U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

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

of the Securities Exchange Act of 1934

  

For the quarterly period ended September 30, 2015

or

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

of the Securities Exchange Act of 1934

 

For the transition period ended from                to                    

 

Commission File Number 000-50400   

 

Select Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

 

North Carolina		20-0218264
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

 

700 W. Cumberland Street
Dunn, North Carolina		28334
(Address of principal executive offices)		(Zip Code)

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 6, 2015, the Registrant had outstanding 11,577,111 shares of Common Stock, $1.00 par value per share.

 

  

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Balance Sheets
	September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Operations
	Three Months and Nine Months Ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income
	Three Months and Nine Months Ended September 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity
	Nine Months Ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows
	Nine Months Ended September 30, 2015 and 2014	7
	Notes to Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and  Results of Operations	47
Item 4 -	Controls and Procedures	59
Part II.	OTHER INFORMATION
Item 6 -	Exhibits	60
	Signatures	61
	Exhibit Index	62

 

 

Part I. Financial Information

Item 1 - Financial Statements

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2015				December 31,
		(Unaudited)				2014*
		(In thousands, except share
		and per share data)
ASSETS
Cash and due from banks		$	11,926			$	14,417
Interest-earning deposits in other banks			37,629				22,810
Certificates of deposit			1,000				1,000
Federal funds sold and repurchase agreements			-				20,183
Investment securities available for sale, at fair value			84,124				102,235
Loans			597,969				552,038
Allowance for loan losses			(7,032	)			(6,844	)
NET LOANS			590,937				545,194
Accrued interest receivable			2,308				2,416
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost			2,049				1,524
Other non-marketable securities			763				896
Foreclosed real estate			1,007				1,585
Premises and equipment, net			17,974				17,599
Bank owned life insurance			21,435				20,966
Goodwill			6,931				6,931
Core deposit intangible			1,196				1,625
Assets held for sale			1,056				-
Other assets			6,160				6,740
TOTAL ASSETS		$	786,495			$	766,121
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand		$	147,162			$	129,831
Savings			36,444				37,000
Money market and NOW			171,322				166,511
Time			265,007				285,560
TOTAL DEPOSITS			619,935				618,902
Short-term debt			30,722				20,733
Long-term debt			28,846				25,591
Accrued interest payable			204				276
Accrued expenses and other liabilities			3,243				2,934
TOTAL LIABILITIES			682,950				668,436
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 7,645 shares issued and outstanding at September 30, 2015 and December 31, 2014			7,645				7,645
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,577,111 and 11,377,980 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			11,577				11,378
Additional paid-in capital			69,024				68,406
Retained earnings			14,305				9,447
Common stock issued to deferred compensation trust, at cost; 262,827 and    259,551 shares at September 30, 2015 and December 31, 2014, respectively			(2,139	)			(2,121	)
Directors’ Deferred Compensation Plan Rabbi Trust			2,139				2,121
Accumulated other comprehensive income			994				809
TOTAL SHAREHOLDERS’ EQUITY			103,545				97,685
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	786,495			$	766,121

 

* Derived from audited consolidated financial statements.

 

See accompanying notes.

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(In thousands, except share and per share data)
INTEREST INCOME
Loans		$	7,990			$	6,938			$	23,528			$	16,627
Federal funds sold and interest-earning deposits in other banks			13				32				44				90
Investments			409				571				1,344				1,398
TOTAL INTEREST INCOME			8,412				7,541				24,916				18,115
INTEREST EXPENSE
Money market, NOW and savings deposits			99				96				294				213
Time deposits			630				956				1,965				2,890
Short-term debt			10				44				56				57
Long-term debt			139				73				337				217
TOTAL INTEREST EXPENSE			878				1,169				2,652				3,377
NET INTEREST INCOME			7,534				6,372				22,264				14,738
PROVISION FOR (RECOVERY OF) LOAN LOSSES			393				105				384				(370	)
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES			7,141				6,267				21,880				15,108
NON-INTEREST INCOME
Gain (loss) on sale of investment securities			-				-				219				-
Service charges on deposit accounts			274				276				796				728
Other fees and income			298				450				1,361				1,188
TOTAL NON-INTEREST INCOME			572				726				2,376				1,916
NON-INTEREST EXPENSE
Personnel			3,044				3,101				9,116				7,357
Occupancy and equipment			543				487				1,655				1,267
Deposit insurance			125				45				392				251
Professional fees			239				345				981				937
Core deposit intangible amortization			125				128				429				186
Merger/acquisition related expenses			103				1,325				138				1,723
Information systems			527				347				1,412				1,015
Foreclosed real estate related expense			97				60				156				371
Other			767				731				2,214				2,068
TOTAL NON-INTEREST EXPENSE			5,570				6,569				16,493				15,175
INCOME BEFORE INCOME TAX			2,143				424				7,763				1,849
INCOME TAXES			792				230				2,848				770
NET INCOME			1,351				194				4,915				1,079
DIVIDENDS AND ACCRETION OF PREFERRED STOCK			19				19				57				19
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS		$	1,332			$	175			$	4,858			$	1,060
NET INCOME PER COMMON SHARE
Basic		$	0.12			$	0.02			$	0.42			$	0.13
Diluted		$	0.12			$	0.02			$	0.42			$	0.13
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic			11,521,043				10,195,846				11,476,532				8,025,706
Diluted			11,582,724				10,312,085				11,547,581				8,131,477

See accompanying notes.

 

  

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(In thousands)
Net income		$	1,351			$	194			$	4,915			$	1,079
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale			595				222				523				1,151
Tax effect			(222	)			(83	)			(197	)			(429	)
			373				139				326				722
Reclassification adjustment for gain (loss) included in net income			-				-				(219	)			-
Tax effect			-				-				78				-
			-				-				(141	)			-
Total			373				139				185				722
Total comprehensive income		$	1,724			$	333			$	5,100			$	1,801

 

See accompanying notes.

 

  

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except share data)

 

																										Common								Accumulated
																										Stock								Other
																										Issued								Compre-
																		Additional								to Deferred								hensive				Total
		Preferred Stock								Common Stock								paid-in				Retained				Compensation				Deferred				Income				Shareholders’
		Shares				Amount				Shares				Amount				Capital				Earnings				Trust				Comp Plan				(Loss)				Equity
Balance at December 31, 2013			-			$	-				6,921,352			$	6,922			$	42,062			$	7,128			$	(1,976	)		$	1,976			$	(108	)		$	56,004
Net income			-				-				-				-				-				1,079				-				-				-				1,079
Other comprehensive income, net			-				-				-				-				-				-				-				-				722				722
Shares issued for Select merger			7,645				7,645				4,416,668				4,416				23,822				-				-				-				-				35,883
Preferred stock dividends paid			-				-				-				-				-				(19	)			-				-				-				(19	)
Stock option exercises			-				-				11,348				11				67				-				-				-				-				78
Stock based compensation			-				-				-				-				248				-				-				-				-				248
Director equity incentive plan, net			-				-				-				-				-				-				(108	)			108				-				-
Balance at September 30, 2014			7,645			$	7,645				11,349,368			$	11,349			$	66,199			$	8,188			$	(2,084	)		$	2,084			$	614			$	93,995
Balance at December 31, 2014			7,645			$	7,645				11,377,980			$	11,378			$	68,406			$	9,447			$	(2,121	)		$	2,121			$	809			$	97,685
Net income			-				-				-				-				-				4,915				-				-				-				4,915
Other comprehensive income, net			-				-				-				-				-				-				-				-				185				185
Preferred stock dividends paid			-				-				-				-				-				(57	)			-				-				-				(57	)
Stock option exercises			-				-				199,131				199				592				-				-				-				-				791
Stock based compensation			-				-				-				-				26				-				-				-				-				26
Director equity incentive plan, net			-				-				-				-				-				-				(18	)			18				-				-
Balance at September 30, 2015			7,645			$	7,645				11,577,111			$	11,577			$	69,024			$	14,305			$	(2,139	)		$	2,139			$	994			$	103,545

 

See accompanying notes.

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Nine Months Ended
		September 30,
		2015				2014
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	4,915			$	1,079
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses			384				(370	)
Depreciation and amortization of premises and equipment			798				485
Amortization and accretion of investment securities			721				603
Amortization of deferred loan fees and costs			(216	)			(255	)
Amortization of core deposit intangible			429				186
Stock-based compensation			26				248
Accretion on acquired loans			(1,102	)			(344	)
Amortization of acquisition premium on time deposits			(641	)			(201	)
Net accretion of acquisition discount on borrowings			(299	)			(75	)
Increase in cash surrender value of bank owned life insurance			(469	)			(186	)
Gain on the sale of premises and equipment			-				(6	)
Net loss on sale and write-downs of foreclosed real estate			117				316
Net write-down on assets held for sale			271				-
Net (gain) on investment security sales and pay-downs			(219	)			-
Change in assets and liabilities:
Net change in accrued interest receivable			108				256
Net change in other assets			461				2,339
Net change in accrued expenses and other liabilities			237				(303	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			5,521				3,772
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock			(525	)			-
Redemption of non-marketable security			133				34
Purchase of investment securities available for sale			(7,322	)			(7,444	)
Maturities of investment securities available for sale			12,430				8,353
Mortgage-backed securities pay-downs			7,165				6,777
Proceeds from sale of investment securities available for sale			5,640				954
Net change in loans outstanding			(44,908	)			16,421
Cash received from acquisition			-				15,406
Proceeds from sale of foreclosed real estate			560				1,238
Proceeds from sale of premises and equipment			-				18
Purchases of premises and equipment			(2,500	)			(494	)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES			(29,327	)			41,263

 

See accompanying notes.

