SELECT BANCORP, INC. Management's discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations ofSelect Bancorp, Inc. (the "Company"). This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by, and information currently available to us. The words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "could," "project," "predict," "expect," "estimate," "continue," and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include, among other things: the impact of the novel coronavirus and the associated COVID-19 disease pandemic on the business, financial condition and results of operations of the Company and its customers; changes in national, regional and local market conditions; changes in legislative and regulatory conditions; changes in the interest rate environment; breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and adverse changes in credit quality trends. Overview The Company is a commercial bank holding company and has one banking subsidiary,Select Bank & Trust Company (referred to as the "Bank"), and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company's only business activity is the ownership of the Bank and New Century Statutory Trust I. 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 inHarnett ,Brunswick ,New Hanover ,Carteret ,Cumberland ,Jackson ,Johnston ,Macon ,Mecklenburg ,Pitt ,Robeson ,Sampson ,Wake ,Pasquotank ,Alamance , andWayne counties inNorth Carolina ,York andCherokee counties inSouth Carolina , andVirginia Beach, Virginia . 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 accounts, 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. The Company was formerly known asNew Century Bancorp, Inc. OnJuly 25, 2014 ,New Century Bancorp, Inc. acquiredSelect Bancorp, Inc. ("Legacy Select") by merger. The combined company is now known asSelect Bancorp, Inc. , which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered inGreenville, North Carolina , whose wholly owned subsidiary,Select Bank & Trust Company , was a state-chartered commercial bank with approximately$276.9 million in assets. The merger expanded the Company'sNorth Carolina presence with the addition of six branches located inGreenville (two),Elizabeth City ,Washington ,Gibsonville , andBurlington . During 2015, theGibsonville and Burlington branches were combined into a new location inBurlington . OnDecember 15, 2017 , the Company acquiredPremara Financial, Inc. and its banking subsidiaryCarolina Premier Bank ("Carolina Premier") headquartered inCharlotte, North Carolina . At the time of the acquisition, Carolina Premier had approximately$279 million in assets and four full-service offices, including a presence in upstateSouth Carolina . The Bank acquired three branches located in the cities ofSylva ,Franklin andHighlands, North Carolina onApril 17, 2020 . The acquisition of these branches, which were acquired fromFirst-Citizens Bank & Trust Company ,Raleigh, North Carolina , added approximately$103 million in loans and$185 million in deposits as of the
acquisition date.
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Comparison of Financial Condition at
March 31, 2021 and December 31, 2020
During the first three months of 2021, total assets increased by $102.3 million
to $1.8 billion as of March 31, 2021 . The increase in assets was due primarily
to loan growth and the increase in cash on hand and investments. Earning assets
at March 31, 2021 totaled $1.7 billion and consisted of $1.3 billion in net
loans, $208.6 million in investment securities, $134.1 million in cash,
overnight investments and interest-bearing deposits in other banks, $5.0 million
in federal funds sold and $1.5 million in non-marketable equity securities.
Total deposits and shareholders' equity at the end of the first quarter of 2021
were $1.6 billion and $212.5 million , respectively.
Since the end of 2020, gross loans have increased by $37.9 million to $1.3
billion as of March 31, 2021 . The increase in gross loans was due primarily to
normal customer demand and the PPP loan program. At March 31, 2021 , gross loans
consisted of $116.1 million in commercial and industrial loans (which includes
654 PPP loans in the amount of $51.2 million ), $695.7 million in commercial real
estate loans, $86.2 million in multi-family residential loans, $4.5 million in
consumer loans, $185.7 million in residential real estate loans, $56.2 million
in HELOCs, and $203.2 million in construction loans. Deferred loan fees, net of
costs, on these loans were $5.3 million (which includes $2.1 million in net fees
related to PPP loans) at March 31, 2021 .
