Central Federal Corporation: A Cheap Bank In Turnaround Mode Not Recognized By The Market

Central Federal Corporation (CFBK) is a savings and loan holding company, with four branches, located in the state of Ohio. Central Federal Corporation is an extremely cheap bank, transitioning through a turnaround, with attractive growth metrics.

A Turnaround the Street has Overlooked

In 2011, Central Federal was issued a Cease and Desist order. The effect of the order was to put significant constraints on the bank forcing them to reduce their level of their classified and criticized assets, achieve growth for specific operating metrics for their specific business plan, comply with restrictions on brokered deposits, lending prohibitions and injunctions on dividends and repurchases.

In late 2012, the company sold 15.0 million shares of common stock at $1.50/share, resulting in gross proceeds of $22.5 million. The company proceeded to use $13.5 million to improve its capital ratios, support future growth expansion, and bring the company in compliance with the capital ratios set by the Cease and Desist order. Furthermore, the company used the rest of the proceeds from the equity raise to redeem its TARP obligations.

Moving forward to January 23rd, 2014, the company was released from their Cease and Desist order due to an improved capital position. However, the bank was required to maintain a minimum Tier 1 Leverage Capital Ratio of 8% and a Total Risk-based Capital to Risk-Weighted Asset ratio of 12%. These capital requirements were lifted on December 23rd, 2015.

Finally on May 15th, 2014, the FRB announced the termination of the Holding Company Order. However, following the termination, the company was required to follow certain requirements and restrictions such as not to pay or declare dividends, purchase or redeem stock, increase or guarantee debt and provide written notice to the FRB with respect to changes in directors or senior executives. These commitments remained in place until January 8th, 2016.

Given that the company has made it through these regulatory hardships, the business as a whole has more legroom to grow. Without regulators breathing down the company’s neck, the company can focus on loan growth, margin performance and the creation of shareholder value. What is most interesting, since the precipitous drop in 2012 is that the market has left the shares for dead.

big charts

The recent regulatory turnaround coupled with an effectively ‘dead stock price’, suggests that the Street or even the majority of bank investors, are completely unaware that Central Federal Corporation is in existence. This provides the astute investor a unique opportunity to take advantage of a hidden bank in turnaround mode.

Earnings Improvements Transitioning to Shareholder Value Unlocking

With the released prior regulatory constraints, the company can now focus on growth and expansion. An example of growth is Central Federal’s net interest income growing 12.28% from 2014 to 2015. In addition to interest income growth, total assets increased 11.28% YOY. Furthermore, book value grew to $1.64/share in 2015.

An increase in capital and the strengthening of the balance sheet will provide the company with much needed headroom for continued growth. In light of the strengthened up balance sheet, the company has continued to reduce their non-current loans to loans on all fronts…

non current loans to loans

To provide shareholder value, on May of 2016, the company announced a stock repurchase plan, where the company has the option to buy back 3% of the common stock in the next six months. With 16,024,210 shares fully diluted, the company has the ability to repurchase 480,726 shares, helping to engineer bottom-line expansion.

Central Federal has also continued to improve their capital ratios…

capital ratios

Source: SEC Presentation

If the company continues to perform well, we should gradually see the capital ratios improve.

Finally, in the mrq, the company’s net income increased 26% from $251K to $316K.

net income q1

Source: SEC Presentation

The first quarter of 2016 also showed a 6 bps credit quality improvement, a 9% net interest income increase and an 86% increase in income before taxes. Moreover, expenses remained relatively flat, translating into incremental efficiency ratio improvements.

Comps Suggest Undervaluation

Central Federal now has adequate capital to support forward looking growth, a significant amount of opportunities to improve margin performance and cost of funds and is continuing to improve their credit quality.

Despite these positive implications, Central Federal still lags behind its peers on a P/TBV basis.


Source: Created By Nicholas Bodnar

As the company continues to improve its financial metrics, grow its asset base and return value to shareholders, the market will eventually recognize the company’s discount to TBV.

2013 to 2016 comparsion

Source: Created By Nicholas Bodnar

Ask yourself, how has a company that has dramatically improved over the years not been recognized by the broad market or even see any appreciation in the share price? Has the market left this company for dead?


Central Federal is a unique community bank that the broad market has forgotten about. Year over year and quarter over quarter, the company continues to improve its financial position; with no recognition from the market. Investors should expect a decrease in net income for FY 2016 due to a reversal of a deferred tax valuation that occurred in 4Q15. However, if the company continues to have conservative underwriting practices, focuses on loan growth and gives back to shareholders, value may be its own catalyst.

Nick Bodnar

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