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Why Northeast Bancorp (NASDAQ:NBN) May Not Be As Risky Than You Think

Walter Gay

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$169m, Northeast Bancorp’s (NASDAQ:NBN) 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 Northeast Bancorp’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Northeast Bancorp’s a stock investment.

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NasdaqGM:NBN Historical Debt January 22nd 19

How Good Is Northeast Bancorp At Forecasting Its Risks?

The ability for Northeast Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added 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 45.98%, the bank has extremely under-provisioned by -54.02% 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.

What Is An Appropriate Level Of Risk?

If Northeast Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Generally, loans that are “bad” and cannot be recovered by the bank 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 Northeast Bancorp’s bottom line. A ratio of 1.3% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent

Northeast Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Northeast Bancorp’s total deposit level of 95% 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:

How will NBN’s recent acquisition impact the business going forward? Should you be concerned about the future of NBN and the sustainability of its financial health? I’ve bookmarked NBN’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

  1. Future Outlook: What are well-informed industry analysts predicting for NBN’s future growth? Take a look at our free research report of analyst consensus for NBN’s outlook.
  2. 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.
  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 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 editorial-team@simplywallst.com.