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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

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.

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.


‎

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

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.

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.

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.”

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.
‎

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.


‎

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

$

-

-

$

-

-

$

9,980 

1.03%

$

-

-

$

9,980 

1.03%

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

U.S. Treasury

1,007 

0.19%

-

-

-

-

-

-

1,007 

0.19%

Mortgage-backed securities - residential

4 

3.99%

-

-

-

-

-

-

4 

3.99%

Total

$

1,011 

0.21%

$

-

-

$

9,980 

1.03%

$

-

-

$

10,991 

0.95%

(1)Interest yields are presented on a fully taxable equivalent basis using a 21 percent tax rate.

Sources of Funds

General. CFBank’s primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales of loans, borrowings, and funds generated from operations of CFBank. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general market interest rates and economic conditions and competition. Borrowings may be used on a short-term basis for liquidity purposes or on a long-term basis to fund asset growth or manage interest rate risk in accordance with asset/liability management strategies.

The Holding Company, as a financial holding company, has more limited sources of liquidity than CFBank. In general, in addition to its existing liquid assets, sources of liquidity include funds raised in the securities markets through debt or equity offerings, dividends received from its subsidiaries or the sale of assets.

Dividends from CFBank serve as a potential source of liquidity to the Holding Company to meet its obligations. Generally, CFBank may pay dividends to the Holding Company without prior regulatory approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as CFBank remains well capitalized after the dividend payment. See Note 16, Regulatory Capital Matters, in the accompanying Notes to Consolidated Financial Statements for additional information.

The Holding Company’s available cash and cash equivalents totaled $530,000 at December 31, 2023. Management believes that the Holding Company had adequate funds and liquidity sources at December 31, 2023 to meet its current and anticipated operating needs at this time. See the section titled “Liquidity and Capital Resources” for information regarding the Holding Company’s liquidity and regulatory matters.

Deposits. CFBank offers a variety of deposit accounts with a range of interest rates and terms including savings accounts, retail and business checking accounts, money market accounts and certificates of deposit. Management regularly evaluates the internal cost of funds, surveys rates offered by competitors, reviews cash flow requirements for lending and liquidity, and executes rate changes when necessary as part of its asset/liability management, profitability and liquidity objectives. Money market accounts represent the largest portion of our deposit portfolio and totaled 41.4% of average deposit balances in 2023. Certificate of deposit accounts represent the second largest portion of our deposit portfolio and totaled 37.4% of average deposit balances in 2023. The term of the certificates of deposit typically offered vary from six months to five years at rates established by management. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Deposits are obtained predominantly from the areas in which CFBank’s offices are located. We rely primarily on a willingness to pay market-competitive interest rates to attract and retain retail deposits, as well as customer service and relationships with customers.

At December 31, 2023, CFBank had $440.4 million in brokered deposits with maturity dates from January 2024 through February 2027. At December 31, 2023, cash, unpledged securities, and deposits in other financial institutions totaled $262.0 million.

CFBank is a participant in the Certificate of Deposit Account Registry Service® (CDARS) and Insured Cash Sweep (ICS) programs offered through IntraFi Network. IntraFi works with a network of banks to offer products that can provide FDIC insurance coverage in excess of $250,000 through these innovative products. Brokered deposits, including CDARS and ICS deposits that qualify as brokered, totaled $440.4 million at December 31, 2023, and increased $148.6 million, or 50.9%, from $291.8 million at December 31, 2022. Customer balances in the CDARS reciprocal and ICS reciprocal programs, which do not qualify as brokered, totaled $237.8 million at December 31, 2023 and increased $79.9 million, or 50.6%, from $157.9 million at December 31, 2022.

As of December 31, 2023 and 2022, deposits exceeding the FDIC insured limit of $250,000 totaled $509.7 million and $690.4 million, respectively.

Certificate accounts in amounts of $250,000 or more totaled $370.4 million at December 31, 2023, maturing as follows:

Maturity Period

Amount

Weighted Average Rate

(Dollars in thousands)

Three months or less

$

107,921

4.85%

Over 3 through 6 months

105,553

4.42%

Over 6 through 12 months

79,736

4.24%

Over 12 months

77,209

2.70%

Total

$

370,419

The following table sets forth the distribution of average deposit account balances for the periods indicated and the weighted average interest rates on each category of deposits presented.

For The Year Ended December 31,

2023

2022

2021

Average Balance

Percent of Total Average Deposits

Average Rate Paid

Average Balance

Percent of Total Average Deposits

Average Rate Paid

Average Balance

Percent of Total Average Deposits

Average Rate Paid

(Dollars in thousands)

Interest- bearing checking accounts

$

113,141 

6.96%

4.41%

$

91,204 

6.64%

1.41%

$

92,094 

7.60%

0.38%

Money market accounts

672,923 

41.42%

4.47%

429,606 

31.26%

1.76%

282,299 

23.28%

0.50%

Savings accounts

3,087 

0.19%

0.37%

5,582 

0.40%

0.19%

15,793 

1.30%

0.15%

Certificates of deposit

607,147 

37.38%

3.51%

594,611 

43.26%

1.19%

588,072 

48.50%

1.06%

Total Interest-bearing deposits

1,396,298 

85.95%

4.04%

1,121,003 

81.56%

1.42%

978,258 

80.68%

0.82%

Noninterest-bearing deposits:

Demand deposits

228,156 

14.05%

-

253,440 

18.44%

-

234,239 

19.32%

-

Total Average Deposits

$

1,624,454 

100.00%

$

1,374,443 

100.00%

$

1,212,497 

100.00%

See the sections titled “Financial Condition – Deposits” and “Liquidity and Capital Resources” for additional information regarding deposits.

Borrowings. As part of our operating strategy, FHLB advances are used as an alternative to retail and brokered deposits to fund our asset growth. The advances are collateralized primarily by single-family mortgage loans, multi-family mortgage loans, 1-4 family commercial real estate loans and home equity lines of credit loans, securities and cash, and secondarily by CFBank’s investment in the capital stock of the FHLB of Cincinnati. FHLB advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions fluctuates from time to time in accordance with the policies of the FHLB. FHLB advances totaled $76.5 million at December 31, 2023. Based on the collateral pledged, CFBank was eligible to borrow up to a total of $260.2 million at year-end 2023.

The Holding Company has a $35 million facility with a third-party bank. The credit facility is revolving until May 21, 2024, at which time any then-outstanding balance will be converted to a 10-year term note on a graduated 10-year amortization. Borrowings on the credit facility bear interest at a fixed rate of 3.85% until May 21, 2026, and the interest rate then converts to a floating rate equal to PRIME with a floor of 3.25%. The purpose of the credit facility is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth. At December 31, 2023, the Company had an outstanding balance, net of unamortized debt issuance costs, of $33.5 million on the facility.

In addition to access to FHLB advances, CFBank has borrowing capacity available with the Federal Reserve Bank of Cleveland through the Borrower-in-Custody program. The borrowings are collateralized by commercial loans and commercial real estate loans. Based on the collateral pledged, CFBank was eligible to borrow up to a total of $136.2 million at year-end 2023. There were no outstanding borrowings from the Federal Reserve Bank at December 31, 2023.

At December 31, 2023 and 2022, CFBank had $65.0 million of availability in unused lines of credit with two commercial banks. There were no outstanding borrowings on these lines of credit at December 31, 2023 or December 31, 2022. If CFBank were to borrow on these lines of credit, interest would accrue daily at a variable rate based on the commercial bank’s cost of funds and current market returns.

See the section titled “Financial Condition - Subordinated Debentures” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K for information regarding subordinated debentures issued by the Company in 2003 and 2018.

The following table sets forth certain information regarding short-term borrowings at or for the periods ended on the dates indicated (Dollars in thousands)

For the Year ended December 31,

2023

2022

2021

Short-term FHLB advances and other borrowings:

Average balance outstanding

$

223

$

-

$

9,076

Maximum amount outstanding at any month-end during the period

-

-

23,426

Balance outstanding at end of period

-

-

-

Weighted average interest rate during the period

4.91%

-

3.02%

Personnel

As of December 31, 2023, the Company had 103 full-time and 5 part-time employees.

Regulation and Supervision

Set forth below is a brief description of certain laws and regulations that apply to us. This description, as well as other descriptions of laws and regulations contained in this Form 10-K, is not complete and is qualified in its entirety by reference to the applicable laws and regulations. The laws and regulations applicable to the Company are continually under review by the United States Congress and state legislatures and federal and state regulatory agencies, and a change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the Company’s business.

Overview

The Holding Company and CFBank are subject to examination and comprehensive federal regulation and oversight by federal banking agencies. Such regulation and oversight is intended primarily for the protection of consumers, depositors, borrowers, the FDIC’s Deposit Insurance Fund (the “DIF”) and the banking system as a whole and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary and other customers, as well as the DIF. They also may restrict the Holding Company’s ability to repurchase its stock or to receive dividends from CFBank and impose capital adequacy and liquidity requirements.

As a financial holding company, the Holding Company is subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to inspection, examination and supervision by the FRB. The Holding Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as administered by the Securities and Exchange Commission (the “SEC”). The Holding Company’s common stock trades on the NASDAQ Capital Market under the symbol “CFBK”, which subjects the Holding Company to various requirements under the NASDAQ Marketplace Rules.

CFBank, as a national banking association, is subject to regulation, supervision and examination primarily by the Office of the Comptroller of the Currency (the “OCC”). In addition, CFBank is subject to regulation and examination by the FDIC, which insures the deposits of CFBank to the maximum extent permitted by law, and certain other requirements established by the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices and ensures consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products and services. Since its establishment, the CFPB has exercised extensively its rulemaking and interpretative authority.

Federal law provides federal banking regulators, including the OCC, the FRB and the FDIC, with substantial enforcement powers. The enforcement authority of the OCC and the FRB over national banks and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe and unsound practices. Other actions or inactions may also provide the basis for enforcement action.

Regulation of the Holding Company

General. As a financial holding company, the Holding Company’s activities are subject to extensive regulation by the FRB. The Holding Company is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over financial holding companies, including, among other things, the ability to assess civil money penalties, issue cease and desist or removal orders, and require that a financial holding company divest subsidiaries (including a subsidiary bank). In general, the FRB may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.

Source of Strength. A financial holding company is required by law and FRB policy to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. The FRB may require a financial holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the FRB believes the payment of such dividends would be an unsafe or unsound practice.

Prior FRB Approval. The BHCA requires the prior approval of the FRB in any case where a financial holding company proposes to:

acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by the financial holding company;

acquire all or substantially all of the assets of another bank or another financial or bank holding company; or

merge or consolidate with any other financial or bank holding company.

In April 2020, the FRB adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHCA. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the FRB generally views as supporting a facts-and-circumstances determination that one company controls another company. The FRB’s final rule applies to questions of control under the BHCA, but does not extend to the Change in Bank Control Act.

Financial Holding Company Status. A qualifying bank holding company may elect to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company, if the holding company is “well managed” and “well capitalized” and each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act (the “CRA”). The Holding Company became a financial holding company effective as of December 1, 2016.

No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. The Financial Services Modernization Act defines “financial in nature” to include:

securities underwriting, dealing and market making;

sponsoring mutual funds and investment companies;

insurance underwriting and agency;

merchant banking; and

activities that the FRB has determined to be closely related to banking.

A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized and well managed and has at least a satisfactory CRA rating. If a financial holding company or a subsidiary bank fails to maintain all requirements for the holding company to maintain financial holding company status, material restrictions may be placed on the activities of the financial holding company and its subsidiaries and on the ability of the holding company to enter into certain transactions and obtain regulatory approvals for new activities and transactions. The financial holding company could also be required to divest of subsidiaries that engage in activities that are not permitted for bank holding companies that are not financial holding companies. If restrictions are imposed on the activities of a financial holding company, the existence of such restrictions may not be made publicly available pursuant to confidentiality regulations of the bank regulatory agencies.

Each subsidiary bank of a financial holding company is subject to certain restrictions on the maintenance of reserves against deposits, extensions of credit to the financial holding company or any of its subsidiaries, investments in the stock or other securities of the financial holding company or its subsidiaries and the taking of such stock or securities as collateral for loans to any borrower. Further, a financial holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries.

Economic Growth, Regulatory Relief and Consumer Protection Act

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act") was signed into law. The Regulatory Relief Act repealed or modified certain provisions of the Dodd-Frank Act and eased restrictions on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including the Company, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including the Company, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

Transactions with Affiliates, Directors, Executive Officers and Shareholders

Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W generally:

limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate;

limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates; and

require that all such transactions be on terms (including interest rates charged and collateral required) substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.

An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. The term “covered transaction” includes the making of loans to an affiliate, the purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate, the purchase of securities issued by an affiliate and other similar types of transactions with an affiliate.

A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Regulation of CFBank

General. CFBank, as a national bank, is subject to regulation, periodic examination, enforcement authority and oversight by the OCC extending to all aspects of CFBank’s operations. OCC regulations govern permissible activities, capital requirements, dividend limitations, investments, loans and other matters. CFBank also is subject to regulation and examination by the FDIC, which insures the deposits of CFBank to the maximum extent permitted by law. Furthermore, CFBank is subject, as a member bank, to certain rules and regulations of the FRB, many of which restrict activities and prescribe documentation to protect consumers. In addition, the establishment of branches by CFBank is subject to prior approval of the OCC. The OCC has broad enforcement powers over national banks, including the power to impose fines and other civil and criminal penalties and to appoint a conservator or receiver if any of a number of conditions are met.


‎

The CFPB regulates consumer financial products and services provided by CFBank through interpretations designed to protect consumers.

Regulatory Capital. National banks are required to maintain a minimum level of regulatory capital. The OCC has adopted risked-based capital guidelines for national banks, which guidelines include both a definition of capital and a framework for calculating risk weighted assets by assigning assets and off-balance-sheet items to broad risk categories.

In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including CFBank, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital were phased in from January 1, 2015 through January 1, 2019.

The Basel III Capital Rules include (a) a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4.0%.

Common equity for the common equity tier 1 capital ratio generally includes common stock (plus related surplus), retained earnings, accumulated other comprehensive income (unless an institution elects to exclude such income from regulatory capital), and limited amounts of minority interests in the form of common stock, subject to applicable regulatory adjustments and deductions.

Tier 1 capital generally includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus limited amounts of the allowance for credit losses, subject to specified eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter.

In September 2019, the FRB, along with other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including CFBank, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio ("CBLR") framework if it had less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%. Qualifying institutions that elected to use the CBLR framework (each, a “CBLR Bank”) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies' generally applicable capital rules and to have met the well-capitalized ratio requirements. No CBLR Bank was required to calculate or report risk-based capital, and each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (“CARES Act”), on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provided a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020, increased to 8.5% for 2021, and returned to 9.0% on January 1, 2022. This final rule became effective on October 1, 2020. The Company did not utilize the CBLR in assessing capital adequacy and, instead, continued to follow existing capital rules.

In December 2018, the federal banking agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the CECL model (accounting standard). The rule revises the federal banking agencies’ regulatory capital rules to identify which

credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model.

The federal banking agencies have established a system of prompt corrective action to resolve certain of the problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after the bank becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable.

In order to be “well-capitalized”, a bank must have a common equity tier I capital ratio of at least 6.5%, a total risk-based capital of at least 10.0%, a Tier 1 risk-based capital ratio of at least 8.0% and a leverage ratio of at least 5.0%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Company’s management believes that CFBank met the ratio requirements to be deemed “well-capitalized” according to the guidelines described above as of December 31, 2023.

The Holding Company currently qualifies under the FRB’s Small Bank Holding Company Policy Statement for exemption from the FRB’s consolidated risk-based capital and leverage rules at the holding company level. In April 2015, the FRB issued a final rule which increased the size limitation for qualifying bank holding companies under the Small Bank Holding Company Policy Statement from $500 million to $1 billion of total consolidated assets. In August 2018, the FRB issued an interim final rule, as required by the Regulatory Relief Act, to further increase the size limitation under the Small Bank Holding Company Policy Statement to $3 billion of total consolidated assets.

FDIC Regulation and Insurance of Accounts. CFBank’s deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. The general deposit insurance limit is $250,000 per separately insured depositor. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions, to prohibit any insured institution from engaging in any activity the FDIC determines to pose a threat to the DIF, and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any insured institution if the FDIC finds that the insured institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency.

The FDIC assesses quarterly deposit insurance premiums on each insured institution based on risk characteristics of the insured institution and may also impose special assessments in emergency situations. The premiums fund the DIF. Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC's rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. The DRR met the statutory minimum of 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019. As of June 30, 2021, the DRR fell below the minimum DRR to 1.30%. As a result, the FDIC adopted a restoration plan requiring the restoration of the DRR to 1.35% within eight years (September 30, 2028). The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk. As of September 30, 2022, the DRR was 1.26%. Because the DRR remained below the statutory minimum, the FDIC adopted a final rule in October 2022 increasing the assessment rate from three basis points to five basis points beginning with the first quarterly assessment period of 2023. In the FDIC’s most recent semiannual update for the amended restoration plan in November 2023, the FDIC noted that increased loss provisions associated with the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023 that reduced the DIF balance, coupled with strong growth in insured deposits, resulted in the reserve ratio declining 15 basis points from 1.25% as of December 31, 2022, to 1.10% as of June 30, 2023. Despite the decline in the reserve ratio, the FDIC staff projected that the reserve ratio remains on track to reach the statutory minimum of 1.35% ahead of the deadline of September 30, 2028. As a result, the FDIC staff recommended no changes to the amended restoration plan and all scheduled

assessment rates were maintained.

On November 16, 2023, the FDIC adopted a final rule implementing a special assessment to recover the loss to the DIF arising from the protection of uninsured depositors following the failures of Silicon Valley Bank and Signature Bank. The assessment base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits reported for the quarter ended December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The FDIC will collect the special assessment at an annual rate of approximately 13.4 basis points, over eight quarterly assessment periods, beginning with the first quarter of 2024. Because CFBank’s uninsured deposits were less than $5 billion for the quarter ended December 31, 2022, CFBank will not be subject to this special assessment.

Limitations on Dividends and Other Capital Distributions. Banking regulations impose various restrictions on distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

Generally, for national banks such as CFBank, it is required that before and after the proposed distribution the institution remain well-capitalized. National banks may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted by the OCC. In addition, to the extent that a national bank has a negative accumulated deficit, any distributions or dividends by the bank are subject to prior non-objection by the OCC.

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 CFBank to the extent necessary to fund such dividends. As of December 31, 2023, the Holding Company had a total of $530,000 of cash at the Holding Company level. At December 31, 2023, the Holding Company also had $1.2 million available on its revolving line-of-credit facility.

The Holding Company also is subject to various legal and regulatory policies and requirements impacting the Holding Company’s ability to pay dividends on its stock. In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. Finally, under the terms of the Company’s fixed-to-floating rate subordinated debt, the Holding Company’s ability to pay dividends on its stock is conditioned upon the Holding Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt. See Note 16, Regulatory Capital Matters, in the accompanying Notes to Consolidated Financial Statements for additional information.

Federal income tax laws provided deductions, totaling $2.3 million, for the Company’s thrift bad debt reserves established before 1988. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total $473,000 at year-end 2023. However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded. Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank.

Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve Board reduced reserve requirement ratios to 0% effective on March 26, 2020, to support lending to households and businesses. The reserve requirement ratio remained at 0% as of December 31, 2023.

Federal Home Loan Bank

The Federal Home Loan Banks (“FHLBs”) provide credit to their members in the form of advances. CFBank is a member of the FHLB of Cincinnati. As an FHLB member, CFBank must maintain an investment in the capital stock of the FHLB of Cincinnati.

Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in certain types of collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the CRA and the member’s record of lending to first-time home buyers.

Community Reinvestment Act

The CRA requires CFBank’s primary federal regulatory agency, the OCC, to assess CFBank’s record in meeting the credit needs of the communities it serves. The OCC assigns one of four ratings: outstanding, satisfactory, needs to improve or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by the financial institution or its holding company to its banking regulators, including applications to acquire another financial institution or

to open or close a branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities.

On October 24, 2023, the federal banking agencies, including the OCC, issued a final rule designed to strengthen and modernize the regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry, including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations, and tailor CRA evaluations and data collection to bank size and type. The applicability date for the majority of the changes to the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. The Company cannot predict the impact the changes to the CRA will have on its operations at this time.

In March 2023, CFBank’s primary federal regulator, the OCC, publicly released its CRA rating of “Needs to Improve” for CFBank as a result of the OCC’s regularly scheduled evaluation covering 2020 through 2022. The Company believes that the “Needs to Improve” rating was primarily attributable to CFBank’s legacy direct-to-consumer residential mortgage business. Beginning in 2021, CFBank strategically scaled down its residential mortgage business and exited the direct-to-consumer mortgage business in favor of lending in our regional markets. The Company believes that this change in our residential mortgage business and focus, together with changes in our branch network and other actions taken since 2021, have remediated these legacy issues. While CFBank’s CRA rating remains “Needs to Improve,” the Company is subject to additional requirements and conditions with respect to certain activities, including acquisitions of and mergers with other financial institutions and commencement of new activities. CFBank’s next CRA evaluation is expected to commence in 2026.

Consumer Protection Laws and Regulations

Banks are subject to regular examination to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:

The Equal Credit Opportunity Act (prohibiting discrimination in any credit transaction on the basis of any of various criteria);

The Truth in Lending Act (requiring that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably);

The Fair Housing Act (making it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of certain criteria);

The Home Mortgage Disclosure Act (requiring financial institutions to collect data that enables regulatory agencies to determine whether financial institutions are serving the housing credit needs of the communities in which they are located); and

The Real Estate Settlement Procedures Act (requiring that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs).

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.

Patriot Act and Anti-Money Laundering

In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. CFBank has established policies and procedures that are believed to be compliant with the requirements of the Patriot Act.

The Anti-Money Laundering Act of 2020 (the “AMLA”), which amends the Bank Secrecy Act of 1970 (the “BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower initiatives and protections.

Office of Foreign Assets Control Regulation

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. CFBank is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Corporate Governance

As mandated by the Sarbanes-Oxley Act of 2002, the SEC has adopted rules and regulations governing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The Nasdaq Stock Market has also adopted corporate governance rules. The Board of Directors of the Company has taken a series of actions to strengthen and improve the Company’s already strong corporate governance practices in light of the rules of the SEC and Nasdaq. The Board of Directors has adopted charters for the Board’s various committees, including the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee, as well as a Code of Ethics and Business Conduct governing the directors, officers and employees of the Company.

Executive and Incentive Compensation

The Dodd-Frank Act requires that the federal banking agencies, including the FRB and the OCC, issue a rule related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to: (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation; and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, the Company has undertaken efforts to ensure that the Company’s incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above.

In June 2010, the FRB, the OCC and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, described above.

The FRB and the OCC review, as part of their respective regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Holding Company and CFBank, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-Frank Act, public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.

Following the adoption of additional listing requirements in 2023 to comply with the Dodd-Frank Act and rules adopted by the SEC in October 2022, public companies are now required to adopt and implement “clawback” policies for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback

policy is intended to apply to compensation paid the three completed fiscal years immediately preceding the date the issuer is required to prepare a restatement and would cover all executives who received incentive awards. The Company adopted its Clawback policy effective November 29, 2023.

SEC regulations require public companies such as the Holding Company to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation.

Financial Privacy Provisions

Federal and state regulations limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

CFBank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal bank regulatory agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If CFBank fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

In November 2021, the OCC, the FRB and the FDIC issued a final rule, which became effective in May, 2022, requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity, or availability of an information system or the information occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident that rises to the level of a notification event has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into larger incidents. This rule also requires bank service providers to notify their bank organization customers of a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation.

Furthermore, the Cyber Incident Reporting for Critical Infrastructure Act, enacted in March 2022, will require, once administrative rules are adopted, certain covered entities, including those in the financial services industry, to report a covered cyber incident to the U.S. Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (“CISA”) within 72 hours after it reasonably believes an incident has occurred. Separate reporting to CISA will also be required within 24 hours if a ransom payment is made as a result of a ransomware attack.

On July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K and detailed information regarding their cybersecurity risk management, strategy, and governance on an annual basis in an Annual Report on Form 10-K. Companies are required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See Item 1C. “Cybersecurity” in Part I of this Form 10-K. These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue, and is continually monitoring developments in the states in which our customers are located.

In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its operations and to store sensitive data. The Company employs significant resources, processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Although to date the Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Effect of Environmental Regulation

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. In the opinion of management, the Company does not have exposure to material costs associated with compliance with environmental laws and regulations or material expenditures related to environmental hazardous waste mitigation or cleanup.

The Company believes its primary exposure to environmental risk is through the lending activities of CFBank. In cases where management believes environmental risk potentially exists, CFBank mitigates its environmental risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

Federal and State Taxation

Federal Taxation General. We report income on a calendar year, consolidated basis using the accrual method of accounting, and we are subject to federal income taxation in the same manner as other corporations, with some exceptions discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and CFBank.

Our deferred tax assets are composed of U.S. net operating losses (“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 December 31, 2023 that no valuation allowance was required against the net deferred tax asset.

In 2012, a recapitalization program through the sale of $22.5 million in common stock improved the capital levels of CFBank and provided working capital for the Holding Company. The result of the change in stock ownership associated with the stock offering, however, was that the Company incurred an ownership change within the guidelines of Section 382 of the Internal Revenue Code of 1986. At year-end 2023, the Company had net operating loss carryforwards of $21.9 million, which expire at various dates from 2024 to 2032. As a result of the ownership change, the Company's ability to utilize carryforwards that arose before the 2012 stock offering closed is limited to $163,000 per year. Due to this limitation, management determined it is more likely than not that $20.5 million of net operating loss carryforwards will expire unutilized. As required by accounting standards, the Company reduced the carrying value of deferred tax assets, and the corresponding valuation allowance, by the $7.0 million tax effect of this lost realizability.

Federal income tax laws provided additional deductions, totaling $2.3 million, for thrift bad debt reserves established before 1988. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled $473,000 at year-end 2023. However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded. Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank. See Note 13 in the accompanying Notes to Consolidated Financial Statements for additional information.

Distributions. Under the Small Business Job Protection Act of 1996, if CFBank makes “non-dividend distributions” to the Company,

such distributions will be considered to have been made from CFBank’s unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from CFBank’s supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in CFBank’s taxable income. Non-dividend distributions include distributions in excess of CFBank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of CFBank’s current or accumulated earnings and profits will not be so included in CFBank’s taxable income.

Ohio Taxation

The consolidated organization is subject to the Ohio Financial Institutions Tax (“Ohio FIT”). The Ohio FIT is a business privilege tax for financial institutions doing business or domiciled in the State of Ohio. The three-tier structure charges financial institutions based on total capital at the prior calendar year-end based on regulatory reporting requirements.

