CF Bankshares Inc. (CFBK)

Executive Summary / Key Takeaways

• The $7M Charge-Off Was a Feature, Not a Bug: A single non-customer loan charge-off crushed Q3 reported earnings but cleared the deck, normalizing credit metrics and revealing underlying core earnings power of ~$5.5M quarterly run rate, implying ROE above 12% and ROA over 1.0%.

• NIM Expansion Through Liability Discipline: Net interest margin jumped 35 basis points to 2.76% not from reckless asset chasing but from a 58 basis point reduction in funding costs, demonstrating sophisticated liability management rare for a bank of this size.

• Strategic Portfolio Rotation Accelerating: The bank is deliberately shedding commoditized single-family residential loans (down $35.4M) while growing higher-yielding commercial real estate (up $54.3M) and multi-family (up $17.2M), positioning for rate cycle resilience and relationship-driven pricing power.

• Efficiency Gains at Scale: The efficiency ratio improved to 49.8% despite asset growth, suggesting technology investments and process discipline are overcoming the typical scale disadvantages that plague sub-$2B banks.

• Valuation Disconnect: Trading at $23.81 with a P/E of 9.6x and price-to-book of 0.86x, the market prices CFBK as a stagnant community bank while underlying metrics suggest a commercial banking specialist approaching an inflection point in profitability and growth.

Setting the Scene: The Boutique Commercial Bank in a Consolidating Landscape

CF Bankshares operates as a deliberate anomaly in the regional banking landscape. With $2.11 billion in assets and a footprint concentrated in Ohio's Franklin, Delaware, Cuyahoga, Summit, and Hamilton counties plus Marion County, Indiana, the company has chosen depth over breadth. Founded in 1892 as CFBank and headquartered in Columbus, Ohio, the institution spent its first century as a traditional thrift before undertaking a series of strategic transformations that culminated in its current identity as a commercial banking specialist.

The company makes money through a relationship-driven model that targets closely held businesses and entrepreneurs. This is not a retail deposit gatherer competing on rate. CFBank's value proposition rests on three pillars: individualized service, direct customer access to decision-makers, and ease of doing business. Management explicitly positions the bank as matching the sophistication of larger institutions without the associated bureaucracy. This positioning is not marketing fluff; it manifests in a loan portfolio increasingly weighted toward commercial real estate and multi-family residential loans where underwriting expertise and local market knowledge create durable competitive advantages.

The industry structure presents both threat and opportunity. Regional bank consolidation continues unabated, with competitors like Farmers National Banc Corp. announcing a $299 million merger to create a $7 billion entity. Larger players like Huntington Bancshares (HBAN) are digesting acquisitions that divert attention from CFBank's core markets. Simultaneously, fintech platforms and national banks are digitizing commoditized products like mortgages and consumer deposits, squeezing margins on precisely the business lines CFBank is exiting. This environment rewards specialists who can command premium pricing through expertise while punishing generalists competing on convenience.

Technology and Strategic Differentiation: The Construction Lending Moat

CFBank's digital capabilities—mobile banking, remote deposit capture, online account opening—are table stakes, not differentiators. The real moat lies in construction lending and the bank's ability to generate full banking relationships with proven developers. This expertise, built over decades of local market presence, cannot be replicated by fintech algorithms or regional bank credit committees three states away. Construction lending demands granular understanding of local zoning, contractor networks, and market absorption rates. CFBank's ability to underwrite these loans profitably while converting developers into permanent deposit and treasury management clients creates a self-reinforcing ecosystem.

The strategic portfolio shift underway validates this focus. In Q1 2025, the bank sold two single-family residential portfolios totaling $18.1 million, accepting near-term balance sheet contraction to exit low-margin, rate-sensitive assets. This was not a defensive move but an offensive repositioning. Commercial real estate loans grew $54.3 million while multi-family residential increased $17.2 million, both categories offering higher yields and deeper customer relationships than the commoditized residential mortgages being shed. The bank's core competency in construction lending generates developers as full-banking clients, creating sticky deposit relationships that fund asset growth at lower cost.

This differentiation matters because it insulates CFBK from the deposit-gathering arms race. While peers like Peoples Bancorp maintain 127 branches to capture retail deposits, CFBank's five locations operate as relationship hubs serving commercial clients who value speed and expertise over branch density. The bank's ability to grow noninterest-bearing deposits by $4 million in a challenging rate environment suggests these relationships translate into stable, low-cost funding.

