As a small-cap bank stock with a market capitalisation of US$1.5b, Seacoast Banking Corporation of Florida’s (NASDAQ:SBCF) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. 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 GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Seacoast Banking of Florida to vulnerabilities. Unpredictable macro events such as political instability could weaken its financial position which is why it is important to understand how well the bank manages its risk levels. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Seacoast Banking of Florida’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.
Is SBCF’s Leverage Level Appropriate?A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Seacoast Banking of Florida’s leverage level of less than the suitable maximum level of 20x, at 7.81x, is considered to be very cautious and prudent. With assets 7.81 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 increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
How Should We Measure SBCF’s Liquidity?As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Seacoast Banking of Florida’s total asset. Generally, they should make up less than 70% of total assets, but its current level of 71% means the bank has lent out 1.03% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.
Does SBCF Have Liquidity Mismatch?Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. Loans are generally fixed term which means they cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Seacoast Banking of Florida’s ratio of over 93% is higher, which places the bank in a relatively dangerous territory to go into negative discrepancy in liquidity. Essentially, for $1 of deposits with the bank, it lends out more than $0.9 which is risky.
Today, we’ve only explored one aspect of Seacoast Banking of Florida. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three key aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for SBCF’s future growth? Take a look at our free research report of analyst consensus for SBCF’s outlook.
- Valuation: What is SBCF worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether SBCF is currently mispriced by the market.
- 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.