10-Q 1 tv500165_10q.htm FORM 10-Q

 

 

U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2018

or

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the transition period ended from                to                    

 

Commission File Number     000-50400

 

Select Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

 

North Carolina   20-0218264
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
700 W. Cumberland Street    
Dunn, North Carolina   28334
(Address of principal executive offices)   (Zip Code)

 

Registrant's telephone number, including area code (910) 892-7080

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of August 1, 2018, the Registrant had outstanding 14,025,187 shares of Common Stock, $1.00 par value per share.

 

 

 

 

 

    Page No.
     
Part I. FINANCIAL INFORMATION  
     
Item 1 - Financial Statements (Unaudited)  
     
  Consolidated Balance Sheets June 30, 2018 and December 31, 2017 3
     
  Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2018 and 2017 5
     
  Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2018 and 2017 6
     
  Consolidated Statements of Cash Flows Six Months Ended June 30, 2018 and 2017 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and  Results of Operations 42
     
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 56
     
Item 4 - Controls and Procedures 57
     
Part II. OTHER INFORMATION  
     
Item 1 - Legal Proceedings 59
     
Item 1A - Risk Factors 59
     
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 59
     
Item 3 - Defaults Upon Senior Securities 59
     
Item 4 - Mine Safety Disclosures 59
     
Item 5- Other Information 59
     
Item 6 - Exhibits 60
     
  Signatures 61

 

 - 2 - 

 

 

Part I. Financial Information

Item 1 - Financial Statements

 

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2018   December 31, 
   (Unaudited)   2017* 
   (In thousands, except share
and per share data)		 
ASSETS          
Cash and due from banks  $20,997   $16,554 
Interest-earning deposits in other banks   62,498    37,996 
Certificates of deposit   1,000    1,500 
Federal funds sold   -    6,645 
Investment securities available for sale, at fair value   55,733    63,774 
Loans held for sale   349    98 
Loans   992,885    982,626 
Allowance for loan losses   (9,528)   (8,835)
NET LOANS   983,357    973,791 
           
Accrued interest receivable   3,888    3,997 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost   3,882    2,490 
Other non-marketable securities   876    1,019 
Foreclosed real estate   1,497    1,258 
Premises and equipment, net   18,141    18,268 
Bank owned life insurance   28,772    28,431 
Goodwill   24,579    24,904 
Core deposit intangible (“CDI”)   2,564    3,101 
Assets held for sale   796    846 
Other assets   7,802    9,463 
TOTAL ASSETS  $1,216,731   $1,194,135 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Demand  $236,793   $227,066 
Savings   55,906    69,503 
Money market and NOW   259,689    250,864 
Time   441,096    447,611 
TOTAL DEPOSITS   993,484    995,044 
Short-term debt   21,071    28,279 
Long-term debt   57,372    19,372 
Accrued interest payable   528    427 
Accrued expenses and other liabilities   3,574    14,898 
TOTAL LIABILITIES   1,076,029    1,058,020 
Shareholders’ Equity:          
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017   -    - 
Common stock, $1.00 par value, 25,000,000 shares authorized; 14,024,887 and 14,009,137 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively   14,025    14,009 
Additional paid-in capital   96,032    95,850 
Retained earnings   30,865    25,858 
Common stock issued to deferred compensation trust, at cost; 291,964 and 295,231 shares at June 30, 2018 and December 31, 2017, respectively   (2,477)   (2,518)
Directors’ Deferred Compensation Plan Rabbi Trust   2,477    2,518 
Accumulated other comprehensive income (loss)   (220)   398 
TOTAL SHAREHOLDERS’ EQUITY   140,702    136,115 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $1,216,731   $1,194,135 

 

* Derived from audited consolidated financial statements.

 

See accompanying notes.

 

 - 3 - 

 

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
   (In thousands, except share and per share data) 
INTEREST INCOME                    
Loans  $13,527   $9,024   $26,684   $17,731 
Federal funds sold and interest-earning deposits in other banks   307    119    518    207 
Investments   353    326    707    656 
TOTAL INTEREST INCOME   14,187    9,469    27,909    18,594 
INTEREST EXPENSE                    
Money market, NOW and savings deposits   325    117    639    220 
Time deposits   1,489    880    2,843    1,639 
Short-term debt   81    63    210    118 
Long-term debt   363    137    584    267 
TOTAL INTEREST EXPENSE   2,258    1,197    4,276    2,244 
NET INTEREST INCOME   11,929    8,272    23,633    16,350 
PROVISION FOR LOAN LOSSES   557    1,083    698    889 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   11,372    7,189    22,935    15,461 
NON-INTEREST INCOME                    
Fees on the sale of mortgages   158    -    184    - 
Service charges on deposit accounts   245    216    521    431 
Other fees and income   823    562    1,686    1,077 
TOTAL NON-INTEREST INCOME   1,226    778    2,391    1,508 
NON-INTEREST EXPENSE                    
Personnel   4,656    3,702    9,397    7,116 
Occupancy and equipment   861    492    1,749    1,064 
Deposit insurance   213    75    378    147 
Professional fees   420    251    690    571 
CDI amortization   262    88    537    181 
Merger/acquisition related expenses   -    -    1,826    - 
Information systems   1,045    534    2,047    1,038 
Foreclosed-related expenses   91    (25)   103    (9)
Other   1,054    863    2,159    1,677 
TOTAL NON-INTEREST EXPENSE   8,602    5,980    18,886    11,785 
INCOME BEFORE INCOME TAX   3,996    1,987    6,440    5,184 
INCOME TAXES   886    651    1,433    1,733 
                     
NET INCOME  $3,110   $1,336   $5,007   $3,451 
NET INCOME PER COMMON SHARE                    
Basic  $0.22   $0.11   $0.36   $0.30 
Diluted  $0.22   $0.11   $0.36   $0.29 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                    
Basic   14,019,273    11,662,117    14,015,511    11,657,391 
Diluted   14,086,671    11,727,110    14,084,288    11,720,841 

 

See accompanying notes.

 

 - 4 - 

 

 

SELECT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
   (In thousands) 
                 
Net income  $3,110   $1,336   $5,007   $3,451 
                     
Other comprehensive income (loss):                    
Unrealized gain (loss) on investment securities available for sale   (271)   151    (807)   233 
Tax effect   63    (55)   189    (85)
Total   (208)   96    (618)   148 
                     
Total comprehensive income  $2,902   $1,432   $4,389   $3,599 

 

See accompanying notes.

 

 - 5 - 

 

 

SELECT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

(in thousands, except share data)

                           Common             
                           Stock            
                           Issued       Accumulated     
                   Additional       to Deferred       Other   Total 
   Preferred Stock   Common Stock   paid-in   Retained   Compensation   Deferred   Comprehensive   Shareholders’ 
   Shares   Amount   Shares   Amount   Capital   Earnings   Trust   Comp Plan   Income (loss)   Equity 
Balance at December 31, 2016   -   $-    11,645,413   $11,645   $69,597   $22,673   $(2,340)  $2,340   $358   $104,273 
Net income   -    -    -    -    -    3,451    -    -    -    3,451 
Other comprehensive income, net   -    -    -    -    -    -    -    -    148    148 
Stock option exercises   -    -    17,058    17    85    -    -    -    -    102 
Stock based compensation   -    -    -    -    43    -    -    -    -    43 
Director equity incentive plan, net   -    -    -    -    -    -    (57)   57    -    - 
Balance at June 30, 2017   -   $-    11,662,471   $11,662   $69,725   $26,124   $(2,397)  $2,397   $506   $108,017 
                                                   
                                                   
Balance at December 31, 2017   -   $-    14,009,137   $14,009   $95,850   $25,858   $(2,518)  $2,518   $398   $136,115 
Net income   -    -    -    -    -    5,007    -    -    -    5,007 
Other comprehensive loss   -    -    -    -    -    -    -    -    (618)   (618)
Stock option exercises   -    -    15,750    16    93    -    -    -    -    109 
Stock based compensation   -    -    -    -    89    -    -    -    -    89 
Director equity incentive plan, net   -    -    -    -    -    -    41    (41)   -    - 
Balance at June 30, 2018   -   $-    14,024,887   $14,025   $96,032   $30,865   $(2,477)  $2,477   $(220)  $140,702 

 

See accompanying notes.

 

 - 6 - 

 

 

SELECT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Six Months Ended 
   June 30, 
   2018   2017 
   (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $5,007   $3,451 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   698    889 
Depreciation and amortization of premises and equipment   870    575 
Amortization and accretion of investment securities   323    282 
Amortization of deferred loan fees and costs   (351)   (291)
Amortization of core deposit intangible   537    181 
Stock-based compensation   89    43 
Accretion on acquired loans   (1,706)   (450)
Amortization of acquisition premium on time deposits   (139)   (161)
Net accretion of acquisition discount on borrowings   (8)   (87)
Increase in cash surrender value of bank owned life insurance   (341)   (283)
Proceeds from loans held for sale   10,306    - 
Originations of loans held for sale   (10,374)   - 
Gain on sales of loans held for sale   (184)   - 
Net (gain) loss on sale and write-downs of foreclosed real estate   53    (61)
Gain on sale of premises and equipment   -    (9)
Write-down on assets held for sale   50    - 
Change in assets and liabilities:          
Net change in accrued interest receivable   109    122 
Net change in other assets   2,175    (514)
Net change in accrued expenses and other liabilities   (11,223)   (121)
           
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   (4,109)   3,566 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Redemption (purchase) of FHLB stock   (1,392)   110 
Redemption (purchase) of non-marketable security   143    37 
Purchase of investment securities available for sale   -    (759)
Maturities of investment securities available for sale   650    3,255 
Mortgage-backed securities pay-downs   6,262    2,860 
Net change in loans outstanding   (8,585)   (63,323)
Proceeds from sale of foreclosed real estate   86    384 
Proceeds from sale of premises and equipment   -    95 
Purchases of premises and equipment   (743)   (247)
           
NET CASH USED BY INVESTING ACTIVITIES   (3,579)   (57,588)

 

See accompanying notes.

 

 - 7 - 

 

 

SELECT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

   Six Months Ended 
   June 30, 
   2018   2017 
   (In thousands) 
CASH FLOWS FROM FINANCING ACTIVITIES          
Net change in deposits  $(1,421)  $60,153 
Proceeds from long-term debt   38,000    - 
Repayments on short-term debt   (7,200)   (3,444)
Repayments on long-term debt   -    (200)
Proceeds from stock option exercises   109    102 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   29,488    56,611 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   21,800    2,589 
           
CASH AND CASH EQUIVALENTS, BEGINNING   62,695    55,714 
           
CASH AND CASH EQUIVALENTS, ENDING  $84,495   $58,303 
          
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Cash paid during the period for:          
Interest  $4,175   $2,224 
Taxes   927    1,768 
           
Non-cash transactions:          
Unrealized gains (losses) on investment securities available for sale, net of tax   (618)   148 
Transfers from loans to foreclosed real estate   378    2,426 

 

See accompanying notes.