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

		Nine Months Ended
		September 30,
		2015				2014
		(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		$	1,674			$	(26,572	)
Proceeds from short-term debt			17,883				4,001
Repayments on short-term debt			(7,812	)			(1,658	)
Proceeds from long-term debt			3,472				-
Preferred stock dividends paid			(57	)			(19	)
Proceeds from stock option exercises			791				78
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			15,951				(24,170	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(7,855	)			20,865
CASH AND CASH EQUIVALENTS, BEGINNING			58,410				72,869
CASH AND CASH EQUIVALENTS, ENDING		$	50,555			$	93,734
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$	2,724			$	3,312
Taxes			1,847				87
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax			185				722
Transfers from loans to foreclosed real estate			99				1,324
Transfers from premises and equipment to assets held for sale			1,056				-
Business combinations:
Assets acquired			-				276,937
Liabilities assumed			-				245,878
Net assets acquired			-				31,059
Additional consideration ensuing from stock options issued to Legacy Select shareholders			-				179

See accompanying notes.

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE A - BASIS OF PRESENTATION

 

Select Bancorp, Inc. (the “Company”), formerly known as New Century Bancorp, Inc. (“New Century”), is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (the “Bank”), formerly known as New Century Bank. The Bank is engaged in general commercial and retail banking and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

 

On September 30, 2013, the Company signed a merger agreement with Select Bancorp, Inc. (“Legacy Select”), a bank holding company headquartered in Greenville, North Carolina, whose wholly-owned subsidiary, Select Bank & Trust Company (“Legacy Select Bank”), was a state-chartered commercial bank with approximately $276.9 million in assets. The merger, which closed July 25, 2014, expanded the Bank’s North Carolina presence with six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville and Burlington.

 

As a result of the merger, New Century acquired Legacy Select and Legacy Select Bank and changed its name to Select Bancorp, Inc. New Century Bank changed its name to Select Bank & Trust Company.

 

Under the terms of the merger agreement, former shareholders of Legacy Select common stock received 1.8264 shares of the Company’s common stock for each share of Legacy Select common stock. The Company issued 4,416,668 shares of common stock in the merger.

 

In addition, each share of Legacy Select’s issued and outstanding preferred stock was exchanged for one newly issued share of the Company’s preferred stock having terms substantially identical to the Legacy Select preferred stock. All of the issued and outstanding shares of theCompany’s preferred stock are held by the Secretary of the United States Treasury and were issued in connection with Legacy Select’s participation in the Small Business Lending Fund.

 

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine month periods ended September 30, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015.

 

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2014 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2015. This quarterly report should be read in conjunction with the Annual Report.

 

Certain reclassifications of the information in prior periods were made to conform to the September 30, 2015 presentation. Such reclassifications had no effect on shareholders’ equity or net income.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE B - PER SHARE RESULTS

 

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At September 30, 2015 and 2014 there were 111,080 and 71,080 anti-dilutive options outstanding for each three month period, and 111,080 and 75,783 anti-dilutive options for each nine month period, respectively.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Weighted average shares used for basic net income available to common shareholders			11,521,043				10,195,846				11,476,532				8,025,706
Effect of dilutive stock options			61,681				116,239				71,049				105,771
Weighted average shares used for diluted net income available to common shareholders			11,582,724				10,312,085				11,547,581				8,131,477

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

In September 2015, the FASB issued Accounting Standard Update 2015-16. “Simplifying the Accounting for Measurement Period Adjustments” (“ASU 2016-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015. The Company does not expect this guidance to have a material effect on its financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments included in this Update are effective immediately and transition guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This Update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in this Update are effective for periods beginning after December 15, 2016 and early adoption is not permitted. Adoption of this update is not expected to have a material impact on the Company’s financial position or results of operations because this ASU does not apply to financial instruments.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 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 January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40). This ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.

 

The amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We adopted the guidance effective first quarter of 2015. The initial adoption did not have any effect on our consolidated financial position or consolidated results of operations. The new disclosures required by this ASU are included in Note G.

 

In August 2014, the FASB issued ASU 2014-11 Transfers and Servicing (Topic 860). This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The ASU requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The ASU also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.

 

The accounting changes in this ASU were effective for fiscal years beginning after December 15, 2014. In addition, the disclosure for certain transactions accounted for as a sale was effective for the fiscal period beginning after December 15, 2014, the disclosures for transactions accounted for as secured borrowings were required to be presented for fiscal periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. We adopted the guidance effective first quarter of 2015. The initial adoption did not have any effect on our consolidated financial position or consolidated results of operations. The new disclosures required by this ASU are included in Note I.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.

 

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements amendment to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective for fiscal years beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

 

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.

 

Note D – Business Combinations

 

On September 30, 2013, the Company executed a merger agreement with Legacy Select, a bank holding company headquartered in Greenville, North Carolina, whose wholly-owned subsidiary, Legacy Select Bank, was a state-chartered commercial bank with approximately $276.9 million in assets and six banking offices as of the merger date, July 25, 2014.

 

As a result of the merger, New Century acquired Legacy Select and Legacy Select Bank and changed its name to Select Bancorp, Inc. New Century Bank changed its name to Select Bank & Trust Company. Under the acquisition method, the assets and liabilities of Legacy Select, as of the effective date of the acquisition, are recorded at their respective fair values. For the acquisition of Legacy Select, 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 (Unaudited)

 

Note D – Business Combinations (continued)

  

Under the terms of the merger agreement, shareholders of Legacy Select common stock received 1.8264 shares of the Company’s common stock for each share of Legacy Select common stock, for a value of approximately $31.1 million in the aggregate, based on 2,418,347 shares of Legacy Select common stock outstanding and the $6.76 per share closing price of the Company’s common stock on July 25, 2014, valuing each share of Legacy Select common stock at $12.35.

 

Each share of Legacy Select’s issued and outstanding preferred stock was exchanged for one newly issued share of the Company’s preferred stock having terms substantially identical to Legacy Select’s preferred stock. All of the issued and outstanding shares of the Company’s preferred stock are held by the Secretary of the United States Treasury and were issued in connection with Legacy Select’s participation in the Small Business Lending Fund. On July 25, 2014, 202,842 Legacy Select stock options were converted to 370,278 Company stock options. At September 30, 2015, 140,749 of these converted options were outstanding and exercisable with an average weighted remaining contractual life of approximately 4.3 years and an aggregate intrinsic value of $385,000. There were no forfeitures and 227,242 options were exercised since the merger related to Legacy Select stock options through September 30, 2015. 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 $28.6 million at estimated fair value and acquired performing loans totaled $189.0 million at estimated fair value. In addition, $1.6 million of core deposit intangibles and $6.9 million in goodwill were recorded as components of the acquisition. The transaction was accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Accordingly, deferred tax asset and goodwill were adjusted during the year.

 

NOTE E - FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

  

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

 

Fair Value Hierarchy

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

 

	·	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
	·	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
	·	Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

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

 

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three and nine months ended September 30, 2015. Valuation techniques are consistent with techniques used in prior periods.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

Investment securities  available for sale September 30, 2015		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		$	22,119			$	-			$	22,119			$	-
Mortgage-backed securities - GSE’s			41,957				-				41,957				-
Municipal bonds			20,048				-				20,048				-
Total		$	84,124			$	-			$	84,124			$	-

 

Investment securities available for sale December 31, 2014		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		$	27,921			$	-			$	27,921			$	-
Mortgage-backed securities - GSE’s			53,304				-				53,304				-
Municipal bonds			21,010				-				21,010				-
Total		$	102,235			$	-			$	102,235			$	-

 

The following is a description of valuation methodologies used for assets 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 an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2015 and December 31, 2014, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

 

appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At September 30, 2015, the discounts used are weighted between 5% and 47%. There were no transfers between levels from the prior reporting periods and there have been no changes in valuation techniques for the three months ended September 30, 2015.

 

Foreclosed Real Estate

 

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs is completed prior to transferring to foreclosed real estate. At September 30, 2015, the discounts used ranged between 5% and 90%. There have been no changes in valuation techniques for the three months ended September 30, 2015.

