SELECT BANCORP, INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
Years Ended December 31, 2017, 2016 and 2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(Amounts in thousands)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
$
|
89,356
|
|
|
$
|
29,162
|
|
|
$
|
1,904
|
|
Proceeds from short-term debt
|
|
|
-
|
|
|
|
27,000
|
|
|
|
48,111
|
|
Proceeds from long-term debt
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
Repayments of short-term debt
|
|
|
(26,722
|
)
|
|
|
(19,327
|
)
|
|
|
(38,972
|
)
|
Repayments of long-term debt
|
|
|
(14,653
|
)
|
|
|
(5,664
|
)
|
|
|
(6,711
|
)
|
Preferred stock dividends paid
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(77
|
)
|
Redemption of preferred stock
|
|
|
-
|
|
|
|
(7,645
|
)
|
|
|
-
|
|
Proceeds from stock options exercised
|
|
|
166
|
|
|
|
527
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
48,147
|
|
|
|
24,049
|
|
|
|
15,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
6,981
|
|
|
|
(7,695
|
)
|
|
|
4,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING
|
|
|
55,714
|
|
|
|
63,409
|
|
|
|
58,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING
|
|
$
|
62,695
|
|
|
$
|
55,714
|
|
|
$
|
63,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4,900
|
|
|
$
|
3,744
|
|
|
$
|
3,586
|
|
Income taxes paid
|
|
|
3,471
|
|
|
|
2,591
|
|
|
|
2,983
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of investment securities available for sale, net of tax
|
|
|
(41
|
)
|
|
|
(132
|
)
|
|
|
(319
|
)
|
Transfer from loans to foreclosed real estate
|
|
|
2,543
|
|
|
|
1,418
|
|
|
|
590
|
|
Transfer from premises and equipment to assets held for sale
|
|
|
-
|
|
|
|
781
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired (excluding goodwill)
|
|
|
278,772
|
|
|
|
-
|
|
|
|
9,975
|
|
Liabilities assumed
|
|
|
256,052
|
|
|
|
-
|
|
|
|
31,204
|
|
Purchase price
|
|
|
40,693
|
|
|
|
-
|
|
|
|
21,277
|
|
Goodwill recorded
|
|
|
17,973
|
|
|
|
-
|
|
|
|
-
|
|
See accompanying notes.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE A - ORGANIZATION AND OPERATIONS
Select
Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of Select
Bank & Trust Company (referred to as the “Bank”). All significant intercompany transactions and balances have been
eliminated in consolidation. 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. The Company is subject to the rules and regulations of the Board
of Governors of the Federal Reserve and the North Carolina Commissioner of Banks.
The
Bank was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25,
2014, the Company acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank’s legal name
to Select Bank & Trust Company. On December 15, 2017, the Company acquired Premara Financial, Inc. and its subsidiary Carolina
Premier Bank through the merger of Premara with and into the Company, followed immediately by the merger of Carolina Premier with
and into the Bank. The Bank continues as the only banking subsidiary of the Company with its headquarters and operations center
located in Dunn, NC. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina, as well
as now in Charlotte, North Carolina and northwest South Carolina. The Bank is subject to the supervision and regulation of the
Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks.
Reclassification
Certain items for prior years have been reclassified
to conform to the current year presentation. Such reclassifications had no effect on net income, total assets or shareholders’
equity as previously reported.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination
of the allowance for loan losses, business combinations, goodwill, deferred tax assets and the valuation of other real estate owned.
Business Combinations
Business combinations are accounted for under
the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 805, “Business Combinations
.”
Under the acquisition method, the acquiring entity
in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the
date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets
acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets,
exceeds the purchase price, a bargain purchase gain is recognized.
Assets acquired and liabilities assumed
from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results
of operations of an acquired business are included in the Statement of Operations from the date of acquisition. Acquisition-related
costs, including conversion and restructuring charges, are expensed as incurred.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The acquired assets and assumed liabilities
are recorded at estimated fair values. Management makes significant estimates and exercises significant judgment in accounting
for business combinations. Management uses its judgment to assign risk ratings to loans based on credit quality, appraisals and
estimated collateral values, and estimated expected cash flows to measure fair values for loans. Real estate acquired in settlement
of loans is valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Core deposit
intangibles are valued based on a weighted combination of the income and market approach where the income approach converts anticipated
economic benefits to a present value and the market approach evaluates the market in which the asset is traded to find an indication
of prices from actual transactions. Management uses quoted or current market prices to determine the fair value of investment securities.
Fair values of deposits and borrowings are based on current market interest rates and are inclusive of any applicable prepayment
penalties.
Cash and Due from Banks, Interest-Earning
Deposits in Other Banks and Federal Funds Sold
For the purpose of presentation in the statements
of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due
from banks,” “Interest-earning deposits in other banks,” “Certificates of Deposit” and “Federal
funds sold.”
Certificates of Deposit
Certificates of deposit are cash instruments
that management has the intent and ability to hold for the foreseeable future or until maturity and are reported at cost.
Investment Securities Available for Sale
Investment securities available for sale are
reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity
securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a
net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale
are determined using the specific-identification method.
Loans
Loans that management has the intent and ability
to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased
loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield
of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower
may be unable to meet payment obligations as they become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.
Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
The acquired loans are segregated between those
considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors
as past due status, nonaccrual status and credit risk ratings (“purchased credit-impaired loans”).
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
In determining the acquisition date fair value
of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates purchased
loans into pools of loans with common risk characteristics within the following loan categories: 1-to-4 family residential loans
other than junior liens, 1-to-4 family residential junior liens, construction and land development, farm land, commercial real
estate (nonowner-occupied), commercial real estate (owner-occupied), commercial and industrial, and all other loan categories.
Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield”
and recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash
flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected
at the acquisition date are recognized as interest income prospectively. Accordingly, such loans are not classified as nonaccrual
and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting
for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash
flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
The difference between the fair value of
an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”)
is accreted into income over the estimated life of the pool. The Company’s policy for determining when to discontinue accruing
interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated
loans described earlier.
Loans are deemed uncollectible based on
a variety of credit, collateral, documentation and other issues. In the case where a loan is unsecured and in default it is fully
charged off.
Non-accrual Loans
Loans are placed on non-accrual 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. 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 impairment. In the case of an impaired loan that is still on accrual basis, payments are applied
to both principal and interest.
Allowance for Loan Losses
The provision for loan losses is based upon
management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level in light of the
risk inherent in the loan portfolio. In making the evaluation of the adequacy of the allowance for loan losses, management gives
consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency
information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that
all amounts due will not be collected in accordance with the contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate,
or upon the fair value of the collateral if the loan is collateral-dependent. If the recorded investment in the loan exceeds the
measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Interest payments
on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which
case, interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. While
management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company
to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time
of their examination.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Decreases in expected cash flows of PCI loans
after the acquisition date are recognized by recording an allowance for credit loss. For any significant increases in cash flows
expected to be collected, the Company first adjusts any prior recorded allowance for loan and lease losses through a reversal of
previously recognized allowance through provision expense, and then increases the amount of accretable yield to be recognized on
a prospective basis over the pool’s remaining life. Management analyzes these acquired loan pools using various assessments
of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based
upon the collateral type and/or specific review by loan officers. Trends are reviewed in terms of traditional credit metrics such
as accrual status, past due status, and weighted average risk grade of the loans within each of the accounting pools. In addition,
the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate
the directional consistency of the expected loss for each pool.
Loans Held for Sale
Mortgage loans originated and intended for
sale in the secondary market are classified as held for sale and are carried at the lower of cost or fair value. Upon closing,
these loans are sold to mortgage loan investors under pre-arranged terms. Origination fees are recognized upon the sale and are
included in non-interest income. Related to the mortgage business, the Company enters into interest rate lock commitments and commitments
to sell mortgages to investors. Interest rate lock commitments are used to manage interest rate risk associated with the fixed
rate loan commitments, and forward sale commitments are entered into with investors to manage the interest rate risk associated
with the customer interest rate lock commitments, both of which are considered derivative financial instruments. The period of
time between the issuance of a loan commitment and the closing and sale of the loan generally ranges from 10 to 60 days. Interest
rate lock commitments and forward sale commitments are derivative instruments and are carried at fair value. These derivative instruments
do not qualify for hedge accounting. The fair value of interest rate lock commitments is based on current secondary market pricing
and is included in other assets on the balance sheet. The fair value of the forward sale commitments is based on changes in the
value of the commitment, principally because of changes in interest rates, and is included on the consolidated balance sheets in
other assets or other liabilities. Changes in fair value for these instruments are reflected in non-interest income on the income
statement. Gains and losses from sales of the mortgage loans are recognized when the Company ultimately sells the loans, and such
gains and losses are also recorded in non-interest income. An asset is recorded for the value of the servicing rights and is amortized
over the remaining life of the loan on the effective interest method. The servicing asset is included in other assets and the amortization
of the servicing asset is included in non-interest expense. Servicing fees are recorded in non-interest income.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Stock in Federal Home Loan Bank of Atlanta
As a requirement
for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment was carried
at cost at December 31, 2017 and 2016. The Company continually monitors the financial strength of the FHLB and evaluates the investment
for potential impairment. There can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks
will not cause a decrease in the value of the Bank’s investment in FHLB stock.
Other Non-Marketable Securities
Other non-marketable securities are equity instruments that are
reported at cost.
Foreclosed Real Estate
Real estate acquired through, or in lieu of,
loan foreclosure is recorded at fair value, less the estimated cost to sell, at the date of foreclosure. After foreclosure, management
periodically performs valuations of the property and adjusts the value down when the carrying value of the property exceeds the
estimated net realizable value. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosure-related
expense.
Premises and Equipment
Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are 40 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements
are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Repairs and maintenance costs are charged to
operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost
and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.
Income Taxes
Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected
to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax
benefits will not be realized.
Public law No. 115-97, known as the Tax
Cuts and Jobs Act (the "Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to
21%. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which
provides guidance on accounting for tax effects of the Act. SAB 118 provides a measurement period of up to one year from the enactment
date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing
operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information
available and current interpretation of the rules, the Company has made estimates of the impact of the reduction in the corporate
tax rate and re-measurement of certain deferred tax assets and liabilities
.
The provisional amount recorded related
to the re-measurement of the Company's deferred tax balance was $2.6 million. The final impact of the Act may differ from these
estimates as a result of changes in management’s interpretations and assumptions, as well as new guidance that may be issued
by the Internal Revenue Service (IRS). See Note L
Income Taxes
for more information.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Bank Owned Life Insurance
Bank Owned
Life Insurance ("BOLI") is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning
asset. Death benefit proceeds received in excess of the policy's cash surrender value are recognized to income. Returns on the
BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of operations. Any
receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At December 31, 2017 and 2016,
the Company held no loans against its BOLI cash surrender values.
Goodwill
Goodwill
represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted
for as business combinations. Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently
if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first, used to identify
potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired.
In September 2011, the FASB issued ASU 2011-08,
which gives entities the option of first performing a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit
basis. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, the entity would perform the two-step goodwill impairment test described
in the impairment test described above. However, if, after applying the qualitative assessment, the entity concludes that it is
not more likely than not that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required.
The Company performed the qualitative assessment
as outlined in ASU 2011-08 in assessing the carrying value of goodwill related to its acquisitions as of October 5, 2017, its annual
test date, and determined that it was unlikely that the fair value was less than the carrying amount and that no further testing
or impairment charge was necessary. Should the Company’s future earnings and cash flows decline and/or discount rates increase,
an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the October
5, 2017 evaluation that caused the Company to perform an interim review of the carrying value of goodwill.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Core Deposit Intangible
The Company
considers its core deposits to be intangible assets with finite lives. Core deposit intangibles are being amortized using the effective
interest method over six years.
Derivative Financial Instruments
The Company utilizes interest rate lock
commitments and forward sale commitments, which are considered derivative instruments, in its mortgage banking operations. For
2017 the amount of interest rate lock commitments is less than $1,000 and is considered immaterial.
Stock-Based Compensation
The
Company has certain stock-based employee compensation plans, described more fully in
Note P
.
Generally accepted accounting principles (“GAAP”) require recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the
services in exchange for the award (usually the vesting period). GAAP also requires the compensation cost for all awards granted
after the date of adoption and any unvested awards that remained outstanding as of the date of adoption to be measured based on
the fair value of the award on the grant date.
Comprehensive Income
The Company reports as comprehensive income
all changes in shareholders' equity during the year from sources other than shareholders. Other comprehensive income refers to
all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company's
only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.
Segment Information
The Company follows the provisions of ASC 280,
Segment Reporting,
which specifies guidelines for determining an entity’s operating segments and the type and level
of financial information to be disclosed. Based on these guidelines, management has determined that the Bank operates as a single
business segment; the providing of general commercial and retail financial services to customers located in the Company’s
market areas. The various products, as well as the methods used to distribute them, are those generally offered by community banks.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Net Income per Common Share and Common Shares Outstanding
Basic earnings per share represents income
available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued
by the Company relate to outstanding stock options. Basic and diluted net income per share have been computed based upon net income
as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or
assumed to be outstanding as summarized below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in computing basic net income per share
|
|
|
11,763,050
|
|
|
|
11,610,705
|
|
|
|
11,502,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
63,927
|
|
|
|
44,406
|
|
|
|
65,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share
|
|
|
11,826,977
|
|
|
|
11,655,111
|
|
|
|
11,567,811
|
|
At December 31, 2017, 2016 and 2015, there
were 121,300; 88,000 and 97,800 anti-dilutive options, respectively.