 

 - 8 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE A - BASIS OF PRESENTATION

 

Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. On July 25, 2014 the Company changed its name from New Century Bancorp, Inc. to Select Bancorp, Inc. following its acquisition by merger of Select Bancorp, Inc., Greenville, NC (which we refer to herein as “Legacy Select”). The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the North Carolina Commissioner of Banks.

 

The Bank was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25, 2014, the Company acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank’s legal name to Select Bank & Trust Company. On December 15, 2017, the Company acquired Premara Financial, Inc. and its subsidiary Carolina Premier Bank through the merger of Premara with and into the Company, followed immediately by the merger of Carolina Premier with and into the Bank. The Bank continues as the only banking subsidiary of the Company with its headquarters and operations center located in Dunn, NC. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina, as well as in Charlotte, North Carolina and northwest South Carolina. The Bank is subject to the supervision and regulation of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks.

 

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended June 30, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three and six month periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.

 

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2017 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 16, 2018. This quarterly report should be read in conjunction with the Annual Report.

 

Certain reclassifications of the information in prior periods were made to conform to the June 30, 2018 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

 

 - 9 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE B - PER SHARE RESULTS

 

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At June 30, 2018 and 2017 there were 121,300 and 23,300 anti-dilutive options outstanding, respectively.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Weighted average shares used for basic net income available to common shareholders   14,019,273    11,662,117    14,015,511    11,657,391 
                     
Effect of dilutive stock options   67,398    64,993    68,777    63,450 
                     
Weighted average shares used for diluted net income available to common shareholders   14,086,671    11,727,110    14,084,288    11,720,841 

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

 

The following summarizes recent accounting pronouncements and their expected impact on the Company:

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU requires a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was enacted on December 22, 2017. The Tax Act included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.

 

The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company early adopted this pronouncement by retrospective application to each period in which the effect of the change in the tax rate under the 2017 Tax Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings of $67,000 was included in the Statement of Changes in Shareholders’ Equity for the year ended December 31, 2017.

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, and ASU 2017-05 Other Income - Gains and losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets —The new guidance, which does not apply to financial instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an amount equal to the consideration it receives or expects to receive. The guidance also includes expanded disclosure requirements that provide comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not necessary. See Note H Revenue Recognition for more information.

 

 - 10 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU (i) require equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminate the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is prohibited except for the presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk which may be adopted early. The guidance did not have a significant impact on the Company's financial position, results of operations or disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.  For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018.   In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply.  The Company has reviewed its outstanding lease agreements and has centrally documented the terms of its leases.  The Company is currently evaluating the provisions of ASU 2016-02 in relation to its outstanding leases to determine the potential impact the new standard will have to the Company’s financial statements.

 

 - 11 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses.  ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.   The Company has dedicated staff and resources in place evaluating the Company’s options including evaluating the appropriate model options and collecting and reviewing loan data for use in these models.  The Company is still assessing the impact that this new guidance will have on its consolidated financial statements.

 

In August 2016, the FASB amended ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments, of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments were effective for the Company January 1, 2018 and did not have a material effect on its financial statements.

 

In January 2017, the FASB ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting was updated.  The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards.  The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted; however, it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

 

In January 2017, the FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment was amended to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company does not expect these amendments to have a material effect on its financial statements.

 

 - 12 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In February 2017, the FASB ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) clarified the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments were effective for the Company January 2018 and did not have a material effect on its financial statements.

 

In May 2017, the FASB ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost amended the requirements in the changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments were effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption was permitted. These amendments did not have a material effect on the financial statements.

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to clarify certain aspects of the guidance issued in ASU 2016-01. The amendments will be effective for the third quarter of 2018 subsequent to adopting the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2018, the FASB issued ASU 2018-4, Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 which incorporate into the Accounting Standards Codification recent

SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. These amendments did not have a material effect on its financial statements.

 

In March 2018, the FASB issued ASU 2018-05 – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) which updated the Income Taxes Topic of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. These amendments did not have a material effect on its financial statements.

 

In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the Accounting Standards Codification to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the financial statements.

 

In June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards Codification. The amendments expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect these amendments to have a material effect on its financial statements.

 

 - 13 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited) 

 

 NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

 

 - 14 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D - FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

 

Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

 

Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Fair Value Hierarchy

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

  

·Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.

 

·Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

 

·Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

 

 - 15 - 

 

NOTE D – FAIR VALUE MEASUR SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

Investment Securities Available-for-Sale (“AFS”)

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three and six months ended June 30, 2018. Valuation techniques are consistent with techniques used in prior periods.

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):

 

Investment securities
 available for sale
June 30, 2018		  Fair value   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		   Significant
Other
Observable
Inputs (Level 2)		   Significant
Unobservable
Inputs (Level 3)		 
                 
U.S. government agencies – GSE's  $11,259   $-   $11,259   $- 
Mortgage-backed securities - GSE’s   24,778    -    24,778    - 
                     
Corporate Bonds   1,792    -    1,792    - 
                     
Municipal bonds   17,904    -    17,904    - 
                     
Total investment held for sale  $55,733   $-   $55,733   $- 

 

Investment securities  
available for sale  
December 31, 2017		  Fair value   Quoted Prices in  
Active Markets  
for Identical
Assets (Level 1)		   Significant
Other
 Observable
Inputs (Level 2)		   Significant
Unobservable
Inputs (Level 3)		 
                 
U.S. government agencies – GSE's  $13,364   $-   $13,364   $- 
Mortgage-backed securities - GSE’s   29,684    -    29,684    - 
                     
Corporate Bonds   1,888    -    1,888    - 
                     
Municipal bonds   18,838    -    18,838    - 
                     
Total investment held for sale  $63,774   $-   $63,774   $- 

 

 - 16 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

The following is a description of valuation methodologies used for assets recorded at fair value on a non-recurring basis.

 

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310 “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2018 and December 31, 2017, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At June 30, 2018, the discounts to appraised value used are weighted between 3% and 50%. There were no transfers between levels from the prior reporting periods and there have been no changes in valuation techniques for the three months ended June 30, 2018.

 

Foreclosed Real Estate

Foreclosed real estate are properties recorded at estimated fair value less estimated selling costs. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling costs. At June 30, 2018, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended June 30, 2018.

 

Assets held for sale

During 2015, a branch facility was taken out of service as part of the Company’s branch restructuring plan and reclassified as held for sale. The property is recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, assets held for sale is classified within Level 3 of the hierarchy. The significant unobservable input used is the discount applied to appraised values to account for expected liquidation and selling costs ranged between 1% and 25 % at June 30, 2018. There have been no changes in the valuation techniques for the three months ended June 30, 2018.

 

 - 17 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

Loans held for sale

The Company originated fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio.   Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers.  Therefore, these loans present very little market risk.  The Company usually delivers to, and receives funding from, the investor within 30 to 60 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Therefore, loans held for sale is classified within Level 2 of the hierarchy. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of operations.

 

 - 18 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):

 

Asset Category
June 30, 2018		  Fair value   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		   Significant
Other
Observable
Inputs (Level 2)		   Significant
Unobservable
Inputs (Level 3)		 
                 
Impaired loans  $2,139   $-   $-   $2,139 
                     
Loans held for sale   349    -    349    - 
                     
Assets held for sale   796    -    -    796 
                     
Foreclosed real estate   1,497    -    -    1,497 
                     
Total  $4,781   $-   $349   $4,432 

 

Asset Category
December 31, 2017		  Fair value   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		   Significant
Other
Observable
Inputs (Level 2)		   Significant
Unobservable
Inputs (Level 3)		 
                 
Impaired loans  $899   $-   $-   $899 
                     
Loans held for sale   98    -    98    - 
                     
Assets held for sale   846    -    -    846 
                     
Foreclosed real estate   1,258    -    -    1,258 
                     
Total  $3,101   $-   $98   $3,003 

 

 - 19 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

The following table presents the carrying values and estimated fair values of the Company's financial instruments at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
   Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (dollars in thousands) 
Financial assets:                         
Cash and due from banks  $20,997   $20,997   $20,997   $-   $- 
Certificates of deposit   1,000    1,000    1,000    -    - 
Interest-earning deposits in other banks   62,498    62,498    62,498    -    - 
Investment securities available for sale   55,733    55,733    -    55,733    - 
Loans held for sale   349    349         349    - 
Loans, net   983,357    965,859    -    -    965,859 
Accrued interest receivable   3,888    3,888    -    3,888    - 
Stock in FHLB   3,882    3,882    -    -    3,882 
Other non-marketable securities   876    876    -    -    876 
Assets held for sale   796    796    -    -    796 
                          
Financial liabilities:                         
Deposits  $993,484   $993,467   $-   $993,467   $- 
Short-term debt   21,071    21,071    -    21,071    - 
Long-term debt   57,372    54,862    -    54,862    - 
Accrued interest payable   528    528    -    528    - 

 

   December 31, 2017 
   Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (dollars in thousands) 
Financial assets:                         
Cash and due from banks  $16,554   $16,554   $16,554   $-   $- 
Certificates of deposits   1,500    1,500    1,500    -    - 
Interest-earning deposits in other banks   37,996    37,996    37,996    -    - 
Federal funds sold   6,645    6,645    6,645    -    - 
Investment securities available for sale   63,774    63,774    -    63,774    - 
Loans held for sale   98    98    -    98    - 
Loans, net   973,791    972,475    -    -    972,475 
Accrued interest receivable   3,997    3,997    -    3,997    - 
Stock in the FHLB   2,490    2,490    -    -    2,490 
Other non-marketable securities   1,019    1,019    -    -    1,019 
Assets held for sale   846    846    -    -    846 
                          
Financial liabilities:                         
Deposits  $995,044   $991,977   $-   $991,977   $- 
Short-term debt   28,279    28,279    -    28,279    - 
Long-term debt   19,372    14,640    -    14,640    - 
Accrued interest payable   427    427    -    427    - 

 

 - 20 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E - INVESTMENT SECURITIES

 

The amortized cost and fair value of AFS investments, with gross unrealized gains and losses, follow:

 

   June 30, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
U.S. government agencies – GSE’s  $11,384   $19   $(144)  $11,259 
Mortgage-backed securities – GSE’s   25,069    81    (372)   24,778 
Corporate bonds   1,776    24    (8)   1,792 
Municipal bonds   17,790    135    (21)   17,904 
                     
   $56,019   $259   $(545)  $55,733 

 

As of June 30, 2018 accumulated other comprehensive income included net unrealized losses totaling $286,000. Deferred tax assets resulting from these net unrealized losses totaled $66,000.

