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Me

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended December 31, 2023

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to______________

Commission File Number 0-25045

CF BANKSHARES INC.

(Exact name of registrant as specified in its charter)

Delaware

34-1877137

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

4960 E. Dublin Granville Road, Suite #400, Columbus, Ohio

43081

(Address of Principal Executive Offices)

(Zip Code)

(614) 334-7979

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share

CFBK

Nasdaq® Capital Market

(Title of Class)

(Trading Symbol)

(Name of Exchange on which Registered)

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

YES [ ] NO [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

YES [ ] NO [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]     NO [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)

YES [X] NO [ ]


‎

1

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X]  Smaller reporting company [X] 

Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. [ ]

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES [ ] NO [X]

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of June 30, 2023 was $98.3 million based upon the closing price as reported on the Nasdaq® Capital Market for that date. For this purpose, directors and executive officers of the registrant are considered affiliates.

As of March 15, 2024, there were 5,080,597 shares of the registrant’s (Voting) Common Stock outstanding and 1,260,700 shares of the registrant’s Non-Voting Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 2024, are incorporated herein by reference into Part III of this Form 10-K.

 

2

 

INDEX

PART I

Item 1.

Business

4

Item 1A.

Risk Factors

24

Item 1B.

Unresolved Staff Comments

35

Item 1C.

Cybersecurity

36

Item 2.

Properties

37

Item 3.

Legal Proceedings

37

Item 4.

Mine Safety Disclosures

38

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

38

Item 6.

[Reserved]

38

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 8.

Financial Statements and Supplementary Data

55

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

105

Item 9A.

Controls and Procedures

105

Item 9B.

Other Information

105

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

105

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

105

Item 11.

Executive Compensation

106

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

106

Item 13.

Certain Relationships and Related Transactions, and Director Independence

106

Item 14.

Principal Accountant Fees and Services

106

PART IV

Item 15.

Exhibit and Financial Statement Schedules

107

Item 16.

Form 10-K Summary

107

SIGNATURES

110

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Forward-Looking Statements

Statements in this Annual Report on Form 10-K (this “Form 10-K”) and in our other communications that are not statements of historical fact are forward-looking statements which are made in good faith by us. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share of common stock, capital structure and other financial items; (2) plans and objectives of the management or Boards of Directors of CF Bankshares Inc. (the “Holding Company”) or CFBank, National Association (“CFBank”); (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as "estimate," "strategy," "may," "believe," "anticipate," "expect," "predict," "will," "intend," "plan," "targeted," and the negative of these terms, or similar expressions, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Various risks and uncertainties may cause actual results to differ materially from those indicated by our forward-looking statements, including, without limitation, those risks set forth in the section captioned “RISK FACTORS” in Part I, Item 1A of this Form 10-K.

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 Form 10-K speak only as of the date hereof. 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.

PART I

Item 1. Business.

General

CF Bankshares Inc. (“Holding Company”) was organized as a Delaware corporation in September 1998 as the holding company for CFBank, in connection with CFBank’s conversion from a mutual to stock form of organization. CFBank was originally organized in 1892 and was formerly known as Central Federal Savings and Loan Association of Wellsville and more recently as Central Federal Bank. On December 1, 2016, CFBank converted from a federal savings institution to a national bank. Effective as of December 1, 2016 and in conjunction with the conversion of CFBank to a national bank, the Holding Company became a registered bank holding company and elected financial holding company status. Effective as of July 27, 2020, the Holding Company changed its name from Central Federal Corporation to CF Bankshares Inc. As a financial holding company, we are subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”). As used herein, the terms “we,” “us,” “our” and the “Company” refer to CF Bankshares Inc. and CFBank, unless the context indicates to the contrary.

The consolidated financial statements include the Holding Company and CFBank. Intercompany transactions and balances are eliminated in consolidation.

Central Federal Capital Trust I (the “Trust”), a wholly-owned subsidiary of the Holding Company, was formed in 2003 to raise additional funding for the Company through a pooled private offering of trust preferred securities. The Holding Company issued $5,155,000 of subordinated debentures to the Trust in exchange for ownership of all of the common stock of the Trust and the proceeds of the preferred securities sold by the Trust. The Holding Company is not considered the primary beneficiary of this trust (variable interest entity) and, therefore, the Trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

Currently, the Company does not transact material business other than through CFBank. At December 31, 2023, the Company’s assets totaled $2.1 billion and stockholders’ equity totaled $155.4 million.

