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.



	March 31,		December 31,
	2013		2012

Commercial	$	28,524	$	25,408
Real estate:
Single-family residential		46,618		43,058
Multi-family residential		27,109		21,576
Commercial		56,432		54,291
Construction		79		14
Consumer:
Home equity lines of credit		12,748		12,963
Other		971		970
Subtotal		172,481		158,280
Less: ALLL		(5,682)		(5,237)

Loans, net	$	166,799	$	153,043

Commercial loans included $13,880 and $11,782, respectively, of commercial lines of credit which required interest only payments at March 31, 2013 and December 31, 2012.

Home equity lines of credit included $10,340 and $10,447, respectively, of loans which required interest only payments at March 31, 2013 and December 31, 2012.

Mortgage Purchase Program

On December 11, 2012 the Bank entered into a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation. At March 31, 2013 and December 31,2012, CFBank held $27,434 and $25,373, respectively, of such loans which have been included in single family residential loan totals above. Through a participation agreement, CFBank agreed to purchase from Northpointe 75% interest in fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S. The participation agreement provides for CFBank to purchase individually (MERS registered) loans from Northpointe and hold them until funded by the end investor. The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions such as Wells Fargo Bank. This process on average takes approximately 14 days. Given the short term nature of each of these individual loans, common credit risks such as past due, impairment and trouble debt restructure (TDR), nonperforming, and nonaccrual classification are substantially reduced. The maximum aggregate purchase interest shall not exceed $45,000. Northpointe maintains a 25% ownership interest in each loan it participates. The agreement further calls for full control to be relinquished by the Broker to Northpointe and its participants with recourse to the broker after 120 days, at the sole discretion of Northpointe. As such, these purchased loans are classified as portfolio loans. These loans are 100% risk rated for CFBank capital adequacy purposes.

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 contained in the Company’s 2012 Annual Report.

The following tables present the activity in the ALLL by portfolio segment for the three months ended March 31, 2013:



	Three months ended March 31, 2013
			Real Estate								Consumer
			Single-		Multi-						Home Equity
	Commercial		family		family		Commercial		Construction		lines of credit		Other		Total

Beginning balance	$	1,311	$	332	$	1,396	$	1,946	$	-	$	241	$	11	$	5,237
Addition to (reduction in) provision for loan losses		81		(94)		179		197		1		(23)		(15)		326
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		17		1		29		54		-		2		16		119
Ending balance	$	1,409	$	239	$	1,604	$	2,197	$	1	$	220	$	12	$	5,682

The following tables present the activity in the ALLL by portfolio segment for the three months ended March, 2012:



	Three months ended March 31, 2012
			Real Estate								Consumer
			Single-		Multi-						Home Equity
	Commercial		family		family		Commercial		Construction		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		(508)		(19)		370		347		-		19		(9)		200
Charge-offs		(15)		-		(416)		(434)		-		(20)		-		(885)
Recoveries		44		2		22		136		-		3		9		216
Ending balance	$	1,802	$	190	$	1,446	$	1,912	$	-	$	274	$	17	$	5,641

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 March 31, 2013:



			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	$	562	$	44	$	84	$	152	$	-	$	-	$	-	$	842
Collectively evaluated for impairment		847		195		1,520		2,045		1		220		12		4,840
Total ending allowance balance	$	1,409	$	239	$	1,604	$	2,197	$	1	$	220	$	12	$	5,682
		-		-		-		-		-		-		-		-
Loans:
Individually evaluated for impairment		988		128		2,127		5,728		-		-		-		8,971
Collectively evaluated for impairment		27,536		46,490		24,982		50,704		79		12,748		971		163,510
Total ending loan balance	$	28,524	$	46,618	$	27,109	$	56,432	$	79	$	12,748	$	971	$	172,481

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, 2012:



			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	$	609	$	71	$	24	$	126	$	-	$	-	$	-	$	830
Collectively evaluated for impairment		702		261		1,372		1,820		-		241		11		4,407
Total ending allowance balance	$	1,311	$	332	$	1,396	$	1,946	$	-	$	241	$	11	$	5,237
		-		-		-		-		-		-		-		-
Loans:
Individually evaluated for impairment		1,091		129		2,167		6,467		-		-		-		9,854
Collectively evaluated for impairment		24,317		42,929		19,409		47,824		14		12,963		970		148,426
Total ending loan balance	$	25,408	$	43,058	$	21,576	$	54,291	$	14	$	12,963	$	970	$	158,280

The following table presents loans individually evaluated for impairment by class of loans at March 31, 2013. 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 months ended March 31, 2013. Cash payments of interest during the three months ended March 31, 2013 totaled $57.



