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 June 30, 2018

 

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 [  ] 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. (Check one)

 

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 August 10, 2018, there were 1,622,220 shares of common stock outstanding.

 

 

 

     

 

 

Central Federal Bancshares, Inc.

Form 10-Q

 

Index

 

        Page
    Part I. Financial Information    
         
Item 1.   Financial Statements   3
         
    Consolidated Statements of Financial Condition as of June 30, 2018 and December 31, 2017 (unaudited)   3
         
    Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)   4
         
    Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)   5
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)   6
         
    Notes to Consolidated Financial Statements (unaudited)   7
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   3 7
         
Item 4.   Controls and Procedures   37
         
    Part II. Other Information   38
         
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)

 

    June 30, 2018     December 31, 2017  
      (Unaudited)          
ASSETS                
Cash and Due from Financial Institutions   $ 1,401,000     $ 2,049,000  
Federal Funds Sold     1,455,000       876,000  
Cash and Cash Equivalents     2,856,000       2,925,000  
Certificates of Deposit in Other Financial Institutions     2,976,000       5,699,000  
Securities Available-for-Sale at Fair Value     5,603,000       6,220,000  
Federal Home Loan Bank (FHLB) Stock, at Cost     82,000       89,000  
Loans, Net of Allowance for Loan Losses of $260,000 and $273,000 at June 30, 2018 and December 31, 2017, respectively     55,971,000       51,937,000  
Foreclosed Assets     71,000       -  
Premises and Equipment, Net     703,000       710,000  
Accrued Interest Receivable     177,000       163,000  
Other Assets     463,000       346,000  
Total Assets   $ 68,902,000     $ 68,089,000  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
LIABILITIES                
Deposits:                
Noninterest-Bearing   $ 3,465,000     $ 3,181,000  
Interest-Bearing     39,235,000       38,455,000  
Total Deposits     42,700,000       41,636,000  
Other Liabilities     166,000       135,000  
Total Liabilities     42,866,000       41,771,000  
Redeemable Common Stock Held By Employee Stock Ownership Plan (“ESOP”)     199,000       159,000  
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 shares issued; 1,660,220 and 1,675,920 shares outstanding at June 30, 2018 and December 31, 2017, respectively     18,000       18,000  
Retained Earnings - Substantially Restricted     12,775,000       12,758,000  
Additional Paid-In Capital     16,475,000       16,464,000  
Treasury Stock, at cost; 127,800 and 112,100 shares at June 30, 2018 and December 31, 2017, respectively     (1,747,000 )     (1,523,000 )
Common Stock Acquired by Employee Stock                
Ownership Plan (“ESOP”)     (1,287,000 )     (1,316,000 )
Accumulated Other Comprehensive Income (Loss)     (198,000 )     (83,000 )
Total Stockholders’ Equity     26,036,000       26,318,000  
Less Maximum cash obligation related to ESOP shares     199,000       159,000  
Total Stockholders’ Equity Less Maximum Cash Obligations Related to ESOP shares     25,837,000       26,159,000  
Total Liabilities and Stockholders’ Equity   $ 68,902,000     $ 68,089,000  

 

