CF BANKSHARES INC. FORWARD LOOKING STATEMENTS
This quarterly report and other materials we have filed or may file with the
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The forward-looking statements included in this quarterly report speak only as of the date of the report. We undertake no obligation to publicly release revisions to any forward-looking statements to reflect events or circumstances after the date of such statements, except to the extent required by law.
Business Overview
Most of our deposits and loans come from our market areas. Our principal market
area for loans and deposits includes the following counties:
COVID-19 Impact. The
During the COVID-19 pandemic, we assisted numerous existing and new customers
through our participation in the Paycheck Protection Program ("PPP") and by
providing temporary loan modifications to loan customers.
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Program Liquidity Facility ("PPPLF"), which carried a low interest rate of
0.35%.
Repositioning of Residential Mortgage Business Model. In early 2021, a shift in the mortgage industry resulted in significantly fewer refinance opportunities and lower margins on residential mortgage loans. In response, the Company strategically scaled down and repositioned its Residential Mortgage Business and exited the direct-to-consumer mortgage business in favor of portfolio lending in our regional markets with servicing retained. Our Commercial Banking Business continues to experience strong growth and has become the primary driver of our earnings and performance.
General
Our net income is dependent primarily on net interest income, which is the difference between the interest income earned on loans and securities and our cost of funds, consisting of interest paid on deposits and borrowed funds. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, the level of nonperforming assets and deposit flows.
Net income is also affected by, among other things, provisions for loan and
lease losses, loan fee income, service charges, gains on loan sales, operating
expenses, and taxes. Operating expenses principally consist of employee
compensation and benefits, occupancy, advertising and marketing, data
processing, professional fees,
Management's discussion and analysis represents a review of our consolidated financial condition and results of operations for the periods presented. This review should be read in conjunction with our consolidated financial statements and related notes.
Financial Condition
General. Assets totaled
Cash and cash equivalents. Cash and cash equivalents totaled
Securities. Securities available for sale totaled
Loans held for sale. Loans held for sale totaled
Loans and Leases. Net loans and leases totaled
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Allowance for loan and lease losses (ALLL). The allowance for loan and lease
losses totaled
The ALLL is a valuation allowance for probable incurred credit losses. The ALLL methodology is designed as part of a thorough process that incorporates management's current judgments about the credit quality of the loan portfolio into a determination of the ALLL in accordance with generally accepted accounting principles and supervisory guidance. Management analyzes the adequacy of the ALLL quarterly through reviews of the loan portfolio, including the nature and volume of the loan portfolio and segments of the portfolio; industry and loan concentrations; historical loss experience; delinquency statistics and the level of nonperforming loans; specific problem loans; the ability of borrowers to meet loan terms; an evaluation of collateral securing loans and the market for various types of collateral; various collection strategies; current economic conditions, trends and outlook; and other factors that warrant recognition in providing for an adequate ALLL. Based on the variables involved and the significant judgments management must make about outcomes that are uncertain, the determination of the ALLL is considered to be a critical accounting policy. See the section titled "Critical Accounting Policies" for additional discussion.
The ALLL consists of specific and general components. The specific component
relates to loans that are individually classified as impaired. A loan is
impaired when, based on current information and events, it is probable that
Individually evaluated impaired loans totaled
The specific reserve on impaired loans is based on management's estimate of the present value of estimated future cash flows using the loan's effective rate or the fair value of collateral, if repayment is expected solely from the collateral. On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals or internal evaluations to help make this determination. Determination of whether to use an updated appraisal or internal evaluation is based on factors including, but not limited to, the age of the loan and the most recent appraisal, condition of the property and whether we expect the collateral to go through the foreclosure or liquidation process. Management considers the need for a downward adjustment to the valuation based on current market conditions and on management's analysis, judgment and experience. The amount ultimately charged-off for these loans may be different from the specific reserve, as the ultimate liquidation of the collateral and/or projected cash flows may be different from management's estimates.
Nonperforming loans, which are nonaccrual loans and loans at least 90 days past
due but still accruing interest, totaled
Nonaccrual loans include some loans that were modified and identified as TDRs
and are not performing. TDRs included in nonaccrual loans totaled
Nonaccrual loans at
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The general reserve component of our ALLL covers non-impaired loans of all
classes and is based on historical loss experience adjusted for current factors.
