UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER 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 (State or Other Jurisdiction of Incorporation or Organization)		34-1877137 (I.R.S. Employer Identification No.)
2923 Smith Road, Fairlawn, Ohio (Address of Principal Executive Offices)		44333 (Zip Code)

(330) 666-7979
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share (Title of Class)		Nasdaq® Capital Market (Name of Exchange on which Registered)

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act YES o NO þ

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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. (Check one):

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 Act). YES o NO þ

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates as of June 30, 2009 was $9.5 million based upon the closing price as reported on the Nasdaq^® Capital Market for that date.

As of March 15, 2010, there were 4,099,587 shares of the registrant’s Common Stock outstanding.

Portions of the registrant’s Rule 14a-3(b) Annual Report to Stockholders for its fiscal year ended December 31, 2009, which was filed with the Securities and Exchange Commission (the Commission) on or about March 29, 2010, and its Proxy Statement for the 2010 Annual Meeting of Stockholders to be held on May 20, 2010, which will be filed with the Commission on or about April 5, 2010, are incorporated herein by reference into Parts II and III, respectively, of this Form 10-K.

 

 

INDEX

		Page
PART I
Item 1. Business			4
Item 1A. Risk Factors			37
Item 2. Properties			41
Item 3. Legal Proceedings			41
Item 4. Reserved			41
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			41
Item 6. Selected Financial Data			42
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation			42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			42
Item 8. Financial Statements and Supplementary Data			42
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			42
Item 9A(T). Controls and Procedures			43
Item 9B. Other Information			43
PART III
Item 10. Directors, Executive Officers and Corporate Governance			43
Item 11. Executive Compensation			45
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters			45
Item 13. Certain Relationships and Related Transactions, and Director Independence			46
Item 14. Principal Accounting Fees and Services			46
PART IV
Item 15. Exhibits, Financial Statement Schedules			46
SIGNATURES			47
EXHIBIT INDEX			48

Forward-Looking Statements

Statements in this Form 10-K that are not statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per common share, capital structure and other financial items; (2) plans and objectives of the Company, as defined below, or its management or Board of Directors; (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as “estimate,” “strategy,” “may,” “believe,” “anticipate,” “expect,” “predict,” “will,” “intend,” “plan,” “targeted,” and the negative of these terms, or similar expressions, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Various risks and uncertainties may cause actual results to differ materially from those indicated by our forward-looking statements. The following factors could cause such differences:

•

changes in general economic conditions and economic conditions in the markets we serve, any of which may affect, among other things, our level of nonperforming assets, charge-offs, and provision for loan loss expense;

•

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

•

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

•

changes in tax laws, rules and regulations;

•

various monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS);

•

competition with other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions;

•

our ability to grow our core businesses;

•

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

•

unanticipated litigation, claims or assessments; and

•

management’s ability to manage these and other risks.

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

PART I

Item 1.		Business.

General

Central Federal Corporation (the Holding Company), which was formerly known as Grand Central Financial Corp., was organized as a Delaware corporation in September 1998 as the holding company for CFBank in connection with CFBank’s conversion from a mutual to stock form of organization. CFBank is a community-oriented savings institution which was originally organized in 1892, and was formerly known as Central Federal Savings and Loan Association of Wellsville and more recently as Central Federal Bank. As used herein, the terms “we,” “us,” “our” and the “Company” refer to Central Federal Corporation and its subsidiaries, unless the context indicates to the contrary. As a savings and loan holding company, we are subject to regulation by the OTS. Reserve Mortgage Services, Inc. (Reserve), a wholly owned subsidiary of CFBank from October 2004 until May 12, 2005 when it was merged into CFBank, was acquired in October 2004 to expand CFBank’s mortgage services business. Central Federal Capital Trust I (the Trust), a wholly owned subsidiary of the Holding Company, was formed in 2003 to raise additional funding for the Company. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Ghent Road, Inc., a wholly owned subsidiary of the Holding Company, was formed in 2006 and owns land adjacent to CFBank’s Fairlawn, Ohio office. Smith Ghent LLC, a wholly owned subsidiary of the Holding Company owns the office building and land in Fairlawn which is leased to CFBank. The Holding Company previously was a one-third owner in Smith Ghent LLC, and acquired the remaining two-thirds interest on October 6, 2009. Currently, we do not transact any material business other than through CFBank. At December 31, 2009, assets totaled $273.7 million and stockholders’ equity totaled $23.2 million.

CFBank is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. Our business model emphasizes personalized service, clients’ access to decision makers, solution-driven lending and quick execution, efficient use of technology and the convenience of online internet banking, remote deposit, corporate cash management and telephone banking. We attract retail and business deposits from the general public and use the deposits, together with borrowings and other funds, primarily to originate commercial and commercial real estate loans, single-family and multi-family residential mortgage loans and home equity lines of credit. We also invest in consumer loans, construction and land loans and securities. In 2003, we began originating more commercial, commercial real estate and multi-family mortgage loans than in the past as part of our expansion into business financial services. The majority of our customers are consumers, small businesses and small business owners. Revenues are derived principally from the generation of interest and fees on loans originated and, to a lesser extent, interest and dividends on securities. Our primary sources of funds are retail and business deposit accounts and certificates of deposit, brokered certificates of deposit and, to a lesser extent, principal and interest payments on loans and securities, Federal Home Loan Bank (FHLB) advances, other borrowings and proceeds from the sale of loans. Our principal market area for loans and deposits includes the following Ohio counties: Summit County through our office in Fairlawn, Ohio; Franklin County through our office in Worthington, Ohio; and Columbiana County through our offices in Calcutta and Wellsville, Ohio. We originate commercial and conventional real estate loans and business loans primarily throughout Ohio.

Market Area and Competition

Our primary market area is a competitive market for financial services and we face competition both in making loans and in attracting deposits. Direct competition comes from a number of financial institutions operating in our market area, many with a statewide or regional presence, and in some cases, a national presence. Many of these financial institutions are significantly larger and have greater financial resources than we do. Competition for loans and deposits comes from savings institutions, mortgage banking companies, commercial banks, credit unions, brokerage firms and insurance companies.

