Peoples Bancorp of North Carolina, Inc.

Good morning and welcome to the People's Bancorp, Inc. conference call. My name is Cole and I'll be your conference facilitator. Today's call will cover a discussion of the results of operations for the three and six months ended June 30th, 2024. 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, please simply press star then one on your telephone keypad. and questions will be taken in the order that 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 fact, are forward-looking statements and involve a number of risks and uncertainties detailed in the People's Security and Exchange Commission's filings. Management believes that 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 second quarter 2024 earnings release conference call presentation were issued this morning and are available under the peoplesbankorg.com under investor relations. A reconciliation of the non-general accepted accounting principles or GAAP financial measures discussed during this call to to the most directly comparable gap measures is included at the end of the earnings release. This call will include about 15 to 20 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 the peoplesbankcorp.com in the investor relations section for one year. Participants in the call today will be Tyler Wilcox, President and Chief Executive Officer, and Katie Bailey. Chief Financial Officer, and Treasurer. And each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Cole. Good morning, everyone, and thank you for joining our call today. This quarter, we're providing an earnings conference call presentation, which we filed as part of our Form 8K this morning with our earnings release, and is also posted on our website with this webcast. We are pleased to bring another quarter of consistent results for our shareholders. And for the second quarter, diluted earnings per share were 82 cents compared to 84 cents for the linked quarter. For the first half of 2024, diluted EPS were $1.66 compared to $1.56 for 2023. Some positives for the second quarter included loan growth of 8% annualized compared to the linked quarter, improvements in our criticized and classified loans which declined 6% and 19% respectively compared to the linked quarter end. While our total deposits declined $29 million, our core deposits grew by $42 million for the quarter, which excludes brokered CDs. Our brokered CDs continue to decline as we generate customer deposits. Our bulk value increased from $29.93 at the linked quarter end to $30.36 at June 30th, while our Our tangible book value per share grew to 1891, a 3% increase from March 31st. Our tangible equity to tangible assets ratio improved 24 basis points to 7.6%. Our regulatory capital ratios improved by double-digit percentages compared to the linked quarter end. Our return on average assets for the second quarter was 1.3%. We had a decline in our provision for credit losses compared to the linked quarter, and we generated improvements in our fee-based income, excluding the annual performance-based insurance commissions we recognized last quarter. As it relates to our credit quality, we had many improvements this quarter, including a reduction in our criticized and classified loans, which were down $17 million and $27 million, respectively, compared to the linked quarter end. This was driven by paydowns on some loans that we downgraded last quarter as we diligently worked those credits. We noted last quarter in our call that we did not believe the downgrades at that time were indicative of core portfolio issues, and this is shown to be the case. We continue to receive paydowns on these loans and have received additional funds in July, including another $8 million. We also had upgrades of two classified credits totaling $5 million to watch status and one upgrade of $2.5 million from criticized to fair. Our allowance for credit losses remained at 1.05% of total loans at quarter end, consistent with a linked quarter end. Our provision for credit losses for the quarter was driven by net charge-offs, higher reserves on individually analyzed leases, and loan growth. Our annualized net charge-off rate for the quarter increased to 27 basis points, compared to 22 basis points for the first quarter. Combined, our leasing and consumer indirect net charge-offs contributed 21 of the 27 basis points of our annualized net charge-off rate for the second quarter. We continue to see elevated net charge-offs in small ticket leases from our North Star division, which contributed 14 of the 27 basis points to our annualized net charge-off rate. These charge-off levels are similar to pre-pandemic rates or the rates we expected to see when we acquired the business. We continuously evaluate the various lending verticals in the small ticket leasing area and adjust our appetite based on performance. For the second quarter, the yield on our small ticket leasing balances was over 14%, and we continue to be very satisfied with our risk-adjusted return on our core small ticket leasing business. Our net charge-offs have grown in consumer indirect loans, adding seven basis points to our annualized net charge-off rate for the second quarter, we are seeing a national trend of increased delinquency in auto lending, leading to higher surrender rates. When combined with the previous spike in used values, the dollar value of our net charge-offs has increased. We remain disciplined in our lending practices with weighted average FICO scores at over 750 on our production and remain optimistic about the business. Non-performing assets increased $2.4 million, which was mostly due to higher non-accrual leasing balances. Our delinquency improved this quarter, and the portion of our loan portfolio considered current at June 30th was 98.8%, up from 98.7% at March 31st. We are confident in our commercial loan concentrations. With our exposure to non-owner-occupied office space at less than 2%, of our total loan portfolio balance at June 30th. Our exposure declined compared to the linked quarter end as we successfully exited an $8 million classified office loan. Our hospitality and assisted living facilities were each around 2.5% of our total balances. At the same time, our multifamily loan balances were 557 million, a $35 million increase compared to the linked quarter end. We continue to have strong sponsor support and economic metrics with the deals we have chosen in this segment and will continue to be diligent in our underwriting of these loans. We see rents on multifamily