NOTE 4 – LOANS AND LEASES

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




	September 30, 2019		December 31, 2018
	(unaudited)
Commercial (1)	$	155,248	$	126,887
Real estate:
Single-family residential		127,754		118,386
Multi-family residential		46,946		47,651
Commercial		217,851		173,435
Construction		63,654		61,792
Consumer:
Home equity lines of credit		21,585		23,961
Other		4,478		5,583
Subtotal		637,516		557,695
Less: ALLL		(7,057)		(7,012)
Loans and leases, net	$	630,459	$	550,683

⁽¹⁾

Includes $4,937 and $5,403 of commercial leases at September 30, 2019 and December 31, 2018, respectively.

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. 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 loans are 100% risk rated for CFBank capital adequacy purposes. Under the participation agreement, CFBank agrees to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintains a 5% ownership interest in each loan it participates. At September 30, 2019 and December 31, 2018, CFBank held $34,762 and $36,845, respectively, of such loans which have been included in single-family residential loan totals above.

Allowance for Loan and Lease 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 and lease losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors described in Note 1 to the 2018 Audited Financial Statements.

The following tables present the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2019:



	Three months ended September 30, 2019 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,969	$	1,014	$	562	$	2,339	$	759	$	309	$	77	$	7,029
Addition to (reduction in) provision for loan losses		70		(125)		(25)		130		-		(50)		-		-
Charge-offs		-		-		-		-		-		-		(6)		(6)
Recoveries		-		2		-		-		-		32		-		34
Ending balance	$	2,039	$	891	$	537	$	2,469	$	759	$	291	$	71	$	7,057



	Nine months ended September 30, 2019 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,819	$	1,061	$	612	$	2,274	$	739	$	410	$	97	$	7,012
Addition to (reduction in) provision for loan losses		220		(175)		(75)		195		20		(165)		(20)		-
Charge-offs		-		-		-		-		-		-		(6)		(6)
Recoveries		-		5		-		-		-		46		-		51
Ending balance	$	2,039	$	891	$	537	$	2,469	$	759	$	291	$	71	$	7,057

The following tables present the activity in the ALLL by portfolio segment for the three and nine months ended September 30, 2018:



	Three months ended September 30, 2018 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,889	$	1,039	$	697	$	2,149	$	614	$	486	$	107	$	6,981
Addition to (reduction in) provision for loan losses		40		(20)		-		10		5		(25)		(10)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		19		-		-		-		5		-		24
Ending balance	$	1,929	$	1,038	$	697	$	2,159	$	619	$	466	$	97	$	7,005



	Nine months ended September 30, 2018 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,984	$	912	$	660	$	2,143	$	672	$	597	$	2	$	6,970
Addition to (reduction in) provision for loan losses		(57)		111		37		16		(53)		(149)		95		-
Charge-offs		-		(6)		-		-		-		-		-		(6)
Recoveries		2		21		-		-		-		18		-		41
Ending balance	$	1,929	$	1,038	$	697	$	2,159	$	619	$	466	$	97	$	7,005

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of September 30, 2019 (unaudited):



			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	$	1	$	-	$	-	$	34	$	-	$	-	$	-	$	35
Collectively evaluated for impairment		2,038		891		537		2,435		759		291		71		7,022
Total ending allowance balance	$	2,039	$	891	$	537	$	2,469	$	759	$	291	$	71	$	7,057

Loans:
Individually evaluated for impairment	$	89	$	108	$	-	$	4,607	$	-	$	-	$	-	$	4,804
Collectively evaluated for impairment		155,159		127,646		46,946		213,244		63,654		21,585		4,478		632,712
Total ending loan balance	$	155,248	$	127,754	$	46,946	$	217,851	$	63,654	$	21,585	$	4,478	$	637,516

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of December 31, 2018:



