Why Orrstown Financial Services Inc’s (NASDAQ:ORRF) Risk Control Makes It Attractive

Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Orrstown Financial Services Inc (NASDAQ:ORRF) is a small-cap bank with a market capitalisation of US$206m. 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.

See our latest analysis for Orrstown Financial Services

NasdaqCM:ORRF Historical Debt November 21st 18
NasdaqCM:ORRF Historical Debt November 21st 18

Does Orrstown Financial Services Understand Its Own Risks?

The ability for Orrstown Financial Services to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 253.06%, the bank has extremely over-provisioned by 153.06% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.

How Much Risk Is Too Much?

If Orrstown Financial Services does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 Orrstown Financial Services’s profit. Since bad loans make up a relatively small 0.50% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

How Big Is Orrstown Financial Services’s Safety Net?

Handing Money Transparent Orrstown Financial Services 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. Orrstown Financial Services’s total deposit level of 91% 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 ORRF’s recent acquisition impact the business going forward? Should you be concerned about the future of ORRF and the sustainability of its 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.

  1. 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.
  2. 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.
  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.