One of the biggest risk United Security Bancshares (NASDAQ:UBFO) faces as a bank is bad loans, also known as credit risk. As a small cap stock in the heavily regulated financial services sector, its stock has many factors to consider. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts United Security Bancshares’s bottom line and shareholders’ value. Today we’re going to assess the level of bad debt and liabilities United Security Bancshares currently has in order to properly analyse the risk involved with investing in United Security Bancshares.
Does United Security Bancshares Understand Its Own Risks?
United Security Bancshares’s ability to forecast and provision for its bad loans relatively accurately suggests it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does United Security Bancshares understand its own risk?. United Security Bancshares’s low non-performing loan allowance to non-performing loan ratio of 52.85% means the bank has under-provisioned by -47.15%, indicating either an unexpected one-off occurrence with defaults or poor bad debt provisioning. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
How Much Risk Is Too Much?
By nature, banks like United Security Bancshares are 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 United Security Bancshares’s profit. With a ratio of 2.7%, the bank has a reasonable level of bad loans, which could suggest prudent management.
Is There Enough Safe Form Of Borrowing?
United Security Bancshares 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. Since United Security Bancshares’s total deposit to total liabilities is very high at 98% which is well-above the prudent level of 50% for banks, United Security Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Keep in mind that a stock investment requires research on more than just its operational side. I’ve put together three pertinent aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for UBFO’s future growth? Take a look at our free research report of analyst consensus for UBFO’s outlook.
- Valuation: What is UBFO 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 UBFO 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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.