Business Overview and History
CF Bankshares Inc. (CFBK) is a financial holding company that owns 100% of the stock of CFBank, National Association (CFBank). CFBank is a nationally chartered boutique commercial bank operating primarily in four regional markets in Ohio and Indiana. With a focus on serving the financial needs of closely held businesses and entrepreneurs, CFBank provides comprehensive commercial, retail, and mortgage lending services, as well as treasury management and deposit services.
CF Bankshares Inc. was originally formed in Ohio in 1892 as a federal savings association, known as Central Federal Savings and Loan Association. In 1998, the institution converted from a mutual to a stock form of organization. On December 1, 2016, CFBank converted from a federal savings association to a national bank, and the holding company became a registered bank holding company and elected financial holding company status with the Federal Reserve Board.
Prior to the 2016 conversion, the company was a registered savings and loan holding company. In 2020, the company underwent a name change from Central Federal Corporation to CF Bankshares Inc., reflecting its evolution and new strategic direction.
Throughout its history, CF Bankshares has focused on serving the financial needs of closely held businesses and entrepreneurs by providing comprehensive Commercial, Retail, and Mortgage Lending services with a local presence. The company has sought to differentiate itself from competitors by providing individualized service with direct customer access to decision-makers and ease of doing business.
In 2012, CF Bankshares completed a significant recapitalization program, selling 22,500 shares of common stock. This strategic move improved CFBank's capital levels and provided working capital for the holding company, positioning the organization for future growth. However, the change in stock ownership associated with this offering resulted in the company incurring an ownership change within the guidelines of Section 382 of the Internal Revenue Code of 1986, which limited the company's ability to utilize net operating loss carryforwards that arose before the 2012 stock offering.
Financial Performance and Ratios
For the fiscal year ended December 31, 2023, CF Bankshares reported annual revenue of $51.05 million and net income of $16.94 million, or $2.63 per diluted share. The company's return on average equity (ROE) was 10.91% and its return on average assets (ROA) was 0.82% for the year. Net interest margin, a key profitability metric, stood at 2.65% in 2023. The company generated annual operating cash flow of $18.05 million and annual free cash flow of $17.39 million.
For the most recent quarter ended September 30, 2024, CF Bankshares reported quarterly revenue of $29.99 million and net income of $4.27 million. This represents a decrease from the same period in 2023, when the company reported net income of $12.70 million, or $1.97 per diluted share, for the first nine months of the year. The decrease in net income was primarily due to a $4.00 million increase in the provision for credit losses and a $1.80 million decrease in net interest income, partially offset by a $731,000 increase in noninterest income.
As of December 31, 2023, CF Bankshares had total assets of $2.06 billion, total deposits of $1.74 billion, and total stockholders' equity of $155.37 million. The company's Tier 1 risk-based capital ratio, a measure of financial strength, was 12.17% at the end of 2023, well above the regulatory requirement of 8.50% to be considered a "well-capitalized" institution.
Liquidity
Looking at the company's liquidity position as of September 30, 2024, CF Bankshares had $235.86 million in cash, unpledged securities, and deposits in other financial institutions. The company also had significant additional borrowing capacity, including $172.43 million from the Federal Home Loan Bank, $138.07 million from the Federal Reserve Bank, and $65.00 million in unused commercial bank lines of credit. This strong liquidity profile provides the company with the flexibility to support its growth initiatives and navigate potential economic uncertainties.
As of December 31, 2023, the company had $130.26 million in total debt and $155.37 million in stockholders' equity, indicating a relatively balanced capital structure.
Business Segments and Operations
CF Bankshares operates primarily in Ohio and Indiana, with offices in Franklin County, Delaware County, Cuyahoga County, Summit County, and Hamilton County in Ohio, as well as Marion County in Indiana. The company's business is divided into three main segments: Commercial Lending, Retail Lending, and Mortgage Banking.
Commercial Lending: CFBank's commercial lending activities focus on providing loans and equipment leases to closely-held businesses and entrepreneurs. As of September 30, 2024, the commercial loan portfolio, which includes commercial and industrial (C&I) loans as well as commercial real estate (CRE) loans, totaled $432.92 million, representing 25% of the total loan portfolio. The bank's commercial lending activities are diversified across various industries, including retail, healthcare, manufacturing, and professional services.