The historical loss experience is determined by loan class and is based on the
actual loss history experienced by
Management's loan review process is an integral part of identifying problem loans and determining the ALLL. We maintain an internal credit rating system and loan review procedures specifically developed as the primary credit quality indicator to monitor credit risk for commercial, commercial real estate and multi-family residential real estate loans. We analyze these loans individually and categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Credit reviews for these loan types are generally performed at least annually, and more often for loans with higher credit risk. Loan officers maintain close contact with borrowers between reviews. Adjustments to loan risk ratings are based on the reviews and at any time information is received that may affect risk ratings. Additionally, an independent third party review of commercial, commercial real estate and multi-family residential loans is performed at least annually. Management uses the results of these reviews to help determine the effectiveness of the existing policies and procedures and to provide an independent assessment of our internal loan risk rating system.
We have incorporated the regulatory asset classifications as a part of our credit monitoring and internal loan risk rating system. In accordance with regulations, problem loans are classified as special mention, substandard, doubtful or loss, and the classifications are subject to review by the regulators. Assets designated as special mention are considered criticized assets. Assets designated as substandard, doubtful or loss are considered classified assets. See Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the regulatory asset classifications.
The level of total criticized and classified loans decreased by
In addition to credit monitoring through our internal loan risk rating system, we also monitor past due information for all loan segments. Loans that are not rated under our internal credit rating system include groups of homogenous loans, such as single-family residential real estate loans and consumer loans. The primary credit indicator for these groups of homogenous loans is past due information.
Total past due loans decreased
All lending activity involves risk of loss. Certain types of loans, such as
option adjustable-rate mortgage (ARM) products, junior lien mortgages, high
loan-to-value ratio mortgages, interest only loans, subprime loans and loans
with initial teaser rates, can have a greater risk of non-collection than other
loans.
Loans that contain interest only payments may present a higher risk than those
loans with an amortizing payment that includes periodic principal reductions.
Interest only loans are primarily commercial lines of credit secured by business
assets and inventory, and consumer home equity lines of credit secured by the
borrower's primary residence. Due to the fluctuations in business assets and
inventory of our commercial borrowers,
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We believe the ALLL is adequate to absorb probable incurred credit losses in the
loan portfolio as of
Foreclosed assets. The Company held no foreclosed assets at
Deposits. Deposits totaled
FHLB advances and other debt. FHLB advances and other debt totaled
Prior to
At
Subordinated debentures. Subordinated debentures totaled
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Stockholders' equity. Stockholders' equity totaled
Management continues to proactively monitor capital levels and ratios in its
on-going capital planning process.
Currently, the Holding Company has excess cash or sources of liquidity to cover
its expenses for the foreseeable future, and could inject capital into
Comparison of the Results of Operations for the Three Months Ended
General. Net income for the three months ended
Net interest income. Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities. The tables in the sections below titled "Average Balances, Interest Rates and Yields" and "Rate/Volume Analysis of Net Interest Income" provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.
Net interest income totaled
Interest income totaled
Interest expense totaled
Provision for loan and lease losses. There was
The following table presents information regarding net charge-offs (recoveries)
for the three months ended
For the three months ended September 30,
2022 2021
(unaudited) (Dollars in thousands)
Single-family residential real estate (2) 13
Home equity lines of credit (3) (5)
Total $ (5) $ 8
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Noninterest income. Noninterest income for the quarter ended
Noninterest expense. Noninterest expense for the quarter ended
Income tax expense. Income tax expense was
Our deferred tax assets are composed of NOLs, and other temporary book to tax
differences. When determining the amount of deferred tax assets that are
more-likely-than-not to be realized, and therefore recorded as a benefit, the
Company conducts a regular assessment of all available information. This
information includes, but is not limited to, taxable income in prior periods,
projected future income and projected future reversals of deferred tax items.
Based on these criteria, the Company determined as of
The Company records income tax expense based on the federal statutory rate adjusted for the effect of other items such as low income housing credits, bank owned life insurance and other miscellaneous items.
Comparison of the Results of Operations for the Nine Months Ended
General. Net income for the nine months ended
Net interest income. Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities. The tables in the sections below titled "Average Balances, Interest Rates and Yields" and "Rate/Volume Analysis of Net Interest Income" provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.
