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Section 1: 10-Q (FORM 10-Q)

 

 

U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

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

of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2019

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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨

 

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

 

Large accelerated filer ¨   Accelerated filer x
     
Non-accelerated filer ¨ Smaller reporting company ¨  
    Emerging growth company ¨

 

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

 

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

 

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

 

Title of each class   Trading
Symbol(s)
  Name of each exchange on which registered
Common stock, par value $1.00 per share   SLCT   The NASDAQ Stock Market LLC

 

As of May 2, 2019, the registrant had outstanding 19,326,485 shares of Common Stock, $1.00 par value per share.

 

 

 

 

 

 

    Page No.
     
Part I. FINANCIAL INFORMATION  
     
Item 1 - Financial Statements (Unaudited)  
     
  Consolidated Balance Sheets March 31, 2019 and December 31, 2018 3
     
  Consolidated Statements of Operations Three Months Ended March 31, 2019 and 2018 4
     
  Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2019 and 2018 5
     
  Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2019 and 2018 6
     
  Consolidated Statements of Cash Flows Three Months Ended March 31, 2019 and 2018 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
     
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 45
     
Item 4 - Controls and Procedures 47
     
Part II. OTHER INFORMATION  
     
Item 1 - Legal Proceedings 48
     
Item 1A - Risk Factors 48
     
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 48
     
Item 3 - Defaults Upon Senior Securities 48
     
Item 4 - Mine Safety Disclosures 48
     
Item 5- Other Information 48
     
Item 6 - Exhibits 49
     
  Signatures 50

 

2

 

 

Part I. Financial Information

Item 1. Financial Statements

 

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2019   December 31, 
   (Unaudited)   2018* 
   (In thousands, except share 
   and per share data) 
ASSETS          
Cash and due from banks  $15,586   $17,059 
Interest-earning deposits in other banks   44,894    121,303 
Certificates of deposit   1,000    1,000 
Federal funds sold   9,809    - 
Investment securities available for sale, at fair value   86,727    51,533 
Loans held for sale   354    580 
Loans   991,801    986,040 
Allowance for loan losses   (8,510)   (8,669)
           
NET LOANS   983,291    977,371 
           
Accrued interest receivable   4,120    3,889 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost   3,342    3,283 
Other non-marketable securities   738    762 
Foreclosed real estate   1,046    1,088 
Premises and equipment, net   17,715    17,920 
Right of use lease asset   8,750    - 
Bank owned life insurance   29,282    29,117 
Goodwill   24,579    24,579 
Core deposit intangible (“CDI”)   1,866    2,085 
Assets held for sale   668    668 
Other assets   8,310    6,288 
           
TOTAL ASSETS  $1,242,077   $1,258,525 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
Demand  $240,262   $247,007 
Savings   48,080    51,811 
Money market and NOW   262,169    254,482 
Time   400,455    427,127 
           
TOTAL DEPOSITS   950,966    980,427 
           
Short-term debt   7,000    7,000 
Long-term debt   57,372    57,372 
Lease liability   8,842    - 
Accrued interest payable   519    667 
Accrued expenses and other liabilities   3,927    3,448 
           
TOTAL LIABILITIES   1,028,626    1,048,914 
Shareholders’ Equity:          
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018   -    - 
Common stock, $1.00 par value, 25,000,000 shares authorized; 19,326,485 and 19,311,505 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively   19,326    19,312 
Additional paid-in capital   150,877    150,718 
Retained earnings   42,947    39,640 
Common stock issued to deferred compensation trust, at cost; 306,195 and 303,239 shares outstanding at March 31, 2019 and December 31, 2018, respectively   (2,652)   (2,615)
Directors’ Deferred Compensation Plan Rabbi Trust   2,652    2,615 
Accumulated other comprehensive income (loss)   301    (59)
           
TOTAL SHAREHOLDERS’ EQUITY   213,451    209,611 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $1,242,077   $1,258,525 

 

* Derived from audited consolidated financial statements.

 

See accompanying notes.

 

3

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands, except share 
   and per share data) 
INTEREST INCOME          
Loans  $13,042   $13,157 
Federal funds sold and interest-earning deposits in other banks   543    211 
Investments   465    354 
           
TOTAL INTEREST INCOME   14,050    13,722 
           
INTEREST EXPENSE          
Money market, NOW and savings deposits   356    314 
Time deposits   1,753    1,354 
Short-term debt   26    129 
Long-term debt   458    221 
           
TOTAL INTEREST EXPENSE   2,593    2,018 
           
NET INTEREST INCOME   11,457    11,704 
           
PROVISION FOR          
LOAN LOSSES   112    141 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   11,345    11,563 
           
NON-INTEREST INCOME          
Fees on the sale of mortgages   157    26 
Service charges on deposit accounts   266    276 
Other fees and income   774    863 
           
TOTAL NON-INTEREST INCOME   1,197    1,165 
           
NON-INTEREST EXPENSE          
Personnel   4,971    4,741 
Occupancy and equipment   727    888 
Deposit insurance   105    165 
Professional fees   382    270 
CDI amortization   219    275 
Merger/acquisition related expenses   -    1,826 
Information systems   789    1,002 
Foreclosure-related expenses   30    12 
Other   1,081    1,105 
           
TOTAL NON-INTEREST EXPENSE   8,304    10,284 
           
INCOME BEFORE INCOME TAX   4,238    2,444 
           
INCOME TAXES   931    547 
           
NET INCOME  $3,307   $1,897 
           
NET INCOME PER COMMON SHARE          
Basic  $0.17   $0.14 
Diluted  $0.17   $0.13 
           
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          
Basic   19,315,686    14,011,707 
Diluted   19,365,354    14,081,776 

 

See accompanying notes.

 

4

 

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands) 
         
Net income  $3,307   $1,897 
           
Other comprehensive income (loss):          
Unrealized gain (loss) on investment securities available for sale   467    (536)
Tax effect   (107)   126 
    360    (410)
           
Total comprehensive income  $3,667   $1,487 

 

See accompanying notes.

