U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

xQuarterly Report Pursuant to Section 13 or 15(d)


of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 20172019

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered

Common stock, par value $1.00 per share

SLCT

The NASDAQ Stock Market LLC

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. YesxNo¨

 

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). YesxNo¨

 

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"company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨

Accelerated filerx

Non-accelerated filer¨(Do not check if a smaller reporting company)Smaller reporting companyx¨
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¨Nox

 

As of November 3, 2017,October 30, 2019, the Registrantregistrant had outstanding 11,662,62118,513,078 shares of Common Stock, $1.00 par value per share.

 

 

 

 

Page No.
Part I.FINANCIAL INFORMATION
 
Item 1 -Financial Statements(Unaudited)
 
Consolidated Balance Sheets September 30, 20172019 and December 31, 201620183
 
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 20172019 and 20162018
4
 
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 20172019 and 20162018
5
 
Consolidated Statements of Changes in Shareholders’ Equity Nine
Three Months Ended March 31, 2019 and 2018, Three Months Ended June 30, 2019 and 2018 and Three Months Ended September 30, 20172019 and 20162018
6
 
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 20172019 and 20162018
78
 
Notes to Consolidated Financial Statements910
 
Item 2 -Management’s Discussion and Analysis of Financial Condition andResults of Operations4638
 
Item 3 -Quantitative and Qualitative Disclosures about Market Risk5753
 
Item 4 -Controls and Procedures5853
 
Part II.OTHER INFORMATION
 
Item 1 -Legal Proceedings5954
 
Item 1A -Risk Factors5954
 
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds5954
 
Item 3 -Defaults Upon Senior Securities5954
 
Item 4 -Mine Safety Disclosures5954
 
Item 5-Other Information55
Item 6 -Exhibits6055
 
 Signatures6156

 

2

2

 

 

Part I.Financial Information

Item 1 - Financial Statements

 

SELECT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

  September 30, 2017  December 31, 
  (Unaudited)  2016* 
  (In thousands, except share 
  and per share data) 
ASSETS        
Cash and due from banks $15,518  $14,372 
Interest-earning deposits in other banks  36,793   40,342 
Certificates of deposit  1,000   1,000 
Investment securities available for sale, at fair value  53,705   62,257 
Loans  763,432   677,195 
Allowance for loan losses  (8,647)  (8,411)
NET LOANS  754,785   668,784 
Accrued interest receivable  2,949   2,768 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost  1,712   2,251 
Other non-marketable securities  630   703 
Foreclosed real estate  2,093   599 
Premises and equipment, net  17,353   17,931 
Bank owned life insurance  22,610   22,183 
Goodwill  6,931   6,931 
Core deposit intangible (“CDI”)  547   810 
Assets held for sale  846   846 
Other assets  5,277   4,863 
TOTAL ASSETS $922,749  $846,640 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Demand $173,231  $163,569 
Savings  34,214   38,394 
Money market and NOW  192,685   174,205 
Time  374,892   303,493 
TOTAL DEPOSITS  775,022   679,661 
Short-term debt  22,366   37,090 
Long-term debt  12,372   23,039 
Accrued interest payable  302   221 
Accrued expenses and other liabilities  2,868   2,356 
TOTAL LIABILITIES  812,930   742,367 
Shareholders’ Equity:        
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2017 and December 31, 2016  -   - 
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,662,621 and 11,645,413 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  11,663   11,645 
Additional paid-in capital  69,753   69,597 
Retained earnings  27,903   22,673 
Common stock issued to deferred compensation trust, at cost; 286,432 and 280,432 shares at September 30, 2017 and December 31, 2016, respectively  (2,413)  (2,340)
Directors’ Deferred Compensation Plan Rabbi Trust  2,413   2,340 
Accumulated other comprehensive income  500   358 
TOTAL SHAREHOLDERS’ EQUITY  109,819   104,273 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $922,749  $846,640 

  September 30, 2019  December 31, 
  (Unaudited)  2018* 
  (In thousands, except share and per share data) 
ASSETS        
Cash and due from banks $20,052  $17,059 
Interest-earning deposits in other banks  53,093   121,303 
Certificates of deposit  500   1,000 
Federal funds sold  10,728   - 
Investment securities available for sale, at fair value  76,941   51,533 
Loans held for sale  1,714   580 
Loans  1,014,928   986,040 
Allowance for loan losses  (8,056)  (8,669)
         
NET LOANS  1,006,872   977,371 
         
Accrued interest receivable  3,902   3,889 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost  3,045   3,283 
Other non-marketable securities  719   762 
Foreclosed real estate  1,442   1,088 
Premises and equipment, net  18,150   17,920 
Right of use lease asset  8,776   - 
Bank owned life insurance  29,621   29,117 
Goodwill  24,579   24,579 
Core deposit intangible (“CDI”)  1,803   2,085 
Assets held for sale  -   668 
Other assets  7,697   6,288 
         
TOTAL ASSETS $1,269,634  $1,258,525 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
Deposits:        
Demand $243,889  $247,007 
Savings  43,355   51,811 
Money market and NOW  283,414   254,482 
Time  417,015   427,127 
         
TOTAL DEPOSITS  987,673   980,427 
         
Short-term debt  -   7,000 
Long-term debt  57,372   57,372 
Lease liability  8,951   - 
Accrued interest payable  596   667 
Accrued expenses and other liabilities  2,993   3,448 
         
TOTAL LIABILITIES  1,057,585   1,048,914 
Shareholders’ Equity:        
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018  -   - 
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,513,078 and 19,311,505 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively  18,513   19,312 
Additional paid-in capital  142,878   150,718 
Retained earnings  49,634   39,640 
Common stock issued to deferred compensation trust, at cost; 312,956 and 303,239 shares outstanding at September 30, 2019 and December 31, 2018, respectively  (2,730)  (2,615)
Directors’ Deferred Compensation Plan Rabbi Trust  2,730   2,615 
Accumulated other comprehensive income (loss)  1,024   (59)
         
TOTAL SHAREHOLDERS’ EQUITY  212,049   209,611 
         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,269,634  $1,258,525 

 

* Derived from audited consolidated financial statements.

 

See accompanying notes.

3

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
  (In thousands, except share and per share data) 
INTEREST INCOME                
Loans $13,924  $13,609  $40,481  $40,293 
Federal funds sold and interest-earning deposits in other banks  581   422   1,580   940 
Investments  503   351   1,569   1,058 
TOTAL INTEREST INCOME  15,008   14,382   43,630   42,291 
INTEREST EXPENSE                
Money market, NOW and savings deposits  433   338   1,196   977 
Time deposits  2,248   1,665   5,986   4,508 
Short-term debt  4   75   56   285 
Long-term debt  455   452   1,370   1,036 
                 
TOTAL INTEREST EXPENSE  3,140   2,530   8,608   6,806 
NET INTEREST INCOME  11,868   11,852   35,022   35,485 
PROVISION FOR (RECOVERY OF) LOAN LOSSES  231   (459)  136   239 
                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  11,637   12,311   34,886   35,246 
NON-INTEREST INCOME                
Fees on the sale of mortgages  218   109   605   293 
Gain on securities  48   -   48   - 
Service charges on deposit accounts  308   309   858   830 
Other fees and income  874   648   2,462   2,334 
                 
TOTAL NON-INTEREST INCOME  1,448   1,066   3,973   3,457 
NON-INTEREST EXPENSE                
Personnel  5,124   4,464   15,126   13,861 
Occupancy and equipment  1,073   849   2,722   2,598 
Deposit insurance  (30)  239   165   617 
Professional fees  518   322   1,383   1,012 
CDI amortization  208   247   632   784 
Merger/acquisition related expenses  128   -   235   1,826 
Information systems  852   726   2,518   2,773 
Foreclosure-related expenses  (9)  (22)  31   81 
Other  1,067   975   3,234   3,134 
                 
TOTAL NON-INTEREST EXPENSE  8,931   7,800   26,046   26,686 
INCOME BEFORE INCOME TAX  4,154   5,577   12,813   12,017 
INCOME TAXES  915   1,256   2,819   2,689 
                 
NET INCOME $3,239  $4,321  $9,994  $9,328 
NET INCOME PER COMMON SHARE                
Basic $0.17  $0.27  $0.52  $0.64 
Diluted $0.17  $0.27  $0.52  $0.63 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                
Basic  19,028,572   15,858,455   19,219,820   14,636,576 
Diluted  19,073,235   15,916,734   19,266,480   14,697,379 

See accompanying notes.

4

 

SELECT BANCORP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands, except share and per share data) 
INTEREST INCOME                
Loans $9,592  $8,369  $27,323  $24,576 
Federal funds sold and interest-earning deposits in other banks  143   52   350   189 
Investments  307   334   963   1,067 
TOTAL INTEREST INCOME  10,042   8,755   28,636   25,832 
INTEREST EXPENSE                
Money market, NOW and savings deposits  140   98   360   291 
Time deposits  1,010   642   2,649   1,950 
Short-term debt  177   22   295   162 
Long-term debt  30   147   297   345 
TOTAL INTEREST EXPENSE  1,357   909   3,601   2,748 
NET INTEREST INCOME  8,685   7,846   25,035   23,084 
PROVISION FOR LOAN LOSSES  202   337   1,091   847 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  8,483   7,509   23,944   22,237 
NON-INTEREST INCOME                
Gain on sale of investment securities  -   -   -   22 
Service charges on deposit accounts  237   249   668   742 
Other fees and income  541   536   1,618   1,718 
TOTAL NON-INTEREST INCOME  778   785   2,286   2,482 
NON-INTEREST EXPENSE                
Personnel  3,549   3,176   10,665   9,465 
Occupancy and equipment  555   575   1,619   1,756 
Deposit insurance  75   76   222   337 
Professional fees  211   263   782   750 
CDI amortization  82   105   263   332 
Merger/acquisition related expenses  278   -   278   - 
Information systems  569   510   1,607   1,543 
Foreclosed-related expenses  300   140   291   203 
Other  820   786   2,497   2,384 
TOTAL NON-INTEREST EXPENSE  6,439   5,631   18,224   16,770 
INCOME BEFORE INCOME TAX  2,822   2,663   8,006   7,949 
INCOME TAXES  1,043   924   2,776   2,800 
                 
NET INCOME  1,779   1,739   5,230   5,149 
                 
DIVIDENDS ON PREFERRED STOCK  -   -   -   4 
NET INCOME AVAILABLE                
TO COMMON SHAREHOLDERS $1,779  $1,739  $5,230  $5,145 
NET INCOME PER COMMON SHARE                
Basic $0.15  $0.15  $0.45  $0.44 
Diluted $0.15  $0.15  $0.45  $0.44 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                
Basic  11,662,580   11,627,270   11,659,139   11,601,993 
Diluted  11,717,533   11,666,280   11,711,830   11,647,915 

 

See accompanying notes.

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
  (In thousands) 
Net income $3,239  $4,321  $9,994  $9,328 
                 
Other comprehensive income (loss):                
Unrealized gain (loss) on investment securities available for sale  196   (222)  1,454   (1,029)
Tax effect  (48)  50   (334)  239 
   148   (172)  1,120   (790)
                 
Reclassification adjustment for gain included in net income  (48)  -   (48)  - 
Tax effect  11   -   11   - 
   (37)  -   (37)  - 
                 
Total  111   (172)  1,083   (790)
                 
Total comprehensive income $3,350  $4,149  $11,077  $8,538 

4

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands) 
             
Net income $1,779  $1,739  $5,230  $5,149 
                 
Other comprehensive income (loss):                
Unrealized gain (loss) on investment securities available for sale  (11)  (259)  222   840 
Tax effect  5   97   (80)  (300)
   (6)  (162)  142   540 
Reclassification adjustment for gain included in net income  -   -   -   (22)
Tax effect  -   -   -   8 
   -   -   -   (14)
                 
Total  (6)  (162)  142   526 
                 
Total comprehensive income $1,773  $1,577  $5,372  $5,675 

 

See accompanying notes.

 

5


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

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  Equity 
Balance at December 31, 2015  7,645  $7,645   11,583,011  $11,583  $69,061  $15,923  $(2,139) $2,139  $490  $104,702 
Net income  -   -   -   -   -   5,149   -   -   -   5,149 
Other comprehensive income, net  -   -   -   -   -   -   -   -   526   526 
Preferred stock dividends paid  -   -   -   -   -   (4)  -   -   -   (4)
Preferred stock redemption  (7,645)  (7,645)  -   -   -   -   -   -   -   (7,645)
Stock option exercises  -   -   49,181   49   361   -   -   -   -   410 
Stock based compensation  -   -   -   -   53   -   -   -   -   53 
Director equity incentive plan, net  -   -   -   -   -   -   (122)  122   -   - 
Balance at September 30, 2016  -  $-   11,632,192  $11,632  $69,475  $21,068  $(2,261) $2,261  $1,016  $103,191 
                                         
                                         
Balance at December 31, 2016  -  $-   11,645,413  $11,645  $69,597  $22,673  $(2,340) $2,340  $358  $104,273 
Net income  -   -   -   -   -   5,230   -   -   -   5,230 
Other comprehensive income, net  -   -   -   -   -   -   -   -   142   142 
Stock option exercises  -   -   17,208   18   86   -   -   -   -   104 
Stock based compensation  -   -   -   -   70   -   -   -   -   70 
Director equity incentive plan, net  -   -   -   -   -   -   (73)  73   -   - 
Balance at September 30, 2017  -  $-   11,662,621  $11,663  $69,753  $27,903  $(2,413) $2,413  $500  $109,819 
                    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, 2018         -  $          -   19,311,505  $19,312  $150,718  $39,640  $(2,615) $2,615  $(59) $209,611 
Net income  -   -   -   -   -   3,307   -   -   -   3,307 
Other comprehensive income  -   -   -   -   -   -   -   -   360   360 
Stock option exercises  -   -   14,980   14   100   -   -   -   -   114 
Stock based compensation  -   -   -   -   59   -   -   -   -   59 
Directors’ equity incentive plan, net  -   -   -   -   -   -   (37)  37   -   - 
Balance at March 31, 2019  -  $-   19,326,485  $19,326  $150,877  $42,947  $(2,652) $2,652  $301  $213,451 
Net income  -   -   -   -   -   3,448   -   -   -   3,448 
Other comprehensive income  -   -   -   -   -   -   -   -   612   612 
Stock repurchases  -   -   (64,496)  (64)  (662)  -   -   -   -   (726)
Stock based compensation  -   -   -   -   60   -   -   -   -   60 
Balance at June 30, 2019  -  $-   19,261,989  $19,262  $150,275  $46,395  $(2,652) $2,652  $913  $216,845 
Net income  -   -   -   -   -   3,239   -   -   -   3,239 
Other comprehensive income  -   -   -   -   -   -   -   -   111   111 
Stock repurchases  -   -   (748,911)  (749)  (7,456)  -   -   -   -   (8,205)
Directors’ equity incentive plan, net  -   -   -   -   -   -   (78)  78   -   - 
Stock based compensation  -   -   -   -   59   -   -   -   -   59 
Balance at September 30, 2019  -  $-   18,513,078  $18,513  $142,878  $49,634  $(2,730) $2,730  $1,024  $212,049 

 

See accompanying notes.

 

6

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

(in thousands, except share data)

 

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

  Nine Months Ended 
  September 30, 
  2017  2016 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $5,230  $5,149 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  1,091   847 
Depreciation and amortization of premises and equipment  862   808 
Amortization and accretion of investment securities  419   579 
Amortization of deferred loan fees and costs  (438)  (346)
Amortization of core deposit intangible  263   332 
Stock-based compensation  70   53 
Accretion on acquired loans  (633)  (905)
Amortization of acquisition premium on time deposits  (229)  (542)
Net accretion of acquisition discount on borrowings  (87)  (212)
Increase in cash surrender value of bank owned life insurance  (427)  (444)
Net loss on sale and write-downs of foreclosed real estate  214   164 
Gain on sale of premises and equipment  (9)  - 
Net write-down on assets held for sale  -   13 
Net gain on investment security sales  -   (22)
Change in assets and liabilities:        
Net change in accrued interest receivable  (181)  (134)
Net change in other assets  (494)  17 
Net change in accrued expenses and other liabilities  593   1,139 
         
NET CASH PROVIDED BY OPERATING ACTIVITIES  6,244   6,496 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchase (redemption) of FHLB stock  539   (228)
Purchase (redemption) of non-marketable security  73   (45)
Purchase of investment securities available for sale  (759)  (1,517)
Maturities of investment securities available for sale  4,255   9,434 
Mortgage-backed securities pay-downs  4,859   6,788 
Proceeds from sale of investment securities available for sale  -   624 
Net change in loans outstanding  (88,516)  (34,215)
Proceeds from sale of foreclosed real estate  787   1,831 
Proceeds from sale of premises and equipment  -  400 
Purchases of premises and equipment  (275)  (629)
         
NET CASH USED BY INVESTING ACTIVITIES  (79,037)  (17,557)
                    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, 2017         -  $       -   14,009,137  $14,009  $95,850  $25,858  $(2,518) $2,518  $398  $136,115 
Net income  -   -   -   -   -   1,897   -   -   -   1,897 
Other comprehensive income (loss)  -   -   -   -   -   -   -   -   (410)  (410)
Stock option exercises  -   -   4,780   5   21   -   -   -   -   26 
Directors’ equity incentive plan, net  -   -   -   -   -   -   41   (41)  -   - 
Stock based compensation  -   -   -   -   45   -   -   -   -   45 
Balance at March 31, 2018  -  $-   14,013,917  $14,014  $95,916  $27,755  $(2,477) $2,477  $(12) $137,673 
Net income  -   -   -   -   -   3,110   -   -   -   3,110 
Other comprehensive loss  -   -   -   -   -   -   -   -   (208)  (208)
Stock option exercises  -   -   10,970   11   72   -   -   -   -   83 
Stock based compensation  -   -   -   -   44   -   -   -   -   44 
Balance at June 30, 2018  -  $-   14,024,887  $14,025  $96,032  $30,865  $(2,477) $2,477  $(220) $140,702 
Net income  -   -   -   -   -   4,321   -   -   -   4,321 
Other comprehensive loss  -   -   -   -   -   -   -   -   (172)  (172)
Shares issued for capital raise, net  -   -   5,270,834   5,271   54,535   -   -   -   -   59,806 
Stock option exercises  -   -   400   -   4   -   -   -   -   4 
Directors’ equity incentive plan, net  -   -   -   -   -   -   (80)  80   -   - 
Stock based compensation  -   -   -   -   44   -   -   -   -   44 
Balance at September 30, 2018  -  $-   19,296,121  $19,296  $150,615  $35,186  $(2,557) $2,557  $(392) $204,705 

 

See accompanying notes.

