As a small-cap finance stock with a market capitalisation of US$181.07m, the risk and profitability of 1st Constitution Bancorp (NASDAQ:FCCY) are largely tied to the underlying economic growth of the region it operates in US. A bank’s cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. After the Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. These reforms target bank level regulation and aims to improve the banking sector’s ability to absorb shocks arising from economic stress which could expose financial institutions to vulnerabilities. Since its financial standing can unexpectedly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent the bank is at managing its risk levels. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring 1st Constitution Bancorp’s financial risk position by looking at three leverage and liquidity metrics. View out our latest analysis for 1st Constitution Bancorp
Why Does FCCY’s Leverage Matter?Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, 1st Constitution Bancorp’s leverage ratio of 9.36x is significantly below the appropriate ceiling of 20x. With assets 9.36 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
What Is FCCY’s Level of Liquidity?Due to its illiquid nature, loans are an important asset class we should learn more about. Usually, they should not be higher than 70% of total assets, however its current level of 72.46% means the bank has lent out 2.46% above the sensible threshold. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to default compared to banks with less loans.
Does FCCY Have Liquidity Mismatch?FCCY profits by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Since 1st Constitution Bancorp’s loan to deposit ratio of 86.23% is within the sensible margin, below than the appropriate maximum of 90%, this level places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance.
The bank’s prudent management of its risk levels is reflected in its sensible leverage and liquidity ratios. This means it is well-placed to meet its financial obligations in the case of any adverse and unpredictable macro events. Today, we’ve only explored one aspect of 1st Constitution Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three pertinent aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for FCCY’s future growth? Take a look at our free research report of analyst consensus for FCCY’s outlook.
- Historical Performance: What has FCCY’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.