Yahoo Finance Risk Factors To Consider Before Investing In Middlefield Banc Corp. (NASDAQ:MBCN)
Post-GFC recovery has led to improving credit quality and a strong growth environment for 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$133m, Middlefield Banc Corp.’s (NASDAQ:MBCN) 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 Middlefield Banc’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 Middlefield Banc
How Good Is Middlefield Banc At Forecasting Its Risks?
The ability for Middlefield Banc to forecast and provision for its bad loans accurately serves as an indication for the bank's understanding of its own level of risk. The bank may have poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Middlefield Banc understand the risks it has taken on? With a non-performing loan allowance to non-performing loan ratio of 62.21%, Middlefield Banc has under-provisioned by -37.79% which leaves relatively little margin for error. 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.
What Is An Appropriate Level Of Risk?
Middlefield Banc is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Middlefield Banc’s profit. A ratio of 1.2% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.
Is There Enough Safe Form Of Borrowing?
Middlefield Banc 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. Middlefield Banc’s total deposit level of 91% 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.
Next Steps:
MBCN's acquisition will impact the business moving forward. Keep an eye on how this decision plays out in the future, especially on its financial health and earnings growth. I’ve bookmarked MBCN’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 MBCN’s future growth? Take a look at our free research report of analyst consensus for MBCN’s outlook.
Valuation: What is MBCN 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 MBCN 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 editorial-team@simplywallst.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.
