Attached files
| file | filename |
|---|---|
| EX-21 - EXHIBIT 21 - SELECT BANCORP, INC. | v434782_ex21.htm |
| EX-23 - EXHIBIT 23 - SELECT BANCORP, INC. | v434782_ex23.htm |
| EX-31.(I) - EXHIBIT 31(I) - SELECT BANCORP, INC. | v434782_ex31i.htm |
| EX-32.(I) - EXHIBIT 32(I) - SELECT BANCORP, INC. | v434782_ex32i.htm |
| EX-31.(II) - EXHIBIT 31(II) - SELECT BANCORP, INC. | v434782_ex31ii.htm |
| EX-32.(II) - EXHIBIT 32(II) - SELECT BANCORP, INC. | v434782_ex32ii.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 700 W. Cumberland Street, Dunn, North Carolina | 28334 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone number, including area code: (910) 892-7080
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x |
| (Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter $71,515,318.
Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date 11,584,011 shares outstanding as of March 21, 2016.
Documents Incorporated by Reference:
None.
FORM 10-K CROSS-REFERENCE INDEX
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General
Select Bancorp, Inc. (the “Registrant”) (formerly New Century Bancorp, Inc.) was incorporated under the laws of the State of North Carolina on May 14, 2003, at the direction of the Board of Directors of Select Bank & Trust Company (formerly New Century Bank), for the purpose of serving as the bank holding company for Select Bank & Trust Company and became the holding company for Select Bank & Trust Company on September 19, 2003. To become Select Bank & Trust Company’s holding company, the Registrant received the approval of the Federal Reserve Board as well as Select Bank & Trust Company’s shareholders. Upon receiving such approval, each outstanding share of common stock of Select Bank & Trust Company was exchanged on a one-for-one basis for one share of common stock of the Registrant. On July 25, 2014, New Century Bancorp, Inc. and New Century Bank adopted and changed their names to Select Bancorp, Inc. and Select Bank & Trust Company, respectively. This was in conjunction with the merger with “Legacy” Select Bancorp, Inc. and Select Bank & Trust Company of Greenville, NC.
The Registrant operates for the primary purpose of serving as the holding company for its subsidiary depository institution, Select Bank & Trust Company (the “Bank”). The Registrant’s headquarters is located at 700 West Cumberland Street, Dunn, North Carolina 28334.
The Bank was incorporated on May 19, 2000 as a North Carolina-chartered commercial bank, opened for business on May 24, 2000, and is located at 700 West Cumberland Street, Dunn, North Carolina.
The Bank operates for the primary purpose of serving the banking needs of individuals and small to medium-sized businesses in its market area. The Bank offers a range of banking services including checking and savings accounts, commercial, consumer, mortgage and personal loans, and other associated financial services.
Primary Market Area
The Registrant’s market area consists of central and eastern North Carolina which includes Alamance, Beaufort, Brunswick, Carteret, Cumberland, Harnett, Pasquotank, Pitt, Robeson, Sampson, Wake and Wayne counties. The Registrant’s market area has a population of over 2.4 million with an average household income of over $52,000.
Total deposits in the Registrant’s market area exceeded $37.7 billion at June 30, 2015. The leading economic components of Alamance County are healthcare and education with the largest employers being LabCorp, the public school system, the Alamance Regional Medical Center and Elon University. In Beaufort County the top employers are the Beaufort County Schools, PCS Phosphate Company, a manufacturing facility, Vidant Medical Center and other manufacturing facilities and public administration. Brunswick County’s leading industries are education, utilities and public administration with the Brunswick County Schools, Progress Energy and the County of Brunswick as the top employers. In Carteret County, it is public services that are leading economic factors as education, health services and public administration are the leading employers followed by major retailers including Wal-Mart, Food Lion and Big Rock Sports LLC, an outdoor sporting goods distributor. Cumberland County’s leading sector is federal government and military with extensions of the Army, Navy and Air Force located there, followed by education, health services, public administration and manufacturing. In Harnett County, top economic sectors are education and retail trade distribution center as the top three employers are the Harnett County Schools, Food Lion, Rooms-to-Go and Campbell University. In Pasquotank County, education, health services and the U.S. Department of Homeland Security through the U.S. Coast Guard base in Elizabeth City are top employers. Pitt County has a mix of education and health services employers and still relies heavily on manufacturing with over 1,000 jobs attributable to NACCO Materials Handling Group as well as being home to East Carolina University. In Robeson County, leading sectors include education, health services, and manufacturing with Mountaire Farms of N.C. employing over 1,000. In Sampson County, leading sectors include education, manufacturing, agriculture, natural resources and mining. In Wake County, leading sectors include government, education, healthcare, and technology. Wayne County’s leading sectors are the federal government and military services, education and retail trade.
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Competition
Commercial banking in North Carolina is extremely competitive in large part due to early adoption of laws permitting statewide branching. The Registrant competes in its market areas with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of the Registrant’s competitors have broader geographic markets and higher lending limits than Registrant and are also able to provide more services and make greater use of advertising. As of June 30, 2015, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 608 offices of insured depository institutions (44 in Alamance County, 15 in Beaufort County, 42 in Brunswick, 25 in Carteret, 66 in Cumberland County, 25 in Harnett County, 12 in Pasquotank County, 47 in Pitt County, 31 in Robeson County, 16 in Sampson County, 256 in Wake County and 29 in Wayne County), including offices of the Bank.
The enactment of legislation authorizing interstate banking resulted in great increases in the size and financial resources of some of Registrant’s competitors. In addition, as a result of interstate banking and the recent economic recession, out-of-state commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina.
Despite the competition in its market areas, Registrant believes that it has certain competitive advantages that distinguish it from its competition. Registrant believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. Registrant offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. Registrant offers many personalized services and intends to attract customers by being responsive and sensitive to their individualized needs. Registrant also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional marketing media to attract new customers. To enhance a positive image in the community, Registrant supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.
Employees
As of December 31, 2015, the Registrant employed 153 full time equivalent employees. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes relations with its employees to be good.
Regulation
Regulation of the Bank
General. The Bank is a North Carolina chartered commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision, examination and regulation by the North Carolina Office of the Commissioner of Banks (“Commissioner”) and the FDIC and to North Carolina and federal statutory and regulatory provisions governing such matters as capital standards, mergers, subsidiary investments and establishment of branch offices. The FDIC also has the authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition and is required to obtain regulatory approval prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.
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As a federally insured depository institution, the Bank is subject to various regulations promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”), including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank, and is intended primarily for the protection of the FDIC and the depositors of the Bank, rather than shareholders. Changes in the regulatory framework could have a material effect on the Bank that in turn, could have a material effect on the Registrant. Certain of the legal and regulatory requirements are applicable to the Bank and the Registrant. This discussion does not purport to be a complete explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.
State Law. The Bank is subject to extensive supervision and regulation by the Commissioner. The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail its resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.
North Carolina Banking Law Modernization Act. On October 1, 2012, as a result of the recommendations of the Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws, legislation went into effect that comprehensively modernized North Carolina’s banking laws for the first time since the Great Depression. As a result of the legislation, Articles 1 through 10, 12, and 13 of Chapter 53 of the North Carolina General Statutes were repealed, and new Chapter 53C, entitled “Regulation of Banks,” became law. Major changes enacted by the law include: a comprehensive list of definitions enhancing the clarity and meaning of the various sections of North Carolina’s banking law, a broader reliance on the North Carolina Business Corporations Act, and incorporation of modern concepts of capital adequacy and regulatory supervision. In 2013, the North Carolina General Assembly made certain technical corrections and clarifications to Chapter 53C.
Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This law significantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have significant discretion in drafting rules and regulations, pursuant to the Dodd-Frank Act. The Dodd-Frank Act included, among other things:
| · | the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies; |
| · | the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies; |
| · | the establishment of strengthened capital and prudential standards for banks and bank holding companies; |
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| · | enhanced regulation of financial markets, including derivatives and securitization markets; |
| · | the elimination of certain trading activities by banks; |
| · | a permanent increase of FDIC deposit insurance to $250,000 per depository category and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits; |
| · | amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and |
| · | new disclosure and other requirements relating to executive compensation and corporate governance. |
The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of Tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). We do not currently anticipate that the Volcker Rule will have a material effect on our operations.
We believe that certain aspects of the Dodd-Frank Act, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.
Deposit Insurance. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (“DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio” or “DRR”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the DRR at 2.0%.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.
The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation went into effect April 1, 2011.
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On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions.
On December 30, 2009, the Bank paid a $3.1 million prepaid assessment, creating a prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the Bank expensed its regular quarterly assessment and recorded an offsetting credit to the prepaid assessment asset until June 30, 2013 when the remaining assessment was returned to the Bank.
The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Registrant and the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.
Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 1,250% for certain assets with high credit risk, such as securitization exposures.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Common Equity Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Common Equity Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Additional Tier 1 Capital” includes noncumulative perpetual preferred stock, tier 1 minority interests, grandfathered TRuPS, and Troubled Asset Relief Program instruments less applicable regulatory adjustments and deductions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 5% and a ratio of total capital to risk-weighted assets of at least 10% to meet well capitalized thresholds. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant.
The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of board of director and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.
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Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the Registrant and its shareholders.
On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.
The major provisions of the rule applicable to us are:
| · | The rule implements higher minimum capital requirements, includes a new common equity Tier1 capital requirement, and establishes criteria that instruments must meet in order to be considered Common Equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The minimum capital to risk-weighted assets (“RWA”) requirements under the rule are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0%, which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The rule maintains the general structure of the current prompt corrective action, or PCA, framework while incorporating these increased minimum requirements. |
| · | The rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (“MSAs”), deferred tax assets (“DTAs”), and certain investments in the capital of unconsolidated financial institutions. In addition, the rule requires that certain regulatory capital deductions be made from common equity Tier 1 capital. |
| · | Under the rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer is intended to help ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements began on January 1, 2016. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds. |
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| · | The rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. |
On July 9, 2013, the FDIC confirmed that it would join in the Basel III standards and, on September 10, 2013, issued an “interim final rule” applicable to the Bank that is identical in substance to the final rules issued by the Federal Reserve described above. The Bank was required to comply with the interim final rule beginning on January 1, 2015. Compliance by the Registrant and the Bank with these capital requirements affects their respective operations by increasing the amount of capital required to conduct operations.
Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy the minimum capital requirements discussed above, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of business. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior regulatory approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.
On July 2, 2013, the Federal Reserve Board, and on July 9, 2013, the FDIC, adopted a final rule that implements the Basel III changes to the international regulatory capital framework, referred to as the “Basel III Rules.” The Basel III Rules apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Basel III Rules apply only to large, complex financial institutions, substantial portions of the Basel III Rules apply to the Company and the Bank. The Basel III Rules include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.
The Basel III Rules include new risk-based and leverage capital ratio requirements which refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to the Company and the Bank under the Basel III Rules are: (i) a new common equity Tier 1 risk-based capital ratio of 4.5 percent; (ii) a Tier 1 risk-based capital ratio of 6 percent (increased from 4 percent); (iii) a total risk-based capital ratio of 8 percent (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4 percent for all institutions. Common equity Tier 1 capital will consist of retained earnings and common stock instruments, subject to certain adjustments.
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The Basel III Rules also established a “capital conservation buffer” of 2.5 percent above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0 percent, (ii) a Tier 1 risk-based capital ratio of 8.5 percent, and (iii) a total risk-based capital ratio of 10.5 percent. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625 percent of risk-weighted assets with increases to that amount each year until full implementation in January 2019. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.
The Basel III Rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions became effective on January 1, 2015. The prompt corrective action rules were modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. For example, under the prompt corrective action rules, insured depository institutions are required to meet the following capital levels in order to qualify as “well capitalized:” (i) a new common equity Tier 1 risk-based capital ratio of 6.5 percent; (ii) a Tier 1 risk-based capital ratio of 8 percent (increased from 6 percent); (iii) a total risk-based capital ratio of 10 percent (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5 percent (unchanged from current rules).
The Basel III Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn will affect the calculation of risk based ratios. Under the Basel III Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, the Basel III Rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act; (ii) greater recognition of collateral and guarantees; and (iii) revised capital treatment for derivatives and repo-style transactions.
In addition, the final rule includes certain exemptions to address concerns about the regulatory burden on community banks. For example, banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis, without any phase out. The Bank has opted out of the requirement to include most accumulated other comprehensive income (“AOCI”) components in the calculation of CET1 capital and, in effect, retain the AOCI treatment under the prior capital rules and exclude accumulated other comprehensive income from capital.
Certain Basel III Rules became effective January 1, 2015. The conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019. Certain calculations under the Basel III Rules will also have phase-in periods.
Under the implementing regulations, the federal banking regulators, including the FDIC, generally measure an institution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets).
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The following table shows the Bank’s actual capital ratios and the required capital ratios for the various prompt corrective action categories as of December 31, 2015.
| Regulatory | ||||||||||||||
| Adequately | Significantly | Minimum | ||||||||||||
| Actual | Well-capitalized | Capitalized | Undercapitalized | Undercapitalized | Requirement | |||||||||
| Total risk-based capital ratio | 15.47 | % | 10.0% or more | 8.0% or more | Less than 8.0% | Less than 6.0% | 11.50% or more | |||||||
| Tier 1 risk-based capital ratio | 14.50 | % | 8.0% or more | 6.0% or more | Less than 6.0% | Less than 4.0% | 8.00% or more | |||||||
| Common equity Tier 1 risk-based capital ratio | 14.50 | % | 6.5% or more | 4.5% or more | Less than 4.50% | Less than 3.0% | 8.00% or more | |||||||
| Leverage ratio | 13.31 | % | 5.0% or more | 4.0% or more * | Less than 4.0% * | Less than 3.0% | 8.00% or more | |||||||
___________
* 3.0% if institution has the highest regulatory rating and meets certain other criteria.