			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	$	-	$	-	$	-	$	22	$	-	$	-	$	-	$	22
Collectively evaluated for impairment		1,819		1,061		612		2,252		739		410		97		6,990
Total ending allowance balance	$	1,819	$	1,061	$	612	$	2,274	$	739	$	410	$	97	$	7,012

Loans:
Individually evaluated for impairment	$	100	$	110	$	-	$	2,951	$	-	$	-	$	-	$	3,161
Collectively evaluated for impairment		126,787		118,276		47,651		170,484		61,792		23,961		5,583		554,534
Total ending loan balance	$	126,887	$	118,386	$	47,651	$	173,435	$	61,792	$	23,961	$	5,583	$	557,695

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended September 30, 2019. 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, and deferred loan fees and costs. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2019. Cash payments of interest on these loans during the three and nine months ended September 30, 2019 totaled $44 and $132, respectively.


							Three months ended				Nine months ended
	As of September 30, 2019						September 30, 2019				September 30, 2019
	(unaudited)						(unaudited)				(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial:
Owner occupied	$	224	$	120	$	-	$	121	$	4	$	122	$	10
Total with no allowance recorded		224		120		-		121		4		122		10

With an allowance recorded:
Commercial		89		89		1		90		-		94		-
Real estate:
Single-family residential (1)		108		108		-		108		1		109		4
Commercial:
Non-owner occupied		4,487		4,487		34		4,474		38		4,113		116
Total with an allowance recorded		4,684		4,684		35		4,672		39		4,316		120
Total	$	4,908	$	4,804	$	35	$	4,793	$	43	$	4,438	$	130

⁽¹⁾

Allowance recorded is less than $1 resulting in rounding to zero.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018. 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, and deferred loan fees and costs. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2018. Cash payments of interest during the three and nine months ended September 30, 2018 totaled $52 and $151, respectively.


							Three months ended				Nine months ended
	As of December 31, 2018						September 30, 2018				September 30, 2018
							(unaudited)				(unaudited)
	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	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate:
Commercial:
Owner occupied		379		125		-		129		5		132		16
Total with no allowance recorded		379		125		-		129		5		132		16

With an allowance recorded:
Commercial (1)		100		100		-		202		3		212		11
Real estate:
Single-family residential (1)		110		110		-		112		2		114		5
Commercial:
Non-owner occupied		2,826		2,826		22		2,832		39		2,841		117
Owner occupied		-		-		-		150		2		175		6
Total with an allowance recorded		3,036		3,036		22		3,296		46		3,342		139
Total	$	3,415	$	3,161	$	22	$	3,425	$	51	$	3,474	$	155

⁽¹⁾

Allowance recorded is less than $1 resulting in rounding to zero.

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




	September 30, 2019		December 31, 2018
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		89		100
Real estate:
Single-family residential		519		167
Commercial:
Non-owner occupied		1,719		-
Consumer:
Home equity lines of credit:
Originated for portfolio		15		-
Purchased for portfolio		81		89
Other consumer		-		21
Total nonaccrual		2,423		377
Total nonaccrual and nonperforming loans	$	2,423	$	377

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, 2019 or December 31, 2018.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of September 30, 2019 (unaudited):


	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	$	1,001	$	-	$	-	$	1,001	$	154,247	$	89
Real estate:
Single-family residential		1,965		54		391		2,410		125,344		128
Multi-family residential		-		-		-		-		46,946		-
Commercial:
Non-owner occupied		-		-		1,719		1,719		140,579		-
Owner occupied		-		-		-		-		50,073		-
Land		-		-		-		-		25,480		-
Construction		-		-		-		-		63,654		-
Consumer:
Home equity lines of credit:
Originated for portfolio		340		-		-		340		20,960		15
Purchased for portfolio		-		-		-		-		285		81
Other		-		-		-		-		4,478		-
Total	$	3,306	$	54	$	2,110	$	5,470	$	632,046	$	313

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2018:



