Peoples Bancorp of North Carolina, Inc.

Good morning, and welcome to People's Bancorp, Inc.' 's conference call. My name is Nick, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 31, 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'd like to withdraw your question, please press star and then two. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that 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's 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 fourth 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, Nick. Good morning, everyone, and thank you for joining our call today. Our fourth quarter diluted earnings per share was 76 cents. and was $3.31 for the full year of 2024. As we look at 2024, I want to note some key takeaways. Our net interest income improved 3% compared to 2023, and our net interest margin continued to outperform most in our industry at 4.21%. Key-based income grew 10%. Our efficiency ratio stood at 58%. Our book value per share improved 5%, to $31.26, while our tangible book value per share grew 10% to $19.94. We had a favorable shift in the mix of our loan portfolio, as our commercial and industrial loans grew relative to our commercial real estate portfolio. Our commercial and industrial loans increased $163 million, growing from 19% to 21% of our portfolio, as commercial real estate loans declined from 36% to 34% from 2024 to 2023. Our loan to deposits ratio declined to 84% compared to 86% at December 31st, 2023. Our criticized loans improved to 25% of our total risk-based capital at year end compared to 27% for 2023, demonstrating the stability of our commercial loan portfolio. We had deposit balance growth of $443 million, or 6%, compared to 2023. Our tangible equity to tangible assets ratio improved to 8.01% at year end, compared to 7.33% for 2023. And we continued to beat consensus diluted EPS estimates, which were 75 cents for the fourth quarter, and $3.30 for the full year of 2024. As far as our credit quality at year end, our overall allowance for credit losses was 1% of total loans. Our provision for credit losses declined for the fourth quarter as we had a reduction in individually analyzed loan reserves, which was partially offset by charge-offs for the fourth quarter. Our annualized net charge-off rate was 61 basis points for the quarter compared to 38 basis points for the linked quarter. This was driven by our leasing charge-offs, which comprised 49 basis points of the quarterly rate. For the full year, our net charge-off rate was 37 basis points, compared to 15 basis points for 2023. Our leasing business drove 22 basis points of the annual rate for 2024. We have provided guidance in the previous two quarters regarding the elevated charge-offs in our small ticket leasing business and last quarter guided to an anticipated peak of these charge-offs in the fourth quarter. We took an aggressive approach with these credits during the fourth quarter, which drove the higher net charge-off rates as collection strategies brought some of the charge-offs forward into the fourth quarter. While improvements from the fourth quarter peak are expected, we anticipate a gradual decline towards our expected charge-off rate of 4% to 5%. We had reserves established on many of these credits during the previous quarters, which reduced the impact provision for credit losses during the fourth quarter. To provide some perspective on our small-ticket leasing, over the two-year period prior to 2024, net charge-offs within the portfolio went from around 1.5% to our current rate of 6.7%. The average historical net charge-off rate for small ticket leasing was around 4.5% prior to our ownership. Going forward, our strategy with this business continues to be to seek origination yields between 18% and 20% with net charge-offs in the 4% to 5% range. We expect that the adjustments we have made in origination and credit focus are returning us to the average historical net charge-off levels. For more information on our small-ticket leasing business, please refer to our accompanying slides. Our non-performing assets declined $21 million and were 0.53% of total assets at year-end. We noted last quarter during our call that we had administrative past-due lease accounts and premium finance accounts for which we were awaiting expected proceeds from carriers on canceled policies. The majority of those cleared up in the fourth quarter, and our non-performing asset levels were back in a normal range at year end. Criticized and classified loans were relatively similar to levels at the end of the third quarter. Our delinquency approved compared to the linked quarter end, as the portion of our loan portfolio considered current at year end was 98.7% compared to 98.5% at September 30th. As it relates to our loan portfolio concentrations, we had no material changes during the fourth quarter. Our total investment commercial real estate exposure at year end was 36% of the $4.6 billion in our commercial loan portfolio and declined to 183% of our total risk-based capital. We continue to be pleased with our multifamily portfolio metrics, which declined to $562 million, or 8% of total loans, a year end. These loans are focused on quality metropolitan areas that are within our core markets. Collectively, these metropolitan areas experienced average annualized rental rate growth of 3.1%, job growth of 1.25%, median household income growth of 3.1%, and population growth of 0.93%. We continue to have minimal exposure in specific lending concentrations, including land development, which comprised 1.4% of total loan balances at year end, office at 1.7%, and hospitality at 2.7%. As far as loan balances, we had 5% annualized loan growth during the fourth quarter. Our commercial and industrial loans were up over $97 million, while our residential real estate loans were up $57 million compared to the linked quarter end. Our commercial real estate balances declined $24 million, which was the result