Peoples Bancorp of North Carolina, Inc.

Good morning and welcome to the People's Fan Corp, Inc. conference call. My name is Kate and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period ended March 31st, 2023. 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 one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, 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 fact 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's disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's first quarter 2023 earnings release was issued this morning and is available at peoplesbandcorp.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 25 to 30 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 Soloreski, President and Chief Executive Officer and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Soloreski, you may begin your conference.

Thank you, Kate. Good morning, and thank you for joining our call today. Based on our diversified business model and strong core deposit franchise, we are pleased to report strong quarterly earnings. In our earnings release earlier this morning, we inadvertently underreported our weighted average diluted shares by 618,965 shares. As a result, our diluted earnings per share was 94 cents, which was two cents lower than we reported in our earnings release of 96 cents. We will issue an 8K with a new release today. Katie will review our excellent results a little later in the call. In light of the current events in the banking industry, We will start our discussion with deposits, liquidity, credit, and capital. Our deposit base is a key strength of people's. At quarter end, only 32% of our deposit balances exceeded FDIC insurance limits. This is down from 33% at year end. We routinely pledge investment securities against certain governmental deposit accounts, which covered nearly $700 million of uninsured deposit balances at quarter ends. Excluding our uninsured deposits that are covered by pledged investment securities, our uninsured deposits were only 19% of total deposits at quarter ends. Our liquidity position more than covers the remaining uninsured deposits. Our deposits are comprised of 75% retail deposits which includes consumers and small businesses, and 25% commercial balances. Our average customer deposit relationship was $30,000 at quarter end. At the same time, our median retail customer balance was a little over $3,000, while our median commercial customer balance was approximately $65,000. We effectively controlled our cost of deposits, which was 40 basis points for the quarter, compared to 19 basis points for the linked quarter. At the same time, our cost of funds was 72 basis points compared to 36 basis points for the linked quarter. Excluding our brokered CDs, which we use for funding, our deposit costs for the quarter were 29 basis points compared to 16 basis points for the linked quarter. We estimate approximately 85 percent of our deposits are from rural markets while only 15 percent come from urban markets. During the recent turmoil in other markets, our clients have remained calm, and we have seen little unusual deposit movement. Our team has been proactive in educating our clients on FDIC insurance limits and available options. We have also been reassuring our clients of our bank's financial stability, which has been well received in the communities we service. Our total deposits excluding broken CDs declined 76 million or 1% compared to year end. We have had inflated deposits related to COVID, so some of that decline was expected over time. We had outflows of savings and money market balances, but those were nearly offset with an increase in our retail CDs as we offered more attractive pricing. We did experience a decline in our non-interest-bearing deposits. However, some of the decline was tempered by an increase in governmental deposits that are seasonal in nature. Our demand deposits comprised 46% of total deposits at year end, compared to 48% at year end and 47% a year ago. Moving to our liquidity position. We continually monitor our liquidity position and have excellent balance sheet liquidity with quick access to funds. Our loan to deposit ratio stood at 82% at March 31st, which was unchanged from year end. At quarter end, we had liquefiable assets of around $570 million, including cash and unpledged investment securities. We had nearly $3 million of contingent sources of liquidity, which include potential borrowings, the value of other investment securities that had not been pledged, and available CDERS and ICS funding. Of the $3 billion, nearly $800 million of the available funding is from lines available from the FHLB and the FRB, assuming we have all available potential collateral pledges. We have not utilized the Federal Reserve's bank term funding program since its inception, as we have not needed additional funding and there is uncertainty around the markets viewing it negatively. We estimate that using this line as of March 31st in lieu of other funding from the FHLB and the FRB would have saved us around $740,000 annually in