At March 31, 2021 the Company held $5.0 million in federal funds sold compared
to $5.4 million in federal funds sold at December 31, 2020 . Interest-earning
deposits in other banks were $133.9 million at March 31, 2021 , a $46.5 million
increase from December 31, 2020 . The Company's investment securities at March
31, 2021 were $208.6 million , an increase of $14.2 million from December 31,
2020 . The investment portfolio as of March 31, 2021 consisted of $50.8 million
in government agency debt securities, $66.6 million in mortgage-backed
securities, $2.2 million in corporate bonds and $89.0 million in municipal
securities. The net unrealized loss on these securities was $5.6 million as of
March 31, 2021 .
At March 31, 2021 , the Company had an investment of $862,000 in Federal Home
Loan Bank ("FHLB") stock, which decreased by $285,000 from December 31, 2020 .
Also, the Company had $655,000 in other non-marketable securities at March 31,
2021 compared to $709,000 at December 31, 2020 .
At March 31, 2021 , non-earning assets were $119.4 million , an increase of $1.2
milllion from $118.2 million as of December 31, 2020 . Non-earning assets
included $22.5 million in cash and due from banks, bank premises and equipment
of $20.2 million , goodwill of $42.9 million , core deposit intangible of $1.4
million , accrued interest receivable of $5.0 million , right of use lease asset
of $8.4 million , foreclosed real estate of $2.0 million , and other assets
totaling $17.1 million , including net deferred taxes of $5.1 million . Since the
income on bank-owned life insurance is included in non-interest income, this
asset is not included in the Company's calculation of earning assets. The
increase in non-earning assets was due primarily to the increase in cash and due
from banks.
Total deposits at March 31, 2021 were $1.6 billion and consisted of $448.8
million in non-interest-bearing demand deposits, $708.2 million in money market
and negotiable order of withdrawal, or NOW, accounts, $55.2 million in savings
accounts, and $370.4 million in time deposits. Total deposits increased by $96.8
million from $1.5 billion as of December 31, 2020 , due primarily to the federal
stimulus programs and deposits related to the PPP loan program. The Bank had
$1.6 million in brokered demand deposits and $1.6 million in brokered time
deposits as of March 31, 2021 . The Bank had $1.8 million in brokered demand
deposits and $1.7 million in brokered time deposits as of December 31, 2020 .
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As of
Total shareholders' equity atMarch 31, 2021 was$212.5 million , a decrease of$3.1 million from$215.4 million as ofDecember 31, 2020 . Accumulated other comprehensive loss relating to available for sale securities increased by$6.3 million during the three months endedMarch 31, 2021 . The decrease in shareholders' equity was offset by net income of$6.3 million and$64,000 from the exercise of stock options. Also, contributing to the decrease in equity were stock repurchases totaling$3.2 million .
Past Due Loans, Non-performing Assets, and Asset Quality
AtMarch 31, 2021 , the Company had$1.8 million in loans that were 30 to 89 days past due, of which$51,000 in loans were 60 to 89 days past due. This$1.8 million represented 0.13% of gross loans outstanding on that date. This is a decrease fromDecember 31, 2020 when there were$5.2 million in loans that were 30-89 days past due, of which$2.5 million in loans were 60 to 89 days past due. This$5.2 million repesented 0.40% of gross loans outstanding atDecember 31, 2020 . Non-accrual loans decreased from$6.8 million atDecember 31, 2020 to$6.1 million atMarch 31, 2021 . The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 1.10% atDecember 31, 2020 to 0.98% atMarch 31, 2021 . The Company had a decrease of$695,000 in non-accruals from$6.8 million atDecember 31, 2020 and a decrease in accruing troubled debt restructurings, or TDRs, from$7.5 million atDecember 31, 2020 to$7.1 million as ofMarch 31, 2021 . Of the non-accrual loans as ofMarch 31, 2021 , one commercial real estate loan totaled$1.5 million , three construction loans totaled$493,000 , eleven commercial loans totaled$3.1 million , four HELOC loans totaled$91,000 , eight 1-to-4 family residential loans totaled$746,000 and consumer loans made up the remaining balance. AtMarch 31, 2021 , the Bank had fifty-one loans totaling$11.4 million that were considered to be troubled debt restructurings, or TDRs. Thirty-four of these loans totaling$7.1 million were still in accruing status with the remaining TDRs included in non-accrual loans. All TDRs are considered impaired loans regardless of accrual status and have been included as non-performing assets in the table below. 