A $2.45 billion bank holding company in the Golden State might be worth a look for investors seeking a potential upside.
CVB Financial Corp. (CVBF, Financial) grabbed headlines in late February when it merged with Citizens Community Bank, a longtime player in the Southern California community banking industry.
What you might not know about CVB Financial is that it has taken a major ax to its percentage of nonperforming loans, and seen increases in shareholder equity, fueled by a higher rate of loans and deposits, in the last five years.
Using the All-in-One Screener by GuruFocus, CVB Financial popped up as a mid-cap stock among regional banks that is priced at a significant premium to book value. The screener also identified the bank as having favorable values in shareholder equity and return on assets.
Investors who see stock prices at marked discounts to book value can be skeptical about the quality of loans on the balance sheet. But a higher stock price may suggest that the stock is priced too conservatively and there is a potential upside. CFB FInancial has a book value of under $10 a share. It is trading at roughly $22 a share.
It’s been rough for many community banks since the 2008 economic downturn fueled a period of stagnant growth in loans, the bread-and-butter of an industry that makes its profit on interest income. The financial sector also has faced a yield curve environment that has been challenging. But the outlook is changing as interest rates inch up and regulations are loosened on many financial institutions.
CVB Financial Group
In February, CVB Financial Group merged with Southern California-based Citizens Business Bank. The deal was valued at about $878.3 million.
Over the long-term, it has shown steady growth in loans and deposits, as evidenced by its rising book value. The company had total assets of $8.27 billion as of Dec. 31.
Over the last decade, CVB has seen its book value per share rise by 90%. Its current book value is just under $10 a share. Its stock price has jumped 88% to $22.39 a share over the same period.
In a competitive comparison of banks within the same industry with a similar market cap, CVB Financial had the lowest book value per share of a total of 10 regional banking institutions, GuruFocus showed.
GuruFocus ranks the bank 6 in 10 in financial strength and 5 in 10 in profitability and growth.
It saw increases in key bank metrics over the last year. It had assets of $8.27 billion on Dec. 31, a jump of almost $200 million, or about 2.44% more from the prior-year.
It also reported interest-earning assets increased 2% to $7.8 billion over the last year. The increase in interest-earning assets was primarily due to a $435.9 million increase in total loans. Total equity also increased by 7.91% to over $1 billion.
Growth in book value
The bank’s average book value per share for the last decade has been 6.3%. That translates into a jump to $9.71 per share compared to $5.93 in 2008. The bank’s return on equity, which emphasizes its lending strength, is 10.10%. In 2014, it grew to more than 12% after hitting highs of 21% in 2005.
Its return on assets was 122% in the final months of the year. The bank dropped to 98% during the banking crisis.
The bank has an interest income of $285.9 million, which has been steadily rising in the last three years. It has free cash flow of $134 million, which has been rising since 2012.
In dividend yield, it paid 2.29% to investors in December 2017, an increase over the prior year.
Non-performing loans
The bank has seen its number of non-performing loans dramaticaly decline compared to prior years.
Financial filings show that it had 18% of its assets as “non-performing” as compared to total assets in 2017. That is significant drop from a rate of 51% in 2014 and even 70% in 2013.
As of December 2017, loans classified as impaired totaled $15.5 million, or 32% of gross loans, compared to $26.4 million or 60% of total loans the year-prior.
The bank reported 4,200 troubled debt-restructured loans or “non-performing loans” compared to more than 25,000 in 2013. It reported total debt restructurings of $9 million at the end of 2017 compared to $20.9 million in December 2016.
