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, 2020		December 31, 2019
	(unaudited)
Commercial (1)	$	331,273	$	170,646
Real estate:
Single-family residential		140,635		120,256
Multi-family residential		45,856		39,229
Commercial		275,153		247,543
Construction		71,679		67,652
Consumer:
Home equity lines of credit		20,481		20,941
Other		2,124		4,174
Subtotal		887,201		670,441
Less: ALLL		(15,492)		(7,138)
Loans and leases, net	$	871,709	$	663,303

⁽¹⁾

Includes $4,297 and $4,779 of commercial leases at September 30, 2020 and December 31, 2019, respectively.

Included in Commercial loans at September 30, 2020, were $122.9 million of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program, the PPP, to provide funding to small businesses to pay certain payroll costs and benefits, and other expenses, during the COVID-19 pandemic. These loans are 100% guaranteed by the SBA and the full principal amount of the loans may qualify for forgiveness. The loans we originated have a maturity of two years, an interest rate of 1.00% and loan payments are deferred for the initial six months (which the deferral period was subsequently extended to 10 months pursuant to the Paycheck Protection Program Flexibility Act of 2020). The majority of these loans have been pledged as collateral on borrowings under the FRB Paycheck Protection Program Lending Facility (“PPPLF”). See Note 8- FHLB Advances and Other Debt for additional information.

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, 2020 and December 31, 2019, CFBank held $24,569 and $26,046, 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 2019 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2020:



	Three months ended September 30, 2020 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	2,664	$	999	$	567	$	4,534	$	1,024	$	263	$	56	$	10,107
Addition to (reduction in) provision for loan losses		610		500		-		4,400		250		-		(10)		5,750
Charge-offs		-		(350)		-		-		-		(21)		-		(371)
Recoveries		-		1		-		-		-		5		-		6
Ending balance	$	3,274	$	1,150	$	567	$	8,934	$	1,274	$	247	$	46	$	15,492



	Nine months ended September 30, 2020 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	2,054	$	948	$	447	$	2,604	$	759	$	265	$	61	$	7,138
Addition to (reduction in) provision for loan losses		1,330		605		120		6,330		515		(10)		(15)		8,875
Charge-offs		(110)		(408)		-		-		-		(21)		-		(539)
Recoveries		-		5		-		-		-		13		-		18
Ending balance	$	3,274	$	1,150	$	567	$	8,934	$	1,274	$	247	$	46	$	15,492

The following table presents the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2019:



	Three months ended September 30, 2019 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,969	$	1,014	$	562	$	2,339	$	759	$	309	$	77	$	7,029
Addition to (reduction in) provision for loan losses		70		(125)		(25)		130		-		(50)		-		-
Charge-offs		-		-		-		-		-		-		(6)		(6)
Recoveries		-		2		-		-		-		32		-		34
Ending balance	$	2,039	$	891	$	537	$	2,469	$	759	$	291	$	71	$	7,057



	Nine months ended September 30, 2019 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,819	$	1,061	$	612	$	2,274	$	739	$	410	$	97	$	7,012
Addition to (reduction in) provision for loan losses		220		(175)		(75)		195		20		(165)		(20)		-
Charge-offs		-		-		-		-		-		-		(6)		(6)
Recoveries		-		5		-		-		-		46		-		51
Ending balance	$	2,039	$	891	$	537	$	2,469	$	759	$	291	$	71	$	7,057

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, 2020 (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	$	-	$	-	$	-	$	23	$	-	$	-	$	-	$	23
Collectively evaluated for impairment		3,274		1,150		567		8,911		1,274		247		46		15,469
Total ending allowance balance	$	3,274	$	1,150	$	567	$	8,934	$	1,274	$	247	$	46	$	15,492

Loans:
Individually evaluated for impairment	$	80	$	105	$	-	$	2,733	$	-	$	-	$	-	$	2,918
Collectively evaluated for impairment		331,193		140,530		45,856		272,420		71,679		20,481		2,124		884,283
Total ending loan balance	$	331,273	$	140,635	$	45,856	$	275,153	$	71,679	$	20,481	$	2,124	$	887,201

