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.




	June 30, 2016		December 31, 2015
	( unaudited)
Commercial	$	58,714	$	43,744
Real estate:
Single-family residential		91,849		81,985
Multi-family residential		32,949		28,950
Commercial		102,714		96,488
Construction		20,373		24,662
Consumer:
Home equity lines of credit		23,640		21,837
Other		738		6,018
Subtotal		330,977		303,684
Less: ALLL		(6,613)		(6,620)
Loans, net	$	324,364	$	297,064

Mortgage Purchase Program

CFBank has participated in a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation, since December 2012. Pursuant to the terms of a participation agreement, CFBank purchases participation interests in loans made by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S. The underlying loans are individually (MERS) registered loans which are held 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 holding period of the underlying loans, common credit risks (such as past due, impairment and TDR, nonperforming, and nonaccrual classification) are substantially reduced. Therefore, no allowance is allocated by CFBank to these loans. These loans are 100% risk rated for CFBank capital adequacy purposes. Under the participation agreement, CFBank agrees to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintains a 5% ownership interest in each loan it participates. At June 30, 2016 and December 31, 2015, CFBank held $44,218 and $43,517, 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 2015 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three and six months ended June 30, 2016:



	Three months ended June 30, 2016 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,486	$	741	$	722	$	2,609	$	523	$	570	$	65	$	6,716
Addition to (reduction in) provision for loan losses		90		227		(28)		(42)		(45)		16		(58)		160
Charge-offs		(118)		(94)		-		-		-		(53)		-		(265)
Recoveries		-		1		-		-		-		1		-		2
Ending balance	$	1,458	$	875	$	694	$	2,567	$	478	$	534	$	7	$	6,613



	Six months ended June 30, 2016 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,380	$	691	$	705	$	2,710	$	561	$	474	$	99	$	6,620
Addition to (reduction in) provision for loan losses		196		277		(11)		(143)		(83)		66		(92)		210
Charge-offs		(118)		(94)		-		-		-		(53)		-		(265)
Recoveries		-		1		-		-		-		47		-		48
Ending balance	$	1,458	$	875	$	694	$	2,567	$	478	$	534	$	7	$	6,613

The following table presents the activity in the ALLL by portfolio segment for the three months ended June 30, 2015:



	Three months ended June 30, 2015 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,451	$	700	$	693	$	2,497	$	541	$	468	$	92	$	6,442
Addition to (reduction in) provision for loan losses		(57)		(11)		61		(103)		181		(14)		18		75
Charge-offs		-		(31)		-		(25)		-		-		-		(56)
Recoveries		-		-		-		3		-		16		-		19
Ending balance	$	1,394	$	658	$	754	$	2,372	$	722	$	470	$	110	$	6,480



	Six months ended June 30, 2015 (unaudited)
			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		31		54		(64)		(180)		280		9		20		150
Charge-offs		(8)		(31)		-		(25)		-		-		(10)		(74)
Recoveries		25		1		-		36		-		20		6		88
Ending balance	$	1,394	$	658	$	754	$	2,372	$	722	$	470	$	110	$	6,480

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 June 30, 2016 (unaudited):



			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	$	2	$	1	$	-	$	25	$	-	$	-	$	-	$	28
Collectively evaluated for impairment		1,456		874		694		2,542		478		534		7		6,585
Total ending allowance balance	$	1,458	$	875	$	694	$	2,567	$	478	$	534	$	7	$	6,613

Loans:
Individually evaluated for impairment	$	806	$	286	$	1,566	$	3,449	$	-	$	-	$	-	$	6,107
Collectively evaluated for impairment		57,908		91,563		31,383		99,265		20,373		23,640		738		324,870
Total ending loan balance	$	58,714	$	91,849	$	32,949	$	102,714	$	20,373	$	23,640	$	738	$	330,977

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, 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	$	5	$	1	$	-	$	14	$	-	$	-	$	-	$	20
Collectively evaluated for impairment		1,375		690		705		2,696		561		474		99		6,600
Total ending allowance balance	$	1,380	$	691	$	705	$	2,710	$	561	$	474	$	99	$	6,620