CFBank is a nationally chartered boutique commercial bank operating primarily in four (4) major metro markets: Columbus, Cleveland, and Cincinnati, Ohio, and Indianapolis, Indiana. CFBank focuses on serving the financial needs of closely held businesses and entrepreneurs, by providing comprehensive Commercial, Retail and Mortgage Lending services presence. In all regional markets, CFBank provides commercial loans and equipment leases, commercial and residential real estate loans and treasury management depository services, residential mortgage lending, and full-service commercial and retail banking services and products. CFBank seeks to differentiate itself from its competitors by providing individualized service coupled with direct customer access to decision makers, and ease of doing business. We believe that CFBank matches the sophistication of much larger banks, without the bureaucracy. CFBank also offers its clients the convenience of online internet banking, mobile banking, and remote deposit capabilities.

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Our revenues are derived principally from the generation of interest and fees on loans originated and noninterest income generated on the sale of loans. Our primary sources of funds are retail and business deposit accounts and certificates of deposit, brokered certificates of deposit and, to a lesser extent, principal and interest payments on loans and securities, Federal Home Loan Bank (“FHLB”) advances, other borrowings and proceeds from the sale of loans.

Most of our deposits and loans come from our market area. Our principal market area for loans and deposits includes the following counties: Franklin County through our office in Columbus, Ohio (formerly located in Worthington, Ohio until March 1, 2023); Delaware County, Ohio through our Polaris office in Columbus, Ohio; Cuyahoga County through our office in Woodmere, Ohio and our Ohio City office in Cleveland, Ohio; Summit County through our office in Fairlawn, Ohio; Hamilton County through our offices in Blue Ash, Ohio and our Red Bank office in Cincinnati, Ohio; and Marion County, Indiana through our office in Indianapolis. Because of CFBank’s concentration of business activities in Ohio, the Company’s financial condition and results of operations depend in large part upon economic conditions in Ohio.

Market Area and Competition

Our primary market areas are competitive markets for financial services and we face competition both in making loans and in attracting deposits. Direct competition comes from a number of financial institutions operating in our market area, many of which have a statewide or regional presence, and in some cases, a national presence. Many of these financial institutions are significantly larger and have greater financial resources than we do. Competition for loans and deposits comes from savings institutions, mortgage banking companies, commercial banks, credit unions, brokerage firms and insurance companies.

Lending Activities

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 lending in our regional markets. Our Commercial Banking Business continues to experience strong growth and has become the primary driver of our earnings and performance.

Loan and Lease Portfolio Composition. Our loan and lease portfolio consists primarily of commercial, commercial real estate and multi-family mortgage loans, mortgage loans secured by single-family residences and, to a lesser degree, consumer loans. CFBank also finances a variety of commercial and residential construction projects. At December 31, 2023, gross loans receivable totaled $1.7 billion and increased approximately $122.7 million, or 7.7%, from $1.6 billion at December 31, 2022. Commercial, commercial real estate and multi-family mortgage loans, including related construction loans, totaled $1.2 billion in the aggregate and represented 68.4% of the gross loan portfolio at December 31, 2023, as compared to 66.9% of the gross loan portfolio at December 31, 2022. Commercial, commercial real estate and multi-family mortgage loan balances, including related construction loans, increased $108.4 million, or 10.2%, during 2023. Portfolio single-family residential mortgage loans, including related construction loans, totaled $502.8 million and represented 29.4% of total gross loans at year-end 2023, compared to 31.1% at year-end 2022. The remainder of our loan portfolio consists of consumer loans, which totaled $38.4 million, or 2.2% of gross loans receivable, at year-end 2023.

The types of loans originated are subject to federal and state laws and regulations. Interest rates charged on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. In turn, these factors are affected by, among other things, economic conditions, fiscal policies of the federal government, monetary policies of the FRB and legislative tax policies.


‎

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Loan Maturity. The following table shows the remaining contractual maturity of CFBank’s loan portfolio at December 31, 2023. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due within one year. The table does not include potential prepayments or scheduled principal amortization.