of payoffs and sales within the portfolio, which outpaced new loan growth. Our lease balances declined $26 million due to lower originations during the quarter, coupled with charge-offs in our small ticket leasing business. At 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 year 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. For the fourth quarter, net interest income declined 3% compared to the linked quarter and was driven by lower accretion income. Net interest margin was 4.15% compared to 4.27% for the third quarter. The compression in net interest margin was driven by lower accretion income, which totaled $4.9 million and added 23 basis points to margin for the fourth quarter compared to 8.1 million and 39 basis points for the linked quarter. On a core basis, excluding the impact of accretion to the third and fourth quarters, we had net interest margin expansion of four basis points. During the fourth quarter, we were able to reduce our interest-bearing deposit costs by six basis points as we saw lower rates on all of our deposit categories during the quarter. We also fully paid off our borrowings from the bank term funding program which contributed to the reduction in our short-term borrowing costs. For the full year, net interest income increased 3%, while net interest margin declined 34 basis points. As we have mentioned previously, our decline in net interest margin compared to 2023 was mostly due to the timing of our deposit cost increases occurring slower than the repricing of our loans to higher rates. From an interest rate risk perspective, we are in a generally neutral position. Our net interest income profile is robust and is relatively insensitive to changes in interest rates. Moving on to our fee-based income, we had growth of 5% compared to the linked quarter. This increase was driven by higher commercial loan swap fees, which were up nearly $1 million and was partially offset by decline in mortgage banking income. For the full year, fee-based income grew 10% and was the result of improved lease, trust and investment, and insurance income, as well as the full-year impact of the limestone merger. During the fourth quarter, we recognized a $1.2 million loss on an other real estate-owned property which is included in our non-performing assets. This loss was recognized based on a recent appraisal received regarding the property value. As it relates to our net interest expenses, we had an increase of 7% compared to the linked quarter. The majority of this increase was in other non-interest expenses due to higher non-core expenses coupled with reductions in corporate expense recognized last quarter. For the full year, non-interest expense was up 3% as we experienced higher operating costs from the additional footprint from limestone, which was partially offset by lower acquisition-related expenses during 2024. For the fourth quarter, our reported efficiency ratio was 59.6% and was up compared to 55.1% for the linked quarter. Our improvement in fee-based income for the quarter was outpaced by lower net interest income and increased non-interest expense, resulting in the higher efficiency ratio compared to the linked quarter. For the full year, our reported efficiency ratio was 58%, an improvement compared to 58.7% for 2023 due to lower acquisition-related costs in 2024. Looking at our balance sheet at year end, our loan-to-deposit ratio was flat compared to the leaked quarter end and stood at 84% for both periods. We had growth in our investment portfolio during the quarter as we locked in some higher yields and longer durations, putting those investments into our held-to-maturity securities. As noted in our accompanying slides, we had growth in our deposits during the quarter, which were up $112 million compared to September 30th. Our noninterest-bearing deposits grew considerably, while our interest-bearing transaction accounts also increased. At the same time, our governmental deposits declined compared to September 30th. As we have noted previously, these deposits are seasonally higher during the first and third quarter of each year. Our retail CDs grew compared to the linked quarter end, while our brokered CDs also increased as part of our funding strategy. As we have mentioned before, we view brokered CDs as an additional funding source, and they have been available at a rate lower than FHLB advances in recent periods. We expect our deposit costs to continue to decline as they did for the fourth quarter. Our CD specials at year-end 2024 were around 4%, compared to between 4.75% and 5.25% at year-end 2023. While the Fed funds rate increased 4.25% from the fourth quarter of 2021 through year-end 2024, our deposit rates only increased 1.8% over the same time period. Our demand deposits as a percent of total deposits were 34% at quarter-end and were consistent with the linked quarter end. Our non-interest-bearing deposits grew to 20% of total deposits at quarter end, compared to 19% for the linked quarter end. At year end, our deposit composition was 79% in retail deposit balances, which included small businesses, and 21% in commercial deposit balances. Our average retail client deposit relationship was $26,000 at quarter end, while our median was around $2,500. Moving on to our capital position, most of our capital ratios improved compared to the linked quarter and benefited from earnings outpacing dividends. Our tangible equity to tangible assets ratio declined to 8% compared to 8.3%, at September 30th and was due to increases in our accumulated other comprehensive losses related to our available for sale investment securities. Our book value and tangible book value continue to improve and we're up 5% and 10% respectively compared to December 31st, 2023. While managing our capital levels, we continue to provide a high yield return to our shareholders with a current dividend yield of 5.11%. Finally, I will turn the call over to Tyler for his closing comments.