expenses. This funding source also allows us to pledge investment securities at par as collateral instead of at market value. We see the benefit of utilizing this line due to the lower cost compared to other funding sources and believe the projected savings is justified. Therefore, we may utilize this funding source in the future. From a credit quality perspective, we had stable metrics compared to year end. Our allowance for credit losses was 1.12 percent of total loans, which was flat compared to year end. While we increased reserves for pooled loans during the quarter, Much of this increase was offset by payoffs of individually analyzed loans, which resulted in a provision for credit losses that was mostly driven by charge-offs during the quarter. Non-performing assets improved $2.4 million and declined to 0.58% of total assets compared to 0.63% at year-end. This decrease in non-performing assets was driven by payoffs and paydowns on multiple relationships since year end, coupled with loans that were no longer past due. The portion of our loan portfolio considered current at quarter end was 98.8%, an improvement from 98.6% at year end. While the current rate environment has put pressure on commercial customers, we have not seen a meaningful uptick in delinquencies. Our quarterly annualized net charge-off rate was 13 basis points for the quarter, an improvement from 18 basis points for the fourth quarter. This decline was driven by lower lease net charge-offs. Our consumer indirect loan charge-offs have grown in recent periods and were seven basis points of net charge-offs for the quarter compared to six basis points for the linked quarter and three basis points for the prior year quarter. During the first quarter, our number of indirect charge-offs declined. However, the average size of charge-offs grew, resulting in higher annualized net charge-off rate due to used car pricing. The indirect loan charge-offs are within the range we would expect, and we are comfortable with them. Our classified loans experienced a slight increase of $4 million compared to the linked quarter end. This was driven by the downgrade of one commercial and industrial relationship. At the same time, our criticized loans were up 4 percent. This increase was largely due to three commercial and industrial relationships. The increase in criticized loans was partially offset by paydowns of $16 million and upgrades of $2 million during the quarter. With regards to commercial office space, this remains a very small portion of our loan portfolio. Our total exposure was $107 million at quarter end and represented 1.9% of our total loan portfolio. The top 10 borrowers represent 55% of the commercial office space loan portfolio and have average liquidity of $15 million. These borrowers averaged $6 million in commitments and $5.5 million in outstanding balances. We only have 1.7 million of commercial office space balances maturing in 2023. As for our multifamily real estate loan portfolio, our total exposure was 426 million at quarter end. The outstanding balances of this portfolio were 235 million at quarter end, and the majority of our exposure is within the construction phase and the majority of our exposure is within the construction phase with top-tier developers. This portfolio is concentrated in central Ohio, and our top 10 exposures account for 50 percent of the portfolio. The average liquidity of these top 10 borrowers is $21 million. We see no major problems with our projects. While there has been the occasional permitting or construction delay, projects have largely been leasing up at the desired speeds with most of them at rents higher than projected. We remain focused on growing and maintaining a diversified loan portfolio. At quarter end, our commercial real estate loans comprised 31% of total loans, while commercial and industrial loans were 19%. Construction loans were 5%, specialty finance loans totaled 10%, and our consumer loans were 35%. Of our commercial real estate loans, 37% is owner occupied, which we view more like commercial and industrial loans. We generally only do these transactions where we bank the operating company. Compared to year end, our loan portfolio grew 4% on an annualized basis. This includes 16% annualized growth in commercial real estate loans and 11% annualized growth and both leases and consumer indirect loan balances. At quarter end, the percentage of fixed rate loans to total loans was 45%, while our floating rate loans were 55%. We have confidence in our ability to grow our overall loan portfolio organically with credit quality at the forefront of our process. From a capital perspective, our capital ratios continue to be strong and grew at quarter ends. we are meaningfully above well-capitalized levels. At March 31st, even if we included our accumulated other comprehensive loss and held to maturity investment security losses, we would still be above well-capitalized levels for all our capital ratios. I will now turn the call over to Katie for additional details around our earnings and financial performance.