At December 31, 2023

Real Estate Mortgage Loans

Consumer Loans

Commercial Loans

Total Loans Receivable

(Dollars in thousands)

Amounts due:

Within one year

$

184,569

$

39

$

113,439

$

298,047

After one year:

More than one year to five years

367,892

2,447

231,719

602,058

More than five years to 15 years

218,597

6,669

94,737

320,003

More than 15 years

461,692

29,198

-

490,890

Total due after 2024

1,048,181

38,314

326,456

1,412,951

Total amount due

$

1,232,750

$

38,353

$

439,895

$

1,710,998

The following table sets forth at December 31, 2023, the dollar amount of total loans and leases receivable contractually due after one year (December 31, 2024), and whether such loans have fixed interest rates or adjustable interest rates.

Due After December 31, 2024

Fixed

Adjustable

Total

(Dollars in thousands)

Real estate mortgage loans

$

705,970

$

342,211

$

1,048,181

Consumer loans

2,566

35,748

38,314

Commercial loans

269,514

56,942

326,456

Total loans

$

978,050

$

434,901

$

1,412,951

Origination of Loans and Leases. Lending activities are conducted through our offices located in Franklin, Cuyahoga, Delaware, Summit, and Hamilton Counties, Ohio and in Marion County, Indiana. We originate commercial, commercial real estate, multi-family and single-family residential mortgage loans and also expanded into business financial services in the Columbus, Cleveland, Cincinnati and Akron, Ohio and Indianapolis, Indiana markets.

Commercial, commercial real estate and multi-family loans are originated with fixed, floating and ARM interest rates. Fixed-rate loans are typically limited to terms of three to five years. CFBank has also utilized interest-rate swaps to protect the related fixed-rate loans from changes in value due to changes in interest rates. See Note 17 in the accompanying Notes to Consolidated Financial Statements for additional information on interest-rate swaps.

CFBank participates in various loan programs offered by the Small Business Administration (the “SBA”), enabling us to provide our customers and small business owners in our markets with access to funding to support their businesses, as well as reduce credit risk associated with these loans. Individual loans include SBA guarantees of up to 90%.

Single-Family Mortgage Lending. A significant lending activity has been the origination of permanent conventional mortgage loans secured by single-family residences located within and outside of our primary market area. Loan originations are primarily obtained from our loan officers and their contacts within the local real estate industry and with existing or past customers and members of the local communities. We offer both fixed-rate and adjustable-rate mortgage (“ARM”) loans with maturities generally up to 30 years, priced competitively with current market rates. We offer several ARM loan programs with terms of up to 30 years and, with the majority of the programs, interest rates adjust with a maximum adjustment limitation of 2.0% per year and a 5.0% lifetime cap. The interest rate adjustments on ARM loans currently offered are indexed to a variety of established indices, primarily the Secured Overnight Financing Rate (“SOFR”) and these loans do not provide for initial deep discount interest rates. We do not originate option ARM loans or loans with negative amortization.

The volume and types of single-family ARM loan originations are affected by market factors such as the level of interest rates, consumer preferences, competition and the availability of funds. For several years, demand for single-family ARM loans was weak due to consumer preference for fixed-rate loans as a result of the low interest rate environment. However, in the past year, demand for ARM loans has risen sharply, due to recent and significant increases in mortgage rates overall.

All single-family mortgage loans sold are underwritten according to Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage Association (Fannie Mae) guidelines, or are underwritten to comply with additional guidelines as may be

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required by the individual investor. CFBank is a direct endorsed underwriter, a designation by the Department of Housing and Urban Development that allows us to offer loans insured by the Federal Housing Authority (“FHA”). CFBank is approved by the Department of Veterans Affairs (“VA”) to originate and approve VA loans.

For the year ended December 31, 2023, single-family mortgage loans originated for sale totaled $10.8 million, a decrease of $86.5 million, or 88.9%, compared to $97.3 million originated in 2022. A shift in the mortgage industry resulted in significantly fewer refinance opportunities and lower margins on residential mortgage loans. In response, beginning in 2021, the Company strategically scaled down its Residential Mortgage Business and exited the direct-to-consumer mortgage business in favor of lending in our regional markets.

For the year ended December 31, 2023, portfolio single-family mortgage loans originated by CFBank totaled $45.2 million, or 2.6% of total loans. Our policy is to originate quality loans that are evaluated for risk based on the borrower’s ability to repay the loan. Collateral positions are established by obtaining independent appraisal opinions. Mortgage insurance is generally required when the loan-to-value (“LTV”) exceeds 80%. In conjunction with competitive product offerings in the market, and the lack of availability for mortgage insurance, jumbo loans and portfolio ARM loans exceeding 80% are often originated without mortgage insurance.

