Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. As a small-cap bank with a market capitalisation of US$172m, Evans Bancorp, Inc.’s (NYSEMKT:EVBN) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Evans 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.
Does Evans Bancorp Understand Its Own Risks?
Evans Bancorp’s ability to forecast and provision for its bad loans relatively accurately suggests it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it may have underestimated the risks that may have led to a higher bad loan level which begs the question – does Evans Bancorp understand its own risk? With a non-performing loan allowance to non-performing loan ratio of 77.85%, Evans Bancorp has under-provisioned by -22.15% which leaves relatively little margin for error. We do note though, that many banks don’t require 100% coverage of their non-performing loans, as banks often can seize collateral to cover their losses on bad loans.
What Is An Appropriate Level Of Risk?If Evans Bancorp does not engage in overly risky lending practices, it is considered to be in relatively better financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debts. When these loans are not repaid, they are written off as expenses which comes out directly from Evans Bancorp’s profit. Since bad loans only make up 1.64% of total assets for the bank, it may be taking an appropriate approach to risk management.
Is There Enough Safe Form Of Borrowing?Evans 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Evans Bancorp’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Evans Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
EVBN’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. The list below is my go-to checks for EVBN. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.
- Future Outlook: What are well-informed industry analysts predicting for EVBN’s future growth? Take a look at our free research report of analyst consensus for EVBN’s outlook.
- Valuation: What is EVBN 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 EVBN 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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