CF BANKSHARES INC. 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 ofCF Bankshares Inc. (the "Holding Company") orCFBank , National Association ("CFBank" and, together with the Holding Company, the "Company"); (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. ? 40
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CONDENSED CONSOLIDATED FINANCIAL DATA
The following information should be read in conjunction with our Consolidated
Financial Statements, the related Notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this report.
At December 31,
2022 2021 2020 2019 2018
(Dollars in thousands)
Selected Financial Condition Data:
Total assets $ 1,820,174 $ 1,495,589 $ 1,476,995 $ 880,545 $ 665,025
Cash and cash equivalents 151,787 166,591 221,594 45,879 67,304
Securities available for sale 10,442 16,347 8,701 8,174 10,114
Equity securities 5,000 5,000 5,000 - -
Loans held for sale 580 27,988 283,165 135,711 17,385
Loans and leases, net (1) 1,572,255 1,214,149 895,344 663,303 550,683
Allowance for loan and lease loss (ALLL) 16,062 15,508 17,022 7,138 7,012
Nonperforming assets 761 997 695 2,439 415
Foreclosed assets - - - - 38
Deposits 1,527,922 1,246,352 1,113,070 746,323 579,786
FHLB advances and other debt 109,461 89,727 214,426 29,017 19,500
Subordinated debentures 14,922 14,883 14,844 14,806 14,767
Total stockholders' equity 139,248 125,330 110,210 80,664 45,559
For the year ended December 31,
2022 2021 2020 2019 2018
(Dollars in thousands)
Summary of Operations:
Total interest income $ 67,764 $ 52,348 $ 42,386 $ 35,104 $ 24,886
Total interest expense 18,974 10,309 14,578 13,404 6,997
Net interest income 48,790 42,039 27,808 21,700 17,889
Provision for loan and lease losses 787 (1,600) 10,915 - -
Net interest income after provision
for loan and lease losses 48,003 43,639 16,893 21,700 17,889
Noninterest income:
Net gain on sale of loans 1,009 7,359 58,366 10,767 1,927
Other 2,201 4,281 1,627 953 789
Total noninterest income 3,210 11,640 59,993 11,720 2,716
Noninterest expense 28,621 32,461 40,603 21,379 15,275
Income before income taxes 22,592 22,818 36,283 12,041 5,330
Income tax expense 4,428 4,365 6,675 2,440 1,057
Net income $ 18,164 $ 18,453 $ 29,608 $ 9,601 $ 4,273
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At or for the year ended December 31,
2022 2021 2020 2019 2018
(Dollars in thousands)
Selected Financial Ratios and Other
Data:
Performance Ratios (2)
Return on average assets 1.11% 1.26% 2.59% 1.30% 0.78%
Return on average equity 13.69% 15.58% 32.04% 17.57% 10.11%
Average yield on interest-earning
assets (3) 4.37% 3.79% 3.89% 4.98% 4.75%
Average rate paid on
interest-bearing liabilities 1.55% 0.95% 1.64% 2.38% 1.71%
Average interest rate spread (4) 2.82% 2.84% 2.25% 2.60% 3.04%
Net interest margin, fully taxable
equivalent (5) 3.15% 3.04% 2.55% 3.08% 3.41%
Average interest-earning assets to
interest bearing liabilities 126.74% 127.13% 122.64% 124.90% 128.04%
Efficiency ratio (6) 55.04% 60.47% 46.24% 63.97% 74.13%
Noninterest expenses to average
assets 1.76% 2.22% 3.55% 2.89% 2.78%
Common stock dividend payout ratio 6.47% 4.69% 0.67% n/m n/m
Capital Ratios: (2) Equity to total assets at end of period 7.65% 8.38% 7.46% 9.16% 6.85% Average equity to average assets 8.14% 8.11% 8.07% 7.39% 7.68% Tier 1 (core) capital to adjusted total assets (Leverage ratio) (7) 9.89% 11.29% 9.74% 10.58% 10.13% Total capital to risk weighted assets (7) 12.74% 14.02% 14.31% 12.96% 12.37% Tier 1 (core) capital to risk weighted assets (7) 11.65% 12.77% 13.05% 11.97% 11.12% Common equity tier 1 capital to risk weighted assets (7) 11.65% 12.77% 13.05%
11.97% 11.12%
Asset Quality Ratios: (2) Nonperforming loans to total loans (8) 0.05% 0.08% 0.08% 0.36% 0.07% Nonperforming assets to total assets (9) 0.04% 0.07% 0.05% 0.28% 0.06% Allowance for loan and lease losses to total loans 1.01% 1.26% 1.87% 1.06% 1.26% Allowance for loan and lease losses to nonperforming loans (8) 2110.64% 1555.47% 2449.21% 292.66% 1859.95% Net charge-offs (recoveries) to average loans 0.02% (0.01%) 0.13
(0.02%) (0.01%)
Per Share Data: (10) Basic earnings per common share$ 2.84 $ 2.84 $ 4.53 $ 2.05 $ 1.02 Diluted earnings per common share 2.78 2.77 4.47 2.03 1.00 Dividends declared per common share 0.18 0.13 0.03 - - Tangible book value per common share at end of period 21.43 19.28 16.79
12.40 10.51
(1) Loans and leases, net represents the recorded investment in loans net of the ALLL.
