Central Federal Bancshares, Inc - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - Central Federal Bancshares, Inc	t1601965_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Central Federal Bancshares, Inc	t1601965_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Central Federal Bancshares, Inc	t1601965_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 000-55553

Central Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Missouri		47-4884908
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)

210 West 10th Street, Rolla, Missouri		65401
(Address of Principal Executive Offices)		Zip Code

(573) 364-1024

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

As of August 12, 2016, there were 1,788,020 shares of common stock outstanding.

Central Federal Bancshares, Inc.
Form 10-Q

Index

		Page
	Part I. Financial Information

Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition as of June 30, 2016 and December 31, 2015 (unaudited)	3
	Consolidated Statements of Operations for the Three Months Ended and Six Months Ended June 30, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended and Six Months Ended June 30, 2016 and 2015 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	37

	Part II. Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signature Page	38

Table of Contents

Part I. – Financial Information

Item 1. Financial Statements

central federal bancshares, inc.

consolidated statementS of financial condition

	June 30,			December 31,
	2016			2015
	(Unaudited)
ASSETS
Cash and Due from Financial Institutions	$	13,072,000		$	24,910,000
Federal Funds Sold		100,000			100,000
Cash and Cash Equivalents		13,172,000			25,010,000
Certificates of Deposits in Other Financial Institutions		3,472,000			2,480,000
Securities Available-for-Sale at Fair Value (Amortized cost is $7,448,000 at June 30, 2016, and $423,000 at December 31, 2015)		7,469,000			436,000
Federal Home Loan Bank (FHLB) Stock, at Cost		97,000			77,000
Loans, Net of Allowance for Loan Losses of $261,000 at June 30, 2016 and December 31, 2015		48,184,000			49,910,000
Foreclosed Assets		269,000			608,000
Premises and Equipment, Net		649,000			676,000
Accrued Interest Receivable		146,000			115,000
Deferred Tax Asset, Net		136,000			91,000
Other Assets		102,000			1,490,000
Total Assets	$	73,696,000		$	80,893,000
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-Bearing		2,633,000		$	21,845,000
Interest-Bearing		43,144,000			44,770,000
Total Deposits		45,777,000			66,615,000
Other Liabilities		70,000			628,000
Total Liabilities		45,847,000			67,243,000
STOCKHOLDERS' EQUITY
Preferred Stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding		-			-
Common Stock, $0.01 par value; 10,000,000 shares authorized; 1,788,020 issued and outstanding at June 30, 2016		18,000			-
Additional Paid-In Capital		16,440,000			-
Common Stock Acquired by Employee Stock Ownership Plan ("ESOP")		(1,402,000	)		-
Retained Earnings - Substantially Restricted		12,779,000			13,640,000
Accumulated Other Comprehensive Income		14,000			10,000
Total Stockholders' Equity		27,849,000			13,650,000
Total Liabilities and Stockholders' Equity	$	73,696,000		$	80,893,000

See Accompanying Notes to Consolidated Financial Statements.

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central federal bancshares, inc.

consolidated statements of operations

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2016			2015		2016			2015
	(Unaudited)
INTEREST INCOME
Loans, Including Fees	$	549,000		$	570,000	$	1,107,000		$	1,192,000
Securities and Other		62,000			16,000		115,000			30,000
Total Interest Income		611,000			586,000		1,222,000			1,222,000
INTEREST EXPENSE
Deposits		89,000			117,000		186,000			236,000
Total Interest Expense		89,000			117,000		186,000			236,000
NET INTEREST INCOME		522,000			469,000		1,036,000			986,000
PROVISION FOR LOAN LOSSES		-			-		-			-
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		522,000			469,000		1,036,000			986,000
NONINTEREST INCOME
Customer Service Fees		11,000			12,000		23,000			22,000
Other Income		6,000			7,000		8,000			10,000
Total Noninterest Income		17,000			19,000		31,000			32,000
NONINTEREST EXPENSE
Compensation and Employee Benefits		281,000			265,000		539,000			525,000
Data Processing and Other Outside Services		81,000			66,000		142,000			122,000
FDIC Insurance and Regulatory Assessment		18,000			20,000		40,000			40,000
Occupancy and Equipment		38,000			54,000		88,000			108,000
Legal and Professional Services		202,000			11,000		315,000			26,000
Supplies, Telephone, and Postage		11,000			11,000		23,000			22,000
Operations of Foreclosed Assets, net		(3,000	)		5,000		(8,000	)		9,000
Contribution to Charitable Foundation		-			-		788,000			-
Other		29,000			18,000		53,000			41,000
Total Noninterest Expense		657,000			450,000		1,980,000			893,000
INCOME (LOSS) BEFORE INCOME TAXES		(118,000	)		38,000		(913,000	)		125,000
INCOME TAX EXPENSE (BENEFIT)		(42,000	)		14,000		(52,000	)		44,000
NET INCOME (LOSS)	$	(76,000	)	$	24,000	$	(861,000	)	$	81,000

Common share data
Basic and diluted loss per share (1)	$	(0.05	)		N/A	$	(0.56	)		N/A

(1)

Basic and diluted earnings per share is N/A for the three and six months ended June 30, 2015 as no shares were outstanding during these periods.

See Accompanying Notes to Consolidated Financial Statements.

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CENTRAL FEDERAL Bancshares, Inc.

consolidated STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
	(Unaudited)
NET INCOME (LOSS)	$	(76,000	)	$	24,000		$	(861,000	)	$	81,000
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Securities Available-for-Sale		99,000			(2,000	)		8,000			2,000
Income Tax (Expense) Benefit		(37,000	)		1,000			(4,000	)		(1,000	)
Total Other Comprehensive Income (Loss), net of tax		62,000			(1,000	)		4,000			1,000
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(14,000	)	$	23,000		$	(857,000	)	$	82,000

See Accompanying Notes to Consolidated Financial Statements.

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CENTRAL FEDERAL Bancshares, Inc.

consolidated STATEMENTS OF CHANGES in stockholders’ EQUITY

FOR THE six MONTHS ENDED June 30, 2016 AND 2015 (UNAUDITED)

	Common Stock		Additional Paid-In Capital		Common Stock Acquired by Employee Stock Ownership Plan ("ESOP")			Retained Earnings			Accumulated Other Comprehensive Income		Total

BALANCE, DECEMBER 31, 2014	$	-	$	-	$	-		$	13,571,000		$	11,000	$	13,582,000
Net income		-		-		-			81,000			-		81,000
Other comprehensive income		-		-		-			-			1,000		1,000
BALANCE, JUNE 30, 2015 (unaudited)	$	-	$	-	$	-		$	13,652,000		$	12,000	$	13,664,000

BALANCE, DECEMBER 31, 2015	$	-	$	-	$	-		$	13,640,000		$	10,000	$	13,650,000
Net loss		-		-		-			(861,000	)		-		(861,000	)
Other comprehensive income		-		-		-			-			4,000		4,000
Issuance of 1,788,020 shares of common stock at $10.00 per share, net of offering costs		18,000		16,437,000		-			-			-		16,455,000
Funding of ESOP with 143,042 shares of common stock		-		-		(1,430,000	)		-			-		(1,430,000	)
Earned ESOP shares		-		3,000		28,000			-			-		31,000

BALANCE, JUNE 30, 2016 (unaudited)	$	18,000	$	16,440,000	$	(1,402,000	)	$	12,779,000		$	14,000	$	27,849,000

See Accompanying Notes to Consolidated Financial Statements.