Retail Lending: CFBank's retail lending operations encompass single-family residential mortgages, multi-family residential loans, and home equity lines of credit (HELOCs). As of September 30, 2024, the single-family residential mortgage portfolio stood at $461.16 million, the multi-family residential portfolio was $176.55 million, and the HELOC portfolio was $40.93 million. These retail lending products are offered to individuals and investors within CFBank's regional markets.
Mortgage Banking: In addition to its retail lending activities, CFBank also participates in the mortgage banking business, originating and selling single-family residential mortgage loans in the secondary market. During the nine months ended September 30, 2024, the bank originated $31.93 million in mortgage loans held for sale and recognized $287,000 in net gains on the sale of these loans.
Deposit Products and Services: To support its lending activities, CFBank offers a range of deposit products and services, including checking accounts, savings accounts, money market accounts, and certificates of deposit. As of September 30, 2024, total deposits stood at $1.75 billion, with $257.71 million in noninterest-bearing accounts and $1.49 billion in interest-bearing accounts.
Navigating Challenges and Capitalizing on Opportunities
In 2024, CF Bankshares faced a notable challenge when its primary federal regulator, the Office of the Comptroller of the Currency (OCC), assigned CFBank a 'Needs to Improve' CRA rating. The company believes this rating was primarily due to its legacy direct-to-consumer residential mortgage business, which it has since strategically scaled down in favor of a greater focus on lending in its regional markets.
To address this issue, CF Bankshares has taken proactive steps to remediate the legacy CRA concerns, including changes to its branch network and other operational adjustments. While the 'Needs to Improve' CRA rating remains in place, the company is subject to additional requirements and conditions with respect to certain activities, including acquisitions and the commencement of new business lines.
Despite this regulatory challenge, CF Bankshares has continued to capitalize on growth opportunities in its core commercial banking operations. In the first nine months of 2024, the company reported a 1.4% increase in net loans and leases, driven by a $45.8 million increase in multi-family loan balances and a $14.8 million increase in commercial real estate loan balances.
Furthermore, CF Bankshares has strategically diversified its revenue streams by investing in various limited partnerships that sponsor affordable housing projects and federal historic projects. These investments, which are included in the company's other assets, are intended to earn an adequate return of capital through the receipt of tax credits and assist the company in achieving its Community Reinvestment Act goals.
Risks and Outlook
As with any financial institution, CF Bankshares is subject to various risks, including credit risk, interest rate risk, liquidity risk, and regulatory risk. The company's performance is closely tied to economic conditions in its primary markets of Ohio and Indiana, and any significant deterioration in these regional economies could adversely impact the company's financial results.
Additionally, the company's ability to maintain and grow its deposit base, as well as its ability to effectively manage its cost of funds, are critical to its profitability. Increased competition for deposits or a rise in market interest rates could put pressure on the company's net interest margin. This is evident in the decrease of the bank's net interest margin from 2.65% for the nine months ended September 30, 2023, to 2.38% for the same period in 2024, driven by rising interest rates and increased funding costs.
Despite these risks, CF Bankshares remains cautiously optimistic about its future prospects. The company's strategic shift towards commercial banking, coupled with its investments in affordable housing and historic tax credit projects, are expected to drive continued growth and enhance its overall financial performance.
Furthermore, the company's strong capital position and ample liquidity provide a solid foundation to weather potential economic headwinds and capitalize on new opportunities as they arise. CF Bankshares' management team remains focused on prudently managing the company's risks while pursuing sustainable growth strategies to create long-term value for its shareholders.
Conclusion
CF Bankshares Inc. (CFBK) has demonstrated its ability to navigate challenging market conditions and capitalize on growth opportunities throughout its long history. The company's strategic shift towards commercial banking, coupled with its investments in tax credit projects, position it for continued success, despite the recent regulatory hurdle of a 'Needs to Improve' CRA rating.
With a strong capital position, ample liquidity, and a seasoned management team, CF Bankshares is well-equipped to weather potential economic headwinds and pursue new avenues for growth. As the company continues to execute its strategic initiatives, investors will be closely monitoring its financial performance and ability to create long-term value for shareholders.
The company's focus on serving the financial needs of small to medium-sized businesses and entrepreneurs in its regional markets through its Commercial, Retail, and Mortgage Lending operations provides a solid foundation for future growth. However, the bank's performance will continue to be influenced by factors such as interest rate environments, economic conditions, and credit quality within its loan portfolio. As CF Bankshares navigates these challenges and opportunities, it remains committed to its core mission of providing personalized financial services to its target markets while striving to improve its regulatory standing and financial performance.