 

5

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except share data)

 

                   Common             
                   Stock            
                   Issued       Accumulated     
           Additional       to Deferred       Other   Total 
   Preferred Stock   Common Stock   paid-in   Retained   Compensation   Deferred   Comprehensive   Shareholders’ 
   Shares   Amount   Shares   Amount   Capital   Earnings   Trust   Comp Plan   Income (loss)   Equity 
Balance at December 31, 2017   -   $-    14,009,137   $14,009   $95,850   $25,858   $(2,518)  $2,518   $398   $136,115 
Net income   -    -    -    -    -    1,897    -    -    -    1,897 
Other comprehensive income (loss)   -    -    -    -    -    -    -    -    (410)   (410)
Stock option exercises   -    -    4,780    5    21    -    -    -    -    26 
Stock based compensation   -    -    -    -    45    -    -    -    -    45 
Directors’ equity incentive plan, net   -    -    -    -    -    -    41    (41)   -    - 
Balance at March 31, 2018   -   $-    14,013,917   $14,014   $95,916   $27,755   $(2,477)  $2,477   $(12)  $137,673 
                                                   
Balance at December 31, 2018   -   $-    19,311,505   $19,312   $150,718   $39,640   $(2,615)  $2,615   $(59)  $209,611 
Net income   -    -    -    -    -    3,307    -    -    -    3,307 
Other comprehensive income   -    -    -    -    -    -    -    -    360    360 
Stock option exercises   -    -    14,980    14    100    -    -    -    -    114 
Stock based compensation   -    -    -    -    59    -    -    -    -    59 
Directors’ equity incentive plan, net   -    -    -    -    -    -    37    (37)   -    - 
Balance at March 31, 2019   -   $-    19,326,485   $19,326   $150,877   $42,947   $(2,652)  $2,652   $301   $213,451 

 

See accompanying notes.

 

6

 

 

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $3,307   $1,897 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   112    141 
Depreciation and amortization of premises and equipment   622    444 
Amortization and accretion of investment securities   142    170 
Amortization of deferred loan fees and costs   (217)   (155)
Amortization of core deposit intangible   219    275 
Stock-based compensation   59    45 
Accretion on acquired loans   (200)   (938)
Amortization of acquisition premium on time deposits   -    (80)
Net accretion of acquisition discount on borrowings   -    (5)
Increase in cash surrender value of bank owned life insurance   (165)   (169)
Proceeds from loans held for sale   6,667    (2,365)
Originations of loans held for sale   (6,284)   1,995 
Loss (gain) on sales of loans held for sale   (157)   26 
Net loss on sale and write-downs of foreclosed real estate   3    11 
Loss on sale of premises and equipment   -    49 
Write-down on assets held for sale   -    50 
Change in assets and liabilities:          
Net change in accrued interest receivable   (231)   234 
Net change in other assets   (2,016)   2,068 
Net change in accrued expenses and other liabilities   481    (11,473)
           
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   2,342    (7,780)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of FHLB stock   (59)   (1,184)
Redemption of non-marketable security   24    114 
Purchase of investment securities available for sale   (37,948)   - 
Maturities of investment securities available for sale   -    100 
Mortgage-backed securities pay-downs   3,079    3,642 
Net change in loans outstanding   (5,641)   5,085 
Proceeds from sale of foreclosed real estate   65    62 
Net purchases of premises and equipment   (417)   (408)
           
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   (40,897)   7,411 

 

See accompanying notes.

 

7

 

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018 
   (In thousands) 
CASH FLOWS FROM FINANCING ACTIVITIES          
Net change in deposits  $(29,461)  $14,517 
Proceeds from short-term debt   -    3,899 
Proceeds from long-term debt   -    20,000 
Repayments of lease liability   (171)   - 
Proceeds from stock option exercises   114    26 
           
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (29,518)   38,442 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (68,073)   38,073 
           
CASH AND CASH EQUIVALENTS, BEGINNING   139,362    62,695 
           
CASH AND CASH EQUIVALENTS, ENDING  $71,289   $100,768 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Cash paid during the period for:          
Interest  $2,741   $1,946 
Taxes   -    - 
           
Non-cash transactions:          
Unrealized gains (losses) on investment securities available for sale, net of tax   360    (410)
Transfers from loans to foreclosed real estate   26    340 

 

See accompanying notes.

 

8

 

 

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

 

NOTE A - BASIS OF PRESENTATION

 

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

 

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

 

9

 

 

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

 

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 months ended March 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

 

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2018 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2019. This quarterly report should be read in conjunction with the Annual Report.

 

Certain reclassifications of the information in prior periods were made to conform to the March 31, 2019 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

 

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 March 31, 2019 and 2018 there were 168,120 and 121,300 anti-dilutive options outstanding, respectively.

 

   Three Months Ended 
   March 31, 
   2019   2018 
Weighted average shares used for basic net income per share   19,315,686    14,011,707 
           
Effect of dilutive stock options   49,668    70,069 
Weighted average shares used for diluted net income per share   19,365,354    14,081,776 

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.  For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018.  The Company adopted this standard during the first quarter of 2019. The impact was an increase to the Consolidated Balance Sheet for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and expense of the lease liabilities in the Consolidated Statements of Income. Additionally, adding these assets to the balance sheet impacted total risk-weighted assets used to determine the regulatory capital levels.

 

10

 

 

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

 

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

 

The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $9,013,900 and the recognition of right-of-use assets totaling $9,013,900 as of the date of adoption. The adoption of this standard did not impact beginning retained earnings. Total risk-based capital was adversely impacted by 13 basis points due to the increase in risk-weighted assets, see Note J. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. The initial balance sheet gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases.

 

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

 

In August 2018, the FASB amended ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

11

 

 

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

 

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 - FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

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

 

Fair Value Hierarchy

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

 

  ·

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

 

  ·

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

 

 

 

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

 

12

 

 

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

 

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 agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three months ended March 31, 2019. Valuation techniques are consistent with techniques used in prior periods.

