UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[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 No. 000-55553

 

Central Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Missouri   47-4884908

(State or other jurisdiction of

in Company or organization)

 

(I.R.S. Employer

Identification Number)

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

 

(573) 364-1024

(Registrant’s telephone number)

 

N/A

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

 

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

YES [X] NO [  ]

 

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

YES [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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]
(Do not check if smaller reporting company)   Emerging growth company [X]

 

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 of October 31, 2017, there were 1,682,620 shares of common stock outstanding.

 

 

 

     

 

 

Central Federal Bancshares, Inc.
Form 10-Q

 

Index

 

      Page
    Part I. Financial Information  
       
Item 1.   Financial Statements  
       
    Consolidated Statements of Financial Condition as of September 30, 2017 and December 31, 2016 (unaudited) 3
       
    Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) 4
       
    Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) 5
       
    Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited) 6
       
    Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited) 7
       
    Notes to Consolidated Financial Statements (unaudited) 8
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
       
Item 3.   Quantitative and Qualitative Disclosures about Market Risk 37
       
Item 4.   Controls and Procedures 37
       
    Part II. Other Information  
       
Item 1.   Legal Proceedings 38
       
Item 1A.   Risk Factors 38
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 38
       
Item 3.   Defaults upon Senior Securities 38
       
Item 4.   Mine Safety Disclosures 38
       
Item 5.   Other Information 38
       
Item 6.   Exhibits 39
       
    Signature Page 40

 

2
 

 

Part I. – Financial Information

 

Item 1. Financial Statements

 

CENTRAL FEDERAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(ROUNDED TO THOUSANDS, EXCEPT NUMBER OF SHARES)

 

    September 30, 2017     December 31, 2016  
      (Unaudited)          
ASSETS                
Cash and Due from Financial Institutions   $ 1,695,000     $ 12,099,000  
Federal Funds Sold     100,000       100,000  
Cash and Cash Equivalents     1,795,000       12,199,000  
Certificates of Deposit in Other Financial Institutions     6,939,000       4,712,000  
Securities Available-for-Sale at Fair Value     6,500,000       6,581,000  
Federal Home Loan Bank (FHLB) Stock, at Cost     89,000       97,000  
Loans, Net of Allowance for Loan Losses of $264,000 and $263,000 at September 30, 2017 and December 31, 2016     52,337,000       49,248,000  
Foreclosed Assets     -       26,000  
Premises and Equipment, Net     717,000       634,000  
Accrued Interest Receivable     166,000       160,000  
Other Assets     292,000       346,000  
Total Assets   $ 68,835,000     $ 74,003,000  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
LIABILITIES                
Deposits:                
Noninterest-Bearing   $ 3,208,000     $ 3,474,000  
Interest-Bearing     38,722,000       42,749,000  
Total Deposits     41,930,000       46,223,000  
Other Liabilities     70,000       27,000  
Total Liabilities     42,000,000       46,250,000  
STOCKHOLDERS’ EQUITY                
Preferred Stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding     -       -  
Common Stock, $0.01 par value; 10,000,000 shares authorized; 1,788,020 issued at September 30, 2017 and December 31, 2016     18,000       18,000  
Additional Paid-In Capital     16,459,000       16,446,000  
Treasury Stock, at cost; 74,000 shares     (993,000 )     -  
Common Stock Acquired by Employee Stock Ownership Plan (“ESOP”)     (1,330,000 )     (1,373,000 )
Retained Earnings - Substantially Restricted     12,751,000       12,767,000  
Accumulated Other Comprehensive Income (Loss)     (70,000 )     (105,000 )
Total Stockholders’ Equity     26,835,000       27,753,000  
Total Liabilities and Stockholders’ Equity   $ 68,835,000     $ 74,003,000  

 

See Accompanying Notes to Consolidated Financial Statements.

 

3
 

 

central federal bancshares, inc.

consolidated statements of operations

(rounded to thousands, except per share data)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2017     2016     2017     2016  
    (Unaudited)  
INTEREST INCOME                                
Loans, Including Fees   $ 554,000     $ 568,000     $ 1,663,000     $ 1,675,000  
Securities and Other     67,000       58,000       207,000       173,000  
Total Interest Income     621,000       626,000       1,870,000       1,848,000  
INTEREST EXPENSE                                
Deposits     68,000       87,000       221,000       273,000  
Total Interest Expense     68,000       87,000       221,000       273,000  
NET INTEREST INCOME     553,000       539,000       1,649,000       1,575,000  
PROVISION FOR LOAN LOSSES     -       -       -       -  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     553,000       539,000       1,649,000       1,575,000  
NONINTEREST INCOME                                
Customer Service Fees     20,000       22,000       58,000       59,000  
Other Income     2,000       7,000       14,000       15,000  
Total Noninterest Income     22,000       29,000       72,000       74,000  
NONINTEREST EXPENSE                                
Compensation and Employee Benefits     324,000       271,000       963,000       810,000  
Data Processing and Other Outside Services     92,000       85,000       262,000       241,000  
FDIC Insurance and Regulatory Assessment     14,000       13,000       42,000       53,000  
Occupancy and Equipment     50,000       50,000       139,000       138,000  
Legal and Professional Services     34,000       94,000       269,000       409,000  
Supplies, Telephone, and Postage     11,000       13,000       37,000       36,000  
Operations of Foreclosed Assets, net     -       49,000       (16,000 )     41,000  
Contribution to Charitable Foundation     -       -       -       788,000  
Other     28,000       25,000       82,000       78,000  
Total Noninterest Expense     553,000       600,000       1,778,000       2,594,000  
INCOME (LOSS) BEFORE INCOME TAXES     22,000       (32,000 )     (57,000 )     (945,000 )
INCOME TAX BENEFIT     (9,000 )     (8,000 )     (41,000 )     (60,000 )
NET INCOME (LOSS)   $ 31,000     $ (24,000 )   $ (16,000 )   $ (885,000 )
                                 
