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, 2018		December 31, 2017
Commercial (1)	$	126,887	$	101,975
Real estate:
Single-family residential		118,386		95,578
Multi-family residential		47,651		35,665
Commercial		173,435		111,866
Construction		61,792		42,862
Consumer:
Home equity lines of credit		23,961		25,054
Other		5,583		376
Subtotal		557,695		413,376
Less: ALLL		(7,012)		(6,970)
Loans and Leases, net	$	550,683	$	406,406

⁽¹⁾

Includes $5,403 and $6,008 of commercial leases at December 31, 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 December 31, 2018 and 2017, CFBank held $36,845 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 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, 2018 and 2017:


	December 31, 2018
			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		(167)		131		(48)		131		67		(209)		95		-
Charge-offs		-		(6)		-		-		-		-		-		(6)
Recoveries		2		24		-		-		-		22		-		48
Ending balance	$	1,819	$	1,061	$	612	$	2,274	$	739	$	410	$	97	$	7,012


	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

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, 2018:



			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	$	-	$	-	$	-	$	22	$	-	$	-	$	-	$	22
Collectively evaluated for impairment		1,819		1,061		612		2,252		739		410		97		6,990
Total ending allowance balance	$	1,819	$	1,061	$	612	$	2,274	$	739	$	410	$	97	$	7,012

Loans:
Individually evaluated for impairment	$	100	$	110	$	-	$	2,951	$	-	$	-	$	-	$	3,161
Collectively evaluated for impairment		126,787		118,276		47,651		170,484		61,792		23,961		5,583		554,534
Total ending loan balance	$	126,887	$	118,386	$	47,651	$	173,435	$	61,792	$	23,961	$	5,583	$	557,695

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 loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 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, deferred loan fees and costs. Cash payments of interest on these loans during the twelve months ended December 31, 2018 totaled $192.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial:
Owner occupied	$	379	$	125	$	-	$	130	$	21
Total with no allowance recorded		379		125		-		130		21

With an allowance recorded:
Commercial (1)		100		100		-		185		4
Real estate:
Single-family residential (1)		110		110		-		113		6
Commercial:
Non-owner occupied		2,826		2,826		22		2,837		157
Owner occupied		-		-		-		131		7
Total with an allowance recorded		3,036		3,036		22		3,266		174
Total	$	3,415	$	3,161	$	22	$	3,396	$	195

⁽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 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
Total with no allowance recorded		391		137		-		142		26

With an allowance recorded:
Commercial (1)		277		277		-		291		9
Real estate:
Single-family residential (1)		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

⁽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 as of December 31, 2018 and 2017:


	2018		2017
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		100		115
Real estate:
Single-family residential		167		253
Consumer:
Home equity lines of credit:
Purchased for portfolio		89		102
Other consumer		21		-
Total nonaccrual		377		470
Total 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 December 31, 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 December 31, 2018:


	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	$	-	$	-	$	-	$	-	$	126,887	$	100
Real estate:
Single-family residential		597		-		23		620		117,766		144
Multi-family residential		-		-		-		-		47,651		-
Commercial:
Non-owner occupied		-		-		-		-		122,465		-
Owner occupied		-		-		-		-		43,087		-
Land		-		-		-		-		7,883		-
Construction		-		-		-		-		61,792		-
Consumer:
Home equity lines of credit:
Originated for portfolio		474		-		-		474		23,119		-
Purchased for portfolio		-		33		-		33		335		89
Other		-		-		21		21		5,562		-
Total	$	1,071	$	33	$	44	$	1,148	$	556,547	$	333

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 December 31, 2018 and December 31, 2017, TDR’s totaled $3,161 and $3,386, respectively. The Company allocated $22 and $25 of specific reserves to loans modified in TDRs as of December 31, 2018 and 2017, respectively. The Company had not committed to lend additional amounts as of December 31, 2018 or 2017 to customers with outstanding loans that were classified as nonaccrual TDRs.

There were no loans modified as a TDR during the year ended December 31, 2018. 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.

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 TDRs described above resulted in no charge-offs during the years ended December 31, 2018 and December 31, 2017.

There were no TDR’s that went into payment default during the years ended December 31, 2018 and December 31, 2017.

The terms of certain other loans were modified during the years ended December 31, 2018 and 2017 that did not meet the definition of a TDR. These loans had a total recorded investment of $64,898 and $46,731 as of December 31, 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 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, 2018 and 2017, nonaccrual TDRs were as follows:




	2018		2017
Commercial	$	100	$	115
Total	$	100	$	115

Nonaccrual loans at December 31, 2018 and 2017 did not include $3,061 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 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, 2018 and based on the most recent analysis performed follows. There were no loans rated doubtful at December 31, 2018.


	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	123,369	$	2,651	$	867	$	126,887
Real estate:
Single-family residential		118,219		-		-		167		118,386
Multi-family residential		-		47,072		425		154		47,651
Commercial:
Non-owner occupied		76		119,843		1,701		845		122,465
Owner occupied		-		39,747		2,252		1,088		43,087
Land		-		7,883		-		-		7,883
Construction		3,279		58,513		-		-		61,792
Consumer:
Home equity lines of credit:
Originated for portfolio		23,525		-		-		68		23,593
Purchased for portfolio		279		-		-		89		368
Other		5,562		-		-		21		5,583
	$	150,940	$	396,427	$	7,029	$	3,299	$	557,695

The recorded investment in loans and leases by risk category and class of loans as of December 31, 2017 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

Leases:

The following lists the components of the net investment in direct financing leases (1):


	December 31, 2018		December 31, 2017
Total minimum lease payments to be received	$	6,045	$	6,838
Less: unearned income		(642)		(830)
Net investment in direct financing leases	$	5,403	$	6,008

⁽¹⁾

There were no initial direct costs associated with these leases

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


2019	$	793
2020		793
2021		793
2022		793
2023		1,563
Thereafter		1,310
	$	6,045