Is American River Bankshares (NASDAQ:AMRB) Over-Exposed To Risk?

The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. American River Bankshares (NASDAQ:AMRB) is a small-cap bank with a market capitalisation of US$81m. 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 American River Bankshares’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 American River Bankshares’s a stock investment.

Check out our latest analysis for American River Bankshares

NasdaqGS:AMRB Historical Debt January 4th 19
NasdaqGS:AMRB Historical Debt January 4th 19

Does American River Bankshares Understand Its Own Risks?

American River Bankshares’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%, American River Bankshares 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?

American River Bankshares’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from American River Bankshares’s profit. The bank’s bad debt only makes up a very small 0.12% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

How Big Is American River Bankshares’s Safety Net?

Handing Money Transparent American River Bankshares 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since American River Bankshares’s total deposit to total liabilities is very high at 96% which is well-above the prudent level of 50% for banks, American River Bankshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

AMRB’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. I’ve bookmarked AMRB’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

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