 

The amortized cost and fair value of AFS investments, with gross unrealized gains and losses, follow:

 

   December 31, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
U.S. government agencies – GSE’s  $13,241   $148   $(25)  $13,364 
Mortgage-backed securities – GSE’s   29,571    213    (100)   29,684 
Corporate bonds   1,858    44    (14)   1,888 
Municipal bonds   18,583    255    -    18,838 
                     
   $63,253   $660   $(139)  $63,774 

 

As of December 31, 2017, accumulated other comprehensive income included net unrealized gains totaling $521,000. Deferred tax liabilities resulting from these net unrealized gains totaled $123,000.

 

 - 21 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E - INVESTMENT SECURITIES (continued)

 

The scheduled maturities of securities available for sale, with gross unrealized gains and losses, were as follows:

 

   June 30, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
Within 1 year  $2,337   $21   $-   $2,358 
After 1 year but within 5 years   37,703    118    (466)   37,355 
After 5 years but within 10 years   7,004    47    (60)   6,991 
After 10 years   8,975    73    (19)   9,029 
                     
   $56,019   $259   $(545)  $55,733 

 

   December 31, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
Within 1 year  $975   $5   $-   $980 
After 1 year but within 5 years   45,418    406    (125)   45,699 
After 5 years but within 10 years   7,823    81    (14)   7,890 
After 10 years   9,037    168    -    9,205 
                     
   $63,253   $660   $(139)  $63,774 

 

Securities with a carrying value of $12.0 million and $7.5 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

 

None of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations. The Company has the intent and ability to hold these securities to recovery. No other than temporary impairments were identified for these investments having unrealized losses for the periods ended June 30, 2018 and December 31, 2017. The Company has not had any securities sales for the first six months of 2018 or 2017.

 

 - 22 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E - INVESTMENT SECURITIES (continued)

 

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017.

 

   June 30, 2018 
   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   value   losses   value   losses   value   losses 
   (dollars in thousands) 
Securities available for sale:                              
U.S. government agencies-GSE’s  $6,662   $(97)  $1,265   $(47)  $7,927   $(144)
Mortgage-backed securities-GSE’s   17,693    (310)   2,425    (62)   20,118    (372)
Corporate bonds   754    (8)   -    -    754    (8)
Municipal bonds   3,763    (21)   -    -    3,763    (21)
                               
Total temporarily impaired securities  $28,872   $(436)  $3,690   $(109)  $32,562   $(545)

 

 

At June 30, 2018, the Company had three securities with an unrealized loss for more than twelve months of $109,000. Eleven U.S. government agency GSE’s and twenty-seven mortgage-backed GSE’s, one corporate bond and eight municipal bonds had unrealized losses for less than twelve months totaling $436,000 at June 30, 2018. All unrealized losses are attributable to the general trend of interest rates. There were no sales of investment securities during the first half of 2018.

 

   December 31, 2017 
   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   value   losses   value   losses   value   losses 
   (dollars in thousands) 
Securities available for sale:                              
U.S. government agencies – GSE’s  $1,651   $(9)  $1,415   $(16)  $3,066   $(25)
Mortgage-backed securities - GSE’s   8,137    (55)   2,449    (45)   10,586    (100)
Corporate bonds   1,752    (14)   -    -    1,752    (14)
Municipal bonds   1,101    -    -    -    1,101    - 
Total temporarily impaired securities  $12,641   $(78)  $3,864   $(61)  $16,505   $(139)

  

At December 31, 2017, the Company had two mortgage-backed GSE’s and two U.S Government agencies – GSE’s with an aggregate unrealized loss for twelve or more consecutive months of $61,000. The Company had 16 securities with a loss for twelve months or less. Two U.S. government agency GSE’s, three municipals, two corporates and nine mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $78,000 at December 31, 2017. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2017.

 

 - 23 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F - LOANS

 

Following is a summary of the composition of the Company’s loan portfolio at June 30, 2018 and December 31, 2017:

 

   June 30,   December 31, 
   2018   2017 
       Percent       Percent 
   Amount   of total   Amount   of total 
   (dollars in thousands) 
Real estate loans:                    
1-to-4 family residential  $158,453    15.96%  $156,901    15.97%
Commercial real estate   428,900    43.20%   403,100    41.02%
Multi-family residential   63,002    6.34%   76,983    7.83%
Construction   178,098    17.94%   177,933    18.11%
Home equity lines of credit (“HELOC”)   51,149    5.15%   52,606    5.35%
                     
Total real estate loans   879,602    88.59%   867,523    88.28%
                     
Other loans:                    
Commercial and industrial   102,237    10.30%   106,164    10.80%
Loans to individuals   12,551    1.26%   10,097    1.04%
Overdrafts   91    0.01%   147    0.01%
Total other loans   114,879    11.57%   116,408    11.85%
                     
Gross loans   994,481         983,931      
Less deferred loan origination fees, net   (1,596)   (0.16)%   (1,305)   (0.13)%
Total loans   992,885    100.00%   982,626    100.00%
                     
Allowance for loan losses   (9,528)        (8,835)     
                     
Total loans, net  $983,357        $973,791      

 

For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of June 30, 2018 and December 31, 2017 were:

 

(dollars in thousands)  June 30, 2018   December 31, 2017 
         
Contractually required payments  $27,355   $29,285 
Nonaccretable difference   2,493    2,717 
Cash flows expected to be collected   24,862    26,568 
Accretable yield   3,102    3,307 
Carrying value  $21,760   $23,261 

 

Loans are primarily secured by real estate located in eastern and central North Carolina and northwestern South Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.

 - 24 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F - LOANS (continued)

 

At June 30, 2018, the Company had pre-approved but unused lines of credit for customers totaling $172.9 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

 

A floating lien of $138.0 million of loans was pledged to the FHLB to secure borrowings at June 30, 2018.

 

The following tables present an age analysis of past due loans, segregated by class of loans as of June 30, 2018 and December 31, 2017, respectively:

 

   June 30, 2018 
   30+   90+   Non-   Total         
   Days   Days   Accrual   Past       Total 
   Past Due   Accruing   Loans   Due   Current   Loans 
   (dollars in thousands) 
                         
Commercial and industrial  $1,527   $814   $2,289   $4,630   $97,607   $102,237 
Construction   233    373    401    1,007    177,091    178,098 
Multi-family residential   -    -    -    -    63,002    63,002 
Commercial real estate   1,804    -    986    2,790    426,110    428,900 
Loans to individuals & overdrafts   28    -    4    32    12,610    12,642 
1-to-4 family residential   1,441    707    355    2,503    155,950    158,453 
HELOC   70    -    522    592    50,557    51,149 
Deferred loan (fees) cost, net   -    -    -    -    -    (1,596)
                               
   $5,103   $1,894   $4,557   $11,554   $982,927   $992,885 

 

   December 31, 2017 
   30+   90+   Non-   Total         
   Days   Days   Accrual   Past       Total 
   Past Due   Accruing   Loans   Due   Current   Loans 
   (dollars in thousands) 
                         
Commercial and industrial  $215   $396   $96   $707   $105,457   $106,164 
Construction   27    359    384    770    177,163    177,933 
Multi-family residential   30    -    -    30    76,953    76,983 
Commercial real estate   1,464    -    528    1,992    401,108    403,100 
Loans to individuals & overdrafts   22    -    7    29    10,215    10,244 
1-to-4 family residential   2,824    721    771    4,316    152,585    156,901 
HELOC   103    -    329    432    52,174    52,606 
Deferred loan (fees) cost, net   -    -    -    -    -    (1,305)
                               
   $4,685   $1,476   $2,115   $8,276   $975,655   $982,626 

 

 - 25 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F - LOANS (continued)

 

Impaired Loans

 

The following tables present information on loans, excluding PCI loans and loans evaluated collectively as a homogeneous group that were considered to be impaired as of June 30, 2018 and December 31, 2017:

 

               Three months ended   Six months ended 
   As of June 30, 2018   June 30, 2018   June 30, 2018 
       Contractual           Interest Income       Interest Income 
       Unpaid       Average   Recognized on   Average   Recognized on 
   Recorded   Principal   Related   Recorded   Impaired   Recorded   Impaired 
   Investment   Balance   Allowance   Investment   Loans   Investment   Loans 
               (In thousands)             
With no related allowance recorded:                                   
Commercial and industrial  $2,462   $3,835   $-   $3,031   $57   $2,447   $130 
Construction   375    481    -    377    1    380    2 
Commercial real estate   5,571    6,774    -    5,226    94    4,999    155 
Loans to individuals & overdrafts   -    -    -    -    -    -    - 
Multi-family residential   225    225    -    228    3    230    6 
1-to-4 family residential   693    1,066    -    806    (16)   989    25 
HELOC   577    965    -    870    12    800    31 
Subtotal:   9,903    13,346    -    10,538    151    9,845    349 
With an allowance recorded:                                   
Commercial and industrial   140    140    47    141    1    141    1 
Construction   26    26    14    26    -    13    - 
Commercial real estate   -    -    -    -    -    -    - 
Loans to individuals & overdrafts   4    4    4    2    -    2    - 
Multi-family residential   -    -    -    -    -    -    - 
1-to-4 family residential   148    155    12    149    2    175    7 
HELOC   70    70    21    35    1    52    1 
Subtotal:   388    395    98    353    4    383    9 
Totals:                                   
Commercial   8,799    11,481    61    9,029    156    8,210    294 
Consumer   4    4    4    2    -    2    - 
Residential   1,488    2,256    33    1,860    (1)   2,016    64 
Grand Total:  $10,291   $13,741   $98   $10,891   $155   $10,228   $358 

 

Impaired loans at June 30, 2018 were approximately $10.3 million and were composed of $4.6 million in nonaccrual loans and $5.7 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $388,000 in impaired loans had specific allowances provided for them while the remaining $9.9 million had no specific allowances recorded at June 30, 2018. Of the $9.9 million with no allowance recorded, $642,000 of those loans have had partial charge-offs recorded.