Indiana Taxation

The consolidated organization is subject to the Indiana Financial Institution Tax (“Indiana FIT”). The Indiana FIT is a franchise tax measured by a taxpayer's apportioned income imposed on corporations for the privilege of exercising their franchise or transacting the business of a financial institution in Indiana.

Delaware Taxation

As a Delaware corporation not earning income in Delaware, the Company is exempted from Delaware corporate income tax, but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

Available Information

Our website address is www.CF.Bank (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our website into this Form 10-K). We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after we electronically file such reports with the SEC. These reports can be found on our website under the caption “Investor – SEC Filings.” Investors also can obtain copies of our filings from the SEC website at www.sec.gov.

Item 1A. Risk Factors.

The following are certain risk factors that could impact our business, financial condition and/or results of operations. Investing in our common stock involves risks, including those described below. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures contained in this Form 10-K and in other reports that we file with the SEC. These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If any of the events described in the following risk factors actually occur, or if additional risks and uncertainties not presently known to us or that we believe are immaterial do materialize, then our business, financial condition and/or results of operations could be materially adversely impacted. In addition, the trading price of our common stock could decline due to any of the events described in these risk factors.

Economic, Market and Political Risks

Changes in economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans and the value of the collateral securing our loans.

Our success depends to a significant extent upon local and national economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling and/or possible future U.S. government shutdowns over budget disagreements, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors beyond our control may adversely affect CFBank’s deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of CFBank’s borrowers to repay their loans, and the value of the collateral securing loans made by CFBank. The ongoing political turmoil and military conflict in Ukraine and the Middle East are likely to result in substantial changes in economic and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and changes in oil production and supply in the Middle East and Russia, also affect the economy and stock prices in the U.S., which can affect our earnings and/or capital, as well as the ability of our customers to repay loans.


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Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings and cash flows. Moreover, our market activities are concentrated in the following counties: Franklin County through our office in Columbus, Ohio (formerly located in Worthington, Ohio until March 1, 2023); Delaware County through our Polaris office in Columbus, Ohio; Cuyahoga County through our office in Woodmere, Ohio and our Ohio City office in Cleveland, Ohio; Hamilton County through our offices in Blue Ash, Ohio and our Red Bank office in Cincinnati, Ohio; Summit County through our office in Fairlawn, Ohio; and Marion County, Indiana through our office in Indianapolis. Our success depends on the general economic conditions of these areas, particularly given that a significant portion of our lending relates to real estate located in these regions. Therefore, adverse changes in the economic conditions in these areas could adversely impact our earnings and cash flows.

Changing interest rates may decrease our earnings and asset values.

Management is unable to accurately predict future market interest rates, which are affected by many factors, including, but not limited to inflation, recession, changes in employment levels, changes in the money supply and domestic and international disorder and instability in domestic and foreign financial markets. Changes in the interest rate environment may reduce our profits. Net interest income is a significant component of our net income, and consists of the difference, or spread, between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Although certain interest-earning assets and interest-bearing liabilities may have similar maturities or periods to which they reprice, they may react in different degrees to changes in market interest rates. In addition, residential mortgage loan origination and refinancing volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations and refinancings, while falling interest rates are usually associated with higher loan originations and refinancings. Our ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations. Cash flows are affected by changes in market interest rates. Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, loan prepayment rates are likely to increase. A majority of our commercial, commercial real estate and multi-family residential real estate loans are adjustable rate loans and an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations, especially borrowers with loans that have adjustable rates of interest. Changes in interest rates, prepayment speeds and other factors may also cause the value of our loans held for sale to change. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, loan volume, asset quality, value of loans held for sale and cash flows, as well as the market value of our securities portfolio and overall profitability.

Interest rates are highly sensitive to many factors that are beyond our control. Some of these factors include: inflation; recession; unemployment; money supply; international disorders; and instability in domestic and foreign financial markets. The Company’s management uses various measures to monitor interest rate risk and believes it has implemented effective asset and liability management strategies to reduce the potential adverse effects of changes in interest rates on the Company’s financial condition and results of operations. Management also periodically adjusts the mix of assets and liabilities to manage interest rate risk. However, any significant, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

A transition away from LIBOR as a reference rate for financial contracts could negatively affect our income and expenses and the value of various financial contracts.

LIBOR has been used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks. In the U.S., the Alternative Reference Rates Committee (“ARRC”) has recommended the use of a Secured Overnight Financing Rate (“SOFR”) as the set of alternative U.S. dollar reference. SOFR is different from LIBOR in that it is a backward looking secured rate rather than a forward looking unsecured rate. These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit.

The Company's primary exposure to LIBOR was related to its promissory notes with borrowers, swap contracts with clients and offsetting swap contracts with third parties related to the swap contracts with clients. Prior to July 2023, all promissory notes and swap contracts were transitioned away from LIBOR.


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Defaults by other financial institutions could adversely affect our business, earnings and financial condition.

Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to some degree, be interdependent. Several high-profile bank failures in 2023, including Silicon Valley Bank, Signature Bank and Silvergate Capital, resulted in some degree of public panic and caused widespread questions about potential concerns in the financial institutions industry, which in turn impacted stock market prices of financial institutions in general. These failed banks were engaged in activities, such as lending focused on tech startups and cryptocurrency, that are significantly different than the activities and risk profile of community banks such as the Company, and at this time it does not appear that these bank failures are connected to any systematic risks or problems in the financial institutions industry in general. Nevertheless, concerns about, or a default or threatened default by, other financial institutions could lead to significant market-wide liquidity problems and/or losses or defaults by other financial institutions.

Risks Related to Our Lending Activities

Our allowance for credit losses may not be adequate to absorb the expected, lifetime losses in our loan portfolio.

We maintain an allowance for credit losses that is believed to be a reasonable estimate of the expected losses based on management's quarterly analysis of our loan portfolio. The determination of the allowance for credit losses requires management to make various assumptions and judgments about the collectability of CFBank’s loans, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Additional information regarding our allowance for credit losses methodology and the sensitivity of the estimates can be found in the discussion of "CECL Implementation" included in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.

Our estimation of future credit losses is susceptible to changes in economic, operating and other conditions, including changes in regulations and interest rates, which may be beyond our control, and the losses may exceed current estimates. We cannot be assured of the amount or timing of losses, nor whether the allowance for credit losses will be adequate in the future.

If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover the expected losses from our loan portfolio, resulting in the need for additions to the allowance for credit losses which could have a material adverse impact on our financial condition and results of operations. In addition, bank regulators periodically review our allowance for credit losses as part of their examination process and may require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of management.

On June 16, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13 “Financial Instruments - Credit Losses”, which replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model, which we adopted effective January 1, 2023. Under the CECL model, we are required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses. If the methodologies and assumptions that we use in the CECL model prove to be incorrect or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on our financial condition and results of operations. Additionally, the time horizon over which we are required to estimate future credit losses expanded under CECL, which could result in increased volatility in future provisions for credit losses. We may also experience a higher or more volatile provision for credit losses due to higher levels of nonperforming loans and net charge-offs if commercial and consumer customers are unable to make scheduled loan payments. The Company’s one-time cumulative effect adjustment to the allowance for credit losses upon adoption in the first quarter of 2023 was $49,000.

Our emphasis on commercial, commercial real estate and multi-family residential real estate lending may expose us to increased lending risks.

Because payments on commercial loans are dependent on successful operation of the borrowers’ business enterprises, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. Because payments on loans secured by commercial real estate properties are dependent on successful operation or management of the properties, repayment of commercial real estate loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. 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.

Our adjustable-rate loans may expose us to increased lending risks.

While adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate loan borrowers upon an interest rate adjustment in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a rising interest rate environment. In addition, although adjustable-rate loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

We may be required to repurchase loans we have sold or indemnify loan purchasers under the terms of the sale agreements, which could adversely affect our liquidity, results of operations and financial condition.

When we sell a mortgage loan, we may agree to repurchase or substitute a mortgage loan if we are later found to have breached any representation or warranty we made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While we have underwriting policies and procedures designed to avoid breaches of representations and warranties as well as borrower fraud, there can be no assurance that no breach or fraud will ever occur. Required repurchases, substitutions or indemnifications could have an adverse effect on our liquidity, results of operations and financial condition.

We depend upon the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties, including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition, results of operations and cash flows could be negatively impacted to the extent that we rely on financial statements that do not comply with GAAP or on financial statements and other financial information that are materially misleading.

Our business and financial results are subject to risks associated with the creditworthiness of our customers and counterparties.

Credit risk is inherent in the financial services business and results from, among other things, extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly by loans, and the importance of lending to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our customers and counterparties and by diversifying our loan portfolio. Many factors impact credit risk.

A borrower’s ability to repay a loan can be adversely affected by individual factors, such as business performance, job losses or health issues. A weak or deteriorating economy and changes in the United States or global markets also could adversely impact the ability of our borrowers to repay outstanding loans. Any decrease in our borrowers’ ability to repay loans would result in higher levels of nonperforming loans, net charge-offs, and provision for loan losses.

Despite maintaining a diversified loan portfolio, in the ordinary course of business, we may have concentrated credit exposure to a particular person or entity, industry, region or counterparty. Events adversely affecting specific customers, industries, regions or markets, a decrease in the credit quality of a customer base or an adverse change in the risk profile of a market, industry, or group of customers could adversely affect us.

Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure due us.

If we experience higher levels of provision for loan losses in the future, our net income could be negatively affected.

Risks Related to Our Business Operations

We may not be able to effectively manage our growth.

We have experienced significant growth in the amount of our total loans in the past several years. Since January 1, 2016, our total net loans have grown by $1.3 billion, or 389.5%, and our total assets have grown by $1.6 billion, or 372.0%. Our continued growth may place significant demands on our operations and management, and our future operating results depend to a large extent on our ability to successfully manage our growth. We may not successfully implement improvements to, or integrate, our management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate increases in our loan volume and our growth and expansion. If we are unable to manage our loan growth and/or expanded operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such

growth, any one of which could materially and adversely affect us.

Future acquisitions or other expansion may adversely affect our financial condition and results of operations.

In the future, we may acquire other financial institutions or branches or assets of other financial institutions. We may also open new branches, enter into new lines of business, or offer new products or services. Any future acquisition or expansion of our business will involve a number of expenses and risks, which may include some or all of the following:

the time and expense associated with identifying and evaluating potential acquisitions or expansions;

the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to target institutions;

the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;

any financing required in connection with an acquisition or expansion;

the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

entry into unfamiliar markets and the introduction of new products and services into our existing business;

the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

the risk of loss of key employees and customers.

We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing stockholders.

We face strong competition from other financial institutions, financial services companies and other organizations offering services similar to those offered by us, which could result in our not being able to sustain or grow our loan and deposit businesses.

We conduct our business operations primarily in Franklin, Cuyahoga, Hamilton, and Summit, Counties, Ohio, and in Marion County, Indiana, and make loans generally throughout Ohio and Indiana. Increased competition within these markets may result in reduced loan originations and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that we offer. These competitors include other savings associations, community banks, regional banks and money center banks. We also face competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks, fintechs and other financial intermediaries. Our competitors with greater resources may have a marketplace advantage enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns.

Additionally, financial intermediaries not subject to bank regulatory restrictions and banks and other financial institutions with larger capitalization have larger lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they are more diversified than we are, may be able to offer the same loan products and services that we offer at more competitive rates and prices. If we are unable to attract and retain banking clients, we may be unable to sustain current loan and deposit levels or increase our loan and deposit levels, and our business, financial condition and future prospects may be negatively affected.

We rely heavily on our management team and other key employees, and the unexpected loss of key employees may adversely affect our operations.

Our success depends, in large part, on our ability to attract, retain, develop and motivate management and key employees. Competition for key employees is ongoing and we may not be able to attract or retain the key employees that we want or need in order to successfully execute our business. Additionally, the unexpected loss of services of any key employee could have an adverse effect on our business and financial results.

We are exposed to operational risk.

Similar to any large organization, we are exposed to many types of operational risk, including those discussed in more detail elsewhere in this Item, such as reputational risk, legal and compliance risk, cybersecurity risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyber-attacks, spikes in transaction volume and/or customer activity, electrical or

telecommunications outages, or natural disasters. We could be adversely affected by operating systems disruptions if new or upgraded business management systems are defective, not installed properly or not properly integrated into existing operating systems. Although we have programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of our operating systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers, loss of data privacy and loss or liability to us.

Any failure or interruption in our operating or information systems, or any security or data breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject us to regulatory intervention or expose us to civil litigation and financial loss or liability, any of which could have a material adverse effect on us.

Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social and governance (ESG) practices, and from actions taken by governmental regulators and community organizations in response to any of the foregoing. Negative public opinion could adversely affect our ability to attract and keep customers, could expose us to potential litigation or regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility of our stock price.

Given the volume of transactions we process, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect, which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) or that our (or our vendors’) consumer compliance, business continuity, and data security systems will prove to be inadequate.

Unauthorized disclosure of sensitive or confidential client information or breaches in security of our systems could severely harm our business.

As part of our financial institution business, we collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third-party service providers. Our necessary dependence upon automated systems to record and process transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. The Company also routinely reviews documentation of such controls and backups related to third-party service providers. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank's website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Other businesses have been victims of ransomware attacks in which the business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information.

We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are further exposed to the risk that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks as faced by us). These disruptions may interfere with service to our customers, cause additional regulatory scrutiny and result in a financial loss or liability. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others.

Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. We may not be able to prevent employee errors or misconduct, and the precautions we take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.

In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers.

We have implemented security controls to prevent unauthorized access to our computer systems, and we require that our third-party service providers maintain similar controls. However, the Company’s management cannot be certain that these measures will be successful. A security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business. We could also lose revenue if competitors gain access to confidential information about our business operations and use it to compete with us. While we maintain

specific "cyber" insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.

Further, we may be impacted by data breaches at retailers and other third parties who participate in data interchanges with us and our customers that involve the theft of customer credit and debit card data, which may include the theft of our debit card personal identification numbers (PINs) and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of operations.

There can be no assurance that we will not suffer such cyber-attacks or other information security breaches or attempted breaches, or incur resulting losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, and our plans to continue to implement internet and mobile banking capabilities to meet customer demand. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance its protective measures or to investigate and remediate any security vulnerabilities.

Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities.

All of the types of cyber incidents discussed above could result in damage to our reputation, loss of customer business, costs of incentives to customers or business partners in order to maintain their relationships, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), increased insurance premiums, and loss of investor confidence and a reduction in the price of our common shares, all of which could result in financial loss and material adverse effects on our results of operations and financial condition

Our business could be adversely affected through third parties who perform significant operational services on our behalf.

The third parties performing operational services for the Company are subject to risks similar to those faced by the Company relating to cybersecurity, breakdowns or failures of their own systems, or misconduct of their employees. Like many other community banks, CFBank also relies, in significant part, on a single vendor for the systems which allow CFBank to provide banking services to CFBank’s customers, for which the systems are maintained on CFBank’s behalf by this single vendor.

One or more of the third parties utilized by us may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third party. Further, the operations of our third-party vendors could fail or otherwise become delayed. Certain of these third parties may have limited indemnification obligations to us in the event of a cybersecurity event or operational disruption, or may not have the financial capacity to satisfy their indemnification obligations.

Financial or operational difficulties of a third party provider could also impair our operations if those difficulties interfere with such third party’s ability to serve the Company. If a critical third-party provider is unable to meet the needs of the Company in a timely manner, or if the services or products provided by such third party are terminated or otherwise delayed and if the Company is not able to develop alternative sources for these services and products quickly and cost-effectively, our business could be materially adversely effected.

Additionally, regulatory guidance adopted by federal banking regulators addressing how banks select, engage and manage their third-party relationships, affects the circumstances and conditions under which we work with third parties and the cost of managing such relationships.

Derivative transactions may expose us to unexpected risk and potential losses.

We are party to a number of derivative transactions. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling the position difficult. We carry borrowings which contain embedded derivatives. These borrowing arrangements require that we deliver underlying securities to the counterparty as collateral. We are dependent on the creditworthiness of the counterparties and are therefore susceptible to credit and operational risk in these situations.

Derivative contracts and other transactions entered into with third parties are not always confirmed by the counterparties on a timely basis. While the transaction remains unconfirmed, we are subject to heightened credit and operational risk and, in the event of a default, we may find it more difficult to enforce the underlying contract. In addition, as new and more complex derivative products

are created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts could arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs. Any regulatory effort to create an exchange or trading platform for credit derivatives and other over-the-counter derivative contracts, or a market shift toward standardized derivatives, could reduce the risk associated with such transactions, but under certain circumstances could also limit our ability to develop derivatives that best suit our needs and those of our clients and adversely affect our profitability.

Legislative, Legal and Regulatory Risks

We operate in a highly regulated industry, and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in, or failure to comply with the same, may adversely affect the Company.

The banking industry is highly regulated. We are subject to supervision, regulation and examination by various federal and state regulators, including the FRB, the SEC, the CFPB, the OCC, the FDIC, Financial Industry Regulatory Authority, Inc. (also known as FINRA), and various state regulatory agencies. The statutory and regulatory framework that governs the Company is generally designed to protect depositors and customers, the DIF, the U.S. banking and financial system, and financial markets as a whole and not to protect shareholders. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities (including foreclosure and collection practices), limit the dividends or distributions that we can pay, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in capital than would otherwise be required under generally accepted accounting principles in the United States of America. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in response to the perceived state of the financial services industry, as well as other factors such as technological and market changes. Such regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject the Company to restrictions on business activities, fines, and other penalties, any of which could adversely affect results of operations, the capital base, and the price of our common shares. Further, any new laws, rules, or regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.

Legislative or regulatory changes or actions could adversely impact our business.

Regulations affecting banks and financial services businesses are undergoing continuous change, and management cannot predict the effect of those changes. While such changes are generally intended to lessen the regulatory burden on financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies could adversely affect our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on the operation of an institution and the ability to determine the adequacy of an institution’s allowance for loan losses. Failure to comply with applicable laws, regulations and policies could result in sanctions being imposed by the regulatory agencies, including the imposition of civil money penalties, which could have a material adverse effect on our operations and financial condition. Even the reduction of regulatory restrictions could have an adverse effect on us if such lessening of restrictions increases competition within our industry or market areas.

We are subject to limitations and conditions on certain activities as a result of our “Needs to Improve” CRA rating.

In March 2023, CFBank’s primary federal regulator, the OCC, publicly released its CRA rating of “Needs to Improve” for CFBank as a result of the OCC’s regularly scheduled evaluation covering 2020 through 2022. The Company believes that the “Needs to Improve” rating was primarily attributable to CFBank’s legacy direct-to-consumer residential mortgage business. Beginning in 2021, CFBank strategically scaled down its residential mortgage business and exited the direct-to-consumer mortgage business in favor of lending in our regional markets. The Company believes that this change in our residential mortgage business and focus, together with changes in our branch network and other actions taken since 2021, have remediated these legacy issues. While CFBank’s CRA rating remains “Needs to Improve,” the Company is subject to additional requirements and conditions with respect to certain activities, including acquisitions of and mergers with other financial institutions and commencement of new activities. CFBank’s next CRA evaluation is expected to commence in 2026.

Deposit insurance premiums may increase and have a negative effect on our results of operations.

The DIF maintained by the FDIC to resolve bank failures is funded by fees assessed on insured depository institutions. The costs of resolving bank failures increased for a period of time and decreased the DIF. The FDIC collected a special assessment in 2009 to replenish the DIF and also required a prepayment of an estimated amount of future deposit insurance premiums. In October 2022, the FDIC adopted a final rule increasing the assessment rate from three basis points to five basis points beginning with the first quarterly assessment period of 2023. If the costs of future bank failures increase, the deposit insurance premiums required to be paid by

CFBank may also increase. The FDIC recently adopted rules revising its assessments in a manner benefiting banks, such as CFBank, with assets totaling less than $10 billion. There can be no assurance, however, that assessments will not be changed in the future.

We may be the subject of litigation which could result in legal liability and damage to our business and reputation.

From time to time, we may be subject to claims or legal action from customers, employees or others. Financial institutions like the Company and CFBank are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding our business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other large financial institutions, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations and/or cause significant reputational harm to our business.

Changes in accounting standards, policies, estimates or procedures could impact our reported financial condition or results of operations.

The accounting standard setters, including the FASB, the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. The pace of change continues to accelerate and changes in accounting standards can be hard to predict and could materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively, resulting in the restatement of prior period financial statements.

The preparation of consolidated financial statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may vary materially from management’s estimates. In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. The Company was required to comply with the new standard beginning January 1, 2023. As a result of the adoption of CECL, credit loss allowances may increase, which would decrease retained earnings and regulatory capital. The federal banking regulators have adopted a regulation that allows banks to phase in the day-one impact of CECL on regulatory capital over three years, which the Company did not elect to do.

Noncompliance with the Bank Secrecy Act (BSA) and other anti-money laundering statutes and regulations could cause a material financial loss.

The BSA and the Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The BSA, as amended by the Patriot Act and the AMLA, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. The Financial Crimes Enforcement Network (also known as FinCEN), a unit of the U.S. Treasury Department that administers the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws, which includes a codified risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (also known as OFAC). If the Company’s policies, procedures, and systems are deemed deficient, or if the policies, procedures, and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, the Company may be subject to liability, including fines and regulatory actions such as restrictions on CFBank’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which could negatively impact our business, financial condition, and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.

Risks Related to our Capital and Capital Stock

We are a holding company and depend on our subsidiary bank for dividends.

The Holding Company is a legal entity separate and distinct from its subsidiaries and affiliates. The Holding Company’s ability to support its operations, pay dividends on its common shares and service its debt 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 CFBank to the extent necessary to fund such dividends. As of December 31, 2023, the Holding Company had a total of $530,000 of cash at the Holding Company level.

In the event that CFBank is unable to pay dividends to the Holding Company, the Holding Company may not be able to service its debt, pay its other obligations or pay dividends on its outstanding stock. Accordingly, the Holding Company’s inability to receive dividends from CFBank could also have a material adverse effect on our business, financial condition and results of operations.

Various federal and state statutory provisions and regulations limit the amount of dividends that CFBank may pay to the Holding Company without regulatory approval. Generally, financial institutions may pay dividends without prior approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as the financial institution remains well capitalized after the dividend payment.

The ability of CFBank to pay dividends in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital guidelines and may restrict the Holding Company’s ability to declare and pay dividends on its common shares. The ability of CFBank and any other subsidiaries to pay dividends to the Holding Company is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements and contractual obligations. There can be no guaranty that CFBank will be able or permitted to pay dividends to the Holding Company in the future, and any such future dividends by CFBank would be based on future earnings and, if necessary, regulatory approval.

We may elect or need to raise additional capital in the future, but capital may not be available when it is needed.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, federal banking agencies have recently finalized extensive changes to their capital requirements, including the adoption of the Basel III Capital Rules as discussed above, which result in higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place. The final impact on us is unknown at this time, but could potentially require us to raise additional capital in the future. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and are based on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed or on acceptable terms, it may have a material adverse effect on our financial condition, results of operations and prospects.

Although publicly traded, our Common Stock has less liquidity than the average liquidity of stocks listed on NASDAQ.

Although our common stock is listed for trading on NASDAQ, our common stock has less liquidity than the average liquidity for companies listed on NASDAQ. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This marketplace depends on the individual decisions of investors and general economic and market conditions over which we have no control. This limited market may affect your ability to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price of our common stock. For these reasons, our common stock should not be viewed as a short-term investment.


‎

The market price of our Common Stock may be subject to fluctuations and volatility.

The market price of our common stock may fluctuate significantly due to, among other things, changes in market sentiment regarding our operations or business prospects, the banking industry generally or the macroeconomic outlook. Factors that could impact our trading price include:

our operating and financial results, including how those results vary from the expectations of management, securities analysts and investors;

developments in our business or operations or in the financial sector generally;

future offerings by us of debt or preferred shares, which would be senior to our common stock upon liquidation and for purposes of dividend distributions;

legislative or regulatory changes affecting our industry generally or our business and operations specifically;

the operating and stock price performance of companies that investors consider to be comparable to us;

announcements of strategic developments, acquisitions and other material events by us or our competitors;

actions by our current stockholders, including future sales of common shares by existing stockholders, including our directors and executive officers; and

other changes in U.S. or global financial markets, global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

Equity markets in general and our common stock in particular have experienced considerable volatility over the past few years. The market price of our common stock may continue to be subject to volatility unrelated to our operating performance or business prospects. Increased volatility could result in a decline in the market price of our common stock.

Provisions in the Holding Company’s Amended and Restated Certificate of Incorporation and statutory provisions could discourage a hostile acquisition of control.

The Holding Company’s Amended and Restated Certificate of Incorporation contains certain provisions that could discourage non-negotiated takeover attempts that certain stockholders might deem to be in their interests or through which stockholders might otherwise receive a premium for their shares over the then current market price and that may tend to perpetuate existing management. The Amended and Restated Certificate of Incorporation restricts the ability of an acquirer to vote more than 10% of our outstanding common stock. The provisions of the Amended and Restated Certificate of Incorporation also include: the classification of the terms of the members of the board of directors; supermajority provisions for the approval of certain business combinations; elimination of cumulative voting by stockholders in the election of directors; certain provisions relating to meetings of stockholders; and provisions allowing the board of directors to consider nonmonetary factors in evaluating a business combination or a tender or exchange offer. The provisions in the Amended and Restated Certificate of Incorporation requiring a supermajority vote for the approval of certain business combinations and containing restrictions on acquisitions of the Company’s equity securities provide that the supermajority voting requirements or acquisition restrictions do not apply to business combinations or acquisitions meeting specified board of directors’ approval requirements.

The Amended and Restated Certificate of Incorporation also authorizes the issuance of 1,000,000 shares of preferred stock, as well as 9,090,909 shares of common stock. These shares could be issued without further stockholder approval on terms or in circumstances that could deter a future takeover attempt.

Additionally, federal banking laws contain various restrictions on acquisitions of control of national banks and their holding companies.

The Amended and Restated Certificate of Incorporation, as well as certain provisions of state and federal law, may have the effect of discouraging or preventing a future takeover attempt in which stockholders of the Company otherwise might receive a substantial premium for their shares over then current market prices.

General Risk Factors

Adverse changes in the financial markets may adversely impact our results of operations.

While we generally invest in securities issued by U.S. government agencies and sponsored entities and U.S. state and local governments with limited credit risk, certain investment securities we hold possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations and other similar asset-backed assets. Even securities issued by governmental agencies and entities may entail risk depending on political and economic changes. Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates, implied credit spreads and credit ratings.
‎

We are at risk of increased losses from fraud.

Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from wire fraud, debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed directly against the Company, the Company may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.

We may experience increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to the Company’s environmental, social and governance practices.

Financial institutions are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights. Increased ESG-related compliance costs for the Company as well as among our suppliers, vendors and various other parties within our supply chain could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and the price of our common shares. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

Changes in tax laws could adversely affect our performance.

We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, financial institutions tax, withholding and ad valorem taxes. Changes to tax laws could have a material adverse effect on our results of operations, fair values of net deferred tax assets and obligations of states and political subdivisions held in our investment securities portfolio. In addition, our customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed securities in which we have invested.

We need to constantly update our technology in order to compete and meet customer demands.

The financial services market, including banking services, is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. Our future success will depend, in part, on our ability to use current technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. Some of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and profit.

Climate change, severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

Item 1B. Unresolved Staff Comments

Not Applicable

Item 1C. Cybersecurity

Risk Management and Strategy

The Company prioritizes the security of our banking operations to protect our customers and our reputation, and to preserve our value. While eliminating all risk is unrealistic, we invest heavily in our Information Security program to mitigate cybersecurity risks. Our controls focus on safeguarding information systems, networks, and assets from unauthorized access, ransomware threats, and service disruptions. Third-party vendors are also held to similar standards, with reviews conducted annually.

The Company’s Information Security program establishes policies, procedures, and risk assessments related to effective and efficient controls related to design and operations of the program. The Company also leverages regulatory guidance issued by the Federal Financial Institutions Examination Council (FFIEC) and frameworks to develop and maintain the information security program, including, without limitation the: FFIEC Cybersecurity Assessment Tool, National Institute of Standards and Technology (NIST) Cybersecurity Framework, and Section 501(b) of the Gramm-Leach-Bliley Act of 1999. Senior Management also monitors notifications from the U.S. Computer Emergency Readiness Team (“CERT”) and the Financial Services Information Sharing and Analysis Center (FS-ISAC). Some of our procedures and controls include, without limitation:

•Security Information and Event Management (“SIEM”) logging and triggers, alerts, and 24/7 monitoring.

•Endpoint Detection and Response (“EDR”), encryption, and backups.

•Third party vendor risk management.

•Disaster recovery and incident response plans.

•Security awareness training, social engineering testing, and remedial training.

•Vulnerability scanning, remediation tracking, and reporting.

We [regularly] engage certified and reputable consultants and auditing firms to evaluate the maturity and effectiveness of our security, including testing the design and operational effectiveness of controls, penetration testing, engaging in independent reviews of policies and standards, and consulting on best practices.

Governance

The Board of Directors, Audit Committee and the Information Technology (IT) Steering Committee, which is comprised of members from various departments including IT, Accounting, Compliance, Lending, Credit, Human Resources, Operations, Treasury Management, Treasury Support, Retail, Mortgage Sales, Mortgage Operations, Commercial Operations, and the Executive Team, provide oversight and direction of cybersecurity threats and risk management. The Board of Directors reviews and approves the Company’s policies related to Information Security and receives periodic updates from the IT Steering Committee and management in the areas of cybersecurity risks, controls, projects and initiatives, vulnerability assessments, vendor management, and security considerations. The Board of Directors is promptly notified and provided information on any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates of any such incidents until they are resolved.

A dedicated team, led by the Senior Vice President of Information Technology and Information Security Officer (the “SVP of IT and ISO”) manages the day-to-day cybersecurity risk program and supervises internal personnel and relationships with external technology and security consultants. The SVP of IT and ISO has over 18 years of experience in the banking industry as it relates to strategy and cyber security and reports to the Chief Operating Officer, the IT Steering Committee, the Audit Committee, and the Board of Directors.

While we believe we have implemented robust security procedures and controls to mitigate cybersecurity threats, we cannot be certain that these measures will be successful. The threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Although to date the Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.


‎

Item 2. Properties.

We conducted our business through seven branch offices located in Franklin, Cuyahoga, Delaware, Hamilton and Summit counties in Ohio and one branch office located in Marion County, Indiana as of December 31, 2023. The net book value of the Company’s properties totaled $2.2 million at December 31, 2023. CFBank also leases its branch offices in Columbus, Ohio, Cleveland, Ohio, Woodmere, Ohio, Fairlawn, Ohio, Blue Ash, Ohio, Cincinnati, Ohio and its loan production office in Columbus. See Note 8 in the accompanying Notes to Consolidated Financial Statements for further discussion. In March 2023, the administrative office and Worthington branch moved to a new location in Columbus.

Locations

Administrative Office (leased facility):

4960 East Dublin Granville Road, Suite 400

Columbus, Ohio 43081

Branch Offices:

New Albany Branch (leased facility)

4960 East Dublin Granville Road, Suite 400

Columbus, Ohio 43081

Polaris Branch (leased facility)

1942 Polaris Parkway

Columbus, Ohio 43240

Eton Branch (leased facility)

28879 Chagrin Blvd.

Woodmere, Ohio 44122

Ohio City Branch (leased facility)

2715 Detroit Ave.

Cleveland, Ohio 44113

Fairlawn Branch (leased facility)

3009 Smith Road, Suite 100

Fairlawn, Ohio 44333

Blue Ash Branch (leased facility)

10300 Alliance Rd. #150

Cincinnati, Ohio 45242

Red Bank Branch (leased facility)

4770 Red Bank Expressway

Cincinnati, Ohio 45227

Indianapolis Branch (owned facility)

4729 East 82nd Street

Indianapolis, Indiana 46250

Item 3. Legal Proceedings.

We may, from time to time, be involved in various legal proceedings in the normal course of business. Periodically, there have been various claims and lawsuits involving CFBank, such as claims to enforce liens, condemnation proceedings on properties in which CFBank holds security interests, claims involving the making and servicing of real property loans and other issues incident to our banking business. We are not a party to any pending legal proceeding that management believes would have a material adverse effect on our financial condition or operations, if decided adversely to us.


‎

Item 4. Mine Safety Disclosures.

Not Applicable

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)Market and Dividend Information

The (voting) common stock of CF Bankshares Inc. trades on the Nasdaq® Capital Market under the symbol “CFBK.” As of December 31, 2023, there were 5,284,860 shares of (voting) common stock outstanding and held by approximately 327 registered shareholders of record. As of December 31, 2023, the Company also had an aggregate of 1,260,700 shares of non-voting common stock outstanding which were held by two shareholders of record.

There was $0.23 per share in dividends declared or paid on our common stock during 2023. The Company presently anticipates continuing to pay dividends in the future at similar levels, subject to compliance with applicable legal and regulatory requirements. The Holding Company is subject to various legal and regulatory policies and guidelines impacting the Holding Company’s ability to pay dividends on its stock. In addition, banking regulations limit the amount of dividends that can be paid to the Holding Company by CFBank without prior regulatory approval and, thus, can limit the availability of funds available to the Holding Company for the payment of dividends on its stock. The Holding Company’s ability to pay dividends on its common stock is also conditioned upon the Holding Company continuing to make certain payments on, and no event of default occurring under, the Company’s fixed-to-floating rate subordinated debt and the subordinated debentures underlying the Holding Company’s trust preferred securities. Additional information is contained in the sections titled “Financial Condition - Stockholders’ equity” and “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and in Note 16 in the accompanying Notes to Consolidated Financial Statements.

(b)Not applicable.

(c)The following table provides information concerning purchases of the Holding Company’s shares of common stock made by or on behalf of the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the three months ended December 31, 2023.

Period

Total number of common shares purchased

Average price paid per common share

Total number of common shares purchased as part of publicly announced plans or programs (1)

Maximum number of common shares that may yet be purchased under the plans or programs

October 1, 2023 through October 31, 2023

-

-

-

250,000

November 1, 2023 through November 30, 2023

-

-

-

250,000

December 1, 2023 through December 31, 2023

9,503

18.59

9,503

240,497

Total

9,503

$

18.59

9,503

(1)On July 5, 2023, the Company’s Board of Directors authorized a new stock repurchase program pursuant to which the Company may repurchase up to 250,000 shares of the Company’s common stock on or before June 30, 2024.

Item 6. [Reserved]


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

Statements in this Form 10-K 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 Holding Company or 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.

CONDENSED CONSOLIDATED FINANCIAL DATA

The following information is derived from and should be read in conjunction with our audited Consolidated Financial Statements, the related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-K.

At December 31,

2023

2022

2021

2020

2019

(Dollars in thousands)

Selected Financial Condition Data:

Total assets

$

2,058,615 

$

1,820,174 

$

1,495,589 

$

1,476,995 

$

880,545 

Cash and cash equivalents

261,595 

151,787 

166,591 

221,594 

45,879 

Securities available for sale

8,092 

10,442 

16,347 

8,701 

8,174 

Equity securities

5,000 

5,000 

5,000 

5,000 

-  

Loans held for sale

1,849 

580 

27,988 

283,165 

135,711 

Loans and leases, net (1)

1,694,133 

1,572,255 

1,214,149 

895,344 

663,303 

Allowance for credit losses on loans and leases

16,865 

16,062 

15,508 

17,022 

7,138 

Nonperforming assets

5,722 

761 

997 

695 

2,439 

Foreclosed assets

-  

-  

-

-  

-

Deposits

1,744,057 

1,527,922 

1,246,352 

1,113,070 

746,323 

FHLB advances and other debt

109,995 

109,461 

89,727 

214,426 

29,017 

Subordinated debentures

14,961 

14,922 

14,883 

14,844 

14,806 

Total stockholders' equity

155,374 

139,248 

125,330 

110,210 

80,664 

For the year ended December 31,

2023

2022

2021

2020

2019

(Dollars in thousands)

Summary of Operations:

Total interest income

$

108,279 

$

67,764 

$

52,348 

$

42,386 

$

35,104 

Total interest expense

60,639 

18,974 

10,309 

14,578 

13,404 

Net interest income

47,640 

48,790 

42,039 

27,808 

21,700 

Provision for loan and lease losses

2,317 

787 

(1,600)

10,915 

-

Net interest income after provision for loan and lease losses

45,323 

48,003 

43,639 

16,893 

21,700 

Noninterest income:

Net gain on sale of loans

185 

1,009 

7,359 

58,366 

10,767 

Other

3,846 

2,201 

4,281 

1,627 

953 

Total noninterest income

4,031 

3,210 

11,640 

59,993 

11,720 

Noninterest expense

28,369 

28,621 

32,461 

40,603 

21,379 

Income before income taxes

20,985 

22,592 

22,818 

36,283 

12,041 

Income tax expense

4,048 

4,428 

4,365 

6,675 

2,440 

Net income

$

16,937 

$

18,164 

$

18,453 

$

29,608 

$

9,601 

At or for the year ended December 31,

2023

2022

2021

2020

2019

(Dollars in thousands)

Selected Financial Ratios and Other Data:

Performance Ratios (2)

Return on average assets

0.88%

1.11%

1.26%

2.59%

1.30%

Return on average equity

11.46%

13.69%

15.58%

32.04%

17.57%

Average yield on interest-earning assets (3)

5.89%

4.37%

3.79%

3.89%

4.98%

Average rate paid on interest-bearing liabilities

3.99%

1.55%

0.95%

1.64%

2.38%

Average interest rate spread (4)

1.90%

2.82%

2.84%

2.25%

2.60%

Net interest margin, fully taxable equivalent (5)

2.59%

3.15%

3.04%

2.55%

3.08%

Average interest-earning assets to interest bearing liabilities

120.70%

126.74%

127.13%

122.64%

124.90%

Efficiency ratio (6)

54.90%

55.04%

60.47%

46.24%

63.97%

Noninterest expenses to average assets

1.47%

1.76%

2.22%

3.55%

2.89%

Common stock dividend payout ratio

8.75%

6.47%

4.69%

0.67%

n/m

Capital Ratios: (2)

Equity to total assets at end of period

7.55%

7.65%

8.38%

7.46%

9.16%

Average equity to average assets

7.66%

8.14%

8.11%

8.07%

7.39%

Tier 1 (core) capital to adjusted total assets (Leverage ratio) (7)

9.76%

9.89%

11.29%

9.74%

10.58%

Total capital to risk weighted assets (7)

13.30%

12.74%

14.02%

14.31%

12.96%

Tier 1 (core) capital to risk weighted assets (7)

12.17%

11.65%

12.77%

13.05%

11.97%

Common equity tier 1 capital to risk weighted assets (7)

12.17%

11.65%

12.77%

13.05%

11.97%

Asset Quality Ratios: (2)

Nonperforming loans to total loans (8)

0.33%

0.05%

0.08%

0.08%

0.36%

Nonperforming assets to total assets (9)

0.28%

0.04%

0.07%

0.05%

0.28%

Allowance for credit losses on loans and leases to total loans

0.99%

1.01%

1.26%

1.87%

1.06%

Allowance for credit losses on loan and leases to nonperforming loans (8)

294.74%

2110.64%

1555.47%

2449.21%

292.66%

Net charge-offs (recoveries) to average loans

0.04%

0.02%

(0.01%)

13.00%

(0.02%)

Per Share Data:

Basic earnings per common share

$

2.64

$

2.84

$

2.84

$

4.53

$

2.05

Diluted earnings per common share

2.63

2.78

2.77

4.47

2.03

Dividends declared per common share

0.23

0.18

0.13

-

-

Tangible book value per common share at end of period

23.74

21.43

19.28

16.79

12.40

(1)

Loans and leases, net represents the recorded investment in loans net of the allowance for credit losses on loans and leases (ACL – Loans).

(2)

Asset quality ratios and capital ratios are end-of-period ratios. All other ratios are based on average monthly balances during the indicated periods.

(3)

Calculations of yield are presented on a taxable equivalent basis using the federal income tax rate of 21%.

(4)

The average interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.

(5)

The net interest margin represents net interest income as a percent of average interest-earning assets.

(6)

The efficiency ratio equals noninterest expense (excluding amortization of intangibles and foreclosed asset writedowns) divided by net interest income plus noninterest income (excluding gains or losses on securities transactions).

(7)

Regulatory capital ratios of CFBank.

(8)

Nonperforming loans consist of nonaccrual loans and other loans 90 days or more past due.

(9)

Nonperforming assets consist of nonperforming loans and foreclosed assets.

n/m - not meaningful


‎

Business Overview

The Holding Company is a financial holding company that owns 100% of the stock of CFBank, which was formed in Ohio in 1892 and converted from a federal savings association to a national bank on December 1, 2016. Prior to December 1, 2016, the Holding Company was a registered savings and loan holding company. 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 with the FRB. Effective as of July 27, 2020, the Company changed its name from Central Federal Corporation to CF Bankshares Inc.

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 banking, mobile banking and remote deposit capabilities.

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.

CECL Implementation. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires a new Current Expected Credit Losses (“CECL”) methodology that replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio. CECL provides for an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied historically are still permitted, although the inputs to those techniques will reflect the full amount of expected credit losses. Organizations continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amended the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2023.

The CECL methodology required under ASU 2016-13 applies to loans held for investment, held to maturity debt securities, and off balance-sheet credit exposures. The ASU allows for several different methods of computing the allowance for credit losses: closed pool, vintage, average charge-off, migration, probability of default / loss given default, discounted cash flow, and regression. Based on its analysis of observable data, the Company concluded the average charge-off method to be the most appropriate and statistically relevant. A lookback to March 31, 2000 was utilized as the historical loss period due to its inclusion of several economic cycles and relevance to real estate secured assets.

Upon implementation of ASU 2016-13, the expected loss estimate is made up of a historical lookback of actual losses applied over the life of the loan portfolio and adjusted for qualitative factors and forecasted losses based on economic and forward-looking data applied over a reasonable and supportable forecast period.

The impact of the Company’s adoption of ASU 2016-13 effective January 1, 2023 was a one-time cumulative-effect adjustment increasing our reserves for loans and unfunded commitments by $49,000.

The qualitative impact of the new accounting standard is still directed by many of the same factors that impacted the previous methodology for computing the allowance for loan and lease losses (ALLL) including, but not limited to, economic conditions, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition to this, the Company also uses reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee quarterly economic projections for change in real GDP and of national unemployment.

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.

Recent Regulatory Developments. In March 2023, CFBank’s primary federal regulator, the OCC, publicly released its CRA rating of “Needs to Improve” for CFBank as a result of the OCC’s regularly scheduled evaluation covering 2020 through 2022. The Company believes that the “Needs to Improve” rating was primarily attributable to CFBank’s legacy direct-to-consumer residential mortgage business. Beginning in 2021, CFBank strategically scaled down its residential mortgage business and exited the direct-to-consumer mortgage business in favor of lending in our regional markets. The Company believes that this change in our residential mortgage business and focus, together with changes in our branch network and other actions taken since 2021, have remediated these legacy issues. While CFBank’s CRA rating remains “Needs to Improve,” the Company is subject to additional requirements and conditions with respect to certain activities, including acquisitions of and mergers with other financial institutions and commencement of new activities. CFBank’s next CRA evaluation is expected to commence in 2026.

Critical Accounting Policies and Estimates

We follow financial accounting and reporting policies that are in accordance with U.S. generally accepted accounting principles and conform to general practices within the banking industry. These policies are presented in Note 1 to our Consolidated Financial Statements. Some of these accounting policies are considered to be critical accounting policies, which are those policies that are both most important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Application of assumptions different than those used by management could result in material changes in our financial condition or results of operations. These policies, current assumptions and estimates utilized, and the related disclosure of this process, are determined by management and routinely reviewed with the Audit Committee of the Board of Directors. We believe that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements were appropriate given the factual circumstances at the time.

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.

Determination of the allowance for credit losses on loans (ACL – Loans) . The ACL - Loans represents the Company's best estimate of current expected credit losses (CECL) on loans and leases using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The CECL calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the ACL - Loans is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the ACL - Loans, the loan portfolio was pooled into loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Company analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the average charge-off methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Company sub-segmented certain commercial portfolios by risk level where appropriate. The Company utilized a one-year reasonable and supportable economic forecast period.

The Company qualitatively adjusts model results for risk factors that are not inherently considered in the historical losses, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in economic conditions, (ii) changes in the nature and volume of the loan portfolio, (iii) changes in the existence, growth and effect of any concentrations in credit, (iv) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (v) changes in the quality of the credit review function, (vi) changes in the experience, ability and depth of lending management and staff, (vii) changes in the volume and severity of past due and adversely classified loans and the volume of non-

accrual loans, (viii) changes in the value of underlying collateral for collateral-dependent loans, and (ix) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis. Based on the variables involved and the fact that management must make judgments about outcomes that are inherently uncertain, the determination of the ACL - Loans is considered to be a critical accounting policy. Additional information regarding this policy is included in the section titled “Financial Condition - Allowance for Credit Losses on Loans” and in Notes 1, 4 and 6 in the accompanying Notes to Consolidated Financial Statements.

Fair value of financial instruments. Another critical accounting policy relates to fair values 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 Notes 1 and 6 in the accompanying Notes to Consolidated 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 17 in the accompanying Notes to Consolidated Financial Statements.

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, FDIC insurance premiums and other general and administrative expenses. Our results of operations are significantly affected by general economic and competitive conditions, changes in market interest rates and real estate values, government policies and actions of regulatory authorities. Our regulators have extensive discretion in their supervisory and enforcement activities, including the authority to impose restrictions on our operations, to classify our assets and to require us to increase the level of our allowance for credit losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our business, financial condition, results of operations and/or cash flows.

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 $2.1 billion at December 31, 2023 and increased $238.4 million, or 13.1%, from $1.8 billion at December 31, 2022. The increase was primarily due to a $121.9 million increase in net loan balances and a $109.8 million increase in cash and cash equivalents.

Cash and cash equivalents. Cash and cash equivalents totaled $261.6 million at December 31, 2023, and increased $109.8 million, or 72.3%, from $151.8 million at December 31, 2022. The increase in cash and cash equivalents was primarily attributed to an increase in deposits, partially offset by an increase in net loans.

Securities. Securities available for sale totaled $8.1 million at December 31, 2023, and decreased $2.3 million, or 22.5%, compared to $10.4 million at December 31, 2022. The decrease was primarily due to principal maturities. Equity securities totaled $5.0 million at both December 31, 2023 and December 31, 2022.

Loans held for sale. Loans held for sale totaled $1.8 million at December 31, 2023 and increased $1.3 million, or 218.8%, from $580,000 at December 31, 2022.

Loans and Leases. Net loans and leases totaled $1.7 billion at December 31, 2023 and increased $121.9 million, or 7.8%, from $1.6 billion at December 31, 2022. The increase was primarily due to a $57.9 million increase in commercial real estate loan balances, a $26.6 million increase in multi-family loan balances, a $13.2 million increase in single-family residential loan balances, a $12.5 million increase in commercial loan balances, a $6.6 million increase in construction loan balances, and a $5.2 million increase in home equity lines of credit. The increases in the aforementioned loan balances were related to increased sales activity and new relationships.

Allowance for Credit Losses on Loans . (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.

The ACL - Loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged off against the allowance when the uncollectibility of the loan 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 from the estimate of credit losses. Further information regarding the policies and methodology used to estimate the ACL - Loans is detailed in the accompanying notes to the Consolidated Financial Statements included in this Form 10-K.

Individually evaluated loans totaled $3.5 million at December 31, 2023, and increased $3.3 million, or 1884.9%, from $175,000 at December 31, 2022. The increase was primarily due to three newly identified commercial loans during 2023 totaling $3.4 million, partially offset by one commercial loan returning to collectively evaluated and principal payments during the year ended December 31, 2023. The amount of the ACL - Loans specifically calculated for individually evaluated loans totaled $697,000 at December 31, 2023 and $175 at December 31, 2022.

The reserve on individually evaluated 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 individually evaluated loan to determine whether it should have a 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 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 $5.7 million at December 31, 2023, and increased $5.0 million from $761,000 at December 31, 2022. The increase in nonaccrual loans was primarily driven by seven commercial loans, totaling $5.0 million, becoming nonaccrual during in 2023. The ratio of nonperforming loans to total loans was 0.33% at December 31, 2023 compared to 0.05% at December 31, 2022.

The following table presents information regarding the number and balance of nonperforming loans at December 31, 2023 and December 31, 2022.

December 31, 2023

December 31, 2022

# of loans

Balance

# of loans

Balance

(dollars in thousands)

Commercial

7 

$

5,048 

2 

$

99 

Single-family residential real estate

3 

627 

3 

641 

Home equity lines of credit

1 

17 

1 

18 

Other Consumer

1 

30 

1 

3 

Total

12 

$

5,722 

7 

$

761 

The Company adopted ASU 2022-02, Financial Instruments- Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures, during the first quarter of 2023. This amendment eliminated the 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 at December 31, 2023.

Prior to the adoption of ASU 2022-02, nonaccrual loans included some loans that were modified and identified as TDRs and were not performing. TDRs included in nonaccrual loans totaled $80,000 at December 31, 2022.

Nonaccrual loans at December 31, 2022 did not include $95,000 of TDRs where customers had established a sustained period of repayment performance, generally six months, the loans were current according to their modified terms and repayment of the remaining contractual payments was expected. These loans were included in total impaired loans. See Notes 1 and 4 in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding impaired loans and nonperforming loans.

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 in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding the regulatory asset classifications.

The level of total criticized and classified loans increased by $5.6 million, or 73.6%, during the year ended December 31, 2023. Loans designated as special mention decreased $2.7 million, or 40.3%, and totaled $4.1 million at December 31, 2023, compared to $6.8 million at December 31, 2022. Loans classified as substandard increased $8.0 million and totaled $8.6 million at December 31, 2023, compared to $681,000 at December 31, 2022. See Note 4 in the accompanying Notes to Consolidated Financial Statements included in this Form 10-K for additional information regarding risk classification of loans.

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 $136,000 and totaled $2.0 million at December 31, 2023, compared to $2.1 million at December 31, 2022. Past due loans totaled 0.1% of the loan portfolio at both December 31, 2023 and December 31, 2022. See Note 4 in the accompanying Notes to Consolidated Financial Statements for additional information regarding loan delinquencies.

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. CFBank has not engaged in subprime lending or used option ARM products.

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, CFBank has increased risk due to a potential decline in collateral values without a corresponding decrease in the outstanding principal. Interest-only commercial lines of credit totaled $147.5 million, or 33.5% of CFBank’s commercial portfolio at December 31, 2023, compared to $117.9 million, or 27.6%, at December 31, 2022. Interest only home equity lines of credit totaled $33.6 million, or 93.4% of the total home equity lines of credit, at December 31, 2023 compared to $30.5 million, or 99.2%, at December 31, 2022.

We believe the ACL - Loans is adequate to absorb current expected 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.

Foreclosed assets. There were no foreclosed assets at December 31, 2023 or December 31, 2022. The level of foreclosed assets and charges to foreclosed assets expense may change in the future in connection with workout efforts related to foreclosed assets, nonperforming loans and other loans with credit issues.

Premises and equipment. Premises and equipment, net, totaled $3.8 million at December 31, 2023, and increased $34,000, or 0.9%, from $3.8 million at December 31, 2022. See Note 8 in the accompanying Notes to Consolidated Financial Statements for additional information.

Deposits. Deposits totaled $1.7 billion at December 31, 2023, an increase of $216.1 million, or 14.2%, from $1.5 billion at December 31, 2022. The increase is primarily due to a $105.3 million increase in certificate of deposit account balances, a $102.5 million increase in money market account balances, and an $11.4 million increase in checking account balances, partially offset by a $3.1 million decrease in savings account balances. Noninterest-bearing deposit accounts totaled $235.9 million at December 31, 2023 and decreased $27.3 million from $263.2 million at December 31, 2022.

CFBank is a participant in the Certificate of Deposit Account Registry Service® (CDARS) and Insured Cash Sweep (ICS) programs offered through IntraFi Network. IntraFi works with a network of banks to offer products that can provide FDIC insurance coverage in excess of $250,000 through these innovative products. Brokered deposits, including CDARS and ICS deposits that qualify as brokered, totaled $440.4 million at December 31, 2023, and increased $148.6 million, or 50.9%, from $291.8 million at December 31, 2022. Customer balances in the CDARS reciprocal and ICS reciprocal programs, which do not qualify as brokered, totaled $237.8 million at December 31, 2023 and increased $79.9 million, or 50.6%, from $157.9 million at December 31, 2022.

FHLB advances and other debt. FHLB advances and other debt totaled $110.0 million at December 31, 2023, an increase of $534,000 when compared to $109.5 million at December 31, 2022. The increase was primarily due to a $4.0 million increase on the Company’s line of credit with a third party financial institution, partially offset by a $3.5 million decrease in FHLB advances.

