The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of USD $201.93M, The Community Financial Corporation (NASDAQ:TCFC)’s 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 Financial’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. Check out our latest analysis for Community Financial
How Good Is Community Financial At Forecasting Its Risks?
The ability for Community Financial to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. With a bad loan to bad debt ratio of 380.7%, the bank has extremely over-provisioned by 280.7% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
How Much Risk Is Too Much?
By nature, Community Financial is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Community Financial’s profit. The bank’s bad debt only makes up a very small 0.24% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
Community Financial 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. Community Financial’s total deposit level of 85.03% 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.
Community Financial exhibits prudent management of risky assets and lending behaviour with sensible levels for all three ratios. It seems to have a clear understanding of how much it needs to provision each year for lower quality borrowers and it has maintained a safe level of deposits against its liabilities. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Community Financial a less risky investment. We’ve only touched on operational risks for TCFC in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three essential aspects you should further research:
1. Future Outlook: What are well-informed industry analysts predicting for TCFC’s future growth? Take a look at our free research report of analyst consensus for TCFC’s outlook.
2. Valuation: What is TCFC 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 TCFC is currently mispriced by the market.
3. 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.