Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of USD $137.96M, Auburn National Bancorporation Inc (NASDAQ:AUBN)’s profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Auburn National Bancorporation’s bottom line. Today we will analyse Auburn National Bancorporation’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. Check out our latest analysis for Auburn National Bancorporation
How Good Is Auburn National Bancorporation At Forecasting Its Risks?
Auburn National Bancorporation’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 160.92%, the bank has cautiously over-provisioned by 60.92%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Auburn National Bancorporation is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Auburn National Bancorporation’s profit. Since bad loans make up a relatively small 0.64% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Auburn National Bancorporation’s Safety Net?
Auburn National Bancorporation profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Auburn National Bancorporation’s total deposit level of 98.74% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
Auburn National Bancorporation exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. Auburn National Bancorporation is deemed a less risky investment given its sound and sensible lending strategy which gives us more confidence in its operational risk management. We’ve only touched on operational risks for AUBN in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three key factors you should further research:
1. Valuation: What is AUBN 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 AUBN is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Auburn National Bancorporation’s board and the CEO’s back ground.
3. 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 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.