The Holding Company has a $35.0 million facility with a third-party bank. The credit facility is revolving until May 21, 2024, at which time any then-outstanding balance is converted to a 10-year term note on a graduated 10-year amortization. Borrowings on the credit facility bear interest at a fixed rate of 3.85% until May 21, 2026, and the interest rate then converts to a floating rate equal to PRIME with a floor of 3.25%. The purpose of the credit facility is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth. As of December 31, 2023, the Company had an outstanding balance, net of unamortized debt issuance costs, of $33.5 million on the facility.

At December 31, 2023 and 2022, CFBank had availability in unused lines of credit at two commercial banks in the amounts of $50.0 million and $15.0 million, respectively. There were no outstanding borrowings on either line at December 31, 2023 or December 31, 2022.

Subordinated debentures Subordinated debentures totaled $15.0 million at December 31, 2023 and $14.9 million at December 31, 2022. In December 2018, the Holding Company entered into subordinated note purchase agreements with certain qualified institutional buyers and completed a private placement of $10.0 million of fixed-to-floating rate subordinated notes, resulting in net proceeds of $9,612,000 after deducting unamortized debt issuance costs of approximately $388,000. In 2003, the Holding Company issued subordinated debentures in exchange for the proceeds of a $5.0 million trust preferred securities offering issued by a trust formed by the Holding Company. The terms of the subordinated debentures allow for the Holding Company to defer interest payments for a period not to exceed five years. Interest payments on the subordinated debentures were current at December 31, 2023 and December 31, 2022. See Note 11in the accompanying Notes to Consolidated Financial Statements for additional information.

Stockholders’ equity. Stockholders’ equity totaled $155.4 million at December 31, 2023, an increase of $16.1 million, or 11.6%, from $139.2 million at December 31, 2022. The increase in total stockholders’ equity was primarily attributed to net income, partially offset by $1.5 million in dividend payments and a $253,000 increase in other comprehensive loss. The other comprehensive loss was the result of the mark-to-market adjustment of our investment portfolio.

Management continues to proactively monitor capital levels and ratios in its on-going capital planning process. CFBank has leveraged its capital to support balance sheet growth and drive increased net interest income. Management remains focused on growing capital though improving results from operations; however, should the need arise, CFBank has additional sources of capital and alternatives it could utilize as further discussed in the “Liquidity and Capital Resources” section in this Form 10-K.

Comparison of Results of Operations for 2023 and 2022

General. Net income for the year ended December 31, 2023 totaled $16.9 million (or $2.63 per diluted common share) and decreased $1.3 million, or 6.8%, compared to net income of $18.2 million (or $2.78 per diluted common share) for the year ended December 31,

2022. The decrease in net income was primarily due to a decrease in net interest income and an increase in provision expense, which was partially offset by an increase in noninterest interest income and a decrease in noninterest expense.

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 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 $47.6 million for the year ended December 31, 2023 and decreased $1.2 million, or 2.4%, compared to net interest income of $48.8 million for the year ended December 31, 2022. The decrease in net interest income was primarily due to a $41.6 million, or 219.6%, increase in interest expense, partially offset by a $40.5 million, or 59.8%, increase in interest income. The increase in interest expense was attributed to a 244bps increase in the average cost of funds on interest-bearing liabilities, coupled with a $298.5 million, or 24.4%, increase in average interest-bearing liabilities. The increase in interest income was primarily attributed to a 152bps increase in the average yield on interest-earning assets, coupled with a $286.5 million, or 18.5%, increase in average interest-earning assets outstanding. The net interest margin of 2.59% for the year ended December 31, 2023 decreased 56bps compared to the net interest margin of 3.15% for the year ended December 31, 2022.

Interest income totaled $108.3 million for the twelve months ended December 31, 2023, and increased $40.5 million, or 59.8%, compared to $67.8 million for the twelve months ended December 31, 2022. The increase in interest income was primarily attributed to a 136bps increase in the average yield on loans and leases and loans held for sale, coupled with a $249.5 million, or 18.0%, increase in average loans and leases and loans held for sale.

Interest expense totaled $60.6 million for the twelve months ended December 31, 2023, and increased $41.6 million, or 219.6%, compared to $19.0 million for the twelve months ended December 31, 2022. The increase in interest expense was primarily attributed to a 262bps increase in the average rate of interest-bearing deposits, coupled with a $275.3 million, or 24.6%, increase in average interest-bearing deposits.

Provision for credit losses. The provision for credit losses expense for the year ended December 31, 2023 was $2.3 million, and increased $1.5 million, or 194.4%, compared to $787,000 for the year ended December 31, 2022. Net charge-offs for the year ended December 31, 2023 totaled $646,000, compared to net charge-offs of $233,000 for the year ended December 31, 2022.

The following table presents information regarding net charge-offs (recoveries) for 2023 and 2022.

2023

2022

(Dollars in thousands)

Net charge-offs (recoveries)

Commercial

$

690

$

263

Single-family residential real estate

(40)

(19)

Home equity lines of credit

(4)

(11)

Total

$

646

$

233

See the section above titled “Financial Condition – Allowance for Credit Losses on Loans” for additional information.

Noninterest income. Noninterest income for the year ended December 31, 2023 totaled $4.0 million and increased $821,000, or 25.6%, compared to $3.2 million for the year ended December 31, 2022. The increase was primarily due to a $525,000 increase in swap fee income and a $431,000 increase in service charges on deposit accounts.

Noninterest expense. Noninterest expense for the year ended December 31, 2023 totaled $28.4 million and decreased $252,000, or 0.9%, compared to $28.6 million for the year ended December 31, 2022. The decrease in noninterest expense during the year ended December 31, 2023 was primarily due to a $635,000 decrease in data processing expense and a $612,000 decrease in salaries and employee benefits expense, partially offset by a $1.1 million increase in FDIC premiums. The decrease in data processing expense was due to the core processing system conversion that occurred in the third quarter of 2022, which included some one-time conversion costs. The decrease in salaries and employee benefits expense was primarily due to a decrease in the number of employees. The increase in FDIC expense was related to increased assets and deposit levels and assessment rates.

Income taxes. Income tax expense was $4.0 million for the year ended December 31, 2023, a decrease of $380,000, compared to $4.4 million for the year ended December 31, 2022. The effective tax rate for the year ended December 31, 2023 was approximately 19.3%, as compared to approximately 19.6% for the year ended December 31, 2022.

Our deferred tax assets are composed of U.S. net operating losses (“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 December 31, 2023 that no valuation allowance was required against the net deferred tax asset.

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, historic tax credits, bank owned life insurance and other miscellaneous items.

Comparison of Results of Operations for 2022 and 2021

General. Net income for the year ended December 31, 2022 totaled $18.2 million (or $2.78 per diluted common share) and decreased $289,000, or 1.6%, compared to net income of $18.5 million (or $2.77 per diluted common share) for the year ended December 31, 2021. The decrease in net income was primarily due to a decrease in net gain on sale of loans, a decrease in net gain on sale of deposits and an increase in provision expense, which was partially offset by an increase in net interest income and a decrease in noninterest expenses.

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 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 $48.8 million for the year ended December 31, 2022 and increased $6.8 million, or 16.1%, compared to net interest income of $42.0 million for the year ended December 31, 2021. The increase in net interest income was primarily due to a $15.5 million, or 29.5%, increase in interest income, partially offset by a $8.7 million, or 84.1%, increase in interest expense. The increase in interest income was primarily attributed to a $167.9 million, or 12.2%, increase in average interest-earning assets outstanding, resulting primarily from an increase in net loans and loans held for sale, coupled with a 58bps increase in average yield on interest-earning assets. The increase in interest expense was attributed to a 60bps increase in the average cost of funds on interest-bearing liabilities, coupled with a $135.9 million, or 12.5%, increase in average interest-bearing liabilities. The net interest margin of 3.15% for the year ended December 31, 2022 increased 11bps compared to the net interest margin of 3.04% for the year ended December 31, 2021.

Interest income totaled $67.8 million for the twelve months ended December 31, 2022, and increased $15.5 million, or 29.5%, compared to $52.3 million for the twelve months ended December 31, 2021. The increase in interest income was primarily attributed to a $347.1 million, or 33.6%, increase in average loans outstanding, coupled with a 18bps increase in the average yield on loans, partially offset by a $238.7 million, or 97.4%, decrease in average loans held for sale.

Interest expense totaled $19.0 million for the twelve months ended December 31, 2022, and increased $8.7 million, or 84.1%, compared to $10.3 million for the twelve months ended December 31, 2021. The increase in interest expense was primarily attributed to a 60bps increase in the average rate of interest-bearing deposits, coupled with a $142.7 million, or 14.6%, increase in average interest-bearing deposits.

Provision for loan and lease losses. The provision for loan and lease losses expense for the year ended December 31, 2022 was $787,000, compared to ($1.6) million in provision for loan and lease losses expense for the year ended December 31, 2021. Net charge-offs for the year ended December 31, 2022 totaled $233,000, compared to net recoveries of $86,000 for the year ended December 31, 2021.

The following table presents information regarding net charge-offs (recoveries) for 2022 and 2021.

2022

2021

(Dollars in thousands)

Net charge-offs (recoveries)

Commercial

$

263

$

(56)

Single-family residential real estate

(19)

(9)

Home equity lines of credit

(11)

(21)

Total

$

233

$

(86)

See the section below titled “Financial Condition – Allowance for loan and lease losses” for additional information.

Noninterest income. Noninterest income for the year ended December 31, 2022 totaled $3.2 million and decreased $8.4 million, or 72.4%, compared to $11.6 million for the year ended December 31, 2021. The decrease was primarily due to a $5.3 million decrease in net gain on sale of residential loans, a $1.9 million decrease in gain on sale of deposits and a $1.1 million increase in the net gain on sales of commercial loans. The decrease in the net gain on sale of residential mortgage loans was the result of the Company’s decision

in early 2021 to scale down and exit the direct-to-consumer mortgage business in favor of lending in our regional markets. The decrease in gain on sale of deposits was a result of the sale of CFBank’s two Columbiana County branches in July 2021.

Noninterest expense. Noninterest expense for the year ended December 31, 2022 totaled $28.6 million and decreased $3.9 million, or 11.8%, compared to $32.5 million for the year ended December 31, 2021. The decrease in noninterest expense during the year ended December 31, 2022 was primarily due to a $2.6 million decrease in advertising and promotion expense, a $1.8 million decrease in salaries and employee benefits expense, and a $1.6 million decrease in professional fees expense, partially offset by a $721,000 increase in data processing expense and a $570,000 increase on impairment of property and equipment. The decreases in advertising and marketing expense, salaries and employee benefits expense, and professional fee expense were primarily the result of the Company’s decision in early 2021 to scale down and exit the direct-to-consumer mortgage business in favor of lending in our regional markets as previously discussed. The increase in data processing expense was primarily related to the conversion of our core processing system during the third quarter of 2022. The impairment of property and equipment was related to the then-pending sale (as of December 31, 2022) of our Worthington headquarters building.

Income taxes. Income tax expense was $4.4 million for the year ended December 31, 2022, an increase of $63,000, compared to $4.4 million for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022 was approximately 19.6%, as compared to approximately 19.1% for the year ended December 31, 2021.

Our deferred tax assets are composed of U.S. net operating losses (“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 December 31, 2022 that no valuation allowance was required against the net deferred tax asset.

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, historic tax credits, bank owned life insurance and other miscellaneous items.


‎

Average Balances, Interest Rates and Yields. The following table presents, 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 the Years Ended December 31,

2023

2022

2021

Average

Interest

Average

Average

Interest

Average

Average

Interest

Average

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

Balance

Paid

Rate

Balance

Paid

Rate

Balance

Paid

Rate

(Dollars in thousands)

Interest-earning assets:

Securities (1) (2)

$

14,198 

$

658 

3.86%

$

17,805 

$

881 

4.58%

$

19,311 

$

756 

3.93%

Loans and leases and loans held for sale (3)

1,635,173 

97,383 

5.96%

1,385,701 

63,717 

4.60%

1,277,239 

51,256 

4.01%

Other earning assets

178,275 

9,646 

5.41%

138,805 

2,818 

2.03%

79,017 

102 

0.13%

FHLB and FRB stock

8,566 

592 

6.91%

7,413 

348 

4.69%

6,220 

234 

3.76%

Total interest-earning assets

1,836,212 

108,279 

5.89%

1,549,724 

67,764 

4.37%

1,381,787 

52,348 

3.79%

Noninterest-earning assets

92,957 

79,467 

79,393 

Total assets

$

1,929,169 

$

1,629,191 

$

1,461,180 

Interest-bearing liabilities:

Deposits

$

1,396,298 

56,363 

4.04%

$

1,121,003 

15,952 

1.42%

$

978,258 

8,014 

0.82%

FHLB advances and other borrowings

124,999 

4,276 

3.42%

101,757 

3,022 

2.97%

108,637 

2,295 

2.11%

Total interest-bearing liabilities

1,521,297 

60,639 

3.99%

1,222,760 

18,974 

1.55%

1,086,895 

10,309 

0.95%

Noninterest-bearing liabilities

260,060 

273,789 

255,855 

Total liabilities

1,781,357 

1,496,549 

1,342,750 

Equity

147,812 

132,642 

118,430 

Total liabilities and equity

$

1,929,169 

$

1,629,191 

$

1,461,180 

Net interest-earning assets

$

314,915 

$

326,964 

$

294,892 

Net interest income/interest rate spread

$

47,640 

1.90%

$

48,790 

2.82%

$

42,039 

2.84%

Net interest margin

2.59%

3.15%

3.04%

Average interest-earning assets to average interest-bearing liabilities

120.70%

126.74%

127.13%

(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 ACL - Loans and includes nonperforming loans.

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 the 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.

Year Ended

Year Ended

December 31, 2023

December 31, 2022

Compared to Year Ended

Compared to Year Ended

December 31, 2022

December 31, 2021

Increase (decrease) due to

Increase (decrease) due to

Rate

Volume

Net

Rate

Volume

Net

(Dollars in thousands)

Interest-earning assets:

Securities (1)

$

(98)

$

(125)

$

(223)

$

165

$

(40)

$

125

Loans and leases

20,898

12,768

33,666

2,716

9,745

12,461

Other earning assets

5,832

996

6,828

2,584

132

2,716

FHLB and FRB stock

184

60

244

64

50

114

Total interest-earning assets

26,816

13,699

40,515

5,529

9,887

15,416

Interest-bearing liabilities:

Deposits

35,645

4,766

40,411

6,627

1,311

7,938

FHLB advances and other borrowings

501

753

1,254

880

(153)

727

Total interest-bearing liabilities

36,146

5,519

41,665

7,507

1,158

8,665

Net change in net interest income

$

(9,330)

$

8,180

$

(1,150)

$

(1,978)

$

8,729

$

6,751

(1)Securities amounts are presented on a fully taxable equivalent basis.

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.

CFBank is required by regulation to maintain sufficient liquidity to ensure its safe and sound operation. Thus, adequate liquidity may vary depending on CFBank’s overall asset/liability structure, market conditions, the activities of competitors, the requirements of our own deposit and loan customers and regulatory considerations. Management believes that each of the Holding Company’s and CFBank’s current liquidity is sufficient to meet its daily operating needs and fulfill its strategic planning.

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.

The following table summarizes CFBank’s cash available from liquid assets and borrowing capacity at December 31, 2023 and 2022.

December 31, 2023

December 31, 2022

(Dollars in thousands)

Cash, unpledged securities and deposits in other financial institutions

$

262,004

$

154,410

Additional borrowing capacity at the FHLB

183,654

187,854

Additional borrowing capacity at the FRB

136,240

105,119

Unused commercial bank lines of credit

65,000

65,000

Total

$

646,898

$

512,383

Cash, unpledged securities and deposits in other financial institutions increased $107.6 million, or 69.7%, to $262.0 million at December 31, 2023, compared to $154.4 million at December 31, 2022. The increase was primarily attributed to an increase in deposits, partially offset by an increase in net loan balances.

CFBank’s additional borrowing capacity with the FHLB decreased $4.2 million, or 2.2%, to $183.7 million at December 31, 2023, compared to $187.9 million at December 31, 2022.

CFBank’s additional borrowing capacity at the FRB increased $31.1 million, or 29.6%, to $136.2 million at December 31, 2023 from $105.1 million at December 31, 2022. CFBank is eligible to participate in the FRB’s primary credit program, providing CFBank access to short-term funds at any time, for any reason, based on the collateral pledged.

CFBank’s borrowing capacity with both the FHLB and FRB may be negatively impacted by changes such as, but not limited to, further tightening of credit policies by the FHLB or FRB, deterioration in the credit performance of CFBank’s loan portfolio or CFBank’s financial performance, or a decrease in the balance of pledged collateral.

CFBank had $65.0 million of availability in unused lines of credit with two commercial banks at December 31, 2023 and December 31, 2022.

Deposits are obtained predominantly from the markets in which CFBank’s offices are located. We rely primarily on a willingness to pay market-competitive interest rates to attract and retain retail deposits. Accordingly, rates offered by competing financial institutions may affect our ability to attract and retain deposits.

CFBank relies on competitive interest rates, customer service, and relationships with customers to retain deposits. In 2010, the FDIC, pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, permanently increased deposit insurance coverage from $100,000 to $250,000 per depositor.

The Holding Company has more limited sources of liquidity than CFBank. In general, in addition to its existing liquid assets, sources of liquidity include funds raised in the securities markets through debt or equity offerings, funds borrowed from third party banks or other lenders, dividends received from CFBank or the sale of assets.

Management believes that the Holding Company had adequate funds at December 31, 2023 to meet its current and anticipated operating needs at this time. The Holding Company’s current cash requirements include operating expenses and interest on subordinated debentures and other debt. The Company may also pay dividends on its common stock, if and when declared by the Board of Directors.

Currently, annual debt service on the subordinated debentures underlying the Company’s trust preferred securities is approximately $430,000. Prior to July 1, 2023, the subordinated debentures had a variable rate of interest, which reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) plus 2.85%. Effective July 1, 2023, the rate of interest on the subordinated debentures resets quarterly to the three-month Secured Overnight Financing Rate (SOFR) plus 3.112%, which was 8.44% at December 31, 2023.

The Holding Company’s subordinated notes had a fixed rate of 7.00% until December 2023, at which time the interest rate began to reset quarterly to a rate equal to the then current three-month SOFR plus 4.402%.

The Holding Company has a $35.0 million credit facility. The credit facility is revolving until May 21, 2024 at which time any then-outstanding balance will be converted to a 10-year term note on a graduated 10-year amortization. Borrowings on the credit facility bear interest at a fixed rate of 3.85% until May 21, 2026, and the interest rate then converts to a floating rate equal to PRIME with a floor of 3.75%. The purpose of the credit facility is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth. At December 31, 2023, the Company had an outstanding balance, net of unamortized debt issuance costs, of $33.5 million on the facility.

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 CFBank to the extent necessary to fund such dividends.

The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company. Banking regulations limit the amount of dividends that can be paid to the Holding Company by CFBank without prior regulatory approval. Generally, financial institutions may pay dividends without prior regulatory approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as the financial institution remains well capitalized after the dividend payment.

The Holding Company also is subject to various legal and regulatory policies and requirements impacting the Holding Company’s ability to pay dividends on its stock. In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. Finally, under the terms of the Company’s fixed-to-floating rate subordinated debt, the Holding Company’s ability to pay dividends on its stock is conditioned upon the Holding Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.

Federal income tax laws provided deductions, totaling $2.3 million, for thrift bad debt reserves established before 1988. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled $473,000 at year-end 2023. However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded. Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank.

Impact of Inflation

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which presently require us to measure financial position and results of operations primarily in terms of historical dollars. Changes in the relative value of money due to inflation are generally not considered. In our opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate. While interest rates are generally influenced by changes in the inflation rate, they do not move concurrently. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as changes in monetary and fiscal policy. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its ability to perform in a volatile economic environment. In an effort to protect performance from the effects of interest rate volatility, we review interest rate risk frequently and take steps to minimize detrimental effects on profitability.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. We have not engaged in and, accordingly, have no risk related to trading accounts, commodities or foreign exchange. Our hedging policy allows hedging activities, such as interest-rate swaps, up to a notional amount of 10% of total assets and a value at risk of 10% of core capital. Disclosures about our hedging activities are set forth in Note 17 to our Consolidated Financial Statements. The Company’s market risk arises primarily from interest rate risk inherent in our lending, investing, deposit gathering and borrowing activities. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated and the resulting net positions are identified. Disclosures about fair value are set forth in Note 6 to our Consolidated Financial Statements.

Management actively monitors and manages interest rate risk. The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on our net interest income and capital. We measure the effect of interest rate changes on CFBank’s economic value of equity (EVE), which is the difference between the estimated market value of CFBank’s assets and liabilities under different interest rate scenarios. The change in the EVE ratio is a long-term measure of what might happen to the market value of financial assets and liabilities over time if interest rates changed instantaneously and CFBank did not change existing strategies. At December 31, 2023, CFBank’s EVE ratios, using interest rate shocks ranging from a 400 bps rise in rates to a 400 bps decline in rates, are shown in the following table. All values are within the acceptable range established by CFBank’s Board of Directors.

Economic Value of Equity

as a Percent of Assets

(CFBank only)

Basis Point

Economic

Change in Rates

Value Ratio

+400

7.9%

+300

8.5%

+200

9.0%

+100

9.6%

0

10.2%

-100

10.8%

-200

11.4%

-300

12.1%

-400

12.3%

In evaluating CFBank’s exposure to interest rate risk, certain limitations inherent in the method of analysis presented in the foregoing table must be considered. For example, the table indicates results based on changes in the level of interest rates, but not changes in the shape of the yield curve. CFBank also has exposure to changes in the shape of the yield curve. Although certain assets and liabilities may have similar maturities or periods to which they reprice, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their debt may decrease when interest rates rise. As a result, the actual effect of changing interest rates may differ materially from that presented in the foregoing table.

Changes in levels of market interest rates could materially and adversely affect our net interest income, loan volume, asset quality, value of loans held for sale and cash flows, as well as the market value of our securities portfolio and overall profitability.

Residential mortgage loan origination volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations, while falling interest rates are usually associated with higher loan originations. Our ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations. Changes in interest rates, prepayment speeds and other factors may also cause the value of our loans held for sale to change.

We originate commercial, commercial real estate, multi-family residential and single family residential real estate mortgage loans for our portfolio, which, in many cases, have adjustable interest rates. Many of these loans have interest-rate floors, which protect income to CFBank should rates fall. While adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate loan borrowers upon an interest rate adjustment in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a rising interest rate environment.

Cash flows are affected by changes in market interest rates. Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, loan prepayment rates are likely to increase.

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Table of Contents

CF BANKSHARES INC.

Item 8. Financial Statements and Supplementary Data.

The following consolidated financial statements of CF Bankshares Inc., and reports of independent registered public accounting firm and management are included below.


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Table of Contents

CF BANKSHARES INC.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of CF Bankshares Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria for effective internal control over financial reporting as described in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2023.

This annual report does not contain an audit report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Timothy T. O’Dell

Timothy T. O’Dell

President and Chief Executive Officer

/s/ Kevin J. Beerman

Kevin J. Beerman

Executive Vice President and Chief Financial Officer

March 28, 2024

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CF BANKSHARES INC.

 

Shareholders, Board of Directors and Audit Committee

CF Bankshares Inc.

Columbus, Ohio

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of CF Bankshares Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Notes 1 and 4 to the consolidated financial statements, the Company changed its method of accounting for credit losses on financial instruments due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

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Report of Independent Registered Public Accounting Firm

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

As described in Notes 1 and 4 to the consolidated financial statements and referred to in the change in accounting principle explanatory paragraph above, the Company adopted ASC 326 as of January 1, 2023, which among other things, required the Company to recognize expected credit losses over the contractual lives of financial assets carried at amortized costs, including loans receivables, utilizing the Current Expected Credit Losses (“CECL”) methodology. As of December 31, 2023, the allowance for credit losses (ACL) balance was $18.2 million. Estimates of expected credit losses are based on relevant information about current conditions, past events, and reasonable and supportable forward-looking forecasts regarding collectability of the reported amounts. The Company utilized an average charge-off method derived from historical data to construct a loss rate for each identified loan segment. Due to the Company’s loss history not being sufficient and relevant enough to predict future losses, the Company also utilized peer data from a peer group. The loss rates are then adjusted, for reasonable and supportable forecasts of relevant economic indicators as well as other environmental factors based on the risks present for each portfolio segment. The environmental factors (“qualitative adjustments”) include consideration of economic conditions and portfolio trends.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included:

Obtained an understanding of the Company’s process for establishing the ACL, including the selection of models and the qualitative factor adjustments of the ACL.

Tested clerical and computational accuracy of the formulas within the calculation.

Tested completeness and accuracy of the information and reports utilized in the ACL.

Performed reviews of individual credit files to evaluate the reasonableness of loan credit risk ratings.

Evaluated the qualitative adjustments to the ACL including assessing the basis for adjustments and the reasonableness of the significant assumptions.

Evaluated the reserve generated for unfunded commitments and tested the completeness and accuracy of the information utilized.

Evaluated the forecast adjustment, including assessing that it is reasonable and supportable.

Tested the reasonableness of specific reserves on individually reviewed loans.

Evaluated credit quality trends in delinquencies, non-accruals, charge-offs, and loan risk ratings.

/s/ FORVIS, LLP

FORVIS, LLP

We have served as the Company's auditor since 2014.

Indianapolis, Indiana

March 28, 2024

 

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CF BANKSHARES INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2023 and 2022

(Dollars in thousands, except per share data)

         

December 31,

December 31,

2023

2022

ASSETS

Cash and cash equivalents

$

261,595

$

151,787

Interest-bearing deposits in other financial institutions

100

100

Securities available for sale

8,092

10,442

Equity securities

5,000

5,000

Loans held for sale, at fair value

1,849

580

Loans and leases, net of allowance of $16,865 and $16,062, respectively

1,694,133

1,572,255

FHLB and FRB stock

8,482

7,942

Premises and equipment, net

3,812

3,778

Other assets held for sale

-  

1,930

Operating lease right-of-use assets

5,221

1,357

Bank owned life insurance

26,266

25,641

Accrued interest receivable and other assets

44,065

39,362

Total assets

$

2,058,615

$

1,820,174

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits

Noninterest bearing

$

235,916

$

263,241

Interest bearing

1,508,141

1,264,681

Total deposits

1,744,057

1,527,922

FHLB advances and other debt

109,995

109,461

Advances by borrowers for taxes and insurance

2,179

3,513

Operating lease liabilities

5,302

1,438

Accrued interest payable and other liabilities

26,747

23,670

Subordinated debentures

14,961

14,922

Total liabilities

1,903,241

1,680,926

Commitments and contingent liabilities

-  

-  

Stockholders' equity

Common stock, $0.01 par value;

shares authorized: 9,090,909, including 1,260,700 shares of non-voting common stock

Voting common stock, $0.01 par value; shares issued: 5,665,958 at December 31, 2023 and 5,601,289 at December 31, 2022

57

56

Non-voting common stock, $0.01 par value;

shares issued: 1,260,700 at December 31, 2023 and December 31, 2022

13

13

Additional paid-in capital

91,068

89,813

Retained earnings

76,517

61,095

Accumulated other comprehensive loss

(2,290)

(2,037)

Treasury stock, at cost; 381,098 shares of voting common stock at December 31, 2023 and 365,165 shares of voting common stock at December 31, 2022

(9,991)

(9,692)

Total stockholders' equity

155,374

139,248

Total liabilities and stockholders' equity

$

2,058,615

$

1,820,174

 

See accompanying notes to consolidated financial statements.

