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Three Understated Metrics For Select Bancorp Inc (NASDAQ:SLCT) You Should Know

Austin Wood

As a small-cap bank stock with a market capitalisation of USD $146.48M, Select Bancorp Inc’s (NASDAQ:SLCT) 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. 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. 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. High liquidity and low leverage could position Select 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. View our latest analysis for Select Bancorp

NasdaqGM:SLCT Historical Debt Jan 6th 18
NasdaqGM:SLCT Historical Debt Jan 6th 18

Why Does SLCT’s Leverage Matter?

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, Select Bancorp’s leverage level of 8x is very safe and substantially below the maximum limit of 20x. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. 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 SLCT’s Level of Liquidity?

Handing Money Transparent
Handing Money Transparent

Due to its illiquid nature, loans are an important asset class we should learn more about. Generally, they should make up less than 70% of total assets, but its current level of 81.80% means the bank has obviously lent out 12% 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 SLCT Have Liquidity Mismatch?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. 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. Compared to the appropriate industry loan to deposit level of 90%, Select Bancorp’s ratio of over 97.39% is higher which puts the bank in a risky position as it borders negative liquidity disparity between loan and deposit levels. Basically, for USD 1 of deposits with the bank, it lends out over USD 0.9 which is imprudent.

Conclusion

Now that you know to keep in mind these liquidity factors when putting together your investment thesis, I recommend you check out our latest free analysis report on Select Bancorp to see its growth prospects and whether it could be considered an undervalued opportunity.

PS. Interested in Select Bancorp’s competitors instead? Take a look at our free platform for a deep dive into other bank stocks.


To help readers see pass 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.