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, and deferred loan fees and costs.



	March 31,		December 31,
	2015		2014

Commercial	$	47,778	$	46,532
Real estate:
Single-family residential		57,537		51,445
Multi-family residential		28,437		28,790
Commercial		87,445		91,119
Construction		28,161		23,641
Consumer:
Home equity lines of credit		18,271		16,898
Other		5,072		4,976
Subtotal		272,701		263,401
Less: ALLL		(6,442)		(6,316)
Loans, net	$	266,259	$	257,085

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 interest from Northpointe in 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 CFBank’s holding 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 an 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. Effective December 18, 2014, the participation agreement was amended and CFBank agreed to increase the level of interest in loans it purchases from Northpointe from 80% to 95% of the aforementioned loans, and therefore, Northpointe now maintains a 5% (reduced from 20%) ownership interest in each loan it participates. At March 31, 2015 and December 31, 2014, CFBank held $27,837 and $24,996, respectively, of such loans which have been included in single-family residential loan totals above.

Allowance for Loan Losses

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 2014 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three months ended March 31, 2015:



	Three months ended March 31, 2015
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,346	$	634	$	818	$	2,541	$	442	$	441	$	94	$	6,316
Addition to (reduction in) provision for loan losses		88		65		(125)		(77)		99		23		2		75
Charge-offs		(8)		-		-		-		-		-		(10)		(18)
Recoveries		25		1		-		33		-		4		6		69
Ending balance	$	1,451	$	700	$	693	$	2,497	$	541	$	468	$	92	$	6,442

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
	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		(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 balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2015:



			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	$	28	$	-	$	-	$	26	$	-	$	-	$	-	$	54
Collectively evaluated for impairment		1,423		700		693		2,471		541		468		92		6,388
Total ending allowance balance	$	1,451	$	700	$	693	$	2,497	$	541	$	468	$	92	$	6,442

Loans:
Individually evaluated for impairment	$	548	$	292	$	1,621	$	3,565	$	-	$	-	$	-	$	6,026
Collectively evaluated for impairment		47,230		57,245		26,816		83,880		28,161		18,271		5,072		266,675
Total ending loan balance	$	47,778	$	57,537	$	28,437	$	87,445	$	28,161	$	18,271	$	5,072	$	272,701

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, 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	$	29	$	-	$	1	$	34	$	-	$	-	$	-	$	64
Collectively evaluated for impairment		1,317		634		817		2,507		442		441		94		6,252
Total ending allowance balance	$	1,346	$	634	$	818	$	2,541	$	442	$	441	$	94	$	6,316

Loans:
Individually evaluated for impairment		630	$	296	$	1,631	$	3,695	$	-	$	-	$	-	$	6,252
Collectively evaluated for impairment		45,902		51,149		27,159		87,424		23,641		16,898		4,976		257,149
Total ending loan balance	$	46,532	$	51,445	$	28,790	$	91,119	$	23,641	$	16,898	$	4,976	$	263,401

The following table presents loans individually evaluated for impairment by class of loans at March 31, 2015. 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. The table presents accrual basis interest income recognized during the three months ended March 31, 2015. Cash payments of interest on these loans during the three months ended March 31, 2015 totaled $83.


							Three months ended
	As of March 31, 2015						March 31, 2015
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	76	$	68	$	-	$	69	$	1
Real estate:
Single-family residential		331		170		-		171		-
Multi-family residential		1,570		1,570		-		1,574		23
Commercial:
Non-owner occupied		564		463		-		468		-
Owner occupied		700		179		-		180		10
Land		-		-		-		-		-
Total with no allowance recorded		3,241		2,450		-		2,462		34

With an allowance recorded:
Commercial		480		480		28		490		3
Real estate:
Single-family residential		122		122		-		123		2
Multi-family residential		51		51		-		51		1
Commercial:
Non-owner occupied		2,253		2,253		9		2,256		33
Owner occupied		375		375		2		377		5
Land		339		295		15		297		5
Total with an allowance recorded		3,620		3,576		54		3,594		49
Total	$	6,861	$	6,026	$	54	$	6,056	$	83

The following table presents loans individually evaluated for impairment by class of loans at December 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. 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.


							Three months ended
	As of December 31, 2014						March 31, 2014
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	121	$	-	$	121	$	-
Real estate:
Single-family residential		334		173		-		185		-
Multi-family residential		1,579		1,579		-		-		-
Commercial:
Non-owner occupied		577		477		-		1,444		-
Owner occupied		704		183		-		1,044		-
Land		-		-		-		-		-
Total with no allowance recorded		3,329		2,533		-		2,794		-

With an allowance recorded:
Commercial		509		509		29		817		6
Real estate:
Single-family residential		123		123		-		126		2
Multi-family residential		52		52		1		1,736		1
Commercial:
Non-owner occupied		2,352		2,352		17		2,122		33
Owner occupied		380		380		2		394		5
Land		348		303		15		733		5
Total with an allowance recorded		3,764		3,719		64		5,928		52
Total	$	7,093	$	6,252	$	64	$	8,722	$	52

