The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. 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$587m, The First of Long Island Corporation’s (NASDAQ:FLIC) 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 First of Long Island’s bottom line. Today we will analyse First of Long Island’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does First of Long Island Understand Its Own Risks?
The ability for First of Long Island 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 provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, First of Long Island has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
How Much Risk Is Too Much?
If First of Long Island does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of First of Long Island’s profit. The bank’s bad debt only makes up a very small 0.065% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
How Big Is First of Long Island’s Safety Net?
First of Long Island makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since First of Long Island’s total deposit to total liabilities is very high at 80% which is well-above the prudent level of 50% for banks, First of Long Island may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
FLIC’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. The list below is my go-to checks for FLIC. 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 FLIC’s future growth? Take a look at our free research report of analyst consensus for FLIC’s outlook.
- Valuation: What is FLIC 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 FLIC 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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