A “critically undercapitalized” institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. See Note N of the Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the “CDRI Act”), each federal banking agency was required to establish safety and soundness standards for institutions under its authority. The interagency guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business. The guidelines also establish certain basic standards for the documentation of loans, credit underwriting, interest rate risk exposure, asset growth, and information security. The guidelines further provide that depository institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the appropriate federal banking agency determines that a depository institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A depository institution must submit an acceptable compliance plan to its primary federal regulator within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions.
Management believes that the Bank substantially meets all the standards adopted in the interagency guidelines at December 31, 2015 and at January 20, 2016 after the full redemption of the SBLF preferred stock. Our capital ratios decreased approximately 1.0% after the redemption but are still classified as well capitalized.
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.
| - 11 - |
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure of a financial institution to comply with these sanctions could result in legal consequences for the institution.
Community Reinvestment Act. The Bank, like other financial institutions, is subject to the Community Reinvestment Act (“CRA”). The purpose of the CRA is to encourage financial institutions to help meet the credit needs of their entire communities, including the needs of low-and moderate-income neighborhoods.
The federal banking agencies have implemented an evaluation system that rates an institution based on its asset size and actual performance in meeting community credit needs. Under these regulations, the institution is first evaluated and rated under two categories: a lending test and a community development test. For each of these tests, the institution is given a rating of either “outstanding,” “high satisfactory,” “low satisfactory,” “needs to improve,” or “substantial non-compliance.” A set of criteria for each rating has been developed and is included in the regulation. If an institution disagrees with a particular rating, the institution has the burden of rebutting the presumption by clearly establishing that the quantitative measures do not accurately present its actual performance, or that demographics, competitive conditions or economic or legal limitations peculiar to its service area should be considered. The ratings received under the three tests will be used to determine the overall composite CRA rating. The composite ratings currently given are: “outstanding,” “satisfactory,” “needs to improve” or “substantial non-compliance.”
The Bank’s CRA rating would be a factor to be considered by the FRB and the FDIC in considering applications submitted by the Bank to acquire branches or to acquire or combine with other financial institutions and take other actions and, if such rating was less than “satisfactory,” could result in the denial of such applications. During the Bank’s last compliance examination, the Bank received a satisfactory rating with respect to CRA compliance.
Federal Home Loan Bank System. The FHLB System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $2.1 million at December 31, 2015. The FHLB of Atlanta serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It offers advances to members in accordance with policies and procedures established by the FHFA and the Board of Directors of the FHLB of Atlanta. Long-term advances may only be made for the purpose of providing funds for residential housing finance, small businesses, small farms and small agribusinesses.
Reserves. Pursuant to regulations of the FRB, the Bank must maintain average daily reserves equal to 3% on transaction accounts of $15.2 million up to $110.2 million, plus 10% on the remainder. This percentage is subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of December 31, 2015, the Bank met its reserve requirements.
| - 12 - |
The Bank is also subject to the reserve requirements of North Carolina commercial banks. North Carolina law requires state nonmember banks to maintain, at all times, a reserve fund in an amount set by the Commissioner.
Liquidity Requirements. FDIC policy requires that banks maintain an average daily balance of liquid assets (cash, certain time deposits, mortgage-backed securities, loans available for sale and specified United States government, state, or federal agency obligations) in an amount which it deems adequate to protect the safety and soundness of the Bank. The FDIC currently has no specific level which it requires. The Bank maintains its liquidity position under policy guidelines based on liquid assets in relationship to deposits and short-term borrowings. Based on its policy calculation guidelines, the Bank’s calculated liquidity ratio was 15.33% of total deposits and short-term borrowings at December 31, 2015, which management believes is adequate.
Dividend Restrictions. Under FDIC regulations, the Bank is prohibited from making any capital distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. The FDIC and the Commissioner have the power to further restrict the payment of dividends by the Bank.
Limits on Loans to One Borrower. The Bank generally is subject to both FDIC regulations and North Carolina law regarding loans to any one borrower, including related entities. Under applicable law, with certain limited exceptions, loans and extensions of credit by a state chartered nonmember bank to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15% of the unimpaired capital of the Bank. In addition, the Bank has an internal policy that loans and extensions of credit fully secured by readily marketable collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 10% of the unimpaired capital fund of the Bank. Under the internal policy, the Bank’s loans to one borrower were limited to $10.5 million at December 31, 2015.
Transactions with Related Parties. Transactions between a state nonmember bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state nonmember bank is any company or entity which controls, is controlled by or is under common control with the state nonmember bank. In a holding company context, the parent holding company of a state nonmember bank (such as the Registrant) and any companies which are controlled by such parent holding company are affiliates of the savings institution or state nonmember bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.
Loans to Directors, Executive Officers and Principal Stockholders. State nonmember banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the applicable regulations thereunder (“Regulation O”) on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a state nonmember bank and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% stockholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.
| - 13 - |
State nonmember banks also are subject to the requirements and restrictions of Regulation O on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended (“BHCA”) prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.
The Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of bank holding companies and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities. The Volcker Rule became fully effective in July 2015. The Volcker Rule did not have a material impact on the Bank or the Registrant.
Restrictions on Certain Activities. State chartered nonmember banks with deposits insured by the FDIC are generally prohibited from engaging in equity investments that are not permissible for a national bank. The foregoing limitation, however, does not prohibit FDIC-insured state banks from acquiring or retaining an equity investment in a subsidiary in which the bank is a majority owner. State chartered banks are also prohibited from engaging as a principal in any type of activity that is not permissible for a national bank and, subject to certain exceptions, subsidiaries of state chartered FDIC-insured banks may not engage as a principal in any type of activity that is not permissible for a subsidiary of a national bank, unless in either case, the FDIC determines that the activity would pose no significant risk to the DIF and the bank is, and continues to be, in compliance with applicable capital standards.
The Registrant cannot predict what legislation might be enacted or what regulations might be adopted in the future, or if enacted or adopted, the effect thereof on the Bank’s operations.
| - 14 - |
Regulation of the Registrant
Federal Regulation. The Registrant is a registered bank holding company subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.
The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.
The merger or consolidation of the Registrant with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases, an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.
The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well-capitalized” and well-managed under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to promote community welfare; and
- acquiring a savings and loan association.
| - 15 - |
In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.
However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.
A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well-capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Registrant has not yet elected to become a financial holding company.
Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:
- leverage capital requirement expressed as a percentage of adjusted total assets;
- common equity Tier 1 expressed as a percentage of adjusted total assets;
- risk-based requirement expressed as a percentage of total risk-weighted assets; and
- Tier 1 leverage requirement expressed as a percentage of adjusted total assets.
| - 16 - |
The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4.0%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8.0%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3.0% for the most highly-rated companies, with minimum requirements of 4.0% to 5.0% for all others.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.
Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Bank. At present, the Registrant’s only source of income is dividends paid by the Bank and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Bank. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings where the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.
The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Registrant, any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.
| - 17 - |
Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.
Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant and the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.
Future Legislation
The Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Registrant’s operations.
Item 1A – RISK FACTORS
Not required for smaller reporting companies.
Item 1B – UNRESOLVED STAFF COMMENTS
Not required for smaller reporting companies.
| - 18 - |
The following table sets forth the location of the main office, branch offices, and operation centers of the Registrant’s subsidiary depository institution, Select Bank & Trust Company, as well as certain information relating to these offices.
| Office Location | Year Opened | Approximate | Owned or Leased | |||||
| Select Bank & Trust Main Office | 2001 | 12,600 | Owned | |||||
| 700 West Cumberland Street | ||||||||
| Dunn, NC 28334 | ||||||||
| Burlington Office | 2015 | 5,056 | Owned | |||||
| 3158 South Church Street | ||||||||
| Burlington, NC 27217 | ||||||||
| Clinton Office | 2008 | 3,100 | Owned | |||||
| 111 Northeast Boulevard | ||||||||
| Clinton, NC 28328 | ||||||||
| Elizabeth City Office | 2014 | 3,229 | Owned | |||||
| 416 Hughes Boulevard | ||||||||
| Elizabeth City, NC 27909 | ||||||||
| Fayetteville Office | 2004 | 10,000 | Owned | |||||
| 2818 Raeford Road | ||||||||
| Fayetteville, NC 28303 | ||||||||
| Goldsboro Office | 2005 | 6,300 | Owned | |||||
| 431 North Spence Avenue | ||||||||
| Goldsboro, NC 27534 | ||||||||
| Greenville 10th Street Office | 2014 | 13,994 | Owned | |||||
| 3800 East 10th Street | ||||||||
| Greenville, NC 27858 | ||||||||
| Greenville Charles Blvd Office | 2014 | 6,860 | Owned | |||||
| 3600 Charles Blvd. | ||||||||
| Greenville, NC 27858 | ||||||||
| Leland Office | 2015 | 3,731 | Owned | |||||
| 1101 New Pointe Boulevard | ||||||||
| Leland, NC 28451 | ||||||||
| Lillington Office | 2007 | 4,500 | Owned | |||||
| 818 McKinney Parkway | ||||||||
| Lillington, NC 27546 | ||||||||
| Lumberton Office | 2006 | 3,500 | Owned | |||||
| 4400 Fayetteville Road | ||||||||
| Lumberton, NC 28358 | ||||||||
| Morehead City Office | 2015 | 3,731 | Leased | |||||
| 168 N.C. 24 | ||||||||
| Morehead City, NC 28577 | ||||||||
| Raleigh Office | 2013 | 4,200 | Leased | |||||
| 8470 Falls of Neuse Road, Suite #100 | ||||||||
| Raleigh, NC 27615 | ||||||||
| Washington Office | 2014 | 1,126 | Owned | |||||
| 155 North Market Street, Suite 103 | ||||||||
| Washington, NC 27889 | ||||||||
| Operations Center | 2010 | 7,500 | Owned | |||||
| 861 Tilghman Drive | ||||||||
| Dunn, NC 28335 | ||||||||
| Operations Center - Annex | 2010 | 5,000 | Owned | |||||
| 863 Tilghman Drive | ||||||||
| Dunn, NC 28335 | ||||||||
| - 19 - |
In the ordinary course of operations, the Company and the Bank are at times involved in legal proceedings. In the opinion of management, as of December 31, 2015 there are no material pending legal proceedings to which the Registrant, or any of its subsidiaries, is a party, or of which any of their property is the subject.
Item 4 – mine safety disclosureS
None.
Item 5 - Market for registrant’s Common Equity, Related Stockholder Matters and ISSUER PURCHASES OF EQUITY SECURITIES
The Registrant’s common stock is quoted on the NASDAQ Global Market under the trading symbol “SLCT.” Raymond James & Associates, Inc., Automated Trading Desk Financial Services, B-Trade Services, Citadel Securities, Domestic Securities, Hill Thompson Magid & Company, Hudson Securities, J. P. Morgan Securities, Janney Montgomery Scott, LLC, Knight Capital Americas, L.P., Monroe Financial Partners, UBS Securities, Sandler O’Neill & Partners, L.P., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2015, there were 11,583,011 shares of common stock issued and outstanding, which were held by 1,173 shareholders of record.
| Sales Prices | ||||||||
| High | Low | |||||||
| 2015 | ||||||||
| First Quarter | $ | 7.56 | $ | 6.62 | ||||
| Second Quarter | 7.57 | 6.85 | ||||||
| Third Quarter | 8.25 | 6.94 | ||||||
| Fourth Quarter | 8.47 | 7.30 | ||||||
| 2014 | ||||||||
| First Quarter | $ | 7.00 | $ | 6.30 | ||||
| Second Quarter | 7.50 | 6.26 | ||||||
| Third Quarter | 10.78 | 6.25 | ||||||
| Fourth Quarter | 7.97 | 6.60 | ||||||
The Registrant did not declare or pay common stock cash dividends during 2015 and 2014 and it is not currently anticipated that cash dividends will be declared and paid to common shareholders at any time in the foreseeable future.