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CENTRAL FEDERAL Bancshares, Inc.

consolidated statements of cash flows

	Six Months Ended
	June 30,
	2016			2015
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income	$	(861,000	)	$	81,000
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities:
Net Amortization of Securities		13,000			-
Provision for Loan Losses		-			-
Depreciation		33,000			38,000
Deferred Income Tax		(49,000	)		50,000
Loss on Sale of Foreclosed Assets		9,000			-
ESOP Expense		31,000			-
Net Changes in:
Accrued Interest Receivable		(31,000	)		(4,000	)
Other Assets		1,388,000			(84,000	)
Other Liabilities		(558,000	)		5,000
Net Cash (Used In) Provided by Operating Activities		(25,000	)		86,000
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits in Other Financial Institutions		(992,000	)		-
Net Change in FHLB Stock		(20,000	)		1,000
Purchases of Securities Available-for-Sale		(7,259,000	)		-
Proceeds from Maturities, Calls and Paydowns of Securities Available-for-Sale		221,000			-
Net Decrease in Loans		1,700,000			2,295,000
Purchases of Premises and Equipment		(6,000	)		(8,000	)
Proceeds from Sale of Foreclosed Assets		356,000			-
Net Cash (Used In) Provided by Investing Activities		(6,000,000	)		2,288,000
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		(20,838,000	)		(1,640,000	)
Proceeds from Issuance of Common Stock		15,025,000			-
Net Cash Used In Financing Activities		(5,813,000	)		(1,640,000	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(11,838,000	)		734,000
Cash and Cash Equivalents at Beginning of Period		25,010,000			7,902,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,172,000		$	8,636,000

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest Paid on Deposits	$	179,000		$	231,000
Income Taxes Paid, Net of Refunds Received	$	(6,239	)	$	21,000
Noncash Investing Activities:
Transfer of Loans to Foreclosed Assets	$	26,000		$	265,000

See Accompanying Notes to Consolidated Financial Statements.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Central Federal Bancshares, Inc. (“Central Federal Bancshares” or the “Company”) is a holding company that owns 100% of Central Federal Savings and Loan Association of Rolla (“Central Federal”). Central Federal is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which generally consists of Phelps County, Missouri, although it also services customers in the contiguous Missouri counties of Dent, Texas, Crawford, Pulaski and Maries. Central Federal offers a variety of loan and deposit products to meet the borrowing needs of its customers. Central Federal operates out of its office in Rolla, Missouri. Central Federal is subject to regulation, examination, and supervision by the Office of the Comptroller of the Currency, or OCC, its primary federal regulator, and the Federal Deposit Insurance Corporation, or FDIC, its deposit insurer.

Stock Conversion

On August 4, 2015, the Board of Directors of Central Federal adopted a Plan of Conversion, as subsequently amended, providing for Central Federal to convert from a federally chartered mutual savings association into a federally chartered stock savings association and operate as a wholly-owned subsidiary of a newly chartered savings and loan holding company. On January 12, 2016, Central Federal completed the conversion and now operates as a wholly-owned subsidiary of the Company. In connection with the conversion, the Company sold 1,719,250 shares of common stock in a subscription offering at $10.00 per share, including the sale of 143,042 shares to the employee stock ownership plan formed by Central Federal in connection with the conversion. In addition, the Company contributed an additional 68,770 shares of common stock and $100,000 in cash to the Central Federal Community Foundation, a charitable organization created by the Company and Central Federal in connection with the conversion and the related stock offering. The costs of the conversion and issuance of common stock was deferred and deducted from the proceeds of the offering. Central Federal incurred conversion costs of $1,425,000.

In accordance with applicable federal conversion regulations, at the time of the completion of the conversion, Central Federal established a liquidation account in an amount equal to Central Federal’s total retained earnings as of the latest balance sheet date in the final prospectus used in the conversion (which was June 30, 2015). Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account only in the event of a complete liquidation of Central Federal. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any December 31 and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance. Central Federal may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Principles of Consolidation

On January 12, 2016, Central Federal completed its conversion from the mutual to stock form of ownership and now operates as a wholly-owned subsidiary of the Company. The conversion will be accounted for as a change in corporate form with the historic base of Central Federal’s assets, liabilities and equity unchanged as a result. The unaudited consolidated financial statements as of and for the three and six months ended June 30, 2016 are for the Company and Central Federal. Intercompany transactions and balances have been eliminated in the consolidation. The financial statements as of December 31, 2015 and the unaudited financial statements for the three and six months ended June 30, 2015 represent Central Federal only, as the conversion to stock form had not yet occurred.

Unaudited Interim Consolidated Financial Statements

The interim consolidated financial statements prepared by management as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2016, and the results of operations and cash flows for the periods ended June 30, 2016 and 2015, and are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the financial statements of Central Federal for the year ended December 31, 2015, contained in the 2015 Annual Report on Form 10-K filed with the SEC on March 30, 2016.

Use of Estimates

Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, valuation of foreclosed assets, valuation of deferred tax assets, and fair values of financial instruments.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2020. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

Reclassification

Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 presentation.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were available to be issued.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

Note 2

LOSS per share

Loss per share is based upon the weighted-average shares outstanding. The shares outstanding were issued on January 12, 2016. The shares in the Company’s Employee Stock Ownership Plan, which have been committed to be released, are considered outstanding.

	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	(Unaudited)
Basic and Diluted Loss per Share:

Net Loss	$	(76,000	)	$	(861,000	)
Less: Dividends Paid on Common Stock		-			-
Undistributed Loss	$	(76,000	)	$	(861,000	)

Weighted-Average Basic and Diluted Shares Outstanding		1,646,408			1,537,539

Distributed Loss per Share	$	-		$	-
Undistributed Loss per Share		(0.05	)		(0.56	)
Net Loss per Share	$	(0.05	)	$	(0.56	)

note 3

Certificates of DEPOSIT IN OTHER FINANCIAL INSTITUTIONS

Certificates of deposit in other financial institutions are as follows:

	June 30, 2016		December 31, 2015
	(Unaudited)
Certificates of Deposit at Cost Maturing In:
One Year or Less	$	248,000	$	248,000
One Year to Five Years		3,224,000		2,232,000
Over Five Years		-		-
	$	3,472,000	$	2,480,000

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central federal bancshares, inc.

notes to CoNsolidated financial statements

note 4

sECURITIES

The amortized cost and estimated fair market value of investment securities classified as available-for-sale are summarized as follows:

	June 30, 2016 (Unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Mortgage Backed Securities	$	6,016,000	$	3,000	$	8,000	$	6,011,000
Small Business Administration Pools		1,009,000		1,000		-		1,010,000
Muncipal Obligation		408,000		17,000		-		425,000
Federal Home Loan Mortgage Corp. Stock		15,000		8,000		-		23,000
Total	$	7,448,000	$	29,000	$	8,000	$	7,469,000

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Muncipal Obligation	$	408,000	$	6,000	$	-	$	414,000
Federal Home Loan Mortgage Corp. Stock		15,000		7,000		-		22,000
Total	$	423,000	$	13,000	$	-	$	436,000

The amortized cost and fair value of securities available-for-sale as of June 30, 2016 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage backed securities, because mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are segregated in the following maturity summary:

	Amortized Cost		Fair Value
	(Unaudited)
Five Years or Less	$	-	$	-
Over Ten Years		1,417,000		1,435,000
Mortgage Backed Securities		6,016,000		6,011,000
No Stated Maturity Date		15,000		23,000
Total	$	7,448,000	$	7,469,000

There were no securities pledged as collateral at June 30, 2016 and December 31, 2015.

During the six-month periods ended June 30, 2016 and 2015, the Company did not sell any securities.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

note 4

sECURITIES (CONTINUED)

The following table shows securities with gross unrealized losses at June 30, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position. There were no securities in an unrealized loss position at December 31, 2015.

	June 30, 2016 (Unaudited)
	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Mortgage Backed Securities	$	5,029,000	$	8,000	$	-	$	-	$	5,029,000	$	8,000

There were no securities with unrealized losses which management believes were other-than-temporarily impaired at June 30, 2016 and December 31, 2015.

note 5

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are summarized as follows:

	June 30,			December 31,
	2016			2015
	(Unaudited)
Commercial Business	$	1,410,000		$	1,951,000
Commercial and Multi-Family Real Estate		14,189,000			16,116,000
Residential Real Estate		32,379,000			31,705,000
Consumer and Other		485,000			418,000
		48,463,000			50,190,000
Allowance for Loan Losses		(261,000	)		(261,000	)
Net Deferred Loan Fees		(18,000	)		(19,000	)
Loans, Net	$	48,184,000		$	49,910,000

Residential real estate loans at June 30, 2016 and December 31, 2015 include loans secured by one-to-four family, non-owner occupied properties of $8,612,000 and $10,177,000, respectively.

At June 30, 2016 and December 31, 2015, construction loans were $2,240,000 and $2,011,000, respectively. Loans in process at June 30, 2016 and December 31, 2015 were $1,322,000 and $609,000, respectively.