Net interest income totaled
Interest income totaled
Interest expense totaled
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Provision for loan and lease losses. There was
The following table presents information regarding net charge-offs (recoveries)
for the nine months ended
For the nine months ended September 30,
2022 2021
(unaudited) (Dollars in thousands)
Commercial $ - $ (56)
Single-family residential real estate (19) 6
Home equity lines of credit (10) (15)
Total $ (29) $ (65)
Noninterest income. Noninterest income for the nine months ended
Noninterest expense. Noninterest expense for the nine months ended
Income tax expense. Income tax expense was
Our deferred tax assets are composed of NOLs, and other temporary book to tax
differences. When determining the amount of deferred tax assets that are
more-likely-than-not to be realized, and therefore recorded as a benefit, the
Company conducts a regular assessment of all available information. This
information includes, but is not limited to, taxable income in prior periods,
projected future income and projected future reversals of deferred tax items.
Based on these criteria, the Company determined as of
The Company records income tax expense based on the federal statutory rate adjusted for the effect of other items such as low income housing credits, bank owned life insurance and other miscellaneous items.
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Average Balances, Interest Rates and Yields. The following tables present, for
the periods indicated, the total dollar amount of fully taxable equivalent
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed in both dollars and rates. Average balances are computed using
month-end balances.
For Three Months Ended September 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Interest-earning assets:
Securities (1) (2) $ 17,044 $ 219 4.64% $ 22,312 $ 230 4.13%
Loans and leases and
loans held for sale (3) 1,424,326 16,876 4.74% 1,223,868 12,397 4.05%
Other earning assets 135,240 813 2.40% 45,174 21 0.19%
FHLB and FRB stock 7,192 98 5.45% 6,221 55 3.54%
Total interest-earning
assets 1,583,802 18,006 4.54% 1,297,575 12,703 3.92%
Noninterest-earning
assets 78,222 81,674
Total assets $ 1,662,024 $ 1,379,249
Interest-bearing
liabilities:
Deposits $ 1,154,605 3,992 1.38% $ 912,533 1,777 0.78%
FHLB advances and other
borrowings 93,397 698 2.99% 67,853 513 3.02%
Total interest-bearing
liabilities 1,248,002 4,690 1.50% 980,386 2,290 0.93%
Noninterest-bearing
liabilities 279,383 277,469
Total liabilities 1,527,385 1,257,855
Equity 134,639 121,394
Total liabilities and
equity $ 1,662,024 $ 1,379,249
Net interest-earning
assets $ 335,800 $ 317,189
Net interest
income/interest rate
spread $ 13,316 3.04% $ 10,413 2.99%
Net interest margin 3.36% 3.21%
Average interest-earning
assets
to average
interest-bearing
liabilities 126.91% 132.35%
(1)Average balance is computed using the carrying value of securities. Average
yield is computed using the historical amortized cost average balance for
available for sale securities.
(2)Average yields and interest earned are stated on a fully taxable equivalent
basis.
(3)Average balance is computed using the recorded investment in loans net of the
ALLL and includes nonperforming loans.
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For Nine Months Ended September 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Interest-earning assets:
Securities (1) (2) $ 18,353 $ 664 4.52% $ 18,492 $ 529 3.83%
Loans and leases and
loans held for sale (3) 1,339,590 43,746 4.35% 1,301,027 38,452 3.94%
Other earning assets 131,020 1,215 1.24% 81,473 73 0.12%
FHLB and FRB stock 7,280 238 4.36% 6,120 167 3.64%
Total interest-earning
assets 1,496,243 45,863 4.08% 1,407,112 39,221 3.72%
Noninterest-earning
assets 76,937 80,743
Total assets $ 1,573,180 $ 1,487,855
Interest-bearing
liabilities:
Deposits $ 1,074,075 8,177 1.02% $ 996,192 6,382 0.85%
FHLB advances and other
borrowings 96,255 2,051 2.84% 124,923 1,769 1.89%
Total interest-bearing
liabilities 1,170,330 10,228 1.17% 1,121,115 8,151 0.97%
Noninterest-bearing
liabilities 271,961 249,910
Total liabilities 1,442,291 1,371,025
Equity 130,889 116,830
Total liabilities and
equity $ 1,573,180 $ 1,487,855
Net interest-earning
assets $ 325,913 $ 285,997
Net interest
income/interest rate
spread $ 35,635 2.91% $ 31,070 2.75%
Net interest margin 3.17% 2.94%
Average interest-earning
assets
to average
interest-bearing
liabilities 127.85% 125.51%
(1)Average balance is computed using the carrying value of securities. Average
yield is computed using the historical amortized cost average balance for
available for sale securities.