Recent Accounting Pronouncements
The following summarizes recent accounting
pronouncements and their expected impact on the Company:
In January 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income.
This ASU requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings
for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017
(Tax Act), which was enacted on December 22, 2017. The Tax Act included a reduction to the corporate income tax rate from 35 percent
to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate
income tax rate and the newly enacted 21 percent corporate income tax rate.
The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted
and the Company adopted this ASU as of December 31, 2017 resulting in an immaterial adjustment.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
ASU 2014-09,
Revenue from Contracts
with Customers (Topic 606),
ASU 2015-14
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
ASU 2016-08
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net),
ASU 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
ASU 2016-11
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because
of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
, ASU
2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
ASU 2016-20
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
and ASU 2017-05
Other Income
- Gains and losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition
Guidance and Accounting for Partial Sales of Nonfinancial Assets
—The new guidance, which does not apply to financial
instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an amount equal
to the consideration it receives or expects to receive. The guidance also includes expanded disclosure requirements that provide
comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2017. The Company 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.
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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). ASU 2016-02 applies a right-of-use (ROU) model that requires a lessee to record, for all leases with
a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease
payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class
of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either
finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern
of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the
lease classification. For public business entities, the amendments in ASU 2016-02 are effective for interim and annual
periods beginning after December 15, 2018. In transition, lessees and lessors are required to recognize and measure
leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of optional
practical expedients that entities may elect to apply. The Company has reviewed its outstanding lease agreements and
has centrally documented the terms of its leases. The Company is currently evaluating the provisions of ASU 2016-02
in relation to its outstanding leases to determine the potential impact the new standard will have to the Company’s financial
statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
guidance
to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its
lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial
asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result
in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at
amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual
reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption is permitted. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is adopted. The Company has dedicated
staff and resources in place evaluating the Company’s options including evaluating the appropriate model options and collecting
and reviewing loan data for use in these models. The Company is still assessing the impact that this new guidance will
have on its consolidated financial statements.
In August 2016, the FASB amended the ASU
2016-15,
Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments,
of the Accounting
Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of
cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim
periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In January 2017, the FASB ASU 2016-07,
Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
was updated. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under
SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The
ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of
the standards is adopted; however, it does not expect these amendments to have a material effect on its financial position, results
of operations or cash flows.
In January 2017, the FASB ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment
was amended to simplify the accounting
for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements
and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of
the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical
corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company
does not expect these amendments to have a material effect on its financial statements.
In February 2017, the FASB ASU2017-05,
Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic610-20)
clarified the scope
of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments
conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments
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 ASU 2017-07,
Compensation
– Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost
amended the requirements in the changes to the terms or conditions of a share-based payment award. The amendments
provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. The amendments 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 its 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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
Note
C – Business Combinations
On July 20, 2017, the Company executed a merger
agreement with Premara Financial, Inc. (“Premara”), a bank holding company headquartered in Charlotte, North Carolina,
whose wholly owned subsidiary, Carolina Premier Bank, was a North Carolina state-chartered commercial bank. On December 15, 2017,
Select completed its previously announced acquisition of Premara and pursuant to the terms of the merger agreement, Premara was
merged with and into the Company, followed immediately by the merger of Carolina Premier Bank with and into the Bank. Carolina
Premier had approximately $279.6 million in assets as of the merger date, December 15, 2017. The merger expanded the Bank’s
North Carolina presence with a branch in Charlotte and marked the Bank’s initial entry into South Carolina with the acquisition
of branches in Rock Hill, Blacksburg and Six Mile, South Carolina.
Premara had 3,179,808 shares of common
stock outstanding as of the merger closing date. Under the terms of the merger agreement, 948,080 shares of Premara common stock
(equivalent to 30% of Premara’s outstanding shares of common stock as of the date of the merger agreement) were converted
to the $12.65 per share cash merger consideration, for aggregate cash consideration of $11,993,212 (exclusive of cash paid-in-lieu
of fractional shares) which was paid out subsequent to year end. Pursuant to the Merger Agreement, each warrant or stock option
to acquire shares of Premara common stock issued and outstanding as of the effective time of the Merger was converted into the
right to receive from the Company a cash payment equal to $12.65 less the exercise price of such warrant or option, as applicable
and paid out prior to year end. The remaining 2,231,728 Premara common shares were converted into stock consideration at the merger
exchange ratio of 1.0463 shares of Company common stock for each share of Premara common stock, resulting in the issuance of 2,334,999
new shares of Company common stock. The transaction was valued at approximately $40.6 million in the aggregate based on 3,179,808
shares of Premara common stock outstanding on December 15, 2017. The Premara common stock shares converted to Select common stock
are valued at $12.14 per share, the low price of Select common stock on December 15, 2017.
The merger with Premara was accounted for under
the acquisition method of accounting with the Company as the legal and accounting acquirer and Premara as the legal and accounting
acquiree. The assets and liabilities of Premara, as of the effective date of the acquisition, are recorded at their respective
fair values. For the acquisition of Premara, estimated fair values of assets acquired and liabilities assumed are based on the
information that is available, and the Company believes this information provides a reasonable basis for determining fair values.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
Note
C – Business Combinations (
continued
)
The following table provides the carrying value
of acquired assets and assumed liabilities, as recorded by the Company, the fair value adjustments calculated at the time of the
merger and the resulting fair value recorded by the Company.
|
|
December 15, 2017
|
|
|
|
As recorded by
|
|
|
Fair Value
|
|
|
As recorded by
|
|
|
|
Premara
|
|
|
adjustments
|
|
|
the Company
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,513
|
|
|
$
|
-
|
|
|
$
|
28,513
|
|
Investment securities
|
|
|
32,939
|
|
|
|
(106
|
)
|
|
|
32,833
|
|
Loans
|
|
|
203,780
|
|
|
|
(5,340
|
)
|
|
|
198,440
|
|
Less: allowance for loan losses
|
|
|
(2,341
|
)
|
|
|
2,341
|
|
|
|
-
|
|
Premises and equipment
|
|
|
928
|
|
|
|
(233
|
)
|
|
|
695
|
|
Accrued interest receivable
|
|
|
853
|
|
|
|
(56
|
)
|
|
|
797
|
|
Bank owned life insurance
|
|
|
5,673
|
|
|
|
-
|
|
|
|
5,673
|
|
Goodwill
|
|
|
325
|
|
|
|
(325
|
)
|
|
|
-
|
|
Core deposit intangible
|
|
|
223
|
|
|
|
2,477
|
|
|
|
2,700
|
|
Other assets
|
|
|
8,701
|
|
|
|
790
|
|
|
|
9,491
|
|
Total assets acquired
|
|
$
|
279,594
|
|
|
$
|
(452
|
)
|
|
$
|
279,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
55,617
|
|
|
$
|
-
|
|
|
$
|
55,617
|
|
Interest-bearing
|
|
|
170,873
|
|
|
|
171
|
|
|
|
171,044
|
|
Total deposits
|
|
|
226,490
|
|
|
|
171
|
|
|
|
226,661
|
|
Borrowings
|
|
|
29,000
|
|
|
|
14
|
|
|
|
29,014
|
|
Other liabilities
|
|
|
747
|
|
|
|
-
|
|
|
|
747
|
|
Total liabilities assumed
|
|
$
|
256,237
|
|
|
$
|
185
|
|
|
$
|
256,422
|
|
Fair value of net assets assumed
|
|
|
|
|
|
|
|
|
|
|
22,720
|
|
Value of common shares of Premara shareholders
|
|
|
|
|
|
|
|
|
|
|
40,693
|
|
Goodwill recorded for Premara
|
|
|
|
|
|
|
|
|
|
$
|
17,973
|
|
Goodwill recorded for Premara represents future
revenues to be derived from the existing customer base, including efficiencies that will result from combining operations.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
Note
C – Business Combinations (
continued
)
In determining the acquisition date fair
value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates loans
into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of
loans are referred to as the “accretable yield” and recorded as interest income prospectively.
PCI loans acquired totaled $8.6 million
at estimated fair value and acquired performing loans totaling $189.6 million at estimated fair value. For PCI loans acquired from
Premara, the contractually required payments including principal and interest, cash flows expected to be collected and fair values
as of the closing date of the merger were:
(Dollars in thousands)
|
|
December 15, 2017
|
|
|
|
|
|
Contractually required payments
|
|
$
|
11,752
|
|
Nonaccretable difference
|
|
|
1,768
|
|
Cash flows expected to be collected
|
|
|
9,984
|
|
Accretable yield
|
|
|
1,392
|
|
Fair value at acquisition date
|
|
$
|
8,592
|
|
Merger-related expense in 2017 totaled
$2.2 million which were recorded as noninterest expense as incurred.
The following tables reflect the pro forma
total net interest income, noninterest income and net income for the twelve months ended December 31, 2017 and 2016 as though the
acquisition of Premara had taken place on January 1, 2016. The pro forma results have not been adjusted to remove non-recurring
acquisition-related expenses, and are not necessarily indicative of the results of operations that would have occurred had the
acquisition actually taken place on January 1, 2016, nor of future results of operations.
|
|
Twelve Months Ended December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands, except per share)
|
|
Net interest income
|
|
$
|
44,248
|
|
|
$
|
42,329
|
|
Non-interest income
|
|
|
4,332
|
|
|
|
4,166
|
|
Net income available to common shareholders
|
|
|
5,530
|
|
|
|
8,665
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic
|
|
$
|
0.44
|
|
|
$
|
0.58
|
|
Earnings per share, diluted
|
|
$
|
0.44
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
13,995,692
|
|
|
|
13,945,704
|
|
Weighted average common shares outstanding, diluted
|
|
|
14,059,619
|
|
|
|
13,990,110
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE D - INVESTMENT SECURITIES
The amortized cost and fair value of available
for sale (“AFS”) investments, with gross unrealized gains and losses, follow:
|
|
December 31, 2017
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies – GSE’s
|
|
$
|
13,241
|
|
|
$
|
148
|
|
|
$
|
(25
|
)
|
|
$
|
13,364
|
|
Mortgage-backed securities – GSE’s
|
|
|
29,571
|
|
|
|
213
|
|
|
|
(100
|
)
|
|
|
29,684
|
|
Corporate bonds
|
|
|
1,858
|
|
|
|
44
|
|
|
|
(14
|
)
|
|
|
1,888
|
|
Municipal bonds
|
|
|
18,583
|
|
|
|
255
|
|
|
|
-
|
|
|
|
18,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,253
|
|
|
$
|
660
|
|
|
$
|
(139
|
)
|
|
$
|
63,774
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
|
|
(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
|
|
Municipal bonds
|
|
|
15,527
|
|
|
|
209
|
|
|
|
(1
|
)
|
|
|
15,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,695
|
|
|
$
|
689
|
|
|
$
|
(127
|
)
|
|
$
|
62,257
|
|
Securities with a carrying value of $7.5
million and $34.3 million at December 31, 2017 and 2016, respectively, were pledged to secure public monies on deposit as required
by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE D - INVESTMENT SECURITIES (Continued)
The following tables show gross unrealized
losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous
unrealized loss position as of December 31, 2017 and 2016.
|
|
2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies – GSE’s
|
|
$
|
1,651
|
|
|
$
|
(9
|
)
|
|
$
|
1,415
|
|
|
$
|
(16
|
)
|
|
$
|
3,066
|
|
|
$
|
(25
|
)
|
Mortgage-backed securities- GSE’s
|
|
|
8,137
|
|
|
|
(55
|
)
|
|
|
2,449
|
|
|
|
(45
|
)
|
|
|
10,586
|
|
|
|
(100
|
)
|
Corporate bonds
|
|
|
1,752
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,752
|
|
|
|
(14
|
)
|
Municipal bonds
|
|
|
1,101
|
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,101
|
|
|
|
-
|
|
Total temporarily impaired securities
|
|
$
|
12,641
|
|
|
$
|
(78
|
)
|
|
$
|
3,864
|
|
|
$
|
(61
|
)
|
|
$
|
16,505
|
|
|
$
|
(139
|
)
|
At December 31, 2017, the Company had two AFS mortgage-backed GSE’s and two U.S Government agencies
– GSE’s with an unrealized loss for twelve or more consecutive months totaling $61,000. The Company had 16 AFS securities
with a loss for twelve months or less. Two U.S. government agency GSE’s, three municipals, two corporates and nine mortgage-backed
GSE’s had unrealized losses for less than twelve months totaling $78,000 at December 31, 2017. All unrealized losses are
attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.
