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Why Summit Financial Group Inc’s (NASDAQ:SMMF) Risk Control Makes It Attractive

Ajay Mannan

Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$325.79M, Summit Financial Group Inc’s (NASDAQ:SMMF) 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 Summit Financial Group’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. View our latest analysis for Summit Financial Group

NasdaqCM:SMMF Historical Debt May 21st 18

Does Summit Financial Group Understand Its Own Risks?

Summit Financial Group’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. 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 Summit Financial Group understand its own risk?. Summit Financial Group’s low bad loan to bad debt ratio of 79.3% means the bank has under-provisioned by -20.7%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

How Much Risk Is Too Much?

If Summit Financial Group does not engage in overly risky lending practices, it is considered to be in good financial shape. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise 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. Since bad loans make up a relatively small 0.94% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent

Summit Financial Group 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Summit Financial Group’s total deposit to total liabilities is very high at 85.73% which is well-above the prudent level of 50% for banks, Summit Financial Group may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

Summit Financial Group’s level of deposits is sensible relative to its liabilities. However, its mediocre management of bad debt could negatively impact its cash flows. We’ve only touched on operational risks for SMMF in this article. But as a stock investment, there are other fundamentals you need to understand. There are three essential factors you should further examine:

  1. Future Outlook: What are well-informed industry analysts predicting for SMMF’s future growth? Take a look at our free research report of analyst consensus for SMMF’s outlook.
  2. Valuation: What is SMMF 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 SMMF 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.