Common share data                                
Basic and diluted loss per share   $ 0.02     $ (0.01 )   $ (0.01 )   $ (0.56 )

 

See Accompanying Notes to Consolidated Financial Statements.

 

4
 

 

CENTRAL FEDERAL SAVINGS AND LOAN ASSOCIATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

  (ROUNDED TO THOUSANDS)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2017     2016     2017     2016  
    (Unaudited)  
NET INCOME (LOSS)   $ 31,000     $ (24,000 )   $ (16,000 )   $ (885,000 )
Other Comprehensive Income:                                
Unrealized Gains on Securities Available-for-Sale     36,000       12,000       50,000       20,000  
Income Tax Expense     (11,000 )     (3,000 )     (15,000 )     (7,000 )
Total Other Comprehensive Income, net of tax     25,000       9,000       35,000       13,000  
TOTAL COMPREHENSIVE INCOME (LOSS)   $ 56,000     $ (15,000 )   $ 19,000     $ (872,000 )

 

See Accompanying Notes to Consolidated Financial Statements

 

5
 

 

CENTRAL FEDERAL Bancshares, Inc.

consolidated STATEMENTS OF stockholders’ EQUITY

(rounded to thousands)

 

    Common Stock     Additional
Paid-In Capital
    Common Stock Acquired by Employee Stock Ownership Plan (“ESOP”)     Retained Earnings     Treasury Stock     Accumulated Other Comprehensive Income (Loss)     Total  
                                           
BALANCE, JANUARY 1, 2016   $ -     $ -     $ -     $ 13,640,000     $ -     $ 10,000     $ 13,650,000  
Net loss     -       -       -       (885,000 )     -       -       (885,000 )
Other comprehensive income     -       -       -       -       -       13,000       13,000  
Issuance of 1,788,020 shares of common stock at $10.00 per share, net of offering costs     18,000       16,437,000       -       -       -       -       16,455,000  
Funding of ESOP with 143,042 shares of common stock     -       -       (1,430,000 )     -       -       -       (1,430,000 )
Earned ESOP shares     -       3,000       42,000       -       -       -       45,000  
BALANCE, SEPTEMBER 30, 2016 (unaudited)   $ 18,000     $ 16,440,000     $ (1,388,000 )   $ 12,755,000     $ -     $ 23,000     $ 27,848,000  
                                                         
BALANCE, JANUARY 1, 2017   $ 18,000     $ 16,446,000     $ (1,373,000 )   $ 12,767,000     $ -     $ (105,000 )   $ 27,753,000  
Net income (loss)     -       -       -       (16,000 )     -       -       (16,000 )
Other comprehensive income     -       -       -       -       -       35,000       35,000  
Earned ESOP shares     -       13,000       43,000       -       -       -       56,000  
Treasury Stock Purchased, 74,000 shares     -       -       -       -       (993,000 )     -       (993,000 )
BALANCE, SEPTEMBER 30, 2017 (unaudited)   $ 18,000     $ 16,459,000     $ (1,330,000 )   $ 12,751,000     $ (993,000 )   $ (70,000 )   $ 26,835,000  

 

See Accompanying Notes to Consolidated Financial Statements.

 

6
 

 

CENTRAL FEDERAL Bancshares, Inc.

consolidated statements of cash flows

(rounded to thousands)

 