Portfolio single-family residential ARM loans totaled $90.9 million, or 19.0% of the single-family mortgage loan portfolio, at December 31, 2023. These loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the credit risks associated with ARM loans, but also limit the interest rate sensitivity of such loans.

Commercial Real Estate and Multi-Family Residential Mortgage Lending. Origination of commercial real estate and multi-family residential mortgage loans continues to be a significant portion of CFBank’s lending activity. Commercial real estate and multi-family residential mortgage loan balances increased $84.6 million to $563.8 million at December 31, 2023. This represented an increase of 17.6% over the $479.2 million balance at December 31, 2022.

We originate commercial real estate loans that are secured by properties used for business purposes, such as manufacturing facilities, office buildings or retail facilities. We originate multi-family residential mortgage loans that are secured by apartment buildings, condominiums, and multi-family residential houses. Commercial real estate and multi-family residential mortgage loans are secured by properties generally located in our primary market area.

Underwriting policies provide that commercial real estate and multi-family residential mortgage loans may be made in amounts up to 85% of the lower of the appraised value or purchase price of the property. An independent appraisal of the property is required on all loans greater than or equal to $500,000. In underwriting commercial real estate and multi-family residential mortgage loans, we consider the appraised value and net operating income of the property, the debt service ratio and the property owner’s and/or guarantor’s financial strength, expertise and credit history. We offer both fixed and adjustable rate loans. Fixed rate loans are generally limited to three to five years, at which time they convert to adjustable rate loans. At times, CFBank accommodates loans to borrowers who desire fixed-rate loans for longer than three to five years. We have utilized interest-rate swaps to protect these fixed-rate loans from changes in value due to changes in interest rates, as appropriate. See Note 17 in the accompanying Notes to Consolidated Financial Statements for additional information on interest-rate swaps. Adjustable-rate loans are tied to various market indices and generally adjust monthly or annually. Payments on both fixed and adjustable rate loans are based on 15 to 30 year amortization periods.

Commercial real estate and multi-family residential mortgage loans are generally considered to involve a greater degree of risk than single-family residential mortgage loans. Because payments on loans secured by commercial real estate and multi-family residential properties are dependent on successful operation or management of the properties, repayment of commercial real estate and multi-family residential mortgage loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. As with single-family residential mortgage loans, adjustable rate commercial real estate and multi-family residential mortgage loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Additionally, adjustable rate commercial real estate and multi-family residential mortgage loans generally do not contain periodic and lifetime caps on interest rate changes. We seek to minimize the additional risk presented by adjustable rate commercial real estate and multi-family residential mortgage loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate stress scenarios.

Commercial real estate and multi-family residential mortgage loans also have larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans. Some of our borrowers also have more than one commercial real estate or multi-family residential mortgage loan outstanding with us. Additionally, some loans may be collateralized by junior liens. Consequently, an adverse development involving one or more loans or credit relationships can expose us to significantly greater risk of loss compared to an adverse development involving a single-family residential mortgage loan. We seek to minimize and mitigate these risks through underwriting policies which require such loans to be qualified at origination on the basis of the property’s income and debt coverage ratio and the financial strength of the property owners and/or guarantors.

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Commercial Lending. The origination of commercial loans continues to be a significant component of our lending activity. During 2023, commercial loan balances increased by $12.5 million, or 2.9%, to $439.9 million at year-end 2023. Commercial loans are generally secured by business equipment, inventory, accounts receivable and other business assets. In underwriting commercial loans, we consider the net operating income of the borrower, the debt service ratio and the financial strength, expertise and credit history of the business owners and/or guarantors. We offer both fixed- and adjustable-rate commercial loans. Fixed-rate loans are typically limited to a maximum term of five years. Adjustable-rate loans are tied to various market indices and generally adjust monthly or annually.

Commercial loans are generally considered to involve a greater degree of risk than loans secured by real estate. Because payments on commercial loans are dependent on successful operation of the business enterprise, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. We seek to mitigate these risks through underwriting policies which require such loans to be qualified at origination on the basis of the enterprise’s income and debt coverage ratio and the financial strength of the business owners and/or guarantors.

Adjustable-rate commercial loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Additionally, adjustable-rate commercial loans generally do not contain periodic and lifetime caps on interest rate changes. We seek to minimize the additional risk presented by adjustable-rate commercial loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate scenarios.

