UPDATE: CNA Financial Corp, Latrobe, PA (CNAF)

Three years after my November 2014 Timyan Bank Alert review of CNAF, the stock is still ripe for investors cherry picking high dividends.

CNAF is still cheap — priced roughly the same as in 2014, whereas the BKX index is up 47%.

Today, though, I'm less impressed with Commercial Bank & Trust's Management, which is missing opportunities to cultivate value and is putting CNAF at risk of languishing around book value for another three years.

More responsible caretakers of the stock would reduce the bank's bond market bet, and use excess capital to repurchase shares. CNAF could then reach $30 per share and pay increased dividends.


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


Prospective Buyers

As a unionized bank, Commercial Bank & Trust of PA is highly unlikely to sell in the foreseeable future, but that doesn't mean these local players wouldn't find it to be sweet pickings.

First Commonwealth, Indiana, PA (FCF)
F.N.B Corp, Pittsburgh, PA (FNB)
S&T Bancorp, Indiana, PA (STBA)

Financial Snapshot
as of 09/30/2017

Total assets:
$429M
Tangible book value per share:
$20.70
NPAs to assets:
0.08%
Price to book:
106%
Market cap:
$62.8M
Dividend yield:
4.7%
Trailing 12-month ROA:
1.04%
Trailing 12-month ROE:
7.51%

The Crew

George V. Welty, Chairman
Gregg E. Hunter, Vice Chairman, President and CEO
Thomas D. Watters, Executive VP and CFO

The Skinny

Sweet Notes
I find a lot of things sweet about this stock pick:
  • Insiders own 25% of CNAF 
  • CEO Hunter is CNAF's largest holder with 9.9%
  • CNAF offers a nice safe dividend yielding 4.7%
  • The stock is cheap to book at 106%
  • Commercial Bank & Trust of PA has built a wonderful deposit base and growing, albeit slowly, loan portfolio
  • 32% of the bank's deposits are low-cost transaction accounts
  • Credit quality at the bank is pristine 
  • The bulk of loans are lower-risk 1-4 family mortgages
Sour Notes
On the other hand, every cherry has a pit, and CNAF could choke on any one of these pitfalls:
  • Commercial Bank & Trust of PA is holding more securities in its portfolio than advisable, subjecting the bank to significant losses if interest rates rise
  • The bank's location in a low growth area of Pennsylvania limits opportunities for loan growth
  • Management has probably squeezed all the earnings growth we're going to see from cost cutting — there's not much more to cut
  • Management's reluctance to buy back shares may spoil CNAF's best opportunity to grow earnings per share

    Sources

    • Confidential interviews with shareholders and analysts

    4 comments :

    1. I was wondering if you could touch a bit more on this comment "Management's reluctance to buy back shares may spoil CNAF's best opportunity to grow earnings per share."

      As I have a so-so understanding of the concept, especially in the bank space. On the one hand, I could see it leading to increased earnings for other shareholders if it is done below book, if the P/B ratio of the stock (and related stock price) continues to increase, or if the cost of equity is more than the cost of their debt (which I think would change the overall capital structure, decrease their very flush capital ratios, and replace some cash flow out as dividends with smaller interest payments).

      However, couldn't it also be destructive, if they pay too rich a price? Or potentially be problematic if they do a special buyback and just buyback insider shares?

      ReplyDelete
      Replies
      1. Correct, it would theoretically be value destructive if the returns on buybacks are less than their WACC.

        However, I would argue that if you are a buyer at this price level (hence you think CNAF is cheap), then buying back shares is adding value.

        I have never heard of a special buyback like that taking place. Maybe you mean they could issue options and share buybacks simply balance the effects?

        Best,
        MA

        Delete
      2. maran- Thanks for reading and commenting. I agree that buying back shares here adds value. I really wish CNAF would do so. Many banks routinely buy their own shares back when they are selling below intrinsic value. There is no need to issue options.
        Good Luck!
        Phil

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