See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.
| - 20 - |
ITEM 6 – SELECTED FINANCIAL DATA
| At or for the year ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||||||||
| Operating Data: | ||||||||||||||||||||
| Total interest income | $ | 33,341 | $ | 26,104 | $ | 22,903 | $ | 25,132 | $ | 30,383 | ||||||||||
| Total interest expense | 3,542 | 4,519 | 5,258 | 6,632 | 8,425 | |||||||||||||||
| Net interest income | 29,799 | 21,585 | 17,645 | 18,500 | 21,958 | |||||||||||||||
| Provision (Recovery) for loan losses | 890 | (194 | ) | (325 | ) | (2,597 | ) | 6,218 | ||||||||||||
| Net interest income after | ||||||||||||||||||||
| Provision (recovery) for loan losses | 28,909 | 21,779 | 17,970 | 21,097 | 15,740 | |||||||||||||||
| Total non-interest income | 3,292 | 2,675 | 2,629 | 3,598 | 2,817 | |||||||||||||||
| Merger related expenses | 378 | 1,941 | 428 | - | - | |||||||||||||||
| Other non-interest expense | 21,852 | 18,719 | 15,427 | 17,236 | 19,105 | |||||||||||||||
| Income (loss) before income taxes | 9,971 | 3,794 | 4,744 | 7,459 | (548 | ) | ||||||||||||||
| Provision for income taxes (benefit) | 3,418 | 1,437 | 1,803 | 2,822 | (385 | ) | ||||||||||||||
| Net Income (loss) | 6,553 | 2,357 | 2,941 | 4,637 | (163 | ) | ||||||||||||||
| Dividends on Preferred Stock | 77 | 38 | - | - | - | |||||||||||||||
| Net income (loss) | $ | 6,476 | $ | 2,319 | $ | 2,941 | $ | 4,637 | $ | (163 | ) | |||||||||
| Per Share Data: | ||||||||||||||||||||
| Earnings (loss) per share - basic | $ | 0.56 | $ | 0.26 | $ | 0.43 | $ | 0.67 | $ | (0.02 | ) | |||||||||
| Earnings (loss) per share - diluted | 0.56 | 0.26 | 0.43 | 0.67 | (0.02 | ) | ||||||||||||||
| Market Price | ||||||||||||||||||||
| High | 8.47 | 10.78 | 7.42 | 6.14 | 6.00 | |||||||||||||||
| Low | 6.62 | 6.25 | 5.43 | 1.89 | 1.84 | |||||||||||||||
| Close | 8.09 | 7.37 | 6.67 | 5.60 | 2.00 | |||||||||||||||
| Book value | 8.38 | 8.59 | 8.09 | 7.84 | 7.22 | |||||||||||||||
| Tangible book value | 7.67 | 7.82 | 8.07 | 7.79 | 7.14 | |||||||||||||||
| Selected Year-End Balance Sheet Data: | ||||||||||||||||||||
| Loans, gross of allowance | $ | 617,398 | $ | 552,038 | $ | 346,500 | $ | 367,892 | $ | 417,624 | ||||||||||
| Allowance for loan losses | 7,021 | 6,844 | 7,054 | 7,897 | 10,034 | |||||||||||||||
| Other interest-earning assets | 134,368 | 138,198 | 138,406 | 183,679 | 128,800 | |||||||||||||||
| Goodwill | 6,931 | 6,931 | - | - | - | |||||||||||||||
| Core deposit intangible | 1,241 | 1,625 | 182 | 298 | 545 | |||||||||||||||
| Total assets | 817,015 | 766,121 | 525,646 | 585,453 | 589,651 | |||||||||||||||
| Deposits | 651,161 | 618,902 | 448,458 | 498,559 | 501,377 | |||||||||||||||
| Borrowings | 58,376 | 46,324 | 18,677 | 30,220 | 36,249 | |||||||||||||||
| Shareholders’ equity | 104,702 | 97,685 | 56,004 | 54,179 | 49,546 | |||||||||||||||
| Selected Average Balances: | ||||||||||||||||||||
| Total assets | $ | 765,274 | $ | 631,905 | $ | 555,354 | $ | 574,610 | $ | 624,015 | ||||||||||
| Loans, gross of allowance | 578,759 | 430,571 | 354,871 | 391,648 | 451,358 | |||||||||||||||
| Total interest-earning assets | 686,663 | 565,264 | 511,597 | 532,193 | 565,867 | |||||||||||||||
| Goodwill | 6,931 | 2,946 | - | - | - | |||||||||||||||
| Core deposit intangible | 1,330 | 884 | 237 | 389 | 621 | |||||||||||||||
| Deposits | 607,214 | 523,954 | 470,526 | 481,387 | 533,000 | |||||||||||||||
| Total interest-bearing liabilities | 521,346 | 554,405 | 413,419 | 442,554 | 494,520 | |||||||||||||||
| Shareholders’ equity | 102,068 | 73,660 | 55,701 | 52,769 | 50,094 | |||||||||||||||
| Selected Performance Ratios: | ||||||||||||||||||||
| Return on average assets | 0.86 | % | 0.37 | % | 0.53 | % | 0.81 | % | (0.03 | )% | ||||||||||
| Return on average equity | 6.42 | % | 3.12 | % | 5.28 | % | 8.79 | % | (0.33 | )% | ||||||||||
| Net interest margin (4) | 4.34 | % | 3.88 | % | 3.46 | % | 3.57 | % | 3.91 | % | ||||||||||
| Net interest spread (4) | 4.18 | % | 3.60 | % | 3.22 | % | 3.34 | % | 3.70 | % | ||||||||||
| Efficiency ratio (1) | 67.18 | % | 77.16 | % | 78.20 | % | 78.00 | % | 77.10 | % | ||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||
| Nonperforming loans to period-end loans (2) | 1.41 | % | 2.15 | % | 4.58 | % | 3.27 | % | 4.70 | % | ||||||||||
| Allowance for loan losses to period-end loans (3) | 1.14 | % | 1.24 | % | 2.04 | % | 2.15 | % | 2.40 | % | ||||||||||
| Net loan charge-offs (recoveries) to average loans | 0.12 | % | (0.03 | )% | 0.15 | % | (0.12 | )% | 1.37 | % | ||||||||||
| - 21 - |
| At or for the year ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Total risk-based capital | 16.01 | % | 17.70 | % | 19.26 | % | 16.60 | % | 13.49 | % | ||||||||||
| Tier 1 risk-based capital | 15.04 | % | 16.56 | % | 18.00 | % | 15.34 | % | 12.22 | % | ||||||||||
| Common equity Tier 1 Capital | 12.33 | % | - | - | - | - | ||||||||||||||
| Leverage ratio | 13.81 | % | 13.10 | % | 12.62 | % | 10.78 | % | 9.14 | % | ||||||||||
| Tangible equity to assets | 10.88 | % | 11.65 | % | 10.62 | % | 9.20 | % | 8.31 | % | ||||||||||
| Equity to assets ratio | 13.68 | % | 15.46 | % | 10.65 | % | 9.25 | % | 8.40 | % | ||||||||||
| Other Data: | ||||||||||||||||||||
| Number of banking offices | 14 | 14 | 8 | 7 | 9 | |||||||||||||||
| Number of full time equivalent employees | 153 | 154 | 97 | 111 | 116 | |||||||||||||||
| (1) | Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income. |
| (2) | Nonperforming loans consist of non-accrual loans and restructured loans. |
| (3) | Allowance for loan losses to period-end loans ratio excludes loans held for sale. |
| (4) | Fully taxable equivalent basis. |
| - 22 - |
Item 7 - ManageMent’s Discussion and Analysis of Financial Condition and Results of Operation
The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors, many of which are beyond our control. The following discussion is intended to assist in understanding the financial condition and results of operations of Select Bancorp, Inc. Because Select Bancorp, Inc. has no material operations and conducts no business on its own other than owning its consolidated subsidiary, Select Bank & Trust Company, and its unconsolidated subsidiary, New Century Statutory Trust I, the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the bank subsidiary. However, for ease of reading and because the financial statements are presented on a consolidated basis, Select Bancorp, Inc. and Select Bank & Trust are collectively referred to herein as the Company unless otherwise noted.
DESCRIPTION OF BUSINESS
The Company is a commercial bank holding company that was incorporated on September 19, 2003 and has one wholly-owned banking subsidiary, Select Bank & Trust Company (referred to as the “Bank”), which became a subsidiary of the Company as part of a holding company reorganization. In September 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the expansion of the Bank. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company’s only business activity is the ownership of the Bank. Accordingly, 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 central and eastern North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking, 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.
FINANCIAL CONDITION
DECEMBER 31, 2015 AND 2014
Overview
Total assets at December 31, 2015 were $817.0 million, which represents an increase of $50.9 million or 6.6% from December 31, 2014. Interest earning assets at December 31, 2015 totaled $740.9 million and consisted of $610.4 million in net loans, $80.7 million in investment securities, and $49.8 million in overnight investments and interest-bearing deposits in other banks. Total deposits and shareholders’ equity at December 31, 2015 were $651.2 million and $104.7 million, respectively. The Company purchased two branches in 2015, which included loans and deposits, in Leland and Morehead City, North Carolina. Our growth was also supplemented by the acquisition of Legacy Select Bancorp, Inc. and its subsidiary Legacy Select Bank & Trust, resulting in expansion of the Company’s market footprint in North Carolina. Due to the size of this merger, we also witnessed meaningful growth of our asset size. With the closing of the transaction in the third quarter of 2014, Select Bank & Trust Company became an institution of over $750.0 million in total assets with 14 branches throughout the central and eastern half of North Carolina.
| - 23 - |
Investment Securities
Investment securities decreased to $80.7 million at December 31, 2015 from $102.2 million at December 31, 2014. The Company’s investment portfolio at December 31, 2015, which consisted of U.S. government sponsored entities agency securities (GSE’s), mortgage-backed securities and bank-qualified municipal securities, aggregated $80.7 million with a weighted average taxable equivalent yield of 2.49%. The Company also holds an investment of $2.1 million in Federal Home Loan Bank Stock with a weighted average yield of 4.43%. The investment portfolio decreased $21.5 million in 2015, as a result of $9.3 million in purchases, $21.6 million of maturities and prepayments, $7.8 million in disposals, a decrease of $500,000 in the market value of securities held available for sale and net accretion of investment discounts.
The following table summarizes the securities portfolio by major classification as of December 31, 2015:
Securities Portfolio Composition
(dollars in thousands)
| Tax | ||||||||||||
| Amortized | Fair | Equivalent | ||||||||||
| Cost | Value | Yield | ||||||||||
| U. S. government agency securities - GSE’s: | ||||||||||||
| Due within one year | $ | 13 | $ | 13 | 5.52 | % | ||||||
| Due after one but within five years | 11,605 | 11,630 | 1.13 | % | ||||||||
| Due after five but within ten years | 9,703 | 9,583 | 1.94 | % | ||||||||
| Due after ten years | - | - | - | % | ||||||||
| 21,321 | 21,226 | 1.50 | % | |||||||||
| Mortgage-backed securities: | ||||||||||||
| Due within one year | 31 | 32 | 5.01 | % | ||||||||
| Due after one but within five years | 37,058 | 37,467 | 2.39 | % | ||||||||
| Due after five but within ten years | 2,034 | 2,037 | 1.88 | % | ||||||||
| Due after ten years | - | - | - | % | ||||||||
| 39,123 | 39,536 | 2.36 | % | |||||||||
| State and local governments: | ||||||||||||
| Due within one year | 1,317 | 1,322 | 4.71 | % | ||||||||
| Due after one but within five years | 3,914 | 4,009 | 4.12 | % | ||||||||
| Due after five but within ten years | 5,560 | 5,662 | 3.23 | % | ||||||||
| Due after ten years | 8,693 | 8,954 | 4.06 | % | ||||||||
| 19,484 | 19,947 | 3.89 | % | |||||||||
| Total securities available for sale: | ||||||||||||
| Due within one year | 1,361 | 1,367 | 4.72 | % | ||||||||
| Due after one but within five years | 52,577 | 53,106 | 2.24 | % | ||||||||
| Due after five but within ten years | 17,297 | 17,282 | 2.34 | % | ||||||||
| Due after ten years | 8,693 | 8,954 | 4.06 | % | ||||||||
| $ | 79,928 | $ | 80,709 | 2.49 | % | |||||||
Loans Receivable
The loan portfolio at December 31, 2015 totaled $617.4 million and was composed of $537.6 million in real estate loans, $73.5 million in commercial and industrial loans, and $7.3 million in loans to individuals. Also included in loans outstanding is $990,000 in net deferred loan fees. During 2015 the increase in loans was due primarily to loan growth and acquiring two branches from Yadkin Bank. The acquisition of the branches accounted for $9.1 million of loans at December 31, 2015.
| - 24 - |
The following table describes the Company’s loan portfolio composition by category:
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
| 1 to 4 family residential | $ | 87,955 | 14.2 | % | $ | 90,903 | 16.5 | % | $ | 35,006 | 10.1 | % | $ | 40,017 | 11.1 | % | $ | 52,182 | 12.5 | % | ||||||||||||||||||||
| Commercial real estate | 259,259 | 42.0 | % | 233,630 | 42.3 | % | 169,176 | 48.9 | % | 186,949 | 50.8 | % | 192,047 | 46.0 | % | |||||||||||||||||||||||||
| Multi-family residential | 40,738 | 6.6 | % | 42,224 | 7.6 | % | 19,739 | 5.7 | % | 19,524 | 5.3 | % | 23,377 | 5.6 | % | |||||||||||||||||||||||||
| Construction | 107,688 | 17.4 | % | 83,593 | 15.1 | % | 53,325 | 15.3 | % | 48,220 | 13.1 | % | 70,846 | 16.9 | % | |||||||||||||||||||||||||
| Home equity lines of credit | 42,002 | 6.8 | % | 38,093 | 6.9 | % | 31,863 | 9.2 | % | 34,603 | 9.4 | % | 38,702 | 9.3 | % | |||||||||||||||||||||||||
| Total real estate loans | 537,642 | 87.0 | % | 488,443 | 88.4 | % | 309,109 | 89.2 | % | 330,313 | 89.7 | % | 377,154 | 90.3 | % | |||||||||||||||||||||||||
| Other loans: | ||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 73,491 | 11.9 | % | 58,217 | 10.6 | % | 29,166 | 8.4 | % | 29,297 | 8.0 | % | 33,146 | 8.0 | % | |||||||||||||||||||||||||
| Loans to individuals & overdrafts | 7,255 | 1.2 | % | 6,017 | 1.1 | % | 8,775 | 2.5 | % | 8,734 | 2.4 | % | 7,671 | 1.8 | % | |||||||||||||||||||||||||
| Total other loans | 80,746 | 13.1 | % | 64,234 | 11.7 | % | 37,941 | 10.9 | % | 38,031 | 10.4 | % | 40,817 | 9.8 | % | |||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||||
| Deferred loan origination (fees) cost, net | (990 | ) | (0.1 | )% | (639 | ) | (0.1 | )% | (550 | ) | (0.1 | )% | (452 | ) | (0.1 | )% | (347 | ) | (0.1 | )% | ||||||||||||||||||||
| Total loans | 617,398 | 100.0 | % | 552,038 | 100 | % | 346,500 | 100.0 | % | 367,892 | 100.0 | % | 417,624 | 100.0 | % | |||||||||||||||||||||||||
| Allowance for loan losses | (7,021 | ) | (6,844 | ) | (7,054 | ) | (7,897 | ) | (10,034 | ) | ||||||||||||||||||||||||||||||
| Total loans, net | $ | 610,377 | $ | 545,194 | $ | 339,446 | $ | 359,995 | $ | 407,590 | ||||||||||||||||||||||||||||||
During 2015, loans receivable increased by $65.4 million, or 11.8%, to $617.4 million as of December 31, 2015 partially due to the purchase of two branches during the year. The increase in loans during the prior year is attributable primarily to the merger with Legacy Select in July 2014.