 

Assets held for sale

 

During the third quarter of 2015 two branch facilities were taken out service as part of the Company’s branch restructuring plan and reclassified as held for sale. The properties are 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 following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

Asset Category September 30, 2015		Fair value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans		$	2,936			$	-			$	-			$	2,936
Assets held for sale			1,056				-				-				1,056
Foreclosed real estate			1,007				-				-				1,007
Total		$	4,999			$	-			$	-			$	4,999

 

Asset Category  December 31, 2014		Fair value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans		$	6,896			$	-			$	-			$	6,896
Foreclosed real estate			1,585				-				-				1,585
Total		$	8,481			$	-			$	-			$	8,481

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

 

The following table presents the carrying values and estimated fair values of the Company's financial instruments at September 30, 2015 and December 31, 2014:

 

		September 30, 2015
		Carrying				Estimated
		Amount				Fair Value				Level 1				Level 2				Level 3
		(In thousands)
Financial assets:
Cash and due from banks		$	11,926			$	11,926			$	11,926			$	-			$	-
Certificates of deposit			1,000				1,000				1,000				-				-
Interest-earning deposits in other banks			37,629				37,629				37,629				-				-
Investment securities available for sale			84,124				84,124				-				84,124				-
Loans, net			590,937				600,522				-				-				600,522
Accrued interest receivable			2,308				2,308				-				-				2,308
Stock in FHLB			2,049				2,049				-				-				2,049
Other non-marketable securities			763				763				-				-				763
Financial liabilities:
Deposits		$	619,935			$	621,405			$	-			$	621,405			$	-
Short-term debt			30,722				30,722				-				30,722				-
Long-term debt			28,846				22,628				-				22,628				-
Accrued interest payable			204				204				-				204				-

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

 

		December 31, 2014
		Carrying				Estimated
		Amount				Fair Value				Level 1				Level 2				Level 3
		(In thousands)
Financial assets:
Cash and due from banks		$	14,417			$	14,417			$	14,417			$	-			$	-
Certificates of deposit			1,000				1,000				1,000				-				-
Interest-earning deposits in other banks			22,810				22,810				22,810				-				-
Federal funds sold and repurchase agreeements			20,183				20,183				20,183				-				-
Investment securities available for sale			102,235				102,235				-				102,235				-
Loans, net			545,194				555,736				-				-				555,736
Accrued interest receivable			2,416				2,416				-				-				2,416
Stock in the FHLB			1,524				1,524				-				-				1,524
Other non-marketable securities			896				896				-				-				896
Financial liabilities:
Deposits		$	618,902			$	621,049			$	-			$	621,049			$	-
Short-term debt			20,733				20,593				-				20,593				-
Long-term debt			25,591				20,771				-				20,771				-
Accrued interest payable			276				276				-				276				-

 

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

 

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

 

Investment Securities Available for Sale

 

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

 

Loans

 

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

 

Stock in Federal Home Loan Bank of Atlanta

 

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

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E – FAIR VALUE MEASUREMENTS (continued)

 

Other Non-Marketable Securities

 

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

 

Deposits

 

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

 

Short-term Debt

 

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

 

Long-term Debt

 

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

 

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 F - INVESTMENT SECURITIES

 

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follow:

 

		September 30, 2015
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
		(In thousands)
Securities available for sale:
Within 1 year		$	632			$	8			$	-			$	640
After 1 year but within 5 years			51,740				1,233				(6	)			52,967
After 5 years but within 10 years			18,567				184				(93	)			18,658
After 10 years			11,599				260				-				11,859
		$	82,538			$	1,685			$	(99	)		$	84,124

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F - INVESTMENT SECURITIES (continued)

 

As of September 30, 2015, accumulated other comprehensive income included net unrealized gains totaling $1.6 million. Deferred tax liabilities resulting from these unrealized gains totaled $592,000.

 

		December 31, 2014
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
						(In thousands)
Securities available for sale:
Within 1 year			6,949				12				-				6,961
After 1 year but within 5 years			44,938				1,139				(63	)			46,014
After 5 years but within 10 years			33,526				288				(279	)			33,535
After 10 years			15,541				253				(69	)			15,725
		$	100,954			$	1,692			$	(411	)		$	102,235

  

As of December 31, 2014, accumulated other comprehensive income included net unrealized gains totaling $1.3 million. Deferred tax liabilities resulting from these unrealized gains totaled $481,000.

 

Securities with a carrying value of $41.6 million and $85.1 million at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

 

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 September 30, 2015 and December 31, 2014. In 2014 the Company incurred a loss on the disposal of one security and did not realize any losses related to securities in 2015.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F- INVESTMENT SECURITIES (continued)

 

The following tables show the gross unrealized losses and fair value of the Company’s investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014.

 

		September 30, 2015
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		value				losses				value				losses				value				losses
		(In thousands)
Securities available for sale:
U.S. government agencies- GSE’s		$	1,977			$	(22	)		$	8,121			$	(76	)		$	10,098			$	(98	)
Mortgage-backed securities- GSE’s			1,428				(1	)			-				-				1,428				(1	)
Total temporarily impaired securities		$	3,405			$	(23	)		$	8,121			$	(76	)		$	11,526			$	(99	)

 

At September 30, 2015, the Company had five AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agency GSE’s had unrealized losses for more than twelve months totaling $76,000 at September 30, 2015. One U.S. government agency GSE, and one mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $23,000 at September 30, 2015. All unrealized losses are attributable to the general trend of interest rates. There were no investment sales during the third quarter of 2015.

 

		December 31, 2014
		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		$	2,926			$	(24	)		$	12,731			$	(296	)		$	15,657			$	(320	)
Mortgage-backed securities- GSE’s			1,965				(28	)			4,590				(61	)			6,555				(89	)
Municipal bonds			-				-				112				(2	)			112				(2	)
Total temporarily impaired securities		$	4,891			$	(52	)		$	17,433			$	(359	)		$	22,324			$	(411	)

 

At December 31, 2014, the Company had thirteen AFS securities with an unrealized loss for twelve or more consecutive months. Eight U.S. government agency GSE’s, one municipal and four mortgage-backed GSE’s had unrealized losses for more than twelve months totaling $359,000 at December 31, 2014. Two U.S. government agency GSE’s and one mortgage-backed GSE bonds had unrealized losses for less than twelve months totaling $52,000 at December 31, 2014. 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 incurred a $46,000 loss on the sale of one municipal security during 2014.

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS

 

Following is a summary of the composition of the Company’s loan portfolio at September 30, 2015 and December 31, 2014:

 

		September 30,								December 31,
Total Loans:		2015								2014
						Percent								Percent
		Amount				of total				Amount				of total
		(Dollars in thousands)
Real estate loans:
1 to 4 family residential		$	85,789				14.35	%		$	90,903				16.47	%
Commercial real estate			244,582				40.90	%			233,630				42.32	%
Multi-family residential			44,832				7.50	%			42,224				7.65	%
Construction			104,809				17.52	%			83,593				15.14	%
Home equity lines of credit (“HELOC”)			38,382				6.42	%			38,093				6.90	%
Total real estate loans			518,394				86.69	%			488,443				88.48	%
Other loans:
Commercial and industrial			74,494				12.46	%			58,217				10.55	%
Loans to individuals			5,879				0.99	%			5,953				1.08	%
Overdrafts			89				0.01	%			64				0.01	%
Total other loans			80,462				13.46	%			64,234				11.64	%
Gross loans			598,856								552,677
Less deferred loan origination fees, net			(887	)			(0.15	)%			(639	)			(0.12	)%
Total loans			597,969				100.00	%			552,038				100.00	%
Allowance for loan losses			(7,032	)							(6,844	)
Total loans, net		$	590,937							$	545,194

 

 

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

		September 30,								December 31,
Purchased Credit Impaired (PCI) Loans:		2015								2014
						Percent								Percent
		Amount				of total				Amount				of total
		(Dollars in thousands)
Real estate loans:
1 to 4 family residential		$	8,412				38.49	%		$	9,972				36.89	%
Commercial real estate			10,581				48.41	%			11,903				44.03	%
Multi-family residential			853				3.90	%			2,724				10.08	%
Construction			1,091				4.99	%			1,463				5.41	%
Home equity lines of credit (“HELOC”)			190				0.87	%			188				0.69	%
Total real estate loans			21,127				96.66	%			26,250				97.10	%
Other loans:
Commercial and industrial			609				2.79	%			657				2.43	%
Loans to individuals			120				0.55	%			128				0.47	%
Overdrafts			-				0.00	%			-				0.00	%
Total other loans			729				3.34	%			785				2.90	%
Gross loans			21,856								27,035
Less deferred loan origination fees, net			-				-	%			-				-	%
Total loans			21,856				100.00	%			27,035				100.00	%
Allowance for loan losses			(9	)							-
Total loans, net		$	21,847							$	27,035

 

For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the closing date of the merger and September 30, 2015 were:

 

(Dollars in thousands)		September 30, 2015				July 25, 2014
Contractually required payments		$	26,073			$	34,329
Nonaccretable difference			1,433				1,402
Cash flows expected to be collected			24,640				32,927
Accretable yield			2,784				4,360
Carrying value		$	21,856			$	28,567

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

		September 30,								December 31,
Loans – excluding PCI:		2015								2014
						Percent								Percent
		Amount				of total				Amount				of total
		(Dollars in thousands)
Real estate loans:
1 to 4 family residential		$	77,377				13.43	%		$	80,931				15.42	%
Commercial real estate			234,001				40.62	%			221,727				42.23	%
Multi-family residential			43,979				7.64	%			39,500				7.52	%
Construction			103,718				17.98	%			82,130				15.64	%
Home equity lines of credit (“HELOC”)			38,192				6.63	%			37,905				7.22	%
Total real estate loans			497,267				86.30	%			462,193				88.03	%
Other loans:
Commercial and industrial			73,885				12.83	%			57,560				10.97	%
Loans to individuals			5,759				1.00	%			5,825				1.11	%
Overdrafts			89				0.02	%			64				0.01	%
Total other loans			79,733				13.85	%			63,449				12.09	%
Gross loans			577,000								525,642
Less deferred loan origination fees, net			(887	)			(0.15	)%			(639	)			(0.12	)%
Total loans			576,113				100.00	%			525,003				100.00	%
Allowance for loan losses			(7,023	)							(6,844	)
Total loans, net		$	569,090							$	518,159

 

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

 

At September 30, 2015, the Company had pre-approved but unused lines of credit for customers totaling $134.1 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.

