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, and deferred loan fees and costs.



	December 31,		December 31,
	2015		2014

Commercial	$	43,744	$	46,532
Real estate:
Single-family residential		81,985		51,445
Multi-family residential		28,950		28,790
Commercial		96,488		91,119
Construction		24,662		23,641
Consumer:
Home equity lines of credit		21,837		16,898
Other		6,018		4,976
Subtotal		303,684		263,401
Less: ALLL		(6,620)		(6,316)
Loans, net	$	297,064	$	257,085

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 such as Wells Fargo Bank. 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 purchased loans are classified as portfolio loans. These loans are 100% risk rated for CFBank capital adequacy purposes. Northpointe maintains an ownership interest in each loan it participates. 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. As a result, Northpointe now maintains a 5% (reduced from 20%) ownership interest in each loan it participates. At December 31, 2015 and 2014, CFBank held $43,517 and $24,996, 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 years ended December 31, 2015 and 2014:


	December 31, 2015
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total

Beginning balance	$	1,346	$	634	$	818	$	2,541	$	442	$	441	$	94	$	6,316
Addition to (reduction in) provision for loan losses		17		96		(113)		161		119		(39)		9		250
Charge-offs		(8)		(40)		-		(25)		-		(41)		(10)		(124)
Recoveries		25		1		-		33		-		113		6		178
Ending balance	$	1,380	$	691	$	705	$	2,710	$	561	$	474	$	99	$	6,620


	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

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, 2015:



			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	$	5	$	1	$	-	$	14	$	-	$	-	$	-	$	20
Collectively evaluated for impairment		1,375		690		705		2,696		561		474		99		6,600
Total ending allowance balance	$	1,380	$	691	$	705	$	2,710	$	561	$	474	$	99	$	6,620

Loans:
Individually evaluated for impairment	$	422	$	289	$	1,590	$	3,449	$	-	$	-	$	-	$	5,750
Collectively evaluated for impairment		43,322		81,696		27,360		93,039		24,662		21,837		6,018		297,934
Total ending loan balance	$	43,744	$	81,985	$	28,950	$	96,488	$	24,662	$	21,837	$	6,018	$	303,684

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		630	$	296	$	1,631	$	3,695	$	-	$	-	$	-	$	6,252
Collectively evaluated for impairment		45,902		51,149		27,159		87,424		23,641		16,898		4,976		257,149
Total ending loan balance	$	46,532	$	51,445	$	28,790	$	91,119	$	23,641	$	16,898	$	4,976	$	263,401

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2015. 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.


	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	36	$	28	$	-	$	65	$	1
Real estate:
Single-family residential		322		161		-		166		-
Multi-family residential		1,545		1,545		-		1,561		95
Commercial:
Non-owner occupied		546		446		-		455		-
Owner occupied		688		167		-		174		39
Land		-		-		-		-		-
Total with no allowance recorded		3,137		2,347		-		2,421		135

With an allowance recorded:
Commercial		394		394		5		439		12
Real estate:
Single-family residential		128		128		1		130		7
Multi-family residential		45		45		-		48		3
Commercial:
Non-owner occupied		2,224		2,224		9		2,242		136
Owner occupied		363		363		1		371		20
Land		294		249		4		274		18
Total with an allowance recorded		3,448		3,403		20		3,504		196
Total	$	6,585	$	5,750	$	20	$	5,925	$	331

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.


	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		1,579		1,579		-		1,631		-
Commercial:
Non-owner occupied		577		477		-		502		-
Owner occupied		704		183		-		208		-
Land		-		-		-		-		-
Total with no allowance recorded		3,329		2,533		-		2,642		-

With an allowance recorded:
Commercial		509		509		29		766		22
Real estate:
Single-family residential		123		123		-		125		7
Multi-family residential		52		52		1		56		13
Commercial:
Non-owner occupied		2,352		2,352		17		2,123		134
Owner occupied		380		380		2		388		25
Land		348		303		15		327		20
Total with an allowance recorded		3,764		3,719		64		3,785		221
Total	$	7,093	$	6,252	$	64	$	6,427	$	221

The following table presents the recorded investment in nonperforming loans by class of loans as of December 31, 2015 and 2014:


	December 31,		December 31,
	2015		2014
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		224		369
Real estate:
Single-family residential		640		549
Multi-family residential		-		-
Commercial:
Non-owner occupied		446		477
Owner occupied		-		-
Land		-		-
Consumer:
Home equity lines of credit:
Originated for portfolio		20		51
Purchased for portfolio		95		102
Total nonaccrual		1,425		1,548
Total nonperforming loans	$	1,425	$	1,548

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, 2015 or December 31, 2014.

