Real Risks To Know Before Investing In TowneBank (NASDAQ:TOWN)

Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. TowneBank (NASDAQ:TOWN) is a small-cap bank with a market capitalisation of US$2.0b. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting TowneBank’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.

See our latest analysis for TowneBank

NasdaqGS:TOWN Historical Debt November 15th 18
NasdaqGS:TOWN Historical Debt November 15th 18

How Good Is TowneBank At Forecasting Its Risks?

TowneBank’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 it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of over 500%, TowneBank has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.

How Much Risk Is Too Much?

TowneBank’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of TowneBank’s profit. The bank’s bad debt only makes up a very small 0.088% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

How Big Is TowneBank’s Safety Net?

Handing Money Transparent TowneBank 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. TowneBank’s total deposit level of 86% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will TOWN’s recent acquisition impact the business going forward? Should you be concerned about the future of TOWN and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for TOWN. I’ve also used this site as a source of data for my article.

  1. Future Outlook: What are well-informed industry analysts predicting for TOWN’s future growth? Take a look at our free research report of analyst consensus for TOWN’s outlook.
  2. Valuation: What is TOWN 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 TOWN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.