Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Bank of Marin Bancorp (NASDAQ:BMRC) is a small-cap bank with a market capitalisation of US$544m. 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 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 forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. Given its large non-performing loan allowance to non-performing loan ratio of over 500%, Bank of Marin Bancorp has over-provisioned relative to its current level of non-performing loans, which could indicate the bank is expecting to incur further bad loans in the near future.
What Is An Appropriate Level Of Risk?If Bank of Marin Bancorp does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. 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 as expenses when loans are not repaid which directly impacts Bank of Marin Bancorp’s bottom line. The bank’s bad debt only makes up a very small 0.039% to total debt which suggests the bank either has strict risk management – or its loans haven’t started going bad yet.
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. Since Bank of Marin Bancorp’s total deposit to total liabilities is very high at 99% which is well-above the prudent level of 50% for banks, Bank of Marin Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
The recent acquisition is expected to bring more opportunities for BMRC, 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 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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