Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. 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$1.2b, First Bancorp’s (NASDAQ:FBNC) 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 Bancorp’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.
How Good Is First Bancorp At Forecasting Its Risks?
First Bancorp’s ability to forecast and provision for its bad loans relatively accurately suggests it has a good understanding of the level of risk it is taking on. The bank may have poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does First Bancorp understand the risks it has taken on? With a non-performing loan allowance to non-performing loan ratio of 58.45%, First Bancorp has under-provisioned by -41.55% which leaves relatively little margin for error. 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?
By nature, banks like First Bancorp are 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 when loans are not repaid. This is classified as an expense which directly impacts First Bancorp’s bottom line. A ratio of 0.85% 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 Bancorp’s Safety Net?
First Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since First Bancorp’s total deposit to total liabilities is very high at 91% which is well-above the prudent level of 50% for banks, First Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FBNC’s recent acquisition impact the business going forward? Should you be concerned about the future of FBNC and the sustainability of its financial health? The list below is my go-to checks for FBNC. 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 FBNC’s future growth? Take a look at our free research report of analyst consensus for FBNC’s outlook.
- Valuation: What is FBNC 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 FBNC 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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