Yahoo Finance What You Should Know About Community First Bancshares Inc’s (NASDAQ:CFBI) Risks
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$87.4m, Community First Bancshares Inc’s (NASDAQ:CFBI) 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 Community First Bancshares’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.
See our latest analysis for Community First Bancshares
How Good Is Community First Bancshares At Forecasting Its Risks?
Community First Bancshares’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 105.92%, the bank has cautiously over-provisioned by 5.92%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
Community First Bancshares is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from Community First Bancshares’s profit. Since bad loans only make up 1.67% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Big Is Community First Bancshares’s Safety Net?
Community First Bancshares 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 Community First Bancshares’s total deposit to total liabilities is very high at 93.9% which is well-above the prudent level of 50% for banks, Community First Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
The recent acquisition is expected to bring more opportunities for CFBI, 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. I’ve bookmarked CFBI’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 CFBI’s future growth? Take a look at our free research report of analyst consensus for CFBI’s outlook.
Historical Performance: What has CFBI’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 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 editorial-team@simplywallst.com.