Financial Performance: Signal Through the Noise

The headline numbers appear contradictory. Q3 2025 net income of $2.3 million represented a 45% decline from the prior year. Yet this decline masks a fundamental strengthening of the business. The entire shortfall traces to a $5.1 million provision for credit losses, $3.7 million of which stemmed from the full charge-off of a single non-customer loan. This loan, acquired as investment-grade paper, had no relationship to CFBank's core underwriting. Its removal, while painful, reduced nonperforming loans by $5 million to $10 million and dropped the nonperforming loan ratio to 0.57% from 0.87%.

Pre-provision, pre-tax net revenue (PPNR) tells the true story. At $7.8 million, PPNR increased 33% year-over-year, while the efficiency ratio improved 550 basis points to 49.8%. These metrics demonstrate that the underlying business engine is accelerating, not stalling. Management's commentary that core earnings approximate a $5.5 million quarterly run rate—assuming normalized $1 million provision expense—implies an annualized earnings power of $22 million that the market has yet to recognize.

Net interest income rose 20.3% to $13.8 million, driven by a $2.0 million decrease in interest expense despite a $30.8 million increase in average interest-bearing liabilities. The 58 basis point reduction in funding costs reflects disciplined deposit pricing and improved mix, not rate environment tailwinds. Net interest margin expanded to 2.76% from 2.41%, a 35 basis point improvement that peers like Ohio Valley Banc Corp. with their rural deposit bases cannot easily replicate in urban markets.

Noninterest income grew 7% on higher mortgage sale gains, while noninterest expense increased a controlled 6.9%, with the rise attributable to strategic investments in talent and recruiting. The effective tax rate dropped to 13.8% from 20.4% due to tax credit investments, boosting after-tax earnings without operational improvement. These moving parts obscure the core message: the bank is growing revenue faster than expenses while improving its funding profile.

Loan Portfolio Dynamics: Quality Over Quantity

The balance sheet transformation is accelerating. Total loans grew a modest 0.4% to $1.73 billion, but the composition shift reveals strategic intent. Commercial real estate increased $54.3 million and multi-family residential rose $17.2 million, offsetting deliberate reductions in single-family residential ($35.4 million) and commercial and industrial ($32.2 million). The single-family decline included the $18.1 million portfolio sale, a clear exit from rate-sensitive, low-margin assets.

Credit quality metrics improved materially. The allowance for credit losses decreased $633,000 to $16.8 million, representing 0.97% of total loans versus 1.00% at year-end. This reduction was primarily due to the charge-off, which cleared a problematic loan, and was further supported by a $7.2 million (21.8%) drop in the bank's criticized and classified loans. Substandard loans fell 38.2% to $8.8 million. These improvements signal that the charge-off was idiosyncratic, not indicative of portfolio deterioration.

The bank's exposure to interest-only commercial lines of credit—29.2% of the commercial portfolio at $113 million—carries heightened risk if collateral values decline. However, this is mitigated by the bank's construction lending expertise and the fact that this percentage decreased from 31.3% at year-end. Management acknowledges the risk but frames it as manageable within their specialized underwriting framework.

Capital Management and Liquidity: Fortress Balance Sheet

CFBank's capital position remains robust with a Tier 1 Leverage ratio of 11.19% and Total Capital ratio of 14.88%, well above regulatory minimums. The Holding Company added a $10 million revolving line of credit in April 2025, which provided liquidity and supported the injection of additional Tier 1 capital into CFBank during Q2. This proactive capital raise, while modest, demonstrates management's commitment to maintaining excess capacity for growth.

Liquidity is ample. Cash and cash equivalents increased $37.1 million to $272.4 million, funded by deposit growth and FHLB advances.

The Holding Company has excess liquidity to cover expenses and can inject capital into CFBank if needed. This flexibility matters because it allows the bank to pursue commercial loan growth without the capital constraints that limit smaller competitors like United Bancorp (UBCP) with its $867 million asset base.

In February 2025, the board authorized a 325,000-share repurchase program through January 2026. At current prices, this represents approximately $7.7 million of capital return, signaling management's view that the stock trades below intrinsic value. The modest dividend yield of 1.34% reflects a preference for capital retention to fund growth over income distribution.

Outlook and Management Guidance: The 2026 Acceleration Thesis

Management's guidance is unusually specific and optimistic. President and CEO Timothy T. O'Dell stated that core earnings run at approximately $5.5 million quarterly, assuming $1 million of normalized provision expense. This implies the bank is already operating at an ROE above 12% and ROA above 1.0%, levels that would place it in the top quartile of community banks. The market's failure to recognize this run rate creates a potential inflection point as reported earnings normalize.

