Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Emclaire Financial Corp (NASDAQ:EMCF) is a small-cap bank with a market capitalisation of US$95m. 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 Emclaire Financial’s bottom line. Today we will analyse Emclaire Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Emclaire Financial Understand Its Own Risks?
Emclaire Financial’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. Given its large bad loan to bad debt ratio of 246.1%, Emclaire Financial excessively over-provisioned by 146.1% above the appropriate minimum, indicating the bank may perhaps be too cautious with their expectation of bad debt.
What Is An Appropriate Level Of Risk?
If Emclaire Financial does not engage in overly risky lending practices, it is considered to be in good financial shape. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Emclaire Financial’s bottom line. The bank’s bad debt only makes up a very small 0.42% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Emclaire Financial’s Safety Net?
Emclaire Financial 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Emclaire Financial’s total deposit level of 96% 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.
EMCF’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. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for EMCF. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for EMCF’s future growth? Take a look at our free research report of analyst consensus for EMCF’s outlook.
- Valuation: What is EMCF 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 EMCF 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.
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.