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):

 

       Quoted Prices in   Significant     
Investment securities      Active Markets   Other   Significant 
available for sale      for Identical   Observable   Unobservable 
March 31, 2019  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
U.S. government agencies- GSE’s  $11,937   $-   $11,937   $- 
                     
Mortgage-backed securities-GSE’s   56,118    -    56,118    - 
                     
Corporate bonds   1,638    -    1,638    - 
                     
Municipal bonds   17,034    -    17,034    - 
                     
Total investment for sale  $86,727   $-   $86,727   $- 

 

       Quoted Prices in   Significant     
Investment securities      Active Markets   Other   Significant 
available for sale      for Identical   Observable   Unobservable 
December 31, 2018  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
U.S. government agencies- GSE’s  $9,837   $-   $9,837   $- 
                     
Mortgage-backed securities-GSE’s   22,983    -    22,983    - 
                     
Corporate bonds   1,722    -    1,722    - 
                     
Municipal bonds   16,991    -    16,991    - 
                     
Total investment for sale  $51,533   $-   $51,533   $- 

 

13

 

 

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

 

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

 

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2019 and December 31, 2018, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as 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 March 31, 2019, the discounts used are weighted between 5% and 50%. There were no transfers between levels from the prior reporting periods and there have been no changes in valuation techniques for the three months ended March 31, 2019.

 

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value of the real estate collateral 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 foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling costs. At March 31, 2019, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended March 31, 2019.

 

Assets held for sale

During 2015, a branch facility was taken out of service as part of the Company’s branch restructuring plan and reclassified as held for sale. The property is recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. The significant unobservable input used is the discount applied to appraised values to account for expected liquidation and selling costs ranged between 1% and 25% at March 31, 2019 and December 31, 2018. There have been no changes in the valuation techniques for the three months ended March 31, 2019.

 

Loans held for sale

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

 

14

 

 

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

 

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

 

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 March 31, 2019 and December 31, 2018 (in thousands):

 

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
Asset Category      for Identical   Observable   Unobservable 
March 31, 2019  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
Impaired loans  $6,337   $-   $-   $6,337 
                     
Loans held for sale   354    -    354    - 
                     
Assets held for sale   668    -    -    668 
                     
Foreclosed real estate   1,046    -    -    1,046 
                     
Total  $8,405   $-   $354   $8,051 

 

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
Asset Category      for Identical   Observable   Unobservable 
December 31, 2018  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
Impaired loans  $7,257   $-   $-   $7,257 
                     
Loans held for sale   580    -    580    - 
                     
Assets held for sale   668    -    -    668 
                     
Foreclosed real estate   1,088    -    -    1,088 
                     
Total  $9,593   $-   $580   $9,013 

 

15

 

 

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

 

The following table presents the carrying values and estimated fair values of the Company's financial instruments at March 31, 2019 and December 31, 2018:

 

   March 31, 2019 
   Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (dollars in thousands) 
Financial assets:                         
Cash and due from banks  $15,586   $15,586   $15,586   $-   $- 
Certificates of deposit   1,000    1,000    1,000    -    - 
Interest-earning deposits in other banks   44,894    44,894    44,894    -    - 
Federal funds sold   9,809    9,809    9,809    -    - 
Investment securities available for sale   86,727    86,727    -    86,727    - 
Loans held for sale   354    354         354    - 
Loans, net   983,291    975,395    -    -    975,395 
Accrued interest receivable   4,120    4,120    -    4,120    - 
Stock in FHLB   3,342    3,342    -    -    3,342 
Other non-marketable securities   738    738    -    -    738 
                          
Financial liabilities:                         
Deposits  $950,966   $952,022   $-   $952,022   $- 
Short-term debt   7,000    7,000    -    7,000    - 
Long-term debt   57,372    55,878    -    55,878    - 
Accrued interest payable   519    519    -    519    - 

 

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

 

16

 

 

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

 

NOTE E - INVESTMENT SECURITIES

 

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

 

   March 31, 2019 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
U.S. government agencies   GSE’s  $11,808   $151   $(22)  $11,937 
Mortgage-backed securities   GSE’s   56,064    167    (113)   56,118 
Corporate bonds   1,617    21    -    1,638 
Municipal bonds   16,846    190    (2)   17,034 
                     
   $86,335   $529   $(137)  $86,727 

 

As of March 31, 2019, accumulated other comprehensive income included net unrealized gains totaling $392,000. Deferred tax assets resulting from these net unrealized losses totaled $91,000.

 

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

 

   December 31, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
U.S. government agencies   GSE’s  $9,852   $36   $(51)  $9,837 
Mortgage-backed securities   GSE’s   23,150    62    (229)   22,983 
Corporate bonds   1,697    25    -    1,722 
Municipal bonds   16,910    105    (24)   16,991 
                     
   $51,609   $228   $(304)  $51,533 

 

As of December 31, 2018, accumulated other comprehensive income included net unrealized losses totaling $76,000. Deferred tax liabilities resulting from these net unrealized gains totaled $17,000.

 

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

 

   March 31, 2019 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
Within 1 year  $5,174   $15   $-   $5,189 
After 1 year but within 5 years   34,438    203    (126)   34,515 
After 5 years but within 10 years   27,940    130    (10)   28,060 
After 10 years   18,783    181    (1)   18,963 
                     
   $86,335   $529   $(137)  $86,727 

 

17

 

 

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

 

   December 31, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (dollars in thousands) 
Securities available for sale:                    
Within 1 year  $3,275   $13   $-   $3,288 
After 1 year but within 5 years   32,862    96    (252)   32,706 
After 5 years but within 10 years   6,551    48    (29)   6,570 
After 10 years   8,921    71    (23)   8,969 
                     
   $51,609   $228   $(304)  $51,533 

 

Securities with a carrying value of $6.1 million and $6.4 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

 

None of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations. 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 March 31, 2019 and December 31, 2018. The Company has not incurred any losses related to securities sales in the first three months of 2019 or during the year ended December 31, 2018.

 

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 March 31, 2019 and December 31, 2018.

