Post-GFC recovery has led to improving credit quality and a strong growth environment for 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$150.42m, FNCB Bancorp Inc’s (NASDAQ:FNCB) 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 FNCB Bancorp’s bottom line. Today we will analyse FNCB Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. Check out our latest analysis for FNCB Bancorp NasdaqCM:FNCB Historical Debt July 3rd 18
Does FNCB Bancorp Understand Its Own Risks?
The ability for FNCB Bancorp 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 397.92%, the bank has extremely over-provisioned by 297.92% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
FNCB Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.30% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
FNCB Bancorp 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. FNCB Bancorp’s total deposit level of 86.64% 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.
How will FNCB’s recent acquisition impact the business going forward? Should you be concerned about the future of FNCB and the sustainability of its financial health? I’ve bookmarked FNCB’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:
- Future Outlook: What are well-informed industry analysts predicting for FNCB’s future growth? Take a look at our free research report of analyst consensus for FNCB’s outlook.
- Historical Performance: What has FNCB’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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