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CF BANKSHARES INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

       

2023

2022

2021

Interest and dividend income

Loans and leases, including fees

$

97,383 

$

63,717 

$

51,256 

Securities

658 

881 

756 

FHLB and FRB stock dividends

592 

348 

234 

Federal funds sold and other

9,646 

2,818 

102 

108,279 

67,764 

52,348 

Interest expense

Deposits

56,363 

15,952 

8,014 

FHLB advances and other debt

3,107 

2,040 

1,398 

Subordinated debentures

1,169 

982 

897 

60,639 

18,974 

10,309 

Net interest income

47,640 

48,790 

42,039 

Provision for credit losses

Provision for credit losses-loans

1,858 

787 

(1,600)

Provision for credit losses-unfunded commitments

459 

-

-

2,317 

787 

(1,600)

Net interest income after provision for credit losses

45,323 

48,003 

43,639 

Noninterest income

Service charges on deposit accounts

1,566 

1,135 

845 

Net gains on sales of residential mortgage loans

119 

656 

5,916 

Net gains on sales of SBA loans

66 

353 

1,443 

Gain (loss) on redemption of life insurance policies

-

(173)

383 

Earnings on bank owned life insurance

625 

598 

532 

Gain on sale of deposits

-

-

1,893 

Swap fee income

715 

190 

194 

Other

940 

451 

434 

4,031 

3,210 

11,640 

Noninterest expense

Salaries and employee benefits

14,513 

15,125 

16,948 

Occupancy and equipment

1,694 

1,253 

1,120 

Data processing

2,172 

2,807 

2,086 

Franchise and other taxes

1,263 

1,151 

975 

Professional fees

2,470 

2,758 

4,348 

Director fees

658 

632 

622 

Postage, printing and supplies

149 

183 

146 

Advertising and marketing

336 

431 

3,061 

Telephone

257 

249 

263 

Loan expenses

619 

694 

352 

Depreciation

567 

496 

435 

FDIC premiums

2,215 

1,130 

1,238 

Regulatory assessment

242 

272 

261 

Other insurance

209 

177 

158 

Impairment of property and equipment

60 

570 

17 

Other

945 

693 

431 

28,369 

28,621 

32,461 

Income before incomes taxes

20,985 

22,592 

22,818 

Income tax expense

4,048 

4,428 

4,365 

Net income

$

16,937 

$

18,164 

$

18,453 

Earnings per common share:

Basic

$

2.64

$

2.84

$

2.84

Diluted

$

2.63

$

2.78

$

2.77

 

See accompanying notes to consolidated financial statements.

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CF BANKSHARES INC.

CONSOLIDATED STATEMENTS OF COMREHENSIVE INCOME

Years ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

             

2023

2022

2021

Net income

$

16,937

$

18,164

$

18,453

Other comprehensive income:

Unrealized holding gains (losses) arising during the period related to investment securities available for sale, net of tax of ($67), ($496) and ($71):

(253)

(1,867)

(266)

Other comprehensive income (loss), net of tax

(253)

(1,867)

(266)

Comprehensive income

$

16,684

$

16,297

$

18,187

 

See accompanying notes to consolidated financial statements.

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CF BANKSHARES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

       

Voting

Non-voting

Additional

Accumulated Other

Total

Common

Common

Paid-In

Retained

Comprehensive

Treasury

Stockholders'

Stock

Stock

Capital

Earnings

Income (Loss)

Stock

Equity

Balance at January 1, 2021

$

54 

13 

87,637 

26,479 

96 

(4,069)

110,210 

Net income

-

-

-

18,453 

-

-

18,453 

Other comprehensive income

-

-

-

-

(266)

-

(266)

Issuance of 19,660 stock based incentive plan shares, net of forfeitures

1 

-

(1)

-

-

-

-

Restricted stock expense, net of forfeitures

-

-

707 

-

-

-

707 

Stock options exercised

-

-

185 

-

-

-

185 

Acquisition of 2,261 treasury shares surrendered upon vesting of restricted stock for payment of taxes

-

-

-

-

-

(43)

(43)

Acquisition of 4,522 treasury shares surrendered upon exercise of stock options for payment of taxes and exercise price

-

-

-

-

-

(96)

(96)

Purchase of 143,551 treasury shares

-

-

-

-

-

(2,972)

(2,972)

Dividends declared ( $0.13 per share)

-

-

-

(848)

-

-

(848)

Balance at December 31, 2021

55 

13 

88,528 

44,084 

(170)

(7,180)

125,330 

Net income

-

-

-

18,164 

-

-

18,164 

Other comprehensive income

-

-

-

-

(1,867)

-

(1,867)

Issuance of 69,648 stock based incentive plan shares, net of forfeitures

1 

-

(1)

-

-

-

-

Restricted stock expense, net of forfeitures

-

-

899 

-

-

-

899 

Stock options exercised

-

-

387 

-

-

-

387 

Acquisition of 3,424 treasury shares surrendered upon vesting of restricted stock for payment of taxes

-

-

-

-

-

(73)

(73)

Acquisition of 4,366 treasury shares surrendered upon exercise of stock options for payment of exercise price

-

-

-

-

-

(100)

(100)

Purchase of 110,998 treasury shares

-

-

-

-

-

(2,339)

(2,339)

Dividends declared ( $0.18 per share)

-

-

-

(1,153)

-

-

(1,153)

Balance at December 31, 2022

56 

13 

89,813 

61,095 

(2,037)

(9,692)

139,248 

Cumulative effect of ASC 326 adoption

-

-

-

(39)

-

-

(39)

Balance at January 1, 2023

56 

13 

89,813 

61,056 

(2,037)

(9,692)

139,209 

Net income

-

-

-

16,937 

-

-

16,937 

Other comprehensive loss

-

-

-

-

(253)

-

(253)

Issuance of 59,784 stock based incentive plan shares, net of forfeitures

1 

-

(1)

-

-

-

-

Restricted stock expense, net of forfeitures

-

-

1,172 

-

-

-

1,172 

Stock options exercised

-

-

84 

-

-

-

84 

Acquisition of 4,875 treasury shares surrendered upon vesting of restricted stock for payment of taxes

-

-

-

-

-

(95)

(95)

Acquisition of 1,555 treasury shares surrendered upon exercise of stock options for payment of exercise price

-

-

-

-

-

(27)

(27)

Purchase of 9,503 treasury shares

-

-

-

-

-

(177)

(177)

Dividends declared ( $0.23 per share)

-

-

-

(1,476)

-

-

(1,476)

Balance at December 31, 2023

$

57 

$

13 

$

91,068 

$

76,517 

$

(2,290)

$

(9,991)

$

155,374 

See accompanying notes to consolidated financial statements.

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CF BANKSHARES INC.

CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOWS

Years ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

2023

2022

2021

Net income

$

16,937 

$

18,164 

$

18,453 

Adjustments to reconcile net income to net cash from operating activities:

Provision for loan and lease losses

2,317 

787 

(1,600)

Depreciation

567 

496 

435 

Amortization, net

(1,024)

(881)

(2,505)

Deferred income tax expense

456 

215 

773 

Originations of loans held for sale

(10,800)

(97,265)

(2,358,511)

Proceeds from sale of loans held for sale

9,650 

123,655 

2,602,993 

Net gains on sales of residential mortgage loans

(119)

(656)

(5,916)

Net gains on sales of SBA loans

(66)

(353)

(1,443)

Gain on sale of deposits

-  

-  

(1,893)

Write-down of premises and equipment

60 

570 

17 

Loss on sale of other assets held for sale

13 

-  

-  

Earnings on bank owned life insurance

(625)

(598)

(532)

Loss (gain) on redemption of life insurance policies

-  

173 

(383)

Stock-based compensation expense

1,172 

899 

707 

Net change in:

Accrued interest receivable and other assets

(2,676)

(6,475)

17,880 

Operating lease right-of-use asset

687 

568 

461 

Operating lease right-of-use liability

(686)

(594)

(498)

Accrued interest payable and other liabilities

2,188 

1,059 

(15,135)

Net cash from operating activities

18,051 

39,764 

253,303 

Cash flows from investing activities:

Available-for-sale securities:

Maturities, prepayments and calls

2,013 

3,517 

5,030 

Purchases

-  

-  

(13,070)

Purchase of bank owned life insurance

-  

-  

(8,000)

Loan and lease originations and payments, net

(124,851)

(364,759)

(311,232)

Purchase of loans and leases

-  

(3,698)

(18,677)

Proceeds from the sale of loans

1,835 

12,569 

33,361 

Additions to premises and equipment

(661)

(905)

(2,962)

Purchase of FRB and FHLB stock

(540)

(627)

(1,468)

Purchase of other investments

(1,200)

-  

(1,500)

Purchase of investment- joint ventures

(1,000)

-  

-  

Return of investment- joint ventures

659 

582 

756 

Proceeds from the sale of assets held for sale

1,892 

-  

-  

Proceeds from the redemption of life insurance policies

-  

-  

661 

Proceeds from the sale of premises and equipment

-  

-  

371 

Net cash used by investing activities

(121,853)

(353,321)

(316,730)

Cash flows from financing activities:

Net change in deposits

216,135 

281,570 

237,593 

Cash paid for assumption of deposits in branch sale

-  

-  

(102,418)

Proceeds from FHLB advances and other debt

37,075 

40,150 

174,277 

Repayments on FHLB advances and other debt

(36,575)

(20,450)

(228,964)

Net change in warehouse line of credit

-  

-  

(70,013)

Net change in advances by borrowers for taxes and insurance

(1,334)

761 

1,723 

Cash dividends paid on common stock

(1,476)

(1,153)

(848)

Proceeds from exercise of stock options

84 

387 

185 

Acquisition of treasury shares surrendered upon vesting of restricted stock and exercised options for payment of taxes and exercise proceeds

(122)

(173)

(139)

Purchase of treasury shares

(177)

(2,339)

(2,972)

Net cash from financing activities

213,610 

298,753 

8,424 

Net change in cash and cash equivalents

109,808 

(14,804)

(55,003)

Beginning cash and cash equivalents

151,787 

166,591 

221,594 

Ending cash and cash equivalents

$

261,595 

$

151,787 

$

166,591 

 


‎

See accompanying notes to consolidated financial statements.

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CF BANKSHARES INC.

CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOWS

Years ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

2023

2022

2021

Supplemental cash flow information:

Interest paid

$

58,799 

$

18,362 

$

10,579 

Income tax paid

3,975 

2,450 

3,850 

Supplemental noncash disclosures:

Loans transferred from held for sale to portfolio

$

-  

$

1,674 

$

16,611 

Transfer from premises and equipment to assets held for sale

-  

1,930 

-  

Investment payable on limited liability corporation and limited partnership

889 

8,097 

7,764 

Initial recognition of operating right-of-use lease asset

4,550 

-  

999 

Initial recognition of operating right-of-use lease liability

4,550 

-  

999 

Redemption proceeds receivable on life insurance policy

-  

528 

-  

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation:

The consolidated financial statements include CF Bankshares Inc. (the “Holding Company”) and its wholly-owned subsidiary, CFBank, National Association (“CFBank”). On December 1, 2016, CFBank converted from a federal savings institution to a national bank. Prior to December 1, 2016, the Holding Company was a registered savings and loan holding company. 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 with the Board of Governors of the Federal Reserve System (the “FRB”). Effective as of July 27, 2020, the Company changed its name from Central Federal Corporation to CF Bankshares Inc. The Holding Company and CFBank are sometimes collectively referred to herein as the “Company”. Intercompany transactions and balances are eliminated in consolidation.

CFBank provides financial services through its eight full-service banking offices in the metro markets of Columbus, Cincinnati, Cleveland and Akron, Ohio and Indianapolis, Indiana. Its primary deposit products are commercial and retail checking, savings, money market and term certificate accounts. Its primary lending products are commercial and commercial real estate, residential mortgages and installment loans. There are no significant concentrations of loans to any one industry or customer segment. However, our customers’ ability to repay their loans is dependent on general economic conditions and the real estate values in their geographic areas.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for credit losses on financial assets, deferred tax assets and fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions and borrowings with original maturities under 90 days.

Cash in Excess of FDIC Limits: At December 31, 2023, the Company’s cash accounts exceeded federally insured limits by approximately $229.1 million. Approximately $225.1 million of that amount was held by either the Federal Reserve Bank or the Federal Home Loan Bank of Cincinnati, which is not federally insured.

Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature in April, 2025 and are carried at cost. As of December 31, 2023 and December 31, 2022, there was $100 in interest-bearing deposits in other financial institutions.

Securities: Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.

Interest income includes amortization of purchase premium or accretion of discount. Premiums and discounts on securities are amortized or accreted on the level-yield method, except for mortgage-backed securities and collateralized mortgage obligations where prepayments are anticipated based on industry payment trends. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Allowance for credit losses on investment securities available for sale: For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value is less than the amortized cost basis. Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income. Adjustments to the allowance for credit losses are reported in the income statement as a component of the provision for credit loss. The Company has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses. Investment securities available for sale are charged off against the allowance or, in the absence of any allowance, written down through the income statement when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Company did not record an allowance for credit losses on

 

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its investment securities available for sale as of December 31, 2023, as the unrealized losses were attributable to changes in interest rates, not credit quality.

Equity Securities: Equity securities without a readily determinable fair value are held at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. In accordance with ASC 321, the Company performs a qualitative assessment for equity securities without readily determinable fair values considering impairment indicators to evaluate whether an impairment exists. If an impairment exists, the Company will recognize a loss based on the difference between carrying value and estimated fair value.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value under the fair value option, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing rights when mortgage loans held for sale are sold with servicing rights retained. Loans originated as construction loans, that were subsequently transferred to held for sale, are carried at the lower of cost or market. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans and Leases: Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, adjusted for purchase premiums and discounts, deferred loan fees and costs and an allowance for credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

The accrual of interest income on all classes of loans, except other consumer loans, is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Other consumer loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan for all classes of loans. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Commercial, multi-family residential real estate loans and commercial real estate loans placed on nonaccrual status are individually classified as impaired loans.

All interest accrued but not received for each loan placed on nonaccrual status is reversed against interest income in the period in which it is placed on nonaccrual status. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual status. Loans are considered for return to accrual status provided all the principal and interest amounts that are contractually due are brought current, there is a current and well documented credit analysis, there is reasonable assurance of repayment of principal and interest, and the customer has demonstrated sustained, amortizing payment performance of at least six months.

Concentration of Credit Risk: Most of the Company’s primary business activity is with customers located within the Ohio counties of Franklin, Delaware, Hamilton, Cuyahoga and Summit and Marian County, Indiana and contiguous counties. Therefore, the Company’s exposure to credit risk can be affected by changes in the economies within these counties. Although these counties are the Company’s primary market area for loans, the Company originates residential and commercial real estate loans throughout the United States.

Adoption of ASC 326: Effective January 1, 2023, the Company adopted Accounting Standard Codification 326 (“ASC 326”) “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Results for the periods beginning after January 1, 2023 are presented under the new “Current Expected Credit Losses” methodology under ASC 326, while prior period amounts continue to be reported in accordance with the “incurred loss” model under previously applicable GAAP.

Allowance for Credit Losses – Loans and Leases ("ACL - Loans"): The ACL - Loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans and leases are collectively referred to as loans for the purpose of discussing the allowance for credit losses. Loans are charged off against the allowance when the uncollectibility of the loan 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 from the estimate of credit losses.

The ACL - Loans represents the Company's best estimate of current expected credit losses (CECL) on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The CECL calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the ACL - Loans is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

 

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In calculating the ACL - Loans, the loan portfolio was pooled into loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Company analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the average charge-off methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Company sub-segmented certain commercial portfolios by risk level where appropriate. The Company utilized a one-year reasonable and supportable economic forecast period.

The Company qualitatively adjusts model results for risk factors that are not inherently considered in the historical losses, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in economic conditions, (ii) changes in the nature and volume of the loan portfolio, (iii) changes in the existence, growth and effect of any concentrations in credit, (iv) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (v) changes in the quality of the credit review function, (vi) changes in the experience, ability and depth of lending management and staff, (vii) changes in the volume and severity of past due and adversely classified loans and the volume of non-accrual loans, (viii) changes in the value of underlying collateral for collateral-dependent loans, and (ix) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserves in the allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

The following portfolio segments have been identified: commercial loans; single-family residential real estate loans; multi-family residential real estate loans; commercial real estate loans; construction loans; home equity lines of credit; and other consumer loans. A description of each segment of the loan portfolio, along with the risk characteristics of each segment, is included below.

Commercial loans: Commercial loans and direct financing leases include loans and leases to businesses generally located within our primary market area. Those loans and leases are typically 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. 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 borrower’s financial performance and the financial strength of the business owners and/or guarantors.

Single-family residential real estate loans: Single-family residential real estate loans include permanent conventional mortgage loans secured by single-family residences that we originate for portfolio and purchased loans located primarily within our primary market area. Credit approval for single-family residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment and an established credit record. 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 may be required when the LTV exceeds 80%.

Multi-family residential real estate loans: Multi-family residential real estate loans include loans secured by apartment buildings, condominiums and multi-family residential houses generally located within our primary market area. Underwriting policies provide that multi-family residential real estate loans generally may be made in amounts up to 85% of the lower of the appraised value or purchase price of the property. In underwriting multi-family residential real estate 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-rate and adjustable-rate loans. Fixed-rate loans are generally limited to three years to five years, at which time they convert to adjustable-rate loans. Because payments on loans secured by multi-family residential properties are dependent on successful operation or management of the properties, repayment of multi-family residential real estate loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. Adjustable-rate multi-family residential real

 

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estate 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 multi-family residential real estate loans generally do not contain periodic and lifetime caps on interest rate changes. We seek to minimize the additional risk presented by adjustable-rate multi-family residential real estate loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate scenarios.

Commercial real estate loans: Commercial real estate loans include loans secured by owner occupied and non-owner occupied properties used for business purposes, such as manufacturing facilities, office buildings or retail facilities generally located within our primary market area. Underwriting policies provide that commercial real estate loans may be made in amounts up to 85% of the lower of the appraised value or purchase price of the property. In underwriting commercial real estate 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 years to five years, at which time they convert to adjustable-rate loans. Because payments on loans secured by commercial real estate properties are dependent on successful operation or management of the properties, repayment of commercial real estate loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. Adjustable-rate commercial real estate 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 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 loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate scenarios.

Construction loans: Construction loans include loans to finance the construction of residential and commercial properties generally located within our primary market area. Construction loans are fixed-rate or adjustable-rate loans which may convert to permanent loans with maturities of up to 30 years. Our policies provide that construction loans may generally be made in amounts 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. In underwriting construction loans, we consider the property owner’s and/or guarantor’s financial strength, expertise and credit history. Construction 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 through inspections of construction progress on the property and by requiring personal guarantees and reviewing current personal financial statements and tax returns, as well as other projects of the developer.

Home equity lines of credit: Home equity lines of credit include both loans we originate for portfolio and purchased loans. We originate home equity lines of credit to customers generally within our primary market area. Home equity lines of credit are variable rate loans and the interest rate adjusts monthly at various margins to the prime rate of interest 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, 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. Collectability of home equity lines of credit are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. We continue to monitor collateral values and borrower FICO® scores on both purchased and portfolio loans and, when the situation warrants, have frozen the lines of credit.

Other consumer loans: Other consumer loans include closed-end home equity, home improvement, auto, credit card loans and any purchased loans to consumers generally located within our primary market area. Credit approval for other consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.

CFBank’s charge-off policy for commercial loans, single-family residential real estate loans, multi-family residential real estate loans, commercial real estate loans, construction loans and home equity lines of credit requires management to record a specific reserve or charge-off as soon as it is apparent that the borrower is troubled and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing the loan. Other consumer loans are typically charged off no later than 90 days past due.

 

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Allowance for Loan and Lease Losses under prior GAAP (Incurred loss model): Prior to the adoption of ASC 326 and the current expected credit loss model on January 1, 2023, the Company maintained an allowance for loan and lease losses (ALLL) in accordance with the “incurred loss” model under previously applicable GAAP. The ALLL was a valuation allowance for probable incurred credit losses. Loan losses were charged against the allowance when management believed the uncollectibility of a loan balance was confirmed. Subsequent recoveries, if any, were credited to the allowance. Management estimated the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance were made for specific loans, but the entire allowance was available for any loan that, in management’s judgment, should be charged off.

The allowance consisted of specific and general components. The specific component related to loans that were individually classified as impaired. A loan was impaired when, based on current information and events, it was probable that CFBank would be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans within any loan class for which the terms had been modified resulted in a concession, and for which the borrower was experiencing financial difficulties, were considered troubled debt restructurings (TDRs) and classified as impaired. See recent and future Accounting Pronouncement and Developments below for changes in 2023 to TDR accounting.

Factors considered by management in determining impairment for all loan classes included payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

All substandard loans within the commercial, multi-family residential, commercial real estate and construction segments were individually evaluated for impairment when they were 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicated that payment in full according to the loan terms was doubtful. If a loan was impaired, a portion of the allowance was allocated so that the loan was reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment was expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer, single-family residential real estate loans and commercial leases, were collectively evaluated for impairment, and accordingly, they were not separately identified for impairment disclosures.

TDRs of all classes of loans were separately identified for impairment disclosures and were measured at the present value of estimated future cash flows using each loan’s effective rate at inception. If a TDR was considered to be a collateral dependent loan, the loan was reported, net, at the fair value of the collateral. If the payment of the loan was dependent on the sale of the collateral, then costs to liquidate the collateral were included when determining the impairment. For TDRs that subsequently default, the amount of reserve was determined in accordance with the accounting policy for the ALLL.

The general reserve component covered non-impaired loans of all classes and was based on historical loss experience adjusted for current factors. The historical loss experience was determined by loan class and was based on the actual loss history experienced by CFBank over a three-year period. The general component was calculated based on CFBank’s loan balances and actual three-year historical loss rates. For loans with little or no actual loss experience, industry estimates were used based on loan segment. This loss experience was supplemented with other economic and judgmental factors based on the risks present for each loan class. These economic and judgmental factors included consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Allowance for Credit Losses - Off-Balance Sheet Credit Exposures: The allowance for credit losses on off-balance sheet credit exposures is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The allowance for off-balance sheet credit exposures is adjusted through the income statement as a component of provision for credit loss.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the

 

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transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, an adjustment is recorded through expense. Operating costs after acquisition are expensed.

Low Income Housing Tax Credits (LIHTC): The Company has invested in LIHTCs through funds that assist corporations in investing in limited partnerships and limited liability companies that own, develop and operate low income residential rental properties for purposes of qualifying for the LIHTCs. These investments are accounted for under the proportional amortization method which recognizes the amortization of the investment in proportion to the tax credit and other tax benefits received.

Historic Tax Credits: The Company has made equity investments as a non-managing member in two entities that received historic tax credits (HTC) pursuant to Section 47 of the Internal Revenue Code. The Company receives a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investment over a period of time. The HTC investments are accounted for under the equity method of accounting and are included in accrued interest receivable and other assets on the consolidated balance sheets. The Company’s recorded investment in these entities was $2,097 at December 31, 2023 and 2022. The maximum exposure to loss related to these investments was $2,097 at December 31, 2023, representing the Company’s investment balance.

Joint Ventures: The Holding Company has contributed funds into a series of joint ventures for the purpose of allocating excess liquidity into higher earning assets while diversifying its revenue sources. The joint ventures are engaged in shorter term operating activities related to single family real estate developments. Income is recognized based on a rate of return on the outstanding investment balance. As units are sold, the Holding Company receives an additional incentive payment. The balance outstanding in joint ventures at December 31, 2023 and December 31, 2022 was $1,909 and $1,568, respectively. Income recognized on the joint ventures was $224, $172, and $224, respectively, for 2023, 2022 and 2021.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 3 years to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 2 years to 25 years. Leasehold improvements are depreciated straight-line over the shorter of the useful life or the lease term.

Federal Home Loan Bank (FHLB) stock: CFBank is a member of the Federal Home Loan Bank of Cincinnati (the “FHLB”). Members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Federal Reserve Bank (FRB) stock: CFBank is a member of the Federal Reserve System and is required to own a certain amount of stock in the FRB. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Bank Owned Life Insurance: CFBank has purchased life insurance policies on certain directors and employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and issue commercial letters of credit to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded, and fees associated with origination are booked to non-interest income at the origination date.

Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The Company's derivatives consist mainly of interest rate swap agreements, which are used as part of its asset liability management program to help manage interest rate risk. The Company does not use derivatives for trading purposes. The derivative transactions are stand-alone derivatives with no hedging designation. Changes in the fair value of the derivatives are reported currently in earnings, as other noninterest income.

Mortgage Banking Derivatives: Commitments to fund mortgage loans to be sold into the secondary market, otherwise known as interest rate locks, are accounted for as free standing derivatives. Mortgage banking activities include two types of commitments: rate lock commitments and forward loan commitments. Fair values of these mortgage derivatives are based on anticipated gains on the underlying loans. Changes in the fair values of these derivatives are included in net gains on sales of loans.

 

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Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to directors and employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the required service period for each separately vesting portion of the award. Forfeitures are recognized as incurred.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other noninterest expense.

Retirement Plans: Pension expense is the amount of annual contributions by the Company to the multi-employer contributory trusteed pension plan. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Supplemental retirement plan expense allocates the benefits over years of service.

Earnings Per Common Share: Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under the equity incentive plan, computed using the treasury stock method. See Note 20- Earnings Per Common Share.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity. Reclassifications from accumulated other comprehensive income are conducted on a specific identification method.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there were any such matters at December 31, 2023 that will have a material effect on the financial statements. See Note 21 – Contingent Liabilities.

