SELECT BANCORP, INC. The following presents management's discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Readers are directed to the "Note Regarding Forward-Looking Statements" that appears at the end of this discussion. The following discussion is intended to assist in understanding the financial condition and results of operations ofSelect Bancorp, Inc. BecauseSelect Bancorp, Inc. has no material operations and conducts no business on its own other than owning its consolidated subsidiary,Select Bank & Trust Company , and its unconsolidated subsidiary, New Century Statutory Trust I, the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the bank subsidiary. However, for ease of reading and because the financial statements are presented on a consolidated basis,Select Bancorp, Inc. andSelect Bank & Trust are collectively referred to herein as the Company unless otherwise noted. - 46 - Table of Contents DESCRIPTION OF BUSINESS The Company is a commercial bank holding company that was incorporated onMay 14, 2003 and has one wholly owned banking subsidiary,Select Bank & Trust Company (referred to as the "Bank"), which became a subsidiary of the Company as part of a holding company reorganization. InSeptember 2004 , the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the expansion of the Bank. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company's only business activity is the ownership of the Bank. Accordingly, this discussion focuses primarily on the financial condition and operating results of the Bank. The Bank's lending activities are oriented to the consumer/retail customer as well as to the small-to-medium sized businesses located in the Bank's market areas. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts. Readers are directed to "Part I - Item 1 - Business" of this annual report for a description of the Bank's market areas. FINANCIAL CONDITIONDECEMBER 31, 2020 AND 2019 Overview Total assets atDecember 31, 2020 were$1.7 billion , which represents an increase of$455.0 million or 35.7% fromDecember 31, 2019 . Interest earning assets atDecember 31, 2020 totaled$1.6 billion and consisted of$1.3 billion in net loans,$194.5 million in investment securities, and$92.8 million in overnight investments and interest-bearing deposits in other banks. Total deposits and shareholders' equity atDecember 31, 2020 were$1.5 billion and$215.4 million , respectively. OnApril 17, 2020 the Company acquired three branches fromFirst-Citizens Bank & Trust Company located inHighlands ,Franklin andSylva, North Carolina (westernNorth Carolina ). The Company added additional assets of$167.3 million , net loans of$103.3 million and$185.5 million in deposits through the acquisition. Additionally, inFebruary 2020 the Company opened a new branch inCornelius, North Carolina , which is part of theLake Norman area North ofCharlotte . With the addition of these branches, the Company now operates 22 full-service offices in three states.Investment Securities
Investment securities increased to$194.5 million atDecember 31, 2020 from$72.4 million atDecember 31, 2019 . The Company's investment portfolio atDecember 31, 2020 , which consisted ofU.S. government sponsored entities agency securities (GSE's), mortgage-backed securities, corporate bonds and bank-qualified municipal securities, aggregated$194.5 million with a weighted average taxable equivalent yield of 2.16%. The Company also holds an investment of$1.1 million in Federal Home LoanBank Stock with a weighted average yield of 4.48%. The investment portfolio increased$122.1 million in 2020 as a result of$152.1 million in purchases, which was offset by$11.9 million of maturities and$18.9 million of principal payments, as well as an increase in unrealized gains and losses of$1.4 million in the market value of securities available for sale and net accretion of investment discounts of$587,000 . - 47 -
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The following table summarizes the securities portfolio by major classification
as of
Securities Portfolio Composition
(dollars in thousands)
Tax
Amortized Fair Equivalent
Cost Value Yield
U. S. government agency securities - GSE's:
Due within one year $ 480 $ 492 2.36 %
Due after one but within five years 4,383 4,529 2.39 %
Due after five but within ten years 16,781 16,782
1.49 %
Due after ten years 28,660 28,429 1.82 %
50,304 50,232 1.74 %
Mortgage-backed securities:
Due within one year 2,000 1,999 2.27 %Due after one but within five years 19,258 20,234 2.84 % Due after five but within ten years 126 131
3.51 %
Due after ten years 26,274 26,567 1.98 %
47,658 48,931 2.36 %
Corporate bonds:
Due within one year 96 96 8.56 %Due after one but within five years 497 500 6.90 % Due after five but within ten years 1,750 1,754
4.66 %
Due after ten years - - - %
2,343 2,350 5.30 %
State and local governments:
Due within one year 577 578 3.43 %
Due after one but within five years 377 390 4.03 %
Due after five but within ten years 3,958 3,956
1.98 %
Due after ten years 86,723 88,055 2.20 %
91,635 92,979 2.21 %
Total securities available for sale:
Due within one year 3,153 3,165 2.69 %
Due after one but within five years 24,515 25,653 2.86 %
Due after five but within ten years 22,615 22,623
1.83 %
Due after ten years 141,657 143,051 2.07 %
$ 191,940 $ 194,492 2.16 %
Loans Receivable
The loan portfolio at December 31, 2020 totaled $1.3 billion , which was a $274.4
million , or 26.6%, increase from December 31, 2019 . At December 31, 2020 , the
portfolio was composed of $1.2 billion in real estate loans, $125.7 million in
commercial and industrial loans, and $7.1 million in loans to individuals and
overdrafts. Also included in loans outstanding at December 31, 2020 , was $4.0
million in net deferred loan fees.
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The following table describes the Company's loan portfolio composition by category at the dates indicated:
At December 31,
2020 2019 2018 2017 2016
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(dollars in thousands)
Real estate
loans:
1-to-4 family
residential $ 194,031 14.9 % $ 151,697 14.7 % $ 159,597 16.2 % $ 156,901 16.0 % $ 97,978 14.5 %
Commercial real
estate 608,482 46.6 % 459,115 44.6 % 457,611 46.4 % 403,100 41.0 % 281,723 41.6 %
Multi-family
residential 82,508 6.3 % 69,124 6.7 % 63,459 6.4 % 76,983 7.8 % 56,119 8.3 %
Construction 236,735 18.2 % 221,878 21.6 % 170,404 17.3 % 177,933 18.1 % 100,911 14.9 %
Home equity
lines of credit 53,806 4.1 % 44,514 4.3 % 49,713 5.0 % 52,606 5.3 % 41,158 6.1 %
Total real
estate loans 1,175,562 90.1 % 946,328 91.9 % 900,784 91.3 % 867,523 88.2 % 577,889 85.4 %
Other loans:
Commercial and
industrial 125,700 9.7 % 75,748 7.4 % 74,181 7.6 % 106,164 10.8 % 90,678 13.4 %
Loans to
individuals &
overdrafts 7,122 0.5 % 10,013 0.9 % 12,814 1.3 % 10,244 1.1 % 9,827 1.4 %
Total other
loans 132,822 10.2 % 85,761 8.3 % 86,995 8.9 % 116,408 11.9 % 100,505 14.8 %
Less:
Deferred loan
origination
(fees) cost, net (4,000) (0.3) % (2,114) (0.2) % (1,739) (0.2) % (1,305) (0.1) % (1,199) (0.2) %
Total loans 1,304,384 100.0 % 1,029,975 100.0 % 986,040 100.0 % 982,626 100.0 % 677,195 100.0 %
Allowance for
loan losses (14,108) (8,324) (8,669) (8,835) (8,411)
Total loans, net $ 1,290,276 $ 1,021,651 $ 977,371 $ 973,791 $ 668,784
As demonstrated by the above table, the majority of the Company's loan portfolio
is comprised of real estate loans. This category, which includes both commercial
and consumer loan balances, decreased from 91.9% of the loan portfolio at
December 31, 2019 to 90.1% at December 31, 2020 . There was a $149.4 million
increase in commercial real estate loans, a $42.3 million increase in 1-to-4
family residential loans, a $9.3 million increase in HELOC loans, a $14.9
million increase in construction loans, and a $13.4 million increase in
multi-family residential loans. The increase in commercial real estate loans was
the biggest factor in the year-over-year increase in total loans.
