NOTE 4 – LOANS

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



	March 31,		December 31,
	2014		2013

Commercial	$	43,105	$	37,526
Real estate:
Single-family residential		25,169		32,219
Multi-family residential		28,671		32,197
Commercial		82,466		83,752
Construction		17,306		11,465
Consumer:
Home equity lines of credit		15,377		14,851
Other		2,571		860
Subtotal		214,665		212,870
Less: ALLL		(5,763)		(5,729)

Loans, net	$	208,902	$	207,141

Commercial loans included $14,371 and $12,918, respectively, of commercial lines of credit which required interest only payments at March 31, 2014 and December 31, 2013.

Home equity lines of credit included $12,983 and $12,144, respectively, of loans which required interest only payments at March 31, 2014 and December 31, 2013.

Mortgage Purchase Program

On December 11, 2012, CFBank entered into a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation. Through a participation agreement, CFBank agreed to purchase an 80% interest from Northpointe fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S. The participation agreement provides for CFBank to purchase individually (MERS registered) loans from Northpointe and hold them until funded by the end investor. The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions such as Wells Fargo Bank. This process on average takes approximately 14 days. Given the short term nature of each of these individual loans common credit risks such as the following are substantially reduced: past due, impairment and TDR, nonperforming, and nonaccrual classification, therefore no allowance is allocated to these loans. NorthPointe maintains a 20% ownership interest in each loan it participates. The agreement further calls for full control to be relinquished by the Broker to NorthPointe and its Participants with recourse to the broker after 120 days, at the sole discretion of Northpointe. As such, these purchased loans are classified as portfolio loans. These loans are 100% risk rated for CFBank capital adequacy purposes. At March 31, 2014 and December 31, 2013, CFBank held $4,998 and $12,743, respectively, of such loans which have been included in single-family residential loan totals above.

The ALLL is a valuation allowance for probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors described in Note 1 to the consolidated financial statements in the Company’s 2013 Annual Report to Stockholders incorporated by reference into our 2013 Annual Report on Form 10-K.

The following table presents the activity in the ALLL by portfolio segment for the three months ended March 31, 2014:


	Three months ended March 31, 2014
			Real Estate								Consumer
			Single-		Multi-						Home Equity
	Commercial		family		family		Commercial		Construction		lines of credit		Other		Total

Beginning balance	$	1,759	$	120	$	1,262	$	2,325	$	119	$	139	$	5	$	5,729
Addition to (reduction in) provision for loan losses		(175)		38		196		(265)		259		(35)		2		20
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		3		1		-		4		-		5		1		14
Ending balance	$	1,587	$	159	$	1,458	$	2,064	$	378	$	109	$	8	$	5,763

The following table presents the activity in the ALLL by portfolio segment for the three months ended March, 2013:


	Three months ended March 31, 2013
			Real Estate								Consumer
			Single-		Multi-						Home Equity
	Commercial		family		family		Commercial		Construction		lines of credit		Other		Total

Beginning balance	$	1,311	$	332	$	1,396	$	1,946	$	-	$	241	$	11	$	5,237
Addition to (reduction in) provision for loan losses		81		(94)		179		197		1		(23)		(15)		326
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		17		1		29		54		-		2		16		119
Ending balance	$	1,409	$	239	$	1,604	$	2,197	$	1	$	220	$	12	$	5,682

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2014:



			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	$	487	$	-	$	369	$	163	$	-	$	-	$	-	$	1,019
Collectively evaluated for impairment		1,100		159		1,089		1,901		378		109		8		4,744
Total ending allowance balance	$	1,587	$	159	$	1,458	$	2,064	$	378	$	109	$	8	$	5,763

Loans:
Individually evaluated for impairment	$	926	$	311	$	1,725	$	5,706	$	-	$	-	$	-	$	8,668
Collectively evaluated for impairment		42,179		24,858		26,946		76,760		17,306		15,377		2,571		205,997
Total ending loan balance	$	43,105	$	25,169	$	28,671	$	82,466	$	17,306	$	15,377	$	2,571	$	214,665

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2013:



