As a small cap company operating in a heavily regulated financial services sector, an investment in Evans Bancorp Inc (NYSEMKT:EVBN) has many factors to consider. One of the biggest risk it faces as a bank is bad loans, also known as credit risk. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts Evans Bancorp’s bottom line and shareholders’ value. I will take you through some useful measures of bad debt and liabilities in order to properly analyse Evans Bancorp’s risk level before you invest in the stock.
Does Evans Bancorp Understand Its Own Risks?
The ability for Evans Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Evans Bancorp understand the risks it has taken on? With a bad loan to bad debt ratio of 66.24%, Evans Bancorp has under-provisioned by -33.76% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
What Is An Appropriate Level Of Risk?
By nature, Evans Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. 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 2.04% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
How Big Is Evans Bancorp’s Safety Net?
Evans 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 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.
We’ve only touched on operational risks for EVBN in this article. But as a stock investment, there are other fundamentals you need to understand. There are three relevant factors you should further examine:
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.
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 firstname.lastname@example.org.