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 US$139m. 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. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
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 non-performing loan allowance to non-performing loan ratio of 76.75%, Colony Bankcorp has under-provisioned by -23.25% which leaves relatively little margin for error. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Much Risk Is Too Much?
If Colony Bankcorp does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Loans that cannot be recovered by the bank are known as bad loans and typically 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 Colony Bankcorp’s profit. A ratio of 1.21% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management – or it could indicate risks in the portfolio have not fully matured.
How Big Is Colony Bankcorp’s Safety Net?
Colony Bankcorp 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. Colony Bankcorp’s total deposit level of 94% 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 CBAN, 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 CBAN. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for CBAN’s future growth? Take a look at our free research report of analyst consensus for CBAN’s outlook.
- 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.
- 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.
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