32 Table of Contents The table below sets forth, for the periods indicated, information about the Company's non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus accruing TDRs), and total non-performing assets. For Periods Ended March 31, December 31, 2021 2020 Non-accrual loans$ 6,095 $ 6,790 Accruing TDRs 2,217 7,506 Total non-performing loans 8,312 14,296 Foreclosed real estate 1,968 2,172 Total non-performing assets$ 10,280 $ 16,468
Accruing loans past due 90 days or more$ 1,673 $ 802 Allowance for loan losses$ 13,187
Non-performing loans to period end loans 0.62 % 1.10 %
Non-performing loans and accruing loans past due 90 days or more to period end loans
0.74 % 1.16 %
Allowance for loan losses to period end loans 0.98 % 1.08 %
Allowance for loan losses to non-performing loans 159 % 99 %
Allowance for loan losses to non-performing assets 128 % 86 %
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more
110 % 82 %
Non-performing assets to total assets 0.56 % 0.95 %
Non-performing assets and accruing loans past due 90
days or more to total assets 0.65 % 1.00 %
Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed
real estate) at March 31, 2021 and December 31, 2020 were $10.3 million and
$16.5 million , respectively. The allowance for loan losses at March 31, 2021
represented 128% of non-performing assets compared to 86% at December 31, 2020 .
Total impaired loans at
Total impaired loans at
The allowance for loan losses was$13.2 million atMarch 31, 2021 or 0.98% of gross loans outstanding as compared to 1.08% reported as a percentage of gross loans atDecember 31, 2020 . This decrease resulted primarily from changes in loans requiring a specific reserve plus a reduction in 33
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qualitative factors related to COVID-19 and economic performance indicators. The loans acquired from Legacy Select,Carolina Premier andFirst Citizens Bank were recorded at estimated fair value as of the acquisition date; the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for loan 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 atMarch 31, 2021 represented 100% of non-performing loans compared to 99% atDecember 31, 2020 . It is management's assessment that the allowance for loan losses as ofMarch 31, 2021 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 have improved compared to a year ago but are still influenced by some deteriorated economic factors that have not returned to pre-recession levels. State, local, and national governing bodies continue to 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 over the balance of 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 the remainder of 2021. The Coronavirus Aid, Relieft, and Econnomic Security Act, or 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 512 loans amounting to$302.5 million of which 18 loans totaling$16.8 million remained on modification as ofMarch 31, 2021 .
Contractual Obligations
The following table presents the Company's significant fixed and determinable
contractual obligations by payment date. The payment amounts represent those
amounts contractually due to the recipient. The table excludes liabilities
recorded where management cannot reasonably estimate the timing of any payments
that may be required in connection with these liabilities.
Payments Due by Period
More
1 Year Over 1 to Over 3 to Than
or Less 3 Years 5 Years 5 years Total
(dollars in thousands) (dollars in thousands)
Time deposits $ 305,492 $ 57,233 $ 7,617 $ 104 $ 370,446
Long-term debt - - - 12,372 12,372
Operating leases 516 1,493 1,504 5,253 8,766Total contractual obligations$ 306,008 $ 58,726 $
9,121$ 17,729 $ 391,584 Other Lending Risk Factors Besides monitoring non-performing loans and past due loans, management also monitors trends in the loan portfolio that may indicate more than normal risk. A discussion of certain other risk factors follows. Some loans or groups of loans may contain one or more of these individual loan risk factors. 34
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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.
