UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-25045

CENTRAL FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

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

2923 Smith Road, Fairlawn, Ohio 44333

(330) 666-7979

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2009, there were 4,100,337 shares of the registrant’s Common Stock outstanding.

 

 

CENTRAL FEDERAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2009
INDEX

		Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008			3
Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008			4
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2009			5
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2009 and 2008			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008			7
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 4T. Controls and Procedures			34
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 6. Exhibits			36
Signatures			37
Exhibit 3.4
Exhibit 11.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

CENTRAL FEDERAL CORPORATION

PART I. Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

		June 30,				December 31,
		2009				2008
		(unaudited)
ASSETS
Cash and cash equivalents		$	12,510			$	4,177
Securities available for sale			22,700				23,550
Loans held for sale			5,995				284
Loans, net of allowance of $3,996 and $3,119			231,707				233,922
Federal Home Loan Bank stock			2,109				2,109
Loan servicing rights			97				112
Premises and equipment, net			5,032				5,246
Bank owned life insurance			3,956				3,892
Deferred tax asset			2,064				1,598
Accrued interest receivable and other assets			2,232				2,891
		$	288,402			$	277,781
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	14,960			$	14,557
Interest bearing			199,958				193,090
Total deposits			214,918				207,647
Federal Home Loan Bank advances			33,942				29,050
Advances by borrowers for taxes and insurance			72				167
Accrued interest payable and other liabilities			2,265				2,687
Subordinated debentures			5,155				5,155
Total liabilities			256,352				244,706
Stockholders’ equity
Preferred stock, Series A, $.01 par value; $7,225 aggregate liquidation value, 1,000,000 shares authorized; 7,225 shares issued, 2009 and 2008			6,998				6,989
Common stock, $.01 par value; shares authorized; 12,000,000 in 2009 and 6,000,000 in 2008, shares issued; 4,658,870 in 2009 and 4,660,070 in 2008			47				47
Common stock warrants			217				217
Additional paid-in capital			27,480				27,455
Retained earnings			52				1,262
Accumulated other comprehensive income			501				350
Treasury stock, at cost; 558,533 shares, 2009 and 2008			(3,245	)			(3,245	)
Total stockholders’ equity			32,050				33,075
		$	288,402			$	277,781

See accompanying notes to consolidated financial statements.

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Interest and dividend income
Loans, including fees		$	3,326			$	3,732			$	6,723			$	7,709
Securities			288				338				585				693
Federal Home Loan Bank stock dividends			23				27				47				53
Federal funds sold and other			7				3				19				4
			3,644				4,100				7,374				8,459
Interest expense
Deposits			1,222				1,450				2,581				3,225
Federal Home Loan Bank advances and other debt			296				358				551				798
Subordinated debentures			53				73				109				173
			1,571				1,881				3,241				4,196
Net interest income			2,073				2,219				4,133				4,263
Provision for loan losses			1,357				260				1,907				484
Net interest income after provision for loan losses			716				1,959				2,226				3,779
Noninterest income
Service charges on deposit accounts			79				87				161				169
Net gains on sales of loans			179				61				331				97
Loan servicing fees, net			9				7				18				18
Net gain on sales of securities			—				21				—				44
Earnings on bank owned life insurance			32				34				64				63
Other			2				7				13				17
			301				217				587				408
Noninterest expense
Salaries and employee benefits			1,097				997				2,143				2,045
Occupancy and equipment			139				112				284				218
Data processing			144				140				294				277
Franchise taxes			92				84				178				166
Professional fees			105				95				442				165
Director fees			17				34				51				68
Postage, printing and supplies			53				44				112				95
Advertising and promotion			2				15				14				27
Telephone			28				22				52				44
Loan expenses			10				1				18				8
Foreclosed assets, net			—				9				—				8
Depreciation			117				176				236				351
FDIC Premiums			271				8				336				13
Other			107				129				202				227
			2,182				1,866				4,362				3,712
Income (loss) before income taxes			(1,165	)			310				(1,549	)			475
Income tax expense (benefit)			(403	)			86				(541	)			127
Net income (loss)			(762	)			224				(1,008	)			348
Preferred stock dividends and accretion of unearned discount on preferred stock			(102	)			—				(203	)			—
Net income (loss) available to common stockholders		$	(864	)		$	224			$	(1,211	)		$	348
Earnings (loss) per common share:
Basic		$	(0.21	)		$	0.05			$	(0.30	)		$	0.08
Diluted		$	(0.21	)		$	0.05			$	(0.30	)		$	0.08

See accompanying notes to consolidated financial statements.

