Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$675.50M, The First of Long Island Corporation’s (NASDAQ:FLIC) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting First of Long Island’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of First of Long Island’s a stock investment. View our latest analysis for First of Long Island
Does First of Long Island Understand Its Own Risks?
First of Long Island’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. Given its large bad loan to bad debt ratio of over 500%, First of Long Island has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
How Much Risk Is Too Much?
First of Long Island is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts First of Long Island’s bottom line. The bank’s bad debt only makes up a very small 0.03% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. First of Long Island’s total deposit level of 79.71% of its total liabilities is within the sensible margin for for financial institutions which generally has a ratio of 50%. This indicates a prudent level of the bank’s safer form of borrowing and a prudent level of risk.
First of Long Island shows prudent management of risky assets and lending behaviour. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes First of Long Island a less risky investment. Today, we’ve only explored one aspect of First of Long Island. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three pertinent factors you should look at:
- 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.
To help readers see pass 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.