NOTE 4 – LOANS

Loans at year-end were as follows:



	December 31,		December 31,
	2014		2013

Commercial	$	46,656	$	37,526
Real estate:
Single-family residential		51,542		32,219
Multi-family residential		28,863		32,197
Commercial		91,404		83,752
Construction		23,732		11,465
Consumer:
Home equity lines of credit		16,955		14,851
Other		4,995		860
Subtotal		264,147		212,870
Less: ALLL		(6,316)		(5,729)
Loans, net	$	257,831	$	207,141

Mortgage Purchase Program

On December 11, 2012, CFBank entered into a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation. Through a participation agreement, CFBank agreed to purchase an 80% interest from Northpointe 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 interests in 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, and therefore no allowance is allocated to these loans. The maximum aggregate purchase investment shall not exceed $25 million, as of December 31, 2014. NorthPointe maintains a 20% ownership interest in each loan it participates. The participation agreement further calls for full control to be relinquished by the mortgage 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. Effective December 18, 2014, the participation agreement was amended and CFBank agreed to increase the level of interest in loans it purchases from Northpointe from 80% to 95% of the aforementioned loans, and therefore, Northpointe now maintains a 5% ownership interest in each loan it participates. At December 31, 2014 and 2013, CFBank held $25,013 and $12,743, respectively, of such loans which have been included in single-family residential loan totals above.

Allowance for Loan 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 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, 2014, 2013 and 2012:


	December 31, 2014
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,759	$	120	$	1,262	$	2,325	$	119	$	139	$	5	$	5,729
Addition to (reduction in) provision for loan losses		(374)		510		(444)		(128)		323		304		87		278
Charge-offs		(44)		-		-		(5)		-		(26)		-		(75)
Recoveries		5		4		-		349		-		24		2		384
Ending balance	$	1,346	$	634	$	818	$	2,541	$	442	$	441	$	94	$	6,316


	December 31, 2013
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity 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		407		(51)		(163)		319		119		(114)		(21)		496
Charge-offs		-		(164)		(59)		(6)		-		(17)		(6)		(252)
Recoveries		41		3		88		66		-		29		21		248
Ending balance	$	1,759	$	120	$	1,262	$	2,325	$	119	$	139	$	5	$	5,729


	December 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		(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

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, 2014:



			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	$	29	$	-	$	1	$	34	$	-	$	-	$	-	$	64
Collectively evaluated for impairment		1,317		634		817		2,507		442		441		94		6,252
Total ending allowance balance	$	1,346	$	634	$	818	$	2,541	$	442	$	441	$	94	$	6,316

Loans:
Individually evaluated for impairment	$	631	$	296	$	1,634	$	3,709	$	-	$	-	$	-	$	6,270
Collectively evaluated for impairment		46,025		51,246		27,229		87,695		23,732		16,955		4,995		257,877
Total ending loan balance	$	46,656	$	51,542	$	28,863	$	91,404	$	23,732	$	16,955	$	4,995	$	264,147

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, 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	$	532	$	-	$	402	$	191	$	-	$	-	$	-	$	1,125
Collectively evaluated for impairment		1,227		120		860		2,134		119		139		5		4,604
Total ending allowance balance	$	1,759	$	120	$	1,262	$	2,325	$	119	$	139	$	5	$	5,729

Loans:
Individually evaluated for impairment		992	$	317	$	1,759	$	5,845	$	-	$	-	$	-	$	8,913
Collectively evaluated for impairment		36,534		31,902		30,438		77,907		11,465		14,851		860		203,957
Total ending loan balance	$	37,526	$	32,219	$	32,197	$	83,752	$	11,465	$	14,851	$	860	$	212,870

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2014. 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	$	135	$	121	$	-	$	121	$	-
Real estate:
Single-family residential		334		173		-		180		-
Multi-family residential		1,581		1,581		-		1,631		-
Commercial:
Non-owner occupied		577		477		-		502		-
Owner occupied		708		187		-		208		-
Land		-		-		-		-		-
Total with no allowance recorded		3,335		2,539		-		2,642		-

With an allowance recorded:
Commercial		510		510		29		766		22
Real estate:
Single-family residential		123		123		-		125		7
Multi-family residential		53		53		1		56		13
Commercial:
Non-owner occupied		2,360		2,360		17		2,123		134
Owner occupied		381		381		2		388		25
Land		349		304		15		327		20
Total with an allowance recorded		3,776		3,731		64		3,785		221
Total	$	7,111	$	6,270	$	64	$	6,427	$	221

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 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.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	135	$	120	$	-	$	292	$	-
Real estate:
Single-family residential		352		191		-		-		-
Multi-family residential		-		-		-		185		-
Commercial:
Non-owner occupied		2,022		1,453		-		1,895		-
Owner occupied		2,021		1,070		-		1,392		-
Land		-		-		-		423		-
Total with no allowance recorded		4,530		2,834		-		4,187		-

With an allowance recorded:
Commercial		872		872		532		815		26
Real estate:
Single-family residential		126		126		-		454		8
Multi-family residential		1,759		1,759		402		1,880		4
Commercial:
Non-owner occupied		2,158		2,158		46		2,191		139
Owner occupied		397		397		7		162		24
Land		812		767		138		370		22
Total with an allowance recorded		6,124		6,079		1,125		5,872		223
Total	$	10,654	$	8,913	$	1,125	$	10,059	$	223

The following table presents the recorded investment in nonperforming loans by class of loans as of December 31, 2014 and 2013:


	December 31,		December 31,
	2014		2013
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		369		563
Real estate:
Single-family residential		549		479
Multi-family residential		-		1,701
Commercial:
Non-owner occupied		477		1,453
Owner occupied		-		1,070
Land		-		420
Consumer:
Home equity lines of credit:		51		-
Originated for portfolio		102		52
Total nonaccrual		1,548		5,738
Total nonperforming loans	$	1,548	$	5,738

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, 2014 or December 31, 2013.