	As of March 31, 2013						Three months ended March 31, 2013
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	136	$	120	$	-	$	172	$	-
Real estate:
Single-family residential		-		-		-		-		-
Multi-family residential		1,972		1,851		-		1,860		-
Commercial:
Non-owner occupied		2,222		1,527		-		1,928		-
Owner occupied		2,155		1,204		-		1,219		-
Land		-		-		-		-		-
Construction		-		-		-		-		-
Consumer:				-
Home equity lines of credit:
Originated for portfolio		-		-		-		-		-
Purchased for portfolio		-		-		-		-		-
Other		-		-		-		-		-
Total with no allowance recorded		6,485		4,702		-		5,179		-

With an allowance recorded:
Commercial		867		868		562		884		5
Real estate:
Single-family residential		128		128		44		128		2
Multi-family residential		277		276		84		280		1
Commercial:
Non-owner occupied		2,225		2,225		132		2,230		34
Owner occupied		392		392		7		393		6
Land		425		380		13		386		6
Construction
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-
Purchased for portfolio		-		-		-		-
Other		-		-		-		-
Total with an allowance recorded		4,314		4,269		842		4,301		54
Total	$	10,799	$	8,971	$	842	$	9,480	$	54

The following table presents loans individually evaluated for impairment by class of loans at December 31, 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 months ended March 31, 2012. Cash payments of interest during the three months ended March 31, 2012 totaled $88.



	As of December 31, 2012						Three months ended March 31, 2012
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	136	$	121	$	-	$	67	$	-
Real estate:
Single-family residential		-		-		-		-		-
Multi-family residential		2,001		1,879		-		4,244		10
Commercial:
Non-owner occupied		3,000		2,195		-		1,367		-
Owner occupied		2,195		1,244		-		429		-
Land		-		-		-		224		1
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		135
Purchased for portfolio		-		-		-		-
Other		-		-		-		-
Total with no allowance recorded		7,332		5,439		-		6,466		11

With an allowance recorded:
Commercial		970		970		609		696		13
Real estate:
Single-family residential		129		129		71		90		-
Multi-family residential		288		288		24		92		1
Commercial:
Non-owner occupied		2,239		2,239		105		2,340		57
Owner occupied		396		396		7		736		6
Land		438		393		14		384		6
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-
Purchased for portfolio		-		-		-		-
Other		-		-		-		-
Total with an allowance recorded		4,460		4,415		830		4,338		83
Total	$	11,792	$	9,854	$	830	$	10,804	$	94

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



	March 31,		December 31,
	2013		2012
Loans past due over 90 days still on accrual:
Real estate:
Commercial:		-		-
Non-owner occupied		-		-
Other consumer loans		-		-
Total over 90 days still on accrual loans		-		-
Nonaccrual loans:
Commercial	$	653	$	714
Real estate:
Single-family residential		119		113
Multi-family residential		2,044		2,082
Commercial:
Non-owner occupied		1,527		2,195
Owner occupied		1,204		1,243
Land		-		-
Consumer:
Home equity lines of credit:		-		-
Originated for portfolio		12		-
Purchased for portfolio		6		9
Other consumer		-		-
Total nonaccrual		5,565		6,356
Total nonaccrual and nonperforming loans	$	5,565	$	6,356

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 March 31, 2013 or December 31, 2012.