 

   March 31, 2019 
   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- GSEs  $-   $-   $3,026   $(22)  $3,026   $(22)
Mortgage-backed securities- GSEs   10,044    (13)   11,858    (100)   21,902    (113)
Municipal bonds   -    -    1,301    (2)   1,301    (2)
                               
Total temporarily impaired securities  $10,044   $(13)  $16,185   $(124)  $26,229   $(137)

 

At March 31, 2019, the Company had twenty-two securities with an unrealized loss for more than twelve months of $124,000 which consisted of five U.S. government agencies-GSEs, fourteen mortgage-backed GSEs and three municipal bonds. Three mortgage-backed GSEs had unrealized losses for less than twelve months totaling $13,000 at March 31, 2019. All unrealized losses are attributable to the general trend of interest rates. There were no sales of investment securities during the first quarter of 2019.

 

18

 

 

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

 

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

 

At December 31, 2018, the Company had twenty-four AFS mortgage-backed GSE’s, four municipals and six U.S Government agencies – GSE’s with an unrealized loss for twelve or more consecutive months totaling $296,000. The Company had six AFS securities with a loss for twelve months or less. Three U.S. government agency GSE’s, two municipals and one mortgage-backed GSE had unrealized losses for less than twelve months totaling $8,000 at December 31, 2018. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. There were no sales of investment securities available for sale during 2018.

 

19

 

 

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

 

NOTE F - LOANS

 

Following is a summary of the composition of the Company’s loan portfolio at March 31, 2019 and December 31, 2018:

 

   March 31,   December 31, 
Total Loans:  2019   2018 
       Percent       Percent 
   Amount   of total   Amount   of total 
       (dollars in thousands)     
Real estate loans:                    
1-to-4 family residential  $156,732    15.80%  $159,597    16.19%
Commercial real estate   458,488    46.23%   457,611    46.41%
Multi-family residential   57,230    5.77%   63,459    6.44%
Construction   181,162    18.26%   170,404    17.28%
Home equity lines of credit (“HELOC”)   48,760    4.92%   49,713    5.04%
                     
Total real estate loans   902,372    90.98%   900,784    91.36%
                     
Other loans:                    
Commercial and industrial   79,729    8.04%   74,181    7.52%
Loans to individuals   11,338    1.14%   12,597    1.28%
Overdrafts   92    0.01%   217    0.02%
Total other loans   91,159    9.19%   86,995    8.82%
                     
Gross loans   993,531         987,779      
Less deferred loan origination fees, net   (1,730)   (0.17)%   (1,739)   (0.18)%
Total loans   991,801    100.00%   986,040    100.00%
                     
Allowance for loan losses   (8,510)        (8,669)     
                     
Total loans, net  $983,291        $977,371      

 

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

 

(dollars in thousands)  March 31, 2019   December 31, 2018 
         
Contractually required payments  $24,366   $24,823 
Nonaccretable difference   1,842    1,962 
Cash flows expected to be collected   22,524    22,861 
Accretable yield   3,721    3,593 
Carrying value  $18,803   $19,268 

 

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

 

20

 

 

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

 

At March 31, 2019, the Company had pre-approved but unused lines of credit for customers totaling $176.8 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

 

A floating lien of $138.1 million of loans was pledged to the FHLB to secure borrowings at March 31, 2019.

 

The following tables present an age analysis of past due loans, segregated by class of loans as of March 31, 2019 and December 31, 2018, respectively:

 

   March 31, 2019 
   30-59   60-89   90+   Non-   Total         
   Days   Days   Days   Accrual   Past       Total 
   Past Due   Past Due   Accruing   Loans   Due   Current   Loans 
   (dollars in thousands) 
                             
Commercial and industrial  $36   $452   $1,340   $2,652   $4,480   $75,249   $79,729 
Construction   31    1,799    70    543    2,443    178,719    181,162 
Multi-family residential   -    -    -    -    -    57,230    57,230 
Commercial real estate   254    829    313    1,867    3,263    455,225    458,488 
Loans to individuals & overdrafts   12    -    -    29    41    11,389    11,430 
1-to-4 family residential   594    75    1,423    266    2,358    154,374    156,732 
HELOC   13    -    -    980    993    47,767    48,760 
Deferred loan (fees) cost, net   -    -    -    -    -    -    (1,730)
                                    
   $940   $3,155   $3,146   $6,337   $13,578   $979,953   $991,801 
     
   December 31, 2018 
   30-59   60-89   90+   Non-   Total         
   Days   Days   Days   Accrual   Past       Total 
   Past Due   Past Due   Accruing   Loans   Due   Current   Loans 
   (dollars in thousands) 
                             
Commercial and industrial  $27   $203   $1,665   $4,170   $6,065   $68,116   $74,181 
Construction   -    -    69    587    656    169,748    170,404 
Multi-family residential   -    -    -    -    -    63,459    63,459 
Commercial real estate   103    483    -    1,074    1,660    455,951    457,611 
Loans to individuals & overdrafts   1    24    -    -    25    12,789    12,814 
1-to-4 family residential   502    505    1,433    386    2,826    156,771    159,597 
HELOC   -    43    -    1,040    1,083    48,630    49,713 
Deferred loan (fees) cost, net   -    -    -    -    -    -    (1,739)
                                    
   $633   $1,258   $3,167   $7,257   $12,315   $975,464   $986,040 

 

21

 

 

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

 

Impaired Loans

 

The following tables present information on loans that were considered to be impaired as of March 31, 2019 and December 31, 2018:

 

       Three months ended 
   As of March 31, 2019   March 31, 2019 
       Contractual             
       Unpaid   Related   Average   Interest Income 
   Recorded   Principal   Allowance   Recorded   Recognized on 
   Investment   Balance   for Loan Losses   Investment   Impaired Loans 
   (dollars in thousands) 
With no related allowance recorded:                         
Commercial and industrial  $2,584   $2,788   $       -   $3,853   $4 
Construction   465    525    -    552    5 
Commercial real estate   6,008    7,251    -    5,843    66 
Multi-family residential   211    211    -    213    3 
Loans to individuals   117    121    -    109    - 
HELOC   857    1,060    -    957    15 
1-to-4 family residential   648    1,196    -    990    16 
                          
Subtotal:   10,890    13,152    -    12,517    109 
With an allowance recorded:                         
Commercial and industrial   183    239    75    232    6 
Construction   78    133    -    -    - 
HELOC   -    -    -    -    - 
1-to-4 family residential   -    -    7    134    7 
Subtotal:   261    372    82    366    13 
Totals:                         
Commercial   9,451    11,014    75    10,693    84 
Consumer   117    121    -    109    - 
Residential   1,583    2,389    7    2,081    38 
                          
Grand Total:  $11,151   $13,524   $82   $12,883   $122 

 

Impaired loans at March 31, 2019 were approximately $11.2 million and were composed of $6.3 million in non-accrual loans and $4.9 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $261,000 in impaired loans had specific allowances provided for them while the remaining $10.9 million had no specific allowances recorded at March 31, 2019. Of the $10.9 million with no allowance recorded, $1.1 million of those loans have had partial charge-offs recorded.