    Nine Months Ended  
    September 30,  
    2017     2016  
    (Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (16,000 )   $ (885,000 )
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:                
Net Amortization of Securities     41,000       33,000  
Provision for Loan Losses     -       -  
Depreciation     47,000       52,000  
Deferred Income Tax     16,000       (9,000 )
Loss (Gain) on Sale of Foreclosed Assets     (22,000 )     14,000  
ESOP Expense     56,000       45,000  
Net Changes in:                
Accrued Interest Receivable     (6,000 )     (39,000 )
Other Assets     23,000       1,246,000  
Other Liabilities     43,000       (544,000 )
Net Cash Provided by (Used In) Operating Activities     182,000       (87,000 )
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of Certificates of Deposit in Other Financial Institutions     (2,971,000 )     (1,488,000 )
Proceeds from Maturities of Certificates of Deposit in Other Financial Instiutions     744,000       -  
Net Change in FHLB Stock     8,000       (20,000 )
Purchase of Securities Available-for-Sale     (777,000 )     (7,259,000 )
Proceeds from Maturities, Calls and Paydowns of Securities Available for Sale     867,000       565,000  
Net Decrease (Increase) in Loans     (3,171,000 )     712,000  
Purchases of Premises and Equipment     (130,000 )     (6,000 )
Proceeds from Sale of Foreclosed Assets, Net     130,000       359,000  
Net Cash (Used In) Investing Activities     (5,300,000 )     (7,137,000 )
CASH FLOWS FROM FINANCING ACTIVITIES                
Net Decrease in Deposits     (4,293,000 )     (20,200,000 )
Purchase of Treasury Stock     (993,000 )     -  
Proceeds from Issuance of Common Stock     -       15,025,000  
Net Cash (Used In) Financing Activities     (5,286,000 )     (5,175,000 )
NET CHANGE IN CASH AND CASH EQUIVALENTS     (10,404,000 )     (12,399,000 )
Cash and Cash Equivalents at Beginning of Period     12,199,000       25,010,000  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 1,795,000     $ 12,611,000  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE                
Interest Paid on Deposits   $ 215,000     $ 267,000  
Income Taxes Paid, Net of Refunds Received   $ (41,000 )   $ (11,000 )
Noncash Investing Activities:                
Transfer of Loans to Foreclosed Assets   $ -     $ -  
Transfer of Foreclosed Assets to Loans   $ 82,000     $ 209,000  

 

See Accompanying Notes to Consolidated Financial Statements.

 

7
 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

(rounded to thousands)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

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

 

Stock Conversion

 

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

 

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

8
 

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Principles of Consolidation

 

On January 12, 2016, Central Federal completed its conversion from the mutual to stock form of ownership and now operates as a wholly-owned subsidiary of the Company. The conversion was accounted for as a change in corporate form with the historic base of Central Federal’s assets, liabilities and equity unchanged as a result. The unaudited consolidated financial statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 are for the Company and Central Federal. Intercompany transactions and balances have been eliminated in the consolidation.

 

Unaudited Interim Consolidated Financial Statements

 

The interim consolidated financial statements prepared by management as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2017, and the results of operations and cash flows for the periods ended September 30, 2017 and 2016, and are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of Central Federal Bancshares or Company for the year ended December 31, 2016, contained in the 2016 Annual Report on Form 10-K filed with the SEC on March 24, 2017.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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

 

9
 

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

New Accounting Standards

 

In January 2016, the FASB issued ASU 2016-01,“Recognition and Measurement of Financial Assets and Financial Liabilities,” an amendment to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company intends to adopt the accounting standard during the first quarter of 2018, as required, and is currently evaluating the impact of implementation.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

  

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic) 310-20):  Premium Amortization of Purchased Callable Debt Securities.  The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendment will be effective for interim and annual reporting periods beginning after December 15, 2018. The Company elected to early adopt ASU 2017-08 during 2017 and it did not have a significant effect on our consolidated financial statements.

 

Reclassification

 

Certain amounts in the 2016 consolidated financial statements have been reclassified to conform to the 2017 presentation.

 

Subsequent Events

 

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

 

10
 

 

note 2 INCOME (LOSS) per share

 

Income (loss) per share is based upon the weighted-average shares outstanding. The shares outstanding were issued on January 12, 2016. Any shares in the ESOP, that have been committed-to-be-released, are considered outstanding.

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2017       2016       2017       2016  
  (Unaudited)  
Basic and Diluted Income (Loss) per Share:                                
                                 
Net Income (Loss)   $ 31,000     $ (24,000 )   $ (16,000 )   $ (885,000 )
Less: Dividends Paid on Common Stock     -       -       -       -  
Undistributed Income (Loss)   $ 31,000     $ (24,000 )   $ (16,000 )   $ (885,000 )
                                 
Weighted-Average Basic and Diluted Shares Outstanding     1,602,410       1,647,123       1,630,348       1,574,331  
                                 
Distributed Income (Loss) per Share                                
Undistributed Income (Loss) per Share     0.02       (0.01 )     (0.01 )     (0.56 )
Net Income (Loss) per Share   $ 0.02     $ (0.01 )   $ (0.01 )   $ (0.56 )

 

note 3 Certificates of DEPOSIT IN OTHER FINANCIAL INSTITUTIONS

 

Certificates of deposit in other financial institutions are as follows:

 

    September 30, 2017     December 31, 2016  
      (Unaudited)          
Certificates of Deposit at Cost Maturing In:                
Less than One Year   $ 3,721,000     $ 1,488,000  
One Year to Five Years     3,218,000       3,224,000  
    $ 6,939,000     $ 4,712,000  