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands except per share data)

(Unaudited)

																						Accumulated
										Common				Additional								Other								Total
		Preferred				Common				Stock				Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Stock				Stock				Warrants				Capital				Earnings				Income				Stock				Equity
Balance at January 1, 2009		$	6,989			$	47			$	217			$	27,455			$	1,262			$	350			$	(3,245	)		$	33,075
Comprehensive loss:
Net loss																			(1,008	)											(1,008	)
Other comprehensive income																							151								151
Total comprehensive loss																															(857	)
Preferred stock offering costs			(13	)																											(13	)
Accretion of unearned discount on preferred stock			22																(22	)											—
Release of 6,925 stock based incentive plan shares															29																29
Forfeiture of 1,200 stock based incentive plan shares																			1												1
Tax benefits from dividends on unvested stock based incentive plan shares															1																1
Tax effect from vesting of stock based incentive plan shares															(20	)															(20	)
Stock option expense															15																15
Preferred stock dividends																			(181	)											(181	)
Balance at June 30, 2009		$	6,998			$	47			$	217			$	27,480			$	52			$	501			$	(3,245	)		$	32,050

See accompanying notes to consolidated financial statements.

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income (loss)		$	(762	)		$	224			$	(1,008	)		$	348
Change in net unrealized gain (loss) on securities available for sale			(37	)			(487	)			229				(72	)
Less: Reclassification adjustment for gains later recognized in net income			—				(21	)			—				(44	)
Net unrealized gain (loss)			(37	)			(508	)			229				(116	)
Tax effect			13				174				(78	)			40
Other comprehensive income (loss)			(24	)			(334	)			151				(76	)
Comprehensive income (loss)		$	(786	)		$	(110	)		$	(857	)		$	272

See accompanying notes to consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

		Six months ended
		June 30,
		2009				2008
Cash flows from operating activities		$	(4,808	)		$	(1,658	)
Cash flows from investing activities
Available-for-sale securities:
Sales			—				1,053
Maturities, prepayments and calls			3,157				7,121
Purchases			(2,031	)			(5,963	)
Loan originations and payments, net			340				(916	)
Purchase of FHLB stock			—				(65	)
Additions to premises and equipment			(22	)			(38	)
Proceeds from the sale of premises and equipment			1				2
Proceeds from the sale of foreclosed assets			28				86
Net cash from investing activities			1,473				1,280
Cash flows from financing activities
Net change in deposits			7,250				4,564
Net change in short-term borrowings from the FHLB and other debt			(5,850	)			(12,675	)
Proceeds from FHLB advances and other debt			17,942				11,000
Repayments on FHLB advances and other debt			(7,200	)			(1,000	)
Net change in advances by borrowers for taxes and insurance			(95	)			(60	)
Cash dividends paid on common stock			(205	)			(445	)
Cash dividends paid on preferred stock			(161	)			—
Costs associated with issuance of preferred stock			(13	)			—
Repurchase of common stock			—				(1,293	)
Net cash from financing activities			11,668				91
Net change in cash and cash equivalents			8,333				(287	)
Beginning cash and cash equivalents			4,177				3,894
Ending cash and cash equivalents		$	12,510			$	3,607
Supplemental cash flow information:
Interest paid		$	3,265			$	4,181
Income taxes paid			—				30
Supplemental noncash disclosures:
Transfers from loans to repossessed assets		$	174			$	123
Loans issued to finance the sale of repossessed assets			162				—

See accompanying notes to consolidated financial statements.

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The consolidated financial statements include Central Federal Corporation and its wholly owned subsidiaries, CFBank and Ghent Road, Inc. (together referred to as the Company). The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) and in compliance with U.S. generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.

In the opinion of the management of the Company, the accompanying consolidated financial statements as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008 include all adjustments necessary for a fair presentation of the financial condition and the results of operations for those periods. Management has evaluated events occurring subsequent to the balance sheet date through August 14, 2009 (the date on which the financial statements were issued) and determined no items that require adjustment in or additional disclosure to the financial statements. The financial performance reported for the Company for each of the three and six months ended June 30, 2009 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company’s Annual Report to Stockholders and Form 10-K for the period ended December 31, 2008. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements contained in the Company’s 2008 Annual Report that was filed as Exhibit 13.1 to the Form 10-K. The Company has consistently followed those policies in preparing this Form 10-Q.

Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and stock warrants.

		Three months ended June 30,								Six months ended June 30,
		2009				2008				2009				2008
Basic
Net income (loss)		$	(762	)		$	224			$	(1,008	)		$	348
Less: Preferred stock dividends and accretion of unearned discount on preferred stock			(102	)			—				(203	)			—
Net income (loss) available to common stockholders		$	(864	)		$	224			$	(1,211	)		$	348
Weighted average common shares outstanding			4,099,723				4,253,958				4,099,828				4,349,160
Basic earnings (loss) per common share		$	(0.21	)		$	0.05			$	(0.30	)		$	0.08
Diluted
Net income (loss) available to common stockholders		$	(864	)		$	224			$	(1,211	)		$	348
Weighted average common shares outstanding for basic earnings per common share			4,099,723				4,253,958				4,099,828				4,349,160
Add: Dilutive effects of assumed exercises of stock options			—				4,154				—				2,290
Add: Dilutive effects of assumed exercises of warrants to purchase common stock			—				—				—				—
Average shares and dilutive potential common shares			4,099,723				4,258,112				4,099,828				4,351,450
Diluted earnings (loss) per common share		$	(0.21	)		$	0.05			$	(0.30	)		$	0.08

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The following potential average common shares were anti-dilutive and not considered in computing diluted earnings (loss) per common share because, with respect to the three and six months ended June 30, 2009, the Company had a loss from continuing operations, and, with respect to the three and six months ended June 30, 2008, the exercise price of the options was greater than the average stock price for these periods.

		Three months ended June 30,								Six months ended June 30,
		2009				2008				2009				2008
Stock options			414,177				296,400				415,410				295,511
Stock warrants			336,568				—				336,568				—

Adoption of New Accounting Standards:

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141 (revised 2007), Business Combinations (FAS 141(R)), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption was prohibited. There was no impact on the Company’s consolidated financial statements upon adoption.

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160), which changed the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. FAS 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption was prohibited. There was no impact on the Company’s consolidated financial statements upon adoption.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (FAS 161). FAS 161 amended and expanded the disclosure requirements of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for derivative instruments and hedging activities. FAS 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of FAS 161 did not have a material impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that should be included in computing earnings per share using the two-class method under FAS No. 128, Earnings per Share. The FSP is effective for the Company’s financial statements for the year beginning on January 1, 2009 and all prior-period earnings per share data is adjusted retrospectively. The impact of the adoption of the FSP on the Company’s earnings per common share was less than $.01 in each of the periods presented.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP amends and clarifies FAS No. 141 (revised 2007), Business Combinations, to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of the FSP did not have an impact on the Company’s financial condition and results of operations.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ended after March 15, 2009. The adoption of this FSP by the Company on April 1, 2009 did not have a material impact on its results of operations or financial position.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. It is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this FSP by the Company at June 30, 2009 did not have a material impact on its results of operations or financial position.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. Adoption of the FSP by the Company at June 30, 2009 did not have a material impact on its results of operations or financial position as it only required disclosures which are included in Note 4.

In May 2009, the FASB issued FAS No. 165, Subsequent Events, which sets forth requirements for subsequent events including establishing the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions, and the disclosures that an entity shall make about the events or transactions. FAS 165 is effective for interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively. Adoption of FAS 165 did not have a material impact on the Company’s financial condition and results of operations.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In June 2009, the FASB issued FAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (FAS 166). This FAS amends FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and removes the concept of qualifying special-purpose entity, modifies the financial-components approach and limits circumstances in which a transferor derecognizes a portion or component of a financial asset when the transferor has a continuing involvement with the financial asset. It clarifies the principle of whether a transferor and all the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. FAS 166 is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of FAS 166 is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). This FAS requires an enterprise to perform an analysis to determine whether the enterprise’s variable purpose interest or interests give it a controlling financial interest in a variable interest entity, and requires ongoing reassessments of whether the entity is the primary beneficiary of a variable interest entity. FAS 167 is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of FAS 167 is not expected to have a material effect on the Company’s consolidated financial statements.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 2 – SECURITIES