The Company did not incur a loss on any securities sold during 2017.
|
|
2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies – GSE’s
|
|
$
|
2,748
|
|
|
$
|
(13
|
)
|
|
$
|
1,651
|
|
|
$
|
(12
|
)
|
|
$
|
4,399
|
|
|
$
|
(25
|
)
|
Mortgage-backed securities- GSE’s
|
|
|
8,778
|
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,778
|
|
|
|
(101
|
)
|
Municipal bonds
|
|
|
110
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
(1
|
)
|
Total temporarily impaired securities
|
|
$
|
11,636
|
|
|
$
|
(115
|
)
|
|
$
|
1,651
|
|
|
$
|
(12
|
)
|
|
$
|
13,287
|
|
|
$
|
(127
|
)
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE D - INVESTMENT SECURITIES (Continued)
At December 31, 2016, the Company had two AFS
securities with an unrealized loss for twelve or more consecutive months. The two U.S. government agency GSE’s had unrealized
losses for more than twelve months totaling $12,000 at December 31, 2016. Two U.S. government agency GSE’s, one municipal
and eight mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $115,000 at December 31, 2016.
All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments
to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2016.
Since none of the unrealized losses relate
to the liquidity of the securities or the issuer’s ability to honor redemption obligations and 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 December 31, 2017 and December 31, 2016. In 2017 the Company realized gains of $1,000 on
proceeds of $22.0 million related to the disposal of fifty one securities, in 2016 the Company realized gains of $22,000 on proceeds
of $624,000 related to the disposal of eleven securities and in 2015 the Company had gains of $332,000 on proceeds of $8.1 million
related to the disposal of forty-three securities.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE D - INVESTMENT SECURITIES (Continued)
The following table sets forth certain information
regarding the amortized costs, carrying values and contractual maturities of the Company’s investment portfolio at December
31, 2017.
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(dollars in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
U.S. government agencies – GSE’s
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
324
|
|
|
$
|
327
|
|
Due after one but within five years
|
|
|
9,636
|
|
|
|
9,718
|
|
Due after five but within ten years
|
|
|
3,155
|
|
|
|
3,189
|
|
Due after ten years
|
|
|
126
|
|
|
|
130
|
|
|
|
|
13,241
|
|
|
|
13,364
|
|
Mortgage-backed securities – GSE’s
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
-
|
|
|
|
-
|
|
Due after one but within five years
|
|
|
27,667
|
|
|
|
27,774
|
|
Due after five but within ten years
|
|
|
1,904
|
|
|
|
1,910
|
|
Due after ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
|
29,571
|
|
|
|
29,684
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
-
|
|
|
|
-
|
|
Due after one but within five years
|
|
|
593
|
|
|
|
607
|
|
Due after five but within ten years
|
|
|
1,265
|
|
|
|
1,281
|
|
Due after ten years
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,858
|
|
|
|
1,888
|
|
Municipal bonds
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
651
|
|
|
|
653
|
|
Due after one but within five years
|
|
|
7,522
|
|
|
|
7,600
|
|
Due after five but within ten years
|
|
|
1,499
|
|
|
|
1,510
|
|
Due after ten years
|
|
|
8,911
|
|
|
|
9,075
|
|
|
|
|
18,583
|
|
|
|
18,838
|
|
Total securities available for sale
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
975
|
|
|
|
980
|
|
Due after one but within five years
|
|
|
45,418
|
|
|
|
45,699
|
|
Due after five but within ten years
|
|
|
7,823
|
|
|
|
7,890
|
|
Due after ten years
|
|
|
9,037
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,253
|
|
|
$
|
63,774
|
|
For purposes of the maturity table, mortgage-backed
securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS
The following is a summary of loans at December
31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of total
|
|
|
Amount
|
|
|
of total
|
|
|
|
(dollars in thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-to-4 family residential
|
|
$
|
156,901
|
|
|
|
15.97
|
%
|
|
$
|
97,978
|
|
|
|
14.47
|
%
|
Commercial real estate
|
|
|
403,100
|
|
|
|
41.02
|
%
|
|
|
281,723
|
|
|
|
41.60
|
%
|
Multi-family residential
|
|
|
76,983
|
|
|
|
7.83
|
%
|
|
|
56,119
|
|
|
|
8.29
|
%
|
Construction
|
|
|
177,933
|
|
|
|
18.11
|
%
|
|
|
100,911
|
|
|
|
14.90
|
%
|
Home equity lines of credit (“HELOC”)
|
|
|
52,606
|
|
|
|
5.35
|
%
|
|
|
41,158
|
|
|
|
6.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
867,523
|
|
|
|
88.28
|
%
|
|
|
577,889
|
|
|
|
85.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
106,164
|
|
|
|
10.80
|
%
|
|
|
90,678
|
|
|
|
13.39
|
%
|
Loans to individuals
|
|
|
10,097
|
|
|
|
1.04
|
%
|
|
|
9,756
|
|
|
|
1.44
|
%
|
Overdrafts
|
|
|
147
|
|
|
|
0.01
|
%
|
|
|
71
|
|
|
|
0.01
|
%
|
Total other loans
|
|
|
116,408
|
|
|
|
11.85
|
%
|
|
|
100,505
|
|
|
|
14.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
983,931
|
|
|
|
|
|
|
|
678,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less deferred loan origination fees, net
|
|
|
(1,305
|
)
|
|
|
(.13
|
)%
|
|
|
(1,199
|
)
|
|
|
(.18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
982,626
|
|
|
|
100.00
|
%
|
|
|
677,195
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(8,835
|
)
|
|
|
|
|
|
|
(8,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
973,791
|
|
|
|
|
|
|
$
|
668,784
|
|
|
|
|
|
Loans are primarily made in central and eastern
North Carolina and northwest South Carolina. Real estate loans can be affected by the condition of the local real estate market
and can be affected by the local economic conditions.
At December 31, 2017, the Company had pre-approved
but unused lines and letters of credit totaling $178.1 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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
A description of the various loan products
provided by the Bank is presented below.
Residential 1-to-4 Family Loans
Residential 1-to-4 family loans are mortgage
loans that typically 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 and 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 liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial
real estate loans based on collateral, market area, and risk grade.
Multi-family Residential Loans
Multi-family residential loans are typically
nonfarm 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 contractor to perform under the terms of
the contract, and the feasibility, marketability, and valuation of the project.
Also, consideration is given to the cost of
the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction
loans are traditionally 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 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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
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
Consumer loans are approved using Bank policies
and procedures established to evaluate each credit request. All lending decisions and credit risks are 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
Overdrafts on customer accounts are classified
as loans for reporting purposes.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Non-Accrual and Past Due Loans
The following tables present as of December
31, 2017 and 2016 an age analysis of past due loans, segregated by class of loans:
|
|
30+
|
|
|
Non-
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Accrual
|
|
|
Past
|
|
|
|
|
|
Total
|
|
2017
|
|
Past Due
|
|
|
Loans
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
611
|
|
|
$
|
96
|
|
|
$
|
707
|
|
|
$
|
105,457
|
|
|
$
|
106,164
|
|
Construction
|
|
|
386
|
|
|
|
384
|
|
|
|
770
|
|
|
|
177,163
|
|
|
|
177,933
|
|
Multi-family residential
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
76,953
|
|
|
|
76,983
|
|
Commercial real estate
|
|
|
1,464
|
|
|
|
528
|
|
|
|
1,992
|
|
|
|
401,108
|
|
|
|
403,100
|
|
Loans to individuals & overdrafts
|
|
|
22
|
|
|
|
7
|
|
|
|
29
|
|
|
|
10,215
|
|
|
|
10,244
|
|
1-to-4 family residential
|
|
|
3,545
|
|
|
|
771
|
|
|
|
4,316
|
|
|
|
152,585
|
|
|
|
156,901
|
|
HELOC
|
|
|
103
|
|
|
|
329
|
|
|
|
432
|
|
|
|
52,174
|
|
|
|
52,606
|
|
Deferred loan (fees) cost, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,305
|
)
|
|
|
$
|
6,161
|
|
|
$
|
2,115
|
|
|
$
|
8,276
|
|
|
$
|
975,655
|
|
|
$
|
982,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans- PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
429
|
|
|
$
|
-
|
|
|
$
|
429
|
|
|
$
|
2,504
|
|
|
$
|
2,933
|
|
Construction
|
|
|
360
|
|
|
|
-
|
|
|
|
360
|
|
|
|
709
|
|
|
|
1,069
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
971
|
|
|
|
971
|
|
Commercial real estate
|
|
|
712
|
|
|
|
-
|
|
|
|
712
|
|
|
|
8,344
|
|
|
|
9,056
|
|
Loans to individuals & overdrafts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
|
67
|
|
1-to-4 family residential
|
|
|
2,634
|
|
|
|
-
|
|
|
|
2,634
|
|
|
|
6,485
|
|
|
|
9,119
|
|
HELOC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
|
|
$
|
4,135
|
|
|
$
|
-
|
|
|
$
|
4,135
|
|
|
$
|
19,126
|
|
|
$
|
23,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans- excluding PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
182
|
|
|
$
|
96
|
|
|
$
|
278
|
|
|
$
|
102,953
|
|
|
$
|
103,231
|
|
Construction
|
|
|
26
|
|
|
|
384
|
|
|
|
410
|
|
|
|
176,454
|
|
|
|
176,864
|
|
Multi-family residential
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
75,982
|
|
|
|
76,012
|
|
Commercial real estate
|
|
|
752
|
|
|
|
528
|
|
|
|
1,280
|
|
|
|
392,764
|
|
|
|
394,044
|
|
Loans to individuals & overdrafts
|
|
|
22
|
|
|
|
7
|
|
|
|
29
|
|
|
|
10,148
|
|
|
|
10,177
|
|
1-to-4 family residential
|
|
|
911
|
|
|
|
771
|
|
|
|
1,682
|
|
|
|
146,100
|
|
|
|
147,782
|
|
HELOC
|
|
|
103
|
|
|
|
329
|
|
|
|
432
|
|
|
|
52,128
|
|
|
|
52,560
|
|
Deferred loan (fees) cost, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,305
|
)
|
|
|
$
|
2,026
|
|
|
$
|
2,115
|
|
|
$
|
4,141
|
|
|
$
|
956,529
|
|
|
$
|
959,365
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Non-Accrual and Past Due Loans
|
|
30+
|
|
|
Non-
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Accrual
|
|
|
Past
|
|
|
|
|
|
Total
|
|
2016
|
|
Past Due
|
|
|
Loans
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
|
|
|
|
(dollars 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans- PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
29
|
|
|
$
|
73
|
|
|
$
|
102
|
|
|
$
|
117
|
|
|
$
|
219
|
|
Construction
|
|
|
-
|
|
|
|
83
|
|
|
|
83
|
|
|
|
849
|
|
|
|
932
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
669
|
|
|
|
669
|
|
Commercial real estate
|
|
|
404
|
|
|
|
-
|
|
|
|
404
|
|
|
|
7,770
|
|
|
|
8,174
|
|
Loans to individuals & overdrafts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
100
|
|
1-to-4 family residential
|
|
|
122
|
|
|
|
373
|
|
|
|
495
|
|
|
|
6,934
|
|
|
|
7,429
|
|
HELOC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
197
|
|
|
|
197
|
|
|
|
$
|
555
|
|
|
$
|
529
|
|
|
$
|
1,084
|
|
|
$
|
16,636
|
|
|
$
|
17,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans- excluding PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,430
|
|
|
$
|
-
|
|
|
$
|
1,430
|
|
|
$
|
89,029
|
|
|
$
|
90,459
|
|
Construction
|
|
|
221
|
|
|
|
68
|
|
|
|
289
|
|
|
|
99,690
|
|
|
|
99,979
|
|
Multi-family residential
|
|
|
46
|
|
|
|
346
|
|
|
|
392
|
|
|
|
55,058
|
|
|
|
55,450
|
|
Commercial real estate
|
|
|
185
|
|
|
|
3,807
|
|
|
|
3,992
|
|
|
|
269,557
|
|
|
|
273,549
|
|
Loans to individuals & overdrafts
|
|
|
23
|
|
|
|
46
|
|
|
|
69
|
|
|
|
9,658
|
|
|
|
9,727
|
|
1-to-4 family residential
|
|
|
509
|
|
|
|
229
|
|
|
|
738
|
|
|
|
89,811
|
|
|
|
90,549
|
|
HELOC
|
|
|
24
|
|
|
|
780
|
|
|
|
804
|
|
|
|
40,157
|
|
|
|
40,961
|
|
Deferred loan (fees) cost, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,199
|
)
|
|
|
$
|
2,438
|
|
|
$
|
5,276
|
|
|
$
|
7,714
|
|
|
$
|
652,960
|
|
|
$
|
659,475
|
|
There were eleven loans in the aggregate amount
of $1.5 million greater than 90 days past due and still accruing interest at December 31, 2017 and 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. All loans greater
than 90 days past due and still accruing are acquired loans that are considered past due rather than non-accrual loans due to the
accounting treatment of acquired loans. In accordance with the ASC 310-20 guidance, if the loan pays different than contractually
required, then a discount / (premium) adjustment is made in order to maintain the same effective interest rate.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Non-Accrual and Past Due Loans
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. 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. In the case of an impaired loan that is still on accrual basis, payments are
applied to both principal and interest.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Impaired Loans
The following tables present information on
loans, excluding PCI loans and loans evaluated collectively as a homogenous group, that were considered to be impaired as of December
31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
Year to Date
|
|
|
|
|
|
|
Unpaid
|
|
|
Related
|
|
|
Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Allowance
|
|
|
Recorded
|
|
|
Recognized on
|
|
|
|
Investment
|
|
|
Balance
|
|
|
for Loan Losses
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
(dollars in thousands)
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
940
|
|
|
$
|
1,234
|
|
|
$
|
-
|
|
|
$
|
1,203
|
|
|
$
|
97
|
|
Construction
|
|
|
385
|
|
|
|
490
|
|
|
|
-
|
|
|
|
308
|
|
|
|
30
|
|
Commercial real estate
|
|
|
4,428
|
|
|
|
5,606
|
|
|
|
-
|
|
|
|
4,396
|
|
|
|
264
|
|
Loans to individuals & overdrafts
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multi-family residential
|
|
|
234
|
|
|
|
234
|
|
|
|
-
|
|
|
|
290
|
|
|
|
12
|
|
HELOC
|
|
|
602
|
|
|
|
926
|
|
|
|
-
|
|
|
|
887
|
|
|
|
44
|
|
1-to-4 family residential
|
|
|
1,077
|
|
|
|
1,209
|
|
|
|
-
|
|
|
|
842
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal:
|
|
|
7,667
|
|
|
|
9,700
|
|
|
|
-
|
|
|
|
7,926
|
|
|
|
501
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
142
|
|
|
|
142
|
|
|
|
50
|
|
|
|
72
|
|
|
|
8
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans to individuals & overdrafts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multi-family Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HELOC
|
|
|
202
|
|
|
|
202
|
|
|
|
11
|
|
|
|
249
|
|
|
|
12
|
|
1-to-4 family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subtotal:
|
|
|
344
|
|
|
|
344
|
|
|
|
61
|
|
|
|
321
|
|
|
|
20
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
6,129
|
|
|
|
7,706
|
|
|
|
50
|
|
|
|
6,269
|
|
|
|
411
|
|
Consumer
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential
|
|
|
1,881
|
|
|
|
2,337
|
|
|
|
11
|
|
|
|
1,978
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total:
|
|
$
|
8,011
|
|
|
$
|
10,044
|
|
|
$
|
61
|
|
|
$
|
8,247
|
|
|
$
|
521
|
|
Impaired loans at December 31, 2017 were approximately $8.0 million and were comprised of $2.1 million in
non-accrual loans and $5.9 million in loans still in accruing status. Recorded investment represents the current principal balance
for the loan.