(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.
(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
(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.
(10) Adjusted to reflect the 1-for-5.5 reverse stock split effected on
n/m - not meaningful
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Table of Contents Business OverviewThe Holding Company is a financial holding company that owns 100% of the stock ofCFBank , which was formed inOhio in 1892 and converted from a federal savings association to a national bank onDecember 1, 2016 . Prior toDecember 1, 2016 , the Holding Company was a registered savings and loan holding company. Effective as ofDecember 1, 2016 and in conjunction with the conversion ofCFBank to a national bank, the Holding Company became a registered bank holding company and elected financial holding company status with theFederal Reserve Board (the "FRB"). Effective as ofJuly 27, 2020 , the Company changed its name fromCentral Federal Corporation toCF 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 thatCFBank matches the sophistication of much larger banks, without the bureaucracy. Most of our deposits and loans come from our market area. Our principal market area for loans and deposits includes the followingOhio counties:Franklin County through our office inColumbus, Ohio (formerly located inWorthington, Ohio untilMarch 1, 2023 ) and our loan production office inColumbus, Ohio ;Delaware County, Ohio through our Polaris office inColumbus, Ohio ;Cuyahoga County , through our office inWoodmere, Ohio and ourOhio City office inCleveland, Ohio ;Summit County through our office inFairlawn, Ohio ;Hamilton County through our offices inBlue Ash, Ohio and ourRed Bank office inCincinnati, Ohio ; andMarion County, Indiana through our office inIndianapolis . Because ofCFBank's concentration of business activities inOhio , the Company's financial condition and results of operations depend in large part upon economic conditions inOhio . COVID-19 Impact. TheWorld Health Organization declared the coronavirus COVID-19 a pandemic inMarch 2020 . COVID-19 negatively impacted global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. While the direct impacts related to the COVID-19 pandemic have waned, certain economic concerns remain. The extent to which COVID-19 will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted. In addition, a resurgence in the spread of COVID-19, including new variants thereof, or a new pandemic could result in similar, or potentially greater, impacts in the future which could adversely affect our business, financial condition, liquidity, and results of operations. During the COVID-19 pandemic, we assisted numerous existing and new customers through our participation in the Paycheck Protection Program ("PPP") and by providing temporary loan modifications to loan customers.CFBank originated approximately$126 million of PPP loans during the second quarter of 2020 to over 550 borrowers. The PPP loans provided low interest rates (1%) and potentially forgivable funds to small businesses and are fully guaranteed by the SBA, warranting no credit loss provision. Using the PPP loans as collateral,CFBank funded nearly all of the PPP loans through loans obtained under the FRB's Paycheck Protection Program Liquidity Facility ("PPPLF"), which carried a low interest rate of 0.35%.CFBank's loans outstanding through the PPP totaled$50,000 atDecember 31, 2022 and$450,000 atDecember 31, 2021 . During the pandemic,CFBank also granted payment deferrals on loans totaling approximately$100 million (or approximately 12% of outstanding loan balances). AtDecember 31, 2022 , there were no remaining loans on payment deferrals. 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.
Critical Accounting Policies and Estimates
We follow financial accounting and reporting policies that are in accordance withU.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. 43
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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 loan and lease losses. The ALLL represents management's estimate of probable incurred credit losses in the loan portfolio at each balance sheet date. The allowance consists of general and specific components. The general component covers loans not classified as impaired and is based on historical loss experience, adjusted for current factors. Current factors considered include, but are not limited to, management's oversight of the portfolio, including lending policies and procedures; nature, level and trend of the portfolio, including past due and nonperforming loans, loan concentrations, loan terms and other characteristics; current economic conditions and outlook; collateral values; and other items. The specific component of the ALLL relates to loans that are individually classified as impaired. Loans exceeding policy thresholds are regularly reviewed to identify impairment. A loan is impaired when, based on current information and events, it is probable thatCFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Determining whether a loan is impaired and whether there is an impairment loss requires judgment and estimates, and the eventual outcomes may differ from estimates made by management. The determination of whether a loan is impaired includes: review of historical data; judgments regarding the ability of the borrower to meet the terms of the loan; an evaluation of the collateral securing the loan and estimation of its value, net of selling expenses, if applicable; various collection strategies; and other factors relevant to the loan or loans. Impairment is measured based on the fair value of collateral, less costs to sell, if the loan is collateral dependent, or alternatively, the present value of expected future cash flows discounted at the loan's effective rate, if the loan is not collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment loss is recorded. As a result, determining the appropriate level for the ALLL involves not only evaluating the current financial situation of individual borrowers or groups of borrowers, but also current predictions about future events that could change before an actual loss is determined. Based on the variables involved and the fact that management must make judgments about outcomes that are inherently uncertain, the determination of the ALLL is considered to be a critical accounting policy. Additional information regarding this policy is included in the previous section titled "Financial Condition - Allowance for loan and lease losses" 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 value of financial instruments, which are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Additional information is included in 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 18 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 loan and lease 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. 44
