NOTE 4 – LOANS AND LEASES

The following table presents the recorded investment in loans and leases by portfolio segment. The recorded investment in loans and leases includes the principal balance outstanding adjusted for purchase premiums and discounts, and deferred loan fees and costs.



	December 31, 2017		December 31, 2016
Commercial (1)	$	101,975	$	71,334
Real estate:
Single-family residential		95,578		92,544
Multi-family residential		35,665		34,291
Commercial		111,866		105,313
Construction		42,862		25,822
Consumer:
Home equity lines of credit		25,054		23,109
Other		376		637
Subtotal		413,376		353,050
Less: ALLL		(6,970)		(6,925)
Loans and Leases, net	$	406,406	$	346,125

⁽¹⁾

Includes $6,008 and $2,874 of commercial leases at December 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 December 31, 2017 and 2016, CFBank held $37,665 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 and lease 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 of the Notes to Consolidated Financial Statements.

The following tables present the activity in the ALLL by portfolio segment for the years ended December 31, 2017 and 2016:


	December 31, 2017
			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		335		157		(56)		(584)		92		88		(32)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		2		20		-		-		-		23		-		45
Ending balance	$	1,984	$	912	$	660	$	2,143	$	672	$	597	$	2	$	6,970


	December 31, 2016
			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		390		149		(132)		(128)		19		(4)		(64)		230
Charge-offs		(123)		(147)		-		-		-		(53)		(1)		(324)
Recoveries		-		42		143		145		-		69		-		399
Ending balance	$	1,647	$	735	$	716	$	2,727	$	580	$	486	$	34	$	6,925

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on impairment method as of December 31, 2017:



			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	$	-	$	-	$	-	$	26	$	-	$	-	$	-	$	26
Collectively evaluated for impairment		1,984		912		660		2,117		672		597		2		6,944
Total ending allowance balance	$	1,984	$	912	$	660	$	2,143	$	672	$	597	$	2	$	6,970

Loans:
Individually evaluated for impairment	$	277	$	116	$	-	$	3,183	$	-	$	-	$	-	$	3,576
Collectively evaluated for impairment		101,698		95,462		35,665		108,683		42,862		25,054		376		409,800
Total ending loan balance	$	101,975	$	95,578	$	35,665	$	111,866	$	42,862	$	25,054	$	376	$	413,376

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on 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 year ended December 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. Cash payments of interest on these loans during the twelve months ended December 31. 2017 totaled $190.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial:
Owner occupied	$	391	$	137	$	-	$	142	$	26
Land		-		-		-		-		-
Total with no allowance recorded		391		137		-		142		26

With an allowance recorded:
Commercial		277		277		-		291		9
Real estate:
Single-family residential		116		116		-		118		6
Commercial:
Non-owner occupied		2,856		2,856		24		2,882		154
Owner occupied		190		190		2		194		9
Total with an allowance recorded		3,439		3,439		26		3,485		178
Total	$	3,830	$	3,576	$	26	$	3,627	$	204

The following table presents loans individually evaluated for impairment by class of loans as of and for the year 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. Cash payments of interest on these loans during the twelve months ended December 31. 2016 totaled $216.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	476	$	358	$	-	$	436	$	13
Real estate:
Multi-family residential		37		37		-		41		2
Commercial:
Non-owner occupied		112		112		-		114		8
Owner occupied		871		350		-		360		46
Total with no allowance recorded		1,496		857		-		951		69

With an allowance recorded:
Commercial		199		199		1		232		9
Real estate:
Single-family residential		122		122		-		125		7
Commercial:
Non-owner occupied		2,068		2,068		19		2,086		126
Owner occupied		202		202		2		208		10
Total with an allowance recorded		2,591		2,591		22		2,651		152
Total	$	4,087	$	3,448	$	22	$	3,602	$	221

The following table presents the recorded investment in nonperforming loans by class of loans as of December 31, 2017 and 2016:


	2017		2016
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		115		263
Real estate:
Single-family residential		253		397
Consumer:
Home equity lines of credit:
Originated for portfolio		-		44
Purchased for portfolio		102		-
Total nonaccrual		470		704
Total nonperforming loans	$	470	$	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 December 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 December 31, 2017:


	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	$	-	$	-	$	-	$	-	$	101,975	$	115
Real estate:
Single-family residential		1,610		27		104		1,741		93,837		149
Multi-family residential		-		-		-		-		35,665		-
Commercial:
Non-owner occupied		-		-		-		-		67,792		-
Owner occupied		-		-		-		-		38,787		-
Land		-		-		-		-		5,287		-
Construction		-		-		-		-		42,862		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		24,592		-
Purchased for portfolio		-		-		102		102		360		-
Other		24		-		-		24		352		-
Total	$	1,634	$	27	$	206	$	1,867	$	411,509	$	264

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 December 31, 2017 and December 31, 2016, TDR’s totaled $3,386 and $3,130, respectively. The Company allocated $25 and $22 of specific reserves to loans modified in TDRs as of December 31, 2017 and 2016, respectively. The Company had not committed to lend additional amounts as of December 31, 2017 or 2016 to customers with outstanding loans that were classified as nonaccrual TDRs.

There was one commercial real estate loan in the amount of $841 that was modified as a TDR during the year ended December 31, 2017, where concessions were granted to a borrower experiencing financial difficulty. The loan was re-written at a lower interest rate than otherwise would have been offered on this credit grade in the current market. There was one commercial loan in the amount of $239 that was modified as TDRs during the year ended December 31, 2016, where concessions were granted to a borrower experiencing financial difficulties.

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2017:



	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		1	$	841	$	841
Total		1	$	841	$	841

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2016:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		1	$	339	$	339
Total		1	$	339	$	339

The TDRs described above resulted in no charge-offs during the years ended December 31, 2017 and 2016, respectively.

There were no TDR’s that went into payment default during the year ended December 31, 2017. There was one nonperforming TDR that went into payment default during the year ending December 31, 2016.

The terms of certain other loans were modified during the year ended December 31, 2017 and 2016 that did not meet the definition of a TDR. These loans had a total recorded investment of $46,731 and $33,294 as of December 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 a payment 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 December 31, 2017 and 2016, nonaccrual TDRs were as follows:




	2017		2016
Commercial	$	115	$	144
Total	$	115	$	144

Nonaccrual loans at December 31, 2017 and 2016 did not include $3,271 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 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, condition 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 included in 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, doubtful or loss.

The recorded investment in loans and leases by risk category and by class of loans as of December 31, 2017 and based on the most recent analysis performed follows. There were no loans rated doubtful at December 31, 2017.


	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	98,829	$	2,869	$	277	$	101,975
Real estate:
Single-family residential		95,317		-		-		261		95,578
Multi-family residential		-		35,036		466		163		35,665
Commercial:
Non-owner occupied		88		65,161		1,711		832		67,792
Owner occupied		-		37,453		1,008		326		38,787
Land		-		5,287		-		-		5,287
Construction		2,239		40,623		-		-		42,862
Consumer:
Home equity lines of credit:
Originated for portfolio		24,516		-		-		76		24,592
Purchased for portfolio		360		-		-		102		462
Other		376		-		-		-		376
	$	122,896	$	282,389	$	6,054	$	2,037	$	413,376

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