The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$187m, First Guaranty Bancshares Inc’s (NASDAQ:FGBI) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off First Guaranty Bancshares’s bottom line. Today we will analyse First Guaranty Bancshares’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does First Guaranty Bancshares Understand Its Own Risks?
First Guaranty Bancshares’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 167.12% First Guaranty Bancshares has cautiously over-provisioned 67.12% 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?
First Guaranty Bancshares is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of First Guaranty Bancshares’s profit. A ratio of 0.53% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?
First Guaranty Bancshares 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since First Guaranty Bancshares’s total deposit to total liabilities is very high at 96% which is well-above the prudent level of 50% for banks, First Guaranty Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FGBI’s recent acquisition impact the business going forward? Should you be concerned about the future of FGBI and the sustainability of its financial health? I’ve bookmarked FGBI’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 FGBI’s future growth? Take a look at our free research report of analyst consensus for FGBI’s outlook.
- Valuation: What is FGBI 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 FGBI 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.