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central federal bancshares, inc.

notes to CoNsolidated financial statements

note 5

loans and allowance for loan losses (continued)

The following presents by portfolio segment, the activity in the allowance for loan losses for the six months ended June 30, 2016 and 2015:

June 30, 2016 (Unaudited)	Commercial Business			Commercial and Multi- Family Real Estate		Residential Real Estate		Consumer and Other			Unallocated			Total
Allowance for Loan Losses:
Balance at Beginning of Year	$	5,000		$	30,000	$	183,000	$	4,000		$	39,000		$	261,000
Provision for Loan Losses		(2,000	)		6,000		8,000		6,000			(18,000	)		-
Loans Charged-Off		-			-		-		(1,000	)		-			(1,000	)
Recoveries of Loans
Previously Charged-Off		-			-		1,000		-			-			1,000
Balance at End of Period	$	3,000		$	36,000	$	192,000	$	9,000		$	21,000		$	261,000

Ending Balance: Individually Evaluated for Impairment	$	-		$	-	$	15,000	$	-		$	-		$	15,000

Ending Balance: Collectively Evaluated for Impairment	$	3,000		$	36,000	$	177,000	$	9,000		$	21,000		$	246,000

Loans:
Ending Balance: Individually Evaluated for Impairment	$	-		$	413,000	$	366,000	$	-					$	779,000

Ending Balance: Collectively Evaluated for Impairment	$	1,410,000		$	13,776,000	$	32,013,000	$	485,000					$	47,684,000

December 31, 2015	Commercial Business		Commercial and Multi- Family Real Estate		Residential Real Estate		Consumer and Other		Unallocated	Total
Loans:
Ending Balance: Individually Evaluated for Impairment	$	-	$	390,000	$	289,000	$	-		$	679,000

Ending Balance: Collectively Evaluated for Impairment	$	1,951,000	$	15,726,000	$	31,416,000	$	418,000		$	49,511,000

June 30, 2015 (Unaudited)	Commercial Business		Commercial and Multi- Family Real Estate			Residential Real Estate		Consumer and Other			Unallocated			Total
Allowance for Loan Losses:
Balance at Beginning of Year	$	4,000	$	46,000		$	193,000	$	4,000		$	32,000		$	279,000
Provision for Loan Losses		-		(15,000	)		17,000		2,000			(4,000	)		-
Loans Charged-Off		-		-			-		(2,000	)		-			(2,000	)
Recoveries of Loans
Previously Charged-Off		-		-			1,000		-			-			1,000
Balance at End of Period	$	4,000	$	31,000		$	211,000	$	4,000		$	28,000		$	278,000

Ending Balance: Individually Evaluated for Impairment	$	-	$	-		$	15,000	$	-		$	-		$	15,000

Ending Balance: Collectively Evaluated for Impairment	$	4,000	$	31,000		$	196,000	$	4,000		$	28,000		$	263,000

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note 5

loans and allowance for loan losses (continued)

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended June 30, 2016 and 2015:

June 30, 2016 (Unaudited)	Commercial Business			Commercial and Multi- Family Real Estate			Residential Real Estate		Consumer and Other			Unallocated		Total
Allowance for Loan Losses:
Balance at Beginning of Period	$	5,000		$	38,000		$	192,000	$	10,000		$	16,000	$	261,000
Provision for Loan Losses		(2,000	)		(2,000	)		-		(1,000	)		5,000		-
Loans Charged-Off		-			-			-		-			-		-
Recoveries of Loans
Previously Charged-Off		-			-			-		-			-		-
Balance at End of Period	$	3,000		$	36,000		$	192,000	$	9,000		$	21,000	$	261,000

Ending Balance: Individually Evaluated for Impairment	$	-		$	-		$	15,000	$	-		$	-	$	15,000

Ending Balance: Collectively Evaluated for Impairment	$	3,000		$	36,000		$	177,000	$	9,000		$	21,000	$	246,000

June 30, 2015 (Unaudited)	Commercial Business			Commercial and Multi- Family Real Estate		Residential Real Estate		Consumer and Other			Unallocated			Total
Allowance for Loan Losses:
Balance at Beginning of Period	$	5,000		$	31,000	$	201,000	$	4,000		$	38,000		$	279,000
Provision for Loan Losses		(1,000	)		-		9,000		2,000			(10,000	)		-
Loans Charged-Off		-			-		-		(2,000	)		-			(2,000	)
Recoveries of Loans
Previously Charged-Off		-			-		1,000		-			-			1,000
Balance at End of Period	$	4,000		$	31,000	$	211,000	$	4,000		$	28,000		$	278,000

Ending Balance: Individually Evaluated for Impairment	$	-		$	-	$	15,000	$	-		$	-		$	15,000

Ending Balance: Collectively Evaluated for Impairment	$	4,000		$	31,000	$	196,000	$	4,000		$	28,000		$	263,000

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NOTE 5

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following tables show the loans allocated by management’s internal risk ratings:

	Risk Profile by Risk Rating
June 30, 2016 (Unaudited)	Commercial Business		Commercial and Multi- Family Real Estate		Residential Real Estate		Consumer and Other		Total
Risk Rating:
Unclassified	$	1,410,000	$	13,776,000	$	31,610,000	$	483,000	$	47,279,000
Special Mention		-		-		263,000		-		263,000
Substandard		-		413,000		506,000		2,000		921,000
Total	$	1,410,000	$	14,189,000	$	32,379,000	$	485,000	$	48,463,000

	Risk Profile by Risk Rating
December 31, 2015	Commercial Business		Commercial and Multi- Family Real Estate		Residential Real Estate		Consumer and Other		Total
Risk Rating:
Unclassified	$	1,951,000	$	15,726,000	$	31,049,000	$	418,000	$	49,144,000
Special Mention		-				225,000		-		225,000
Substandard		-		390,000		431,000		-		821,000
Total	$	1,951,000	$	16,116,000	$	31,705,000	$	418,000	$	50,190,000

The following tables show the aging analysis of the loan portfolio by time past due:

	Accruing Interest
June 30, 2016 (Unaudited)	Current		30-89 Days Past Due		90 Days or More Past Due		Total Nonaccrual		Toal Loans

Commercial Business	$	1,410,000	$	-	$	-	$	-	$	1,410,000
Commerical and Multi-Family Real Estate		13,776,000		-		-		413,000		14,189,000
Residential Real Estate		31,846,000		98,000		69,000		366,000		32,379,000
Consumer and Other		477,000		6,000		2,000		-		485,000
	$	47,509,000	$	104,000	$	71,000	$	779,000	$	48,463,000

	Accruing Interest
December 31, 2015	Current		30-89 Days Past Due		90 Days or More Past Due		Total Nonaccrual		Toal Loans

Commercial Business	$	1,951,000	$	-	$	-	$	-	$	1,951,000
Commerical and Multi-Family Real Estate		15,726,000		-		-		390,000		16,116,000
Residential Real Estate		31,130,000		186,000		100,000		289,000		31,705,000
Consumer and Other		406,000		12,000		-		-		418,000
	$	49,213,000	$	198,000	$	100,000	$	679,000	$	50,190,000

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NOTE 5

LOANS and allowance for loan losses (continued)

Interest income that would have been recorded for the six months ended June 30, 2016 and 2015 had nonaccrual loans been current according to their original terms amounted to $16,000 and $14,000, respectively. Interest income recognized on nonaccrual loans during the six months ended June 30, 2016 and 2015 amounted to $3,000 for both periods.