Lending Activities

Loan Portfolio Composition. The loan portfolio consists primarily of commercial, commercial real estate and multi-family mortgage loans and, to a lesser degree, mortgage loans secured by single-family residences and consumer loans. At December 31, 2009, gross loans receivable totaled $238.5 million. Commercial, commercial real estate and multi-family mortgage loans totaled $181.8 million and represented 76.2% of the gross loan portfolio at December 31, 2009 compared to 76.7% of the gross loan portfolio at December 31, 2008 and 74.6% at December 31, 2007. The slight decrease in the percentage of commercial, commercial real estate and multi-family mortgage loans in the portfolio during the current year was due to management’s decision to reduce the origination of loans to reflect the uncertainty with the economy and to prudently manage the Company’s capital. Portfolio single-family residential mortgage loans totaled $30.6 million and represented 12.9% of total gross loans at year-end 2009, compared to 12.2% of total gross loans at year-end 2008 and 13.3% at year-end 2007. The remainder of the portfolio consisted of consumer loans, which totaled $26.0 million, or 10.9% of gross loans receivable at year-end 2009.

The types of loans originated are subject to federal and state laws and regulations. Interest rates charged on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. In turn, these factors are affected by, among other things, economic conditions, fiscal policies of the federal government, monetary policies of the Federal Reserve Board and legislative tax policies.

The following table sets forth the composition of the loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.

		At December 31,
		2009								2008								2007								2006								2005
						Percent								Percent								Percent								Percent								Percent
		Amount				of Total				Amount				of Total				Amount				of Total				Amount				of Total				Amount				of Total
		(Dollars in thousands)
Real estate mortgage loans:
Single-family		$	30,636				12.85	%		$	28,884				12.16	%		$	31,082				13.31	%		$	30,209				16.15	%		$	23,627				18.81	%
Multi-family			37,732				15.82	%			41,495				17.48	%			43,789				18.75	%			47,247				25.25	%			30,206				24.04	%
Commercial real estate			101,350				42.49	%			99,652				41.98	%			95,088				40.71	%			47,474				25.37	%			25,937				20.64	%
Total real estate mortgage loans			169,718				71.16	%			170,031				71.62	%			169,959				72.77	%			124,930				66.77	%			79,770				63.49	%
Consumer loans:
Home equity loans			1,159				0.49	%			631				0.27	%			604				0.26	%			865				0.46	%			734				0.58	%
Home equity lines of credit			18,938				7.94	%			19,708				8.30	%			18,726				8.02	%			22,148				11.84	%			23,852				18.98	%
Automobile			4,898				2.05	%			5,084				2.14	%			7,957				3.41	%			6,448				3.45	%			4,237				3.37	%
Other			1,035				0.43	%			1,006				0.42	%			961				0.41	%			785				0.42	%			717				0.57	%
Total consumer loans			26,030				10.91	%			26,429				11.13	%			28,248				12.10	%			30,246				16.17	%			29,540				23.50	%
Commercial loans			42,755				17.93	%			40,945				17.25	%			35,334				15.13	%			31,913				17.06	%			16,347				13.01	%
Total loans receivable			238,503				100.00	%			237,405				100.00	%			233,541				100.00	%			187,089				100.00	%			125,657				100.00	%
Less:
Net deferred loan fees			(308	)							(364	)							(382	)							(285	)							(136	)
Allowance for loan losses			(7,090	)							(3,119	)							(2,684	)							(2,109	)							(1,495	)
Loans receivable, net		$	231,105							$	233,922							$	230,475							$	184,695							$	124,026

Single-family residential real estate loans include $1,064, $180, $1,445, $429, and $1,027 in construction loans at year-end 2009, 2008, 2007, 2006, and 2005, respectively.

Commercial real estate loans include $4,759, $2,872, $4,739, $3,788, and $439 in construction loans at year-end 2009, 2008, 2007, 2006 and 2005, respectively.

Multi-family real estate loans include $237 in construction loans at year-end 2006.

Loan Maturity. The following table shows the remaining contractual maturity of the loan portfolio at December 31, 2009. Demand loans and other loans having no stated schedule of repayments or no stated maturity are reported as due within one year. The table does not include potential prepayments or scheduled principal amortization.

		At December 31, 2009
		Real Estate
		Mortgage				Consumer				Commercial				Total Loans
		Loans(1)				Loans				Loans				Receivable
		(Dollars in thousands)
Amounts due:
Within one year		$	16,582			$	5,080			$	27,374			$	49,036
After one year:
More than one year to three years			29,265				3,231				3,873				36,369
More than three years to five years			16,604				2,236				4,860				23,700
More than five years to 10 years			73,428				1,397				5,680				80,505
More than 10 years to 15 years			9,830				2,725				898				13,453
More than 15 years			24,009				11,361				70				35,440
Total due after 2010			153,136				20,950				15,381				189,467
Total amount due		$	169,718			$	26,030			$	42,755			$	238,503

The following table sets forth at December 31, 2009, the dollar amount of total loans receivable contractually due after December 31, 2010, and whether such loans have fixed interest rates or adjustable interest rates.

		Due after December 31, 2010
		Fixed				Adjustable				Total
		(Dollars in thousands)
Real estate mortgage loans(1)		$	63,114			$	90,022			$	153,136
Consumer loans			6,023				14,927				20,950
Commercial loans			4,761				10,620				15,381
Total loans		$	73,898			$	115,569			$	189,467

Origination of Loans. Lending activities are conducted through our offices. In 2003, we began originating commercial, commercial real estate and multi-family mortgage loans to take advantage of opportunities for expansion into business financial services and growth in the Fairlawn and Columbus, Ohio, markets.

CFBank participates in various loan programs offered by the Small Business Administration (SBA) enabling us to provide our customers and small business owners in our markets with access to funding to support their businesses, as well as reduce credit risk associated with these loans. SBA loans totaled $3.0 million at December 31, 2009. Individual loans include SBA guarantees of up to 90%. We also participate in the State of Ohio’s GrowNOW program, which provides small business borrowers with a 3% interest rate reduction on small business loans funded through deposits from the State of Ohio at CFBank. At December 31, 2009, loans outstanding under the GrowNOW program totaled $2.2 million.

Commercial, commercial real estate and multi-family loans are predominantly adjustable rate loans, although we offer both fixed rate and adjustable rate loans. Fixed rates are generally limited to three to five years. CFBank also accommodates borrowers who desire fixed rate loans for longer than three to five years by utilizing interest rate swaps to protect the related fixed rate loans from changes in value due to changes in interest rates. See Note 18 to the Consolidated Financial Statements.