During 2020 the Bank participated in the Small Business Administration's ("SBA")
Paycheck Protection Program ("PPP") which are guaranteed by the SBA. As a
result of the SBA guarantee the need for an Allowance for Loan Loss is
significantly reduced but not fully eliminated due to certain factors which may
cause the guarantee to be reduced or eliminated. Since it is possible that the
PPP loans may not be fully guaranteed a reduced loan loss allowance was
calculated for those loans. The PPP loans are classified as Commercial &
Industrial loans. At December 31, 2020 there were $125.7 million in Commercial
& Industrial loans of which $55.5 million were PPP loans. The total loan loss
allowance for Commercial & industrial loans at December 31, 2020 was $3.5
million of which $249,000 was attributable to PPP loans. The PPP loan loss
allowance percentage to gross PPP loans was 0.45%. There have not been any
charge-offs to date related to PPP loans. Deferred fees recognized during 2020
related to the PPP loans amounted to $2.6 million .
Management monitors trends in the loan portfolio that may indicate more than
normal risk. A discussion of certain risk factors follows. Some loans or groups
of loans may contain one or more of these individual loan risk factors.
Therefore, an accumulation of the amounts or percentages of the individual loan
risk factors may not necessarily be an indication of the cumulative risk in
the
total loan portfolio.
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Acquisition, Development and Construction Loans
The Company originates construction loans for the purpose of acquisition,
development, and construction ("ADC") of both residential and commercial
properties.
Acquisition, Development and Construction Loans
As of December 31, 2020
(dollars in thousands)
Land and Land
Construction Development Total
Total ADC loans $ 195,649 $ 41,086 $ 236,735
Average Loan Size $ 288 $ 595
Percentage of total loans 15.00 % 3.15 % 18.15 %
Non-accrual loans $ 154 $ - $ 154 Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company's market areas.
Included in ADC loans and residential real estate loans as ofDecember 31, 2020 were certain loans that exceeded regulatory loan to value ("LTV") guidelines. As of that date, the Company had$27.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits and$10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits. The banking regulators recognize that it may be appropriate in individual cases to originate or purchase loans with LTV ratios in excess of regulatory limits based on the support provided by other credit factors. The Bank has established a review and approval procedure for such loans. Under applicable guidance, the total amount of all loans in excess of regulatory LTV limits should not exceed 100% of total capital. The total amount of these loans represented 23.2% of total risk-based capital as ofDecember 31, 2020 , which is less than the 100% maximum specified in regulatory guidance. These loans may present more than ordinary risk to the Company if the real estate market softens for both market activity and collateral valuations. Similar information with respect to the Company's ADC portfolio atDecember 31, 2019 is set forth below: Acquisition, Development and Construction Loans As of December 31, 2019 (dollars in thousands) Land and Land Construction Development Total Total ADC loans$ 186,038 $ 35,840 $ 221,878 Average Loan Size $ 331 $ 607 Percentage of total loans 18.06 % 3.48 % 21.55 % Non-accrual loans $ 181 $ -$ 181
Included in ADC loans and residential real estate loans as ofDecember 31, 2019 were certain loans that exceeded regulatory loan to value ("LTV") guidelines. As of that date, the Company had$27.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits and$10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 23.2% of total risk-based capital as ofDecember 31, 2019 , which is less than the 100% maximum specified in regulatory guidance. - 50 -
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Business Sector Concentrations
Loan concentrations in certain business sectors impacted by lower than normal
retail sales, higher unemployment, higher vacancy rates, and weakened real
estate market values may also pose additional risk to the Company's capital
position. The Company has established an internal commercial real estate
guideline of 40% of
AtDecember 31, 2020 , the Company had three product types that exceeded the 40% guideline. The following product types were in excess of the 40% guidelines; apartments, commercial construction and office buildings. All other commercial and residential real estate product types were under the 40% threshold.
At
Geographic Concentrations
Certain risks exist arising from the geographic location of specific types of
higher than normal risk real estate loans. Below is a table showing geographic
concentrations for ADC and home equity lines of credit ("HELOC") loans at
December 31, 2020 . Except as otherwise noted, the counties identified in the
following table are located in North Carolina .
ADC Loans Percent HELOC Percent
(dollars in thousands)
Harnett County $ 9,515 4.02 % $ 4,672 8.68 %
Alamance County 536 0.23 % 920 1.71 %
Brunswick County 14,173 5.99 % 1,506 2.80 %
Carteret County 5,219 2.20 % 2,606 4.84 %
Cherokee County (SC) - - % 22 0.04 %
Cumberland County 24,261 10.25 % 2,667 4.96 %
Durham County 541 0.23 % 554 1.03 %
Forsyth County 5,055 2.14 % 82 0.15 %
Jackson County 3,295 1.39 % 2,204 4.10 %
Macon County 9,454 3.99 % 5,160 9.59 %
Mecklenburg County 23,788 10.05 % 4,360 8.10 %
New Hanover County 25,608 10.82 % 3,416 6.35 %
Pasquotank County 3,148 1.33 % 1,241 2.31 %
Pitt County 17,154 7.25 % 3,733 6.94 %
Robeson County 33 0.01 % 2,966 5.51 %
Sampson County 295 0.12 % 1,830 3.40 %
Virginia Beach County (VA) 3,648 1.54 % 795 1.48 %
Wake County 23,514 9.93 % 2,694 5.01 %
Wayne County 2,426 1.03 % 2,962 5.50 %
Wilson County 1,112 0.47 % 130 0.24 %
York County (SC) 2,538 1.07 % 1,253 2.33 %
All other locations 61,422 25.94 % 8,033 14.93 %
Total $ 236,735 100.00 % $ 53,806 100.00 %
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For comparative purposes, below is a table showing geographic concentrations for
ADC and HELOC loans at
ADC Loans Percent HELOC Percent
(dollars in thousands)
Harnett County $ 9,637 4.34 % $ 5,156 11.58 %
Alamance County 845 0.38 % 1,072 2.41 %
Brunswick County 15,456 6.97 % 1,629 3.67 %
Carteret County 5,352 2.41 % 2,190 4.92 %
Cherokee County (SC) - - % 22 0.05 %
Cumberland County 24,601 11.09 % 2,285 5.13 %
Mecklenburg County 18,142 8.18 % 2,689 6.04 %
New Hanover County 40,518 18.26 % 2,885 6.48 %
Pasquotank County 1,997 0.90 % 1,693 3.80 %
Pitt County 16,098 7.25 % 5,442 12.23 %
Robeson County 1,165 0.53 % 2,939 6.60 %
Sampson County 23 0.01 % 1,743 3.92 %
Virginia Beach County (VA) 142 0.06 % 99 0.22 %
Wake County 23,407 10.56 % 1,640 3.68 %
Wayne County 1,572 0.71 % 3,183 7.15 %
Wilson County 477 0.21 % 72 0.16 %
York County (SC) 1,931 0.87 % 1,123 2.52 %
All other locations 60,515 27.27 % 8,652 19.44 %
Total $ 221,878 100.00 % $ 44,514 100.00 %
Interest Only Payments
Another risk factor that exists in the total loan portfolio pertains to loans
with interest only payment terms. At December 31, 2020 , the Company had $312.2
million in loans that had terms permitting interest only payments. This
represented 23.94% of the total loan portfolio. At December 31, 2019 , the
Company had $249.9 million in loans that had terms permitting interest only
payments. This represented 24.26% of the total loan portfolio. In light of the
risk inherent with interest only loans, it is customary and general industry
practice that loans in the ADC portfolio are interest only payments during the
acquisition, development, and construction phases of such projects but then
convert to amortizing term loans with scheduled payments of principal and
interest.