 

 - 26 - 

 

  

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Impaired Loans (continued)

 

   Three months ended   Six months ended 
   As of December 31, 2017   June 30, 2017   June 30, 2017 
       Contractual           Interest Income       Interest Income 
       Unpaid       Average   Recognized on   Average   Recognized on 
   Recorded   Principal   Related   Recorded   Impaired   Recorded   Impaired 
   Investment   Balance   Allowance   Investment   Loans   Investment   Loans 
               (In thousands)             
With no related allowance recorded:                                   
Commercial and industrial  $940   $1,234   $-   $1,077   $21   $1,119   $40 
Construction   385    490    -    169    1    198    5 
Commercial real estate   4,428    5,606    -    3,958    54    4,019    113 
Loans to individuals & overdrafts   1    1    -    -    -    -    - 
Multi-family residential   234    234    -    48    -    197    - 
1-to-4 family residential   1,077    1,209    -    1,022    20    1,111    33 
HELOC   602    926    -    654    12    844    22 
Subtotal:   7,667    9,700    -    6,928    108    7,488    213 
With an allowance recorded:                                   
Commercial and industrial   142    142    50    -    -    1    - 
Construction   -    -    -    -    -    -    - 
Commercial real estate   -    -    -    1,429    10    1,563    20 
Loans to individuals & overdrafts   -    -    -    -    -    -    - 
Multi-family residential   -    -    -    -    -    -    - 
1-to-4 family residential   -    -    -    302    5    298    11 
HELOC   202    202    11    16    -    33    - 
Subtotal:   344    344    61    1,747    15    1,895    31 
Totals:                                   
Commercial   6,129    7,706    50    6,681    86    7,097    178 
Consumer   1    1    -    -    -    -    - 
Residential   1,881    2,337    11    1,994    37    2,286    66 
Grand Total:  $8,011   $10,044   $61   $8,675   $123   $9,383   $244 

 

Impaired loans at December 31, 2017 were approximately $8.0 million and consisted of $2.1 million in non-accrual loans and $5.9 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $344,000 of the $8.0 million in impaired loans at December 31, 2017 had specific allowances aggregating $61,000 while the remaining $7.7 million had no specific allowances recorded. Of the $7.7 million with no allowance recorded, partial charge-offs to date amounted to $2.0 million.

 

Loans are placed on non-accrual status when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.

  

 - 27 - 

 

  

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Troubled Debt Restructurings

 

The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the three and six months ended June 30, 2018 and 2017:

 

   Three months ended June 30, 2018   Six months ended June 30, 2018 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
       Outstanding   Outstanding       Outstanding   Outstanding 
   Number   Recorded   Recorded   Number   Recorded   Recorded 
   of loans   Investment   Investment   of loans   Investment   Investment 
           (Dollars in thousands)         
Extended payment terms:                              
1-to-4 family residential   1   $408   $403    1   $408   $403 
Commercial real estate   2    892    817    2    892    817 
Commercial & industrial   2    533    510    6    1,579    1,555 
                               
Total   5   $1,833   $1,730    9   $2,879   $2,775 

 

 

   Three months ended June 30, 2017   Six months ended June 30, 2017 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
       Outstanding   Outstanding       Outstanding   Outstanding 
   Number   Recorded   Recorded   Number   Recorded   Recorded 
   of loans   Investment   Investment   of loans   Investment   Investment 
   (Dollars in thousands) 
Extended payment terms:                              
1-to-4 family residential   1   $17   $17    1   $17   $17 
Commercial & industrial   1    44    44    1    44    44 
                               
Total   2   $61   $61    2   $61   $61 

 

Loans may be considered troubled debt restructurings for reasons other than below market interest rates, extended payment terms or forgiveness of principal.

  

 - 28 - 

 

  

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Troubled Debt Restructurings (continued)

 

The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default during that period together with concessions made by loan class during the twelve month period ended June 30, 2018 and 2017:

 

   Twelve months ended   Twelve months ended 
   June 30, 2018   June 30, 2017 
   Number   Recorded   Number   Recorded 
   of loans   investment   of loans   investment 
       (Dollars in thousands)     
Extended payment terms:                    
Commercial & industrial   6   $1,544    2   $927 
Commercial real estate   1    384    -    - 
1-to-4 family residential   2    470    1    77 
Total   9   $2,398    3   $1,004 

 

At June 30, 2018, the Bank had forty-three loans with an aggregate balance of $8.3 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-six loans with a balance totaling $5.6 million were still accruing as of June 30, 2018. The remaining TDRs with balances totaling $2.7 million as of June 30, 2018 were in non-accrual status.

 

At June 30, 2017, the Bank had thirty-two loans with an aggregate balance of $4.7 million that were considered to be troubled debt restructurings. Of those TDRs, seventeen loans with a balance totaling $3.2 million were still accruing as of June 30, 2017. The remaining TDRs with balances totaling $1.5 million as of June 30, 2017 were in non-accrual status.

  

 - 29 - 

 

  

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of June 30, 2018 and December 31, 2017, respectively:

 

Total loans:

 

June 30, 2018
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
       (dollars in thousands)         
                 
Superior  $1,347   $-   $-   $- 
Very good   1,657    138    1,227    - 
Good   13,772    11,840    57,922    5,475 
Acceptable   38,592    43,219    246,499    38,768 
Acceptable with care   38,502    121,370    115,438    18,218 
Special mention   2,413    757    4,365    316 
Substandard   5,954    774    3,449    225 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $102,237   $178,098   $428,900   $63,002 

 

Consumer Credit        
Exposure By        
Internally  1-to-4 family     
Assigned Grade  residential   HELOC 
         
Pass  $152,353   $49,918 
Special mention   2,381    247 
Substandard   3,719    984 
   $158,453   $51,149 

 

Consumer Credit    
Exposure Based  Loans to 
On Payment  individuals & 
Activity  overdrafts 
     
Pass  $12,521 
Non –pass   121 
   $12,642 

 

 - 30 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Total Loans:

 

December 31, 2017 
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
   (dollars in thousands) 
                 
Superior  $1,207   $-   $-   $- 
Very good   2,454    111    420    - 
Good   13,161    11,343    46,790    11,394 
Acceptable   44,968    40,558    249,988    46,246 
Acceptable with care   38,631    124,593    97,798    18,787 
Special mention   3,172    583    3,771    322 
Substandard   2,571    745    4,333    234 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $106,164   $177,933   $403,100   $76,983 

 

Consumer Credit        
Exposure By        
Internally  1-to-4 family     
Assigned Grade  residential   HELOC 
         
Pass  $149,767   $51,326 
Special mention   3,270    253 
Substandard   3,864    1,027 
   $156,901   $52,606 

 

Consumer Credit    
Exposure Based  Loans to 
On Payment  individuals & 
Activity  overdrafts 
     
Pass  $10,233 
Non-pass   11 
   $10,244 

 

 - 31 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Determining the fair value of Purchased Credit Impaired (“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 acquired companies.

 

The following table documents changes to the amount of the accretable yield on PCI loans for the three and six months ended June 30, 2018 and 2017:

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30,   June 30,   June 30,   June 30, 
   2018   2017   2018   2017 
   (dollars in thousands) 
Accretable yield, beginning of period  $3,040   $2,465   $3,307   $2,626 
Accretion   (348)   (260)   (702)   (520)
Reclassification from (to) nonaccretable difference   78    72    63    79 
Other changes, net   332    3    434    95 
Accretable yield, end of period  $3,102   $2,280   $3,102   $2,280 

 

 - 32 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and six month periods ended June 30, 2018, respectively:

 

   Three months ended June 30, 2018 
   Commercial           1 to 4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (dollars in thousands) 
Loans – excluding PCI                                        
Balance, beginning of period  $729   $1,686   $3,590   $1,275   $645   $125   $697   $8,747 
Provision for loan losses   37    82    330    137    (16)   200    (109)   661 
Loans charged-off   -    -    -    -    (13)   (13)   -    (26)
Recoveries   15    -    6    9    2    8    -    40 
Balance, end of period  $781   $1,768   $3,926   $1,421   $618   $320   $588   $9,422 
                                         
PCI Loans                                        
Balance, beginning of period  $144   $-   $66   $-   $-   $-   $-   $210 
Provision for loan losses   (90)   -    (14)   -    -    -    -    (104)
Loans charged-off   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $54   $-   $52   $-   $-   $-   $-   $106 
                                         
Total Loans                                        
Balance, beginning of period  $873   $1,686   $3,656   $1,275   $645   $125   $697   $8,957 
Provision for loan losses   (53)   82    316    137    (16)   200    (109)   557 
Loans charged-off   -    -    -    -    (13)   (13)   -    (26)
Recoveries   15    -    6    9    2    8    -    40 
Balance, end of period  $835   $1,768   $3,978   $1,421   $618   $320   $588   $9,528 
                                         
Ending Balance: individually evaluated for impairment  $47   $14   $-   $12   $21   $4   $-   $98 
Ending Balance: collectively evaluated for impairment  $788   $1,754   $3,978   $1,409   $597   $316   $588   $9,430 
                                         
Loans:                                        
Ending Balance: collectively evaluated for impairment non PCI loans  $98,078   $176,956   $414,666   $149,664   $50,452   $12,576   $61,753   $964,145 
Ending Balance: collectively evaluated for impairment PCI loans  $1,557   $741   $8,663   $7,948   $50   $62   $1,024   $20,045 
Ending Balance: individually evaluated for impairment  $2,602   $401   $5,571   $841   $647   $4   $225   $10,291 
Ending Balance  $102,237   $178,098   $428,900   $158,453   $51,149   $12,642   $63,002   $994,481 

 

 - 33 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

   Six months ended June 30, 2018 
   Commercial           1 to 4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (dollars in thousands) 
Loans – excluding PCI                                        
Balance, beginning of period  $742   $1,955   $3,304   $1,058   $549   $305   $791   $8,704 
Provision for loan losses   27    (193)   612    345    109    26    (203)   723 
Loans charged-off   (9)   -    -    -    (48)   (28)   -    (85)
Recoveries   21    6    10    18    8    17    -    80 
Balance, end of period  $781   $1,768   $3,926   $1,421   $618   $320   $588   $9,422 
                                         
PCI Loans                                        
Balance, beginning of period  $65   $-   $66   $-   $-   $-   $-   $131 
Provision for loan losses   (11)   -    (14)   -    -    -    -    (25)
Loans charged-off   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $54   $-   $52   $-   $-   $-   $-   $106 
                                         
Total Loans                                        
Balance, beginning of period  $807   $1,955   $3,370   $1,058   $549   $305   $791   $8,835 
Provision for loan losses   16    (193)   598    345    109    26    (203)   698 
Loans charged-off   (9)   -    -    -    (48)   (28)   -    (85)
Recoveries   21    6    10    18    8    17    -    80 
Balance, end of period  $835   $1,768   $3,978   $1,421   $618   $320   $588   $9,528 

 

 - 34 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and six month periods ended June 30, 2017, respectively:

 

   Three months ended June 30, 2017 
   Commercial           1 to 4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (dollars in thousands) 
Loans – excluding PCI                                        
Balance, beginning of period  $958   $1,177   $3,169   $770   $589   $465   $583   $7,711 
Provision for loan losses   (119)   111    1,110    143    (28)   (294)   149    1,072 
Loans charged-off   (35)   -    (373)   -    -    (34)   -    (442)
Recoveries   91    4    7    10    2    5    -    119 
Balance, end of period  $895   $1,292   $3,913   $923   $563   $142   $732   $8,460 
                                         