 

7


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

  Nine Months Ended 
  September 30, 
  2017  2016 
  (In thousands) 
CASH FLOWS FROM FINANCING ACTIVITIES        
Net change in deposits $95,590  $26,502 
Proceeds from short-term debt  -   22,000 
Repayments on short-term debt  (14,724)  (18,493)
Repayments on long-term debt  (10,580)  (1,124)
Preferred stock dividends paid  -   (4)
Redemption of preferred stock  -   (7,645)
Proceeds from stock option exercises  104   410 
         
NET CASH PROVIDED BY FINANCING ACTIVITIES  70,390   21,646 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS  (2,403)  10,585 
         
CASH AND CASH EQUIVALENTS, BEGINNING  55,714   63,409 
         
CASH AND CASH EQUIVALENTS, ENDING $53,311  $73,994 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION        
Cash paid during the period for:        
Interest $3,520  $2,790 
Income Taxes  2,322   1,772 
         
Non-cash transactions:        
Unrealized gains on investment securities available for sale, net of tax  142   526 
Transfers from loans to foreclosed real estate  2,495   1,142 
Transfers from premises and equipment to assets held for sale  -   768 

 

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

  Nine Months Ended 
  September 30, 
  2019  2018 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $9,994  $9,328 
Adjustments to reconcile net income to net cash (used) provided by operating activities:        
Provision for loan losses  136   239 
Depreciation and amortization of premises and equipment  2,147   1,305 
Amortization and accretion of investment securities  543   455 
Amortization of deferred loan fees and costs  (590)  (543)
Amortization of core deposit intangible  632   784 
Stock-based compensation  178   133 
Accretion on acquired loans  (679)  (2,647)
Amortization of acquisition premium on time deposits  (7)  (171)
Net accretion of acquisition discount on borrowings  -   (11)
Increase in cash surrender value of bank-owned life insurance  (504)  (513)
Proceeds from loans held for sale  25,388   18,317 
Originations of loans held for sale  (25,917)  (19,223)
Fees on the sale of mortgages  (605)  (293)
Net loss on sale and write-downs of foreclosed real estate  12   100 
Loss on sale of premises and equipment  8   179 
Net write-down on assets held for sale  8   178 
Gain on sale of securities  (48)  - 
Change in assets and liabilities:        
Net change in accrued interest receivable  (13)  (26)
Net change in other assets  (1,656)  2,330 
Net change in accrued expenses and other liabilities  (408)  (10,409)
         
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES  8,619   (488)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Redemption (purchase) of FHLB stock  238   (964)
Redemption of non-marketable securities  43   219 
Purchase of investment securities available for sale  (37,948)  - 
Maturities of investment securities available for sale  2,883   1,400 
Proceeds from the sale of securities  1,125   - 
Cash received from branch acquisitions  24,093   - 
Mortgage-backed securities pay-downs  9,367   8,626 
Net change in loans outstanding  (28,837)  (7,493)
Proceeds from sale of foreclosed real estate  103   657 
Proceeds from sale of assets held for sale  660   - 
Purchases of premises and equipment  (1,167)  (1,200)
         
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES  (29,440)  1,245 

See accompanying notes.

 

8

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

 

  Nine Months Ended 
  September 30, 
  2019  2018 
   (In thousands) 
CASH FLOWS FROM FINANCING ACTIVITIES        
Net change in deposits $(17,786) $(20,712)
Repayments on short-term debt  (7,000)  (17,266)
Proceeds from long-term debt  -   38,000 
Repayment in lease liability  (565)  - 
Proceeds from issuance of common stock  -   63,250 
Direct expenses related to capital transactions  -   (3,444)
Repurchase of common stock  (8,931)  - 
Proceeds from stock option exercises  114   113 
         
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES  (34,168)  59,941 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS  (54,989)  60,698 
         
CASH AND CASH EQUIVALENTS, BEGINNING  139,362   62,695 
         
CASH AND CASH EQUIVALENTS, ENDING $84,373  $123,393 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION        
Cash paid during the period for:        
Interest $8,679  $6,654 
Income Taxes  2,496   1,529 
         
Non-cash transactions:        
Unrealized (losses) gains on investment securities available for sale, net of tax  1,120   (790)
Transfers from loans to foreclosed real estate  469   519 

 

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

See accompanying notes.


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

 

NOTE A - BASIS OF PRESENTATION

 

Select Bancorp, Inc. (“Company”(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.

 

SelectThe Bank & Trust Company was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25, 2014, in connection with the Company’s acquisition of LegacyCompany acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank changed itsBank’s legal name from New Century Bank to Select Bank & Trust Company. On December 15, 2017, the Company followingacquired Premara Financial, Inc. and its subsidiary Carolina Premier Bank through the merger of Premara with and into the two banking corporations.Company, followed immediately by the merger of Carolina Premier with and into the Bank. The Bank iscontinues as the only banking subsidiary of the Company andwith its headquarters and operations center are located in Dunn, NC. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina, and operates under the banking laws ofas well as in Charlotte, North Carolina, northwest South Carolina, and Virginia Beach, Virginia. The Bank is subject to the rulessupervision and regulationsregulation of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

 

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 threethree- and nine monthnine-month periods ended September 30, 20172019 and 2016,2018, 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 threethree- and nine monthnine-month periods ended September 30, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2019.

 

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 20162018 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2017.15, 2019. 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 September 30, 20172019 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)

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 September 30, 20172019 and 20162018 there were 152,300172,120 and 123,800119,800 anti-dilutive stock options outstanding, respectively.

 

 Three Months Ended Nine Months Ended  Three Months Ended  Nine Months Ended 
 September 30,  September 30,  September 30, September 30, 
 2017  2016  2017  2016  2019 2018 2019 2018 
Weighted average shares used for basic net income available to common shareholders  11,662,580   11,627,270   11,659,139   11,601,993   19,028,572   15,858,455   19,219,820   14,636,576 
                                
Effect of dilutive stock options  54,953   39,010   52,691   45,922   44,663   58,279   46,660   60,803 
                                
Weighted average shares used for diluted net income available to common shareholders  11,717,533   11,666,280   11,711,830   11,647,915   19,073,235   15,916,734   19,266,480   14,697,379 

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

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 — In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. 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 currently plans to adopt the guidance using the modified retrospective method and without electing any of the practical expedients available. The Company has performed an analysis of the guidance and it is not expected to have a significant impact on the Company's financial position or results of operations but will increase disclosures of revenue.

10

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In March 2016, the FASB issued ASU 2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting,to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, including the tax effect of forfeitures and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted these amendments to its financial statements during the first quarter of 2017 with a positive impact to net earnings as an excess tax benefit of $4,000 was recorded through the income statement rather than additional paid in capital.

In January 2016, 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) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates 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) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires 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) requires 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) clarifies 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 early adopted. The guidance is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.

In February 2016, the FASBFinancial Accounting Standards Board (the FASB) issued ASUAccounting Standards Update (“ASU”) 2016-02,Leases (Topic 842). ASU 2016-02 applies a right-of-use (ROU)(“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.  The Company adopted this standard during the first quarter of 2019. The impact was an increase to the Consolidated Balance Sheet for ROU assets and associated lease liabilities, as well as resulting depreciation expense of the ROU assets and expense of the lease liabilities in the Consolidated Statements of Income. Additionally, adding these assets to the balance sheet impacted total risk-weighted assets used to determine the regulatory capital levels.

In transition, lesseesJuly 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to make narrow amendments to clarify how to apply certain aspects of the new standard. The amendments are effective for reporting periods beginning after December 15, 2018.

The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and lessorswill not restate comparative periods. Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $9,013,900 and the recognition of ROU assets totaling $9,013,900 as of the date of adoption. The adoption of this standard did not impact beginning retained earnings. Total risk-based capital was adversely impacted by 13 basis points due to the increase in risk-weighted assets, see Note J. Lease liabilities and ROU assets are requiredreflected in other liabilities and other assets, respectively. The initial balance sheet gross up upon adoption was primarily related to recognizeoperating leases of certain real estate properties. The Company has a finance lease and measureno material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases.

 

11


SELECT BANCORP, INC.

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

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.

 

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.   On October 16, 2019, the FASB voted to delay implementation of CECL until January 2023 for certain companies, including smaller reporting companies (as defined by the SEC). The Company has dedicated staffcurrently qualifies as a smaller reporting company 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 2016,2018, the FASB amended ASU 2018-13- Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Statement of Cash Flows Disclosure Requirements for Fair Value Measurementtopic of the Accounting Standards Codification to clarify howCodification. The amendments remove, modify, and add certain cash receipts and cash payments are presented and classifiedfair value disclosure requirements based on the concepts in the statement of cash flows.FASB Concepts Statement,Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments will beare effective for the Companyall entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 including interim periods within those fiscal years.2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification.  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 amended the Goodwill and Other Topic of the Accounting Standards Codification 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

12

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

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.

In February 2017, the FASB amended the Other Income Topic of the Accounting Standards Codification to clarify 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 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to 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 will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on itsconsolidated financial statements.

 

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.

13

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

 

NOTED 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.

 


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

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.

 

14

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 sponsoredgovernment-sponsored entities (“GSEs”), and municipal bonds. There have been no changes in valuation techniques for the three and nine months ended September 30, 2017.2019. Valuation techniques are consistent with techniques used in prior periods.


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

 

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 September 30, 20172019 and December 31, 20162018 (in thousands):

 

     Quoted Prices in  Significant    
Investment securities    Active Markets  Other  Significant 
available for sale    for Identical  Observable  Unobservable 
September 30, 2017 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
             
U.S. government agencies – GSE's $10,644  $-  $10,644  $- 
Mortgage-backed securities - GSE's  28,939   -   28,939   - 
Municipal bonds  14,122   -   14,122   - 
                 
Total $53,705  $-  $53,705  $- 
Investment securities
available for sale
September 30, 2019
 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-GSEs $10,381  $          -  $10,381  $          - 
Mortgage-backed securities-GSEs  52,104   -   52,104   - 
Corporate bonds  1,553   -   1,553   - 
Municipal bonds  12,903   -   12,903   - 
Total investment AFS $76,941  $-  $76,941  $- 

 

     Quoted Prices in  Significant    
Investment securities    Active Markets  Other  Significant 
available for sale    for Identical  Observable  Unobservable 
December 31, 2016 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
             
U.S. government agencies – GSE's $14,159  $-  $14,159  $- 
Mortgage-backed securities - GSE's  32,363   -   32,363   - 
Municipal bonds  15,735   -   15,735   - 
                 
Total $62,257  $-  $62,257  $- 

15

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Investment securities
available for sale
December 31, 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-GSEs $9,837  $         -  $9,837  $         - 
Mortgage-backed securities-GSEs  22,983   -   22,983   - 
Corporate bonds  1,722   -   1,722   - 
Municipal bonds  16,991   -   16,991   - 
Total investment AFS $51,533  $-  $51,533  $- 

 

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”.“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 September 30, 20172019 and December 31, 2016,2018, 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 September 30, 2017,2019, the discounts to appraised value used are weighted between 6%3% and 61%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 September 30, 2017.2019.


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

 

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 September 30, 2017,2019, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended September 30, 2017.2019.

 

Assets heldHeld for saleSale

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.

Loans Held for Sale

The significant unobservable input used is the discount applied to appraised values to account for expected liquidationCompany originates fixed and selling costs which ranged between 1% and 25% at September 30, 2017. There have been no changesvariable rate residential mortgage loans on a servicing-released 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 are classified within Level 2 of the hierarchy. Net unrealized losses are provided for in a valuation techniques forallowance 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 fees on the three months ended September 30, 2017.sale of mortgages in the consolidated statements of income.

 

16


SELECT BANCORP, INC.

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 September 30, 20172019 and December 31, 20162018 (in thousands):

 

     Quoted Prices in  Significant    
     Active Markets  Other  Significant 
Asset Category    for Identical  Observable  Unobservable 
September 30, 2017 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
             
Impaired loans $2,013  $-  $-  $2,013 
Asset held for sale  846   -   -   846 
Foreclosed real estate  2,093   -   -   2,093 
                 
Total $4,952  $-  $-  $4,952 

    Quoted Prices in Significant    
    Active Markets Other Significant 
Asset Category    for Identical Observable Unobservable 
December 31, 2016 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
         
Asset Category
September 30, 2019
 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 $5,805  $-  $-  $5,805  $9,083  $          -  $-  $9,083 
Asset held for sale  846   -   -   846 
Loans held for sale  1,714   -   1,714   - 
Foreclosed real estate  599   -   -   599   1,442   -   -   1,442 
                
Total $7,250  $-  $-  $7,250  $12,239  $-  $1,714  $10,525 

 

17

 

 

Asset Category

December 31, 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 $7,257  $            -  $-  $7,257 
Loans held for sale  580   -   580                 - 
Assets held for sale  668   -               -   668 
Foreclosed real estate  1,088   -   -   1,088 
Total $9,593  $-  $580  $9,013 

 


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

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

The following table presents the carrying values and estimated fair values of the Company's financial instruments at September 30, 20172019 and December 31, 2016:2018:

 

 September 30, 2017  September 30, 2019 
 Carrying Estimated         Carrying Estimated       
 Amount  Fair Value  Level 1  Level 2  Level 3  Amount  Fair Value  Level 1  Level 2  Level 3 
 (In thousands)  (In thousands) 
Financial assets:                                        
Cash and due from banks $15,518  $15,518  $15,518  $-  $-  $20,052  20,052  20,052  -  - 
Certificates of deposit  1,000   1,000   1,000   -   -   500   500   500   -   - 
Interest-earning deposits in other banks  36,793   36,793   36,793   -   -   53,093   53,093   53,093   -   - 
Federal funds sold  10,728   10,728   10,728   -   - 
Investment securities available for sale  53,705   53,705   -   53,705   -   76,941   76,941   -   76,941   - 
Loans held for sale  1,714   1,714       1,714    
Loans, net  754,785   757,055   -   -   757,055   1,006,872   998,827   -   -   998,827 
Accrued interest receivable  2,949   2,949   -   2,949   -   3,902   3,902   -   3,902   - 
Stock in FHLB  1,712   1,712   -   -   1,712   3,045   3,045   -   -   3,045 
Other non-marketable securities  630   630   -   -   630   719   719   -   -   719 
                                        
Financial liabilities:                                        
Deposits $775,022  $773,189  $-  $773,189  $-  $987,673  $989,577  -  $989,577  - 
Short-term debt  22,366   22,366   -   22,366   - 
Long-term debt  12,372   6,982   -   6,982   -   57,372   55,941   -   55,941   - 
Accrued interest payable  302   302   -   302   -   596   596   -   596   - 

  

  December 31, 2016 
  Carrying  Estimated          
  Amount  Fair Value  Level 1  Level 2  Level 3 
  (in thousands) 
Financial assets:                    
Cash and due from banks $14,372  $14,372  $14,372  $-  $- 
Certificates of deposits  1,000   1,000   1,000   -   - 
Interest-earning deposits in other banks  40,342   40,342   40,342   -   - 
Investment securities available for sale  62,257   62,257   -   62,257   - 
Loans, net  668,784   671,208   -   -   671,208 
Accrued interest receivable  2,768   2,768   -   2,768   - 
Stock in the FHLB  2,251   2,251   -   -   2,251 
Other non-marketable securities  703   703   -   -   703 
                     
Financial liabilities:                    
Deposits $679,661  $678,328  $-  $678,328  $- 
Short-term debt  37,090   37,177   -   37,177   - 
Long-term debt  23,039   17,649   -   17,649   - 
Accrued interest payable  221   221   -   221   - 

  December 31, 2018 
  Carrying  Estimated          
  Amount  Fair Value  Level 1  Level 2  Level 3 
  (dollars in thousands) 
Financial assets:                    
Cash and due from banks $17,059  17,059  $17,059  $-  $- 
Certificates of deposits  1,000   1,000   1,000   -   - 
Interest-earning deposits in other banks  121,303   121,303   121,303   -   - 
Investment securities available for sale  51,533   51,533   -   51,533   - 
Loans held for sale  580   580   -   580   - 
Loans, net  977,371   970,330   -   -   970,330 
Accrued interest receivable  3,889   3,889   -   3,889   - 
Stock in the FHLB  3,283   3,283   -   -   3,283 
Other non-marketable securities  762   762   -   -   762 
Assets held for sale  668   668   -   -   668 
                     
Financial liabilities:                    
Deposits $980,427  $979,570  $-  $979,570 ��$- 
Short-term debt  7,000   7,000   -   7,000   - 
Long-term debt  57,372   55,504   -   55,504   - 
Accrued interest payable  667   667   -   667   - 
18


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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Cash and Due from Banks, Certificates of Deposit, Interest-Earning Deposits in Other Banks and Federal Funds Sold

The carrying amounts for cash and due from banks, certificates of deposit, interest-earning deposits in other banks and federal funds sold approximate fair value because of the short maturities of those instruments.