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2014:


	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	$	19	$	-	$	121	$	140	$	46,516	$	248
Real estate:
Single-family residential		525		55		68		648		50,894		481
Multi-family residential		-		-		-		-		28,863		-
Commercial:
Non-owner occupied		115		-		-		115		49,027		477
Owner occupied		-		-		-		-		35,991		-
Land		-		-		-		-		6,271		-
Construction		52		-		-		52		23,680		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		51		51		15,469		-
Purchased for portfolio		30		102		-		132		1,303		102
Other		5		10		-		15		4,980		-
Total	$	746	$	167	$	240	$	1,153	$	262,994	$	1,308

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 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	$	-	$	-	$	121	$	121	$	37,405	$	442
Real estate:
Single-family residential		352		268		247		867		31,352		232
Multi-family residential		-		-		-		-		32,197		1,701
Commercial:
Non-owner occupied		-		-		923		923		42,199		530
Owner occupied		-		-		-		-		35,202		1,070
Land		-		-		420		420		5,008		-
Construction		-		-		-		-		11,465		-
Consumer:
Home equity lines of credit:
Originated for portfolio		52		-		-		52		12,930		52
Purchased for portfolio		123		-		-		123		1,746		-
Other		2		11		-		13		847		-
Total	$	529	$	279	$	1,711	$	2,519	$	210,351	$	4,027

Troubled Debt Restructurings (TDRs)

As of December 31, 2014 and December 31, 2013, TDR’s totaled $5.7 million and $6.1 million, respectively. The Company allocated $64 and $998 of specific reserves to loans whose terms have been modified in TDRs as of December 31, 2014 and 2013, respectively. The Company had not committed to lend additional amounts as of December 31, 2014 or 2013 to customers with outstanding loans that are classified as 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.

There was one loan modification during the year ended December 31, 2014 which constituted a TDR, which involved a reduction of the stated interest rate and an extension of the maturity date. The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2014:



	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial		1	$	104	$	100
		1	$	104	$	100

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2013:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial		1	$	126	$	126
Real estate:
Single-family residential		1		346		350
Multi-family residential		1		1,760		1,701
Commercial:
Non-owner occupied		-		-		-
Owner occupied		1		237		239
Land		-		-		-
Construction		-		-		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-
Purchased for portfolio		-		-		-
Other		-		-		-
		4	$	2,469	$	2,416

The TDRs described above resulted in charge-offs of $4 and $220 during the years ended December 31, 2014 and 2013, respectively.

There were no loans classified as TDRs for which there was a payment default within twelve months following the modification during the year ending 2014. During the year ending 2013, there was one single-family mortgage loan with a total recorded investment of $196 at December 31, 2013 which had been modified as a TDR in May 2013 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, 2014 and 2013 that did not meet the definition of a TDR. These loans had a total recorded investment of $20,719 and $17,835 as of December 31, 2014 and 2013, 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, 2014 and 2013, nonaccrual TDRs were as follows:




	December 31, 2014		December 31, 2013
Commercial	$	249	$	442
Real estate:
Single-family residential		173		190
Multi-family residential		-		1,701
Commercial:
Non-owner occupied		-		-
Owner occupied		-		238
Total	$	422	$	2,571

Nonaccrual loans at December 31, 2014 and 2013 did not include $5,250 and $3,517, respectively, in TDRs 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, 2014 and based on the most recent analysis performed follows:


	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	1,090	$	44,663	$	443	$	460	$	46,656
Real estate:
Single-family residential		50,961		-		-		581		51,542
Multi-family residential		-		26,481		-		2,382		28,863
Commercial:
Non-owner occupied		139		43,665		89		5,249		49,142
Owner occupied		-		33,389		1,508		1,094		35,991
Land		78		3,428		-		2,765		6,271
Construction		8,673		15,059		-		-		23,732
Consumer:
Home equity lines of credit:
Originated for portfolio		15,370		-		-		150		15,520
Purchased for portfolio		858		-		313		264		1,435
Other		4,995		-		-		-		4,995
	$	82,164	$	166,685	$	2,353	$	12,945	$	264,147

The recorded investment in loans by risk category and class of loans as of December 31, 2013 follows:



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	228	$	35,424	$	921	$	953	$	37,526
Real estate:
Single-family residential		31,685		-		-		534		32,219
Multi-family residential		-		29,667		-		2,530		32,197
Commercial:
Non-owner occupied		3,170		34,834		556		4,561		43,121
Owner occupied		-		31,489		1,045		2,669		35,203
Land		87		2,023		-		3,318		5,428
Construction		2,115		9,350		-		-		11,465
Consumer:
Home equity lines of credit:
Originated for portfolio		12,828		-		-		154		12,982
Purchased for portfolio		1,285		-		414		170		1,869
Other		860		-		-		-		860
	$	52,258	$	142,787	$	2,936	$	14,889	$	212,870