Large Dollar Concentrations
Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company's ten largest loans or lines of credit concentrations totaled$104.6 million or 10.1% of total loans atDecember 31, 2020 compared to$82.0 million or 8.0% of total loans atDecember 31, 2019 . The Company's ten largest customer loan relationship concentrations totaled$158.1 million , or 15.3% of total loans, atDecember 31, 2020 compared to$129.5 million , or 12.6% of total loans atDecember 31, 2019 . Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have a material adverse impact on the capital position of the Company and on our results of operations. - 52 - Table of Contents
Maturities and Sensitivities of Loans to Interest Rates
The following table presents the maturity distribution of the Company's loans atDecember 31, 2020 . The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate: At December 31, 2020 Due after one Due within year but within Due after one year five years five years Total (dollars in thousands) Fixed rate loans: 1-to-4 family residential$ 14,229 $ 108,416 $ 38,064 $ 160,709 Commercial real estate 43,154 362,021 139,324 544,499 Multi-family residential 3,032 57,727 11,151 71,910 Construction 13,067 72,071 8,515 93,653 Home equity lines of credit 314 831 2,335 3,480 Commercial and industrial 5,838 81,442 5,606 92,886 Loans to individuals & overdrafts 1,482 3,505 803 5,790 Total at fixed rates 81,116 686,013 205,798 972,927 Variable rate loans: 1-to-4 family residential 3,356 2,827 26,484 32,667 Commercial real estate 12,933 18,621 30,421 61,975 Multi-family residential 828 4,761 5,009 10,598 Construction 77,174 27,204 38,550 142,928 Home equity lines of credit 11,117 7,163 31,819 50,099 Commercial and industrial 23,832 2,573 2,808 29,213
Loans to individuals & overdrafts 716
122 349 1,187 Total at variable rates 129,956 63,271 135,440 328,667 Subtotal 211,072 749,284 341,238 1,301,594 Non-accrual loans 3,094 2,105 1,591 6,790 Gross loans$ 214,166 $ 751,389 $ 342,829 $ 1,308,384
Deferred loan origination (fees) costs, net
(4,000)
Total loans $ 1,304,384 The Company may renew loans at maturity when requested by a customer whose
financial strength appears to support such renewal or when such renewal appears
to be in the Company's best interest. In such instances, the Company generally
requires payment of accrued interest and may require a principal reduction or
modify other terms of the loan at the time of renewal.
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Past Due Loans and Nonperforming Assets
AtDecember 31, 2020 , the Company had$6.0 million in loans that were 30 days or more past due. This represented 0.46% of gross loans outstanding on that date. This is an increase fromDecember 31, 2019 when there were$4.7 million in loans that were past due 30 days or more, or 0.46% of gross loans outstanding. Non-accrual loans increased to$6.8 million atDecember 31, 2020 from$5.9 million atDecember 31, 2019 . As ofDecember 31, 2020 , the Company had fifty-three loans totaling$11.3 million that were considered to be troubled debt restructurings, of which thirty-five loans totaling$7.5 million were still accruing interest. As ofDecember 31, 2019 , the Company had forty-two loans totaling$9.4 million that were considered to be troubled debt restructurings, of which twenty-eight loans totaling$6.2 million were still accruing interest. There were nine loans in the aggregate amount of$802,000 greater than 90 days past due and still accruing interest atDecember 31, 2020 , and there were six loans in the amount of$1.2 million greater than 90 days past due and still accruing interest atDecember 31, 2019 . Tables included in Note E of the Notes to Consolidated Financial Statements included under Item 8 of this report present an age analysis of past due loans, including acquired credit-impaired loans, or PCI Loans, segregated by class of loans as ofDecember 31, 2020 . The table below sets forth, for the periods indicated, information about the Company's non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus restructured loans), and total non-performing assets. As December 31, 2020 2019 2018 2017 2016 (dollars in thousands) Non-accrual loans$ 6,790 $ 5,941 $ 7,257 $ 2,115 $ 5,805 Accruing TDRs 7,506 6,207 4,378 4,863 3,625 Total non-performing loans 14,296 12,148 11,635 6,978 9,430 Foreclosed real estate 2,172 3,533 1,088 1,258 599 Total non-performing assets$ 16,468 $ 15,681 $ 12,723 $ 8,236 $ 10,029
Accruing loans past due 90 days or more
$ 1,476 $ 529 Allowance for loan losses$ 14,108 $ 8,324 $ 8,669
Non-performing loans to period end loans 1.10 % 1.18 % 1.18 % 0.71 % 1.39 Non-performing loans and accruing loans past due 90 days or more to period end loans 1.16 % 1.30 % 1.50 % 0.86 % 1.47 Allowance for loan losses to period end loans 1.08 % 0.81 % 0.88 % 0.90 % 1.24 Allowance for loan losses to non-performing loans 99 % 69 % 75 % 127 % 89 Allowance for loan losses to non-performing assets 86 % 53 % 68 % 107 % 84 Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more 82 % 49 % 55 % 91 % 80 Non-performing assets to total assets 0.95 % 1.23 % 1.01 % 0.69 % 1.18 Non-performing assets and accruing loans past due 90 days or more to total assets 1.00 % 1.33 % 1.26
% 0.81 % 1.25
In addition to the above, atDecember 31, 2020 the Company had$7.5 million in loans that were considered to be impaired for reasons other than their past due, accrual or restructured status. In total, there were$10.6 million in loans that were considered to be impaired atDecember 31, 2020 , which is a$600,000 decrease from the$11.2 million that was impaired atDecember 31, 2019 . Impaired loans have been evaluated by management in accordance with Accounting Standards Codification ("ASC") 310 and$758,000 has been included in the allowance for loan losses as ofDecember 31, 2020 for these loans. All troubled debt restructurings and other non-performing loans are included within impaired
loans as ofDecember 31, 2020 . - 54 - Table of Contents Allowance for Loan Losses The allowance for loan losses is a reserve established through provisions for loan losses charged to expense and represents management's best estimate of probable loan losses that will be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company's allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company's loan origination and servicing policies and practices. Individual reserves are calculated according to ASC 310-10-35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves. The following table presents the Company's allowance for loan losses by loan type as well as each loan type as a percentage of total loans atDecember 31 for the years indicated. At December 31, % of % of % of % of % of Total Total Total Total Total 2020 loans 2019 loans 2018 loans 2017 loans 2016 loans (dollars in thousands) 1-to-4 family residential$ 1,450 14.88 %$ 1,493 14.73 %$ 1,667 16.19 %$ 1,058 11.98 %$ 846 10.05 % Commercial real estate 5,476 46.65 % 2,851 44.58 % 3,409 46.41 % 3,370 38.15 % 3,448 41.12 % Multi-family residential 831 6.32 % 434 6.71 % 471 6.44 % 791 8.95 % 628 7.48 % Construction 2,365 18.15 % 1,737 21.55 % 1,385 17.28 % 1,955 22.13 % 1,301 15.47 % Home equity lines of credit 372 4.12 % 329 4.32 % 555 5.04 % 549 6.21 % 623 7.42 % Commercial and industrial 3,505 9.64 % 1,305 7.35 % 976 7.52 % 807 9.13 % 1,248 14.84 % Loans to individuals & overdrafts 109 0.55 % 175 0.97 % 206 1.30 % 305 3.60 % 317 3.76 % Deferred loan origination (fees) cost, net - (0.31) % - (0.21) % - (0.18) % - (0.15) % - (0.14) % Total$ 14,108 $ 8,324 $ 8,669