The following tables present information related to impaired loans:

June 30, 2016 (Unaudited)	Recorded Investment		Unpaid Principal Balance		Related Allowance

Loans With No Related Allowance Recorded:
Commercial and Multi-Family Real Estate	$	413,000	$	413,000	$	-
Residential Real Estate		88,000		219,000		-
Total Loans With No Related Allowance Recorded	$	501,000	$	632,000	$	-

Loans With an Allowance Recorded:
Residential Real Estate	$	278,000	$	302,000	$	15,000

Total Impaired Loans:
Commercial and Multi-Family Real Estate	$	413,000	$	413,000	$	-
Residential Real Estate		366,000		521,000		15,000
Total	$	779,000	$	934,000	$	15,000

December 31, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance

Loans With No Related Allowance Recorded:
Commercial and Multi-Family Real Estate	$	390,000	$	390,000	$	-
Residential Real Estate		-		130,000		-
Total Loans With No Related Allowance Recorded	$	390,000	$	520,000	$	-

Loans With an Allowance Recorded:
Residential Real Estate	$	289,000	$	306,000	$	15,000

Total Impaired Loans:
Commercial and Multi-Family Real Estate	$	390,000	$	390,000	$	-
Residential Real Estate		289,000		436,000		15,000
Total	$	679,000	$	826,000	$	15,000

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NOTE 5

LOANS and allowance for loan losses (continued)

	Three Months Ended				Six Months Ended
June 30, 2016 (Unaudited)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans With No Related Allowance Recorded:
Commercial and Multi-Family Real Estate	$	401,000	$	-	$	401,000	$	3,000
Residential Real Estate		89,000		-		89,000		-
Total Loans With No Related Allowance Recorded	$	490,000	$	-	$	490,000	$	3,000

Loans With an Allowance Recorded:
Residential Real Estate	$	281,000	$	-	$	281,000	$	-

Total Impaired Loans:
Commercial and Multi-Family Real Estate	$	401,000	$	-	$	401,000	$	3,000
Residential Real Estate		370,000		-		370,000		-
Total	$	771,000	$	-	$	771,000	$	3,000

June 30, 2015 (Unaudited)
Loans With No Related Allowance Recorded:
Commercial and Multi-Family Real Estate	$	392,000	$	9,000	$	389,000	$	12,000
Residential Real Estate		109,000		2,000		170,000		3,000
Total Loans With No Related Allowance Recorded	$	501,000	$	11,000	$	559,000	$	15,000

Loans With an Allowance Recorded:
Residential Real Estate	$	305,000	$	-	$	306,000	$	-

Total Impaired Loans:
Commercial and Multi-Family Real Estate	$	392,000	$	9,000	$	389,000	$	12,000
Residential Real Estate		414,000		2,000		476,000		3,000
Total	$	806,000	$	11,000	$	865,000	$	15,000

The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings (TDRs) or whose loans are on nonaccrual.

There was one loan relationship that was considered a TDR as of June 30, 2016 with a balance of $413,000, respectively. There were no loans modified in TDRs for the six months ended June 30, 2015.

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notes to CoNsolidated financial statements

Note 6

foreclosed assets

Activity in foreclosed assets is as follows:

	Six Months Ended June 30,
	2016			2015
	(Unaudited)
Balance Beginning of Period	$	608,000		$	243,000
Additions		26,000			265,000
Sales		(356,000	)		-
Loss on Sales		(9,000	)		-
Balance at End of Period	$	269,000		$	508,000

note 7

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. Central Federal’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

The following financial instruments whose contract amount represents credit risk were approximately as follows:

	June 30, 2016		December 31, 2015
	(Unaudited)
Commitments to Extend Credit	$	7,512,000	$	5,626,000
Standby Letters of Credit		-		15,000
	$	7,512,000	$	5,641,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

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note 7

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

Central Federal was not required to perform on any financial guarantees and did not incur any losses on its commitments.

note 8

income taxes

In connection with the offering of common stock, the Company contributed to the Central Federal Community Foundation $100,000 in cash and common stock with a fair value of $687,700 (68,770 shares at the $10.00 offering price) for a total contribution of $787,700. For Federal income tax purposes, the deduction for charitable contributions is limited to a maximum of 10% of taxable income before charitable contributions, net operating losses and dividends received deductions. The Company is permitted, under the Internal Revenue Code, to carry the excess contribution over the five-year period following the contribution to the charitable foundation, subject to the 10% annual limitation.

The Company may not have sufficient taxable income to be able to fully deduct the contribution in the year in which it is made or during the five-year carryover period permitted under the Internal Revenue Code. The Company estimates it will not be able to fully utilize the carryover and, in the first quarter of 2016, established a valuation allowance related to the entire deferred tax asset related to the contribution as it is not deemed to be realizable. As of June 30, 2016, the deferred tax asset related to the contribution that is not deemed to be realized is $304,000.

note 9

REGULATORY MATTERS

Central Federal is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Central Federal must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not generally applicable to savings and loan holding companies.

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note 9

REGULATORY MATTERS (CONTINUED)

As of June 30, 2016, the most recent notification from the banking regulators categorized Central Federal as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Central Federal must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed Central Federal’s category.

Quantitative measures established by regulation to ensure capital adequacy require Central Federal to maintain minimum amounts and ratios set forth in the following table. Management believes, as of June 30, 2016 and December 31, 2015, that Central Federal met all its capital adequacy requirements.

Central Federal’s capital amounts and ratios are presented in the following table.

	Actual					Minimum Capital Requirement					Minimum to be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016 (Unaudited)
Total Capital to Risk Weighted Assets	$	20,573,000		50.6	%	$	3,251,000		8.0	%	$	4,064,000		10.0	%

Tier I Capital to Risk Weighted Assets		20,312,000		50.0	%		2,438,000		6.0	%		3,251,000		8.0	%

Common Equity Tier I Capital to Risk Weighted Assets		20,312,000		50.0	%		1,829,000		4.5	%		2,641,000		6.5	%

Tier I Capital to Average Assets		20,312,000		27.0	%		3,005,000		4.0	%		3,756,000		5.0	%

December 31, 2015
Total Capital to Risk Weighted Assets	$	13,813,000		36.8	%	$	3,002,000		8.0	%	$	3,753,000		10.0	%

Tier I Capital to Risk Weighted Assets		13,552,000		36.1	%		2,252,000		6.0	%		3,002,000		8.0	%

Common Equity Tier I Capital to Risk Weighted Assets		13,552,000		36.1	%		1,689,000		4.5	%		2,439,000		6.5	%

Tier I Capital to Average Assets		13,552,000		20.5	%		2,639,000		4.0	%		3,299,000		5.0	%

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note 9

REGULATORY MATTERS (CONTINUED)

The Basel III Capital Rules, which became effective January 1, 2015, revised the prompt corrective action requirements by: (i) introducing a Common Equity Tier 1 risk-based ratio requirement at each level (other than critically undercapitalized), with the required Common Equity Tier 1 risk-based ratio being 6.5% for “well-capitalized” status; (ii) increasing the minimum Tier 1 risk-based capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 risk-based capital ratio for “well-capitalized” status being 8% (compared to the prior ratio of 6%); and (iii) eliminating the former provision that provided that a bank with a composite supervisory rating of 1 may have a 3% Leverage Ratio and still be adequately capitalized. The Basel III Capital Rules did not change the total risk based capital requirement for any prompt corrective action category. The rules also establish a “capital conservation buffer” of 2.5% above the risk-based capital ratios, shown in the table above, which is being phased in at 0.625% of risk-weighted assets each year beginning in January 2016.

NOTE 10

EMPLOYEE STOCK OWNERSHIP PLAN (“esop”)

On January 12, 2016, the Company announced the formation of the Employee Stock Ownership Plan, a non-contributory plan for its employees. All employees of the Company meeting certain tenure requirements are entitled to participate in the ESOP.

The ESOP was originally established with the purchase of 143,042 shares of common stock using the proceeds in the offering completed on January 12, 2016. The Company is making quarterly payments of principal and interest over a term of 100 quarters and the unpaid principal has an annual interest rate of 3.50%. Dividends paid on unallocated stock will also be applied as a payment. The trustee holds unallocated shares purchased by the ESOP in a loan suspense account and will release the shares of common stock on a pro rata basis each quarter as payments are made. Released shares will be allocated among active participants on the basis of each active participant’s proportional share of compensation. Compensation expense related to the ESOP was $31,000 for the six months ended June 30, 2016.

A summary of Central Federal’s ESOP is as follows for the six months ended June 30, 2016:

	At June 30, 2016
	(unaudited)

Allocated		2,860
Committed-to-be-allocated		-
Unallocated		140,182
Total ESOP Shares		143,042

Fair value of unallocated shares	$	1,574,246

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NOTE 11

FAIR VALUE MEASUREMENTS

The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

Subsequent to initial recognition, the Company may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.

Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.

