The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Orrstown Financial Services Inc (NASDAQ:ORRF) is a small-cap bank with a market capitalisation of US$193m. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Orrstown Financial Services’s bottom line. Today we will analyse Orrstown Financial Services’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Orrstown Financial Services At Forecasting Its Risks?
Orrstown Financial Services’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its large bad loan to bad debt ratio of 253.06%, Orrstown Financial Services excessively over-provisioned by 153.06% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
Orrstown Financial Services is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Orrstown Financial Services’s profit. A ratio of 0.50% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Orrstown Financial Services’s Safety Net?
Orrstown Financial Services makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Orrstown Financial Services’s total deposit to total liabilities is very high at 91% which is well-above the prudent level of 50% for banks, Orrstown Financial Services may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for ORRF, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. The list below is my go-to checks for ORRF. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for ORRF’s future growth? Take a look at our free research report of analyst consensus for ORRF’s outlook.
- Valuation: What is ORRF 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 ORRF 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.
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