 

11
 

 

note 4 sECURITIES

 

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

 

    September 30, 2017 (Unaudited)  
    Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair
Value
 
       
Mortgage Backed Securities   $ 5,246,000     $ -     $ (85,000 )   $ 5,161,000  
Small Business Administration (“SBA”) Pools     916,000       -       (27,000 )     889,000  
Muncipal Obligation     406,000       4,000       -       410,000  
Federal Home Loan Mortgage Corp. Stock     15,000       25,000       -       40,000  
Total   $ 6,583,000     $ 29,000     $ (112,000 )   $ 6,500,000  

 

    December 31, 2016  
    Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair
Value
 
                         
Mortgage Backed Securities   $ 5,321,000     $ -     $ (139,000 )   $ 5,182,000  
Small Business Administration (“SBA”) Pools     988,000       -       (34,000 )     954,000  
Muncipal Obligation     407,000       -       (4,000 )     403,000  
Federal Home Loan Mortgage Corp. Stock     15,000       27,000       -       42,000  
Total   $ 6,731,000     $ 27,000     $ (177,000 )   $ 6,581,000  

 

The following table indicates amortized cost and the estimated fair value of securities available-for-sale as of September 30, 2017 based upon contractual maturity.

 

    Amortized Cost     Fair Value  
    (Unaudited)  
Over Ten Years   $ 406,000     $ 410,000  
Mortgage Backed Securities and SBA Pools     6,162,000       6,050,000  
No Stated Maturity Date     15,000       40,000  
Total   $ 6,583,000     $ 6,500,000  

 

There were no securities pledged as collateral at September 30, 2017 and December 31, 2016.

 

During the nine-month period ended September 30, 2017 and 2016, the Company did not sell any securities.

 

12
 

 

note 4 sECURITIES (CONTINUED)

 

The following tables show securities with gross unrealized losses at September 30, 2017 and December 31, 2016 aggregated by investment category and length of time that individual securities have been in a continuous loss position.

 

    September 30, 2017 (Unaudited)  
    Less Than 12 Months     12 Months or More     Total  
          Gross           Gross           Gross  
          Unrealized           Unrealized           Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
                                     
Mortgage Backed Securities   $ 3,776,000     $ (64,000 )   $ 1,385,000     $ (21,000 )   $ 5,161,000     $ (85,000 )
Small Business Administration Pools     889,000       (27,000 )     -       -       889,000       (27,000 )
Muncipal Obligation     -       -       -       -       -       -  
Total   $ 4,665,000     $ (91,000 )   $ 1,385,000     $ (21,000 )   $ 6,050,000     $ (112,000 )

 

    December 31, 2016  
    Less Than 12 Months     12 Months or More     Total  
          Gross           Gross           Gross  
          Unrealized           Unrealized           Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
                                     
Mortgage Backed Securities   $           -     $                -     $ 5,182,000     $ (139,000 )   $ 5,182,000     $ (139,000 )
Small Business Administration Pools     -       -       954,000       (34,000 )     954,000       (34,000 )
Muncipal Obligation     -       -       403,000       (4,000 )     403,000       (4,000 )
Total   $ -     $ -     $ 6,539,000     $ (177,000 )   $ 6,539,000     $ (177,000 )

 

There were no securities with unrealized losses which management believes were other-than-temporarily impaired, at September 30, 2017 and December 31, 2016.

 

note 5 LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans are summarized as follows:

 

    September 30,     December 31,  
    2017     2016  
      (Unaudited)          
Commercial Business   $ 1,292,000     $ 1,543,000  
Commercial and Multi-Family Real Estate     16,522,000       14,428,000  
Residential Real Estate     34,090,000       32,999,000  
Consumer and Other     711,000       558,000  
      52,615,000       49,528,000  
Allowance for Loan Losses     (264,000 )     (263,000 )
Net Deferred Loan Fees     (14,000 )     (17,000 )
Loans, Net   $ 52,337,000     $ 49,248,000  

 

Residential real estate loans at September 30, 2017 and December 31, 2016 include loans secured by one- to four-family, non-owner occupied properties of $9,848,000 and $9,493,000, respectively.

 

13
 

 

note 5 loans and allowance for loan losses (continued)

 

At September 30, 2017 and December 31, 2016, construction loans were $1,494,000 and $2,736,000, respectively. Loans in process at September 30, 2017 and December 31, 2016 were $140,000 and $2,299,000, respectively.

 

The Company maintains a separate general allowance for each portfolio segment. These portfolio segments include commercial business, commercial and multi-family real estate, residential real estate, and consumer and other with risk characteristics described as follows:

 

Commercial Business : Commercial business loans generally possess a lower inherent risk of loss than other real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

 

Commercial and Multi-Family Real Estate : Commercial and multi-family real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments. Adverse economic developments or an overbuilt market can impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for the properties to produce sufficient cash flow to service debt obligations.