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     Six Months Ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
    (Unaudited)  
INTEREST INCOME                                
Loans, Including Fees   $ 610,000     $ 565,000     $ 1,172,000     $ 1,109,000  
Securities and Other     49,000       69,000       113,000       140,000  
Total Interest Income     659,000       634,000       1,285,000       1,249,000  
INTEREST EXPENSE                                
Deposits     73,000       72,000       138,000       153,000  
Total Interest Expense     73,000       72,000       138,000       153,000  
NET INTEREST INCOME     586,000       562,000       1,147,000       1,096,000  
PROVISION FOR LOAN LOSSES     -       -       -       -  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     586,000       562,000       1,147,000       1,096,000  
NONINTEREST INCOME                                
Customer Service Fees     28,000       20,000       48,000       38,000  
Unrealized Gain (Loss) on Equity Securities     2,000       -       (15,000 )     -  
Other Income     11,000       10,000       12,000       12,000  
Total Noninterest Income     41,000       30,000       45,000       50,000  
NONINTEREST EXPENSE                                
Compensation and Employee Benefits     333,000       325,000       655,000       639,000  
Data Processing and Other Outside Services     82,000       91,000       170,000       170,000  
FDIC Insurance and Regulatory Assessment     14,000       14,000       28,000       28,000  
Occupancy and Equipment     48,000       45,000       99,000       89,000  
Legal and Professional Services     60,000       128,000       154,000       235,000  
Supplies, Telephone, and Postage     9,000       16,000       18,000       26,000  
Expense (Income) from Foreclosed Assets, net     1,000       (7,000 )     10,000       (16,000 )
Other     29,000       27,000       56,000       54,000  
Total Noninterest Expense     576,000       639,000       1,190,000       1,225,000  
INCOME (LOSS) BEFORE INCOME TAXES     51,000       (47,000 )     2,000       (79,000 )
INCOME TAX EXPENSE (BENEFIT)     2,000       (16,000 )     3,000       (32,000 )
NET INCOME (LOSS)   $ 49,000     $ (31,000 )   $ (1,000 )   $ (47,000 )
                                 
Common share data                                
Basic and diluted Income (Loss) per share   $ 0.03     $ (0.02 )   $ -     $ (0.03 )

 

See Accompanying Notes to Consolidated Financial Statements.

 

  4  

 

 

CENTRAL FEDERAL Bancshares, Inc.

consolidated STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(rounded to thousands)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
    (Unaudited)  
NET INCOME (LOSS)   $ 49,000     $ (31,000 )   $ (1,000 )   $ (47,000 )
Other Comprehensive Income (Loss):                                
Unrealized Gains (Losses) on Debt Securities Available-for-Sale     (13,000 )     95,000       (135,000 )     87,000  
Income Tax (Expense) Benefit     3,000       (27,000 )     38,000     (27,000 )
Total Other Comprehensive Income (Loss), net of tax     (10,000 )     68,000       (97,000 )     60,000  
TOTAL COMPREHENSIVE INCOME (LOSS)   $ 39,000     $ 37,000     $ (98,000 )   $ 13,000  

 

See Accompanying Notes to Consolidated Financial Statements

 

  5  

 

 

CENTRAL FEDERAL Bancshares, Inc.

consolidated statements of cash flows

(rounded to thousands)

 

    Six Months Ended  
    June 30,  
    2018     2017  
    ( Unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net Loss   $ (1,000 )   $ (47,000 )
Items not requiring (providing) cash:                
Net Amortization of Securities     20,000       26,000  
Provision for Loan Losses     -       -  
Depreciation     37,000       33,000  
Gain on Sale of Foreclosed Assets     -       (22,000 )
ESOP Expense     40,000       37,000  
Loss on Equity Securities     15,000       -  
Net Changes in:                
Accrued Interest Receivable     (14,000 )     (15,000 )
Other Assets     (79,000 )     23,000  
Other Liabilities     31,000       32,000  
Net Cash Provided by Operating Activities     49,000       67,000  
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchases of Certificates of Deposit in Other Financial Institutions     -       (3,218,000 )
Proceeds from Maturities of Certificates of Deposit in Other Financial Institutions     2,723,000       745,000  
Net Change in FHLB Stock     7,000       8,000  
Purchase of Securities Available-for-Sale     -       (777,000 )
Proceeds from Maturities, Calls and Paydowns of Securities Available-for-Sale     447,000       557,000  
Net Increase in Loans     (4,105,000 )     (2,140,000 )
Purchases of Premises and Equipment     (30,000 )     (100,000 )
Proceeds from Sale of Foreclosed Assets     -       130,000  
Net Cash Used In Investing Activities     (958,000 )     (4,795,000 )
CASH FLOWS FROM FINANCING ACTIVITIES                
Net Increase (Decrease) in Deposits     1,064,000       (2,900,000 )
Purchase of Treasury Stock     (224,000 )     (555,000 )
Net Cash Used in Financing Activities     840,000       (3,455,000 )
NET CHANGE IN CASH AND CASH EQUIVALENTS     (69,000 )     (8,183,000 )
Cash and Cash Equivalents at Beginning of Period     2,925,000       12,199,000  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 2,856,000     $ 4,016,000  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE                
Interest Paid on Deposits   $ 138,000     $ 148,000  
Income Taxes Paid, Net of Refunds Received   $ -     $ (47,000 )
Noncash Investing Activities:                
Transfer of Loans to Foreclosed Assets   $ 71,000     $ 82,000  

 

See Accompanying Notes to Consolidated Financial Statements.

