either Q1 2022 or Q1 2021; Q1 2022 had $12,000 of net recoveries. Nonperforming loans were $1.0 million, or 0.08% of loans. CFBank’s regulatory capital ratios included 14.01% total capital and 12.76% common equity tier 1, both above the filing’s well-capitalized thresholds. Stockholders’ equity was $128.3 million.
Material changes and management commentary
- Net interest income improved as interest expense fell $862,000 and interest income rose $295,000. Management attributed the margin improvement to lower funding costs and changes in earning-asset yields and mix.
- Net income declined 29.6%, primarily because residential mortgage gains fell $5.8 million as the company repositioned and scaled down its mortgage business. Noninterest expense also declined, including lower advertising, compensation and professional fees associated primarily with that scale-back.
- Residential mortgage loans held for sale fell $19.5 million to $8.5 million from year-end 2021. Net loans grew, with increases in single-family residential, commercial and construction balances.
- Deposits rose overall, led by money-market balances, while noninterest-bearing deposits declined $31.1 million. Customer balances in reciprocal CDARS/ICS programs that do not qualify as brokered increased to $134.0 million.
- Available-for-sale securities had $1.548 million of gross unrealized losses at quarter-end; the resulting after-tax other comprehensive loss was $1.050 million. Management attributed the valuation decline to market conditions rather than credit quality and said it did not intend, and was not likely required, to sell the securities before recovery.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management says Q1 results are not necessarily indicative of full-year results and considers current liquidity sufficient for operating needs and strategic plans.
- Management identifies possible future credit-loss allowance increases if borrower performance, economic conditions or real estate values deteriorate. It considers the current allowance adequate, while noting estimates and regulatory reviews could differ.
- Interest-rate risk is a heightened concern. The filing discusses rate increases, potential effects on funding costs, loan demand, mortgage activity, asset values and adjustable-rate borrower repayment capacity. It also cites inflation, supply-chain pressures and the Russia-Ukraine conflict as sources of uncertainty and potential economic weakness.
- The company warns that geopolitical developments may increase cybersecurity risk, including potential attacks affecting financial institutions.
- CECL (expected-credit-loss) accounting was scheduled to become effective for the company after December 15, 2022; management said the impact could not yet be reasonably determined. The company was also transitioning contracts away from LIBOR.
- Management said ordinary-course litigation was not expected to have a material adverse effect. It disclosed $22.3 million of tax-loss carryforwards, with substantial pre-2012 amounts subject to annual utilization limits and expected to expire unused. Dividend capacity is subject to regulatory, capital and debt-related restrictions.
- The board declared a $0.04-per-share dividend on April 2, 2022, payable April 25. During Q1, the company repurchased 15,755 shares under its repurchase program, in addition to shares surrendered for taxes upon restricted-stock vesting.
Important facts for investors to verify
- Whether commercial loan growth and the 3.13% net interest margin are sustainable as market rates and deposit costs change.
- How the mortgage-business repositioning affects future gains, expenses and earnings, given the sharp year-over-year decline in mortgage income.
- Loan concentration, borrower performance and collateral exposure, particularly as interest rates rise; also monitor criticized loans, delinquencies and the adequacy of the allowance.
- The stability and cost of deposits, including brokered and reciprocal-program balances, and continued access to disclosed borrowing capacity.
- The effect of unrealized securities losses, CECL adoption, LIBOR transition and tax-loss limitations on future results and capital.