A majority of our single-family mortgage loan originations are fixed-rate loans. Current originations of long-term fixed-rate single-family mortgages are generally sold rather than retained in portfolio in order to minimize investment in long-term, fixed-rate assets that have the potential to expose the Company to long-term interest rate risk. Although we currently expect that most of the long-term fixed-rate mortgage loan originations will continue to be sold, primarily on a servicing-released basis, a portion of the loans may be retained for portfolio within our interest rate risk and profitability guidelines.

Single-Family Mortgage Lending. A significant lending activity has been the origination of permanent conventional mortgage loans secured by single-family residences located within and outside of our primary market area. Loan originations are obtained from our loan officers and their contacts with the local real estate industry, existing or past customers, members of the local communities, and to a lesser extent through telemarketing and purchased leads. We offer both fixed-rate and adjustable-rate mortgage (ARM) loans with maturities up to 30 years, priced competitively with current market rates. We offer several ARM loan programs with terms of up to 30 years and interest rates that adjust with a maximum adjustment limitation of 2.0% per year and a 6.0% lifetime cap. The interest rate adjustments on ARM loans currently offered are indexed to a variety of established indices and these loans do not provide for initial deep discount interest rates. We do not originate option ARM loans.

The volume and types of single-family ARM loan originations are affected by market factors such as the level of interest rates, consumer preferences, competition and the availability of funds. In recent years, demand for single-family ARM loans has been weak due to consumer preference for fixed-rate loans as a result of the low interest rate environment. Consequently, our origination of ARM loans on single-family residential properties has not been significant as compared to our origination of fixed-rate loans.

We currently sell a significant number of the single-family mortgage loans that we originate, substantially all of which are sold on a servicing released basis. All single-family mortgage loans sold are underwritten according to Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage Association (Fannie Mae) guidelines, or are underwritten directly by the investor. A high volume of residential mortgage originations is a key component for profitability. For the year ended December 31, 2009, single-family mortgage loans originated for sale totaled $66.0 million, and increased $39.0 million, or 144.4%, compared to $27.0 million in 2008. The increase in mortgage loan production was due to low mortgage interest rates in 2009, which resulted from the Federal Reserve Board reducing interest rates to historically low levels in the fourth quarter of 2008, and management’s decision to increase CFBank’s staff of professional mortgage loan originators, who have been successful in increasing this business despite the depressed condition of the housing market. The volume of refinance activity, which is very sensitive to long-term interest rates, may be a significant factor that impacts the level of residential originations in 2010. If market mortgage rates increase or the housing market deteriorates further, mortgage production, and resultant gains on sales of loans, could decrease.

At December 31, 2009, portfolio single-family mortgage loans totaled $30.6 million, or 12.9% of total loans. Our policy is to originate single-family residential mortgage loans for portfolio in amounts up to 85% of the lower of the appraised value or the purchase price of the property securing the loan, and up to 100% of the appraised value of the property if private mortgage insurance is obtained. Mortgage loans generally include due-on-sale clauses which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without our consent.

Portfolio single-family ARM loans, which totaled $11.9 million, or 38.7% of the single-family mortgage loan portfolio at December 31, 2009, generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the credit risks associated with ARM loans, but also limit the interest rate sensitivity of such loans. CFBank requires that all ARM loans held in the loan portfolio have payments sufficient to amortize the loan over its term and the loans do not have negative principal amortization.

Commercial and Multi-Family Real Estate Lending. Origination of commercial real estate and multi-family residential mortgage loans has been a significant lending activity since 2003, when we expanded into business financial services in the Fairlawn and Columbus, Ohio, markets. Commercial real estate and multi-family residential mortgage loans totaled $139.1 million, or 58.3% of gross loans at December 31, 2009. We anticipate that commercial real estate and multi-family residential mortgage lending activities may not increase, and may potentially decline in the near term as a result of the recessionary economic conditions which began in 2008 and continued in 2009. Future lending activities are subject to a number of conditions including, but not limited to, the capital position of the CFBank, the general economy, the performance of existing loans and the availability of appropriate funding sources.

We originate commercial real estate loans that are secured by properties used for business purposes, such as manufacturing facilities, office buildings or retail facilities. We also originate multi-family residential mortgage loans that are secured by apartment buildings, condominiums, and multi-family residential houses. Commercial real estate and multi-family residential mortgage loans are secured by properties generally located in our primary market area.

Underwriting policies provide that commercial real estate and multi-family residential mortgage loans may be made in amounts up to 80% of the lower of the appraised value or purchase price of the property. An independent appraisal of the property is required on all loans greater than or equal to $250,000. In underwriting commercial real estate and multi-family residential mortgage loans, we consider the appraisal value and net operating income of the property, the debt service ratio and the property owner’s and/or guarantor’s financial strength, expertise and credit history. We offer both fixed and adjustable rate loans. Fixed rates are generally limited to three to five years, at which time they convert to adjustable rate loans. CFBank also accommodates borrowers who desire fixed rate loans for longer than three to five years by utilizing interest rate swaps to protect the related fixed rate loans from changes in value due to changes in interest rates. See Note 18 to the Consolidated Financial Statements. Adjustable rate loans are tied to various market indices and generally adjust at monthly to annual time intervals. Payments on both fixed and adjustable rate loans are based on 15 to 25 year amortization periods.

Commercial real estate and multi-family residential mortgage loans are generally considered to involve a greater degree of risk than single-family residential mortgage loans. Because payments on loans secured by commercial real estate and multi-family properties are dependent on successful operation or management of the properties, repayment of commercial real estate and multi-family loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. As with single-family residential mortgage loans, adjustable rate commercial real estate and multi-family loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Additionally, adjustable rate commercial loans generally do not contain periodic and lifetime caps on interest rate changes. We seek to minimize the additional risk presented by adjustable rate commercial real estate and multi-family loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate scenarios.

Commercial real estate and multi-family residential mortgage loans also have larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans. Some of our borrowers also have more than one commercial real estate or multi-family residential loan outstanding with us. Additionally, some loans may be collateralized by junior liens. Consequently, an adverse development involving one or more loans or credit relationships can expose us to significantly greater risk of loss compared to an adverse development involving a single-family residential mortgage loan. We seek to minimize and mitigate these risks through underwriting policies which require such loans to be qualified at origination on the basis of the property’s income and debt coverage ratio and the financial strength of the property owners and/or guarantors.