Approximately $344,000 of the $8.0 million
in impaired loans at December 31, 2017 had specific allowances aggregating $61,000 while the remaining $7.7 million had no specific
allowances recorded. Of the $7.7 million with no allowance recorded, partial charge-offs to date amounted to $2.0 million.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Impaired Loans (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
Year to Date
|
|
|
|
|
|
|
Unpaid
|
|
|
Related
|
|
|
Average
|
|
|
Interest Income
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Allowance
|
|
|
Recorded
|
|
|
Recognized on
|
|
|
|
Investment
|
|
|
Balance
|
|
|
for Loan Losses
|
|
|
Investment
|
|
|
Impaired Loans
|
|
|
|
(dollars in thousands)
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
4
|
|
Construction
|
|
|
231
|
|
|
|
318
|
|
|
|
-
|
|
|
|
423
|
|
|
|
9
|
|
Commercial real estate
|
|
|
4,364
|
|
|
|
5,983
|
|
|
|
-
|
|
|
|
4,685
|
|
|
|
205
|
|
Loans to individuals & overdrafts
|
|
|
1,139
|
|
|
|
1,144
|
|
|
|
-
|
|
|
|
622
|
|
|
|
69
|
|
Multi-family residential
|
|
|
346
|
|
|
|
365
|
|
|
|
-
|
|
|
|
387
|
|
|
|
19
|
|
HELOC
|
|
|
1,041
|
|
|
|
1,378
|
|
|
|
-
|
|
|
|
870
|
|
|
|
51
|
|
1-to-4 family residential
|
|
|
1,000
|
|
|
|
1,278
|
|
|
|
-
|
|
|
|
1,530
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal:
|
|
|
8,167
|
|
|
|
10,512
|
|
|
|
-
|
|
|
|
8,540
|
|
|
|
440
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
2,496
|
|
|
|
2,905
|
|
|
|
80
|
|
|
|
1,872
|
|
|
|
40
|
|
Loans to individuals & overdrafts
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
9
|
|
|
|
-
|
|
Multi-family Residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HELOC
|
|
|
34
|
|
|
|
35
|
|
|
|
19
|
|
|
|
17
|
|
|
|
1
|
|
1-to-4 family residential
|
|
|
296
|
|
|
|
296
|
|
|
|
17
|
|
|
|
293
|
|
|
|
14
|
|
Subtotal:
|
|
|
2,827
|
|
|
|
3,237
|
|
|
|
117
|
|
|
|
2,191
|
|
|
|
55
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
7,483
|
|
|
|
9,617
|
|
|
|
80
|
|
|
|
7,390
|
|
|
|
277
|
|
Consumer
|
|
|
1,140
|
|
|
|
1,145
|
|
|
|
1
|
|
|
|
631
|
|
|
|
69
|
|
Residential
|
|
|
2,371
|
|
|
|
2,987
|
|
|
|
36
|
|
|
|
2,710
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total:
|
|
$
|
10,994
|
|
|
$
|
13,749
|
|
|
$
|
117
|
|
|
$
|
10,731
|
|
|
$
|
495
|
|
Impaired loans at December 31, 2016 were
approximately $11.0 million and were comprised of $5.8 million in non-accrual loans and $5.2 million in loans still in accruing
status. Recorded investment represents the current principal balance for the loan. Approximately $2.8 million of the $11.0 million
in impaired loans at December 31, 2016 had specific allowances aggregating $117,000 while the remaining $8.2 million had no specific
allowances recorded. Of the $8.2 million with no allowance recorded, partial charge-offs to date amounted to $2.3 million with
a remaining recorded amount of $3.2 million.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Troubled Debt Restructurings
The following tables present loans that were
modified as troubled debt restructurings (“TDRs”) within the previous twelve months with a breakdown of the types of
concessions made by loan class during the twelve months ended December 31, 2017 and 2016:
|
|
Twelve Months Ended December 31, 2017
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
loans
|
|
|
Investments
|
|
|
Investments
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Extended payment terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4
|
|
|
|
602
|
|
|
|
598
|
|
Commercial real estate
|
|
|
3
|
|
|
|
845
|
|
|
|
839
|
|
1-to-4 family residential
|
|
|
2
|
|
|
|
86
|
|
|
|
82
|
|
HELOC
|
|
|
1
|
|
|
|
126
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10
|
|
|
$
|
1,659
|
|
|
$
|
1,645
|
|
As noted in the tables above, there were ten
loans that were considered TDRs during the year ended December 31, 2017, for reasons due to extended terms. These loans were renewed
at terms that vary from those that the Company would enter into for new loans of this type.
|
|
Twelve Months Ended December 31, 2016
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
loans
|
|
|
Investments
|
|
|
Investments
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Extended payment terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
6
|
|
|
|
1,326
|
|
|
|
1,194
|
|
Construction
|
|
|
1
|
|
|
|
139
|
|
|
|
66
|
|
Commercial real estate
|
|
|
1
|
|
|
|
923
|
|
|
|
911
|
|
1-to-4 family residential
|
|
|
2
|
|
|
|
126
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10
|
|
|
$
|
2,514
|
|
|
$
|
2,297
|
|
As noted in the tables above, there were ten
loans that were considered TDRs during the year ended December 31, 2016, for reasons due to extended terms. These loans were renewed
at terms that vary from those that the Company would enter into for new loans of this type.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (continued)
Troubled Debt Restructurings (Continued)
The following tables present loans that were
modified as TDRs within the previous twelve months for which there was a payment default together with a breakdown of the types
of concessions made by loan class during the twelve months ended December 31, 2017 and 2016:
|
|
Twelve months ended
|
|
|
|
December 31, 2017
|
|
|
|
Number
|
|
|
Recorded
|
|
|
|
of loans
|
|
|
investment
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Extended payment terms:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
37
|
|
1-to-4 family residential
|
|
|
1
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
50
|
|
|
|
Twelve months ended
|
|
|
|
December 31, 2016
|
|
|
|
Number
|
|
|
Recorded
|
|
|
|
of loans
|
|
|
investment
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Extended payment terms:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4
|
|
|
|
660
|
|
Construction
|
|
|
1
|
|
|
|
66
|
|
1-to-4 family residential
|
|
|
1
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
$
|
774
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Troubled Debt Restructurings (Continued)
At December 31, 2017, the Company had thirty-six
loans with an aggregate balance of $5.8 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-two
loans with a balance totaling $4.9 million were still accruing as of December 31, 2017. The remaining fourteen TDRs with a balance
totaling $958,000 were in non-accrual status. All TDRs are included in non-performing assets and impaired loans.
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)
.
|
|
·
|
Risk Grade 3 (Good) - These loans have
excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade
will demonstrate the following characteristics:
|
|
o
|
Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and
State regulations (no exceptions of any kind).
|
|
o
|
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that
can be supplemented with verifiable cash flow from other sources.
|
|
o
|
Adequate 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:
|
|
o
|
General 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.
|
|
o
|
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that
can be supplemented with verifiable cash flow from other sources.
|
|
o
|
Adequate 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.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
|
·
|
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:
|
|
o
|
Additional 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.
|
|
o
|
Unproven, insufficient or marginal primary sources of repayment that appear 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.
|
|
o
|
Marginal 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:
|
|
o
|
Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.
|
|
o
|
Extending 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.
|
|
o
|
Loans 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.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
Consumer loans are graded on a scale of 1 to
9. A description of the general characteristics of the 9 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:
|
|
o
|
Loans within guideline tolerances or with exceptions of any kind that have not been mitigated by
other economic or credit factors.
|
|
o
|
Extending 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.
|
|
o
|
Loans 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.
|
|
·
|
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.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
The following tables present information on
risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of December 31, 2017 and 2016:
Total Loans:
December 31, 2017
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure By
|
|
Commercial
|
|
|
|
|
|
Commercial
|
|
|
|
|
Internally
|
|
and
|
|
|
|
|
|
real
|
|
|
Multi-family
|
|
Assigned Grade
|
|
industrial
|
|
|
Construction
|
|
|
estate
|
|
|
residential
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior
|
|
$
|
1,207
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Very good
|
|
|
2,454
|
|
|
|
111
|
|
|
|
420
|
|
|
|
-
|
|
Good
|
|
|
13,161
|
|
|
|
11,343
|
|
|
|
46,790
|
|
|
|
11,394
|
|
Acceptable
|
|
|
44,968
|
|
|
|
40,558
|
|
|
|
249,988
|
|
|
|
46,246
|
|
Acceptable with care
|
|
|
38,631
|
|
|
|
124,593
|
|
|
|
97,798
|
|
|
|
18,787
|
|
Special mention
|
|
|
3,172
|
|
|
|
583
|
|
|
|
3,771
|
|
|
|
322
|
|
Substandard
|
|
|
2,571
|
|
|
|
745
|
|
|
|
4,333
|
|
|
|
234
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
106,164
|
|
|
$
|
177,933
|
|
|
$
|
403,100
|
|
|
$
|
76,983
|
|
Consumer Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure By
|
|
|
|
|
|
|
|
|
|
|
|
|
Internally
|
|
1-to-4 family
|
|
|
|
|
|
|
|
|
|
|
Assigned Grade
|
|
residential
|
|
|
HELOC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
149,767
|
|
|
$
|
51,326
|
|
|
|
|
|
|
|
|
|
Special mention
|
|
|
3,270
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
|
3,864
|
|
|
|
1,027
|
|
|
|
|
|
|
|
|
|
|
|
$
|
156,901
|
|
|
$
|
52,606
|
|
|
|
|
|
|
|
|
|
Consumer Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure Based
|
|
Loans to
|
|
|
|
|
|
|
|
|
|
|
On Payment
|
|
individuals &
|
|
|
|
|
|
|
|
|
|
|
Activity
|
|
overdrafts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
10,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-pass
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
Credit Quality Indicators (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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
The process of determining the allowance for
loan losses is driven by the risk grade system and the loss experience on non-risk graded homogeneous types of loans. The Bank’s
allowance for loan losses is calculated and determined, at a minimum, each fiscal quarter end. The allowance for loan losses represents
management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.
In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is
placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan
loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined
to be impaired, the impairment is based on discounted expected cash flows using the loan’s initial effective interest rate
or the fair value of the collateral (less selling costs) for certain collateral dependent loans. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to
recognize changes to the allowance based on their judgments about information available to them at the time of their examinations.
Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against
the allowance, and subsequent recoveries are added to the allowance. The Credit Management Committee of the Board of Directors
has responsibility for oversight.
Management believes the allowance for loan
losses of $8.8 million at December 31, 2017 is adequate to provide for inherent losses in the loan portfolio; however, assessing
the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments
are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus,
there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in
the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio
in light of changing economic conditions and other relevant circumstances will not require significant future additions to the
allowance, thus adversely affecting future operating results of the Bank.