The following table summarizes the amortized cost and fair value of available-for-sale securities at June 30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains and losses:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
June 30, 2009
Issued by U.S. government-sponsored agencies:
Mortgage-backed securities — residential		$	5,846			$	314			$	—			$	6,160
Collateralized mortgage obligations			14,138				464				(2	)			14,600
Collateralized mortgage obligations issued by private issuers			1,957				—				(17	)			1,940
Total		$	21,941			$	778			$	(19	)		$	22,700

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
December 31, 2008
Issued by U.S. government-sponsored agencies:
Mortgage-backed securities — residential		$	6,671			$	254			$	(3	)		$	6,922
Collateralized mortgage obligations			16,349				289				(10	)			16,628
Total		$	23,020			$	543			$	(13	)		$	23,550

At June 30, 2009 there were no debt securities contractually due at a single maturity date. The amortized cost and fair value, respectively, of securities available for sale which do not have a single maturity date totaled $21,942 and $22,700, respectively.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 2 – SECURITIES (continued)

The following table summarizes available-for-sale securities with unrealized losses at June 30, 2009 and December 31, 2008 by aggregated major security type and length of time in a continuous unrealized loss position:

		Less than 12 Months								12 Months or More								Total
June 30, 2009						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
Issued by U.S. government—sponsored agencies:
Collateralized mortgage obligations		$	1,940			$	(2	)		$	—			$	—			$	1,940			$	(2	)
Collateralized mortgage obligations issued by private issuers			969			$	(17	)			—				—				969				(17	)
Total temporarily impaired		$	2,909			$	(19	)		$	—			$	—			$	2,909			$	(19	)

		Less than 12 Months								12 Months or More								Total
December 31, 2008						Unrealized								Unrealized								Unrealized
Description of Securities		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
Issued by U.S. government—sponsored agencies:
Mortgage-backed securities — residential		$	568			$	(3	)		$	—			$	—			$	568			$	(3	)
Collateralized mortgage obligations			165				—				1,013				(10	)			1,178				(10	)
Total temporarily impaired		$	733			$	(3	)		$	1,013			$	(10	)		$	1,746			$	(13	)

The following table summarizes the proceeds from sales of available-for-sale securities and the realized gains and losses for the three and six months ended June 30, 2009 and 2008 as follows:

		Three months ended June 30,								Six months ended June 30,
		2009				2008				2009				2008
Proceeds		$	—			$	1,030			$	—			$	1,053
Gross gains			—				21				—				44
Gross losses			—				—				—				—

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 2 – SECURITIES (continued)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115). However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets (EITF 99-20). The Company currently does not have any securities which are evaluated using the model outlined in EITF 99-20.

In determining OTTI under the FAS 115 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2009, the Company’s security portfolio consisted of $22,700 of securities, of which $2,909 were in an unrealized loss position. The majority of unrealized losses, $17, is related to one private label collateralized mortgage obligation. This non-agency collateralized mortgage obligation was rated AAA at purchase and is not within the scope of EITF 99-20. The Company monitors to insure it has adequate credit support and, as of June 30, 2009, the Company believes there is no OTTI. The remaining $2 of unrealized losses is related to collateralized mortgage obligations issued by Freddie Mac, a U.S. government-sponsored agency which the government has affirmed its commitment to support. Because the decline in fair value of both the agency and non-agency securities is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these collateralized mortgage obligations and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 3 – LOANS

		June 30,				December 31,
		2009				2008
Commercial		$	40,960			$	40,945
Real estate:
Single-family residential			28,810				28,884
Multi-family residential			40,303				41,495
Commercial			100,845				99,652
Consumer			25,060				26,429
Subtotal			235,978				237,405
Less: Net deferred loan fees			(275	)			(364	)
Allowance for loan losses			(3,996	)			(3,119	)
Loans, net		$	231,707			$	233,922

Real estate loans include $3,200 and $3,052 in construction loans at June 30, 2009 and December 31, 2008.

Activity in the allowance for loan losses was as follows.

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Beginning balance		$	3,528			$	2,729			$	3,119			$	2,684
Provision for loan losses			1,357				260				1,907				484
Loans charged-off			(893	)			(46	)			(1,036	)			(226	)
Recoveries			4				4				6				5
Ending balance		$	3,996			$	2,947			$	3,996			$	2,947

Individually impaired loans were as follows.