Restrictions on Cash: Cash on deposit with the FHLB included $3,300 pledged as collateral for FHLB advances at December 31, 2023.

Equity: Treasury stock is carried at cost. Shares sold out of treasury are valued based on the weighted average cost.

Dividend Restriction: Banking regulations require us to maintain certain capital levels and may limit the dividends paid by CFBank to the Holding Company or by the Holding Company to stockholders. 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 CFBank to the extent necessary to fund such dividends. The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company. The Holding Company also is subject to various legal and regulatory policies and guidelines impacting the Holding Company’s ability to pay dividends on its stock. In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. Finally, under the terms of the Holding Company’s fixed-to-floating rate subordinated debt, the Holding Company’s ability to pay dividends on its stock is conditioned upon the Holding Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 6 – Fair Value. 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 these estimates.

 

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Advertising and Marketing Expense: Advertising costs are expensed as incurred and are recorded as advertising and marketing, a component of noninterest expense. Advertising and marketing expense also includes leads-based marketing for our residential mortgage lending business.

Operating Segments: While management monitors and analyzes the revenue streams of the Company’s various products and services, the operations and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or stockholders’ equity.

Recent and Future Accounting Pronouncements and Developments:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires a new Current Expected Credit Losses (“CECL”) methodology that replaces the previous "incurred loss" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio. CECL provides for an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new CECL model requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied historically are still permitted, although the inputs to those techniques will reflect the full amount of expected credit losses. Organizations continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, ASU 2016-13 amended the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2023.

The CECL methodology under ASU 2016-13 applies to loans held for investment, held to maturity debt securities, and off balance-sheet credit exposures. The ASU allows for several different methods of computing the allowance for credit losses: closed pool, vintage, average charge-off, migration, probability of default / loss given default, discounted cash flow, and regression. Based on its analysis of observable data, the Company concluded the average charge-off method to be the most appropriate and statistically relevant. A lookback to March 31, 2000 was utilized as the historical loss period due to its inclusion of several economic cycles and relevance to real estate secured assets.

Upon implementation of ASU 2016-13, the expected loss estimate is made up of a historical lookback of actual losses applied over the life of the loan portfolio and adjusted for qualitative factors and forecasted losses based on economic and forward-looking data applied over a reasonable and supportable forecast period.

The impact of the Company’s adoption of ASU 2016-13, effective January 1, 2023, was a one-time cumulative-effect adjustment increasing our reserves for loans and unfunded commitments by $49.

The qualitative impact of the new accounting standard is still directed by many of the same factors that impacted the previous methodology for computing the allowance for loan and lease losses (ALLL), including, but not limited to, economic conditions, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition to this, the Company will also use reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee quarterly economic projections for change in real GDP and of national unemployment.

The Company did not have any material changes to its business practices as a result of implementing ASU 2016-13.

In March 2022, the FASB issued ASU 2022-02 "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." This ASU eliminated the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and required entities to evaluate all receivable modifications under ASC 310-20 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. The amended guidance added enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amended guidance also required disclosure of current period gross charge-offs by year of origination within the vintage disclosures required by ASC 326. The Company adopted ASU 2022-02 on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact to our consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. They provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. As subsequently amended, this update is effective December 31, 2024. The adoption of ASU No. 2020-04 did not have a material impact on our consolidated financial statements.

Future Accounting Matters:

In March 2023, the FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using Proportional Amortization Method. The ASU is intended to improve the accounting and disclosures for investments in tax credit structures. It allows reporting entities to elect to adopt for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of the ASU on the Company's consolidated financial statements, but adoption of the standard is not expected to have a significant impact on the Company’s financial statements or disclosures.

In August 2023, FASB issued ASU 2023-05, Business Combinations - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The amendments in this ASU require that a joint venture, upon formation, apply a new basis of accounting and initially measure assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance. This update will be effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Early adoption is permitted. The Company is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments apply to all public entities that are required to report segment information in accordance with FASB ASC Topic 280, Segment Reporting. The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss. Public entities are required to disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. In addition, public entities must provide all annual disclosures about a reportable segment's profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting, in interim periods. The amendments clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity's consolidated financial statements. The Amendments require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. Finally, the amendments require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in ASC Topic280. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the potential impacts related to the adoption of the ASU.

In December 2023, FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The FASB issued ASU 2023-09 to address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is to be applied on a prospective basis and is effective for annual periods beginning after December 15, 2024 with early adoption permitted. ASU 2023-09 will impact income tax disclosures, and the Company does not expect a material impact to the Company’s consolidated financial statements.

NOTE 2- REVENUE RECOGNITION

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage activities related to net gains on sale of loans.

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income, are as follows:

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity, or transaction-based fees, and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

NOTE 3 – SECURITIES

The following tables summarize the amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2023 and December 31, 2022 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

December 31, 2023

Corporate debt

$

9,980

$

-  

$

2,880

$

7,100

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

U.S. Treasury

1,007

-  

19

988

Mortgage-backed securities - residential

4

-  

-  

4

Total

$

10,991

$

-  

$

2,899

$

8,092

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

December 31, 2022

Corporate debt

$

9,978

$

-  

$

2,478

$

7,500

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

U.S. Treasury

3,025

-  

100

2,925

Mortgage-backed securities - residential

17

-  

-  

17

Total

$

13,020

$

-  

$

2,578

$

10,442

There was no impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at December 31, 2023 or December 31, 2022.

There were no sales of securities during the years ended December 31, 2023, December 31, 2022 and December 31, 2021.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The amortized cost and fair value of debt securities at December 31, 2023 and December 31, 2022 are shown in the table below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

December 31, 2023

December 31, 2022

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due in one year or less

$

1,007

$

988

$

2,001

$

1,961

Due from one to five years

-  

-  

1,024

964

Due from five to ten years

9,980

7,100

9,978

7,500

Mortgage-backed securities - residential

4

4

17

17

Total

$

10,991

$

8,092

$

13,020

$

10,442

Fair value of securities pledged was as follows:

At December 31,

2023

2022

2021

Pledged as collateral for:

FHLB advances

$

497

$

967

$

1,016

Public deposits

492

479

501

Mortgage banking derivatives

-  

-  

1,504

Total

$

989

$

1,446

$

3,021

At year-end 2023, 2022 and 2021, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity.

The following table summarizes securities with unrealized losses at December 31, 2023 and December 31, 2022 aggregated by major security type and length of time in a continuous unrealized loss position.

December 31, 2023

Less than 12 Months

12 Months or More

Total

Description of Securities

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Corporate debt

$

-  

$

-  

$

7,100

$

2,880

$

7,100

$

2,880

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

U.S. Treasury

-  

-  

988

19

988

19

Mortgage-backed securities - residential (1)

1

-  

3

-  

4

-  

Total temporarily impaired

$

1

$

-  

$

8,091

$

2,899

$

8,092

$

2,899

(1)Unrealized loss is less than $1 resulting in rounding to zero.

December 31, 2022

Less than 12 Months

12 Months or More

Total

Description of Securities

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Corporate debt

$

-  

$

-  

$

7,500

$

2,478

$

7,500

$

2,478

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

U.S. Treasury

1,482

19

1,443

81

2,925

100

Mortgage-backed securities - residential (1)

17

-  

-  

-  

17

-  

Total temporarily impaired

$

1,499

$

19

$

8,943

$

2,559

$

10,442

$

2,578

(1)Unrealized loss is less than $1 resulting in rounding to zero.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The unrealized losses at December 31, 2023 were related to one Corporate debt security, one Mortgage-backed security and two U.S. Treasuries. The unrealized losses at December 31, 2022 were related to one Corporate debt security, two Mortgage-backed securities and multiple U.S. Treasuries. Because the decline in fair value was attributable to changes in market conditions, and not credit quality, and because the Company did not have the intent to sell these securities and would unlikely be required to sell these securities before their anticipated recovery, the Company did not consider these securities to be impaired at December 31, 2023 and December 31, 2022.

NOTE 4 – LOANS AND LEASES

The following table presents the recorded investment in loans and leases by portfolio segment. The recorded investment in loans and leases includes the principal balance outstanding adjusted for purchase premiums and discounts, and deferred loan fees and costs.

December 31, 2023

December 31, 2022

Commercial (1)

$

439,895

$

427,423

Real estate:

Single-family residential

478,224

465,057

Multi-family residential

130,778

104,148

Commercial

433,026

375,092

Construction

190,722

184,122

Consumer:

Home equity lines of credit

35,960

30,748

Other

2,393

1,727

Subtotal

1,710,998

1,588,317

Less: ACL – Loans

(16,865)

(16,062)

Loans and Leases, net

$

1,694,133

$

1,572,255

(1)Includes $13,497 and $20,768 of commercial leases at December 31, 2023 and December 31, 2022, respectively.

Allowance for Credit Losses on Loans (ACL – Loans)

As discussed in Note 1, effective January 1, 2023, the Company adopted ASC 326. Results for the periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with the “incurred loss” model under previously applicable GAAP.

The ACL - Loans is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net of recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

The ACL - Loans represents the Company's best estimate of current expected credit losses (CECL) on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The CECL calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the ACL - Loans is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the ACL - Loans, the loan portfolio was pooled into loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Company analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the average charge-off methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The Company sub-segmented certain commercial portfolios by risk level where appropriate. The Company utilized a one-year reasonable and supportable economic forecast period.

The Company qualitatively adjusts model results for risk factors that are not inherently considered in the historical losses, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in economic conditions, (ii) changes in the nature and volume of the loan portfolio, (iii) changes in the existence, growth and effect of any concentrations in credit, (iv) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (v) changes in the quality of the credit review function, (vi) changes in the experience, ability and depth of lending management and staff, (vii) changes in the volume and severity of past due and adversely classified loans and the volume of non-accrual loans, (viii) changes in the value of underlying collateral for collateral-dependent loans, and (ix) other environmental factors such as regulatory, legal and technological considerations, as well as competition.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserves in the allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

The following table presents the activity in the ACL - Loans by portfolio segment for the year ended December 31, 2023.

December 31, 2023

Real Estate

Consumer

Commercial

Single-family

Multi-family

Commercial

Construction

Home equity lines of credit

Other

Total

Allowance for credit losses

Balances, December 31, 2022

$

4,764 

$

3,914 

$

997 

$

3,384 

$

2,644 

$

333 

$

26 

$

16,062 

Impact of adoption of ASC 326

877 

(958)

66 

726 

(1,019)

(129)

28 

(409)

Balances, January 1, 2023 Post-ASC 326 adoption

5,641 

2,956 

1,063 

4,110 

1,625 

204 

54 

15,653 

Provision of credit losses

933 

375 

168 

(5)

82 

126 

179 

1,858 

Recoveries on loans

85 

40 

-

-

-

4 

3 

132 

Loans charged off

(775)

-

-

-

-

-

(3)

(778)

Balances, December 31, 2023

$

5,884 

$

3,371 

$

1,231 

$

4,105 

$

1,707 

$

334 

$

233 

$

16,865 

Allowance for Loan and Lease Losses under prior GAAP (Incurred Loss Model):

Prior to the adoption of ASC 326 on January 1, 2023, the Company maintained an allowance for loan and lease losses (ALLL) in accordance with the Incurred Loss Model.

The following tables present the activity in the ALLL by portfolio segment for the years ended December 31, 2022 and 2021:

December 31, 2022

Real Estate

Consumer

Commercial

Single-family

Multi-family

Commercial

Construction

Home Equity lines of credit

Other

Total

Beginning balance

$

4,127

$

3,348

$

827

$

5,034

$

1,744

$

272

$

156

$

15,508

Addition to (reduction in)
‎provision for loan losses

900

547

170

(1,650)

900

50

(130)

787

Charge-offs

(263)

-  

-  

-  

-  

-  

-  

(263)

Recoveries

-  

19

-  

-  

-  

11

-  

30

Ending balance

$

4,764

$

3,914

$

997

$

3,384

$

2,644

$

333

$

26

$

16,062

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

December 31, 2021

Real Estate

Consumer

Commercial

Single-family

Multi-family

Commercial

Construction

Home Equity lines of credit

Other

Total

Beginning balance

$

3,426

$

1,299

$

467

$

9,184

$

2,254

$

276

$

116

$

17,022

Addition to (reduction in)
‎provision for loan losses

645

2,040

360

(4,150)

(510)

(25)

40

(1,600)

Charge-offs

-  

(17)

-  

-  

-  

-  

-  

(17)

Recoveries

56

26

-  

-  

-  

21

-  

103

Ending balance

$

4,127

$

3,348

$

827

$

5,034

$

1,744

$

272

$

156

$

15,508

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. The fair value of other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and/or customer financial statements. Both appraised values and values based on the borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

 

The table below presents the amortized cost basis of collateral dependent loans by loan class and their respective collateral types, which are individually evaluated to determine expected credit losses.

December 31, 2023

Residential Real Estate

Other

Total

Allowance on Collateral Dependent Loans

Commercial

$

-  

$

449

$

449

$

44

Real estate:

Single-family residential

90

-  

90

-  

Total

$

90

$

449

$

539

$

44

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on impairment method as of December 31, 2022:

Real Estate

Consumer

Commercial

Single-
‎family

Multi-
‎family

Commercial

Construction

Home Equity
‎lines of credit

Other

Total

ALLL:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$

-  

(1)

$

-  

(1)

$

-  

$

-  

$

-  

$

-  

$

-  

$

-  

Collectively evaluated for impairment

4,764 

3,914 

997 

3,384 

2,644 

333 

26 

16,062 

Total ending allowance balance

$

4,764 

$

3,914 

$

997 

$

3,384 

$

2,644 

$

333 

$

26 

$

16,062 

Loans:

Individually evaluated for impairment

$

80 

$

95 

$

-  

$

-  

$

-  

$

-  

$

-  

$

175 

Collectively evaluated for impairment

427,343 

464,962 

104,148 

375,092 

184,122 

30,748 

1,727 

1,588,142 

Total ending loan balance

$

427,423 

$

465,057 

$

104,148 

$

375,092 

$

184,122 

$

30,748 

$

1,727 

$

1,588,317 

(1)Allowance recorded is less than $1 resulting in rounding to zero.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following tables present loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2022 and 2021. The unpaid principal balance is the contractual principal balance outstanding. The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, deferred loan fees and costs. Cash payments of interest on these loans during the twelve months ended December 31, 2022 and 2021 totaled $47 and $169, respectively.

At or for the year ended December 31, 2022:

Unpaid Principal Balance

Recorded Investment

ALLL Allocated

Average Recorded Investment

Interest Income Recognized

With no related allowance recorded:

Real estate:

Commercial:

Owner occupied

$

-  

$

-  

$

-  

$

-  

$

-  

Total with no allowance recorded

-  

-  

-  

-  

-  

With an allowance recorded:

Commercial (1)

371 

80 

-  

125 

1 

Real estate:

Single-family residential (1)

95 

95 

-  

97 

5 

Commercial:

Non-owner occupied

-  

-  

-  

350 

17 

Total with an allowance recorded

466 

175 

-  

572 

23 

Total

$

466 

$

175 

$

-  

$

572 

$

23 

(1)Allowance recorded is less than $1 resulting in rounding to zero

At or for the year ended December 31, 2021:

Unpaid Principal Balance

Recorded Investment

ALLL Allocated

Average Recorded Investment

Interest Income Recognized

With no related allowance recorded:

Real estate:

Commercial:

Owner occupied

$

-  

$

-  

$

-  

$

-  

$

-  

Total with no allowance recorded

-  

-  

-  

-  

-  

With an allowance recorded:

Commercial (1)

485 

221 

-  

241 

9 

Real estate:

Single-family residential (1)

99 

99 

-  

101 

6 

Commercial:

Non-owner occupied

2,658 

2,658 

20 

2,688 

150 

Total with an allowance recorded

3,242 

2,978 

20 

3,030 

165 

Total

$

3,242 

$

2,978 

$

20 

$

3,030 

$

165 

(1)Allowance recorded is less than $1 resulting in rounding to zero

The following table presents the recorded investment in non-accrual loans by class of loans at December 31, 2023:

Non-Accrual Loans

Non-Accrual Loans with no Allowance for Credit Losses

Commercial

$

5,048

$

1,658

Real estate:

Single-family residential

627

627

Consumer:

Home equity lines of credit:

17

17

Other consumer

30

30

Total nonaccrual loans

$

5,722

$

2,332

Of the $5.7 million of nonaccrual loans at December 31, 2023, $1.1 million is guaranteed by the SBA.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents the recorded investment in nonperforming loans by class of loans as of December 31, 2022:

2022

Loans past due over 90 days still on accrual

$

-  

Nonaccrual loans:

Commercial

99

Real estate:

Single-family residential

641

Commercial:

Consumer:

Home equity lines of credit:

Originated for portfolio

18

Purchased for portfolio

-  

Other consumer

3

Total nonaccrual

761

Total nonperforming loans

$

761

Nonaccrual loans include both single-family mortgage, consumer loans and commercial leases that are collectively evaluated for impairment and individually classified impaired loans. There were no loans 90 days or more past due and still accruing interest at December 31, 2023 or December 31, 2022.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2023:

30 - 59 Days Past Due

60 - 89 Days Past Due

90 Days or more Past Due

Total Past Due

Loans Not Past Due

Nonaccrual Loans Not 90 days or more Past Due

Commercial

$

98

$

-  

$

622

$

720

$

439,175

$

4,426

Real estate:

Single-family residential

165

372

563

1,100

477,124

64

Multi-family residential

-  

-  

-  

-  

130,778

-  

Commercial:

Non-owner occupied

-  

-  

-  

-  

228,548

-  

Owner occupied

-  

-  

-  

-  

183,773

-  

Land

-  

-  

-  

-  

20,705

-  

Construction

-  

-  

-  

-  

190,722

-  

Consumer:

Home equity lines of credit:

Originated for portfolio

97

-  

17

114

35,846

-  

Purchased for portfolio

-  

-  

-  

-  

-  

-  

Other

-  

-  

30

30

2,363

-  

Total

$

360

$

372

$

1,232

$

1,964

$

1,709,034

$

4,490

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2022:

30 - 59 Days Past Due

60 - 89 Days Past Due

90 Days or more Past Due

Total Past Due

Loans Not Past Due

Nonaccrual Loans Not 90 days or more Past Due

Commercial

$

255

$

-  

$

99

$

354

$

427,069

$

-  

Real estate:

Single-family residential

966

167

563

1,696

463,361

78

Multi-family residential

-  

-  

-  

-  

104,148

-  

Commercial:

Non-owner occupied

-  

-  

-  

-  

169,686

-  

Owner occupied

-  

-  

-  

-  

172,698

-  

Land

-  

-  

-  

-  

32,708

-  

Construction

-  

-  

-  

-  

184,122

-  

Consumer:

Home equity lines of credit:

Originated for portfolio

29

-  

18

47

30,701

-  

Purchased for portfolio

-  

-  

-  

-  

-  

-  

Other

-  

-  

3

3

1,724

-  

Total

$

1,250

$

167

$

683

$

2,100

$

1,586,217

$

78

Troubled Debt Restructurings (TDRs):

Prior to the adoption of ASU 2022-02, from time to time, the terms of certain loans were modified as TDRs, where concessions were granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have included one or a combination of the following: a reduction of the stated interest rate of the loan; an increase in the stated rate of interest lower than the current market rate for new debt with similar risk; an extension of the maturity date; or a change in the payment terms.

As of December 31, 2022, TDRs totaled $175. The Company allocated $0 of specific reserves to loans modified in TDRs as of December 31, 2022. The Company had not committed to lend any additional amounts as of December 31, 2022 to customers with outstanding loans that were classified as nonaccrual TDRs.

During the year ended December 31, 2022, there were no loans modified as a TDR.

There was one TDR that went into payment default during the year ended December 31, 2022.

In order to determine whether a borrower was experiencing financial difficulty, an evaluation was performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation was performed under the Company’s internal underwriting policy.

Nonaccrual loans include loans that were modified and identified as TDRs and the loans are not performing. At December 31, 2022, nonaccrual TDRs were as follows:

2022

Commercial

$

80

Total

$

80

Nonaccrual loans at December 31, 2022 did not include $95 of TDRs where customers had established a sustained period of repayment performance, generally six months, the loans were current according to their modified terms and repayment of the remaining contractual payments was expected. These loans are included in total impaired loans.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Loan Modifications:

The Company adopted ASU 2022-02 during the first quarter of 2023. This amendment eliminated the 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 loans. 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.

Credit Quality Indicators:

The Company categorizes 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. Management analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial, commercial real estate and multi-family residential real estate loans. Internal loan reviews for these loan types are typically performed annually, and more often for loans with higher credit risk. Adjustments to loan risk ratings are based on the reviews and at any time information is received that may affect risk ratings. The following definitions are used for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of CFBank’s credit position at some future date.

Substandard. Loans classified as substandard are 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.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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 not meeting the criteria to be classified into one of the above categories are considered to be not rated or pass-rated loans. Loans listed as not rated are included in groups of homogeneous loans. Past due information is the primary credit indicator for groups of homogenous loans. Loans listed as pass-rated are loans that are subject to internal loan reviews and are determined not to meet the criteria required to be classified as special mention, substandard, doubtful or loss.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following table summarizes the risk grading of the Company’s loan portfolio by loan class and by year of origination for the years indicated as of December 31, 2023. Consumer and Single-family residential loans are not risk graded. For purposes of this disclosure, those loans are classified in the following manner: loans that are 89 days or less past due and accruing are “performing” loans and loans greater than 89 days past due or in nonaccrual are “nonperforming” loans.

Term Loans (amortized cost basis by origination year)

2023

2022

2021

2020

2019

Prior

Revolving loans amortized cost basis

Revolving loans converted to term

Total

Commercial and Industrial

Pass

$

32,965 

$

86,433 

$

90,297 

$

45,670 

$

3,189 

$

9,888 

$

159,065 

$

1,078 

$

428,585 

Special Mention

-

-

2,807 

-

84 

-

-

-

2,891 

Substandard

-

384 

7,537 

-

-

-

50 

-

7,971 

Doubtful

-

448 

-

-

-

-

-

-

448 

Total Commercial and industrial loans

32,965 

87,265 

100,641 

45,670 

3,273 

9,888 

159,115 

1,078 

439,895 

Current period gross charge-offs

-

564 

211 

-

-

-

-

-

775 

Real estate loans:

Single-family residential

Payment performance

Performing

42,655 

131,416 

231,379 

45,785 

9,584 

16,778 

477,597 

Nonperforming

-

-

-

-

-

627 

-

-

627 

Total Single-family residential loans

42,655 

131,416 

231,379 

45,785 

9,584 

17,405 

-

-

478,224 

Multi-family residential

Pass

24,839 

8,776 

53,815 

7,311 

15,772 

20,265 

-

-

130,778 

Total Multi-family residential loans

24,839 

8,776 

53,815 

7,311 

15,772 

20,265 

-

-

130,778 

Commercial:

Non-owner occupied

Pass

57,092 

27,068 

61,990 

15,085 

20,101 

45,725 

982 

-

228,043 

Special Mention

-

-

-

-

505 

-

-

-

505 

Total Non-owner occupied loans

57,092 

27,068 

61,990 

15,085 

20,606 

45,725 

982 

-

228,548 

Owner occupied

Pass

20,353 

55,169 

50,210 

19,775 

18,751 

18,768 

68 

-

183,094 

Special Mention

-

-

-

-

679 

-

-

-

679 

Total Owner occupied loans

20,353 

55,169 

50,210 

19,775 

19,430 

18,768 

68 

-

183,773 

Land

Pass

7,932 

6,037 

6,177 

-

149 

410 

-

-

20,705 

Total Land loans

7,932 

6,037 

6,177 

-

149 

410 

-

-

20,705 

Construction

Pass

31,739 

78,602 

61,435 

4,174 

-

-

14,772 

-

190,722 

Total Construction loans

31,739 

78,602 

61,435 

4,174 

-

-

14,772 

-

190,722 

Total Real Estate loans

184,610 

307,068 

465,006 

92,130 

65,541 

102,573 

15,822 

-

1,232,750 

Consumer:

Home equity lines of credit:

Payment performance

Performing

-

-

-

-

-

-

33,510 

2,433 

35,943 

Nonperforming

-

-

-

-

-

-

-

17 

17 

Total Home equity lines of credit

-

-

-

-

-

-

33,510 

2,450 

35,960 

Other

Payment performance

-

Performing

-

-

-

12 

-

216 

2,135 

-

2,363 

Nonperforming

-

-

-

-

-

-

-

30 

30 

Total Other consumer loans

-

-

-

12 

-

216 

2,135 

30 

2,393 

Current period gross charge-offs

-

-

-

-

-

3 

-

-

3 

Total loans

$

217,575 

$

394,333 

$

565,647 

$

137,812 

$

68,814 

$

112,677 

$

210,582 

$

3,558 

$

1,710,998 

Total current period gross charge-offs

$

-

$

564 

$

211 

$

-

$

-

$

3 

$

-

$

-

$

778 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The recorded investment in loans and leases by risk category and by class of loans as of December 31, 2022 and based on the most recent analysis performed follows.

Not Rated

Pass

Special Mention

Substandard

Doubtful

Total

Commercial

$

-  

$

422,673

$

4,651

$

19

$

80

$

427,423

Real estate:

Single-family residential

451,939

12,477

-  

641

-  

465,057

Multi-family residential

-  

104,148

-  

-  

-  

104,148

Commercial:

Non-owner occupied

-  

168,731

955

-  

-  

169,686

Owner occupied

-  

171,998

700

-  

-  

172,698

Land

-  

32,708

-  

-  

-  

32,708

Construction

3,084

180,520

518

-  

-  

184,122

Consumer:

Home equity lines of credit:

Originated for portfolio

30,730

-  

-  

18

-  

30,748

Purchased for portfolio

-  

-  

-  

-  

-  

-  

Other

1,724

-  

-  

3

-  

1,727

$

487,477

$

1,093,255

$

6,824

$

681

$

80

$

1,588,317

Direct Financing Leases:

The following lists the components of the net investment in direct financing leases:

December 31, 2023

December 31, 2022

Total minimum lease payments to be received

$

14,343

$

22,533

Less: unearned income

(863)

(1,798)

Plus: indirect initial costs

17

33

Net investment in direct financing leases

$

13,497

$

20,768

The following summarizes the future minimum lease payments receivable in subsequent fiscal years:

2024

$

5,917

2025

5,097

2026

2,736

2027

543

2028

50

$

14,343

NOTE 5 – FORECLOSED ASSETS

There were no foreclosed assets at December 31, 2023 and December 31, 2022.

There was no activity in the valuation allowance account or any write-downs during the years ended December 31, 2023 and 2022.

