NOTE 4 – LOANS AND LEASES

The following table presents the recorded investment in loans and leases 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, 2017		December 31, 2016
	( unaudited)
Commercial (1)	$	85,929	$	71,334
Real estate:
Single-family residential		87,101		92,544
Multi-family residential		31,076		34,291
Commercial		107,489		105,313
Construction		32,696		25,822
Consumer:
Home equity lines of credit		23,243		23,109
Other		382		637
Subtotal		367,916		353,050
Less: ALLL		(6,942)		(6,925)
Loans and leases, net	$	360,974	$	346,125

(1)

Includes $2,806 and $2,874 of commercial leases at March 31, 2017 and December 31, 2016, respectively.

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 March 31, 2017 and December 31, 2016, CFBank held $34,286 and $46,919, 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 2016 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three months ended March 31, 2017:



	Three months ended March 31, 2017 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,647	$	735	$	716	$	2,727	$	580	$	486	$	34	$	6,925
Addition to (reduction in) provision for loan losses		121		115		(87)		(236)		74		17		(4)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		16		-		-		-		1		-		17
Ending balance	$	1,768	$	866	$	629	$	2,491	$	654	$	504	$	30	$	6,942

The following table presents the activity in the ALLL by portfolio segment for the three months ended March 31, 2016:



	Three months ended March 31, 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		106		50		17		(101)		(38)		50		(34)		50
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		-		-		-		-		46		-		46
Ending balance	$	1,486	$	741	$	722	$	2,609	$	523	$	570	$	65	$	6,716

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of March 31, 2017 (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		1,768		866		629		2,466		654		504		30		6,917
Total ending allowance balance	$	1,768	$	866	$	629	$	2,491	$	654	$	504	$	30	$	6,942

Loans:
Individually evaluated for impairment	$	475	$	120	$	35	$	3,463	$	-	$	-	$	-	$	4,093
Collectively evaluated for impairment		85,454		86,981		31,041		104,026		32,696		23,243		382		363,823
Total ending loan balance	$	85,929	$	87,101	$	31,076	$	107,489	$	32,696	$	23,243	$	382	$	367,916

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of December 31, 2016:



			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	$	1	$	-	$	-	$	21	$	-	$	-	$	-	$	22
Collectively evaluated for impairment		1,646		735		716		2,706		580		486		34		6,903
Total ending allowance balance	$	1,647	$	735	$	716	$	2,727	$	580	$	486	$	34	$	6,925

Loans:
Individually evaluated for impairment	$	557	$	122	$	37	$	2,732	$	-	$	-	$	-	$	3,448
Collectively evaluated for impairment		70,777		92,422		34,254		102,581		25,822		23,109		637		349,602
Total ending loan balance	$	71,334	$	92,544	$	34,291	$	105,313	$	25,822	$	23,109	$	637	$	353,050

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended March 31, 2017. 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, 2017. Cash payments of interest on these loans during the three months ended March 31, 2017 totaled $56.


							Three months ended
	As of March 31, 2017						March 31, 2017
	(unaudited)						(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	411	$	293	$	-	$	293	$	2
Real estate:
Single-family residential		-		-		-		-		-
Multi-family residential		-		-		-		-		-
Commercial:
Non-owner occupied		-		-		-		-		-
Owner occupied		760		344		-		394		12
Total with no allowance recorded		1,171		637		-		687		14

With an allowance recorded:
Commercial		182		182		-		188		1
Real estate:
Single-family residential		120		120		-		120		2
Multi-family residential		35		35		-		36		1
Commercial:
Non-owner occupied		2,171		2,171		17		2,173		32
Owner occupied		948		948		8		1,025		2
Total with an allowance recorded		3,456		3,456		25		3,542		38
Total	$	4,627	$	4,093	$	25	$	4,229	$	52

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended December 31, 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 months ended March 31, 2016. Cash payments of interest during the three months ended March 31, 2016 totaled $79.


