Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. First Community Bancshares Inc (NASDAQ:FCBC) is a small-cap bank with a market capitalisation of US$576.57M. 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 First Community Bancshares’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 Community Bancshares’s a stock investment. Check out our latest analysis for First Community Bancshares
How Good Is First Community Bancshares At Forecasting Its Risks?
The ability for First Community Bancshares to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has 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 Community Bancshares understand the risks it has taken on? With a bad loan to bad debt ratio of 87.25%, First Community Bancshares has under-provisioned by -12.75% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
First Community Bancshares is engaging in risking lending practices if it is over-exposed to bad debt. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from First Community Bancshares’s profit. Since bad loans make up a relatively small 1.24% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is First Community Bancshares’s Safety Net?
First Community Bancshares 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since First Community Bancshares’s total deposit to total liabilities is very high at 94.94% which is well-above the prudent level of 50% for banks, First Community Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
First Community Bancshares’s level of deposits is sensible relative to its liabilities. However, its mediocre management of bad debt could negatively impact its cash flows. Today, we’ve only explored one aspect of First Community Bancshares. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three essential aspects you should look at:
- Valuation: What is FCBC 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 FCBC is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on First Community Bancshares’s board and the CEO’s back ground.
- 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.