Loans:
Individually evaluated for impairment	$	422	$	289	$	1,590	$	3,449	$	-	$	-	$	-	$	5,750
Collectively evaluated for impairment		43,322		81,696		27,360		93,039		24,662		21,837		6,018		297,934
Total ending loan balance	$	43,744	$	81,985	$	28,950	$	96,488	$	24,662	$	21,837	$	6,018	$	303,684

The following table presents loans individually evaluated for impairment by class of loans at June 30, 2016. 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 and six months ended June 30, 2016. Cash payments of interest on these loans during the three and six months ended June 30, 2016 totaled $84 and $161, respectively.


							Three months ended				Six months ended
	As of June 30, 2016						June 30, 2016				June 30, 2016
	(unaudited)						(unaudited)				(unaudited)
	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	$	688	$	569	$	-	$	571	$	6	$	571	$	8
Real estate:
Single-family residential		322		161		-		161		-		161		-
Multi-family residential		1,525		1,525		-		1,529		23		1,534		47
Commercial:
Non-owner occupied		546		446		-		446		-		446		-
Owner occupied		884		363		-		365		13		367		22
Land		-		-		-		-		-		-		-
Total with no allowance recorded		3,965		3,064		-		3,072		42		3,079		77

With an allowance recorded:
Commercial		237		237		2		242		1		251		2
Real estate:
Single-family residential		125		125		1		126		2		126		4
Multi-family residential		41		41		-		42		1		43		1
Commercial:
Non-owner occupied		2,203		2,203		20		2,206		33		2,211		66
Owner occupied		208		208		2		209		2		211		5
Land		274		229		3		232		4		237		8
Total with an allowance recorded		3,088		3,043		28		3,057		43		3,079		86
Total	$	7,053	$	6,107	$	28	$	6,129	$	85	$	6,158	$	163

The following table presents loans individually evaluated for impairment by class of loans at December 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 and six months ended June 30, 2015. Cash payments of interest during the three and six months ended June 30, 2015 totaled $84 and $166, respectively.


							Three months ended				Six months ended
	As of December 31, 2015						June 30, 2015				June 30, 2015
							(unaudited)				(unaudited)
	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	$	36	$	28	$	-	$	74	$	-	$	78	$	1
Real estate:
Single-family residential		322		161		-		176		-		178		-
Multi-family residential		1,545		1,545		-		1,565		24		1,569		47
Commercial:
Non-owner occupied		546		446		-		458		-		463		-
Owner occupied		688		167		-		176		10		178		19
Land		-		-		-		-		-		-		-
Total with no allowance recorded		3,137		2,347		-		2,449		34		2,466		67

With an allowance recorded:
Commercial		394		394		5		451		3		464		6
Real estate:
Single-family residential		128		128		1		122		2		123		4
Multi-family residential		45		45		-		49		1		50		2
Commercial:
Non-owner occupied		2,224		2,224		9		2,247		34		2,252		68
Owner occupied		363		363		1		373		5		375		10
Land		294		249		4		277		4		287		9
Total with an allowance recorded		3,448		3,403		20		3,519		49		3,551		99
Total	$	6,585	$	5,750	$	20	$	5,968	$	83	$	6,017	$	166

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




	June 30, 2016		December 31, 2015
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		292		224
Real estate:
Single-family residential		565		640
Commercial:
Non-owner occupied		446		446
Consumer:
Home equity lines of credit:
Originated for portfolio		-		20
Purchased for portfolio		94		95
Other consumer		-		-
Total nonaccrual		1,397		1,425
Total nonaccrual and nonperforming loans	$	1,397	$	1,425

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 June 30, 2016 or December 31, 2015.