PCI Loans                                        
Balance, beginning of period  $5   $-   $294   $-   $12   $-   $-   $311 
Provision for loan losses   (5)   -    12    16    (12)   -    -    11 
Loans charged-off   -    -    (294)   -    -    -    -    (294)
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $-   $-   $12   $16   $-   $-   $-   $28 
                                         
Total Loans                                        
Balance, beginning of period  $963   $1,177   $3,463   $770   $601   $465   $583   $8,022 
Provision for loan losses   (124)   111    1,122    159    (40)   (294)   149    1,083 
Loans charged-off   (35)   -    (667)   -    -    (34)   -    (736)
Recoveries   91    4    7    10    2    5    -    119 
Balance, end of period  $895   $1,292   $3,925   $939   $563   $142   $732   $8,488 
                                         
Ending Balance: individually evaluated for impairment  $-   $-   $12   $16   $-   $-   $-   $28 
Ending Balance: collectively evaluated for impairment  $895   $1,292   $3,913   $923   $563   $142   $732   $8,460 
                                         
Loans:                                        
Ending Balance: collectively evaluated for impairment non PCI loans  $87,122   $125,207   $285,314   $95,242   $41,431   $10,315   $70,268   $714,899 
Ending Balance: collectively evaluated for impairment PCI loans  $31   $894   $7,788   $6,880   $193   $107   $750   $16,643 
Ending Balance: individually evaluated for impairment  $1,053   $164   $4,304   $1,522   $681   $-   $48   $7,772 
Ending Balance  $88,206   $126,265   $297,406   $103,644   $42,305   $10,422   $71,066   $739,314 

 

 - 35 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

   Six months ended June 30, 2017 
   Commercial           1 to 4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (dollars in thousands) 
Loans – excluding PCI                                        
Balance, beginning of period  $1,211   $1,301   $3,448   $846   $611   $317   $628   $8,362 
Provision for loan losses   (466)   (18)   1,081    58    (2)   (139)   102    616 
Loans charged-off   (37)   -    (623)   -    (69)   (50)   -    (779)
Recoveries   187    9    7    19    23    14    2    261 
Balance, end of period  $895   $1,292   $3,913   $923   $563   $142   $732   $8,460 
                                         
PCI Loans                                        
Balance, beginning of period  $37   $-   $-   $-   $12   $-   $-   $49 
Provision for loan losses   (37)   -    306    16    (12)   -    -    273 
Loans charged-off   -    -    (294)   -    -    -    -    (294)
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $-   $-   $12   $16   $-   $-   $-   $28 
                                         
Total Loans                                        
Balance, beginning of period  $1,248   $1,301   $3,448   $846   $623   $317   $628   $8,411 
Provision for loan losses   (503)   (18)   1,387    74    (14)   (139)   102    889 
Loans charged-off   (37)   -    (917)   -    (69)   (50)   -    (1,073)
Recoveries   187    9    7    19    23    14    2    261 
Balance, end of period  $895   $1,292   $3,925   $939   $563   $142   $732   $8,488 

 

 - 36 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G – LOANS HELD FOR SALE

 

We originate fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio.   Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers.  Therefore, these loans present very little market risk.  We usually deliver to, and receive funding from, the investor within 30 to 60 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. We are not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.

 

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of operations.

 

NOTE H – REVENUE RECOGNITION

 

On January 1, 2018, the Company adopted ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note C Recent Accounting Pronouncements, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

 

Service Charges on Deposit Accounts

 

Service charges on deposit accounts consist of insufficient funds fees, account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

 

 - 37 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE H – REVENUE RECOGNITION (continued)

 

Other Fees and Income

 

Other fees and income primarily consist of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income primarily consists of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Other fees and income also includes other recurring revenue streams such as safety deposit box rental fees and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2018 and 2017.

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30,   June 30,   June 30,   June 30, 
   2018   2017   2018   2017 
   (dollars in thousands) 
Service Charges on Deposit Accounts  $245   $216   $521   $413 
Other   364    343    771    609 
Noninterest Income (in-scope of Topic 606)   609    559    1,292    1,040 
Noninterest Income (out-of-scope of Topic 606)   617    219    1,099    468 
                     
Total Non-interest Income  $1,226   $778   $2,391   $1,508 

 

Contract Balances

 

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

 

 - 38 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE H – REVENUE RECOGNITION (continued)

 

Contract Acquisition Costs

 

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

 

NOTE I – OTHER REAL ESTATE OWNED

 

The following table explains changes in other real estate owned during the six months ended June 30, 2018 and 2017 (dollars in thousands):

 

   Six Months   Six Months 
   Ended June 30,   Ended June 30, 
   2018   2017 
   (dollars in thousands) 
         
Beginning balance January 1  $1,258   $599 
Sales   (86)   (384)
Write-downs and gains/(losses) on sales   (53)   61 
Transfers   378    2,426 
Ending balance  $1,497   $2,702 

 

At June 30, 2018 and December 31, 2017, the Company had $1.5 million and $1.3 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure totaled $135,000 at June 30, 2018. At December 31, 2017, the Company had no such loans.

 

Note J – Business Combinations

 

On July 20, 2017, the Company executed a merger agreement with Premara Financial, Inc. (“Premara”), a bank holding company headquartered in Charlotte, North Carolina, whose wholly owned subsidiary, Carolina Premier Bank, was a North Carolina state-chartered commercial bank. On December 15, 2017, the Company completed its previously announced acquisition of Premara and pursuant to the terms of the merger agreement, Premara was merged with and into the Company, followed immediately by the merger of Carolina Premier Bank with and into the Bank. Carolina Premier had approximately $279.6 million in assets as of the merger date, December 15, 2017. The merger expanded the Bank’s North Carolina presence with a branch in Charlotte and marked the Bank’s initial entry into South Carolina with the acquisition of branches in Rock Hill, Blacksburg and Six Mile, South Carolina.

 

 - 39 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

Note J – Business Combinations (continued)

 

Premara had 3,179,808 shares of common stock outstanding as of the merger closing date. Under the terms of the merger agreement, 948,080 shares of Premara common stock (equivalent to 30% of Premara’s outstanding shares of common stock as of the date of the merger agreement) were converted to the $12.65 per share cash merger consideration, for aggregate cash consideration of $11,993,212 (exclusive of cash paid-in-lieu of fractional shares) which was paid out subsequent to December 31, 2017. Pursuant to the merger agreement, each warrant or stock option to acquire shares of Premara common stock issued and outstanding as of the effective time of the merger was converted into the right to receive from the Company a cash payment equal to $12.65 less the exercise price of such warrant or option, as applicable and paid out prior to year-end. The remaining 2,231,728 Premara common shares were converted into stock consideration at the merger exchange ratio of 1.0463 shares of Company common stock for each share of Premara common stock, resulting in the issuance of 2,334,999 new shares of Company common stock. The transaction was valued at approximately $40.6 million in the aggregate based on 3,179,808 shares of Premara common stock outstanding on December 15, 2017. The shares of Premara common stock converted to the Company’s common stock are valued at $12.14 per share, the low price of Select common stock on December 15, 2017.

 

The merger with Premara was accounted for under the acquisition method of accounting with the Company as the legal and accounting acquirer and Premara as the legal and accounting acquiree. The assets and liabilities of Premara, as of the effective date of the acquisition, are recorded at their respective fair values. For the acquisition of Premara, estimated fair values of assets acquired and liabilities assumed are based on the information that is available, and the Company believes this information provides a reasonable basis for determining fair values.

 

Goodwill recorded for Premara represents future revenues to be derived from the existing customer base, including efficiencies that will result from combining operations. During the first quarter of 2018, goodwill decreased by $325,000 due to adjustments to liabilities assumed and the tax re-measurement associated with the completion of the final short-year tax return. Merger-related expenses in the first quarter of 2018 totaled $1.8 million which were recorded as noninterest expense as incurred.

 

The following tables reflect the pro forma total net interest income, noninterest income and net income for the six months ended June 30, 2017 as though the acquisition of Premara had taken place on January 1, 2017 and actual amounts for the six months ended June 30, 2018. The pro forma results have not been adjusted to remove non-recurring acquisition-related expenses, and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2017, nor of future results of operations.

 

   Six Months Ended June 30 
   2018   2017 
   (dollars in thousands, except per share) 
Net interest income  $23,633   $22,422 
Non-interest income   2,391    2,358 
Net income available to common shareholders   5,007    4,728 
           
Earnings per share, basic  $0.36   $0.34 
Earnings per share, diluted  $0.36   $0.34 
           
Weighted average common shares outstanding, basic   14,015,511    13,992,390 
Weighted average common shares outstanding, diluted   14,084,226    14,055,840 

 

 - 40 - 

 

 

SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE K – SUBSEQUENT EVENTS

 

The Company has evaluated for subsequent events through the date and time the financial statements were issued and has determined there are no reportable subsequent events.

 

 - 41 - 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select 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 and assumptions 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: 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; adverse change in credit quality trends; and diversion of management’s time and attention to merger-related issues.

 

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 in Harnett, Brunswick, New Hanover, Carteret, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake, Pasquotank, Martin, Alamance, and Wayne counties in North Carolina and York, Pickens and Cherokee counties in South Carolina. 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 as New Century Bancorp, Inc. On July 25, 2014 New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. The combined company is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, 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’s North Carolina presence with the addition of six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville, and Burlington. During 2015, the Gibsonville and Burlington branches were combined into a new location in Burlington. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”) located in Charlotte, North Carolina and the cities of Rock Hill, Blacksburg and Six Mile, South Carolina. Under the terms of that acquisition, Premara was merged with and into the Company, Carolina Premier was merged with and into the Bank, and shareholders of Premara received 1.0463 shares of the Company’s common stock or $12.65 in cash for each outstanding share of Premara common stock, with approximately 70% of such shares being exchanged for shares of the Company’s common stock and 30% being exchanged for cash.

 

 - 42 - 

 

 

We closed our branch located at 6390 Ramsey Street, Fayetteville, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The property that housed our former Ramsey Street branch is included in assets held for sale on the consolidated balance sheet as of June 30, 2018.

 

Comparison of Financial Condition at

June 30, 2018 and December 31, 2017

 

During the first six months of 2018, total assets increased by $22.6 million to $1.2 billion as of June 30, 2018. The increase in assets was due primarily to loan growth funded by deposits in other banks and borrowings. Earning assets at June 30, 2018 totaled $1.1 billion and consisted of $983.4 million in net loans, $55.7 million in investment securities, $63.5 million in overnight investments and interest-bearing deposits in other banks and $4.8 million in non-marketable equity securities, of which $3.9 million is FHLB stock. Total deposits and shareholders’ equity at the end of the second quarter of 2018 were $993.5 million and $140.7 million, respectively.

