UNITED STATES

SECURITIES AND EXCHANGE COMMISION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

Or

[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from __________ to______________

Commission File Number 0-25045

CENTRAL FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	34-1877137
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

7000 North High St.,  Worthington, Ohio  43085

(Address of principal executive offices) (Zip Code)

(614) 334-7979

(Registrant’s telephone number, including area code)

(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 filing 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 (§232.405 of this chapter) 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, a  smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]Accelerated filer [  ]  Non-accelerated filer [  ]  Smaller reporting company [X]Emerging growth company []

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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 ofNovember  1, 2017, there were 23,137,665 shares of the registrant’s Common Stock outstanding.

CENTRAL FEDERAL CORPORATION

INDEX

PART I.  Financial Information		Page
Item 1.  Financial Statements		3
	Consolidated Balance Sheets as of September 30, 2017 (unaudited)and December31, 2016	3
	Consolidated Statements of Income for the three and nine months ended September30, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the threeand nine months ended September30, 2017 and 2016 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the threeand ninemonths ended September30, 2017 and 2016 (unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended September30, 2017 and 2016 (unaudited)	7
	Notes to Consolidated Financial Statements (three and ninemonths ended September30, 2017 and 2016 unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.     Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.     Controls and Procedures		58
PART II.  Other Information		59
Item 1.     Legal Proceedings		59
Item 1A.   Risk Factors		59
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3.     Defaults Upon Senior Securities		59
Item 4.     Mine Safety Disclosures		59
Item 5.     Other Information		59
Item 6.     Exhibits		60
Signatures		61

CENTRAL FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

	September 30,		December 31,
	2017		2016
	(unaudited)
ASSETS
Cash and cash equivalents	$	27,956	$	57,941
Interest-bearing deposits in other financial institutions		100		100
Securities available for sale		11,878		14,058
Loans held for sale, at fair value		3,509		2,812
Loans and leases, net of allowance of $6,964 and $6,925		387,749		346,125
FHLB and FRB stock		3,227		1,942
Foreclosed assets, net		-		204
Premises and equipment, net		3,572		3,429
Bank owned life insurance		5,030		4,930
Accrued interest receivable and other assets		5,880		4,571
Total assets	$	448,901	$	436,112
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing	$	76,445	$	72,779
Interest bearing		304,508		302,585
Total deposits		380,953		375,364
FHLB advances		19,000		13,500
Advances by borrowers for taxes and insurance		182		408
Accrued interest payable and other liabilities		3,061		2,393
Subordinated debentures		5,155		5,155
Total liabilities		408,351		396,820
Commitments and contingent liabilities		-		-
Stockholders' equity
Common stock, $.01 par value;
shares authorized: 50,000,000;
shares issued: 16,413,584 at September 30, 2017 and 16,427,917 at December 31, 2016		164		164
Series B Preferred stock, $0.01 par value; 480,000 shares authorized;
480,000 issued at September 30, 2017 and December 31, 2016		5		5
Additional paid-in capital		60,425		60,163
Accumulated deficit		(16,765)		(17,767)
Accumulated other comprehensive income (loss)		(4)		2
Treasury stock, at cost; 133,007 shares of common stock at September 30, 2017 and December 31, 2016		(3,275)		(3,275)
Total stockholders' equity		40,550		39,292
Total liabilities and stockholders' equity	$	448,901	$	436,112

See accompanying notes to consolidated financial statements.

3

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

(Unaudited)

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Interest and dividend income
Loans and leases, including fees	$	4,225	$	3,658	$	11,944	$	10,439
Securities		44		29		139		89
FHLB and FRB stock dividends		45		19		108		58
Federal funds sold and other		83		28		247		76
		4,397		3,734		12,438		10,662
Interest expense
Deposits		771		683		2,115		1,899
FHLB advances and other debt		68		69		195		190
Subordinated debentures		54		46		156		136
		893		798		2,466		2,225
Net interest income		3,504		2,936		9,972		8,437
Provision for loan and lease losses		-		20		-		230
Net interest income after provision for loan losses		3,504		2,916		9,972		8,207
Noninterest income
Service charges on deposit accounts		106		241		290		612
Net gains on sales of loans		23		46		70		97
Earnings on bank owned life insurance		33		33		100		99
Other		33		30		78		136
		195		350		538		944
Noninterest expense
Salaries and employee benefits		1,544		1,283		4,450		3,610
Occupancy and equipment		170		149		503		432
Data processing		197		285		775		827
Franchise and other taxes		88		89		264		265
Professional fees		218		320		694		944
Director fees		76		61		218		166
Postage, printing and supplies		46		35		138		130
Advertising and promotion		48		51		97		86
Telephone		29		32		89		90
Loan expenses		45		51		124		94
Foreclosed assets, net		-		-		18		49
Depreciation		49		52		150		159
FDIC premiums		64		34		221		168
Regulatory assessment		31		3		95		59
Other insurance		21		26		70		84
Other		56		41		149		142
		2,682		2,512		8,055		7,305
Income before incomes taxes		1,017		754		2,455		1,846
Income tax expense		332		249		810		603
Net income		685		505		1,645		1,243
Dividends on Series B preferred stock and accretion of discount		(214)		(214)		(643)		(643)
Net income attributable to common stockholders	$	471	$	291	$	1,002	$	600
Earnings per common share:
Basic	$	0.03	$	0.02	$	0.06	$	0.04
Diluted	$	0.03	$	0.02	$	0.06	$	0.04

See accompanying notes to consolidated financial statements.

4

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands except per share data)

(Unaudited)

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Net income	$	685	$	505	$	1,645	$	1,243
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period related to securities available for sale, net of tax of ($2) and ($12) and ($3) and $29		(3)		(23)		(6)		66
Other comprehensive income (loss), net of tax		(3)		(23)		(6)		66
Comprehensive income	$	682	$	482	$	1,639	$	1,309

See accompanying notes to consolidated financial statements.

5

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands except per share data)

(Unaudited)

									Accumulated
			Series B		Additional				Other				Total
	Common		Preferred		Paid-In		Accumulated		Comprehensive		Treasury		Stockholders'
	Stock		Stock		Capital		Deficit		Income (Loss)		Stock		Equity
Balance at January 1, 2017	$	164	$	5	$	60,163	$	(17,767)	$	2	$	(3,275)	$	39,292
Net income								1,645						1,645
Other comprehensive loss										(6)				(6)
Restricted stock expense, net of forfeitures						181								181
Cash dividends declared on Series B preferred stock and accretion of discount						81		(643)						(562)
Balance at September 30, 2017	$	164	$	5	$	60,425	$	(16,765)	$	(4)	$	(3,275)	$	40,550

									Accumulated
			Series B		Additional				Other				Total
	Common		Preferred		Paid-In		Accumulated		Comprehensive		Treasury		Stockholders'
	Stock		Stock		Capital		Deficit		Income (Loss)		Stock		Equity
Balance at January 1, 2016	$	161	$	5	$	59,937	$	(18,537)	$	(9)	$	(3,245)	$	38,312
Net income								1,243						1,243
Other comprehensive income										66				66
Restricted stock expense, net of forfeitures						68								68
Stock option expense, net of forfeitures						24								24
Cash dividends declared on Series B preferred stock and accretion of discount						81		(643)						(562)
Purchase of 20,500 treasury shares				-		-						(30)		(30)
Balance at September 30, 2016	$	161	$	5	$	60,110	$	(17,937)	$	57	$	(3,275)	$	39,121

See accompanying notes to consolidated financial statements.

6

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

		Nine months ended
		September 30,
		2017		2016
Net Income	$	1,645	$	1,243
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan and lease losses		-		230
Depreciation		150		159
Amortization, net		(83)		(54)
Deferred income tax (benefit)		(30)		(29)
Originations of loans held for sale		(15,318)		(16,137)
Proceeds from sale of loans held for sale		14,691		14,657
Net gains on sales of loans		(70)		(97)
Gain (loss) on sale of foreclosed assets		7		(4)
Earnings on bank owned life insurance		(100)		(99)
Stock-based compensation expense		181		92
Net change in:
Accrued interest receivable and other assets		(785)		1,501
Accrued interest payable and other liabilities		176		212
Net cash from operating activities		464		1,674
Cash flows from investing activities
Net increase in interest-bearing deposits in other financial institutions		-		(100)
Available-for-sale securities:
Maturities, prepayments and calls		2,148		206
Purchases		-		-
Loan and lease originations and payments, net		(41,517)		(32,130)
Proceeds from the sale of loans		-		1,124
Additions to premises and equipment		(293)		(44)
Purchase of FRB Stock		(1,285)		-
Proceeds from the sale of foreclosed assets		197		200
Net cash used by investing activities		(40,750)		(30,744)
Cash flows from financing activities
Net change in deposits		5,589		55,376
Proceeds from FHLB advances		34,200		37,600
Repayments on FHLB advances		(28,700)		(36,600)
Net change in advances by borrowers for taxes and insurance		(226)		(307)
Cash dividends paid on Series B preferred stock		(562)		(562)
Purchase of treasury shares		-		(30)
Net cash from (used by) financing activities		10,301		55,477
Net change in cash and cash equivalents		(29,985)		26,407
Beginning cash and cash equivalents		57,941		25,895
Ending cash and cash equivalents	$	27,956	$	52,302
Supplemental cash flow information:
Interest paid	$	2,479	$	2,205
Income tax paid		605		70
Supplemental noncash disclosures:
Loans issued to finance the sale of repossessed assets	$	288	$	1,440
Dividends payable on Series B preferred stock		187		187
Investment payable on limited partnerships		500		-

See accompanying notes to consolidated financial statements.

7

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: 

The consolidated financial statements include Central Federal Corporation (the “Holding Company”) and its wholly-owned subsidiary, CFBank, National Association (“CFBank”).  On December 1, 2016, CFBank converted from a federal savings association to a national bank.  The Holding Company and CFBank are sometimes collectively referred to herein as the “Company”.  Intercompany transactions and balances are eliminated in consolidation.  The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in compliance with U.S. generally accepted accounting principles (GAAP).  Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of the management of the Company, the accompanying unaudited interim consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented.  These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The financial performance reported for the Company for the three and nine months ended September 30, 2017 is not necessarily indicative of the results that may be expected for the full year.  This information should be read in conjunction with the Company’s latest Annual Report to Stockholders and Annual Report on Form 10-K on file with the SEC.  Reference is made to the accounting policies of the Company described in Note 1 to the Audited Consolidated Financial Statements contained in the Company’s 2016 Annual Reportto Stockholders that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2016 (referred to herein as the “2016 Audited Financial Statements”).  The Company has consistently followed those policies in preparing this Form 10-Q.

Loans and Leases:  Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, adjusted for purchase premiums and discounts, deferred loan fees and costs and an allowance for loan and lease losses (ALLL).  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments. 

The accrual of interest income on all classes of loans, except other consumer loans, is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.  Other consumer loans are typically charged off no later than 90 days past due.  Past due status is based on the contractual terms of the loan for all classes of loans.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  Commercial loans, multi-family residential real estate loans and commercial real estate loans placed on nonaccrual status are individually classified as impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income in the period in which the loan is placed in a nonaccrual status.  Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual status.  Loans are considered for return to accrual status if and when all the principal and interest amounts that are contractually due are brought current, there is a current and well documented credit analysis, there is reasonable assurance of repayment of principal and interest, and the customer has demonstrated sustained, amortizing payment performance of at least six months.

Allowance for Loan and Lease Losses (ALLL):  The ALLL is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

8

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that CFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans within any loan class for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired.  

Factors considered by management in determining impairment for all loan classes include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

All loans within the commercial, multi-family residential and commercial real estate segments, regardless of size, and loans of all other classes with balances over $250 are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneous loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

TDRs of all classes of loans are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. If the payment of the loan is dependent on the sale of the collateral, then costs to liquidate the collateral are included when determining the impairment.  For TDRs that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the ALLL.

Interest income on all classes of impaired loans that are on nonaccrual status is recognized in accordance with the accounting policy on nonaccrual loans.  Cash receipts on all classes of impaired loans that are on nonaccrual status are generally applied to the principal balance outstanding.  Interest income on all classes of impaired loans that are not on nonaccrual status is recognized on the accrual method.  TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured loan.

The general reserve component covers non-impaired loans of all classes and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by loan class and is based on the actual loss history experienced by CFBank over a three-year period.  The general component is calculated based on CFBank’s loan balances and actual three-year historical loss rates.  For loans with little or no actual loss experience, industry estimates are used based on loan segment. This actual loss experience is supplemented with other economic and judgmental factors based on the risks present for each loan class.  These economic and judgmental factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

CFBank’s charge-off policy for commercial loans, single-family residential real estate loans, multi-family residential real estate loans, commercial real estate loans, construction loans and home equity lines of credit requires management to record a specific reserve or charge-off as soon as it is apparent that the borrower is troubled and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing the loan.  Other consumer loans are typically charged off no later than 90 days past due.

Joint Ventures:  The Holding Company has contributed funds into a series of joint ventures (equity stake) for the purpose of allocating excess liquidity into higher earning assets while diversifying its revenue sources.  The funding for the joint ventures is related to shorter term operating activities and is related to the development of single family real estate in the form of condominiums.  Income is recognized based on a rate of return on the outstanding investment balance.  As units are sold, the Holding Company receives an additional incentive payment, which is recognized as income.

9

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Low Income Housing Tax Credit (LIHTC):  The Company has invested in low income housing tax credits through a fund that assists corporations in investing in limited partnerships and limited liability companies that own, develop and operate low income residential rental properties for purposes of qualifying for the Housing Tax credit. These investments are accounted for under the proportional amortization method which recognizes the amortization of the investment in proportion to the tax credit and other tax benefits received.

Earnings Per Common Share: The two-class method is used in the calculation of basic and diluted earnings per share.  Under the two-class method, earnings available to common stockholders for the period are allocated between common stockholders and participating securities (unvested share-based payment awards) according to dividends declared (or accumulated) and participation rights in undistributed earnings.  The factors used in the earnings per share computation follow:

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
Basic
Net income	$	685	$	505	$	1,645	$	1,243
Dividends on Series B preferred stock and accretion of discount		(214)		(214)		(643)		(643)
Net income allocated to common stockholders	$	471	$	291	$	1,002	$	600
Weighted average common shares outstanding including unvested share-based payment awards		16,282,077		16,003,363		16,287,570		16,015,147
Less: Unvested share-based payment awards		-		-		-		-
Average shares		16,282,077		16,003,363		16,287,570		16,015,147
Basic earnings per common share	$	0.03	$	0.02	$	0.06	$	0.04
Diluted
Net earnings allocated to common stockholders	$	471	$	291	$	1,002	$	600
Add back: Dividends on Series B preferred stock and accretion of discount		214		-		-		-
Net earnings allocated to common stockholders	$	685	$	291	$	1,002	$	600
Weighted average common shares outstanding for basic earnings per common share		16,282,077		16,003,363		16,287,570		16,015,147
Add:  Dilutive effects of assumed exercises of stock options		229,281		17,660		200,032		13,191
Add:  Dilutive effects of Series B preferred stock conversion		6,857,143		-		-		-
Add:  Dilutive effects of assumed exercises of stock warrants		1,152,125		-		1,152,125		-
Average shares and dilutive potential common shares		24,520,626		16,021,023		17,639,727		16,028,338
Diluted earnings per common share	$	0.03	$	0.02	$	0.06	$	0.04

The following securities exercisable for or convertible into common shares were anti-dilutive and not considered in computing diluted earnings per common share.