 

Residential Real Estate : The degree of risk in residential mortgage lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of probable loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

 

Consumer and Other : The consumer and other loan portfolio segment is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most loans are made directly for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

 

Although management believes the allowance for loan losses to be adequate, ultimate losses may vary from management’s estimates. At least quarterly, the board of directors reviews the adequacy of the allowance, including consideration of the relevant risks in the portfolio, current economic conditions, and other factors. If the board of directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. Central Federal is subject to periodic examination by its primary regulator, which may require additions to the allowance based on judgments regarding loan portfolio information available at the time of its examinations.

 

14
 

 

NOTE 5 LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2017. Also presented is the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2017.

 

September 30, 2017 (Unaudited)   Commercial Business     Commercial
and Multi-Family Real Estate
    Residential
Real Estate
    Consumer
and Other
    Unallocated     Total  
Allowance for Loan Losses:                                                
Balance July 1, 2017   $ 3,000     $ 38,000     $ 192,000     $ 3,000     $ 28,000     $ 264,000  
Provision for Loan Losses     (1,000 )     -       19,000       1,000       (19,000 )     -  
Loans Charged-Off     -       -       -       (1,000 )     -       (1,000 )
Recoveries of Loans                                                
Previously Charged-Off     -       -       1,000       -       -       1,000  
Balance September 30, 2017   $ 2,000     $ 38,000     $ 212,000     $ 3,000     $ 9,000     $ 264,000  
                                                 
Balance January 1, 2017   $ 3,000     $ 37,000     $ 181,000     $ 3,000     $ 39,000     $ 263,000  
Provision for Loan Losses     (1,000 )     1,000       28,000       2,000       (30,000 )     -  
Loans Charged-Off     -       -       -       (2,000 )     -       (2,000 )
Recoveries of Loans                                                
Previously Charged-Off     -       -       3,000       -       -       3,000  
Balance September 30, 2017   $ 2,000     $ 38,000     $ 212,000     $ 3,000     $ 9,000     $ 264,000  
                                                 
Ending Balance: Individually
Evaluated for Impairment
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Ending Balance: Collectively
Evaluated for Impairment
  $ 2,000     $ 38,000     $ 212,000     $ 3,000     $ 9,000     $ 264,000  
                                                 
Loans:                                                
Ending Balance: Individually
Evaluated for Impairment
  $ -     $ -       $ 30,000      $ -             $ -  
                                                 
Ending Balance: Collectively
 Evaluated for Impairment
  $ 1,292,000     $ 16,522,000     $ 34,060,000     $ 711,000             $ 52,615,000  

 

15
 

 

NOTE 5 LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

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

 

September 30, 2016 (Unaudited)   Commercial Business     Commercial
and Multi-Family Real Estate
    Residential
Real Estate
    Consumer
and Other
    Unallocated     Total  
Allowance for Loan Losses:                                                
Balance July 1, 2016   $ 3,000     $ 36,000     $ 192,000     $ 9,000     $ 21,000     $ 261,000  
Provision for Loan Losses     -       5,000       4,000       -       (9,000 )     -  
Loans Charged-Off     -       -       -       -       -       -  
Recoveries of Loans                                                
Previously Charged-Off     -       -       1,000       -       -       1,000  
Balance September 30, 2016   $ 3,000     $ 41,000     $ 197,000     $ 9,000     $ 12,000     $ 262,000  
                                                 
Balance January 1, 2016   $ 5,000     $ 30,000     $ 183,000     $ 4,000     $ 39,000     $ 261,000  
Provision for Loan Losses     (2,000 )     11,000       12,000       6,000       (27,000 )     -  
Loans Charged-Off     -       -       -       (1,000 )     -       (1,000 )
Recoveries of Loans                                                
Previously Charged-Off     -       -       2,000       -       -       2,000  
Balance September 30, 2016   $ 3,000     $ 41,000     $ 197,000     $ 9,000     $ 12,000     $ 262,000  

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at December 31, 2016.

 

December 31, 2016   Commercial Business     Commercial
and Multi-Family Real Estate
    Residential
Real Estate
    Consumer
and Other
    Unallocated     Total  
Ending Balance: Individually
Evaluated for Impairment
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Ending Balance: Collectively
Evaluated for Impairment
  $ 3,000     $ 37,000     $ 181,000     $ 3,000     $ 39,000     $ 263,000  
                                                 
Loans:                                                
Ending Balance: Individually
Evaluated for Impairment
  $ -     $ -     $ 199,000     $ -             $ 199,000  
                                                 
Ending Balance: Collectively
Evaluated for Impairment
  $ 1,543,000     $ 14,428,000     $ 32,800,000     $ 558,000             $ 49,329,000  

 

 

16
 

 

NOTE 5 LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

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

 