$ 8,835 $ 8,411 The allowance for loan losses as a percentage of gross loans outstanding increased by 0.27% during 2020 to 1.08% of gross loans atDecember 31, 2020 . The change in the allowance during 2020 resulted from net charge-offs of$460,000 and a provision of$6.2 million . Loan loss reserves totaled$14.1 million or 1.08% of gross loans outstanding as ofDecember 31, 2020 , as compared to year-end 2019 when they totaled$8.3 million or 0.81% of loans outstanding. AtDecember 31, 2020 , specific reserves on impaired loans constituted$758,000 or 0.06% of gross loans outstanding compared to$413,000 or 0.04% of loans outstanding as ofDecember 31, 2019 . The loans that were acquired in our 2020 acquisition of the three westernNorth Carolina branches are included in the gross loan number used in the calculations above. The acquired loans are accounted for under ASC 310-20 and ASC 310-30 which results in initial credit marks for the inherent loss risk for those loans being established as part of the initial fair value mark and is not included in the allowance for loan losses. Total acquired loans represented$180.2 million of the gross loan total atDecember 31, 2020 of which$29.0 million were purchased credit impaired loans compared to total acquired loans representing$129.6 million of the gross loan total atDecember 31, 2019 of which$15.4 million were purchased credit impaired loans. - 55 - Table of Contents The allowance for loan losses was$14.1 million atDecember 31, 2020 or 1.08% of gross loans outstanding as compared to 0.81% reported as a percentage of gross loans atDecember 31, 2019 . This increase resulted primarily from changes in loans requiring a specific reserve plus qualitative factors related to COVID-19 and economic performance indicators. The Legacy Select loans,Carolina Premier andFirst Citizens Bank loans were recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. The allowance for loan losses atDecember 31, 2020 represented 99% of non-performing loans compared to 69% atDecember 31, 2019 . It is management's assessment that the allowance for loan losses as ofDecember 31, 2020 is appropriate in light of the risk inherent within the Company's loan portfolio. No assurances, however, can be given that further adjustments to the allowance for loan losses may not be deemed necessary in the future. The current economic and business disruptions in the Bank's markets, and in the national and global markets more generally, are unprecedented, as state, local, and national governing bodies attempt to address the public health emergency caused by COVID-19. Management expects the Company's customers, including its borrowers, will continue to experience the financial impacts of COVID-19 during the 2021 fiscal year. Depending on the length of financial impact and the effectiveness of the various governmental programs put in place to stabilize economic conditions, the Company's management would expect to see continued volatility in the Company's allowance for loan losses and related provision expense during 2020. The CARES Act provided an opportunity for loan customers to request a temporary modification of the payment terms on their loans granting the customer time to address cashflow issues. The Bank entered into modifications on 497 loans amounting to$252.3 million during 2020 of which 48 loans totaling$32.7 million remained on modification as ofDecember 31, 2020 . - 56 - Table of Contents
The following table presents information regarding changes in the allowance for loan losses in detail for the years indicated:
As of December 31,
2020 2019 2018 2017 2016
(dollars in thousands)
Allowance for loan losses at beginning
of year $ 8,324 $ 8,669 $ 8,835 $ 8,411 $ 7,021
Provision (recovery) for loan losses 6,244 438 (156)
1,367 1,516
14,568 9,107 8,679 9,778 8,537
Loans charged off:
Commercial and industrial (628) (790) (196) (73) (182)
Construction - - - (17) (2)
Commercial real estate (70) (10) (2) (914) (189)
Multi-family residential - - - - -
Home equity lines of credit - (150) (68) (179) (205)
1-to-4 family residential - - (12) (22) (7)Loans to individuals & overdrafts (50) (206) (191) (101) (90) Total charge-offs (748) (1,156) (469)
(1,306) (675)
Recoveries of loans previously charged off: Commercial and industrial 169 12 239 211 22 Construction - 18 6 29 22 Multi-family residential 4 - - 2 - Commercial real estate 17 194 48 16 151 Home equity lines of credit 45 93 43 25 35 1-to-4 family residential 33 33 32 46 299
Loans to individuals & overdrafts 20 23 91
34 20
Total recoveries 288 373 459 363 549
Net recoveries (charge-offs) (460) (783) (10) (943) (126)
Allowance for loan losses at end of
year $ 14,108 $ 8,324 $ 8,669 Ratios:
Net charge-offs (recoveries) as a percent of average loans 0.04 % 0.07 % - % 0.13 % 0.02 % Allowance for loan losses as a percent of loans at end of year 1.08 % 0.81 % 0.88
% 0.90 % 1.24 %
While the Company believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making determinations regarding the allowance.
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The table below presents information detailing the allowance for loan losses for originated and purchased credit impaired acquired loans:
Analysis of Allowance for Credit Losses
(dollars in thousands)
Beginning Charge Ending
Balance Offs Recoveries Provision Balance
Year ended December 31, 2020
Total loans
Commercial and Industrial $ 1,305 $ (628) $ 169 $ 2,659 $ 3,505
Construction 1,737 - - 628 2,365
Commercial real estate 2,851 (70) 17 2,678 5,476
Multi-family residential 434 - 4 393 831Home Equity Lines of credit 329 - 45 (2) 372 1-to-4 family residential 1,493 - 33 (76) 1,450 Loans to individuals & overdrafts 175 (50)
20 (36) 109
Total $ 8,324 $ (748) $ 288 $ 6,244 $ 14,108
PCI loans
Commercial and Industrial $ 178 $ - $ - $ 25 $ 203
Construction 6 - - 25 31
Commercial real estate 14 - - (10) 4
Multi-family residential 15 - - (4) 11
Home Equity Lines of credit - - - 1 1
1-to-4 family residential 56 - - 29 85Loans to individuals & overdrafts - -
- - -
Total $ 269 $ - $ - $ 66 $ 335
Loans - excluding PCI
Commercial and Industrial $ 1,127 $ (628) $ 169 $ 2,634 $ 3,302
Construction 1,731 - - 603 2,334
Commercial real estate 2,837 (70) 17 2,688 5,472
Multi-family residential 419 - 4 397 820
Home Equity Lines of credit 329 - 45 (3) 371
1-to-4 family residential 1,437 - 33 (105) 1,365Loans to individuals & overdrafts 175 (50)
20 (36) 109
Total $ 8,055 $ (748) $ 288 $ 6,178 $ 13,773 Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the loan portfolio purchased in 2020. Management believes the level of the allowance for loan losses as ofDecember 31, 2020 is appropriate in light of the risk inherent within the Company's
loan
portfolio.
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Other Assets
At December 31, 2020 , non-earning assets totaled $108.1 million , an increase of
$30.1 million from $78.0 million at December 31, 2019 . Non-earning assets at
December 31, 2020 consisted of: cash and due from banks of $23.3 million ,
premises and equipment totaling $20.6 million , foreclosed real estate totaling
$2.2 million , accrued interest receivable of $5.1 million , goodwill of $42.9
million and other assets totaling $14.0 million , including net deferred taxes of
$3.2 million .
The Company had an investment in bank owned life insurance of $30.4 million at
December 31, 2020 , as compared to $29.8 million at December 31, 2019 . The
increase in BOLI in 2020 was from earnings of $643,000 . Since the income on this
investment is included in non-interest income, the asset is not included in the
Company's calculation of earning assets.
Deposits
Total deposits atDecember 31, 2020 were$1.5 billion and consisted of$395.9 million in non-interest-bearing demand deposits,$649.7 million in money market and NOW accounts,$51.8 million in savings accounts, and$388.4 million in time deposits. Total deposits increased by$493.0 million from$992.8 million as ofDecember 31, 2019 . Non-interest-bearing demand deposits increased by$155.6 million from$240.3 million as ofDecember 31, 2019 . Money market deposit accounts and NOW accounts increased by$369.5 million from$280.1 million as ofDecember 31, 2019 . Savings accounts increased by$8.7 million from$43.1 million as ofDecember 31, 2019 . Time deposits decreased by$40.9 million during 2020. The increase in deposits during 2020 was primarily due to the acquisition of the three branches in westernNorth Carolina .