Determining the fair value of PCI loans at
acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at
appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated
fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference
between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the
impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over
of previously established allowance for credit losses from the acquired company.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
For PCI loans acquired from Legacy Select
and Premara, the contractually required payments including principal and interest, cash flows expected to be collected and fair
values as of the closing date of the merger and December 31, 2017 and 2016 were:
|
|
December 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contractually required payments
|
|
$
|
29,285
|
|
|
$
|
21,761
|
|
Nonaccretable difference
|
|
|
2,717
|
|
|
|
1,415
|
|
Cash flows expected to be collected
|
|
|
26,568
|
|
|
|
20,346
|
|
Accretable yield
|
|
|
3,307
|
|
|
|
2,626
|
|
Fair value
|
|
$
|
23,261
|
|
|
$
|
17,720
|
|
The following table documents changes to the
amount of the PCI accretable yield as of December 31, 2017 and 2016 (dollars in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Accretable yield, beginning of period
|
|
$
|
2,626
|
|
|
$
|
2,822
|
|
Additions
|
|
|
1,392
|
|
|
|
-
|
|
Accretion
|
|
|
(1,043
|
)
|
|
|
(1,055
|
)
|
Reclassification from nonaccretable difference
|
|
|
131
|
|
|
|
261
|
|
Other changes, net
|
|
|
201
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
Accretable yield, end of period
|
|
$
|
3,307
|
|
|
$
|
2,626
|
|
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 inherent 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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
The Company’s allowance for loan losses
model calculates historical loss rates 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 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 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.
|
|
·
|
South 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.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
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 most likely be 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.
|
|
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 losses that are likely to be incurred, 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.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
The following tables present a roll forward
of the Company’s allowance for loan losses by loan segment for the twelve month periods ended
December 31, 2017, 2016 and 2015, respectively (in thousands):
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
– excluding PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
01/01/2017
|
|
$
|
1,211
|
|
|
$
|
1,301
|
|
|
$
|
3,448
|
|
|
$
|
846
|
|
|
$
|
611
|
|
|
$
|
317
|
|
|
$
|
628
|
|
|
$
|
8,362
|
|
Provision for loan losses
|
|
|
(607
|
)
|
|
|
642
|
|
|
|
754
|
|
|
|
188
|
|
|
|
92
|
|
|
|
55
|
|
|
|
161
|
|
|
|
1,285
|
|
Loans charged-off
|
|
|
(73
|
)
|
|
|
(17
|
)
|
|
|
(914
|
)
|
|
|
(22
|
)
|
|
|
(179
|
)
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
(1,306
|
)
|
Recoveries
|
|
|
211
|
|
|
|
29
|
|
|
|
16
|
|
|
|
46
|
|
|
|
25
|
|
|
|
34
|
|
|
|
2
|
|
|
|
363
|
|
Balance, end of period
12/31/2017
|
|
$
|
742
|
|
|
$
|
1,955
|
|
|
$
|
3,304
|
|
|
$
|
1,058
|
|
|
$
|
549
|
|
|
$
|
305
|
|
|
$
|
791
|
|
|
$
|
8,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2017
|
|
$
|
37
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49
|
|
Provision for loan losses
|
|
|
28
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
Loans charged-off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
65
|
|
|
$
|
-
|
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2017
|
|
$
|
1,248
|
|
|
$
|
1,301
|
|
|
$
|
3,448
|
|
|
$
|
846
|
|
|
$
|
623
|
|
|
$
|
317
|
|
|
$
|
628
|
|
|
$
|
8,411
|
|
Provision for loan losses
|
|
|
(579
|
)
|
|
|
642
|
|
|
|
820
|
|
|
|
188
|
|
|
|
80
|
|
|
|
55
|
|
|
|
161
|
|
|
|
1,367
|
|
Loans charged-off
|
|
|
(73
|
)
|
|
|
(17
|
)
|
|
|
(914
|
)
|
|
|
(22
|
)
|
|
|
(179
|
)
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
(1,306
|
)
|
Recoveries
|
|
|
211
|
|
|
|
29
|
|
|
|
16
|
|
|
|
46
|
|
|
|
25
|
|
|
|
34
|
|
|
|
2
|
|
|
|
363
|
|
Balance, end of period
12/31/2017
|
|
$
|
807
|
|
|
$
|
1,955
|
|
|
$
|
3,370
|
|
|
$
|
1,058
|
|
|
$
|
549
|
|
|
$
|
305
|
|
|
$
|
791
|
|
|
$
|
8,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance: individually evaluated for impairment
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
61
|
|
Ending
Balance: collectively evaluated for impairment
|
|
$
|
757
|
|
|
$
|
1,955
|
|
|
$
|
3,370
|
|
|
$
|
1,047
|
|
|
$
|
549
|
|
|
$
|
305
|
|
|
$
|
791
|
|
|
$
|
8,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance: collectively evaluated for impairment
|
|
$
|
105,081
|
|
|
$
|
177,548
|
|
|
$
|
398,673
|
|
|
$
|
155,623
|
|
|
$
|
52,004
|
|
|
$
|
10,243
|
|
|
$
|
76,748
|
|
|
$
|
975,920
|
|
Ending
Balance: individually evaluated for impairment
|
|
$
|
1,083
|
|
|
$
|
385
|
|
|
$
|
4,427
|
|
|
$
|
1,278
|
|
|
$
|
602
|
|
|
$
|
1
|
|
|
$
|
235
|
|
|
$
|
8,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$
|
106,164
|
|
|
$
|
177,933
|
|
|
$
|
403,100
|
|
|
$
|
156,901
|
|
|
$
|
52,606
|
|
|
$
|
10,244
|
|
|
$
|
76,983
|
|
|
$
|
983,931
|
|
Also included in this table are $23.3 million
of acquired loans with deteriorated credit quality.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans – excluding PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2016
|
|
$
|
922
|
|
|
$
|
1,386
|
|
|
$
|
3,005
|
|
|
$
|
605
|
|
|
$
|
564
|
|
|
$
|
137
|
|
|
$
|
393
|
|
|
$
|
7,012
|
|
Provision for loan losses
|
|
|
449
|
|
|
|
(105
|
)
|
|
|
481
|
|
|
|
(51
|
)
|
|
|
217
|
|
|
|
250
|
|
|
|
235
|
|
|
|
1,476
|
|
Loans charged-off
|
|
|
(182
|
)
|
|
|
(2
|
)
|
|
|
(189
|
)
|
|
|
(7
|
)
|
|
|
(205
|
)
|
|
|
(90
|
)
|
|
|
-
|
|
|
|
(675
|
)
|
Recoveries
|
|
|
22
|
|
|
|
22
|
|
|
|
151
|
|
|
|
299
|
|
|
|
35
|
|
|
|
20
|
|
|
|
-
|
|
|
|
549
|
|
Total
|
|
$
|
1,211
|
|
|
$
|
1,301
|
|
|
$
|
3,448
|
|
|
$
|
846
|
|
|
$
|
611
|
|
|
$
|
317
|
|
|
$
|
628
|
|
|
$
|
8,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
Provision for loan losses
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Loans charged-off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
37
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2016
|
|
$
|
922
|
|
|
$
|
1,386
|
|
|
$
|
3,005
|
|
|
$
|
605
|
|
|
$
|
573
|
|
|
$
|
137
|
|
|
$
|
393
|
|
|
$
|
7,021
|
|
Provision for loan losses
|
|
|
486
|
|
|
|
(105
|
)
|
|
|
481
|
|
|
|
(51
|
)
|
|
|
220
|
|
|
|
250
|
|
|
|
235
|
|
|
|
1,516
|
|
Loans charged-off
|
|
|
(182
|
)
|
|
|
(2
|
)
|
|
|
(189
|
)
|
|
|
(7
|
)
|
|
|
(205
|
)
|
|
|
(90
|
)
|
|
|
-
|
|
|
|
(675
|
)
|
Recoveries
|
|
|
22
|
|
|
|
22
|
|
|
|
151
|
|
|
|
299
|
|
|
|
35
|
|
|
|
20
|
|
|
|
-
|
|
|
|
549
|
|
Balance, end of period 12/31/2016
|
|
$
|
1,248
|
|
|
$
|
1,301
|
|
|
$
|
3,448
|
|
|
$
|
846
|
|
|
$
|
623
|
|
|
$
|
317
|
|
|
$
|
628
|
|
|
$
|
8,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
117
|
|
Ending Balance: collectively evaluated for impairment
|
|
$
|
1,248
|
|
|
$
|
1,301
|
|
|
$
|
3,368
|
|
|
$
|
829
|
|
|
$
|
604
|
|
|
$
|
316
|
|
|
$
|
628
|
|
|
$
|
8,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: collectively evaluated for impairment
|
|
$
|
90,632
|
|
|
$
|
100,680
|
|
|
$
|
274,863
|
|
|
$
|
96,682
|
|
|
$
|
40,083
|
|
|
$
|
8,687
|
|
|
$
|
55,773
|
|
|
$
|
667,400
|
|
Ending Balance: individually evaluated for impairment
|
|
$
|
46
|
|
|
$
|
231
|
|
|
$
|
6,860
|
|
|
$
|
1,296
|
|
|
$
|
1,075
|
|
|
$
|
1,140
|
|
|
$
|
346
|
|
|
$
|
10,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
90,678
|
|
|
$
|
100,911
|
|
|
$
|
281,723
|
|
|
$
|
97,978
|
|
|
$
|
41,158
|
|
|
$
|
9,827
|
|
|
$
|
56,119
|
|
|
$
|
678,394
|
|
Also included in this table are $17.7 million
of acquired loans with deteriorated credit quality.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE E - LOANS (Continued)
2015
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans – excluding PCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2015
|
|
$
|
803
|
|
|
$
|
1,103
|
|
|
$
|
2,914
|
|
|
$
|
630
|
|
|
$
|
930
|
|
|
$
|
185
|
|
|
$
|
279
|
|
|
$
|
6,844
|
|
Provision for loan losses
|
|
|
212
|
|
|
|
333
|
|
|
|
670
|
|
|
|
(57
|
)
|
|
|
(272
|
)
|
|
|
(18
|
)
|
|
|
13
|
|
|
|
881
|
|
Loans charged-off
|
|
|
(141
|
)
|
|
|
(79
|
)
|
|
|
(663
|
)
|
|
|
(70
|
)
|
|
|
(115
|
)
|
|
|
(54
|
)
|
|
|
(5
|
)
|
|
|
(1,127
|
)
|
Recoveries
|
|
|
48
|
|
|
|
29
|
|
|
|
84
|
|
|
|
102
|
|
|
|
21
|
|
|
|
24
|
|
|
|
106
|
|
|
|
414
|
|
Total
|
|
$
|
922
|
|
|
$
|
1,386
|
|
|
$
|
3,005
|
|
|
$
|
605
|
|
|
$
|
564
|
|
|
$
|
137
|
|
|
$
|
393
|
|
|
$
|
7,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Loans charged-off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period 01/01/2015
|
|
$
|
803
|
|
|
$
|
1,103
|
|
|
$
|
2,914
|
|
|
$
|
630
|
|
|
$
|
930
|
|
|
$
|
185
|
|
|
$
|
279
|
|
|
$
|
6,844
|
|
Provision for loan losses
|
|
|
212
|
|
|
|
333
|
|
|
|
670
|
|
|
|
(57
|
)
|
|
|
(263
|
)
|
|
|
(18
|
)
|
|
|
13
|
|
|
|
890
|
|
Loans charged-off
|
|
|
(141
|
)
|
|
|
(79
|
)
|
|
|
(663
|
)
|
|
|
(70
|
)
|
|
|
(115
|
)
|
|
|
(54
|
)
|
|
|
(5
|
)
|
|
|
(1,127
|
)
|
Recoveries
|
|
|
48
|
|
|
|
29
|
|
|
|
84
|
|
|
|
102
|
|
|
|
21
|
|
|
|
24
|
|
|
|
106
|
|
|
|
414
|
|
Balance, end of period 12/31/2015
|
|
$
|
922
|
|
|
$
|
1,386
|
|
|
$
|
3,005
|
|
|
$
|
605
|
|
|
$
|
573
|
|
|
$
|
137
|
|
|
$
|
393
|
|
|
$
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: individually evaluated for impairment
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
73
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
94
|
|
Ending Balance: collectively evaluated for impairment
|
|
$
|
920
|
|
|
$
|
1,386
|
|
|
$
|
2,932
|
|
|
$
|
590
|
|
|
$
|
573
|
|
|
$
|
133
|
|
|
$
|
393
|
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance: collectively evaluated for impairment
|
|
$
|
73,373
|
|
|
$
|
107,073
|
|
|
$
|
253,005
|
|
|
$
|
85,604
|
|
|
$
|
41,303
|
|
|
$
|
7,251
|
|
|
$
|
40,738
|
|
|
$
|
608,397
|
|
Ending Balance: individually evaluated for impairment
|
|
$
|
118
|
|
|
$
|
615
|
|
|
$
|
6,254
|
|
|
$
|
2,351
|
|
|
$
|
699
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
10,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
73,491
|
|
|
$
|
107,688
|
|
|
$
|
259,259
|
|
|
$
|
87,955
|
|
|
$
|
42,002
|
|
|
$
|
7,255
|
|
|
$
|
40,738
|
|
|
$
|
618,388
|
|
Also included in this table are $21.1 million
of acquired loans with deteriorated credit quality.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE F– OTHER REAL ESTATE OWNED
The following table explains changes in
other real estate owned (“OREO”) during the years ended December 31, 2017 and 2016 (dollars in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Beginning balance January 1
|
|
$
|
599
|
|
|
$
|
1,401
|
|
Sales
|
|
|
(1,442
|
)
|
|
|
(2,062
|
)
|
Write-downs and loss on sales
|
|
|
(442
|
)
|
|
|
(158
|
)
|
Transfers
|
|
|
2,543
|
|
|
|
1,418
|
|
Ending balance
|
|
$
|
1,258
|
|
|
$
|
599
|
|
At December 31, 2017 and December 31, 2016,
the Company had $1.3 million and $599,000, respectively, of foreclosed residential real estate property in OREO. The Company did
have $376,000 which was comprised of 5 loans with recorded investment in consumer mortgage loans collateralized by residential
real estate property in the process of foreclosure at December 31, 2017. The Company did not have any loans with recorded investment
in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at December 31, 2017.