The majority of the Company’s loan portfolio is comprised of real estate loans. This category, which includes both commercial and consumer loan balances, decreased from 88.4% of the loan portfolio at December 31, 2014 to 87.0% at December 31, 2015. There was a $25.6 million increase in commercial real estate loans, a $2.9 million decrease in 1-to-4 family residential loans, a $3.9 million increase in HELOC loans, a $24.1 million increase in construction loans, and a $1.5 million decrease in multi-family residential loans. The increase in loans during 2015 was primarily from loan growth and the acquisition of two branches which accounted for $9.1 million of the increase. The increase in the real estate loans during 2014 was primarily the result of the loans acquired from the Legacy Select acquisition.
Management monitors trends in the loan portfolio that may indicate more than normal risk. A discussion of certain 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.
| - 25 - |
Acquisition, Development and Construction Loans
The Company originates construction loans for the purpose of acquisition, development, and construction of both residential and commercial properties (“ADC” loans).
Acquisition, Development and Construction Loans
As of December 31, 2015
(dollars in thousands)
Construction | Land and Land Development |
Total | ||||||||||
| Total ADC loans | $ | 90,805 | $ | 16,883 | $ | 107,688 | ||||||
| Average Loan Size | $ | 171 | $ | 268 | ||||||||
| Percentage of total loans | 14.71 | % | 2.73 | % | 17.44 | % | ||||||
| Non-accrual loans | $ | 523 | $ | - | $ | 523 | ||||||
Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company’s market area.
Included in ADC loans and residential real estate loans as of December 31, 2015 were certain loans that exceeded regulatory loan to value (“LTV”) guidelines. As of that date, the Company had $16.7 million in non1-to-4 family residential loans that exceeded the regulatory LTV limits and $5.0 million of 1-to-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 19.4% of total risk-based capital as of December 31, 2015, which is less than the 100% maximum specified in regulatory guidance. These loans may present more than ordinary risk to the Company if the real estate market softens for both market activity and collateral valuations.
Acquisition, Development and Construction Loans
As of December 31, 2014
(dollars in thousands)
| Construction | Land and Land Development | Total | ||||||||||
| Total ADC loans | $ | 72,161 | $ | 11,432 | $ | 83,593 | ||||||
| Average Loan Size | $ | 155 | $ | 216 | ||||||||
| Percentage of total loans | 13.07 | % | 2.07 | % | 15.14 | % | ||||||
| Non-accrual loans | $ | 591 | $ | 224 | $ | 815 | ||||||
Included in ADC loans and residential real estate loans as of December 31, 2014 were certain loans that exceeded regulatory loan to value (“LTV”) guidelines. As of that date, the Company had $11.1 million in non1-to-4 family residential loans that exceeded the regulatory LTV limits and $6.0 million of 1-to-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 16.5% of total risk-based capital as of December 31, 2014.
| - 26 - |
Business Sector Concentrations
Loan concentrations in certain business sectors impacted by lower than normal retail sales, higher unemployment, higher vacancy rates, and weakened real estate market values may also pose additional risk to the Company’s capital position. The Company has established an internal commercial real estate guideline of 40% of Risk-Based Capital for any single product type.
At December 31, 2015, the Company exceeded the 40% guideline in one product type. The 1-to-4 Family Residential Rental category represented 62% of Risk-Based Capital or $68.8 million at December 31, 2015. All other commercial real estate product types were under the 40% threshold. This product type exceeded established guidelines as a result of loans acquired in the merger with Legacy Select.
At December 31, 2014, the Company exceeded the 40% guideline in two product types. The 1-to-4 Family Residential Rental and the Multi-family Residential categories represented 68% of Risk-Based Capital, or $70.0 million, and 41% of Risk-Based Capital, or $42.4 million, respectively at December 31, 2014. All other commercial real estate product types were under the 40% threshold. These two product types exceeded established guidelines as a result of loans acquired in the merger with Legacy Select.
Geographic Concentrations
Certain risks exist arising from geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and home equity lines of credit (“HELOC”) loans at December 31, 2015.
| ADC Loans | Percent | HELOC | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Harnett County | $ | 10,120 | 9.40 | % | $ | 6,008 | 14.30 | % | ||||||||
| Alamance County | 1,128 | 1.05 | % | 565 | 1.35 | % | ||||||||||
| Beaufort County | 2,542 | 2.36 | % | 1,220 | 2.90 | % | ||||||||||
| Brunswick County | 1,784 | 1.66 | % | 2,427 | 5.78 | % | ||||||||||
| Carteret County | 919 | 0.85 | % | 2,297 | 5.47 | % | ||||||||||
| Cumberland County | 23,117 | 21.47 | % | 5,412 | 12.88 | % | ||||||||||
| Guilford County | - | 0.00 | % | - | 0.00 | % | ||||||||||
| Hoke County | - | 0.00 | % | - | 0.00 | % | ||||||||||
| Johnston County | - | 0.00 | % | - | 0.00 | % | ||||||||||
| Pasquotank County | 1,250 | 1.16 | % | 1,008 | 2.40 | % | ||||||||||
| Pitt County | 19,486 | 18.09 | % | 4,903 | 11.67 | % | ||||||||||
| Robeson County | 198 | 0.18 | % | 3,720 | 8.86 | % | ||||||||||
| Sampson County | 406 | 0.38 | % | 1,457 | 3.47 | % | ||||||||||
| Wake County | 19,484 | 18.09 | % | 1,191 | 2.83 | % | ||||||||||
| Wayne County | 3,715 | 3.45 | % | 4,391 | 10.46 | % | ||||||||||
| All other locations | 23,539 | 21.86 | % | 7,403 | 17.63 | % | ||||||||||
| Total | $ | 107,688 | 100.00 | % | $ | 42,002 | 100.00 | % | ||||||||
| - 27 - |
Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2014.
| ADC Loans | Percent | HELOC | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Harnett County | $ | 4,466 | 5.34 | % | $ | 5,925 | 15.55 | % | ||||||||
| Alamance County | 422 | 0.50 | % | 292 | 0.76 | % | ||||||||||
| Beaufort County | 834 | 1.00 | % | 1,244 | 3.27 | % | ||||||||||
| Cumberland County | 29,404 | 35.18 | % | 5,816 | 15.27 | % | ||||||||||
| Guilford County | 10 | 0.01 | % | 157 | 0.41 | % | ||||||||||
| Hoke County | 2,385 | 2.85 | % | 144 | 0.38 | % | ||||||||||
| Johnston County | 1,615 | 1.93 | % | 556 | 1.46 | % | ||||||||||
| Pasquotank County | 1,906 | 2.28 | % | 722 | 1.90 | % | ||||||||||
| Pitt County | 16,273 | 19.47 | % | 4,245 | 11.14 | % | ||||||||||
| Robeson County | 648 | 0.78 | % | 3,941 | 10.35 | % | ||||||||||
| Sampson County | 343 | 0.41 | % | 1,600 | 4.20 | % | ||||||||||
| Wake County | 10,113 | 12.10 | % | 800 | 2.10 | % | ||||||||||
| Wayne County | 2,109 | 2.52 | % | 5,451 | 14.31 | % | ||||||||||
| All other locations | 13,065 | 15.63 | % | 7,200 | 18.90 | % | ||||||||||
| Total | $ | 83,593 | 100.00 | % | $ | 38,093 | 100.00 | % | ||||||||
Interest Only Payments
Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At December 31, 2015, the Company had $156.1 million in loans that had terms permitting interest only payments. This represented 25.28% of the total loan portfolio. At December 31, 2014, the Company had $103.7 million in loans that had terms permitting interest only payments. This represented 18.78% of the total loan portfolio. In light of the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio are interest only payments during the acquisition, development, and construction phases of such projects but then convert to amortizing term loans with scheduled payments of principal and interest.
Large Dollar Concentrations
Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit concentrations totaled $51.6 million or 8.4% of total loans at December 31, 2015 compared to $46.7 million or 8.4% of total loans at December 31, 2014. The Company’s ten largest customer loan relationship concentrations totaled $85.1 million, or 13.8% of total loans, at December 31, 2015 compared to $68.7 million, or 12.4% of total loans at December 31, 2014. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have a material adverse impact on the capital position of the Company and on our results of operations.
| - 28 - |
Maturities and Sensitivities of Loans to Interest Rates
The following table presents the maturity distribution of the Company’s loans at December 31, 2015. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate:
| At December 31, 2015 | ||||||||||||||||
| Due after one | ||||||||||||||||
| Due within one year | year but within five years | Due after five years | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Fixed rate loans: | ||||||||||||||||
| 1 to 4 family residential | $ | 6,364 | $ | 50,896 | $ | 10,165 | $ | 67,425 | ||||||||
| Commercial real estate | 16,059 | 146,144 | 49,954 | 212,157 | ||||||||||||
| Multi-family residential | 1,636 | 25,273 | 6,457 | 33,366 | ||||||||||||
| Construction | 5,056 | 25,036 | 4,296 | 34,388 | ||||||||||||
| Home equity lines of credit | 34 | 162 | 423 | 619 | ||||||||||||
| Commercial and industrial | 10,681 | 32,598 | 9,883 | 53,162 | ||||||||||||
| Loans to individuals & overdrafts | 907 | 3,255 | 1,438 | 5,600 | ||||||||||||
| Total at fixed rates | 40,737 | 283,364 | 82,616 | 406,717 | ||||||||||||
| Variable rate loans: | ||||||||||||||||
| 1 to 4 family residential | 2,495 | 15,326 | 1,115 | 18,936 | ||||||||||||
| Commercial real estate | 6,320 | 28,045 | 8,901 | 43,266 | ||||||||||||
| Multi-family residential | 875 | 3,704 | 2,362 | 6,941 | ||||||||||||
| Construction | 60,709 | 12,063 | 7 | 72,779 | ||||||||||||
| Home equity lines of credit | 1,588 | 2,271 | 37,165 | 41,024 | ||||||||||||
| Commercial and industrial | 16,116 | 4,276 | 48 | 20,440 | ||||||||||||
| Loans to individuals & overdrafts | 953 | 194 | 503 | 1,650 | ||||||||||||
| Total at variable rates | 89,056 | 65,879 | 50,101 | 205,036 | ||||||||||||
| Subtotal | 129,793 | 349,243 | 132,717 | 611,753 | ||||||||||||
| Non-accrual loans | 2,150 | 4,086 | 399 | 6,635 | ||||||||||||
| Gross loans | $ | 131,943 | $ | 353,329 | $ | 133,116 | $ | 618,388 | ||||||||
| Deferred loan origination (fees) costs, net | (990 | ) | ||||||||||||||
| Total loans | $ | 617,398 | ||||||||||||||
The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company’s best interest. In such instances, the Company generally requires payment of accrued interest and may require a principal reduction or modify other terms of the loan at the time of renewal.
Past Due Loans and Nonperforming Assets
At December 31, 2015, the Company had $2.5 million in loans that were 30 days or more past due. This represented 0.40% of gross loans outstanding on that date. This is a decrease from December 31, 2014 when there were $5.0 million in loans that were past due 30 days or more, or 0.91% of gross loans outstanding. Non-accrual loans decreased to $6.6 million at December 31, 2015 from $6.9 million at December 31, 2014. As of December 31, 2015, the Company had forty loans totaling $5.1 million that were considered to be troubled debt restructurings, of which twenty loans totaling $2.1 million were still accruing interest. As of December 31, 2014, the Company had forty loans totaling $7.3 million that were considered to be troubled debt restructurings, of which twenty-four loans totaling $4.9 million were still accruing interest. There was one loan in the amount of $142,000 greater than 90 days past due and still accruing interest at December 31, 2015 and there was one loan in the amount of $2.2 million greater than 90 days past due and still accruing interest at December 31, 2014. Tables included in Note E present an age analysis of past due loans, including acquired credit-impaired loans, or PCI Loans, segregated by class of loans as of December 31, 2015.
| - 29 - |
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 restructured loans), and total non-performing assets.
| As December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Non-accrual loans | $ | 6,635 | $ | 6,938 | $ | 9,319 | $ | 10,126 | $ | 17,623 | ||||||||||
| Restructured loans | 2,077 | 4,938 | 6,537 | 1,904 | 2,013 | |||||||||||||||
| Total non-performing loans | 8,712 | 11,876 | 15,856 | 12,030 | 19,636 | |||||||||||||||
| Foreclosed real estate | 1,401 | 1,585 | 2,008 | 2,833 | 3,031 | |||||||||||||||
| Total non-performing assets | $ | 10,113 | $ | 13,461 | $ | 17,864 | $ | 14,863 | $ | 22,667 | ||||||||||
| Accruing loans past due 90 days or more | $ | 142 | $ | 2,230 | $ | - | $ | - | $ | 108 | ||||||||||
| Allowance for loan losses | $ | 7,021 | $ | 6,844 | $ | 7,054 | $ | 7,897 | $ | 10,034 | ||||||||||
| Non-performing loans to period end loans | 1.41 | % | 2.15 | % | 4.58 | % | 3.27 | % | 4.70 | % | ||||||||||
| Non-performing loans and accruing loans past due 90 days or more to period end loans | 1.43 | % | 2.56 | % | 4.58 | % | 3.27 | % | 4.73 | % | ||||||||||
| Allowance for loan losses to period end loans | 1.14 | % | 1.24 | % | 2.04 | % | 2.15 | % | 2.40 | % | ||||||||||
| Allowance for loan losses to non-performing loans | 81 | % | 58 | % | 44 | % | 66 | % | 51 | % | ||||||||||
| Allowance for loan losses to non-performing assets | 69 | % | 51 | % | 39 | % | 53 | % | 44 | % | ||||||||||
| Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more | 68 | % | 44 | % | 39 | % | 53 | % | 44 | % | ||||||||||
| Non-performing assets to total assets | 1.24 | % | 1.76 | % | 3.40 | % | 2.53 | % | 3.84 | % | ||||||||||
| Non-performing assets and accruing loans past due 90 days or more to total assets | 1.26 | % | 2.05 | % | 3.40 | % | 2.53 | % | 3.86 | % | ||||||||||
In addition to the above, the Company had $3.0 million in loans that were considered to be impaired for reasons other than their past due, accrual or restructured status. In total, there were $10.0 million in loans that were considered to be impaired at December 31, 2015, which is a $5.6 million decrease from the $15.6 million that was impaired at December 31, 2014. Impaired loans have been evaluated by management in accordance with Accounting Standards Codification (“ASC”) 310 and $94,000 has been included in the allowance for loan losses as of December 31, 2015 for these loans. All troubled debt restructurings and other non-performing loans are included within impaired loans as of December 31, 2015.
| - 30 - |
Allowance for Loan Losses
The allowance for loan losses is a reserve established through provisions for loan losses charged to expense and represents management’s best estimate of probable loan losses that will be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices. Included in the allowance are specific reserves on loans that are considered to be impaired, which are identified and measured in accordance with ASC 310.