 

22

 

 

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

 

       Three months ended 
   As of December 31, 2018   March 31, 2018 
       Contractual             
       Unpaid   Related   Average   Interest Income 
   Recorded   Principal   Allowance   Recorded   Recognized on 
   Investment   Balance   for Loan Losses   Investment   Impaired Loans 
   (dollars in thousands) 
With no related allowance recorded:                         
Commercial and industrial  $4,210   $4,495   $-   $1,806   $72 
Construction   561    647    -    382    1 
Commercial real estate   4,744    6,903    -    4,655    60 
Multi-family residential   101    109    -    232    3 
Loans to individuals   215    215    -    1    - 
HELOC   1,040    1,204    -    803    13 
1-to-4 family residential   572    732    -    998    48 
                          
Subtotal:   11,443    14,305    -    8,877    197 
With an allowance recorded:                         
Commercial and industrial   127    325    51    142    1 
Construction   27    27    14    13    - 
HELOC   -    -    -    16    - 
1-to-4 family residential   137    555    22    177    5 
Subtotal:   291    907    87    348    6 
Totals:                         
Commercial   10,007    12,612    65    7,230    137 
Consumer   101    109    -    1    - 
Residential   1,626    2,491    22    1,994    66 
                          
Grand Total:  $11,734   $15,212   $87   $9,225   $203 

 

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

 

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

 

23

 

 

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

 

Troubled Debt Restructurings

 

The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the first quarter of 2019 and 2018:

 

   Three months ended March 31, 2019   Three months ended March 31, 2018 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
       Outstanding   Outstanding       Outstanding   Outstanding 
   Number   Recorded   Recorded   Number   Recorded   Recorded 
   of loans   Investment   Investment   of loans   Investment   Investment 
   (dollars in thousands) 
Extended payment terms:                              
Commercial and industrial   4   $1,365   $1,275    4   $1,046   $1,046 
Commercial real estate   3    1,283    1,015    -    -    - 
1-to-4 family residential   2    432    409    -    -    - 
Loans to individuals   1    1    1    -    -    - 
                               
Total   10   $3,081   $2,700    4   $1,046   $1,046 

 

The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default during that period together with concessions made by loan class during the twelve month periods ended March 31, 2019 and 2018:

 

   Twelve months ended   Twelve months ended 
   March 31, 2019   March 31, 2018 
   Number   Recorded   Number   Recorded 
   of loans   investment   of loans   investment 
   (dollars in thousands) 
                 
Extended payment terms:                    
Commercial and industrial   8   $1,591    3   $996 
Construction   1    34    1    62 
Commercial real estate   3    697    1    899 
Loans to Individuals   1    1    -    - 
1-to-4 family residential   4    128    2    125 
                     
Total   17   $2,451    7   $2,082 

 

At March 31, 2019, the Bank had thirty-nine loans with an aggregate balance of $7.7 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-two loans with a balance totaling $5.2 million were still accruing as of March 31, 2019. The remaining TDRs with balances totaling $2.5 million as of March 31, 2019 were in non-accrual status.

 

At March 31, 2018, the Bank had thirty-nine loans with an aggregate balance of $6.7 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-three loans with a balance totaling $4.8 million were still accruing as of March 31, 2018. The remaining TDRs with balances totaling $1.9 million as of March 31, 2018 were in non-accrual status.

 

24

 

 

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

 

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of March 31, 2019 and December 31, 2018, respectively:

 

Total loans:

 

March 31, 2019
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
       (dollars in thousands)     
                 
Superior  $990   $-   $185   $- 
Very good   2,207    142    1,075    - 
Good   6,203    11,705    53,857    4,965 
Acceptable   25,780    24,847    271,454    35,438 
Acceptable with care   38,572    141,357    124,997    16,616 
Special mention   84    697    1,414    - 
Substandard   5,893    2,414    5,506    211 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $79,729   $181,162   $458,488   $57,230 
                         
Consumer Credit                        
Exposure By                        
Internally  1-to-4 family                     
Assigned Grade  residential   HELOC                 
                         
Pass  $153,077   $47,300                 
Special mention   1,125    76                 
Substandard   2,530    1,384                 
   $156,732   $48,760                 
                             
Consumer Credit                            
Exposure Based  Loans to                         
On Payment  individuals &                         
Activity  overdrafts                         
                             
Pass  $11,309                         
Non -pass   121                         
   $11,430                         

 

25

 

 

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

 

Total Loans:

 

December 31, 2018
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
       (dollars in thousands)     
                 
Superior  $1,662   $-   $21   $- 
Very good   2,266    246    1,120    - 
Good   5,773    12,106    47,959    5,116 
Acceptable   22,332    30,897    263,017    37,832 
Acceptable with care   34,626    125,788    139,484    20,296 
Special mention   879    711    1,789    - 
Substandard   6,643    656    4,221    215 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $74,181   $170,404   $457,611   $63,459 
                         
Consumer Credit                        
Exposure By                        
Internally  1-to-4 family                     
Assigned Grade  residential   HELOC                 
                         
Pass  $155,117   $48,143                 
Special mention   900    88                 
Substandard   3,580    1,482                 
   $159,597   $49,713                 
                             
Consumer Credit                            
Exposure Based  Loans to                         
On Payment  individuals &                         
Activity  overdrafts                         
                             
Pass  $10,891                         
Special mention   1,923                         
   $12,814                         

 

