Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. 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$488m, Independent Bank Corporation’s (NASDAQ:IBCP) 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 Independent Bank’s bottom line. Today we will analyse Independent Bank’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Independent Bank At Forecasting Its Risks?
Independent Bank’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 275.49%, Independent Bank over-provisioned by 175.49% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?Independent Bank may be taking on too many risky loans if it is over-exposed to bad debt. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.35% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
How Big Is Independent Bank’s Safety Net?Independent Bank 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 Independent Bank’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Independent Bank 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 IBCP, 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 IBCP. 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 IBCP’s future growth? Take a look at our free research report of analyst consensus for IBCP’s outlook.
- Valuation: What is IBCP 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 IBCP 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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