The following table presents the Company’s allowance for loan losses as a percentage of loans at December 31 for the years indicated.
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| 2015 | loans | 2014 | loans | 2013 | loans | 2012 | loans | 2011 | loans | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| 1 to 4 family residential | $ | 605 | 14.25 | % | $ | 628 | 16.47 | % | $ | 826 | 10.10 | % | $ | 1,070 | 11.14 | % | $ | 1,597 | 12.49 | % | ||||||||||||||||||||
| Commercial real estate | 3,005 | 41.99 | % | 2,938 | 42.32 | % | 4,599 | 48.82 | % | 4,946 | 50.82 | % | 4,771 | 45.98 | % | |||||||||||||||||||||||||
| Multi- family residential | 393 | 6.60 | % | 279 | 7.65 | % | 74 | 5.70 | % | 106 | 5.31 | % | 127 | 5.60 | % | |||||||||||||||||||||||||
| Construction | 1,386 | 17.44 | % | 1,103 | 15.14 | % | 565 | 15.39 | % | 798 | 13.11 | % | 1,540 | 16.96 | % | |||||||||||||||||||||||||
| Home equity lines of credit | 573 | 6.80 | % | 985 | 6.90 | % | 680 | 9.20 | % | 627 | 9.41 | % | 1,186 | 9.27 | % | |||||||||||||||||||||||||
| Commercial and industrial | 922 | 11.90 | % | 726 | 10.55 | % | 245 | 8.42 | % | 278 | 7.96 | % | 719 | 7.94 | % | |||||||||||||||||||||||||
| Loans to individuals & overdrafts | 137 | 1.18 | % | 185 | 1.09 | % | 65 | 2.53 | % | 72 | 2.37 | % | 94 | 1.84 | % | |||||||||||||||||||||||||
| Deferred loan origination (fees) cost, net | (0.16 | )% | - | (0.12 | )% | - | (0.16 | )% | - | (0.12 | )% | - | (0.08 | )% | ||||||||||||||||||||||||||
| Total allocated | 7,021 | 100.00 | % | 6,844 | 100.00 | % | 7,054 | 100.00 | % | 7,897 | 100.00 | % | 10,034 | 100.00 | % | |||||||||||||||||||||||||
| Unallocated | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Total | $ | 7,021 | $ | 6,844 | $ | 7,054 | $ | 7,897 | $ | 10,034 | ||||||||||||||||||||||||||||||
The allowance for loan losses as a percentage of gross loans outstanding decreased by 0.10% during 2015 to 1.14% of gross loans at December 31, 2015. The change in the allowance during 2015 resulted from net charge-offs of $713,000 and a provision of $890,000. General reserves totaled $6.9 million or 1.12% of gross loans outstanding as of December 31, 2015, as compared to year-end 2014 when they totaled $6.2 million or 1.11% of loans outstanding. At December 31, 2015, specific reserves on impaired loans constituted $94,000 or 0.02% of gross loans outstanding compared to $687,000 or 0.12% of loans outstanding as of December 31, 2014. The loans that were acquired are included in the gross loan number used in the calculations above. The acquired loans are accounted for under ASC 310-20 and ASC 310-30 which results in credit marks for the inherent loss risk for those loans and is not included in the Allowance for Loan Losses. The acquired loans represent $147.5 million of the gross loan total of which $21.1 million are purchased credit impaired loans.
| - 31 - |
The following table presents information regarding changes in the allowance for loan losses in detail for the years indicated:
| As of December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Allowance for loan losses at beginning of year | $ | 6,844 | $ | 7,054 | $ | 7,897 | $ | 10,034 | $ | 10,015 | ||||||||||
| Provision (recovery) for loan losses | 890 | (194 | ) | (325 | ) | (2,597 | ) | 6,218 | ||||||||||||
| 7,734 | 6,860 | 7,572 | 7,437 | 16,233 | ||||||||||||||||
| Loans charged off: | ||||||||||||||||||||
| Commercial and industrial | (141 | ) | (63 | ) | (135 | ) | (193 | ) | (4,116 | ) | ||||||||||
| Construction | (79 | ) | (4 | ) | (28 | ) | (720 | ) | (993 | ) | ||||||||||
| Commercial real estate | (663 | ) | (150 | ) | (384 | ) | (1,580 | ) | (2,970 | ) | ||||||||||
| Multi-family residential | (5 | ) | - | - | - | - | ||||||||||||||
| Home equity lines of credit | (115 | ) | (327 | ) | (316 | ) | (459 | ) | (661 | ) | ||||||||||
| 1 to 4 family residential | (70 | ) | (26 | ) | (325 | ) | (232 | ) | (1,512 | ) | ||||||||||
| Loans to individuals & overdrafts | (54 | ) | (98 | ) | (135 | ) | (70 | ) | (170 | ) | ||||||||||
| Total charge-offs | (1,127 | ) | (668 | ) | (1,323 | ) | (3,254 | ) | (10,422 | ) | ||||||||||
| Recoveries of loans previously charged off: | ||||||||||||||||||||
| Commercial and industrial | 48 | 32 | 137 | 2,714 | 3,765 | |||||||||||||||
| Construction | 29 | 63 | 25 | 317 | 12 | |||||||||||||||
| Multi-family residential | 106 | - | - | - | - | |||||||||||||||
| Commercial real estate | 84 | 364 | 96 | 287 | 60 | |||||||||||||||
| Home equity lines of credit | 21 | 78 | 81 | 74 | 52 | |||||||||||||||
| 1 to 4 family residential | 102 | 92 | 398 | 232 | 247 | |||||||||||||||
| Loans to individuals & overdrafts | 24 | 23 | 68 | 90 | 87 | |||||||||||||||
| Total recoveries | 414 | 652 | 805 | 3,714 | 4,223 | |||||||||||||||
| Net recoveries (charge-offs) | (713 | ) | (16 | ) | (518 | ) | 460 | (6,199 | ) | |||||||||||
| Allowance for loan losses at end of year | $ | 7,021 | $ | 6,844 | $ | 7,054 | $ | 7,897 | $ | 10,034 | ||||||||||
| Ratios: | ||||||||||||||||||||
| Net charge-offs (recoveries) as a percent of average loans | 0.12 | % | 0.00 | % | 0.15 | % | (0.12 | )% | 1.37 | % | ||||||||||
| Allowance for loan losses as a percent of loans at end of year | 1.14 | % | 1.24 | % | 2.04 | % | 2.15 | % | 2.40 | % | ||||||||||
While the Company believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making determinations regarding the allowance.
| - 32 - |
The table below presents information detailing the allowance for loan losses for originated and purchased credit impaired acquired loans:
Analysis of Allowance for Credit Losses
(dollars in thousands)
| Beginning | Charge | Ending | ||||||||||||||||||
| Balance | Offs | Recoveries | Provision | Balance | ||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| Total loans | ||||||||||||||||||||
| Commercial and Industrial | $ | 803 | $ | 141 | $ | 48 | $ | 212 | $ | 922 | ||||||||||
| Construction | 1,103 | 79 | 29 | 333 | 1,386 | |||||||||||||||
| Commercial real estate | 2,914 | 663 | 84 | 670 | 3,005 | |||||||||||||||
| Multi-family residential | 279 | 5 | 106 | 13 | 393 | |||||||||||||||
| Home Equity Lines of credit | 930 | 115 | 21 | (263 | ) | 573 | ||||||||||||||
| 1 to 4 family residential | 630 | 70 | 102 | (57 | ) | 605 | ||||||||||||||
| Loans to individuals & overdrafts | 185 | 54 | 24 | (18 | ) | 137 | ||||||||||||||
| Total | $ | 6,844 | $ | 1,127 | $ | 414 | $ | 890 | $ | 7,021 | ||||||||||
| PCI loans | ||||||||||||||||||||
| Commercial and Industrial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Construction | - | - | - | - | - | |||||||||||||||
| Commercial real estate | - | - | - | - | - | |||||||||||||||
| Multi-family residential | - | - | - | - | - | |||||||||||||||
| Home Equity Lines of credit | - | - | - | 9 | 9 | |||||||||||||||
| 1 to 4 family residential | - | - | - | - | - | |||||||||||||||
| Loans to individuals & overdrafts | - | - | - | - | - | |||||||||||||||
| Total | $ | - | $ | - | $ | - | $ | 9 | $ | 9 | ||||||||||
| Loans – excluding PCI | ||||||||||||||||||||
| Commercial and Industrial | $ | 803 | $ | 141 | $ | 48 | $ | 212 | $ | 922 | ||||||||||
| Construction | 1,103 | 79 | 29 | 333 | 1,386 | |||||||||||||||
| Commercial real estate | 2,914 | 663 | 84 | 670 | 3,005 | |||||||||||||||
| Multi-family residential | 279 | 5 | 106 | 13 | 393 | |||||||||||||||
| Home Equity Lines of credit | 930 | 115 | 21 | (272 | ) | 564 | ||||||||||||||
| 1 to 4 family residential | 630 | 70 | 102 | (57 | ) | 605 | ||||||||||||||
| Loans to individuals & overdrafts | 185 | 54 | 24 | (18 | ) | 137 | ||||||||||||||
| Total | $ | 6,844 | $ | 1,127 | $ | 414 | $ | 881 | $ | 7,012 | ||||||||||
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.
Management believes the level of the allowance for loan losses as of December 31, 2015 is appropriate in light of the risk inherent within the Company’s loan portfolio.
Other Assets
At December 31, 2015, non-earning assets totaled $53.5 million, an increase of $1.4 million from $52.1 million at December 31, 2014. Non-earning assets at December 31, 2015 consisted of: cash and due from banks of $12.6 million, premises and equipment totaling $19.1 million, foreclosed real estate totaling $1.4 million, accrued interest receivable of $2.4 million, goodwill of $6.9 million and other assets totaling $6.3 million, with net deferred taxes of $4.3 million.
The Company has an investment in bank owned life insurance of $21.6 million, which increased $626,000 from December 31, 2014. The increase in BOLI in 2015 was from earnings and in 2014 was due partially to the acquisition of Legacy Select, which accounted for $2.2 million of the increase and $10.0 million was purchased in the fourth quarter of 2014 with the remainder due to an increase in cash surrender value. Since the income on this investment is included in non-interest income, the asset is not included in the Company’s calculation of earning assets.
| - 33 - |
Deposits
Total deposits at December 31, 2015 were $651.2 million and consisted of $148.3 million in non-interest-bearing demand deposits, $179.5 million in money market and NOW accounts, $37.4 million in savings accounts, and $286.1 million in time deposits. Total deposits increased by $32.3 million from $618.9 million as of December 31, 2014. Non-interest-bearing demand deposits increased by $18.5 million from $129.8 million as of December 31, 2014. MMDA and NOW accounts increased by $12.9 million from $166.5 million as of December 31, 2014. Savings accounts increased by $353,000 from $37.0 million as of December 31, 2014. Time deposits increased by $494,000 during 2015. The deposit growth in 2015 was primarily due to the purchase of two branches which amounted to $31.1 million. The increase in deposits during 2014 was primarily due to the acquisition of Legacy Select, which accounted for $222.2 million of deposits at July 25, 2014.
