Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. 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$126m, CB Financial Services, Inc.’s (NASDAQ:CBFV) 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 CB Financial Services’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.

Check out our latest analysis for CB Financial Services

How Good Is CB Financial Services At Forecasting Its Risks?

The ability for CB Financial Services to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. 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 high non-performing loan allowance to non-performing loan ratio of 151.4% CB Financial Services has cautiously over-provisioned 51.4% above its current level of non-performing loans. This could indicate a prudent forecasting methodology, or indicate that further bad loans are expected.

What Is An Appropriate Level Of Risk?

CB Financial Services is considered to be in better financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risk? Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. Bad debt is written off when loans are not repaid. This is classified as an expense which directly impacts CB Financial Services’s bottom line. A ratio of 0.69% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management - or it could indicate risks in the portfolio have not fully matured.

How Big Is CB Financial Services’s Safety Net?

CB Financial Services 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. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since CB Financial Services’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, CB Financial Services may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

CBFV'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 CBFV. 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.

1. Future Outlook: What are well-informed industry analysts predicting for CBFV’s future growth? Take a look at our free research report of analyst consensus for CBFV’s outlook.

2. Valuation: What is CBFV 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 CBFV 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.