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$240m, FVCBankcorp, Inc.’s ( NASDAQ:FVCB ) 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 FVCBankcorp’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 FVCBankcorp At Forecasting Its Risks?
The ability for FVCBankcorp to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its large non-performing loan allowance to non-performing loan ratio of 205.77%, FVCBankcorp over-provisioned by 105.77% above the minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
How Much Risk Is Too Much?
FVCBankcorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts FVCBankcorp’s bottom line. Since bad loans only make up an insignificant 0.39% 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 FVCBankcorp’s Safety Net?
FVCBankcorp 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 FVCBankcorp’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, FVCBankcorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will FVCB’s recent acquisition impact the business going forward? Should you be concerned about the future of FVCB and the sustainability of its financial health? I’ve bookmarked FVCB’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 FVCB’s future growth? Take a look at our free research report of analyst consensus for FVCB’s outlook.
- Valuation : What is FVCB 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 FVCB 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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