 

Since the end of 2017, gross loans have increased by $10.3 million to $992.9 million as of June 30, 2018. At June 30, 2018, gross loans consisted of $102.2 million in commercial and industrial loans, $428.9 million in commercial real estate loans, $63.0 million in multi-family residential loans, $12.6 million in loans to individuals, $158.5 million in 1-to-4 family residential real estate loans, $51.1 million in HELOCs, and $178.1 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.6 million at June 30, 2018.

 

At June 30, 2018, there were no federal funds sold compared to $6.6 million, at December 31, 2017. At June 30, 2018 and December 31, 2017 there were no repurchase agreements. Interest-earning deposits in other banks were $62.5 million at June 30, 2018, an increase of $24.5 million from December 31, 2017. The Company’s investment securities at June 30, 2018 were $55.7 million, a decrease of $8.0 million from December 31, 2017. The Company decreased the size of its investment securities portfolio during the first six months of 2018 in order to provide funding for higher yielding loans. The investment portfolio as of June 30, 2018 consisted of $11.3 million in government agency debt securities, $24.8 million in mortgage-backed securities, $1.8 million in corporate bonds and $17.9 million in municipal securities. The net unrealized loss on these securities was $286,000.

 

At June 30, 2018, the Company had an investment of $3.9 million in FHLB stock, which increased from $2.5 million at December 31, 2017. Also, the Company had $876,000 in other non-marketable securities at June 30, 2018, which decreased by $143,000 from December, 31, 2017.

 

At June 30, 2018, non-earning assets were $109.0 million, an increase of $2.2 million from $106.8 million as of December 31, 2017. Non-earning assets included $21.0 million in cash and due from banks, bank premises and equipment of $18.1 million, goodwill of $24.6 million, core deposit intangible of $2.6 million, accrued interest receivable of $3.9 million, foreclosed real estate of $1.5 million, $28.8 million in bank owned life insurance (“BOLI”), $796,000 of assets held for sale, and other assets of $7.8 million which included $4.6 million in deferred tax assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets.

 

Total deposits at June 30, 2018 were $993.5 million and consisted of $236.8 million in non-interest-bearing demand deposits, $259.7 million in money market and NOW accounts, $55.9 million in savings accounts, and $441.1 million in time deposits. Total deposits decreased by $1.6 million from $995.0 million as of December 31, 2017, due primarily to a decrease in savings deposits as a result of customers moving funds into higher yielding deposit products. The Bank had no brokered demand deposits and $71.9 million in brokered time deposits as of June 30, 2018.

 

 - 43 - 

 

 

As of June 30, 2018, the Company had $21.1 million of short-term debt (of which none was repurchase agreements with local customers), $57.4 million of long-term debt, of which $45.0 million are FHLB borrowings and $12.4 million in junior subordinated debentures. The increase in long-term debt was implemented as an interest rate sensitivity measure in the upward interest environment.

 

Total shareholders’ equity at June 30, 2018 was $140.7 million, an increase of $4.6 million from $136.1 million as of December 31, 2017. This increase is primarily due to year to date earnings of $5.0 million. Accumulated other comprehensive income relating to available for sale securities decreased $618,000 during the six months ended June 30, 2018 due to the increase in interest rates. Other changes in shareholders’ equity included increases of $89,000 in stock-based compensation and $109,000 from the exercise of stock options.

 

Past Due Loans, Non-performing Assets, and Asset Quality

 

At June 30, 2018, the Company had $5.1 million in loans that were 30 to 89 days past due. This represented 0.51% of gross loans outstanding on that date. This is an increase from December 31, 2017 when there were $4.7 million in loans that were 30-89 days past due or 0.48% of gross loans outstanding. Non-accrual loans increased from $2.1 million at December 31, 2017 to $4.6 million at June 30, 2018. Past dues have increased due to non-timely payments from customers and nonaccruals increased primarily as a result of deterioration on loans.

 

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans increased from 0.71% at December 31, 2017 to 1.02% at June 30, 2018. The Company had an increase of $2.4 million in non-accruals from $2.1 million at December 31, 2017 and an increase in accruing troubled debt restructurings from $4.9 million at December 31, 2017 to $5.6 million as of June 30, 2018. Of the non-accrual loans as of June 30, 2018, seven commercial real estate loans totaled $986,000, five construction loans totaled $401,000, four commercial loans totaled $1.3 million, seven HELOC loans totaled $522,000, four agricultural loans totaled $1.0 million, fourteen 1-to-4 family residential loans totaled $355,000 and one consumer loan made up the remaining balance.

 

At June 30, 2018, the Company had forty-three loans totaling $8.3 million that were considered to be troubled debt restructurings. Twenty-six of these loans totaling $5.6 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.

 

 - 44 - 

 

 

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 
   June 30,   December 31, 
   2018   2017 
   (dollars in thousands) 
Non-accrual loans  $4,557   $2,115 
Accruing TDRs   5,561    4,863 
Total non-performing loans   10,118    6,978 
Foreclosed real estate   1,497    1,258 
Total non-performing assets  $11,615   $8,236 
           
Accruing loans past due 90 days or more  $1,894   $1,476 
Allowance for loan losses  $9,528   $8,835 
           
Non-performing loans to period end loans   1.02%   0.71%
Non-performing loans and accruing loans past due 90 days or more to period end loans   1.21%   0.86%
Allowance for loans losses to period end loans   0.96%   0.90%
Allowance for loan losses to non-performing loans   94%   127%
Allowance for loan losses to non-performing assets   82%   107%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more   71%   91%
Non-performing assets to total assets   0.95%   0.69%
Non-performing assets and accruing loans past due 90 days or more to total assets   1.11%   0.81%

 

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at June 30, 2018 and December 31, 2017 were $11.6 million and $8.2 million, respectively. The allowance for loan losses at June 30, 2018 represented 82% of non-performing assets compared to 107% at December 31, 2017.

 

Total impaired loans at June 30, 2018 were $10.3 million. This includes $4.6 million in loans that were classified as impaired because they were in non-accrual status and $5.7 million in loans that were determined to be impaired for other reasons. Of these loans, $388,000 required a specific reserve of $98,000 at June 30, 2018.

 

Total impaired loans at December 31, 2017 were $8.0 million. This includes $2.1 million in loans that were classified as impaired because they were in non-accrual status and $5.9 million in loans that were determined to be impaired for other reasons. Of these loans, $344,000 required a specific reserve of $61,000 at December 31, 2017.

 

The allowance for loan losses was $9.5 million at June 30, 2018 or 0.96% of gross loans outstanding as compared to 0.90% reported as a percentage of gross loans at December 31, 2017. This increase resulted primarily from changes in loans requiring a specific reserve plus qualitative factors related to interest rates and economic performance indicators. The Legacy Select loans and Carolina Premier 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 at June 30, 2018 represented 94% of non-performing loans compared to 127% at December 31, 2017. It is management’s assessment that the allowance for loan losses as of June 30, 2018 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.

 

 - 45 - 

 

 

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.

 

   June 30, 2018 
(dollars in thousands)  1 Year
or Less		   Over 1 to
3 Years		   Over 3 to
5 Years		   More
Than
5 Years		   Total 
                     
Time deposits  $315,441   $107,410   $18,245   $-   $441,096 
Short-term borrowings   21,071    -    -    -    21,071 
Long-term debt   -    20,000    25,000    12,372    57,372 
Operating leases   1,200    1,691    1,130    133    4,154 
Total contractual obligations  $337,712   $129,101   $44,375   $12,505   $523,693 

 

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. 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

 

The Company monitors its exposure to loans that exceed the guidelines established by regulators for loan to value (“LTV”) ratios.

 

At June 30, 2018 and December 31, 2017, the Company had $16.4 million and $24.6 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At June 30, 2018 and December 31, 2017, the Company had $10.4 million and $13.8 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 20.9% and 31.2% of total risk-based capital as of June 30, 2018 and December 31, 2017, which is less than the 100% maximum allowed. These loans may present 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 various factors such as 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.

 

 - 46 - 

 

 

At June 30, 2018 the Company had five product type groups which exceeded this guideline; Real Estate Construction – Speculative and Presold, which represented 41% of risk-based capital, or $52.6 million, 1-4 Family Rental, which represented 48%, or $61.7 million, Office Building which represented 52% of risk-based capital or $66.8 million, Real Estate Construction spec & presold, which represents 42% or $54.4 million and Multifamily Residential, which represented 50% of risk-based capital, or $64.4 million. All other commercial real estate groups were at or below the 40% threshold. At December 31, 2017, the Company exceeded the 40% guideline in five product types. The 1-to-4 Family Residential Rental category represented 52% of Risk-Based Capital or $64.4 million, Real Estate Commercial Construction represented 51% of Risk-Based Capital or $62.3 million, Real Estate Construction Spec & Presold represented 42% or $51.6 million, Office Building category represented 56% or $68.8 million, and the Multi-family Residential category represented 61% of Risk-Based Capital or $74.6 million. All other commercial real estate product types were under the 40% threshold.

 

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 of June 30, 2018 and December 31, 2017.

 

Acquisition, Development and Construction Loans

(dollars in thousands)

 

   June 30, 2018   December 31, 2017 
       Land and Land           Land and Land     
   Construction   Development   Total   Construction   Development   Total 
                         
Total ADC loans  $153,363   $24,735   $178,098   $149,856   $28,077   $177,933 
                               
Average Loan Size  $267   $339        $262   $265      
                               
Percentage of total loans   15.45%   2.49%   17.94%   15.25%   2.86%   18.11%
                               
Non-accrual loans  $1,039   $-   $1,039   $384   $-   $384 

 

Management closely 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.

 

 - 47 - 

 

 

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 at June 30, 2018 and December 31, 2017.

