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Credit risk is one of the biggest risk Premier Financial Bancorp, Inc. (NASDAQ:PFBI) faces as a small cap company operating in a heavily regulated financial services sector. As a small bank, Premier Financial Bancorp’s profits are directly affected by macroeconomic events as the ability for borrowers to repay their debt depends on the stability of their salary and interest rate levels. Bad debt is directly written off as an expense which impacts Premier Financial Bancorp’s bottom line and shareholders’ value. Today we will analyse Premier Financial Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in Premier Financial Bancorp
Does Premier Financial Bancorp Understand Its Own Risks?
The ability for Premier Financial Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. 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 Premier Financial Bancorp understand its own risk?. With a bad loan to bad debt ratio of 52.13%, Premier Financial Bancorp has under-provisioned by -47.87% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?Premier Financial Bancorp 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? Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. With a ratio of 2.49%, the bank faces an appropriate level of bad loan, indicating prudent management and an industry-average risk of default.
How Big Is Premier Financial Bancorp’s Safety Net?Premier Financial Bancorp makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Premier Financial Bancorp’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Premier Financial Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
We’ve only touched on operational risks for PFBI in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three key aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for PFBI’s future growth? Take a look at our free research report of analyst consensus for PFBI’s outlook.
- Valuation: What is PFBI 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 PFBI 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. On rare occasion, data errors may occur. Thank you for reading.