	Three months ended September 30,		Nine months ended September 30,
	2017	2016	2017	2016
	(unaudited)		(unaudited)
Stock options	5,446	347,746	5,446	375,379
Series B preferred stock	-	6,857,143	6,857,143	6,857,143
Stock warrants	-	1,152,125	-	1,152,125

10

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Adoption of New Accounting Standards:

In May 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion.  The new guidance establishes a “comprehensive framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.  ASU No. 2014-09 provides that an entity should recognize revenue to depict the transfer of promised goods or services.  The guidance provides steps to follow to achieve the core principle.  An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, and uncertainty of revenue and cash flows arising from contracts with customers.

Guidance in ASU No. 2014-09 has been clarified by the following ASUs:

· ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”

· ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”

· ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients”

· ASU No. 2016-20, “Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements to Topic 606”

As extended by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU No. 2014-09 and the clarifying ASUs are effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  Transitional guidance is included in the updates.  Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  While interest income is specifically out of scope of this standard, management is currently evaluating the revenue streams within “noninterest income” to assess the applicability of this standard.  Since the Company’s products are substantially financial in nature and although we have not yet reasonably determined the estimated financial statement impact, adoption of ASU No. 2015-14 is not expected to have a significant effect on the Company’s consolidated financial statements, including disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01 amends the guidance in U.S. GAAP on the accounting for equity investments, financial liabilities under the fair value option and the presentations and disclosure requirements of financial instruments.  ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option.  The Company will adopt the methodologies prescribed by the ASU by the date required.  The Company continues to evaluate this standard, however, adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheets for all leases with terms of more than 12 months.  The new lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP.  One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today.  The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases.  Lessor accounting under the new standard is fundamentally consistent with existing GAAP.  Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases.  These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.  For public business entities, the final lease standard will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years.  Early application is permitted.  The Company continues to evaluate the provision of the new lease standard and although we have not yet reasonably determined the estimated financial statement impact, due to the small number of lease agreements presently in effect for the Company, we believe the new guidance will not have a significant impact on the Company’s consolidated financial statements, including disclosures.

11

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.  ASU No. 2016-07 affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.  The amendments in this update eliminate the requirement that, when an investment qualifies for use of the equity method, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.  ASU No. 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.  The amendments also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.  The amendments in ASU No. 2016-07 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Adoption of ASU No. 2016-07 did not have a significant effect on the Company’s consolidated financial statements.

In March 2016, the FASB issuedASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees.  The new guidance involves several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Under ASU No. 2016-09, any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement.  Excess tax benefits are to be classified as an operating activity in the statement of cash flows.  In accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under current guidance, or account for forfeitures when they occur.  For an award to qualify for equity classification, an entity cannot partially settle the award in excess of the employer's maximum statutory withholding requirements.  Such cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows.  The amendments in ASU No. 2016-09 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016.  Adoption of ASU No. 2016-07 did not have a significant effect on the Company’s consolidated financial statements as of September 30, 2017.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  Once effective, ASU No. 2016-13 will significantly change current guidance for recognizing impairment of financial instruments.  Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred.  ASU No. 2016-13 replaces the incurred loss impairment methodology with a new methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates.  The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts.  Additional disclosures are required.  ASU No. 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss.  Any credit loss will be recognized as an allowance for credit losses on available-for-sale debt securities rather than as a direct reduction of the amortized cost basis of the investment, as is currently required.  As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time, as currently required.  ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities.  Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses.  Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.  ASU No. 2016-13 will take effect for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  While the Company generally expects that the implementation of ASU 2016-13 has the potential to increase its allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Company’s financial statements and disclosures.  Management is currently assessing any additional data and system requirements necessary for adoption.  At this time, the estimated financial statement impact cannot be reasonably determined, including disclosures.

12

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments which may change how an entity classifies certain cash receipts and cash payments on its statement of cash flows to reduce diversity in practice.  The update also provides guidance on when an entity should separate cash flows and classify them into more than one class and when an entity should classify the aggregate of those cash flows into a single class based on the predominance principle.  The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not anticipate this update will have a material impact on its consolidated financial statements.

The FASB has issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basis that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. Further, there is diversity in practice (1) in the amortization period for premiums of callable debt securities, and (2) in how the potential for exercise of a call is factored into current impairment assessments.  Another issue is that the practice in the United States is to quote, price, and trade callable debt securities assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing).  The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date.  However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods.  Early adoption is permitted. The Company has decided to adopt this ASU early and adoption did not have a material impact the Company’s consolidated financial statements as there were no callable debt securities held at a premium at the date of adoption.

The FASB has issued ASU No. 2017-09,Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.  ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award.  The FASB adopted ASU 2017-09 to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to the modification of the terms and conditions of a share-based payment award.  The amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period for: (a) public business entities for reporting periods for which financial statements have not yet been issued, and (b) all other entities for reporting periods for which financial statements have not yet been made available for issuance.  The amendments should be applied prospectively to an award modified on or after the adoption date. Adoption of ASU No. 2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

The FASB has issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The new standard is intended to improve and simplify accounting rules around hedge accounting.  The new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks.  Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts.  The new standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.  Adoption of ASU No. 2017-12 is not expected to have a significant impact on the Company’s consolidated financial statements.

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business.  In the opinion of management, the disposition or ultimate resolution of such claims and lawsuits is not anticipated to have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

Reclassifications

Reclassification of certain amounts in the 2016 consolidated financial statements have been made to conform to the 2017 presentation.

13

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 2- REGULATORY MATTERS

Regulatory Matters:

From May 2011 until 2014, the Holding Company and CFBank each were subject to Cease and Desist Orders (the “Holding Company Order” and the “CFBank Order”, respectively, and collectively, the “Orders”) with the Federal Reserve Board (the “FRB”), as successor to the Office of Thrift Supervision (the “OTS”) as the primary regulator of the Holding Company and CFBank.  The Orders imposed significant directives applicable to the Holding Company and CFBank, including requirements that we maintain heightened capital levels, reduce the level of our classified and criticized assets, achieve growth and operating metrics in line with an approved business plan, and comply with restrictions on brokered deposits and on certain types of lending and prohibitions on dividends and repurchases of our capital stock.

The OCC released and terminated the CFBank Order effective as of January 23, 2014.  On May 15, 2014, the FRB announced the termination of the Holding Company Order, effective as of May 9, 2014.  Notwithstanding the termination of the Holding Company Order, the Holding Company was required to continue to adhere to certain requirements and restrictions based on commitments made to the FRB in connection with the termination of the Holding Company Order.  These commitments required the Holding Company, among other things, to continue to implement certain actions in accordance with the capital plan previously submitted to the FRB; not declare or pay dividends on its stock, purchase or redeem its stock, or accept dividends or other capital distributions from CFBank without the prior written approval of the FRB; not incur, increase or guarantee any debt without the prior written consent of the FRB; and provide prior written notice to the FRB with respect to certain changes in directors and senior executive officers.  The foregoing commitments remained in place until January 8, 2016.

Although we are no longer subject to the Orders or the regulatory commitments made following the release of the Orders, we remain subject to extensive supervision and regulation by our regulators and it is possible that regulatory compliance expenses could continue to have an adverse impact on us in the future.

Dividend Restrictions:

The ability of the Holding Company to pay dividends on its Common Stock and Series B Preferred Stock is generally dependent upon the receipt of dividends and other distributions from CFBank.  The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company.  The Holding Company also is subject to various legal and regulatory policies and guidelines impacting the Holding Company’s ability to pay dividends on its stock.  In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities.  Finally, so long as the Company’s Series B Preferred Stock remains outstanding, the Holding Company is prohibited from paying dividends (other than dividends payable solely in shares) on the Company’s common stock for the then-current dividend period, unless full dividends on the Series B Preferred Stock have been paid or set aside for payment. 

Effective October 6, 2017, the Company caused the conversion of all of its outstanding shares of Series B Preferred Stock into shares of Common Stock of the Company.  The conversion of the Series B Preferred Stock results in the elimination of the non-cumulative preferred dividend payments on the Series B Preferred Stock beginning with the 4th quarter of 2017.  See Note 14 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the conversion of the Series B Preferred Stock.

14

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at September 30, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017 (unaudited)
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	11,499	$	4	$	23	$	11,480
Mortgage-backed securities - residential		258		10		-		268
Collateralized mortgage obligations		127		3		-		130
Total	$	11,884	$	17	$	23	$	11,878

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2016
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	13,521	$	11	$	27	$	13,505
Mortgage-backed securities - residential		345		12		-		357
Collateralized mortgage obligations		189		7		-		196
Total	$	14,055	$	30	$	27	$	14,058

There was no other-than-temporary impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at September 30, 2017 or September 30, 2016.

There were no sales of securities for the three and nine months ended September 30, 2017and 2016.

The amortized cost and fair value of debt securities at September 30, 2017 and December 31, 2016 are shown in the table below by contractual maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity date are shown separately.

	September 30, 2017					December 31, 2016
	(unaudited)
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,509	$	2,505	$	2,518	$	2,518
Due from one to five years		8,990		8,975		11,003		10,987
Mortgage-backed securities - residential		258		268		345		357
Collateralized mortgage obligations		127		130		189		196
Total	$	11,884	$	11,878	$	14,055	$	14,058

15

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Fair value of securities pledged was as follows:

	September 30, 2017		December 31, 2016
	(unaudited)
Pledged as collateral for:
FHLB advances	$	4,702	$	2,327
Public deposits		2,031		2,043
Interest-rate swaps		163		195
Total	$	6,896	$	4,565

At September 30, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following table summarizes securities with unrealized losses at September 30, 2017 and December 31, 2016 aggregated by major security type and length of time in a continuous unrealized loss position.

September 30, 2017 (unaudited)	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	8,484	$	23	$	-	$	-	$	8,484	$	23
Total temporarily impaired	$	8,484	$	23	$	-	$	-	$	8,484	$	23

December 31, 2016	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	10,492	$	27	$	-	$	-	$	10,492	$	27
Mortgage-backed securities - residential (1)		1		-		-		-		1		-
Total temporarily impaired	$	10,493	$	27	$	-	$	-	$	10,493	$	27

(1) Securities with an unrealized loss were less than $1 resulting in rounding to zero.

The unrealized losses in U.S. Treasuries at September 30, 2017 and December 31, 2016 are related to multiple securities.  Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.

16

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 4 – LOANS AND LEASES

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

	September 30, 2017		December 31, 2016
	( unaudited)
Commercial (1)	$	91,410	$	71,334
Real estate:
Single-family residential		93,025		92,544
Multi-family residential		38,713		34,291
Commercial		107,705		105,313
Construction		38,744		25,822
Consumer:
Home equity lines of credit		24,751		23,109
Other		365		637
Subtotal		394,713		353,050
Less: ALLL		(6,964)		(6,925)
Loans and leases, net	$	387,749	$	346,125

(1) Includes  $6,156 and $2,874 of commercial leases at September 30, 2017 and December 31, 2016, respectively.

Mortgage Purchase Program

CFBank has participated in a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation, since December 2012.  Pursuant to the terms of a participation agreement, CFBank purchases participation interests in loans made by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S.  The underlying loans are individually (MERS) registered loans which are held until funded by the end investor. The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions.  This process on average takes approximately 14 days.  Given the short-term holding period of the underlying loans, common credit risks (such as past due, impairment and TDR, nonperforming, and nonaccrual classification) are substantially reduced.  Therefore, no allowance is allocated by CFBank to these loans.  These loans are 100% risk rated for CFBank capital adequacy purposes.  Under the participation agreement, CFBank agrees to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintains a 5% ownership interest in each loan it participates.  At September 30, 2017 and December 31, 2016, CFBank held $37,618 and $46,919, respectively, of such loans which have been included in single-family residential loan totals above.

Allowance for Loan and Lease Losses

The ALLL is a valuation allowance for probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. A provision for loan and lease losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors described in Note 1 to the 2016 Audited Financial Statements. 

17

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following table presents the activity in the ALLL by portfolio segment for the three and ninemonths ended September 30, 2017:

	Three months ended September 30, 2017 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,770	$	956	$	725	$	2,365	$	586	$	554	$	2	$	6,958
Addition to (reduction in) provision for loan losses		113		(20)		72		(246)		52		29		-		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		-		1		-		-		-		5		-		6
Ending balance	$	1,883	$	937	$	797	$	2,119	$	638	$	588	$	2	$	6,964

	Nine months ended September 30, 2017 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,647	$	735	$	716	$	2,727	$	580	$	486	$	34	$	6,925
Addition to (reduction in) provision for loan losses		234		184		81		(608)		58		83		(32)		-
Charge-offs		-		-		-		-		-		-		-		-
Recoveries		2		18		-		-		-		19		-		39
Ending balance	$	1,883	$	937	$	797	$	2,119	$	638	$	588	$	2	$	6,964

The following table presents the activity in the ALLL by portfolio segment for the threeand ninemonths ended September 30, 2016:  

	Three months ended September 30, 2016 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,458	$	875	$	694	$	2,567	$	478	$	534	$	7	$	6,613
Addition to (reduction in) provision for loan losses		252		(54)		(122)		(52)		25		(62)		33		20
Charge-offs		(5)		-		-		-		-		-		(1)		(6)
Recoveries		-		3		143		100		-		20		-		266
Ending balance	$	1,705	$	824	$	715	$	2,615	$	503	$	492	$	39	$	6,893

18

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

	Nine months ended September 30, 2016 (unaudited)
			Real Estate								Consumer
	Commercial		Single-family		Multi-family		Commercial		Construction		Home Equity lines of credit		Other		Total
Beginning balance	$	1,380	$	691	$	705	$	2,710	$	561	$	474	$	99	$	6,620
Addition to (reduction in) provision for loan losses		448		223		(133)		(195)		(58)		4		(59)		230
Charge-offs		(123)		(94)		-		-		-		(53)		(1)		(271)
Recoveries		-		4		143		100		-		67		-		314
Ending balance	$	1,705	$	824	$	715	$	2,615	$	503	$	492	$	39	$	6,893

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of September 30, 2017 (unaudited):

			Real Estate								Consumer
	Commercial		Single- family		Multi- family		Commercial		Construction		Home Equity lines of credit		Other		Total
ALLL:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	31	$	-	$	-	$	-	$	31
Collectively evaluated for impairment		1,883		937		797		2,088		638		588		2		6,933
Total ending allowance balance	$	1,883	$	937	$	797	$	2,119	$	638	$	588	$	2	$	6,964
Loans:
Individually evaluated for impairment	$	336	$	117	$	31	$	4,091	$	-	$	-	$	-	$	4,575
Collectively evaluated for impairment		91,074		92,908		38,682		103,614		38,744		24,751		365		390,138
Total ending loan balance	$	91,410	$	93,025	$	38,713	$	107,705	$	38,744	$	24,751	$	365	$	394,713

19

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following table presents the balance in the ALLL and the recorded investment in loans and leases by portfolio segment and based on the impairment method as of December 31, 2016: 

			Real Estate								Consumer
	Commercial		Single- family		Multi- family		Commercial		Construction		Home Equity lines of credit		Other		Total
ALLL:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1	$	-	$	-	$	21	$	-	$	-	$	-	$	22
Collectively evaluated for impairment		1,646		735		716		2,706		580		486		34		6,903
Total ending allowance balance	$	1,647	$	735	$	716	$	2,727	$	580	$	486	$	34	$	6,925
Loans:
Individually evaluated for impairment	$	557	$	122	$	37	$	2,732	$	-	$	-	$	-	$	3,448
Collectively evaluated for impairment		70,777		92,422		34,254		102,581		25,822		23,109		637		349,602
Total ending loan balance	$	71,334	$	92,544	$	34,291	$	105,313	$	25,822	$	23,109	$	637	$	353,050

The following table presents loans individually evaluated for impairment by class of loans as of and for the period endedSeptember 30, 2017.  The unpaid principal balance is the contractual principal balance outstanding.  The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, and deferred loan fees and costs.  The table presents accrual basis interest income recognized during the three and ninemonths ended September 30, 2017.  Cash payments of interest on these loans during the three and nine months ended September 30, 2017 totaled $52 and $164, respectively.

