Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$330m, Southern National Bancorp of Virginia, Inc.’s (NASDAQ:SONA) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Southern National Bancorp of Virginia’s bottom line. Today we will analyse Southern National Bancorp of Virginia’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Southern National Bancorp of Virginia At Forecasting Its Risks?
Southern National Bancorp of Virginia’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 230.82%, the bank has extremely over-provisioned by 130.82% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
If Southern National Bancorp of Virginia does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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 Southern National Bancorp of Virginia’s bottom line. Since bad loans only make up a very insignificant 0.23% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?
Southern National Bancorp of Virginia 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. Since Southern National Bancorp of Virginia’s total deposit to total liabilities is very high at 86% which is well-above the prudent level of 50% for banks, Southern National Bancorp of Virginia 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 SONA, 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 SONA. I’ve also used this site as a source of data for my article.
Future Outlook: What are well-informed industry analysts predicting for SONA’s future growth? Take a look at our free research report of analyst consensus for SONA’s outlook.
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