Peoples Bancorp of North Carolina, Inc. (PEBK) Earnings

Management highlights

### Core Franchise Performance - Strong organic growth: 9% annualized loan growth, 12% annualized deposit growth, with $2.8 billion in total Q2 loan production - Cumulative new non-interest-bearing business deposits from relationships opened in the last two years reached $1.2 billion at quarter-end, demonstrating traction for the firm's relationship-based banking model - New loan production pricing averaged 6.39%, supporting ongoing portfolio remixing toward higher-yield assets; lower-loss lending categories now represent 37% of held-for-investment loans, up from 34% in Q1 2026 - Meaningful credit quality improvement quarter-over-quarter: special mention loans down 56%, classified loans down 31%, delinquent loans down 50%; ACL (allowance for credit losses) ratio rose 2 basis points to 1.14%, which management views as appropriate for the revised portfolio composition ### Strategic Balance Sheet Actions Management executed three complementary actions to remove balance sheet overhang and boost long-term returns, without issuing new equity and maintaining capital ratios well above regulatory well-capitalized thresholds: 1. **Securities portfolio repositioning**: Sold $2.3 billion of low-yielding (2.1% average yield) long-duration held-to-maturity securities. Partially redeployed $1.7 billion of proceeds into higher-yielding (4.87% average yield), shorter-duration securities, generating a 276 basis point net yield pickup; ~$100 million in remaining proceeds are yet to be invested. The repositioning reduced average portfolio duration from 5 years to 4 years, lowered portfolio risk weighting from 19.5% to 9.5%, and has an expected tangible book value earn-back period of just 1.4 years 2. **Targeted loan sale**: Executed purchase and sale agreements for the full $825 million of selected loans, consisting of $300 million in weakening construction loans to a single borrower and $525 million in performing but low-yielding (4.6% blended average) commercial real estate/multifamily loans. Closings are expected by the end of Q3 2026. The sale reduces concentration risk, future credit volatility, and allows redeployment into higher-market-rate loans 3. **Early subordinated debt retirement**: Retired $385 million of subordinated debt ahead of a significantly higher contractual reset rate, lowering long-term funding costs and supporting net interest margin expansion ### Capital Position - Common Equity Tier 1 (CET1) ratio was 9.25% at June 30, 2026, well above regulatory requirements - CET1 is expected to rise to ~9.5% upon closing of the targeted loan sale, driven by the removal of ~100% risk-weighted assets from the balance sheet

Guidance

- **Net Interest Margin (NIM)**: Expected to reach ~3.30% in Q3 2026 after loan sale closing and full reinvestment of securities proceeds, with a full year 2026 target range of 3.30% to 3.40%, representing an upward revision from prior outlook - **Pre-Tax Pre-Provision Income (PTPP)**: Fourth quarter 2026 PTPP is guided to $125 million to $130 million; management notes this guidance range is intentionally conservative - **Capital**: CET1 is expected to reach 9.5% to 9.6% by the end of Q3 2026, 9.8% to 9.9% by the end of 2026, and exceed 10% in early 2027, assuming no implementation of new regulatory capital reforms (if implemented, reforms are expected to require an increase in CET1 of ~60 basis points) - **Loan Growth**: Full year 2026 guidance reaffirmed for mid-single-digit overall loan growth, with management noting current performance is outpacing this target - **Expenses**: Full year 2026 total expenses are expected to come in well below the prior guidance of 3% year-over-year increase; Q3 and Q4 2026 operating expenses are expected to be flat to down relative to Q2 2026 levels. Elevated FDIC assessments will gradually decline through H2 2026 and fully normalize by early 2027 - **Normalized Provisioning**: Normal quarterly provision run rate is expected to be $9 million to $12 million going forward - **Earnings Accretion**: Management expects the strategic balance sheet actions to deliver mid-to-high teens percentage earnings growth relative to the 7% tangible book value dilution from the one-time sale loss, with earn-back of tangible book value within 1.4 years - **Return Targets**: ROA and ROTC are targeted at higher ranges by year-end 2026, driven by the revised balance sheet composition

