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Codorus Valley Bancorp, Inc.’s (NASDAQ:CVLY) profitability and risk are largely affected by the underlying economic growth for the region it operates in US given it is a small-cap stock with a market capitalisation of US$208m. 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. Post-GFC recovery brought about a new set of reforms, Basel III, which was created to improve regulation, supervision and risk management in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Codorus Valley Bancorp 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. High liquidity and low leverage could position Codorus Valley Bancorp favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today.
Why Does CVLY’s Leverage Matter?
Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. While financial companies will always have some leverage for a sufficient capital buffer, Codorus Valley Bancorp’s leverage ratio of less than the suitable maximum level of 20x, at 10.11x, is considered to be very cautious and prudent. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. 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 CVLY’s Liquidity?
As I eluded to above, loans are relatively illiquid. It’s helpful to understand how much of this illiquid asset makes up Codorus Valley Bancorp’s total asset. Normally, they should not exceed 70% of total assets, however its current level of 81% means the bank has clearly lent out 11.36% above the sensible threshold. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to default compared to banks with less loans.
Does CVLY Have Liquidity Mismatch?
A way banks make money is by lending out its deposits as loans. These loans tend to be fixed term which means they cannot be readily realized, however, customer deposits are liabilities which must be repaid 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 Codorus Valley Bancorp’s loan to deposit ratio of 98% is higher than the appropriate level of 90%, this level 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 Codorus Valley Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three pertinent factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for CVLY’s future growth? Take a look at our free research report of analyst consensus for CVLY’s outlook.
- Valuation: What is CVLY 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 CVLY 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.