 

  6  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

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

 

Stock Conversion

 

On August 4, 2015, the Board of Directors of Central Federal adopted a Plan of Conversion, as subsequently amended, providing for Central Federal to convert from a federally chartered mutual savings association into a federally chartered stock savings association and operate as a wholly-owned subsidiary of a newly chartered savings and loan holding company. On January 12, 2016, Central Federal completed the conversion and now operates as a wholly-owned subsidiary of the Company. In connection with the conversion, the Company sold 1,719,250 shares of common stock in a subscription offering at $10.00 per share, including the sale of 143,042 shares to the 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 costs of the conversion and issuance of common stock was deferred and deducted from the proceeds of the offering. Central Federal incurred conversion costs of $1,425,000.

 

In accordance with applicable federal conversion regulations, at the time of the completion of the conversion, Central Federal established a liquidation account in an amount equal to Central Federal’s total retained earnings as of the latest balance sheet date in the final prospectus used in the conversion (which was June 30, 2015). Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account 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.

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 June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 are for the Company and Central Federal. Intercompany transactions and balances have been eliminated in the consolidation.

 

  7  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Unaudited Interim Consolidated Financial Statements

 

The interim consolidated financial statements prepared by management as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2018, and the results of operations and cash flows for the periods ended June 30, 2018 and 2017 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, Inc. for the year ended December 31, 2017, contained in the 2017 Annual Report on Form 10-K filed with the SEC on March 28, 2018.

 

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.

 

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. The Company adopted the accounting standard during the first quarter of 2018, as required. The adoption of the standard resulted in a cumulative–effect adjustment that increased retained earnings by $18,000 with offsetting adjustment to AOCI.

 

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.

 

  8  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  

Revenue Recognition Accounting Changes

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), an amendment that clarifies the principles for recognizing revenue and establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cashflows arising from the entity’s contracts to provide goods or services to customers. Most of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, investments and letters of credit. Service charges on deposit accounts, representing general services fees for monthly account maintenance, and transaction-based fee revenue is recognized when our performance is completed which is generally monthly.

 

ASU 2014-09 became effective for us on January 1, 2018 and had no material effect on how we recognize revenue or to our consolidated financial statements and disclosures.

 

Treasury Stock

 

Common stock shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the first in, first out method.

 

Reclassification

 

Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2018 presentation. These reclassifications had no effect on net income (loss).

 

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.

 

note 2 INCOME (LOSS) per share

 

Income (loss) per share is based upon the weighted-average shares outstanding. Any shares in the ESOP that have been committed-to-be-released are considered outstanding.

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
  2018     2017     2018     2017  
Basic and Diluted Income (Loss) per Share:                        
Net Income (Loss)   $ 49,000     $ (31,000 )   $ (1,000 )   $ (47,000 )
Weighted-Average Basic and Diluted Shares Outstanding     1,530,393       1,640,722       1,536,704       1,644,642  
                                 
Net Income (Loss) per Share, Basic and Diluted   $ 0.03     $ (0.02 )   $ (0.00 )   $ (0.03 )

 

  9  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

note 3 Certificates of DEPOSIT IN OTHER FINANCIAL INSTITUTIONS

 

Certificates of deposit in other financial institutions are as follows:

 

    June 30, 2018     December 31, 2017  
    (Unaudited)        
Certificates of Deposit at Cost Maturing In:                
Less than One Year   $ 992,000     $ 2,481,000  
One Year to Five Years     1,984,000       3,218,000  
    $ 2,976,000     $ 5,699,000  

 

note 4 sECURITIES

 

The carrying amount and estimated fair value of available-for-sale debt securities are summarized as follows:

 

