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$169m, Mackinac Financial Corporation’s (NASDAQ:MFNC) 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 Mackinac 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 Mackinac Financial’s a stock investment.
Does Mackinac Financial Understand Its Own Risks?
The ability for Mackinac 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 level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 102.09%, the bank has cautiously over-provisioned by 2.09%, which may suggest the bank is anticipating additional non-performing loans.
What Is An Appropriate Level Of Risk?If Mackinac Financial does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. 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 come directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.49% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
How Big Is Mackinac Financial’s Safety Net?Mackinac 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. Mackinac Financial’s total deposit level of 94% 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 MFNC’s recent acquisition impact the business going forward? Should you be concerned about the future of MFNC and the sustainability of its financial health? Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for MFNC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for MFNC’s future growth? Take a look at our free research report of analyst consensus for MFNC’s outlook.
- Valuation: What is MFNC 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 MFNC 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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