26

 

 

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

 

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 months ended March 31, 2019 and 2018:

 

   2019   2018 
   (dollars in thousands) 
         
Accretable yield, beginning of period  $3,593   $3,307 
Accretion   (288)   (354)
Reclassification from (to) nonaccretable difference   117    - 
Other changes, net   299    87 
           
Accretable yield, end of period  $3,721   $3,040 

 

27

 

 

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

 

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three month periods ended March 31, 2019 and March 31, 2018, respectively (dollars in thousands):

 

   Three months ended March 31, 2019 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
                                 
Loans – excluding PCI                                        
Balance, beginning of period  $762   $1,385   $3,024   $1,663   $555   $206   $471   $8,066 
Provision for (recovery of) loan losses   214    186    356    (461)   (80)   (15)   (63)   137 
Loans charged-off   (251)   -    -    -    (49)   (19)   -    (319)
Recoveries   5    1    15    9    13    5    -    48 
Balance, end of period  $730   $1,572   $3,395   $1,211   $439   $177   $408   $7,932 
                                         
PCI Loans                                        
Balance, beginning of period  $214   $-   $385   $4   $-   $-   $-   $603 
Provision for (recovery of) loan losses   (168)   23    (152)   242    2    -    28    (25)
Loans charged-off   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $46   $23   $233   $246   $2   $-   $28   $578 
                                         
Total Loans                                        
Balance, beginning of period  $976   $1,385   $3,409   $1,667   $555   $206   $471   $8,669 
Provision for (recovery of) loan losses   46    209    204    (219)   (78)   (15)   (35)   112 
Loans charged-off   (251)   -    -    -    (49)   (19)   -    (319)
Recoveries   5    1    15    9    13    5    -    48 
Balance, end of period  $776   $1,595   $3,628   $1,457   $441   $177   $436   $8,510 
                                         
Ending Balance: individually evaluated for impairment  $75   $-   $-   $7   $-   $-   $-   $82 
Ending Balance: collectively evaluated for impairment  $701   $1,595   $3,628   $1,450   $441   $177   $436   $8,428 
                                         
  Loans:                                        
Ending Balance: collectively evaluated for impairment non PCI loans  $75,481   $179,872   $444,893   $148,073   $47,853   $11,313   $56,092   $963,577 
Ending Balance: collectively evaluated for impairment PCI loans  $1,481   $747   $7,587   $8,011   $50   $-   $927   $18,803 
Ending Balance: individually evaluated for impairment  $2,767   $543   $6,008   $648   $857   $117   $211   $11,151 
Ending Balance  $79,729   $181,162   $458,488   $156,732   $48,760   $11,430   $57,230   $993,531 

 

28

 

 

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

 

   Three months ended March 31, 2018 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
                                 
Loans – excluding PCI                                        
Balance, beginning of period  $742   $1,955   $3,304   $1,058   $549   $305   $791   $8,704 
Provision for (recovery of) loan losses   (10)   (275)   282    208    125    (174)   (94)   62 
Loans charged-off   (9)   -    -    -    (35)   (15)   -    (59)
Recoveries   6    6    4    9    6    9    -    40 
Balance, end of period  $729   $1,686   $3,590   $1,275   $645   $125   $697   $8,747 
                                         
PCI Loans                                        
Balance, beginning of period  $65   $-   $66   $-   $-   $-   $-   $131 
Provision for loan losses   79    -    -    -    -    -    -    79 
Loans charged-off   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Balance, end of period  $144   $-   $66   $-   $-   $-   $-   $210 
                                         
Total Loans                                        
Balance, beginning of period  $807   $1,955   $3,370   $1,058   $549   $305   $791   $8,835 
Provision for (recovery of) loan losses   69    (275)   282    208    125    (174)   (94)   141 
Loans charged-off   (9)   -    -    -    (35)   (15)   -    (59)
Recoveries   6    6    4    9    6    9    -    40 
Balance, end of period  $873   $1,686   $3,656   $1,275   $645   $125   $697   $8,957 
                                         
Ending Balance: individually evaluated for impairment  $49   $14   $-   $13   $-   $-   $-   $76 
Ending Balance: collectively evaluated for impairment  $824   $1,672   $3,657   $1,262   $645   $125   $697   $8,881 
                                         
  Loans:                                        
Ending Balance: collectively evaluated for impairment  $105,045   $169,869   $410,783   $149,490   $51,174   $10,754   $73,572   $970,687 
Ending Balance: individually evaluated for impairment  $2,071   $430   $4,858   $862   $595   $1   $230   $9,047 
Ending Balance  $107,116   $170,299   $415,641   $150,352   $51,769   $10,755   $73,802   $979,734 

 

29

 

 

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

 

NOTE G – LOANS HELD FOR SALE

 

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

 

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

 

NOTE H – REVENUE RECOGNITION

 

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

 

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

 

Service Charges on Deposit Accounts

 

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

 

30

 

 

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

 

Other Fees and Income

 

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

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2019 and 2018.

 

   Three Months   Three Months 
   Ended   Ended 
   March 31,   March 31, 
   2019   2018 
   (dollars in thousands) 
         
Service Charges on Deposit Accounts  $266   $276 
Other   502    413 
Noninterest Income (in-scope of Topic 606)   768    689 
Noninterest Income (out-of-scope of Topic 606)   429    476 
Total Non-interest Income  $1,197   $1,165 

 

Contract Balances

 

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.

 

31

 

 

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

 

Contract Acquisition Costs

 

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

 

 

NOTE I – OTHER REAL ESTATE OWNED

 

The following table explains changes in other real estate owned, or OREO, during the three months ended March 31, 2019 and the year ended December 31, 2018:

 

   Three Months   Twelve Months 
   Ended   Ended 
   March 31,   December 31, 
   2019   2018 
   (dollars in thousands) 
         
Beginning balance January 1  $1,088   $1,258 
Sales   (65)   (717)
Write-downs   (3)   (71)
Transfers   26    618 
Ending balance  $1,046   $1,088 

 

At March 31, 2019 and December 31, 2018, the Company had $1.0 million and $1.1 million, respectively, of foreclosed residential real estate property in OREO. The Company had five loans with a recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure in the aggregate amount of $770,000 at March 31, 2019. At December 31, 2018, the Company had 5 loans with recorded investment in the amount of $376,000 in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure.

