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$859m, Lakeland Bancorp Inc’s (NASDAQ:LBAI) 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 Lakeland Bancorp’s bottom line. Today we will analyse Lakeland Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Lakeland Bancorp Understand Its Own 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 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 256.56%, Lakeland Bancorp excessively over-provisioned by 156.56% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
By nature, Lakeland Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Lakeland Bancorp’s profit. 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 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. Lakeland Bancorp’s total deposit level of 89% 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.
How will LBAI’s recent acquisition impact the business going forward? Should you be concerned about the future of LBAI and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for LBAI. I’ve also used this site as a source of data for my article.
- 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 past 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. For errors that warrant correction please contact the editor at email@example.com.