NOTE 4 – LOANS

Loans at year-end were as follows:


	2012			2011
Commercial	$	25,408		$	25,994
Real estate:
Single-family residential		43,058			18,214
Multi-family residential		21,576			27,163
Commercial		54,291			69,757
Construction		14			—
Consumer:
Home equity lines of credit		12,963			14,921
Other		970			1,221

Subtotal		158,280			157,270
Less: ALLL		(5,237	)		(6,110	)

Loans, net	$	153,043		$	151,160

Mortgage Purchase Program

On December 11, 2012 the Bank entered into a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation. At December 31, 2012, CFBank held $25,373 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 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 of the Notes to Consolidated Financial Statements.

The following tables present the activity in the ALLL by portfolio segment for the year ended December 31, 2012 and 2011:


December 31, 2012:
				Real Estate											Consumer
	Commercial			Single-family			Multi-family			Commercial			Construction		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		(1,251	)		180			700			1,412			—		78			10			1,129
Charge-offs		(99	)		(64	)		(796	)		(1,467	)		—		(126	)		(39	)		(2,591	)
Recoveries		380			9			22			138			—		17			23			589

Ending balance	$	1,311		$	332		$	1,396		$	1,946		$	—	$	241		$	11		$	5,237


December 31, 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		1,481			83			2,108			(406	)		(74	)		183			—			3,375
Charge-offs		(1,296	)		(124	)		(3,167	)		(2,652	)		—			(241	)		(18	)		(7,498	)
Recoveries		214			7			9			202			—			27			13			472
Reclass of ALLL on loan-related commitments ⁽¹⁾		3			—			—			—			—			—			—			3

Ending balance	$	2,281		$	207		$	1,470		$	1,863		$	—		$	272		$	17		$	6,110

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

Activity in the ALLL was as follows:


	2010
Beginning balance	$	7,090
Provision for loan losses		8,468
Reclassification of ALLL on loan-related commitments ⁽¹⁾		10
Loans charged-off		(6,165	)
Recoveries		355

Ending balance	$	9,758

⁽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 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 the balance in the ALLL and the recorded investment in loans by portfolio segment and based on 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 as of and for the year ended 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.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	136	$	121	$	—	$	503	$	—
Real estate:
Single-family residential		—		—		—		—		—
Multi-family residential		2,001		1,879		—		2,223		—
Commercial:
Non-owner occupied		3,000		2,195		—		1,819		—
Owner occupied		2,195		1,244		—		1,258		—
Land		—		—		—		—		—
Construction		—		—		—		—		—
Consumer:
Home equity lines of credit:
Originated for portfolio		—		—		—		—		—
Purchased for portfolio		—		—		—		—		—
Other		—		—		—		—		—

Total with no allowance recorded		7,332		5,439		—		5,803		—
With an allowance recorded:
Commercial		970		970		609		658		5
Real estate:
Single-family residential		129		129		71		129		2
Multi-family residential		288		288		24		1,975		1
Commercial:
Non-owner occupied		2,239		2,239		105		2,650		56
Owner occupied		396		396		7		397		6
Land		438		393		14		396		6
Construction
Consumer:
Home equity lines of credit:
Originated for portfolio		—		—		—		—
Purchased for portfolio		—		—		—		—
Other		—		—		—		—

Total with an allowance recorded		4,460		4,415		830		6,205		76

Total	$	11,792	$	9,854	$	830	$	12,008	$	76

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	573	$	47	$	—	$	1,171	$	—
Real estate:
Single-family residential		—		—		—		23		—
Multi-family residential		6,748		4,996		—		3,396		—
Commercial:
Non-owner occupied		2,171		1,755		—		1,446		—
Owner occupied		876		446		—		1,017		—
Land		—		—		—		—		—
Consumer:
Home equity lines of credit:
Originated for portfolio		135		135		—		136		—

Total with no allowance recorded		10,503		7,379		—		7,189		—
With an allowance recorded:
Commercial		796		774		624		428		30
Real estate:
Multi-family residential		94		94		11		48		3
Commercial:
Non-owner occupied		2,823		2,823		210		1,322		85
Owner occupied		411		411		20		211		43
Land		766		650		32		681		42

Total with an allowance recorded		4,890		4,752		897		2,690		203

Total	$	15,393	$	12,131	$	897	$	9,879	$	203


	2010
Average of individually impaired loans during the year	$	11,722
Interest income recognized during impairment		41

There was no cash basis interest income recognized during the years ended December 31, 2012, 2011 or 2010.

The following table presents the recorded investment in nonaccrual loans by class of loans as of December 31, 2012 and 2011:


	December 31, 2012		December 31, 2011
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	$	714	$	47
Real estate:
Single-family residential		113		736
Multi-family residential		2,082		4,996
Commercial:
Non-owner occupied		2,195		1,910
Owner occupied		1,243		446
Construction
Consumer:
Home equity lines of credit:
Originated for portfolio		—		157
Purchased for portfolio		9		9
Other consumer		—		—

Total nonaccrual loans		6,356		8,301

Total nonaccrual and nonperforming loans	$	6,356	$	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.

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

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

TDRs:

The Company has allocated $830 and $897 of specific reserves to loans whose terms have been modified in TDRs as of December 31, 2012 and 2011. The Company has not committed to lend additional amounts as of December 31, 2012 or 2011 to customers with outstanding loans that are classified as TDRs.

During the year ended December 31, 2012, the terms of certain loans were modified as TDRs, where concessions had been 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.

There were no modifications involving a reduction of the stated interest rate. Modifications involving an extension of the maturity date were for periods ranging from 2 months to 4 years.

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2012:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		2	$	319	$	319
Real estate:
Single-family residential		1		132		138
Multi-family residential		1		2,017		203
Commercial:
Non-owner occupied		1		478		428

Total		5	$	2,946	$	1,088

The TDRs described above increased the allowance for loan losses by $97 and resulted in charge-offs of $797 during the year ended December 31, 2012.

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2011:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
TDR’s:
Commercial		4	$	1,127	$	1,105
Real estate:
Multi-family residential		2		2,507		2,051
Commercial:
Non-owner occupied		5		2,710		2,710
Owner occupied		3		1,355		1,355
Land		7		655		655

Total		21	$	8,354	$	7,876

The TDRs described above increased the allowance for loan losses by $897 and resulted in charge-offs of $699 during the year ended December 31, 2011.

During 2012 there were no loans classified as troubled debt restructurings for which there was a payment default within twelve months following the modification. During the year ending 2011, there was one commercial loan with a total recorded investment of $47 at December 31, 2011 which had been modified as a TDR in May 2011 for which there was a payment default within twelve months following the modification.

The terms of certain other loans were modified during the year ended December 31, 2012 and 2011 that did not meet the definition of a TDR. These loans had a total recorded investment of $13,298 and $17,498 as of December 31, 2012 and 2011, 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, 2012 and 2011, nonaccrual troubled debt restructurings were as follows:


	2012		2011
Commercial	$	528	$	47
Real estate:
Single-family residential		—
Multi-family residential		2,082		2,527
Commercial:
Non-owner occupied		388		—
Owner occupied		288		446

Total	$	3,286		3,020

Nonaccrual loans at December 31, 2012 and 2011 do not include $3,684 and $4,597, respectively, in troubled debt restructurings where customers have established a sustained period of repayment performance, 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 by risk category and by class of loans as of December 31, 2012 and based on the most recent analysis performed 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

The recorded investment in loans by risk category and 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