Construction and Land Lending. During 2023, construction loans increased by $6.6 million, or 3.6%, to $190.7 million, as compared to the $184.1 million in the portfolio at year-end 2022. CFBank’s strong capital levels have allowed CFBank to take advantage of select market opportunities in this area within the risk tolerances we have identified.

Construction loans are made to finance the construction of residential and commercial properties generally located within our primary market area. Construction loans are fixed- or adjustable-rate loans which may convert to permanent loans with maturities of up to 30 years. Our policies provide that construction loans may be made in amounts generally up to 80% of the appraised value of the property, and an independent appraisal of the property is required. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant and regular inspections are required to monitor the progress of construction. Land development loans generally do not exceed 75% of the actual cost or current appraised value of the property, whichever is less. Loans on raw land generally do not exceed 65% of the actual cost or current appraised value of the property, whichever is less.

Construction and land financing is considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. We attempt to reduce such risks on construction loans by requiring personal guarantees and reviewing current personal financial statements and tax returns, as well as other projects of the developer.

Consumer and Other Lending. The consumer loan portfolio generally consists of home equity lines of credit, home improvement loans, loans secured by deposits and purchased loans. At December 31, 2023, our consumer loan portfolio totaled $38.4 million, which was 2.2% of gross loans receivable. During 2023, our consumer loan portfolio increased $5.9 million, or 18.1%, over the year-end 2022 balance of $32.5 million.

Home equity lines of credit include those loans we originate for our portfolio and purchased loans. We offer a variable rate home equity line of credit product which we originate for our portfolio. The interest rate adjusts monthly at various margins above the prime rate of interest (“PRIME”) as disclosed in The Wall Street Journal. The margin is based on certain factors including the loan balance, value of collateral, election of auto-payment and the borrower’s FICO® score. The amount of the line is based on the borrower’s credit history, income and equity in the home. When combined with the balance of the prior mortgage liens, these lines generally may not exceed 89.9% of the appraised value of the property at the time of the loan commitment. The lines are secured by a subordinate lien on the underlying real estate and are, therefore, vulnerable to declines in property values in the geographic areas where the properties are located. Credit approval for home equity lines of credit requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral.

Delinquencies and Classified Assets. Management and the Board of Directors monitors the status of all loans 30 days or more past due on a monthly basis through the analysis of past due statistics and trends for all loans. Procedures with respect to resolving delinquencies vary depending on the nature and type of the loan and period of delinquency. We make efforts, consistent with safety and soundness principles, to work with the borrower and develop action steps to have the loan brought current. If the loan is not brought current, it then becomes necessary to take additional legal actions including the repossession of collateral.

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We maintain an internal credit rating system and loan review procedures specifically developed to monitor credit risk for commercial, commercial real estate and multi-family residential loans. Internal loan reviews for these loan types are 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.

Federal regulations and CFBank’s asset classification policy require use of an internal asset classification system as a means of reporting and monitoring assets. We have incorporated the regulatory asset classifications as a part of our credit monitoring and internal loan risk rating system. Loans are classified 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. In accordance with regulations, problem loans are classified as special mention, substandard, doubtful or loss, and the classifications are subject to review by banking regulators. Loans designated as special mention are considered criticized assets. Loans designated as substandard, doubtful or loss are considered classified assets. Loans designated as special mention possess weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the loan or of CFBank’s credit position at some future date. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that there will be some loss if the deficiencies are not corrected. A loan considered doubtful has all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, condition and values, highly questionable and improbable. Loans designated as loss are considered uncollectible based on the borrower’s inability to make payments, and any value attached to collateral, if any, is based on liquidation value. Loans considered loss are generally uncollectible and have so little value that their continuance as assets is not warranted and are charged off, unless certain circumstances exist that could potentially warrant a specific reserve to be established.

See the section titled “Financial Condition - Allowance for credit losses on loans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and Notes 1 and 4 in the accompanying Notes to Consolidated Financial Statements for detailed information on criticized and classified loans as of December 31, 2023 and 2022.

Classified loans include all nonaccrual loans, which are discussed in further detail in the section below titled “Nonperforming Assets”. In addition to nonaccrual loans, classified loans include loans that were identified as substandard assets, were still accruing interest at December 31, 2023, but exhibit weaknesses that could lead to nonaccrual status in the future. At December 31, 2023, there was one classified loan still accruing interest.

Nonperforming Assets.

