Introduction
In these low volume for all fixed-income securities days, a small capitalization Pennsylvania bank, CNB Financial Corporation (CCNE), is issuing its first Preferred stock IPO. With its market capitalization of $280M, it becomes the third-smallest bank to issue an exchange-traded fixed-income security as only First Internet Bancorp ($146M) and AmeriServ Financial ($50M) are the smallest. In this article, we will present the newest fixed-rate preferred stock, CCNEP.
The New Issue
Before we dive into our brief analysis, here is a link to the 424B5 Filing by CNB Financial Corporation – the prospectus.
Source: SEC.gov
For a total of 2.1M shares issued, the total gross proceeds for the company are $52.5M. You can find some relevant information about the new preferred stock in the table below:
Source: Author’s spreadsheet
CNB Financial Corporation 7.125% Series A Fixed Rate Non-Cumulative Perpetual Preferred Stock (NASDAQ: CCNEP) pays a qualified fixed dividend at a rate of 7.125%. The new preferred stock has no Standard & Poor’s rating and is callable as of 09/01/2025. The new IPO is currently trading above its par value at a price of $25.77 which translates into a 6.91% Current Yield and a YTC of 6.40%
Here’s how the stock’s YTC curve looks right now:
Source: Author’s spreadsheet
The Company
CNB Financial Corporation is a financial holding company. The Company is the holding company of CNB Bank (the Bank); CNB Securities Corporation, which maintains investments in debt and equity securities; CNB Insurance Agency, which provides for the sale of nonproprietary annuities and other insurance products; CNB Risk Management, Inc., which is a captive insurance company, and Holiday Financial Services Corporation, which offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment. The Bank is a full-service bank engaged in a range of banking activities and services for individual, business, governmental and institutional customers. The Bank’s activities include checking, savings and time deposit accounts; real estate loans, commercial loans, industrial loans, residential loans and consumer loans, and other specialized financial services.
Source: Reuters.com | CNB Financial Corporation
Below, you can see a price chart of the common stock, CCNE:
Source: Tradingview.com
The company is currently paying a quarterly dividend on its common stock of $0.17 that translates into an annualized payout of $0.68. With a market price of $16.67, the current yield of CCNE sits at 4.08%. As an absolute value, this means it pays $11.49M in dividends yearly. For comparison, the yearly dividend expenses for the newly issued Series A Preferred Stock are around $3.74M.
In addition, with a market capitalization of around $280M, CCNE takes its place as one of the smallest ‘Regional Banks’ in the U.S. (according to Finviz.com).
Capital Structure
Below you can see a snapshot of CNB Financial Corporation’s capital structure as of its Quarterly Report in June 2020. You can also see how the capital structure evolved historically.
Source: Morningstar.com | Company’s Balance Sheet
As of Q2, CCNE had a total debt of $490M ranking senior to the newly issued preferred stock. The new Series A preferred stock rank is junior to all outstanding debt and equal to other future preferred stocks of the company. At this point, CCNEP is the only outstanding preferred stock.
The Ratios Of Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of CCNE but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 280/(490 + 52.5) = 0.51. The company is very highly leveraged as the company’s debt is twice its equity, which from a preferred stockholder point of view the ratio is poor.
- Earnings/(Debt and Preferred Payments). This is also quite an easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM results is 37.77/(9.02 + 3.74) = 2.96, which looks better against the background of the high leverage. In the following table, we can also see historically how the company performs with respect to its debt payments coverage for the last 5 financial years.
Source: Morningstar.com | Company’s Income Statement
Sector Comparison
In this section, I’ll compare the newly issued preferred stock with all other $25 fixed-rate preferred stocks issued by any regional banks, with a positive Yield-to-Call. Note that all of these preferred stocks are eligible for the 15% to 20% federal tax rate.
- By % of PAR and Current Yield
Source: Author’s database
With its current yield of 6.91%, CCNEP is the fifth-highest yielding preferred stock in this group, lagging only behind OFG-B, OFG-D, TBKCP, and BANC-D. However, BANC-D is anytime callable and with its market price of a little above its par value, its Yield-to-Call, which is also its Yield-to-Worst, is 4.34%. Due to the fact, CCNEP is trading above its par value, this 7.17% Current Yield is in fact its Yield-to-Best, while its Yield-to-Worst will be equal to its YTC of 6.40%. Since almost all issues are trading above par (an exception make DCOMP, CIT-B, OFG-D, and OFG-B), I will compare all issues by their Years-to-Call and YTW.
- By Years-to-Call and Yield-to-Call
For this chart, to have a better idea of the YTC curve, I’m excluding the callable OFG-B and OFG-D.
Source: Author’s spreadsheet
If we neglect the trading below $25 DCOMP and CIT-B, the new IPO gives the second-highest YTC of 6.40%, just after TBKCP and its YTC of 7.05%. If we look at the group’s average YTC of 4.49%, CCNEP has a 1.89% higher return.
The Banking Preferreds
This section contains all preferred stocks, issued by a bank company, that pay a fixed-rate dividend, have a par value of $25, and a positive Yield-to-Call. Again, all of these preferred stocks are eligible for the preferential federal tax rate.
- By % of PAR and Current Yield
Source: Author’s database
- By Years-to-Call and Yield-to-Call
Source: Author’s database
For the second chart, again, I’m excluding all callable issues.
Redemption Following a Regulatory Capital Treatment Event
The Preferred Stock will be redeemable, in whole but not in part, within 90 days following a regulatory capital treatment event at a redemption price equal to the liquidation preference, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. A “regulatory capital treatment event” means our good-faith determination that, as a result of (‘I)’ any amendment to, or change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any share of Preferred Stock; (‘II’) any proposed change in those laws or regulations that is announced after the initial issuance of any share of Preferred Stock; or (‘III’) any official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the initial issuance of any share of Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation value of the shares of Preferred Stock then outstanding as “Additional Tier 1 Capital” (or its equivalent) for purposes of the capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.
Source: 424B5 Filing by CNB Financial Corporation
Use Of Proceeds
We estimate that the net proceeds from this offering will be approximately $50,346,250 (or approximately $57,973,187.50 if the underwriters exercise in full their over-allotment option), after deducting underwriting discounts and commissions and our estimated offering expenses. We expect to use these net proceeds for general corporate purposes, which may include working capital and the funding of organic growth or potential acquisitions.
Source: 424B5 Filing by CNB Financial Corporation
Addition to the iShares Preferred and Income Securities ETF
With the current market capitalization of only $52M, CCNEP cannot be an addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index, thus it will not be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (PFF), which is important to us due to its influence on the behavior of all fixed-income securities.
Conclusion
CCNEP is currently the only outstanding preferred stock of CNB Financial Corporation. It is trading above its $25 par value and it gives a 6.40% Yield-to-Call, which is also its Yield-to-Worst. The company is quite leveraged, as its debt and the preferred stock are twice its market capitalization. However, despite its tiny market capitalization, it has a good ratio of the creditors’ payments vs. the net income available to the common stockholders.
Also, historically CCNE handles well with the interest expenses on the debt, maintaining a ratio of between 2.95 and 5.56 for the last 5 years. When we compare the newly issued Series A Preferred stock to all other fixed-rate preferred stocks in the sector or generally issued by a bank, CCNEP has the fourth-highest YTW, as only TBKCP and OFG Bancorp’s (NYSE:OFG) OFG-D and OFG-B have a higher one. The three have a YTW, equal to their Current yields, at 7.03%, 7.37%, and 7.06%, respectively.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
