CF Bankshares Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CF Bankshares is the holding company of CFBank, a community bank focused on commercial, real estate, retail and mortgage lending, primarily in Ohio and Indiana. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.5 million | $11.5 million in Q2 2022; down 0.5% |
| Net interest margin | 2.52% | 3.04% in Q2 2022 |
| Net income | $4.2 million; diluted EPS $0.66 | $4.7 million; diluted EPS $0.72 in Q2 2022 |
| Total assets | $1.963 billion | Up 7.8% from $1.820 billion at Dec. 31, 2022 |
| Net loans and leases | $1.631 billion | Up 3.7% from $1.572 billion at Dec. 31, 2022 |
| Total deposits | $1.660 billion | Up 8.6% from $1.528 billion at Dec. 31, 2022 |
| Stockholders’ equity | $147.3 million | Up 5.8% from $139.2 million at Dec. 31, 2022 |
- For the first six months, net income was $8.7 million, down 6.2% from $9.2 million; diluted EPS was $1.35 versus $1.41. Net interest income rose 8.5% to $24.2 million, but net interest margin fell to 2.72% from 3.08%.
- Q2 interest income increased 78.3% year over year to $26.2 million, while interest expense rose 366.4% to $14.7 million. Management attributed the funding-cost increase primarily to higher deposit rates and greater interest-bearing liabilities.
- Q2 provision for credit losses was $12,000; the six-month provision was $249,000. The June 30 allowance for credit losses was $16.0 million, or 0.97% of loans, versus 1.01% at year-end 2022. Nonperforming loans were $799,000, or 0.05% of loans.
- Six-month noninterest income was $1.7 million, down 8.5%, largely reflecting lower residential mortgage loan-sale gains. Noninterest expense rose 16.6% to $14.9 million, including higher FDIC premiums and employee costs.
- Cash and cash equivalents were $231.6 million, versus $151.8 million at year-end. For the six months, operating cash flow was $7.6 million, investing cash outflow was $58.2 million, and financing cash inflow was $130.4 million. Deposit growth was a major source of financing cash.
- FHLB advances and other debt totaled $110.0 million; subordinated debentures were $14.9 million. CFBank’s regulatory capital ratios at June 30 were 13.24% total capital, 12.15% Tier 1 and common equity Tier 1, and 9.82% leverage; each exceeded the filing’s well-capitalized thresholds.
Material changes, outlook and risks
- Deposit growth was led by money market and certificate-of-deposit balances, while noninterest-bearing deposits fell to $217.0 million from $263.2 million at year-end. Brokered deposits increased 33.2% to $388.7 million. Approximately 28.8% of deposits exceeded the $250,000 FDIC insurance limit.
- Management reported available liquidity of $638.3 million, including cash, unpledged securities and deposits, additional FHLB and Federal Reserve borrowing capacity, and unused commercial-bank lines. Management considered liquidity sufficient for current operating and strategic needs, while noting borrowing capacity depends on collateral, credit performance and lender policies.
- The company adopted CECL on January 1, 2023. The adoption adjustment reduced the allowance for loans by $409,000 in the allowance rollforward; the filing also describes a $49,000 increase in reserves for loans and unfunded commitments as the cumulative adoption impact. Investors should verify the presentation and reconciliation of these adoption figures.
- Management cited continued loan growth and commercial banking as the primary earnings driver, while higher funding costs pressured margins. The company provided no specific earnings or financial guidance. It said it was monitoring credit quality and loan opportunities; future credit-loss provisions may be affected by borrower performance, economic conditions and real estate values.
- A subsequent event disclosed a potential credit issue involving a loan participation for which CFBank’s share was $2.9 million at June 30. The lead bank was gathering information; the filing does not provide a clear estimate of potential loss.
- Other considerations include interest-only commercial lines of $128.3 million, or 29.2% of the commercial portfolio, and interest-rate sensitivity. The filing reported no material change in market risk from the 2022 Form 10-K. It also noted ordinary-course legal matters not expected by management to have a material adverse effect.
- On July 5, 2023, the board authorized repurchases of up to 250,000 common shares through June 30, 2024. The company reported no publicly announced repurchase plan in effect during Q2.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than asset yields, and the resulting effect on net interest margin and earnings.
- Deposit mix and stability, including uninsured and brokered deposits, and the availability and terms of contingent borrowing sources.
- The outcome of the $2.9 million participation-loan credit review and any resulting allowance or charge-off.
- Credit trends in commercial real estate, construction, interest-only commercial lines, criticized loans and the allowance under CECL.
- The CECL adoption disclosures and reconciliation, given the differing reserve-impact descriptions in the filing.
- How the planned share repurchase authorization, dividends and debt service affect holding-company liquidity and capital flexibility.