Peoples Bancorp of North Carolina, Inc.

Good morning and welcome to People's Bank Corp Inc's conference call. My name is Gary and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the three and nine months ended September 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, simply press star then 1 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 2. 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's disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's third quarter 2024 earnings release and earnings conference call presentation were issued this morning and are 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 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 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, Gary. Good morning, everyone, and thank you for joining our call today. For the third quarter, our diluted earnings per share improved to 89 cents compared to 82 cents for the linked quarter. Diluted EPS for the first nine months of 2024 was $2.55 compared to $2.47 for 2023. As we reflect on our performance for the third quarter, here are a few highlights compared to the linked quarter. Our net interest income improved 3%, and our net interest margin expanded 9 basis points. Fee-based income grew 5%. Total non-interest expense declined 4%. Return on average assets for the third quarter improved to 1.38% compared to 1.27%. Return on average stockholders' equity improved to 11.5% from 11%. Our efficiency ratio improved to 55.1% compared to 59.2%. Compared to June 30th, our deposits increased $185 million, with over $100 million client deposit growth. Our tangible equity to tangible assets improved 65 basis points to 8.25%. Compared to the linked quarter end, our book value per share improved 4% to $31.65, while our tangible book value grew 7% to $20.29. Our regulatory capital ratios improved compared to the linked quarter end as earnings exceeded dividends paid. We also surpassed consensus estimates for diluted EPS for the third quarter, which were 82 cents compared to our reported results of 89 cents. As far as our credit quality, compared to June 30th, our criticized loans declined as a result of paydowns and upgrades during the quarter. Our classified loans increased during the third quarter, primarily due to the downgrade of two commercial relationships, totaling nearly $10 million combined, from criticized to substandard. Our delinquency was comparable to the prior quarter, with the portion of our loan portfolio considered current at September 30th was 98.5% compared to 98.8% at June 30th. We continue to prudently manage our portfolio concentrations, and there were no material changes in balances in any specific loan segment during the third quarter. At quarter end, our total investment commercial real estate exposure was 37% of the $4.5 billion in our commercial loan portfolio and was 182% of our total risk-based capital. This compares favorably to the other banks in our peer group and is well under the regulatory limit of 300%. Most of our commercial real estate exposure continues to be within our multifamily portfolio accounting for $564 million, or 9% of total loans. We remain happy with the diversified risk profile and geographic distribution of this portfolio, focused on quality metropolitan areas within our core markets. During the third quarter, economic indicators in these markets showed the following highlights. Average annualized rental rate growth of 3.4%, job growth of 1.09%, median household income growth of 3.1%, and population growth of 0.74%. Other notable concentrations include land development at 1.3% of total loan balances at quarter end, office at 1.9%, and hospitality at 2.6%. As we have anticipated, Our small ticket leasing division continued to experience higher net charge-off levels this quarter. Industry data and peer reporting have demonstrated a similar trend of higher charge-offs in the small equipment leasing space. The leases originated through this division are at much higher interest rates and carry a higher credit risk than our traditional loans. We were aware of the higher net charge-off rates of this business when we purchased it, which was around 4.5% historically. We have enjoyed high gross origination yields from our small ticket leasing division of around 20%. We have also experienced multiple years of lower than expected credit losses with net charge off levels of less than 1.5% from 2021 through 2023, as noted on page four of our accompanying slide presentation. Even with the higher net charge off rates, this business remains highly profitable providing meaningful contribution to return on average assets and margin due to the higher returns. Through the first nine months of 2024, our return on assets from our small ticket leasing division was over 2%, and for the full year of 2023 was over 4%. Going into the fourth quarter, we expect net charge-offs for this business will be higher than the third quarter, with elevated levels continuing into the first quarter of 2025. While we greatly value the risk-adjusted return of this business, we've been making adjustments to our risk appetite to ensure that credit remains in line with our pricing and reserve levels. On September 30th, we had included specific reserves in our allowance for credit losses for nearly $4 million of the remaining lease balances we believe will be charged off. We have also made a strategic decision to eliminate some large broker relationships in order to increase the focus on the core vendor and lending channels within this division. Finally, we have also pulled back on leasing activity with respect to certain industries and equipment types, as we have noted increased delinquency and charge-offs both in our portfolio and in national industry data. While we are focused on the credit quality of this business, The small ticket leasing division only comprised around 3% of our outstanding balances at September 30th. To provide perspective on a combined basis, our total leasing portfolio year to date had an average balance of $418 million. This combined portfolio had a yield of 11.3%, 2.2% of net charge-offs, and contributed 38 basis points to our net interest margin. Our consumer indirect loan net charge-offs have also increased in recent quarters as they return to pre-pandemic levels. We continue to maintain healthy FICO scores on our originated consumer indirect loans with a weighted average FICO score of 749 for our third quarter production. Our net charge-offs are being driven by a combination of economic hardship on borrowers and softening in used car prices, collectively resulting in higher net charge-offs. This level of net charge-offs is typical for this portfolio, which provides an appropriate risk-adjusted return. At quarter end, our overall allowance for credit losses was 1.06% of total loans. Our provision for credit losses in the third quarter was mostly due to charge-offs and was up from the linked quarter due to higher individually analyzed loans and leases. Our annualized net charge-off rate was 38 basis points for the third quarter, compared to 27 basis points for the linked quarter. The higher lease net charge-offs represented 23 basis points of the annualized rate for the third quarter, while our core commercial credit quality performance has been stable. Our non-performing assets increased to 0.76% of total assets at quarter end and were driven