 

A floating lien of $74.2 million of quality loans was pledged to the FHLB to secure borrowings at September 30, 2015.

 

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

 

1-to-4 Family Residential Loans

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

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Commercial Real Estate Loans

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

 

Multi-family Residential Loans

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

 

Construction Loans

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

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Also, much consideration needs to be 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 often be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, and interest rates increasing beyond budget.

 

Home Equity Lines of Credit

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

 

Commercial and Industrial Loans

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

 

Loans to Individuals & Overdrafts

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

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

The following tables present an age analysis of past due loans, segregated by class of loans as of September 30, 2015 and December 31, 2014, respectively:

 

Total Loans:		September 30, 2015
		30+				Non-				Total
		Days				Accrual				Past								Total
		Past Due				Loans				Due				Current				Loans
		(In thousands)
Commercial and industrial		$	110			$	129			$	239			$	74,255			$	74,494
Construction			-				765				765				104,044				104,809
Multi-family residential			479				-				479				44,353				44,832
Commercial real estate			234				4,450				4,684				239,898				244,582
Loans to individuals & overdrafts			17				1				18				5,950				5,968
1-to-4 family residential			1,070				1,663				2,733				83,056				85,789
HELOC			221				320				541				37,841				38,382
Deferred loan (fees) cost, net			-				-				-				-				(887	)
		$	2,131			$	7,328			$	9,459			$	589,397			$	597,969

 

NOTE G - LOANS (continued)

 

There were two loans that amounted to $298,000 that were more than 90 days past due and still accruing interest at September 30, 2015.

 

		December 31, 2014
		30+				Non-				Total
		Days				Accrual				Past								Total
		Past Due				Loans				Due				Current				Loans
		(dollars in thousands)
Total Loans
Commercial and industrial		$	141			$	632			$	773			$	57,444			$	58,217
Construction			-				816				816				82,777				83,593
Multi-family residential			-				901				901				41,323				42,224
Commercial real estate			3,377				2,576				5,953				227,677				233,630
Loans to individuals & overdrafts			22				-				22				5,995				6,017
1 to 4 family residential			1,464				1,160				2,624				88,279				90,903
HELOC			14				853				867				37,226				38,093
Deferred loan (fees) cost, net			-				-				-				-				(639	)
		$	5,018			$	6,938			$	11,956			$	540,721			$	552,038

 

There was one loan in the amount of $2.2 million greater than 90 days past due and still accruing interest at December 31, 2014.

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Impaired Loans

 

The following tables present information on loans that were considered to be impaired as of September 30, 2015 and December 31, 2014:

 

														Three months ended								Nine months ended
		As of September 30, 2015												September 30, 2015								September 30, 2015
						Contractual												Interest Income								Interest Income
						Unpaid								Average				Recognized on				Average				Recognized on
		Recorded				Principal				Related				Recorded				Impaired				Recorded				Impaired
		Investment				Balance				Allowance				Investment				Loans				Investment				Loans
		(In thousands)
With no related allowance recorded:
Commercial and industrial		$	566			$	856			$	-			$	640			$	6			$	630			$	40
Construction			839				987				-				1,070				10				1,070				12
Commercial real estate			3,836				4,509				-				2,556				49				3,136				130
Loans to individuals & overdrafts			-				-				-				-				-				-				-
Multi-family residential			1,326				1,496				-				1,769				21				1,779				59
1 to 4 family residential			2,102				2,612				-				2,485				28				2,201				77
HELOC			659				825				-				641				9				648				30
Subtotal:			9,328				11,285				-				9,161				123				9,464				348
With an allowance recorded:
Commercial and industrial			-				-				-				11				-				133				-
Construction			24				27				8				166				1				96				2
Commercial real estate			2,860				3,689				316				4,436				19				3,869				88
Loans to individuals & overdrafts			1				1				1				-				-				-				-
Multi-family residential			-				-				-				-				-				-				-
1 to 4 family residential			435				435				59				495				6				442				13
HELOC			-				-				-				288				-				142				-
Subtotal:			3,320				4,152				384				5,396				26				4,682				103
Totals:
Commercial			9,451				11,564				324				10,551				106				10,713				331
Consumer			1				1				1				-				-				-				-
Residential			3,196				3,872				59				3,909				43				3,433				120
Grand Total:		$	12,648			$	15,437			$	384			$	14,460			$	149			$	14,146			$	451

 

Impaired loans at September 30, 2015 were approximately $12.6 million and were composed of $7.3 million in nonaccrual loans and $5.3 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $3.3 million in impaired loans had specific allowances provided for them while the remaining $8.3 million had no specific allowances recorded at September 30, 2015. Of the $9.3 million with no allowance recorded, $1.7 million of those loans have had partial charge-offs recorded.

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Impaired Loans (continued)

 

														Three months ended								Nine months ended
		As of December 31, 2014												September 30, 2014								September 30, 2014
						Contractual												Interest Income								Interest Income
						Unpaid								Average				Recognized on				Average				Recognized on
		Recorded				Principal				Related				Recorded				Impaired				Recorded				Impaired
		Investment				Balance				Allowance				Investment				Loans				Investment				Loans
		(In thousands)
With no related allowance recorded:
Commercial and industrial		$	478			$	478			$	-			$	119			$	3			$	156			$	8
Construction			1,300				1,525				-				1,520				21				1,733				64
Commercial real estate			2,652				3,536				-				3,111				35				3,479				143
Loans to individuals & overdrafts			-				2				-				1				-				2				-
Multi-family residential			2,232				2,515				-				2,311				25				2,337				100
1 to 4 family residential			2,301				2,750				-				2,505				48				3,092				120
HELOC			637				768				-				654				7				708				28
Subtotal:			9,600				11,574				-				10,221				139				11,507				463
With an allowance recorded:
Commercial and industrial			265				267				64				265				-				266				-
Construction			167				168				80				168				-				248				-
Commercial real estate			4,878				5,761				419				2,765				16				4,255				59
Loans to individuals & overdrafts			-				-				-				20				-				11				-
Multi-family residential			-				-				-				-				-				-				-
1 to 4 family residential			450				455				74				442				-				434				11
HELOC			284				526				50				357				-				433				8
Subtotal:			6,044				7,177				687				4,017				16				5,647				78
Totals:
Commercial			11,972				14,250				563				10,259				100				12,474				374
Consumer			-				2				-				21				-				13				-
Residential			3,672				4,499				124				3,958				55				4,667				167
Grand Total:		$	15,644			$	18,751			$	687			$	14,238			$	155			$	17,154			$	541

 

Impaired loans at December 31, 2014 were approximately $15.6 million and consisted of $6.9 million in non-accrual loans and $8.7 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately, $6.0 million of the $15.6 million in impaired loans at December 31, 2014 had specific allowances recorded while the remaining $9.6 million had no specific allowances recorded. Of the $9.6 million with no allowance recorded, $1.6 million of those loans have had partial charge-offs recorded.

 

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

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Troubled Debt Restructurings

 

There were no loans newly classified or modified as troubled debt restructured in three and nine months ended September 30, 2015. The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the three and nine months ended September 30, 2014:

 

		Three months ended September 30, 2014												Nine months ended September 30, 2014
						Pre-				Post-								Pre-				Post-
						Modification				Modification								Modification				Modification
						Outstanding				Outstanding								Outstanding				Outstanding
		Number				Recorded				Recorded				Number				Recorded				Recorded
		of loans				Investment				Investment				of loans				Investment				Investment
		(Dollars in thousands)
Below market interest rate:
1-to-4 family residential			-			$	-			$	-				1			$	22			$	20
Total			-				-				-				1				22				20
Extended payment terms:
Commercial real estate			-				-				-				1				46				41
1-to-4 family residential			-				-				-				1				947				942
Total			-				-				-				2				993				983
Total			-			$	-			$	-				3			$	1,015			$	1,003

 

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

 

The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default together with concessions made by loan class during the twelve month periods ended September 30, 2015 and 2014:

 

		Twelve months ended								Twelve months ended
		September 30, 2015								September 30, 2014
		Number				Recorded				Number				Recorded
		of loans				investment				of loans				investment
		(Dollars in thousands)
Below market interest rate:
1-to-4 family residential			-			$	-				1			$	21
Total			-				-				1				21
Extended payment terms:
Commercial real estate			1				145				1				947
Total			-				-				1				947
Total			1			$	145				2			$	968

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Troubled Debt Restructurings (continued)

 

At September 30, 2015, the Bank had thirty-nine loans with an aggregate balance of $6.4 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-three loans with a balance totaling $3.6 million were still accruing as of September 30, 2015. The remaining TDRs with balances totaling $2.9 million as of September 30, 2015 were in non-accrual status.

 

At September 30, 2014, the Bank had forty-two loans with a total balance of $7.9 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-five loans with balances totaling $5.1 million were still accruing as of September 30, 2014. The remaining TDRs with balances totaling $2.8 million as of September 30, 2014 were in non-accrual status.