Investment Securities Available for Sale

Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using prices quoted for similar investments or quoted market prices obtained from independent pricing services.

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.

Stock in Federal Home Loan Bank of Atlanta

The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the FHLB stock.

Other Non-Marketable Securities

The fair value of equity instruments in other non-marketable securities is assumed to approximate carrying value.

Deposits

The fair value of demand, savings, and money market and NOW deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using the rates currently offered for instruments of similar remaining maturities.

Short-term Debt

Short-term debt consists of repurchase agreements and FHLB advances with maturities of less than twelve months. The carrying values of these instruments is a reasonable estimate of fair value.

Long-term Debt

The fair values of long-term debt are based on discounted expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

19

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value because of the short maturities of these instruments.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.

  

NOTE E - INVESTMENT SECURITIES

 

The amortized cost and fair value of available for sale investments (“AFS”), with gross unrealized gains and losses, follow:

 

 September 30, 2017  September 30, 2019 
  Gross  Gross       Gross Gross    
 Amortized unrealized unrealized Fair  Amortized unrealized unrealized Fair 
 cost gains losses value  cost  gains  losses  value 
 (dollars in thousands)  (dollars in thousands) 
Securities available for sale:                                
U.S. government agencies – GSE’s $10,489  $168  $(13) $10,644 
Mortgage-backed securities – GSE’s  28,589   387   (37)  28,939 
U.S. government agencies – GSEs $10,181  $202  $(2) $10,381 
Mortgage-backed securities – GSEs  51,200   919   (15)  52,104 
Corporate bonds  1,532   21   -   1,553 
Municipal bonds  13,842   280   -   14,122   12,698   205   -   12,903 
                                
 $52,920  $835  $(50) $53,705  $75,611  $1,347  $(17) $76,941 

 

As of September 30, 2017,2019, accumulated other comprehensive income included net unrealized gains totaling $785,000.$1.3 million. Deferred tax liabilities resulting from these net unrealized gains totaled $285,000.$300,000.

 

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

 

 December 31, 2016  December 31, 2018 
    Gross Gross        Gross Gross    
 Amortized unrealized unrealized Fair  Amortized unrealized unrealized Fair 
 cost gains losses value  cost  gains  losses  value 
 (in thousands)  (dollars in thousands) 
Securities available for sale:                                
U.S. government agencies – GSE’s $14,086  $98  $(25) $14,159 
Mortgage-backed securities – GSE’s  32,082   382   (101)  32,363 
U.S. government agencies – GSEs $9,852  $36  $(51) $9,837 
Mortgage-backed securities – GSEs  23,150   62   (229)  22,983 
Corporate bonds  1,697   25   -   1,722 
Municipal bonds  15,527   209   (1)  15,735   16,910   105   (24)  16,991 
                                
 $61,695  $689  $(127) $62,257  $51,609  $228  $(304) $51,533 

 

As of December 31, 2016,2018, accumulated other comprehensive incomeloss included net unrealized gainslosses totaling $562,000.$76,000. Deferred tax liabilitiesassets resulting from these net unrealized gainslosses totaled $204,000.$17,000.

  

20

18

 

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

NOTE E - INVESTMENT SECURITIES (continued)SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

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

 

 September 30, 2017  September 30, 2019 
   Gross Gross       Gross Gross    
 Amortized unrealized unrealized Fair  Amortized unrealized unrealized Fair 
 cost gains losses value  cost  gains  losses  value 
 (In thousands)  (In thousands) 
Securities available for sale:                                
Within 1 year $877  $11  $-  $888  $8,114  $23  $(7) $8,130 
After 1 year but within 5 years  41,013   575   (50)  41,538   45,902   728   (10)  46,620 
After 5 years but within 10 years  5,774   145   -   5,919   14,083   423   -   14,506 
After 10 years  5,256   104   -   5,360   7,512   173 �� -   7,685 
                                
 $52,920  $835  $(50) $53,705  $75,611  $1,347  $(17) $76,941 

  

 December 31, 2016  December 31, 2018 
   Gross Gross       Gross Gross    
 Amortized unrealized unrealized Fair  Amortized unrealized unrealized Fair 
 cost gains losses value  cost  gains  losses  value 
 (in thousands)  (dollars in thousands) 
Securities available for sale:                                
Within 1 year $3,735  $12  $-  $3,747  $3,275  $13  $-  $3,288 
After 1 year but within 5 years  37,615   424   (110)  37,929   32,862   96   (252)  32,706 
After 5 years but within 10 years  10,695   109   (12)  10,792   6,551   48   (29)  6,570 
After 10 years  9,650   144   (5)  9,789   8,921   71   (23)  8,969 
                                
 $61,695  $689  $(127) $62,257  $51,609  $228  $(304) $51,533 

  

Securities with a carrying value of $1.9$21.8 million and $34.3$6.4 million at September 30, 20172019 and December 31, 2016,2018, 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 and theobligations. 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 September 30, 20172019 and December 31, 2016. In 2016 the2018. The Company realized a gain on the disposal of eleven securities and hasdid not soldsell any securities in 2017.2018 and sold two securities for a gain of $48,000 in the first nine months of 2019.


21

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

NOTE E- INVESTMENT SECURITIES (continued)

The following tables show the gross unrealized losses and fair value of the Company’s investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 20172019 and December 31, 2016.2018.

 

 September 30, 2017  September 30, 2019 
 Less Than 12 Months 12 Months or More Total  Less Than 12 Months  12 Months or More  Total 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized Fair Unrealized Fair Unrealized 
 value losses value losses value losses  value  losses  value  losses  value  losses 
 (dollars in thousands)  (dollars in thousands) 
Securities available for sale:                                                
U.S. government agencies – GSEs $1,420  $(13) $-  $-  $1,420  $(13) $-  $-  $627  $(2) $627  $(2)
Mortgage-backed securities- GSEs  6,660   (29)  479   (8)  7,139   (37)
Municipal bonds  110   -   -   -   110   - 
Mortgage-backed securities-GSEs  3,150   (3)  3,784   (12)  6,934   (15)
Total temporarily impaired securities $8,190  $(42) $479  $(8) $8,669  $(50) $3,150  $(3) $4,411  $(14) $7,561  $(17)

 

One mortgage-backed GSEAt September 30, 2019, the Company had four securities in an unrealized lossesloss position for more than twelve months totaling $8,000 at September 30, 2017. One U.S. government agency GSE, one municipal and sixof $4.4 million. There were three mortgage-backed GSEs hadin an unrealized lossesloss position for less than twelve months totaling $42,000$3.2 million at September 30, 2017.2019. All unrealized losses are attributable to the general trend of interest rates. DuringThere were two investment securities sold during the first nine months of 2017 there were no investment security sales. During the first quarter2019 at a gain of 2016 gross proceeds of investment sales amounted to $624,000 and gains of $22,000. There were no sales of investment securities in the second or third quarters of 2016.$48,000.

 

 December 31, 2016  December 31, 2018 
 Less Than 12 Months  12 Months or More  Total  Less Than 12 Months  12 Months or More  Total 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized Fair Unrealized Fair Unrealized 
 value losses value losses value losses  value  losses  value  losses  value  losses 
 (in thousands)  (dollars in thousands) 
Securities available for sale:                                                
U.S. government agencies – GSEs $2,748  $(13) $1,651  $(12) $4,399  $(25) $1,224  $(6) $4,086  $(45) $5,310  $(51)
Mortgage-backed securities- GSEs  8,778   (101)  -   -   8,778   (101)
Mortgage-backed securities-GSEs  200   -   16,932   (229)  17,132   (229)
Municipal bonds  110   (1)  -   -   110   (1)  1,007   (2)  1,740   (22)  2,747   (24)
Total temporarily impaired securities $11,636  $(115) $1,651  $(12) $13,287  $(127) $2,431  $(8) $22,758  $(296) $25,189  $(304)

 

At December 31, 2016,2018, the Company had twotwenty-four AFS mortgage-backed GSEs, four municipals and six U.S Government agencies – GSEs with an unrealized loss for twelve or more consecutive months totaling $296,000. The Company had six AFS securities with a loss for twelve months or less. Three U.S. government agency GSEs, with unrealized losses for more than twelve months totaling $12,000. Two U.S. government agency GSEs,two municipals and one municipal and eight mortgage-backed GSEsGSE had unrealized losses for less than twelve months totaling $115,000$8,000 at December 31, 2016.2018. 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 anyThere were no sales of investment securities soldavailable for sale during 2016.2018.


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

22

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 September 30, 20172019 and December 31, 2016:2018:

 

 September 30, December 31,  September 30, December 31, 
 2017 2016  2019  2018 
   Percent    Percent    Percent   Percent 
 Amount of total Amount of total  Amount  of total  Amount  of total 
 (dollars in thousands) 
Total Loans:                
                 (dollars in thousands) 
Real estate loans:                                
1-to-4 family residential $106,229   13.91% $97,978   14.47% $153,862   15.16% $159,597   16.19%
Commercial real estate  301,555   39.50%  281,723   41.60%  452,644   44.60%  457,611   46.41%
Multi-family residential  72,238   9.46%  56,119   8.29%  62,080   6.12%  63,459   6.44%
Construction  147,557   19.33%  100,911   14.90%  212,677   20.95%  170,404   17.28%
Home equity lines of credit (“HELOC”)  43,016   5.63%  41,158   6.08%  46,221   4.55%  49,713   5.04%
                                
Total real estate loans  670,595   87.83%  577,889   85.34%  927,484   91.38%  900,784   91.36%
                                
Other loans:                                
Commercial and industrial  84,563   11.08%  90,678   13.39%  79,686   7.85%  74,181   7.52%
Loans to individuals  9,518   1.25%  9,756   1.44%  9,539   0.94%  12,597   1.28%
Overdrafts  68   0.01%  71   0.01%  180   0.02%  217   0.02%
Total other loans  94,149   12.34%  100,505   14.84%  89,405   8.81%  86,995   8.82%
                                
Gross loans  764,744      678,394       1,016,889       987,779     
Less deferred loan origination fees, net  (1,312)  (0.17)%  (1,199)  (0.18)%  (1,961)  (0.19)%  (1,739)  (0.18)%
Total loans  763,432   100.00%  677,195   100.00%  1,014,928   100.00%  986,040   100.00%
                                
Allowance for loan losses  (8,647)      (8,411)      (8,056)      (8,669)    
                                
Total loans, net $754,785      $668,784      $1,006,872      $977,371     

For Purchased Credit Impaired, or PCI, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of September 30, 2019 and December 31, 2018 were:

(dollars in thousands) September 30,
2019
  December 31,
2018
 
Contractually required payments $20,999  $24,823 
Nonaccretable difference  1,659   1,962 
Cash flows expected to be collected  19,340   22,861 
Accretable yield  3,305   3,593 
Carrying value $16,035  $19,268 

  

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.

  

At September 30, 2017,2019, the Company had pre-approved but unused lines of credit for customers totaling $153.0$178.2 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 $109.3$112.6 million of loans was pledged to the FHLB to secure borrowings at September 30, 2017.

2019.

23


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

NOTE F - LOANS (continued)

 

A description of the various loan products provided by the Bank is presented below.

1-to-4 Family Residential LoansSELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

Residential 1-to-4 family loans are mortgage loans secured by residential real estate within the Bank’s market areas. These loans may also include loans that convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas.

Commercial Real Estate Loans

Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts. The repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower's and guarantor's global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by a liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, cash flow, market area, and risk grade.

Multi-family Residential Loans

Multi-family residential loans are typically non-farm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependent on occupancy rates, rental rates, and property management.

Construction Loans

Construction loans are non-revolving extensions of credit secured by real property of which the proceeds are used to acquire and develop land and to construct commercial or residential buildings.The primary source of repayment for these types of loans is the sale of the improved property or permanent financing in which case the property is expected to generate the cash flow necessary for repayment on a permanent loan basis. Property cash flow may be supplemented with financial support from the borrowers/guarantors.Proper underwriting of a construction loan consists of the initial process of obtaining, analyzing, and approving various aspects of information pertaining to: the analysis of the permanent financing source, creditworthiness of the borrower and guarantors, ability of the contractor to perform under the terms of the contract, and thefeasibility, marketability, and valuation of the project.

24

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

NOTE F - LOANS (continued)

Also, consideration is given to thecost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction loans aretraditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can often be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, and interest rates increasing beyond budget.

Home Equity Lines of Credit

Home equity lines of credit are consumer-purpose revolving extensions of credit which are secured by first or second liens on owner-occupied residential real estate. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established guidelines. The degree of utilization of revolving commitments within this loan segment is reviewed periodically to identify changes in the behavior of this borrowing group.

Commercial and Industrial Loans

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and the guarantors. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for repayment can be impacted by the borrower’s ability to collect amounts due from its customers.

Loans to Individuals & Overdrafts

Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are required to be clearly documented. Several factors are considered in making these decisions such as credit score, adjusted net worth, liquidity, debt ratio, disposable income, credit history, and loan-to-value of the collateral. This process, combined with the relatively smaller loan amounts spreads the risk among many individual borrowers. Overdrafts on customer accounts are classified as loans for reporting purposes.

25

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

NOTE F - LOANS (continued)

 

The following tables present an age analysis of past due loans, segregated by class of loans as of
September 30, 20172019 and December 31, 2016,2018, respectively:

 

 September 30, 2017  September 30, 2019 
 30+ Non- Total       30-59 60-89 90+ Non- Total     
 Days Accrual Past   Total  Days Days Days Accrual Past   Total 
 Past Due Loans Due Current Loans  Past Due  Past Due  Accruing  Loans  Due  Current  Loans 
 (dollars in thousands) 
           
Total Loans:                    
                     (dollars in thousands) 
Commercial and industrial $131  $82  $213  $84,350  $84,563  $80  $-  $1,362  $3,664  $5,106  $74,580  $79,686 
Construction  809   184   993   146,564   147,557   166   -   -   2,272   2,438   210,239   212,677 
Multi-family residential  238   -   238   72,000   72,238   -       -   -   -   62,080   62,080  
Commercial real estate  827   551   1,378   300,177   301,555   6   88   -   2,020   2,114   450,530   452,644 
Loans to individuals & overdrafts  13   6   19   9,567   9,586   31   -   -   -   31   9,688   9,719 
1-to-4 family residential  630   856   1,486   104,743   106,229   51   474   934   382   1,841   152,021   153,862 
HELOC  230   334   564   42,452   43,016   -   -   -   745   745   45,476   46,221 
Deferred loan (fees) cost, net  -   -   -   -   (1,312)  -   -   -   -   -   -   (1,961)
                                                
 $2,878  $2,013  $4,891  $759,853  $763,432  $334  $562  $2,296  $9,083  $12,275  $1,004,614  $1,014,928 

 

There were five loans that amounted to $663,000 that were more than 90 days past due and still accruing interest at September 30, 2017.

  December 31, 2018 
  30-59  60-89  90+  Non-  Total       
  Days  Days  Days  Accrual  Past     Total 
  Past Due  Past Due  Accruing  Loans  Due  Current  Loans 
  (dollars in thousands) 
Commercial and industrial $27  $203  $1,665  $4,170  $6,065  $68,116  $74,181 
Construction  -   -   69   587   656   169,748   170,404 
Multi-family residential  -   -   -   -   -   63,459   63,459 
Commercial real estate  103   483   -   1,074   1,660   455,951   457,611 
Loans to individuals & overdrafts  1   24   -   -   25   12,789   12,814 
1-to-4 family residential  502   505   1,433   386   2,826   156,771   159,597 
HELOC  -   43   -   1,040   1,083   48,630   49,713 
Deferred loan (fees) cost, net  -   -   -   -   -   -   (1,739)
  $633  $1,258  $3,167  $7,257  $12,315  $975,464  $986,040 

  December 31, 2016 
  30+  Non-  Total       
  Days  Accrual  Past     Total 
  Past Due  Loans  Due  Current  Loans 
  (in thousands) 
                
Total Loans                    
Commercial and industrial $1,459  $73  $1,532  $89,146  $90,678 
Construction  221   151   372   100,539   100,911 
Multi-family residential  46   346   392   55,727   56,119 
Commercial real estate  589   3,807   4,396   277,327   281,723 
Loans to individuals & overdrafts  23   46   69   9,758   9,827 
1-to-4 family residential  631   602   1,233   96,745   97,978 
HELOC  24   780   804   40,354   41,158 
Deferred loan (fees) cost, net  -   -   -   -   (1,199)
  $2,993  $5,805  $8,798  $669,596  $677,195 

 

There were three loans in the aggregate amount of $529,000 greater than 90 days past due and still accruing interest at December 31, 2016.