    Risk Profile by Risk Rating  
September 30, 2017 (Unaudited)   Commercial Business     Commercial
and Multi-Family Real Estate
    Residential
Real Estate
    Consumer
 and Other
    Total  
Risk Rating:                                        
Unclassified   $ 1,167,000     $ 16,522,000     $ 33,117,000     $ 711,000     $ 51,517,000  
Special Mention     125,000       -       643,000       -       768,000  
Substandard     -       -       330,000       -       330,000  
Total   $ 1,292,000     $ 16,522,000     $ 34,090,000     $ 711,000     $ 52,615,000  

 

    Risk Profile by Risk Rating  
December 31, 2016   Commercial Business     Commercial
and Multi-Family Real Estate
    Residential
Real Estate
    Consumer
 and Other
    Total  
Risk Rating:                                        
Unclassified   $ 1,540,000     $ 14,428,000     $ 32,269,000     $ 557,000     $ 48,794,000  
Special Mention     3,000       -       118,000       -       121,000  
Substandard     -       -       612,000       1,000       613,000  
Total   $ 1,543,000     $ 14,428,000     $ 32,999,000     $ 558,000     $ 49,528,000  

 

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

 

    Accruing Interest              
September 30, 2017 (Unaudited)   Current     30-89
Days Past Due
    90 Days or More
Past Due
    Total
Nonaccrual
    Toal
Loans
 
                               
Commercial Business   $ 1,292,000     $ -     $ -     $ -     $ 1,292,000  
Commerical and Multi-Family Real
Estate
    16,522,000       -       -       -       16,522,000  
Residential Real Estate     33,334,000       726,000       -       30,000       34,090,000  
Consumer and Other     711,000               -       -       711,000  
    $ 51,859,000     $ 726,000     $ -     $ 30,000     $ 52,615,000  

 

    Accruing Interest              
December 31, 2016   Current     30-89
Days Past Due
    90 Days or More
Past Due
    Total
Nonaccrual
    Toal
Loans
 
                               
Commercial Business   $ 1,543,000     $ -     $ -     $ -     $ 1,543,000  
Commerical and Multi-Family Real
 Estate
    14,428,000       -       -       -       14,428,000  
Residential Real Estate     32,650,000       150,000       -       199,000       32,999,000  
Consumer and Other     556,000       2,000       -       -       558,000  
    $ 49,177,000     $ 152,000     $ -     $ 199,000     $ 49,528,000  

 

17
 

 

NOTE 5 LOANS and allowance for loan losses (continued)

 

Interest income that would have been recorded for the nine months ended September 30, 2017 and 2016 had nonaccrual loans been current according to their original terms amounted to $2,000 and $19,000, respectively. Interest income recognized on nonaccrual loans during the nine months ended September 30, 2017 and 2016 amounted to $1,000 and $3,000 respectively.

 

The following tables present information related to impaired loans:

 

September 30, 2017 (Unaudited)   Recorded Investment     Unpaid Principal Balance     Related
Allowance
 
                   
Loans With No Related Allowance Recorded:                        
Commercial and Multi-Family Real Estate   $ -     $ -     $ -  
Residential Real Estate     30,000       32,000       -  
Total Loans With No Related Allowance Recorded   $ 30,000     $ 32,000     $ -  
                         
Loans With an Allowance Recorded:                        
Residential Real Estate   $ -     $ -     $ -  
                         
Total Impaired Loans:                        
Commercial and Multi-Family Real Estate   $ -     $ -     $ -  
Residential Real Estate     30,000       32,000       -  
Total   $ 30,000     $ 32,000     $ -  

 

December 31, 2016   Recorded Investment     Unpaid Principal Balance     Related
Allowance
 
                   
Loans With No Related Allowance Recorded:                        
Commercial and Multi-Family Real Estate   $ -     $ -     $ -  
Residential Real Estate     199,000       202,000       -  
Total Loans With No Related Allowance Recorded   $ 199,000     $ 202,000     $ -  
                         
Loans With an Allowance Recorded:                        
Residential Real Estate   $ -     $ -     $ -  
                         
Total Impaired Loans:                        
Commercial and Multi-Family Real Estate   $ -     $ -     $ -  
Residential Real Estate     199,000       202,000       -  
Total   $ 199,000     $ 202,000     $ -  

 

18
 

 

NOTE 5 LOANS and allowance for loan losses (continued)

 

    Three Months Ended     Nine Months Ended  
September 30, 2017 (Unaudited)   Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
Loans With No Related Allowance Recorded:                                
Commercial and Multi-Family Real Estate   $ -     $ -     $ -     $ -  
Residential Real Estate     31,000       -       94,000       1,000  
Total Loans With No Related Allowance
Recorded
  $ 31,000     $ -     $ 94,000     $ 1,000  
                                 
Loans With an Allowance Recorded:                                
Residential Real Estate   $ -     $ -     $ -     $ -  
                                 
Total Impaired Loans:                                
Commercial and Multi-Family Real Estate   $ -     $ -     $ -     $ -  
Residential Real Estate     31,000       -       94,000       1,000  
Total   $ 31,000     $ -     $ 94,000     $ 1,000  

 

