Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$559m, The First of Long Island Corporation’s (NASDAQ:FLIC) 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 First of Long Island’s bottom line. Today we will analyse First of Long Island’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is First of Long Island At Forecasting Its Risks?
The ability for First of Long Island to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, First of Long Island has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
What Is An Appropriate Level Of Risk?By nature, banks like First of Long Island are exposed to risky assets, by lending to borrowers who may not be able to repay their loans. Ideally, 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 First of Long Island’s bottom line. Since bad loans only make up an insignificant 0.065% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.
How Big Is First of Long Island’s Safety Net?First of Long Island 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. Since First of Long Island’s total deposit to total liabilities is very high at 80% which is well-above the prudent level of 50% for banks, First of Long Island may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
FLIC’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. The list below is my go-to checks for FLIC. 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 FLIC’s future growth? Take a look at our free research report of analyst consensus for FLIC’s outlook.
- Valuation: What is FLIC 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 FLIC 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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