 

Credit Quality Indicators

 

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

 

·

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

 

·

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

 

·

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: Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). Loans assigned this risk grade will demonstrate the following characteristics:

 

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 (Unaudited)

 

NOTE G - LOANS (continued)

 

Credit Quality Indicators

 

·

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 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. 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 (Unaudited)

 

NOTE G - 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 nine risk grades is as follows:

 

·

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

 

·

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

 

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 (Unaudited)

 

NOTE G - LOANS (continued)

 

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of September 30, 2015 and December 31, 2014, respectively:

 

Total loans:

 

September 30, 2015
Commercial
Credit
Exposure By		Commercial								Commercial
Internally		and								real				Multi-family
Assigned Grade		industrial				Construction				estate				residential
(In thousands)
Superior		$	611			$	-			$	-			$	-
Very good			1,086				-				-				-
Good			5,773				4,118				20,617				-
Acceptable			31,189				17,586				133,196				33,379
Acceptable with care			35,257				80,715				75,388				9,422
Special mention			321				1,529				9,130				-
Substandard			257				861				6,251				2,031
Doubtful			-				-				-				-
Loss			-				-				-				-
		$	74,494			$	104,809			$	244,582			$	44,832

 

Consumer Credit
Exposure By
Internally		1-to-4 family
Assigned Grade		residential				HELOC
Pass		$	78,476			$	37,122
Special mention			3,544				467
Substandard			3,769				793
		$	85,789			$	38,382

 

Consumer Credit
Exposure Based		Loans to
On Payment		individuals &
Activity		overdrafts
Pass		$	5,947
Non –pass			21
		$	5,968

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Total Loans:

 

December 31, 2014
Commercial
Credit
Exposure By		Commercial								Commercial
Internally		And								real				Multi-family
Assigned Grade		Industrial				Construction				estate				residential
(dollars in thousands)
Superior		$	1,241			$	-			$	-			$	-
Very good			1,110				-				-				-
Good			5,282				2,705				15,276				-
Acceptable			26,132				13,579				128,056				31,619
Acceptable with care			23,404				65,717				75,554				8,374
Special mention			221				384				8,036				1,330
Substandard			827				1,208				6,708				901
Doubtful			-				-				-				-
Loss			-				-				-				-
		$	58,217			$	83,593			$	233,630			$	42,224

 

Consumer Credit
Exposure By
Internally		1-to-4 family
Assigned Grade		residential				HELOC
Pass		$	82,794			$	36,357
Special mention			3,978				695
Substandard			4,131				1,041
		$	90,903			$	38,093

 

Consumer Credit
Exposure Based		Loans to
On Payment		individuals &
Activity		overdrafts
Pass		$	5,969
Non-pass			48
		$	6,017

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

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.

 

The following table documents changes to the amount of the accretable yield on PCI loans for the three and nine months ended September 30, 2015 (dollars in thousands):

 

		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2015				2015
		(Dollars in thousands)
Accretable yield, beginning of period		$	3,320			$	3,762
Accretion			(289	)			(938	)
Reclassification from (to) nonaccretable difference			57				152
Other changes, net			(304	)			(192	)
Accretable yield, end of period		$	2,784			$	2,784

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses

 

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

 

As of March 31, 2014, the Company elected to change the allowance for loan loss model it uses to calculate historical loss rates and qualitative and environmental factors in its allowance for loan losses. The Company elected to change the model used for allowance for loan losses in order to utilize the loss migration, improve the objectivity of loss projections, and increase reliability of identifying losses inherent in the portfolio. The impact of the change to the model resulted in a $177,000 increase to the loan loss reserves as of the time of the change. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool.

 

The new model continues to incorporate various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors utilized by the Company in the new model for all loan classes are as follows:

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (continued)

 

Internal Factors

·

Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio.

·

Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines.

·

Compliance exceptions– Measures the risk derived from granting terms outside of regulatory guidelines.

·

Document exceptions– Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections.

·

Financial information monitoring – Measures the risk associated with not having current borrower financial information.

·

Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status.

·

Delinquency – Reflects the increased risk deriving from higher delinquency rates.

·

Personnel turnover – Reflects staff competence in various types of lending.

·

Portfolio growth – Measures the impact of growth and potential risk derived from new loan production.

 

External Factors

·

GDP growth rate – Impact of general economic factors that affect the portfolio.

·

North Carolina unemployment rate – Impact of local economic factors that affect the portfolio.

·

Peer group delinquency rate – Measures risk associated with the credit requirements of competitors.

·

Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate.

 

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

 

Reserves are generally divided into three allocation segments:

 

1.

Individual reserves. These are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to 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.

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (continued)

 

3.

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

 

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

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2015, respectively (in thousands):

 

		Three months ended September 30, 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		$	1,077			$	1,313			$	2,573			$	602			$	764			$	153			$	292			$	6,774
Provision for loan losses			(56	)			118				388				16				(74	)			11				49				452
Loans charged-off			(11	)			(69	)			(119	)			(26	)			(75	)			(11	)			-				(311	)
Recoveries			7				5				59				23				8				6				-				108
Balance, end of period		$	1,017			$	1,367			$	2,901			$	615			$	623			$	159			$	341			$	7,023
PCI Loans
Balance, beginning of period		$	-			$	-			$	57			$	-			$	9			$	-			$	2			$	68
Provision for loan losses			-				-				(57	)			-				-				-				(2	)			(59	)
Loans charged-off			-				-				-				-				-				-				-				-
Recoveries			-				-				-				-				-				-				-				-
Balance, end of period		$	-			$	-			$	-			$	-			$	9			$	-			$	-			$	9
Total Loans
Balance, beginning of period		$	1,077			$	1,313			$	2,630			$	602			$	773			$	153			$	294			$	6,842
Provision for loan losses			(56	)			118				331				16				(74	)			11				47				393
Loans charged-off			(11	)			(69	)			(119	)			(26	)			(75	)			(11	)			-				(311	)
Recoveries			7				5				59				23				8				6				-				108
Balance, end of period		$	1,017			$	1,367			$	2,901			$	615			$	632			$	159			$	341			$	7,032
Ending Balance: individually
evaluated for impairment		$	-			$	8			$	316			$	59			$	-			$	1			$	-			$	384
Ending Balance: collectively
evaluated for impairment		$	1,017			$	1,359			$	2,585			$	556			$	632			$	158			$	341			$	6,648
Loans:
Ending Balance: collectively
evaluated for impairment		$	73,928			$	103,946			$	237,886			$	83,252			$	37,723			$	5,967			$	43,506			$	586,208
Ending Balance: individually
evaluated for impairment		$	566			$	863			$	6,696			$	2,537			$	659			$	1			$	1,326			$	12,648
Ending Balance		$	74,494			$	104,809			$	244,582			$	85,789			$	38,382			$	5,968			$	44,832			$	598,856

 

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

		Nine months ended September 30, 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		$	803			$	1,103			$	2,914			$	630			$	930			$	185			$	279			$	6,844
Provision for loan losses			309				320				65				(69	)			(211	)			-				(39	)			375
Loans charged-off			(141	)			(69	)			(148	)			(26	)			(115	)			(46	)			(5	)			(550	)
Recoveries			46				13				70				80				19				20				106				354
Balance, end of period		$	1,017			$	1,367			$	2,901			$	615			$	623			$	159			$	341			$	7,023
PCI Loans
Balance, beginning of period		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Provision for loan losses			-				-				-				-				9				-				-				9
Loans charged-off			-				-				-				-				-				-				-				-
Recoveries			-				-				-				-				-				-				-				-
Balance, end of period		$	-			$	-			$	-			$	-			$	9			$	-			$	2			$	9
Total Loans
Balance, beginning of period		$	803			$	1,103			$	2,914			$	630			$	930			$	185			$	279			$	6,844
Provision for loan losses			309				320				65				(69	)			(202	)			-				(39	)			384
Loans charged-off			(141	)			(69	)			(148	)			(26	)			(115	)			(46	)			(5	)			(550	)
Recoveries			46				13				70				80				19				20				106				354
Balance, end of period		$	1,017			$	1,367			$	2,901			$	615			$	632			$	159			$	341			$	7,032

  

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

  

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2014, respectively:

 

		Three months ended September 30, 2014
		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
		(In thousands)
Balance, beginning of period		$	523			$	1,002			$	2,903			$	588			$	1,009			$	156			$	266			$	6,447
Provision (recovery) for loan losses			67				(15	)			188				(48	)			(137	)			45				6				106
Loans charged-off			-				(4	)			-				-				(26	)			(38	)			-				(68	)
Recoveries			5				2				6				12				14				5				-				44
Balance, end of period		$	595			$	985			$	3,097			$	552			$	860			$	168			$	272			$	6,529
Ending balance: individually evaluated for impairment		$	66			$	81			$	455			$	29			$	54			$	20			$	-			$	705
Ending balance: collectively evaluated for impairment		$	529			$	904			$	2,642			$	523			$	806			$	148			$	272			$	5,824
Loans:
Ending balance: collectively evaluated for impairment		$	52,028			$	77,807			$	230,906			$	88,961			$	36,794			$	6,996			$	39,625			$	533,117
Ending balance: individually evaluated for impairment		$	381			$	1,575			$	5,766			$	2,944			$	964			$	21			$	2,290			$	13,941
Ending balance		$	52,409			$	79,382			$	236,672			$	91,905			$	37,758			$	7,017			$	41,915			$	547,058

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

		Nine months ended September 30, 2014
		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
		(In thousands)
Balance, beginning of period		$	245			$	565			$	4,599			$	826			$	680			$	65			$	74			$	7,054
Provision (recovery) for loan losses			385				361				(1,536	)			(322	)			402				142				198				(370	)
Loans charged-off			(63	)			(4	)			-				(1	)			(297	)			(57	)			-				(422	)
Recoveries			28				63				34				49				75				18				-				267
Balance, end of period		$	595			$	985			$	3,097			$	552			$	860			$	168			$	272			$	6,529

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE H – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents changes in accumulated other comprehensive income for the three and nine months ended September 30, 2015 and 2014.

