CF Bankshares Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. CF Bankshares is a financial holding company whose subsidiary, CFBank, provides commercial, retail and mortgage banking services, primarily in Ohio. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $11.0 | $6.3 | $20.7 | $12.4 |
| Net interest margin | 2.95% | 2.42% | 2.83% | 2.62% |
| Provision for loan losses | $(1.6) | $3.1 | $(1.6) | $3.1 |
| Noninterest income | $1.0 | $19.9 | $8.2 | $23.3 |
| Noninterest expense | $9.3 | $10.3 | $18.2 | $17.4 |
| Net income | $3.5 | $10.1 | $9.9 | $12.1 |
| Diluted EPS | $0.52 | $1.53 | $1.48 | $1.82 |
Q2 net income fell 65.3%; first-half net income declined 17.9%. Stronger net interest income reflected asset growth and lower deposit funding costs, while mortgage-sale income dropped sharply. Q2 mortgage-loan sale activity recorded a net loss of $0.7 million, versus a $19.6 million gain a year earlier; first-half gains were $5.6 million versus $22.4 million. The $1.6 million negative provision was a reversal, which management attributed to an improved economic outlook and strong credit quality. First-half net recoveries were $73,000, compared with $156,000 in net charge-offs in 2020.
Financial position, cash flow and capital
- Total assets were $1.508 billion at June 30, up 2.1% from year-end 2020. Net loans and leases rose 11.9% to $1.001 billion; deposits increased 5.3% to $1.172 billion.
- Cash and cash equivalents were $134.3 million, down $87.3 million from year-end. First-half operating cash flow was $35.2 million, investing cash flow was negative $148.2 million, and financing cash flow was $25.7 million.
- Loans held for sale were $254.3 million, down 10.2% from year-end. The allowance for loan and lease losses was $15.5 million, or 1.52% of total loans, versus $17.0 million, or 1.87%, at year-end.
- Nonperforming loans were $327,000, or 0.03% of loans, compared with $695,000, or 0.08%, at year-end. No loans remained on COVID-related payment deferrals at June 30.
- FHLB advances and other debt totaled $74.3 million, down from $214.4 million at year-end; subordinated debentures were $14.9 million. The reduction largely reflected repayments of PPPLF and warehouse borrowings. CFBank reported $331.4 million in cash, unpledged securities and available borrowing capacity, compared with $412.8 million at year-end.
- Stockholders’ equity was $119.9 million, up 8.8% from year-end. CFBank’s regulatory ratios included a 14.10% total risk-based capital ratio and a 9.72% leverage ratio; the bank exceeded applicable “well-capitalized” thresholds.
Changes, outlook and risks
- Management said narrower direct-to-consumer (DTC) mortgage margins prompted a decision, announced July 1, to wind down that business after Q2 and shift toward a traditional retail mortgage model. The transition was expected to be completed in Q3 2021; management anticipated substantially lower mortgage originations and related noninterest income for the remainder of 2021 versus 2020.
- The sale of two Columbiana County branches closed July 16, 2021, after quarter-end. At June 30, approximately $29.3 million of related assets and $107.2 million of deposits were classified as held for sale. The transaction included a $1.9 million deposit premium.
- Management considered liquidity sufficient for operating needs. It noted that credit quality, loan demand, deposit flows and borrowing availability could be affected by economic conditions, COVID-19 developments, real estate values and regulatory decisions. The allowance is based on estimates and may require future additions.
- The company was evaluating the expected-credit-loss standard, effective for it after December 15, 2022; management said the impact could not yet be reasonably determined. It was also assessing the transition away from LIBOR.
- A proposed increase in the federal corporate tax rate from 21% to 28% was identified as a risk if enacted. Management reported no pending litigation expected to materially affect the company and no material change in market risk from its 2020 Form 10-K.
- After quarter-end, the board declared a $0.03-per-share quarterly dividend, payable August 2, 2021. Dividend capacity is subject to regulatory and debt-related restrictions.
Important facts for investors to verify
- Whether the DTC mortgage exit and retail repositioning occur as expected, and their effects on revenue, expenses and earnings.
- Mortgage banking results and fair-value volatility: Q2 included a $1.0 million gain from changes in held-for-sale loan fair value but a $4.0 million loss from derivative fair-value changes.
- Loan growth and credit quality, especially commercial real estate and construction exposures, criticized loans, and the adequacy of the allowance as economic conditions evolve.
- The financial and deposit effects of the completed branch sale, including the final transaction accounting and use of proceeds.
- Liquidity and funding trends, including brokered deposits, borrowing capacity, and repayment of PPP-related funding as loans are forgiven or repaid.