Loans And Leases

3 Months Ended

Mar. 31, 2023

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.




	March 31, 2023		December 31, 2022
	(unaudited)
Commercial ⁽¹⁾	$	430,264	$	427,423
Real estate:
Single-family residential		474,082		465,057
Multi-family residential		109,659		104,148
Commercial		391,658		375,092
Construction		188,356		184,122
Consumer:
Home equity lines of credit		36,567		30,748
Other		1,412		1,727
Subtotal		1,631,998		1,588,317
Less: ACL – Loans		(15,915)		(16,062)
Loans and leases, net	$	1,616,083	$	1,572,255

⁽¹⁾Includes $19,317 and $20,768 of commercial leases at March 31, 2023 and December 31, 2022, respectively.

‎

Included in Commercial loans at both March 31, 2023 and December 31, 2022, were $50 of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), authorized the SBA to temporarily guarantee loans under the PPP to provide funding to small businesses to pay certain payroll costs and benefits, and other expenses, during the COVID-19 pandemic. These loans are 100% guaranteed by the SBA and the full principal amount of the loans may qualify for forgiveness. The loans we originated have a maturity of two years, an interest rate of 1.00% and loan payments were deferred for the initial six months (which deferral period was subsequently extended to 10 months pursuant to the Paycheck Protection Program Flexibility Act of 2020). Using the PPP loans as collateral, CFBank funded nearly all of the PPP loans through loans obtained under the Paycheck Protection Program Liquidity Facility (“PPPLF”), which carried a low interest rate of 0.35%. At March 31, 2023 and December 31,2022, there were no loans pledged as collateral and all PPPLF borrowings were paid off. See Note 8 - FHLB Advances and Other Debt for additional information.

Allowance for Credit Losses on Loans (ACL – Loans)

As discussed in Note 1, effective January 1, 2023, the Company adopted 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 ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP (“Incurred Loss Model”).

The ACL - Loans is a valuation account that is deducted from the amortized cost basis of loans 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 allowance represents the Company's best estimate of current expected credit losses 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 allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the allowance for credit losses, 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.

The following table presents the activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2023 (unaudited).


	Three Months Ended March 31, 2023 (unaudited)
			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 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		(198)		235		(18)		13		54		127		54		267
Recoveries on loans		-		3		-		-		-		-		-		3
Loans charged off		(5)		-		-		-		-		-		(3)		(8)
Balances, March 31, 2023	$	5,438	$	3,194	$	1,045	$	4,123	$	1,679	$	331	$	105	$	15,915

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

Prior to the adoption of ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1,2023, the Company maintained an allowance for loan losses in accordance with the incurred loss model as disclosed in the Company’s 2022 Annual Report on Form 10-K.

The following table presents the activity in the allowance for loan and lease losses (ALLL) by portfolio segment for the three months ended March 31, 2022.



	Three months ended March 31, 2022 (unaudited)
			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		300		150		(40)		(400)		-		-		(10)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		8		-		-		-		4		-		12
Ending balance	$	4,427	$	3,506	$	787	$	4,634	$	1,744	$	276	$	146	$	15,520

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. Fair value on 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 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.


	March 31, 2023
	Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial	$	-	$	80	$	80	$	-
Real estate:
Single-family residential		638		-		638		-
Total nonaccrual loans	$	638	$	80	$	718	$	-

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the 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	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
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

‎

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022. 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, and deferred loan fees and costs. The table also presents the average recorded investment and accrual basis interest income recognized during the three ended March 31, 2022. Cash payments of interest during the three months ended March 31, 2022 totaled $30.


							Three months ended
	As of December 31, 2022						March 31, 2022
							(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Owner occupied	$	-	$	-	$	-	$	-	$	-
Total with no allowance recorded		-		-		-		-		-

With an allowance recorded:
Commercial ⁽¹⁾		371		80		-		165		1
Real estate:
Single-family residential ⁽¹⁾		95		95		-		99		1
Commercial:
Non-owner occupied		-		-		-		1,399		17
Total with an allowance recorded		466		175		-		1,663		19
Total	$	466	$	175	$	-	$	1,663	$	19

⁽¹⁾Allowance recorded in an amount less than $1 has been rounded down to zero.

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



	Non-Accrual Loans		Non-Accrual loans with no Allowance for Credit Losses
Commercial	$	80	$	80
Real estate:
Single-family residential		638		638
Total nonaccrual loans	$	718	$	718

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




	December 31, 2022

Loans past due over 90 days still on accrual	$	-
Nonaccrual loans:
Commercial		99
Real estate:
Single-family residential		641
Consumer:
Home equity lines of credit:
Originated for portfolio		18
Purchased for portfolio		3
Total nonaccrual		761
Total nonaccrual and nonperforming loans	$	761

Nonaccrual loans include both smaller balance 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 March 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 March 31, 2023 (unaudited):


	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Nonaccrual Loans Not > 90 days Past Due
Commercial	$	301	$	-	$	80	$	381	$	429,883	$	-
Real estate:
Single-family residential		-		-		564		564		473,518		74
Multi-family residential		-		-		-		-		109,659		-
Commercial:
Non-owner occupied		-		-		-		-		182,252		-
Owner occupied		-		-		-		-		178,629		-
Land		-		-		-		-		30,777		-
Construction		-		-		-		-		188,356		-
Consumer:
Home equity lines of credit:
Originated for portfolio		28		-		-		28		36,539		-
Purchased for portfolio		-		-		-		-		-		-
Other		-		-		-		-		1,412		-
Total	$	329	$	-	$	644	$	973	$	1,631,025	$	74

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		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Nonaccrual Loans Not > 90 days 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):

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 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 first quarter of 2023, the Company did not modify any loans.