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(In thousands)
Beginning balance		$	621			$	475			$	809			$	(108	)
Unrealized gain (loss) on investment securities available for sale			595				222				523				1,151
Tax effect			(222	)			(83	)			(197	)			(429	)
Other comprehensive gain (loss) before reclassification			373				139				326				722
Amounts reclassified from accumulated comprehensive income:
Realized gains on investment securities included in net income			-				-				(219	)			-
Tax effect			-				-				78				-
Total reclassifications net of tax			-				-				(141	)			-
Net current period other comprehensive income			373				139				185				722
Ending balance		$	994			$	614			$	994			$	614

 

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

 

NOTE I - REPURCHASE AGREEMENTS

 

We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and secure long-term funding needs. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates the Company to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected as short-term borrowings.

 

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from 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 $15.0 million and $15.7 million at September 30, 2015 and December 31, 2014, respectively.

 

 

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE I - REPURCHASE AGREEMENTS (continued)

 

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in short-term borrowings as of September 30, 2015 and December 31, 2014 is presented in the following tables.

 

		September 30, 2015
		Remaining Contractual Maturity of the Agreements
(Dollars in thousands)		Overnight and continuous				Up to 30 Days				30-90 Days				Greater than 90 Days				Total
Repurchase agreements
Government agency		$	3,757			$	-			$	-			$	-			$	3,757
Mortgage-backed Securities			8,873				-				-				-				8,873
Municipals			2,368				-				-				-				2,368
Total borrowings		$	14,998			$	-			$	-			$	-			$	14,998
Gross amount of recognized liabilities for repurchase agreements																		$	14,998

 

		December 31, 2014
(Dollars in thousands)		Remaining Contractual Maturity of the Agreements
		Overnight and continuous				Up to 30 Days				30-90 Days				Greater than 90 Days				Total
Repurchase agreements
Government agency		$	4,909			$	-			$	-			$	-			$	4,909
Mortgage-backed Securities			8,228				-				-				-				8,228
Municipals			2,526				-				-				-				2,526
Total borrowings		$	15,663			$	-			$	-			$	-			$	15,663
Gross amount of recognized liabilities for repurchase agreements																		$	15,663

 

  

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE J – OTHER REAL ESTATE OWNED

 

The following table explains changes in other real estate owned during the nine months ended September 30, 2015 and 2014 (dollars in thousands):

 

		Nine Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2015				2014
		(Dollars in thousands)
Beginning balance January 1		$	1,585			$	2,008
Sales			(557	)			(1,315	)
Writedowns			(120	)			(330	)
Transfers			99				1,324
Ending balance		$	1,007			$	1,687

 

At September 30, 2015 and December 31, 2014, the Company had $1.0 million and $1.6 million, respectively, of foreclosed residential real estate property in OREO. The Company did not have any recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at September 30, 2015 and December 31, 2014, respectively.

 

 

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

 

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.

 

Overview

 

The Company is a commercial bank holding company and has one banking subsidiary, Select Bank & Trust Company (referred to as the “Bank”), and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company’s only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

 

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small- to medium-sized businesses located in Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake, Pasquotank, Martin, Alamance, Guilford, and Wayne counties in North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

 

The Company was formerly known as New Century Bancorp, Inc. On July 25, 2014 New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. The combined company is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, North Carolina, whose wholly owned subsidiary, Select Bank & Trust Company, was a state-chartered commercial bank with approximately $276.9 million in assets and six banking offices located in central and eastern North Carolina. As noted throughout the following discussion and analysis, the combination of the former New Century Bancorp and Legacy Select has had a significant impact on the Company’s financial condition and results of operations.

 

The Company completed construction of a new branch at 416 South Hughes Boulevard, Elizabeth City, North Carolina in October 2015. The Company’s branch at 100 Nance Court will relocate to this location. In addition, we plan to acquire two new branches located at 1101 New Pointe Boulevard, Leland, North Carolina and 168 NC Highway 24, Morehead City, North Carolina in December 2015.

 

In August 2015, we closed our branches located at 220 Burlington Street, Gibsonville, North Carolina and 523 S. Worth Street, Burlington, North Carolina and transferred accounts to our new Burlington branch located at 3158 South Church Street. In addition, we closed our branch located at 6390 Ramsey Street, Fayetteville, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The closed properties are included in assets held for sale on the consolidated balance sheet as of September 30, 2015 and we recorded impairment charges of $271,000 during the three months ended September 30, 2015.

 

 

Comparison of Financial Condition at

September 30, 2015 and December 31, 2014

 

During the first nine months of 2015, total assets increased by $20.4 million to $786.5 million as of September 30, 2015. The increase in assets was due primarily to an increase in loans. Earning assets at September 30, 2015 totaled $716.4 million and consisted of $591.0 million in net loans, $84.1 million in investment securities, $38.6 million in overnight investments and interest-bearing deposits in other banks and $2.7 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the third quarter of 2015 were $619.9 million and $103.5 million, respectively.

 

Since the end of 2014, gross loans have increased by $45.9 million to $598.0 million as of September 30, 2015. At September 30, 2015, gross loans consisted of $74.5 million in commercial and industrial loans, $244.6 million in commercial real estate loans, $44.8 million in multi-family residential loans, $6.0 million in consumer loans, $85.8 million in residential real estate loans, $38.4 million in HELOCs, and $104.8 million in construction loans. Deferred loan fees, net of costs, on these loans were $887,000 at September 30, 2015.

 

At September 30, 2015, there were no federal funds sold and no repurchase agreements. At December 31, 2014, the Company held $3.0 million in federal funds sold and $17.2 million in repurchase agreements. Interest-earning deposits in other banks were $37.6 million at September 30, 2015, a $14.8 million increase from December 31, 2014. The Company’s investment securities at September 30, 2015 were $84.1 million, a decrease of $18.1 million from December 31, 2014 in order to provide funding for higher yielding loans. The investment portfolio as of September 30, 2015 consisted of $22.1 million in government agency debt securities, $42.0 million in mortgage-backed securities and $20.0 million in municipal securities. The net unrealized gain on these securities was $1.6 million.

 

At September 30, 2015, the Company had an investment of $2.0 million in the form of Federal Home Loan Bank (“FHLB”) stock, which increased by $525,000 from December 31, 2014. Also, the Company had $763,000 in other non-marketable securities at September 30, 2015, which decreased by $133,000 from December 31, 2014 due to a security redemption.

 

At September 30, 2015, non-earning assets were $70.0 million, a decrease of $2.3 million from $72.3 million as of December 31, 2014. Non-earning assets included $11.9 million in cash and due from banks, bank premises and equipment of $18.0 million, goodwill of $6.9 million, core deposit intangible of $1.2 million, accrued interest receivable of $2.3 million, foreclosed real estate of $1.0 million, $21.4 million in bank owned life insurance (“BOLI”), and $4.0 million in deferred tax assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The decrease in non-earning assets was due primarily to the reduction in deposits and the corresponding reduction in on-balance sheet cash.

 

Total deposits at September 30, 2015 were $619.9 million and consisted of $147.1 million in non-interest-bearing demand deposits, $171.3 million in money market and NOW accounts, $36.5 million in savings accounts, and $265.0 million in time deposits. Total deposits increased by $1.0 million from $618.9 million as of December 31, 2014. The Bank had $18.9 million in time deposits and $497,000 in brokered demand deposits as of September 30, 2015.

 

  

As of September 30, 2015, the Company had $30.7 million of short-term debt of which $15.0 million was repurchase agreements with local customers, $28.8 million (of which $16.4 million is identified as long-term debt) in FHLB borrowings, and $12.4 million in junior subordinated debentures that are classified as long-term debt.

 

Total shareholders’ equity at September 30, 2015 was $103.5 million, an increase of $5.9 million from $97.7 million as of December 31, 2014. Accumulated other comprehensive income relating to available for sale securities increased $185,000 during the nine months ended September 30, 2015. Other changes in shareholders’ equity included increases of $26,000 in stock-based compensation, net income of $4.9 million, and $791,000 from the exercise of stock options.

 

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

 

At September 30, 2015, the Company had $2.1 million in loans that were 30 to 89 days past due. This represented 0.31% of gross loans outstanding on that date. This is a decrease from December 31, 2014 when there were $5.0 million in loans that were 30-89 days past due or 0.91% of gross loans outstanding.

 

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 2.15% at December 31, 2014 to 1.82% at September 30, 2015. The Company has experienced an increase in non-accrual loans from $6.9 million at December 31, 2014 to $7.3 million as of September 30, 2015 and a decrease in accruing troubled debt restructurings from $4.9 million at December 31, 2014 to $3.6 million as of September 30, 2015. Of the $391,000 increase in non-accrual loans in the first nine months of the year, the increase is concentrated in the 1-to- 4 family residential and commercial real estate loans.