The following table shows historical information regarding the average balances outstanding and average interest rates for each major category of deposits:
| For the Period Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Savings, NOW and money market deposits | $ | 205,792 | 0.19 | % | $ | 170,183 | 0.19 | % | $ | 147,800 | 0.23 | % | $ | 124,583 | 0.42 | % | $ | 120,363 | 0.53 | % | ||||||||||||||||||||
Time deposits > $100,000 | 158,704 | 0.85 | % | 113,340 | 1.34 | % | 122,166 | 2.13 | % | 144,029 | 2.24 | % | 167,689 | 2.32 | % | |||||||||||||||||||||||||
| Other time deposits | 104,388 | 1.19 | % | 137,561 | 1.65 | % | 117,564 | 1.61 | % | 137,566 | 1.78 | % | 168,172 | 2.00 | % | |||||||||||||||||||||||||
| Total interest-bearing deposits | 468,884 | 0.64 | % | 421,084 | 0.98 | % | 387,530 | 1.25 | % | 406,178 | 1.53 | % | 456,224 | 1.73 | % | |||||||||||||||||||||||||
| Noninterest-bearing deposits | 138,330 | - | 102,870 | - | 82,996 | - | 76,659 | - | 76,776 | - | ||||||||||||||||||||||||||||||
| Total deposits | $ | 607,214 | 0.49 | % | $ | 523,924 | 0.79 | % | $ | 470,526 | 1.02 | % | $ | 481,837 | 1.29 | % | $ | 533,000 | 1.48 | % | ||||||||||||||||||||
Short-Term and Long-Term Debt
As of December 31, 2015, the Company had $29.7 million in short-term debt, which consisted of repurchase agreements and an FHLB advance and $28.7 million in long-term debt, which included $12.4 million in junior subordinated debentures issued to New Century Statutory Trust I in connection with the Company’s issuance of trust preferred securities. The $12.1 million increase in short-term and long-term debt in 2015 was due to decreasing high rate certificates of deposit. In 2014, the increase in short-term and long-term debt was due to the acquisition of Legacy Select, which accounted for $17.6 million of advances at December 31, 2014.
Shareholders’ Equity
Total shareholders’ equity at December 31, 2015 was $104.7 million, an increase of $7.0 million from $97.7 million as of December 31, 2014. Changes in shareholders’ equity included $6.6 million in net income, $34,000 in stock based compensation, proceeds of $821,000 from stock option exercises, and other comprehensive loss of $319,000 related to the decrease in the unrealized gain in the Company’s available for sale investment security portfolio. The July 25, 2014 merger with Legacy Select resulted in a $37.5 million increase in stockholders’ equity of which SBLF preferred stock comprised $7.6 million of the increase. The SBLF preferred stock was redeemed in full, at par, on January 20, 2016.
| - 34 - |
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Overview
During 2015, Select Bancorp had net income of $6.6 million compared to net income of $2.4 million for 2014. Both basic and diluted net income per share for the year ended December 31, 2015 were $0.56, compared with basic and diluted net income per share of $0.26 for 2014.
Net Interest Income
Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.
Net interest income increased by $8.2 million to $29.8 million for the year ended December 31, 2015. The Company’s total interest income was impacted by an increase in interest earning assets and a low interest rate environment in 2015. Average total interest-earnings assets were $686.7 million in 2015 compared with $576.8 million in 2014. The yield on those assets increased by 31 basis points from 4.55% in 2014 to 4.86% in 2015. Meanwhile, average interest-bearing liabilities increased by $69.8 million from $451.5 million for the year ended December 31, 2014 to $521.3 million for the year ended December 31, 2015. Cost of these funds decreased by 32 basis points in 2015 to 0.68% from 1.00% in 2014 which primarily due to the maturity of higher rate time deposits. In 2015, the Company’s net interest margin was 4.39% and net interest spread was 4.22%. In 2014, net interest margin was 3.86% and net interest spread was 3.60%.
Provision for Loan Losses
The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflect loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.
The Company recorded an $890,000 provision for loan losses in 2015 compared to a negative provision of $(194,000) recorded in 2014 as a result of loan recoveries. The increase in provision was due to loan growth, increased charge offs and a reduction in recoveries. For more information on changes in the allowance for loan losses, refer to Note E of the financial statements in the section titled Allowance for Loan Losses.
| - 35 - |
Non-Interest Income
Non-interest income for the year ended December 31, 2015 was $3.3 million, up $617,000 from 2014. Contributing to the increase were an increase in deposit service charges of $60,000 due to higher overdraft fee income, increase in gain on sale of securities of $378,000 and an increase in other non-interest income of $179,000.
Non-Interest Expenses
Non-interest expenses increased by $1.6 million or 7.6% to $22.2 million for the year ended December 31, 2015, from $20.7 million for the same period in 2014. The following are highlights of the significant changes in non-interest expenses from 2014 to 2015. Many of these changes were due to comparing a full year of post-merger expenses to partial year expenses in 2014 resulting from the acquisition of Legacy Select.
| · | Personnel expenses increased $2.0 million to $12.2 million primarily due to acquiring six branches in the merger with Legacy Select. |
| · | Occupancy and equipment expenses increased $506,000 to $2.2 million also primarily related to the merger and branch restructuring. |
| · | Information systems increased $415,000 to $1.9 million from $1.5 million in 2014 due largely to the increase in the number of customer loan and deposit accounts from the merger. |
| · | Foreclosure-related expenses decreased to $205,000 in 2015 from $480,000 in 2014, a 57.3% increase. |
| · | Merger /acquisition related expenses reduced $1.6 million. |
| · | Other operating expense increased by $249,000 or 8.9%. |
Provision for Income Taxes
The Company’s effective tax rate in 2015 was 34.3%, compared to 37.9% in 2014. The primary difference in the effective tax rates is due to the tax treatment of certain merger costs being non-deductible for tax purposes. For further discussion pertaining to the Company’s tax position, refer to Note L of the consolidated financial statements.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Overview
During 2014, Select Bancorp had net income of $2.3 million compared to a net income of $2.9 million for 2013. Both basic and diluted net income per share for the year ended December 31, 2014 were $0.27, compared with a basic and diluted net income per share of $0.43 for 2013.
Net Interest Income
Net interest income increased by $4.1 million to $21.7 million for the year ended December 31, 2014. The Company’s total interest income was impacted by an increase in interest earning assets and a low interest rate environment in 2014. Average total interest-earnings assets were $576.8 million in 2014 compared with $509.7 million in 2013. The yield on those assets increased by 6 basis points from 4.49% in 2013 to 4.55% in 2014. Meanwhile, average interest-bearing liabilities increased by $37.8 million from $413.8 million for the year ended December 31, 2013 to $451.5 million for the year ended December 31, 2014. Cost of these funds decreased by 27 basis points in 2014 to 1.00% from 1.27% in 2013. In 2014, the Company’s net interest margin was 3.85% and net interest spread was 3.60%. In 2013, net interest margin was 3.46% and net interest spread was 3.22%.
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Provision for Loan Losses
Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.
In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent eight consecutive quarters. In determining the appropriate level of the allowance for loan losses at December 31, 2012, the loss history was expanded to ten consecutive quarters of net charge-offs in 2013. Since the most recent quarters contain a declining amount of charge offs coupled with a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio.
The Company recorded a $(194,000) negative provision for loan losses in 2014 compared to a negative provision of $(325,000) recorded in 2013 as a result of loan recoveries. The negative provisions in 2014 and 2013 were driven by improving credit metrics coupled with reductions in the loan portfolio. For more information on changes in the allowance for loan losses, refer to Note E of the financial statements in the section titled Allowance for Loan Losses.
Non-Interest Income
Non-interest income for the year ended December 31, 2014 was $2.7 million, an increase of $46,000 compared to December 31, 2013.
Non-Interest Expenses
Non-interest expenses increased by $4.8 million or 30.4% to $20.7 million for the year ended December 31, 2014, from $15.9 million for the same period in 2013. The following are highlights of the significant changes in non-interest expenses from 2013 to 2014. Many of these changes were due to the acquisition of Legacy Select.
| · | Personnel expenses increased $2.1 million to $10.2 million due to acquiring six branches in the merger with Legacy Select. |
| · | Occupancy and equipment expenses increased $208,000 to $1.7 million also related to the merger. |
| · | Professional fees increased $83,000 to $1.2 million from $1.1 million in 2013 due largely to lending related legal fees. |
| · | Foreclosure-related expenses increased to $447,000 in 2014 from $388,000 in 2013, a 15.2% increase. |
| · | Merger related expenses were $1.9 million for 2014. |
| · | Other operating expense increased by $198,000 or 7.4%. |
Provision for Income Taxes
The Company’s effective tax rate in 2014 was 37.9%, compared to 38.0% in 2013. For further discussion pertaining to the Company’s tax position, see Note L to the consolidated financial statements.
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NET INTEREST INCOME
The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans.
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| balance | Interest | rate | balance | Interest | rate | balance | Interest | rate | ||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans, gross of allowance | $ | 578,759 | $ | 31,576 | 5.46 | % | $ | 423,811 | $ | 24,147 | 5.70 | % | $ | 347,465 | $ | 21,147 | 6.09 | % | ||||||||||||||||||
| Investment securities | 91,790 | 2,027 | 2.21 | % | 91,193 | 1,916 | 2.10 | % | 77,590 | 1,552 | 2.00 | % | ||||||||||||||||||||||||
| Other interest-earning assets | 16,114 | 71 | 0.44 | % | 55,065 | 157 | 0.29 | % | 84,675 | 204 | 0.24 | % | ||||||||||||||||||||||||
| Total interest-earning assets | 686,663 | 33,674 | 4.90 | % | 576,829 | 26,220 | 4.60 | % | 509,730 | 22,903 | 4.49 | % | ||||||||||||||||||||||||
| Other assets | 78,611 | 54,371 | 45,626 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 765,274 | $ | 631,200 | $ | 555,356 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| Savings, NOW and money market | $ | 205,792 | 393 | 0.19 | % | $ | 170,183 | 326 | 0.19 | % | $ | 147,800 | 425 | 0.29 | % | |||||||||||||||||||||
| Time deposits over $100,000 | 158,704 | 1,356 | 0.85 | % | 137,911 | 2,096 | 1.52 | % | 122,166 | 2,607 | 2.13 | % | ||||||||||||||||||||||||
| Other time deposits | 104,388 | 1,242 | 1.19 | % | 112,990 | 1,697 | 1.50 | % | 117,564 | 1,891 | 1.61 | % | ||||||||||||||||||||||||
| Borrowings | 52,462 | 551 | 1.05 | % | 30,451 | 400 | 1.31 | % | 26,251 | 335 | 1.28 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 521,346 | 3,542 | 0.68 | % | 451,535 | 4,519 | 1.00 | % | 413,781 | 5,258 | 1.27 | % | ||||||||||||||||||||||||
| Non-interest-bearing deposits | 138,330 | 102,870 | 82,996 | |||||||||||||||||||||||||||||||||
| Other liabilities | 3,530 | 3,135 | 2,878 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 102,068 | 73,660 | 55,701 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 765,274 | $ | 631,200 | $ | 555,356 | ||||||||||||||||||||||||||||||
| Net interest income/interest rate spread (taxable-equivalent basis) | $ | 30,132 | 4.22 | % | $ | 21,921 | 3.60 | % | $ | 17,727 | 3.22 | % | ||||||||||||||||||||||||
| Net interest margin (taxable-equivalent basis) | 4.39 | % | 3.85 | % | 3.46 | % | ||||||||||||||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 131.71 | % | 127.75 | % | 123.19 | % | ||||||||||||||||||||||||||||||
| Reported net interest income | ||||||||||||||||||||||||||||||||||||
| Net interest income/net interest | ||||||||||||||||||||||||||||||||||||
| margin (taxable-equivalent basis) | $ | 30,132 | 4.36 | % | $ | 21,921 | 3.88 | % | $ | 17,727 | 3.48 | % | ||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||
| taxable-equivalent adjustment | 333 | 220 | 82 | |||||||||||||||||||||||||||||||||
| Net Interest Income | $ | 29,799 | $ | 21,701 | $ | 17,645 | ||||||||||||||||||||||||||||||
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RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||||||||||||||
| December 31, 2015 vs. 2014 | December 31, 2014 vs. 2013 | December 31, 2013 vs. 2012 | ||||||||||||||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||||||||||
| Loans | $ | 8,641 | $ | (1,212 | ) | $ | 7,429 | $ | 4,859 | $ | (1,859 | ) | $ | 3,000 | $ | (2,135 | ) | $ | (138 | ) | $ | (2,273 | ) | |||||||||||||
| Investment securities | 12 | (234 | ) | (222 | ) | 301 | 208 | 509 | 181 | (344 | ) | (163 | ) | |||||||||||||||||||||||
| Other interest-earning assets | (141 | 55 | (86 | ) | (78 | ) | 31 | (47 | ) | 32 | 8 | 40 | ||||||||||||||||||||||||
| Total interest income (taxable-equivalent basis) | 8,512 | (1,391 | ) | 7,121 | 5,082 | (1,620 | ) | 3,462 | (1,922 | ) | (475 | ) | (2,396 | ) | ||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||||||||||||||
| Savings, NOW and money market | 68 | (1 | ) | 67 | 54 | (153 | ) | (99 | ) | 76 | (255 | ) | (179 | ) | ||||||||||||||||||||||
| Time deposits over $100,000 | 247 | (987 | ) | (740 | ) | 288 | (799 | ) | (511 | ) | (479 | ) | (146 | ) | (625 | ) | ||||||||||||||||||||
| Other time deposits | (116 | ) | (339 | ) | (455 | ) | (71 | ) | (123 | ) | (194 | ) | (339 | ) | (216 | ) | (555 | ) | ||||||||||||||||||
| Borrowings | 260 | (109 | ) | 151 | 54 | 11 | 65 | (125 | ) | 28 | (97 | ) | ||||||||||||||||||||||||
| Total interest expense | 459 | (1,436 | ) | (977 | ) | 325 | (1,064 | ) | (739 | ) | (866 | ) | (590 | ) | (1,456 | ) | ||||||||||||||||||||
| Net interest income | ||||||||||||||||||||||||||||||||||||
| Increase/(decrease) (taxable-equivalent basis) | $ | 8,053 | $ | (45 | ) | 8,098 | $ | 4,757 | $ | (556 | ) | 4,201 | $ | (1,055 | ) | $ | 115 | (940 | ) | |||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | 333 | 145 | 85 | |||||||||||||||||||||||||||||||||
| Net interest income | ||||||||||||||||||||||||||||||||||||
| Increase/(decrease) | $ | 7,765 | $ | 4,056 | $ | (855 | ) | |||||||||||||||||||||||||||||
During 2015, the interest rate component was essentially neutral to overall net interest income as decreased asset yields were offset by reductions in funding costs. In 2015 and 2014, increasing loan volume was the major contributor to increased net interest income. Primarily driven by the merger of Legacy Select, the volume component had a positive variance which also resulted in an overall increase in net interest income.