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2013:



	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	$	-	$	-	$	165	$	165	$	28,359	$	488
Real estate:
Single-family residential		796		131		88		1,015		45,603		30
Multi-family residential		-		-		-		-		27,109		2,045
Commercial:
Non-owner occupied		-		38		957		995		28,047		570
Owner occupied		-		-		-		-		22,905		1,204
Land		-		-		-		-		4,485		-
Construction		-		-		-		-		79		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		54		12		66		10,548		-
Purchased for portfolio		6		-		-		6		2,128		6
Other		-		-		-		-		971		-
Total	$	802	$	223	$	1,222	$	2,247	$	170,234	$	4,343

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 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	$	-	$	65	$	121	$	186	$	25,222	$	593
Real estate:
Single-family residential		1,105		122		74		1,301		41,757		39
Multi-family residential		-		-		-		-		21,576		2,082
Commercial:
Non-owner occupied		40		-		1,611		1,651		28,299		583
Owner occupied		-		-		-		-		19,774		1,244
Land		-		-		-		-		4,568		-
Construction		-		-		-		-		14		-
Consumer:
Home equity lines of credit:
Originated for portfolio		20		-		-		20		10,699		-
Purchased for portfolio		-		-		9		9		2,235		-
Other		18		-		-		18		951		-
Total	$	1,183	$	187	$	1,815	$	3,185	$	155,095	$	4,541

Troubled Debt Restructurings (TDRs):

As of March 31, 2013 and December 31, 2012, TDR’s totaled $6.4 and $7.0, respectively. The Company allocated $842 and $830 of specific reserves to loans whose terms had been modified in TDRs as of March 31, 2013 and December 31, 2012. The Company had not committed to lend any additional amounts as of March 31, 2013 or December 31, 2012 to customers with outstanding loans classified as nonaccrual TDRs.

During the quarter ended March 31, 2013, no loans were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties.

During the three months ended March 31, 2012, the terms of one loan was modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties. One single-family residential loan was modified as a TDR during the three months ended March 31, 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.

There were no TDRs in payment default or that became nonperforming during the period ended March 31, 2013 and 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 quarter ended March 31, 2013 and 2012 that did not meet the definition of a TDR. These loans had a total recorded investment of $6,635 and $2,815 as of March 31, 2013 and 2012, 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 payments 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 March 31, 2013 and December 31, 2012, nonaccrual TDRs were as follows:



	March 31,		December 31,
	2013		2012
Commercial	$	488	$	528
Real estate:
Multi-family residential		2,044		2,082
Commercial:
Non-owner occupied		-		388
Owner occupied		279		288
Total	$	2,811	$	3,286

Nonaccrual loans at March 31, 2013 and December 31, 2012 do not include $3,588 and $3,684, 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 March 31, 2013 and based on the most recent analysis performed follows. There were no loans rated doubtful at March 31, 2013 and December 31, 2012.



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	270	$	24,072	$	2,653	$	1,529	$	28,524
Real estate:
Single-family residential		46,499		-		-		119		46,618
Multi-family residential		-		18,451		5,763		2,895		27,109
Commercial:
Non-owner occupied		220		21,666		2,405		4,752		29,043
Owner occupied		-		19,017		423		3,465		22,905
Land		115		944		432		2,993		4,484
Construction		12		67		-		-		79
Consumer:
Home equity lines of credit:
Originated for portfolio		10,602		-		-		12		10,614
Purchased for portfolio		1,699		-		429		6		2,134
Other		971		-		-		-		971
	$	60,388	$	84,217	$	12,105	$	15,771	$	172,481

The recorded investment in loans by risk category and by class of loans as of December 31, 2012 follows.



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	285	$	21,013	$	2,637	$	1,473	$	25,408
Real estate:
Single-family residential		42,945		-		-		113		43,058
Multi-family residential		-		12,846		5,790		2,939		21,575
Commercial:
Non-owner occupied		322		21,147		2,995		5,486		29,950
Owner occupied		-		16,385		762		2,627		19,774
Land		119		987		434		3,028		4,568
Construction		-		14		-		-		14
Consumer:
Home equity lines of credit:
Originated for portfolio		10,719		-		-		-		10,719
Purchased for portfolio		1,800		-		435		9		2,244
Other		970		-		-		-		970
	$	57,160	$	72,392	$	13,053	$	15,675	$	158,280