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NOTE 11

FAIR VALUE MEASUREMENTS (CONTINUED)

Recurring Basis

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following tables present the balances of assets and liabilities measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
June 30, 2016 (Unaudited)
Securities Available-for-Sale
Mortgage Backed Securities	$	-	$	6,011,000	$	-	$	6,011,000
Small Business Administration Pools		-		1,010,000		-		1,010,000
Municipal Obligation		-		425,000		-		425,000
Federal Home Loan Mortgage Corp. Stock		23,000		-		-		23,000
	$	23,000	$	7,446,000	$	-	$	7,469,000
December 31, 2015
Securities Available-for-Sale
Municipal Obligation	$	-	$	414,000	$	-	$	414,000
Federal Home Loan Mortgage Corp. Stock		22,000		-		-		22,000
	$	22,000	$	414,000	$	-	$	436,000

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities

When available, the Company uses quoted market prices to determine the fair value of securities; such items are classified in Level 1 of the fair value hierarchy. For the Company’s securities for which quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds for which no price is observable or may compile prices from various sources. Level 2 inputs consider observable data that may include dealer quotes, market spread, cash flows, treasury yield curve, trading levels, credit information and terms, amount other factors.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.

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NOTE 11

FAIR VALUE MEASUREMENTS (CONTINUED)

Nonrecurring Basis (Continued)

Net impairment losses including charge-offs or allocated losses, related to nonrecurring fair value measurements of certain assets for the periods ended June 30, 2016 and December 31, 2015 consisted of the following:

	Level 1		Level 2		Level 3		Impairment Losses
June 30, 2016 (Unaudited)
Impaired Loans	$	-	$	-	$	263,000	$	15,000
December 31, 2015
Impaired Loans	$	-	$	-	$	274,000	$	15,000

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on the nonrecurring basis are as follows as of June 30, 2016 and December 31, 2015:

	Valuation	Unobservable	Range
	Techniques	Inputs	(Average)
Impaired Loans	Evaluation of Collateral	Estimation of Value	NM*

Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific allowance. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment, and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral and potential market for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

Impaired Loans

In accordance with the provisions of the loan impairment guidance, impairment was measured for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.

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NOTE 12

fair value OF FINANCIAL INSTRUMENTS

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the statements of financial condition. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balances at June 30, 2016 and December 31, 2015 are not carried at fair value in their entirety on the statements of financial condition.

Cash and Cash Equivalents and Accrued Interest

The carrying amounts reported in the statements of financial condition approximate those assets’ and liabilities’ fair values. Accrued interest is primarily accrued interest from loans.

Certificates of Deposit in Other Financial Institutions

Fair values of certificates of deposit in other financial institutions are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Federal Home Loan Bank (“FHLB”) Stock, at Cost

The carrying amount of FHLB stock approximates its fair value based on the redemption provisions of the FHLB.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits

The fair values of demand deposits are, by definition, equal to the amount payable on demand at the balance sheet date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies current incremental interest rates being offered on certificates of deposit to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

Off-Balance-Sheet Credit-Related Instruments

Off-Balance-Sheet Credit Related Instrument commitments are generally of a short-term nature. The contract amount of such commitments approximates their fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.

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NOTE 12

fair value OF FINANCIAL INSTRUMENTS (Continued)

Fair Value of Financial Instruments

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

	June 30, 2016				December 31, 2015
	(Unaudited)
	Carrying		Fair		Carrying		Fair		Input
	Amount		Value		Amount		Value		Level
Financial Assets:
Cash and Cash Equivalents	$	13,172,000	$	13,172,000	$	25,010,000	$	25,010,000		1
Certificates of Deposit in Other Financial Institutions		3,472,000		3,533,000		2,480,000		2,493,000		2
Securities Available-For-Sale:
Mortgage Backed Securities		6,011,000		6,011,000		-		-		2
Small Business Administration Pools		1,010,000		1,010,000		-		-		2
Municipal Obligation		425,000		425,000		414,000		414,000		2
FHLMC Stock		23,000		23,000		22,000		22,000		1
FHLB Stock		97,000		97,000		77,000		77,000		2
Loans, net		48,184,000		48,426,000		49,910,000		50,317,000		3
Accrued Interest Receivable		146,000		146,000		115,000		115,000		2
Financial Liabilities:
Deposits		45,777,000		45,708,000		66,615,000		66,815,000		3
Accrued Interest Payable		7,000		7,000		1,000		1,000		2

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements included in this report and in our future filings with the Securities and Exchange Commission, in our press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These forward-looking statements are sometimes identified by the use of terms and phrases such as “believe,” “should,” “expect,” “project,” “estimate,” “anticipate,” “aim,” “intend,” “plan,” “will,” “can,” “may,” or similar expressions elsewhere in this report. Forward-looking statements include:

statements of our goals, intentions and expectations;

statements regarding our business plan, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

Such statements are based on management’s current views and assumptions, and involve risks and uncertainties that could affect expected results. Those risks and uncertainties include but are not limited to the following:

general economic conditions, either nationally or in our primary market area, that are worse than expected;

changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial investments;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

our ability to implement our strategic plans;

changes in our organization, compensation and benefit plans, and our ability to attract and retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by any declines in the value of real estate in our market area;

our ability to attract and maintain deposits and our success in introducing new financial products

significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

declines in the yield on our assets resulting from the current low interest rate environment;

risks related a high concentration of loans secured by real estate located in our market area;

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

our ability to have sufficient taxable income to be able to fully deduct the contribution to our charitable foundation;

the recovery of the valuation allowance on deferred tax assets;

changes in the level of government support of housing finance;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in our compensation and benefit plans;

loan delinquencies and changes in the underlying cash flows of our borrowers;

our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

the failure or security breaches of computer systems on which we depend;

the ability of key third-party service providers to perform their obligations to us;

changes in the financial condition or future prospects of issuers of securities that we own;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

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changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the SEC, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board; and

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this report.

Our results of operations and financial condition may differ materially from those in the forward-looking statements. Any of the forward-looking statements that we make in this report and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

You should not rely upon forward-looking statements that we make in this report and in other public statements we make as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

Overview

We offer a variety of loan and deposit products to meet the borrowing needs of our customers. Our real estate loans consist primarily of residential loans, including owner-occupied and non-owner occupied one-to four-family residential loans. We also offer commercial and multi-family real estate loans, commercial business loans and consumer loans, including automobile and recreational vehicle loans. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.

We will continue to explore ways to service our customers and their needs in order to be a full service banking institution. The results of our operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on interest-earning assets, primarily loans, and interest we pay on interest-bearing liabilities, consisting of deposits. The interest income we generate is based on the origination of commercial, mortgage and consumer loans. Our primary source of funding is deposits. The largest expenses we incur are associated with salaries and related employee benefits. It is critical for Central Federal to maintain appropriate regulatory leverage and risk-based capital ratios.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, valuation of foreclosed assets, and valuation of deferred tax assets.

Allowance for Loan Losses. The allowance for loan losses is an estimate made by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses are charged-off against the allowance when Central Federal determines the loan balance to be uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to the allowance. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the board of directors reviews the adequacy of the allowance, including consideration of the relevant risks in the portfolio, current economic conditions, and other factors. If the board of directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, Central Federal’s primary regulator may require additions to the allowance based on their judgment about information available at the

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time of their examinations. The regulatory agency is not, however, directly involved in the determination of the allowance for loan losses, and any decisions to increase or decrease the allowance for loan losses are the responsibility of Central Federal’s management.

Foreclosed Assets. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets held for sale are carried at the lower of the new cost basis or fair value less cost to sell. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values will occur in the near term and that such changes could materially affect the amounts reported in Central Federal’s financial statements.

Deferred Tax Assets. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.

The Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relates to the Company’s contribution to establish the Central Federal Community Foundation. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax planning strategies and assessments of the current and future economic and business conditions. The Company considers both positive and negative evidence regarding the ultimate realizability of the deferred tax assets. Positive evidence includes the ability to implement tax planning strategies to accelerate taxable income recognition and the probability that taxable income will be generated in future periods. Negative evidence includes the continued expenses related to operating as a publicly traded company, current financial performance, and the general business and economic trends.