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Table of Contents Financial Condition General. Assets totaled$1.8 billion atDecember 31, 2022 and increased$324.6 million , or 21.7%, from$1.5 billion atDecember 31, 2021 . The increase was primarily due to a$358.1 million increase in net loan balances, partially offset by a$27.4 million decrease in loans held for sale and a$14.8 million decrease in cash and cash equivalents. Cash and cash equivalents. Cash and cash equivalents totaled$151.8 million atDecember 31, 2022 , and decreased$14.8 million , or 8.9%, from$166.6 million atDecember 31, 2021 . The decrease in cash and cash equivalents was primarily attributed to an increase in net loans, partially offset by an increase in deposits and a decrease in loans held for sale. Securities. Securities available for sale totaled$10.4 million atDecember 31, 2022 , and decreased$5.9 million , or 36.1%, compared to$16.3 million atDecember 31, 2021 . The decrease was primarily due to principal maturities. Equity securities totaled$5.0 million atDecember 31, 2022 andDecember 31, 2021 . Loans held for sale. Loans held for sale totaled$580,000 atDecember 31, 2022 and decreased$27.4 million , or 97.9%, from$28.0 million atDecember 31, 2021 . The decrease is the result of the Company's decision to strategically scale down its Residential Mortgage Business in response to the shift in the residential mortgage industry. Loans and Leases. Net loans and leases totaled$1.6 billion atDecember 31, 2022 , and increased$358.1 million , or 29.5%, from$1.2 billion atDecember 31, 2021 . The increase was primarily due to a$118.3 million increase in single-family residential loan balances, a$100.8 million increase in construction loan balances, a$90.5 million increase in commercial loan balances, a$27.4 million increase in multi-family loan balances, a$15.5 million increase in commercial real estate loan balances, and a$6.5 million increase in home equity lines of credit. The increases in the aforementioned loan balances were related to increased sales activity and new relationships.CFBank previously participated in a Mortgage Purchase Program withNorthpointe Bank ("Northpointe"), aMichigan banking corporation, fromDecember 2012 untilCFBank discontinued its participation in the program in the first quarter of 2021. Pursuant to the terms of a participation agreement,CFBank purchased participation interests in loans made by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout theU.S. The underlying loans were individually Mortgage Electronic Registered Systems (MERS) registered loans which were held until funded by the end investor. The mortgage loan investors included Fannie Mae and Freddie Mac, and other major financial institutions. This process on average took approximately 14 days. Given the short-term holding period of the underlying loans, common credit risks (such as past due, impairment and TDR, nonperforming, and nonaccrual classification) were substantially reduced. Therefore, no allowance was allocated byCFBank to these loans. These loans were 100% risk rated forCFBank capital adequacy purposes. Under the participation agreement,CFBank agreed to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintained a 5% ownership interest in each loan it participated.CFBank exited this program during the first quarter of 2021 and had no loans outstanding under the program atDecember 31, 2022 andDecember 31, 2021 . Allowance for loan and lease losses (ALLL). The ALLL totaled$16.1 million atDecember 31, 2022 , and increased$554,000 , or 3.6%, from$15.5 million atDecember 31, 2021 . The increase in the ALLL was due to$787,000 in provision expense, partially offset by net charge-offs of$233,000 during the year endedDecember 31, 2022 . The ratio of the ALLL to total loans was 1.01% atDecember 31, 2022 , compared to 1.26% atDecember 31, 2021 . The ratio of the ALLL to total loans, excluding loan balances subject to SBA guarantees, was 1.03% atDecember 31, 2022 , compared to 1.27% atDecember 31, 2021 . The ALLL is a valuation allowance for probable incurred credit losses. The ALLL methodology is designed as part of a thorough process that incorporates management's current judgments about the credit quality of the loan portfolio into a determination of the ALLL in accordance with generally accepted accounting principles and supervisory guidance. Management analyzes the adequacy of the ALLL quarterly through reviews of the loan portfolio, including the nature and volume of the loan portfolio and segments of the portfolio; industry and loan concentrations; historical loss experience; delinquency statistics and the level of nonperforming loans; specific problem loans; the ability of borrowers to meet loan terms; an evaluation of collateral securing loans and the market for various types of collateral; various collection strategies; current economic conditions, trends and outlook; and other factors that warrant recognition in providing for an adequate ALLL. Based on the variables involved and the significant judgments management must make about outcomes that are uncertain, the determination of the ALLL is considered to be a critical accounting policy. See the section below titled "Critical Accounting Policies" for additional discussion. The ALLL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable thatCFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Substandard loans of all classes within the commercial, commercial real estate, construction and multi-family residential loan segments, regardless of size, are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful. If a loan is impaired, a portion of the allowance is 45
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allocated so that the loan is 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 is expected solely from the
collateral. Large groups of smaller balance loans, such as consumer and
single-family residential real estate loans, are collectively evaluated for
impairment, and accordingly, they are not separately identified for impairment
disclosures. Loans within any class for which the terms have been modified
resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings ("TDRs") and are
classified as impaired. See Notes 1 and 4 in the accompanying Notes to
Consolidated Financial Statements for additional information regarding the ALLL.
