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.




	June 30, 2020		December 31, 2019
	(unaudited)
Commercial (1)	$	327,539	$	170,646
Real estate:
Single-family residential		128,241		120,256
Multi-family residential		46,654		39,229
Commercial		272,207		247,543
Construction		59,574		67,652
Consumer:
Home equity lines of credit		19,596		20,941
Other		2,825		4,174
Subtotal		856,636		670,441
Less: ALLL		(10,107)		(7,138)
Loans and leases, net	$	846,529	$	663,303

⁽¹⁾

Includes $4,459 and $4,779 of commercial leases at June 30, 2020 and December 31, 2019, respectively.

Included in Commercial loans at June 30, 2020, were $123.5 million of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program, the PPP. These loans are 100% guaranteed by the SBA and the full principal amount of the loan may qualify for forgiveness. The loans we originated have a maturity of two years, an interest rate of 1.00% and loan payments are deferred for the initial six months. The majority of these loans have been pledged as collateral on borrowings under the FRB Paycheck Protection Program Lending Facility (“PPPLF”). See Note 8- FHLB Advances and Other Debt for additional information.

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 June 30, 2020 and December 31, 2019, CFBank held $23,116 and $26,046, 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 2019 Audited Financial Statements.

The following table presents the activity in the ALLL by portfolio segment for the three and six months ended June 30, 2020:



	Three months ended June 30, 2020 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	2,103	$	905	$	512	$	2,674	$	574	$	249	$	56	$	7,073
Addition to (reduction in) provision for loan losses		600		150		55		1,860		450		10		-		3,125
Charge-offs		(39)		(58)		-		-		-		-		-		(97)
Recoveries		-		2		-		-		-		4		-		6
Ending balance	$	2,664	$	999	$	567	$	4,534	$	1,024	$	263	$	56	$	10,107



	Six months ended June 30, 2020 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	2,054	$	948	$	447	$	2,604	$	759	$	265	$	61	$	7,138
Addition to (reduction in) provision for loan losses		720		105		120		1,930		265		(10)		(5)		3,125
Charge-offs		(110)		(58)		-		-		-		-		-		(168)
Recoveries		-		4		-		-		-		8		-		12
Ending balance	$	2,664	$	999	$	567	$	4,534	$	1,024	$	263	$	56	$	10,107

The following table presents the activity in the ALLL by portfolio segment for the three and six months ended June 30, 2019:



	Three months ended June 30, 2019 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,819	$	1,063	$	622	$	2,299	$	759	$	375	$	87	$	7,024
Addition to (reduction in) provision for loan losses		150		(50)		(60)		40		-		(70)		(10)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		1		-		-		-		4		-		5
Ending balance	$	1,969	$	1,014	$	562	$	2,339	$	759	$	309	$	77	$	7,029



	Six months ended June 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		150		(50)		(50)		65		20		(115)		(20)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		3		-		-		-		14		-		17
Ending balance	$	1,969	$	1,014	$	562	$	2,339	$	759	$	309	$	77	$	7,029

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 June 30, 2020 (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	$	-	$	-	$	-	$	22	$	-	$	-	$	-	$	22
Collectively evaluated for impairment		2,664		999		567		4,512		1,024		263		56		10,085
Total ending allowance balance	$	2,664	$	999	$	567	$	4,534	$	1,024	$	263	$	56	$	10,107

Loans:
Individually evaluated for impairment	$	81	$	106	$	-	$	2,728	$	-	$	-	$	-	$	2,915
Collectively evaluated for impairment		327,458		128,135		46,654		269,479		59,574		19,596		2,825		853,721
Total ending loan balance	$	327,539	$	128,241	$	46,654	$	272,207	$	59,574	$	19,596	$	2,825	$	856,636

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, 2019:



			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	$	1	$	-	$	33	$	-	$	-	$	-	$	35
Collectively evaluated for impairment		2,053		947		447		2,571		759		265		61		7,103
Total ending allowance balance	$	2,054	$	948	$	447	$	2,604	$	759	$	265	$	61	$	7,138

Loans:
Individually evaluated for impairment	$	85	$	107	$	-	$	4,420	$	-	$	-	$	-	$	4,612
Collectively evaluated for impairment		170,561		120,149		39,229		243,123		67,652		20,941		4,174		665,829
Total ending loan balance	$	170,646	$	120,256	$	39,229	$	247,543	$	67,652	$	20,941	$	4,174	$	670,441

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended June 30, 2020. 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 six months ended June 30, 2020. Cash payments of interest on these loans during the three and six months ended June 30, 2020 totaled $11 and $53, respectively.