In connection with the offering of common stock, the Company contributed to the Central Federal Community Foundation $100,000 in cash and common stock with a fair value of approximately $688,000 (68,770 shares at the $10.00 offering price) for a total contribution of approximately $788,000. For Federal income tax purposes, the deduction for charitable contributions is limited to a maximum of 10% of taxable income before charitable contributions, net operating losses and dividends received deductions. We are permitted, under the Internal Revenue Code, to carry the excess contribution over the five-year period following the contribution to the charitable foundation, subject to the 10% annual limitation.

We may not have sufficient taxable income to be able to fully deduct the contribution in the year in which it is made or during the five-year carryover period permitted under the Internal Revenue Code. We estimate we will not be able to fully utilize the carryover and, in the first quarter of 2016, we established a valuation allowance related to the entire deferred tax asset related to the contribution as it is not deemed to be realizable. This determination was based primarily upon the effect of anticipated costs related to operation as a publicly traded company and their effect on future taxable income. The creation of the valuation allowance does not have an effect on the Company’s cash flows and may be recoverable in subsequent periods if the Company were to realize certain sustainable future taxable income. It is possible that future conditions may differ substantially from those anticipated in determining the need for a valuation allowance on deferred tax assets and adjustments may be required in the future.

Determining the ultimate settlement of any tax position requires significant estimates and judgements in arriving at the amount of tax benefits to be recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.

Results of Operations for the Six Months Ended June 30, 2016 and 2015

Overview. We had a net loss of $861,000 for the six months ended June 30, 2016 as compared to net income of $81,000 for the six months ended June 30, 2015. The $942,000, or 1,163.0%, decrease in net income between the periods was primarily a result of noninterest expense increasing $1.1 million, partially offset by net interest income increasing $50,000. We also had an income tax benefit of $52,000 for the six months ended June 30, 2016, compared to an income tax expense of $44,000 for the six months ended June 30, 2015.

Net Interest Income. Net interest income increased by $50,000, or 5.1%, to $1.0 million for the six months ended June 30, 2016 from $986,000 for the six months ended June 30, 2015. Although interest income on loans decreased by $85,000 from the six months

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ended June 30, 2015 to the six months ended June 30, 2016, interest expense on deposits decreased by $50,000 during that same period. In addition, securities and other interest income increased by $85,000 due to increased investment in available-for-sale securities during 2016. Securities and other interest income consists primarily of interest on bank accounts, securities available-for-sale, certificates of deposits and federal funds sold and, to a lesser extent, Federal Home Loan Mortgage Corporation stock and Federal Home Loan Bank stock.

The $85,000, or 7.1%, decrease in interest income on loans is a result of a decrease in the average yield on loans of 29 basis points and a $523,000, or 1.0%, decrease in the average balance of loans from $50.7 million for the six months ended June 30, 2015 to $50.2 million for the six months ended June 30, 2016.

The $50,000, or 21.2%, decrease in interest expense on deposits was due to a decrease in the average rate on deposits of 15 basis points and a $3.4 million, or 7.3%, decrease in the average balance of interest-bearing deposits from $47.1 million for the six months ended June 30, 2015 to $43.6 million for the six months ended June 30, 2016.

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances, and non-accrual loans are included in average balances only. Loan fees are included in interest income on loans and are insignificant. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

	Six Months Ended June 30,
	2016									2015
	Average			Interest and						Average			Interest and
	Balance			Dividends			Yield/Cost			Balance			Dividends			Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net of fees	$	50,209		$	1,107			4.41	%	$	50,732		$	1,192			4.70	%
Securities and other interest bearing assets (1)		21,690			115			1.06	%		10,475			30			0.57	%
Total interest-earning assets		71,899			1,222			3.40	%		61,207			1,222			3.99	%
Non-interest-earning assets		1,689									2,627
Allowance for loan losses		(261	)								(313	)
Total assets	$	73,327								$	63,521

Interest-bearing liabilities:
Certificate of deposits	$	20,352			126			1.24	%	$	24,342			178			1.46	%
Savings		3,415			5			0.29	%		3,701			6			0.32	%
Money Market		9,288			25			0.54	%		9,738			25			0.51	%
Interest-bearing DDA		10,563			30			0.57	%		9,274			27			0.58	%
Total interest-bearing deposits		43,618			186			0.85	%		47,055			236			1.00	%
Non-interest-bearing deposits		2,514									2,704
Other non-interest-bearing liabilities		213									77
Total Liabilities		46,345									49,836
Total equity		26,982									13,685
Total liabilities and equity	$	73,327								$	63,521

Net interest income				$	1,036								$	986
Net interest rate spread (2)								2.55	%								2.99	%
Net interest-earning assets (3)	$	28,281								$	14,152
Net interest margin (4)					2.88	%								3.22	%
Ratio of average interest-earning assets to average interest-bearing liabilities		164.8	%								130.1	%

(1)

Includes municipal obligations with an average balance and interest income of $400,000 and $6,000, respectively.

(2)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income divided by total interest-earning assets.

Provision for Loan Losses. We maintain an allowance for loan losses at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management reviews the level of the allowance for loan losses on a quarterly basis based on a variety of factors. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Such loans carry a higher degree of credit risk than our historical single-family lending.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

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We had no provision for loan losses for the six months ended June 30, 2016 and 2015. Net loan charge-offs amounted to $0 during the six months ended June 30, 2016, compared to $1,000 during the six months ended June 30, 2015.

Although management utilizes its best judgment in providing for losses, there can be no assurance that they will not have to change its allowance for loan losses in subsequent periods. The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses in the loan portfolio at June 30, 2016. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations. In addition, our primary regulator may comment during an examination on the provision for loan losses or the recognition of further loan charge-offs. The regulatory agency is not, however, directly involved in the determination of the allowance for loan losses, and any decisions to increase or decrease the allowance for loan losses are the responsibility of Central Federal’s management. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as appropriate.

Noninterest Income. Total noninterest income decreased by $1,000 during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. This was a result of customer service fees increasing $1,000 and other non-interest income decreasing by $2,000.

Noninterest Expense. Total noninterest expenses increased by $1.1 million, or 121.7%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. The increase primarily was attributable to a $788,000 contribution made to the Central Federal Community Foundation during the six months ended June 30, 2016. At this time, we do not expect to make additional contributions during the year. Legal and professional services expense increased by $289,000 from period to period due to higher professional fees incurred as a public company and certain one time events, including legal costs incurred for establishment of the ESOP and outside consulting fees paid due to lack of a CFO for the majority of the period. At this time, we do not expect this trend to continue or any additional one-time costs such as these to be incurred. In addition, data processing and outside services increased by $20,000 from period to period attributable to IT and network expenses, and increases in data processing costs.

Income Tax Expense (Benefit). We had an income tax benefit of $52,000 for the six months ended June 30, 2016, compared to an income tax expense of $44,000 for the six months ended June 30, 2015. This is due to a loss before income taxes of $913,000 for the six months ended June 30, 2016, compared to income before income taxes of $125,000 during the same period in 2015. In the first quarter of 2016, we established a valuation allowance on the entire deferred tax asset related to the contribution to the Central Federal Community Foundation of $788,000 as it is not deemed to be realizable.

Results of Operations for the Three Months Ended June 30, 2016 and 2015

Overview. We had a net loss of $76,000 for the three months ended June 30, 2016 as compared to net income of $24,000 for the three months ended June 30, 2015. The $100,000, or 416.7%, decrease in net income between the periods was primarily a result of noninterest expense increasing $207,000, partially offset by net interest income increasing $53,000. We also had an income tax benefit of $42,000 for the three months ended June 30, 2016, compared to an income tax expense of $14,000 for the three months ended June 30, 2015.

Net Interest Income. Net interest income increased by $53,000, or 11.3%, to $522,000 for the three months ended June 30, 2016 from $469,000 for the three months ended June 30, 2015. Interest income on loans decreased by $21,000 from the three months ended June 30, 2015 to the three months ended June 30, 2016, while interest expense on deposits decreased by $28,000 during that same period. In addition, securities and other interest income increased by $46,000 for the same period due to increased investment in available-for-sale securities in 2016. Securities and other interest income consists primarily of interest on bank accounts, securities available-for-sale, certificates of deposits and federal funds sold and, to a lesser extent, Federal Home Loan Mortgage Corporation stock and Federal Home Loan Bank stock.