The following table shows historical information regarding the average balances outstanding and average interest rates for each major category of deposits:
For the Period Ended December 31,
2020 2019 2018 2017 2016
Average Average Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
(dollars in thousands)
Savings, NOW and
money market
deposits $ 523,359 0.56 % $ 319,930 0.51 % $ 315,849 0.42 % $ 220,249 0.25 % $ 209,769 0.19 %
Time deposits
>$100,000 286,890 1.61 % 299,451 2.04 % 321,387 1.50 % 258,141 1.09 % 204,120 0.82 %
Other time deposits 112,290 1.40 % 115,025 1.70 % 115,603 1.28 % 94,420 1.03 % 91,573 1.08 %
Total
interest-bearing
deposits 922,539 0.99 % 734,406 1.32 % 752,839 1.01 % 572,810 0.76 % 505,462 0.60 %
Noninterest-bearing
deposits 355,529 - 246,726 - 236,999 - 173,608 - 160,302 -
Total deposits $ 1,278,068 0.71 % $ 981,132 0.99 % $ 989,838 0.77 % $ 746,418 0.58 % $ 665,764 0.46 %
Short-Term and Long-Term Debt
As of
Shareholders' Equity
Total shareholders' equity atDecember 31, 2020 was$215.4 million , an increase of$2.6 million from$212.8 million as ofDecember 31, 2019 . Changes in shareholders' equity included$8.2 million in net income,$360,000 in stock-based compensation, proceeds of$112,000 from stock option exercises, other comprehensive income of$1.1 million related to the increase in the unrealized gain in the Company's available for sale investment security portfolio offset by$7.1 million of common stock repurchases. During 2018, the Company completed a follow-on public offering which resulted in net proceeds of approximately$59.8 million . Our share repurchase program remains active, and we are able to return capital - 59 - Table of Contents
to shareholders by buying our shares when market conditions warrant. We intend to retain adequate capital for any acquisitions which meet our criteria.
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RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Overview
During 2020, the Company had net income of $8.2 million compared to net income
of $13.0 million for 2019. Basic and diluted net income per share for the year
ended December 31, 2020 were $0.46 and $0.45 , respectively compared with basic
and diluted net income per share of $0.69 and $0.68 , respectively for 2019.
During 2020 our provision for allowance for loan losses was $6.2 million in
response to the increased risk profile associated with the economic impact of
the COVID - 19 disruptions seen in our market and across the country.
Embedded in the Company's net income numbers for the year ended December 31,
2020 , are integration expenses of $755,000 , related to the acquisition of three
branches in western North Carolina . Embedded in the Company's net income
numbers for the year ended December 31, 2019 , are integration expenses of
$140,000 , related to the acquisition of Virginia Beach branch, the sale of the
Six Mile branch and consolidation of the Washington branch.
Net Interest Income
Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels of non-interest bearing liabilities and capital. Net interest income increased by$5.6 million to$52.4 million for the year endedDecember 31, 2020 . The Company's total interest income was impacted by an increase in interest earning assets and a lower interest rate environment in 2020, plus activity related to the acquired westernNorth Carolina branches. Average total interest-earning assets were$1.6 billion in 2020 compared with$1.2 billion in 2019. The yield on those assets decreased by 46 basis points from 5.03% in 2019 to 4.57% in 2020. Factors impacting yield during 2020 were decreasing investment yields of 42 basis points, decreasing loan yields of 36 basis points and decreased yield on other interest earning assets of 173 basis points. Meanwhile, average interest-bearing liabilities increased by$183.4 million from$795.2 million for the year endedDecember 31, 2019 to$978.6 million for the year endedDecember 31, 2020 . Cost of these funds decreased by 35 basis points in 2020 to 1.10% from 1.45% in 2019, which was primarily due to an decrease of 43 basis points on larger time deposits which was offset by an increase of 5 basis points on money market deposits. In 2020, the Company's net interest margin was 3.79% and net interest spread was 3.47%. In 2019, net interest margin was 4.04% and net interest spread was 3.58%.
Provision for Loan Losses
The allowance for loan losses is a reserve established through provisions for
loan losses charged to income and represents management's best estimate of
probable loan losses that have been incurred within the existing portfolio of
loans. The allowance, in the judgment of management, is necessary to reserve for
estimated losses and risk inherent in the loan portfolio. The Company's
allowance for loan loss methodology is based on historical loss experience by
type of credit and internal risk grade, specific homogeneous risk pools and
specific loss allocations, with adjustments for current events and conditions.
The Company's process for determining the appropriate level of reserves is
designed to account for changes in credit quality as they occur. The provision
for loan losses reflects loan quality trends, including the levels of and trends
related to past due loans and economic conditions at the local and national
levels. It also considers the quality and risk characteristics of the Company's
loan origination and servicing policies and practices.
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The Company recorded a$6.2 million provision for loan losses in 2020 compared to a provision of$438,000 recorded in 2019. The increase in provision was due to risk associated with the economic impact from COVID - 19 and loan growth. For more information on changes in the allowance for loan losses, refer to Note E of the notes to the consolidated financial statements in the section titled Allowance for Loan Losses.
Non-Interest Income
Non-interest income for the year endedDecember 31, 2020 was$6.1 million , an increase of$701,000 from$5.4 million for the comparative 2019 period. Contributing to the increase was an increase in fees on sale of mortgages of$660,000 from our mortgage department that was launched in 2019, and an increase in other non-interest income of$158,000 primarily due to an increased number of debit cards which was offset by a decrease in deposit service charges of$69,000 and a decrease of$48,000 related to gain on the sale of securities.
Non-Interest Expenses
Non-interest expenses increased by$6.8 million or 19.4% to$41.9 million for the year endedDecember 31, 2020 , from$35.1 million for the same period in 2019. The following are highlights of the significant changes in non-interest expenses from 2019 to 2020.
Personnel expenses increased
? additions in branch staff, employment taxes and benefit costs primarily related
to the acquisition of the western
? Occupancy and equipment expenses increased by
acquisitions and a de novo branch.
? Core Deposit Intangible ("CDI") amortization expense decreased by
2020 due to normal amortization.
? Deposit insurance expense increased
size.
? Information systems expense increased
software and security costs and additional branches.
? Extinguishment of debt to
Merger/acquisition related expenses increased by
? integration expenses associated with the acquisition of the western North
Carolina branches.
? Foreclosed real estate expenses increased
write downs in 2020.
Professional fees decreased
? branch closures, branch opening, internal audit fees, repurchase plan and
various other consultants.
? Other non-interest expenses increased by
several categories of other non-interest expenses.
Provision for Income Taxes
The Company's effective tax rate in 2020 was 21.3%, compared to 22.1% in 2019.
For further discussion pertaining to the Company's tax position, refer to Note L of the consolidated financial statements.
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RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
Overview
During 2019, the Company had net income of $13.0 million compared to net income
of $13.8 million for 2018. Both basic and diluted net income per share for
the year ended December 31, 2019 were $0.69 and $0.68 , respectively, compared
with basic and diluted net income per share of $0.87 for 2018.
Embedded in the Company's net income numbers for the year ended December 31,
2019 , are net after tax integration expenses of $316,000 , related to the
acquisition of the Virginia Beach branch, the sale of the Six Mile banch and
consolidation of the Washington branch. Embedded in the Company's net income
numbers for the year ended December 31, 2018 , are net after tax merger expenses
of $1.4 million , related to the acquisition of Carolina Premier Bank .
Net Interest Income
Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels of non-interest bearing liabilities and capital. Net interest income decreased by$495,000 to$46.9 million for the year endedDecember 31, 2019 . The Company's total interest income was impacted by an increase in interest earning assets and a lower interest rate environment in 2019. Average total interest-earning assets were$1.2 billion in 2019 compared with$1.1 billion in 2018. The yield on those assets increased by 1 basis point from 5.02% in 2018 to 5.03% in 2019. Factors increasing yield during 2019 were increasing investment yields of 5 basis points, decreasing loan yields of 1 basis point and increased yield on other interest earning assets of 37 basis points. Meanwhile, average interest-bearing liabilities decreased by$28.4 million from$823.6 million for the year endedDecember 31, 2018 to$795.2 million for the year endedDecember 31, 2019 . Cost of these funds increased by 30 basis points in 2019 to 1.45% from 1.15% in 2018, which was primarily due to an increase of 42 basis points on larger time deposits and an increase of 52 basis points on borrowings. In 2019, the Company's net interest margin was 4.04% and net interest spread was 3.58%. In 2018, net interest margin was 4.19% and net interest spread was 3.88%.