NOTE G - PREMISES AND EQUIPMENT
The following is a summary of premises
and equipment at December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Land
|
|
$
|
5,078
|
|
|
$
|
5,054
|
|
Buildings
|
|
|
14,671
|
|
|
|
14,519
|
|
Furniture and equipment
|
|
|
6,577
|
|
|
|
5,846
|
|
Leasehold improvements
|
|
|
453
|
|
|
|
144
|
|
Construction in progress
|
|
|
100
|
|
|
|
-
|
|
|
|
|
26,879
|
|
|
|
25,563
|
|
Less accumulated depreciation
|
|
|
8,611
|
|
|
|
7,632
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,268
|
|
|
$
|
17,931
|
|
Depreciation amounting to approximately
$1.0 million, $1.1 million, and $1.0 million for the years ended December 31, 2017, 2016, and 2015, respectively, is included in
occupancy and equipment expenses.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE G - PREMISES AND EQUIPMENT (Continued)
The Company has operating leases for its
corporate offices and branches that expire at various times through 2024. Future minimum lease payments under the leases for years
subsequent to December 31, 2017 are as follows:
|
|
Total Lease Payments
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
2018
|
|
$
|
1,203
|
|
2019
|
|
|
1,202
|
|
2020
|
|
|
738
|
|
2021
|
|
|
739
|
|
2022
|
|
|
568
|
|
Years thereafter
|
|
|
330
|
|
|
|
|
|
|
|
|
$
|
4,780
|
|
During 2017, 2016, and 2015, payments under
operating leases were approximately $408,000, $370,000, and $401,000, respectively. Lease expense was accounted for on a straight
line basis. Rental income earned on office space leased to third parties was $148,000, $182,000 and $161,000 for 2017, 2016 and
2015, respectively.
NOTE H – GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes the changes
in carrying amounts of goodwill and other intangibles (core deposit intangibles) for the periods presented.
|
|
|
|
|
Core Deposit Intangible
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
Balance at January 1, 2015
|
|
$
|
6,931
|
|
|
$
|
3,059
|
|
|
$
|
(1,434
|
)
|
|
$
|
1,625
|
|
Core deposit intangible resulting from branch acquisition
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(544
|
)
|
|
|
(544
|
)
|
Balance at December 31, 2015
|
|
|
6,931
|
|
|
|
3,219
|
|
|
|
(1,978
|
)
|
|
|
1,241
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(431
|
)
|
|
|
(431
|
)
|
Balance at December 31, 2016
|
|
|
6,931
|
|
|
|
3,219
|
|
|
|
(2,409
|
)
|
|
|
810
|
|
Core deposit intangible resulting from Premara merger
|
|
|
17,973
|
|
|
|
2,700
|
|
|
|
-
|
|
|
|
2,700
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(409
|
)
|
|
|
(409
|
)
|
Balance at December 31, 2017
|
|
$
|
24,904
|
|
|
$
|
5,919
|
|
|
$
|
(2,818
|
)
|
|
$
|
3,101
|
|
Goodwill represents the excess of the purchase
price over the fair value of acquired net assets under the acquisition method of accounting.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE H – GOODWILL AND OTHER INTANGIBLE ASSETS
(
Continued
)
The value of acquired core deposit relationships
was determined using the present value of the difference between a market participant's cost of obtaining alternative funds and
the cost to maintain the acquired deposit base.
The table below summarizes the remaining
core deposit intangible amortization (dollars in thousands):
2018
|
|
$
|
1,016
|
|
2019
|
|
|
791
|
|
2020
|
|
|
565
|
|
2021
|
|
|
379
|
|
2022
|
|
|
239
|
|
Thereafter
|
|
|
111
|
|
|
|
|
|
|
|
|
$
|
3,101
|
|
NOTE I – DEPOSITS
The scheduled maturities of time deposits
at December 31, 2017 are as follows:
|
|
Total Time Deposits
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
2017
|
|
$
|
316,051
|
|
2018
|
|
|
78,240
|
|
2019
|
|
|
28,631
|
|
2020
|
|
|
13,967
|
|
2021
|
|
|
10,722
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
447,611
|
|
Time deposits with balances of $250,000
or more were $96.9 million and $68.8 million at December 31, 2017 and 2016, respectively.
NOTE J - REPURCHASE AGREEMENTS
We utilize securities sold under agreements
to repurchase to facilitate the needs of our customers. 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 amount of cash received in connection with the transaction and are reflected as short-term
borrowings.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE J - REPURCHASE AGREEMENTS (Continued)
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 its 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. The carrying value of
available for sale investment securities pledged as collateral under repurchase agreements totaled none and $12.1 million at December
31, 2017 and 2016, respectively.
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 table.
|
|
December 31, 2016
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
|
Overnight and
|
|
|
Up to 30
|
|
|
30-90
|
|
|
Greater than
|
|
|
|
|
(Dollars in thousands)
|
|
continuous
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies-GSE’s
|
|
$
|
5,568
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,568
|
|
Mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities-GSE’s
|
|
|
6,496
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,496
|
|
Total borrowings
|
|
$
|
12,064
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,064
|
|
Gross amount of recognized liabilities for repurchase agreements
|
|
|
|
|
|
|
|
$
|
12,003
|
|
NOTE K – SHORT-TERM AND LONG-TERM
DEBT
At December 31, 2017, the Company had $28.3
million in short-term debt and $19.4 million in long-term debt. Short-term debt consisted of $28.3 million in Federal Home Loan
Bank advances. Long-term debt consisted of $12.4 million in junior subordinated debentures and $7.0 million in Federal Home Loan
Bank advances. The Federal Home Loan Bank advances are collateralized by $117.4 million of loans as of December 31, 2017.
At December 31, 2016, the Company had $37.1
million in short-term debt and $23.0 million in long-term debt. Short-term debt consisted of $25.1 million in Federal Home Loan
Bank advances and $12.0 million in repurchase agreements. Long-term debt consisted of $12.4 million in junior subordinated debentures
and $10.6 million in Federal Home Loan Bank advances. The Federal Home Loan Bank advances were collateralized by $93.5 million
of loans as of December 31, 2016.
Securities sold under agreements to repurchase
generally mature within one to four days from the transaction date and are classified as short-term debt. Securities sold under
agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements
are collateralized by U. S. Government agency obligations and all are floating rate. During 2017 we terminated our repurchase agreement
program. The following table presents certain information for securities sold under agreements to repurchase:
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE K – SHORT-TERM AND LONG-TERM
DEBT (Continued)
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
-
|
|
|
$
|
12,003
|
|
Weighted average interest rate at December 31
|
|
|
-
|
|
|
|
0.32
|
%
|
Maximum amount outstanding at any month-end during the year
|
|
$
|
15,235
|
|
|
$
|
12,003
|
|
Average daily balance outstanding during the year
|
|
$
|
6,751
|
|
|
$
|
9,973
|
|
Average annual interest rate paid during the year
|
|
|
0.35
|
%
|
|
|
0.30
|
%
|
At December 31, 2017, the Company had $35.3
million in advances from the Federal Home Loan Bank of Atlanta and no borrowings from the Federal Reserve Bank discount window.
The advances include a premium on borrowings acquired of $12,000. Advances consisted of the following at December 31, 2017:
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance type:
|
|
|
|
|
|
|
|
|
|
|
Fixed rate credit
|
|
$
|
4,000
|
|
|
|
1.21
|
%
|
|
1/26/2018
|
Fixed rate credit
|
|
|
2,000
|
|
|
|
1.26
|
%
|
|
3/30/2018
|
Fixed rate credit
|
|
|
5,000
|
|
|
|
1.31
|
%
|
|
4/30/2018
|
Fixed rate credit
|
|
|
3,000
|
|
|
|
1.42
|
%
|
|
6/18/2018
|
Fixed rate credit
|
|
|
10,000
|
|
|
|
1
.38
|
%
|
|
7/30/2018
|
Principal Reducing
|
|
|
266
|
|
|
|
1.09
|
%
|
|
8/13/2018
|
Fixed rate hybrid
|
|
|
4,000
|
|
|
|
1.87
|
%
|
|
12/17/2018
|
Fixed rate credit
|
|
|
3,000
|
|
|
|
1.51
|
%
|
|
6/28/2019
|
Fixed rate credit
|
|
|
4,000
|
|
|
|
1.52
|
%
|
|
6/28/2019
|
On September 20, 2004, $12.4 million of
junior subordinated debentures were issued to New Century Statutory Trust I (“the Trust”) in exchange for the proceeds
of trust preferred securities issued by the Trust. All of the Trust’s common equity is owned by the Company. The junior subordinated
debentures are included in long-term debt and the Company’s equity interest in the Trust is included in other assets.
The Company pays interest on the junior
subordinated debentures at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The debentures are redeemable on
September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory
at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s
obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The trust preferred
securities qualify as Tier 1 capital for regulatory capital purposes subject to certain limitations, none of which were applicable
at December 31, 2017.
Lines of credit amounted to $223.3 million
with various correspondent banks with $60.3 million outstanding and $163.0 million available. Some of the lines of credit are secured
and others unsecured with a variety of rates and terms.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE L - INCOME TAXES
The significant components of the provision
for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(dollars in thousands)
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,059
|
|
|
$
|
2,998
|
|
|
$
|
2,094
|
|
State
|
|
|
328
|
|
|
|
498
|
|
|
|
354
|
|
Total current tax provision
|
|
|
3,387
|
|
|
|
3,496
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,328
|
|
|
|
52
|
|
|
|
752
|
|
State
|
|
|
(3
|
)
|
|
|
99
|
|
|
|
218
|
|
Total deferred tax provision
|
|
|
2,325
|
|
|
|
151
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax provision
|
|
$
|
5,712
|
|
|
$
|
3,647
|
|
|
$
|
3,418
|
|
The difference between the provision for
income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is
summarized below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at federal statutory rate
|
|
$
|
3,025
|
|
|
$
|
3,536
|
|
|
$
|
3,390
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax effect
|
|
|
214
|
|
|
|
394
|
|
|
|
377
|
|
Tax-exempt interest income
|
|
|
(128
|
)
|
|
|
(151
|
)
|
|
|
(172
|
)
|
Income from life insurance
|
|
|
(195
|
)
|
|
|
(201
|
)
|
|
|
(213
|
)
|
Incentive stock option expense
|
|
|
39
|
|
|
|
24
|
|
|
|
13
|
|
Merger expenses
|
|
|
209
|
|
|
|
-
|
|
|
|
-
|
|
Impact of changes in tax rates
|
|
|
2,591
|
|
|
|
-
|
|
|
|
-
|
|
Other permanent differences
|
|
|
(43
|
)
|
|
|
45
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,712
|
|
|
$
|
3,647
|
|
|
$
|
3,418
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE L - INCOME TAXES (Continued
)
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
Deferred tax assets relating to:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,030
|
|
|
$
|
3,026
|
|
Deferred compensation
|
|
|
172
|
|
|
|
294
|
|
Supplemental executive retirement plan
|
|
|
-
|
|
|
|
17
|
|
Net operating loss carryforwards
|
|
|
1,446
|
|
|
|
-
|
|
Acquisition accounting
|
|
|
1,738
|
|
|
|
986
|
|
Core deposit intangible
|
|
|
-
|
|
|
|
165
|
|
Write-downs on foreclosed real estate
|
|
|
116
|
|
|
|
53
|
|
Other
|
|
|
143
|
|
|
|
184
|
|
Total deferred tax assets
|
|
|
5,645
|
|
|
|
4,725
|
|
Deferred tax liabilities relating to:
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
(654
|
)
|
|
|
(1,287
|
)
|
Deferred loan fees/costs
|
|
|
(54
|
)
|
|
|
(70
|
)
|
Unrealized gains on available-for-sale securities
|
|
|
(119
|
)
|
|
|
(204
|
)
|
Core deposit intangible
|
|
|
(319
|
)
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
(32
|
)
|
Total deferred tax liabilities
|
|
|
(1,146
|
)
|
|
|
(1,593
|
)
|
|
|
|
|
|
|
|
|
|
Net recorded deferred tax asset, included in other assets
|
|
$
|
4,499
|
|
|
$
|
3,132
|
|
Deferred income taxes are measured at the
enacted tax rate for the period in which they are expected to reverse. In December 2017 the U.S. Congress passed and the President
signed legislation which reduced the statutory corporate tax rate to 21% effective January 1, 2018 and for all taxable years ending
after that date. North Carolina also enacted legislation to reduce its corporate tax rate from 3.0% to 2.5% effective January 1,
2019. Therefore, deferred income taxes as of December 31, 2017 have been measured using the tax rate enacted for subsequent years
of 21% and 2.5%. The impact of this change in tax rate is additional income tax expense of $2.6 million.