    June 30, 2018 (Unaudited)  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
                         
Mortgage Backed Securities   $ 4,563,000     $                       -     $ (220,000 )   $ 4,343,000  
Small Business Administration (“SBA”) Pools     881,000       -       (45,000 )     836,000  
Muncipal Obligation     405,000       -       (5,000 )     400,000  
Total   $ 5,849,000     $ -     $ (270,000 )   $ 5,579,000  

 

    December 31, 2017  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
                         
Mortgage Backed Securities   $ 4,994,000     $ -     $ (111,000 )   $ 4,883,000  
Small Business Administration (“SBA”) Pools     916,000       -       (31,000 )     885,000  
Muncipal Obligation     406,000       6,000       -       412,000  
Total   $ 6,316,000     $ 6,000     $ (142,000 )   $ 6,180,000  

 

The following table indicates amortized cost and the estimated fair value of available-for-sale debt securities as of June 30, 2018 based upon contractual maturity.

 

    Amortized Cost     Fair Value  
    (Unaudited)        
Over Ten Years   $ 405,000     $ 400,000  
Mortgage Backed Securities and SBA Pools with no stated maturity date     5,444,000       5,179,000  
Total   $ 5,849,000     $ 5,579,000  

 

  10  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

note 4 sECURITIES (CONTINUED)

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2018 and December 31, 2017 was $5,579,000 and $5,768,000, which is approximately 100% and 93%, respectively, of the Company’s available-for-sale debt securities portfolio. These declines primarily resulted from changes in market interest rates.

 

The following tables show securities with gross unrealized losses at June 30, 2018 and December 31, 2017 aggregated by investment category and length of time that individual securities have been in a continuous loss position.

 

    June 30, 2018 (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   $ -     $ -     $ 4,343,000     $ (220,000 )   $ 4,343,000     $ (220,000 )
Small Business Administration Pools     -       -       836,000       (45,000 )     836,000       (45,000 )
Muncipal Obligation     -       -       400,000       (5,000 )     400,000       (5,000 )
Total   $ -     $ -     $ 5,579,000     $ (270,000 )   $ 5,579,000     $ (270,000 )

 

    December 31, 2017  
    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   $          665,000     $ (8,000 )   $ 4,218,000     $ (103,000 )   $ 4,883,000     $ (111,000 )
Small Business Administration Pools              -       -       885,000       (31,000 )     885,000       (31,000 )
Muncipal Obligation     -       -       -       -       -       -  
Total   $ 665,000     $ (8,000 )   $ 5,103,000     $ (134,000 )   $ 5,768,000     $ (142,000 )

 

There were no debt securities with unrealized losses which management believes were other-than-temporarily impaired at June 30, 2018 and December 31, 2017.

 

  11  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

note 4 sECURITIES (CONTINUED)

 

The carrying amount and estimated fair value of equity securities are shown below:

 

    June 30, 2018 (Unaudited)  
    Amortized
Cost
    Gross
Recognized
Gains
    Gross
Recognized
Losses
    Fair
Value
 
                         
Federal Home Loan Mortgage Corp. Stock   $ 15,000     $ 9,000     $ -     $ 24,000  
Total   $ 15,000     $ 9,000     $ -     $ 24,000  

 

    December 31, 2017  
    Amortized
Cost
    Gross
Recognized
Gains
    Gross
Recognized
Losses
    Fair
Value
 
                         
Federal Home Loan Mortgage Corp. Stock   $ 15,000     $ 25,000     $ -     $ 40,000  
Total   $ 15,000     $ 25,000     $ -     $ 40,000  

 

Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported in AOCI, net of tax. On January 1, 2018, the unrealized gain was reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net income. Net losses recognized during the six months ended June 30, 2018 amounted to $15,000, all of which was unrealized as securities were still held at June 30, 2018.

 

There were no securities pledged as collateral at June 30, 2018 and December 31, 2017.

 

During the six-month period ended June 30, 2018 and 2017, the Company did not sell any securities.

