The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of USD $191.85M, Peoples Bancorp of North Carolina Inc (NASDAQ:PEBK)’s 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 Peoples Bancorp of North Carolina’s bottom line. Today we will analyse Peoples Bancorp of North Carolina’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank. Check out our latest analysis for Peoples Bancorp of North Carolina
How Good Is Peoples Bancorp of North Carolina At Forecasting Its Risks?
Peoples Bancorp of North Carolina’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. Given its high bad loan to bad debt ratio of 138.8% Peoples Bancorp of North Carolina has cautiously over-provisioned 38.8% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?
Peoples Bancorp of North Carolina’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts Peoples Bancorp of North Carolina’s bottom line. Since bad loans make up a relatively small 0.66% of total assets, the bank exhibits strict bad debt management and faces low risk of default.
How Big Is Peoples Bancorp of North Carolina’s Safety Net?
Peoples Bancorp of North Carolina 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. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Peoples Bancorp of North Carolina’s total deposit level of 89.68% 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.
Peoples Bancorp of North Carolina shows prudent management of risky assets and lending behaviour. It has a strong understanding of how much it should provision for lower quality borrowers and has maintained a sensible level of deposits against its liabilities. The company’s sound and sensible lending strategy gives us more conviction in its ability to manage its operational risks which makes an investment in Peoples Bancorp of North Carolina a less risky one. Today, we’ve only explored one aspect of Peoples Bancorp of North Carolina. However, as a potential stock investment, there are many more fundamentals you need to consider. I’ve put together three important factors you should further examine:
1. Valuation: What is PEBK 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 PEBK is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Peoples Bancorp of North Carolina’s board and the CEO’s back ground.
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.