26

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

NOTE F - LOANS (continued)SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

Impaired Loans

 

The following tables present information on loans that were considered to be impaired as of
September 30, 20172019 and December 31, 2016:2018:

 

     Three months ended  Nine months ended 
  As of September  30, 2017  September 30, 2017  September 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 $1,043  $1,053  $-  $1,048  $12  $1,114  $51 
Construction  253   337   -   209   9   242   15 
Commercial real  estate  3,226   4,663   -   3,564   33   3,909   147 
Loans to individuals  & overdrafts  -   -   -   -   -   -   - 
Multi-family residential  -   -   -   24   -   173   - 
1-to-4 family residential  1,159   1,378   -   1,191   16   1,080   49 
HELOC  746   934   -   697   10   893   32 
Subtotal:  6,427   8,365   -   6,733   80   7,411   294 
With an allowance recorded:                            
Commercial and  industrial  -   -   -   -   -   1   - 
Construction  -   -   -   -   -   -   - 
Commercial real estate  766   822   6   698   18   1,631   38 
 Loans to individuals  & overdrafts  -   -   -   -   -      - 
Multi-family residential  -   -   -   -   -   -   - 
1-to-4 family residential  283   282   14   291   2   289   12 
HELOC  33   35   -   33   -   34   - 
Subtotal:  1,082   1,139   20   1,022   20   1,955   50 
Totals:                            
Commercial  5,288   6,875   6   5,543   72   7,070   251 
Consumer  -   -   -   -   -   -   - 
Residential  2,221   2,629   14   2,212   28   2,296   93 
Grand Total: $7,509  $9,504  $20  $7,755  $100  $9,366  $344 

           Three months ended  Nine months ended 
  As of September 30, 2019  September 30, 2019  September 30, 2019 
     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 $3,142  $4,530  $-  $4,010  $32  $4,397  $100 
Construction  2,531   2,635   -   2,413   12   1,546   20 
Commercial real estate  6,366   7,601   -   7,167   70   6,022   218 
Loans to individuals & overdrafts  85   89   -   84   6   93   6 
Multi-family residential  202   202   -   205   3   209   10 
1-to-4 family residential  658   1,843   -   1,205   21   1,202   61 
HELOC  845   1,044   -   861   11   944   36 
Subtotal:  13,829   17,944   -   15,945   155   14,413   451 
With an allowance recorded:                            
Commercial and  industrial  731   1,056   230   882   1   572   41 
Construction  -   -   -   -   -   13   - 
Commercial real estate  -   -   -   -   -   -   - 
Loans to individuals & overdrafts  -   -   -   -   -   -   - 
Multi-family residential  -   -   -   -   -   -   - 
1-to-4 family residential  81   94   6   546   14   563   7 
HELOC  160   222   48   162   4   212   10 
Subtotal:  972   1,372   284   1,590   19   1,360   58 
Totals:                            
Commercial  12,972   16,024   230   14,677   118   12,759   389 
Consumer  85   89   -   84   6   93   6 
Residential  1,744   3,203   54   2,774   50   2,921   114 
Grand Total: $14,801  $19,316  $284  $17,535  $174  $15,773  $509 

 

Impaired loans at September 30, 20172019 were approximately $7.5$14.8 million and were composed of $2.0$9.1 million in nonaccrual loans and $5.5$5.7 million in loans that were still accruing interest. Certain PCI loans are redirected and are not included in the table above. Recorded investment represents the current principal balance of the loan. Approximately $1.0 million$972,000 in impaired loans had specific allowances provided for them while the remaining $6.5$13.8 million had no specific allowances recorded at September 30, 2017.2019. Of the $6.5$13.8 million with no allowance recorded, $1.2 million of those loans have had partial charge-offs recorded.through September 30, 2019 amounted to $844,000.

 

27


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

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

NOTE F - LOANS (continued)

 

Impaired Loans (continued)

       Three months ended Nine months ended 
 As of December 31, 2016 Three months ended
September 30, 2016
 Nine months ended
September 30, 2016
  As of December 31, 2018 September 30, 2018 September 30, 2018 
    Contractual       Interest Income     Interest Income    Contractual     Interest Income   Interest Income 
    Unpaid     Average Recognized on Average Recognized on    Unpaid   Average Recognized on Average Recognized on 
 Recorded Principal Related Recorded Impaired Recorded Impaired  Recorded Principal Related Recorded Impaired Recorded Impaired 
 Investment Balance Allowance Investment Loans Investment Loans  Investment Balance Allowance Investment Loans Investment Loans 
 (In thousands)  (In thousands) 
With no related allowance recorded:                                           
Commercial and industrial $46  $46  $-  $307  $4  $175  $12  $4,210  $4,495  $-  $3,789  $-  $2,178  $108 
Construction  231   318   -   505   1   557   7   561   647   -   481   8   486   10 
Commercial real estate  4,364   5,983   -   3,685   34   4,313   107   4,744   6,903   -   5,361   84   4,789   238 
Loans to individuals & overdrafts  1,139   1,144   -   -   -   -   -   215   215   -   66   1   66   1 
Multi-family residential  346   365   -   363   7   394   14   101   109   -   223   5   227   11 
1-to-4 family residential  1,000   1,278   -   1,129   15   1,534   67   1,040   1,204   -   782   10   829   35 
HELOC  1,041   1,378   -   620   10   658   28   572   732   -   896   9   803   34 
Subtotal:  8,167   10,512   -   6,609   71   7,631   235   11,443   14,305   -   11,598   117   9,378   437 
With an allowance recorded:                                                        
Commercial and industrial  -   -   -   35   -   9   -   127   325   51   386   19   387   20 
Construction  -   -   -   -   -   -   -   27   27   14   26   -   -   - 
Commercial real estate  2,496   2,905   80   2,765   8   1,848   27   -   -   -   -   -   -   - 
Loans to individuals & overdrafts  1   1   1   -   -   2   -   -   -   -   2   -   -        - 
Multi-family residential  -   -   -   -   -   -   -   -   -   -   -   -   -   - 
1-to-4 family residential  296   296   17   280   3   287   11   137   555   22   145   -   172   6 
HELOC  34   35   19   33   -   16   -   -   -   -   142   3   -   - 
Subtotal:  2,827   3,237   117   3,113   11   2,162   38   291   907   87   701   22   559   26 
Totals:                                                        
Commercial  7,483   9,617   80   7,660   54   7,296   167   10,007   12,612   65   10,266   116   8,067   387 
Consumer  1,140   1,145   1   -   -   2   -   101   109   -   68   1   66   1 
Residential  2,371   2,987   36   2,062   28   2,495   106   1,626   2,491   22   1,965   22   1,804   75 
Grand Total: $10,994  $13,749  $117  $9,722  $82  $9,793  $273  $11,734  $15,212  $87  $12,299  $139  $9,937  $463 

 

Impaired loans at December 31, 20162018 were approximately $11.0$11.7 million and consistedwere comprised of $5.8$7.3 million in non-accrual loans and $5.2$4.4 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $2.8 million$291,000 of the $11.0$11.7 million in impaired loans at December 31, 20162018 had specific allowances aggregating $117,000$87,000 while the remaining $8.2$11.4 million had no specific allowances recorded. Of the $8.2$11.4 million with no allowance recorded, partial charge-offs to datethrough December 31, 2018 amounted to $2.3$3.5 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.

 

28


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

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

 

NOTE F - 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 nine months ended September 30, 20172019 and 2016:2018:

  

 Three months ended September 30, 2017 Nine months ended September 30, 2017  Three months ended September 30, 2019  Nine months ended September 30, 2019 
    Pre- Post-     Pre- Post-     Pre- Post-     Pre- Post- 
    Modification Modification     Modification Modification     Modification Modification     Modification Modification 
    Outstanding Outstanding     Outstanding Outstanding     Outstanding Outstanding     Outstanding Outstanding 
 Number Recorded Recorded Number Recorded Recorded  Number Recorded Recorded Number Recorded Recorded 
 of loans Investment Investment of loans Investment Investment  of loans  Investment  Investment  of loans  Investment  Investment 
 (Dollars in thousands)   (Dollars in thousands) 
Extended payment terms:                                                
1-to-4 family residential  -  $-  $-   1  $14  $14   1  $174  $173   3  $233  $211 
HELOCs  1   126   126   1   126   126 
Commercial real estate  -   -   -   1   752   702 
Construction  1   259   259   1   259   259 
Commercial & industrial  -   -   -   1   41   41   1   103   71   4   931   899 
                                                
Total  1  $126  $126   3  $181  $181   3  $536  $503   9  $2,175  $2,071 

 

  Three months ended September 30, 2016  Nine months ended September 30, 2016 
     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  -  $-  $-   2  $100  $48 
Commercial & industrial  -   -   -   3   296   188 
Construction  1   139   68   1   139   68 
Loans to individuals  -   -   -   1   4   1 
                         
Total  1  $139  $68   7  $539  $305 

  Three months ended September 30, 2018  Nine months ended September 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  $17  $16   2  $426  $413 
Commercial real estate  1   392   350   3   1,283   1,123 
Commercial & industrial  1   74   74   7   1,653   1,625 
                         
Total  3  $483  $440   12  $3,362  $3,161 

  

Loans may be considered troubled debt restructurings for reasons other thanincluding, but not limited to, below market interest rates, extended payment terms or forgiveness of principal.

 

29

25

 

 

SELECT BANCORP, INC.

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

NOTE F - 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 monthtwelve-month periods ended September 30, 20172019 and 2016:2018:

 

  Twelve months ended  Twelve months ended 
  September 30, 2017  September 30, 2016 
  Number  Recorded  Number  Recorded 
  of loans  investment  of loans  investment 
  (Dollars in thousands) 
Extended payment terms:                
Commercial real estate  -  $-   3  $188 
Loans to individuals & overdrafts  -   -   1   1 
Construction  -   -   1   68 
Commercial & Industrial  2   78   -   - 
Multi-family residential  -   -   1   364 
1-to-4 family residential  1   14   1   48 
Total  3  $92   7  $669 

  Twelve months ended  Twelve months ended 
  September 30, 2019  September 30, 2018 
  Number  Recorded  Number  Recorded 
  of loans  investment  of loans  investment 
   (Dollars in thousands)  
Extended payment terms:                
Commercial & industrial  -  $-   5  $1,512 
Commercial real estate  -   -   2   724 
1-to-4 family residential  1   16   2   461 
                 
Total  1  $16   9  $2,697 

At September 30, 2017,2019, the Bank had thirty-oneforty-one loans with an aggregate balance of $4.7$8.2 million that were considered to be troubled debt restructurings. Of those TDRs, nineteentwenty-eight loans with a balance totaling $4.1$6.5 million were still accruing as of September 30, 2017.2019. The remaining TDRs with balances totaling $539,000$1.7 million as of September 30, 20172019 were in non-accrual status.

 

At September 30, 2016,2018, the Bank had thirty-threeforty-one loans with an aggregate balance of $4.1$7.5 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-twotwenty-three loans with a balance totaling $2.7$4.5 million were still accruing as of September 30, 2016.2018. The remaining TDRs with balances totaling $1.4$3.0 million as of September 30, 20162018 were in non-accrual status.


Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. All non-consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of these nine different risk grades is as follows:

·Risk Grade 1 (Superior) - Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

·Risk Grade 2 (Very Good) - This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

30

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

·Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

oConformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

oGeneral conformity to the Bank's policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.  

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.  Loans assigned this grade may demonstrate some or all of the following characteristics:

oAdditional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank.  Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.

oUnproven, insufficient or marginal primary sources of repayment that appears sufficient to service the debt at this time.  Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.

oMarginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:

oLoans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.

oExtending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

31

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

oLoans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

·Risk Grade 7 (Substandard) -A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action.

·Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

·Risk Grade 9 (Loss) -Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:

·Risk Grades 1 – 5 (Pass) – The loans in this category range from loans secured by cash with no risk of principal deterioration (Risk Grade 1) to loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss (Risk Grade 5).

·Risk Grade 6 (Watch List or Special Mention) -Watch List or Special Mention loans include the following characteristics:

oLoans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.

oExtending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

oLoans where adverse economic conditions that develop subsequent to the loan origination that don't jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

·Risk Grade 7 (Substandard) -A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

32

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

·Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

·Risk Grade 9 (Loss) -Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.

33

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

NOTE F - LOANS (continued)

 

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of September 30, 20172019 and December 31, 2016,2018, respectively:

  

Total loans:

 

September 30, 2017
Commercial            
Credit            
Exposure By Commercial     Commercial    
Internally and     real  Multi-family 
Assigned Grade industrial  Construction  estate  residential 
(In thousands)
             
Superior $570  $-  $-  $- 
Very good  1,132   145   431   - 
Good  9,753   11,004   39,394   10,831 
Acceptable  30,727   22,648   164,391   42,710 
Acceptable with care  40,314   112,706   89,080   18,460 
Special mention  1,780   736   4,717   - 
Substandard  287   318   3,542   237 
Doubtful  -   -   -   - 
Loss  -   -   -   - 
  $84,563  $147,557  $301,555  $72,238 

September 30, 2019 
Commercial            
Credit            
Exposure By Commercial     Commercial    
Internally and     real  Multi-family 
Assigned Grade industrial  Construction  estate  residential 
   (In thousands)  
Superior $1,602  $-  $232  $- 
Very good  670   153   1,121   - 
Good  4,122   8,849   60,135   4,884 
Acceptable  22,853   19,978   246,804   38,784 
Acceptable with care  44,004   180,985   137,263   18,412 
Special mention  1,499   441   1,885   - 
Substandard  4,936   2,271   5,204   - 
Doubtful  -   -   -   - 
Loss  -   -   -   - 
  $79,686  $212,677  $452,644  $62,080 

 

Consumer Credit      
Exposure By      
Internally 1-to-4 family    
Assigned Grade residential  HELOC 
       
Pass $100,543  $41,356 
Special mention  2,932   581 
Substandard  2,754   1,079 
  $106,229  $43,016 

Consumer Credit            
Exposure By            
Internally 1-to-4 family          
Assigned Grade residential  HELOC       
Pass $149,883  $44,990         
Special mention  1,550   76         
Substandard  2,429   1,155         
  $153,862  $46,221         

 

Consumer Credit   
Exposure Based Loans to 
On Payment individuals & 
Activity overdrafts 
    
Pass $9,576 
Non–pass  10 
  $9,586 

Consumer Credit            
Exposure Based  Loans to             
On Payment  individuals &             
Activity  overdrafts          ��  
Pass $9,593             
Special mention  10             
Substandard  116             
  $9,719             

34

27

 

 

SELECT BANCORP, INC.

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

Total Loans:

December 31, 2018 
Commercial            
Credit            
Exposure By Commercial     Commercial    
Internally and     real  Multi-family 
Assigned Grade industrial  Construction  estate  residential 
   (dollars in thousands)  
Superior $1,662  $-  $21  $- 
Very good  2,266   246   1,120   - 
Good  5,773   12,106   47,959   5,116 
Acceptable  22,332   30,897   263,017   37,832 
Acceptable with care  34,626   125,788   139,484   20,296 
Special mention  879   711   1,789   - 
Substandard  6,643   656   4,221   215 
Doubtful  -   -   -   - 
Loss  -   -   -   - 
  $74,181  $170,404  $457,611  $63,459 

Consumer Credit            
Exposure By            
Internally 1-to-4 family          
Assigned Grade residential  HELOC       
Pass $155,117  $48,143         
Special mention  900   88         
Substandard  3,580   1,482         
  $159,597  $49,713         

Consumer Credit            
Exposure Based Loans to          
On Payment individuals &          
Activity overdrafts          
                 
Pass $10,891             
Special mention  1,923             
  $12,814             


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

NOTE F - LOANS (continued)

Total Loans:            
December 31, 2016
Commercial            
Credit            
Exposure By Commercial    Commercial     
Internally and    real    Multi-family  
Assigned Grade industrial  Construction  estate  residential 
(dollars in thousands)
             
Superior $435  $-  $-  $- 
Very good  326   245   460   - 
Good  13,632   4,506   36,501   12,139 
Acceptable  35,720   12,922   152,608   29,873 
Acceptable with care  37,351   82,771   81,231   13,467 
Special mention  2,905   173   4,868   - 
Substandard  309   294   6,055   640 
Doubtful  -   -   -   - 
Loss  -   -   -   - 
  $90,678  $100,911  $281,723  $56,119 

Consumer Credit      
Exposure By      
Internally 1-to-4 family    
Assigned Grade residential  HELOC 
       
Pass $92,115  $39,554 
Special mention  3,015   439 
Substandard  2,848   1,165 
  $97,978  $41,158 

Consumer Credit   
Exposure Based Loans to 
On Payment individuals & 
Activity overdrafts 
    
Pass $9,820 
Non-pass  7 
  $9,827 

35

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

NOTE F - LOANS (continued)

 

Determining the fair value of Purchased Credit Impaired (PCI)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 company.companies.