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2015:


	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	$	-	$	9	$	28	$	37	$	43,707	$	196
Real estate:
Single-family residential		598		161		148		907		81,078		492
Multi-family residential		-		-		-		-		28,950		-
Commercial:
Non-owner occupied		-		446		-		446		57,573		446
Owner occupied		-		-		-		-		30,169		-
Land		-		-		-		-		8,300		-
Construction		-		-		-		-		24,662		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		-		-		20,789		20
Purchased for portfolio		-		-		-		-		1,048		95
Other		-		-		-		-		6,018		-
Total	$	598	$	616	$	176	$	1,390	$	302,294	$	1,249

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	$	18	$	-	$	121	$	139	$	46,393	$	248
Real estate:
Single-family residential		521		55		68		644		50,801		481
Multi-family residential		-		-		-		-		28,790		-
Commercial:
Non-owner occupied		115		-		-		115		48,879		477
Owner occupied		-		-		-		-		35,900		-
Land		-		-		-		-		6,225		-
Construction		52		-		-		52		23,589		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		51		51		15,414		-
Purchased for portfolio		30		102		-		132		1,301		102
Other		5		10		-		15		4,961		-
Total	$	741	$	167	$	240	$	1,148	$	262,253	$	1,308

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 December 31, 2015 and December 31, 2014, TDR’s totaled $5,276 and $5,655, respectively. The Company allocated $20 and $64 of specific reserves to loans whose terms have been modified in TDRs as of December 31, 2015 and 2014, respectively. The Company had not committed to lend additional amounts as of December 31, 2015 or 2014 to customers with outstanding loans that are classified as nonaccrual TDRs.

There was one single-family residential loan and one home equity line of credit that were modified as TDRs during the year ended December 31, 2015, where concessions were granted to borrowers experiencing financial difficulties. The home equity line of credit was paid off in June 2015.

The following table presents loans modified as TDRs by class of loans during the year ended December 31, 2015:



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

Real estate:
Single-family residential		1	$	9	$	9
Consumer:
Home equity lines of credit:
Originated for portfolio		1		9		9
		2	$	18	$	18

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 TDRs described above resulted in charge-offs of $0 and $4 during the years ended December 31, 2015 and 2014, 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 December 31, 2015 and 2014.

The terms of certain other loans were modified during the year ended December 31, 2015 and 2014 that did not meet the definition of a TDR. These loans had a total recorded investment of $19,097 and $20,719 as of December 31, 2015 and 2014, 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, 2015 and 2014, nonaccrual TDRs were as follows:




	December 31, 2015		December 31, 2014
Commercial	$	195	$	249
Real estate:
Single-family residential		161		173
Multi-family residential		-		-
Commercial:
Non-owner occupied		-		-
Owner occupied		-		-
Total	$	356	$	422

Nonaccrual loans at December 31, 2015 and 2014 did not include $4,920 and $5,233, 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 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, 2015 and based on the most recent analysis performed follows. There were no loans rated doubtful at December 31, 2015.


	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	83	$	41,473	$	1,892	$	296	$	43,744
Real estate:
Single-family residential		81,318		-		-		667		81,985
Multi-family residential		2,777		25,466		528		179		28,950
Commercial:
Non-owner occupied		125		54,674		1,852		1,368		58,019
Owner occupied		-		26,923		3,079		167		30,169
Land		-		5,720		-		2,580		8,300
Construction		11,252		13,410		-		-		24,662
Consumer:
Home equity lines of credit:
Originated for portfolio		20,677		-		-		112		20,789
Purchased for portfolio		802		-		-		246		1,048
Other		2,172		3,846		-		-		6,018
	$	119,206	$	171,512	$	7,351	$	5,615	$	303,684

The recorded investment in loans by risk category and class of loans as of December 31, 2014 follows. There were no loans rated doubtful at December 31, 2014.



	Not Rated		Pass		Special Mention		Substandard		Total

Commercial	$	1,088	$	44,543	$	441	$	460	$	46,532
Real estate:
Single-family residential		50,864		-		-		581		51,445
Multi-family residential		-		26,412		-		2,378		28,790
Commercial:
Non-owner occupied		139		43,547		89		5,219		48,994
Owner occupied		-		33,305		1,507		1,088		35,900
Land		78		3,417		-		2,730		6,225
Construction		8,645		14,996		-		-		23,641
Consumer:
Home equity lines of credit:
Originated for portfolio		15,316		-		-		149		15,465
Purchased for portfolio		857		-		313		263		1,433
Other		4,976		-		-		-		4,976
	$	81,963	$	166,220	$	2,350	$	12,868	$	263,401