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$222m, Northrim BanCorp, Inc.’s (NASDAQ:NRIM) 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 Northrim BanCorp’s bottom line. Today we will analyse Northrim BanCorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Northrim BanCorp At Forecasting Its Risks?
Northrim BanCorp’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 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. Given its high bad loan to bad debt ratio of 119.43% Northrim BanCorp has cautiously over-provisioned 19.43% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?Northrim BanCorp is engaging in risking lending practices if it is over-exposed to bad debt. 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 Northrim BanCorp’s bottom line. With a ratio of 1.71%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Northrim BanCorp’s Safety Net?Northrim 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Northrim BanCorp’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Northrim BanCorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
NRIM’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for NRIM. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for NRIM’s future growth? Take a look at our free research report of analyst consensus for NRIM’s outlook.
- Valuation: What is NRIM 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 NRIM 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.
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