 

   June 30, 2018   December 31, 2017 
   ADC Loans   Percent   HELOC   Percent   ADC Loans   Percent   HELOC   Percent 
   (dollars in thousands) 
                                 
Harnett County  $6,059    3.40%  $5,528    10.81%  $5,076    2.85%  $5,365    10.20%
Alamance County   2,079    1.17%   1,266    2.47%   1,727    0.97%   1,075    2.04%
Beaufort County   900    0.51%   1,243    2.43%   147    0.08%   1,649    3.13%
Brunswick County   9,254    5.20%   1,621    3.17%   8,509    4.78%   1,696    3.22%
Carteret County   3,140    1.76%   2,731    5.34%   3,279    1.84%   2,795    5.31%
Cherokee County   13    0.01%   53    0.10%   -    -%    59    0.11%
Craven County   1,085    0.61%   443    0.87%   923    0.52%   578    1.10%
Cumberland County   20,275    11.38%   3,425    6.70%   23,105    12.99%   4,196    7.98%
Mecklenburg County   21,053    11.82%   3,366    6.58%   10,826    6.08%   3,249    6.18%
New Hanover County   20,566    11.55%   2,830    5.53%   19,445    10.93%   2,136    4.06%
Pasquotank County   960    0.54%   1,538    3.01%   1,115    0.63%   1,730    3.29%
Pickens County   -    -%    99    0.19%   -    -%    72    0.14%
Pitt County   16,096    9.04%   6,827    13.35%   17,421    9.79%   6,727    12.79%
Robeson County   1,237    0.70%   3,712    7.26%   837    0.47%   3,606    6.85%
Sampson County   25    0.01%   1,996    3.90%   26    0.01%   1,694    3.22%
Wake County   18,811    10.56%   1,701    3.32%   25,785    14.49%   1,281    2.44%
Wayne County   3,286    1.84%   3,471    6.79%   10,475    5.89%   4,185    7.96%
Wilson County   158    0.09%   67    0.13%   85    0.05%   71    0.13%
York County   525    0.29%   973    1.90%   408    0.23%   1,454    2.76%
All other locations   52,576    29.52%   8,259    16.15%   48,744    27.40%   8,988    17.09%
                                         
Total  $178,098    100.00%  $51,149    100.00%  $177,933    100.00%  $52,606    100.00%

 

Interest Only Payments

 

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At June 30, 2018, the Company had $201.6 million in loans that had terms permitting interest only payments. This represented 20.3% of the total loan portfolio. At December 31, 2017, the Company had $291.8 million in loans that had terms permitting interest-only payments. This represented 29.7% 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 $68.6 million, or 6.9% of total loans, at June 30, 2018 compared to $66.7 million, or 6.8% of total loans, at December 31, 2017. The Company’s ten largest customer relationships totaled $101.0 million, or 10.2% of total loans, at June 30, 2018 compared to $90.0 million, or 9.2% of total loans, at December 31, 2017. 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.

 

 - 48 - 

 

 

Comparison of Results of Operations for the

Three Months Ended June 30, 2018 and 2017

 

General. During the second quarter of 2018, the Company had net income of $3.1 million as compared with net income of $1.3 million for the second quarter of 2017. Net income per common share for the second quarter of 2018 was $0.22, basic and diluted, compared with net income per common share of $0.11, basic and diluted, for the second quarter of 2017. Results of operations for the second quarter of 2018 were primarily impacted by an increase of $3.7 million in net interest income, and an increase in non-interest expenses of $2.6 million and a decrease in the provision for loan losses of $526,000. Non-interest expenses increased $2.6 million which was primarily related to increased personnel expense of $954,000, occupancy expense of $369,000, deposit insurance expense of $138,000, professional fees of $169,000, information systems expense of $511,000 and, core deposit intangible amortization of $174,000 and other associated expenses of $191,000. The Company recorded a provision for loan losses of $557,000 for the second quarter of 2018 compared to $1.1 million in the second quarter of 2017. Net interest margin of 4.41% in the second quarter of 2018 increased 23 basis points from the same period in 2017 resulting from the accretion of the credit mark associated with the acquired loan portfolio.

 

Net Interest Income. Net interest income increased to $11.9 million for the second quarter of 2018 from $8.3 million for the second quarter of 2017. The Company’s total interest income was primarily affected by the increase in loan balances due to growth. Average total interest-earning assets were $1.1 billion in the second quarter of 2018 compared with $799.2 million during the same period in 2017, while the yield on those assets increased 47 basis points from 4.78% to 5.25% which was primarily due to the yield accretion on the acquired loans and the increase of rates on recently originated loans.

 

The Company’s average interest-bearing liabilities increased by $232.5 million to $839.1 million for the quarter ended June 30, 2018 from $606.6 million for the same period one year earlier and the cost of those funds increased from 0.79% to 1.08%, or 29 basis points. During the second quarter of 2018, the Company’s net interest margin was 4.41% and net interest spread was 4.17%. In the same quarter ended one year earlier, net interest margin was 4.18% and net interest spread was 3.99%.

 

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. Historical loss rates are calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the second quarter of 2018, the Company recorded a provision for loan losses of $557,000 based primarily on loan growth, which was a decrease of approximately $526,000 compared to the provision for loan losses recorded in the second quarter of 2017. The Company, however, has seen a slight deterioration of credit metrics primarily related to past dues, non-accruals of acquired loans and TDRs during 2018 compared to the second quarter of 2017, where the Company recorded a provision for loan losses of $1.1 million based primarily on loan growth and charge offs on three loans.

 

Non-Interest Income. Non-interest income for the quarter ended June 30, 2018 was $1.2 million, an increase from $778,000 in the second quarter of 2017. Service charges on deposit accounts increased $29,000 to $245,000 for the quarter ended June 30, 2018 from $216,000 for the same period in 2017. Other non-deposit fees and income increased $261,000 from the second quarter of 2017 to the second quarter of 2018 due to the merger. Fees from presold mortgages increased non-interest income $158,000 in the second quarter of 2018. The Company did not sell any investment securities in the second quarter of 2018 or 2017.

 

 - 49 - 

 

 

Non-Interest Expenses. Non-interest expenses increased by $2.6 million to $8.6 million for the quarter ended June 30, 2018, from $6.0 million for the same period in 2017. In general, categories of non-interest expenses that increased were offset by decreases in other areas. The following are highlights of the significant categories of non-interest expenses during the second quarter of 2018 compared to the same period in 2017:

 

·Personnel expenses increased $954,000 to $4.7 million, due to increased staff, employment taxes and benefits costs.
·Deposit insurance expense increased $138,000, due to growth.
·Core deposit intangible increased $174,000 as scheduled.
·Occupancy and equipment expense increased by $369,000 to $861,000, due to branch additions due to the merger with Premara.
·Information systems expense increased by $511,000 due to merger with Premara and new customers.
·Other non-interest expenses increased by $191,000, due to increases in several categories of other non-interest expenses related to the merger with Premara.

 

Provision for Income Taxes. The Company’s effective tax rate was 22.2% and 32.8% for the quarters ended June 30, 2018 and 2017, respectively. The effective tax rate was impacted by an adjustment resulting from enacted lower corporate tax rates for the State of North Carolina in 2017 plus a federal tax rate reduction resulting from the passage of the Tax Cuts and Jobs Act in December 2017.

 

As of June 30, 2018 and December 31, 2017, the Company had a net deferred tax asset in the amount of $4.6 million and $4.5 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 of June 30, 2018 and December 31, 2017, 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.

 

 - 50 - 

 

 

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. Non-accrual loans have been included in determining average loans. The table is presented on a taxable equivalent basis where applicable.

 

   For the quarter ended   For the quarter ended 
   June 30, 2018   June 30, 2017 
   (dollars in thousands)             
   Average       Average   Average       Average 
   balance   Interest   rate   balance   Interest   rate 
Interest-earning assets:                              
Loans, gross of allowance  $981,829   $13,533    5.53%  $707,526   $9,036    5.12%
Investment securities   59,256    385    2.61%   59,140    370    2.51%
Other interest-earning assets   46,598    307    2.64%   32,574    119    1.47%
Total interest-earning assets   1,087,683    14,225    5.25%   799,240    9,525    4.78%
                               
Other assets   131,542              88,172           
                               
Total assets  $1,219,225             $887,412           
Interest-bearing liabilities:                              
Deposits:                              
Savings, NOW and money market  $323,431    325    0.40%  $210,667    117    0.22%
Time deposits over $100,000   329,268    1,142    1.39%   247,596    652    1.06%
Other time deposits   115,054    347    1.21%   92,074    228    0.99%
Borrowings   71,337    444    2.50%   56,284    200    1.43%
                               
Total interest-bearing liabilities   839,090    2,258    1.08%   606,621    1,197    0.79%
                               
Non-interest-bearing deposits   236,817              169,638           
Other liabilities   3,508              3,082           
Shareholders' equity   139,810              108,071           
                               
Total liabilities and shareholders' equity  $1,219,225             $887,412           
                               
Net interest income/interest rate spread (taxable-equivalent basis)       $11,967    4.17%       $8,328    3.99%
                               
Net interest margin (taxable-equivalent basis)             4.41%             4.18%
                               
Ratio of interest-earning assets to interest-bearing liabilities   129.63%             131.75%          
                               
Reported net interest income                              
Net interest income/net interest margin (taxable-equivalent basis)       $23,713             $8,328      
Less:                              
taxable-equivalent adjustment        (80)             (56)     
                               
Net Interest Income       $23,633    4.41%       $8,272    4.15%

 

 - 51 - 

 

 

Comparison of Results of Operations for the

Six months ended June 30, 2018 and 2017

 

General. During the first six months of 2018, the Company had net income of $5.0 million as compared with net income of $3.5 million for the first six months of 2017. Net income per share for the first six months of 2018 was $0.36, basic and diluted, compared with net income per share of $0.30, basic and $0.29 diluted, for the first six months of 2017. Results of operations for the first six months of 2018 compared to 2017 was primarily impacted by an increase of $9.3 million in interest income offset by an increase in interest expense of $2.0 million and a reduction in provision for loan losses of $191,000, an increase of $883,000 in non-interest income and increased non-interest expenses of $7.1 million and a reduction in the federal corporate income tax rate. Net interest margin of 4.42% in the first six months of 2018 increased 21 basis points from the same period in 2017.

 

Net Interest Income. Net interest income increased to $23.6 million for the first six months of 2018 from $16.4 million for the first six months of 2017. The Company’s total interest income was affected by the increase in total loan balances. Average total interest-earning assets were $1.1 billion in the first six months of 2018 compared with $787.9 million during the same period in 2017, while the yield on those assets increased 43 basis points from 4.79% to 5.22% as a result of increases in the prime interest rate which contributed to the increase in loan yield.

 

The Company’s average interest-bearing liabilities increased by $240.0 million to $835.2 million for the six months ended June 30, 2018 from $595.2 million for the same period one year earlier and the cost of those funds increased from 0.76% to 1.03%, or 27 basis points. During the first six months of 2018, the Company’s net interest margin was 4.42% and net interest spread was 4.19%. In the same period ended one year earlier, net interest margin was 4.21% and net interest spread was 4.03%.

 

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. Historical loss rates are calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. Loan growth and the increase in qualitative factors were the primary contributors to the 2018 provision expense.

 

Non-Interest Income. Non-interest income for the six months ended June 30, 2018 was $2.4 million, an increase of $883,000 from the first six months of 2017. Service charges on deposit accounts increased $90,000 to $521,000 for the six months ended June 30, 2018 from $431,000 for the same period in 2017, primarily due to the merger with Carolina Premier Bank. Other non-deposit fees and income increased $609,000 from the first six months of 2017 to the first six months of 2018, primarily due to the merger. Fees from presold mortgages increased non-interest income $184,000 in the first six months of 2018. The Company did not sale any investment securities during the first six months of 2018 or 2017.

