Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Unity Bancorp Inc (NASDAQ:UNTY) is a small-cap bank with a market capitalisation of US$248.99m. 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 Unity Bancorp’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Unity Bancorp’s a stock investment. Check out our latest analysis for Unity Bancorp
How Good Is Unity Bancorp At Forecasting Its Risks?
Unity Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 331.91%, the bank has extremely over-provisioned by 231.91% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
If Unity Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Unity Bancorp’s bottom line. Since bad loans only make up a very insignificant 0.36% 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.
How Big Is Unity Bancorp’s Safety Net?
Unity 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. Unity Bancorp’s total deposit level of 84.87% 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.
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.
- Historical Performance: What has UNTY’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 pass 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.