 

The following table documents changes to the amount of the accretable yield on PCI loans for the three and nine months ended September 30, 20172019 and 2016 (dollars in thousands):2018:

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
   (dollars in thousands)  
Accretable yield, beginning of period $3,481  $3,102  $3,593  $3,307 
Accretion  (277)  (540)  (855)  (1,242)
Reclassification from (to) nonaccretable difference  45   15   293   78 
Other changes, net  56   35   274   469 
                 
Accretable yield, end of period $3,305  $2,612  $3,305  $2,612 


 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands) 
             
Accretable yield, beginning of period $2,280  $2,568  $2,626  $2,822 
Accretion  (262)  (252)  (782)  (787)
Reclassification from (to) nonaccretable difference  (1)  248   78   250 
Other changes, net  169   188   264   467 
                 
Accretable yield, end of period $2,186  $2,752  $2,186  $2,752 

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.

Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves.

36

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

The Company’s allowance for loan losses model calculates historical loss rates 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 the twelve quarter look back period, loss factors are calculated for each risk-graded pool. The model incorporates various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors utilized by the Company in the model for all loan classes are as follows:

Internal Factors

·Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio.
·Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines.
·Compliance exceptions – Measures the risk derived from granting terms outside of regulatory guidelines.
·Document exceptions – Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections.
·Financial information monitoring – Measures the risk associated with not having current borrower financial information.
·Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status.
·Delinquency – Reflects the increased risk deriving from higher delinquency rates.
·Personnel turnover – Reflects staff competence in various types of lending.
·Portfolio growth – Measures the impact of growth and potential risk derived from new loan production.

External Factors

·GDP growth rate – Impact of general economic factors that affect the portfolio.
·North Carolina unemployment rate – Impact of local economic factors that affect the portfolio.
·Peer group delinquency rate – Measures risk associated with the credit requirements of competitors.
·Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate.

Each pool is assigned an adjustment to the potential loss percentage by assessing its characteristics against each of the factors listed above.

Reserves are generally divided into three allocation segments:

1.Individual reserves. These are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to be most likely impaired.  All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off.

37

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

NOTE F – LOANS (continued)

Allowance for Loan Losses (continued)

2.Formula reserves. Formula reserves are held against loans evaluated collectively. Loans are grouped by type or by risk grade, or some combination of the two. Loss estimates are based on historical loss rates for each respective loan group. Formula reserves represent the Company’s best estimate of losses that may be inherent, or embedded, within the group of loans, even if it is not apparent at this time which loans within any group or pool represent those embedded losses.

3.Qualitative and external reserves. If individual reserves represent estimated losses tied to specific loans, and formula reserves represent estimated losses tied to a pool of loans but not yet to any specific loan, then these reserves represent an estimate of likely incurred losses, but are not yet tied to any loan or group of loans.

All information related to the calculation of the three segments, including data analysis, assumptions, and calculations are documented. Assigning specific individual reserve amounts, formula reserve factors, or unallocated amounts based on unsupported assumptions or conclusions is not permitted.

38

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

NOTE F - 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 nine month periods ended September 30, 2017,2019, respectively:

 

  Three months ended September 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 $895  $1,292  $3,913  $923  $563  $142  $732  $8,460 
Provision for loan losses  301   366   (840)  50   89   219   25   210 
Loans charged-off  -   -   -   -   (60)  (45)  -   (105)
Recoveries  18   10   4   18   1   11   -   62 
Balance, end of period $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 
                                 
PCI Loans                                
Balance, beginning of period $-  $-  $12  $16  $-  $-  $-  $28 
Provision for loan losses  -   -   (6)  (2)  -   -   -   (8)
Loans charged-off  -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $-  $-  $6  $14  $-  $-  $-  $20 
                                 
Total Loans                                
Balance, beginning of period $895  $1,292  $3,925  $939  $563  $142  $732  $8,488 
Provision for loan losses  301   366   (846)  48   89   219   25   202 
Loans charged-off  -   -   -   -   (60)  (45)  -   (105)
Recoveries  18   10   4   18   1   11   -   62 
Balance, end of period $1,214  $1,668  $3,083  $1,005  $593  $327  $757  $8,647 
                                 
Ending Balance: individually evaluated for impairment $-  $-  $6  $14  $-  $-  $-  $20 
Ending Balance: collectively evaluated for impairment $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 
                                 
Loans:                                
Ending Balance: collectively evaluated for impairment $83,520  $147,304  $297,562  $104,788  $42,237  $9,586  $72,238  $757,235 
Ending Balance: individually evaluated for impairment $1,043  $253  $3,993  $1,441  $779  $-  $-  $7,509 
Ending Balance $84,563  $147,557  $301,555  $106,229  $43,016  $9,586  $72,238  $764,744 

  Three months ended September 30, 2019 
  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 $814  $1,487  $2,818  $1,543  $432  $309  $383  $7,786 
Provision for (recovery of) loan losses  123   212   (44)  (111)  18   9   11   218 
Loans charged-off  (48)  -   -   -   (50)  (155)  -   (253)
Recoveries  2   -   1   8   21   5   -   37 
Balance, end of period $891  $1,699  $2,775  $1,440  $421  $168  $394  $7,788 
                                 
PCI Loans                                
Balance, beginning of period $298  $6  $142  $62  $1  $-  $8  $517 
Provision for (recovery of) loan losses  10   -   -   (10)  -   13   -   13 
Loans charged-off  (249)  -   -   -   -   (13)  -   (262)
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $59  $6  $142  $52  $1  $-  $8  $268 
                                 
Total Loans                                
Balance, beginning of period $1,112  $1,493  $2,960  $1,605  $433  $309  $391  $8,303 
Provision for (recovery of) loan losses  133   212   (44)  (121)  18   22   11   231 
Loans charged-off  (297)  -   -   -   (50)  (168)  -   (515)
Recoveries  2   -   1   8   21   5   -   37 
Balance, end of period $950  $1,705  $2,917  $1,492  $422  $168  $402  $8,056 
                                 
Ending Balance: individually evaluated for impairment $230  $-  $-  $6  $48  $-  $-  $284 
Ending Balance: collectively evaluated for impairment $720  $1,705  $2,917  $1,486  $374  $168  $402  $7,772 
                                 
Loans:                                
Ending Balance: collectively evaluated for impairment non PCI loans 74,658  $209,464  $440,244  $145,645  $45,170  $9,634  $60,970  $985,785 
Ending Balance: collectively evaluated for impairment PCI loans $1,154  $682  $6,033  $7,479  $47  $-  $908  $16,303 
Ending Balance: individually evaluated for impairment $3,874  $2,531  $6,367  $738  $1,004  $85  $202  $14,801 
Ending Balance $79,686  $212,677  $452,644  $153,862  $46,221  $9,719  $62,080  $1,016,889 

 

39

30

 

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

NOTE F - LOANS (continued)

 

  Nine months ended September 30, 2019 
  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 $762  $1,385  $3,024  $1,663  $555  $206  $471  $8,066 
Provision for (recovery of) loan losses  422   296   (289)  (248)  (18)  123   (77)  209 
Loans charged-off  (305)  -   (10)  -   (150)  (179)  -   (644)
Recoveries  12   18   50   25   34   18   -   157 
Balance, end of period $891  $1,699  $2,775  $1,440  $421  $168  $394  $7,788 
                                 
PCI Loans                                
Balance, beginning of period $214  $-  $385  $4  $-  $-  $-  $603 
Provision for (recovery of) loan losses  94   6   (243)  48   1   13   8   (73)
Loans charged-off  (249)  -   -   -   -   (13)  -   (262)
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $59  $6  $142  $52  $1  $-  $8  $268 
                                 
Total Loans                                
Balance, beginning of period $976  $1,385  $3,409  $1,667  $555  $206  $471  $8,669 
Provision for (recovery of) loan losses  516   302   (532)  (200)  (17)  136   (69)  136 
Loans charged-off  (554)  -   (10)  -   (150)  (192)  -   (906)
Recoveries  12   18   50   25   34   18   -   157 
Balance, end of period $950  $1,705  $2,917  $1,492  $422  $168  $402  $8,056 

Allowance for Loan Losses (Continued)

 

  Nine months ended September 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  (165)  348   241   108   87   80   127   826 
Loans charged-off  (37)  -   (623)  -   (129)  (95)  -   (884)
Recoveries  205   19   11   37   24   25   2   323 
Balance, end of period $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 
                                 
PCI Loans                                
Balance, beginning of period $37  $-  $-  $-  $12  $-  $-  $49 
Provision for loan losses  (37)  -   300   14   (12)  -   -   265 
Loans charged-off  -   -   (294)  -   -   -   -   (294)
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $-  $-  $6  $14  $-  $-  $-  $20 
                                 
Total Loans                                
Balance, beginning of period $1,248  $1,301  $3,448  $846  $623  $317  $628  $8,411 
Provision for loan losses  (202)  348   541   122   75   80   127   1,091 
Loans charged-off  (37)  -   (917)  -   (129)  (95)  -   (1,178)
Recoveries  205   19   11   37   24   25   2   323 
Balance, end of period $1,214  $1,668  $3,083  $1,005  $593  $327  $757  $8,647 

The Company periodically reviews and updates its qualitative factors for changes in current conditions. During the three months ended September 30, 2019, the Company adjusted several factors, including reducing the factors relating to exceptions, accuracy, and delinquency for certain loan types resulting in a reduction of $270,000 of the allowance for loan losses.

40

 

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

NOTE F - 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 nine month periods ended September 30, 2016,2018, respectively:

 

 Three months ended September 30, 2016  Three months ended September 30, 2018 
 Commercial       1 to 4     Loans to Multi-     Commercial       1 to 4     Loans to Multi-    
 and     Commercial family     individuals & family     and     Commercial family     individuals & family    
Allowance for loan losses industrial  Construction  real estate  residential  HELOC  overdrafts  residential  Total  industrial Construction real estate residential HELOC overdrafts residential Total 
 (Dollars in thousands)  (Dollars in thousands) 
Loans – excluding PCI                                                                
Balance, beginning of period $1,086  $1,511  $3,113  $772  $493  $169  $523  $7,667  $781  $1,768  $3,926  $1,421  $618  $320  $588  $9,422 
Provision for loan losses  113   (13)  102   7   60   78   (31)  316 
Provision for (recovery of) loan losses  (178)  (295)  163   (36)  (105)  -   (41)  (492)
Loans charged-off  (136)  -   (4)  -   (25)  (13)  -   (178)  -   -   (2)  -   (20)  (79)  -   (101)
Recoveries  8   6   2   9   9   4   -   38   26   -   6   7   14   68   -   121 
Balance, end of period $1,071  $1,504  $3,213  $788  $537  $238  $492  $7,843  $629  $1,473  $4,093  $1,392  $507  $309  $547  $8,950 
                                                                
PCI Loans                                                                
Balance, beginning of period $16  $-  $-  $-  $9  $-  $-  $25  $54  $-  $52  $-  $-  $-  $-  $106 
Provision for loan losses  21   -   -   -   -   -   -   21 
Provision for (recovery of) loan losses  61  -   (52)  24   -   -   -   33 
Loans charged-off  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Balance, end of period $37  $-  $-  $-  $9  $-  $-  $46  $115  $-  $-  $24  $-  $-  $-  $139 
                                                                
Total Loans                                                                
Balance, beginning of period $1,102  $1,511  $3,113  $772  $502  $169  $523  $7,692  $835  $1,768  $3,978  $1,421  $618  $320  $588  $9,528 
Provision for loan losses  134   (13)  102   7   60   78   (31)  337 
Provision for (recovery of) loan losses  (117)  (295)  111   (12)  (105)  -   (41)  (459)
Loans charged-off  (136)  -   (4)  -   (25)  (13)  -   (178)  -   -   (2)  -   (20)  (79)  -   (101)
Recoveries  8   6   2   9   9   4   -   38   26   -   6   7   14   68   -   121 
Balance, end of period $1,108  $1,504  $3,213  $788  $546  $238  $492  $7,889  $744  $1,473  $4,093  $1,416  $507  $309  $547  $9,089 
                                                                
Ending Balance: individually evaluated for impairment $4  $-  $85  $15  $-  $-  $-  $104  $115  $-  $-  $24  $-  $-  $-  $139 
Ending Balance: collectively evaluated for impairment $1,104  $1,505  $3,128  $773  $545  $238  $492  $7,785  $629  $1,473  $4,093  $1,392  $507  $309  $547  $8,950 
                                
Loans:                                                                
Ending Balance: collectively evaluated for impairment $82,352  $115,788  $255,732  $92,534  $40,727  $9,073  $47,526  $643,732 
Ending Balance: collectively evaluated for impairment non PCI loans $76,355  $161,323  $447,676  $155,648  $49,409  $12,124  $64,062  $966,597 
Ending Balance: collectively evaluated for impairment PCI loans $621  $935  $7,529  $6,790  $50  $-  $1,012  $16,937 
Ending Balance: individually evaluated for impairment $248  $499  $6,068  $1,291  $650  $-  $360  $9,116  $3,362  $615  $5,151  $807  $634  $132�� $220  $10,921 
Ending Balance $82,600  $116,287  $261,800  $93,825  $41,377  $9,073  $47,886  $652,848  $80,338  $162,873  $460,356  $163,245  $50,093  $12,256  $65,294  $994,455 

 

41


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

  Nine months ended September 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  (151)  (488)  775   309   4   26   (244)  231 
Loans charged-off  (9)  -   (2)  -   (68)  (107)  -   (186)
Recoveries  47   6   16   25   22   85   -   201 
Balance, end of period $629  $1,473  $4,093  $1,392  $507  $309  $547  $8,950 
                                 
PCI Loans                                
Balance, beginning of period $65  $-  $66  $-  $-  $-  $-  $131 
Provision for loan losses  50   -   (66)  24   -   -   -   8 
Loans charged-off  -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $115  $-  $-  $24  $-  $-  $-  $139 
                                 
Total Loans                                
Balance, beginning of period $807  $1,955  $3,370  $1,058  $549  $305  $791  $8,835 
Provision for loan losses  (101)  (488)  709   333   4   26   (244)  239 
Loans charged-off  (9)  -   (2)  -   (68)  (107)  -   (186)
Recoveries  47   6   16   25   22   85   -   201 
Balance, end of period $744  $1,473  $4,093  $1,416  $507  $309  $547  $9,089 


NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

  Nine months ended September 30, 2016 
  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 $922  $1,386  $3,005  $605  $564  $137  $393  $7,012 
Provision for loan losses  310   103   321   (107)  (36)  119   99   809 
Loans charged-off  (177)  (2)  (189)  -   (26)  (31)  -   (425)
Recoveries  15   17   76   290   35   13   -   446 
Balance, end of period $1,070  $1,504  $3,213  $788  $537  $238  $492  $7,842 
                                 
PCI Loans                                
Balance, beginning of period $-  $-  $-  $-  $9  $-  $-  $9 
Provision for loan losses  38   -   -   -   -   -   -   38 
Loans charged-off  -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $38  $-  $-  $-  $9  $-  $-  $47 
                                 
Total Loans                                
Balance, beginning of period $922  $1,386  $3,005  $605  $573  $137  $393  $7,021 
Provision for loan losses  348   103   321   (107)  (36)  119   99   847 
Loans charged-off  (177)  (2)  (189)  -   (26)  (31)  -   (425)
Recoveries  15   17   76   290   35   13   -   446 
Balance, end of period $1,108  $1,504  $3,213  $788  $546  $238  $492  $7,889 

42

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

NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOMELOANS HELD FOR SALE

We originate fixed and variable rate residential mortgage loans on a servicing-released 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. 2014-09Revenue from Contracts with Customers (Topic 606)and all subsequent ASUs that modified Topic 606. 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.


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

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 safe 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 table presents changes in accumulated other comprehensivenoninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 20172019 and 2016.2018.

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
     (In thousands)    
             
Beginning balance $506  $1,178  $358  $490 
                 
Unrealized gain (loss) on investment securities available for sale  (11)  (259)  222   840 
Tax effect  5   97   (80)  (300)
Other comprehensive gain (loss) before reclassification  (6)  (162)  142   540 
Amounts reclassified from accumulated comprehensive income:                
Realized gains on investment securities included in net income  -   -   -   (22)
Tax effect  -   -   -   8 
Total reclassifications net of tax  -   -   -   (14)
                 
Net current period other comprehensive income (loss)  (6)  (162)  142   526 
                 
Ending balance $500  $1,016  $500  $1,016 
  Three Months  Three Months  Nine Months  Nine Months 
  Ended  Ended  Ended  Ended 
  September 30,  September 30,  September 30,  September 30 
  2019  2018  2019  2018 
  (dollars in thousands) 
Service Charges on Deposit Accounts $308  $309  $858  $830 
Other  584   349   1,618   1,119 
Noninterest Income (in-scope of Topic 606)  892   658   2,476   1,949 
Noninterest Income (out-of-scope of Topic 606)  556   408   1,497   1,508 
                 
Total Non-interest Income $1,448  $1,066  $3,973  $3,457 

The income statement line items impacted by the reclassifications of realized gains (losses) on investment securities are the gain on the sale of securities and income tax expense line items in the consolidated statement of operations.

 

NOTE H - REPURCHASE AGREEMENTSContract Balances

 

We utilize securities sold under agreementsA 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 repurchasetransfer a service to facilitatea customer for which the needs of ourentity 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 secure long-term funding needs. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates the Company to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amounttherefore, does not experience significant contract balances. As of cash received in connection with the transaction and are reflected as short-term borrowings.

