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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. As a small-cap bank with a market capitalisation of US$319m, Bank First National Corporation’s (NASDAQ:BFC) 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 Bank First National’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 Bank First National’s a stock investment.
How Good Is Bank First National At Forecasting Its Risks?
Bank First National’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. 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 Bank First National understand its own risk?. With an extremely low bad loan to bad debt ratio of 40.23%, Bank First National has significantly under-provisioned by -59.77% which is well below the appropriate margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
If Bank First National 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. Bad debt is written off as expenses when loans are not repaid which directly impacts Bank First National’s bottom line. With a ratio of 1.99%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Bank First National’s Safety Net?
Bank First National 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 Bank First National’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Bank First National may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
BFC’s acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked BFC’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:
- Valuation: What is BFC 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 BFC is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Bank First National’s board and the CEO’s back ground.
- 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.