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2016 (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	$	226	$	119	$	-	$	345	$	58,369	$	292
Real estate:
Single-family residential		1,201		41		214		1,456		90,393		351
Multi-family residential		-		-		-		-		32,949		-
Commercial:
Non-owner occupied		-		-		446		446		58,994		-
Owner occupied		-		-		-		-		32,926		-
Land		-		-		-		-		10,348		-
Construction		-		-		-		-		20,373		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		22,635		-
Purchased for portfolio		-		-		94		94		911		-
Other		-		-		-		-		738		-
Total	$	1,427	$	160	$	754	$	2,341	$	328,636	$	643

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 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	$	-	$	9	$	28	$	37	$	43,707	$	196
Real estate:
Single-family residential		598		161		148		907		81,078		492
Multi-family residential		-		-		-		-		28,950		-
Commercial:
Non-owner occupied		-		446		-		446		57,573		446
Owner occupied		-		-		-		-		30,169		-
Land		-		-		-		-		8,300		-
Construction		-		-		-		-		24,662		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		20,789		20
Purchased for portfolio		-		-		-		-		1,048		95
Other		-		-		-		-		6,018		-
Total	$	598	$	616	$	176	$	1,390	$	302,294	$	1,249

Troubled Debt Restructurings (TDRs):

From time to time, the terms of certain loans are modified as TDRs, where concessions are granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have 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 June 30, 2016 and December 31, 2015, TDRs totaled $4,999 and $5,276, respectively. The Company allocated $28 and $20 of specific reserves to loans whose terms had been modified in TDRs as of June 30, 2016 and December 31, 2015, respectively. The Company had not committed to lend any additional amounts as of June 30, 2016 or December 31, 2015 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and six months ended June 30, 2016, there were no loans modified as a TDR. During the three and six months ended June 30, 2015, there was one single-family residential loan in the amount of $9 and one home equity line of credit in the amount of $9 that were modified as TDRs, where concessions were granted to borrowers experiencing financial difficulties. The home equity line of credit was paid off prior to June 30, 2015.

There was one nonperforming TDR that went into payment default during the period ended June 30, 2016. There were no TDRs in payment default or that became nonperforming during the period ended June 30, 2015. 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 June 30, 2016 and 2015 that did not meet the definition of a TDR. These loans had a total recorded investment of $10,408 and $4,575 as of June 30, 2016 and 2015, 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 June 30, 2016 and December 31, 2015, nonaccrual TDRs were as follows:




	June 30, 2016		December 31, 2015
	(unaudited)
Commercial	$	172	$	195
Real estate:
Single-family residential		161		161
Multi-family residential		-		-
Commercial:
Non-owner occupied		-		-
Owner occupied		-		-
Total	$	333	$	356

Nonaccrual loans at June 30, 2016 and December 31, 2015 do not include $4,666 and $4,920, 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 June 30, 2016 and based on the most recent analysis performed follows. There were no loans rated doubtful at June 30, 2016.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	49	$	57,557	$	413	$	695	$	58,714
Real estate:
Single-family residential		91,263		-		-		586		91,849
Multi-family residential		-		32,260		514		175		32,949
Commercial:
Non-owner occupied		120		55,956		2,029		1,335		59,440
Owner occupied		-		30,649		1,914		363		32,926
Land		-		7,837		-		2,511		10,348
Construction		5,388		14,985		-		-		20,373
Consumer:
Home equity lines of credit:
Originated for portfolio		22,548		-		-		87		22,635
Purchased for portfolio		764		-		-		241		1,005
Other		738		-		-		-		738
	$	120,870	$	199,244	$	4,870	$	5,993	$	330,977

The recorded investment in loans by risk category and by class of loans as of December 31, 2015 follows. There were no loans rated doubtful at December 31, 2015.



	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	83	$	41,473	$	1,892	$	296	$	43,744
Real estate:
Single-family residential		81,318		-		-		667		81,985
Multi-family residential		2,777		25,466		528		179		28,950
Commercial:
Non-owner occupied		125		54,674		1,852		1,368		58,019
Owner occupied		-		26,923		3,079		167		30,169
Land		-		5,720		-		2,580		8,300
Construction		11,252		13,410		-		-		24,662
Consumer:
Home equity lines of credit:
Originated for portfolio		20,677		-		-		112		20,789
Purchased for portfolio		802		-		-		246		1,048
Other		2,172		3,846		-		-		6,018
	$	119,206	$	171,512	$	7,351	$	5,615	$	303,684