loans holding up, and in our seven metro markets, we are still experiencing average rental growth of 3.2% compared to the national average of 0.9%. Compared to the linked quarter end, Our total loan portfolio grew $123 million, or 8% annualized. Our premium finance balances contributed $54 million of growth compared to the linked quarter end. Increases in our commercial and industrial portfolio of $43 million, mostly offset declines of $48 million in our commercial real estate portfolio. But as I mentioned earlier, a meaningful portion of the credits that paid down this quarter were part of our criticized and classified assets, which we view as a positive. Consumer loans contributed $39 million of growth, driven by higher consumer indirect balances. At quarter end, our commercial real estate loans comprised 35% of total loans, nearly 40% of which were owner-occupied, while the remainder were investment real estate. At the same time, our total consumer loans which include residential real estate and home equity lines of credit, were 29% of total loans. Commercial and industrial loans were 20%. Leases totaled 7%. Construction loans were 5%. And premium finance was 4% of total loans. At quarter end, 47% of our total loans were fixed rate, with the remaining 53% at a variable rate. We continue to actively assess market conditions on our commercial real estate books, including the impact of higher interest rates on upcoming loans repricing or maturing. We are comfortable with our ability to handle the repricing of our commercial loan portfolio and only have $289 million repricing or maturing during the last half of 2024 and another $396 million during 2025. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. Our net interest income was stable compared to the first quarter, while our net interest margin was 4.18% compared to 4.26%. Nearly half of the reduction in net interest margin compared to the linked quarter was lower accretion income, net of amortization expense, which only added 28 basis points this quarter compared to 32 basis points last quarter. The remainder of the decline was mostly due to higher borrowing costs incurred during the second quarter, which offset higher earning asset yields. For the first half of 2024, our net interest income grew 10%, while our net interest margin declined 31 basis points to 4.22%. Our earning asset yields improved to 6.32% for the first six months of 2024, compared to 5.49% for 2023. while higher funding costs more than offset the improvement. Accretion income net of amortization expense added 31 basis points to net interest margin for the first half of 2024 compared to 19 basis points for 2023. Moving on to our fee-based income, excluding our annual performance-based insurance commission of $2.2 million we received in the first quarter, fee-based income grew. compared to the linked quarter. We typically recognize the performance-based insurance commission during the first quarter of each year. Additionally, for the second quarter, growth in electronic banking income and trust and investment income offset declines in bank-owned life insurance and lease income. For the first half of 2024, our fee-based income grew 15%, with increases in all lines, primarily due to the limestone merger that occurred on April 30, 2023. As it relates to our non-interest expenses, they were relatively flat compared to the first quarter of 2024, as our other non-interest expense was impacted by a one-time prior period true-up of corporate expenses. For the first half of 2024, Non-interest expense was up 8% as higher operating costs from the additional footprint from limestone was partially offset by lower acquisition related expenses during 2024. For the second quarter, both our reported efficiency ratio and our efficiency ratio adjusted for non-core expenses was 59.2%. Our reported and adjusted efficiency ratio increased compared to the linked quarter and was related to lower fee-based income compared to the linked quarter. For the first half of 2024, the reported efficiency ratio was 58.6%, a decline from 2023. The adjusted efficiency ratio for the first six months of 2024 was 58.7%, an increase from 2023 due to higher non-interest expenses. Moving on to the balance sheet. Our investment securities portfolio continued to comprise 20% of total assets at June 30th, while our loan-to-deposit ratio increased to 87%. During the quarter, we were able to gain additional liquidity by moving some of our governmental deposits and repurchase agreements with our customers to insured cash suite products, which allowed us to free up some previously pledged investment securities. From a deposit perspective, our total deposits declined $29 million from the linked quarter end, which was mostly due to reductions in brokered CDs and seasonal declines in governmental deposits, which are typically higher during the first and third quarters of each year. Excluding brokered CDs, our deposits were up $42 million compared to the linked quarter end. Our retail CDs grew $132 million, while we were able to reduce our brokered CDs by $71 million. For the second quarter, our deposit costs only increased by nine basis points compared to the linked quarter. Our retail CD promotions have been for a 5% CD over a relatively short term, and our entire retail CD portfolio had an average remaining life of five months at June 30th. Our demand deposits as a percent of total deposits were flat compared to the linked quarter end and remained at 35% at June 30th, while our non-interest bearing deposits were 20% of total deposits. At quarter end, our deposit composition was 78% in retail deposit balances, which included small businesses, and 22% in commercial deposit balances, Our average retail customer deposit relationship was $25,000 at quarter end, while our median was nearly $3,000. Moving on to our capital position, our capital ratios improved compared to the linked quarter and benefited from earnings outpacing dividends. At quarter end, our common equity tier one capital ratio was 11.8%. Our total risk-based capital ratio was 13.5%, our leverage ratio was 9.7%, and our tangible equity to tangible assets ratio improved to 7.6% compared to 7.4% at quarter end. As it relates to our capital deployment, we did not repurchase shares this quarter. We do provide an attractive dividend as part of our capital usage, which has a current yield of 4.89%. Our dividend payout ratio stood at 48.9% for the second quarter. Finally, I will turn the call over to Tyler for his closing comments.