Peoples Bancorp of North Carolina, Inc.

Good morning and welcome to People's Bank Corp Inc's conference call. My name is Betsy and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly and fiscal year ended December 31st, 2022. Please be advised that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, please press star then two. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised. that the commentary in this call will contain projections or other forward-looking statements regarding people's future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical facts, are forward-looking statements and involve a number of risks and uncertainties detailed in People's Securities and Exchange Commission filings. Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of people's business and operations. However, it is possible actual results may differ materially from these forward-looking statements. People disclaim any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's fourth quarter 2022 earnings release was issued this morning and is available at peoplesbankcorp.com under investor relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 20 to 25 minutes of prepared commentary. followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbankcorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Stelarezki, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Celaresti, you may begin your conference.

Thank you, Betsy. Good morning, and we appreciate you joining our call today. We are pleased to report that our net income totaled $26.8 million for the fourth quarter, or 95 cents in diluted earnings per share. For the full year, our net income more than doubled compared to 2021 to $101.3 million, or $3.60 in diluted EPS. This is record annual net income for our company. Our fourth quarter results included several highlights. We had record quarterly total revenue compared to prior periods of over $90 million, which was nearly $3 million higher than the linked quarter. We were able to expand our fourth quarter net interest margin by 27 basis points compared to the linked quarter as we closely managed our deposit costs while our yields improved. We had annualized loan growth of 8% compared to the linked quarter. We lowered our reported efficiency ratio to 56.7% compared to 57.2% for the linked quarter. We generated positive operating leverage compared to the linked quarter. For the full year of 2022, we grew our total revenues by 37%, while growing our expenses by 13% compared to 2021, resulting in positive operating leverage. We had record pre-tax, pre-provision net revenue as a percent of total average assets, which was 2.06% for the fourth quarter and 1.77% for the full year of 2022. Our return on average stockholder equity grew to 13.9% compared to 12.9% for the linked quarter and was 12.7% for the full year of 2022 compared to 7.2% for 2021. Our fourth quarter return on average assets improved six basis points from the linked quarter to 1.51% and we maintained our fourth quarter total non-interest expense excluding acquisition related expenses within the range we previously had guided. Our allowance for credit losses was relatively flat compared to the linked quarter and was down 17 percent from the prior year end. Provision for credit losses was $2.3 million for the fourth quarter, which negatively impacted diluted EPS by six cents. For the full year, we had a release of provision totaling $3.5 million, which added 10 cents to diluted EPS. Our allowance for credit losses has grown in recent quarters due to the deterioration in macroeconomic conditions within the underlying forecast coupled with loan growth. We have also experienced improvements in our reserves for individually analyzed loans, which have partially offset the increases. Our allowance for credit losses stood at 1.1% of total loans at quarter ends. slightly lower than the length quarter end, and a decrease from 1.4 percent at prior year end. Moving on to our loan portfolio, for the fourth quarter, we grew balances by 96 million, or 8 percent annualized, compared to the length quarter end. Our largest contributor to the growth was our consumer indirect loans, which increased 37 million, or 25 percent annualized. We had significant We had significant growth in our leasing balances, which were up $32 million, or 41% annualized. Our construction loans increased $31 million, or 58% annualized, while commercial and industrial loans were up $15 million, or 7% annualized. Compared to year-end 2021, we had organic loan growth of 5%. We doubled our organic lease balances, which were up $133 million compared to year end 2021. Consumer indirect loans increased 19% compared to December 31, 2021, while construction and premium finance loans each had 17% growth. The 5% annual organic growth is on the low end of our 5 to 11% historic annual growth rate since 2013. We continue to have high production levels, which exceeded our 2021 production. We had some headwinds during the year with payoffs. Some of these payoffs were desired to improve our concentrations and overall credit quality. During the fourth quarter, we were able to return to our historic growth levels. From a credit quality perspective, we had stable metrics compared to the length quarter ends. Non-performing assets as a percent of total assets improved to 63 basis points, which is one basis point lower than the length quarter end and five basis points lower than the prior year end. Our non-performing loans were relatively flat compared to