							Three months ended				Nine months ended
	As of September 30, 2017						September 30, 2017				September 30, 2017
	(unaudited)						(unaudited)				(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate:
Single-family residential		-		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
Commercial:
Non-owner occupied		-		-		-		-		-		-		-
Owner occupied		394		139		-		140		6		144		20
Total with no allowance recorded		394		139		-		140		6		144		20
With an allowance recorded:
Commercial (1)		336		336		-		339		2		346		7
Real estate:
Single-family residential (1)		117		117		-		118		2		119		5
Multi-family residential (1)		31		31		-		32		1		34		2
Commercial:
Non-owner occupied		2,982		2,982		23		2,989		42		3,001		120
Owner occupied		970		970		8		972		5		1,098		14
Total with an allowance recorded		4,436		4,436		31		4,450		52		4,598		148
Total	$	4,830	$	4,575	$	31	$	4,590	$	58	$	4,742	$	168

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

20

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following table presents loans individually evaluated for impairment by class of loans as of and for the period ended December 31, 2016.  The unpaid principal balance is the contractual principal balance outstanding.  The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, and deferred loan fees and costs.  The table presents accrual basis interest income recognized during the three and ninemonths ended September 30,2016.  Cash payments of interest during the threeand ninemonths ended September 30, 2016 totaled $60 and $174, respectively.

							Three months ended				Nine months ended
	As of December 31, 2016						September 30, 2016				September 30, 2016
							(unaudited)				(unaudited)
	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	476	$	358	$	-	$	457	$	4	$	455	$	9
Real estate:
Single-family residential		-		-		-		161		-		161		-
Multi-family residential		37		37		-		-		-		-		-
Commercial:
Non-owner occupied		112		112		-		-		-		-		-
Owner occupied		871		350		-		358		13		363		35
Land		-		-		-		-		-		-		-
Total with no allowance recorded		1,496		857		-		976		17		979		44
With an allowance recorded:
Commercial		199		199		1		222		1		241		3
Real estate:
Single-family residential (1)		122		122		-		124		2		126		6
Multi-family residential		-		-		-		40		1		42		2
Commercial:
Non-owner occupied		2,068		2,068		19		2,196		33		2,206		101
Owner occupied		202		202		2		206		2		209		7
Land		-		-		-		222		4		232		11
Total with an allowance recorded		2,591		2,591		22		3,010		43		3,056		130
Total	$	4,087	$	3,448	$	22	$	3,986	$	60	$	4,035	$	174

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

21

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

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

	September 30, 2017		December 31, 2016
	(unaudited)
Loans past due over 90 days still on accrual	$	-	$	-
Nonaccrual loans:
Commercial		119		263
Real estate:
Single-family residential		269		397
Commercial:
Owner occupied		585		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		44
Purchased for portfolio		65		-
Total nonaccrual		1,038		704
Total nonaccrual and nonperforming loans	$	1,038	$	704

Nonaccrual loans include both smaller balance single-family mortgage and consumer loans that are collectively evaluated for impairment and individually classified impaired loans.  There were no loans 90 days or more past due and still accruing interest at September 30, 2017 or December 31, 2016.  

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of September 30, 2017 (unaudited):

	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Nonaccrual Loans Not > 90 days Past Due
Commercial	$	2,433	$	-	$	-	$	2,433	$	88,977	$	119
Real estate:
Single-family residential		477		111		59		647		92,378		210
Multi-family residential		-		-		-		-		38,713		-
Commercial:
Non-owner occupied		-		-		-		-		68,090		-
Owner occupied		-		-		585		585		35,524		-
Land		-		-		-		-		3,506		-
Construction		260		-		-		260		38,484		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		15		-		15		24,267		-
Purchased for portfolio		-		37		65		102		367		-
Other		-		-		-		-		365		-
Total	$	3,170	$	163	$	709	$	4,042	$	390,671	$	329

22

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following table presents the aging of the recorded investment in past due loans and leases by class of loans as of December 31, 2016:  

	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Nonaccrual Loans Not > 90 days Past Due
Commercial	$	-	$	-	$	119	$	119	$	71,215	$	144
Real estate:
Single-family residential		284		49		106		439		92,105		291
Multi-family residential		-		-		-		-		34,291		-
Commercial:
Non-owner occupied		-		-		-		-		60,936		-
Owner occupied		269		600		-		869		34,891		-
Land		-		-		-		-		8,617		-
Construction		48		-		-		48		25,774		-
Consumer:
Home equity lines of credit:
Originated for portfolio		-		15		-		15		22,440		44
Purchased for portfolio		69		-		-		69		585		-
Other		-		-		-		-		637		-
Total	$	670	$	664	$	225	$	1,559	$	351,491	$	479

Troubled Debt Restructurings (TDRs):

From time to time, the terms of certain loans are modified as TDRs, where concessions are granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have included one or a combination of the following: a reduction of the stated interest rate of the loan; an increase in the stated rate of interest lower than the current market rate for new debt with similar risk; an extension of the maturity date; or a change in the payment terms.

As of September 30, 2017 and December 31, 2016, TDRs totaled  $3,746 and$3,130, respectively.  The Company allocated  $25  and $22 of specific reserves to loans whose terms had been modified in TDRs as of September 30, 2017 and December 31, 2016, respectively.  The Company had not committed to lend any additional amounts as of September 30, 2017 or December 31, 2016 to customers with outstanding loans classified as nonaccrual TDRs.

During the three months ended September 30, 2017, there were no loans modified as a TDR. During the nine months ended September 30, 2017,  one commercial real estate loan in the amount of $841 was modified as a TDR during the second quarter, where concessions were granted to a borrower experiencing financial difficulties.  The loan was re-written at a lower interest rate than otherwise would have been offered on this credit grade in the current market.  During the three and nine months endedSeptember 30, 2016, there was one commercial loan in the amount of$339 that was modified as a TDR,where concessions were granted to a borrower experiencing financial difficulties.

There were no TDRs in payment default or that became nonperforming during the period ended September 30, 2017.  There was one nonperforming TDR that went into payment default during the period endedSeptember 30,2016.  A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms, at which time the loan is re-evaluated to determine whether an impairment loss should be recognized, either through a write-off or specific valuation allowance, so that the loan is reported, net, at the present value of estimated future cash flows, or at the fair value of collateral, less cost to sell, if repayment is expected solely from the collateral.

23

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The terms of certain other loans were modified during the quarter ended September 30,2017 and 2016 that did not meet the definition of a TDR. These loans had a total recorded investment of  $10,843 and$18,255as of September 30,2017 and 2016, respectively. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties, a delay in payments that was considered to be insignificant or a modification where no concessions were granted.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Nonaccrual loans include loans that were modified and identified as TDRs and the loans are not performing.  At September 30, 2017 and December 31, 2016, nonaccrual TDRs were as follows:

	September 30, 2017		December 31, 2016
	(unaudited)
Commercial	$	119	$	144
Total	$	119	$	144

Nonaccrual loans at September 30, 2017 and December 31, 2016 do not include $3,627 and $2,986, respectively, of TDRs where customers have established a sustained period of repayment performance, generally nine months, the loans are current according to their modified terms and repayment of the remaining contractual payments is expected. These loans are included in total impaired loans.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  Management analyzes loans individually by classifying the loans as to credit risk.  This analysis includes commercial, commercial real estate and multi-family residential real estate loans.  Internal loan reviews for these loan types are performed at least annually, and more often for loans with higher credit risk. Adjustments to loan risk ratings are made based on the reviews and at any time information is received that may affect risk ratings.  The following definitions are used for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of CFBank’s credit position at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that there will be some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria to be classified into one of the above categories are considered to be not rated or pass-rated loans.  Loans listed as not rated are primarily groups of homogeneous loans.  Past due information is the primary credit indicator for groups of homogenous loans.  Loans listed as pass-rated loans are loans that are subject to internal loan reviews and are determined not to meet the criteria required to be classified as special mention, substandard or doubtful. 

24

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The recorded investment in loans and leases by risk category and by class of loans and leases as of September 30, 2017 and based on the most recent analysis performed follows.  There were no loansor leases rated doubtful at September 30, 2017.  

(unaudited)	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	-	$	90,786	$	289	$	335	$	91,410
Real estate:
Single-family residential		92,746		-		-		279		93,025
Multi-family residential		-		38,072		476		165		38,713
Commercial:
Non-owner occupied		90		65,445		1,719		836		68,090
Owner occupied		-		34,177		1,015		917		36,109
Land		-		3,506		-		-		3,506
Construction		2,589		36,155		-		-		38,744
Consumer:
Home equity lines of credit:
Originated for portfolio		24,204		-		-		78		24,282
Purchased for portfolio		403		-		-		66		469
Other		365		-		-		-		365
	$	120,397	$	268,141	$	3,499	$	2,676	$	394,713

The recorded investment in loans and leases by risk category and by class of loans and leases as of December 31, 2016 follows.  There were no loansor leases rated doubtful at December 31, 2016. 

	Not Rated		Pass		Special Mention		Substandard		Total
Commercial	$	47	$	70,444	$	286	$	557	$	71,334
Real estate:
Single-family residential		92,130		-		-		414		92,544
Multi-family residential		-		33,615		505		171		34,291
Commercial:
Non-owner occupied		115		58,183		1,782		856		60,936
Owner occupied		-		33,493		1,048		1,219		35,760
Land		-		6,380		-		2,237		8,617
Construction		1,997		23,825		-		-		25,822
Consumer:
Home equity lines of credit:
Originated for portfolio		22,328		-		-		127		22,455
Purchased for portfolio		512		-		-		142		654
Other		637		-		-		-		637
	$	117,766	$	225,940	$	3,621	$	5,723	$	353,050

25

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 5 - FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability:

Securities available for sale:  The fair value of securities available for sale is determined using pricing models that vary based on asset class and include available trade, bid and other market information or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Derivatives:  The fair value of derivatives, which includes yield maintenance provisions, interest rate lock commitments and interest rate swaps, is based on valuation models using observable market data as of the measurement date (Level 2).

Impaired loans:  The fair value of impaired loans with specific allocations of the ALLL is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by a third-party appraisal management company approved by the Board of Directors annually. Once received, the loan officer or a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  Appraisals are updated as needed based on facts and circumstances associated with the individual properties.  Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties.  Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property.  Management applies an additional discount to real estate appraised values, typically to reflect changes in market conditions since the date of the appraisal if warranted and to cover disposition costs (including selling expenses) based on the intended disposition method of the property.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Loans held for sale:  Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors (Level 2). 

26

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

	Fair Value Measurements at September 30, 2017 using Significant Other Observable Inputs
	(Level 2)
	(unaudited)
Financial Assets:
Securities available for sale:
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	11,480
Mortgage-backed securities - residential		268
Collateralized mortgage obligations		130
Total securities available for sale	$	11,878
Loans held for sale		3,509
Yield maintenance provisions (embedded derivatives)	$	82
Interest rate lock commitments	$	10
Financial Liabilities:
Interest-rate swaps	$	82

	Fair Value Measurements at December 31, 2016 using Significant Other Observable Inputs
	(Level 2)
Financial Assets:
Securities available for sale:
Issued by U.S. government-sponsored entities and agencies:
U.S. Treasury	$	13,505
Mortgage-backed securities - residential		357
Collateralized mortgage obligations		196
Total securities available for sale	$	14,058
Loans held for sale		2,812
Yield maintenance provisions (embedded derivatives)	$	122
Interest rate lock commitments	$	9
Financial Liabilities:
Interest-rate swaps	$	122

27

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The Company had noassets or liabilities measured at fair value on a recurring basis that were measured using Level 1 or Level 3 inputs at September 30,2017 or December 31, 2016.  There were notransfers of assets or liabilities measured at fair value between levels during the periods ended September 30,2017 and December 31, 2016.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at September 30, 2017 Using
Significant Unobservable Inputs (Level 3)
(unaudited)
Impaired loans:
Commercial	$	119
Real Estate:
Single-family residential		117
Multi-family residential		31
Commercial:
Non-owner occupied		2,959
Owner occupied		771
Total impaired loans	$	3,997

Fair Value Measurements at December 31, 2016 Using
Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	130
Real Estate:
Single-family residential		122
Multi-family residential		37
Commercial:
Non-owner occupied		2,161
Owner occupied		200
Total impaired loans	$	2,650

The Company had nomaterialassets or liabilities measured at fair value on a non-recurring basis that were measured using Level 1 or Level 2 inputs at September 30,2017 or December 31, 2016. 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $4,026 with a valuation allowance of $30 at September 30, 2017. There were no write-downs of impaired collateral dependent loans during the three and ninemonths ended September 30,2017 or 2016.  Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2,672, with a valuation allowance of $21 at December 31, 2016.

During the three and ninemonths ended September 30,2017, the Company did not have any transfers of assets or liabilities between those measured using Level 1, 2 or 3 inputs.  The Company recognizes transfers of assets and liabilities between Level 1, 2 and 3 inputs based on the information relating to those assets and liabilities at the end of the reporting period.

