Understated Factors To Consider Before Investing In LCNB Corp. (NASDAQ:LCNB)
As a small-cap bank stock with a market capitalisation of US$214m, LCNB Corp.’s (NASDAQ:LCNB) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. Since a bank profits from reinvesting its clients’ deposits in the form of loans, negative economic growth may lower deposit levels and demand for loan, adversely impacting its cash flow. 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. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like LCNB to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. 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 LCNB’s financial risk position by looking at three leverage and liquidity metrics.
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Why Does LCNB’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. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. LCNB’s leverage level of less than the suitable maximum level of 20x, at 7.59x, is considered to be very cautious and prudent. With assets 7.59 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.
How Should We Measure LCNB’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up LCNB’s total assets. Normally, they should not exceed 70% of total assets, but its current level of 71% means the bank has lent out 1.49% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more exposed to defaulting relative to banks with less loans.
Does LCNB Have Liquidity Mismatch?
LCNB 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, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. The discrepancy between loan assets and deposit liabilities threatens the bank’s financial position. If an adverse event occurs, it may not be well-placed to repay its depositors immediately. Since LCNB’s loan to deposit ratio of 84% 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.
Next Steps:
Passing two of the three checks for liquidity and leverage demonstrates a relatively sensible operational risk management by the bank. This means it is well-positioned to meet its financial obligations in case of any unforeseen and adverse macro events. Today, we’ve only explored one aspect of LCNB. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three important factors you should look at:
Future Outlook: What are well-informed industry analysts predicting for LCNB’s future growth? Take a look at our free research report of analyst consensus for LCNB’s outlook.
Valuation: What is LCNB 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 LCNB 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 editorial-team@simplywallst.com.