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LIQUIDITY
Market and public confidence in the Company’s financial strength and in the strength of financial institutions in general will largely determine the Company’s access to appropriate levels of liquidity. This confidence depends significantly on the Company’s ability to maintain sound asset quality and appropriate levels of capital resources. The term “liquidity” refers to the Company’s ability to generate adequate amounts of cash to meet current needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures the Company’s liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 17.6% and 19.1% of total assets at December 31, 2015 and 2014, respectively.
The Company has been a net seller of federal funds, maintaining liquidity sufficient to fund new loan demand. When the need arises, the Company has the ability to sell securities classified as available for sale, sell loan participations to other banks, or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $159.6 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 10% of assets, subject to our available collateral. A floating lien of $78.6 million on qualifying loans is pledged to FHLB to secure such borrowings. In addition, the Company may borrow at the Federal Reserve discount window and has pledged $1.0 million in securities for that purpose. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2015, borrowings consisted of securities sold under agreements to repurchase of $12.1 million.
At December 31, 2015, the Company’s outstanding commitments to extend credit totaled $144.8 million and consisted of loan commitments and undisbursed lines of credit of $143.1 million, and letters of credit of $1.7 million. The Company believes that its combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.
Total deposits were $651.2 million and $618.9 million at December 31, 2015 and 2014, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 43.9% and 46.1% of total deposits at December 31, 2015 and 2014, respectively. Time deposits of $250,000 or more represented 15.9% and 27.7%, respectively, of the total deposits at December 31, 2015 and 2014. Management believes most other time deposits are relationship-oriented. While competitive rates will need to be paid to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, management anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.
Management believes that current sources of funds provide adequate liquidity for the Bank’s current cash flow needs. The Bank’s parent company (“Select Bancorp”) maintains minimal cash balances. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for Select Bancorp’s current cash flow needs. Subject to certain regulatory dividend restrictions and maintenance of required capital levels, dividends paid by the bank to Select Bancorp may also be a source of liquidity for the holding company.
The holding company liquidated $7.6 million of Treasury SBLF preferred stock in early 2016. The dividend rate for the preferred stock was 1% for 2014 and 2015; however, it was scheduled to increase to 9% in early 2016.
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CAPITAL
A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity (including qualifying trust preferred securities), and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions and holding companies became subject to the new Basel III capital requirements beginning on January 1, 2015. A new part of the capital ratios profile is the Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and Small Business Lending Fund (SBLF) preferred stock. Minimum capital levels are regulated by risk-based capital adequacy guidelines that require a financial institution to maintain capital as a percent of its assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier 1 capital as a percentage of risk-adjusted assets of 6.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The new capital rules which took effect in 2015 require banks to hold Common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 2.5 percent to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees. The Company’s equity to assets ratio was 12.8% at December 31, 2015. As the following table indicates that, at December 31, 2015, the Company and its bank subsidiary exceeded regulatory capital requirements.
| At December 31, 2015 | ||||||||
| Actual | Minimum | |||||||
| Ratio | Requirement | |||||||
| Select Bancorp, Inc. | ||||||||
| Total risk-based capital ratio | 16.01 | % | 8.00 | % | ||||
| Tier 1 risk-based capital ratio | 15.04 | % | 6.00 | % | ||||
| Common equity Tier 1 risk-based capital ratio | 12.33 | % | 4.50 | % | ||||
| Leverage ratio | 13.81 | % | 4.00 | % | ||||
| Select Bank & Trust | ||||||||
| Total risk-based capital ratio | 15.47 | % | 8.00 | % | ||||
| Tier 1 risk-based capital ratio | 14.50 | % | 6.00 | % | ||||
| Common equity Tier 1 risk-based capital ratio | 14.50 | % | 4.50 | % | ||||
| Leverage ratio | 13.31 | % | 4.00 | % | ||||
During 2004, the Company issued $12.4 million of junior subordinated debentures to a special purpose subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities to investors. The proceeds provided additional capital for the expansion of the Bank. Under the current applicable regulatory guidelines, all of the trust preferred securities qualify as Tier 1 capital. Management expects that the Company and the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the future.
Preferred Stock
As part of the merger with Legacy Select, the Company amended its Articles of Incorporation to authorize the issuance of 5,000,000 shares of preferred stock, no par value per share.
The Company’s amended Articles of Incorporation, subject to certain limitations, authorize the Board from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the preferences, limitations and relative rights of such shares of preferred stock.
| - 41 - |
On August 9, 2011, Legacy Select Bancorp issued 7,645 shares of Series A stock for $7.645 million to the Secretary of the U.S. Treasury as a condition to its participation in the U.S. Treasury’s Small Business Lending Fund program. The Select Bancorp Series A stock is non-voting, other than having class voting rights on certain matters. The Select Bancorp Series A stock pays the U.S. Treasury dividends quarterly. During the first nine quarters following the date of the Treasury’s initial investment, the quarterly dividend rate fluctuates between an annualized rate of 1% to 5% based on changes in the level of qualified small business lending of Select Bank. The annualized dividend rate on the Select Bancorp Series A stock during 2015 was 1%. All outstanding shares of the Company’s Series A preferred stock were redeemed at par and retired during January 2016.
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ASSET/LIABILITY MANAGEMENT
The Company’s results of operations depend substantially on its net interest income. Like most financial institutions, the Company’s interest income and cost of funds are affected by general economic conditions and by competition in the marketplace.
The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company’s earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. The Company maintains, and has complied with, a Board approved asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analyses: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Company’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.
When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies, mortgage-backed securities and municipal obligations. The securities portfolio contributes to the Company’s income and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.
In reviewing the needs of the Company with regard to proper management of its asset/liability program, the Company’s management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and forecasted interest rate changes.
The analysis of an institution’s interest rate gap (the difference between the re-pricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2015, of which are projected to re-price or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which re-price or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate re-pricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.
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| Terms to Re-pricing at December 31, 2015 | ||||||||||||||||||||
| More Than | More Than | |||||||||||||||||||
| 1 Year | 1 Year to | 3 Years to | More Than | |||||||||||||||||
| or Less | 3 Years | 5 Years | 5 Years | Total | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||
| Loans | $ | 170,648 | $ | 137,958 | $ | 192,039 | $ | 116,753 | $ | 617,398 | ||||||||||
| Securities, available for sale | 24,767 | 6,094 | 2,763 | 47,085 | 80,709 | |||||||||||||||
| Interest-earning deposits in other banks | 50,842 | - | - | - | 50,842 | |||||||||||||||
| Federal funds sold | - | - | - | - | - | |||||||||||||||
| Stock in the Federal Home Loan Bank of Atlanta | 2,112 | - | - | - | 2,112 | |||||||||||||||
| Other non-marketable securities | 705 | - | - | - | 705 | |||||||||||||||
| Total interest-earning assets | $ | 249,074 | $ | 144,052 | $ | 194,802 | $ | 163,838 | $ | 751,766 | ||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Savings, NOW and money market | $ | 365,107 | $ | - | $ | - | $ | - | $ | 365,107 | ||||||||||
| Time | 57,856 | 34,878 | 5,414 | - | 98,148 | |||||||||||||||
| Time over $100,000 | 122,916 | 58,588 | 6,402 | - | 187,906 | |||||||||||||||
| Short term debt | 29,673 | - | - | - | 29,673 | |||||||||||||||
| Long term debt | - | 16,331 | - | 12,372 | 28,703 | |||||||||||||||
| Total interest-bearing liabilities | $ | 575,552 | $ | 109,797 | $ | 11,816 | $ | 12,372 | $ | 709,537 | ||||||||||
| Interest sensitivity gap per period | $ | (326,478 | ) | $ | 34,255 | $ | 182,986 | $ | 151,466 | $ | 42,229 | |||||||||
| Cumulative interest sensitivity gap | $ | (326,478 | ) | $ | (292,223 | ) | $ | (109,237 | ) | $ | 42,229 | $ | 42,229 | |||||||
| Cumulative gap as a percentage of total interest-earning assets | (131.08 | )% | (74.33 | )% | (18.58 | )% | 5.62 | % | 5.62 | % | ||||||||||
| Cumulative interest-earning assets as a percentage of interest-bearing liabilities | 43.28 | % | 57.36 | % | 84.33 | % | 105.95 | % | 105.95 | % | ||||||||||
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both very important to the portrayal of the Company's financial condition and results, and requires management's most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. The following is a summary of the Company’s most complex and judgmental accounting policies: the allowance for loan losses, business combinations and deferred tax asset.
Asset Quality and the Allowance for Loan Losses
The financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on a non-accrual basis. Loans are placed on a non-accrual basis when there are serious doubts about the collectability of principal or interest. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or which the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. See the previous section titled “Past Due Loans and Nonperforming Assets” for a discussion on past due loans, non-performing assets and other impaired loans.
| - 44 - |
The allowance for loan losses is maintained at a level considered appropriate in light of the risk inherent within the Company’s loan portfolio, based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. Additional information regarding the Company’s allowance for loan losses and loan loss experience is presented above in the discussion of the allowance for loan losses and in Note E to the accompanying financial statements.
Business combinations and method of accounting for loans acquired
The Company accounts for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value along with the identifiable intangible assets. The recognized net goodwill is associated with the difference from the fair value and the acquired book value of the assets and liabilities of the transaction. No allowance for credit losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings. Acquired credit-impaired loans (PCI loans) are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as acquired performing loans and lines of credit (consumer and commercial) are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated lives of the loans. For further discussion of the Company's loan accounting and acquisitions, see Note B—Summary of Significant Accounting Policies, Note C— Business Combinations and Note E—Loans of the Notes to Consolidated Financial Statements.
Allowance for credit losses
The allowance for credit losses reflects the estimated losses that will result from the inability of the Bank's borrowers to make required loan payments. The allowance for credit losses is established for estimated credit losses through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish an appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. A three-year loss history is incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina.
| - 45 - |
Allowance for credit losses for acquired loans
In the third quarter 2014, the Company implemented the methodology for estimating the potential credit losses for acquired loans. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are statistically sound for the acquired loans. In addition, commercial risk graded loans are segregated between those that are real estate secured and those that are not. A more robust identification of risk factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the Fair Value Marks associated with these loans. These changes did not have a material impact on the allowance recorded at December 31, 2015.
Subsequent to the acquisition date, decreases in cash flows expected to be received on FASB ASC Topic 310-30 acquired loans from the Company's initial estimates are recognized as impairment through the provision for credit losses. Probable and significant increases in cash flows (in a loan pool where an allowance for acquired credit losses was previously recorded) reduces the remaining allowance for acquired credit losses before recalculating the amount of accretable yield percentage for the loan pool in accordance with ASC 310-30.
Acquired loans that are not subject to FASB ASC Topic 310-30 are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on contractual cash flows over the estimated life of the loan. The allowance for these loans will be determined in a similar manner to the non-acquired credit losses.
Deferred Tax Asset
The Company’s net deferred tax asset was $4.3 million at December 31, 2015. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality. As of December 31 2015, management concluded that the Company’s net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations, or other factors could impact the realization of the deferred tax asset in the future.
OFF-BALANCE SHEET ARRANGEMENTS
Information about the Company’s off-balance sheet risk exposure is presented in Note O to the accompanying financial statements. During 2004, the Company formed an unconsolidated subsidiary trust to which the Company issued $12.4 million of junior subordinated debentures (see Note K to the consolidated financial statements). Otherwise, as part of its ongoing business, the Company has not participated in, nor does it anticipate participating in, transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (“SPE”), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
| - 46 - |
Recent Accounting Pronouncements
See Note B to the Company’s audited financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability make-up that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of a commercial bank’s assets are monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. The following table reflects contractual obligations of the Company outstanding as of December 31, 2015.
| Payments Due by Period | ||||||||||||||||||||
| On Demand | ||||||||||||||||||||
| Or Within | After | |||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Short term debt | $ | 29,673 | $ | 29,673 | $ | - | $ | - | $ | - | ||||||||||
| Long term debt | 28,703 | - | 16,331 | - | 12,372 | |||||||||||||||
| Lease obligations | 1,806 | 257 | 369 | 386 | 794 | |||||||||||||||
| Deposits | 651,161 | 545,879 | 93,466 | 11,816 | - | |||||||||||||||
| Total contractual cash obligations | $ | 711,343 | $ | 575,809 | $ | 110,166 | $ | 12,202 | $ | 13,166 | ||||||||||
The following table reflects other commitments outstanding as of December 31, 2015.
| Amount of Commitment Expiration Per Period | ||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Amounts | Less than | After | ||||||||||||||||||
| Other Commitments | Committed | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
| Undisbursed home equity credit lines | $ | 32,704 | $ | 1,949 | $ | 901 | $ | 2,774 | $ | 27,080 | ||||||||||
| Other commitments and credit lines | 35,061 | 20,661 | 1,225 | 4,962 | 8,213 | |||||||||||||||
| Un-disbursed portion of constructions loans | 75,362 | 55,926 | 17,253 | 1,460 | 723 | |||||||||||||||
| Letters of credit | 1,723 | 1,596 | 127 | - | - | |||||||||||||||
| Total loan commitments | $ | 144,850 | $ | 80,132 | $ | 19,506 | $ | 9,196 | $ | 36,016 | ||||||||||
In addition, the Company has legally binding delayed equity commitments to private investment funds. These commitments are not currently expected to called, and therefore, are not reflected in the financial statements. The amount of these commitments at December 31, 2015 and 2014 was $200,000.
| - 47 - |
FORWARD-LOOKING INFORMATION
Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein; as well as the Company’s results of operations in future periods; could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services.