28

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30,2017 (unaudited):

		Fair Value	Valuation Technique(s)	Unobservable Inputs	(Range) Weighted Average
Impaired loans:
Commercial	$	119	Comparable sales approach	Adjustment for differences between the comparable market transactions	3.48%
Real estate:
Single-family residential		117	Comparable sales approach	Adjustment for differences between the comparable market transactions	(1.81% , 3.61%)  2.91%
Multi-family residential		31	Comparable sales approach	Adjustment for differences between the comparable market transactions	9.64%
Commercial:
Non-owner occupied		2,959	Comparable sales approach	Adjustment for differences between the comparable market transactions	(3.48%,  9.64%) 5.15%
Owner occupied		771	Comparable sales approach	Adjustment for differences between the comparable market transactions	(-4.46%,  -5.26%) 5.09%

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016:

		Fair Value	Valuation Technique(s)	Unobservable Inputs	(Range) Weighted Average
Impaired loans:
Commercial	$	130	Comparable sales approach	Adjustment for differences between the comparable market transactions	3.48%
Real estate:
Single -family residential		122	Comparable sales approach	Adjustment for differences between the comparable market transactions	(1.81% , 3.61%)  2.91%
Multi-family residential		37	Comparable sales approach	Adjustment for differences between the comparable market transactions	9.64%
Commercial:
Non-owner occupied		2,161	Comparable sales approach	Adjustment for differences between the comparable market transactions	(1.10%,  5.74%) 1.35%
Owner occupied		200	Comparable sales approach	Adjustment for differences between the comparable market transactions	-4.46%

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for loans held for sale.  These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans.  Loans originated as construction loans, that were subsequently transferred to held for sale, are carried at the lower of cost or market and are not included.  Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment.  None of these loans were 90 days or more past due or on nonaccrual as of September 30, 2017 or December 31, 2016.

29

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

As of September 30,2017 and December 31, 2016, the aggregate fair value, contractual balance and gain or loss of loans held for sale were as follows:

	September 30, 2017		December 31, 2016
	(unaudited)
Aggregate fair value	$	3,509	$	2,812
Contractual balance		3,494		2,801
Gain (loss)	$	15	$	11

The total amount of gains and losses from changes in fair value included in earnings for the three and ninemonths ended September 30,2017 and 2016 for loans held for sale were:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
Interest income	$	10	$	25	$	39	$	40
Interest expense		-		-		-		-
Change in fair value		13		(2)		4		2
Total change in fair value	$	23	$	23	$	43	$	42

The carrying amounts and estimated fair values of financial instruments at September 30, 2017 were as follows:

	Fair Value Measurements at September 30, 2017 Using:
	Carrying
(unaudited)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	27,956	$	27,956	$	-	$	-	$	27,956
Interest-bearing deposits in other financial institutions		100		100		-		-		100
Securities available for sale		11,878		-		11,878		-		11,878
Loans held for sale		3,509		-		3,509		-		3,509
Loans and leases, net		387,749		-		-		385,939		385,939
FHLB and FRB stock		3,227		n/a		n/a		n/a		n/a
Accrued interest receivable		1,285		6		57		1,222		1,285
Yield maintenance provisions (embedded derivatives)		82		-		82		-		82
Interest rate lock commitments		10		-		10		-		10
Financial liabilities
Deposits	$	(380,953)	$	(204,195)	$	(176,660)	$	-	$	(380,855)
FHLB advances and other borrowings		(19,000)		-		(19,073)		-		(19,073)
Advances by borrowers for taxes and insurance		(182)		-		-		(182)		(182)
Subordinated debentures		(5,155)		-		(3,730)		-		(3,730)
Accrued interest payable		(66)		(2)		(64)		-		(66)
Interest-rate swaps		(82)		-		(82)		-		(82)

30

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The carrying amounts and estimated fair values of financial instruments at December 31, 2016 were as follows:

	Fair Value Measurements at December 31, 2016 Using:
	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	57,941	$	57,941	$	-	$	-	$	57,941
Interest-bearing deposits in other financial institutions		100		100		-		-		100
Securities available for sale		14,058		-		14,058		-		14,058
Loans held for sale		2,812		-		2,812		-		2,812
Loans and leases, net		346,125		-		-		343,523		343,523
FHLB stock		1,942		n/a		n/a		n/a		n/a
Accrued interest receivable		1,054		13		40		1,001		1,054
Yield maintenance provisions (embedded derivatives)		122		-		122		-		122
Interest rate lock commitments		9		-		9		-		9
Financial liabilities
Deposits	$	(375,364)	$	(202,158)	$	(171,967)	$	-	$	(374,125)
FHLB advances and other borrowings		(13,500)		-		(13,597)		-		(13,597)
Advances by borrowers for taxes and insurance		(408)		-		-		(408)		(408)
Subordinated debentures		(5,155)		-		(3,411)		-		(3,411)
Accrued interest payable		(78)		(2)		(76)		-		(78)
Interest-rate swaps		(122)		-		(122)		-		(122)

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents and Interest-Bearing Deposits in Other Financial Institutions

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

FHLB and FRB Stock

It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability. 

Loans and Leases

Fair values of loans and leases, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for 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 resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits

The fair values disclosed for demand deposits (e.g., interest and noninterest bearing checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Other Borrowings

The fair values of the Company’s long-term FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

31

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification,consistent with the asset or liability with which they are associated.

Advances by Borrowers for Taxes and Insurance

The carrying amount of advances by borrowers for taxes and insurance approximates fair value resulting in a Level 3 classification,consistent with the liability with which they are associated.

Off-Balance-Sheet Instruments

The fair value of off-balance-sheet items is not considered material.

NOTE 6 – SUBORDINATED DEBENTURES

In December 2003, Central Federal Capital Trust I, a trust formed by the Holding Company, closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1 per security.  The Holding Company issued $5,155 of subordinated debentures to the trust in exchange for ownership of all of the common stock of the trust and the proceeds of the preferred securities sold by the trust.  The Holding Company is not considered the primary beneficiary of this trust (which is classified as a variable interest entity); therefore, the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.  The Holding Company’s investment in the common stock of the trust was $155 and is included in other assets.

The Holding Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,at 100% of the principal amount, plus accrued and unpaid interest.  The subordinated debentures mature on December 30, 2033.  The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture.  There are no required principal payments on the subordinated debentures over the next five years. The Holding Company has the option to defer interest payments on the subordinated debentures for a period not to exceed five consecutive years.

The subordinated debentures have a variable rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate plus 2.85%, which was 4.15% at September 30, 2017 and 3.85% at December 31, 2016.

NOTE 7 – STOCK-BASED COMPENSATION

The Company has issued awards under three stock-based compensation plans (the “Plans”), as described below.  Total compensation cost that has been charged against income for those Plans totaled $59 and $181, respectively, for the three and nine months ended September 30, 2017 and $33 and $92, respectively, for the three and nine months ended September  30, 2016.  The total income tax effect was  $20 and $62, respectively, for the three and nine months ended September 30, 2017 and $9 and $26, respectively, for the three and nine months ended September 30, 2016.

The Plans are all stockholder-approved and authorize stock option grants and restricted stock awards to be made to directors, officers and employees.  The 1999 Stock-Based Incentive Plan, which expired July 13, 2009, provided 38,778 shares of common stock for stock option grants and 15,511 shares of common stock for restricted stock awards.  The 2003 Equity Compensation Plan (the “2003 Plan”), as amended and restated, provided an aggregate of 100,000 shares for stock option grants and restricted stock awards, of which up to 30,000 shares could be awarded in the form of restricted stock awards.  The 2009 Equity Compensation Plan (the “2009 Plan”), which was approved by stockholders on May 21, 2009, replaced the 2003 Plan and provided for 200,000 shares, plus any remaining shares available to grant or that are later forfeited or expire under the 2003 Plan, to be made available to be issued as stock option grants, stock appreciation rights or restricted stock awards.  On May 16, 2013, the Company’s stockholders approved the First Amendment to the 2009 Plan to increase the number of shares of common stock reserved for stock option grants and restricted stock awards thereunder to 1,500,000.  

32

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Stock Options:

The Plans permit the grant of stock options to directors, officers and employees of the Holding Company and CFBank.  Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally have vesting periods ranging from one to three years, and are exercisable for ten years from the date of grant.  Unvested stock options immediately vest upon a change of control. 

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below.  Expected volatilities are based on historical volatilities of the Company’s common stock.  The Company uses historical data to estimate option exercise and post-vesting termination behavior.  Employee and management options are tracked separately.  The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

There were nooptionsgranted or exercised during the three and nine months ended September 30, 2017 and September 30, 2016 (unaudited). 

A summary of stock option activity in the Plans for the nine months ended September 30, 2017 follows (unaudited):

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Intrinsic Value
Outstanding at beginning of year	542,746	$	1.46
Expired	(300)		36.75
Cancelled or Forfeited	(3,000)		1.43
Outstanding at end of period	539,446	$	1.44	5.7	$	554,860
Expected to vest	-	$	-	-	$	-
Exercisable at end of period	539,446	$	1.44	5.7	$	554,860

During the nine months ended September 30, 2017, there were 300 stock options that expired.There were no stock options that expired during the nine months ended September 30, 2016.  During the nine months ended September 30, 2017, there were 3,000 cancelled or forfeited stock options compared to 23,950 for the nine months ended at September 30, 2016.  Previously recognized expense associated with nonvested forfeited shares was reversed.   As of September 30, 2017, all stock options granted under the Plans were vested.

Restricted Stock Awards:

The Plans permit the grant of restricted stock awards to directors, officers and employees. Compensation is recognized over the vesting period of the awards based on the fair value of the stock at grant date.  The fair value of the stock is determined using the closing share price on the date of grant and shares generally have vesting periods of one to three years.  There were no shares of restricted stock issued during the three and nine months ended September 30, 2017 and 2016 (unaudited).

A summary of changes in the Company’s nonvested restricted stock awardsfor the year follows (unaudited):

Nonvested Shares	Shares	Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2017	425,666	$	1.56
Forfeited	(14,333)		1.58
Nonvested at September 30, 2017	411,333	$	1.55

33

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

As of September 30, 2017 and 2016, the unrecognized compensation cost related to nonvested restricted stock awards granted under the Plans was $439 and $191, respectively. 

There were 14,333 shares of restricted stock forfeited during the nine month period ended September 30, 2017.  There were no shares of restricted stock forfeited during the nine months ended September 30, 2016.  Also, there were no shares of restricted stock that vested during the nine months ended September 30, 2017 and 2016.

There were 557,425 shares of common stock remaining available for stock option grants and restricted stock awards under the 2009 Plan at September 30, 2017.

NOTE 8 – REGULATORY CAPITAL MATTERS

CFBank is subject to regulatory capital requirements administered by federal banking agencies.  Prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off‑balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. 

Prompt corrective action regulations provide five classifications for banking organizations:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If a banking organization is classified as adequately capitalized, regulatory approval is required to accept brokered deposits.  If a banking organization is classified as undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

In July 2013, the Holding Company’s primary federal regulator, the FRB, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations.  The rules implement the Basel Committee's December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.  The Basel III Capital Rules provide higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place.  In addition, in order to avoid limitations on capital distributions, such as dividend payments and certain bonus payments to executive officers, the Basel III Capital Rules require insured financial institutions to hold a capital conservation buffer of common equity tier 1 capital above the minimum risk-based capital requirements.  The capital conservation buffer will be phased in over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to2.5% of risk-weighted assets.  The Basel III Capital Rules revise the regulatory agencies' prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of common equity.  The Basel III Capital Rules became effective for the Company on January 1, 2015, and will be fully phased in by January 1, 2019.  Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).  CFBank’s implementation of the new rules on January 1, 2015 did not have a material impact on our capital needs or classifications.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require CFBank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0% upon full implementation); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5% upon full implementation); and 4) a minimum Leverage Ratio of 4.0%.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period increasing by increments of that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019.  The capital conservation buffer is designed to absorb losses during periods of economic stress.  Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

34

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

The following tables present actual and required capital ratios as of September 30, 2017 and December 31, 2016 for CFBank under the Basel III Capital Rules.  The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2017, based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in.  Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

	Actual			Minimum Capital Required-Basel III Phase-In Schedule			Minimum Capital Required-Basel III Fully Phased-In			To Be Well Capitalized Under Applicable Regulatory Capital Standards
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
September 30, 2017 (unaudited)
Total Capital to risk weighted assets	$	47,817	12.22%	$	36,187	9.25%	$	41,078	10.50%	$	39,122	10.00%
Tier 1 (Core) Capital to risk weighted assets		42,898	10.97%		28,363	7.25%		33,253	8.50%		31,297	8.00%
Common equity tier 1 capital to risk-weighted assets		42,898	10.97%		22,495	5.75%		27,385	7.00%		25,429	6.50%
Tier 1 (Core) Capital to adjusted total assets (Leverage ratio)		42,898	9.99%		17,169	4.00%		17,169	4.00%		21,462	5.00%

	Actual			Minimum Capital Required-Basel III Phase-In Schedule			Minimum Capital Required-Basel III Fully Phased-In			To Be Well Capitalized Under Applicable Regulatory Capital Standards
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
December 31, 2016
Total Capital to risk weighted assets	$	45,118	12.46%	$	31,256	8.63%	$	38,029	10.50%	$	36,218	10.00%
Tier 1 (Core) Capital to risk weighted assets		40,556	11.20%		24,013	6.63%		30,785	8.50%		28,974	8.00%
Common equity tier 1 capital to risk-weighted assets		40,556	11.20%		18,580	5.13%		25,353	7.00%		23,542	6.50%
Tier 1 (Core) Capital to adjusted total assets (Leverage ratio)		40,556	9.66%		16,792	4.00%		16,792	4.00%		20,991	5.00%

Effective December 1, 2016, CFBank converted from a federal savings association to a national bank and, as a result, is no longer subject to the Qualified Thrift Lender (QTL) requirements. Previously, the Qualified Thrift Lender test required CFBank to maintain at least 65% of assets in housing‑related finance and other specified areas.

35

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

CFBank converted from a mutual to a stock institution in 1998, and a “liquidation account” was established in the amount of $14,300, which was the net worth reported in the conversion prospectus.  The liquidation account represents a calculated amount for the purposes described below, and it does not represent actual funds included in the consolidated financial statements of the Company.  Eligible depositors who have maintained their accounts, less annual reductions to the extent they have reduced their deposits, would receive a distribution from this account if CFBank liquidated and its assets exceeded its liabilities.  Dividends may not reduce CFBank’s stockholder’s equity below the required liquidation account balance.

Dividend Restrictions:

The Holding Company’s principal source of funds for dividend payments is dividends received from CFBank.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above.  Any future dividend payments by CFBank to the Holding Company would be based on future earnings and, if necessary, regulatory approval. 

The Holding Company’s ability to pay dividends on its stock is also conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities.  Additionally, so long as the Company’s Series B Preferred Stock remains outstanding, the Holding Company is prohibited from paying dividends (other than dividends payable solely in shares) on the Company’s common stock for the then-current dividend period, unless full dividends on the Series B Preferred Stock have been paid or set aside for payment. 

Effective October 6, 2017, the Company caused the conversion of all of its outstanding shares of Series B Preferred Stock into shares of Common Stock of the Company.  The conversion of the Series B Preferred Stock results in the elimination of the non-cumulative preferred dividend payments on the Series B Preferred Stock beginning with the 4th quarter of 2017.  See Note 14 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the conversion of the Series B Preferred Stock.

Additionally, CFBank does not intend to make distributions to the Holding Company that would result in a recapture of any portion of its thrift bad debt reserve as discussed in Note 10-Income Taxes.

