NOTE 4 – LOANS AND LEASES

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.




	September 30, 2016		December 31, 2015
	( unaudited)
Commercial	$	70,128	$	43,744
Real estate:
Single-family residential		87,949		81,985
Multi-family residential		32,493		28,950
Commercial		100,695		96,488
Construction		21,251		24,662
Consumer:
Home equity lines of credit		23,074		21,837
Other		679		6,018
Subtotal		336,269		303,684
Less: ALLL		(6,893)		(6,620)
Loans and leases, net	$	329,376	$	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. 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 September 30, 2016 and December 31, 2015, CFBank held $43,056 and $43,517, respectively, of such loans which have been included in single-family residential loan totals above.

Allowance for Loan and Lease 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 and lease 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 nine months ended September 30, 2016:



	Three months ended September 30, 2016 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,458	$	875	$	694	$	2,567	$	478	$	534	$	7	$	6,613
Addition to (reduction in) provision for loan losses		252		(54)		(122)		(52)		25		(62)		33		20
Charge-offs		(5)		-		-		-		-		-		(1)		(6)
Recoveries		-		3		143		100		-		20		-		266
Ending balance	$	1,705	$	824	$	715	$	2,615	$	503	$	492	$	39	$	6,893



	Nine months ended September 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		448		223		(133)		(195)		(58)		4		(59)		230
Charge-offs		(123)		(94)		-		-		-		(53)		(1)		(271)
Recoveries		-		4		143		100		-		67		-		314
Ending balance	$	1,705	$	824	$	715	$	2,615	$	503	$	492	$	39	$	6,893

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



	Three months ended September 30, 2015 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,394	$	658	$	754	$	2,372	$	722	$	470	$	110	$	6,480
Addition to (reduction in) provision for loan losses		(121)		6		(4)		276		(120)		17		(4)		50
Charge-offs		-		(9)		-		-		-		-		-		(9)
Recoveries		-		-		-		(3)		-		4		-		1
Ending balance	$	1,273	$	655	$	750	$	2,645	$	602	$	491	$	106	$	6,522



	Nine months ended September 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		(90)		60		(68)		96		160		26		16		200
Charge-offs		(8)		(40)		-		(25)		-		-		(10)		(83)
Recoveries		25		1		-		33		-		24		6		89
Ending balance	$	1,273	$	655	$	750	$	2,645	$	602	$	491	$	106	$	6,522

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, 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	$	-	$	-	$	-	$	25	$	-	$	-	$	-	$	25
Collectively evaluated for impairment		1,705		824		715		2,590		503		492		39		6,868
Total ending allowance balance	$	1,705	$	824	$	715	$	2,615	$	503	$	492	$	39	$	6,893

Loans:
Individually evaluated for impairment	$	674	$	284	$	39	$	2,971	$	-	$	-	$	-	$	3,968
Collectively evaluated for impairment		69,454		87,665		32,454		97,724		21,251		23,074		679		332,301
Total ending loan balance	$	70,128	$	87,949	$	32,493	$	100,695	$	21,251	$	23,074	$	679	$	336,269

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 September 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 nine months ended September 30, 2016. Cash payments of interest on these loans during the three and nine months ended September 30, 2016 totaled $60 and $174, respectively.


							Three months ended				Nine months ended
	As of September 30, 2016						September 30, 2016				September 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	$	576	$	458	$	-	$	457	$	4	$	455	$	9
Real estate:
Single-family residential		322		161		-		161		-		161		-
Multi-family residential		-		-		-		-		-		-		-
Commercial:
Non-owner occupied		-		-		-		-		-		-		-
Owner occupied		877		356		-		358		13		363		35
Land		-		-		-		-		-		-		-
Total with no allowance recorded		1,775		975		-		976		17		979		44

With an allowance recorded:
Commercial		216		216		-		222		1		241		3
Real estate:
Single-family residential		123		123		-		124		2		126		6
Multi-family residential		39		39		-		40		1		42		2
Commercial:
Non-owner occupied		2,192		2,192		20		2,196		33		2,206		101
Owner occupied		205		205		2		206		2		209		7
Land		263		218		3		222		4		232		11
Total with an allowance recorded		3,038		2,993		25		3,010		43		3,056		130
Total	$	4,813	$	3,968	$	25	$	3,986	$	60	$	4,035	$	174

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 nine months ended September 30, 2015. Cash payments of interest during the three and nine months ended September 30, 2015 totaled $83 and $251, respectively.