Commercial Lending. Origination of commercial loans has been a significant lending activity since 2003, when we expanded into business financial services in the Fairlawn and Columbus, Ohio, markets. Commercial loans totaled $42.8 million, or 17.9% of gross loans, at December 31, 2009. We anticipate that lending activities may not increase, and may potentially decline in the near term as a result of the recessionary economic conditions which began in 2008 and continued in 2009. Future lending activities are subject to a number of conditions including, but not limited to, the capital position of the CFBank, the general economy, the performance of existing loans and the availability of appropriate funding sources.

We make commercial loans primarily to businesses. Those loans are generally secured by business equipment, inventory, accounts receivable and other business assets. In underwriting commercial loans, we consider the net operating income of the company, the debt service ratio and the financial strength, expertise and credit history of the business owners and/or guarantors. We offer both fixed and adjustable rate commercial loans. Fixed rates are generally limited to three to five years. Adjustable rate loans are tied to various market indices and generally adjust at monthly to annual time intervals.

Commercial loans are generally considered to involve a greater degree of risk than loans secured by real estate. Because payments on commercial loans are dependent on successful operation of the business enterprise, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. We seek to minimize and mitigate these risks through underwriting policies which require such loans to be qualified at origination on the basis of the enterprise’s income and debt coverage ratio and the financial strength of the business owners and/or guarantors.

Adjustable rate commercial loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the borrowers’ payments rise, increasing the potential for default. Additionally, adjustable rate commercial loans generally do not contain periodic and lifetime caps on interest rate changes. We seek to minimize the additional risk presented by adjustable rate commercial loans through underwriting criteria that require such loans to be qualified at origination with sufficient debt coverage ratios under increasing interest rate scenarios.

Construction and Land Lending. To a lesser extent, we originate construction and land development loans in our primary market areas. Construction loans are made to finance the construction of residential and commercial properties. Construction loans are fixed or adjustable-rate loans which may convert to permanent loans with maturities of up to 30 years. Our policies provide that construction loans may be made in amounts up to 80% of the appraised value of the property, and an independent appraisal of the property is required. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant, and regular inspections are required to monitor the progress of construction. Land development loans are evaluated on an individual basis, but generally they do not exceed 75% of the actual cost or current appraised value of the property, whichever is less. Loans on raw land generally do not exceed 65% of the actual cost or current appraised value of the property, whichever is less.

Construction and land financing is considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value which is insufficient to assure full repayment. Construction loans totaled $5.8 million at December 31, 2009. Land loans totaled $8.8 million at December 31, 2009.

Consumer and Other Lending. The consumer loan portfolio generally consists of home equity lines of credit, automobile loans, home equity and home improvement loans and loans secured by deposits. At December 31, 2009, the consumer loan portfolio totaled $26.0 million, or 10.9% of gross loans receivable.

Home equity lines of credit comprise the majority of consumer loan balances and totaled $18.9 million at December 31, 2009. We offer a variable rate home equity line of credit with rates adjusting monthly at various margins above the prime rate of interest as disclosed in The Wall Street Journal, based on certain factors including the loan balance, election of auto-deduct payment, and the borrower’s FICO^® score. The amount of the line is based on the borrower’s credit, income and equity in the home. When combined with the balance of the prior mortgage liens, these lines generally may not exceed 89.9% of the appraised value of the property at the time of the loan commitment. These lines are secured by a subordinate lien on the underlying real estate and are, therefore, vulnerable to declines in property values in the geographic areas where the properties are located. These home equity lines of credit are retained in our portfolio.

Auto loan balances primarily represent remaining unpaid amounts on pools of loans purchased in 2005, 2006, 2007, and 2009. We originate a few automobile loans, primarily as a courtesy to our existing customers.

Delinquencies and Classified Assets. The Board of Directors monitors, through management reporting, the status of all loans 30 days or more past due, past due statistics and trends for all loans on a monthly basis. Procedures with respect to resolving delinquencies vary depending on the nature and type of the loan and period of delinquency. In general, we make every effort, consistent with safety and soundness principles, to work with the borrower to have the loan brought current. If the loan is not brought current, it then becomes necessary to take legal action and/or repossess collateral.

We maintain an internal credit rating system and loan review procedures specifically developed to monitor credit risk for commercial, commercial real estate and multi-family residential loans. Internal loan reviews for these loan types are performed annually, and loan officers maintain close contact with borrowers between annual reviews. Adjustments to loan risk ratings are based on the internal annual reviews, or any time loan officers receive information that may affect risk ratings. Additionally, we contract with an outside firm to perform an independent review of commercial, commercial real estate and multi-family residential loans at least annually. Management uses the results of this review to help determine the effectiveness of the existing policies and procedures and to provide an independent assessment of our internal loan risk rating system.

Federal regulations and CFBank’s asset classification policy require use of an internal asset classification system as a means of reporting and monitoring assets. We have incorporated the OTS internal asset classifications as a part of our credit monitoring system. In accordance with regulations, problem assets are classified as “substandard,” “doubtful” or “loss,” and the classifications are subject to review by the OTS. An asset is considered “substandard” under the regulations if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset considered “doubtful” under the regulations has all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets considered “loss” under the regulations are those considered “uncollectible” and having so little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets are required to be designated “special mention” when they posses weaknesses but do not currently expose the insured institution to sufficient risk to warrant classification in one of the problem asset categories.

The following table presents information on criticized and classified loans as of December 31, 2009 and 2008. No loans were classified “loss” at either date. The increase in loans classified as “special mention” and “substandard” was primarily related to deterioration in the commercial, multi-family residential, commercial real estate, and home equity lines of credit portfolios due to the continued adverse economic environment that existed in 2009 and its detrimental effect on collateral values and borrowers’ ability to make timely loan payments.