The bank anticipates a decline in loan payoffs and expects net commercial loan growth to accelerate in 2026. This forecast is grounded in current pipeline strength: new commercial loan production totaled $155 million year-to-date through September 30, 2025, offsetting considerable payoffs from successful commercial real estate developments refinancing into permanent loans. The commercial pipeline remains very strong, suggesting the portfolio shift is gaining momentum.

O'Dell explicitly stated, "At this point, we are not aware of any extraordinary items to impact meaningfully upon Q4 operating results." This confidence, following the major charge-off, suggests credit normalization is complete. The decertification of financial holding company status in August 2025 simplifies the regulatory structure, allowing management to focus exclusively on core banking operations.

Risks and Asymmetries: What Could Break the Thesis

The primary risk is concentration. Commercial real estate represents a growing portion of the loan portfolio in a rising rate environment. If property values decline or occupancy rates fall, the bank could face credit losses beyond normalized levels. The $113 million in interest-only commercial lines of credit is particularly vulnerable to collateral value declines without principal amortization.

Scale remains a structural disadvantage. CFBK's 0.78% ROA and 9.45% ROE generally trail peers like Farmers National Banc Corp. (FMNB) (1.04% ROA, 12.00% ROE), though its ROE is stronger than Peoples Bancorp 's (1.09% ROA, 8.84% ROE). While the bank's efficiency ratio is improving, its absolute expense base is higher relative to assets than larger competitors who can spread costs across bigger balance sheets. This gap could widen if technology investments required to compete with digital offerings accelerate.

Interest rate cycle risk is asymmetric. The bank's NIM expansion has been driven by funding cost reduction, which has limits. If rates rise or the yield curve inverts, asset yields could compress faster than liability costs, reversing margin gains. CFBK's smaller scale provides less flexibility to reposition the balance sheet compared to Peoples Bancorp's $9.6 billion asset base.

Execution risk on the commercial growth strategy is material. The bank is deliberately shrinking parts of the balance sheet while growing others, a maneuver that requires precise underwriting and market timing. If commercial real estate demand softens or competition intensifies from larger banks or fintechs, the anticipated 2026 acceleration may not materialize.

Valuation Context: The Discount to Transformation

At $23.81 per share, CFBK trades at 9.6x trailing earnings, 0.86x book value, and 5.6x free cash flow. These multiples place it at a discount to direct peers: Ohio Valley Banc Corp. (OVBC) trades at 13.8x earnings and 1.19x book, while Peoples Bancorp (PEBO) trades at 11.0x earnings and 0.93x book. The discount is more striking when considering the bank's 36% earnings growth this year, reversing a five-year average decline of 11.7%.

The price-to-tangible-book ratio below 1.0x implies the market assigns no value to the franchise or future earnings power. Yet management's core earnings run rate suggests the bank can generate a 12%+ ROE on current equity, a level that historically commands 1.5-2.0x book value in community bank valuations. The disconnect likely stems from the Q3 earnings noise and the bank's small size, which limits institutional ownership and research coverage.

Analyst commentary suggests the stock trades "significantly below fair value by more than 20%." While such statements require skepticism, the quantitative metrics support the view. The bank's 31.98% profit margin exceeds most peers, and its 1.34% dividend yield provides income while investors wait for the market to recognize the transformation.

Conclusion: A Niche Bank at an Inflection Point

CF Bankshares is executing a deliberate strategy to transform from a generalist community bank into a specialized commercial lender with superior profitability metrics. The Q3 charge-off, while painful, cleared non-core assets and revealed underlying earnings power that the market has yet to recognize. With NIM expansion driven by liability discipline, an efficiency ratio approaching best-in-class levels, and a loan portfolio shifting toward higher-yielding relationship-based assets, the bank is positioned for accelerated growth in 2026.

The investment thesis hinges on two variables: whether management can execute the commercial loan acceleration as guided, and whether the market revalues the stock from a stagnant community bank multiple to a commercial specialist multiple. The competitive moat—construction lending expertise and direct decision-maker access—provides durable differentiation against both larger banks and fintechs, while the fortress balance sheet and active capital management provide downside protection.

Trading at a discount to book value despite demonstrable earnings power, CFBK offers an asymmetric risk/reward profile. If management delivers on its 2026 commercial growth forecast, earnings could approach $3.00 per share, supporting a valuation in the mid-$30s based on peer multiples. If execution falters, the strong capital position and liquid balance sheet limit downside. For investors willing to look past quarterly noise to underlying business momentum, the stock represents a niche player at a rare inflection point between transformation and recognition.