 

Note J – LEASES

 

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

 

At March 31, 2019, the Company did not have any leases that had not yet commenced for which we had created a right-of-use asset and a lease liability. The Company does not have any finance leases. For the operating leases the Company has elected the practical expedient of not separating lease components from non-lease components and instead to account for each separate lease component and the non-lease components associated with that lease as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the lease agreements include periodic rate adjustments for inflation.

 

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

 

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

 

The components of lease expense were as follows:

 

(In thousands)  Three Months Ended
March 31,
 
   2019 
      
Operating lease cost  $261 

 

Supplemental cash flow information related to leases was as follows:

 

(In thousands) 

Three Months Ended

March 31,

 
   2019 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $261 
      
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases   9,013 

 

The following table presents the remaining weighted average lease terms and discount rates as of March 31, 2019:

 

Weighted Average Remaining Lease Term     
Operating leases   7.3 years 
      
Weighted Average Discount Rate     
Operating leases   6.0%

 

Maturities of lease liabilities were as follows:

 

     
(In thousands)
Year Ending December 31,
 

Operating

Leases

 
     
2019 (excluding the three months ended March 31, 2019)  $398 
2020   580 
2021   642 
2022   713 
2023   693 
Thereafter   5,816 
Total lease payments  $8,842 

 

 

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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, among other things: changes in national, regional and local market conditions; changes in legislative and regulatory conditions, changes in the interest rate environment, breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and adverse changes in credit quality trends.

 

Overview

 

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

 

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

 

The Company was formerly known as New Century Bancorp, Inc. On July 25, 2014, New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. The combined company is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, North Carolina, whose wholly owned subsidiary, Select Bank & Trust Company, was a state-chartered commercial bank with approximately $276.9 million in assets. The merger expanded the Company’s North Carolina presence with the addition of six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville, and Burlington. During 2015, the Gibsonville and Burlington branches were combined into a new location in Burlington. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”) located in Charlotte, North Carolina and the cities of Rock Hill, Blacksburg and Six Mile, South Carolina. Under the terms of that acquisition, Premara was merged with and into the Company, Carolina Premier was merged with and into the Bank, and shareholders of Premara received 1.0463 shares of the Company’s common stock or $12.65 in cash for each outstanding share of Premara common stock, with approximately 70% of such shares being exchanged for shares of the Company’s common stock and 30% being exchanged for cash.

 

On January 29, 2019, the Bank entered into a Purchase and Assumption Agreement with City National Bank of West Virginia pursuant to which the Bank will assume the majority of deposits and acquire the equipment and other selected assets associated with City National Bank of West Virginia’s branch located at 621 Nevan Road, Virginia Beach, Virginia. The transaction is subject to state and federal bank regulatory approvals and other customary closing conditions and is expected to close during the second quarter of 2019.

 

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Comparison of Financial Condition at

March 31, 2019 and December 31, 2018

 

During the first three months of 2019, total assets decreased by $16.4 million to $1.2 billion as of March 31, 2019. The decrease in assets was due primarily to cash used to pay down wholesale deposits. Earning assets at March 31, 2019 totaled $1.1 billion and consisted of $983.3 million in net loans, $86.7 million in investment securities, $61.5 million in cash, overnight investments and interest-bearing deposits in other banks, $9.8 million in federal funds sold and $4.1 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2019 were $951.0 million and $213.5 million, respectively.

 

Since the end of 2018, gross loans have increased by $5.8 million to $991.8 million as of March 31, 2019. The increase in gross loans was due primarily to normal customer demand. At March 31, 2019, gross loans consisted of $79.7 million in commercial and industrial loans, $458.5 million in commercial real estate loans, $57.2 million in multi-family residential loans, $11.4 million in consumer loans, $156.7 million in residential real estate loans, $48.8 million in HELOCs, and $181.2 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.7 million at March 31, 2019.

 

At March 31, 2019 the Company held $9.8 million in federal funds sold and $0 in repurchase agreements compared to $0 in federal funds sold and $0 in repurchase agreements for December 31, 2018. Interest-earning deposits in other banks were $45.9 million at March 31, 2019, a $76.4 million decrease from December 31, 2018. The Company’s investment securities at March 31, 2019 were $86.7 million, an increase of $35.2 million from December 31, 2018. The investment portfolio as of March 31, 2019 consisted of $11.9 million in government agency debt securities, $56.1 million in mortgage-backed securities, $1.6 million in corporate bonds and $17.0 million in municipal securities. The net unrealized gain on these securities was $392,000 as of March 31, 2019.

 

At March 31, 2019, the Company had an investment of $3.3 million in the form of Federal Home Loan Bank (“FHLB”) stock, which increased by $59,000 from December 31, 2018. Also, the Company had $738,000 in other non-marketable securities at March 31, 2019 compared to $762,000 at December 31, 2018.

 

At March 31, 2019, non-earning assets were $107.2 million, an increase of $516,000 from $106.7 million as of December 31, 2018. Non-earning assets included $15.6 million in cash and due from banks, bank premises and equipment of $17.7 million, goodwill of $24.6 million, core deposit intangible of $1.9 million, accrued interest receivable of $4.1 million, right of use lease asset of $8.8 million, foreclosed real estate of $1.0 million, and other assets totaling $8.3 million, including net deferred taxes of $3.6 million. Since the income on bank–owned life insurance is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The decrease in non-earning assets was due primarily to the reduction in cash and due from banks.

 

Total deposits at March 31, 2019 were $951.0 million and consisted of $240.3 million in non-interest-bearing demand deposits, $262.2 million in money market and negotiable order of withdrawal, or NOW, accounts, $48.1 million in savings accounts, and $400.5 million in time deposits. Total deposits decreased by $29.5 million from $980.4 million as of December 31, 2018, due primarily to the decrease in wholesale deposits. The Bank had $0 in brokered demand deposits and $26.3 million in brokered time deposits as of March 31, 2019. The Bank had $0 in brokered demand deposits and $56.5 million in brokered time deposits as of December 31, 2018.

