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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. FNCB Bancorp, Inc. (NASDAQ:FNCB) is a small-cap bank with a market capitalisation of US$126m. 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 FNCB Bancorp’s bottom line. Today we will analyse FNCB Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does FNCB Bancorp Understand Its Own Risks?
The ability for FNCB Bancorp 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 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. With a bad loan to bad debt ratio of 202.7%, the bank has extremely over-provisioned by 102.7% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
By nature, FNCB 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 FNCB Bancorp’s bottom line. Since bad loans make up a relatively small 0.56% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is FNCB Bancorp’s Safety Net?
FNCB 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. FNCB Bancorp’s total deposit level of 96% 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 FNCB’s recent acquisition impact the business going forward? Should you be concerned about the future of FNCB and the sustainability of its financial health? The list below is my go-to checks for FNCB. 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.
- Future Outlook: What are well-informed industry analysts predicting for FNCB’s future growth? Take a look at our free research report of analyst consensus for FNCB’s outlook.
- Valuation: What is FNCB 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 FNCB 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 firstname.lastname@example.org.