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from our general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. During the third quarter of 2017 the Bank eliminated and no longer offered Repurchase Agreements to its customers. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements totaled none and $12.0 million at September 30, 20172019 and December 31, 2016, respectively.2018, the Company did not have any significant contract balances.

 


43

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

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 H - REPURCHASE AGREEMENTS (continued)

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in short-term borrowings as of December 31, 2016 is presented in the following tables.

  December 31, 2016 
  Remaining Contractual Maturity of the Agreements 
  Overnight and  Up to 30  30-90  Greater than    
(in thousands) continuous  Days  Days  90 Days  Total 
Repurchase agreements                    
U.S. government agencies-GSE’s $5,568  $-  $-  $-  $5,568 
Mortgage-backed Securities-GSEs  6,496   -   -   -   6,496 
Total borrowings $12,064  $-  $-  $-  $12,064 
Gross amount of recognized liabilities for repurchase agreements  $12,003 

NOTE I – OTHER REAL ESTATE OWNED

 

The following table explains changes in other real estate owned (“OREO”) during the nine months ended September 30, 20172019 and 2016 (dollars in thousands):2018:

 

 Nine Months Nine Months 
 Ended Ended  Nine Months Nine Months 
 September 30, September 30,  Ended Ended 
 2017 2016  September 30, September 30, 
 (Dollars in thousands)  2019  2018 
      (Dollars in thousands) 
Beginning balance January 1 $599  $1,401  $1,088  $1,258 
Sales  (787)  (1,831)  (103)  (657)
Write-downs  (214)  (164)  (12)  (100)
Transfers  2,495   1,142   469   519 
Ending balance $2,093  $548  $1,442  $1,020 

 

At September 30, 20172019 and December 31, 2016,2018, the Company had $2.1$1.4 million and $599,000,$1.1 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 $461,000 and none$233,000 at September 30, 2017 and2019. At December 31, 2016, respectively.2018, the Company had 3 loans with recorded investment in the amount of $376,000 in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure.

 

44

Note J – LEASES

 

The Company has operating leases for branches and certain equipment. The Company’s leases have remaining lease terms of 1 year to 15 years which may include options to extend the leases for up to 5 years per option period. The Company has some leases that are month to month or expire within 1 year that are not included below.

At September 30, 2019, the Company did not have any leases that had not yet commenced for which we had created a ROU asset and a lease liability. For the operating leases the Company has elected the practical expedient of not separating lease components from non-lease components and instead to account for each separate lease component and the non-lease components associated with that lease as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the lease agreements include periodic rate adjustments for inflation.


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

NOTE J – MERGERS AND ACQUISITIONS

 

Proposed MergerMost leases include one or more options to renew, with Premara Financial, Inc.renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in determining the value of the ROU asset and lease liability.

 

The Companycomponents of lease expense were as follows:

  Three Months  Nine Months 
  Ended  Ended 
  September 30,  September 30, 
  2019  2019 
  (Dollars in thousands) 
Operating lease cost $268  $787 

Supplemental cash flow information related to leases was as follows:

  Three Months  Nine Months 
  Ended  Ended 
  September 30,  September 30, 
  2019  2019 
  (Dollars in thousands) 
Cash paid for amounts included in the measurement of lease liabilities:        
         
Operating cash flows from operating leases $268  $787 
         
Right-of-use assets obtained in exchange for lease obligations:        
Operating leases  -   8,776 

The following table presents the remaining weighted average lease terms and Bank entered into an Agreement and Plan of Merger and Reorganization dateddiscount rates as of July 20, 2017, with Premara Financial, Inc. (“Premara”) and its subsidiary bank, Carolina Premier Bank, Charlotte, NC. Pursuant to the terms of the merger agreement, the Company would acquire Carolina Premier Bank through the merger of Premara with and into the Company, with the Company as the surviving corporation. Immediately following the parent company merger, Carolina Premier Bank would be merged with and into the Bank, with the Bank as the surviving banking corporation in the bank merger. The transaction is subject to various closing conditions, including the receipt of requisite shareholder approvals and required approvals of State and Federal banking regulators.September 30, 2019:

 

If the merger is completed, each share of Premara common stock issued and outstanding will be converted into the right to receive 1.0463 shares of Company common stock or $12.65 in cash, with 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) being converted to the per share cash consideration and the balance of the outstanding shares of Premara common stock being converted into Company common stock. Based on the Company’s closing price of $11.89 per share on July 20, 2017, the day before the proposed transaction was publicly announced, the estimated aggregate purchase price payable by the Company was approximately $40 million.

NOTE K – SUBSEQUENT EVENTS

Litigation related to the Proposed Merger

On October 12, 2017, a purported class action complaint captionedSharpenter v. Premara Financial, Inc., et al., Case# 3:17-cv-00607-GCM, was filed by an alleged shareholder of Premara on behalf of himself and similarly situated shareholders against Premara and Carolina Premier Bank and each of the entities’ individual directors in the U.S. District Court for the Western District of North Carolina. The complaint also names the Company and the Bank as defendants in the action. The complaint alleges, among other things, that Premara and the individually named directors (by virtue of their positions as officers and/or directors of Premara) omitted material facts related to the proposed merger from the Form S-4 Registration Statement that was filed in connection with the merger on September 27, 2017, and that as a result of such omissions, certain statements in the Registration Statement were materially false or misleading. The complaint alleges that the Company and the Bank, by virtue of their position of control over the composition of the Registration Statement, are also liable for the omissions alleged in the complaint. Plaintiff seeks to enjoin closing of the merger and have the Court direct the defendants to disseminate a Registration Statement that does not contain any alleged untrue statements of material fact and that states all material facts necessary to make such statements not false or misleading. In the event that the proposed merger is consummated, the plaintiff seeks to rescind it or set it aside or receive an award of unspecified damages. Plaintiff seeks to recover all costs of the lawsuit, including attorneys’ fees and experts’ fees.

Weighted Average Remaining Lease Term
Operating leases7.0 years
 45 
Weighted Average Discount Rate
Operating leases6.0%

 

Maturities of lease liabilities were as follows:

(In thousands)

  Operating 
  Leases 
Year Ending December 31,    
     
2019 (excluding the nine months ended September 30, 2019) $138 
2020  586 
2021  649 
2022  722 
2023  702 
Thereafter  6,154 
Lease payments  8,951 
Amounts representing interest  (274)
Present Value of Net Future Minimum Lease Payments  8,677 


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; the receipt of required shareholder and regulatory approvals for the announced merger with Premara Financial, Inc. may not be obtained or may be delayed or take longer than anticipated; and diversion of management’s time and attention to our merger-related, issues.acquisition, or divestiture activities.

 

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.Carolina and York, Pickens and Cherokee counties in South Carolina, and Virginia Beach, Virginia. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts, and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

 

The Company was formerly known as New Century Bancorp, Inc. On July 25, 2014, New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. TheIn connection with that merger the combined company is now known aschanged its legal name to 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.

We closed our branch On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”), located at 6390 Ramsey Street, Fayetteville,in Charlotte, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The propertythe cities of Rock Hill, Blacksburg and Six Mile, South Carolina. Under the terms of that housed our former Ramsey Street branch is includedacquisition, 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 assets heldcash for sale oneach outstanding share of Premara common stock, with approximately 70% of such shares being exchanged for shares of the consolidated balance sheet as of September 30, 2017.Company’s common stock and 30% being exchanged for cash.

 

46

On July 21, 2017,January 29, 2019, the Company announced that it hadBank entered into a definitive merger agreementPurchase and Assumption Agreement with Premara Financial, Inc., Charlotte, North Carolina (“Premara”)City National Bank of West Virginia pursuant to which the Company wouldBank assumed the majority of deposits and acquired the equipment and other selected assets associated with City National Bank of West Virginia’s branch located at 621 Nevan Road, Virginia Beach, Virginia. The purchase and assumption transaction closed on June 28, 2019 resulting in the assumption of $25.7 million in deposits.

On June 4, 2019, the Bank entered into a Purchase and Assumption Agreement with Pickens Savings and Loan Association, FA (“Pickens”), pursuant to which Pickens will assume the majority of deposits and acquire Premara and its subsidiary bank, Carolina Premier Bank. Please see Note Jselected assets associated with the Bank’s branch located at 115 North Main Street, Six Mile, South Carolina. The transaction is expected to close in the Company’s Notes to Consolidated Financial Statements above for additional discussion.fourth quarter of 2019 pending satisfaction of customary closing conditions.

 

Comparison of Financial Condition at

September 30, 20172019 and December 31, 20162018

 

During the first nine months of 2017,2019, total assets increased by $76.1$11.1 million to $922.7 million$1.3 billion as of September 30, 2017. The increase in assets was due primarily to loan growth funded by demand deposit accounts and time deposits.2019. Earning assets at September 30, 20172019 totaled $848.6 million$1.2 billion and consisted of $754.8 million$1.0 billion in net loans, $53.7$76.9 million in investment securities, $37.8$64.3 million in overnight investments and interest-bearing deposits in other banks and $2.3$3.8 million in non-marketable equity securities, of which $1.7$3.0 million is FHLB stock. Total deposits and shareholders’ equity at the end of the third quarter of 20172019 were $775.0$987.7 million and $109.8$212.0 million, respectively.

 

Since the end of 2016,2018, gross loans have increased by $86.2$28.9 million to $763.4 million$1.0 billion as of September 30, 2017.2019. At September 30, 2017,2019, gross loans consisted of $84.6$79.7 million in commercial and industrial loans, $301.6$452.6 million in commercial real estate loans, $72.2$62.1 million in multi-family residential loans, $9.6$9.7 million in loans to individuals, $106.2$153.9 million in 1-to41-to-4 family residential real estate loans, $43.0$46.2 million in HELOCs, and $147.6$212.7 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.3$2.0 million at September 30, 2017.2019.

 

At September 30, 2017 and December 31, 2016,2019, there were $10.7 million of federal funds sold compared to no federal funds sold, at December 31, 2018. At September 30, 2019 and December 31, 2018 there were no repurchase agreements. Interest-earning deposits in other banks were $36.8$53.6 million at September 30, 2017,2019, a $3.5$68.7 million decrease from December 31, 2016.2018 primarily due to investment purchases and loan growth. The Company’s investment securities at September 30, 20172019 were $53.7$76.9 million, a decreasean increase of $8.6$25.4 million from December 31, 2016 in order2018. These securities are used to provide funding for higher yielding loans.loans and reduce wholesale funding reliance. The investment portfolio as of September 30, 20172019 consisted of $10.6$10.4 million in government agency debt securities, $28.9$52.1 million in mortgage-backed securities, $1.6 million in corporate securities and $14.1$12.9 million in municipal securities. The net unrealized gain on these securities as of September 30, 20172019 was $785,000.$1.3 million.

 

At September 30, 2017,2019, the Company had an investment of $1.7$3.0 million in FHLB stock, which decreased by $539,000$239,000 from December 31, 20162018 due to the effect of the repayment of advances during 20172019 on the stock calculation. Also, the Company had $630,000$719,000 in other non-marketable securities at September 30, 2017,2019, which decreased by $73,000$43,000 from December 31, 2016.2018.

 

At September 30, 2017,2019, non-earning assets were $74.1$107.2 million, an increase of $2.8 million$509,000 from $71.3$106.7 million as of December 31, 2016.2018. Non-earning assets included $15.5$20.1 million in cash and due from banks, bank premises and equipment of $17.4$18.1 million, right of use asset of $8.8 million, goodwill of $6.9$24.6 million, core deposit intangible of $547,000,$1.8 million, accrued interest receivable of $2.9$3.9 million, foreclosed real estate of $2.1$1.4 million, $22.6$29.6 million in bank ownedbank-owned life insurance (“BOLI”), $846,000 of assets held for sale, and other assets of $5.3$7.7 million, which included $2.7$3.3 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. The increase in non-earning assets was due primarily to the increase in deposits.

 


Total deposits at September 30, 20172019 were $775.0$987.7 million and consisted of $173.2$243.9 million in non-interest-bearing demand deposits, $192.7$283.4 million in money market and NOW accounts, $34.2$43.4 million in savings accounts, and $374.9$417.0 million in time deposits. Total deposits increased by $95.4$7.2 million from $679.7$980.4 million as of December 31, 2016,2018, due primarily to an increase in DDAmoney market deposits which was offset by decreases in DDAs, savings and a CD marketing program.wholesale CDs. The Bank had no brokered demand deposits and $61.7$13.5 million in brokered time deposits as of September 30, 2017.2019.

47

 

As of September 30, 2017,2019, the Company had $22.4no short-term debt and $57.4 million of short-termlong-term debt, of which wasincluding $45.0 million in FHLB advances,borrowings and $12.4 million in long-term debt which is junior subordinated debentures that are classified as long-term debt.debentures.

 

Total shareholders’ equity at September 30, 20172019 was $109.8$212.0 million, an increase of $5.5$2.4 million from $104.3$209.6 million as of December 31, 2016.2018. Accumulated other comprehensive income relating to available for sale securities increased $142,000$1.1 million during the nine months ended September 30, 2017.2019. Other changes in shareholders’ equity included increases of $70,000$178,000 in stock-based compensation, earnings of $5.2$10.0 million, and $104,000$114,000 from the exercise of stock options. These increases were offset by the repurchase of $8.9 million in common stock of the Company. The Company’s historical financial performance and well-capitalized status enable us to return value to our shareholders through the repurchase plan by focusing on creating shareholder value over the long term. We believe that the Company's share repurchases continue to be an effective part of the Company’s overall capital management strategies.

 

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

 

At September 30, 2017,2019, the Company had $2.9 million$334,000 in loans that were 30 to 59 days past due and $562,000 in loans that were 60 to 89 days past due. This represented 0.38%0.33% and 0.55%, respectively, of gross loans outstanding on that date. This is a decrease from December 31, 20162018 when there were $3.0$633,000 in loans that were 30-59 days past due or 0.64% of gross loans outstanding and $1.3 million in loans that were 30-8960-89 days past due or 0.44%0.13% of gross loans outstanding. Non-accrual loans decreasedincreased from $5.8$7.3 million at December 31, 20162018 to $2.0$9.1 million at September 30, 2017.2019.

 

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreasedincreased from 1.39%1.50% at December 31, 20162018 to 0.81%1.76% at September 30, 2017.2019. The Company has experienced a decreasean increase in non-accruals from $5.8$7.3 million at December 31, 20162018 to $2.0$9.1 million as of September 30, 20172019 and an increase in accruing troubled debt restructurings from $3.6$4.4 million at December 31, 20162018 to $4.1$6.5 million as of September 30, 2017.2019. Of the $3.8 million decrease in non-accrual loans inas of September 30, 2019, seven commercial real estate loans totaled $2.0 million, five construction loans totaled $2.3 million, eight commercial loans totaled $1.5 million, six HELOC loans totaled $745,000, eight agricultural loans totaled $500,000 and ten 1-to-4 family residential real estate loans made up the first nine months of the year, the decrease is related to loans primarily in Multifamily Residential, HELOCS and Commercial Real Estate loan pool classifications.remaining balance.

 

At September 30, 2017,2019, the Company had thirty-oneforty-one loans totaling $4.7$8.2 million that were considered to be troubled debt restructurings or TDRs. NineteenTwenty-eight of these loans totaling $4.1$6.5 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.

 


The table below sets forth, as offor the datesperiods 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.

 

  As of 
  September 30,  December 31, 
  2017  2016 
  (Dollars in thousands) 
       
Non-accrual loans $2,013  $5,805 
Accruing TDRs  4,140   3,625 
Total non-performing loans  6,153   9,430 
Foreclosed real estate  2,093   599 
Total non-performing assets $8,246  $10,029 
         
Accruing loans past due 90 days or more $663  $529 
Allowance for loan losses $8,647  $8,411 
         
Non-performing loans to period end loans  0.81%  1.39%
Non-performing loans and accruing loans past due 90 days or more to period end loans  0.89%  1.47%
Allowance for loans losses to period end loans  1.13%  1.24%
Allowance for loan losses to non-performing loans  141%  89%
Allowance for loan losses to non-performing assets  105%  84%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more  97%  80%
Non-performing assets to total assets  0.89%  1.18%
Non-performing assets and accruing loans past due 90 days or more to total assets  0.97%  1.25%

48
  For Periods Ended 
  September 30,  December 31, 
  2019  2018 
  (dollars in thousands) 
Non-accrual loans $9,083  $7,257 
Accruing TDRs  6,477   4,378 
Total non-performing loans  15,560   11,635 
Foreclosed real estate  1,442   1,088 
Total non-performing assets $17,002  $12,723 
         
Accruing loans past due 90 days or more $2,296  $3,167 
Allowance for loan losses $8,056  $8,669 
         
Non-performing loans to period end loans  1.53%  1.18%
Non-performing loans and accruing loans past due 90 days or more to period end loans  1.76%  1.50%
Allowance for loans losses to period end loans  0.79%  0.88%
Allowance for loan losses to non-performing loans  52%  75%
Allowance for loan losses to non-performing assets  47%  68%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more  42%  55%
Non-performing assets to total assets  1.34%  1.01%
Non-performing assets and accruing loans past due 90 days or more to total assets  1.52%  1.26%

 

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at September 30, 20172019 and December 31, 20162018 were $8.2$17.0 million and $10.0$12.7 million, respectively. The allowance for loan losses at September 30, 20172019 represented 105%47% of non-performing assets compared to 84%68% at December 31, 2016.2018.