Provision for Loan Losses
The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management's best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company's allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company's loan origination and servicing policies and practices. The Company recorded a$438,000 provision for loan losses in 2019 compared to a reverse provision of$156,000 recorded in 2018. The increase in provision was due to additional risk related to the COVID - 19 impact on the economy in our markets and by loan growth. For more information on changes in the allowance for loan losses, refer to Note E of the notes to the consolidated financial statements in the section titled Allowance for Loan Losses. - 63 - Table of Contents Non-Interest Income
Non-interest income for the year endedDecember 31, 2019 was$5.4 million , an increase of$718,000 from$4.7 million for the comparative 2018 period. Contributing to the increase was an increase in deposit service charges of$37,000 due to a higher number of deposits accounts from growth of deposit accounts, an increase in fees on sale of mortgages of$256,000 from our mortgage department launched in 2018, a gain on the sale of securities and an increase in other non-interest income of$377,000 primarily due to an increased number
of debit cards. Non-Interest Expenses
Non-interest expenses increased by
? Personnel expenses increased
in branch staff, employment taxes and benfit costs.
? Occupancy and equipment expenses increased
start-up which is offset by a reduction of repairs and maintenance expenses.
? Core Deposit Intangible ("CDI") amortization expense decreased by
2019 due to normal amortization.
? Deposit insurance expense decreased
? Information systems increased
security costs.
? Merger/acquisition related expenses decreased by
non-recurring 2018 merger cost associated with the Premara acquisition.
? Foreclosed real estate expenses increased
taxes and write downs in 2019.
Professional fees increased to
? closures, branch opening, internal audit fees, repurchase plan and various
other consultants.
? Other operating expense increased
categories of other non-interest expenses.
Provision for Income Taxes
The Company's effective tax rate in 2019 was 22.1%, compared to 22.1% in 2018. Included in the effective tax rate for 2019 and 2018 is the effect of the tax law legislation change enactedDecember 22, 2017 . For further discussion pertaining to the Company's tax position, refer to Note L of the consolidated financial statements included under Item 8 of this annual report. - 64 - Table of Contents NET INTEREST INCOME
The following table sets forth, for the periods indicated, information with
regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest-earning assets and interest
expense on interest-bearing liabilities, resultant yields or costs, net interest
income, net interest spread, net interest margin and ratio of average
interest-earning assets to average interest-bearing liabilities. Tax exempt
interest income has been presented on a taxable-equivalent basis. Non-accrual
loans have been included in determining average loans.
For the Years Ended December 31,
2020 2019 2018
(dollars in thousands)
Average Average Average Average Average Average
balance Interest rate balance Interest rate balance Interest rate
INTEREST-EARNING ASSETS:
Loans, gross of
allowance $ 1,189,894 $ 61,025 5.13 % $ 995,699 $ 54,645 5.49 % $ 978,499 $ 53,822 5.50 %
Investment securities 86,961 2,015 2.32 % 76,875 2,110 2.74 % 57,505 1,545 2.69 %
Other interest-earning
assets 109,332 307 0.28 % 91,575 1,838 2.01 % 98,460 1,618 1.64 %
Total interest-earning
assets 1,386,187 63,347 4.57 % 1,164,149 58,593 5.03 % 1,134,464 56,985 5.02 %
Other assets 175,678 104,579 94,112
Total assets $ 1,561,865 $ 1,268,728 $ 1,228,576
INTEREST-BEARING
LIABILITIES:
Deposits:
Savings, NOW and money
market $ 523,359 2,928 0.56 % $ 319,930 1,616 0.51 % $ 315,849 1,339 0.42 %
Time deposits over
$100,000 286,890 4,620 1.61 % 299,451 6,104 2.04 % 321,387 4,811 1.50 %
Other time deposits 112,290 1,571 1.40 % 115,025 1,957 1.70 % 115,603 1,482 1.28 %
Borrowings 56,036 1,640 2.93 % 60,799 1,879 3.09 % 70,750 1,818 2.57 %
Total interest-bearing
liabilities 978,575 10,759 1.10 % 795,205 11,556 1.45 % 823,589 9,450 1.15 %
Non-interest-bearing
deposits 355,529 246,726 236,999
Other liabilities 13,401 12,473 6,035
Shareholders' equity 214,360 214,324 161,953
Total liabilities and
shareholders' equity $ 1,561,865 $ 1,268,728 $ 1,228,576
Net interest
income/interest rate
spread
(taxable-equivalent
basis) $ 52,588 3.47 % $ 47,037 3.58 % $ 47,535 3.98 %
Net interest margin
(taxable-equivalent
basis) 3.79 % 4.04 % 4.19 %
Ratio of
interest-earning assets
to interest-bearing
liabilities 141.65 % 146.40 % 135.91 %
Reported net interest
income
Net interest income/net
interest margin
(taxable-equivalent
basis) $ 52,588 3.78 % $ 47,037 4.03 % $ 47,685 4.19 %
Less:
taxable-equivalent
adjustment 140 147 150
Net Interest Income $ 52,448 $ 46,890 $ 47,535
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RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
Year Ended Year Ended Year Ended
December 31, 2020 vs. 2019 December 31, 2019 vs. 2018 December 31, 2018 vs. 2017
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total Volume Rate Total
(dollars in thousands)
Interest income:
Loans $ 10,309 $ (3,929) $ 6,380 $ 945 $ (122) $ 823 $ 13,135 $ 2,834 $ 15,969
Investment
securities 255 (350) (95) 526 39 565 (42) 64 22
Other
interest-earning
assets 203 (1,734) (1,531) (126) 346 220 740 398 1,138
Total interest
income
(taxable-equivalent
basis) 10,767 (6,013) 4,754 1,345 263 1,608 13,833 3,296 17,129
Interest expense:
Deposits:
Savings, NOW and
money market 1,083 229 1,312 19 258 277 321 471 792
Time deposits over
$100,000 (229) (1,255) (1,484) (388) 1,681 1,293 818 1,182 2,000
Other time deposits (42) (344) (386) (9) 484 475 244 270 514
Borrowings (143) (96) (239) (282) 343 61 431 607 1,038
Total interest
expense 669 (1,466) (797) (660) 2,766 2,106 1,814 2,530 4,344
Net interest income
Increase/(decrease)
(taxable-equivalent
basis) $ 10,098 $ (4,547) 5,551 $ 2,005 $ (2,503) (498) $ 12,019 $ 766 12,785
Less:
Taxable-equivalent
adjustment (7) (3) (88)
Net interest income
Increase/(decrease) $ 5,558 $ (495) $ 12,873
During 2020, we experienced an overall decrease in the interest rate component
of our net interest income with an increase for loan volume and a decrease in
funding costs which was offset by an increase in deposit balances. The changes
in 2020
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caused an overall increase in net interest income. The increase in interest expense during 2019 caused an overall decrease in net interest income. The volume component had a positive variance which also resulted in an overall increase in net interest income. In 2018, increasing loan volume was the major contributor to increased net interest income.
LIQUIDITY
Market and public confidence in the Company's financial strength and in the
strength of financial institutions in general will largely determine the
Company's access to appropriate levels of liquidity. This confidence depends
significantly on the Company's ability to maintain sound asset quality and
appropriate levels of capital resources. The term "liquidity" refers to the
Company's ability to generate adequate amounts of cash to meet current needs for
funding loan originations, deposit withdrawals, maturities of borrowings and
operating expenses. Management measures the Company's liquidity position by
giving consideration to both on and off-balance sheet sources of, and demands
for, funds on a daily and weekly basis.
Liquid assets (consisting of cash and due from banks, interest-earning deposits
with other banks, federal funds sold and investment securities classified as
available for sale) comprised 18.0% and 11.9% of total assets at December 31,
2020 and 2019, respectively.