Individually impaired loans totaled $175,000 at December 31, 2022 , and decreased
$2.8 million , or 94.1%, from $3.0 million at December 31, 2021 . The decrease was
primarily due to the payoffs of three impaired loans during the year ended
December 31, 2022 . The amount of the ALLL specifically allocated to individually
impaired loans totaled $176 at December 31, 2022 and $20,000 at December 31,
2021 . The decrease in the ALLL specifically allocated to impaired loans was
primarily due to the payoffs of the three impaired loans.
The specific reserve on impaired loans is based on management's estimate of the
present value of estimated future cash flows using the loan's effective rate or
the fair value of collateral, if repayment is expected solely from the
collateral. On at least a quarterly basis, management reviews each impaired loan
to determine whether it should have a specific reserve or partial charge-off.
Management relies on appraisals or internal evaluations to help make this
determination. Determination of whether to use an updated appraisal or internal
evaluation is based on factors including, but not limited to, the age of the
loan and the most recent appraisal, condition of the property and whether we
expect the collateral to go through the foreclosure or liquidation process.
Management considers the need for a downward adjustment to the valuation based
on current market conditions and on management's analysis, judgment and
experience. The amount ultimately charged-off for these loans may be different
from the specific reserve, as the ultimate liquidation of the collateral and/or
projected cash flows may be different from management's estimates.
Nonperforming loans, which are nonaccrual loans and loans 90 days past due but
still accruing interest, totaled $761,000 at December 31, 2022 , and decreased
$236,000 from $997,000 at December 31, 2021 . The decrease was primarily due to
two nonaccrual consumer loans paying off, partially offset by two consumer loans
and one commercial lease going into nonaccrual status, a partial charge off and
principal paydowns of nonaccrual loans. The ratio of nonperforming loans to
total loans was 0.05% at December 31, 2022 , compared to 0.08% at December 31,
2021 .
The following table presents information regarding the number and balance of
nonperforming loans at
December 31, 2022 December 31, 2021
# of loans Balance # of loans Balance
(dollars in thousands)
Commercial 2 $ 99 1 $ 147
Single-family residential real estate 3 641 3 656
Home equity lines of credit 1 18 2 194
Other Consumer 1 3 - -
Total 7 $ 761 6 $ 997
Nonaccrual loans include some nonperforming loans that were previously modified
and identified as TDRs. TDRs included in nonaccrual loans totaled $80,000 at
December 31, 2022 and $147,000 at December 31, 2021 . The decrease in TDRs
included in nonaccrual loans was primarily due to a partial charge-down.
Nonaccrual loans at December 31, 2022 and December 31, 2021 do not include
$95,000 and $2.8 million , respectively, of TDRs where customers have established
a sustained period of repayment performance, generally six months, loans are
current according to their modified terms and repayment of the remaining
contractual payments is expected. These loans are included in total impaired
loans. See Notes 1 and 4 in the accompanying Notes to Consolidated Financial
Statements for additional information regarding impaired loans and nonperforming
loans.
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The general reserve component of our ALLL covers non-impaired loans of all classes and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by loan class and is based on the actual loss history experienced byCFBank over a three-year period. The general component is calculated based onCFBank's loan balances and actual three-year historical loss rates. For loans with little or no actual loss experience, industry estimates are used based on loan segment. This actual loss experience is supplemented with other economic and judgmental factors based on the risks present for each loan class. These economic and judgmental factors include 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. Management's loan review process is an integral part of identifying problem loans and determining the ALLL. We maintain an internal credit rating system and loan review procedures specifically developed as the primary credit quality indicator to monitor credit risk for commercial, commercial real estate and multi-family residential real estate loans. We analyze these loans individually and categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Credit reviews for these loan types are generally performed at least annually, and more often for loans with higher credit risk. Loan officers maintain close contact with borrowers between reviews. Adjustments to loan risk ratings are based on the reviews and at any time information is received that may affect risk ratings. Additionally, an independent third party review of commercial, commercial real estate and multi-family residential loans is performed at least annually. Management uses the results of these reviews to help determine the effectiveness of the existing policies and procedures and to provide an independent assessment of our internal loan risk rating system.
We have incorporated the regulatory asset classifications as a part of our credit monitoring and internal loan risk rating system. In accordance with regulations, problem loans are classified as special mention, substandard, doubtful or loss, and the classifications are subject to review by the regulators. Assets designated as special mention are considered criticized assets. Assets designated as substandard, doubtful or loss are considered classified assets. See Note 4 in the accompanying Notes to Consolidated Financial Statements for additional information regarding descriptions of the regulatory asset classifications.
