CF BANKSHARES INC. annual report, FY2019

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CF Bankshares Inc. (Central Federal Corporation) — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter earnings release. The filing identifies the registrant as Central Federal Corporation, parent of CFBank, National Association. Its consolidated financial statements and detailed MD&A are incorporated by reference from the 2019 Annual Report, which is not included in the supplied text.

Business context and key financial metrics

  • Business: Ohio-focused commercial bank operating in Columbus, Cleveland, Cincinnati and Akron, with residential mortgage lending nationwide. Revenue is generated principally from loan interest and fees and gains or other noninterest income from loan sales.
  • Year-end size: Total assets were $880.5 million and stockholders’ equity was $80.7 million at December 31, 2019.
  • Lending: Gross loans were $670.4 million, up $112.7 million (20.2%) from $557.7 million a year earlier. Commercial, commercial real estate and multifamily loans, including related construction loans, totaled $510.0 million, or 76.1% of gross loans, versus 69.9% in 2018.
  • Mortgage production: Single-family mortgage loans originated for sale were $733.7 million, up 213.8% from $233.9 million in 2018; management cited expansion of its leads-based mortgage business and increased sales activity. Portfolio loans sold or retained and gains on sale are not fully quantified in the supplied text.
  • Deposits: Average deposits were $638.0 million, versus $478.3 million in 2018. Average interest-bearing deposit cost rose to 2.22% from 1.59%. Certificates of deposit represented 48.7% of average deposits. Brokered deposits totaled $124.9 million at year-end.
  • Liquidity: Cash, unpledged securities and deposits at other financial institutions totaled $44.1 million at year-end; the holding company separately held $10.0 million in cash. CFBank had $89.0 million of FHLB borrowing capacity and $65.6 million of Federal Reserve borrowing capacity against pledged collateral, with no Federal Reserve borrowings outstanding.
  • Disclosed borrowings: FHLB advances were $16.5 million. The holding company had a $5.0 million term loan and no balance on its $10.0 million revolving line. A mortgage warehouse facility had $7.5 million outstanding. These disclosed amounts do not establish total consolidated debt; the supplied text does not clearly state total debt.
  • Credit quality and allowance: Nonperforming loans were $2.439 million, or 0.36% of loans, compared with $0.377 million, or 0.07%, in 2018. The allowance for loan and lease losses was $7.138 million (1.06% of loans), versus $7.012 million (1.26%) in 2018. The company reported $126,000 in net recoveries and no provision for loan losses in 2019.
  • Profit, cash flow and margins: The supplied filing text does not provide clear values for net income, earnings per share, operating cash flow, net interest income, net interest margin or return ratios. These figures are in the incorporated Annual Report and should not be inferred from the figures above.

Material changes versus 2018

  • Loans grew 20.2%, led by commercial, commercial real estate and multifamily lending; the combined commercial and real estate-related categories rose from 69.9% to 76.1% of gross loans.
  • Average deposits increased about 33.4%, while average interest-bearing deposit cost increased 63 basis points. Brokered deposits were $124.9 million at year-end.
  • Mortgage originations for sale more than tripled. The filing warns that higher mortgage rates could reduce production and gains on loan sales.
  • Nonperforming loans increased by approximately $2.1 million, mainly from one commercial loan, two single-family loans and two consumer loans. Total nonperforming loans and troubled debt restructurings rose to $5.277 million from $3.476 million.
  • The allowance balance increased slightly, but its ratio to loans declined as the portfolio expanded. Net recoveries, rather than a provision expense, were reported for 2019.
  • CFBank opened a Blue Ash, Ohio branch in March 2019. In the fourth quarter it entered a $25 million warehouse facility to fund loans held for sale.

Outlook, risks and unusual items

  • No numerical earnings, growth, margin or credit guidance is provided in the supplied text. Management said it believed the holding company had adequate funds for anticipated operating needs and considered the allowance adequate at year-end.
  • Key risks include rapid loan growth and the ability to manage it; concentration in Ohio and in commercial and commercial real estate lending; borrower repayment and collateral-value deterioration; rising funding costs; interest-rate and mortgage-origination sensitivity; and reliance on brokered and certificate deposits.
  • The filing notes that commercial real estate, multifamily, construction and commercial loans can carry higher loss exposure, including risks from borrower or property concentration and adjustable-rate payment increases. Nonperforming loans rose materially from the prior year, warranting attention alongside the allowance’s lower ratio to loans.
  • Other cited risks include regulatory and capital requirements, dependence on CFBank dividends for parent-company liquidity, cybersecurity and third-party service-provider exposure, loan-sale repurchase or indemnification obligations, and the transition away from LIBOR.
  • CECL adoption was expected to begin January 1, 2023 for the company; management cautioned that the transition could require additional data, systems and methodology changes and could affect credit-loss allowances and capital.
  • Management reported effective internal control over financial reporting at December 31, 2019, no material fourth-quarter changes to those controls, and no pending legal proceeding believed likely to have a material adverse effect.

Most important facts for investors to verify

  1. Review the incorporated 2019 Annual Report for audited net income, EPS, operating cash flow, net interest margin, loan-sale gains, full debt balances and regulatory capital ratios; these are not clearly stated in the supplied text.
  2. Examine the increase in nonperforming loans and total nonperforming loans plus TDRs, including subsequent payment, resolution and charge-off activity.
  3. Assess credit concentration and underwriting exposure in commercial real estate, multifamily, construction and commercial loans, and compare allowance coverage with portfolio growth and risk migration.
  4. Confirm deposit composition, brokered-deposit dependence, certificate maturities and funding costs, as well as availability and terms of borrowing facilities.
  5. Evaluate the sustainability of the sharp increase in mortgage originations for sale and the sensitivity of production and gains to interest rates and refinancing demand.