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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. First Community Corporation (NASDAQ:FCCO) is a small-cap bank with a market capitalisation of US$148m. 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’s bottom line. Today we will analyse First Community’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does First Community Understand Its Own Risks?
First Community’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of 243.13%, First Community over-provisioned by 143.13% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
First Community may be taking on too many risky loans 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. Bad debt is written off as expenses when loans are not repaid which directly impacts First Community’s bottom line. The bank’s bad debt only makes up a very small 0.36% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
Is There Enough Safe Form Of Borrowing?
First Community 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’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, First Community may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for FCCO, 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. The list below is my go-to checks for FCCO. 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 FCCO’s future growth? Take a look at our free research report of analyst consensus for FCCO’s outlook.
- Valuation: What is FCCO 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 FCCO 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.