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The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$832m, Carolina Financial Corporation’s (NASDAQ:CARO) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Carolina Financial’s bottom line. Today we will analyse Carolina Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Carolina Financial At Forecasting Its Risks?
Carolina 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 123.13% Carolina Financial has cautiously over-provisioned 23.13% 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?Carolina Financial is engaging in risking lending practices if it is over-exposed to bad debt. 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. Since bad loans only make up a very insignificant 0.47% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.
Is There Enough Safe Form Of Borrowing?Carolina 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. Carolina Financial’s total deposit level of 85% 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.
How will CARO’s recent acquisition impact the business going forward? Should you be concerned about the future of CARO and the sustainability of its financial health? I’ve bookmarked CARO’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:
- Future Outlook: What are well-informed industry analysts predicting for CARO’s future growth? Take a look at our free research report of analyst consensus for CARO’s outlook.
- Valuation: What is CARO 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 CARO 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.
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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.