		June 30,				December 31,
		2009				2008
Period-end loans with no allocated allowance for loan losses		$	—			$	—
Period-end loans with allocated allowance for loan losses			5,933				2,257
Total		$	5,933			$	2,257
Amount of the allowance for loan losses allocated		$	1,867			$	514

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 3 – LOANS (continued)

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Average of individually impaired loans during the period		$	5,675			$	1,694			$	3,900			$	1,269
Interest income recognized during impairment			—				—				—				—
Cash-basis interest income recognized			—				—				—				—

Nonaccrual loans and loans past due over 90 days still on accrual were as follows:

		June 30,				December 31,
		2009				2008
Loans past due over 90 days still on accrual		$	302			$	348
Nonaccrual loans:
Commercial			349				646
Single-family residential real estate			75				63
Multi-family residential real estate			—				1,264
Commercial real estate			5,084				—
Home equity lines of credit			1,478				60
Other consumer			—				31
Total nonaccrual loans		$	6,986			$	2,064

Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance single-family mortgage and consumer loans that are collectively evaluated for impairment and individually classified impaired loans.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 4 – FAIR VALUE

FAS No. 157, Fair Value Measurements (FAS 157), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

		Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
		Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
		Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

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

The fair value of derivatives is based on the present value of future cash flows using the prevailing interest rate curve. Our derivative instruments consist of interest-rate swaps. Significant fair value inputs can generally be verified and do not typically involve significant judgments by management. (Level 2 inputs.)

The fair value of servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness. (Level 2 inputs.)

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

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 4 – FAIR VALUE (continued)

Assets and Liabilities Measured on a Recurring Basis

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

		Fair Value
		Measurements at
		June 30, 2009
		Significant Other
		Observable Inputs
		(Level 2)
Assets:
Securities available for sale:
Issued by U.S. government-sponsored agencies:
Mortgage-backed securities — residential		$	6,160
Collateralized mortgage obligations			14,600
Collateralized mortgage obligations issued by private issuers			1,940
Interest-rate swaps			499
Liabilities:
Interest-rate swaps		$	499

		Fair Value
		Measurements at
		December 31, 2008
		Using Significant
		Other Observable
		Inputs
		(Level 2)
Assets:
Securities available for sale:
Mortgage-backed securities — residential		$	6,922
Collateralized mortgage obligations			16,628
Interest-rate swaps			929
Liabilities:
Interest-rate swaps		$	929

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 4 – FAIR VALUE (continued)

Assets Measured on a Non-Recurring Basis

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

		Fair Value Measurements at June 30, 2009 Using
		Significant Other				Significant
		Observable Inputs				Unobservable Inputs
		(Level 2)				(Level 3)
Loan servicing rights		$	30			$	—
Impaired loans			—				4,066

		Fair Value Measurements at December 31, 2008 Using
		Significant Other				Significant
		Observable Inputs				Unobservable Inputs
		(Level 2)				(Level 3)
Loan servicing rights		$	52			$	—
Impaired loans			—				1,743

At June 30, 2009, servicing rights, which are carried at the lower of cost or fair value, were written down to fair value of $30, resulting in a valuation allowance of $8. At December 31, 2008, servicing rights were written down to fair value of $52, resulting in a valuation allowance of $8. There was no charge included in earnings with respect to servicing rights for the three and six months ended June 30, 2009 or 2008.

At June 30, 2009, impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $5,933, with a valuation allowance of $1,867, resulting in an additional provision for loan losses of $848 for the three months ended June 30, 2009, and an additional provision of $1,353 for the six months ended June 30, 2009. At December 31, 2008, impaired loans had a carrying amount of $2,257, with a valuation allowance of $514. There was no impairment charge included in earnings for the three and six months ended June 30, 2008.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 4 – FAIR VALUE (continued)

The carrying amounts and estimated fair values of financial instruments at June 30, 2009 and December 31, 2008 are as follows:

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets
Cash and cash equivalents		$	12,510			$	12,510			$	4,177			$	4,177
Securities available for sale			22,700				22,700				23,550				23,550
Loans held for sale			5,995				6,050				284				287
Loans, net			231,707				236,209				233,922				239,399
FHLB stock			2,109				n/a				2,109				n/a
Accrued interest receivable			979				979				1,100				1,100
Interest-rate swaps			499				499				929				929
Financial liabilities
Deposits			(214,918	)			(216,629	)			(207,647	)			(210,052	)
FHLB advances			(33,942	)			(34,168	)			(29,050	)			(29,531	)
Subordinated debentures			(5,155	)			(5,155	)			(5,155	)			(5,155	)
Accrued interest payable			(280	)			(280	)			(301	)			(301	)
Interest-rate swaps			(499	)			(499	)			(929	)			(929	)