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, 2019:



			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	$	1	$	-	$	33	$	-	$	-	$	-	$	35
Collectively evaluated for impairment		2,053		947		447		2,571		759		265		61		7,103
Total ending allowance balance	$	2,054	$	948	$	447	$	2,604	$	759	$	265	$	61	$	7,138

Loans:
Individually evaluated for impairment	$	85	$	107	$	-	$	4,420	$	-	$	-	$	-	$	4,612
Collectively evaluated for impairment		170,561		120,149		39,229		243,123		67,652		20,941		4,174		665,829
Total ending loan balance	$	170,646	$	120,256	$	39,229	$	247,543	$	67,652	$	20,941	$	4,174	$	670,441

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended September 30, 2020. 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, 2020. Cash payments of interest on these loans during the three and nine months ended September 30, 2020 totaled $51 and $105, respectively.


							Three months ended				Nine months ended
	As of September 30, 2020						September 30, 2020				September 30, 2020
	(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	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total with no allowance recorded		-		-		-		-		-		-		-

With an allowance recorded:
Commercial (1)		80		80		-		80		2		111		8
Real estate:
Single-family residential (1)		105		105		-		105		1		106		3
Commercial:
Non-owner occupied		2,733		2,733		23		2,728		38		2,730		113
Total with an allowance recorded		2,918		2,918		23		2,913		41		2,947		124
Total	$	2,918	$	2,918	$	23	$	2,913	$	41	$	2,947	$	124

⁽¹⁾

Allowance recorded in an amount less than $1 has been rounded down to zero.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019. 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, 2019. Cash payments of interest during the three and nine months ended September 30, 2019 totaled $44 and $132, respectively.


							Three months ended				Nine months ended
	As of December 31, 2019						September 30, 2019				September 30, 2019
							(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:
Owner occupied	$	-	$	-	$	-	$	121	$	4	$	122	$	10
Total with no allowance recorded		-		-		-		121		4		122		10

With an allowance recorded:
Commercial		85		85		1		90		-		94		-
Real estate:
Single-family residential		107		107		1		108		1		109		4
Commercial:
Non-owner occupied		4,420		4,420		33		4,474		38		4,113		116
Total with an allowance recorded		4,612		4,612		35		4,672		39		4,316		120
Total	$	4,612	$	4,612	$	35	$	4,793	$	43	$	4,438	$	130

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




	September 30, 2020		December 31, 2019
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		-		85
Real estate:
Single-family residential		441		550
Commercial:
Non-owner occupied		-		1,689
Consumer:
Home equity lines of credit:
Originated for portfolio		13		36
Purchased for portfolio		73		79
Other consumer		-		-
Total nonaccrual		527		2,439
Total nonaccrual and nonperforming loans	$	527	$	2,439

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, 2020 or December 31, 2019.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of September 30, 2020 (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	$	-	$	-	$	-	$	-	$	331,273	$	-
Real estate:
Single-family residential		444		-		331		775		139,860		110
Multi-family residential		-		-		-		-		45,856		-
Commercial:
Non-owner occupied		-		-		-		-		157,817		-
Owner occupied		-		-		-		-		89,693		-
Land		-		-		-		-		27,643		-
Construction		-		-		-		-		71,679		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		130		-		130		20,158		13
Purchased for portfolio		-		47		-		47		146		73
Other		-		-		-		-		2,124		-
Total	$	444	$	177	$	331	$	952	$	886,249	$	196

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2019:



	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	$	-	$	71	$	-	$	71	$	170,575	$	85
Real estate:
Single-family residential		2,453		261		426		3,140		117,116		124
Multi-family residential		-		-		-		-		39,229		-
Commercial:
Non-owner occupied		-		-		1,689		1,689		138,762		-
Owner occupied		-		-		-		-		81,871		-
Land		-		-		-		-		25,221		-
Construction		304		-		-		304		67,348		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		22		22		20,713		14
Purchased for portfolio		-		-		-		-		206		79
Other		-		-		-		-		4,174		-
Total	$	2,757	$	332	$	2,137	$	5,226	$	665,215	$	302

Short-term Loan Deferrals

Under the CARES Act, financial institutions are permitted to not classify loan modifications as TDRs that were related to the impact of COVID-19 if:

The modifications were made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the public health emergency, and

The underlying loans were not more than 30 days past due as of December 31, 2019.