the length quarter end, as declines in loans 90-plus days past due and accruing were offset by higher non-accruals. The portion of our loan portfolio considered current stood at 98.6%, which was a slight decline from 98.9% for the linked quarter. Our quarterly annualized net charge-off rate was 18 basis points for the fourth quarter and totaled 16 basis points for 2022. We had some growth in our net charge-offs compared to the linked quarter and experienced most of the increase in leases and consumer indirect loans. Classified loans declined compared to the linked quarter end and were driven by $7 million in upgrades and $3 million in payoffs. Our criticized loans grew compared to the linked quarter end and were primarily driven by the downgrade of three commercial and industrial relationships. We believe all three relationships will have positive resolution in future months, so we expect the downgrades will be temporary. The increase in criticized loans from these downgrades was partially offset by pay downs of $7 million and upgrades of $8 million compared to the linked quarter ends. We continue to closely monitor our credit quality and take action to reduce exposure and risk where we can. We are confident in the credit quality of our new originations as we focus on maintaining high credit standards. As it relates to our announced merger, We have made a lot of progress thanks to the alignment and cooperation from the Limestone team. We continue to be impressed with the organization and prospects and looking forward to closing. We have submitted our proposed applications and documents to our regulators and are in the process of obtaining shareholder approval. At the same time, we have sent teams to Limestone locations to ensure a smooth transition and a positive outlook for all associates. Our extensive experience with merger and acquisitions allows us to complete an array of processes quickly, accurately, and efficiently. At this point, we are impressed with the Limestone team and the quality of their talent. We are on track to meet our internal and external deadlines associated with the merger, which we expect to close during the second quarter of 2023. And we are looking forward to putting our teams together to move our combined institution forward. I will now turn the call over to Katie for additional details around our financial performance.

Thank you, Chuck. Our net interest income continued to grow and was up 5% compared to the linked quarter, and our net interest margin expanded 27 basis points to 4.44%. Our loan and investment yields increased compared to the linked quarter and continued to be positively impacted by the higher market interest rate environments. Accretion income, net of amortization expense from acquisitions was $2.2 million, adding 14 basis points to margin compared to 2.8 million and 16 basis points, respectively, for the linked quarter. Our funding costs were up 12 basis points and were driven by higher borrowing costs and increased borrowing balances while we raised our deposit rates marginally. Our controlled deposit costs which were 19 basis points for the fourth quarter compared to 16 basis points for the linked quarter, have continued to help our margin expand at a high rate in recent quarters. Compared to the prior year quarter, net interest income grew 29% and net interest margin expanded 107 basis points. We continue to see improvement from our core growth in the increases in market interest rates. quarterly loan yields improved by 116 basis points, while our investment securities yield was 70 basis points higher than the prior year quarter. Funding costs doubled and were tied to higher borrowing costs and balances and the increase in our deposit rate. For the full year, our net interest income grew 47%, while our net interest margin expanded 56 basis points. compared to 2021. The majority of the increase was driven by the premier merger and Vantage acquisition, coupled with organic growth and higher market interest rates during 2022. We are currently in an asset sensitive position as it relates to our balance sheet, and we expect a slight reduction in asset sensitivity once we complete the limestone merger. As it relates to our efficiency ratio, we are pleased that our efforts for reduction have paid off. Our efficiency ratio is 56.7% on a reported basis for the fourth quarter compared to 57.2% for the linked quarter and 62.7% for the prior year quarter. When adjusted for non-core expenses, our efficiency ratio was 55.9%, a decline compared to 56.6% for the linked quarter and 61.5% for the prior year quarter. On a year-to-date basis, we improved our reported efficiency ratio to 59.6% from 73.6% for 2021. The adjusted efficiency ratio was 58.6% compared to 63.5% for 2021. We had positive operating leverage compared to the linked quarter prior year quarter, and full year of 2021. The value we find in this measure is identifying if we are growing our revenues faster than our expenses, and we did, both on a reported basis and when adjusted for non-core expenses compared to the prior period. Compared to the linked quarter, our fee-based income declined 4%. While insurance income grew, the overall decrease was driven by lower commercial loan swap fee income, which is included in other non-interested income, along with lower lease and electronic banking income. Compared to the prior year quarter, our fee-based income was down 1%. Lease income grew considerably, totaling $1.3 million compared to $600,000 for the prior