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. Fair value of loans held for sale is based on binding quotes from third party investors. For fixed rate loans and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (entry price). The fair value for fixed rate deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 5 – FEDERAL HOME LOAN BANK (FHLB) ADVANCES

Advances from the FHLB were as follows:

		June 30, 2009				December 31, 2008
Maturity January 2009 at 0.54% floating rate		$	—			$	5,850
Maturities September 2009 thru May 2014, fixed at rates from 1.90% to 4.96%, averaging 2.98% at June 30, 2009; Maturities February 2009 thru July 2011, fixed at rates from 2.48% to 5.60%, averaging 3.98% at December 31, 2008			33,942				23,200
Total		$	33,942			$	29,050

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.

The advances were collateralized as follows:

		June 30, 2009				December 31, 2008
First mortgage loans under a blanket lien arrangement		$	25,481			$	26,285
Second mortgage loans			592				462
Multi-family mortgage loans			16,404				17,421
Home equity lines of credit			16,137				19,271
Commercial real estate loans			61,030				61,818
Securities			12,352				13,508
Total		$	131,996			$	138,765

Based on this collateral and CFBank’s holdings of FHLB stock, CFBank is eligible to borrow up to a total of $56,014 from the FHLB at June 30, 2009.

Payment information

Required payments over the next five years are:
June 30, 2010		$	10,000
June 30, 2011			5,200
June 30, 2012			8,742
June 30, 2013			—
June 30, 2014			10,000
Total		$	33,942

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 6 – STOCK-BASED COMPENSATION

The Company has three stock-based compensation plans (the Plans), as described below, under which awards have been or may be issued. Total compensation cost that has been charged against income for those Plans was $12 and $44 respectively for the three and six months ended June 30, 2009 and $40 and $73 respectively for the three and six months ended June 30 2008. The total income tax benefit was $2 and $10 respectively for the three and six months ended June 30, 2009 and $12 and $22 respectively for the three and six months ended June 30 2008.

The Plans, which are stockholder-approved, provide for stock option grants and restricted stock awards to directors, officers and employees. The 1999 Stock-Based Incentive Plan, which expired July 13, 2009, provided 193,887 shares for stock option grants and 77,554 shares for restricted stock awards. The 2003 Equity Compensation Plan (2003 Plan) as amended and restated, provided an aggregate of 500,000 shares for stock option grants and restricted stock awards, of which up to 150,000 shares could be awarded in the form of restricted stock awards. The 2009 Equity Compensation Plan (2009 Plan), which was approved by stockholders on May 21, 2009, replaced the 2003 Plan and provides 1,000,000 shares, plus any remaining shares available to grant or that are later forfeited or expire under the 2003 Plan, that may be issued as stock option grants, stock appreciation rights or restricted stock awards.

The Plans permit the grant of stock options to directors, officers and employees for up to 1,693,887 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its stockholders. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally have vesting periods ranging from one to five years, and are exercisable for ten years from the date of grant.

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

The fair value of the options granted during the three and six month periods ended June 30, 2009 and 2008 was determined using the following weighted-average assumptions as of the grant dates.

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Risk-free interest rate			n/a				3.10	%			1.64	%			2.46	%
Expected term (years)			n/a				6				7				6
Expected stock price volatility			n/a				22	%			27	%			23	%
Dividend yield			n/a				4.30	%			3.63	%			4.87	%

CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

NOTE 6 – STOCK-BASED COMPENSATION (continued)

A summary of stock option activity in the Plans for the six months ended June 30, 2009 follows:

		Six months ended June 30, 2009
										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Intrinsic
		Shares				Exercise Price				Term (Years)				Value
Options outstanding, beginning of period			416,377			$	8.47
Granted			800				2.75
Exercised			—				—
Forfeited or expired			(3,000	)			3.33
Options outstanding, end of period			414,177			$	8.50				5.9			$	—
Options exercisable, end of period			285,657			$	10.70				4.5			$	—