The Company has been a net seller of federal funds, maintaining liquidity
sufficient to fund new loan demand. When the need arises, the Company has the
ability to sell securities classified as available for sale, sell loan
participations to other banks, or to borrow funds as necessary. The Company has
established credit lines with other financial institutions to purchase up to
$249.1 million in federal funds. Also, as a member of the Federal Home Loan Bank
of Atlanta ("FHLB"), the Company may obtain advances of up to 10% of assets,
subject to our available collateral. A floating lien of $93.7 million on
qualifying loans is pledged to FHLB to secure such borrowings. In addition, the
Company may borrow at the Federal Reserve discount window and has pledged
$421,000 in securities for that purpose. As another source of short-term
borrowings, the Company, from time to time, also utilizes securities sold under
agreements to repurchase. At December 31, 2020 and 2019, the Company has no
borrowings outstanding under securities sold under agreements to repurchase.
At December 31, 2020 , the Company's outstanding commitments to extend credit
totaled $311.0 million , which consisted of loan commitments and undisbursed
lines of credit of $308.5 million , and letters of credit of $2.5 million . The
Company believes that its combined aggregate liquidity position from all sources
is sufficient to meet the funding requirements of loan demand and deposit
maturities and withdrawals in the near term.
Total deposits were $1.5 billion and $992.8 million at December 31, 2020 and
2019, respectively. Time deposits, which are the only deposit accounts that have
stated maturity dates, are generally considered to be rate sensitive. Time
deposits represented 26.1% and 43.2% of total deposits at December 31, 2020 and
2019, respectively. Time deposits of more than $250,000 represented 9.0% and
15.1%, respectively, of the total deposits at December 31, 2020 and 2019.
Management believes most other time deposits are relationship-oriented. While
competitive rates will need to be paid to retain these deposits at their
maturities, there are other subjective factors that will determine their
continued retention. Based upon prior experience, management anticipates that a
substantial portion of outstanding certificates of deposit will renew upon
maturity.
Management believes that current sources of funds provide adequate liquidity for
the Bank's current cash flow needs. The Company maintains minimal cash balances.
Management believes that the current cash balances plus taxes receivable will
provide adequate liquidity for the Company's current cash flow needs. Subject to
certain regulatory dividend restrictions and maintenance of required capital
levels, dividends paid by the Bank to the Company may also be a source of
liquidity for the Company.
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CAPITAL
A significant measure of the strength of a financial institution is its capital
base. Federal regulations have classified and defined capital into the following
components: (1) Tier 1 capital, which includes common shareholders' equity and
qualifying preferred equity (including qualifying trust preferred securities),
and (2) Tier 2 capital, which includes a portion of the allowance for loan
losses, certain qualifying long-term debt and preferred stock which does not
qualify as Tier 1 capital. Financial institutions and holding companies became
subject to the Basel III capital requirements beginning on January 1, 2015 . A
relatively new part of the capital ratios profile is the Common Equity Tier 1
risk-based ratio, which does not include limited life components such as trust
preferred securities. Minimum capital levels are regulated by risk-based capital
adequacy guidelines that require a financial institution to maintain capital as
a percent of its assets and certain off-balance sheet items adjusted for
predefined credit risk factors (risk-adjusted assets). A financial institution
is required to maintain, at a minimum, Tier 1 capital as a percentage of
risk-adjusted assets of 6.0% and combined Tier 1 and Tier 2 capital as
a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based
guidelines, federal regulations require that we maintain a minimum leverage
ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The capital
rules that took effect in 2015 require banks to hold Common Equity Tier 1
capital in excess of minimum risk-based capital ratios by at least 2.5 percent
to avoid limits on capital distributions and certain discretionary bonus
payments to executive officers and similar employees. The Company's equity to
assets ratio was 12.4% at December 31, 2020 . As the following table indicates,
at December 31, 2020 , the Company and its bank subsidiary exceeded minimum
regulatory capital requirements.
At December 31, 2020
Actual Minimum
Ratio Requirement
Select Bancorp, Inc.
Total risk-based capital ratio 13.84 % 8.00 %
Tier 1 risk-based capital ratio 12.84 % 6.00 %
Common equity Tier 1 risk-based capital ratio 11.99 % 4.50 % Leverage ratio
10.41 % 4.00 %
Total risk-based capital ratio 12.43 % 8.00 % Tier 1 risk-based capital ratio 11.42 % 6.00 %
Common equity Tier 1 risk-based capital ratio 11.42 % 4.50 % Leverage ratio
9.25 % 4.00 %
During 2004, the Company issued $12.4 million of junior subordinated debentures
to a special purpose subsidiary, New Century Statutory Trust I, which in turn
issued $12.0 million of trust preferred securities to investors. The proceeds
provided additional capital for the expansion of the Bank. Under the current
applicable regulatory guidelines, all of the trust preferred securities qualify
as Tier 1 capital. Management expects that the Company and the Bank will remain
"well capitalized" for regulatory purposes, although there can be no assurance
that additional capital will not be required in the future.
The Company's amended Articles of Incorporation, subject to certain limitations,
authorize the Company's board of directors from time to time by resolution and
without further shareholder action, to provide for the issuance of shares of
preferred stock, in one or more series, and to fix the preferences, limitations
and relative rights of such shares of preferred stock. The Company does not
currently have any preferred stock outstanding.
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ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its net interest
income. Like most financial institutions, the Company's interest income and cost
of funds are affected by general economic conditions and by competition in the
marketplace.
The purpose of asset/liability management is to provide stable net interest
income growth by protecting the Company's earnings from undue interest rate
risk, which arises from volatile interest rates and changes in the balance sheet
mix, and by managing the risk/return relationships between liquidity, interest
rate risk, market risk, and capital adequacy. The Company maintains, and has
complied with, a board approved asset/liability management policy that provides
guidelines for controlling exposure to interest rate risk by utilizing the
following ratios and trend analyses: liquidity, equity, volatile liability
dependence, portfolio maturities, maturing assets and maturing liabilities. The
Company's policy is to control the exposure of its earnings to changing interest
rates by generally endeavoring to maintain a position within a narrow range
around an "earnings neutral position," which is defined as the mix of assets and
liabilities that generate a net interest margin that is least affected by
interest rate changes.
When suitable lending opportunities are not sufficient to utilize available
funds, the Company has generally invested such funds in securities, primarily
securities issued by governmental agencies, mortgage-backed securities and
municipal obligations. The securities portfolio contributes to the Company's
income and plays an important part in overall interest rate management. However,
management of the securities portfolio alone cannot balance overall interest
rate risk. The securities portfolio must be used in combination with other
asset/liability techniques to actively manage the balance sheet. The primary
objectives in the overall management of the securities portfolio are safety,
liquidity, yield, asset/liability management (interest rate risk), and investing
in securities that can be pledged for public deposits.
In reviewing the needs of the Company with regard to proper management of its
asset/liability program, the Company's management estimates its future needs,
taking into consideration historical periods of high loan demand and low deposit
balances, estimated loan and deposit increases (due to increased demand through
marketing), and forecasted interest rate changes.
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The analysis of an institution's interest rate gap (the difference between the re-pricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding atDecember 31, 2020 , of which are projected to re-price or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which re-price or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate re-pricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company's assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions. Terms to Re-pricing at December 31, 2020 More Than More Than 1 Year 1 Year to 3 Years to More Than or Less 3 Years 5 Years 5 Years Total (dollars in thousands) Interest-earning assets: Loans$ 213,511 $ 327,508 $ 421,584 $ 341,781 $ 1,304,384 Securities, available for sale 3,165 4,083 21,570 165,674 194,492 Interest-earning deposits in other banks 87,399 - - - 87,399 Federal funds sold 5,364 - - - 5,364 Stock in the Federal Home Loan Bank of Atlanta 1,147 - - - 1,147 Other non-marketable securities 709 - - - 709
Total interest-earning assets
Interest-bearing liabilities: Deposits: Savings, NOW and money market$ 701,520 $ - $ -
$ -$ 701,520 Time 89,083 22,314 3,727 127 115,251 Time over$100,000 221,365 46,792 4,973 - 273,130 Short-term debt - - - - - Long-term debt - - - 12,372 12,372 Total interest-bearing liabilities$ 1,011,968 $ 69,106 $ 8,700
Interest sensitivity gap per period$ (700,673) $ 262,485 $ 434,454
Cumulative interest sensitivity gap$ (700,673) $ (438,188) $ (3,734)
Cumulative gap as a percentage of total interest-earning assets (225.08) % (68.13) % (0.34)
% 30.83 % 30.83 %
Cumulative interest-earning assets as a percentage of interest-bearing liabilities 30.76 % 59.47 % 99.66
% 144.56 % 144.56 %
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CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the portrayal
of the Company's financial condition and results, and requires management to
make difficult, subjective or complex judgments. What makes these judgments
difficult, subjective and/or complex is the need to make estimates about the
effects of matters that are inherently uncertain. The following is a summary of
the Company's most complex accounting policies: the allowance for loan losses,
business combinations and deferred tax asset.