		2009				2008
		(Dollars in thousands)
Special mention
Commercial		$	3,892			$	535
Multi-family residential real estate			3,143				2,852
Commercial real estate			1,432				1,221
Home equity lines of credit			3,894				—
Total		$	12,361			$	4,608
Substandard
Commercial		$	317			$	2,570
Single-family residential real estate			426				63
Multi-family residential real estate			5,671				1,264
Commercial real estate			10,723				877
Home equity lines of credit			1,307				60
Other consumer loans			14				32
Total		$	18,458			$	4,866
Doubtful
Commercial		$	—			$	646

All nonaccrual loans, discussed in further detail in the section titled “Nonperforming Assets,” are classified assets and included in the above table. In addition to nonaccrual loans, classified loans include the following loans and loan relationships that were identified as substandard assets and were not nonaccrual at December 31, 2009, but exhibit weaknesses that could lead to nonaccrual status in the future:

	•		At December 31, 2009, one commercial loan, totaling $100,000 and secured by business assets of a computer services firm in Fairlawn, was identified as a significant problem loan that is inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged. Payments on this loan are current as of December 31, 2009, and the loan is not nonaccrual at year-end 2009; however, the loan exhibits weaknesses that could lead to nonaccrual classification in the future. As a substandard asset, the loan is characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected. In the first quarter of 2010, this loan was refinanced with a loan through the SBA and, as a result, is guaranteed by the SBA to 90%.
	•		At December 31, 2009, one multi-family loan, totaling $1.3 million and secured by a townhouse complex in Columbus, Ohio, was identified as a significant problem loan that is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. A complete documentation review has been performed and the loan is in the active process of being collected. The loan was current at December 31, 2009, and the loan was not nonaccrual at year-end 2009; however, the loan exhibits weaknesses that could lead to nonaccrual classification in the future. As a substandard asset, the loan is characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.
	•		At December 31, 2009, four commercial real estate loans to related borrowers, totaling $3.9 million, were identified as significant problem loans that are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged. One loan, totaling $1.1 million, is secured by an office building in Columbus, Ohio. One loan, totaling $1.3 million, is secured by a parking garage in Columbus, Ohio. Two loans, totaling $1.5 million, are secured by junior liens on four commercial properties in Columbus, Ohio. The loans are current at December 31, 2009 and were not nonaccrual at year-end 2009; however, the loans exhibit weaknesses that could lead to nonaccrual classification in the future. As substandard assets, the loans are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected.
	•		CFBank’s home equity lines of credit portfolio includes both purchased loans and loans we originated for portfolio. In 2005 and 2006, we purchased home equity lines of credit collateralized by properties located throughout the United States, including geographic areas that have experienced significant declines in housing values, such as California, Virginia and Florida. The outstanding balance of the purchased home equity lines of credit totaled $4.6 million at December 31, 2009, and $2.8 million, or 61.5%, of the balances, are collateralized by properties in the states referenced above. The collateral values associated with loans in these states have declined from 10% to 25% since these loans were originated in 2005 and 2006. Two of the loans where loan balances exceeded collateral values were nonaccrual at December 31, 2009, and totaled $580,000. We have experienced increased write-offs in the purchased portfolio as the depressed state of the housing market and general economy has continued and, in 2009, three loans totaling $322,000 were written off. We continue to monitor collateral values and borrower FICO® scores and, when the situation warrants, have frozen the lines of credit. Further declines in the value of properties collateralizing these loans may result in additional loan losses.

The following table sets forth information concerning delinquent loans in dollar amounts and as a percentage of the total loan portfolio. The amounts presented represent the total remaining principal balances of the loans rather than the actual payment amounts which are overdue.

		December 31, 2009																December 31, 2008																December 31, 2007
		60-89 Days								90 Days or More								60-89 Days								90 Days or More								60-89 Days								90 Days or More
		Number				Principal				Number				Principal				Number				Principal				Number				Principal				Number				Principal				Number				Principal
		of				Balance				of				Balance				of				Balance				of				Balance				of				Balance				of				Balance
		Loans				of Loans				Loans				of Loans				Loans				of Loans				Loans				of Loans				Loans				of Loans				Loans				of Loans
		(Dollars in thousands)
Real estate loans:
Single-family			—			$	—				6			$	426				—			$	—				3			$	63				—			$	—				5			$	332
Multi-family			—				—				8				4,406				—				—				3				1,264				—				—				—				—
Commercial			2				515				15				6,864				1				530				1				347				—				—				—				—
Consumer loans:
Home equity lines of credit			—				—				5				1,307				—				—				1				60				—				—				1				146
Automobile			3				18				1				14				1				2				—				—				—				—				1				9
Other			3				4				—				—				1				1				1				32				—				—				—				—
Commercial loans			—				—				1				217				—				—				1				646				—				—				1				1
Total delinquent loans			8			$	537				36			$	13,234				3			$	533				10			$	2,412				—			$	—				8			$	488
Delinquent loans as a percent of total loans							.23	%							5.55	%							.22	%							1.02	%							.00	%							.21	%

The table does not include delinquent loans less than 60 days past due. At December 31, 2009, 2008 and 2007, total loans past due 30 to 59 days totaled $4,000, $1,070, and $333, respectively.

		December 31, 2006																December 31, 2005
		60-89 Days								90 Days or More								60-89 Days								90 Days or More
		Number				Principal				Number				Principal				Number				Principal				Number				Principal
		of				Balance				of				Balance				of				Balance				of				Balance
		Loans				of Loans				Loans				of Loans				Loans				of Loans				Loans				of Loans
		(Dollars in thousands)
Real estate loans:
Single-family			—			$	—				5			$	288				—			$	—				10			$	800
Automobile			1				1				1				9				4				30				—				—
Other			—				—				—				—				1				2				—				—
Commercial loans			2				509				—				—				—				—				—				—
Total delinquent loans			3			$	510				6			$	297				5			$	32				10			$	800
Delinquent loans as a percent of total loans							.27	%							.16	%							.03	%							.64	%

The table does not include delinquent loans less than 60 days past due. At December 31, 2006 and 2005, total loans past due 30 to 59 days totaled $1,533 and $859, respectively.

Nonperforming Assets. The following table contains information regarding nonperforming loans and repossessed assets. CFBank’s policy is to stop accruing interest on loans 90 days or more past due (unless the loan principal and interest are determined by management to be fully secured and in the process of collection) and set up reserves for all previously accrued interest. At December 31, 2009, nonaccrual loans include $1.8 million in troubled debt restructurings. For the year ended December 31, 2009, the amount of additional interest income that would have been recognized on nonaccrual loans, if such loans had continued to perform in accordance with their contractual terms, was approximately $434,000. There was no interest income recognized on nonaccrual loans in 2009. At December 31, 2009, troubled debt restructurings totaled $1.3 million in loans where customers have established a sustained period of repayment performance, loans are current according to their modified terms, and repayment of the remaining contractual payments is expected. For the year ended December 31, 2009, the amount of additional interest income that would have been recognized on these troubled debt restructurings, if such loans had continued to perform in accordance with the original contract terms, was approximately $24,000. Interest income recognized on these troubled debt restructurings totaled $24,000 in 2009. There were no properties held as real estate owned (REO) at December 31, 2009.