 

  12  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

note 5 LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans are summarized as follows:

 

      June 30,2018       December 31, 2017   
    (Unaudited)        
Commercial Business   $ 1,526,000     $ 1,285,000  
Commercial and Multi-Family Real Estate     20,596,000       16,503,000  
Residential Real Estate     33,321,000       33,753,000  
Consumer and Other     800,000       683,000  
      56,243,000       52,224,000  
Allowance for Loan Losses     (260,000 )     (273,000 )
Net Deferred Loan Fees     (12,000 )     (14,000 )
Loans, Net   $ 55,971,000     $ 51,937,000  

 

Residential real estate loans at June 30, 2018 and December 31, 2017 include loans secured by one- to four-family, non-owner-occupied properties of $8,924,000 and $9,190,000, respectively.

 

At June 30, 2018 and December 31, 2017, construction loan commitments were $5,689,000 and $2,076,000, respectively. Undisbursed loans in process at June 30, 2018 and December 31, 2017 were $3,307,000 and $1,330,000, 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 many small loans scheduled to be amortized over a specific period. Most loans are made directly for consumer purchases.

 

  13  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

note 5 loans and allowance for loan losses (continued)

 

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.

 

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and six months ended June 30, 2018. 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 June 30, 2018.

 

June 30, 2018 (Unaudited)   Commercial Business     Commercial and Multi-Family Real Estate     Residential Real Estate     Consumer and Other     Unallocated     Total  
Allowance for Loan Losses:                                                
Balance April 1, 2018   $ 3,000     $ 40,000     $ 200,000     $ 4,000     $ 11,000     $ 258,000  
Provision for Loan Losses     -       21,000       (18,000 )     -       (3,000 )     -  
Loans Charged-Off     -       -       -       -       -       -  
Recoveries of Loans                                                
Previously Charged-Off     -       -       2,000       -       -       2,000  
Balance June 30, 2018   $ 3,000     $ 61,000     $ 184,000     $ 4,000     $ 8,000     $ 260,000  
                                                 
Balance January 1, 2018   $ 3,000     $ 38,000     $ 220,000     $ 3,000     $ 9,000     $ 273,000  
Provision for Loan Losses     -       23,000       (23,000 )     1,000       (1,000 )     -  
Loans Charged-Off     -       -       (16,000 )     -       -       (16,000 )
Recoveries of Loans                                                
Previously Charged-Off     -       -       3,000       -       -       3,000  
Balance June 30, 2018   $ 3,000     $ 61,000     $ 184,000     $ 4,000     $ 8,000     $ 260,000  
                                                 
Allowance for Loan Losses:                                                
Ending Balance: Individually Evaluated for Impairment   $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Ending Balance: Collectively Evaluated for Impairment   $ 3,000     $ 61,000     $ 184,000     $ 4,000     $ 8,000     $ 260,000  
                                                 
Loans:                                                
Ending Balance: Individually Evaluated for Impairment   $ -     $ -     $ 120,000     $ -             $ 120,000  
                                                 
Ending Balance: Collectively Evaluated for Impairment   $ 1,526,000     $ 20,596,000     $ 33,201,000     $ 800,000             $ 56,123,000  

 

 

  14  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

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 six months ended June 30, 2017:

 

June 30, 2017 (Unaudited)   Commercial Business     Commercial and Multi-Family Real Estate     Residential Real Estate     Consumer and Other     Unallocated     Total  
Allowance for Loan Losses:                                                
Balance April 1, 2017   $ 2,000     $ 39,000     $ 190,000     $ 3,000     $ 29,000     $ 263,000  
Provision for Loan Losses     1,000       (1,000 )     1,000       -       (1,000 )     -  
Loans Charged-Off     -       -       -       -       -       -  
Recoveries of Loans                                                
Previously Charged-Off     -       -       1,000       -       -       1,000  
Balance June 30, 2017   $ 3,000     $ 38,000     $ 192,000     $ 3,000     $ 28,000     $ 264,000  
                                                 
Balance January 1, 2017   $ 3,000     $ 37,000     $ 181,000     $ 3,000     $ 39,000     $ 263,000  
Provision for Loan Losses     -       1,000       9,000       1,000       (11,000 )     -  
Loans Charged-Off     -       -       -       (1,000 )     -       (1,000 )
Recoveries of Loans                                                
Previously Charged-Off     -       -       2,000       -       -       2,000  
Balance June 30, 2017   $ 3,000     $ 38,000     $ 192,000     $ 3,000     $ 28,000     $ 264,000  

 

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, 2017.