 

Non-Interest Expenses. Non-interest expenses increased by $7.1 million to $18.9 million for the six months ended June 30, 2018, from $11.8 million for the same period in 2017. The following are highlights of the significant categories of non-interest expenses during the first six months of 2018 versus the same period in 2017:

 

 - 52 - 

 

 

·Personnel expenses increased $2.3 million to $9.4 million, due to additions in staff, employment taxes and benefits costs.
·Occupancy and equipment expenses increased by $685,000 due to branch additions.
·Professional fees increased by $119,000 in the first six months of 2018 to $690,000 compared to $571,000 in the 2017 period primarily due to contracted internal audit and consulting fees.
·Deposit insurance expense increased $231,000 due to the merger.
·Merger expenses increased $1.8 million due to the acquisition.
·Other non-interest expenses increased by $482,000, due to small increases in several categories of other non-interest expenses and the merger.

 

Provision for Income Taxes. The Company’s effective tax rate was 22.3% and 33.4% for the six months ended June 30, 2018 and 2017, respectively. The effective tax rate was impacted by an adjustment resulting from enacted lower corporate tax rates for the State of North Carolina in 2017 plus a federal tax rate reduction resulting from the passage of the Tax Cuts and Jobs Act in December 2017.

 

As of June 30, 2018 and December, 31, 2017, the Company had a net deferred tax asset in the amount of $4.6 million and $4.5 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 of June 30, 2018 and December 31, 2017, 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.

 

 - 53 - 

 

 

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. Non-accrual loans have been included in determining average loans. The table is presented on a taxable equivalent basis where applicable.

 

   For the six months ended   For the six months ended 
   June 30, 2018   June 30, 2017 
   (dollars in thousands)             
   Average       Average   Average       Average 
   balance   Interest   rate   balance   Interest   rate 
Interest-earning assets:                              
Loans, gross of allowance  $976,395   $26,700    5.51%  $692,982   $17,755    5.17%
Investment securities   61,081    771    2.55%   60,175    748    2.51%
Other interest-earning assets   43,348    518    2.41%   34,774    207    1.20%
Total interest-earning assets   1,080,824    27,989    5.22%   787,931    18,710    4.79%
                               
Other assets   128,139              84,216           
                               
Total assets  $1,208,963             $872,147           
Interest-bearing liabilities:                              
Deposits:                              
Savings, NOW and money market  $320,660    639    0.40%  $211,941    220    0.21%
Time deposits over $100,000   329,704    2,172    1.33%   234,918    1,191    1.02%
Other time deposits   114,638    671    1.18%   91,191    448    0.99%
Borrowings   70,173    794    2.28%   57,155    385    1.36%
                               
Total interest-bearing liabilities   835,175    4,276    1.03%   595,205    2,244    0.76%
                               
Non-interest-bearing deposits   228,050              166,919           
Other liabilities   7,279              3,052           
Shareholders' equity   138,459              106,971           
                               
Total liabilities and shareholders' equity  $1,208,963             $872,147           
                               
Net interest income/interest rate spread (taxable-equivalent basis)       $23,713    4.19%       $16,466    4.03%
                               
Net interest margin (taxable-equivalent basis)             4.42%             4.21%
                               
Ratio of interest-earning assets to interest-bearing liabilities   129.41%             132.38%          
                               
Reported net interest income                              
Net interest income/net interest margin (taxable-equivalent basis)       $23,713             $16,466      
Less:                              
taxable-equivalent adjustment        (80)             (115)     
                               
Net Interest Income       $23,633    4.41%       $16,351    4.18%

 

 - 54 - 

 

 

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 and investment securities classified as available for sale) represented 11.4% of total assets at June 30, 2018 and increased as compared to 10.5% as of December 31, 2017. This increase in liquid assets to total assets resulted primarily from investment pay-downs and maturities and long-term borrowings.

 

The Company has been a net seller of federal funds and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Federal funds sold was $0 at June 30, 2018. 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 of June 30, 2018, the Company had existing credit lines with other financial institutions to purchase up to $172.9 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $138.0 million of qualifying loans is pledged to the FHLB to secure borrowings. At June 30, 2018, the Company had $66.1 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At June 30, 2018, in addition to FHLB advances, total borrowings consisted of junior subordinated debentures of $12.4 million.

 

Total deposits were $993.5 million at June 30, 2018. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 44.4% of total deposits at June 30, 2018. Time deposits of $250,000 or more represented 11.8% of the Company’s total deposits at June 30, 2018. At quarter-end, the Company had $71.9 million in brokered time deposits and no 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 minimal 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. Commencing in the first quarter of 2015, financial institutions and their holding companies became subject to the capital requirements. A new part of the capital ratios profile under the Basel III rules is the Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and SBLF preferred stock 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 11.6% at June 30, 2018.

 

 - 55 - 

 

 

As the following table indicates, at June 30, 2018, the Company and the Bank both exceeded minimum regulatory capital requirements as specified in the tables below.

 

   Actual   Minimum 
Select Bancorp, Inc.  Ratio   Requirement 
         
Total risk-based capital ratio   12.52%   8.00%
Tier 1 risk-based capital ratio   11.63%   6.00%
Leverage ratio   10.44%   4.00%
Common equity Tier 1 risk-based capital ratio   10.51%   4.50%

 

       Regulatory     
   Actual   Minimum   Well-Capitalized 
Select Bank & Trust  Ratio   Requirement   Requirement 
             
Total risk-based capital ratio   12.02%   8.00%   10.00%
Tier 1 risk-based capital ratio   11.13%   6.00%   8.00%
Leverage ratio   9.99%   4.00%   5.00%
Common equity Tier 1 risk-based capital ratio   11.13%   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 June 30, 2018.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Company intends to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Company’s most significant market risk exposure is interest rate risk. The Company's primary goal in managing interest rate risk is to minimize the effect that changes in market interest rates have on earnings and capital. This goal is accomplished through the active management of the balance sheet. The goal of these activities is to structure the maturity and repricing of assets and liabilities to produce stable net interest income despite changing interest rates. The Company's overall interest rate risk position is governed by policies approved by the Board of Directors and guidelines established and monitored by the Bank’s Asset/Liability Committee (“ALCO”).

 

To measure, monitor, and report on interest rate risk, the Company begins with two models: (1) net interest income ("NII") at risk, which measures the impact on NII over the next twelve and twenty-four months to immediate changes in interest rates and (2) net economic value of equity ("EVE"), which measures the impact on the present value of net assets to immediate changes in interest rates. NII at risk is designed to measure the potential short-term impact of changes in interest rates on NII. EVE is a long-term measure of interest rate risk to the Company's balance sheet, or equity. Gap analysis, which is the difference between the amount of balance sheet assets and liabilities repricing within a specified time period, is used as a secondary measure of the Company's interest rate risk position. All of these models are subject to ALCO guidelines and are monitored regularly.

 

 - 56 - 

 

 

In calculating NII at risk, the Company begins with a base amount of NII that is projected over the next twelve and twenty-four months, assuming that the balance sheet is static and the yield curve remains unchanged over the period. The current yield curve is then “shocked,” or moved immediately, ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent in a parallel fashion, or at all points along the yield curve. New twelve-month and twenty four-month NII projections are then developed using the same balance sheet but with the new yield curves and these results are compared to the base scenario. The Company also models other scenarios to evaluate potential NII at risk such as a gradual ramp in interest rates, a flattening yield curve, a steepening yield curve, and others that management deems appropriate.

 

EVE at risk is based on the change in the present value of all assets and liabilities under different interest rate scenarios. The present value of existing cash flows with the current yield curve serves as the base case. The Company then applies an immediate parallel shock to that yield curve of ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent and recalculates the cash flows and related present values.

 

Key assumptions used in the models described above include the timing of cash flows, the maturity and repricing of assets and liabilities, changes in market conditions, and interest-rate sensitivities of the Company's non-maturity deposits with respect to interest rates paid and the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NII or predict the impact of changes in interest rates on NII and EVE. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management strategies, among other factors. Projections of NII are assessed as part of the Company's forecasting process.

 

NII and EVE Analysis. The following table presents the estimated exposure to NII for the next twelve months due to immediate changes in interest rates and the estimated exposure to EVE due to immediate changes in interest rates. All information is presented as of March 31, 2018.

 

   March 31, 2018 
(dollars in thousands)  Estimated
Exposure to
NII		   Estimated
Exposure
to EVE		 
         
Immediate change in interest rates:          
+ 4.0%   18.0%   6.2%
+ 3.0%   14.1    5.3 
+ 2.0%   9.9    4.2 
+ 1.0%   5.2    2.5 
No change   -    - 
- 1.0%   (5.2)   (3.8)

 

While the measures presented in the table above are not a prediction of future NII or EVE valuations, they do suggest that if all other variables remained constant, immediate increases in interest rates at all points on the yield curve may produce higher NII in the short term. Other important factors that impact the levels of NII are balance sheet size and mix, interest rate spreads, the slope of the yield curve, the speed of interest rate changes, and management actions taken in response to the preceding conditions.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

 

 - 57 - 

 

 

 

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the second quarter of 2018. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the second quarter of 2018 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 - 58 - 

 

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is not currently engaged in, nor are any of its properties subject to, any material legal proceedings.  From time to time, the Bank is a party to legal proceedings in the ordinary course of business wherein it attempts to collect loans, enforce its security interest in loans, or other matters of similar nature.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors that we have previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company announced a repurchase program on August 31, 2016, by which management was authorized to repurchase up to 581,518 shares of Company common stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the three-month period covered by this Report.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 - 59 - 

 

 

Item 6. Exhibits

 

Exhibit Index

 

       

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit
No.		   Description of Exhibit   Form   Exhibit   Filing
Date		  

SEC

File No.

                     
10.1   Select Bancorp, Inc. 2018 Omnibus Stock Incentive Plan   8-K   10.1   05/24/18   000-50400
                     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act           Filed herewith    
                     
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act           Filed herewith    
                     
32.1   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act           Furnished herewith    
                     
32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act           Furnished herewith    
                     
101   Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, in XBRL (eXtensible Business Reporting Language)           Filed herewith    

 

 - 60 - 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SELECT BANCORP, INC.
   
Date: August 8, 2018 By:  /s/ William L. Hedgepeth II
    William L. Hedgepeth II
    President and Chief Executive Officer
     
Date: August 8, 2018 By: /s/ Mark A. Jeffries
    Mark A. Jeffries
    Executive Vice President and Chief Financial Officer

 

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