The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$269m, Codorus Valley Bancorp Inc’s (NASDAQ:CVLY) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off Codorus Valley Bancorp’s bottom line. Today we will analyse Codorus Valley Bancorp’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.
How Good Is Codorus Valley Bancorp At Forecasting Its Risks?
Codorus Valley Bancorp’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. 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 301.57%, the bank has extremely over-provisioned by 201.57% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.
What Is An Appropriate Level Of Risk?
By nature, Codorus Valley Bancorp is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Codorus Valley Bancorp’s profit. The bank’s bad debt only makes up a very small 0.39% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.
How Big Is Codorus Valley Bancorp’s Safety Net?
Codorus Valley 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. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Codorus Valley Bancorp’s total deposit level of 90% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.
How will CVLY’s recent acquisition impact the business going forward? Should you be concerned about the future of CVLY and the sustainability of its financial health? The list below is my go-to checks for CVLY. 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 CVLY’s future growth? Take a look at our free research report of analyst consensus for CVLY’s outlook.
- Valuation: What is CVLY 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 CVLY 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.