		At December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Nonaccrual loans:
Single-family real estate		$	426			$	63			$	235			$	288			$	800
Multi-family real estate			4,406				1,264				—				—				—
Commercial real estate			6,864				—				—				—				—
Consumer			1,307				92				155				9				—
Commercial			217				646				1				—				—
Total nonaccrual loans			13,220				2,065				391				297				800
Loans past due 90 days or more and still accruing:
Single-family real estate			—				—				97				—				—
Multi-family real estate			—				—				—				—				—
Commercial real estate			—				347				—				—				—
Consumer			14				—				—				—				—
Commercial			—				—				—				—				—
Total nonperforming loans(1)			13,234				2,412				488				297				800
REO			—				—				86				—				—
Other repossessed assets			—				—				—				—				—
Total nonperforming assets(2)		$	13,234			$	2,412			$	574			$	297			$	800
Troubled debt restructurings(3)			1,310				—				—				—				—
Total nonperforming assets and troubled debt restructurings		$	14,544			$	2,412			$	574			$	297			$	800
Nonperforming loans to total loans			5.56	%			1.02	%			.21	%			.16	%			.64	%
Nonperforming assets to total assets			4.83	%			.87	%			.21	%			.13	%			.46	%

The increase in nonperforming loans was primarily related to deterioration in the multi-family residential, commercial real estate, and home equity lines of credit portfolios as a result of the sustained adverse economic conditions and its affect on collateral values and borrowers’ ability to make loan payments.

At December 31, 2009, one commercial loan, totaling $148,000 and secured by business assets of an architectural firm in Columbus, Ohio, was determined to be impaired as it was modified in a troubled debt restructuring in 2009. The loan is not on nonaccrual status at year-end 2009 because the borrower has established a sustained period of repayment performance, the loan is current according to its modified terms, and repayment of the remaining contractual payments is expected.

At December 31, 2009, two commercial real estate loans, totaling $1.2 million and secured by an office complex in Euclid, Ohio, were determined to be impaired as they were modified in a troubled debt restructuring in 2009. The loans are not on nonaccrual status at year-end 2009 because the borrower has established a sustained period of repayment performance, the loans are current according to the modified terms, and repayment of the remaining contractual payments is expected.

Nonperforming home equity lines of credit increased $1.2 million and totaled $1.3 million, or 6.90% of total home equity lines of credit, at December 31, 2009, compared to $60,000, or .30% of total home equity lines of credit, at December 31, 2008. Nonperforming home equity lines of credit included three loans from the purchased portfolio, totaling $778,000, and two loans from the portfolio originated by CFBank, totaling $529,000, at December 31, 2009.

Allowance for Loan Losses (ALLL). The ALLL totaled $7.1 million at December 31, 2009 and increased $4.0 million, or 127.3%, from $3.1 million at December 31, 2008. The increase was due to continued adverse economic conditions affecting loan performance, which resulted in an increase in nonperforming loans and loan charge-offs. The ratio of the ALLL to total loans totaled 2.98% at December 31, 2009, compared to 1.32% at December 31, 2008.

The ALLL is a valuation allowance for probable incurred credit losses. The ALLL methodology is designed as part of a thorough process that incorporates management’s current judgments about the credit quality of the loan portfolio into determination of the ALLL in accordance with generally accepted accounting principles and supervisory guidance. Management analyzes the adequacy of the ALLL quarterly through reviews of the loan portfolio, including the nature and volume of the loan portfolio and segments of the portfolio, industry and loan concentrations, historical loss experience, delinquency statistics and the level of nonperforming loans, specific problem loans, the ability of borrowers to meet loan terms, an evaluation of collateral securing loans and the market for various types of collateral, various collection strategies, current economic conditions and trends and expectations about future economic conditions and trends, and other factors that warrant recognition in providing for an adequate ALLL. See the section titled “Allowance for loan losses” in our 2009 Annual Report to Stockholders, attached as Exhibit 13.1 to this Form 10-K, for a detailed discussion of management’s methodology for determining the appropriate level of the ALLL.

The ALLL consists of general and specific components. The general component of the ALLL covers loans not classified as impaired and is based on CFBank and industry historical loss experience adjusted for current factors. Current factors considered include, but are not limited to, management’s oversight of the portfolio, including lending policies and procedures; nature, level and trend of the portfolio, including past due and nonperforming loans, loan concentrations, loan terms and other characteristics; current economic conditions and outlook; and collateral values.

The specific component relates to loans that are individually classified as impaired. A loan is impaired when full payment under the loan terms is not expected. Commercial, commercial real estate and multi-family residential loans are individually evaluated for impairment when 90 days delinquent and adversely classified, regardless of size. Loans over $500,000 are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful. Loans for which the terms have been modified to grant concessions, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. If a loan is determined to be impaired, the loan is evaluated to determine whether an impairment loss should be recognized, either through a write-off or specific valuation allowance, so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Individually impaired loans totaled $13.7 million at December 31, 2009, and increased $11.4 million, from $2.3 million, at December 31, 2008. The ALLL specifically allocated to impaired loans totaled $2.0 million at December 31, 2009 and $514,000 at December 31, 2008. The specific reserve on impaired loans is based on management’s estimate of the fair value of collateral securing the loans, or based on projected cash flows from the sale of the underlying collateral and payments from the borrowers. The amount ultimately charged-off for these loans may be different from the specific reserve, as the ultimate liquidation of the collateral and/or projected cash flows may be different from management’s estimates.

We believe the ALLL is adequate to absorb probable incurred credit losses in the loan portfolio as of December 31, 2009; however, future additions to the allowance may be necessary based on factors including, but not limited to, deterioration in client business performance, continued or deepening recessionary economic conditions, declines in borrowers’ cash flows, and market conditions which result in lower real estate values. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL. Such agencies may require additional provisions for loan losses based on judgments and estimates that differ from those used by management or based on information available at the time of their review. Management and the Board continue to diligently monitor credit quality in the existing portfolio and analyze potential loan opportunities carefully in order to manage credit risk. An increase in the ALLL and loan losses would occur if economic conditions and factors which affect credit quality continue to worsen or do not improve.

The following table sets forth activity in the ALLL for the periods indicated.