Segment performance

Bank of California is a single-segment commercial banking firm, so product segment breakdown is not provided. For the overall firm in Q2 2026: - Reported net loss available to common shareholders: $251.3 million ($1.61 per dilutive share), driven by one-time accounting losses from strategic balance sheet actions - Net interest income: $250.5 million, down 1 basis point quarter-over-quarter; excluding non-accrual loan interest reversals ($5 million negative impact), net interest income rose $3.9 million quarter-over-quarter - Reported net interest margin: 3.13%, down 11 basis points quarter-over-quarter - Non-interest income: A loss of $234.1 million, driven by the $256.7 million pre-tax securities sale loss and $12.5 million lower of cost or market adjustment on held-for-sale loans; excluding these one-time items, core non-interest income was $35.2 million, stable with prior quarters - Non-interest expense: $189.9 million, up $8.5 million quarter-over-quarter, driven by temporarily elevated FDIC assessments and a non-recurring software obsolescence charge, partially offset by lower seasonal compensation expenses - Provision expense: $161.8 million, driven by the marking of $825 million in loans transferred to held-for-sale in connection with the targeted loan sale

Risks & headwinds

- Uncertainty in the broader macroeconomic environment, including the potential for future Federal Reserve rate hikes, persistent inflation, and slowing economic growth that could impact loan demand and credit quality - Strategic balance sheet actions depend on timely completion of the $825 million targeted loan sale; while management secured multiple competitive bids and executed binding agreements, buyers have limited due diligence rights that could result in minor price adjustments or loan exclusions, though management has reserved conservatively for this risk - Proposed regulatory capital reforms (Basel III) would require an additional 60 basis points of CET1 capital, which would impact capital allocation plans if implemented - Existing lower-yielding multifamily mortgage loans ($6 billion at 4% average yield) create a drag on net interest income as they gradually reprice over time, though management notes the burn rate and repricing timeline is transparent and the portfolio is performing as expected - Bank of California has inherited large concentrated lending relationships from its predecessor PacWest, and while management has reduced concentrations substantially, future unexpected credit weakness in remaining large relationships could impact results

Analyst Q&A

• Q: How much of the 20% markdown on the sold $825 million loan pool was from credit risk versus interest rate risk, and why did non-performing assets increase despite the sale? /

  A: The one-time uptick in NPAs came from a single $34 million loan that was removed from the held-for-sale pool and lagged the sale process; this loan has already been sold at par and will come off the books in Q3, so NPAs will decline meaningfully. It is difficult to disaggregate buyer valuation between credit and rate, but management marked the loans more conservatively than the received bids to account for potential adjustments, with most of the pool ($525 million) consisting of fully performing low-yield loans and $300 million consisting of the already disclosed weakening single-borrower construction relationship that management targeted to exit.

• Q: After $1.3 billion in problem loan sales over two quarters, can investors be confident this is the last large-scale credit overhang reduction? /

  A: Management expects no additional large problem loan sales in the near future, having completed the planned reduction of large concentrated lending relationships inherited from PacWest to shift to a more granular lending profile. Management retains the flexibility to sell loans in the future if it benefits shareholders, but has addressed all currently identified credit overhangs. The actions did not require new equity, have a very short 1.4-year earn-back period, and already have accelerated earnings growth, demonstrating the strategic benefit of the transactions.

• Q: What is driving expected NIM expansion beyond Q3 2026, and what Fed rate assumptions are embedded in guidance? /

  A: Guidance does not assume any future Fed rate hikes. NIM will expand in H2 2026 from the full-quarter benefit of the securities repositioning, the removal of low-yield loans from the balance sheet, and ongoing new loan production at current elevated market rates. Additionally, core deposit costs are expected to continue declining gradually following strong deposit inflows at the end of Q2 and ongoing H1 2026 deposit optimization initiatives, which will further reduce the overall cost of funds.

• Q: Now that most balance sheet optimization work is complete, what are management's new strategic priorities going forward? /

  A: Core priorities remain executing on the higher earnings trajectory from the completed balance sheet actions, continuing to grow high-quality relationship-based loans and deposits, and maintaining credit and expense discipline. New strategic initiatives in early rollout that will drive long-term growth include a new card and payments acquiring business, a private banking offering for high-net-worth individuals focused on tailored banking solutions, and enhanced API banking technology to deepen client relationships and reduce deposit attrition. Management also expects to redeem its outstanding preferred stock in Q3 2027, which will add ~$20 million per year in net income available to common shareholders.