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.




	September 30, 2018		December 31, 2017
	(unaudited)
Commercial (1)	$	131,176	$	101,975
Real estate:
Single-family residential		93,982		95,578
Multi-family residential		48,400		35,665
Commercial		151,385		111,866
Construction		46,081		42,862
Consumer:
Home equity lines of credit		23,849		25,054
Other		5,661		376
Subtotal		500,534		413,376
Less: ALLL		(7,005)		(6,970)
Loans and leases, net	$	493,529	$	406,406

(1)

Includes $5,557 and $6,008 of commercial leases at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, CFBank held $13,466 and $37,665, 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 2017 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2018:



	Three months ended September 30, 2018 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,889	$	1,039	$	697	$	2,149	$	614	$	486	$	107	$	6,981
Addition to (reduction in) provision for loan losses		40		(20)		-		10		5		(25)		(10)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		19		-		-		-		5		-		24
Ending balance	$	1,929	$	1,038	$	697	$	2,159	$	619	$	466	$	97	$	7,005



	Nine months ended September 30, 2018 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,984	$	912	$	660	$	2,143	$	672	$	597	$	2	$	6,970
Addition to (reduction in) provision for loan losses		(57)		111		37		16		(53)		(149)		95		-
Charge-offs		-		(6)		-		-		-		-		-		(6)
Recoveries		2		21		-		-		-		18		-		41
Ending balance	$	1,929	$	1,038	$	697	$	2,159	$	619	$	466	$	97	$	7,005

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2017:



	Three months ended September 30, 2017 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,770	$	956	$	725	$	2,365	$	586	$	554	$	2	$	6,958
Addition to (reduction in) provision for loan losses		113		(20)		72		(246)		52		29		-		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		1		-		-		-		5		-		6
Ending balance	$	1,883	$	937	$	797	$	2,119	$	638	$	588	$	2	$	6,964



	Nine months ended September 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		234		184		81		(608)		58		83		(32)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		2		18		-		-		-		19		-		39
Ending balance	$	1,883	$	937	$	797	$	2,119	$	638	$	588	$	2	$	6,964

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 September 30, 2018 (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	$	-	$	-	$	-	$	24	$	-	$	-	$	-	$	24
Collectively evaluated for impairment		1,929		1,038		697		2,135		619		466		97		6,981
Total ending allowance balance	$	1,929	$	1,038	$	697	$	2,159	$	619	$	466	$	97	$	7,005

Loans:
Individually evaluated for impairment	$	201	$	112	$	-	$	3,038	$	-	$	-	$	-	$	3,351
Collectively evaluated for impairment		130,975		93,870		48,400		148,347		46,081		23,849		5,661		497,183
Total ending loan balance	$	131,176	$	93,982	$	48,400	$	151,385	$	46,081	$	23,849	$	5,661	$	500,534

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, 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 loans individually evaluated for impairment by class of loans as of and for the period ended September 30, 2018. 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 nine months ended September 30, 2018. Cash payments of interest on these loans during the three and nine months ended September 30, 2018 totaled $52 and $151, respectively.


							Three months ended				Nine months ended
	As of September 30, 2018						September 30, 2018				September 30, 2018
	(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:
Real estate:
Commercial:
Owner occupied	$	382	$	128	$	-	$	129	$	5		132		16
Total with no allowance recorded		382		128		-		129		5		132		16

With an allowance recorded:
Commercial (1)		201		201		-		202		3		212		11
Real estate:
Single-family residential (1)		112		112		-		112		2		114		5
Multi-family residential		-		-		-		-		-		-		-
Commercial:
Non-owner occupied		2,826		2,826		23		2,832		39		2,841		117
Owner occupied		84		84		1		150		2		175		6
Total with an allowance recorded		3,223		3,223		24		3,296		46		3,342		139
Total	$	3,605	$	3,351	$	24	$	3,425	$	51	$	3,474	$	155

(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 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, and deferred loan fees and costs. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2017. Cash payments of interest during the three and nine months ended September 30, 2017 totaled $52 and $164, respectively.