		2009				2008				2007				2006				2005
		(Dollars in thousands)
Allowance for loan losses, beginning of period		$	3,119			$	2,684			$	2,109			$	1,495			$	978
Charge-offs:
Real estate mortgage loans:
Single-family			453				73				27				159				170
Multi-family			287				—				—				—				—
Commercial real estate			1,114				—				—				—				—
Consumer loans:
Home equity lines of credit			388				360				—				77				—
Automobile			17				61				15				66				85
Other			7				3				2				—				—
Commercial			3,998				—				—				—				—
Total charge-offs			6,264				497				44				302				255
Recoveries on loans previously charged off:
Real estate mortgage loans:
Single-family			18				4				72				53				27
Commercial real estate			5				—				—				—				—
Consumer loans:
Home equity lines of credit			3				—				—				—				—
Automobile			22				11				8				43				71
Commercial			295				—				—				—				—
Total recoveries			343				15				80				96				98
Net charge-offs (recoveries)			5,921				482				(36	)			206				157
Provision for loan losses			9,928				917				539				820				674
Reclassification of allowance for loan losses on loan-related commitments			(36	)			—				—				—				—
Allowance for loan losses, end of period		$	7,090			$	3,119			$	2,684			$	2,109			$	1,495
Allowance for loan losses to total loans			2.98	%			1.32	%			1.15	%			1.13	%			1.19	%
Allowance for loan losses to nonperforming loans			53.57	%			129.31	%			550.00	%			710.10	%			186.88	%
Net charge-offs (recoveries) to the allowance for losses			83.51	%			15.45	%			-1.34	%			9.77	%			10.50	%
Net charge-offs (recoveries) to average loans			2.48	%			.21	%			-.02	%			.13	%			.14	%

The provision for loan losses totaled $9.9 million in 2009, compared to $917,000 in 2008, and $539,000 in 2007. The increase in the provision in 2009 was due to continued adverse economic conditions affecting loan performance, which resulted in an increase in nonperforming loans and loan charge-offs. The provision in 2009 was significantly impacted by a $3.3 million net charge-off related to a single commercial loan customer.

Continuing adverse economic conditions and its effect on the housing market, collateral values, businesses and consumers’ ability to pay may increase the level of charge-offs in the future. Further or continuing weakness in the housing markets in geographic regions that have experienced the largest decline in housing values may negatively impact our purchased home equity lines of credit. See “Delinquencies and Classified Assets.” Additionally, our commercial, commercial real estate and multi-family residential loan portfolios, where we have already experienced an increase in delinquent and nonperforming assets and charge-offs, may be detrimentally affected by prolonged adverse economic conditions. Further decline in these portfolios could expose us to significant losses which could materially and adversely affect the Company’s earnings and profitability. Conversely, an increase in economic activity and growth of gross domestic product could retard any further declines in the existing portfolio and strengthen our customers’ ability to repay, thus having a positive effect on the Company’s earnings.

The following table sets forth the ALLL in each of the categories listed at the dates indicated and the percentage of such amounts to the total ALLL and loans in each category as a percent of total loans. Although the ALLL may be allocated to specific loans or loan types, the entire ALLL is available for any loan that, in management’s judgment, should be charged off.

		At December 31,
		2009												2008												2007
						% of				Percent								% of				Percent								% of				Percent
						Allowance				of Loans								Allowance				of Loans								Allowance				of Loans
						in each				in Each								in each				in Each								in each				in Each
						Category				Category								Category				Category								Category				Category
						to Total				to Total								to Total				to Total								to Total				to Total
		Amount				Allowance				Loans				Amount				Allowance				Loans				Amount				Allowance				Loans
		(Dollars in thousands)
Single-family mortgage loans		$	462				6.52	%			12.85	%		$	43				1.38	%			12.16	%		$	86				3.20	%			13.31	%
Consumer loans			1,017				14.34	%			10.91	%			142				4.55	%			11.13	%			46				1.72	%			12.10	%
Commercial, commercial real estate and multi-family mortgage loans			5,611				79.14	%			76.24	%			2,934				94.07	%			76.71	%			2,552				95.08	%			74.59	%
Total allowance for loan losses		$	7,090				100.00	%			100.00	%		$	3,119				100.00	%			100.00	%		$	2,684				100.00	%			100.00	%

		At December 31,
		2006												2005
						% of				Percent								% of				Percent
						Allowance				of Loans								Allowance				of Loans
						in each				in Each								in each				in Each
						Category				Category								Category				Category
						to Total				to Total								to Total				to Total
		Amount				Allowance				Loans				Amount				Allowance				Loans
		(Dollars in thousands)
Single-family mortgage loans		$	110				5.22	%			16.15	%		$	57				3.81	%			18.81	%
Consumer loans			53				2.51	%			16.17	%			120				8.03	%			23.50	%
Commercial, commercial real estate and multi-family mortgage loans			1,946				92.27	%			67.68	%			1,318				88.16	%			57.69	%
Total allowance for loan losses		$	2,109				100.00	%			100.00	%		$	1,495				100.00	%			100.00	%

Real Estate Owned

There were no properties held as REO at December 31, 2009. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Investment Activities

Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury (U.S. Treasury) obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, municipal bonds, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.

The investment policy established by the Board of Directors is designed to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement lending activities. The policy provides authority to invest in U.S. Treasury and federal agency securities meeting the policy’s guidelines, mortgage-backed securities guaranteed by the United States government and agencies thereof, and municipal bonds. At December 31, 2009, the securities portfolio totaled $21.2 million.

At December 31, 2009, all mortgage-backed securities and collateralized mortgage obligations in the securities portfolio were insured or guaranteed by Freddie Mac or Fannie Mae, except one collateralized mortgage obligation issued by a private issuer. The private label collateralized mortgage obligation was rated AAA at purchase. The Company monitors the security’s performance to insure the security has adequate credit support.

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. In determining OTTI for debt securities, 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 Company 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 decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. As of December 31, 2009, none of the Company’s securities was in an unrealized loss position.

The following table sets forth certain information regarding the amortized cost and fair value of securities at the dates indicated.

