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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Central Valley Community Bancorp (NASDAQ:CVCY) is a small-cap bank with a market capitalisation of US$274m. 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 Central Valley Community Bancorp’s bottom line. Today we will analyse Central Valley Community Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Central Valley Community Bancorp Understand Its Own Risks?
The ability for Central Valley Community 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 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. With a non-performing loan allowance to non-performing loan ratio of 332.26%, the bank has extremely over-provisioned by 232.26% compared to the industry-average. We wonder if this might indicate the bank is expecting to incur further non-performing loans in the near future.
What Is An Appropriate Level Of Risk?
If Central Valley Community Bancorp does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. 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 Central Valley Community Bancorp’s bottom line. Since bad loans only make up an insignificant 0.30% 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 Central Valley Community Bancorp’s Safety Net?
Central Valley Community 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Central Valley Community Bancorp’s total deposit level of 97% 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.
CVCY's acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked CVCY’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 CVCY’s future growth? Take a look at our free research report of analyst consensus for CVCY’s outlook.
- Valuation: What is CVCY 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 CVCY 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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