 

December 31, 2017   Commercial Business     Commercial and Multi-Family Real Estate     Residential Real Estate     Consumer and Other     Unallocated     Total  
Allowance for Loan Losses:                                                
Ending Balance: Individually Evaluated for Impairment   $ -     $ -     $ 19,000     $ -     $ -     $ 19,000  
                                                 
Ending Balance: Collectively Evaluated for Impairment   $ 3,000     $ 38,000     $ 201,000     $ 3,000     $ 9,000     $ 254,000  
Loans:                                                
Ending Balance: Individually Evaluated for Impairment   $ -     $ -     $ 101,000     $ -             $ 101,000  
                                                 
Ending Balance: Collectively Evaluated for Impairment   $ 1,285,000     $ 16,503,000     $ 33,652,000     $ 683,000             $ 52,123,000  

 

 

  15  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 5 LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

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

 

      Risk Profile by Risk Rating  
June 30, 2018 (Unaudited)     Commercial Business       Commercial
and Multi-Family Real Estate
      Residential
Real Estate
      Consumer
and Other
      Total  
Risk Rating:                                        
Unclassified   $ 1,526,000     $ 20,326,000     $ 32,459,000     $ 800,000     $ 55,111,000  
Special Mention     -       270,000       547,000       -       817,000  
Substandard     -       -       315,000       -       315,000  
Total   $ 1,526,000     $ 20,596,000     $ 33,321,000     $ 800,000     $ 56,243,000  

 

      Risk Profile by Risk Rating  
December 31, 2017     Commercial Business       Commercial
and Multi-Family Real Estate
      Residential
Real Estate
      Consumer
and Other
      Total  
Risk Rating:                                        
Unclassified   $ 1,285,000     $ 16,349,000     $ 32,849,000     $ 683,000     $ 51,166,000  
Special Mention     -       154,000       620,000       -       774,000  
Substandard     -       -       284,000       -       284,000  
Total   $ 1,285,000     $ 16,503,000     $ 33,753,000     $ 683,000     $ 52,224,000  

 

  16  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 5 LOANS and allowance for loan losses (continued)

 

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

 

      Accruing Interest                  
June 30, 2018 (Unaudited)     Current       30-89
Days Past Due
      90 Days or More
Past Due
      Total
Nonaccrual
      Toal
Loans
 
                                         
Commercial Business   $ 1,526,000     $ -     $ -     $ -     $ 1,526,000  
Commercial and Multi-Family Real
Estate
    20,596,000       -       -       -       20,596,000  
Residential Real Estate     32,607,000       520,000       74,000       120,000       33,321,000  
Consumer and Other     800,000       -       -       -       800,000  
    $ 55,529,000     $ 520,000     $ 74,000     $ 120,000     $ 56,243,000  

 

December 31, 2017                              
                               
Commercial Business   $ 1,285,000     $ -     $ -     $ -     $ 1,285,000  
Commercial and Multi-Family Real
Estate
    16,503,000       -       -       -       16,503,000  
Residential Real Estate     33,346,000       306,000       71,000       30,000       33,753,000  
Consumer and Other     683,000       -       -       -       683,000  
    $ 51,817,000     $ 306,000     $ 71,000     $ 30,000     $ 52,224,000  

 

Interest income that would have been recorded for the six months ended June 30, 2018 and 2017 had nonaccrual loans been current according to their original terms amounted to $3,000 and $1,000, respectively. There was no interest income recognized for nonaccrual loans during the six months ended June 30, 2018. Interest income recognized for the six months ended June 30,2017 was $1,000.