by loans 90-plus days past due and accruing. The increase was a combination of additional lease, premium finance, and commercial real estate loans that became over 90 days past due. The increase in past due leases was mostly due to the finalization of renewal documentation in process for leases in our midsize leasing business. This resulted in administrative past due accounts, which is typical in the educational and governmental segments, and we very rarely see delinquencies proceed to charge off. We demonstrate the non-performing assets visually on slide five of our accompanying presentation. While our past due premium finance loans increased, these loans carry low credit risk as we have the ability to cancel premiums and recover the majority of our receivables from the insurer. As of September 30th, we were awaiting expected proceeds from insurance carriers on past due premium finance loans where the policies have been appropriately canceled. $20 million of the $27.6 million that was past due at September 30th was related to the leasing and premium finance segments. As far as loan balances, we were impacted by a high volume of paydowns. For the third quarter, we had 23% annualized growth in our midsize leasing business and a 10% annualized increase in our home equity line of credit balances. At the same time, we had reductions in commercial balances due to paydowns of $148 million during the quarter, which exceeded our new loan production. These paydowns are being driven by higher than historical sale activity in the investment commercial real estate market, as stabilized projects are highly valued in the open market. We have a healthy production pipeline for commercial loans for the fourth quarter, and we expect to grow our balances compared to September 30th. We also experience reductions in premium finance and consumer residential real estate balances. We had declines in our small-ticket leasing business, driven primarily by the tightening in the broker channel and our risk appetite within that business, which we discussed earlier. By quarter end, our commercial real estate loans comprised 34% 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 5% of total loans. By quarter end, 47% of our total loans were fixed rate, with the remaining 53% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. Compared to the second quarter, net interest income improved 3% for the third quarter and and net interest margin expanded nine basis points. The improvement was driven by higher accretion income, which totaled $8.1 million for the third quarter and added 39 basis points to net interest margin, compared to $5.8 million and 28 basis points for the second quarter. This positive impact to the third quarter will lower our future accretion income to be recognized. For the first nine months of 2024, Net interest income increased 4%, while net interest margin declined to 36 basis points. Our loans repriced more quickly than our deposits as the Federal Reserve raised rates in prior periods. So the decline in net interest margin compared to the prior year was driven by the catch-up of deposit costs. Accretion income totaled $20 million for the first nine months of 2024, adding 33 basis points to margin, and with $16 million adding 29 basis points for the same period in 2023. Moving on to our fee-based income, we had growth of 5% for the third quarter compared to the linked quarter. Most of the improvement was driven by higher lease income as we recognized some early termination gains on leases that paid off, totaling $1.1 million. These terminations are hard to predict and are driven by client activity. We also had an increase in mortgage banking income due to higher loan production, which was partially offset by lower bank-owned life insurance income. Through the first nine months of 2024, fee-based income grew 13%. We had several improvements, including higher lease, trust and investment, and insurance income. We also had increases due to the full year impact of the limestone merger. As it relates to our non-interest expenses, we came in lower than we had projected for the third quarter, totaling around $66 million, which was a 4% decline from the linked quarter. The decrease was driven by lower other non-interest expense, partially due to the linked quarter one time prior period true up of corporate expenses as well as a reduction in data processing and software expense. For the first nine months of 2024, non-interest expense was up 2%, as higher operating costs from the additional footprint from limestone were partially offset by lower acquisition-related expenses during 2024. For the third quarter, our reported efficiency ratio was 55.1%, improvement over 59.2% for the length quarter. This improvement was driven by a combination of higher revenue and lower non-interest expense. For the first nine months of 2024, our reported efficiency ratio was 57.4%, an improvement from 59.7% for the same period in 2023. Looking at our balance sheet at September 30th, our loan-to-deposit ratio declined to 84% compared to 87% for the late quarter end. During the quarter, our total deposits grew $185 million, with over $100 million of growth coming from client deposits. Retail CDs led the increase, with over $71 million of balance growth, while governmental deposits increased $58 million and money markets grew $26 million. Our governmental deposits are seasonally higher during the third quarter, which contributed to the increase in balances. We also added brokered CDs during the quarter, which was a lower cost funding source for us than FHLB advances and contributed $83 million of our total deposit growth compared to the linked quarter. In conjunction with the Federal Reserve's recent move to reduce rates, We have also lowered our current offerings for retail CDs by a similar rate and are now below 5% on new retail CDs. As we have noted in recent quarters, we have a relatively short term on our CDs at the higher rate and should see the repricing benefit of the lower rates in future quarters. Our demand deposits as a percent of total deposits totaled 34% at quarter end compared to 35% for June 30th. Our non-interest-bearing deposits comprised 19% of total deposits at quarter end. At September 30th, our deposit composition was 79% in retail deposit balances, which includes small businesses, and 21% in commercial deposit balances. Our average retail client deposit relationship was $25,000 at quarter end. while our median was around $2,500. 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 9.9%. And our tangible equity to tangible assets ratio improved to 8.3% compared to 7.6% at June 30th. The increase in this ratio was mostly attributable to improvements and accumulated other comprehensive losses related to our available for sale investment securities. Over the last several quarters, we have improved both our book value and tangible book value significantly. Compared to September 30th, 2023, our book value has grown by 13%, while our tangible book value improved by 23%. Compared to September 30th, 2022, our book value has increased by 18%, while our tangible book value has grown 33%. As part of our capital strategy, we continue to provide an attractive dividend which has a current yield of 5.38%. Our dividend payout ratio stood at 44.7% for the third quarter. Finally, I will turn the call over to Tyler for his closing comments.