The level of total criticized and classified loans increased by$1.4 million , or 23.4%, during the twelve months endedDecember 31, 2022 . Loans designated as special mention increased$4.4 million , or 182.3%, and totaled$6.8 million atDecember 31, 2022 , compared to$2.4 million atDecember 31, 2021 . Loans classified as substandard decreased$2.9 million , or 81.0%, and totaled$681,000 atDecember 31, 2022 , compared to$3.6 million atDecember 31, 2021 . One commercial loan totaling$80,000 was classified as doubtful atDecember 31, 2022 compared to$147,000 atDecember 31, 2021 . See Note 4 in the accompanying Notes to Consolidated Financial Statements 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$1.5 million , and totaled$2.1 million atDecember 31, 2022 , compared to$3.6 million atDecember 31, 2021 . Past due loans totaled 0.1% of the loan portfolio atDecember 31, 2022 , compared to 0.3% atDecember 31, 2021 . 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$117.9 million , or 27.6%, ofCFBank's commercial portfolio atDecember 31, 2022 , compared to$120.1 million , or 35.6% atDecember 31, 2021 . Interest only home equity lines of credit totaled$30.5 million , or 99.2%, of the total home equity lines of credit atDecember 31, 2022 compared to$23.9 million , or 98.7%, atDecember 31, 2021 . 47
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We believe the ALLL is adequate to absorb probable incurred credit losses in the loan portfolio as ofDecember 31, 2022 ; 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 ALLL. 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
Premises and equipment. Premises and equipment, net, totaled$3.8 million atDecember 31, 2022 , and decreased$2.1 million , or 35.6%, from$5.9 million atDecember 31, 2021 . The decrease in premises and equipment was primarily related to the pending sale of the Company's headquarters building inWorthington, Ohio . See Note 8, Premises and Equipment and Note 25, Other assets held for sale, in the accompanying Notes to Consolidated Financial Statements for additional information. Deposits. Deposits totaled$1.5 billion atDecember 31, 2022 , an increase of$281.6 million , or 22.6%, from$1.2 billion atDecember 31, 2021 . The increase is primarily due to a$326.9 million increase in money market account balances, partially offset by a$26.4 million decrease in certificate of deposit account balances and a$16.9 million decrease in checking account balances. The increase in money market account balances during the year endedDecember 31, 2022 included several new Public Funds deposit relationships totaling$207 million . Noninterest-bearing deposit accounts totaled$263.2 million atDecember 31, 2022 and decreased$21.7 million from$284.9 million atDecember 31, 2021 .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 provideFDIC insurance coverage in excess of$250,000 through these innovative products. Brokered deposits, including CDARS and ICS deposits that qualify as brokered, totaled$291.8 million atDecember 31, 2022 , and increased$13.7 million , or 4.9% from$278.1 million atDecember 31, 2021 . Customer balances in the CDARS reciprocal and ICS reciprocal programs, which do not qualify as brokered, totaled$157.9 million atDecember 31, 2022 and increased$99.5 million , or 170.5%, from$58.4 million atDecember 31, 2021 . FHLB advances and other debt. FHLB advances and other debt totaled$109.5 million atDecember 31, 2022 , a increase of$19.8 million when compared to$89.7 million atDecember 31, 2021 . The increase was primarily due to a$15.0 million increase in FHLB advances and a$5.2 million increase in our Holding Company credit facility. Prior toMay 21, 2021 , the Holding Company had a term loan in the original principal amount of$5.0 million with an additional$10.0 million revolving line-of-credit with a third-party bank. That credit facility was refinanced into a new$35.0 million facility onMay 21, 2021 . The credit facility is revolving untilMay 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% untilMay 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 toCFBank to support growth. As ofDecember 31, 2022 , the Company had an outstanding balance, net of unamortized debt issuance costs, of$29.5 million on the facility. AtDecember 31, 2022 and 2021,CFBank had availability in unused lines of credit at two commercial banks in the amounts of$50.0 million and$15.0 million . There were no outstanding borrowings on either line atDecember 31, 2022 orDecember 31, 2021 . During 2019,CFBank entered into a$25.0 million warehouse facility with a commercial bank. The warehouse facility was used to periodically fund loans held for sale from the close (funding) date until they were sold in the secondary market. Borrowings on the facility bore interest at the greater of the 30-day LIBOR plus 2.00%, or 4.00% and were secured by the specific loans that were funded. This warehouse facility, which was closed during the third quarter of 2021, had no outstanding balance atDecember 31, 2022 andDecember 31, 2021 . During 2020,CFBank entered into an additional$75 million warehouse facility with a commercial bank. The purpose of this warehouse facility was to periodically fund loans held for sale from the close (funding) date until sold in the secondary market. Borrowings on the facility bore interest at the greater of the 30-day LIBOR plus 2.35% or 2.90% and were secured by the specific loans that were funded. This warehouse facility, which was closed in the second quarter of 2021, had no outstanding balance atDecember 31, 2022 andDecember 31, 2021 . 48
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CFBank previously participated in the PPPLF, which provides liquidity through term financing backed by PPP loans. Principal payments are due on the PPPLF advances when the related PPP loans are repaid or forgiven by the SBA. AtDecember 31, 2022 andDecember 31, 2021 , the principal balance of PPPLF advances outstanding was$0 and$450,000 , respectively. See the section below titled "Liquidity and Capital Resources" for additional information regarding FHLB advances and other debt. Subordinated debentures Subordinated debentures totaled$14.9 million atDecember 31, 2022 and$14.9 million atDecember 31, 2021 . InDecember 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, net of 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 were current atDecember 31, 2022 andDecember 31, 2021 . See Note 11, Subordinated Debentures, in the accompanying Notes to Consolidated Financial Statements for additional information. Stockholders' equity. Stockholders' equity totaled$139.2 million atDecember 31, 2022 , an increase of$13.9 million , or 11.1%, from$125.3 million atDecember 31, 2021 . The increase in total stockholders' equity was primarily attributed to net income, partially offset by dividends of$1.1 million , share repurchases of$2.5 million and a$1.9 million increase in other comprehensive loss. 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 report.