September 30, 2016 (Unaudited)   Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
Loans With No Related Allowance Recorded:                                
Commercial and Multi-Family Real Estate   $ 206,000     $ -     $ 313,000     $ 3,000  
Residential Real Estate     88,000       -       89,000       -  
Total Loans With No Related Allowance
Recorded
  $ 294,000     $ -     $ 402,000     $ 3,000  
                                 
Loans With an Allowance Recorded:                                
Residential Real Estate   $ 274,000     $ -     $ 277,000     $ -  
                                 
Total Impaired Loans:                                
Commercial and Multi-Family Real Estate   $ 206,000     $ -     $ 313,000     $ 3,000  
Residential Real Estate     362,000       -       366,000       -  
Total   $ 568,000     $ -     $ 679,000     $ 3,000  

 

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

 

There were no loans modified in TDRs for the nine months ended September 30, 2017 and 2016.

 

19
 

 

Note 6 foreclosed assets

 

Activity in foreclosed assets is as follows:

 

    Nine Months Ended September 30,  
    2017     2016  
      (Unaudited)  
Balance Beginning of Period   $ 26,000     $ 608,000  
Additions     82,000       -  
Loans ro Facilitate Sale     -       (209,000 )
Proceeds from Sale, Net     (130,000 )     (359,000 )
Gain (Loss) on Sale     22,000       (14,000 )
Balance at End of Period   $ -     $ 26,000  

 

note 7 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

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

 

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

 

    September 30, 2017     December 31, 2016  
      (Unaudited)  
Commitments to Extend Credit   $ 2,811,000     $ 2,760,000  
Standby Letters of Credit     -       -  
Total   $ 2,811,000     $ 2,760,000  

 

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

 

20
 

 

note 7 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)

 

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

 

Central Federal was not required to perform on any financial guarantees and did not incur any losses on its commitments for the nine months ended September 30, 2017.

 

note 8 income taxes

 

In connection with the offering of common stock in 2016, the Company contributed to the Central Federal Community Foundation $100,000 in cash and common stock with a fair value of $687,700 (68,770 shares at the $10.00 offering price) for a total contribution of $787,700. For federal income tax purposes, the deduction for charitable contributions is limited to a maximum of 10% of taxable income before charitable contributions, net operating losses and dividends received deductions. The Company is permitted, under the Internal Revenue Code, to carry the excess contribution over the five-year period following the contribution to the charitable foundation, subject to the 10% annual limitation.

 

The Company did not have sufficient taxable income to be able to fully deduct the contribution in the year in which it was made, and may not have sufficient taxable income to fully deduct the contribution during the five-year carryover period permitted under the Internal Revenue Code. The Company estimated it will not be able to fully utilize the carryover and established a valuation allowance related to the entire deferred tax asset related to the contribution as it is not deemed to be realizable.

 

note 9 stockholders’ equity and REGULATORY MATTERS

 

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

 

21
 

 

Note 9 STOCK HOLDERS’ EQUITY AND REGULATORY MATTERS (CONTINUED)

 

As of September 30, 2017, the most recent notification from the banking regulators categorized Central Federal as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Central Federal must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed Central Federal’s category.

 

Quantitative measures established by regulation to ensure capital adequacy require Central Federal to maintain the minimum amounts and ratios set forth in the following table. Management believes, as of September 30, 2017 and December 31, 2016, that Central Federal met all its capital adequacy requirements.

 

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

 

    Actual     Minimum Capital
Requirement
    Minimum to be
Well Capitalized
 
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
September 30, 2017 (Unaudited)                                                
Total Capital to Risk Weighted Assets   $ 20,783,000       51.3 %     3,242,000       8.0 %     4,053,000       10.0 %
                                                 
Tier 1 Capital to Risk Weighted Assets     20,506,000       50.6 %     2,432,000       6.0 %     3,242,000       8.0 %
                                                 
Common Equity Tier 1 Capital to Risk Weighted Assets     20,506,000       50.6 %     1,824,000       4.5 %     2,634,000       6.5 %
                                                 
Tier 1 Capital to Average Assets     20,506,000       28.8 %     2,849,000       4.0 %     3,561,000       5.0 %
                                                 
December 31, 2016                                                
Total Capital to Risk Weighted Assets   $ 20,630,000       53.5 %   $ 3,082,000       8.0 %   $ 3,853,000       10.0 %
                                                 
Tier 1 Capital to Risk Weighted Assets     20,367,000       52.9 %     2,312,000       6.0 %     3,082,000       8.0 %
                                                 
Common Equity Tier 1 Capital to Risk Weighted Assets     20,367,000       52.9 %     1,734,000       4.5 %     2,504,000       6.5 %
                                                 
Tier 1 Capital to Average Assets     20,367,000       27.0 %     3,014,000       4.0 %     3,767,000       5.0 %

 

The Basel III Capital Rules establish a “capital conservation buffer” of 2.5% above the risk-based capital ratios, shown in the table above, which is being phased in at 0.625% of risk-weighted assets each year beginning in January 2016.