We implemented a loan modification program in accordance with the CARES Act to provide temporary relief to borrowers that meet the requirements under the CARES Act. The program allows for deferral of payments for up to 90 days, which we may extend for up to an additional 90 days at our option. The deferred payments and accrued interest during the deferral period are due and payable on or before the maturity of the loans. At September 30, 2020, loans with an outstanding balance of approximately $24 million were on temporary deferrals. Under the provisions of the CARES Act, none of these loans were considered a TDR at September 30, 2020.

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, 2020 and December 31, 2019, TDRs totaled $2,918 and $2,923, respectively. The Company allocated $23 and $22 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2020 and December 31, 2019, respectively. The Company had not committed to lend any additional amounts as of September 30, 2020 or December 31, 2019 to customers with outstanding loans classified as nonaccrual TDRs.

During the three months ended September 30, 2020 and September 30, 2019, there were no loans modified as a TDR.

There were no TDRs in payment default or that became nonperforming during the quarters ended September 30, 2020 and September 30, 2019. 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 nine months ended September 30, 2020 and 2019 that did not meet the definition of a TDR. These loans had a total recorded investment of $46,680 and $12,707 as of September 30, 2020 and 2019, respectively. These balances do not include the loans granted temporary payment deferrals in accordance with the CARES Act. 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, 2020 there were no nonaccrual TDRs and at December 31, 2019, nonaccrual TDRs were as follows:




	September 30, 2020		December 31, 2019
	(unaudited)
Commercial	$	-	$	85
Total	$	-	$	85

Nonaccrual loans at September 30, 2020 and December 31, 2019 do not include $2,918 and $2,838, 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, 2020 and based on the most recent analysis performed follows. There were no loans or leases rated as Doubtful at September 30, 2020.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	327,501	$	857	$	2,915	$	331,273
Real estate:
Single-family residential		140,194		-		-		441		140,635
Multi-family residential		-		45,724		-		132		45,856
Commercial:
Non-owner occupied		60		147,957		7,066		2,734		157,817
Owner occupied		-		86,225		2,581		887		89,693
Land		-		27,643		-		-		27,643
Construction		-		71,513		166		-		71,679
Consumer:
Home equity lines of credit:
Originated for portfolio		20,260		-		-		28		20,288
Purchased for portfolio		120		-		-		73		193
Other		2,124		-		-		-		2,124
	$	162,758	$	706,563	$	10,670	$	7,210	$	887,201

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2019 follows. There were no loans or leases rated as Doubtful at December 31, 2019.



	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	168,617	$	1,424	$	605	$	170,646
Real estate:
Single-family residential		119,707		-		-		549		120,256
Multi-family residential		-		39,081		-		148		39,229
Commercial:
Non-owner occupied		67		134,466		1,498		4,420		140,451
Owner occupied		-		79,773		2,098		-		81,871
Land		-		25,221		-		-		25,221
Construction		1,855		65,797		-		-		67,652
Consumer:
Home equity lines of credit:
Originated for portfolio		20,681		-		-		54		20,735
Purchased for portfolio		127		-		-		79		206
Other		4,174		-		-		-		4,174
	$	146,611	$	512,955	$	5,020	$	5,855	$	670,441

Leases:

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


	September 30, 2020		December 31, 2019
	(unaudited)
Total minimum lease payments to be received	$	4,658	$	5,252
Less: unearned income		(361)		(473)
Net investment in direct financing leases	$	4,297	$	4,779

⁽¹⁾

There were no initial direct costs associated with these leases.

The following summarizes the future minimum lease payments receivable in fiscal year 2020 and in subsequent fiscal years:


2020	$	198
2021		793
2022		793
2023		1,564
2024		1,310
	$	4,658