Regulatory Loan to Value Ratios
The Company monitors its exposure to loans that exceed the guidelines established by regulators for loan to value ("LTV") ratios.
AtMarch 31, 2021 andDecember 31, 2020 , the Company had$31.5 million and$27.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. AtMarch 31, 2021 andDecember 31, 2020 , the Company had$7.3 million and$10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 21.6% and 23.2% of total risk-based capital as ofMarch 31, 2021 andDecember 31, 2020 , which is less than the 100% maximum allowed. These loans may represent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.
Business Sector Concentrations
Loan concentrations in certain business sectors can be impacted by lower than normal retail sales, higher unemployment, higher vacancy rates, and a weakening in real estate market conditions. The Company has established an internal commercial real estate guideline of 40% of risk-based capital for any single product line. AtMarch 31, 2021 , the Company had six product type groups which exceeded this guideline:Office Building , which represented 59% of risk-based capital or$106.7 million ;Commercial Construction , which represented 76% of risk-based capital or$136.5 million ; 1-to-4 Family Rental property, which represented 62% of risk-based capital or$111.3 million ; Strip Center property, which represented 50% of risk-based capital or$89.5 million ; Retail property, which represented 48% of risk-based capital or$86.9 million ; andApartment Complex /Multi-Family, which represented 47% of risk-based capital or$83.9 million . All other commercial real estate groups were at or below the 40% threshold. The internal guideline levels heighten the level of Company monitoring of such loans in underwriting and ongoing servicing activities. AtDecember 31, 2020 , the Company had three product types that exceeded the 40% guideline. The following product types were in excess of the 40% guidelines at such date: apartments, commercial construction and office buildings. All other commercial and residential real estate product types were under the 40% threshold as of such date.
Acquisition, Development, and Construction Loans ("ADC")
The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as ofMarch 31, 2021 andDecember 31, 2020 . 35 Table of Contents Acquisition, Development and Construction Loans (dollars in thousands) March 31, 2021 December 31, 2020 Land and Land Land and Land Construction Development Total
Construction Development Total Total ADC loans$ 164,023 $ 39,189 $ 203,212 $ 195,649 $ 41,086 $ 236,735 Average Loan Size $ 233 $ 502 $ 288 $ 595 Percentage of total loans 12.22 % 2.92 % 15.14 % 15.00 % 3.15 % 18.15 % Non-accrual loans $ 493 $ -$ 493 $ 154 $ -$ 154
Management monitors the ADC portfolio by reviewing funding based on project completeness, monthly and quarterly inspections as required by the project, collateral value, geographic concentrations, spec-to-presold ratios and performance of similar loans in the Company's market area.
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 HELOC loans atMarch 31, 2021 andDecember 31, 2020 . March 31, 2021 December 31, 2020 ADC Loans Percent HELOC Percent ADC Loans Percent HELOC Percent (dollars in thousands) Harnett County$ 8,960 4.41 %$ 4,372 7.78 %$ 9,515 4.02 %$ 4,672 8.68 % Alamance County 305 0.15 % 829 1.47 % 536 0.23 % 920 1.71 % Brunswick County 11,815 5.81 % 1,433 2.55 % 14,173 5.99 % 1,506 2.80 % Carteret County 4,753 2.34 % 2,480 4.41 % 5,219 2.20 % 2,606 4.84 % Cherokee County (SC) - - % 20 0.04 % - - % 22 0.04 % Cumberland County 15,878 7.81 % 2,749 4.89 % 24,261 10.25 % 2,667 4.96 % Durham County 657 0.32 % 974 1.73 % 541 0.23 % 554 1.03 % Forsyth County 7,327 3.61 % 53 0.09 % 5,055 2.14 % 82 0.15 % Jackson County 2,526 1.24 % 2,034 3.62 % 3,295 1.39 % 2,204 4.10 % Macon County 5,843 2.88 % 4,838 8.60 % 9,454 3.99 % 5,160 9.59 % Mecklenburg County 22,098 10.87 % 4,464 7.94 % 23,788 10.05 % 4,360 8.10 % New Hanover County 22,164 10.91 % 4,185 7.44 % 25,608 10.82 % 3,416 6.35 % Pasquotank County 3,830 1.88 % 1,182 2.10 % 3,148 1.33 % 1,241 2.31 % Pitt County 15,670 7.71 % 3,511 6.24 % 17,154 7.25 % 3,733 6.94 % Robeson County 30 0.01 % 3,006 5.34 % 33 0.01 % 2,966 5.51 % Sampson County 377 0.19 % 1,673 2.97 % 295 0.12 % 1,830 3.40 % Virginia Beach County (VA) 3,938 1.94 % 1,113 1.98 % 3,648 1.54 % 795 1.48 % Wake County 18,978 9.34 % 4,055 7.21 % 23,514 9.93 % 2,694 5.01 % Wayne County 913 0.45 % 2,285 4.06 % 2,426 1.03 % 2,962 5.50 % Wilson County 760 0.37 % 118 0.21 % 1,112 0.47 % 130 0.24 % York County (SC) 2,794 1.38 % 1,034 1.84 % 2,538 1.07 % 1,253 2.33 % All other locations 53,596 26.38 % 9,839 17.49 % 61,422 25.94 % 8,033 14.93 % - Total$ 203,212 100.00 %$ 56,247 100.00 %$ 236,735 100.00 %$ 53,806 100.00 % 36 Table of Contents Interest-Only Payments Another risk factor that exists in the total loan portfolio pertains to loans with interest-only payment terms. AtMarch 31, 2021 , the Company had$337.7 million in loans that had terms permitting interest-only payments. This represented 25.2% of the total loan portfolio. AtDecember 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. Recognizing the risk inherent with interest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest-only payments during the acquisition, development, and construction phases of such projects.
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 totaled$115.3 million , or 8.6% of total loans, atMarch 31, 2021 compared to$104.6 million , or 10.1% of total loans, atDecember 31, 2020 . The Company's ten largest customer relationships totaled$171.2 million , or 12.8% of total loans, atMarch 31, 2021 compared to$158.1 million , or 15.3% of total loans, atDecember 31, 2020 . Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company's capital position. Comparison of Results of Operations for the Three months endedMarch 31, 2021 and 2020 General. During the first quarter of 2021, the Company reported net income of$6.3 million as compared with net income of$1.1 million for the first quarter of 2020. Net income per common share for the first quarter of 2021 was$0.36 basic and diluted, compared with net income per common share of$0.06 basic and diluted, for the first quarter of 2020. Results of operations for the first quarter of 2021 were primarily impacted by an increase of$4.5 million in net interest income and an increase in non-interest expense of$238,000 . The increase in non-interest expense of$949,000 was primarily related to increases in personnel expense of$500,000 , deposit insurance expense of$392,000 , occupancy expenses of$59,000 , professional fees of$90,000 , other expenses of$112,000 , and which were offset by foreclosure related expenses of$140,000 , and a decrease in merger-related expenses of$39,000 . The Company recorded a recovery of provision for loan losses of$777,000 for the first quarter of 2021 compared to a provision of$2.3 million in the first quarter of 2020. The change in the provision expense had a significant impact on the net income reported for the 2021 first quarter as compared to the comparative period in 2020. Net Interest Income. Net interest income increased by$4.5 million for the first quarter of 2021 from the first quarter of 2020. The Company's total interest income was affected by an increase in earning loans and investments, which was offset by a reduction of earnings on federal funds sold. Average total interest-earning assets were$1.6 billion in the first quarter of 2021 compared with$1.1 billion during the same period in 2020, while the average yield on those assets decreased 44 basis points from 4.98% to 4.54%, which was primarily due to the reduction of interest rates on loans due to reduced rates on overnight interest earning assets and reduced yield on investment securities. 