The Company had $7.0 million of net operating
losses which can be carried forward and applied against future taxable income. If unused, these net operating losses will expire
in 2027 through 2036. The Company’s policy is to report interest and penalties, if any, related to uncertain tax positions
in income tax expense in the Consolidated Statements of Operations. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2014. As of December 31, 2017
and 2016, the Company has no uncertain tax positions.
The Company’s net deferred tax asset
was $4.5 million and $3.2 million at December 31, 2017 and 2016. In evaluating whether we will realize the full benefit of
our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends,
projected earnings, and asset quality. As of December 31, 2017, management concluded that the Company’s net deferred tax
assets were fully realizable. As a result of the reduction in the federal corporate tax rate in December 2017 deferred taxes were
adjusted to reflect this change. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be
able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant
negative trends in credit quality, losses from operations or other factors could impact the realization of the deferred tax asset
in the future.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE M - REGULATORY MATTERS
The Company is subject to various regulatory
capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse
effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of
December 31, 2017, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant
assets are its investments in Select Bank & Trust Company and New Century Statutory Trust I.
Regulatory authorities may limit payment
of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial
soundness of the bank. The North Carolina Commissioner of Banks and the FDIC are also authorized to prohibit the payment of dividends
under certain other circumstances.
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. Financial institutions and holding companies became subject to the Basel III capital requirements beginning
on January 1, 2015. A new part of the capital ratios profile is the Common Equity Tier 1 risk-based ratio which does not include
limited life components such as trust preferred securities and Small Business Lending Fund (“SBLF”) preferred stock.
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).
As the following tables indicate, at December
31, 2017 and 2016, the Company and its Bank subsidiary both exceeded minimum regulatory capital requirements as specified below.
|
|
|
|
|
|
|
|
Minimum for capital
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
The Company:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2017:
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
129,168
|
|
|
|
11.86
|
%
|
|
$
|
87,163
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
120,334
|
|
|
|
11.04
|
%
|
|
|
65,372
|
|
|
|
6.00
|
%
|
Common Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
108,334
|
|
|
|
9.94
|
%
|
|
|
49,029
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
120,334
|
|
|
|
12.64
|
%
|
|
|
38,086
|
|
|
|
4.00
|
%
|
|
|
|
|
|
Minimum for capital
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
The Company:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2016:
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
116,909
|
|
|
|
15.12
|
%
|
|
$
|
61,876
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
108,498
|
|
|
|
14.03
|
%
|
|
|
46,407
|
|
|
|
6.00
|
%
|
Common Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
96,498
|
|
|
|
12.48
|
%
|
|
|
34,805
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
108,498
|
|
|
|
12.99
|
%
|
|
|
33,422
|
|
|
|
4.00
|
%
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE M - REGULATORY MATTERS (Continued
)
Select Bank & Trust Company’s
actual capital amounts and ratios are presented in the table below as of December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Minimum to be well
|
|
|
|
|
|
|
|
|
|
Minimum for capital
|
|
|
capitalized under prompt
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
corrective action provisions
|
|
The Bank:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2017:
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
123,813
|
|
|
|
11.38
|
%
|
|
$
|
87,077
|
|
|
|
8.00
|
%
|
|
|
108,846
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
114,979
|
|
|
|
10.56
|
%
|
|
|
65,308
|
|
|
|
6.00
|
%
|
|
|
87,077
|
|
|
|
8.00
|
%
|
Common equity Tier 1 (to Risk-Weight Assets)
|
|
|
114,979
|
|
|
|
10.56
|
%
|
|
|
48,981
|
|
|
|
4.50
|
%
|
|
|
70,750
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
114,979
|
|
|
|
12.08
|
%
|
|
|
38,086
|
|
|
|
4.00
|
%
|
|
|
47,608
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum to be well
|
|
|
|
|
|
|
|
|
|
Minimum for capital
|
|
|
capitalized under prompt
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
corrective action provisions
|
|
The Bank:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2016:
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
$
|
112,375
|
|
|
|
14.53
|
%
|
|
$
|
61,876
|
|
|
|
8.00
|
%
|
|
|
77,346
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
103,964
|
|
|
|
13.44
|
%
|
|
|
46,407
|
|
|
|
6.00
|
%
|
|
|
61,876
|
|
|
|
8.00
|
%
|
Common equity Tier 1 (to Risk-Weight Assets)
|
|
|
103,964
|
|
|
|
13.44
|
%
|
|
|
34,806
|
|
|
|
4.50
|
%
|
|
|
50,275
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
103,964
|
|
|
|
12.44
|
%
|
|
|
33,422
|
|
|
|
4.00
|
%
|
|
|
41,777
|
|
|
|
5.00
|
%
|
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 December 31, 2017.
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.
NOTE N - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments
with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each customer’s creditworthiness on a case-by-case basis.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE N - OFF-BALANCE SHEET RISK (Continued)
The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral
obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the
Company’s exposure to off-balance sheet credit risk as of December 31, 2017 is as follows:
Financial instruments whose contract amounts represent credit risk:
|
|
(In thousands)
|
|
Undisbursed commitments
|
|
$
|
178,072
|
|
Letters of credit
|
|
|
2,523
|
|
The Company has legally binding delayed
equity commitments to private investment funds. These commitments are not expected to be called, and therefore, are not reflected
in the financial statements. The amount of these commitments at December 31, 2017 and 2016 was $525,000 and $200,000, respectively.
NOTE O – FAIR VALUE MEASUREMENTS
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.
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.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
|
·
|
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 flows 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.
Investment Securities Available-for-Sale
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 agencies – GSE’s, mortgage-backed securities issued by GSE’s, corporate
bonds and municipal bonds. Valuation techniques are consistent with methodologies used in prior periods.
The following tables summarize quantitative
disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of December
31, 2017 and December 31, 2016 (dollars in thousands):
Investment securities
available for sale
December 31, 2017
|
|
Fair value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies – GSE's
|
|
$
|
13,364
|
|
|
$
|
-
|
|
|
$
|
13,364
|
|
|
$
|
-
|
|
Mortgage-backed securities - GSE’s
|
|
|
29,684
|
|
|
|
-
|
|
|
|
29,684
|
|
|
|
-
|
|
Corporate Bonds
|
|
|
1,888
|
|
|
|
-
|
|
|
|
1,888
|
|
|
|
-
|
|
Municipal bonds
|
|
|
18,838
|
|
|
|
-
|
|
|
|
18,838
|
|
|
|
-
|
|
Total investment held for sale
|
|
$
|
63,774
|
|
|
$
|
-
|
|
|
$
|
63,774
|
|
|
$
|
-
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
|
|
|
|
|
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
|
|
|
$
|
-
|
|
The following are descriptions of valuation
methodologies used for assets and liabilities recorded at fair value on a non-recurring basis.
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 a specific reserve in the allowance for
loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management
measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using
one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted
cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments
or collateral exceed the recorded investments in such loans. At December 31, 2017, and 2016, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve 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 nonrecurring 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 nonrecurring Level 3. There
were no transfers between levels from prior reporting periods. Valuation techniques are consistent with prior periods.
The significant unobservable inputs used
in the fair value measurement of the Company’s impaired loans range between 6 - 56% and 6-61% discount from appraisals for
expected liquidation and sales costs at December 31, 2017 and 2016.
Foreclosed Real Estate
Foreclosed real estate are properties recorded
at estimated fair value, less the estimated costs to sell, at the date of foreclosure. 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. Valuation techniques are consistent with prior periods.
The significant unobservable input used
in the fair value measurement of the Company’s foreclosed real estate range between 6 – 10% and 6 – 10% discount
from appraisals for expected liquidation and sales costs at December 31, 2017 and 2016, respectively.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
Assets held for sale
During 2015, a branch facility was taken
out of service as part of the Company’s branch restructuring plan and reclassified as held for sale. The property is recorded
at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include
appraised values on the properties or recent sales activity for similar assets in the property’s market. The significant
unobservable input used is the discount applied to appraised values to account for expected liquidation and selling costs ranged
between 1% and 25 % at December 31, 2017. There have been no changes in the valuation techniques.
The following tables summarize quantitative
disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of December
31, 2017 and
December 31, 2016 (dollars in thousands):
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
Asset Category
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
December 31, 2017
|
|
Fair value
|
|
|
Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,115
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
|
1,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,219
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,219
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
5,805
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
|
599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,250
|
|
As of December 31, 2017, the Bank identified
$8.0 million in impaired loans, of which $2.1 million were carried at fair value on a non-recurring basis which included $344,000
in loans that required a specific reserve of $61,000, and an additional $1.7 million in other loans without specific reserves that
had partial charge-offs. As of December 31, 2016, the Bank identified $11.0 million in impaired loans, of which $5.8 million were
carried at fair value on a non-recurring basis which included $2.8 million in loans that required a specific reserve of $117,000,
and an additional $88,000 in other loans without specific reserves that had charge-offs.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
Financial instruments include cash and
due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Due to the nature of
the Company’s business, a significant portion of its assets and liabilities consist of financial instruments, the estimated
values of which are disclosed. These estimates do not reflect any premium or discount that could result from offering for sale
at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for
a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The following table presents the carrying
values and estimated fair values of the Company's financial instruments at December 31, 2017 and 2016:
|
|
December 31, 2017
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(dollars in thousands)
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
16,554
|
|
|
$
|
16,554
|
|
|
$
|
16,554
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Certificates of deposits
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
Interest-earning deposits in other banks
|
|
|
37,996
|
|
|
|
37,996
|
|
|
|
37,996
|
|
|
|
-
|
|
|
|
-
|
|
Federal funds sold
|
|
|
6,645
|
|
|
|
6,645
|
|
|
|
6,645
|
|
|
|
-
|
|
|
|
-
|
|
Investment securities available for sale
|
|
|
63,774
|
|
|
|
63,774
|
|
|
|
-
|
|
|
|
63,774
|
|
|
|
-
|
|
Loans held for sale
|
|
|
98
|
|
|
|
98
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
Loans, net
|
|
|
973,791
|
|
|
|
972,475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
972,475
|
|
Accrued interest receivable
|
|
|
3,997
|
|
|
|
3,997
|
|
|
|
-
|
|
|
|
3,997
|
|
|
|
-
|
|
Stock in the FHLB
|
|
|
2,490
|
|
|
|
2,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,490
|
|
Other non-marketable securities
|
|
|
1,019
|
|
|
|
1,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,019
|
|
Assets held for sale
|
|
|
846
|
|
|
|
846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
995,044
|
|
|
$
|
991,977
|
|
|
$
|
-
|
|
|
$
|
991,977
|
|
|
$
|
-
|
|
Short-term debt
|
|
|
28,279
|
|
|
|
28,279
|
|
|
|
-
|
|
|
|
28,279
|
|
|
|
-
|
|
Long-term debt
|
|
|
19,372
|
|
|
|
14,640
|
|
|
|
-
|
|
|
|
14,640
|
|
|
|
-
|
|
Accrued interest payable
|
|
|
427
|
|
|
|
427
|
|
|
|
-
|
|
|
|
427
|
|
|
|
-
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(dollars 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
|
|
Assets held for sale
|
|
|
846
|
|
|
|
846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
Cash and Due from Banks, Certificates
of Deposits, 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 the quoted market price if such information is available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
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.
Loans Held for Sale
The fair value of loans held for sale is determined using quoted
prices for similar assets, adjusted for specific attributes of the loan.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE O – FAIR VALUE MEASUREMENTS
(Continued)
Stock
in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock approximates
carrying value, based on the redemption provisions of the Federal Home Loan Bank stock.
Other Non-Marketable Securities
The fair value of equity instruments in
other non-marketable securities is assumed to approximate carrying value.
Assets Held for Sale
The fair value of assets held for sale
approximates the carrying value.
Deposits
The fair value of demand, savings, money
market and NOW deposits are 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 discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.
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 P - EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Plan
The Company has a 401(k) Plan and substantially
all employees participate in the plan. The Company matches 100% of the first 6% of an employee’s compensation contributed
to the plan. Expenses attributable to the plan amounted to $465,000, $382,000, and $365,000 for the years ended December 31, 2017,
2016 and 2015, respectively.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE P - EMPLOYEE AND DIRECTOR BENEFIT
PLANS (Continued)
Employment Agreements
The Company has entered into
employment agreements with five executive officers to promote a stable and competent management base. These agreements
provide for benefits as specified in the contracts and cannot be terminated by the Board of Directors, except for cause,
without prejudicing the officer’s right to receive certain vested rights, including compensation. In the event of
a change in control of the Company, as outlined in the agreements, the acquirer will generally be bound by the terms of those
contracts.
Supplemental Executive Retirement Plans
The Company implemented a nonqualified
supplemental executive retirement plan for the former Chief Executive Officer during 2003. Benefits accrue and vest during the
period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of
$53,000, $22,000, and $130,000 were expensed for future benefits to be provided under this plan during 2017, 2016 and 2015, respectively.
In conjunction with the implementation of this plan, the Company has purchased life insurance on certain key officers to help offset
plan accruals. The life insurance policies provide the payment of a death benefit in the event an insured officer dies prior to
attainment of retirement age. The total liability under this plan at December 31, 2017 and 2016 was $198,000 and $306,000, respectively.