The $21,000, or 3.7%, decrease in interest income on loans is a result of a decrease in the average yield on loans of 17 basis points as there was no change in the average balance of loans from $49.8 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2016.

The $28,000, or 23.9%, decrease in interest expense on deposits was due to a decrease in the average rate on deposits of 17 basis points and a $3.7 million, or 7.9%, decrease in the average balance of interest-bearing deposits from $46.9 million for the three months ended June 30, 2015 to $43.1 million for the three months ended June 30, 2016.

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on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances, and non-accrual loans are included in average balances only. Loan fees are included in interest income on loans and are insignificant. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

	Three Months Ended June 30,
	2016									2015
	Average			Interest and						Average			Interest and
	Balance			Dividends			Yield/Cost			Balance			Dividends			Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net of fees	$	49,804		$	549			4.41	%	$	49,788		$	570			4.58	%
Securities and other interest bearing assets (1)		21,722			62			1.14	%		11,333			16			0.56	%
Total interest-earning assets		71,526			611			3.42	%		61,121			586			3.84	%
Non-interest-earning assets		2,403									2,090
Allowance for loan losses		(261	)								(279	)
Total assets	$	73,668								$	62,932

Interest-bearing liabilities:
Certificate of deposits	$	19,760			58			1.17	%	$	24,005			87			1.45	%
Savings		3,360			3			0.36	%		3,737			3			0.32	%
Money Market		9,306			13			0.56	%		9,527			13			0.55	%
Interest-bearing DDA		10,710			15			0.56	%		9,589			14			0.58	%
Total interest-bearing deposits		43,136			89			0.83	%		46,858			117			1.00	%
Non-interest-bearing deposits		2,606									2,349
Other non-interest-bearing liabilities		82									73
Total Liabilities		45,824									49,280
Total equity		27,844									13,652
Total liabilities and equity	$	73,668								$	62,932

Net interest income				$	522								$	469
Net interest rate spread (2)								2.59	%								2.84	%
Net interest-earning assets (3)	$	28,390								$	14,263
Net interest margin (4)					2.92	%								3.07	%
Ratio of average interest-earning assets to average interest-bearing liabilities		165.8	%								130.4	%

(1)

Includes municipal obligations with an average balance and interest income of $400,000 and $3,000, respectively.

(2)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income divided by total interest-earning assets.

Provision for Loan Losses. We had no provision for loan losses for the three months ended June 30, 2016 and 2015. Net loan charge-offs amounted to $0 and $1,000 during the three months ended June 30, 2016 and 2015, respectively.

Noninterest Income. Total noninterest income decreased by $2,000, or 10.5%, during the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. This was a result of customer service fees and other non-interest income both decreasing by $1,000.

Noninterest Expense. Total noninterest expenses increased by $207,000, or 46.0%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. The increase was primarily attributable to legal and professional services expense increasing by $191,000 from period to period due to higher professional fees incurred as a public company and outside consulting fees paid due to lack of a CFO for the majority of the quarter. We do not expect this trend to continue as we have hired a CFO. In addition, expenses related to data processing and other outside services increased by $15,000, or 22.7%, from period to period attributable to IT and network expenses, and increases in data processing costs.

Income Tax Expense (Benefit). We had an income tax benefit of $42,000 for the three months ended June 30, 2016, compared to an income tax expense of $14,000 for the three months ended June 30, 2015. This is due to a loss before income taxes of $118,000 for the three months ended June 30, 2016, compared to income before income taxes of $38,000 during the same period in 2015.

Balance Sheet Analysis as of June 30, 2016 and December 31, 2015

Total Assets. At June 30, 2016, total assets totaled $73.7 million, a decrease of $7.2 million, or 8.9%, from total assets of $80.9 million at December 31, 2015. The decrease in total assets for the six months ended June 30, 2016 was due mainly to an $11.8 million, or 47.3%, decrease in cash and cash equivalents, offset by an increase in available-for-sale securities of $7.0 million, or 1,613.1%. In addition, a $992,000, or 40.0%, increase in certificates of deposit in other institutions was offset by a $1.7 million, or 3.5%, decrease in net loans, a $339,000, or 55.8%, decrease in foreclosed assets, and a $1.4 million, or 93.2%, decrease in other assets.

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Loans. At June 30, 2016, residential real estate loans totaled $32.4 million, or 66.8% of the total loan portfolio, compared to $31.7 million, or 63.2% of the total loan portfolio, at December 31, 2015. Residential real estate loans increased by $674,000, or 2.1%, during the six months ended June 30, 2016 as we continue to take advantage of new and existing customers in our market area.

Commercial and multi-family real estate loans totaled $14.2 million and represented 29.3% of total loans at June 30, 2016, compared to $16.1 million, or 32.1% of total loans, at December 31, 2015. The decrease in commercial and multi-family real estate loans between periods was primarily due to repayment of loans, offset by minimal originations. The market area served by Central Federal is very competitive and interest rate sensitive.

Commercial business loans totaled $1.4 million, or 2.9% of total loans, at June 30, 2016 and $2.0 million, or 3.9% of total loans, at December 31, 2015.

Consumer and other loans totaled $485,000, or 1.0% of total loans, at June 30, 2016 and $418,000, or 0.8% of total loans, at December 31, 2015.

Allowance for Loan Losses. The allowance for loan losses (allowance) is an estimate of probable loan losses in Central Federal’s loan portfolio. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Loan losses are charged-off against the allowance when Central Federal determines the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance.

At June 30, 2016 and December 31, 2015, the allowance was $261,000 and represented 0.5% of total loans. At June 30, 2016 and December 31, 2015, our allowance for loan losses of $261,000 was 30.7% and 33.5% of nonperforming loans, respectively.

There was no change in the allowance for loan losses for the six months ended June 30, 2016. For the six months ended June 30, 2016, we had $1,000 of charge-offs related to consumer and other loans, as well as $1,000 of recoveries related to residential real estate loans. The allowance for loan losses decreased by $1,000 for the six months ended June 30, 2015 as there were $2,000 of charge-offs related to consumer and other loans and $1,000 of recoveries related to residential real estate loans.

At June 30, 2016 and December 31, 2015, the largest allowance in the portfolio was allowance for residential real estate loans which made up about $192,000, or 73.6%, and $183,000, or 70.1%, of the total allowance, respectively.

Although we believe that we use the best available information to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. At least quarterly, the board of directors reviews the adequacy of the allowance, including consideration of the relevant risks in the portfolio, current economic conditions and other factors. If the board of directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.

Furthermore, while we believe we have established our allowance for loan losses in accordance with generally accepted accounting principles and have taken into account the views of regulators and the current economic environment, there can be no assurance that in the future Central Federal’s regulators will not require further increases in the allowance. The regulatory agency is not, however, directly involved in the determination of the allowance for loan losses, and any decisions to increase or decrease the allowance for loan losses are the responsibility of Central Federal’s management. Any material increases in the allowance for loan losses may adversely affect our financial condition and results of operation.

Delinquent and Non-Accrual Loans and Troubled Debt Restructurings. As of June 30, 2016, there were 4 loans delinquent between 30-89 days which totaled $193,000. This is an improvement on the 9 loans delinquent for 30-89 days which totaled $198,000 as of December 31, 2015, reflecting our continued collection efforts of past due loans. There was no change in the number of loans delinquent for 90 days or more from 3 loans as of December 31, 2015 to June 30, 2016; however, there was an increase in the total amount delinquent from $100,000 to $484,000 from December 31, 2015 to June 30, 2016, respectively. This was primarily attributable to one troubled debt restructuring (“TDR”) totaling $413,000 becoming delinquent over 90 days during this period.

Loans are generally placed on non-accrual status when the collectability is considered to be uncertain or payments have become more than 90 days or more delinquent, unless the credit is well-secured and in process of collection. In some cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Credit card loans and other personal loans are typically charged-off no later than 180 days past due. As of June 30, 2016, we had 3 loans on non-accrual status totaling $779,000, compared to December 31, 2015, at which point there were 2 loans on non-accrual status amounting to $679,000. The increase in loans on non-accrual status is due to the addition of one loan, with an $88,000 balance, and continued delinquency and non-payment of another loan.

