Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Pacific Mercantile Bancorp (NASDAQ:PMBC) is a small-cap bank with a market capitalisation of US$227.37m. 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 Pacific Mercantile Bancorp’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 Pacific Mercantile Bancorp’s a stock investment.
Does Pacific Mercantile Bancorp Understand Its Own Risks?
Pacific Mercantile 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 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?By nature, Pacific Mercantile Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form 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 Pacific Mercantile Bancorp’s bottom line. A ratio of 0.77% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?Pacific Mercantile 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since Pacific Mercantile Bancorp’s total deposit to total liabilities is very high at 94.30% which is well-above the prudent level of 50% for banks, Pacific Mercantile Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
PMBC’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 PMBC. I’ve also used this site as a source of data for my article.
- 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.
- 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.
- 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.