The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$321.2m, Citizens & Northern Corporation’s (NASDAQ:CZNC) 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 Citizens & Northern’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 Citizens & Northern’s a stock investment.
How Good Is Citizens & Northern At Forecasting Its Risks?
Citizens & Northern’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Citizens & Northern understand its own risk? Citizens & Northern’s low bad loan to bad debt ratio of 61.22% means the bank has under-provisioned by -38.78%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
Citizens & Northern is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Citizens & Northern’s bottom line. Since bad loans only make up 1.76% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?
Citizens & Northern 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. Citizens & Northern’s total deposit level of 95.1% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for CZNC, 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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for CZNC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CZNC’s future growth? Take a look at our free research report of analyst consensus for CZNC’s outlook.
- Valuation: What is CZNC 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 CZNC 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 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 email@example.com.