The $5.0 million increase in nonperforming loans in 2023 compared to 2022 was due to seven commercial loans, totaling $5.0 million, becoming nonaccrual during 2023.

For the year ended December 31, 2023, the amount of additional interest income that would have been recognized on nonaccrual loans, if such loans had continued to perform in accordance with their contractual terms, was approximately $251,000. There was no interest income recognized on nonaccrual loans in 2023.

The Company adopted Accounting Standard Update (“ASU”) 2022-02 during the first quarter of 2023. This amendment eliminated the Trouble Debt Restructuring (“TDR”) recognition and measurement guidance and, instead, required that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhanced existing disclosure requirements and introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

During the year ended December 31, 2023, the Company modified one commercial loan, totaling $2.9 million, where the borrower was experiencing financial difficulty. The loan was modified to defer principal and interest payments for up to one year. For any period where the payments are deferred, the note will accrue at a higher rate of interest. The loan was not past due during the year ended December 31, 2023.

See the section titled “Financial Condition - Allowance for credit losses on loans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and Notes 1 and 4, in the accompanying Notes to Consolidated Financial Statements for additional information on nonperforming loans and modified loans as of December 31, 2023 and 2022.

For information on real estate owned (“REO”) and other foreclosed assets, see the section below titled “Foreclosed Assets.”

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Allowance for Credit Losses on Loans and Leases (ACL - Loans). The ACL - Loans is a valuation account that is deducted from the loans and leases' amortized cost basis to present the net amount expected to be collected on loans and leases over the contractual term. Loans and leases are charged off against the allowance when the uncollectibility of the loan or lease is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Adjustments to the ACL- Loans are reported in the income statement as a component of provision for credit loss. The Company has made the accounting policy election to exclude accrued interest receivable on loans and leases from the estimate of credit losses. The allowance and related disclosures for periods beginning after January 1, 2023 are presented under the current expected credit loss model (“CECL”), while the allowance and related disclosures for prior periods are reported under the allowance for loan losses (“ALLL”) incurred loss model.

See the section titled “Financial Condition - Allowance for credit losses on loans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K for a detailed discussion of management’s methodology for determining the appropriate level of the ACL – Loans.

The ACL – Loans totaled $16.9 million at December 31, 2023, and increased $803,000, or 5.0%, from $16.1 million at December 31, 2022. The increase in the ACL - Loans is due to $1.9 million in loan provision expense, partially offset by a $409,000 reduction attributable to a one-time “Day 1” adjustment upon adoption of CECL on January 1, 2023 and $646,000 in net charge-offs during the year ended December 31, 2023. The ratio of the ACL - Loans to total loans was 0.99% at December 31, 2023, compared to 1.01% at December 31, 2022.

We believe the ACL - Loans is adequate to absorb probable incurred credit losses in the loan portfolio as of December 31, 2023; however, future additions to the allowance may be necessary based on factors including, but not limited to, deterioration in client business performance, recessionary economic conditions, declines in borrowers’ cash flows and market conditions which result in lower real estate values. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the ACL - Loans. Such agencies may require additional provisions for loan losses based on judgments and estimates that differ from those used by management, or on information available at the time of their review. Management continues to diligently monitor credit quality in the existing portfolio and analyze potential loan opportunities carefully in order to manage credit risk. An increase in loan losses could occur if economic conditions and factors which affect credit quality, real estate values and general business conditions worsen or do not improve.

2023

2022

2021

ACL-Loans, beginning of period

$

16,062 

$

15,508 

$

17,022 

Impact of adoption ASC 326

(409)

-

-

Balances, January 1, 2023 post ASC 326 adoption

15,653 

15,508 

17,022 

Charge-offs:

Real estate loans:

Single-family

-

-

17 

Consumer loans:

Other

3 

-

-

Commercial loans

775 

263 

-

Total charge-offs

778 

263 

17 

Recoveries on loans previously charged off:

Recoveries

Real estate loans:

Single-family

40 

19 

26 

Consumer loans:

Home equity

4 

11 

21 

Other

3 

-

-

Commercial loans

85 

-

56 

Total recoveries

132 

30 

103 

Net charge-offs (recoveries)

646 

233 

(86)

Provision for credit losses on loans

1,858 

787 

(1,600)