 

Total impaired loans at September 30, 20172019 were $7.5$15.6 million. This includes $2.0$9.1 million in loans that were classified as impaired because they were in non-accrual status and $7.0$6.5 million in loans that were determined to be impaired for other reasons. Of these loans, $1.0 million$972,000 required a specific reserve of $20,000$284,000 at September 30, 2017.2019.

 

Total impaired loans at December 31, 20162018 were $11.0$11.7 million. This includes $5.8included $7.3 million in loans that were considered to beclassified as impaired due to beingbecause they were in non-accrual status and $5.2$4.4 million in loans that were deemed to be impaired for other reasons.accruing TDRs. Of these loans, $2.8 million$291,000 required a specific reserve of $117,000$87,000 at December 31, 2016.2018.

 

The allowance for loan losses was $8.6$8.1 million at September 30, 20172019 or 1.13%0.79% of gross loans outstanding. This is a decrease from the 1.24%outstanding as compared to 0.88% reported as a percentage of gross loans at December 31, 2016.2018. This decrease resulted primarily from reductions in qualitative factors related to interest rates, document exceptions 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 principlesGAAP has resulted in a lower percentage of the allowance for loan losses to gross loans. In the last few quarters past dues, nonaccruals and impaired loans at September 30, 2017have increased and those loans have been assessed for all periods post acquisition of Legacy Select.loss and charged offs have been incurred specifically on those loans for the respective expected loss. The allowance for loan losses at September 30, 2017 and2019 represented 52% of non-performing loans, as compared to 75% at December 31, 2016 represented 141% and 89%, respectively, of non-performing loans.2018. It is management’s assessment that the allowance for loan losses as of September 30, 20172019 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.


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.

  September 30, 2019 
(dollars in thousands) 1 Year
or Less
  Over 1
to 3 Years
  Over 3 to
5 Years
  More Than
5 Years
  Total 
Time deposits $304,206  $106,056  $6,753  $-  $417,015 
Long-term debt  -   20,000   25,000   12,372   57,372 
Lease liability  573   1,334   1,389   5,655   8,951 
Total contractual obligations $304,779  $127,390  $33,142  $18,527  $483,338 

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 September30, 20172019 and December 31, 2016,2018, the Company had $23.1$33.8 million and $21.7$27.7 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At September 30, 20172019 and December 31, 2016,2018, the Company had $11.3$10.9 million and $4.8$10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 29.4%25.9% and 23.6%23.2% of total risk-based capital as of September 30, 20172019 and December 31, 2016,2018, 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.

49

 

Business Sector Concentrations

 

Loan concentrations in certain business sectors can be impacted by lower than normal retail sales, higher unemployment, higher vacancy rates, and a weakening in real estate market conditions. The Company has established an internal commercial real estate guideline of 40% of risk-based capital for any single product line.

 


At September 30, 20172019 the Company had fourtwo product type groups thatwhich exceeded this guideline; Real Estatethreshold; Office Building, which represented 46% of risk-based capital or $79.7 million and Commercial Construction, which represented 54%46% of risk-based capital or $63.8 million, Real Estate Construction – Speculative and Presold, which represented 42% of risk-based capital, or $49.5 million, 1-4 Family Rental, which represented 54% of risk-based capital, or $63.8 million, and Multifamily Residential, which represented 60% of risk-based capital, or $69.9$79.9 million. All other commercial real estate groups were at or below the 40% threshold. At December 31, 2016,2018, the Company exceededdid not exceed the 40% guideline in twoany product types. The 1-to-4 Family Residential Rental category represented 66% of risk-based capital or $74.2 millionAll commercial and the Multi-family Residential category represented 49% of risk-based capital or $54.5 million at December 31, 2016. All other commercialresidential 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 September 30, 20172019 and December 31, 2016.2018.

 

Acquisition, Development and Construction Loans

(Dollarsdollars in thousands)

 

  September 30, 2017  December 31, 2016 
     Land and Land        Land and Land    
  Construction  Development  Total  Construction  Development  Total 
                   
Total ADC loans $120,245  $27,312  $147,557  $76,037  $24,874  $100,911 
                         
Average Loan Size $226  $294      $166  $350     
                         
Percentage of total loans  15.75%  3.58%  19.33%  11.23%  3.67%  14.90%
                         
Non-accrual loans $248  $-  $248  $151  $-  $151 

  September 30, 2019  December 31, 2018 
     Land and Land        Land and Land    
  Construction  Development  Total  Construction  Development  Total 
Total ADC loans $178,499  $34,178  $212,677  $145,736  $24,668  $170,404 
                         
Average Loan Size 301  510      $267  $308     
                         
Percentage of total loans  17.59%  3.37%  20.95%  14.78%  2.50%  17.28%
                         
Non-accrual loans 2,272  $-  $2,272  $587  $-  $587 

  

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-presoldspeculative-to-presold ratios and performance of similar loans in the Company’s market area.

50

 

Geographic Concentrations

 

Certain risks exist arisingarise 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 September 30, 20172019 and December 31, 2016.2018.

 

  September 30, 2017  December 31, 2016 
  ADC Loans  Percent  HELOC  Percent  ADC Loans  Percent  HELOC  Percent 
  (Dollars in thousands) 
                         
Harnett County $6,293   4.26% $5,894   13.70% $4,505   4.46% $5,817   14.13%
Alamance County  2,016   1.37%  1,190   2.77%  1,169   1.16%  1,065   2.59%
Beaufort County  156   0.11%  1,502   3.49%  182   0.18%  1,026   2.49%
Brunswick County  8,808   5.97%  1,754   4.08%  4,506   4.46%  1,899   4.61%
Carteret County  3,027   2.05%  2,404   5.59%  585   0.58%  2,350   5.71%
Craven County  930   0.63%  442   1.03%  -   -%  -   -%
Cumberland County  22,468   15.23%  4,211   9.79%  22,610   22.41%  5,278   12.82%
Pasquotank County  1,030   0.70%  1,398   3.25%  947   0.94%  1,258   3.06%
Pitt County  15,702   10.64%  6,334   14.72%  13,697   13.57%  5,151   12.52%
Robeson County  703   0.48%  3,671   8.53%  803   0.80%  3,709   9.01%
Sampson County  26   0.02%  1,650   3.84%  71   0.07%  1,574   3.83%
Wake County  22,363   15.15%  1,367   3.18%  15,689   15.55%  1,536   3.73%
Wayne County  9,996   6.77%  4,384   10.19%  9,734   9.65%  4,281   10.40%
All other locations  54,039   36.62%  6,815   15.84%  26,413   26.17%  6,214   15.10%
                                 
Total $147,557   100.00% $43,016   100.00% $100,911   100.00% $41,158   100.00%

  September 30, 2019  December 31, 2018 
  ADC Loans  Percent  HELOC  Percent  ADC Loans  Percent  HELOC  Percent 
  (dollars in thousands) 
Harnett County $10,126   4.76% $5,126   11.09% $5,389   3.16% $5,367   10.80%
Alamance County  693   0.33%  1,214   2.63%  740   0.43%  1,350   2.72%
Beaufort County  3,287   1.54%  975   2.11%  908   0.53%  1,113   2.24%
Brunswick County  14,061   6.61%  1,670   3.61%  8,440   4.95%  1,492   3.00%
Carteret County  4,033   1.90%  2,876   6.22%  1,544   0.91%  2,676   5.38%
Cherokee County  -   -%   23   0.05%  -   -%   52   0.11%
Craven County  1,278   0.60%  337   0.73%  1,060   0.62%  319   0.64%
Cumberland County  26,236   12.34%  2,503   5.42%  21,019   12.34%  3,116   6.27%
Mecklenburg County  17,306   8.14%  2,734   5.92%  24,853   14.59%  3,635   7.31%
New Hanover County  37,300   17.54%  3,070   6.64%  23,396   13.73%  2,721   5.47%
Pasquotank County  1,533   0.72%  1,754   3.79%  1,145   0.67%  1,915   3.85%
Pickens County  -   -  96   0.21%  -   -  99   0.20%
Pitt County  16,724   7.86%  5,515   11.93%  10,574   6.21%  6,334   12.74%
Robeson County  850   0.40%  2,835   6.13%  1,076   0.63%  3,505   7.05%
Sampson County  176   0.08%  1,699   3.68%  149   0.09%  1,835   3.69%
Virginia Beach  142   0.07%  103   0.22%  -   -  -   -
Wake County  19,373   9.11%  2,192   4.74%  18,528   10.87%  1,744   3.51%
Wayne County  1,689   0.79%  3,134   6.78%  2,212   1.30%  3,457   6.95%
Wilson County  481   0.23%  96   0.21%  392   0.23%  73   0.15%
York County  1,881   0.88%  788   1.70%  124   0.07%  1,053   2.12%
All other locations  55,508   26.10%  7,481   16.19%  48,855   28.67%  7,857   15.80%
                                 
Total $212,677   100.00% $46,221   100.00% $170,404   100.00% $49,713   100.00%

 


Interest OnlyInterest-Only Payments

 

Another risk factor that exists in the total loan portfolio pertains to loans with interest onlyinterest-only payment terms. At September 30, 2017,2019, the Company had $211.3$225.8 million in loans that had terms permitting interest onlyinterest-only payments. This represented 27.7%22.2% of the total loan portfolio. At December 31, 2016,2018, the Company had $161.5$224.6 million in loans that had terms permitting interest onlyinterest-only payments. This represented 23.8%22.8% of the total loan portfolio as of such date. Notwithstandingportfolio. Recognizing the risk inherent with interest onlyinterest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest onlyinterest-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 $66.8$77.6 million, or 8.8%7.6% of total loans, at September 30, 20172019 compared to $62.9$70.6 million, or 9.3%7.2% of total loans, at December 31, 2016.2018. The Company’s ten largest customer relationships totaled $89.9$125.8 million, or 11.8%12.4% of total loans, at September 30, 20172019 compared to $80.9$106.8 million, or 11.9%10.8% of total loans, at December 31, 2016.2018. 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.

 

51

Comparison of Results of Operations for the

Three months ended September 30, 20172019 and 20162018

 

General. During the third quarter of 2017,2019, the Company had net income of $1.8$3.2 million as compared with net income of $1.7$4.3 million for the third quarter of 2016.2018. Net income per common share for the third quarter of 20172019 was $0.15,$0.17, basic and diluted, compared with net income per common share of $0.15,$0.27, basic and diluted, for the third quarter of 2016.2018. Results of operations for the third quarter of 20172019 were primarily impacted by an increase of $839,000$16,000 in net interest income, and a decreasean increase in non-interest income of $7,000$382,000 and a decreasean increase in the provision for loan losses of $135,000$690,000 versus the comparative three-month period in 2016.2018. Noninterest expenses increased $808,000$1.1 million which werewas primarily related to increased personnel expense of $373,000, merger$660,000, occupancy expenses of $224,000, information system expenses of $126,000, integration related expenses of $278,000,$128,000, foreclosure related expenses of $160,000, information system expenses$13,000, professional fees of $59,000$196,000, and other expenses of $34,000$92,000 which was partially offset by a reduction in professional feesdeposit insurance expense of $52,000,$269,000 and core deposit intangible amortization of $23,000 and a $20,000 decrease in occupancy expenses.$39,000. The Company recorded a provision offor loan losses of $202,000$231,000 for the third quarter of 20172019 compared to a provisionrecovery of $337,000losses of $459,000 in the third quarter of 2016.2018. Net interest margin of 4.19%3.94% in the third quarter of 20172019 decreased 826 basis points from the same period in 2016 resulting from the accretion of the credit mark associated with the acquired Legacy Select loan portfolio and increased deposit costs.2018.

44

 

Net Interest Income. Net interest income increased to $8.7was $11.9 million for the third quarter of 20172019, which was a $16,000 increase from $7.8 million for the comparative third quarter of 2016.2018. The Company’s total interest income was affected by the increase in interest rates and loan balances due to growth. Average total interest-earning assets were $826.6 million$1.2 billion in the third quarter of 20172019 compared with $737.2 million$1.1 billion during the same period in 2016,2018, while the yield on those assets increased 841 basis points from 4.76%5.09% to 4.84%5.50%, which was primarily due to the increase in rates on recently originated loans on a comparative quarter basis and accretion from acquired loans.

 

The Company’s average interest-bearing liabilities increaseddecreased by $80.2$1.6 million to $630.9$818.6 million for the quarter ended September 30, 20172019 from $550.7$820.2 million for the same period one year earlier, and the cost of those funds increased from 0.66%1.22% to 0.85%1.52%, or 1930 basis points. During the third quarter of 2017,2019, the Company’s net interest margin was 4.19%3.94% and net interest spread was 3.98%3.46%. In the same quarter ended one year earlier, net interest margin was 4.27%4.20% and net interest spread was 4.10%3.87%.

 

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. The loss history to be applied to its ASC 450 loan pools within the allowance for loan losses is based on the risk-graded pool to which the loss was assigned. Historical loss rates are now 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 third quarter of 2017,2019, the Company recorded a provision for loan losses of $202,000$231,000, based primarily on adjustments to qualitative loan growth and improvingfactors related to the underlying risk in loan portfolio. On a comparative quarter basis, the Company had a $459,000 recovery for the third quarter of 2018. The Company, has seen a slight deterioration of credit metrics asprimarily related to past dues, non-accruals of acquired loans, and TDRs during the third quarter of 2019, compared to the second quarter of 2019, where the Company recorded a provisionrecovery of $337,000loan losses of $207,000 based primarily on qualitative loan factors. As a result of the estimated deterioration the Company incurred charge-offs of $515,000 in the third quarter of 2016. This trend of improving credit metrics had been consistently maintained in 2017.2019.

 

Non-Interest Income. Non-interest income for the quarter ended September 30, 20172019 was $778,000, a slight decrease$1.4 million, an increase from $785,000$382,000 in the third quarter of 2016.2018. Service charges on deposit accounts decreased $12,000$1,000 to $237,000$308,000 for the quarter ended September 30, 20172019 from $249,000$309,000 for the same period in 2016.2018. Other non-deposit fees and income increased $5,000$226,000 from the third quarter of 20162018 to the third quarter of 2017 due primarily2019. Fees from presold mortgages increased non-interest income by $109,000 in the third quarter of 2019 to debit card fee transactions.$218,000 from $109,000 in the third quarter of 2018. The Company sold two investment securities in the third quarter of 2019 for a gain of $48,000. The Company did not sell any investment securities in the third quarter of 2017 or 2016.2018.

 

Non-Interest Expenses. Non-interest expenses increased by $808,000$1.1 million to $6.4$8.9 million for the quarter ended September 30, 2017,2019, from $5.6$7.8 million for the same period in 2016.2018. The following are highlights of the significant categories of non-interest expenses during the third quarter of 20172019 compared to the same period in 2016:2018:

·Personnel expenses increased $373,000$660,000 to $3.5$5.1 million, due to increased staff.staff for new branches, employment taxes and benefits costs.

52

·Foreclosed real estate-related expense increased $160,000,$13,000, primarily due to write downs on a large real estate owned property.maintenance expenses and property taxes.
·There was an increase of $59,000 of$126,000 in information system expenses incurred in the third quarter of 20172019 primarily due to complianceadditional software and cyber security needs.costs.
·Professional fees increased by $196,000 to $518,000, primarily due to expenses associated with branch purchases and divestures.

·Deposit insurance expense decreased by $52,000 to $211,000,$269,000, due to internal audit procedures being performed by staff.receiving a credit from the FDIC as a result regulatory changes in the premium calculation.
·Occupancy and equipment decreasedexpense increased by $20,000$224,000 to $555,000,$1.1 million, due to repairs and maintenance and branch restructuring.addition.
·MergerIntegration related expenses increased by $278,000 due to announced acquisition.$128,000 for branch purchase and divestures.
·Other non-interest expenses increased by $34,000,$92,000, primarily due to an increase in various administrative related non-interest expenses.

 

Provision for Income Taxes. The Company’s effective tax rate was 37.0%22.0% and 34.7%22.5% for the quarters ended September 30, 20172019 and 2016,2018, respectively. The effective tax rate for the third quarter of 2017 compared to the same quarter in 2016 was impacted by an adjustment to reduce the Company’s deferred tax asset resulting from enacted lower corporate tax rates for the State of North Carolina in 2016.

 

As of September 30, 20172019 and December 31, 2016,2018, the Company had a net deferred tax asset in the amount of $2.7$3.3 million and $3.1$3.7 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 September 30, 20172019 and December 31, 2016,2018, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.


NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, 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 
  September 30, 2019  September 30, 2018 
  (dollars in thousands)          
  Average     Average  Average     Average 
  balance  Interest  rate  balance  Interest  rate 
Interest-earning assets:                  
Loans, gross of allowance 1,005,170  $13,935   5.50% $978,928  $13,615   5.52%
Investment securities  80,503   527   2.60%  55,318   382   2.74%
Other interest-earning assets  111,593   581   2.07%  89,092   442   1.88%
Total interest-earning assets  1,197,266   15,043   4.98  1,123,338   14,419   5.09%
                        
Other assets  102,871           104,921         
                         
Total assets $1,300,137          $1,228,259         
Interest-bearing liabilities:                        
Deposits:                        
Savings, NOW and money market $327,737   433   0.52% $310,697   338   0.43%
Time deposits over $100,000  317,310   1,720   2.15%  318,822   1,282   1.60%
Other time deposits  116,191   528   1.80%  115,796   383   1.31%
Borrowings  57,372   459   3.17%  74,916   527   2.79%
                         
Total interest-bearing liabilities  818,610   3,140   1.52%  820,231   2,530   1.22%
                         
Non-interest-bearing deposits  252,266           240,859         
Other liabilities  12,705           4,370         
Shareholders' equity  216,556           162,799         
                        
Total liabilities and shareholders' equity $1,300,137          $1,228,259         
                         
                        
Net interest income/interest rate spread (taxable-equivalent basis)     $11,903   3.46%     $11,889   3.87%
                         
                        
Net interest margin
(taxable-equivalent basis)
          3.94%          4.20%
                         
Ratio of interest-earning assets to interest-bearing liabilities  146.26%          136.95%        
                         
Reported net interest income                        
Net interest income/net interestmargin (taxable-equivalent basis)     $11,903          $11,889     
Less:                        
taxable-equivalent adjustment      (39)          (37)    
                         
Net Interest Income     $11,864   3.93%     $11,852   4.19%


 

Comparison of Results of Operations for the

Nine months ended September 30, 20172019 and 20162018

 

General. During the first nine months of 2017,2019, the Company had net income of $5.2$10.0 million as compared with net income of $5.1$9.3 million for the first nine months of 2016.2018. Net income per share for the first nine months of 20172019 was $0.45,$0.52 for basic and diluted, compared with net income per share of $0.44,$0.64 for basic and $0.63 diluted for the first nine months of 2016.2018. Results of operations for the first nine months of 20172019 compared to 2016 was2018 were primarily impacted by an increasea decrease of $2.0 million$463,000 in net interest income, an increasea decrease in provision for loan losses of $244,000, a decrease$103,000, an increase of $196,000$516,000 in non-interest income and an increasea decrease in non-interest expenses of $1.5 million.$640,000. Net interest margin of 4.20%4.03% in the first nine months of 20172019 decreased 226 basis points from the same period in 2016.2018.

Net Interest Income. Net interest income increaseddecreased to $25.0$35.0 million for the first nine months of 20172019 from $23.1$35.5 million for the first nine months of 2016.2018. The Company’s total interest income was affected by the increase in total loan balances. Average total interest-earning assets were $800.9 million in$1.2 billion for the first nine months of 20172019 compared with $737.1 million$1.1 billion during the same period in 2016,2018, while the yield on those assets increased 8decreased 9 basis points from 4.72%5.11% to 4.80%.5.02%, which was primarily due to the decrease in rates on recently originated loans and accretion from acquired loans.

 

The Company’s average interest-bearing liabilities increaseddecreased by $46.3$37.0 million to $607.2$793.1 million for the nine months ended September 30, 20172019 from $560.9$830.1 million for the same period one year earlier and the cost of those funds increased from 0.65%1.10% to 0.79%1.45%, or 1435 basis points. During the first nine months of 2017,2019, the Company’s net interest margin was 4.20%4.03% and net interest spread was 4.00%3.57%. In the same period ended one year earlier, net interest margin was 4.22%4.29% and net interest spread was 4.07%4.01%. The increase in the costinterest rates of fundsdeposits was the primary driver of a lower net interest margin in 2017.2019.

53

 

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. The loss history to be applied to its ASC 450 loan pools within the allowance for loan losses is based on the risk-graded pool to which the loss was assigned. Historical loss rates are now 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. The Company recorded a provision of $1.1 million forDuring the first nine months of 20172019, the Company recorded a provision for loan losses of $136,000 compared to $847,000 for$239,000 in the first nine months of 2016. Loan growth2018. This reduction was based primarily on the primary contributorreduction of qualitative loan factors associated with concentration ratios on CRE and Construction loans exceeding regulatory concentration guidelines. The reduction in these concentration ratios occurred as a result of downstreaming $25.0 million in capital to the increased 2017Bank from the common stock offering completed in August of 2018. The provision expense. Improvingdecreased approximately $103,000 compared to the provision for loan losses recorded in the first nine months of 2018. The Company periodically reviews and updates it qualitative factors for changes in current conditions. The Company has seen a slight deterioration of credit metrics have been consistently maintained in 2016primarily related to past dues, non-accruals and 2017.TDRs during 2019 compared to the same period of 2018; however, management considers the allowance for loan losses to be appropriate.


Non-Interest Income. Non-interest income for the nine months ended September 30, 20162019 was $2.3$4.0 million, a decreasean increase of $196,000$516,000 from the first nine months of 2016.2018. Service charges on deposit accounts decreased $74,000increased $28,000 to $668,000$858,000 for the nine months ended September 30, 20172019 from $742,000$830,000 for the same period in 2016, primarily due to a decrease in overdraft charges.2018. Other non-deposit fees and income decreased $100,000increased $128,000 from the first nine months of 20162018 to the first nine months of 2017, primarily due2019. Fees from presold mortgages increased non-interest income $312,000 in the nine months of 2019 to decreases$605,000 from $293,000 for the same period in debit card activity.2018. The Company recognizedsold two investment securities for a gain on sale of investment securities of $22,000 for$48,000 in the first nine months of 2016 compared to no gains for2019. The Company did not sell any investment securities during the first nine months of 2017.2018.

Non-Interest Expenses. Non-interest expenses increaseddecreased by $1.5 million$640,000 to $18.2$26.0 million for the nine months ended September 30, 2017,2019, from $16.8$26.7 million for the same period in 2016. Non-interest expenses were also impacted in 2017 by $278,000 in merger related expenses for our announced acquisition of Premara.2018. The following are highlights of the significant categories of non-interest expenses during the first nine months of 20172019 versus the same period in 2016:2018:

 

·Personnel expenses increased $1.2$1.3 million to $10.7$15.1 million, due to additions in staff.branch staff, employment taxes and benefit costs.
·Occupancy and equipment expenses decreasedincreased by $137,000$124,000 due to branch repositioning.acquisition and repairs and maintenance expenses.
·CDI amortization expense decreased by $69,000$152,000 in the first nine months of 20172019 due to scheduled reductions.normal amortization.
·Deposit insurance expense decreased $115,000$452,000 due to rate reductions.receiving a credit from the FDIC as a result regulatory changes in the premium calculation.
·Information systems expense increased $64,000decreased $255,000 due to compliance and cybersecurity initiatives.expense elimination associated with assumed contracts from the Premara merger for similar services.
·MergerMerger/integration related expenses increaseddecreased by $278,000 due$1.6 million compared to an announcedthe non-recurring 2018 merger cost associated with the Premara acquisition.
·Foreclosed real estate increased $88,000expenses decreased $50,000 due to decreased HOA dues and write downs on a large property.in 2019.
·Other non-interest expenses increased by $113,000,$100,000, due to small increases in several categories of other non-interest expenses.

 

Provision for Income Taxes. The Company’s effective tax rate was 34.7%22.0% and 35.2%22.4% for the nine months ended September 30, 20172019 and 2016,2018, respectively. The effective tax rate for the first nine months of 2017 was impacted by North Carolina corporate income tax rate reductions compared to 2016 tax rates.

 

As of September 30, 20172019 and December 31, 2016,2018, the Company had a net deferred tax asset in the amount of $2.7$3.3 million and $3.1$3.7 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 September 30, 20172019 and December 31, 2016,2018, management concluded that the net deferred tax asset wasassets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.


NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, 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 nine months ended  For the nine months ended 
  September 30, 2019  September 30, 2018 
  (dollars in thousands)        
  Average     Average  Average     Average 
  balance  Interest  rate  balance  Interest  rate 
Interest-earning assets:                        
Loans, gross of allowance $988,268  $40,510   5.48% $976,862  $40,315   5.52%
Investment securities  77,674   1,653   2.85%  59,139   1,153   2.61%
Other interest-earning assets  99,966   1,580   2.11%  73,821   940   1.70%
Total interest-earning assets  1,165,908   43,743   5.02%  1,109,822   42,408   5.11%
                         
Other assets  101,558           105,644         
                         
Total assets $1,267,466          $1,215,466         
Interest-bearing liabilities:                        
Deposits:                        
Savings, NOW and money market $315,349   1,196   0.51% $317,303   977   0.41%
Time deposits over $100,000  299,092   4,516   2.02%  326,037   3,453   1.42%
Other time deposits  116,710   1,470   1.68%  115,028   1,055   1.23%
Borrowings  61,954   1,426   3.08%  71,771   1,321   2.46%
                         
Total interest-bearing liabilities  793,105   8,608   1.45%  830,139   6,806   1.10%
                         
Non-interest-bearing deposits  247,087           232,366         
Other liabilities  12,452           6,300         
Shareholders' equity  214,822           146,661         
                         
Total liabilities and shareholders' equity $1,267,466          $1,215,466         
Net interest income/interest rate spread (taxable-equivalent basis)     $35,135   3.57%     $35,602   4.01%
                         
Net interest margin                        
(taxable-equivalent basis)          4.03%          4.29%
                         
Ratio of interest-earning assets to interest-bearing liabilities  147.01%          133.69%        
                         
Reported net interest income                        
Net interest income/net interestmargin (taxable-equivalent basis)     $35,135          $35,602     
Less:                        
taxable-equivalent adjustment      (113)          (117)    
                         
Net Interest Income     $35,022   4.02%     $34,485   4.27%

 

54

50

 

 

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 effectivecost-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 11.6%12.7% of total assets at September 30, 2017 which was a decrease2019 and decreased as compared to 13.9%15.2% as of December 31, 2016. This reduction in liquid assets to total assets resulted primarily from loan growth and letting higher rate deposits roll off.2018.

 

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Federal funds sold was $10.7 million at September 30, 2019. 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 September 30, 2017,2019, the Company had existing credit lines with other financial institutions to purchase up to $153.0$243.2 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 25%10% of total assets, subject to available collateral. A floating lien of $109.3$112.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At September 30, 2017,2019, the Company had $22.4$45.0 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At September 30, 2017,2019, in addition to FHLB advances, total borrowings also consisted of junior subordinated debentures of $12.4 million.

 

Total deposits were $775.0$987.7 million at September 30, 2017.2019. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 48.4%42.2% of total deposits at September 30, 2017.2019. Time deposits of $250,000 or more represented 11.8%16.0% of the Company’s total deposits at September 30, 2017.2019. At quarter-end, the Company had $61.7$13.5 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 BASEL IIIa revised set of regulatory capital requirements. A newrequirements, due in part of the capital ratios profile underto agreements reached by the Basel IIICommittee on Banking Supervision. Under the revised capital rules, is the common equityCommon 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.the calculation, was added as part on an institution’s capital ratio profile. 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 11.9% at September 30, 2017.

55

As the following table indicates, at September 30, 2017,2019, 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  14.18%  8.00%
Tier 1 risk-based capital ratio  13.18%  6.00%
Leverage ratio  12.57%  4.00%
Common equity Tier 1 risk-based capital ratio  11.79%  4.50%

  Actual  Minimum    
Select Bancorp, Inc. Ratio  Requirement    
Total risk-based capital ratio  18.39%  8.00%    
Tier 1 risk-based capital ratio  17.67%  6.00%    
Leverage ratio  15.39%  4.00%    
Common equity Tier 1 risk-based capital ratio  16.58%  4.50%    

 

     Regulatory    
  Actual  Minimum  Well-Capitalized 
Select Bank & Trust Ratio  Requirement  Requirement 
          
Total risk-based capital ratio  13.56%  8.00%  10.00%
Tier 1 risk-based capital ratio  12.56%  6.00%  8.00%
Leverage ratio  11.98%  4.00%  5.00%
Common equity Tier 1 risk-based capital ratio  12.56%  4.50%  6.50%

     Regulatory    
  Actual  Minimum  Well-Capitalized 
Select Bank & Trust Ratio  Requirement  Requirement 
Total risk-based capital ratio  15.62%  8.00%  10.00%
Tier 1 risk-based capital ratio  14.89%  6.00%  8.00%
Leverage ratio  12.97%  4.00%  5.00%
Common equity Tier 1 risk-based capital ratio  14.89%  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 September 30, 2017.2019. During the third quarter of 2018 the Company completed a common stock offering netting $59.8 million which resulted in an increase in capital ratios for the holding company. Shortly after the receipt of the common stock offering proceeds, $25.0 million was downstreamed to the Bank, increasing its capital ratios.

 

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.

The Company’s equity to assets ratio was 16.7% at September 30, 2019.

56

 


Item 3. Quantitative and Qualitative Disclosures about Market RiskRisk.

 

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 ofassets 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.

 

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 June 30, 2017.2019.

 

57

 June 30, 2017  June 30, 2019 
(Dollars in thousands) 

Estimated

Exposure to

NII

 

Estimated

Exposure

to EVE

   Estimated
Exposure to
NII
   Estimated
Exposure to
EVE
 
     
Immediate change in interest rates:                
+ 4.0%  14.4%  6.0%  12.4%  13.3%
+ 3.0%  11.6   5.4   9.7   10.8 
+ 2.0%  8.3   4.2   6.7   8.0 
+ 1.0%  4.1   2.3   3.4   4.3 
No change  -   -   -   - 
- 1.0%  (5.0)  (4.8)  (2.5)  (5.3)

 

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 rates changes, and management actions taken in response to the preceding conditions.

 

Item 4. Controls and ProceduresProcedures.

 

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.

 

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 third quarter of 2017.2019. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the third quarter of 20172019 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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53

 

 

Part II.        OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The discussion under the subheading “Litigation Related to the Proposed Merger” under “Note K – Subsequent Events” in the accompanying Notes to Consolidated Financial Statements included in Part I of this Report is incorporated herein by reference.

Except as noted in the immediately prior paragraph, 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

 

We face additional risk of litigation due to our acquisition strategy.

In addition to the ordinary risk of litigation that we face in connection with our day-to-day banking activities, we also face litigation risk in connection with our strategy to grow through acquisition of other financial institutions. The Company, as well as our directors and officers and the companies we seek to acquire, may face claims from shareholders related to transaction disclosures or alleged breaches of fiduciary duties in connection with entering into such acquisition transactions. The defense or settlement of any such lawsuit or claims, or the delay that any such lawsuit may cause on the strategic acquisitions that we pursue, may adversely affect the Company’s business, financial condition, results of operations and cash flows.

Except as noted in the immediately prior paragraph, there areThere have been no material changes fromto the risk factors set forth under Part II, Item 1A. “Risk Factors”that we have previously disclosed in our Quarterlythe Company’s Annual Report on Form 10-Q10-K for the quarteryear ended MarchDecember 31, 2017.2018.

 

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

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The Company announced a repurchase programplan on August 31, 2016 (the “2016 Repurchase Plan”), 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 shareDuring the three months ended September 30, 2019, the Company exhausted its available repurchases under the 2016 Repurchase Plan. On September 17, 2019, the Company announced that its Board of Directors approved a new stock repurchase transactions conductedplan (the “2019 Repurchase Plan”). Under the 2019 Repurchase Plan, the Company is authorized to repurchase up to 937,248 outstanding shares of its common stock in the open market or through privately negotiated transactions.

Share repurchase activity for the 2016 Repurchase Plan during the three-month period covered by this Report.three months ended September 30, 2019 was as follows:

Issuer Purchases of Equity Securities

Period Total number of
Shares
Purchased
  

Average Price
Paid Per Share

  Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
  Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan
 
July 1-31, 2019  -   -   -   517,022 
August 1-31, 2019  428,492   10.78   428,492   88,530 
September 1-30, 2019 (Plan 1)  88,530   10.90   517,022   - 
September 17-30, 2019 (Plan 2)  231,889   11.30   231,889   705,359 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 


Item 5. Other Information

59

 

None.

 

Item 6. ExhibitsExhibits.

 

Exhibit Index

 

   

Incorporated by Reference

(Unless Otherwise Indicated)

   

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit No. Description of Exhibit Form Exhibit Filing
Date
 

SEC

File No.

 Description of Exhibit Form Exhibit Filing
Date
 

SEC

File No.

         
2.1 Agreement and Plan of Merger and Reorganization by and among Select Bancorp, Inc., Select Bank & Trust Company, Premara Financial, Inc., and Carolina Premier Bank dated as of July 20, 2017 8-K 2.1 07/26/17 000-50400
10.1 2019 Supplemental Executive Retirement Agreement dated September 23, 2019, with William L. Hedgepeth II 8-K 10.1 09/24/19 000-50400
        
10.2 2019 Supplemental Executive Retirement Agreement dated September 23, 2019, with Lynn L. Johnson 8-K 10.2 09/24/19 000-50400
            
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  Filed herewith  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  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  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  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 September 30, 2017, in XBRL (eXtensible Business Reporting Language)  Filed herewith  Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, in XBRL (eXtensible Business Reporting Language)  Filed herewith 

 

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55

 

 

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: November 9, 20176, 2019By:/s/ William L. Hedgepeth II
  William L. Hedgepeth II
  President and Chief Executive Officer
 
 
Date: November 9, 20176, 2019By:/s/ Mark A. Jeffries
  Mark A. Jeffries
  Executive Vice President and Chief Financial Officer

 

61