Chuck always steals the earnings discussion, and I am delighted to report the following good news. Our earnings improved compared to the linked quarter and were highlighted by diluted EPS totaling 94 cents per share, which was negatively impacted by 2 cents for acquisition-related expenses versus consensus estimates of 91 cents. Continued improvement in our net interest income, which was up 3%, and net interest margin expansion of 9 basis points. fee-based income growth of 9%, which was primarily due to the annual performance-based insurance income we receive in the first quarter of each year. Our pre-tax, pre-provision return on average assets grew five basis points to 2.11%. We also had 4% annualized total loan growth compared to year-end. Our deposit costs, excluding brokered CDs, remained low and only grew 13 basis points compared to the linked quarter. Our tangible equity to tangible assets ratio improved to 7.1% and was up 41 basis points compared to year end. At the same time, our tangible book value per share improved $1.14 compared to year end and was $17.37. For the quarter, our net income was impacted by expected additional expenses we typically recognize in the first quarter of each year. As a result, our total non-interest expense for the quarter included employer contributions to health savings accounts of $591,000 and stock-based compensation expense for certain employees of $1.1 million. Combined, these additional expenses reduced our diluted EPS by 5 cents. We also incurred $551,000 in acquisition-related expenses for the quarter, which negatively impacted our diluted EPS by 2 cents. Our net interest income grew compared to the prior period, as the higher market interest rates benefited our interest income, outpacing the increase in our funding costs. Compared to the linked quarter, net interest margin grew nine basis points. Accretion income declined over $220,000 and added 13 basis points to margin compared to 14 basis points for the linked quarter. During the first quarter, we sold nearly $100 million of available for sale investment securities and recognized a loss of $1.9 million. We expect to recover this loss within the calendar year. The purpose of the sales was to make our investment portfolio and overall balance sheet more efficient and improve net interest income. Compared to the linked quarter, our investment yields improved 41 basis points. Our total loan yields improved to 6.1% from 5.6% for the linked quarter and 4.5% for the prior year quarter. Our fee-based income improved 9% compared to the linked quarter, primarily due to the annual performance-based insurance commissions we receive in the first quarter of each year. Our total non-interest expense grew compared to the linked quarter. As I mentioned earlier, we were impacted by additional costs we typically recognize during the first quarter of each year. We also had higher franchise tax and electronic banking expense compared to the linked quarter. Our reported efficiency ratio was 57.8% for the quarter compared to 56.7% for the linked quarter. When adjusted for non-core expenses, our efficiency ratio was 57.2% compared to 55.9% for the linked quarter. From a balance sheet perspective, we grew our investment securities portfolio to 24.6% of total assets compared to 24.2% at year end. We have been selectively choosing certain securities to enhance our portfolio prior to the closing of the limestone merger as we manage towards our future outlook for the balance sheet. We still anticipate that investment securities as a percent of total assets will decline in future periods as we manage our liquidity position and bring on limestone. We will continue to actively manage the investment securities portfolio and may be opportunistic as it relates to future sales as we were in the first quarter where there is a benefit from an interest rate and earn back perspective. From a liquidity viewpoint, we do not anticipate the need to liquidate our investments to ensure future liquidity. As it relates to our interest rate sensitivity, we continue to manage to a relatively neutral balance sheet position. We remain slightly asset sensitive We have taken actions over the last couple of quarters to reduce our exposure to lower interest rates, primarily through the investment security purchases we have made. We anticipate that the limestone merger will have a minimal impact on our interest rate sensitivity position. We believe they may reduce our asset sensitivity slightly, but will not meaningfully change our interest rate profile. We continue to have a strong capital position which further grew this quarter and exceeds well-capitalized limits. At quarter end, our common equity Tier 1 capital ratio improved 30 basis points compared to year end, while our total risk-based capital grew 29 basis points, and our leverage ratio includes 10 basis points. In reaction to the recent bank failures, we have taken additional steps to analyze our capital levels. Although we exclude our accumulated other comprehensive loss from the calculation of our regulatory capital ratios as permitted by regulators, we completed an analysis where we included that loss as well as losses on our held to maturity investment securities portfolio in our regulatory capital ratios. Even including these unrealized losses, which totaled $165 million after tax, our regulatory capital ratios would have all been considered above well-capitalized levels at March 31, 2023. For example, at quarter end, our common equity Tier 1 capital was $624 million, or 12.2% of risk-weighted assets. If you reduce our common equity Tier 1 capital by our accumulated other comprehensive loss of $111 million, that ratio is 10% of risk-weighted assets. If you further reduce our common equity Tier 1 capital by our after-tax unrealized loss on our held to maturity investment securities, which was $54 million, it resulted in a ratio of 8.7% of risk-weighted assets. These calculations are above the 6.5% well-capitalized level set by regulators for this particular ratio. Our tangible equity to tangible asset ratio improved to 7.1% from 6.7% at the linked 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 per share and tangible book value per share by 15% and 28% respectively on an annualized basis compared to year end. Earlier this morning, we announced a one cent increase to our quarterly dividend. We remain focused on providing a quality return for our shareholders and have increased our dividend for eight consecutive years. I will now turn the call back to Chuck for additional comments. Thank you, Katie.