 

At September 30, 2015, the Company had thirty-nine loans totaling $6.4 million that were considered to be troubled debt restructurings. Twenty-three of these loans totaling $3.6 million were still in accruing status with the remaining TDRs included in non-accrual loans. All TDRs are considered impaired loans regardless of accrual status and have been included as non-performing assets in the table below.

 

  

The table below sets forth, for the periods indicated, information about the Company’s non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus accruing TDRs), and total non-performing assets.

 

		For Periods Ended
		September 30,				December 31,
		2015				2014
		(Dollars in thousands)
Non-accrual loans		$	7,328			$	6,938
Accruing TDRs			3,570				4,938
Total non-performing loans			10,898				11,876
Foreclosed real estate			1,007				1,585
Total non-performing assets		$	11,905			$	13,461
Accruing loans past due 90 days or more		$	298			$	2,230
Allowance for loan losses		$	7,032			$	6,844
Non-performing loans to period end loans			1.82	%			2.15	%
Non-performing loans and accruing loans past due 90 days or more to period end loans			1.87	%			2.56	%
Allowance for loans losses to period end loans			1.18	%			1.24	%
Allowance for loan losses to non-performing loans			65	%			58	%
Allowance for loan losses to non-performing assets			59	%			51	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more			58	%			44	%
Non-performing assets to total assets			1.51	%			1.76	%
Non-performing assets and accruing loans past due 90 days or more to total assets			1.55	%			2.05	%

 

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at September 30, 2015 and December 31, 2014 were $11.9 million and $13.5 million, respectively. The allowance for loan losses at September 30, 2015 represented 59% of non-performing assets compared to 51% at December 31, 2014.

 

Total impaired loans at September 30, 2015 were $12.6 million. This includes $7.3 million in loans that were classified as impaired because they were in non-accrual status and $5.3 million in loans that were determined to be impaired for other reasons. Of these loans, $3.3 million required a specific reserve of $384,000 at September 30, 2015.

 

Total impaired loans at December 31, 2014 were $15.6 million. This includes $6.9 million in loans that were considered to be impaired due to being in non-accrual status and $8.7 million in loans that were deemed to be impaired for other reasons. Of these loans, $6.0 million required a specific reserve of $687,000 at December 31, 2014.

 

The allowance for loan losses was $7.0 million at September 30, 2015 or 1.18% of gross loans outstanding. This is a decrease from the 1.24% reported as a percentage of gross loans at December 31, 2014. The Legacy Select loans have been recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans at September 30, 2015 compared to the allowance percentage before the Legacy Select merger. The allowance for loan losses at September 30, 2015 and December 31, 2014 represented 65% and 58% of non-performing loans, respectively. It is management’s assessment that the allowance for loan losses as of September 30, 2015 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be given that further adjustments to the allowance for loan losses may not be deemed necessary in the future.

 

  

Other Lending Risk Factors

 

Besides monitoring non-performing loans and past due loans, management also monitors trends in the loan portfolio that may indicate more than normal risk. A discussion of certain other risk factors follows. Some loans or groups of loans may contain one or more of these individual loan risk factors. Therefore, an accumulation of the amounts or percentages of the individual loan risk factors may not necessarily be an indication of the cumulative risk in the total loan portfolio.

 

Regulatory Loan to Value

 

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

 

At September 30, 2015 and December 31, 2014 the Company had $15.3 million and $11.1 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At September 30, 2015 and December 31, 2014, the Company had $5.4 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 18.9% and 16.5% of total risk-based capital as of September 30, 2015 and December 31, 2014, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

 

Business Sector Concentrations

 

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

 

At September 30, 2015 the Company had two product type groups which exceeded this guideline: Real Estate Construction – Speculative and Presold, which represented 68% of risk-based capital, or $74.4 million; and 1-to-4 Family Residential, which represented 61% of risk-based capital, or $67.3 million. All other commercial real estate groups were at or below the 40% threshold. At December 31, 2014, the Company exceeded the 40% guideline in two product types. The 1-to-4 Family Residential and the Multi-family Residential represented 68% of Risk-Based Capital, or $70.0 million, and 41% of Risk-Based Capital, or $42.4 million, respectively at December 31, 2014. All other commercial real estate product types were under the 40% threshold. These two product types exceeded established guidelines as a result of loans acquired in the merger with Legacy Select.

 

  

Acquisition, Development, and Construction Loans (“ADC”)

 

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of
September 30, 2015 and December 31, 2014.

 

Acquisition, Development and Construction Loans

(Dollars in thousands)

 

		September 30, 2015												December 31, 2014
						Land and Land												Land and Land
		Construction				Development				Total				Construction				Development				Total
Total ADC loans		$	87,643			$	17,116			$	104,809			$	72,161			$	11,432			$	83,593
Average Loan Size		$	171			$	300							$	155			$	216
Percentage of total loans			14.67	%			2.86	%			17.53	%			13.07	%			2.07	%			15.14	%
Non-accrual loans		$	541			$	224			$	765			$	592			$	224			$	816

 

Management closely monitors the ADC portfolio by reviewing funding based on project completeness, monthly and quarterly inspections as required by the project, collateral value, geographic concentrations, spec-to-presold ratios and performance of similar loans in the Company’s market area.

 

Geographic Concentrations

 

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at
September 30, 2015 and December 31, 2014.

 

		September 30, 2015																December 31, 2014
		ADC Loans				Percent				HELOC				Percent				ADC Loans				Percent				HELOC				Percent
		(Dollars in thousands)
Harnett County		$	6,287				6.00	%		$	5,971				15.55	%		$	4,466				5.34	%		$	5,925				15.55	%
Alamance County			870				0.83	%			537				1.39	%			422				0.50	%			292				0.76	%
Beaufort County			2,794				2.67	%			1,208				3.15	%			834				1.00	%			1,244				3.27	%
Craven County			415				0.39	%			-				-				-				-				-				-
Cumberland County			30,035				28.66	%			5,672				14.78	%			29,404				35.18	%			5,816				15.27	%
Guilford County			-				-				-				-				10				0.01	%			157				0.41	%
Hoke County			-				-				-				-				2,385				2.85	%			144				0.38	%
Johnston County			-				-				-				-				1,615				1.93	%			556				1.46	%
Pasquotank County			1,338				1.28	%			917				2.39	%			1,906				2.28	%			722				1.90	%
Pitt County			18,205				17.37	%			4,747				12.37	%			16,273				19.47	%			4,245				11.14	%
Robeson County			149				0.14	%			3,838				10.00	%			648				0.78	%			3,941				10.35	%
Sampson County			334				0.32	%			1,540				4.01	%			343				0.41	%			1,600				4.20	%
Wake County			17,796				16.98	%			650				1.70	%			10,113				12.10	%			800				2.10	%
Wayne County			3,206				3.06	%			4,896				12.75	%			2,109				2.52	%			5,451				14.31	%
All other locations			23,380				22.30	%			8,406				21.91	%			13,065				15.63	%			7,200				18.90	%
Total		$	104,809				100.00	%		$	38,382				100.00	%		$	83,593				100.00	%		$	38,093				100.00	%

 

  

Interest Only Payments

 

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At September 30, 2015, the Company had $122.4 million in loans that had terms permitting interest only payments. This represented 20.5% of the total loan portfolio. At December 31, 2014, the Company had $103.7 million in loans that had terms permitting interest only payments. This represented 18.8% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest only payments during the acquisition, development, and construction phases of such projects.

 

Large Dollar Concentrations

 

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $50.9 million, or 8.5% of total loans, at September 30, 2015 compared to $46.7 million, or 8.4% of total loans, at December 31, 2014. The Company’s ten largest customer relationships totaled $81.2 million, or 13.6% of total loans, at September 30, 2015 compared to $68.7 million, or 12.4% of total loans, at December 31, 2014. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

 

Comparison of Results of Operations for the

Three months ended September 30, 2015 and 2014

 

General. During the third quarter of 2015, the Company had net income of $1.4 million as compared with net income of $194,000 for the third quarter of 2014. Net income per common share for the third quarter of 2015 was $0.12, basic and diluted, compared with net income per common share of $0.02, basic and diluted, for the third quarter of 2014. As previously mentioned, the Company’s acquisition of Legacy Select was consummated on July 25, 2014, thereby, impacting year-over-year results for the comparative quarter. Results of operations for the third quarter of 2015 were primarily impacted by an increase of $871,000 in interest income and a decrease in non-interest expense of $1.0 million, which was primarily related to a decrease in post-merger associated expenses. The Company recorded a provision of $393,000 for the third quarter of 2015 compared to a provision of $106,000 in the third quarter of 2014. Net interest margin of 4.34% in the third quarter of 2015 increased 37 basis points from the same period in 2014 resulting from the accretion of the credit mark associated with the acquired loan portfolio.

 

Net Interest Income. Net interest income increased to $7.5 million for the third quarter of 2015 from $6.4 million for the third quarter of 2014. The Company’s total interest income was affected by the increase in loan balances due to the Legacy Select merger. Average total interest-earning assets were $689.2 million in the third quarter of 2015 compared with $632.9 million during the same period in 2014, while the yield on those assets increased 14 basis points from 4.70% to 4.84% which was primarily due to the yield accretion on the acquired loans.

 

The Company’s average interest-bearing liabilities increased by $175.3 million to $679.5 million for the quarter ended September 30, 2015 from $504.2 million for the same period one year earlier and the cost of those funds decreased from 0.92% to 0.67%, or 25 basis points. During the third quarter of 2015, the Company’s net interest margin was 4.34% and net interest spread was 4.18%. In the same quarter ended one year earlier, net interest margin was 3.97% and net interest spread was 3.78%.