There were no expenses related to foreclosed assets during the years ended December 31, 2023, 2022 and 2021.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 6 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability:

Securities available for sale: The fair value of securities available for sale is determined using pricing models that vary based on asset class and include available trade, bid and other market information or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Derivatives: The fair value of derivatives, which includes interest rate lock commitments and interest rate swaps, is based on valuation models using observable market data as of the measurement date (Level 2).

TBA mortgage – back securities: To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into either a forward sales contract to sell loans to investors when using best efforts or a trade of “to be announced (TBA)” mortgage-backed securities for mandatory delivery. The forward sales contracts lock in a price for the sale of loans with similar characteristics to the specific rate lock commitments based on a valuation model using observable market data for pricing commitments (Level 2).

Impaired loans: The fair value of impaired loans with specific allocations of the ACL-Loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by a third-party appraisal management company approved by the Board of Directors annually. Once received, the loan officer or a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are updated as needed based on facts and circumstances associated with the individual properties. Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management applies an additional discount to real estate appraised values, typically to reflect changes in market conditions since the date of the appraisal and to cover disposition costs (including selling expenses) based on the intended disposition method of the property. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Loans held for sale: Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors (Level 2).

 

85

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

Fair Value Measurements at December 31, 2023 Using Significant Other Observable Inputs

(Level 2)

Financial Assets:

Securities available for sale:

Corporate debt

$

7,100

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

U.S. Treasury

988

Mortgage-backed securities - residential

4

Total securities available for sale

$

8,092

Loans held for sale

$

1,849

Derivative assets

$

4,710

Financial Liabilities:

Derivative liabilities

$

4,710

Fair Value Measurements at December 31, 2022 Using Significant Other Observable Inputs

(Level 2)

Financial Assets:

Securities available for sale:

Corporate debt

$

7,500

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

U.S. Treasury

2,925

Mortgage-backed securities - residential

17

Total securities available for sale

$

10,442

Loans held for sale

$

580

Derivative assets

$

4,233

Financial Liabilities:

Derivative liabilities

$

4,233

The Company had no assets or liabilities measured at fair value on a recurring basis that were measured using Level 1 or Level 3 inputs at December 31, 2023 or December 31, 2022. There were no transfers of assets or liabilities measured at fair value between levels during 2023 or 2022.

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2023 are summarized below:

Fair Value Measurements at December 31, 2023 Using

Significant Unobservable Inputs (Level 3)

Impaired loans:

Commercial

$

403

There was a total of $564 in write downs on two impaired collateral-dependent loans during the year ended December 31, 2023. Impaired loans that are measured for impairment using the fair value of the collateral for collateral-dependent loans had a principal balance of $448 with a valuation allowance of $45 at December 31, 2023.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2022 are summarized below:

Fair Value Measurements at December 31, 2022 Using

Significant Unobservable Inputs (Level 3)

Impaired loans:

Commercial

$

80

Other assets held for sale

$

1,930

There was a $27 write down of an impaired collateral-dependent loan during the year ended December 31, 2022. Impaired loans that are measured for impairment using the fair value of the collateral for collateral-dependent loans had a principal balance of $80 with a valuation allowance of $0 at December 31, 2022.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2023:

Fair Value

Valuation Technique(s)

Unobservable Inputs

(Range) Weighted Average

Impaired loans:

Commercial

$

403 

Comparable sales approach

Adjustment for differences between the stated value and net realizable value

10.43%

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2022:

Fair Value

Valuation Technique(s)

Unobservable Inputs

(Range) Weighted Average

Impaired loans:

Commercial

$

80 

Comparable sales approach

Adjustment for differences between the stated value and net realizable value

64.00%

Other assets held for sale

$

1,930 

Contract value less costs to sell

Sales commission

4.00%

Financial Instruments Recorded Using Fair Value Option:

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Loans originated as construction loans, that were subsequently transferred to held for sale, are carried at the lower of cost or market and are not included. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due or on nonaccrual as of December 31, 2023 or December 31, 2022.

As of December 31, 2023 and December 31, 2022, the aggregate fair value, contractual balance and gain or loss on loans held for sale were as follows:

December 31, 2023

December 31, 2022

Aggregate fair value

$

1,849

$

580

Contractual balance

1,849

580

Gain

-  

-  

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The total amount of gains and losses from changes in fair value included in earnings for the years ended December 31, 2023, 2022 and 2021 for loans held for sale were:

2023

2022

2021

Interest income

$

30

$

172

$

5,572

Interest expense

-  

-  

-  

Change in fair value

-  

(356)

(8,408)

Total change in fair value

$

30

$

(184)

$

(2,836)

The carrying amounts and estimated fair values of financial instruments at year-end 2023 were as follows:

Fair Value Measurements at December 31, 2023 Using:

Carrying

Value

Level 1

Level 2

Level 3

Total

Financial assets

Cash and cash equivalents

$

261,595

$

261,595

$

-  

$

-  

$

261,595

Interest-bearing deposits in other financial institutions

100

100

-  

-  

100

Securities available for sale

8,092

-  

8,092

-  

8,092

Equity securities

5,000

-  

5,000

-  

5,000

Loans held for sale

1,849

-  

1,849

-  

1,849

Loans and leases, net

1,694,133

-  

-  

1,670,885

1,670,885

FHLB and FRB stock

8,482

n/a

n/a

n/a

n/a

Accrued interest receivable

9,210

171

125

8,914

9,210

Derivative assets

4,710

-  

4,710

-  

4,710

Financial liabilities

Deposits

$

(1,744,057)

$

(1,080,605)

$

(659,492)

$

-  

$

(1,740,097)

FHLB advances and other debt

(109,995)

-  

(108,294)

-  

(108,294)

Advances by borrowers for taxes and insurance

(2,179)

-  

-  

(2,179)

(2,179)

Subordinated debentures

(14,961)

-  

(17,345)

-  

(17,345)

Accrued interest payable

(2,680)

-  

(2,680)

-  

(2,680)

Derivative liabilities

(4,710)

-  

(4,710)

-  

(4,710)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The carrying amounts and estimated fair values of financial instruments at year-end 2022 were as follows:

Fair Value Measurements at December 31, 2022 Using:

Carrying

Value

Level 1

Level 2

Level 3

Total

Financial assets

Cash and cash equivalents

$

151,787

$

151,787

$

-  

$

-  

$

151,787

Interest-bearing deposits in other financial institutions

100

100

-  

-  

100

Securities available for sale

10,442

-  

10,442

-  

10,442

Equity securities

5,000

-  

5,000

-  

5,000

Loans held for sale

580

-  

580

-  

580

Loans and leases, net

1,572,255

-  

-  

1,542,796

1,542,796

FHLB and FRB stock

7,942

n/a

n/a

n/a

n/a

Accrued interest receivable

8,067

70

176

7,821

8,067

Other assets held for sale

1,930

-  

-  

1,930

1,930

Derivative assets

4,233

-  

4,233

-  

4,233

Financial liabilities

Deposits

$

(1,527,922)

$

(969,797)

$

(545,871)

$

-  

$

(1,515,668)

FHLB advances and other debt

(109,461)

-  

(105,715)

-  

(105,715)

Advances by borrowers for taxes and insurance

(3,513)

-  

-  

(3,513)

(3,513)

Subordinated debentures

(14,922)

-  

(14,621)

-  

(14,621)

Accrued interest payable

(840)

-  

(840)

-  

(840)

Derivative liabilities

(4,233)

-  

(4,233)

-  

(4,233)

The methods and assumptions used to estimate fair value are described below.

Cash and Cash Equivalents and Interest-Bearing Deposits in Other Financial Institutions

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Equity Securities

Equity securities without a readily determinable fair value are held at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company performs a qualitative assessment for equity securities without readily determinable fair values considering impairment indicators to evaluate whether an impairment exists. If an impairment exists, the Company will recognize a loss based on the difference between carrying value and fair value. This method results in a Level 3 classification.

FHLB and FRB Stock

It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability.

Loans and Leases

Fair values of loans and leases, excluding loans held for sale, are estimated utilizing an exit pricing methodology as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The discount rate for the discounted cash flow analyses includes a credit quality adjustment. Impaired loans are valued at the lower of cost or fair value as described previously.

Other Assets Held for Sale

The carrying amount of other assets held for sale approximates fair value and is classified as Level 3.

Deposits

The fair values disclosed for demand deposits (e.g., interest and noninterest bearing checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

FHLB Advances and Other Debt

The fair values of the Company’s long-term FHLB and credit facility advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification, consistent with the asset or liability with which they are associated.

Advances by Borrowers for Taxes and Insurance

The carrying amount of advances by borrowers for taxes and insurance approximates fair value resulting in a Level 3 classification, consistent with the liability with which they are associated.

Off-Balance-Sheet Instruments

The fair value of off-balance-sheet items is not considered material.

NOTE 7 – LOAN SERVICING

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year-end were as follows:

December 31, 2023

December 31, 2022

Mortgage loans serviced for Freddie Mac

$

991

$

1,163

Custodial escrow balances maintained in connection with serviced loans were $33 and $38 at year-end 2023 and 2022, respectively.

The mortgage servicing rights on these loans were immaterial at December 31, 2023 and 2022. 

NOTE 8- PREMISES AND EQUIPMENT AND OPERATING LEASES

Year-end premises and equipment were as follows:

December 31, 2023

December 31, 2022

Land and land improvements

$

248

$

248

Buildings

2,444

2,295

Furniture, fixtures and equipment

2,905

3,321

5,597

5,864

Less: accumulated depreciation

(1,785)

(2,086)

$

3,812

$

3,778

Depreciation expense for 2023, 2022 and 2021 totaled $567, $496, and $435, respectively.

Operating Leases:

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration.

The leases in which the Company is the lessee are comprised of real estate property for branches and offices and for equipment with terms extending through 2034. All of our leases are classified as operating leases, and therefore are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding operating lease liability.

The calculated amounts of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion which were considered, as applicable, in the calculation of the ROU assets and lease liabilities. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, the rate implicit in the lease is used whenever this rate is readily determinable. As this rate is not readily determinable in our operating leases, the Company utilizes its incremental

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

borrowing rate at lease inception, on a collateralized basis, over a similar term. At December 31, 2023, the weighted-average remaining lease term for the Company’s operating leases was 8.9 years and the weighted-average discount rate was 7.21%.

The Company’s operating lease costs were $687, $568, and $461 for the years ended December 31, 2023, 2022 and 2021, respectively. The variable lease costs totaled $681, $301, and $292 for the years ended December 31, 2023, 2022 and 2021, respectively. As the Company elected not to separate lease and non-lease components for all classes of underlying assets and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Future minimum operating lease payments as of December 31, 2023 are as follows:

2024

$

1,034

2025

820

2026

737

2027

687

2028

700

Thereafter

3,407

Total future minimum rental commitments

7,385

Less - amounts representing interest

(2,083)

Total operating lease liabilities

$

5,302

NOTE 9 – DEPOSITS

Time deposits of $100 or more were $588,849 and $483,719 at year-end 2023 and 2022, respectively. Time deposits of $250 or more were $370,419 and $245,099 at year-end 2023 and 2022, respectively.

Scheduled maturities of time deposits for the next five years are as follows:

2024

$

567,215

2025

60,025

2026

28,811

2027

7,401

Thereafter

-

Total

$

663,452

Brokered deposits at year-end 2023 and 2022 totaled $440,350 and $291,827, respectively.  

NOTE 10 –FHLB ADVANCES AND OTHER DEBT

FHLB advances and other debt were as follows:

Weighted

Average Rate

December 31, 2023

December 31, 2022

FHLB fixed rate advances

Maturities:

2023

-

-

3,500

2024

1.46%

18,500

18,500

2026

1.45%

16,000

16,000

2027

3.88%

12,500

12,500

2028

1.69%

17,000

-

Thereafter

3.94%

12,500

29,500

Total FHLB fixed rate advances

76,500

80,000

Variable rate other debt:

Holding Company credit facility

3.85%

33,495

29,461

Total

$

109,995

$

109,461

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Each FHLB advance is payable at its maturity date, with a prepayment penalty if repaid before maturity.

The FHLB advances were collateralized as follows:

December 31, 2023

December 31, 2022

Single-family mortgage loans

$

305,283

$

292,558

Multi-family mortgage loans

63,024

43,021

Commercial real estate loans (1-4 family)

17,757

12,938

Home equity lines of credit

4,057

4,007

Securities

497

1,004

Cash

3,300

3,300

Total

$

393,918

$

356,828

Based on the collateral pledged to the FHLB, CFBank was eligible to borrow up to a total of $260,154 from the FHLB at December 31, 2023 inclusive of the amount outstanding.

Payments due on FHLB advances over the next five years are as follows:

December 31, 2023

2024

$

18,500

2025

-

2026

16,000

2027

12,500

2028

17,000

$

64,000

The Holding Company has a $35,000 credit facility with a third-party bank. The credit facility is revolving until May 21, 2024, at which time any then-outstanding balance will be converted to a 10-year term note on a graduated 10-year amortization. Borrowings on the credit facility bear interest at a fixed rate of 3.85% until May 21, 2026, and the interest rate then converts to a floating rate equal to PRIME with a floor of 3.25%. The purpose of the credit facility is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth. As of December 31, 2023, the Company had an outstanding balance, net of unamortized debt issuance costs, of $33,495 the credit facility. At December 31, 2022, the Company had an outstanding balance of $29,461 on the credit facility.

At December 31, 2023, CFBank had additional availability in unused lines of credit at two commercial banks in amounts of $50,000 and $15,000. There were no outstanding borrowings on either line at December 31, 2023 and December 31, 2022. Interest on any principal amounts outstanding from time to time under these lines accrues daily at a variable rate based on the commercial bank’s cost of funds and current market returns.

There were no outstanding borrowings with the FRB at December 31, 2023 and December 31, 2022.

Assets pledged as collateral with the FRB were as follows:

2023

2022

Commercial loans

$

67,295

$

62,909

Commercial real estate loans

113,739

84,836

$

181,034

$

147,745

Based on the collateral pledged, CFBank was eligible to borrow up to $136,240 from the FRB at year-end 2023.

NOTE 11 – SUBORDINATED DEBENTURES

2003 Subordinated Debentures:

In December 2003, Central Federal Capital Trust I, a trust formed by the Holding Company, closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1 per security. The Holding Company issued $5,155 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); therefore, the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Holding Company’s investment in the common stock of the trust was $155 and is included in other assets.

The Holding Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1, at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on December 30, 2033. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. There are no required principal payments on the subordinated debentures over the next five years. The Holding Company has the option to defer interest payments on the subordinated debentures for a period not to exceed five consecutive years.

Prior to July 1, 2023, the subordinated debentures had a variable rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) plus 2.85%. At December 31, 2022 the rate was 7.58%. Effective July 1, 2023, the rate of interest on the subordinated debentures began to reset quarterly to the three-month Secured Overnight Financing Rate (SOFR) plus 3.112%, which was 8.44% at December 31, 2023.

2018 Fixed-to-floating rate subordinated notes:

In December 2018, the Holding Company entered into subordinated note purchase agreements with certain qualified institutional buyers and completed a private placement of $10 million of fixed-to-floating rate subordinated notes with a maturity date of December 30, 2028 pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. After payment of approximately $388 of debt issuance costs, the Holding Company’s net proceeds were approximately $9,612

The subordinated notes initially bore interest at 7.00%, from and including December 20, 2018, to but excluding December 30, 2023, payable semi-annually in arrears on June 30 and December 30 of each year. From and including December 30, 2023, to but excluding December 30, 2028 or the earlier redemption of the notes, the interest rate resets quarterly to an interest rate equal to the then current three-month SOFR (but not less than zero) plus 4.402%, payable quarterly in arrears on March 30, June 30, September 30, and December 30 of each year. The Holding Company may, at its option, redeem the notes beginning on December 30, 2023 and on any scheduled interest payment date thereafter. At December 31, 2023, the balance of the subordinated notes, net of unamortized debt issuance costs, was $9,806.

NOTE 12 – BENEFIT PLANS

Multi-employer pension plan:

CFBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra DB Plan”), a multi-employer contributory trusteed pension plan. The retirement benefits to be provided by the plan were frozen as of June 30, 2003 and future employee participation in the plan was stopped. The plan was maintained for all eligible employees and the benefits were funded as accrued. The cost of funding was charged directly to operations.

The funding shortfall (surplus) of the Pentegra DB Plan at June 30, 2023 was $180 and at June 30, 2022 was $102. CFBank’s contributions for the plan years ending June 30, 2023, June 30, 2022, and June 30, 2021 totaled $24, $19, and $22, respectively. Contributions to the plan may vary from period to period due to the change in the plan's unfunded liability. The unfunded liability is primarily related to the change in plan assets and the change in plan liability from one year to the next. The change in plan assets is based on contributions deposited, benefits paid and the actual rate of return earned on plan assets. The change in plan liability is based on demographic changes and changes in the interest rates used to determine plan liability. In the event the actual rate of return earned on plan assets declines, the value of the plan assets will decline. In the event the interest rates used to determine plan liability decrease, plan liability will increase. The combined effect of each change determines the change in the unfunded liability and the change in the employer contributions.

The Pentegra DB Plan is a tax-qualified defined-benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.

The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits to participants of other participating employers.

Funded status (market value of plan assets divided by funding target) based on valuation reports as of July 1, 2023 and 2022 was 81.12% and 90.10%, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Total contributions made to the Pentegra DB Plan, as reported on Form 5500 of the Pentegra DB Plan, totaled $142,405 and $248,563 for the plan years ended June 30, 2022 and June 30, 2021, respectively. CFBank’s contributions to the Pentegra DB Plan were not more than 5% of the total contributions to the Pentegra DB Plan.

401(k) Plan:

The Company sponsors a 401(k) plan that allows employee contributions up to the maximum amount allowable under federal tax regulations, which are currently matched in an amount equal to 50% of the first 8% of the compensation contributed. Total expense for matching contributions for 2023, 2022 and 2021 was $92, $301 and $343, respectively.

Salary Continuation Agreement:

In 2004, CFBank entered into a nonqualified salary continuation agreement with its former Chairman Emeritus. Benefits provided under the plan are unfunded, and payments are made by CFBank. Under the plan, CFBank pays him, or his beneficiary, a benefit of $25 annually for 20 years, beginning 6 months after his retirement date, which was February 28, 2008. The expense related to this plan totaled $5, $6, and $7 in 2023, 2022 and 2021, respectively. The accrual is included in accrued interest payable and other liabilities in the consolidated balance sheets and totaled $95 at year-end 2023 and $115 at year-end 2022.

Life Insurance Benefits:

CFBank has entered into agreements with certain employees, former employees and directors to provide life insurance benefits which are funded through life insurance policies purchased and owned by CFBank. The expense related to these benefits totaled ($12), ($3) and $13 in 2023, 2022 and 2021, respectively. The accrual for CFBank’s obligation under these agreements is included in accrued interest payable and other liabilities in the consolidated balance sheets and totaled $126 at year-end 2023 and $139 at year-end 2022.

Deferred Cash Incentive Agreements:

CFBank has entered into agreements with certain officers to provide deferred cash compensation as an incentive and reward for the success of CFBank. The expense related to these benefits totaled $129, $262, and $118 in 2023, 2022 and 2021, respectively. The accrual for CFBank’s obligation under these agreements is included in accrued interest payable and other liabilities in the consolidated balance sheets and totaled $509 at year-end 2023 and $380 at year-end 2022.

NOTE 13 – INCOME TAXES

Income tax expense was as follows:

December 31, 2023

December 31, 2022

December 31, 2021

Current federal

$

3,592

$

4,213

$

3,592

Deferred federal (1)

456

215

773

Total

$

4,048

$

4,428

$

4,365

(1)Includes tax benefit of operating loss carryforwards of $34, $34, and $34 for the years ended December 31, 2023, 2022 and 2021, respectively.

Effective tax rates differ from the federal statutory rate of 21% for 2023, 2022 and 2021 applied to income before income taxes due to the following:

December 31, 2023

December 31, 2022

December 31, 2021

Federal Statutory rate times financial statement income

$

4,407

$

4,744

$

4,792

Effect of:

Stock compensation

(7)

(50)

(50)

Bank owned life insurance income

(131)

(126)

(112)

Gain on redemption of life insurance policies

-

-

(80)

Tax credits, net of amortization

(194)

(111)

(154)

Other

(27)

(29)

(31)

$

4,048

$

4,428

$

4,365

Effective tax rate

19%

20%

19%

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Year-end deferred tax assets and liabilities were due to the following:

2023

2022

Deferred tax assets:

Allowance for credit losses

$

3,819

$

3,458

Compensation related items

599

573

Deferred loan fees

-

-

Nonaccrual interest

13

9

Net operating loss carry forward

295

330

Operating lease liabilities

1,142

302

Unrealized mark-to-market loss

609

541

6,477

5,213

Deferred tax liabilities:

FHLB stock dividend

226

226

Depreciation

469

268

Operating lease right-of-use assets

1,124

285

Deferred loan costs

9

34

Limited partnership interests

642

-

Prepaid expenses

65

70

2,535

883

Net deferred tax asset

$

3,942

$

4,330

At December 31, 2023, the Company had a deferred tax asset recorded of approximately $3,942. At December 31, 2022, the Company had a deferred tax asset recorded of approximately $4,330. These balances are included in the accrued interest receivable and other assets on the consolidated balance sheets. At December 31, 2023 and December 31, 2022, the Company had no unrecognized tax benefits recorded. The Company is subject to U.S. federal income tax and is no longer subject to federal examination for years prior to 2020.

Our deferred tax assets are composed of U.S. net operating losses (“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 December 31, 2023 that no valuation allowance was required against the net deferred tax asset.

In 2012, a recapitalization program through the sale of $22,500 in common stock improved the capital levels of CFBank and provided working capital for the Holding Company. The result of the change in stock ownership associated with the stock offering, however, was that the Company incurred an ownership change within the guidelines of Section 382 of the Internal Revenue Code of 1986. At year-end 2023, the Company had net operating loss carryforwards of $21,927, which expire at various dates from 2024 to 2032. As a result of the ownership change, the Company's ability to utilize carryforwards that arose before the 2012 stock offering closed is limited to $163 per year. Due to this limitation, management determined it was more likely than not that $20,520 of net operating loss carryforwards would expire unutilized. As required by accounting standards, the Company reduced the carrying value of deferred tax assets, and the corresponding valuation allowance, by the $6,977 tax effect of this lost realizability.

Federal income tax laws provided additional deductions, totaling $2,250, for thrift bad debt reserves established before 1988. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled $473 at year-end 2023. However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded. Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank.


‎

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 14 – RELATED-PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates during 2023 and 2022 were as follows:

Year ended December 31,

2023

2022

Beginning balance

$

8,298

$

10,137

New loans

15,604

1,189

Repayments

(514)

(3,028)

Ending balance

$

23,388

$

8,298

All loans to related parties were made by CFBank in the ordinary course of business under terms equivalent to those prevailing in the market for arm’s length transactions at the time of origination.

Deposits from principal officers, directors, and their affiliates totaled $3,922 and $4,214 at year-end 2023 and 2022, respectively.

NOTE 15 – STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans (collectively, the “Plans”), as described below, under which awards are outstanding or may be granted in the future. Total compensation cost that has been charged against income for those Plans totaled $1,172, $899 and $707 for 2023, 2022 and 2021, respectively. The total income tax benefit was $246, $189 and $148 for 2023, 2022 and 2021, respectively.

Both Plans are stockholder-approved and authorize stock option grants and restricted stock awards to be made to directors, officers and employees. The 2009 Equity Compensation Plan (the “2009 Plan”), which was approved by stockholders on May 21, 2009, replaced the Company’s 2003 Equity Compensation Plan (the “2003 Plan”) and provided for 36,363 shares, plus any remaining shares available to grant or that are later forfeited or expire under the 2003 Plan, to be made available to be issued as stock option grants, stock appreciation rights or restricted stock awards. On May 16, 2013, the Company’s stockholders approved the First Amendment to the 2009 Plan to increase the number of shares of common stock reserved for stock option grants and restricted stock awards thereunder to 272,727. The 2009 Plan terminated in accordance with its terms on March 19, 2019 and, as a result, no further awards may be granted under the 2009 Plan.

The 2019 Equity Incentive Plan (the “2019 Plan”), which was approved by stockholders on May 29, 2019, authorizes up to 300,000 shares (plus any shares that are subject to grants under the 2009 Plan and that are later forfeited or expire), to be awarded pursuant to stock options, stock appreciation rights, restricted stock or restricted stock units. There were 76,330 shares remaining available for awards of stock option grants, stock appreciation rights, restricted stock awards or restricted stock units under the 2019 Plan at December 31, 2023.

Stock Options:

The Plans permit the grant of stock options to directors, officers and employees of the Holding Company and CFBank. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally have vesting periods ranging from one year to three years, and are exercisable for ten years from the date of grant. Unvested stock options immediately vest upon a change of control.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and management options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

A summary of stock option activity in the Plans for 2023 follows:

Shares

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Intrinsic Value

Outstanding at beginning of year

11,089

$

7.63

Exercised

(11,089)

7.63

Expired

-  

-

Cancelled or forfeited

-  

-

Outstanding at end of period

-  

$

-

-

$

-  

Exercisable at end of period

-  

$

-

-

$

-  

There were no stock options granted during the years ended December 31, 2023 and December 31, 2022. There were 11,089 options exercised during the year ended December 31, 2023 and 52,358 options exercised during the year ended December 31, 2022. There were no options canceled, forfeited or expired during the year ended December 31, 2023. Stock options to purchase a total of 545 common shares were cancelled, forfeited or expired during the year ended December 31, 2022. Expense associated with unvested forfeited shares is reversed. As of December 31, 2023, there were no outstanding stock options. As of December 31, 2022, all stock options granted under the Plans were vested.

Restricted Stock Awards:

The Plans also permit the grant of restricted stock awards to directors, officers and employees. Compensation is recognized over the vesting period of the awards based on the fair value of the stock at grant date. The fair value of the stock is determined using the closing share price on the date of grant and shares generally have vesting periods of one to three years. There were 59,784 shares of restricted stock granted in 2023 and 69,648 shares of restricted stock granted in 2022.

A summary of changes in the Company’s nonvested shares of restricted stock for the year follows:

Nonvested Shares

Shares

Weighted Average Grant-Date Fair Value

Nonvested at January 1, 2023

112,413

$

19.35

Granted

59,784

20.15

Vested

(46,967)

18.60

Forfeited

(6,204)

20.32

Nonvested at December 31, 2023

119,026

$

19.99

As of December 31, 2023 and 2022, the unrecognized compensation cost related to nonvested shares granted under the Plans was $1,381 and $1,475, respectively.