NOTE 9 – DERIVATIVE INSTRUMENTS

Interest-rate swaps:

CFBank utilizes interest-rate swaps as part of its asset/liability management strategy to help manage its interest rate risk position, and does not use derivatives for trading purposes.  The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.  CFBank was party to interest-rate swaps with a combined notional amount of $2,209 at September 30, 2017 and $2,280 at December 31, 2016.

The objective of the interest-rate swaps is to protect the related fixed-rate commercial real estate loans from changes in fair value due to changes in interest rates.  CFBank has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap.  The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges.  Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.CFBank currently does not have any derivatives designated as hedges. 

ContingentFeatures:

Thecounterparty to CFBank’sinterest-rate swaps is exposed to credit risk whenever the interest-rate swaps are inaliability position. At September 30, 2017, CFBankhad $663in securities and cash pledged as collateral for these derivatives.Shouldthe liability increase, beyond the collateral value, CFBank will be required to pledge additional collateral. 

Additionally, CFBank’s interest-rate swap instruments contain provisions that require CFBank to remain well capitalized under regulatory capital standards.  The interest-rate swaps may be called by the counterparty if CFBank fails to maintain well-capitalized status under regulatory capital standards.  As of September 30, 2017, CFBank was well-capitalized under regulatory capital standards.

36

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Summary information about the derivative instruments is as follows:

	September 30, 2017		December 31, 2016
	(unaudited)
Notional amount	$	2,209	$	2,280
Weighted average pay rate on interest-rate swaps		3.75%		3.74%
Weighted average receive rate on interest-rate swaps		1.24%		0.75%
Weighted average maturity (years)		2.4		3.1
Fair value of interest-rate swaps	$	(82)	$	(122)
Fair value of yield maintenance provisions		82		122

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheet.  Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported currently in earnings, as other noninterest income in the consolidated statements of operations.  There were no net gains or losses recognized in earnings related to yield maintenance provisions and interest-rate swaps for the three and ninemonths ended September 30, 2017 or 2016.  

Mortgage banking derivatives:

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives.  These mortgage banking derivatives are not designated in hedge relationships.  The Company had approximately $2,365 and $2,164 of interest rate lock commitments related to residential mortgage loans at September 30, 2017 and December 31, 2016, respectively.  The fair value of these mortgage banking derivatives was reflected by a derivative asset of  $10 and$9 at September 30, 2017 and December 31, 2016, respectively, which was included in other assets in the consolidated balance sheet. Fair values were estimated based on anticipated gains on the sale of the underlying loans. Changes in the fair values of these mortgage banking derivatives are included in net gains on sales of loans.

NOTE 10 – INCOME TAXES

At September 30, 2017, the Company had a deferred tax asset recorded in the amount of $2,600.  At December 31, 2016, the Company had a deferred tax asset recorded of approximately$2,600.  At September 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits recorded.  The Company is subject to U.S. federal income tax and is no longer subject to federal examination for years prior to 2013.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.   When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of September 30, 2017that no valuation allowance was required against thenet deferred tax asset.

In 2012, a recapitalization program through the sale of $22,500 in common stock improved the capital levels of CFBank and provided working capital for the Holding Company. The result of the change in stock ownership associated with the stock offering, however, was that the Company incurred an ownership change within the guidelines of Section 382 of the Internal Revenue Code of 1986.  At year-end 2016, the Company had net operating loss carryforwards of $23,059, which expire at various dates from 2024 to 2033, and hadalternative minimum tax credit carryforwards of $50, which do not expire. As a result of the ownership change, the Company's ability to utilize carryforwards that arose before the stock offering closed is limited to $163 per year. Due to this limitation, management determined it is more likely than not that $20,520 of net operating loss carryforwards will expire unutilized. As required by accounting standards, the Company reduced the carrying value of deferred tax assets, and the corresponding valuation allowance, by the $6,977 tax effect of this lost realizability.

37

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Federal income tax laws provided additional deductions, totaling $2,250, for thrift bad debt reserves established before 1988.  Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled$765 at year-end 2016.  However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded.  Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank. The amount of additional taxable income created by such a distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if CFBank makes a distribution that reduces the amount allocated to its bad debt reserve, then approximately one and one-half times the amount used would be includible in gross income for federal income tax purposes, assuming a 34% corporate income tax rate. CFBank does not intend to make distributions that would result in a recapture of any portion of its bad debt reserve.

The Company records income tax expense based on the federal statutory rate adjusted for the effect of bank owned life insurance and other miscellaneous items.  The effective tax rate for the three and nine months ended September 30, 2017  was approximately 32.6% and 33.0%, respectively, and 33.0% and 32.7%, respectively for the three and nine months ended September 30, 2016, which management believes is a reasonable estimate for the effective tax rate.

The following table summarizes the major components creating differences between income taxes at the federal statutory tax rate and the effective tax rate recorded in the consolidated statements of income for the three and nine months endedSeptember 30, 2017 and 2016:

	For the three months ended September 30,		For the nine months ended September 30,
	2017	2016	2017	2016
	(unaudited)		(unaudited)
Statutory tax rate	34.0%	34.0%	34.0%	34.0%
Increase (decrease) resulting from:
Tax exempt income on bank owned life insurance	(1.1%)	(1.5%)	(1.4)%	(1.8)%
Other, net	(0.3%)	0.5%	0.4%	0.5%
Effective tax rate	32.6%	33.0%	33.0%	32.7%

NOTE 11- ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes within each classification of accumulated other comprehensive income, net of tax, for the three and nine months ended September 30, 2017 and 2016 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

Changes in Accumulated Other Comprehensive Income by Component (1)
	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)
	Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Gains and Losses on Available-for-Sale Securities
Accumulated other comprehensive income (loss), beginning of period	$	(1)	$	80	$	2	$	(9)
Other comprehensive gain (loss) before reclassifications (2)		(3)		(23)		(6)		66
Net current-period other comprehensive income (loss)		(3)		(23)		(6)		66
Accumulated other comprehensive income (loss), end of period	$	(4)	$	57	$	(4)	$	57

⁽¹⁾ All amounts are net of tax.  Amounts in parentheses indicate a reduction of other comprehensive income.

⁽²⁾ There were no amounts reclassified out of other comprehensive income for the three and nine months endedSeptember 30, 2017 and 2016.

38

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 12- PREFERRED STOCK

Series B Preferred Stock:

Commencing in April 2014, the Company conducted a private placement of up to 480,000 shares of its6.25% Non-Cumulative Convertible Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) for an offering price of $25.00 per share (the “Private Placement”).  Pursuant to the Private Placement, the Company sold an aggregate of 480,000 shares of Series B Preferred Stock on May 12, 2014 and July 15, 2014, for an aggregate offering price of $12,000.After payment of approximately $482 in placement fees and approximately $149 of other offering expenses, the Company’s net proceeds from its sale of the 480,000 shares of Series B Preferred Stock in the Private Placement were approximately $11,369. 

For each share of Series B Preferred Stock sold in the Private Placement, the Company also agreed to issue, at no additional charge, a Warrant to purchase common stock of the Company.See Note 13-Common Stock Warrants and Note 14-Subsequent Events and Other Mattersfor additional information.  

NOTE 13- COMMON STOCK WARRANTS

Series B Preferred Stock – Warrants:

For each share of Series B Preferred Stock issued by the Company in the Private Placement, the Company also issued, at no additional charge, a Warrant to purchase (i) 2.00 shares of common stock of the Company if the purchaser purchased less than $700  (28,000 shares) of Series B Preferred Stock in the Private Placement, or (ii) 3.25 shares of common stock if the purchaser purchased $700  (28,000 shares) or more of Series B Preferred Stock in the Private Placement.  Warrants to purchase an aggregate of 1,152,125shares of common stock were issued by the Company to the purchasers of the 480,000 shares of Series B Preferred Stock sold in the Private Placement.  The Warrants are exercisable for a period of approximately five (5) years expiring on July 15, 2019, at a current exercise price of $1.85 per share of common stock.

NOTE 14-  SUBSEQUENT EVENTS AND OTHER MATTERS

Conversion of Series B Preferred Stock to Common Stock:

On September 29, 2017, the Company announced the conversion of its Series B Preferred Stock into shares of Common Stock of the Company.  The conversion was effective October 6, 2017, and resulted in the conversion of all 480,000 of the Company’s issued and outstanding shares of Series B Preferred Stock into approximately 6,857,143 shares of Common Stock.  

The conversion of the Series B Preferred Stock results in the elimination of the non-cumulative preferred dividend payments on the Series B Preferred Stock beginning with the 4th quarter of 2017. The preferred dividends, in the aggregate amount of approximately $187,500 quarterly, or approximately $750,000 annually, will not be payable by the Company going forward.

39

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENTS

Statements in this quarterly report that are not statements of historical fact are forward-looking statements which are made in good faith by us. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per common share, capital structure and other financial items; (2) plans and objectives of the management or Boards of Directors of Central Federal Corporation (the “Holding Company”) or CFBank, National Association (“CFBank”); (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements.  Words such as "estimate," "strategy," "may," "believe," "anticipate," "expect," "predict," "will," "intend," "plan," "targeted," and the negative of these terms, or similar expressions, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.  Various risks and uncertainties may cause actual results to differ materially from those indicated by our forward-looking statements.  The following, among other factors, could cause such differences:

· changes in economic and political conditions could adversely affect our earnings through declines in deposits, loan demand, the ability of our customers to repay loans and the value of the collateral securing our loans;

· changes in interest rates that may reduce net interest margin and impact funding sources;

· the possibility that we will need to make increased provisions for loan and lease losses;

· our ability to maintain sufficient liquidity to continue to fund our operations;

· our ability to effectively manage our growth;

· changes in market rates and prices, including real estate values, which may adversely impact the value of financial products including securities, loans and deposits;

· the possibility of other-than-temporary impairment of securities held in our securities portfolio;

· results of examinations of the Holding Company and CFBank by their regulators, including the possibility that the regulators may, among other things, require CFBank to increase its allowance for loan and lease losses or write-down assets;

· our ability to continue to meet regulatory requirements and guidelines to which we are subject;

· our ability to maintain consistent earnings or profitability in the future;

· our ability to raise additional capital if and when necessary in the future;

· changes in tax laws, rules and regulations;

· increases in deposit insurance rates or premiums;

· legislative and regulatory changes which may increase compliance costs and burdens;

· unexpected losses of key management;

· various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC”);

· further increases in competition from other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions;

· any failure, interruption or breach in security of our communications and information systems;

· technological factors which may affect our operations, pricing, products and services;

· unanticipated litigation, claims or assessments; and

· Management's ability to manage these and other risks.

40

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward-looking statements are not guarantees of performance or results.  A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement.  We believe that we have chosen these assumptions or bases in good faith and that they are reasonable.  We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material.  The forward-looking statements included in this report speak only as of the date of the report.  We undertake no obligation to publicly release revisions to any forward-looking statements to reflect events or circumstances after the date of such statements, except to the extent required by law.

Our filings with the Securities and Exchange Commission (the “SEC”) detail other risks, all of which are difficult to predict and many of which are beyond our control.

Business Overview

The Holding Company is a financial holding company that owns 100% of the stock of CFBank, National Association (“CFBank”), which was formed in Ohio in 1892 and converted from a federal savings association to a national bank on December 1, 2016.  Prior to December 1, 2016, the Holding Company was a registered savings and loan holding company.  Effective as of December 1, 2016 and in conjunction with the conversion of CFBank to a national bank, the Holding Company became a registered bank holding company and elected financial holding status with the FRB.

CFBank, with the opening of its Glendale branch in the Cincinnati market during the third quarter of 2017, has a presence in four major metro Ohio markets – Columbus, Cleveland, Cincinnati and Akron– as well as its two locations in Columbiana County, Ohio. CFBank provides personalized Business Banking products and services including commercial loans and leases, commercial and residential real estate loans and treasury management depository services.  As a full service commercial bank, our business, along with our products and services, is focused on serving the banking and financial needs of closely held businesses.  Our business model emphasizes personalized service, customer access to decision makers, quick execution, and the convenience of online internet banking, mobile banking, remote deposit and corporate treasury management.  In addition, CFBank provides residential lending and full service retail banking services and products.  Most of our deposits and loans come from our market area.  Because of CFBank’s concentration of business activities in Ohio, the Company’s financial condition and results of operations depend in large part upon economic conditions in Ohio.

Our principal market area for loans and deposits includes the following Ohio counties: Franklin County through our office in Worthington, Ohio; Summit County through our office in Fairlawn, Ohio; Hamilton County through our office in Glendale, Ohio; Columbiana County through our offices in Calcutta and Wellsville, Ohio; and Cuyahoga County, through our agency office in Woodmere, Ohio.  We originate commercial and residential real estate loans and business loans primarily throughout Ohio.

General

Our net income is dependent primarily on net interest income, which is the difference between the interest income earned on loans and securities and our cost of funds, consisting of interest paid on deposits and borrowed funds.  Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, the level of nonperforming assets and deposit flows.

Net income is also affected by, among other things, provisions for loan losses, loan fee income, service charges, gains on loan sales, operating expenses,  and  taxes.  Operating expenses principally consist of employee compensation and benefits, occupancy, FDIC insurance premiums and other general and administrative expenses.  In general, results of operations are significantly affected by general economic and competitive conditions, changes in market interest rates and real estate values, government policies and actions of regulatory authorities.  Our regulators have extensive discretion in their supervisory and enforcement activities, including the authority to impose restrictions on our operations, to classify our assets and require us to increase the level of our allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our business, financial condition, results of operations and/or cash flows.

Regulatory Matters

From May 2011 until 2014, the Holding Company and CFBank each were subject to Cease and Desist Orders (the “Holding Company Order” and the “CFBank Order”, respectively, and collectively, the “Orders”) with the FRB, as successor to the Office of Thrift Supervision (the “OTS”) as the primary regulator of the Holding Company and CFBank.  See Note 2 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the Orders.

Effective as of January 23, 2014, the OCC released and terminated the CFBank Order based upon the improved capital position of CFBank, among other factors.  On May 15, 2014, the FRB announced the termination of the Holding Company Order, effective as of

41

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

May 9, 2014.  Following the termination of the Holding Company Order, the Holding Company was required to continue to adhere to certain requirements and restrictions based on commitments made to the FRB in connection with the termination of the Holding Company Order.  These commitments required the Holding Company, among other things, to continue to implement certain actions in accordance with the capital plan previously submitted to the FRB; not declare or pay dividends on its stock, purchase or redeem its stock, or accept dividends or other capital distributions from CFBank without the prior written approval of the FRB; not incur, increase or guarantee any debt without the prior written consent of the FRB; and provide prior written notice to the FRB with respect to certain changes in directors and senior executive officers.  The foregoing commitments remained in place until January 8, 2016.  See Note 2 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the Orders.

Although we are no longer subject to the Orders or the regulatory commitments made following the release of the Orders, we remain subject to extensive supervision and regulation by our regulators and it is possible that regulatory compliance expenses could continue to have an adverse impact on us in the future.

Dividend Restrictions

Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Generally, CFBank may pay dividends to the Holding Company without prior approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as CFBank remains well capitalized after the dividend payment.  Future dividend payments by CFBank to the Holding Company would be based on future earnings and, if necessary, regulatory approval.  Management believes that the Holding Company has adequate operating capital for the foreseeable future. The Holding Company had $950,000 in cash and cash equivalents at September 30, 2017.