		At December 31,
		2009								2008								2007
		Amortized								Amortized								Amortized
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
		(Dollars in thousands)
Securities available for sale:
Federal agency		$	—			$	—			$	—			$	—			$	6,998			$	6,993
State and municipal			—				—				—				—				1,009				1,009
Issued by U.S. government-sponsored agencies:
Mortgage-backed securities — residential			5,171				5,561				6,671				6,922				7,865				8,068
Collateralized mortgage obligations			13,551				14,030				16,349				16,628				12,242				12,328
Collateralized mortgage obligations issued by private issuers			1,635				1,650				—				—				—				—
Total securities available for sale		$	20,357			$	21,241			$	23,020			$	23,550			$	28,114			$	28,398

At year-end 2009, there were no debt securities contractually due at a single maturity date. The weighted average yield on securities available for sale at December 31, 2009 totaled 4.87%

Sources of Funds

General. Primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales of loans, borrowings, and funds generated from operations of CFBank. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general market interest rates and economic conditions and competition. Borrowings may be used on a short-term basis for liquidity purposes or on a long-term basis to fund asset growth.

The Holding Company, as a savings and loan holding company, has more limited funding sources than CFBank, and is significantly dependent on dividends from CFBank to provide the liquidity necessary to meet its obligations. Banking regulations limit the amount of dividends that can be paid to the Holding Company by CFBank without prior approval of the OTS. As of December 31, 2009, CFBank can pay no dividends to the Holding Company without OTS approval. Future dividend payments by CFBank to the Holding Company would be based on future earnings and OTS approval. Due to the uncertainty surrounding CFBank’s future ability to pay dividends to the Holding Company, management is exploring options to secure funding to enhance the cash position at the Holding Company.

Deposits. CFBank offers a variety of deposit accounts with a range of interest rates and terms including savings accounts, retail and business checking accounts, money market accounts and certificates of deposit. Management regularly evaluates the internal cost of funds, surveys rates offered by competitors, reviews cash flow requirements for lending and liquidity, and executes rate changes when necessary as part of its asset/liability management, profitability and growth objectives. Certificate of deposit accounts represent the largest portion of our deposit portfolio and totaled 57.6% of average deposit balances in 2009. The term of the certificates of deposit typically offered vary from seven days to five years at rates established by management. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. CFBank participates in the Certificate of Deposit Account Registry Service^® (CDARS), a network of banks that allows us to provide our customers with FDIC insurance coverage on certificate of deposit balances up to $50 million. During the credit crisis in 2008, many CFBank customers sought the full FDIC coverage available through the CDARS program; however, balances declined during 2009 as a result of certain of these customers’ transferring their funds to our higher yielding, more liquid money market account. Balances in CDARS accounts decreased $11.0 million to $37.4 million at December 31, 2009, compared to $48.4 million at December 31, 2008 and $16.8 million at December 31, 2007. At December 31, 2009, certificate accounts maturing in less than one year totaled $93.5 million and included $34.6 million in CDARS balances. Although most of the certificate of deposit accounts are expected to be reinvested with CFBank, there is a risk that the CDARS account holders may not require the full FDIC coverage available through the CDARS program, and may select higher yielding investments outside of CFBank.

We rely primarily on a willingness to pay market-competitive interest rates to attract and retain retail deposits. Accordingly, rates offered by competing financial institutions affect our ability to attract and retain deposits. Deposits are obtained predominantly from the areas in which CFBank offices are located, and brokered deposits are accepted. We consider brokered deposits to be a useful element of a diversified funding strategy and an alternative to borrowings. Management regularly compares rates on brokered certificates of deposit with other funding sources in order to determine the best mix of funding sources, balancing the costs of funding with the mix of maturities. Although CFBank customers participate in the CDARS program, CDARS deposits are considered brokered deposits by regulation. Brokered deposits, including CDARS deposits, totaled $45.9 million at December 31, 2009, $67.2 million at December 31, 2008 and $52.2 million at December 31, 2007. Current regulatory restrictions limit an institution’s use of brokered deposits in situations where capital levels fall below well-capitalized levels and in certain situations where a well-capitalized institution is under a formal regulatory enforcement action. CFBank was well-capitalized and not subject to regulatory restrictions on the use of brokered deposits at December 31, 2009.

CFBank could raise additional deposits by offering above-market interest rates. Current regulatory restrictions limit an institution’s ability to pay above-market interest rates in situations where capital levels fall below well-capitalized levels and in certain situations where a well-capitalized institution is under a formal regulatory enforcement action. CFBank was well-capitalized and not subject to regulatory restrictions on its ability to pay above-market interest rates at December 31, 2009.

To promote and stabilize liquidity in the banking and financial services sector, the FDIC temporarily increased deposit insurance coverage from $100,000 to $250,000 per depositor through December 31, 2013. CFBank is a participant in the FDIC’s Temporary Liquidity Guarantee Program that provides unlimited deposit insurance coverage, through June 30, 2010, for noninterest-bearing transaction accounts. Based on our historical experience with deposit retention, current retention strategies and participation in programs offering additional FDIC insurance protection, we believe that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of existing deposits will remain with CFBank.

Certificate accounts in amounts of $100,000 or more totaled $52.6 million at December 31, 2009, maturing as follows:

						Weighted
Maturity Period		Amount				Average Rate
		(Dollars in thousands)
Three months or less		$	25,050				1.30	%
Over 3 through 6 months			9,286				2.96	%
Over 6 through 12 months			12,843				2.24	%
Over 12 months			5,376				3.04	%
Total		$	52,555

The following table sets forth the distribution of average deposit account balances for the periods indicated and the weighted average interest rates on each category of deposits presented. Averages for the periods presented are based on month-end balances.

		For the Year ended December 31,
		2009												2008												2007
						Percent												Percent												Percent
						of Total				Average								of Total				Average								of Total				Average
		Average				Average				Rate				Average				Average				Rate				Average				Average				Rate
		Balance				Deposits				Paid				Balance				Deposits				Paid				Balance				Deposits				Paid
		(Dollars in thousands)
Interest-bearing checking accounts		$	10,650				4.92	%			.21	%		$	11,399				5.66	%			.49	%		$	10,676				6.00	%			2.17	%
Money market accounts			54,529				25.17	%			1.58	%			44,059				21.89	%			2.41	%			40,890				22.97	%			4.39	%
Savings accounts			10,516				4.85	%			.10	%			10,322				5.13	%			.33	%			10,613				5.96	%			.50	%
Certificates of deposit			124,743				57.57	%			3.07	%			121,715				60.47	%			4.16	%			104,063				58.47	%			4.93	%
Noninterest-bearing deposits:
Demand deposits			16,243				7.49	%			—				13,776				6.85	%			—				11,742				6.60	%			—
Total average deposits		$	216,681				100.00	%			2.36	%		$	201,271				100.00	%			3.31	%		$	177,984				100.00	%			4.34	%