Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Tompkins Financial Corporation (NYSEMKT:TMP) is a small-cap bank with a market capitalisation of US$1.1b. 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 Tompkins Financial’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 Tompkins Financial’s a stock investment.
How Good Is Tompkins Financial At Forecasting Its Risks?
Tompkins Financial’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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. Given its high bad loan to bad debt ratio of 169% Tompkins Financial has cautiously over-provisioned 69% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
How Much Risk Is Too Much?
If Tompkins Financial does not engage in overly risky lending practices, it is considered to be in good financial shape. 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 Tompkins Financial’s profit. A ratio of 0.51% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
How Big Is Tompkins Financial’s Safety Net?
Tompkins Financial 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. Since Tompkins Financial’s total deposit to total liabilities is very high at 82% which is well-above the prudent level of 50% for banks, Tompkins Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
TMP’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 TMP’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:
- Valuation: What is TMP 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 TMP is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Tompkins Financial’s board and the CEO’s back ground.
- 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 email@example.com.