 

  

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the third quarter of 2015, the Company had a provision of $393,000, as compared to a provision of $106,000 that was recorded in the third quarter of 2014. In both 2015 and 2014, the small provisions resulted from loan growth coupled with a low level of net charge-offs and improving overall credit metrics.

 

Non-Interest Income. Non-interest income for the third quarter ended September 30, 2015 was $572,000, a decrease of $154,000 from the third quarter of 2014. Service charges on deposit accounts were unchanged compared to the same period in 2014. The Company incurred an impairment charge of $271,000 related to branches that were closed as a result of branch consolidation plan during the third quarter ended September 30, 2015. Other non-deposit fees and income decreased $153,000 from the third quarter of 2014 to the third quarter of 2015 due to decreases in various non-interest income components.

 

Non-Interest Expenses. Non-interest expenses decreased by $1.0 million to $5.6 million for the quarter ended September 30, 2015, from $6.6 million for the same period in 2014. Various categories of non-interest expenses increased, offset by decreases in compensation expenses of $57,000, merger-related expenses of $1.2 million and professional fees of $105,000. The following are highlights of the significant categories of non-interest expenses during the third quarter of 2015 compared to the same period in 2014:

·

FDIC deposit insurance expense increased $80,000 to $125,000, due to the Legacy Select merger.

·

Foreclosed real estate-related expense increased $37,000, primarily carrying expenses for the other real estate owned portfolio.

·

Information systems expense increased $180,000 due to the increase in accounts acquired from the merger.

·

Occupancy and equipment increased by $56,000 to $543,000, due to the additional six branches acquired in the merger with Legacy Select.

·

Other non-interest expenses increased by $35,000, due to increases in several categories of other non-interest expenses related to the merger with Legacy Select.

 

Provision for Income Taxes. The Company’s effective tax rate was 37.0% and 54.2% for the quarters ended September 30, 2015 and 2014, respectively. The effective tax rate for the third quarter of 2014 was impacted by an adjustment to reduce the Company’s deferred tax asset resulting from enacted lower corporate tax rates for the State of North Carolina and the tax treatment of merger related expenses incurred in 2014.

 

As of September 30, 2015 and December, 31, 2014, the Company had a net deferred tax asset in the amount of $4.0 million and $4.1 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things, recent earnings trends, projected earnings, and asset quality. As of September 30, 2015 and December 31, 2014, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

 

  

Comparison of Results of Operations for the

Nine months ended September 30, 2015 and 2014

 

General. During the first nine months of 2015, the Company had net income of $4.9 million as compared with net income of $1.1 million for the first nine months of 2014. Net income per share for the first nine months of 2015 was $0.42, basic and diluted, compared with net income per share of $0.13, basic and diluted, for the first nine months of 2014. Results of operations for the first nine months of 2015 compared to 2014 was primarily impacted by an increase of $6.8 million in interest income. Net interest margin of 4.40% in the first nine months of 2015 increased 62 basis points from the same period in 2014.

 

Net Interest Income. Net interest income increased to $22.3 million for the first nine months of 2015 from $14.7 million for the first nine months of 2014. The Company’s total interest income was affected by the increase in total loan balances in connection with the merger with Legacy Select. Average total interest-earning assets were $677.2 million in the first nine months of 2015 compared with $521.4 million during the same period in 2014, while the yield on those assets increased 27 basis points from 4.65% to 4.92% which is primarily related to accreted purchase marks.

 

The Company’s average interest-bearing liabilities increased by $98.2 million to $516.7 million for the nine months ended September 30, 2015 from $418.5 million for the same period one year earlier and the cost of those funds decreased from 1.08% to 0.69%, or 39 basis points which is primarily due to a reduction in higher cost time deposits. During the first nine months of 2015, the Company’s net interest margin was 4.40% and net interest spread was 4.23%. In the same period ended one year earlier, net interest margin was 3.78% and net interest spread was 3.57%.

 

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the first nine months of 2015, the Company recorded a provision of $384,000 compared to $370,000 recovery of provision that was recorded in the first nine months of 2014. In 2015 and 2014, the respective loan provision and recovery resulted from a low level of net charge-offs and overall improving credit metrics.

 

Non-Interest Income. Non-interest income for the nine months ended September 30, 2015 was $2.4 million, an increase of $460,000 from the first nine months of 2014. Service charges on deposit accounts increased $68,000 to $796,000 for the nine months ended September 30, 2015 from $728,000 for the same period in 2014, primarily due to an increase in overdraft charges and additional accounts from the merger. Other non-deposit fees and income increased $173,000 from the first nine months of 2014 to the first nine months of 2015, due to increases in various other items related to the Legacy Select merger. The Company recognized a gain on sale of investment securities of $219,000 for the first nine months of 2015. The Company incurred an impairment charge of $271,000 related to branches that were closed as a result of branch consolidation plan. BOLI income increased $283,000 due to a fourth quarter 2014 purchase of $10.0 million of BOLI.

 

  

Non-Interest Expenses. Non-interest expenses increased by $1.3 million to $16.5 million for the nine months ended September 30, 2015, from $15.2 million for the same period in 2014. The following are highlights of the significant categories of non-interest expenses during the first nine months of 2015 versus the same period in 2014:

 

·

Personnel expenses increased $1.8 million to $9.1 million, due to additions in personnel and the Legacy Select merger.

·

Occupancy and equipment expenses increased $388,000 due to the increased number of branches acquired in connection with the Legacy Select merger.

·

Merger related expenses incurred in the first nine months of 2014 were $1.7 million compared to $138,000 in the 2015 period.

·

FDIC deposit insurance expense increased $141,000 due to the increase in assets.

·

Core Deposit Intangible expense increased $244,000 due to increase in acquired deposits.

·

Information systems expense increased $396,000 due to the increase in accounts acquired from the merger.

·

Other non-interest expenses increased by $146,000, due to small increases in several categories of other non-interest expenses as a result of the merger with Legacy Select.

 

Provision for Income Taxes. The Company’s effective tax rate was 36.7% and 41.6% for the nine months ended September 30, 2015 and 2014, respectively. The effective tax rate for the first nine months of 2014 was impacted by non-deductible merger expenses incurred in 2014.

 

As of September 30, 2015 and December, 31, 2014, the Company had a net deferred tax asset in the amount of $4.0 million and $4.3 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of September 30, 2015 and December 31, 2014, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

 

Liquidity

 

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) represented 17.1% of total assets at September 30, 2015 as compared to 21.0% as of December 31, 2014 which resulted primarily from letting higher rate deposits roll off.

 

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of September 30, 2015, the Company had existing credit lines with other financial institutions to purchase up to $80.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $74.2 million of qualifying loans is pledged to the FHLB to secure borrowings. At September 30, 2015, the Company had $32.2 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At September 30, 2015, in addition to FHLB advances, total borrowings consisted of securities sold under agreements to repurchase of $15.0 million and junior subordinated debentures of $12.4 million.

 

  

Total deposits were $619.9 million at September 30, 2015. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 42.7% of total deposits at September 30, 2015. Time deposits of $250,000 or more represented 8.6% of the Company’s total deposits at September 30, 2015. At quarter-end, the Company had $18.4 million in brokered time deposits and $497,000 in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

 

Management believes that current sources of funds provide adequate liquidity for the Bank’s current cash flow needs. The Company maintains minimal cash balances at the parent holding company level. Management believes that the current cash balances will provide adequate liquidity for the Company’s current cash flow needs.

 

Capital Resources

 

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions and holding companies became subject to the new 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). The Company’s equity to assets ratio was 13.17% at September 30, 2015.

 

  

As the following table indicates, at September 30, 2015, the Company and the Bank both exceeded minimum regulatory capital requirements as specified in the tables below.

 

		Actual				Minimum
Select Bancorp, Inc.		Ratio				Requirement
Total risk-based capital ratio			16.98	%			8.00	%
Tier 1 risk-based capital ratio			15.93	%			6.00	%
Leverage ratio			14.04	%			4.00	%
Common equity Tier 1 risk-based capital ratio			13.01	%			4.50	%

 

						Regulatory
		Actual				Minimum				Well-Capitalized
Select Bank & Trust		Ratio				Requirement				Requirement
Total risk-based capital ratio			15.66	%			8.00	%			10.00	%
Tier 1 risk-based capital ratio			14.66	%			6.00	%			8.00	%
Leverage ratio			13.49	%			4.00	%			5.00	%
Common equity Tier 1 risk-based capital ratio			14.66	%			4.50	%			6.50	%

 

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of September 30, 2015.

 

Management expects that the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the future.

 

  

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.

 

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

 

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the third quarter of 2015. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the third quarter of 2015 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

  

Part II.   OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

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

 

Item 6.   Exhibits

 

Exhibit Number		Description of Exhibit
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.1		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015, in XBRL (eXtensible Business Reporting Language)

 

 

SIGNATURES

 

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

 

	SELECT BANCORP, INC.
Date: November 12, 2015	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer
Date: November 12, 2015	By:	/s/ Mark A. Jeffries
		Mark A. Jeffries
		Executive Vice President and Chief Financial Officer

 

  

Exhibit Index

 

Exhibit Number		Description of Exhibit
31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015, in XBRL (eXtensible Business Reporting Language)