							Three months ended				Nine months ended
	As of December 31, 2017						September 30, 2017				September 30, 2017
							(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	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate:
Commercial:
Owner occupied		391		137		-		140		6		144		20
Total with no allowance recorded		391		137		-		140		6		144		20

With an allowance recorded:
Commercial		277		277		-		339		2		346		7
Real estate:
Single-family residential (1)		116		116		-		118		2		119		5
Multi-family residential		-		-		-		32		1		34		2
Commercial:
Non-owner occupied		2,856		2,856		24		2,989		42		3,001		120
Owner occupied		190		190		2		972		5		1,098		14
Total with an allowance recorded		3,439		3,439		26		4,450		52		4,598		148
Total	$	3,830	$	3,576	$	26	$	4,590	$	58	$	4,742	$	168

(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:




	September 30, 2018		December 31, 2017
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		104		115
Real estate:
Single-family residential		182		253
Consumer:
Home equity lines of credit:
Purchased for portfolio		91		102
Total nonaccrual		377		470
Total nonaccrual and nonperforming loans	$	377	$	470

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, 2018 or December 31, 2017.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of September 30, 2018 (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	$	-	$	-	$	-	$	-	$	131,176	$	104
Real estate:
Single-family residential		23		20		33		76		93,906		149
Multi-family residential		-		-		-		-		48,400		-
Commercial:
Non-owner occupied		-		-		-		-		96,587		-
Owner occupied		-		-		-		-		46,667		-
Land		-		-		-		-		8,131		-
Construction		-		-		-		-		46,081		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		23,453		-
Purchased for portfolio		34		-		-		34		362		91
Other		22		-		-		22		5,639		-
Total	$	79	$	20	$	33	$	132	$	500,402	$	344

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

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, 2018 and December 31, 2017, TDRs totaled $3,266 and $3,386, respectively. The Company allocated $24 and $26 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2018 and December 31, 2017, respectively. The Company had not committed to lend any additional amounts as of September 30, 2018 or December 31, 2017 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and nine months ended September 30, 2018 there were no loans modified as a TDR. During the three months ended September 30, 2017, there were no loans modified as a TDR. During the nine months ended September 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.

There were no TDRs in payment default or that became nonperforming during the quarters ended September 30, 2018 and September 30, 2017. 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 quarters ended September 30, 2018 and 2017 that did not meet the definition of a TDR. These loans had a total recorded investment of $10,210 and $10,843 as of September 30, 2018 and 2017, 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 a modification where no concessions were 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, 2018 and December 31, 2017, nonaccrual TDRs were as follows:




	September 30, 2018		December 31, 2017
	(unaudited)
Commercial	$	104	$	115
Total	$	104	$	115

Nonaccrual loans at September 30, 2018 and December 31, 2017 do not include $3,163 and $3,271, 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 September 30, 2018 and based on the most recent analysis performed follows. There were no loans or leases rated doubtful at September 30, 2018.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	128,587	$	2,388	$	201	$	131,176
Real estate:
Single-family residential		93,799		-		-		183		93,982
Multi-family residential		-		47,808		436		156		48,400
Commercial:
Non-owner occupied		77		93,975		1,701		834		96,587
Owner occupied		-		45,482		973		212		46,667
Land		-		8,131		-		-		8,131
Construction		2,946		43,135		-		-		46,081
Consumer:
Home equity lines of credit:
Originated for portfolio		23,344		38		-		71		23,453
Purchased for portfolio		306		-		-		90		396
Other		5,661		-		-		-		5,661
	$	126,133	$	367,156	$	5,498	$	1,747	$	500,534

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2017 follows. There were no loans or leases 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

Leases:

The following lists the components of the net investment in direct financing leases:


	September 30, 2018		December 31, 2017
	(unaudited)
Total minimum lease payments to be received	$	6,244	$	6,838
Less: unearned income		(687)		(830)
Net investment in direct financing leases	$	5,557	$	6,008

(1)

There were no initial direct costs associated with these leases.

The following summarizes the future minimum lease payments receivable in fiscal year 2018 and in subsequent fiscal years:


2018	$	198
2019		793
2020		793
2021		793
2022		793
Thereafter		2,874
	$	6,244