The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Colony Bankcorp Inc (NASDAQ:CBAN)is a small-cap bank with a market capitalisation of USD $121.53M. 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 Colony Bankcorp’s bottom line. Today we will analyse Colony Bankcorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. See our latest analysis for Colony Bankcorp
How Good Is Colony Bankcorp At Forecasting Its Risks?
The ability for Colony Bankcorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. 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 Colony Bankcorp understand its own risk?. With a bad loan to bad debt ratio of 90.58%, Colony Bankcorp has under-provisioned by -9.42% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
If Colony Bankcorp 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 Colony Bankcorp’s profit. A ratio of 1.14% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
Colony Bankcorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to 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. Colony Bankcorp’s total deposit level of 92.43% 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.
Colony Bankcorp has maintained a safe level of deposits against its liabilities. Nevertheless, its imprudent bad debt management could negatively impact its cash flows. Today, we’ve only explored one aspect of Colony Bankcorp. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three key factors you should look at:
1. Valuation: What is CBAN 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 CBAN is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Colony Bankcorp’s board and the CEO’s back ground.
3. 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.