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 those loans 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 whose terms had been 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 classified as nonaccrual TDRs.

During the three months ended March 31, 2022, there were no loans modified as a TDR.

There were no TDR’s that went into payment default during the quarter ended March 31, 2022. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms, at which time the loan is re-evaluated to determine whether an impairment loss should be recognized, either through a write-off or specific valuation allowance, so that the loan is reported, net, at the present value of estimated future cash flows, or at the fair value of collateral, less cost to sell, if repayment is expected solely from the collateral.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is 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 is 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:




	December 31, 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 were included in total impaired loans.

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 performed at least annually, and more often for loans with higher credit risk. Adjustments to loan risk ratings are made 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, conditions 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 primarily groups of homogeneous loans. Past due information is the primary credit indicator for groups of homogenous loans. Loans listed as pass-rated loans 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 or doubtful.

‎

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. 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 less than 89 days past due and accruing are performing and loans greater that 89 days past due or in nonaccrual are nonperforming loans.


	Term Loans (amortized cost basis by origination year)
(unaudited)	2023		2022		2021		2020		2019		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total
Commercial and Industrial
Pass	$	22,079	$	99,936	$	104,776	$	49,138	$	6,298	$	13,424	$	129,905	$	-	$	425,556
Doubtful		-		-		4,628		-		-		80		-		-		4,708
Total Commercial and industrial loans		22,079		99,936		109,404		49,138		6,298		13,504		129,905		-		430,264
Current period gross charge-offs		-		-		5		-		-		-		-		-		5
Real estate loans:
Single-family residential
Payment performance
Performing		15,362		137,473		243,617		47,787		10,505		18,700						473,444
Nonperforming		-		-		-		-		-		638		-		-		638
Total Single-family residential loans		15,362		137,473		243,617		47,787		10,505		19,338		-		-		474,082
Multi-family residential
Pass		4,806		8,840		51,062		7,389		15,945		21,617		-		-		109,659
Total Multi-family residential loans		4,806		8,840		51,062		7,389		15,945		21,617		-		-		109,659
Commercial:
Non-owner occupied
Pass		12,839		26,149		48,185		15,716		20,610		56,388		948		-		180,835
Special Mention		-		-		-		-		514		903		-		-		1,417
Total Non-owner occupied loans		12,839		26,149		48,185		15,716		21,124		57,291		948		-		182,252
Owner occupied
Pass		4,673		57,194		56,762		20,540		19,353		19,344		70		-		177,936
Special Mention		-		-		-		-		693		-		-		-		693
Total Owner occupied loans		4,673		57,194		56,762		20,540		20,046		19,344		70		-		178,629
Land
Pass		1,138		8,391		18,221		2,030		263		636		98		-		30,777
Total Land loans		1,138		8,391		18,221		2,030		263		636		98		-		30,777
Construction
Pass		4,937		65,953		94,773		8,938		-		213		13,542		-		188,356
Total Construction loans		4,937		65,953		94,773		8,938		-		213		13,542		-		188,356
Consumer:
Home equity lines of credit:
Payment performance
Performing		-		-		-		-		-		-		36,198		369		36,567
Nonperforming		-		-		-		-		-		-		-		-		-
Total Home equity lines of credit		-		-		-		-		-		-		36,198		369		36,567
Other
Payment performance
Performing		-		-		-		15		-		315		1,082		-		1,412
Nonperforming		-		-		-		-		-		-		-		-		-
Total Other consumer loans		-		-		-		15		-		315		1,082		-		1,412
Current period gross charge-offs		-		-		-		-		-		3		-		-		3
Total loans	$	65,834	$	403,936	$	622,024	$	151,553	$	74,181	$	132,258	$	181,843	$	369	$	1,631,998
Total current period gross charge-offs	$	-	$	-	$	5	$	-	$	-	$	3	$	-	$	-	$	8

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2022 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

Leases:

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


	March 31, 2023		December 31, 2022
	(unaudited)
Total minimum lease payments to be received	$	20,855	$	22,533
Less: Unearned income		(1,567)		(1,798)
Plus: Indirect initial costs		29		33
Net investment in direct financing leases	$	19,317	$	20,768

The following summarizes the future minimum lease payments receivable in fiscal year 2023 and in subsequent fiscal years:


2023, excluding the three months ended March 31, 2023	$	5,181
2024		6,358
2025		5,640
2026		3,000
2027		626
Thereafter		50
Total future minimum payments	$	20,855