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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$288m, The First Bancorp, Inc.’s (NASDAQ:FNLC) 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 Bancorp’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 First Bancorp At Forecasting Its Risks?
First Bancorp’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 First Bancorp understand its own risk?. First Bancorp’s low bad loan to bad debt ratio of 82.43% means the bank has under-provisioned by -17.57%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.
What Is An Appropriate Level Of Risk?First Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? 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 Bancorp’s profit. Since bad loans make up a relatively small 1.14% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
Is There Enough Safe Form Of Borrowing?First Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since First Bancorp’s total deposit to total liabilities is very high at 87% which is well-above the prudent level of 50% for banks, First Bancorp 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 FNLC, 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 FNLC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for FNLC’s future growth? Take a look at our free research report of analyst consensus for FNLC’s outlook.
- Valuation: What is FNLC 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 FNLC 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.