			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	$	532	$	-	$	402	$	191	$	-	$	-	$	-	$	1,125
Collectively evaluated for impairment		1,227		120		860		2,134		119		139		5		4,604
Total ending allowance balance	$	1,759	$	120	$	1,262	$	2,325	$	119	$	139	$	5	$	5,729

Loans:
Individually evaluated for impairment		992	$	317	$	1,759	$	5,845	$	-	$	-	$	-	$	8,913
Collectively evaluated for impairment		36,534		31,902		30,438		77,907		11,465		14,851		860		203,957
Total ending loan balance	$	37,526	$	32,219	$	32,197	$	83,752	$	11,465	$	14,851	$	860	$	212,870

The following table presents loans individually evaluated for impairment by class of loans at March 31, 2014. The unpaid principal balance is the contractual principal balance outstanding. The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, deferred loan fees and costs and includes accrued interest. The table presents accrual basis interest income recognized during the three months ended March 31, 2014. Cash payments of interest during the three months ended March 31, 2014 totaled $54.


	As of March 31, 2014						Three months ended March 31, 2014
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	120	$	-	$	121	$	-
Real estate:
Single-family residential		346		185		-		185		-
Multi-family residential		-		-		-		-		-
Commercial:
Non-owner occupied		2,009		1,440		-		1,444		-
Owner occupied		1,987		1,036		-		1,044		-
Land		-		-		-		-		-
Total with no allowance recorded		4,477		2,781		-		2,794		-

With an allowance recorded:
Commercial		806		806		487		817		6
Real estate:
Single-family residential		126		126		-		126		2
Multi-family residential		1,725		1,725		369		1,736		1
Commercial:
Non-owner occupied		2,117		2,117		44		2,122		33
Owner occupied		392		392		7		394		5
Land		766		721		112		733		5
Total with an allowance recorded		5,932		5,887		1,019		5,928		52
Total	$	10,409	$	8,668	$	1,019	$	8,722	$	52

The following table presents loans individually evaluated for impairment by class of loans at December 31, 2013. The unpaid principal balance is the contractual principal balance outstanding. The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, deferred loan fees and costs and includes accrued interest. The table presents accrual basis interest income recognized during the three months ended March 31, 2013. Cash payments of interest during the three months ended March 31, 2013 totaled $57.


	As of December 31, 2013						Three months ended March 31, 2013
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	120	$	-	$	172	$	-
Real estate:
Single-family residential		352		191		-		-		-
Multi-family residential		-		-		-		1,860		-
Commercial:
Non-owner occupied		2,022		1,453		-		1,928		-
Owner occupied		2,021		1,070		-		1,219		-
Land		-		-		-		-		-
Total with no allowance recorded		4,530		2,834		-		5,179		-

With an allowance recorded:
Commercial		872		872		532		884		5
Real estate:
Single-family residential		126		126		-		128		2
Multi-family residential		1,759		1,759		402		280		1
Commercial:
Non-owner occupied		2,158		2,158		46		2,230		34
Owner occupied		397		397		7		393		6
Land		812		767		138		386		6
Total with an allowance recorded		6,124		6,079		1,125		4,301		54
Total	$	10,654	$	8,913	$	1,125	$	9,480	$	54

The following table presents the recorded investment in nonaccrual loans by class of loans:



	March 31,		December 31,
	2014		2013
Nonaccrual loans:
Commercial	$	523	$	563
Real estate:
Single-family residential		463		479
Multi-family residential		1,669		1,701
Commercial:
Non-owner occupied		1,440		1,453
Owner occupied		1,036		1,070
Land		381		420
Consumer:
Home equity lines of credit:
Originated for portfolio		52		52
Total nonaccrual and nonperforming loans	$	5,564	$	5,738

Nonaccrual loans include both smaller balance single-family mortgage and consumer loans 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, 2014 or December 31, 2013.

