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$304m, The First Bancorp Inc’s (NASDAQ:FNLC) 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 Bancorp’s bottom line. Today we will analyse First Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is First Bancorp At Forecasting Its Risks?
First Bancorp’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 poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does First Bancorp understand its own risk?. First Bancorp’s low bad loan to bad debt ratio of 79.77% means the bank has under-provisioned by -20.23%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
How Much Risk Is Too Much?
If First Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of First Bancorp’s profit. A ratio of 1.17% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is First Bancorp’s Safety Net?
First Bancorp 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. First Bancorp’s total deposit level of 84% 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.
FNLC’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 FNLC. 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 FNLC’s future growth? Take a look at our free research report of analyst consensus for FNLC’s outlook.
- Valuation: What is FNLC 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 FNLC 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.
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