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Why Pacific Mercantile Bancorp’s (NASDAQ:PMBC) Risk Control Makes It Attractive

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Petra Goodwin
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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$229.70m, Pacific Mercantile Bancorp’s (NASDAQ:PMBC) 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 Pacific Mercantile 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. See our latest analysis for Pacific Mercantile Bancorp

NasdaqGS:PMBC Historical Debt June 24th 18
NasdaqGS:PMBC Historical Debt June 24th 18

Does Pacific Mercantile Bancorp Understand Its Own Risks?

The ability for Pacific Mercantile Bancorp 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 it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 163.46%, the bank has cautiously over-provisioned by 63.46%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

What Is An Appropriate Level Of Risk?

Pacific Mercantile Bancorp is engaging in risking lending practices if it is over-exposed to bad debt. Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Pacific Mercantile Bancorp’s bottom line. Since bad loans make up a relatively small 0.77% of total assets, the bank exhibits strict bad debt management and faces low risk of default.

How Big Is Pacific Mercantile Bancorp’s Safety Net?

Handing Money Transparent
Handing Money Transparent

Pacific Mercantile 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. Pacific Mercantile Bancorp’s total deposit level of 94.30% 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 PMBC, 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 PMBC. 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 PMBC’s future growth? Take a look at our free research report of analyst consensus for PMBC’s outlook.

  2. Historical Performance: What has PMBC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  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.