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2014:


	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	$	-	$	9	$	121	$	130	$	42,975	$	402
Real estate:
Single-family residential		334		61		354		749		24,420		109
Multi-family residential		548		-		-		548		28,123		1,669
Commercial:
Non-owner occupied		-		-		923		923		41,506		517
Owner occupied		-		-		-		-		34,691		1,036
Land		-		-		381		381		4,965		-
Construction		309		-		-		309		16,997		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		13,535		52
Purchased for portfolio		-		-		-		-		1,842		-
Other		42		-		-		42		2,529		-
Total	$	1,233	$	70	$	1,779	$	3,082	$	211,583	$	3,785

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2013:



	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	$	-	$	-	$	121	$	121	$	37,405	$	442
Real estate:
Single-family residential		352		268		247		867		31,352		232
Multi-family residential		-		-		-		-		32,197		1,701
Commercial:
Non-owner occupied		-		-		923		923		42,199		530
Owner occupied		-		-		-		-		35,202		1,070
Land		-		-		420		420		5,008		-
Construction		-		-		-		-		11,465		-
Consumer:
Home equity lines of credit:
Originated for portfolio		52		-		-		52		12,930		52
Purchased for portfolio		123		-		-		123		1,746		-
Other		2		11		-		13		847		-
Total	$	529	$	279	$	1,711	$	2,519	$	210,351	$	4,027

Troubled Debt Restructurings (TDRs):

As of March 31, 2014 and December 31, 2013, TDRs totaled $5.9 million and $6.1 million, respectively. The Company allocated $918 and $998 of specific reserves to loans whose terms had been modified in TDRs as of March 31, 2014 and December 31, 2013, respectively. The Company had not committed to lend any additional amounts as of March 31, 2014 or December 31, 2013 to customers with outstanding loans classified as nonaccrual TDRs.

During the quarter ended March 31, 2014 and March 31, 2013, no loans were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties.

There were no TDRs in payment default or that became nonperforming during the period ended March 31, 2014 and 2013. 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.

The terms of certain other loans were modified during the quarter ended March 31, 2014 and 2013 that did not meet the definition of a TDR. These loans had a total recorded investment of $379 and $6,635 as of March 31, 2014 and 2013, respectively. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties, a delay in payments that was considered to be insignificant or there were no concessions granted.

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 March 31, 2014 and December 31, 2013, nonaccrual TDRs were as follows:



	March 31,		December 31,
	2014		2013
Commercial	$	402	$	442
Real estate:
Single-family residential		185		190
Multi-family residential		1,668		1,701
Commercial:
Non-owner occupied		-		-
Owner occupied		224		238
Total	$	2,479	$	2,571

Nonaccrual loans at March 31, 2014 and December 31, 2013 do not include $3,435 and $3,517, respectively, of TDRs where customers have established a sustained period of repayment performance, generally six months, the 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.

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 recorded investment in loans by risk category and by class of loans as of March 31, 2014 and based on the most recent analysis performed follows. There were no loans rated doubtful at March 31, 2014.


	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	196	$	41,431	$	586	$	892	$	43,105
Real estate:
Single-family residential		24,653		-		-		516		25,169
Multi-family residential		-		26,180		-		2,491		28,671
Commercial:
Non-owner occupied		159		37,243		519		4,508		42,429
Owner occupied		-		31,219		858		2,614		34,691
Land		86		2,011		-		3,249		5,346
Construction		5,295		12,011		-		-		17,306
Consumer:
Home equity lines of credit:
Originated for portfolio		13,383		-		-		152		13,535
Purchased for portfolio		1,265		-		409		168		1,842
Other		2,571		-		-		-		2,571
	$	47,608	$	150,095	$	2,372	$	14,590	$	214,665

The recorded investment in loans by risk category and by class of loans as of December 31, 2013 follows. There were no loans rated doubtful at December 31, 2013.



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	228	$	35,424	$	921	$	953	$	37,526
Real estate:
Single-family residential		31,685		-		-		534		32,219
Multi-family residential		-		29,667		-		2,530		32,197
Commercial:
Non-owner occupied		3,170		34,834		556		4,561		43,121
Owner occupied		-		31,489		1,045		2,669		35,203
Land		87		2,023		-		3,318		5,428
Construction		2,115		9,350		-		-		11,465
Consumer:
Home equity lines of credit:
Originated for portfolio		12,828		-		-		154		12,982
Purchased for portfolio		1,285		-		414		170		1,869
Other		860		-		-		-		860
	$	52,258	$	142,787	$	2,936	$	14,889	$	212,870