Management’s discussion and analysis represents a review of our consolidated financial condition and results of operations for the periods presented.  This review should be read in conjunction with our consolidated financial statements and related notes.

Financial Condition

General. Assets totaled $448.9 million at September 30, 2017 and increased $12.8 million, or 2.9%, from $436.1 million at December 31, 2016.  The increase was primarily due to a $41.6 million increase in net loan and lease balances, partially offset by a $30.0 million decrease in cash and cash equivalents

Cash and cash equivalents.  Cash and cash equivalents totaled $28.0 million at September 30, 2017 and decreased approximately $30.0 million, or 51.8%, from $57.9 million at December 31, 2016.  The decrease in cash and cash equivalents was primarily a result of funding loan growth.

Securities. Securities available for sale totaled $11.9 million at September 30, 2017 and decreased $2.2 million, or 15.5%, from $14.1 million at December 31, 2016. The decrease was a result of scheduled maturities and repayments.

Loans and Leases.Net loans and leases totaled $387.7 million at September 30, 2017 and increased $41.6 million, or 12.0%, from $346.1 million at December 31, 2016.  The increase was primarily due to a $20.1 million increase in commercial loan balances, a $12.9 million increase in construction loan balances, a $4.4 million increase in multi-family loans balances, a $2.4 million increase in commercial real estate loan balances, and a $1.6 million increase in home equity lines of credit.  The increases in the aforementioned loan balances were primarily due to increased sales activity and new relationships.

CFBank has participated in a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation, since December 2012.  Pursuant to the terms of a participation agreement, CFBank purchases participation interests in loans made by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S.  The underlying loans are individually (MERS) registered loans which are held until funded by the end investor.  The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions.  This process on average takes approximately 14 days.  Given the short-term holding period of the underlying loans, common credit risks (such as past due, impairment and TDR, nonperforming, and nonaccrual classification) are substantially reduced.  Therefore, no allowance is allocated by CFBank to these loans.  These loans are 100% risk rated for CFBank capital adequacy purposes.  Under the participation agreement, CFBank agrees to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintains a 5% ownership interest in each loan it participates.  During the three and nine months ended September 30, 2017, loan origination activity totaled $177.3 and $492.8 million, respectively, and payoffs for the same period totaled $178.9 and $502.1 million, respectively.  At September 30, 2017 and December 31, 2016, CFBank held $37.6 million and $46.9 million, respectively, of such loans which are included in single-family residential loan totals.

42

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Allowance for loan and lease losses (ALLL).The ALLL totaled $7.0 million at September 30, 2017 and increased $39,000, or 0.6%, from $6.9 million at December 31, 2016.  The increase in the ALLL was due to net recoveries for the nine months ended September 30, 2017.  The ratio of the ALLL to total loans was 1.76% at September 30, 2017 compared to 1.96% at December 31, 2016.  The ratio of the ALLL to nonperforming loans was 670.9% at September 30, 2017, compared to 983.7% at December 31, 2016.

The ALLL is a valuation allowance for probable incurred credit losses.  The ALLL methodology is designed as part of a thorough process that incorporates management’s current judgments about the credit quality of the loan portfolio into a determination of the ALLL in accordance with generally accepted accounting principles and supervisory guidance.  Management analyzes the adequacy of the ALLL quarterly through reviews of the loan portfolio, including the nature and volume of the loan portfolio and segments of the portfolio; industry and loan concentrations; historical loss experience; delinquency statistics and the level of nonperforming loans; specific problem loans; the ability of borrowers to meet loan terms; an evaluation of collateral securing loans and the market for various types of collateral; various collection strategies; current economic conditions, trends and outlook; and other factors that warrant recognition in providing for an adequate ALLL.  Based on the variables involved and the significant judgments management must make about outcomes that are uncertain, the determination of the ALLL is considered to be a critical accounting policy. See the section titled “Critical Accounting Policies” for additional discussion.

The ALLL consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.  A loan is impaired when, based on current information and events, it is probable that CFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans of all classes within the commercial, commercial real estate and multi-family residential loan segments, regardless of size, and loans of all other classes over $250,000, are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral.  Large groups of smaller balance loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.  Loans within any class for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and are classified as impaired.  See Notes 1 and 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the ALLL.

Individually evaluated impaired loans totaled $4.6 million at September 30, 2017, and increased $1.1 million, or 32.7%, from $3.4 million at December 31, 2016.  The increase was primarily due to one commercial real estate loan in the amount of $841,000 that was modified as a TDR during the second quarter of 2017, coupled with a commercial real estate loan relationship totaling $749,000 that became nonaccrual during the first quarter of 2017, partially offset by three commercial loans that paid off totaling $188,000, and other loan repayments. The amount of the ALLL specifically allocated to individually impaired loans totaled $31,000 atSeptember 30, 2017 and $22,000 at December 31, 2016.  The increase in the ALLL specifically allocated to impaired loans was primarily due to management’s updated analysis.

The specific reserve on impaired loans is based on management’s estimate of the present value of estimated future cash flows using the loan’s effective rate or the fair value of collateral, if repayment is expected solely from the collateral.  On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals or internal evaluations to help make this determination.  Determination of whether to use an updated appraisal or internal evaluation is based on factors including, but not limited to, the age of the loan and the most recent appraisal, condition of the property and whether we expect the collateral to go through the foreclosure or liquidation process.  Management considers the need for a downward adjustment to the valuation based on current market conditions and on management’s analysis, judgment and experience. The amount ultimately charged-off for these loans may be different from the specific reserve, as the ultimate liquidation of the collateral and/or projected cash flows may be different from management’s estimates. 

Nonperforming loans, which are nonaccrual loans and loans at least 90 days past due but still accruing interest, totaled $1.0 million at September 30, 2017, and increased $334,000, or 47.4%, from $704,000 at December 31, 2016.  The ratio of nonperforming loans to total loans was 0.26% at September 30, 2017 compared to 0.20% at December 31, 2016.

Nonaccrual loans include some loans that were modified and identified as TDRs and are not performing. TDRs included in nonaccrual loans totaled $119,000 at September 30, 2017 and $144,000 at December 31, 2016.  The decrease in TDRs included in nonaccrual loans was primarily due to loan repayments.

43

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Nonaccrual loans at September 30, 2017 and December 31, 2016 do not include  $3.6 million and $3.0 million, respectively, in TDRs where customers have established a sustained period of repayment performance, generally six months, loans are current according to their modified terms and repayment of the remaining contractual payments is expected.  These loans are included in total impaired loans.  See Note 1 and 4 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding impaired loans and nonperforming loans.

The general reserve component of our ALLL covers non-impaired loans of all classes and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by loan class and is based on the actual loss history experienced by CFBank over a three-year period.  The general component is calculated based on CFBank’s loan balances and actual three-year historical loss rates.  For loans with little or no actual loss experience, industry estimates are used based on loan segment. This actual loss experience is supplemented with other economic and judgmental factors based on the risks present for each loan class.  These economic and judgmental factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Management’s loan review process is an integral part of identifying problem loans and determining the ALLL. We maintain an internal credit rating system and loan review procedures specifically developed as the primary credit quality indicator to monitor credit risk for commercial, commercial real estate and multi-family residential real estate loans.  We analyze these loans individually and categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  Credit reviews for these loan types are performed at least annually, and more often for loans with higher credit risk.  Loan officers maintain close contact with borrowers between reviews.  Adjustments to loan risk ratings are based on the reviews and at any time information is received that may affect risk ratings.  Additionally, an independent third party review of commercial, commercial real estate and multi-family residential loans is performed at least annually.  Management uses the results of these reviews to help determine the effectiveness of the existing policies and procedures and to provide an independent assessment of our internal loan risk rating system.

We have incorporated the regulatory asset classifications as a part of our credit monitoring and internal loan risk rating system.  In accordance with regulations, problem loans are classified as special mention, substandard, doubtful or loss, and the classifications are subject to review by the regulators.  Assets designated as special mention are considered criticized assets.  Assets designated as substandard, doubtful or loss are considered classified assets.  See Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding descriptions of the regulatory asset classifications.

The level of total criticized and classified loans decreased by $3.2 million, or 33.9%, during the nine months ended September 30, 2017 due to management’s on-going efforts to improve credit quality and continued payments by customers.  Loans designated as special mention decreased $122,000, or 3.4 %, and totaled $3.5 million at September 30, 2017, compared to $3.6 million at December 31, 2016.  Loans classified as substandard decreased $3.0 million, or 53.2%, and totaled $2.7 million at September 30, 2017, compared to $5.7 million at December 31, 2016.  No loans were classified as doubtful at September 30, 2017 and December 31, 2016.  See Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding risk classification of loans.

In addition to credit monitoring through our internal loan risk rating system, we also monitor past due information for all loan segments.  Loans that are not rated under our internal credit rating system include groups of homogenous loans, such as single-family residential real estate loans and consumer loans. The primary credit indicator for these groups of homogenous loans is past due information.

Total past due loans increased $2.5 million, or 159.3%, and totaled $4.0 million at September 30, 2017, compared to $1.6 million at December 31, 2016.  The increase in past due loans was primarily due to two commercial loans.  Past due loans totaled 1.0% of the loan portfolio at September 30, 2017, compared to 0.4% at December 31, 2016.  See Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding loan delinquencies.

All lending activity involves risk of loss.  Certain types of loans, such as option adjustable-rate mortgage (ARM) products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans.  CFBank has not engaged in subprime lending or used option ARM products.

44

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Loans that contain interest only payments may present a higher risk than those loans with an amortizing payment that includes periodic principal reductions. Interest only loans made by CFBank primarily consist of commercial lines of credit secured by business assets and inventory, and consumer home equity lines of credit secured by the borrower’s primary residence.  Due to the fluctuations in business assets and inventory of our commercial borrowers, CFBank has increased risk due to a potential decline in collateral values without a corresponding decrease in the outstanding principal.  Interest only commercial lines of credit totaled $25.5 million, or 27.9%, of CFBank’s commercial portfolio at September 30, 2017 compared to $19.9 million, or 27.9%, at December 31, 2016.  Interest only home equity lines of credit totaled $22.4million, or 90.6%, of the total home equity lines of credit at September 30, 2017 compared to $20.7 million, or 89.6%, at December 31, 2016.

We believe the ALLL is adequate to absorb probable incurred credit losses in the loan portfolio as of September 30, 2017; however, future additions to the allowance may be necessary based on factors including, but not limited to, deterioration in client business performance, recessionary economic conditions, declines in borrowers’ cash flows and market conditions which result in lower real estate values.  Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL.  Such agencies may require additional provisions for loan losses based on judgments and estimates that differ from those used by management, or on information available at the time of their review.  Management continues to diligently monitor credit quality in the existing portfolio and analyze potential loan opportunities carefully in order to manage credit risk.  An increase in loan losses could occur if economic conditions and factors which affect credit quality, real estate values and general business conditions worsen or do not improve.

Foreclosed assets.  Foreclosed assets totaled $0 at September 30, 2017 compared to $204,000 at December 31, 2016.  Foreclosed assets at December 31, 2016 consisted of one single-family residential property that was transferred into REO at fair value in December 2016.  This property was sold during the second quarter of 2017.  The level of foreclosed assets and charges to foreclosed assets expense may increase in the future in connection with workout efforts related to foreclosed assets, nonperforming loans and other loans with credit issues.

Deposits.Deposits totaled $381.0 million at September 30, 2017 and increased $5.6 million, or 1.5%, from $375.4 million at December 31, 2016.  The increase was primarily attributed to a $4.4 million increase in certificates of deposits, a $3.1 million increase in checking account balances and a $626,000 increase in savings account balances, partially offset by a $2.6 million decrease in money market account balances.  The majority of the increase in deposit balances was a result of management’s focused sales and marketing efforts to grow deposits to fund loan growth.

CFBank is a participant in the Certificate of Deposit Account Registry Service® (CDARS) program, a network of banks that allows us to provide our customers with FDIC insurance coverage on certificate of deposit account balances up to $50 million.  CDARS balances are considered brokered deposits by regulation.  Brokered deposits, including CDARS balances, totaled $40.5 million at September 30, 2017, and increased $10.7 million, or 36.1%, from $29.7 million at December 31, 2016.

FHLB advances.FHLB advances totaled $19.0 million at September 30, 2017 and increased $5.5 million, or 40.7%, compared to $13.5 million at December 31, 2016.The increase was due to a $5.5 million variable rate short-term borrowing.

Subordinated debentures.Subordinated debentures totaled $5.2 million at both September 30, 2017 and December 31, 2016.  These debentures were issued in 2003 in exchange for the proceeds of a $5.0 million trust preferred securities offering issued by a trust formed by the Holding Company.  The terms of the subordinated debentures allow for the Holding Company to defer interest payments for a period not to exceed five years. 

Stockholders’ equity.Stockholders’ equity totaled $40.6 million at September 30, 2017, an increase of $1.3 million, or 3.2%, from $39.3 million at December 31, 2016.  The increase in total stockholders’ equity was primarily attributed to net income, which was partially offset by the dividends paid on the Company’s Series B Preferred Stock during the nine months ended September 30, 2017.

Management continues to proactively monitor capital levels and ratios in its on-going capital planning process.  CFBank has leveraged its capital to support balance sheet growth and drive increased net interest income.  Management remains focused on growing capital though improving results from operations; however, should the need arise, CFBank has additional sources of capital and alternatives it could utilize. 

Currently, the Holding Company has excess cash to cover its expenses for the foreseeable future, and could inject capital into CFBank if necessary.  Also, CFBank has the flexibility to manage its balance sheet size as a result of the short duration of the assets as discussed with the Northpointe mortgage program, as well as to deploy those assets into higher earning assets to improve net interest income as the opportunity presents itself.

45

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Conversion of Preferred Stock to Common Stock

On September 29, 2017, the Company announced the conversion of its Series B Preferred Stock into shares of Common Stock of the Company.  The conversion was effective October 6, 2017, and resulted in the conversion of all 480,000 of the Company’s issued and outstanding shares of Series B Preferred Stock into approximately 6,857,143 shares of Common Stock. 

The conversion of the Series B Preferred Stock results in the elimination of the non-cumulative preferred dividend payments on the Series B Preferred Stock beginning with the 4th quarter of 2017. The preferred dividends, in the aggregate amount of approximately $187,500 quarterly, or approximately $750,000 annually, will not be payable by the Company going forward.  

Stock Repurchase Program

On April 26, 2017, the Company’s Board of Directors authorized an extension to the Company’s common stock repurchase program for an additional six months commencing May 10, 2017.  Any purchases under the repurchase program will be made from time to time in the open market in accordance with applicable federal and state securities laws and regulations.  The timing and amount of any stock repurchases will be determined by the Company’s management based on its evaluation of market conditions, regulatory requirements and other corporate considerations.  Since the commencement of the stock repurchase program in May 2016, the Company has repurchased a total of 21,300 shares of common stock for an aggregate purchase price of $30,000 as of September 30, 2017.  All repurchased shares are held by the Company as treasury stock.  No shares of common stock were repurchased during the nine months ended September 30, 2017. 