							Three months ended				Six months ended
	As of June 30, 2020						June 30, 2020				June 30, 2020
	(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	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Total with no allowance recorded		-		-		-		-		-		-		-

With an allowance recorded:
Commercial (1)		81		81		-		108		3		126		5
Real estate:
Single-family residential (1)		106		106		-		106		-		106		1
Commercial:
Non-owner occupied		2,728		2,728		22		2,730		38		2,732		75
Total with an allowance recorded		2,915		2,915		22		2,944		41		2,964		81
Total	$	2,915	$	2,915	$	22	$	2,944	$	41	$	2,964	$	81

⁽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, 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 six months ended June 30, 2019. Cash payments of interest during the three and six months ended June 30, 2019 totaled $43 and $88.


							Three months ended				Six months ended
	As of December 31, 2019						June 30, 2019				June 30, 2019
							(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	$	-	$	-	$	-	$	94	$	-	$	96	$	-
Real estate:
Single-family residential		-		-		-		109		2		109		3
Commercial:
Owner occupied		-		-		-		121		1		122		7
Total with no allowance recorded		-		-		-		324		3		327		10

With an allowance recorded:
Commercial		85		85		1		-		-		-		-
Real estate:
Single-family residential		107		107		1		-		-		-		-
Multi-family residential		-		-		-		-		-
Commercial:
Non-owner occupied		4,420		4,420		33		4,483		39		3,932		76
Total with an allowance recorded		4,612		4,612		35		4,483		39		3,932		76
Total	$	4,612	$	4,612	$	35	$	4,807	$	42	$	4,259	$	86

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




	June 30, 2020		December 31, 2019
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		-		85
Real estate:
Single-family residential		472		550
Commercial:
Non-owner occupied		-		1,689
Consumer:
Home equity lines of credit:
Originated for portfolio		35		36
Purchased for portfolio		74		79
Other consumer		-		-
Total nonaccrual		581		2,439
Total nonaccrual and nonperforming loans	$	581	$	2,439

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 June 30, 2020 or December 31, 2019.

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of June 30, 2020 (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	$	-	$	-	$	-	$	-	$	327,539	$	-
Real estate:
Single-family residential		892		17		358		1,267		126,974		114
Multi-family residential		-		-		-		-		46,654		-
Commercial:
Non-owner occupied		-		-		-		-		151,927		-
Owner occupied		-		-		-		-		92,176		-
Land		-		-		-		-		28,104		-
Construction		-		-		-		-		59,574		-
Consumer:
Home equity lines of credit:
Originated for portfolio		132		-		22		154		19,245		13
Purchased for portfolio		-		-		-		-		197		74
Other		-		-		-		-		2,825		-
Total	$	1,024	$	17	$	380	$	1,421	$	855,215	$	201

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2019:



	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	$	-	$	71	$	-	$	71	$	170,575	$	85
Real estate:
Single-family residential		2,453		261		426		3,140		117,116		124
Multi-family residential		-		-		-		-		39,229		-
Commercial:
Non-owner occupied		-		-		1,689		1,689		138,762		-
Owner occupied		-		-		-		-		81,871		-
Land		-		-		-		-		25,221		-
Construction		304		-		-		304		67,348		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		-		22		22		20,713		14
Purchased for portfolio		-		-		-		-		206		79
Other		-		-		-		-		4,174		-
Total	$	2,757	$	332	$	2,137	$	5,226	$	665,215	$	302

Short-term Loan Deferrals

Under the CARES Act, financial institutions are permitted to not classify loan modifications that were related to the impact of COVID-19 if:

The modifications were made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the public health emergency, and

The underlying loans were not more than 30 days past due as of December 31, 2019.

