PEOPLES BANCORP OF NORTH CAROLINA INC (PEBK) stock intrinsic value fair value estimate & owner earnings analysis

Peoples Bancorp of North Carolina owns Peoples Bank, a community bank founded in 1912 and based in Newton, North Carolina. It gathers deposits and makes loans through roughly twenty branches in Catawba, Alexander, Lincoln and Iredell counties, about 40 miles north of Charlotte, with loan offices in Charlotte, Denver (North Carolina), Salisbury and Winston-Salem. It also earns fee income from an appraisal management subsidiary whose revenue rises and falls with mortgage and real-estate activity (up $2.0 million in 2025). The core of the franchise is cheap, sticky funding: at June 30, 2026, $409 million of its $1.57 billion of deposits (26%) paid no interest at all, a share that has held steady for years. How we measure earning power. We start from the cash the bank's operations generate, charge loan-loss provisions as a real cost of lending rather than adding them back, and deduct the spending needed to keep branches and systems in working order. On that basis earning power ranged from $1.30 to $3.75 per share over 2016-2025 and was $3.46 in 2025. That 2025 figure excludes a one-time $3.0 million gain when the North Carolina Department of Transportation took the former Mooresville branch by eminent domain for a highway widening. We anchor on $3.42 per share, the middle of 2022-2025: those years reflect today's balance sheet (about $1.7 billion of assets) and today's interest-rate conditions, including the squeeze on margins in 2022-2023 and the recovery since. We left out 2021 because a release of loan-loss reserves flattered it, and earlier years describe a meaningfully smaller bank. Where the business is now. Earning power fell 7.7% in 2025 ($3.75 to $3.46), but mostly because 2024 was flattered by almost no spending on premises that year ($0.1 million against a normal $1-4 million). The first half of 2026 (quarterly report filed August 2026) is a clearer read: net interest income rose 8.9% to $31.1 million as deposit costs fell, but loan-loss provisions jumped to $853,000 from $55,000 a year earlier and expenses rose, so net income grew only 1.3%, to $9.63 million. Our base case therefore starts with 1% growth in year one, below the improvement in interest income and in line with what actually reached the bottom line. An important change in how growth is valued. A bank cannot grow its loans for free: every extra dollar of loans needs roughly nine to ten cents of shareholder capital kept in the business. Our earlier estimate credited growth without charging for the earnings that have to be retained to fund it, and it assumed earnings kept growing about 1% a year forever after year ten. We now deduct the capital needed for each year's growth (about $29.50 of equity per share today grows in step with the balance sheet) and, after year ten, hold earnings flat rather than assuming further growth. That is the main reason our estimates are lower than before. We also no longer count on share buybacks: the $2.0 million program authorized in June 2024 and the $3.0 million program authorized in March 2025 both expired unused. What the bank owes. For a bank, deposits and borrowings are the raw material of the business rather than financing on top of it, and their interest cost is already deducted in the earnings above, so nothing further is subtracted in any case. That includes the holding company's $15.5 million of junior subordinated debentures (issued through PEBK Capital Trust II, maturing September 15, 2036), whose interest is small against roughly $19 million of annual earnings. Leverage instead shows up in the bear case as credit losses: the bank carries roughly ten dollars of assets for each dollar of equity, so a loan problem equal to a small fraction of the loan book hits owners hard. The bond portfolio ($364 million at June 30, 2026) still carries unrealized losses, leaving equity $29.5 million below what it would otherwise be; those bonds repay at face value as they mature, so this is a drag on current yields rather than a loss we deduct again. Base case ($61.70 per share). Earnings grow 1% in year one, then 2.5% a year through year five, tapering to 1.5% by year ten, which is below the bank's own record: assets grew about 5% a year from 2015 to 2025, funded entirely from retained earnings through the 2020 pandemic and the 2022-2023 rate shock, and per-share earning power grew about 3.9% a year from 2018 to 2025 (part of that from buybacks that have since stopped). Each year's growth is charged for the capital it needs. Year four carries one ordinary credit-cycle year, costing about $0.50 per share, sized from the $4.3 million reserve build in 2020. After year ten, earnings of about $4.19 per share continue flat, supported by a deposit franchise that has operated for more than a century. Business worth $61.70 per share; nothing further owed beyond the funding already charged; value to shareholders $61.70. Bear case ($47.69 per share). The provision increase already visible in 2026 continues and margins give back part of the recent gain as rates fall further, cutting earning power 15% to about $2.91 per share, roughly where it stood in 2019-2022, and it stays there with no growth. In year three a harder credit year like 2020's costs an additional $0.90 per share. Worth $47.69 per share; nothing further owed beyond the funding already charged; value to shareholders $47.69. Bull case ($72.30 per share). The first-half-2026 pace holds, lifting year-one earning power 7% to about $3.66 per share. Low-yielding bonds maturing into today's higher yields add about 1.5% a year in years two through four. The balance sheet grows 3.5% a year, tapering to 2.5% by year ten, still charged for the capital it needs. After year ten, earnings of about $5.07 per share hold flat. Worth $72.30 per share; nothing further owed beyond the funding already charged; value to shareholders $72.30. We did not credit faster growth from the Charlotte-area loan offices, share-gain hopes or a resumption of buybacks, because none is yet backed by a record or a commitment. Every case is discounted at a flat 6%. The shares appear to be worth about $48 to $72, with $62 the central estimate. The margin-of-safety price is $42. That is about a third below the base case and below the bear case, a margin that reflects a bank with ten-to-one leverage, credit costs already rising, and fee income tied to the real-estate cycle. What would make this wrong: a regional real-estate downturn producing loan losses well beyond 2020's, or a drain of the noninterest-bearing deposits that underpin the bank's margin. Reconciliation note: operating cash flow ran about 1-2% above our earning-power figure in 2024 and 2025, a gap from the timing of loans made for sale and similar items. It does not affect the conclusion.