year quarter. Our insurance income grew 12% compared to the fourth quarter of 2021 and was positively impacted by our insurance acquisition earlier this year. We also experienced growth in bank-owned life insurance income as we purchased additional policies during 2022 and we had higher deposit account service charges. Our increases were more than offset by declines in mortgage banking and commercial loan swap fee income. which were a result of the high interest rate environment reducing customer demand. For the full year, fee-based income was up 14% compared to the prior year. Our biggest area of growth was deposit account service charges, which was driven by the additional customers from the Premier merger. Lease income grew $3 million compared to 2021, driven by the lease acquisitions. Our electronic banking income increased largely due to higher customer activity in additional accounts from the premier merger in late 2021. Insurance income increased during 2022 compared to 2021, and mortgage banking income declined due to fewer refinancing and home purchases made by customers related to higher market interest rates in recent periods. Bank owned life insurance income increased because of the policies purchased during 2022. Moving on to expenses, compared to the linked quarter, total non-interest expense increased 2%. This was driven by higher data processing and software expense, while other non-interest expense and professional fees grew due to recent acquisition-related expenses recorded, which totaled over $700,000 for the quarter. At the same time, we had higher other loan expenses. We were able to offset some of these increases with declines in our electronic banking, franchise tax, and marketing expenses. Compared to the prior year quarter, our total non-interest expense grew 11%. The largest growth was in salaries and employee benefit costs, which was driven by the increases in pay for associates related to merit increases during 2022, coupled with the recent salary increase we completed at the beginning of October for associates making $60,000 or less a year. We had increased expenses due to the addition of associates from the Vantage and Elite acquisitions completed this year. Also contributing to the increase was higher sales and incentive compensation tied to improved performance and production, along with higher medical insurance costs. We recorded higher data processing and software expenses, as well as increased amortization of intangible assets associated with our recent acquisitions. We had additional operating expenses from the Vantage acquisition, which was completed in early 2022. The growth in these expenses was partially offset by lower electronic banking and franchise tax expense. For the full year of 2022 compared to 2021, Our total non-interest expense grew 13%. We have been acquisitive in recent periods, which has led to a growth in cost associated with our larger size and footprint over the last year. This has resulted in higher costs reflected through most categories, excluding acquisition-related expenses. Moving on to the balance sheet. We grew our held to maturity investment portfolio by over $150 million from the late quarter end. We have been purchasing bonds that are high yielding with relatively low credit risk as they are issued by government sponsored enterprises. The additional investment in held to maturity investment securities has allowed us to reduce some of our exposure to the swings and accumulated other comprehensive losses that we have been experiencing in our available for sale investment securities. At year end, our investment securities comprise 24.1% of our total assets compared to 23.1% for the linked quarter end and 23.8% for the prior year end. We anticipate that our investment securities as a percent of total assets could decline in future periods as we continue to manage our liquidity position. As Chuck mentioned earlier, we had loan growth of over 996 million or 8% annualized since September 30, 2022. Compared to the linked quarter end, our total deposits declined 3%. This was driven by outflows of governmental deposits, which have a seasonal decrease during the fourth quarter of each year. We also had some shrinkage in our non-interest bearing and retail CDs. However, our demand deposits as a percent of total deposits were still at 48% at year end, consistent with the linked quarter end and prior year end. We had some growth in our brokered CD balances, which was a function of our funding process, as these were at a lower price than certain FHLB advances. At year end, the reduction in our deposits put us in an overnight borrowed position. From a capital perspective, we grew our regulatory capital ratios compared to the linked quarter end. At year end, our common equity Tier 1 capital ratio was 12%, total risk-based capital ratio was 13.2%, and the Tier 1 leverage ratio was 8.9%. Each ratio improved by 22 to 28 basis points compared to September 30th, 2022. We have substantially recovered from the decreases in our capital ratios caused by the Vantage acquisition earlier in 2022. Our tangible equity to tangible asset ratio improved to 6.7% from 6.5% at the late quarter end as earnings net of dividends increased our capital coupled with a slight recovery in our accumulated other comprehensive loss. We grew our book value and tangible book value per share by 13% and 25% respectively on an annualized basis compared to the linked quarter. I will now turn the call back to Chuck for additional comments.