	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	$	-	$	-	$	-	$	-	$	126,887	$	100
Real estate:
Single-family residential		597		-		23		620		117,766		144
Multi-family residential		-		-		-		-		47,651		-
Commercial:
Non-owner occupied		-		-		-		-		122,465		-
Owner occupied		-		-		-		-		43,087		-
Land		-		-		-		-		7,883		-
Construction		-		-		-		-		61,792		-
Consumer:
Home equity lines of credit:
Originated for portfolio		474		-		-		474		23,119		-
Purchased for portfolio		-		33		-		33		335		89
Other		-		-		21		21		5,562		-
Total	$	1,071	$	33	$	44	$	1,148	$	556,547	$	333

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 September 30, 2019 and December 31, 2018, TDRs totaled $3,085 and $3,161, respectively. The Company allocated $22 and $22 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2019 and December 31, 2018, respectively. The Company had not committed to lend any additional amounts as of September 30, 2019 or December 31, 2018 to customers with outstanding loans classified as nonaccrual TDRs.

During the three and nine months ended September 30, 2019 and September 30, 2018, there were no loans modified as a TDR.

There were no TDRs in payment default or that became nonperforming during the quarters ended September 30, 2019 and September 30, 2018. 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 quarters ended September 30, 2019 and 2018 that did not meet the definition of a TDR. These loans had a total recorded investment of $12,707 and $10,210 as of September 30, 2019 and 2018, 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 payments that was considered to be insignificant or a modification where no concessions were 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 September 30, 2019 and December 31, 2018, nonaccrual TDRs were as follows:




	September 30, 2019		December 31, 2018
	(unaudited)
Commercial	$	89	$	100
Total	$	89	$	100

Nonaccrual loans at September 30, 2019 and December 31, 2018 do not include $2,996 and $3,061, 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 and leases by risk category and by class of loans and leases as of September 30, 2019 and based on the most recent analysis performed follows. There were no loans or leases rated doubtful at September 30, 2019.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	152,937	$	1,649	$	662	$	155,248
Real estate:
Single-family residential		127,235		-		-		519		127,754
Multi-family residential		-		46,797		-		149		46,946
Commercial:
Non-owner occupied		68		136,233		1,510		4,487		142,298
Owner occupied		-		47,816		2,137		120		50,073
Land		-		25,480		-		-		25,480
Construction		981		62,673		-		-		63,654
Consumer:
Home equity lines of credit:
Originated for portfolio		21,222		-		-		78		21,300
Purchased for portfolio		204		-		-		81		285
Other		4,478		-		-		-		4,478
	$	154,188	$	471,936	$	5,296	$	6,096	$	637,516

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2018 follows. There were no loans or leases rated doubtful at December 31, 2018.



	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	123,369	$	2,651	$	867	$	126,887
Real estate:
Single-family residential		118,219		-		-		167		118,386
Multi-family residential		-		47,072		425		154		47,651
Commercial:
Non-owner occupied		76		119,843		1,701		845		122,465
Owner occupied		-		39,747		2,252		1,088		43,087
Land		-		7,883		-		-		7,883
Construction		3,279		58,513		-		-		61,792
Consumer:
Home equity lines of credit:
Originated for portfolio		23,525		-		-		68		23,593
Purchased for portfolio		279		-		-		89		368
Other		5,562		-		-		21		5,583
	$	150,940	$	396,427	$	7,029	$	3,299	$	557,695

Leases:

The following lists the components of the net investment in direct financing leases (1):


	September 30, 2019		December 31, 2018
	(unaudited)
Total minimum lease payments to be received	$	5,451	$	6,045
Less: unearned income		(514)		(642)
Net investment in direct financing leases	$	4,937	$	5,403

⁽¹⁾

There were no initial direct costs associated with these leases.

The following summarizes the future minimum lease payments receivable in fiscal year 2019 and in subsequent fiscal years:


2019	$	199
2020		793
2021		793
2022		793
2023		1,563
Thereafter		1,310
	$	5,451