Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Evans Bancorp Inc (AMEX:EVBN) is a small-cap bank with a market capitalisation of US$214.00M. 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 Evans Bancorp’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 Evans Bancorp’s a stock investment. View our latest analysis for Evans Bancorp

Does Evans Bancorp Understand Its Own Risks?

Evans Bancorp’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. With a bad loan to bad debt ratio of 102.22%, the bank has cautiously over-provisioned by 2.22%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

How Much Risk Is Too Much?

If Evans Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Bad debt is written off as expenses when loans are not repaid which directly impacts Evans Bancorp’s bottom line. A ratio of 1.29% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

How Big Is Evans Bancorp’s Safety Net?

Evans Bancorp 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 Evans Bancorp’s total deposit to total liabilities is very high at 89.29% 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.

Next Steps:

With positive measures for all three ratios, Evans Bancorp shows a prudent level of managing its risky assets. It has maintained a sufficient level of deposits against liabilities and reasonably provisioned for the level of bad debt. The company’s judicious lending strategy gives us higher conviction in its ability to manage its operational risks which makes Evans Bancorp a less risky investment. Today, we’ve only explored one aspect of Evans Bancorp. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three pertinent factors you should further examine:

1. 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.

2. 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.

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 pass 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.