As part of the acquisition of Progressive
State Bank (“Progressive”), the Company assumed a liability for the supplemental early retirement plan for Progressive’s
Chief Executive Officer. Provisions of $36,000, $17,000, and $18,000 and were expensed in 2017, 2016 and 2015, resulting in a total
liability of $308,000 and $326,000 as of December 31, 2017 and 2016, respectively. Corresponding to this liability, Progressive
had purchased a life insurance policy on a key officer to help offset the expense associated with future benefit payments. This
policy was acquired by the Company upon its acquisition of Progressive.
Directors Deferred Compensation
The Company has instituted a Directors’
Deferral Plan (“Deferral Plan”) whereby individual directors may elect annually to defer receipt of all or a designated
portion of their directors’ fees for the coming year. Amounts so deferred are used to purchase shares of the Company’s
common stock on the open market by the administrator of the Deferral Plan or to issue shares from the Company’s authorized
but unissued shares, with such deferred compensation disbursed in the future as specified by the director at the time of his or
her deferral election. All deferral amounts and matching contributions, if any, are paid into a rabbi trust with a separate account
for each participant under the plan. Net compensation and other expenses attributable to this plan for the years ended December
31, 2017, 2016 and 2015 were $178,000, $201,000, and $18,000, respectively. The Directors’ Deferral Plan was amended and
restated on September 22, 2015 to ensure compliance with applicable regulations and to provide that the eventual payment of
compensation deferred under the plan may be made only in the form of the Registrant’s common stock. A liability of $2.5 million
and $2.3 million related to this plan is included in shareholders’ equity for December 31, 2017 and 2016, respectively.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE P - EMPLOYEE AND DIRECTOR BENEFIT
PLANS (Continued)
Stock Option Plans
The Company has shareholder approved stock
option plans under which options are granted to directors and employees of the Company and its subsidiary.
|
·
|
On May 11, 2010, the shareholders of the Company approved the implementation of the New Century
Bancorp, Inc. 2010 Omnibus Stock Ownership and Long-Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides
for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units
and stock appreciation rights. Officers and other full-time employees of the Company and the Bank, including executive officers
and directors, are eligible to receive awards under the Omnibus Plan. Grants under the New Century Bancorp, Inc. 2010 Omnibus Stock
Ownership and Long-Term Incentive Plan (the “Omnibus Plan”) to directors are vested over discretionary periods from
immediate vesting to five years and grants to employees are vested over a five-year period. However, no projections have been made
as to specific award terms or recipients. There were 128,000 and 36,000 incentive stock options granted in 2017 and 2016, respectively.
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE P - EMPLOYEE AND DIRECTOR BENEFIT
PLANS (Continued)
Stock Option Plans (Continued)
For years when stock options were granted
the estimated weighted average fair market value of each option awarded, using the Black-Scholes option pricing model, together
with the assumptions used in estimating those weighted average fair values, are displayed below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of options granted
|
|
$
|
5.47
|
|
|
$
|
4.17
|
|
|
$
|
3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions in estimating average option values:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
1.59
|
%
|
|
|
1.87
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
Volatility
|
|
|
42.42
|
%
|
|
|
46.09
|
%
|
|
|
48.13
|
%
|
Expected life (in years)
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
8.00
|
|
A summary of the Company’s option
plans as of and for the year ended December 31, 2017 is as follows:
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
Shares
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Available
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
for Future
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
Grants
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
877,977
|
|
|
|
200,982
|
|
|
$
|
6.46
|
|
|
|
130,066
|
|
|
$
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options granted/vested
|
|
|
(128,000
|
)
|
|
|
128,000
|
|
|
|
11.04
|
|
|
|
17,100
|
|
|
|
7.27
|
|
Options exercised
|
|
|
28,725
|
|
|
|
(28,725
|
)
|
|
|
5.77
|
|
|
|
(28,725
|
)
|
|
|
5.77
|
|
Options expired
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
14.15
|
|
|
|
(10,000
|
)
|
|
|
14.15
|
|
Options forfeited
|
|
|
19,900
|
|
|
|
(19,900
|
)
|
|
|
8.22
|
|
|
|
(200
|
)
|
|
$
|
8.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
788,602
|
|
|
|
270,357
|
|
|
$
|
8.29
|
|
|
|
108,241
|
|
|
$
|
5.41
|
|
The aggregate intrinsic value of options
outstanding as of December 31, 2017 and 2016 was $1.2 million and $724,000, respectively. The aggregate intrinsic value of options
exercisable as of December 31, 2017 and 2016 was $782,000 and $554,000, respectively. The unrecognized compensation expense for
outstanding options at December 31, 2017, 2016, and 2015 was $768,000, $279,000, and $29,000, respectively. As of December 31,
2017, this cost is expected to be recognized over a weighted average period of 2.20 years.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE P - EMPLOYEE AND DIRECTOR BENEFIT
PLANS (Continued)
Stock Option Plans (Continued)
The weighted average remaining life of
options outstanding and options exercisable as of December 31, 2017 was 6.8 years and 5.41 years, respectively. The weighted average
remaining life of options outstanding and options exercisable as of December 31, 2016 was 5.25 years and 3.45 years, respectively.
Information regarding the stock options outstanding at December 31, 2017 is summarized below:
|
|
Number
|
|
|
Number
|
|
|
|
of options
|
|
|
of options
|
|
Range of Exercise Prices
|
|
outstanding
|
|
|
exercisable
|
|
|
|
|
|
|
|
|
$2.25 - $7.07
|
|
|
108,057
|
|
|
|
92,041
|
|
$7.08 - $10.69
|
|
|
60,300
|
|
|
|
16,200
|
|
$10.70 - $15.81
|
|
|
102,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
270,357
|
|
|
|
108,241
|
|
A summary of the status of the Company’s
non-vested options as of December 31, 2017 and changes during the year ended December 31, 2017, is presented below:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
Non-vested Options
|
|
Options
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2016
|
|
|
70,915
|
|
|
$
|
3.94
|
|
Granted
|
|
|
128,000
|
|
|
|
5.47
|
|
Vested
|
|
|
(17,100
|
)
|
|
|
3.86
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(19,900
|
)
|
|
|
4.33
|
|
Non-vested at December 31, 2017
|
|
|
161,915
|
|
|
|
5.11
|
|
For the years ended December 31, 2017, 2016
and 2015, the intrinsic value of options exercised was $197,000, $333,000 and $836,000, respectively. For the years ended December
31, 2017, 2016 and 2015, the grant-date fair value of options vested was $66,000, $43,000, and $17,000, respectively. In addition,
there were no stock options acquired in the Premara merger. For the years ended December 31, 2017 and 2016, respectively, $93,000
and $75,000 in tax benefits were recognized from non-qualified stock option exercises.
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE Q - PARENT COMPANY FINANCIAL
DATA
Following are the condensed balance sheets
of Select Bancorp as of and for the years ended December 31, 2017 and 2016 and the related condensed statements of operations and
cash flows for each of the years in the three-year period ended December 31, 2017:
Condensed
Balance Sheets
December 31, 2017 and 2016
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash balances with Select Bank & Trust
|
|
$
|
12,617
|
|
|
$
|
314
|
|
Investment in Select Bank & Trust
|
|
|
142,762
|
|
|
|
111,739
|
|
Investment in New Century Statutory Trust I
|
|
|
564
|
|
|
|
551
|
|
Other assets
|
|
|
4,972
|
|
|
|
4,239
|
|
Total Assets
|
|
$
|
160,915
|
|
|
$
|
116,843
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
|
$
|
12,372
|
|
|
$
|
12,372
|
|
Accrued interest and other liabilities
|
|
|
12,428
|
|
|
|
198
|
|
Total Liabilities
|
|
|
24,800
|
|
|
|
12,570
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
Common stock
|
|
|
14,009
|
|
|
|
11,645
|
|
Additional paid-in capital
|
|
|
95,850
|
|
|
|
69,597
|
|
Retained earnings
|
|
|
25,858
|
|
|
|
22,673
|
|
Common stock issued to deferred compensation trust
|
|
|
(2,518
|
)
|
|
|
(2,340
|
)
|
Directors’ Deferred Compensation Plan Rabbi Trust
|
|
|
2,518
|
|
|
|
2,340
|
|
Accumulated other comprehensive income
|
|
|
398
|
|
|
|
358
|
|
Total Shareholders’ Equity
|
|
|
136,115
|
|
|
|
104,273
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity
|
|
$
|
160,915
|
|
|
$
|
116,843
|
|
Condensed Statements of Operations
Years Ended December 31, 2017, 2016 and
2015
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
$
|
(9,236
|
)
|
|
$
|
(788
|
)
|
|
$
|
6,836
|
|
Dividends in excess of earnings
|
|
|
13,291
|
|
|
|
8,195
|
|
|
|
257
|
|
Operating expense
|
|
|
(1,175
|
)
|
|
|
(793
|
)
|
|
|
(814
|
)
|
Income tax benefit
|
|
|
305
|
|
|
|
140
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,185
|
|
|
$
|
6,754
|
|
|
$
|
6,553
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE Q - PARENT COMPANY FINANCIAL
DATA (Continued)
Condensed
Statements of Cash Flows
Years Ended December 31, 2017, 2016 and
2015
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,185
|
|
|
$
|
6,754
|
|
|
$
|
6,553
|
|
Equity in undistributed income of subsidiaries
|
|
|
9,236
|
|
|
|
788
|
|
|
|
(6,836
|
)
|
Stock based compensation
|
|
|
115
|
|
|
|
71
|
|
|
|
39
|
|
Net change in other assets
|
|
|
(315
|
)
|
|
|
(308
|
)
|
|
|
(3,375
|
)
|
Net change in other liabilities
|
|
|
12,066
|
|
|
|
5
|
|
|
|
11
|
|
N
et cash provided by (used) operating activities
|
|
|
24,287
|
|
|
|
7,310
|
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from acquisition
|
|
|
257
|
|
|
|
-
|
|
|
|
-
|
|
Investment in subsidiary
|
|
|
(12,407
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(12,150
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
166
|
|
|
|
527
|
|
|
|
821
|
|
Redemption of preferred stock
|
|
|
-
|
|
|
|
(7,645
|
)
|
|
|
-
|
|
Dividends
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) financing activities
|
|
|
166
|
|
|
|
(7,122
|
)
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
12,303
|
|
|
|
188
|
|
|
|
(2,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
314
|
|
|
|
126
|
|
|
|
2,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
12,617
|
|
|
$
|
314
|
|
|
$
|
126
|
|
SELECT BANCORP, INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years Ended December 31, 2017, 2016 and 2015
|
NOTE R - RELATED PARTY TRANSACTIONS
The Bank has had, and expects to have in
the future, banking and other transactions in the ordinary course of business with certain of its current directors, nominees for
director, executive officers and associates. All such transactions are made on substantially the same terms, including interest
rates, repayment terms and collateral, as those prevailing for comparable transactions with persons not related to the lender,
and do not involve more than the normal risk of collection or present other unfavorable features.
The Bank has loan transactions with its
directors and executive officers in the regular course of business. Such loans were made in the ordinary course of business and
on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve
more than the normal risk of collectability or present other unfavorable features. The following table represents loan transactions
for directors and executive officers who held that position as of December 31, 2017 and 2016. A summary of related party loan transactions,
is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance at January 1
|
|
$
|
10,534
|
|
|
$
|
7,127
|
|
Exposure of directors/executive officers added
|
|
|
2,212
|
|
|
|
-
|
|
Borrowings
|
|
|
1,469
|
|
|
|
4,143
|
|
Directors/executive officers resigned or retired from board
|
|
|
(67
|
)
|
|
|
-
|
|
Loan repayments
|
|
|
(628
|
)
|
|
|
(736
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
13,520
|
|
|
$
|
10,534
|
|
At December 31, 2017, there was $676,000
of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries.
NOTE S – CAPITAL TRANSACTIONS
Common Stock
During 2017 the capital of the Company
increased primarily due to the acquisition of Premara and its subsidiary bank, Carolina Premier Bank, on December 15, 2017. Premara
had 3,179,808 shares of common stock outstanding as of the merger closing date. Under the terms of the merger agreement, 948,080
shares of Premara common stock (equivalent to 30% of Premara’s outstanding shares of common stock as of the date of the merger
agreement) were converted to the $12.65 per share cash merger consideration, for aggregate cash consideration of $11,993,212 (exclusive
of cash paid-in-lieu of fractional shares). The remaining 2,231,728 Premara common shares were converted into stock consideration
at the merger exchange ratio of 1.0463 shares of Company common stock for each share of Premara common stock, resulting in the
issuance of 2,334,999 new shares of Company common stock in the merger.
Preferred Stock
As part of the 2014 merger with Legacy
Select, the Company issued 7,645 shares of a series A preferred stock in exchange for an equivalent number of shares that Legacy
Select Bancorp had previously issued for $7.645 million to the U.S. Treasury as a condition to its participation in the U.S. Treasury’s
Small Business Lending Fund (SBLF) program. The U.S. Treasury was the sole holder of the Series A stock. All outstanding shares
of the Series A stock held by the U.S. Treasury were redeemed on January 20, 2016, and the Company ceased to have any preferred
stock outstanding.
NOTE T – SUBSEQUENT EVENTS
The Company has evaluated for subsequent
events through the date and time the financial statements were issued and has determined there are no reportable subsequent events.