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$215m, Unity Bancorp, Inc.’s (NASDAQ:UNTY) 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 Unity Bancorp’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.
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Does Unity Bancorp Understand Its Own Risks?
The ability for Unity 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 241.94%, the bank has extremely over-provisioned by 141.94% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
By nature, Unity Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Unity Bancorp’s profit. The bank’s bad debt only makes up a very small 0.49% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Unity Bancorp’s Safety Net?
Unity 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Unity Bancorp’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Unity Bancorp 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 UNTY, 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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for UNTY. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for UNTY’s future growth? Take a look at our free research report of analyst consensus for UNTY’s outlook.
- Valuation: What is UNTY 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 UNTY 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.
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 firstname.lastname@example.org.