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.



	September 30,		December 31,
	2014		2013

Commercial	$	49,773	$	37,526
Real estate:
Single-family residential		40,477		32,219
Multi-family residential		29,881		32,197
Commercial		94,314		83,752
Construction		20,259		11,465
Consumer:
Home equity lines of credit		16,466		14,851
Other		3,254		860
Subtotal		254,424		212,870
Less: ALLL		(6,256)		(5,729)
Loans, net	$	248,168	$	207,141

Commercial loans included $24,931 and $12,918, respectively, of commercial lines of credit which required interest only payments at September 30, 2014 and December 31, 2013.

Home equity lines of credit included $14,439 and $12,144, respectively, of loans which required interest only payments at September 30, 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 of 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 past due, impairment and TDR, nonperforming and nonaccrual classification) are substantially reduced and, therefore no allowance is allocated to these loans. Northpointe maintains a 20% ownership interest in each loan it participates. The participation agreement further calls for full control to be relinquished by the mortgage 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 September 30, 2014 and December 31, 2013, CFBank held $14,999 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 Annual Report on Form 10-K for the year ended December 31, 2013.

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2014:



	Three months ended September 30, 2014
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,605	$	196	$	1,211	$	2,231	$	474	$	113	$	41	$	5,871
Addition to (reduction in) provision for loan losses		174		179		(147)		(88)		(103)		49		11		75
Charge-offs		(18)		-		-		-		-		-		-		(18)
Recoveries		-		1		-		320		-		7		-		328
Ending balance	$	1,761	$	376	$	1,064	$	2,463	$	371	$	169	$	52	$	6,256



	Nine months ended September 30, 2014
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity 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		17		254		(198)		(188)		252		21		45		203
Charge-offs		(18)		-		-		(2)		-		(9)		-		(29)
Recoveries		3		2		-		328		-		18		2		353
Ending balance	$	1,761	$	376	$	1,064	$	2,463	$	371	$	169	$	52	$	6,256

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2013:



	Three months ended September 30, 2013
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,449	$	368	$	1,730	$	2,157	$	19	$	331	$	11	$	6,065
Addition to (reduction in) provision for loan losses		159		(93)		19		44		62		(113)		(2)		76
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		9		1		1		4		-		13		2		30
Ending balance	$	1,617	$	276	$	1,750	$	2,205	$	81	$	231	$	11	$	6,171



	Nine months ended September 30, 2013
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity 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		271		(59)		267		197		81		(11)		(20)		726
Charge-offs		-		-		-		-		-		(17)		-		(17)
Recoveries		35		3		87		62		-		18		20		225
Ending balance	$	1,617	$	276	$	1,750	$	2,205	$	81	$	231	$	11	$	6,171

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 September 30, 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	$	410	$	1	$	305	$	102	$	-	$	-	$	-	$	818
Collectively evaluated for impairment		1,351		375		759		2,361		371		169		52		5,438
Total ending allowance balance	$	1,761	$	376	$	1,064	$	2,463	$	371	$	169	$	52	$	6,256

Loans:
Individually evaluated for impairment	$	865	$	302	$	1,658	$	3,609	$	-	$	-	$	-	$	6,434
Collectively evaluated for impairment		48,908		40,175		28,223		90,705		20,259		16,466		3,254		247,990
Total ending loan balance	$	49,773	$	40,477	$	29,881	$	94,314	$	20,259	$	16,466	$	3,254	$	254,424

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 September 30, 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 and nine months ended September 30, 2014. Cash payments of interest during the three and nine months ended September 30, 2014 totaled $52 and $157.


							Three months ended				Nine months ended
	As of September 30, 2014						September 30, 2014				September 30, 2014
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	121	$	-	$	121	$	-	$	121	$	-
Real estate:
Single-family residential		339		177		-		178		-		181		-
Multi-family residential		-		-		-		-		-		-		-
Commercial:
Non-owner occupied		590		490		-		495		-		508		-
Owner occupied		718		197		-		201		-		215		-
Land		177		151		-		152		2		-		7
Total with no allowance recorded		1,959		1,136		-		1,147		2		1,025		7

With an allowance recorded:
Commercial		744		744		410		750		6		783		17
Real estate:
Single-family residential		125		125		1		125		2		125		5
Multi-family residential		1,658		1,658		305		1,670		-		1,703		3
Commercial:
Non-owner occupied		2,087		2,087		57		2,092		33		2,107		100
Owner occupied		385		385		10		386		6		390		16
Land		318		299		35		300		3		593		8
Total with an allowance recorded		5,317		5,298		818		5,323		50		5,701		149
Total	$	7,276	$	6,434	$	818	$	6,470	$	52	$	6,726	$	156

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 and nine months ended September 30, 2013. Cash payments of interest during the three and nine months ended September 30, 2013 totaled $54 and $169, respectively.