ACL - Loans, end of period

$

16,865 

$

16,062 

$

15,508 

ACL - Loans to total loans and leases

0.99%

1.01%

1.26%

ACL - Loans to nonperforming loans

294.74%

2110.64%

1555.47%

Net charge-offs (recoveries) to ACL - Loans

3.83%

1.45%

-0.55%

Net charge-offs (recoveries) to average loans and leases

0.04%

0.02%

-0.01%

The impact of economic conditions on the housing market, collateral values, and businesses’ and consumers’ ability to pay may increase the level of charge-offs in the future. Additionally, our commercial, commercial real estate and multi-family residential loan portfolios may be detrimentally affected by adverse economic conditions. Declines in these portfolios could expose us to losses which could materially affect the Company’s earnings, capital and profitability.
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The following table sets forth the ACL - Loans in each of the categories listed at the dates indicated and the percentage of such amounts to total loans. Although the ACL - Loans may be allocated to specific loans or loan types, the entire ACL - Loans is available for any loan that, in management’s judgment, should be charged off.

At December 31,

2023

2022

2021

Amount

% of Loans in each Category

Amount

% of Loans in each Category

Amount

% of Loans in each Category

(Dollars in thousands)

Real estate loans:

Single-family

$

3,371 

27.95%

$

3,914 

29.28%

$

3,348 

28.20%

Multi-family

1,231 

7.64%

997 

6.56%

827 

6.24%

Commercial real estate

4,105 

25.31%

3,384 

23.62%

5,034 

29.24%

Construction

1,707 

11.15%

2,644 

11.59%

1,744 

6.78%

Consumer loans:

Home equity lines of credit

334 

2.10%

333 

1.93%

272 

1.97%

Other

233 

.14%

26 

.11%

156 

.17%

Commercial loans

5,884 

25.71%

4,764 

26.91%

4,127 

27.40%

Total

$

16,865 

100.00%

$

16,062 

100.00%

$

15,508 

100.00%

Foreclosed Assets

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating and maintenance costs after acquisition are expensed. There were no foreclosed assets at December 31, 2023 or December 31, 2022. See the section titled “Financial Condition - Foreclosed Assets” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and Note 5 in the accompanying Notes to Consolidated Financial Statements for information regarding foreclosed assets at December 31, 2023. Foreclosure activities are closely tied with general economic conditions and the ability of our customers to continue to meet their loan payment obligations and, therefore, the level of foreclosed assets may increase in the future if, among other things, economic conditions in our market area decline.

Investment Activities

National banks have the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances and federal funds. Subject to various restrictions, national banks may also invest their assets in commercial paper, municipal bonds, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a national bank is otherwise authorized to make directly.

The investment policy established by the Board of Directors is designed to provide and maintain adequate liquidity, generate a favorable return on investment without incurring undue interest rate and credit risk, and compliment lending activities. The policy provides authority to invest in U.S. Treasury and federal entity/agency securities meeting the policy’s guidelines, mortgage-backed securities and collateralized mortgage obligations insured or guaranteed by the United States government and its entities/agencies, municipal and corporate bonds and other investment instruments.

At December 31, 2023, the securities available for sale portfolio totaled $8.1 million. At December 31, 2023, all mortgage-backed securities in the securities portfolio were insured or guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae.

Equity securities, consisting of preferred stock in another financial institution, totaled $5.0 million at December 31, 2023 and December 31, 2022.

Management evaluates debt securities impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. See Notes 1 and 3 in the accompanying Notes to Consolidated Financial Statements for a detailed discussion of management’s evaluation of securities for impairment.


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The following table sets forth certain information regarding the amortized cost and fair value of securities at the dates indicated

At December 31,

2023

2022

2021

Securities Available For Sale

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Corporate debt

$

9,980 

$

7,100 

$

9,978 

$

7,500 

$

9,976 

$

9,750 

Issued by U.S. government-sponsored entities and agencies:

U.S. Treasury

1,007 

988 

3,025 

2,925 

6,551 

6,561 

Mortgage-backed securities - residential

4 

4 

17 

17 

35 

36 

Total

$

10,991 

$

8,092 

$

13,020 

$

10,442 

$

16,562 

$

16,347 

The following table sets forth information regarding the amortized cost, weighted average yield and contractual maturity dates of debt securities as of December 31, 2023.

After One Year

After Five Years

One Year or Less

through Five Years

through Ten Years

After Ten Years

Total

Weighted

Weighted

Weighted

Weighted

Weighted

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

Securities Available For Sale

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

Corporate

$

-

-

$

-

-

$