Comparison of the Results of Operations for the Three Months Ended September 30, 2017 and 2016.

General.  Net income for the three months ended September 30, 2017 totaled $685,000 and increased $180,000, or 35.6%, compared to net income of $505,000 for the three months ended September 30, 2016.  The increase in net income was due to a $568,000 increase in net interest income and a $20,000 decrease in provision expense, partially offset by a $170,000 increase in noninterest expense, a $155,000 decrease in noninterest income and a $83,000 increase in income tax expense.

Net income attributable to common stockholders for the three months ended September 30, 2017, totaled $471,000, or $0.03 per diluted common share, and increased $180,000, or 61.9%, compared to net income attributable to common stockholders of $291,000, or $0.02 per diluted common share, for the three months ended September 30, 2016.  For the three months ended September 30, 2017 and 2016, preferred dividends on the Company’s Series B Preferred Stock and accretion of discount reduced net income attributable to common stockholders by $214,000 for each period.

Net interest income. Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities.  Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities.  The tables in the sections below titled “Average Balances, Interest Rates and Yields” and “Rate/Volume Analysis of Net Interest Income” provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.

Net interest income totaled $3.5 million for the quarter ended September 30, 2017 and increased $568,000, or 19.3%, compared to $2.9 million for the quarter ended September 30, 2016.  The increase in net interest income was primarily due to a $663,000, or 17.8%, increase in interest income, partially offset by a $95,000, or 11.9%, increase in interest expense.  The increase in interest income was primarily attributed to a $49.7 million, or 14.0%, increase in average interest-earning assets outstanding and a 14bp increase in average yield on interest-earning assets.  The increase in interest expense was primarily attributed to a $12.6 million, or 4.2%, increase in average interest-bearing liabilities.  As a result, net interest margin of 3.47% for the quarter ended September 30, 2017 increased 15bps compared to the net interest margin of 3.32% for the quarter ended September 30, 2016.

46

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Interest income totaled $4.4 million and increased $663,000, or 17.8%, for the quarter ended September 30, 2017, compared to $3.7 million for the quarter ended September 30, 2016.The increase in interest income was primarily due to a $44.1 million, or 13.6%, increase in average loans and loans held for sale balances from $323.3 million at September 30, 2016, to $367.4 million at September 30, 2017, and a 7bps increase in the average yield on loans.

Interest expense totaled $893,000 and increased $95,000, or 11.9%, for the quarter ended September 30, 2017, compared to $798,000 for the quarter ended September 30, 2016.The increase in interest expense resulted primarily from increased deposit costs due to a $15.5 million, or 5.6%, increase in average interest-bearing deposit balances.  The overall cost of funds on total interest-bearing liabilities increased 8bps to116bps at September 30, 2017 compared to 108bps at September 30,2016.

Provision for loan and lease losses.  The provision for loan losses totaled $0 for the quarter ended September 30, 2017 and decreased $20,000, compared to $20,000 for the quarter ended September 30, 2016.  The decrease in the provision for loan losses for the quarter ended September 30, 2017 was primarily due to continued improvement in credit quality, favorable trends in certain qualitative factors and net recoveries for the quarter.  Net recoveries for the quarter ended September 30, 2017 totaled $6,000.  The ratio of the ALLL to nonperforming loans was 670.9% as of September 30, 2017.  

The following table presents information regarding net charge-offs (recoveries) for the three months ended September 30, 2017 and 2016.

	For the three months ended September 30,
	2017		2016
(unaudited)		(Dollars in thousands)
Commercial	$	-	$	5
Single-family residential real estate		(1)		(3)
Multi-family residential real estate		-		(143)
Commercial real estate		-		(100)
Home equity lines of credit		(5)		(20)
Other consumer loans		-		1
Total	$	(6)	$	(260)

Noninterest income.Noninterest income for the quarter ended September 30, 2017 totaled $195,000 and decreased $155,000, or 44.3%, compared to $350,000 for the quarter ended September 30, 2016. The decrease was primarily due to a $135,000 decrease in service charges on deposit accounts and a $23,000 decrease in net gain on sale of loans.  The decrease in service charges on deposit accounts was primarily related to a decrease in overdraft fee income. The decrease in net gain on sale of loans was primarily due to lower sales volume.  

Noninterest expense.Noninterest expense increased $170,000, or 6.8%, and totaled $2.7 million for the quarter ended September 30, 2017, compared to $2.5 million for the quarter ended September 30, 2016.  The increase in noninterest expense during the three months ended September 30, 2017 was primarily due to a $261,000 increase in salaries and employee benefits expense, a $30,000 increase in FDIC premiums, which was partially offset by a $102,000 decrease in professional fees. The increase in salaries and employee benefits was due to an increase in experienced commercial lenders, coupled with an increase in personnel in operations, credit and information technology to support our growth, infrastructure and risk management practices.  FDIC premiums increased primarily due to growth.  The decrease in professional fees was primarily due to elevated expenses incurred during the third quarter of 2016 for work-out expenses and various other consulting services.

Income taxes.Income tax expense was $332,000 for the three months ended September 30, 2017, an increase of $83,000 compared to $249,000 for the three months ended September 30, 2016.  The effective tax rate for the quarter ended September 30, 2017 and September 30, 2016 was approximately 32.6% and 33.0%, respectively, which management believes is a reasonable estimate for the effective tax rate.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.   When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of September 30, 2017 that no valuation allowance was required against thenet deferred tax asset.

47

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Company records income tax expense based on the federal statutory rate adjusted for the effect of other items such as bank owned life insurance and other miscellaneous items.

Comparison of the Results of Operations for the Nine months Ended September 30, 2017 and 2016

General.  Net income for the nine months ended September 30, 2017 totaled $1.6 million and increased $402,000, or 32.3%, compared to net income of $1.2 million for the nine months ended September 30, 2016.  The increase in net income was due to a $1.5 million increase in net interest income and a $230,000 decrease in provision expense, partially offset by a $750,000 increase in noninterest expense, a $406,000 decrease in noninterest income and a $207,000 increase in income tax expense. 

Net income attributable to common stockholders for the nine months ended September 30, 2017, totaled $1.0 million, or $0.06 per diluted common share, and increased $402,000, or 67.0%, compared to net income attributable to common stockholders of $600,000, or $0.04 per diluted common share, for the nine months ended September 30, 2016.  For the nine months ended September 30, 2017 and 2016, preferred dividends on the Company’s Series B Preferred Stock and accretion of discount reduced net income attributable to common stockholders by $643,000.

Net interest income. Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities.  Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities.  The tables in the sections below titled “Average Balances, Interest Rates and Yields” and “Rate/Volume Analysis of Net Interest Income” provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.

Net interest income totaled $10.0 million for the nine months ended September 30, 2017 and increased approximately $1.5 million, or 18.2%, compared to $8.4 million for the nine months ended September 30, 2016.  The increase in net interest income was primarily due to a $1.8 million, or 16.7%, increase in interest income, partially offset by a $241,000, or 10.8%, increase in interest expense.  The increase in interest income was primarily attributed to a $57.5 million, or 17.1%, increase in average interest-earning assets outstanding, partially offset by a 2bps decrease in average yield on interest-earning assets.  The increase in interest expense was primarily attributed to a $22.3 million, or 7.9%, increase in average interest-bearing liabilities outstanding and a 2bp increase in the average cost of funds on interest-bearing liabilities.  As a result, net interest margin of 3.37% for the nine months ended September 30, 2017 increased 3bps compared to the net interest margin of 3.34% for the nine months ended September 30, 2016.

Interest income totaled $12.4 million and increased $1.8 million, or 16.7%, for the  nine months ended September  30, 2017, compared to $10.7 million for the nine months ended September 30, 2016.  The increase in interest income was primarily due to a $41.4 million, or 13.4%, increase in average loans and loans held for sale balances from $308.1 million at September 30, 2016, to $349.5 million at September 30, 2017, and a 4bps increase in the average yield on loans.

Interest expense totaled $2.5 million and increased $241,000, or 10.8%, for the nine months ended September 30, 2017, compared to $2.2 million for the nine months ended September 30, 2016.  The increase in interest expense resulted primarily from increased deposit costs due to a $24.2 million, or 9.3%, increase in average interest-bearing deposit balances.  The overall cost of funds on total interest-bearing liabilitiesincreased 2bps to 108bps at September 30, 2017 compared to 106bps at September 30, 2016.

Provision for loan and lease losses.  The provision for loan losses totaled $0 for the nine months ended September 30, 2017 and decreased $230,000, compared to $230,000 for the nine months ended September 30, 2016.  The decrease in the provision for loan losses for the nine months ended September 30, 2017 was primarily due to continued improvement in credit quality, favorable trends in certain qualitative factors and net recoveries for the nine months ended September 30, 2017.  Net recoveries for the nine months ended September 30, 2017 totaled $39,000.

48

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents information regarding net charge-offs (recoveries) for the nine months ended September 30, 2017 and 2016.

	For the nine months ended September 30,
	2017		2016
(unaudited)	(Dollars in thousands)
Commercial	$	(2)	$	123
Single-family residential real estate		(18)		90
Multi-family residential real estate		-		(143)
Commercial real estate		-		(100)
Home equity lines of credit		(19)		(14)
Other consumer loans		-		1
Total	$	(39)	$	(43)

Noninterest income. Noninterest income for the nine months ended September 30, 2017 totaled $538,000 and decreased $406,000, or 43.0%, compared to $944,000 for the nine months ended September 30, 2016.  The decrease was primarily due to a $322,000 decrease in service charges on deposit accounts and a $58,000 decrease in other noninterest income.  The decrease in service charges on deposit accounts was primarily related to a decrease in overdraft fee income. The decrease in other noninterest income was primarily related to decreased activity related to the Company’s joint ventures.  

Noninterest expense.Noninterest expense increased $750,000, or 10.3%, and totaled $8.1 million for the nine months ended September 30, 2017, compared to $7.3 million for the nine months ended September 30, 2016.  The increase in noninterest expense during the nine months ended September 30, 2017 was primarily due to a $840,000 increase in salaries and employee benefits expense, a $71,000 increase in occupancy and equipment and a $53,000 increase in FDIC premiums, partially offset by a $250,000 decrease in professional fees.  The increase in salaries and employee benefits was due to an increase in experienced commercial lenders, coupled with an increase in personnel in operations, credit and information technology to support our growth, infrastructure and risk management practices.  The increase in occupancy and equipment was primarily due to various maintenance items, equipment purchases and lease expense related to the opening of our new Glendale branch in the Cincinnati market.  FDIC premiums increased primarily due to growth.  The decrease in professional fees was primarily due to elevated expenses incurred in 2016 for recruiting, work-out expenses, various other consulting services, and mortgage and information technology projects.

Income taxes.  Income tax expense was $810,000 for the nine months ended September 30, 2017, an increase of $207,000 compared to $603,000 for the nine months ended September 30, 2016.  The effective tax rate for the nine months ended September 30, 2017 and September 30, 2016 was approximately 33.0% and 32.7%, respectively, which management believes is a reasonable estimate for the effective tax rate.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.   When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of September 30, 2017 that no valuation allowance was required against thenet deferred tax asset.

The Company records income tax expense based on the federal statutory rate adjusted for the effect of other items such as bank owned life insurance and other miscellaneous items.

49

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Average Balances, Interest Rates and Yields.The following table presents, for the periods indicated, the total dollar amount of fully taxable equivalent interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates.Average balances are computed using month-end balances.

	For Three Months Ended September 30,
	2017						2016
	Average		Interest		Average		Average		Interest		Average
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Securities (1) (2)	$	12,909	$	44		1.36%	$	9,282	$	29		1.26%
Loans and loans held for sale (3)		367,436		4,225		4.60%		323,348		3,658		4.53%
Other earning assets		20,277		83		1.64%		19,586		28		0.57%
FHLB and FRB stock		3,193		45		5.64%		1,942		19		3.91%
Total interest-earning assets		403,815		4,397		4.36%		354,158		3,734		4.22%
Noninterest-earning assets		27,193						26,161
Total assets	$	431,008					$	380,319
Interest-bearing liabilities:
Deposits	$	290,137		771		1.06%	$	274,677		683		0.99%
FHLB advances and other borrowings		19,118		122		2.55%		22,015		115		2.09%
Total interest-bearing liabilities		309,255		893		1.16%		296,692		798		1.08%
Noninterest-bearing liabilities		81,534						44,678
Total liabilities		390,789						341,370
Equity		40,219						38,949
Total liabilities and equity	$	431,008					$	380,319
Net interest-earning assets	$	94,560					$	57,466
Net interest income/interest rate spread			$	3,504		3.20%			$	2,936		3.14%
Net interest margin						3.47%						3.32%
Average interest-earning assets
to average interest-bearing liabilities		130.58%						119.37%

⁽¹⁾ Average balance is computed using the carrying value of securities.  Average yield is computed using the historical amortized cost average balance for available for sale securities.

⁽²⁾ Average yields and interest earned are stated on a fully taxable equivalent basis.

⁽³⁾ Average balance is computed using the recorded investment in loans net of the ALLL and includes nonperforming loans.

50

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

	For Nine Months Ended September 30,
	2017						2016
	Average		Interest		Average		Average		Interest		Average
	Outstanding		Earned/		Yield/		Outstanding		Earned/		Yield/
	Balance		Paid		Rate		Balance		Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Securities (1) (2)	$	13,612	$	139		1.36%	$	9,330	$	89		1.28%
Loans and loans held for sale (3)		349,467		11,944		4.56%		308,113		10,439		4.52%
Other earning assets		28,791		247		1.14%		17,763		76		0.57%
FHLB stock		2,778		108		5.18%		1,942		58		3.98%
Total interest-earning assets		394,648		12,438		4.20%		337,148		10,662		4.22%
Noninterest-earning assets		26,396						25,719
Total assets	$	421,044					$	362,867
Interest-bearing liabilities:
Deposits	$	284,345		2,115		0.99%	$	260,136		1,899		0.97%
FHLB advances and other borrowings		19,056		351		2.46%		21,008		326		2.07%
Total interest-bearing liabilities		303,401		2,466		1.08%		281,144		2,225		1.06%
Noninterest-bearing liabilities		77,853						43,055
Total liabilities		381,254						324,199
Equity		39,790						38,668
Total liabilities and equity	$	421,044					$	362,867
Net interest-earning assets	$	91,247					$	56,004
Net interest income/interest rate spread			$	9,972		3.12%			$	8,437		3.16%
Net interest margin						3.37%						3.34%
Average interest-earning assets
to average interest-bearing liabilities		130.07%						119.92%

⁽¹⁾ Average balance is computed using the carrying value of securities.  Average yield is computed using the historical amortized cost average balance for available for sale securities.

⁽²⁾ Average yields and interest earned are stated on a fully taxable equivalent basis.

⁽³⁾ Average balance is computed using the recorded investment in loans net of the ALLL and includes nonperforming loans.