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




	March 31, 2015		December 31, 2014
Loans past due over 90 days still on accrual:
Real estate:
Commercial:
Non-owner occupied	$	366	$	-
Total over 90 days still on accrual loans	$	366	$	-
Nonaccrual loans:
Commercial		305		369
Real estate:
Single-family residential		723		549
Multi-family residential		-		-
Commercial:
Non-owner occupied		464		477
Owner occupied		-		-
Land		-		-
Consumer:
Home equity lines of credit:
Originated for portfolio		50		51
Purchased for portfolio		99		102
Other consumer		-		-
Total nonaccrual		1,641		1,548
Total nonaccrual and nonperforming loans	$	2,007	$	1,548

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 in the amount of $366 that was 90 days or more past due and still accruing interest at March 31, 2015 and there were no loans 90 days or more past due and still accruing interest at December 31, 2014.

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2015:


	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	$	16	$	793	$	-	$	809	$	46,969	$	305
Real estate:
Single-family residential		1,183		133		256		1,572		55,965		467
Multi-family residential		-		-		-		-		28,437		-
Commercial:
Non-owner occupied		-		-		366		366		48,973		464
Owner occupied		-		-		-		-		32,468		-
Land		-		-		-		-		5,638		-
Construction		-		-		-		-		28,161		-
Consumer:
Home equity lines of credit:
Originated for portfolio		43		-		-		43		16,852		50
Purchased for portfolio		-		-		-		-		1,376		99
Other		-		-		-		-		5,072		-
Total	$	1,242	$	926	$	622	$	2,790	$	269,911	$	1,385

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 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	$	18	$	-	$	121	$	139	$	46,393	$	248
Real estate:
Single-family residential		521		55		68		644		50,801		481
Multi-family residential		-		-		-		-		28,790		-
Commercial:
Non-owner occupied		115		-		-		115		48,879		477
Owner occupied		-		-		-		-		35,900		-
Land		-		-		-		-		6,225		-
Construction		52		-		-		52		23,589		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		51		51		15,414		-
Purchased for portfolio		30		102		-		132		1,301		102
Other		5		10		-		15		4,961		-
Total	$	741	$	167	$	240	$	1,148	$	262,253	$	1,308

Troubled Debt Restructurings (TDRs):

As of March 31, 2015 and December 31, 2014, TDRs totaled $5.5 million and $5.7 million, respectively. The Company allocated $54 and $64 of specific reserves to loans whose terms had been modified in TDRs as of March 31, 2015 and December 31, 2014, respectively. The Company had not committed to lend any additional amounts as of March 31, 2015 or December 31, 2014 to customers with outstanding loans classified as nonaccrual TDRs.

During the quarters ended March 31, 2015 and March 31, 2014, 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, 2015 and 2014. 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, 2015 and 2014 that did not meet the definition of a TDR. These loans had a total recorded investment of $2.5 million and $379 as of March 31, 2015 and 2014, 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, 2015 and December 31, 2014, nonaccrual TDRs were as follows:




	March 31, 2015		December 31, 2014

Commercial	$	237	$	249
Real estate:
Single-family residential		169		173
Multi-family residential		-		-
Commercial:
Non-owner occupied		-		-
Owner occupied		-		-
Total	$	406	$	422

Nonaccrual loans at March 31, 2015 and December 31, 2014 do not include $5,087 and $5,233, 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, 2015 and based on the most recent analysis performed follows. There were no loans rated doubtful at March 31, 2015.


	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	102	$	46,968	$	317	$	391	$	47,778
Real estate:
Single-family residential		56,786		-		-		751		57,537
Multi-family residential		-		27,706		-		731		28,437
Commercial:
Non-owner occupied		136		44,049		-		5,154		49,339
Owner occupied		-		29,910		1,484		1,074		32,468
Land		77		2,863		-		2,698		5,638
Construction		8,699		19,462		-		-		28,161
Consumer:
Home equity lines of credit:
Originated for portfolio		16,747		-		-		148		16,895
Purchased for portfolio		811		-		307		258		1,376
Other		5,072		-		-		-		5,072
	$	88,430	$	170,958	$	2,108	$	11,205	$	272,701

The recorded investment in loans by risk category and by class of loans as of December 31, 2014 follows. There were no loans rated doubtful at December 31, 2014.



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	1,088	$	44,543	$	441	$	460	$	46,532
Real estate:
Single-family residential		50,864		-		-		581		51,445
Multi-family residential		-		26,412		-		2,378		28,790
Commercial:
Non-owner occupied		139		43,547		89		5,219		48,994
Owner occupied		-		33,305		1,507		1,088		35,900
Land		78		3,417		-		2,730		6,225
Construction		8,645		14,996		-		-		23,641
Consumer:
Home equity lines of credit:
Originated for portfolio		15,316		-		-		149		15,465
Purchased for portfolio		857		-		313		263		1,433
Other		4,976		-		-		-		4,976
	$	81,963	$	166,220	$	2,350	$	12,868	$	263,401