							Three months ended				Nine months ended
	As of December 31, 2013						September 30, 2013				September 30, 2013
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	120	$	-	$	248	$	-	$	297	$	-
Real estate:
Single-family residential		352		191		-		-		-		-		-
Multi-family residential		-		-		-		178		-		187		-
Commercial:
Non-owner occupied		2,022		1,453		-		1,496		-		1,905		-
Owner occupied		2,021		1,070		-		1,370		-		1,418		-
Land		-		-		-		-		-		-		-
Total with no allowance recorded		4,530		2,834		-		3,292		-		3,807		-

With an allowance recorded:
Commercial		872		872		532		793		7		831		20
Real estate:
Single-family residential		126		126		-		477		2		478		6
Multi-family residential		1,759		1,759		402		1,866		1		1,903		3
Commercial:
Non-owner occupied		2,158		2,158		46		2,177		35		2,199		104
Owner occupied		397		397		7		162		6		163		18
Land		812		767		138		368		5		377		17
Total with an allowance recorded		6,124		6,079		1,125		5,843		56		5,951		168
Total	$	10,654	$	8,913	$	1,125	$	9,135	$	56	$	9,758	$	168

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




	September 30, 2014		December 31, 2013
Loans past due over 90 days still on accrual:
Real estate:
Commercial:
Non-owner occupied	$	187	$	-
Total over 90 days still on accrual loans		187		-
Nonaccrual loans:
Commercial		506		563
Real estate:
Single-family residential		570		479
Multi-family residential		1,604		1,701
Commercial:
Non-owner occupied		490		1,453
Owner occupied		197		1,070
Land		128		420
Consumer:
Home equity lines of credit:
Originated for portfolio		51		52
Total nonaccrual		3,546		5,738
Total nonaccrual and nonperforming loans	$	3,733	$	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 was one commercial real estate loan totaling $187 that was 90 days or more past due and still accruing interest at September 30, 2014 and none at December 31, 2013 included in the table above.

The following table presents the aging of the recorded investment in past due loans by class of loans as of September 30, 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	$	-	$	-	$	121	$	121	$	49,652	$	385
Real estate:
Single-family residential		1,161		13		299		1,473		39,004		271
Multi-family residential		-		-		-		-		29,881		1,604
Commercial:
Non-owner occupied		379		-		187		566		51,041		490
Owner occupied		-		-		-		-		37,192		197
Land		-		-		128		128		5,387		-
Construction		-		-		-		-		20,259		-
Consumer:
Home equity lines of credit:
Originated for portfolio		51		-		-		51		14,856		51
Purchased for portfolio		-		120		-		120		1,439		-
Other		42		-		-		42		3,212		-
Total	$	1,633	$	133	$	735	$	2,501	$	251,923	$	2,998

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 September 30, 2014 and December 31, 2013, TDRs totaled $5.7 million and $6.1 million, respectively. The Company allocated $797 and $998 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2014 and December 31, 2013, respectively. The Company had not committed to lend any additional amounts as of September 30, 2014 or December 31, 2013 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and nine months ended September 30, 2014, no loans were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties.

During the three months ended September 30, 2013, there were two commercial loans modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties. The modified terms included converting a revolving line of credit to a 10-month term loan with a 36-month amortization and a change in the stated interest rate of the loan from 4.75% to 6.75%. The other modification consolidated two existing TDRs into one loan with a 5-year term amortizing over 15 years and a change in the stated interest rates, of 6% and 5.5%, to 5%. These TDRs had associated reserves of $76.

During the nine months ended September 30, 2013, the terms of three loans were modified as TDRs where concessions were granted to borrowers experiencing financial difficulties. In addition to the loans described in the preceding paragraph, one single-family residential loan was modified as a TDR. The modified terms included a reduction in the stated interest rate of the loan from 6.5% to 3.5%, for a period of six months, and a deferral of two interest payments to the end of the loan. The impact to the income statement was approximately $5. These TDRs had associated reserves of $143.

There were no TDRs in payment default or that became nonperforming during the period ended September 30, 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 September 30, 2014 and 2013 that did not meet the definition of a TDR. These loans had a total recorded investment of $2,709 and $4,026 as of September 30, 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 September 30, 2014 and December 31, 2013, nonaccrual TDRs were as follows:




	September 30, 2014		December 31, 2013
Commercial	$	385	$	442
Real estate:
Single-family residential		177		190
Multi-family residential		1,604		1,701
Commercial:
Non-owner occupied		-		-
Owner occupied		197		238
Total	$	2,363	$	2,571

Nonaccrual loans at September 30, 2014 and December 31, 2013 do not include $3,332 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 September 30, 2014 and based on the most recent analysis performed follows. There were no loans rated doubtful at September 30, 2014.


	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	160	$	48,458	$	473	$	682	$	49,773
Real estate:
Single-family residential		39,862		-		-		615		40,477
Multi-family residential		-		27,469		-		2,412		29,881
Commercial:
Non-owner occupied		143		46,043		120		5,301		51,607
Owner occupied		-		34,620		1,530		1,042		37,192
Land		79		2,502		-		2,934		5,515
Construction		8,760		11,499		-		-		20,259
Consumer:
Home equity lines of credit:
Originated for portfolio		14,756		-		-		151		14,907
Purchased for portfolio		1,078		-		317		164		1,559
Other		3,254		-		-		-		3,254
	$	68,092	$	170,591	$	2,440	$	13,301	$	254,424

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