LOANS

9 Months Ended

Sep. 30, 2012

LOANS

NOTE 4 – LOANS

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

	September 30, 2012			December 31, 2011
Commercial	$	18,187		$	25,994
Real estate:
Single-family residential		15,425			18,214
Multi-family residential		22,900			27,163
Commercial		57,687			69,757
Consumer:
Home equity lines of credit		13,145			14,921
Other		1,038			1,221
Subtotal		128,382			157,270
Less: ALLL		(5,442	)		(6,110	)
Loans, net	$	122,940		$	151,160

Commercial loans included $9,376 and $12,472, respectively, of commercial lines of credit which required interest only payments at September 30, 2012 and December 31, 2011.

Home equity lines of credit included $10,524 and $12,739, respectively, of loans which required interest only payments at September 30, 2012 and December 31, 2011.

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 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 contained in the Company’s 2011 Annual Report that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2011.

The following tables present the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2012:

	Three months ended September 30, 2012
				Real Estate								Consumer
	Commercial			Single-family			Multi-family		Commercial			Home equity lines of  credit			Other			Total
Beginning balance	$	1,386		$	245		$	1,370	$	2,130		$	286		$	17		$	5,434
Addition to (reduction in) provision for loan losses		(370	)		(15	)		544		510			(115	)		(11	)		543
Charge-offs		—			—			—		(536	)		—			—			(536	)
Recoveries		—			1			—		—			3			6			10
Reclass of ALLL on loan-related commitments (1)		(9	)		—			—		—			—			—			(9	)
Ending balance	$	1,007		$	231		$	1,914	$	2,104		$	174		$	12		$	5,442

⁽¹⁾  Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

	Nine months ended September 30, 2012
				Real Estate									Consumer
	Commercial			Single-family			Multi-family			Commercial			Home equity lines of  credit			Other			Total
Beginning balance	$	2,281		$	207		$	1,470		$	1,863		$	272		$	17		$	6,110
Addition to (reduction in) provision for loan losses		(1,467	)		23			856			1,570			(51	)		12			943
Charge-offs		(99	)		(7	)		(434	)		(1,467	)		(60	)		(34	)		(2,101	)
Recoveries		292			8			22			138			13			17			490
Ending balance	$	1,007		$	231		$	1,914		$	2,104		$	174		$	12		$	5,442

The following tables present the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2011:

	Three months ended September 30, 2011
				Real Estate									Consumer
	Commercial			Single-family			Multi-family			Commercial			Home equity lines of  credit			Other			Total
Beginning balance	$	2,754		$	242		$	2,183		$	2,632		$	220		$	19		$	8,050
Addition to (reduction in) provision for loan losses		(266	)		(54	)		1,015			(387	)		100			(3	)		405
Charge-offs		—			—			(867	)		(580	)		(149	)		—			(1,596	)
Recoveries		29			2			—			47			15			1			94
Reclass of ALLL on loan-related commitments (1)		2			—			—			—			—			—			2
Ending balance	$	2,519		$	190		$	2,331		$	1,712		$	186		$	17		$	6,955

⁽¹⁾  Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

	Nine months ended September 30, 2011
				Real Estate												Consumer
	Commercial			Single-family			Multi-family			Commercial			Construction			Home equity lines of  credit			Other			Total
Beginning balance	$	1,879		$	241		$	2,520		$	4,719		$	74		$	303		$	22		$	9,758
Addition to (reduction in) provision for loan losses		1,679			(43	)		1,926			(1,247	)		(74	)		12			3			2,256
Charge-offs		(1,140	)		(14	)		(2,117	)		(1,930	)		—			(149	)		(18	)		(5,368	)
Recoveries		100			6			2			170			—			20			10			308
Reclass of ALLL on loan-related commitments (1)		1			—			—			—			—			—			—			1
Ending balance	$	2,519		$	190		$	2,331		$	1,712		$	—		$	186		$	17		$	6,955

⁽¹⁾  Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2012:

			Real Estate						Consumer
	Commercial		Single-family		Multi-family		Commercial		Home equity lines of  credit		Other		Total
ALLL:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	564	$	47	$	585	$	297	$	—	$	—	$	1,493
Collectively evaluated for impairment		443		184		1,329		1,807		174		12		3,949
Total ending allowance balance	$	1,007	$	231	$	1,914	$	2,104	$	174	$	12	$	5,442
Loans:
Individually evaluated for impairment	$	797	$	129	$	4,024	$	6,610	$	—	$	—	$	11,560
Collectively evaluated for impairment		17,390		15,296		18,876		51,077		13,145		1,038		116,822
Total ending loan balance	$	18,187	$	15,425	$	22,900	$	57,687	$	13,145	$	1,038	$	128,382

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2011:

			Real Estate						Consumer
	Commercial		Single-family		Multi-family		Commercial		Home equity lines of credit		Other		Total
ALLL:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	624	$	—	$	11	$	262	$	—	$	—	$	897
Collectively evaluated for impairment		1,657		207		1,459		1,601		272		17		5,213
Total ending allowance balance	$	2,281	$	207	$	1,470	$	1,863	$	272	$	17	$	6,110
Loans:
Individually evaluated for impairment	$	821	$	—	$	5,090	$	6,085	$	135	$	—	$	12,131
Collectively evaluated for impairment		25,173		18,214		22,073		63,672		14,786		1,221		145,139
Total ending loan balance	$	25,994	$	18,214	$	27,163	$	69,757	$	14,921	$	1,221	$	157,270

The following table presents loans individually evaluated for impairment by class of loans at September 30, 2012. 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 and includes accrued interest. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2012. Cash payments of interest during the three and nine months ended September 30, 2012 totaled $120 and $289, respectively.

	As of September 30, 2012						Three months ended September 30, 2012				Nine months ended September 30, 2012
	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	$	143	$	128	$	—	$	130	$	—	$	137	$	—
Real estate:
Multi-family residential		2,934		2,029		—		2,032		—		2,170		—
Commercial:
Non-owner occupied		2,645		1,839		—		1,869		—		2,357		—
Owner occupied		2,244		1,293		—		1,360		—		1,400		—
Total with no allowance recorded		7,966		5,289		—		5,391		—		6,064		—
With an allowance recorded:
Commercial		669		669		564		672		8		686		30
Real estate:
Single-family residential		129		129		47		129		1		131		1
Multi-family residential		2,117		1,995		585		1,996		61		2,002		103
Commercial:
Non-owner occupied		2,662		2,662		274		2,670		40		2,684		127
Owner occupied		401		401		7		402		6		406		19
Land		460		415		16		416		6		452		19
Total with an allowance recorded		6,438		6,271		1,493		6,285		122		6,361		299
Total	$	14,404	$	11,560	$	1,493	$	11,676	$	122	$	12,425	$	299

The following table presents loans individually evaluated for impairment by class of loans at December 31, 2011. 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 and includes accrued interest. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2011. Cash payments of interest during the three and nine months ended September 30, 2011 totaled $96 and $118, respectively.

	As of December 31, 2011						Three months ended September 30, 2011				Nine months ended September 30, 2011
	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	$	573	$	47	$	—	$	1,248	$	7	$	515	$	7
Real estate:
Single-family residential		—		—		—		—		—		32		—
Multi-family residential		6,742		4,996		—		787		1		262		1
Commercial:
Non-owner occupied		2,177		1,755		—		2,236		9		796		9
Owner occupied		876		446		—		1,314		21		438		21
Land		—		—		—		684		11		688		32
Consumer:
Home equity lines of credit:
Originated for portfolio		135		135		—		135		—		136		—
Total with no allowance recorded		10,503		7,379		—		6,404		49		2,867		70
With an allowance recorded:
Commercial		796		774		624		515		8		1,163		8
Real estate:
Multi-family residential		94		94		11		2,278		—		3,048		—
Commercial:
Non-owner occupied		2,823		2,823		210		1,379		31		1,752		31
Owner occupied		411		411		20		350		—		817		—
Land		766		650		32		—		—		—		—
Total with an allowance recorded		4,890		4,752		897		4,522		39		6,780		39
Total	$	15,393	$	12,131	$	897	$	10,926	$	88	$	9,647	$	109

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

	September 30, 2012		December 31, 2011
Commercial	$	667	$	47
Real estate:
Single-family residential		44		736
Multi-family residential		3,937		4,996
Commercial:
Non-owner occupied		1,839		1,910
Owner occupied		1,293		446
Consumer:
Home equity lines of credit:
Originated for portfolio		66		157
Purchased for portfolio		81		9
Total nonaccrual and nonperforming loans	$	7,927	$	8,301

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, 2012 or December 31, 2011.

The following table presents the aging of the recorded investment in past due loans by class of loans as of September 30, 2012:

	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	$	21	$	112	$	120	$	253	$	17,934	$	547
Real estate:
Single-family residential		302		706		—		1,008		14,417		44
Multi-family residential		—		—		2,029		2,029		20,871		1,908
Commercial:
Non-owner occupied		42		—		1,243		1,285		29,507		596
Owner occupied		—		—		300		300		22,386		993
Land		—		—		—		—		4,639		—
Consumer:
Home equity lines of credit:
Originated for portfolio		—		—		66		66		10,734		—
Purchased for portfolio		130		—		81		211		2,134		—
Other		61		—		—		61		977		—
Total	$	556	$	818	$	3,839	$	5,213	$	123,599	$	4,088

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2011:

	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	$	103	$	—	$	—	$	103	$	25,891	$	47
Real estate:
Single-family residential		714		474		491		1,679		16,535		245
Multi-family residential		—		—		3,065		3,065		24,098		1,931
Commercial:
Non-owner occupied		173		275		68		516		35,899		1,842
Owner occupied		—		—		—		—		27,900		446
Land		—		—		—		—		5,442		—
Consumer:
Home equity lines of credit:
Originated for portfolio		22		—		135		157		12,126		22
Purchased for portfolio		—		—		9		9		2,629		—
Other		—		30		—		30		1,191		—
Total	$	1,012	$	779	$	3,768	$	5,559	$	151,711	$	4,533

Troubled Debt Restructurings (TDRs):

The Company has allocated $1,493 and $897 of specific reserves to loans whose terms have been modified in TDRs as of September 30, 2012 and December 31, 2011. The Company has not committed to lend additional amounts as of September 30, 2012 or December 31, 2011 to customers with outstanding loans that are classified as nonaccrual TDRs.

During the quarter ended September 30, 2012, no loans were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties.

During the nine months ended September 30, 2012, the terms of 2 loans were modified as TDRs, where concessions were granted to borrowers experiencing financial difficulties. One non-owner occupied commercial real estate loan included an extension of the maturity date from May 31, 2012 to September 30, 2012 and required a $50 principal repayment at the date of modification. One single-family residential loan was modified as a TDR during the nine months ended September 30, 2012 and included a reduction in the stated interest rate of the loan from 10% to 5%, a waiver of a portion of the accrued and unpaid interest, addition of the remaining accrued and unpaid interest to the principal balance and extension of the maturity date from 2034 to 2042. This modification involved a reduction in the stated interest rate of the loan for a period of 30 years.

The following table presents loans modified as TDRs by class of loans during the nine months ended September 30, 2012:

	Nine months ended September 30, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate:
Single-family residential		1		132		138
Commercial:
Non-owner occupied		1		478		428
Total		2	$	610	$	566

The TDRs described resulted in a $46 increase in the ALLL during the nine months ended September 30, 2012 and did not result in a charge-off during the three and nine months ended September 30, 2012.

There were no TDRs in payment default or that became nonperforming during the period ended September 30, 2012, that had been modified within the twelve months ended September 30, 2012. 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, 2012 that did not meet the definition of a TDR because the borrowers were not experiencing financial difficulties or there were no concessions granted. These loans had a total recorded investment as of September 30, 2012 of $9,235.

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.

There were no loans which were modified during the three or nine months ended September 30, 2012 that did not meet the definition of a TDR due to a delay in payment that was considered to be insignificant.

Nonaccrual loans include loans that were modified and identified as TDRs and the loans are not performing. At September 30, 2012 and December 31, 2011, nonaccrual TDRs were as follows:

	September 30, 2012		December 31, 2011
Commercial	$	539	$	47
Real estate:
Multi-family residential		1,908		2,527
Commercial:
Owner occupied		300		446
Total	$	2,747		3,020

Nonaccrual loans at September 30, 2012 and December 31, 2011 do not include $3,824 and $4,597, 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 by risk category and by class of loans as of September 30, 2012 and based on the most recent analysis performed follows. There were no loans rated doubtful at September 30, 2012.

	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	389	$	13,568	$	2,960	$	1,270	$	18,187
Real estate:
Single-family residential		15,381		—		—		44		15,425
Multi-family residential		—		12,285		5,815		4,800		22,900
Commercial:
Non-owner occupied		331		21,865		3,018		5,578		30,792
Owner occupied		—		18,555		1,629		2,072		22,256
Land		121		1,013		434		3,071		4,639
Consumer:
Home equity lines of credit:
Originated for portfolio		10,734		—		—		66		10,800
Purchased for portfolio		1,825		—		439		81		2,345
Other		1,038		—		—		—		1,038
	$	29,819	$	67,286	$	14,295	$	16,982	$	128,382

The recorded investment in loans by risk category and by class of loans as of December 31, 2011 follows.

	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	432	$	19,591	$	2,062	$	3,909	$	—	$	25,994
Real estate:
Single-family residential		17,478		—		—		736		—		18,214
Multi-family residential		—		15,395		4,539		6,822		407		27,163
Commercial:
Non-owner occupied		365		22,159		5,717		8,176		—		36,417
Owner occupied		—		22,526		3,474		1,898		—		27,898
Land		954		1,123		—		3,365		—		5,442
Consumer:
Home equity lines of credit:
Originated for portfolio		12,126		—		—		157		—		12,283
Purchased for portfolio		2,182		—		447		9		—		2,638
Other		1,221		—		—		—		—		1,221
	$	34,758	$	80,794	$	16,239	$	25,072	$	407	$	157,270