The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. First Community Bankshares, Inc. (NASDAQ:FCBC) is a small-cap bank with a market capitalisation of US$572m. 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 First Community Bankshares’s bottom line. Today we will analyse First Community Bankshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is First Community Bankshares At Forecasting Its Risks?
The ability for First Community Bankshares 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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does First Community Bankshares understand its own risk?. First Community Bankshares’s low non-performing loan allowance to non-performing loan ratio of 90.77% means the bank has under-provisioned by -9.23%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
What Is An Appropriate Level Of Risk?
First Community Bankshares is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. Bad debt is written off as expenses when loans are not repaid which directly impacts First Community Bankshares’s bottom line. A ratio of 1.13% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management – or it could indicate risks in the portfolio have not fully matured.
How Big Is First Community Bankshares’s Safety Net?
First Community Bankshares 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 First Community Bankshares’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, First Community Bankshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for FCBC, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. The list below is my go-to checks for FCBC. 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 FCBC’s future growth? Take a look at our free research report of analyst consensus for FCBC’s outlook.
- Valuation: What is FCBC 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 FCBC 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.
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