 

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As of March 31, 2019, the Company had $52.0 million (of which $45.0 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 March 31, 2019 was $213.5 million, an increase of $3.8 million from $209.6 million as of December 31, 2018. Accumulated other comprehensive income relating to available for sale securities increased $360,000 during the three months ended March 31, 2019. Other changes in shareholders’ equity included net income of $3.3 million and $114,000 from the exercise of stock options.

 

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

 

At March 31, 2019, the Company had $940,000 in loans that were 30 to 59 days past due and $3.2 million in loans that were 30 to 89 days past due. This represented 0.73% of gross loans outstanding on that date. This is a decrease from December 31, 2018 when there were $5.1 million in loans that were 30-89 days past due or 0.51% of gross loans outstanding. Non-accrual loans decreased from $7.3 million at December 31, 2018 to $6.3 million at March 31, 2019.

 

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 1.50% at December 31, 2018 to 1.49% at March 31, 2019. The Company had a decrease of $920,000 in non-accruals from $7.3 million at December 31, 2018 and an increase in accruing troubled debt restructurings from $4.4 million at December 31, 2018 to $5.2 million as of March 31, 2019. Of the non-accrual loans as of March 31, 2019, five commercial real estate loans totaled $1.1 million, five construction loans totaled $544,000, fourteen commercial loans totaled $2.4 million, nine HELOC loans totaled $980,000, six agricultural loans totaled $1.0 million and ten 1-to-4 family residential loans totaled $266,000 and consumer made up the remaining balance.

 

At March 31, 2019, the Bank had thirty-nine loans totaling $7.7 million that were considered to be troubled debt restructurings. Twenty-two of these loans totaling $5.2 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.

 

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

 

   For Periods Ended 
   March 31,   December 31, 
   2019   2018 
   (dollars in thousands) 
         
Non-accrual loans  $6,337   $7,257 
Accruing TDRs   5,246    4,378 
Total non-performing loans   11,583    11,635 
Foreclosed real estate   1,046    1,088 
Total non-performing assets  $12,629   $12,723 
           
Accruing loans past due 90 days or more  $3,146   $3,167 
Allowance for loan losses  $8,510   $8,669 
           
Non-performing loans to period end loans   1.17%   1.18%
Non-performing loans and accruing loans past due 90 days or more to period end loans   1.49%   1.50%
Allowance for loan losses to period end loans   0.86%   0.88%
Allowance for loan losses to non-performing loans   73%   75%
Allowance for loan losses to non-performing assets   67%   68%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more   54%   55%
Non-performing assets to total assets   1.02%   1.01%
Non-performing assets and accruing loans past due 90 days or more to total assets   1.27%   1.26%

 

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at March 31, 2019 and December 31, 2018 were $12.6 million and $12.7 million, respectively. The allowance for loan losses at March 31, 2019 represented 67% of non-performing assets compared to 68% at December 31, 2018.

 

Total impaired loans at March 31, 2019 were $11.6 million. This includes $6.3 million in loans that were classified as impaired because they were in non-accrual status and $5.2 million in accruing TDRs. Of these loans, $261,000 required a specific reserve of $82,000 at March 31, 2019.

 

Total impaired loans at December 31, 2018 were $11.7 million. This includes $7.3 million in loans that were classified as impaired because they were in non-accrual status and $4.4 million in accruing TDRs. Of these loans, $291,000 required a specific reserve of $87,000 at December 31, 2018.

 

The allowance for loan losses was $8.5 million at March 31, 2019 or 0.86% of gross loans outstanding as compared to 0.88% reported as a percentage of gross loans at December 31, 2018. This decrease resulted primarily from changes in loans requiring a specific reserve plus qualitative factors related to interest rates and economic performance indicators. The Legacy Select loans and Carolina Premier loans were recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. The allowance for loan losses at March 31, 2019 represented 73% of non-performing loans compared to 75% at December 31, 2018. It is management’s assessment that the allowance for loan losses as of March 31, 2019 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.

 

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Contractual Obligations

 

The following table presents the Company's significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

 

   March 31, 2019 
(dollars in thousands) 

1 Year

or Less

   Over 1 to
3 Years
   Over 3 to
5 Years
  

More
Than

5 Years

   Total 
                     
Time deposits  $328,042   $62,068   $10,345   $-   $400,455 
Short-term borrowings   7,000    -    -    -    7,000 
Long-term debt   -    20,000    25,000    12,372    57,372 
Operating leases   541    1,253    1,395    5,653    8,842 
Total contractual obligations  $335,583   $83,321   $36,740   $18,025   $473,669 

 

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 Ratios

 

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

 

At March 31, 2019 and December 31, 2018, the Company had $28.6 million and $27.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2019 and December 31, 2018, the Company had $14.0 million and $10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 25.6% and 23.2% of total risk-based capital as of March 31, 2019 and December 31, 2018, which is less than the 100% maximum allowed. These loans may represent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

 

Business Sector Concentrations

 

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

 

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At March 31, 2019, the Company had one product type group which exceeded this guideline; Office Building, which represented 43% of risk-based capital or $71.7 million. All other commercial real estate groups were at or below the 40% threshold. The internal guideline levels heighten the level of Company monitoring of such loans in underwriting and ongoing servicing activities. At December 31, 2018, the Company did not exceed the 40% guideline in any product types. All commercial and residential real estate product types were under the 40% threshold. All other commercial real estate product types were under the 40% threshold.

 

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

 

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of
March 31, 2019 and December 31, 2018.

 

Acquisition, Development and Construction Loans

(dollars in thousands)

 

   March 31, 2019   December 31, 2018 
   Land and Land   Land and Land 
   Construction   Development   Total   Construction   Development   Total 
                         
Total ADC loans  $151,008   $30,154   $181,162   $145,736   $24,668   $170,404 
                               
Average Loan Size  $275   $372        $267   $308      
                               
Percentage of total loans   15.23%   3.04%   18.27%   14.78%   2.50%   17.28%
                               
Non-accrual loans  $608