Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$949.12M, Lakeland Bancorp Inc’s (NASDAQ:LBAI) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Lakeland 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. See our latest analysis for Lakeland Bancorp
How Good Is Lakeland Bancorp At Forecasting Its Risks?
Lakeland Bancorp’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 259.65%, the bank has extremely over-provisioned by 159.65% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
By nature, Lakeland Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. 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. Bad debt is written off as expenses when loans are not repaid which directly impacts Lakeland Bancorp’s bottom line. The bank’s bad debt only makes up a very small 0.33% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
Lakeland 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Lakeland Bancorp’s total deposit to total liabilities is very high at 90.59% which is well-above the prudent level of 50% for banks, Lakeland Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Lakeland Bancorp shows prudent management of risky assets and lending behaviour. 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. Lakeland Bancorp 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 LBAI in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three important factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for LBAI’s future growth? Take a look at our free research report of analyst consensus for LBAI’s outlook.
- Valuation: What is LBAI 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 LBAI 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 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.