(2)Average yields and interest earned are stated on a fully taxable equivalent
basis.
(3)Average balance is computed using the recorded investment in loans net of the
ALLL and includes nonperforming loans.
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Rate/Volume Analysis of Net Interest Income. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase and decrease related to changes in balances and/or changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by the prior rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2022
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 2021 September 30, 2021
Increase (decrease) Increase (decrease)
due to due to
Rate Volume Net Rate Volume Net
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets:
Securities (1) $ 146 $ (157) $ (11) $ 140 $ (5) $ 135
Loans and leases 2,279 2,200 4,479 4,128 1,166 5,294
Other earning assets 679 113 792 1,072 70 1,142
FHLB and FRB Stock 33 10 43 36 35 71
Total interest-earning
assets 3,137 2,166 5,303 5,376 1,266 6,642
Interest-bearing
liabilities:
Deposits 1,650 565 2,215 1,269 526 1,795
FHLB advances and other
borrowings (41) 226 185 938 (656) 282
Total interest-bearing
liabilities 1,609 791 2,400 2,207 (130) 2,077
Net change in net
interest income $ 1,528 $ 1,375 $ 2,903 $ 3,169 $ 1,396 $ 4,565 (1) Securities amounts are presented on a fully taxable equivalent basis.
Critical Accounting Policies
We follow financial accounting and reporting policies that are in accordance
with
We have identified accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand our financial statements. The following discussion details the critical accounting policies and the nature of the estimates made by management.
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Determination of the ALLL. The ALLL represents management's estimate of probable
incurred credit losses in the loan portfolio at each balance sheet date. The
allowance consists of general and specific components. The general component
covers loans not classified as impaired and is based on historical loss
experience, adjusted for current factors. Current factors considered include,
but are not limited to, management's oversight of the portfolio, including
lending policies and procedures; nature, level and trend of the portfolio,
including past due and nonperforming loans, loan concentrations, loan terms and
other characteristics; current economic conditions and outlook; collateral
values; and other items. The specific component of the ALLL relates to loans
that are individually classified as impaired. Loans exceeding policy thresholds
are regularly reviewed to identify impairment. A loan is impaired when, based on
current information and events, it is probable that
Fair value of financial instruments. Another critical accounting policy relates to fair value of financial instruments, which are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Additional information is included in Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and in Notes 1 and 6 to our 2021 Audited Financial Statements.
Mortgage banking derivatives. Another critical accounting policy relates to the fair value of mortgage banking derivatives. Mortgage banking derivatives include two types of commitments: rate lock commitments and forward loan commitments. The fair values of these mortgage derivatives are based on anticipated gains on the underlying loans and are based on valuation models using observable market data as of the measurement date. Changes in the fair value of the derivatives are reported currently in earnings, as other noninterest income. Changes in assumptions or in market conditions could significantly affect the estimates. Additional information is included in Notes 1, 6 and 11 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and in Notes 1, 6 and 18 to our 2021 Audited Financial Statements.
Liquidity and Capital Resources
In general terms, liquidity is a measurement of an enterprise's ability to meet cash needs. The primary objective in liquidity management is to maintain the ability to meet loan commitments and to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts of securities available for sale; borrowings; and operations. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets, primarily cash, short-term investments and other assets that are widely traded in the secondary market, based on our ongoing assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the objective of our asset/liability management program. In addition to liquid assets, we have other sources of liquidity available including, but not limited to, access to advances from the FHLB and borrowings from the FRB and our commercial bank lines of credit.
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The following table summarizes
September 30, 2022 December 31, 2021
(Dollars in thousands)
Cash, unpledged securities and deposits
in other financial institutions $ 201,709 $ 168,953
Additional borrowing capacity at the FHLB 162,085 113,077
Additional borrowing capacity at the FRB 105,885 72,195
Unused commercial bank lines of credit 65,000 65,000
Total $ 534,679 $ 419,225
Cash, unpledged securities and deposits in other financial institutions
increased
Deposits are obtained predominantly from the markets in which
Management believes that the Holding Company had adequate funds and sources of
liquidity at
Currently, annual debt service on the subordinated debentures underlying the
Company's trust preferred securities is approximately
Currently, the annual debt service on the Company's
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Prior to
The ability of the Holding Company to pay dividends on its common stock is
dependent upon the amount of cash and liquidity available at the Holding Company
level, as well as the receipt of dividends and other distributions from
Federal income tax laws provided deductions, totaling
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