51

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Rate/Volume Analysis of Net Interest Income.  The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  It distinguishes between the increase and decrease related to changes in balances and/or changes in interest rates.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by the prior rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior volume).  For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended						Nine Months Ended
	September 30, 2017						September 30, 2017
	Compared to Three Months Ended						Compared to Nine Months Ended
	September 30, 2016						September 30, 2016
	Increase (decrease)						Increase (decrease)
	due to						due to
	Rate		Volume		Net		Rate		Volume		Net
	(Dollars in thousands)						(Dollars in thousands)
Interest-earning assets:
Securities (1)	$	2	$	13	$	15	$	6	$	44	$	50
Loans and loans held for sale		61		506		567		92		1,413		1,505
Other earning assets		54		1		55		106		65		171
FHLB and FRB Stock		10		16		26		21		29		50
Total interest-earning assets		127		536		663		225		1,551		1,776
Interest-bearing liabilities:
Deposits		48		40		88		37		179		216
FHLB advances and other borrowings		81		(74)		7		70		(45)		25
Total interest-bearing liabilities		129		(34)		95		107		134		241
Net change in net interest income	$	(2)	$	570	$	568	$	118	$	1,417	$	1,535

(1)Securities amounts are presented on a fully taxable equivalent basis.

Critical Accounting Policies

We follow financial accounting and reporting policies that are in accordance with U.S. generally accepted accounting principles and conform to general practices within the banking industry.  These policies are presented in Note 1 to our 2016 Audited Financial Statements.  Some of these accounting policies are considered to be critical accounting policies, which are those policies that are both most important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Application of assumptions different than those used by management could result in material changes in our financial condition or results of operations.  These policies, current assumptions and estimates utilized, and the related disclosure of this process, are determined by management and routinely reviewed with the Audit Committee of the Board of Directors.  We believe that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements were appropriate given the factual circumstances at the time.

We have identified accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand our financial statements.  The following discussion details the critical accounting policies and the nature of the estimates made by management.

52

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Determination of the ALLL.  The ALLL represents management’s estimate of probable incurred credit losses in the loan portfolio at each balance sheet date. The allowance consists of general and specific components.  The general component covers loans not classified as impaired and is based on historical loss experience, adjusted for current factors. Current factors considered include, but are not limited to, management’s oversight of the portfolio, including lending policies and procedures; nature, level and trend of the portfolio, including past due and nonperforming loans, loan concentrations, loan terms and other characteristics; current economic conditions and outlook; collateral values; and other items.  The specific component of the ALLL relates to loans that are individually classified as impaired. Loans exceeding policy thresholds are regularly reviewed to identify impairment. A loan is impaired when, based on current information and events, it is probable that CFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  Determining whether a loan is impaired and whether there is an impairment loss requires judgment and estimates, and the eventual outcomes may differ from estimates made by management.  The determination of whether a loan is impaired includes: review of historical data; judgments regarding the ability of the borrower to meet the terms of the loan; an evaluation of the collateral securing the loan and estimation of its value, net of selling expenses, if applicable; various collection strategies; and other factors relevant to the loan or loans.  Impairment is measured based on the fair value of collateral, less costs to sell, if the loan is collateral dependent, or alternatively, the present value of expected future cash flows discounted at the loan’s effective rate, if the loan is not collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment loss is recorded. As a result, determining the appropriate level for the ALLL involves not only evaluating the current financial situation of individual borrowers or groups of borrowers, but also current predictions about future events that could change before an actual loss is determined.  Based on the variables involved and the fact that management must make judgments about outcomes that are inherently uncertain, the determination of the ALLL is considered to be a critical accounting policy.  Additional information regarding this policy is included in the previous section titled “Financial Condition - Allowance for loan losses”, in Note 4 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and in Notes 1, 4 and 6 to our 2016 Audited Financial Statements.

Valuation of the deferred tax asset.At September 30, 2017, the Company had a deferred tax asset recorded in the amount of  $2.6  million.  At December 31, 2016, the Company had a deferred tax asset recorded in the amount of $2.6 million.  At September 30, 2017 and December 31, 2016, the Company had no unrecognized tax benefits recorded.  The Company is subject to U.S. federal income tax and is no longer subject to federal examination for years prior to 2013.  Additional information is included in Notes 1 and 14 to our 2016AuditedFinancial Statements.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.   When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of September 30, 2017 that no valuation allowance was required against thenet deferred tax asset.

In 2012, a recapitalization program through the sale of $22.5million in common stock improved the capital levels of CFBank and provided working capital for the Holding Company. The result of the change in stock ownership associated with the stock offering, however, was that the Company incurred an ownership change within the guidelines of Section 382 of the Internal Revenue Code of 1986.  At year-end 2016, the Company had net operating loss carryforwards of $23.1 million, which expire at various dates from 2024 to 2033, and had alternative minimum tax credit carryforwards of $50,000, which do not expire. As a result of the ownership change, the Company's ability to utilize carryforwards that arose before the stock offering closed is limited to $163,000 per year.  Due to this limitation, management determined it is more likely than not that $20.5 million of net operating loss carryforwards will expire unutilized.  As required by accounting standards, the Company reduced the carrying value of deferred tax assets, and the corresponding valuation allowance, by the $7.0 million tax effect of this lost realizability.

53

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Federal income tax laws provided additional deductions, totaling $2.3 million, for thrift bad debt reserves established before 1988.  Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled $765,000 at year-end 2016.  However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded.   Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank. The amount of additional taxable income created by such a distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if CFBank were to make a distribution that reduced the amount allocated to its bad debt reserve, then approximately one and one-half times the amount used would be includible in gross income for federal income tax purposes, assuming a 34% corporate income tax rate. CFBank does not intend to make distributions that would result in a recapture of any portion of its bad debt reserve.

Fair value of financial instruments.  Another critical accounting policy relates to the fair values of financial instruments, which are estimated using relevant market information and other assumptions.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.  Additional information is included in Note 5 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and in Notes 1 and 6 to our 2016 Audited Financial Statements.

Fair value of foreclosed assets.  Another critical accounting policy relates to the fair values of foreclosed assets, which are estimated based on real estate appraisals which may use a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant, and changes in assumptions or market conditions could significantly affect the values.  Additional information is included in Note 5 to the consolidated financial statements included in this Quarterly Report on Form 10-Q and in Notes 1, 5 and 6 to our 2016 Audited Financial Statements.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of an enterprise’s ability to meet cash needs.  The primary objective in liquidity management is to maintain the ability to meet loan commitments and to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings.  Principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts of securities available for sale; borrowings; and operations.  While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

CFBank is required by regulation to maintain sufficient liquidity to ensure its safe and sound operation. Thus, adequate liquidity may vary depending on CFBank’s overall asset/liability structure, market conditions, the activities of competitors, the requirements of our own deposit and loan customers and regulatory considerations.  Management believes that each of the Holding Company’s and CFBank’s current liquidity is sufficient to meet its daily operating needs and fulfill its strategic planning.

Liquidity management is both a daily and long-term responsibility of management.  We adjust our investments in liquid assets, primarily cash, short-term investments and other assets that are widely traded in the secondary market, based on our ongoing assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the objective of our asset/liability management program.  In addition to liquid assets, we have other sources of liquidity available including, but not limited to, access to advances from the FHLB and borrowings from the FRB and our commercial bank line of credit. 

54

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table summarizes CFBank’s cash available from liquid assets and borrowing capacity at September 30, 2017 and December 31, 2016.

	September 30, 2017		December 31, 2016
	(Dollars in thousands)
Cash, unpledged securities and deposits in other financial institutions	$	29,238	$	63,734
Additional borrowing capacity at the FHLB		38,196		30,998
Additional borrowing capacity at the FRB		38,284		31,846
Unused commercial bank line of credit		8,000		1,000
Total	$	113,718	$	127,578

Cash, unpledged securities and deposits in other financial institutions decreased $34.5 million, or 54.1%, to $29.2 million at September 30, 2017 compared $63.7 million at December 31, 2016.  The decrease is primarily due to a decrease in cash  from funding loan growth.

CFBank’s additional borrowing capacity with the FHLB increased $7.2 million, or 23.2%, to $38.2 million at September 30, 2017, compared to $31.0 million at December 31, 2016.

CFBank’s additional borrowing capacity at the FRB increased  $6.4 million, or 20.2%, to $38.3 million at September 30, 2017 from $31.8 million at December 31, 2016.  CFBank is eligible to participate in the FRB’s primary credit program, providing CFBank access to short-term funds at any time, for any reason, based on the collateral pledged.

CFBank’s borrowing capacity with both the FHLB and FRB may be negatively impacted by changes such as, but not limited to, further tightening of credit policies by the FHLB or FRB, deterioration in the credit performance of CFBank’s loan portfolio or CFBank’s financial performance, or a decrease in the balance of pledged collateral.

CFBank had $8.0 million in an unused line of credit with one commercial bank at September 30, 2017 and a $1.0 million unused line of credit with one commercial bank at December 31, 2016. During the first quarter of 2017, the Company added a $8.0 line of credit for potential liquidity purposes. The previous $1.0 million line of credit was closed during the second quarter of 2017.

Deposits are obtained predominantly from the areas in which CFBank’s offices are located. We rely primarily on a willingness to pay market-competitive interest rates to attract and retain retail deposits. Accordingly, rates offered by competing financial institutions may affect our ability to attract and retain deposits. 

CFBank relies on competitive interest rates, customer service,and relationships with customers toretain deposits.To promote and stabilize liquidity inthe bankingand financialservices sector, the FDIC, pursuant to the provisions ofthe Dodd-Frank Act as previously discussed, permanently increased deposit insurance coverage from$100,000to $250,000 per depositor.

The Holding Company has more limited sources of liquidity than CFBank.  In general, in addition to its existing liquid assets, sources of liquidity include funds raised in the securities markets through debt or equity offerings, dividends received from CFBank or the sale of assets.

Management believes that the Holding Company had adequate funds at September 30, 2017 to meet its current and anticipated operating needs at this time. The Holding Company’s current cash requirements include operating expenses and interest on subordinated debentures.  The Company may also elect to pay dividends on its common stock, if and when declared by the Board of Directors.

55

CENTRAL FEDERAL CORPORATION

PART 1. Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS

Currently, annual debt service on the subordinated debentures is approximately $210,000.  The subordinated debentures have a variable rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.85%.  The total rate in effect was 4.15% at September 30, 2017.  An increase in the three-month LIBOR would increase the debt service requirement of the subordinated debentures.

Banking regulations limit the amount of dividends that can be paid to the Holding Company by CFBank without prior regulatory approval. Generally, financial institutions may pay dividends without prior approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as the financial institution remains well capitalized after the dividend payment.  Any future dividend payments by CFBank to the Holding Company would be based on future earnings and, if necessary, regulatory approval. 

The ability of the Holding Company to pay dividends on its common stock and Series B Preferred Stock is generally dependent upon the receipt of dividends and other distributions from CFBank.  The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company.  The Holding Company also is subject to various legal and regulatory policies and requirements impacting the Holding Company’s ability to pay dividends on its stock.  In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities.  Finally, so long as the Company’s Series B Preferred Stock remains outstanding, the Holding Company is prohibited from paying dividends (other than dividends payable solely for the then-current dividend period in shares) on the Company’s common stock, unless full dividends on the Series B Preferred Stock have been paid or set aside for payment.  See Note 14 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the conversion of the Series B Preferred Stock and elimination of the Series B preferred dividend beginning with the 4thquarter of 2017.

56

CENTRAL FEDERAL CORPORATION

PART 1. Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes there has been no material change in the Company’s market risk from the information contained in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2016.

57

CENTRAL FEDERAL CORPORATION

PART 1. Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (Exchange Act) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of and for the quarter ended September 30,2017. 

Changes in internal control over financial reporting.  We made no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) in the thirdquarter of 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

58

CENTRAL FEDERAL CORPORATION

PART II. Item 4

OTHER INFORMATION

Item 1. Legal Proceedings

We may, from time to time, be involved in various legal proceedings in the normal course of business.  Periodically, there have been various claims and lawsuits involving CFBank, such as claims to enforce liens, condemnation proceedings on properties in which CFBank holds security interests, claims involving the making and servicing of real property loans and other claims and lawsuits incident to our banking business.

We are not a party to any pending legal proceeding that management believes would have a material adverse effect on our financial condition or operations, if decided adversely to us.

Item 1A.  Risk Factors

There were no material changes to the risk factors as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 

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

(a) None

(b) Not applicable.

(c) No repurchases of the Holding Company’s common shares were made by or on behalf of the Holding Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act during the third quarter of 2017.

Item 3.  Defaults upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

59

CENTRAL FEDERAL CORPORATION

PART II. Item 4

OTHER INFORMATION

Item 6.  Exhibits

Exhibit Number	Description of Exhibit
3.1	Certificate of Incorporation of the registrant
3.2	Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Registration Statement on Form S-2 (File No. 333-129315), filed with the Commission on October28, 2005)
3.3	Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.4 to the registrant’s Form 10-Q for the quarter ended June 30, 2009, filed with the Commission on August14, 2009 (File No. 0-25045))
3.4	Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.5 to the registrant’s Form 10-Q for the quarter ended September30, 2011, filed with the Commission on November10, 2011 (File No. 0-25045))
3.5	Amendment to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.5 to the registrant’s Post-Effective Amendment to the Registration Statement on Form S-1 (File No. 333-177434), filed with the Commission on May 4, 2012)
3.6	Certificate of Designations to Certificate of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K dated May7, 2014 and filed with the Commission on May13, 2014. (File No. 0-25045))
3.7	Second Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.3 to the registrant’s Form 10-K for the fiscal year ended December31, 2007, filed with the Commission on March27, 2008 (File No. 0-25045))
4.1	Form of Certificate for the Series B Preferred Stock of Central Federal Corporation (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated May7, 2014 and filed with the Commission on May13, 2014 (File No. 0-25045))
4.2	Form of Warrant for the purchase of common stock of Central Federal Corporation (incorporated by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K dated May7, 2014 and filed with the Commission on May13, 2014 (File No. 0-25045))
4.3	Form of Registration Rights Agreement (incorporated by reference to Exhibit 4.3 to the registrant’s Current Report on Form 8-K dated May7, 2014 and filed with the Commission on May13, 2014 (File No. 0-25045))
10.1	Amendment to Employment Agreement, dated April 30, 2017, by and among Central Federal Corporation, CFBank and Timothy T. O’Dell
10.2	Amendment to Employment Agreement, dated April 30, 2017, by and among Central Federal Corporation, CFBank and John W. Helmsdoerfer
11.1	Statement Re: Computation of Per Share Earnings
31.1	Rule 13a-14(a) Certifications of the Chief Executive Officer
31.2	Rule 13a-14(a) Certifications of the Chief Financial Officer
32.1	Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer
101.1	Interactive Data File (XBRL)

60

CENTRAL FEDERAL CORPORATION

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.

	CENTRALFEDERALCORPORATION
Dated: November 9, 2017	By:	/s/TimothyT.O’Dell
		TimothyT.O’Dell
		PresidentandChiefExecutiveOfficer
Dated: November 9, 2017	By:	/s/JohnW.Helmsdoerfer
		JohnW.Helmsdoerfer,CPA
		TreasurerandChiefFinancialOfficer

61