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Total non-performing loans increased by $71,000 from $779,000 at December 31, 2015 to $850,000 at June 30, 2016. The majority of this change was due to a $77,000 increase in residential real estate loans on non-accrual as one loan, with a balance of $88,000, was added to non-accrual status. In addition, there was a $23,000 increase in commercial and multi-family real estate loans on non-accrual, as the Bank paid real estate taxes on the loan. Subsequent to June 30, the loan has been paid and no further losses are expected. These were partially offset by a decrease of $31,000 of residential real estate loans accruing 90 days or more past due.

Under certain circumstances, Central Federal will provide borrowers relief through loan restructuring. A restructuring of debt constitutes a TDR if Central Federal, for economic or legal reasons related to the borrower’s financial situation, grants a concession to the borrower that it would not otherwise have considered. Loans that are reported as TDRs are considered impaired and measured for impairment. Depending on the individual facts and circumstances of the borrower, restructuring loans can involve loans remaining in full nonaccrual, moving to nonaccrual or continuing on accrual status.

There was one loan that was considered a TDR as of June 30, 2016 and December 31, 2015 with a balance of $413,000 and $390,000, respectively.

Foreclosed assets at June 30, 2016 totaled $269,000 and consisted of 2 properties, which is a decrease from the 3 foreclosed properties at December 31, 2015 which totaled $608,000. The decline in the total amount of foreclosed assets is due to 2 properties being sold and one property being foreclosed upon during the first quarter of 2016. The first sale was for a property sold in Cuba, Missouri for $265,000. The second sale was a property sold in Rolla, Missouri for $91,000, at a loss of $9,000. During the process of the second sale, the property was separated into 2 distinct properties. As a result, the property that was not sold was added to our foreclosed assets. This added property in Rolla, Missouri was recorded at $26,000.

Investment Portfolio. We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in other permissible securities. As a member of the Federal Home Loan Bank of Des Moines, we also are required to maintain an investment in the stock of that institution.

We held $3.5 million and $2.5 million of certificates of deposit as investment in financial institutions at June 30, 2016 and December 31, 2015, respectively. During the six months ended June 30, 2016, we purchased an additional $1.0 million of certificates of deposits to increase our investment portfolio, as one of our certificates of deposit will mature later this year. We plan to hold these investments until maturity.

At June 30, 2016, our securities available-for-sale consisted of 6 mortgage-backed securities and a fully guaranteed Small Business Administration investment, with fair values of $6,011,000 and $1,010,000, respectively, purchased during the six months ended June 30, 2016, one municipal bond backed by a local school district with a fair value of $425,000, and Federal Home Loan Mortgage Corporation common stock with a fair value of $23,000 for a total of $7,469,000, as compared to the December 31, 2015 available-for-sale security portfolio with a fair value of $436,000.

Deposits. Deposits have traditionally been our primary source of funds for use in lending and investment activities. Deposits generally are attracted from within our market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand deposit accounts (such as NOW and money market accounts), statement savings accounts, and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among other factors.

Total deposits decreased by $20.8 million, or 31.3%, from $66.6 million, or 82.4% of total assets, at December 31, 2015 to $45.8 million, or 62.1% of total assets, at June 30, 2016. The majority of the change was due to a $19.2 million decrease in non-interest bearing deposits from $21.8 million, or 32.8% of total deposits, as of December 31, 2015 to $2.6 million, or 5.8% of total deposits, as of June 30, 2016. Subscriptions in advance of the conversion of Central Federal to stock form were placed in a non-interest bearing deposit account as of December 31, 2015. After the conversion, these funds were released and removed from the deposit account.

Interest-bearing demand deposits and certificates of deposit make up the majority of the deposit balance. Interest-bearing deposits accounted for $20.3 million, or 44.2%, of total deposits as of June 30, 2016, which is an increase of $1.5 million from $18.8 million, or 28.2% of total deposits, as of December 31, 2015. Certificates of deposit decreased by $2.9 million from $22.5 million, or 33.8% of total deposits, as of December 31, 2015 to $19.6 million, or 42.8% of total deposits, as of June 30, 2016. Savings accounts remained consistent.

Stockholders’ Equity. Stockholders’ equity increased by $14.2 million, or 104.3%, to $27.8 million at June 30, 2016 from $13.7 million at December 31, 2015 as the result of the conversion of Central Federal from a federally chartered mutual savings association into a federally chartered stock savings association and the related sale of common stock, which was completed on January 12, 2016.

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The proceeds from the sale of common stock in the subscription were the main source of the increase in stockholders’ equity. As described above, the Company had a net loss of $861,000 for the six months ended June 30, 2016.

Capital Ratios. The Company was well capitalized according to applicable regulatory standards at June 30, 2016 with a Tier 1 capital to adjusted total assets ratio of 27.0%, a Tier 1 capital to risk-weighted assets ratio of 50.0%, a total risk-based capital to weighted assets ratio of 50.6%, and a common equity Tier 1 capital to risk-weighted assets ratio of 50.0%. See Note 9 to our Unaudited Consolidated Financial Statements.

Liquidity Management

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposits, funds from scheduled loan payments, loan prepayments, and income on earning assets. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.

Our most liquid assets are cash and cash equivalents, interest-bearing deposits, and securities available for sale. At June 30, 2016, cash and cash equivalents totaled $13.2 million. Certificates of deposits in other financial institutions and securities available-for-sale totaled $3.5 million and $7.5 million, respectively, at June 30, 2016.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $25,000 for the six months ended June 30, 2016, and net cash provided by operating activities was $86,000 for the six months ended June 30, 2015, respectively. Net cash used in investing activities, which consists primarily of activity in securities available-for-sale and loans, was $6.0 million for the six months ended June 30, 2016, and net cash provided by investing activities was $2.3 million for the six months ended June 30, 2015. Net cash used in financing activities, consisting of activity in deposit accounts and proceeds from sale of common stock, was $5.8 million for the six months ended June 30, 2016. Net cash used in financing activities was $1.6 million for the six months ended June 30, 2015.

Certificates of deposit maturing over the next 12 months totaled $12.6 million, or 64.5% of certificates of deposit. Although we generally manage the pricing of our deposits to be competitive, management understands that if these maturing deposits are not reinvested or do not stay with Central Federal, we will be required to seek other sources of funding or rely on new certificates of deposit. If these deposits are withdrawn, it is anticipated that they would be funded with available cash or replaced with deposits from other customers. FHLB or Federal Reserve Bank borrowings or proceeds from the sale of securities could also be used to replace unanticipated outflows of deposits.

Capital Management

We are subject to various regulatory capital requirements administered by the OCC, including risk-based capital measures. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2016, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements. In the normal course of business, Central Federal has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. Central Federal’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments is represented by the contractual or notional amount of those instruments. Central Federal has $7.5 million in unfunded commitments under lines of credit and no standby letters of credit at June 30, 2016. The amount of unfunded commitments under lines of credit and standby letters of credit were $5.6 million and $15,000 at December 31, 2015.

Commitments to extend credit are agreements to lend a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Central Federal evaluates each customer’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by Central Federal upon extension of credit, is based on management credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial property.

Standby letters of credit are conditional commitments issued by Central Federal to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Central Federal’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. Central Federal was not required to perform on any financial guarantees and did not incur any losses on its commitments.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out, under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the Registrant’s disclosures controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and the principal financial officer concluded that the disclosure controls and procedures are effective.

There was no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Part II. – Other Information

Item 1. Legal Proceedings

The Registrant is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Registrant’s management believes that such routine legal proceedings, in the aggregate, are immaterial to its financial condition and results of operations.

Item 1A. Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

Section 906 Certification

101

The following materials from Central Federal Bancshares’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss,) (iv) the Consolidated Statements of Changes In Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Central Federal Bancshares, Inc.

Date: August 12, 2016	/s/ William A. Stoltz
	William A. Stoltz
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 12, 2016	/s/ Angie Medwick
	Angie Medwick
	Chief Financial Officer
	(Principal Financial Officer)

Central Federal Bancshares, Inc - FORM 10-Q - August 12, 2016

Attached files

Central Federal Bancshares, Inc Reports