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Risk Factors To Consider Before Investing In Two River Bancorp (NASDAQ:TRCB)

Gerald Huddleston

The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Two River Bancorp (NASDAQ:TRCB) is a small-cap bank with a market capitalisation of US$106m. 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 Two River Bancorp’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 Two River Bancorp

NasdaqGM:TRCB Historical Debt January 2nd 19

Does Two River Bancorp Understand Its Own Risks?

Two River Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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%, Two River 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?

If Two River Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.15% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

How Big Is Two River Bancorp’s Safety Net?

Handing Money Transparent

Two River Bancorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Two River Bancorp’s total deposit level of 93% 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.

Next Steps:

The recent acquisition is expected to bring more opportunities for TRCB, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for TRCB. I’ve also used this site as a source of data for my article.

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