 

On April 5, 2017, the Company announced that its Board of Directors adopted a stock repurchase program, under which the Company is authorized to repurchase of up to 178,802 shares of its common stock, or approximately 10% of the current outstanding shares. As of September 30, 2017, the Company had repurchased 74,000 shares.

 

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NOTE 10 EMPLOYEE STOCK OWNERSHIP PLAN (“esop”)

 

On January 12, 2016, the Company announced Central Federal’s establishment of the ESOP, a non-contributory pension benefit plan for its employees. All employees of Central Federal meeting certain tenure requirements are entitled to participate in the ESOP.

 

The ESOP was originally established with Central Federal’s purchase of 143,042 shares of common stock, which was purchased using a loan from the Company consisting of proceeds from the offering completed on January 12, 2016. Central Federal is making quarterly payments to the Company of principal and interest over a term of 100 quarters, and the unpaid principal has an annual interest rate of 3.50%. Dividends paid on unallocated stock will also be applied as a payment. The trustee of the ESOP holds unallocated shares purchased by the ESOP in a loan suspense account and will release the shares of common stock on a pro rata basis each quarter as payments are made. Released shares will be allocated among active participants on the basis of each active participant’s proportional share of compensation. Compensation expense related to the ESOP was $55,000 and $45,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

A summary of the shares held by the ESOP is as follows at September 30, 2017:

 

    At September 30, 2017  
    (unaudited)  
Allocated Shares     10,010  
Committed-to-be-allocated Shares     -  
Unallocated Shares     133,032  
Total ESOP Shares     143,042  
         
Fair value of unallocated shares   $ 1,829,190  

 

NOTE 11 FAIR VALUE MEASUREMENTS

 

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

significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:

 

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

 

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

 

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

 

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NOTE 11 FAIR VALUE MEASUREMENTS (CONTINUED)

 

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

 

Recurring Basis

 

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

 

      Level 1       Level 2       Level 3       Total  
September 30, 2017 (Unaudited)                                
Securities Available-for-Sale                                
Mortgage Backed Securities   $ -     $ 5,161,000     $ -     $ 5,161,000  
Small Business Administration Pools     -       889,000       -       889,000  
Municipal Obligation     -       410,000       -       410,000  
Federal Home Loan Mortgage Corp. Stock     40,000       -       -       40,000  
    $ 40,000     $ 6,460,000     $ -     $ 6,500,000  
December 31, 2016                                
Securities Available-for-Sale                                
Mortgage Backed Securities   $ -     $ 5,182,000     $ -     $ 5,182,000  
Small Business Administration Pools     -       954,000       -       954,000  
Municipal Obligation     -       403,000       -       403,000  
Federal Home Loan Mortgage Corp. Stock     42,000       -       -       42,000  
    $ 42,000     $ 6,539,000     $ -     $ 6,581,000  

 

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

 

Securities

 

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

 

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Nonrecurring Basis

 

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

 

NOTE 11 FAIR VALUE MEASUREMENTS (CONTINUED)

 

Nonrecurring Basis (Continued)

 

Net impairment losses, including charge-offs or allocated losses related to nonrecurring fair value measurements of certain assets, for the periods ended September 30, 2017 and December 31, 2016 consisted of the following:

 

      Level 1       Level 2       Level 3       Impairment Losses  
September 30, 2017 (Unaudited)                                
Impaired Loans   $ -     $ -     $ -     $ -  
December 31, 2016                                
Impaired Loans   $ -     $ -     $ -     $ -  

 

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on the nonrecurring basis are as follows as of June 30, 2017 and December 31, 2016:

 

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

 

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

 

Impaired Loans

 

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

 

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

 

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NOTE 12 fair value OF FINANCIAL INSTRUMENTS

 

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

 

The following disclosures represent financial instruments in which the ending balances at September 30, 2017 and December 31, 2016 are not carried at fair value in their entirety on the consolidated statements of financial condition.

 

Cash and Cash Equivalents and Accrued Interest

 

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

 

Certificates of Deposit in Other Financial Institutions

 

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

 

Federal Home Loan Bank Stock, at Cost

 

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

 

Loans

 

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

 

Deposits

 

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

 

Off-Balance-Sheet Credit-Related Instruments

 

Off-balance-sheet credit-related instrument commitments are generally of a short-term nature. The contract amount of such commitments approximates their fair value since the commitments are comprised primarily of unfunded loan commitments which are generally priced at market at the time of funding.

 

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NOTE 12 fair value OF FINANCIAL INSTRUMENTS (Continued)

 

Fair Value of Financial Instruments

 

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

 

    September 30, 2017     December 31, 2016        
    (Unaudited)                    
    Carrying     Fair     Carrying     Fair     Input  
      Amount       Value       Amount       Value       Level  
Financial Assets:                                        
Cash and Cash Equivalents   $ 1,795,000     $ 1,795,000