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.




	June 30, 2017		December 31, 2016
	( unaudited)
Commercial (1)	$	83,504	$	71,334
Real estate:
Single-family residential		95,724		92,544
Multi-family residential		34,445		34,291
Commercial		106,876		105,313
Construction		28,770		25,822
Consumer:
Home equity lines of credit		23,115		23,109
Other		373		637
Subtotal		372,807		353,050
Less: ALLL		(6,958)		(6,925)
Loans and leases, net	$	365,849	$	346,125

(1)

Includes $4,204 and $2,874 of commercial leases at June 30, 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 June 30, 2017 and December 31, 2016, CFBank held $39,170 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 and six months ended June 30, 2017:



	Three months ended June 30, 2017 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,768	$	866	$	629	$	2,491	$	654	$	504	$	30	$	6,942
Addition to (reduction in) provision for loan losses		-		89		96		(126)		(68)		37		(28)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		2		1		-		-		-		13		-		16
Ending balance	$	1,770	$	956	$	725	$	2,365	$	586	$	554	$	2	$	6,958



	Six months ended June 30, 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		204		9		(362)		6		54		(32)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		2		17		-		-		-		14		-		33
Ending balance	$	1,770	$	956	$	725	$	2,365	$	586	$	554	$	2	$	6,958

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 balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of June 30, 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	$	-	$	-	$	-	$	34	$	-	$	-	$	-	$	34
Collectively evaluated for impairment		1,770		956		725		2,331		586		554		2		6,924
Total ending allowance balance	$	1,770	$	956	$	725	$	2,365	$	586	$	554	$	2	$	6,958

Loans:
Individually evaluated for impairment	$	339	$	119	$	33	$	4,171	$	-	$	-	$	-	$	4,662
Collectively evaluated for impairment		83,165		95,605		34,412		102,705		28,770		23,115		373		368,145
Total ending loan balance	$	83,504	$	95,724	$	34,445	$	106,876	$	28,770	$	23,115	$	373	$	372,807

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 June 30, 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, and deferred loan fees and costs. The table presents accrual basis interest income recognized during the three and six months ended June 30, 2017. Cash payments of interest on these loans during the three and six months ended June 30, 2017 totaled $59 and $114, respectively.


							Three months ended				Six months ended
	As of June 30, 2017						June 30, 2017				June 30, 2017
	(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	$	1	$	1	$	-	$	2	$	-	$	5	$	-
Real estate:
Single-family residential		-		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
Commercial:
Non-owner occupied		-		-		-		-		-		-		-
Owner occupied		396		142		-		143		6		145		14
Total with no allowance recorded		397		143		-		145		6		150		14

With an allowance recorded:
Commercial (1)		338		338		-		342		3		348		6
Real estate:
Single-family residential (1)		119		119		-		119		2		120		3
Multi-family residential (1)		33		33		-		34		1		35		1
Commercial:
Non-owner occupied		3,001		3,001		26		3,004		45		3,009		78
Owner occupied		1,028		1,028		8		1,101		4		1,162		10
Total with an allowance recorded		4,519		4,519		34		4,600		55		4,674		98
Total	$	4,916	$	4,662	$	34	$	4,745	$	61	$	4,824	$	112

(1)

Allowance recorded is less than $1 resulting in rounding to zero.

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, and 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 during the three and six months ended June 30, 2016 totaled $84 and $161, respectively.


							Three months ended				Six months ended
	As of December 31, 2016						June 30, 2016				June 30, 2016
							(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	$	476	$	358	$	-	$	571	$	6	$	571	$	8
Real estate:
Single-family residential		-		-		-		161		-		161		-
Multi-family residential		37		37		-		1,529		23		1,534		47
Commercial:
Non-owner occupied		112		112		-		446		-		446		-
Owner occupied		871		350		-		365		13		367		22
Land		-		-		-		-		-		-		-
Total with no allowance recorded		1,496		857		-		3,072		42		3,079		77

With an allowance recorded:
Commercial		199		199		1		242		1		251		2
Real estate:
Single-family residential (1)		122		122		-		126		2		126		4
Multi-family residential		-		-		-		42		1		43		1
Commercial:
Non-owner occupied		2,068		2,068		19		2,206		33		2,211		66
Owner occupied		202		202		2		209		2		211		5
Land		-		-		-		232		4		237		8
Total with an allowance recorded		2,591		2,591		22		3,057		43		3,079		86
Total	$	4,087	$	3,448	$	22	$	6,129	$	85	$	6,158	$	163

(1)

Allowance recorded is less than $1 resulting in rounding to zero.

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




	June 30, 2017		December 31, 2016
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		124		263
Real estate:
Single-family residential		269		397
Commercial:
Owner occupied		638		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		44
Purchased for portfolio		67		-
Total nonaccrual		1,098		704
Total nonaccrual and nonperforming loans	$	1,098	$	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 June 30, 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 June 30, 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	$	20	$	-	$	-	$	20	$	83,484	$	124
Real estate:
Single-family residential		969		69		-		1,038		94,686		269
Multi-family residential		-		-		-		-		34,445		-
Commercial:
Non-owner occupied		103		-		-		103		64,129		-
Owner occupied		-		-		638		638		36,455		-
Land		-		-		-		-		5,551		-
Construction		80		-		-		80		28,690		-
Consumer:
Home equity lines of credit:
Originated for portfolio		15		177		-		192		22,309		-
Purchased for portfolio		37		-		67		104		510		-
Other		-		-		-		-		373		-
Total	$	1,224	$	246	$	705	$	2,175	$	370,632	$	393

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 June 30, 2017 and December 31, 2016, TDRs totaled $3,829 and $3,130, respectively. The Company allocated $28 and $22 of specific reserves to loans whose terms had been modified in TDRs as of June 30, 2017 and December 31, 2016, respectively. The Company had not committed to lend any additional amounts as of June 30, 2017 or December 31, 2016 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and six months ended June 30, 2017, one commercial real estate loan in the amount of $841 was modified as a TDR during the second quarter, where concessions were granted to a borrower experiencing financial difficulties. The loan was re-written at a lower interest rate than otherwise would have been offered on this credit grade in the current market. During the three and six months ended June 30, 2016, there were no loans modified as a TDR.

There were no TDRs in payment default or that became nonperforming during the period ended June 30, 2017. There was one nonperforming TDR that went into payment default during the period ended June 30, 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 June 30, 2017 and 2016 that did not meet the definition of a TDR. These loans had a total recorded investment of $7,296 and $10,408 as of June 30, 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 June 30, 2017 and December 31, 2016, nonaccrual TDRs were as follows:




	June 30, 2017		December 31, 2016
	(unaudited)
Commercial	$	124	$	144
Total	$	124	$	144

Nonaccrual loans at June 30, 2017 and December 31, 2016 do not include $3,705 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 June 30, 2017 and based on the most recent analysis performed follows. There were no loans or leases rated doubtful at June 30, 2017.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	4,200	$	78,620	$	345	$	339	$	83,504
Real estate:
Single-family residential		95,442		-		-		282		95,724
Multi-family residential		-		33,792		486		167		34,445
Commercial:
Non-owner occupied		92		61,559		1,740		841		64,232
Owner occupied		-		35,092		1,026		975		37,093
Land		-		3,373		-		2,178		5,551
Construction		2,221		26,549		-		-		28,770
Consumer:
Home equity lines of credit:
Originated for portfolio		22,421		-		-		80		22,501
Purchased for portfolio		409		-		-		205		614
Other		373		-		-		-		373
	$	125,158	$	238,985	$	3,597	$	5,067	$	372,807

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