37 Table of Contents The Company's average interest-bearing liabilities increased by$325.1 million to$1.1 billion for the quarter endedMarch 31, 2021 from$788.4 million for the same period one year earlier and the cost of those funds decreased from 1.39% to 0.75%, or 64 basis points. The increase in interest-bearing liabilities was a primary result of increased savings, money market and time deposits from the acquisition of three branches, deposits from PPP loans and general organic growth that is offset by a reduction in wholesale deposits. During the first quarter of 2021, the Company's net interest margin was 4.02% and net interest spread was 3.79%. In the same quarter ended one year earlier, net interest margin was 4.03% and net interest spread was 3.59%. Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company uses loss history based on the weighted average net charge off history for the most recent twelve consecutive quarters, based on the risk-graded pool to which the loss was assigned. Then, using the look-back period, loss factors are calculated for each risk-graded pool. During the first quarter of 2021, the Company recorded a recovery of provision for loan losses of$777,000 , as compared to a provision of$2.3 million that was recorded in the first quarter of 2020 that was primarily influenced by improved qualitative factors compared to prior periods that are associated with the computation of allowance for loan losses. Non-Interest Income. Non-interest income for the quarter endedMarch 31, 2021 was$1.7 million , an increase of$238,000 from the first quarter of 2020. Service charges on deposit accounts decreased$82,000 to$256,000 for the quarter endedMarch 31, 2021 from$338,000 for the same period in 2020. Other non-deposit fees and income increased$128,000 from the first quarter of 2020 to the first quarter of 2021. Fees from the sale of mortgages and SBA loans increased from$192,000 for the quarter endedMarch 31, 2020 to$485,000 for the first quarter of 2021 due to increased volume. The Company did not have any sales of investment securities during the three months endedMarch 31, 2021 and 2020. Non-Interest Expenses. Non-interest expenses increased by$949,000 to$10.2 million for the quarter endedMarch 31, 2021 , from$9.2 million for the same period in 2020. In general, most categories of non-interest expenses increased primarily due to changes in the Company's branch network and the acquisition of the branches in westernNorth Carolina . The following are highlights of the significant categories of non-interest expenses during the first quarter of 2021 versus the same period in 2020:
? Personnel expenses increased
personnel and cost of living increases.
? Occupancy expenses increased
of branches.
? Integration-related expenses decreased
? CDI expense decreased
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Other expenses increased by
? new mobile banking platform, increase in customer accounts and increase in
number of branches.
? Professional fees increased by
? Deposit insurance expenses increased by
Provision for Income Taxes. The Company's effective tax rate was 22.6% and 20.2%
for the quarters ended
As ofMarch 31, 2021 and December, 31, 2020, the Company had a net deferred tax asset in the amount of$5.1 million and$3.2 million , respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including, among other things, recent earnings trends, projected earnings, and asset quality. As ofMarch 31, 2021 andDecember 31, 2020 , management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future. 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,
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net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans.