 

  17  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 5 LOANS and allowance for loan losses (continued)

 

The following tables present information related to impaired loans:

 

June 30, 2018 (Unaudited)   Recorded Investment     Unpaid Principal Balance    

Related

Allowance

 
                   
Loans With No Related Allowance Recorded:                        
Residential Real Estate   $ 120,000     $ 121,000     $        -  
Total Loans With No Related Allowance Recorded   $ 120,000   $ 121,000   $ -  
                         
Loans With an Allowance Recorded:                        
Residential Real Estate   $ -     $ -     $ -  
                         
Total Impaired Loans:                        
Residential Real Estate   $ 120,000     $ 121,000     $ -  
Total   $ 120,000     $ 121,000     $ -  

 

December 31, 2017   Recorded Investment     Unpaid Principal Balance     Related Allowance  
                   
Loans With No Related Allowance Recorded:                        
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   $ 71,000     $ 71,000     $ 19,000  
                         
Total Impaired Loans:                        
Residential Real Estate   $ 101,000     $ 103,000     $ 19,000  
Total   $ 101,000     $ 103,000     $ 19,000  

 

  18  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

NOTE 5 LOANS and allowance for loan losses (continued)

 

    Three Months Ended     Six Months Ended  
June 30, 2018 (Unaudited)   Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
Loans With No Related Allowance Recorded:                                
Residential Real Estate   $ 120,000     $ 1,000     $ 52,000     $ 3,000  
Total Loans With No Related Allowance Recorded   $ 120,000     $ 1,000   $ 52,000     $ 3,000  
                                 
Loans With an Allowance Recorded:                                
Residential Real Estate   $ -     $ -     $ -     $ -  
                                 
Total Impaired Loans:                                
Residential Real Estate   $ 120,000     $ 1,000     $ 52,000     $ 3,000  
Total   $ 120,000     $ 1,000     $ 52,000     $ 3,000  

 

June 30, 2017 (Unaudited)   Average Recorded Investment    

Interest

Income Recognized

    Average Recorded Investment     Interest Income Recognized  
Loans With No Related Allowance Recorded:                                
Residential Real Estate   $ 74,000     $         -     $ 115,000     $ 1,000  
Total Loans With No Related Allowance Recorded   $ 74,000     $ -     $ 115,000     $ 1,000  
                                 
Loans With an Allowance Recorded:                                
Residential Real Estate   $ -     $ -     $ -     $ -  
                                 
Total Impaired Loans:                                
Residential Real Estate   $ 74,000     $ -     $ 115,000     $ 1,000  
Total   $ 74,000     $ -     $ 115,000     $ 1,000  

 

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 six months ended June 30, 2018 and 2017.

 

  19  

 

 

CENTRAL FEDERAL Bancshares, Inc.

notes to consolidated financial statements

 

Note 6 foreclosed assets

 

Activity in foreclosed assets is as follows:

 

    Six Months Ended June 30,  
    2018     2017  
    (Unaudited)  
Balance Beginning of Period   $ -     $ 26,000  
Additions     71,000       82,000  
Proceeds from Sale, Net     -       (130,000 )
Gain (Loss) on Sale     -       22,000  
Balance at End of Period   $ 71,000     $ -  

 

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 statements of financial condition.

 

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

 

    June 30, 2018     December 31, 2017  
    (Unaudited)        
Commitments to Extend Credit   $ 5,405,000     $ 3,759,000  
Standby Letters of Credit             -  
Total   $ 5,405,000     $ 3,759,000  
Range of Rates on Fixed Rate Commitments     2.25-6.25 %     2.00-6.00 %

 

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.

 

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.

 

  20  

 

 

CENTRAL FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Central Federal was not required to perform on any financial guarantees and did not incur any losses on its commitments for the six months ended June 30, 2018.

 

note 8 income taxes

 

At June 30, 2018, the Company had approximately $300,000 of net operating loss carry forward that will begin to expire in 2036. 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 subject to certain annual limitations with unused contributions carried forward five years subject to the same annual limitations.

 

At June 30, 2018 and December 31, 2017, the Company had recorded a valuation allowance against the entire deferred tax asset related to this contribution carryforward. The Company has determined it is more likely than not that this deferred tax asset will not be realized.

 

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.

 

As of June 30, 2018, 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 June 30, 2018 and December 31, 2017, that Central Federal met all its capital adequacy requirements.

 

  21  

 

 

CENTRAL FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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