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Are You Considering All The Risks For Farmers National Banc Corp.’s (NASDAQ:FMNB)?

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Cameron Brookes
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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Farmers National Banc Corp. (NASDAQ:FMNB) is a small-cap bank with a market capitalisation of US$369m. 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 Farmers National Banc’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.

See our latest analysis for Farmers National Banc

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NasdaqCM:FMNB Historical Debt January 17th 19
NasdaqCM:FMNB Historical Debt January 17th 19

How Good Is Farmers National Banc At Forecasting Its Risks?

The ability for Farmers National Banc 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 145.06%, the bank has cautiously over-provisioned by 45.06%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

What Is An Appropriate Level Of Risk?

If Farmers National Banc does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 when loans are not repaid. This is classified as an expense which directly impacts Farmers National Banc’s bottom line. Since bad loans make up a relatively small 0.55% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

How Big Is Farmers National Banc’s Safety Net?

Handing Money Transparent
Handing Money Transparent

Farmers National Banc operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given 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. Since Farmers National Banc’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Farmers National Banc may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will FMNB’s recent acquisition impact the business going forward? Should you be concerned about the future of FMNB and the sustainability of its financial health? I’ve bookmarked FMNB’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

  1. Future Outlook: What are well-informed industry analysts predicting for FMNB’s future growth? Take a look at our free research report of analyst consensus for FMNB’s outlook.

  2. Valuation: What is FMNB 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 FMNB 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.