For the quarter ended For the quarter ended
March 31, 2021 March 31, 2020
(dollars in thousands)
Average Average Average Average
balance Interest rate balance Interest rate
INTEREST-EARNING ASSETS:
Loans, gross of allowance $ 1,310,267 $ 17,069 5.28 % $ 1,020,630 $ 13,600 5.36 %
Investment securities 201,077 969 1.95 % 68,174 439 2.59 %
Other interest-earning assets 102,619 25 0.10 % 58,827 168 1.15 %
Total interest-earning assets 1,613,963 18,063 4.54 % 1,147,631 14,207 4.98 %
Other assets 147,965 108,312
Total assets $ 1,761,928 $ 1,255,943
INTEREST-BEARING LIABILITIES:
Deposits:
Savings, NOW and money market $ 720,683 924 0.52 % $ 323,049 348 0.43 %
Time deposits over $100,000 266,504 680 1.03 % 303,087 1,499 1.99 %
Other time deposits 113,909 358 1.27 % 104,895 432 1.66 %
Borrowings 12,372 87 2.85 % 57,372 439 3.08 %
Total interest-bearing liabilities 1,113,468 2,049 0.75 % 788,403 2,718 1.39 %
Non-interest-bearing deposits 415,516 241,131
Other liabilities 16,938 11,907
Shareholders' equity 216,006 214,502
Total liabilities and shareholders'
equity $ 1,761,928 $ 1,255,943
Net interest income/interest rate
spread (taxable-equivalent basis) $ 16,014 3.79 % $ 11,489 3.59 %
Net interest margin (taxable-equivalent
basis) 4.02 % 4.03 %
Ratio of interest-earning assets to
interest-bearing liabilities 144.95 % 145.56 %
Reported net interest income
Net interest income/net interest margin
(taxable-equivalent basis) $ 16,014 4.01 % $ 11,489 4.02 %
Less:
taxable-equivalent adjustment (30)
(29)
Net Interest Income $ 15,984 $ 11,460
Liquidity
The Company's liquidity is a measure of its ability to fund loans, withdrawals
and maturities of deposits, and other cash outflows in a cost effective manner.
The principal sources of liquidity are deposits, scheduled payments and
prepayments of loan principal, maturities of investment securities, access to
liquid deposits, and funds provided by operations. While scheduled loan payments
and maturing investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. Liquid assets (consisting of cash and due
from banks, interest-earning deposits with other banks, federal funds sold
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and investment securities classified as available for sale) represented 20.2% of
total assets at
The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As ofMarch 31, 2021 , the Company had existing credit lines with other financial institutions to purchase up to$243.4 million in federal funds. Also, as a member of the FHLB ofAtlanta , the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of$87.9 million of qualifying loans is pledged to the FHLB to secure borrowings. AtMarch 31, 2021 , the Company had no FHLB advances outstanding. Another source of short-term borrowings available to the Bank is securities sold under agreements to repurchase. AtMarch 31, 2021 , total borrowings consisted of junior subordinated debentures of$12.4 million . Total deposits were$1.6 billion atMarch 31, 2021 . Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate-sensitive. Time deposits represented 23.4% of total deposits atMarch 31, 2021 . Time deposits of$250,000 or more represented 8.0% of the Company's total deposits atMarch 31, 2021 . At quarter-end, the Company had$1.6 million in brokered time deposits and$1.6 million in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company 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 cash balances at the parent holding company level. Management believes that the current cash balances will provide adequate liquidity for the Company's current cash flow needs. Capital Resources 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, 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. The Common Equity Tier 1 risk-based ratio does not include limited life components such as trust preferred securities in this calculation. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company's equity to assets ratio was 11.60% atMarch 31, 2021 . 41
Table of Contents
As the following table indicates, at
Actual Minimum
Ratio Requirement
Select Bancorp, Inc. Total risk-based capital ratio 13.31 % 8.00 % Tier 1 risk-based capital ratio 12.43 % 6.00 % Leverage ratio 10.74 % 4.00 % Common equity Tier 1 risk-based capital ratio 11.62 % 4.50 %
Actual Minimum Well-Capitalized
Ratio Requirement Requirement
Select Bank & Trust Total risk-based capital ratio 12.19 % 8.00 % 10.00 % Tier 1 risk-based capital ratio 11.30 % 6.00 % 8.00 % Leverage ratio 9.76 % 4.00 % 5.00 % Common equity Tier 1 risk-based capital ratio 11.30 % 4.50 %
6.50 %
During 2004, the Company issued $12.4 million of junior subordinated debentures
to a newly formed subsidiary, New Century Statutory Trust I, which in turn
issued $12.0 million of trust preferred securities. The proceeds from the sale
of the trust preferred securities provided additional capital for the growth and
expansion of the Bank. Under the current applicable regulatory guidelines, all
of the proceeds from the issuance of these trust preferred securities qualify as
Tier 1 capital as of March 31, 2021 .
Management expects that 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.
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