Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. 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$579m, Bank of Marin Bancorp’s (NASDAQ:BMRC) 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 Bank of Marin Bancorp’s bottom line. Today we will analyse Bank of Marin Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
Does Bank of Marin Bancorp Understand Its Own Risks?
Bank of Marin Bancorp’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its large bad loan to bad debt ratio of over 500%, Bank of Marin Bancorp has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.
What Is An Appropriate Level Of Risk?
Bank of Marin Bancorp is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts Bank of Marin Bancorp’s bottom line. The bank’s bad debt only makes up a very small 0.022% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
Is There Enough Safe Form Of Borrowing?
Bank of Marin Bancorp 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Bank of Marin Bancorp’s total deposit level of 99% 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.
BMRC’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 BMRC. I’ve also used this site as a source of data for my article.
- Future Outlook: What are well-informed industry analysts predicting for BMRC’s future growth? Take a look at our free research report of analyst consensus for BMRC’s outlook.
- Valuation: What is BMRC 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 BMRC 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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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.