As a small-cap finance stock with a market capitalisation of US$481m, the risk and profitability of Old Line Bancshares, Inc. (NASDAQ:OLBK) 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 Old Line Bancshares’s financial risk position by looking at three leverage and liquidity metrics.
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Is OLBK’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, Old Line Bancshares’s leverage level of less than the suitable maximum level of 20x, at 8.14x, 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 firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
How Should We Measure OLBK’s Liquidity?
Since loans are relatively illiquid, we should know how much of Old Line Bancshares’s total assets are comprised of these loans. 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 means its revenue is reliant on these specific assets which means the bank is also more exposed to defaulting relative to banks with less loans.
Does OLBK Have Liquidity Mismatch?
Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans tend to be fixed term which means they 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. Relative to the prudent industry loan to deposit level of 90%, Old Line Bancshares’s ratio of over 106% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Essentially, for $1 of deposits with the bank, it lends out more than $1 which is unsustainable.
Today, we’ve only explored one aspect of Old Line Bancshares. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three pertinent aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for OLBK’s future growth? Take a look at our free research report of analyst consensus for OLBK’s outlook.
- Valuation: What is OLBK 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 OLBK 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.