Asset Quality and the Allowance for Loan Losses
The financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on a non-accrual basis. Loans are placed on a non-accrual basis when there are serious doubts about the collectability of principal or interest. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or which the deferral of interest or principal have been granted due to the borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. See the previous section titled "Past Due Loans and Nonperforming Assets" for a discussion on past due loans, non-performing assets and other impaired loans. The allowance for loan losses is maintained at a level considered appropriate in light of the risk inherent within the Company's loan portfolio, based on management's assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. Additional information regarding the Company's allowance for loan losses and loan loss experience is presented below in the discussion of the allowance for loan losses and in Note E to the accompanying notes to consolidated financial statements.
Business combinations and method of accounting for loans acquired
The Company accounts for acquisitions under FASB ASC Topic 805, Business
Combinations, which requires the use of the acquisition method of accounting.
All identifiable assets acquired, including loans, and liabilities assumed, are
recorded at fair value along with the identifiable intangible assets. The
recognized net goodwill is associated with the difference from the fair value
and the acquired book value of the assets and liabilities of the transaction. No
allowance for credit losses related to the acquired loans is recorded on the
acquisition date because the fair value of the loans acquired incorporates
assumptions regarding credit risk.
The acquired loans are segregated between those considered to be performing
("acquired performing") and those with evidence of credit deterioration based on
such factors as past due status, nonaccrual status and credit risk ratings.
Acquired credit-impaired loans (PCI loans) are accounted for under the
accounting guidance for loans and debt securities acquired with deteriorated
credit quality, found in FASB ASC Topic 310-30, Receivables-Loans and Debt
Securities Acquired with Deteriorated Credit Quality, formerly American
Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP)
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,
and initially measured at fair value, which includes estimated future credit
losses expected to be incurred over the lives of the loans. Loans acquired in
business combinations with evidence of credit deterioration are considered
impaired. Loans acquired through business combinations that do not meet the
specific criteria of FASB ASC Topic 310-30, but for which a discount is
attributable, at least in part to credit quality, are also accounted for under
this guidance. Certain acquired loans, such as acquired performing loans and
lines of credit (consumer and commercial) are accounted for in accordance with
FASB ASC Topic 310-20, where the discount is accreted through earnings based on
estimated cash flows over the estimated lives of the loans.
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For further discussion of the Company's loan accounting and acquisitions, see Note B-Summary of Significant Accounting Policies, Note C- Business Combinations, and Note E-Loans of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.
Allowance for loan losses
The allowance for loan losses reflects the estimated losses that will result from the inability of the Bank's borrowers to make required loan payments. The allowance for loan losses is established for estimated credit losses through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The Company's allowance for loan loss methodology incorporates several quantitative and qualitative risk factors used to establish an appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. A three-year loss history is incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values within our market footprint.
Allowance for loan losses for acquired loans
Subsequent to the acquisition date, decreases in cash flows expected to be received on FASB ASC Topic 310-30 acquired loans from the Company's initial estimates are recognized as impairment through the provision for credit losses. Probable and significant increases in cash flows (in a loan pool where an allowance for acquired credit losses was previously recorded) reduces the remaining allowance for acquired credit losses before recalculating the amount of accretable yield percentage for the loan pool in accordance with ASC 310-30. Acquired loans that are not subject to FASB ASC Topic 310-30 are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on contractual cash flows over the estimated life of the loan. The allowance for these loans will be determined in a similar manner to the non-acquired credit losses.
Deferred Tax Asset
The Company's net deferred tax asset was$3.2 million atDecember 31, 2020 . In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including, among other things, recent earnings trends, projected earnings, and asset quality. As ofDecember 31, 2020 , management concluded that the Company's net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations, tax law changes or other factors could impact the realization of the deferred tax asset in the future. OFF-BALANCE SHEET ARRANGEMENTS Information about the Company's off-balance sheet risk exposure is presented in Note N to the accompanying consolidated financial statements. During 2004, the Company formed an unconsolidated subsidiary trust to which the Company issued$12.4 million of junior subordinated debentures (see Note K to the consolidated financial statements). Otherwise, as part of its ongoing business, the Company has not participated in, nor does it anticipate participating in, transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities, which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. - 72 - Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS
See Note B to the Company's audited consolidated financial statements for a full
description of recent accounting pronouncements, including the respective
expected dates of adoption and anticipated effects on results of operations and
financial condition.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability make-up that is distinctly
different from that of a company with substantial investments in plant and
inventory because the major portions of a commercial bank's assets are monetary
in nature. As a result, a bank's performance may be significantly influenced by
changes in interest rates. Although the banking industry is more affected by
changes in interest rates than by inflation in the prices of goods and services,
inflation is a factor that may influence interest rates. However, the frequency
and magnitude of interest rate fluctuations do not necessarily coincide with
changes in the general inflation rate. Inflation does affect operating expenses
in that personnel expenses and the cost of supplies and outside services tend to
increase more during periods of high inflation.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In the normal course of business there are various outstanding contractual
obligations of the Company that will require future cash outflows. In addition,
there are commitments and contingent liabilities, such as commitments to extend
credit that may or may not require future cash outflows. The following table
reflects contractual obligations of the Company outstanding as of December
31,
2020.
Payments Due by Period
On Demand
Or Within After
Contractual Obligations Total 1 Year 1-3Years 4-5 Years 5 Years
(dollars in thousands)
Long-term debt $ 12,372 $ - $ - $ - $ 12,372
Lease obligations 8,930 680 1,493 1,504 5,253
Deposits 1,485,817 1,408,167 68,875 8,648 127
Total contractual cash obligations
The following table reflects other commitments outstanding as ofDecember 31, 2020 . Amount of
Commitment Expiration Per Period
(dollars in thousands)
Total
Amounts Less than After
Other Commitments Committed 1 Year 1-3 Years 4-5 Years 5 YearsUndisbursed home equity credit lines$ 62,397 $ 11,837 $ 5,161 $ 3,222 $ 42,177 Other commitments and credit lines 52,555 37,251 2,752 4,026 8,526 Un-disbursed portion of constructions loans 193,571 120,770
15,642 21,493 35,666
Letters of credit 2,500 2,068 341 91 -
Total loan commitments $ 311,023 $ 171,926 $ 23,896 $ 28,832 $ 86,369 In addition, the Company has legally binding delayed equity commitments to private investment funds. These commitments are not currently expected to be called, and therefore, are not reflected in the financial statements. The amount of these commitments atDecember 31, 2020 and 2019 was$525,000 and$525,000 , respectively. - 73 - Table of Contents NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those results currently anticipated. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "might," "planned," "estimated," and "potential." Factors that could cause results and outcomes to vary include, but are not limited to: fluctuations in general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. Additionally, any of the risks identified under Item 1A of this annual report could also cause actual results to differ materially from those indicated in the Company's forward-looking statements. The Company does not undertake a duty to update any forward-looking statements in this report, whether as a result of new information, future developments or otherwise.
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