							Three months ended
	As of December 31, 2016						March 31, 2016
							(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	476	$	358	$	-	$	28	$	-
Real estate:
Single-family residential		-		-		-		161		-
Multi-family residential		37		37		-		1,539		23
Commercial:
Non-owner occupied		112		112		-		446		-
Owner occupied		871		350		-		370		9
Land		-		-		-		-		-
Total with no allowance recorded		1,496		857		-		2,544		32

With an allowance recorded:
Commercial		199		199		1		701		2
Real estate:
Single-family residential		122		122		-		127		2
Multi-family residential		-		-		-		44		1
Commercial:
Non-owner occupied		2,068		2,068		19		2,217		33
Owner occupied		202		202		2		361		5
Land		-		-		-		242		4
Total with an allowance recorded		2,591		2,591		22		3,692		47
Total	$	4,087	$	3,448	$	22	$	6,236	$	79

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




	March 31, 2017		December 31, 2016
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		251		263
Real estate:
Single-family residential		274		397
Commercial:
Owner occupied		749		-
Consumer:
Home equity lines of credit:
Originated for portfolio		42		44
Purchased for portfolio		69		-
Total nonaccrual		1,385		704
Total nonaccrual and nonperforming loans	$	1,385	$	704

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, 2017 or December 31, 2016.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of March 31, 2017 (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	$	85,810	$	132
Real estate:
Single-family residential		503		-		-		503		86,598		274
Multi-family residential		-		-		-		-		31,076		-
Commercial:
Non-owner occupied		845		-		-		845		61,098		-
Owner occupied		-		-		749		749		36,683		-
Land		-		-		-		-		8,114		-
Construction		-		-		-		-		32,696		-
Consumer:
Home equity lines of credit:
Originated for portfolio		269		-		-		269		22,334		42
Purchased for portfolio		-		-		69		69		571		-
Other		-		-		-		-		382		-
Total	$	1,617	$	-	$	937	$	2,554	$	365,362	$	448

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2016:



	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	$	71,215	$	144
Real estate:
Single-family residential		284		49		106		439		92,105		291
Multi-family residential		-		-		-		-		34,291		-
Commercial:
Non-owner occupied		-		-		-		-		60,936		-
Owner occupied		269		600		-		869		34,891		-
Land		-		-		-		-		8,617		-
Construction		48		-		-		48		25,774		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		15		-		15		22,440		44
Purchased for portfolio		69		-		-		69		585		-
Other		-		-		-		-		637		-
Total	$	670	$	664	$	225	$	1,559	$	351,491	$	479

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 March 31, 2017 and December 31, 2016, TDRs totaled $3,027 and $3,130, respectively. The Company allocated $19 and $22 of specific reserves to loans whose terms had been modified in TDRs as of March 31, 2017 and December 31, 2016, respectively. The Company had not committed to lend any additional amounts as of March 31, 2017 or December 31, 2016 to customers with outstanding loans classified as nonaccrual TDRs.

During the three months ended March 31, 2017 and March 31, 2016, there were no loans modified as a TDR.

There were no TDRs in payment default or that became nonperforming during the quarter ended March 31, 2017 and March 31, 2016. 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, 2017 and 2016 that did not meet the definition of a TDR. These loans had a total recorded investment of $12,915 and $4,090 as of March 31, 2017 and 2016, 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, 2017 and December 31, 2016, nonaccrual TDRs were as follows:




	March 31, 2017		December 31, 2016
	(unaudited)
Commercial	$	131	$	144
Total	$	131	$	144

Nonaccrual loans at March 31, 2017 and December 31, 2016 do not include $2,896 and $2,986, 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 and leases by risk category and by class of loans and leases as of March 31, 2017 and based on the most recent analysis performed follows. There were no loans or leases rated doubtful at March 31, 2017.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	2,819	$	82,361	$	274	$	475	$	85,929
Real estate:
Single-family residential		86,813		-		-		288		87,101
Multi-family residential		-		30,411		496		169		31,076
Commercial:
Non-owner occupied		94		59,244		1,760		845		61,943
Owner occupied		-		35,302		1,037		1,093		37,432
Land		-		5,910		-		2,204		8,114
Construction		2,612		30,084		-		-		32,696
Consumer:
Home equity lines of credit:
Originated for portfolio		22,478		-		-		125		22,603
Purchased for portfolio		431		-		-		209		640
Other		382		-		-		-		382
	$	115,629	$	243,312	$	3,567	$	5,408	$	367,916

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2016 follows. There were no loans or leases rated doubtful at December 31, 2016.



	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	47	$	70,444	$	286	$	557	$	71,334
Real estate:
Single-family residential		92,130		-		-		414		92,544
Multi-family residential		-		33,615		505		171		34,291
Commercial:
Non-owner occupied		115		58,183		1,782		856		60,936
Owner occupied		-		33,493		1,048		1,219		35,760
Land		-		6,380		-		2,237		8,617
Construction		1,997		23,825		-		-		25,822
Consumer:
Home equity lines of credit:
Originated for portfolio		22,328		-		-		127		22,455
Purchased for portfolio		512		-		-		142		654
Other		637		-		-		-		637
	$	117,766	$	225,940	$	3,621	$	5,723	$	353,050