We implemented a loan modification program in accordance with the CARES Act to provide temporary relief to borrowers that meet the requirements under the CARES Act. The program allows for deferral of payments for up to 90 days, which we may extend for up to an additional 90 days at our option. The deferred payments and accrued interest during the deferral period are due and payable on or before the maturity of the loans. At June 30, 2020, we granted temporary deferrals on loans with an outstanding balance of approximately $100 million. Under the provisions of the CARES Act, none of these loans were considered a troubled debt restructuring (“TDR”) at June 30, 2020.

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 June 30, 2020 and December 31, 2019, TDRs totaled $2,915 and $2,923, respectively. The Company allocated $22 and $22 of specific reserves to loans whose terms had been modified in TDRs as of June 30, 2020 and December 31, 2019, respectively. The Company had not committed to lend any additional amounts as of June 30, 2020 or December 31, 2019 to customers with outstanding loans classified as nonaccrual TDRs.

During the three months ended June 30, 2020 and June 30, 2019, there were no loans modified as a TDR.

There were no TDRs in payment default or that became nonperforming during the quarters ended June 30, 2020 and June 30, 2019. 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 six months ended June 30, 2020 and 2019 that did not meet the definition of a TDR. These loans had a total recorded investment of $26,995 and $15,821 as of June 30, 2020 and 2019, 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 June 30, 2020 there were no nonaccrual TDR’s and at December 31, 2019, nonaccrual TDRs were as follows:




	June 30, 2020		December 31, 2019
	(unaudited)
Commercial	$	-	$	85
Total	$	-	$	85

Nonaccrual loans at June 30, 2020 and December 31, 2019 do not include $2,915 and $2,838, 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 June 30, 2020 and based on the most recent analysis performed follows. There were no loans or leases rated doubtful at June 30, 2020.


(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	847	$	324,884	$	1,298	$	510	$	327,539
Real estate:
Single-family residential		127,769		-		-		472		128,241
Multi-family residential		-		46,508		-		146		46,654
Commercial:
Non-owner occupied		62		142,706		6,431		2,728		151,927
Owner occupied		309		88,951		2,018		898		92,176
Land		-		28,104		-		-		28,104
Construction		3,045		56,529		-		-		59,574
Consumer:
Home equity lines of credit:
Originated for portfolio		19,348		-		-		51		19,399
Purchased for portfolio		122		-		-		75		197
Other		2,825		-		-		-		2,825
	$	154,327	$	687,682	$	9,747	$	4,880	$	856,636

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2019 follows. There were no loans or leases rated doubtful at December 31, 2019.



	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	168,617	$	1,424	$	605	$	170,646
Real estate:
Single-family residential		119,707		-		-		549		120,256
Multi-family residential		-		39,081		-		148		39,229
Commercial:
Non-owner occupied		67		134,466		1,498		4,420		140,451
Owner occupied		-		79,773		2,098		-		81,871
Land		-		25,221		-		-		25,221
Construction		1,855		65,797		-		-		67,652
Consumer:
Home equity lines of credit:
Originated for portfolio		20,681		-		-		54		20,735
Purchased for portfolio		127		-		-		79		206
Other		4,174		-		-		-		4,174
	$	146,611	$	512,955	$	5,020	$	5,855	$	670,441

Leases:

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


	June 30, 2020		December 31, 2019
	(unaudited)
Total minimum lease payments to be received	$	4,856	$	5,252
Less: unearned income		(397)		(473)
Net investment in direct financing leases	$	4,459	$	4,779

⁽¹⁾

There were no initial direct costs associated with these leases.

The following summarizes the future minimum lease payments receivable in fiscal year 2020 and in subsequent fiscal years:


2020	$	397
2021		793
2022		793
2023		1,563
2024		1,310
	$	4,856