Commercial National Financial Corp, Latrobe, PA (CNAF)

A Case of Sweet Pickings in Mister Rogers' Neighborhood


Here's one bank stock ripe for cherry picking investors! CNA Financial offers just about everything one could hope for in a bank stock—it's cheap, performing well, managed well, pays a huge dividend, enjoys substantial insider ownership, and offers acquisitive neighbors a sweet prospect. What else would one expect from the town that produced Arnold Palmer, Mister Rogers, and the banana split?

Disclosure: As of this posting, I own shares of CNAF and may subsequently either dispose of them or purchase more.

Prospective Buyers
CNAF is the most trusted community bank in three Westmoreland County, PA cities — Latrobe, Pleasant Unity, and Ligonier, in which these fine banks also do business:
First Commonwealth Financial, Indiana, PA (FCF)
F.N.B. Corp, Pittsburg, PA (FNB)
S&T Bancorp, Indiana, PA (STBA)
Financial Snapshot
(as of 09/30/2014)

Total assets:
$397M
Tangible book value per share:
$19.76
NPAs to assets:
0.02%
Price to book:
109%
Market cap:
$61.8M
Dividend yield:
4.8%
Trailing 12-month return on assets:
1.6%
Trailing 12-month return on equity:
12.5%
TARP:
$0

Luminaries
George V. Welty, Chairman
Gregg E. Hunter, Vice Chairman, President and CEO
Thomas D. Watters, Executive VP and CFO
Gold Stars
As far as community bank stocks go, CNAF is mostly sweet as a banana split.

  • Trustworthy people. The managers at CNA Financial sure seem like the modest Mister Rogers sort that you'd want to be your neighbor. Seasoned bankers, they pay themselves well below industry average and exhibit an attitude of "right relationship" with shareholders, probably because they themselves hold over a quarter of outstanding shares and will only reap what they sow.
  • Consistent performance. Commercial National has been making money since 1934. Even during the Great Recession, its NPAs never got to 1%, and the bank never needed TARP. If my research is accurate, only six other publicly traded banks pay a higher dividend.
  • Solid, fee-based income stream. Commercial Bank & Trust earns nearly a million dollars a year from its $150M trust business. Prospective acquirers that reach into stronger markets will no doubt appreciate the significant excess capital this makes available for lending.

Like the best cherry or "Arnold Palmer," there's just enough of a sour note here to make this stock pick tasty.

  • Low growth market. The population of Westmoreland County, PA has declined every year since it peaked at nearly 400,000 in 1980, which likely explains why CNA Financial both holds more in securities than in loans and is priced for picking. 

Sources

5 comments :

  1. Given the high yield on investment, my guess is that the long-term bonds the bank holds are fixed -rates. Then would you be worried about duration risk and interest rate risk? The management seems quite hostile to shareholder questions and suggestions at least in my case.

    ReplyDelete
  2. Appreciate your comment, Yuanxi!

    Given that CNAF's securities portfolio is larger than its loan portfolio and that the yield last year was North of 4%, I share your concern. Their Other Comprehensive Income line went from a deficit of $9M last year to a positive $8.9M at year end 2014, so I think it is safe to assume, too, that duration risk is huge.

    Were I running this bank, I would eliminate the $12M in borrowings, cut both the size and duration of the securities portfolio, and repurchase up to $20M in stock. If these guys would rather run a leveraged bond fund than a bank, they should sell Commercial National to bankers and start a fixed income hedge fund.

    ReplyDelete
  3. Phil Timyan,
    What do you make of this repeated statement in filings and dividend announcement releases by CNAF? "The Company has been advised that bargaining unit status may limit the Company's strategic options relative to those of non-unionized insured depository institutions. The Company continues to consider this as a factor in its strategic and capital management decisions."
    I am an unsophisticated investor, but wonder why the repeated statement?
    CNAF, though a small percent of my portfolio, is one of only four stocks I own and I thought of buying more.

    ReplyDelete
    Replies
    1. Thanks for reading and commenting Jimmy. I think they will continue to make this statement to let investors know that they are not for sale and they believe they have good reasons for that stance.
      Since I wrote the blog on CNAF I've come to believe that management has turned CNA Financial more into a bond market hedge fund than a bank. The securities portfolio is too big and risky. I believe shareholders would be better served if they cut the securities at least in half and use the extra capital to repurchase common shares outstanding.

      Good Luck!
      Phil

      Delete
    2. Thanks for reading and commenting Jimmy. I think they will continue to make this statement to let investors know that they are not for sale and they believe they have good reasons for that stance.
      Since I wrote the blog on CNAF I've come to believe that management has turned CNA Financial more into a bond market hedge fund than a bank. The securities portfolio is too big and risky. I believe shareholders would be better served if they cut the securities at least in half and use the extra capital to repurchase common shares outstanding.

      Good Luck!
      Phil

      Delete