Comparison of Results of Operations for 2022 and 2021
General. Net income for the year endedDecember 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 endedDecember 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 endedDecember 31, 2022 and increased$6.8 million , or 16.1%, compared to net interest income of$42.0 million for the year endedDecember 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 endedDecember 31, 2022 increased 11bps compared to the net interest margin of 3.04% for the year endedDecember 31, 2021 . Interest income totaled$67.8 million for the twelve months endedDecember 31, 2022 , and increased$15.5 million , or 29.5%, compared to$52.3 million for the twelve months endedDecember 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 outstanding. Interest expense totaled$19.0 million for the twelve months endedDecember 31, 2022 , and increased$8.7 million , or 84.1%, compared to$10.3 million for the twelve months endedDecember 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 endedDecember 31, 2022 was 787,000, compared to($1.6) million in provision for loan and lease losses expense for the year endedDecember 31, 2021 . Net charge-offs for the year endedDecember 31, 2022 totaled$233,000 , compared to net recoveries of$86,000 for the year endedDecember 31, 2021 . 49
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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 endedDecember 31, 2022 totaled$3.2 million and decreased$8.4 million , or 72.4%, compared to$11.6 million for the year endedDecember 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 ofCFBank's two Columbiana County branches inJuly 2021 . Noninterest expense. Noninterest expense for the year endedDecember 31, 2022 totaled$28.6 million and decreased$3.9 million , or 11.8%, compared to$32.5 million for the year endedDecember 31, 2021 . The decrease in noninterest expense during the year endedDecember 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 pending sale of ourWorthington headquarters building. Income taxes. Income tax expense was$4.4 million for the year endedDecember 31, 2022 , an increase of$63,000 , compared to$4.4 million for the year endedDecember 31, 2021 . The effective tax rate for the year endedDecember 31, 2022 was approximately 19.6%, as compared to approximately 19.1% for the year endedDecember 31, 2021 . Our deferred tax assets are composed ofU.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 ofDecember 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.
Comparison of Results of Operations for 2021 and 2020
General. Net income for the year endedDecember 31, 2021 totaled$18.5 million (or$2.77 per diluted common share) and decreased$11.1 million , or 37.7%, compared to net income of$29.6 million (or$4.47 per diluted common share) for the year endedDecember 31, 2020 . The decrease in net income was primarily the result of a decrease in the net gain on sale of loans which was driven by significantly lower refinance opportunities coupled with lower margins on loan sales. The decrease in the net gain on sale of loans was partially offset by an increase in net interest income, a decrease in provision expense and a decrease in noninterest expenses. Net interest income. Net interest income totaled$42.0 million for the year endedDecember 31, 2021 and increased$14.2 million , or 51.2%, compared to net interest income of$27.8 million for the year endedDecember 31, 2020 . The increase in net interest income was primarily due to a$9.9 million , or 23.5%, increase in interest income, coupled with a$4.3 million , or 29.3%, decrease in interest expense. The increase in interest income was primarily attributed to a$292.3 million , or 26.8%, increase in average interest-earning assets outstanding, resulting primarily from an increase in net loans and loans held for sale, partially offset by a 10bps decrease in average yield on interest-earning assets. The decrease in interest expense was attributed to a 69bps decrease in the average cost of funds on interest-bearing liabilities, partially offset by a$198.5 million , or 22.4%, increase in average interest-bearing liabilities. The net interest margin of 3.04% for the year endedDecember 31, 2021 increased 49bps compared to the net interest margin of 2.55% for the year endedDecember 31, 2020 . 50
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Interest income totaled$52.3 million for the twelve months endedDecember 31, 2021 , and increased$9.9 million , or 23.5%, compared to$42.4 million for the twelve months endedDecember 31, 2020 . The increase in interest income was primarily attributed to a$233.5 million , or 29.2%, increase in average loans outstanding and a$31.0 million , or 14.5%, increase in average loans held for sale outstanding, partially offset by a 64bps decrease in the average yield on loans held for sale and a 3bps decrease in the average yield on loans. Interest expense totaled$10.3 million for the twelve months endedDecember 31, 2021 , and decreased$4.3 million , or 29.3%, compared to$14.6 million for the twelve months endedDecember 31, 2020 . The decrease in interest expense was primarily attributed to a 79bps decrease in the average rate of interest-bearing deposits, partially offset by a$238.8 million , or 32.3%, increase in average interest-bearing deposits. Provision for loan and lease losses. The provision for loan and lease losses expense for the year endedDecember 31, 2021 was($1.6) million compared to$10.9 million in provision for loan and lease losses expense for the year endedDecember 31, 2020 . The decrease in the provision for loan and lease losses in 2021 was based on the improved economic outlook and continued strong credit quality of our loan portfolio. Net recoveries for the year endedDecember 31, 2021 totaled$86,000 , compared to net charge-offs of$1.0 million for the year endedDecember 31, 2020 . The following table presents information regarding net charge-offs (recoveries) for 2021 and 2020. 2021 2020 (Dollars in thousands) Net charge-offs (recoveries) Commercial $ (56)$ 633 Single-family residential real estate (9)
394
Home equity lines of credit (21) 4 Total $ (86)$ 1,031
See the section below titled "Financial Condition - Allowance for loan and lease losses" for additional information.