There were 46,967 shares restricted stock that vested during the year ended December 31, 2023 and 40,433 shares of restricted stock that vested during the year ended December 31, 2022. There were 6,204 and 6,697 shares of restricted stock forfeited during the years ended December 31, 2023 and December 31, 2022, respectively. 

NOTE 16 – REGULATORY CAPITAL MATTERS

CFBank is subject to regulatory capital requirements administered by federal banking agencies. Prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications for banking organizations: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a banking organization is classified as adequately capitalized, regulatory approval is required to accept brokered deposits. If a banking organization is classified as undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

In July 2013, the Holding Company’s primary federal regulator, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), published final rules (the “Basel III Capital Rules”) establishing a comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. In order to avoid limitations on capital distributions, such as dividend payments and certain bonus payments to executive officers, the Basel III Capital Rules require insured financial institutions to hold a capital conservation buffer of common equity tier 1 capital above the minimum risk-based capital requirements. The capital conservation buffer consists of an additional amount of common equity equal to 2.5% of risk-weighted assets. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).

The Basel III Capital Rules require CFBank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0%); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5%); and 4) a minimum Leverage Ratio of 4.0%.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

The following tables present actual and required capital ratios as of December 31, 2023 and December 31, 2022 for CFBank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

Actual

Minimum Capital Required-Basel III

To Be Well Capitalized Under Applicable
‎Regulatory Capital Standards

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2023

Total Capital to risk weighted assets

$

215,164

13.30%

$

169,909

10.50%

$

161,818

10.00%

Tier 1 (Core) Capital to risk weighted assets

196,977

12.17%

137,546

8.50%

129,455

8.00%

Common equity tier 1 capital to risk-weighted assets

196,977

12.17%

113,273

7.00%

105,182

6.50%

Tier 1 (Core) Capital to adjusted total assets (Leverage ratio)

196,977

9.76%

80,727

4.00%

100,908

5.00%

Actual

Minimum Capital Required-Basel III

To Be Well Capitalized Under Applicable
‎Regulatory Capital Standards

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2022

Total Capital to risk weighted assets

$

193,294

12.74%

$

159,364

10.50%

$

151,775

10.00%

Tier 1 (Core) Capital to risk weighted assets

176,828

11.65%

129,009

8.50%

121,420

8.00%

Common equity tier 1 capital to risk-weighted assets

176,828

11.65%

106,243

7.00%

98,654

6.50%

Tier 1 (Core) Capital to adjusted total assets (Leverage ratio)

176,828

9.89%

71,502

4.00%

89,377

5.00%

CFBank converted from a mutual to a stock institution in 1998, and a “liquidation account” was established with an initial balance of $14,300, which was the net worth reported in the conversion prospectus. The liquidation account represents a calculated amount for the purposes described below, and it does not represent actual funds included in the consolidated financial statements of the Company. Eligible depositors who have maintained their accounts, less annual reductions to the extent they have reduced their deposits, would be entitled to a priority distribution from this account if CFBank liquidated and its assets exceeded its liabilities. Dividends may not reduce CFBank’s stockholder’s equity below the required liquidation account balance.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Dividend Restrictions:

Banking regulations require us to maintain certain capital levels and may limit the dividends paid by CFBank to the Holding Company or by the Holding Company to stockholders. The ability of the Holding Company to pay dividends on its 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 CFBank to the extent necessary to fund such dividends. The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company. The Holding Company also is subject to various legal and regulatory policies and guidelines impacting the Holding Company’s ability to pay dividends on its stock. In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities. Finally, under the terms of the Holding Company’s fixed-to-floating rate subordinated debt, the Holding Company’s ability to pay dividends on its stock is conditioned upon the Holding Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.

Additionally, CFBank does not intend to make distributions to the Holding Company that would result in a recapture of any portion of its thrift bad debt reserve as discussed in Note 13-Income Taxes.

NOTE 17 – DERIVATIVE INSTRUMENTS

Interest-rate swaps:

The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Bank receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “accrued interest receivable and other assets” and “accrued interest payable and other liabilities” in the Consolidated Balance Sheets.  Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.

CFBank utilizes interest-rate swaps as part of its asset liability management strategy to help manage its interest rate risk position and does not use derivatives for trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements. CFBank was party to interest-rate swaps with a combined notional amount of $81,858, $42,177 and $44,887 at December 31, 2023, 2022 and 2021, respectively.

The counterparty to CFBank’s interest-rate swaps is exposed to credit risk whenever the interest-rate swaps are in a liability position. At December 31, 2023, CFBank had $3,394 in cash pledged as collateral for these derivatives. Should the liability increase beyond the collateral value, CFBank may be required to pledge additional collateral.

Additionally, CFBank’s interest-rate swap instruments contain provisions that require CFBank to remain well capitalized under regulatory capital standards and to comply with certain other regulatory requirements. The interest-rate swaps may be called by the counterparty if CFBank fails to maintain well-capitalized status under regulatory capital standards or becomes subject to certain adverse regulatory events such as a regulatory cease and desist order. As of December 31, 2023, CFBank was well-capitalized under regulatory capital standards and was not subject to any adverse regulatory events specified in CFBank’s interest-rate swap instruments.

Summary information about the derivative instruments is as follows:

2023

2022

2021

Notional amount

$

81,858

$

42,177

$

44,887

Weighted average pay rate on interest-rate swaps

5.36%

4.34%

4.21%

Weighted average receive rate on interest-rate swaps

7.81%

6.21%

3.00%

Weighted average maturity (years)

8.2

7.7

6.9

Fair value of derivative asset

$

4,710

$

4,233

$

538

Fair value of derivative liability

$

(4,710)

$

(4,233)

$

(538)

Mortgage banking derivatives:

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives. These mortgage banking derivatives are not designated in hedge relationships. Early in 2021, we strategically scaled down and repositioned our Residential Mortgage Business as a result of the shifts in the residential mortgage industry and, during the second

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

quarter of 2022, we exited the direct-to-consumer mortgage business in favor of lending in our regional markets. The Company had $5,345, $3,940 and $50,312 of interest rate lock commitments related to residential mortgage loans at December 31, 2023, 2022, and 2021, respectively. The fair value of these mortgage banking derivatives was reflected by a derivative asset was immaterial at December 31, 2023 and 2022 and $555 at December 31, 2021, which was included in other assets in the consolidated balance sheet. Fair values were estimated based on anticipated gains on the sale of the underlying loans. Changes in the fair values of these mortgage banking derivatives are included in net gains on sales of loans.

Mortgage banking activities include two types of commitments: rate lock commitments and forward loan commitments. Rate lock commitments are loans in our pipeline that have an interest rate locked with the customer. The commitments are generally for periods of 30-60 days and are at market rates. In order to mitigate the effect of the interest rate risk inherent in providing rate lock commitments, we economically hedge our commitments by entering into either a forward loan sales contract under best efforts or a trade of “to be announced (TBA)” mortgage-backed securities (“notional securities”) for mandatory delivery. The Company had no TBA mortgage-backed securities at December 31, 2023 and 2022.

The following table reflects the amount and market value of mortgage banking derivatives included in the consolidated balance sheet as of the period end:

December 31, 2023

December 31, 2022

(unaudited)

Notional Amount

Fair Value

Notional Amount

Fair Value

Assets (Liabilities):

Interest rate commitments

$

5,345

$

-

$

3,940

$

-

The following table represents the notional amount of loans sold during the years ended December 31, 2023, 2022 and 2021:

December 31, 2023

December 31, 2022

December 31, 2021

Notional amount of loans sold

$

10,799

$

97,265

$

2,358,510

The following table represents the revenue recognized on mortgage activities for the years ended December 31, 2023, 2022 and 2021:

December 31, 2023

December 31, 2022

December 31, 2021

Gain (loss) on loans sold

$

119

$

(64)

$

21,646

Gain (loss) from change in fair value of loans held-for-sale

-

(356)

(8,408)

Gain (loss) from change in fair value of derivatives

-

1,076

(7,322)

$

119

$

656

$

5,916

NOTE 18 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. As discussed in Note 1, effective January 1, 2023, the Company adopted ASC 326. The related allowance for credit losses on unfunded commitments was $1.3 million at December 31, 2023.

The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:

2023

2022

Fixed Rate

Variable Rate

Fixed Rate

Variable Rate

Commitments to make loans

$

14,578

$

151,693

$

30,441

$

169,838

Unused lines of credit

$

7,513

$

157,695

$

9,364

$

118,687

Standby letters of credit

$

3,345

$

-

$

3,149

$

-

Commitments to make loans are generally made for periods of 60 days or less, except for construction loan commitments, which are typically for a period of one year, and loans under a specific drawdown schedule, which are based on the individual contracts. The fixed-rate loan commitments had interest rates ranging from 3.0% to 9.50% and maturities ranging from 3 months to 30 years at

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

December 31, 2023. The fixed-rate loan commitments had interest rates ranging from 2.0% to 8.5% and maturities ranging from 1 month to 30 years at December 31, 2022.

NOTE 19 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of CF Bankshares Inc. follows:

2023

2022

Assets

Cash and cash equivalents

$

530

$

487

Equity securities

5,000

5,000

Investment in banking subsidiary

194,985

175,123

Investment in and advances to other subsidiary

257

247

Other assets

3,387

3,027

Total assets

$

204,159

$

183,884

Liabilities and Equity

Subordinated debentures

$

14,961

$

14,922

Other borrowings

33,495

29,461

Accrued expenses and other liabilities

329

253

Stockholders' equity

155,374

139,248

Total liabilities and stockholders' equity

$

204,159

$

183,884

2023

2022

2021

Dividend income

$

6,000

$

10,000

$

-  

Interest income

1

-  

414

Other income

724

675

230

Interest expense

2,492

1,882

1,527

Other expense

887

796

851

Loss before income tax and before undistributed subsidiary income

3,346

7,997

(1,734)

Tax effect

599

463

407

Loss after income tax and before undistributed subsidiary income

3,945

8,460

(1,327)

Equity in undistributed subsidiary income

12,992

9,704

19,780

Net income

$

16,937

$

18,164

$

18,453

Comprehensive income

$

16,684

$

16,297

$

18,187

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

2023

2022

2021

Cash flows from operating activities

Net Income

$

16,937

$

18,164

$

18,453

Adjustments:

Effect of subsidiaries' operations

(12,992)

(9,704)

(19,780)

Amortization, net

39

39

39

Change in other assets and other liabilities

(284)

263

(681)

Net cash used by operating activities

3,700

8,762

(1,969)

Cash flows from investing activities

Investments in banking subsidiary

(6,000)

(11,000)

(10,000)

Net cash from (used by ) investing activities

(6,000)

(11,000)

(10,000)

Cash flows from financing activities

Proceeds from other borrowings

10,034

15,184

19,277

Repayments of other borrowings

(6,000)

(10,000)

(4,500)

Proceeds from exercise of stock options

84

387

185

Acquisition of treasury shares surrendered upon vesting of restricted stock for payment of taxes and exercise proceeds

(122)

(173)

(139)

Purchase of treasury shares

(177)

(2,339)

(2,972)

Dividends paid

(1,476)

(1,153)

(848)

Net cash from financing activities

2,343

1,906

11,003

Net change in cash and cash equivalents

43

(332)

(966)

Beginning cash and cash equivalents

487

819

1,785

Ending cash and cash equivalents

$

530

$

487

$

819

NOTE 20 – EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per share:

Year Ended

December 31, 2023

December 31, 2022

December 31, 2021

Basic

Net income

$

16,937

$

18,164

$

18,453

Weighted average common shares outstanding including unvested share-based payment awards

6,547,283

6,508,064

6,605,278

Less: Unvested share-based payment awards-2019 Plan

(126,195)

(111,011)

(97,122)

Average shares

6,421,088

6,397,053

6,508,156

Basic earnings per common share

$

2.64

$

2.84

$

2.84

Diluted

Net income

$

16,937

$

18,164

$

18,453

Weighted average common shares outstanding for basic earnings per common share

6,421,088

6,397,053

6,508,156

Add: Dilutive effects of assumed exercises of stock options

3,353

27,096

45,169

Add: Dilutive effects of unvested share-based payment awards-2019 Plan

23,006

111,011

97,122

Average shares and dilutive potential common shares

6,447,447

6,535,160

6,650,447

Diluted earnings per common share

$

2.63

$

2.78

$

2.77

There were no anti-dilutive securities during the years ended December 31, 2023, 2022 and 2021.
‎

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 21 - CONTINGENT LIABILITIES

General Litigation:

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

NOTE 22 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of accumulated other comprehensive income, net of tax, for the years ended December 31, 2023, 2022 and 2021 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

Changes in Accumulated Other Comprehensive Income by Component

For the Year Ended December 31, 2023, 2022 and 2021 (1)

Unrealized Gains and Losses on Available-for-Sale Securities

2023

2022

2021

Accumulated other comprehensive gain (loss), beginning of period

$

(2,037)

$

(170)

$

96

Other comprehensive gain (loss) before reclassifications

(253)

(1,867)

(266)

Less amount reclassified from accumulated other comprehensive loss (2)

-

-

-

Net current-period other comprehensive income (loss)

(253)

(1,867)

(266)

Accumulated other comprehensive income (loss), end of period

$

(2,290)

$

(2,037)

$

(170)

(1)All amounts are net of tax. Amounts in parentheses indicate a reduction of other comprehensive income.

(2)There were no amounts reclassified out of other comprehensive income for the years ended December 31, 2023, 2022 and 2021.

 

NOTE 23 - BRANCH SALE

On December 29, 2020, CFBank entered into a Branch Purchase and Assumption Agreement (the “P&A Agreement”) with Consumers National Bank (“Consumers”) providing for the acquisition by Consumers of two branches of CFBank in Columbiana County, Ohio – CFBank’s drive-up branch location in Wellsville, Ohio and CFBank’s branch location in Calcutta, Ohio (the “Branches”).

On July 16, 2021, CFBank completed its sale to Consumers of certain assets and liabilities associated with the Branches. Pursuant to the terms of the P&A Agreement, Consumers assumed certain deposit liabilities and acquired certain loans, as well as cash, real property, personal property and other fixed assets associated with the Branches.

During the third quarter of 2021, the Company recognized a combined gain on sale of deposits of $1.9 million related to the sale of the Branches.


‎

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 24- OTHER ASSETS HELD FOR SALE

During the third quarter of 2022, the Company began marketing its Worthington headquarters building for sale as it prepared to move its headquarters to Columbus, Ohio. On October 20, 2022, the Company entered into a contract to sell the building for $2,010. As a result, impairment expense of $542 was recorded during September 2022 to adjust the building and land value to the offered price, less costs to sell, and the associated assets were transferred to other assets held for sale on the consolidated balance sheet. The sale of the building was completed in May 2023.

NOTE 25- SUBSEQUENT EVENT

On February 6, 2024, the Company issued an aggregate of 2,000 shares of its newly-designated series of non-voting convertible perpetual preferred stock, series D, par value $0.01 per share, to an existing stockholder of the Company in exchange for 200,000 shares of (Voting) Common Stock.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None

Item 9A. Controls and Procedures.

Evaluation of disclosure controls and procedures. Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Management's assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met. As of December 31, 2023, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management concluded that our internal controls over financial reporting as of December 31, 2023 were effective.

Management’s Report on Internal Control Over Financial Reporting. Information required by Item 308 of Regulation S-K is included on page 56 of this Form 10-K; the information appears under the caption “Management’s Report on Internal Control over Financial Reporting”.

Changes in internal control over financial reporting. There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) in the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

(a) None

(b) During the quarter ended December 31, 2023, no director or officer (as defined under Rule 16a-1 of the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangements or any non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of regulation S-K)

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors. Information required by Item 401 of Regulation S-K with respect to our directors will be included in the section captioned “PROPOSAL 1 – ELECTION OF DIRECTORS” of our definitive Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “Commission” or the “SEC”) pursuant to SEC Regulation 14A (the “2024 Proxy Statement”), which section is incorporated herein by reference.

Executive Officers of the Registrant. Information required by Item 401 of Regulation S-K with respect to our executive officers will be included in the section captioned “EXECUTIVE OFFICERS” in our 2024 Proxy Statement, which section is incorporated herein by reference.

Compliance with Section 16(a) of the Exchange Act. Information required by Item 405 of Regulation S-K will be included in the section captioned “BENEFICIAL OWNERSHIP OF COMPANY COMMON STOCK – DELINQUENT SECTION 16(a) REPORTS” in our 2024 Proxy Statement, which section is incorporated herein by reference.

Code of Ethics. We have adopted a Code of Ethics and Business Conduct, which applies to all employees, including our principal executive officer, principal financial officer and principal accounting officer. We require all directors, officers and other employees to review and adhere to the Code of Ethics and Business Conduct in addressing the legal and ethical issues encountered in conducting their work. The Code of Ethics and Business Conduct requires that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Company’s best interest. The Code of Ethics and Business Conduct is available on our website, www.CF.Bank under the tab “Investor – Overview–Governance Documents.” Disclosures of any amendments to or waivers with regard to the provisions of the Code of Ethics and Business Conduct also will be posted on the Company’s website.

Corporate Governance. Information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be included in the section captioned “CORPORATE GOVERNANCE – Board Meetings and Committees” in our 2024 Proxy Statement, which section is incorporated herein by reference. The procedures by which stockholders of the Company many recommend nominees to the Company’s

Board of Directors have not materially changed from those described in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Shareholders to be held on May 29, 2024.

Item 11. Executive Compensation.

Information required by Item 402 of Regulation S-K will be included in the sections captioned “COMPENSATION OF EXECUTIVE OFFICERS” and “2023 COMPENSATION OF DIRECTORS” in our 2024 Proxy Statement, which sections are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Security Ownership of Certain Beneficial Owners and Management. Information required by Item 403 of Regulation S-K will be included in the section captioned “BENEFICIAL OWNERSHIP OF COMPANY COMMON STOCK” in our 2024 Proxy Statement, which section is incorporated herein by reference.

Related Stockholder Matters – Equity Compensation Plan Information. The following table shows the number of shares of our common stock subject to outstanding stock option awards and remaining available for awards under the Company’s Equity Incentive Plans at December 31, 2023.

Equity Compensation Plan Information

Plan Category

(a)
‎Number of Common Shares to be issued upon exercise of all outstanding options, warrants and rights (a)

(b)
‎Weighted-average exercise price of outstanding options, warrants and rights (b)

(c)
‎Number of Common Shares remaining available for future issuance under equity compensation plans (excluding common shares reflected in column (a))

Equity compensation plans approved by shareholders

-

$

-

76,330

Equity compensation plans not approved by shareholders

-

-

-

Total

-

$

-

76,330

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by Items 404 and 407(a) of Regulation S-K will be included in the sections captioned “CORPORATE GOVERNANCE – Certain Relationships and Related Party Transactions” and “CORPORATE GOVERNANCE – Director Independence” in our 2024 Proxy Statement, which sections are incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

Our independent registered public accounting firm is FORVIS, LLP, Indianapolis, Indiana(PCAOB Auditor Firm ID 686).

Information required by this Item 14 will be included in the section captioned “AUDIT COMMITTEE MATTERS” in our 2024 Proxy Statement, which section is incorporated herein by reference.


‎

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1)Financial Statements:

The following report of the independent registered public accounting firm and consolidated statements of CF Bankshares Inc. and subsidiaries are included under “Item 8. Financial Statements and Supplementary Data” of this Form 10-K:

(a)(2)Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.

(a)(3)Exhibits:

The documents listed in the Exhibit Index that immediately precedes the signature page of this Form 10-K, are filed/furnished with this Form 10-K as exhibits or incorporated into this Form 10-K by reference as noted. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K is identified as such in the Exhibit Index.

(b)Exhibits:

The documents listed in the Exhibit Index that immediately precedes the signature page of this Form 10-K are filed/furnished with this Form 10-K as exhibits or incorporated into this Form 10-K by reference as noted.

(b)Financial Statement Schedules:

None.

Item 16. Form 10-K Summary

Not Applicable


‎

EXHIBIT INDEX

Exhibit No.

Description of Exhibit

3.1

Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed with the Commission on November 9, 2017 (File No. 0-25045))

3.2

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Registration Statement on Form S-2 (File No. 333-129315), filed with the Commission on October 28, 2005)

3.3

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.4 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed with the commission on August 14, 2009 (File No. 0-25045))

3.4

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.5 to the registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, filed with the Commission on November 10, 2011 (File No. 0-25045))

3.5

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.5 to the registrant’s Post-Effective Amendment to the Registration Statement on Form S-1 (File No. 333-177434), filed with the Commission on May 4, 2012)

3.6

Certificate of Designations to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated May 7, 2014 and filed with the Commission on May 13, 2014. (File No. 0-25045))

3.7

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated August 20, 2018, filed with the commission on August 20, 2018 (File No. 0-25045)

3.8

Certificate of Designations to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated October 25, 2019, filed with the Commission on October 31, 2019 (File No. 0-25045))

3.9

Certificate of Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated May 29, 2020, filed with the Commission on June 2, 2020 (File No. 0-25045))

3.10

Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated July 28, 2020, filed with the Commission on July 20, 2020 (File No. 0-25045))

3.11

Certificate of Incorporation, as amended, of the registrant (incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed with the Commission on August 12, 2020 (File No. 0-25045)) [This document represents the Certificate of Incorporation of the registrant in compiled form incorporating all amendments. This compiled document has not been filed with the Delaware Secretary of State.]

3.12

Certificate of Designations to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated February 5, 2024, filed with the Commission on February 6, 2024 (File No. 0-25045))

3.13

Second Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.3 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the Commission on March 27, 2008 (File No. 0-25045))

4.1

Form of Stock Certificate of Central Federal Corporation (incorporated by reference to Exhibit 4.0 to the registrant’s Registration Statement on Form SB-2 (File No. 333-64089), filed with the Commission on September 23, 1998)

4.2

Form of Subordinated Note Purchase Agreement by and between the Company and several Purchasers, dated December 20,2018 (incorporated by reference to Exhibit 10.1 to the registrants Current Report on Form 8-K dated December 20, 2018, filed with the Commission on December 21, 2018 (File No. 0-25045))

4.3

Form of 7.0% Fixed-to-Floating Rate Subordinated Note due 2028 (incorporated by reference to Exhibit 10.2 to the registrants Current Report on Form 8-K dated December 20, 2018, filed with the Commission on December 21, 2018 (File No. 0-25045))

4.4

Description of Capital Stock

4.5

Agreement to furnish instruments defining rights of holders of long-term debt

10.1*

Central Federal Corporation 2009 Equity Compensation Plan (incorporated by reference to Appendix A to the registrant’s Definitive Proxy Statement filed with the Commission on March 31, 2009)

10.2*

First Amendment to the Central Federal Corporation 2009 Equity Compensation Plan (incorporated by reference to Appendix A to the registrant’s Definitive Proxy Statement filed with the Commission on April 11, 2013)

10.3*

Form of Incentive Stock Option Award Agreement under the Central Federal Corporation 2009 Equity Compensation Plan (incorporated by reference to Exhibit 10.3 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Commission on April 1, 2013 (File No. 0-25045)

10.4*

Form of Non-Qualified Stock Option Award Agreement under the Central Federal Corporation 2009 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Commission on April 1, 2013 (File No. 0-25045)

10.5*

Central Federal Corporation 2019 Equity Compensation Plan (incorporated by reference to Annex A to the registrant’s Definitive Proxy Statement filed with the Commission on April 26, 2019)

10.6*

Form of Employee Restricted Stock Award Agreement under the Central Federal Corporation 2019 Equity Compensation Plan (incorporated by reference to Exhibit 10.8 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Commission on March 16, 2020 (File No. 0-25045))

10.7*

Form of Director Restricted Stock Award Agreement under the Central Federal Corporation 2019 Equity Compensation Plan (incorporated by reference to Exhibit 10.9 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Commission on March 16, 2020 (File No. 0-25045))

10.8*

Employment Agreement, dated April 22, 2019, by and among Central Federal Corporation, CFBank and Timothy T. O’Dell (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated April 26, 2019, filed with the Commission on April 26, 2019 (File No. 0-25045))

10.9*

Central Federal Corporation Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K dated August 16, 2016, filed with the Commission on August 16, 2016 (File No. 0-25045))

10.10*

Employment Agreement, dated January 25, 2023, by and among Central Federal Corporation, CFBank and Bradley Ringwald (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated January 25, 2023, filed with the Commission on January 27, 2023 (File No. 0-25045))

10.11*

Employment Agreement, dated January 25, 2023, by and among Central Federal Corporation, CFBank and Kevin Beerman (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated January 25, 2023, filed with the Commission on January 27, 2023 (File No. 0-25045))

10.12*

Deferred Cash Incentive Agreement, dated as of December 29, 2022, by and between CFBank and Timothy T. O’Dell (incorporated by reference to Exhibit 10.12 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Commission on March 31, 2023 (File No. 0-25045))

10.13*

Deferred Cash Incentive Agreement, dated as of August 23, 2021, by and between CFBank and Bradley Ringwald (incorporated by reference to Exhibit 10.13 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Commission on March 31, 2023 (File No. 0-25045))

10.14*

Deferred Cash Incentive Agreement, dated as of August 23, 2021, by and between CFBank and Kevin Beerman (incorporated by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Commission on March 31, 2023 (File No. 0-25045))

21.1

Subsidiaries of the Registrant

23.1

Consent of Independent Registered Public Accounting Firm

31.1

Rule 13a-14(a) Certifications of the Chief Executive Officer

31.2

Rule 13a-14(a) Certifications of the Principal Financial Officer

32.1

Section 1350 Certifications of the Chief Executive Officer and Principal Financial Officer 

97

Clawback Policy

101.1

Interactive Data File ( Inline XBRL)

104

Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101

*Management contract or compensation plan or arrangement identified pursuant to Item 15 of Form 10-K


‎

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorize

CF BANKSHARES INC.

/s/ Timothy T. O’Dell

Timothy T. O’Dell

President and Chief Executive Officer

Date: March 28, 2024

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name

Title

Date

/s/ Timothy T. O’Dell

Director, President and Chief Executive Officer

March 28, 2024

Timothy T. O’Dell

/s/ Kevin J. Beerman

Executive Vice President and Chief Financial Officer

March 28, 2024

Kevin J. Beerman

/s/ Robert E. Hoeweler

Chairman

March 28, 2024

Robert E. Hoeweler

/s/ Thomas P. Ash

Director

March 28, 2024

Thomas P. Ash

/s/ James H. Frauenberg II

Director

March 28, 2024

James H. Frauenberg II

/s/ Edward W. Cochran

Director

March 28, 2024

Edward W. Cochran

/s/ David L. Royer

Director

March 28, 2024

David L. Royer

/s/ Sundeep Rana

Director

March 28, 2024

Sundeep Rana

 

110