							Three months ended				Nine months ended
	As of December 31, 2015						September 30, 2015				September 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	$	-	$	69	$	-	$	75	$	1
Real estate:
Single-family residential		322		161		-		163		-		167		-
Multi-family residential		1,545		1,545		-		1,557		24		1,565		71
Commercial:
Non-owner occupied		546		446		-		446		-		458		-
Owner occupied		688		167		-		173		10		176		29
Land		-		-		-		-		-		-		-
Total with no allowance recorded		3,137		2,347		-		2,408		34		2,441		101

With an allowance recorded:
Commercial		394		394		5		427		3		452		9
Real estate:
Single-family residential		128		128		1		130		1		131		5
Multi-family residential		45		45		-		47		1		49		2
Commercial:
Non-owner occupied		2,224		2,224		9		2,238		34		2,247		102
Owner occupied		363		363		1		369		5		373		16
Land		294		249		4		267		4		280		13
Total with an allowance recorded		3,448		3,403		20		3,478		48		3,532		147
Total	$	6,585	$	5,750	$	20	$	5,886	$	82	$	5,973	$	248

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




	September 30, 2016		December 31, 2015
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		276		224
Real estate:
Single-family residential		546		640
Commercial:
Non-owner occupied		-		446
Consumer:
Home equity lines of credit:
Originated for portfolio		46		20
Purchased for portfolio		-		95
Total nonaccrual		868		1,425
Total nonaccrual and nonperforming loans	$	868	$	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 September 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 September 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	$	-	$	-	$	119	$	119	$	70,009	$	157
Real estate:
Single-family residential		914		764		287		1,965		85,984		259
Multi-family residential		-		-		-		-		32,493		-
Commercial:
Non-owner occupied		-		-		-		-		58,251		-
Owner occupied		-		-		-		-		33,186		-
Land		-		-		-		-		9,258		-
Construction		-		-		-		-		21,251		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		46		46		22,253		-
Purchased for portfolio		70		-		-		70		705		-
Other		-		-		-		-		679		-
Total	$	984	$	764	$	452	$	2,200	$	334,069	$	416

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 September 30, 2016 and December 31, 2015, TDRs totaled $3,648 and $5,276, respectively. The Company allocated $25 and $20 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2016 and December 31, 2015, respectively. The Company had not committed to lend any additional amounts as of September 30, 2016 or December 31, 2015 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and nine months ended September 30, 2016, there was one commercial loan in the amount of $339 that was modified as a TDR, where concessions were granted to a borrower experiencing financial difficulty. During the three months ended September 30, 2015, there were no loans modified as a TDR. During the nine months ended September 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 September 30, 2015.

There was one nonperforming TDR that went into payment default during the nine months ended September 30, 2016. There were no TDRs in payment default or that became nonperforming during the period ended September 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 September 30, 2016 and 2015 that did not meet the definition of a TDR. These loans had a total recorded investment of $18,255 and $6,915 as of September 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 September 30, 2016 and December 31, 2015, nonaccrual TDRs were as follows:




	September 30, 2016		December 31, 2015
	(unaudited)
Commercial	$	157	$	195
Real estate:
Single-family residential		161		161
Total	$	318	$	356

Nonaccrual loans at September 30, 2016 and December 31, 2015 do not include $3,330 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 September 30, 2016 and based on the most recent analysis performed follows. There were no loans rated doubtful at September 30, 2016.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	5,961	$	63,370	$	123	$	674	$	70,128
Real estate:
Single-family residential		87,384		-		-		565		87,949
Multi-family residential		-		31,810		510		173		32,493
Commercial:
Non-owner occupied		118		55,458		1,802		873		58,251
Owner occupied		-		30,054		1,895		1,237		33,186
Land		-		6,803		-		2,455		9,258
Construction		4,470		16,781		-		-		21,251
Consumer:
Home equity lines of credit:
Originated for portfolio		22,167		-		-		132		22,299
Purchased for portfolio		630		-		-		145		775
Other		679		-		-		-		679
	$	121,409	$	204,276	$	4,330	$	6,254	$	336,269

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