Noninterest income. Noninterest income for the year endedDecember 31, 2021 totaled$11.6 million and decreased$48.4 million , or 80.6%, compared to$60.0 million for the year endedDecember 31, 2020 . The decrease was primarily due to a$52.4 million decrease in net gain on sale of loans, partially offset by a$1.9 million increase in gain on sale of deposits and a$1.4 million increase in the net gain on sales of SBA loans. As previously discussed, the decrease in net gain on sale of loans was the result of the Company's decision early 2021 to strategically scale down its Residential Mortgage Business in response to the shift in the residential mortgage industry. The increase in the net gain on sale of deposits was a result of the sale ofCFBank's two Columbiana County branches that closed onJuly 16, 2021 . Noninterest expense. Noninterest expense for the year endedDecember 31, 2021 totaled$32.5 million and decreased$8.1 million , or 20.1%, compared to$40.6 million for the year endedDecember 31, 2020 . The decrease in noninterest expense during the year endedDecember 31, 2021 was primarily due to a$5.0 million decrease in salaries and employee benefits expense, a$2.6 million decrease in advertising and promotion expense and a$722,000 decrease in professional fees expense, partially offset by a$650,000 increase inFDIC premiums. The decreases in salaries and employee benefits, advertising and promotion expense and professional fees expense were primarily the result of the scaling down of our residential mortgage lending business. The increase inFDIC expense was related to increased asset and deposit levels. Income taxes. Income tax expense was$4.4 million for the year endedDecember 31, 2021 , a decrease of$2.3 million , compared to$6.7 million for the year endedDecember 31, 2020 . The effective tax rate for the year endedDecember 31, 2021 was approximately 19.1%, as compared to approximately 18.4% for the year endedDecember 31, 2020 . The effective tax rate for the year endedDecember 31, 2020 was favorably impacted by the recognition of approximately$1.0 million of historic tax credits. Our deferred tax assets are composed ofU.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 ofDecember 31, 2021 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.
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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,
2022 2021 2020
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) $ 17,805 $ 881 4.58% $ 19,311 $ 756 3.93% $ 10,285 $ 161 1.59%
Loans held for sale 6,509 172 2.64% 245,164 5,572 2.27% 214,177 6,231 2.91%
Loans and leases (3) 1,379,192 63,545 4.61% 1,032,075 45,684 4.43% 798,572 35,620 4.46%
Other earning assets 138,805 2,818 2.03% 79,017 102 0.13% 61,451 175 0.28%
FHLB and FRB stock 7,413 348 4.69% 6,220 234 3.76% 5,006 199 3.98%
Total interest-earning
assets 1,549,724 67,764 4.37% 1,381,78752,348 3.79% 1,089,491 42,386 3.89% Noninterest-earning assets 79,467
79,393 55,597
Total assets $ 1,629,191 $ 1,461,180 $ 1,145,088
Interest-bearing
liabilities:
Deposits $ 1,121,003 15,952 1.42% $ 978,258
8,014 0.82%
101,757 3,022 2.97% 108,637 2,295 2.11% 148,887 2,667 1.79% Total interest-bearing liabilities
1,222,760 18,974 1.55% 1,086,895 10,309 0.95% 888,349 14,578 1.64%
Noninterest-bearing
liabilities 273,789 255,855 164,337
Total liabilities 1,496,549 1,342,750 1,052,686
Equity 132,642 118,430 92,402
Total liabilities and
equity $ 1,629,191 $ 1,461,180 $ 1,145,088
Net interest-earning
assets $ 326,964 $ 294,892 $ 201,142
Net interest
income/interest rate
spread $ 48,790 2.82% $ 42,039 2.84% $ 27,808 2.25%
Net interest margin 3.15% 3.04% 2.55%
Average interest-earning
assets to average
interest-bearing
liabilities 126.74% 127.13% 122.64%
(1) Average balance is computed using the carrying value of securities.
