Have You Considered These Key Risks For Northeast Bancorp (NASDAQ:NBN)?
Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in 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 US$190.11M, Northeast Bancorp’s (NASDAQ:NBN) 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 Northeast Bancorp’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk. View our latest analysis for Northeast Bancorp
How Good Is Northeast Bancorp At Forecasting Its Risks?
Northeast Bancorp’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Northeast Bancorp understand its own risk?. Given Northeast Bancorp’s bad loan to bad debt ratio is 34.46%, the bank has extremely under-provisioned by -65.54% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
Northeast Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Northeast Bancorp’s bottom line. With a ratio of 1.67%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Northeast Bancorp’s Safety Net?
Northeast Bancorp operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Northeast Bancorp’s total deposit level of 94.57% 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.
Next Steps:
Northeast Bancorp’s safer form of borrowing is appropriately high compared to the liabilities of the company. Conversely its cash flow could be negatively impacted by its below-average bad debt management. Today, we’ve only explored one aspect of Northeast Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three essential factors you should look at:
Valuation: What is NBN 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 NBN is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Northeast Bancorp’s board and the CEO’s back ground.
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.
