Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$163m, 1st Constitution Bancorp’s (NASDAQ:FCCY) 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 1st Constitution Bancorp’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 1st Constitution Bancorp’s a stock investment.
How Good Is 1st Constitution Bancorp At Forecasting Its Risks?
The ability for 1st Constitution Bancorp 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. Given its high bad loan to bad debt ratio of 122.25% 1st Constitution Bancorp has cautiously over-provisioned 22.25% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
By nature, 1st Constitution Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts 1st Constitution Bancorp’s bottom line. A ratio of 0.77% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is 1st Constitution Bancorp’s Safety Net?
1st Constitution 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since 1st Constitution Bancorp’s total deposit to total liabilities is very high at 88% which is well-above the prudent level of 50% for banks, 1st Constitution Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FCCY’s recent acquisition impact the business going forward? Should you be concerned about the future of FCCY and the sustainability of its financial health? I’ve bookmarked FCCY’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:
- Future Outlook: What are well-informed industry analysts predicting for FCCY’s future growth? Take a look at our free research report of analyst consensus for FCCY’s outlook.
- Valuation: What is FCCY 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 FCCY 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.