Average yield is computed using the historical amortized cost average balance for available for sale securities.
(2) Average yields and interest earned are stated on a fully taxable equivalent basis.
(3) Average balance is computed using the recorded investment in loans net of the ALLL and includes nonperforming loans.
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Rate/Volume Analysis of Net Interest Income. The following table presents the
dollar amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities. It
distinguishes between the increase and decrease related to changes in balances
and/or changes in interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by the
prior rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior
volume). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.
Year Ended Year Ended
December 31, 2022 December 31, 2021
Compared to Year Ended Compared to Year Ended
December 31, 2021 December 31, 2020
Increase (decrease)
Increase (decrease) due to due to
Rate Volume Net Rate Volume Net
(Dollars in thousands)
Interest-earning assets:
Securities (1) $ 165 $ (40) $ 125 $ 373 $ 222 $ 595
Loans held for sale 780 (6,180) (5,400) (1,482) 823 (659)
Loans and leases 1,936 15,925 17,861 (274) 10,338 10,064
Other earning assets 2,584 132 2,716 (114) 41 (73)
FHLB and FRB stock 64 50 114 (11) 46 35
Total interest-earning
assets 5,529 9,887 15,416 (1,508) 11,470 9,962
Interest-bearing
liabilities:
Deposits 6,627 1,311 7,938 (6,994) 3,097 (3,897)FHLB advances and other borrowings 880 (153) 727 427 (799) (372) Total interest-bearing liabilities 7,507 1,158 8,665
(6,567) 2,298 (4,269)
Net change in net interest income$ (1,978) $ 8,729 $ 6,751 $ 5,059 $ 9,172 $ 14,231
(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 onCFBank'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 andCFBank'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. 53
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The following table summarizes
December 31, 2022
(Dollars in thousands)
Cash, unpledged securities and deposits
in other financial institutions $ 154,410 $ 168,953
Additional borrowing capacity at the FHLB 187,854
113,077
Additional borrowing capacity at the FRB 105,119
72,195
Unused commercial bank lines of credit 65,000 65,000 Total $ 512,383 $ 419,225
Cash, unpledged securities and deposits in other financial institutions
decreased
CFBank's additional borrowing capacity with the FHLB increased$74.8 million , or 66.1%, to$187.9 million atDecember 31, 2022 , compared to$113.1 million atDecember 31, 2021 . The increase is primarily attributed to an increase in pledged collateral.CFBank's additional borrowing capacity at the FRB increased$32.9 million , or 45.6%, to$105.1 million atDecember 31, 2022 from$72.2 million atDecember 31, 2021 .CFBank is eligible to participate in the FRB's primary credit program, providingCFBank 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 ofCFBank's loan portfolio orCFBank's financial performance, or a decrease in the balance of pledged collateral.
Deposits are obtained predominantly from the markets in whichCFBank'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, theFDIC , 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 thanCFBank . 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 fromCFBank or the sale of assets. Management believes that the Holding Company had adequate funds atDecember 31, 2022 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$390,000 . The subordinated debentures have a variable rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.85%. The total rate in effect was 7.58% atDecember 31, 2022 . Currently, the annual debt service on the Company's$10 million of fixed-to-floating rate subordinated notes is$700,000 . The subordinated notes have a fixed rate of 7.00% untilDecember 2023 at which time the interest rate will reset quarterly to a rate equal to the then current three-month LIBOR plus 4.14%. Prior toMay 21, 2021 , the Holding Company had a term loan in the original principal amount of$5.0 million with an additional$10.0 million revolving line-of-credit with a third-party bank. That credit facility was refinanced into a new$35.0 million facility onMay 21, 2021 . The credit facility is revolving untilMay 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% untilMay 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 toCFBank to support growth. AtDecember 31, 2022 , the Company had an outstanding balance, net of unamortized debt issuance costs, of$29.5 million on the facility. 54
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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 fromCFBank to the extent necessary to fund such dividends.The Holding Company is a legal entity that is separate and distinct fromCFBank , 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 byCFBank 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 2022. However, ifCFBank 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 ofCFBank's current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability forCFBank . Impact of Inflation The financial statements and related data presented herein have been prepared in accordance withU.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 18 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 onCFBank's economic value of equity (EVE), which is the difference between the estimated market value ofCFBank'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 andCFBank did not change existing strategies. AtDecember 31, 2022 ,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 byCFBank's Board of Directors. 55
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Economic Value of Equity
as a Percent of Assets
(CFBank only)
Basis Point Economic
Change in Rates Value Ratio
+400 8.1%
+300 8.7%
+200 9.2%
+100 9.9%
0 10.5%
-100 11.1%
-200 11.7%
-300 12.2%
-400 12.4%
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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CF BANKSHARES INC.
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