The Company does not undertake a duty to update any forward-looking statements in this report.
ITEM 7A – Quantitative and qualitative disclosure about market risk
Not required for smaller reporting companies.
Item 8 - Financial Statements AND SUPPLEMEnTARY DATA
| - 48 - |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
Select Bancorp, Inc.
Dunn, North Carolina
We have audited the accompanying consolidated balance sheets of Select Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Select Bancorp, Inc. and subsidiary at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Dixon Hughes Goodman LLP
Raleigh, North Carolina
March 24, 2016
| - 49 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED BALANCE SHEETS |
| December 31, 2015 and 2014 |
| 2015 | 2014 | |||||||
| (In thousands, except share | ||||||||
| and per share data) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 12,567 | $ | 14,417 | ||||
| Interest-earning deposits in other banks | 49,842 | 22,810 | ||||||
| Certificates of deposit | 1,000 | 1,000 | ||||||
| Federal funds sold and repurchase agreements | - | 20,183 | ||||||
| Investment securities available for sale, at fair value | 80,709 | 102,235 | ||||||
| Loans | 617,398 | 552,038 | ||||||
| Allowance for loan losses | (7,021 | ) | (6,844 | ) | ||||
| NET LOANS | 610,377 | 545,194 | ||||||
| Accrued interest receivable | 2,350 | 2,416 | ||||||
| Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost | 2,112 | 1,524 | ||||||
| Other non-marketable securities | 705 | 896 | ||||||
| Foreclosed real estate | 1,401 | 1,585 | ||||||
| Premises and equipment, net | 19,078 | 17,599 | ||||||
| Bank owned life insurance | 21,592 | 20,966 | ||||||
| Goodwill | 6,931 | 6,931 | ||||||
| Core deposit intangible | 1,241 | 1,625 | ||||||
| Assets held for sale | 846 | - | ||||||
| Other assets | 6,264 | 6,740 | ||||||
| TOTAL ASSETS | $ | 817,015 | $ | 766,121 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits: | ||||||||
| Demand | $ | 148,304 | $ | 129,831 | ||||
| Savings | 37,353 | 37,000 | ||||||
| Money market and NOW | 179,450 | 166,511 | ||||||
| Time | 286,054 | 285,560 | ||||||
| TOTAL DEPOSITS | 651,161 | 618,902 | ||||||
| Short-term debt | 29,673 | 20,733 | ||||||
| Long-term debt | 28,703 | 25,591 | ||||||
| Accrued interest payable | 232 | 276 | ||||||
| Accrued expenses and other liabilities | 2,544 | 2,934 | ||||||
| TOTAL LIABILITIES | 712,313 | 668,436 | ||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, no par value, 5,000,000 shares authorized; 7,645 and 7,645 shares outstanding December 31, 2015 and 2014, respectively | 7,645 | 7,645 | ||||||
| Common stock, $1 par value, 25,000,000 shares authorized; 11,583,011 and 11,377,980 shares issued and outstanding at December 31, 2015 and 2014, respectively | 11,583 | 11,378 | ||||||
| Additional paid-in capital | 69,061 | 68,406 | ||||||
| Retained earnings | 15,923 | 9,447 | ||||||
| Common stock issued to deferred compensation trust, at cost 253,538 and 259,551 shares at December 31, 2015 and 2014, respectively | (2,139 | ) | (2,121 | ) | ||||
| Directors’ Deferred Compensation Plan Rabbi Trust | 2,139 | 2,121 | ||||||
| Accumulated other comprehensive income | 490 | 809 | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | 104,702 | 97,685 | ||||||
| TOTAL LIABILITIES AND | ||||||||
| SHAREHOLDERS’ EQUITY | $ | 817,015 | $ | 766,121 | ||||
See accompanying notes.
| - 50 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| Years Ended December 31, 2015, 2014 and 2013 |
| 2015 | 2014 | 2013 | ||||||||||
| (In thousands, except share and per share data) | ||||||||||||
| INTEREST INCOME | ||||||||||||
| Loans | $ | 31,576 | $ | 24,288 | $ | 21,147 | ||||||
| Federal funds sold and interest-earning deposits in other banks | 71 | 157 | 204 | |||||||||
| Investments | 1,694 | 1,659 | 1,552 | |||||||||
| TOTAL INTEREST INCOME | 33,341 | 26,104 | 22,903 | |||||||||
| INTEREST EXPENSE | ||||||||||||
| Money market, NOW and savings deposits | 393 | 326 | 425 | |||||||||
| Time deposits | 2,598 | 3,793 | 4,498 | |||||||||
| Short-term debt | 65 | 59 | 40 | |||||||||
| Long-term debt | 486 | 341 | 295 | |||||||||
| TOTAL INTEREST EXPENSE | 3,542 | 4,519 | 5,258 | |||||||||
| NET INTEREST INCOME | 29,799 | 21,585 | 17,645 | |||||||||
| PROVISION FOR (RECOVERY OF) LOAN LOSSES | 890 | (194 | ) | (325 | ) | |||||||
| NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES | 28,909 | 21,779 | 17,970 | |||||||||
| NON-INTEREST INCOME | ||||||||||||
| Fees from pre-sold mortgages | - | - | 73 | |||||||||
| Gain (loss) on the sale of securities | 332 | (46 | ) | - | ||||||||
| Service charges on deposit accounts | 1,056 | 996 | 1,061 | |||||||||
| Other fees and income | 1,904 | 1,725 | 1,495 | |||||||||
| TOTAL NON-INTEREST INCOME | 3,292 | 2,675 | 2,629 | |||||||||
| NON-INTEREST EXPENSE | ||||||||||||
| Personnel | 12,180 | 10,213 | 8,111 | |||||||||
| Occupancy and equipment | 2,232 | 1,726 | 1,518 | |||||||||
| Deposit insurance | 498 | 404 | 430 | |||||||||
| Professional fees | 1,218 | 1,238 | 1,155 | |||||||||
| Core deposit intangible amortization | 544 | 347 | 116 | |||||||||
| Merger/acquisition-related expenses | 378 | 1,941 | 428 | |||||||||
| Information systems | 1,942 | 1,527 | 1,309 | |||||||||
| Foreclosure related expenses | 205 | 480 | 388 | |||||||||
| Other | 3,033 | 2,784 | 2,400 | |||||||||
| TOTAL NON-INTEREST EXPENSE | 22,230 | 20,660 | 15,855 | |||||||||
| INCOME BEFORE INCOME TAX | 9,971 | 3,794 | 4,744 | |||||||||
| INCOME TAX | 3,418 | 1,437 | 1,803 | |||||||||
| NET INCOME | 6,553 | 2,357 | 2,941 | |||||||||
| DIVIDENDS OF PREFERRED STOCK | 77 | 38 | - | |||||||||
| NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $ | 6,476 | $ | 2,319 | $ | 2,941 | ||||||
| Basic | $ | 0.56 | $ | 0.26 | $ | 0.43 | ||||||
| Diluted | $ | 0.56 | $ | 0.26 | $ | 0.43 | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||
| Basic | 11,502,800 | 8,870,114 | 6,918,814 | |||||||||
| Diluted | 11,567,811 | 8,974,384 | 6,919,760 | |||||||||
See accompanying notes.
| - 51 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| Years Ended December 31, 2015, 2014 and 2013 |
| 2015 | 2014 | 2013 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| Net income | $ | 6,553 | $ | 2,357 | $ | 2,941 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized gains (losses) on investment securities- available for sale | (176 | ) | 1,408 | (1,949 | ) | |||||||
| Tax effect | 65 | (520 | ) | 763 | ||||||||
| (111 | ) | 888 | (1,186 | ) | ||||||||
| Reclassification adjustment for (gains) losses included in net income | (332 | ) | 46 | - | ||||||||
| Tax effect | 124 | (17 | ) | - | ||||||||
| (208 | ) | 29 | - | |||||||||
| Total | (319 | ) | 917 | (1,186 | ) | |||||||
| Total comprehensive income | $ | 6,234 | $ | 3,274 | $ | 1,755 | ||||||
See accompanying notes.
| - 52 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
| Years Ended December 31, 2015, 2014 and 2013 (Amounts in thousands except share data) |
| Common Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Issued | Other | |||||||||||||||||||||||||||||||||||||||
| Additional | to Deferred | Compre- | Total | |||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | paid-in | Retained | Deferred | Compensation | hensive | Shareholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Comp Plan | Trust | Income | Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2012 | - | $ | - | 6,913,636 | $ | 6,914 | $ | 42,000 | $ | 4,187 | $ | 1,777 | $ | (1,777 | ) | $ | 1,078 | $ | 54,179 | |||||||||||||||||||||
| Net income | - | - | - | - | - | 2,941 | - | - | - | 2,941 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | - | (1,186 | ) | (1,186 | ) | ||||||||||||||||||||||||||||
| Stock option exercise | - | - | 7,716 | 8 | 36 | - | - | - | - | 44 | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | 26 | - | - | - | - | 26 | ||||||||||||||||||||||||||||||
| Director equity incentive plan, net | - | - | - | - | - | - | 199 | (199 | ) | - | - | |||||||||||||||||||||||||||||
| Balance at December 31, 2013 | - | - | 6,921,352 | 6,922 | 42,062 | 7,128 | 1,976 | (1,976 | ) | (108 | ) | 56,004 | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 2,357 | - | - | - | 2,357 | ||||||||||||||||||||||||||||||
| Other comprehensive income, net | - | - | - | - | - | - | - | - | 917 | 917 | ||||||||||||||||||||||||||||||
| Shares issued for Select merger | 7,645 | 7,645 | 4,416,500 | 4,416 | 25,441 | - | - | - | - | 37,502 | ||||||||||||||||||||||||||||||
| Preferred stock dividends paid | - | - | - | - | - | (38 | ) | - | - | - | (38 | ) | ||||||||||||||||||||||||||||
| Stock option exercises | - | - | 40,128 | 40 | 178 | - | - | - | - | 218 | ||||||||||||||||||||||||||||||
| Stock options acquired in merger | - | - | - | - | 634 | - | - | - | - | 634 | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | 91 | - | - | - | - | 91 | ||||||||||||||||||||||||||||||
| Director equity incentive plan, net | - | - | - | - | - | - | 145 | (145 | ) | - | - | |||||||||||||||||||||||||||||
| Balance at December 31, 2014 | 7,645 | 7,645 | 11,377,980 | 11,378 | 68,406 | 9,447 | 2,121 | (2,121 | ) | 809 | 97,685 | |||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 6,553 | - | - | - | 6,553 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | - | (319 | ) | (319 | ) | ||||||||||||||||||||||||||||
| Preferred stock dividends paid | - | - | - | - | - | (77 | ) | - | - | - | (77 | ) | ||||||||||||||||||||||||||||
| Stock option exercises | - | - | 205,031 | 205 | 616 | - | - | - | - | 821 | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | 39 | - | - | - | - | 39 | ||||||||||||||||||||||||||||||
| Director equity incentive plan, net | - | - | - | - | - | - | 18 | (18 | ) | - | - | |||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 7,645 | $ | 7,645 | 11,583,011 | $ | 11,583 | $ | 69,061 | $ | 15,923 | $ | 2,139 | $ | (2,139 | ) | $ | 490 | $ | 104,702 | |||||||||||||||||||||
See accompanying notes.
| - 53 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Years Ended December 31, 2015, 2014 and 2013 |
| 2015 | 2014 | 2013 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 6,553 | $ | 2,357 | $ | 2,941 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for (recovery of) loan losses | 890 | (194 | ) | (325 | ) | |||||||
| Depreciation and amortization of premises and equipment | 1,043 | 736 | 522 | |||||||||
| Amortization and accretion of investment securities | 971 | 954 | 874 | |||||||||
| Amortization of deferred loan fees and costs | (346 | ) | (306 | ) | (227 | ) | ||||||
| Amortization of core deposit intangible | 544 | 347 | 116 | |||||||||
| Amortization of acquisition premium on time deposits | (829 | ) | (460 | ) | - | |||||||
| Amortization of acquisition premium on borrowings | (376 | ) | (188 | ) | - | |||||||
| Deferred income taxes | 970 | 130 | 753 | |||||||||
| Stock-based compensation | 39 | 91 | 26 | |||||||||
| Accretion on acquired loans | (1,363 | ) | (732 | ) | - | |||||||
| (Gain) loss on the sale of securities | (332 | ) | 46 | - | ||||||||
| Increase in cash surrender value of bank owned life insurance | (626 | ) | (269 | ) | (235 | ) | ||||||
| Loss (gain) on sale of premises and equipment | 279 | (6 | ) | - | ||||||||
| Net loss on sale and write-downs of foreclosed real estate | 139 | 251 | 319 | |||||||||
| Change in assets and liabilities: | ||||||||||||
| Net change in accrued interest receivable | 94 | (34 | ) | (14 | ) | |||||||
| Net change in other assets | (313 | ) | 538 | (84 | ) | |||||||
| Net change in accrued expenses and other liabilities | (454 | ) | 138 | 12 | ||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 6,883 | 3,399 | 4,678 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Redemption (purchase) of FHLB stock | (588 | ) | 336 | 177 | ||||||||
| Purchase of investment securities available for sale | (9,339 | ) | (10,396 | ) | (25,922 | ) | ||||||
| Maturities of investment securities available for sale | 12,430 | 8,924 | 9,651 | |||||||||
| Mortgage-backed securities pay-downs | 9,210 | 11,003 | 11,103 | |||||||||
| Proceeds from sale of investment securities available for sale | 8,086 | 504 | - | |||||||||
| Net change in loans outstanding | (56,073 | ) | 11,877 | 20,469 | ||||||||
| Cash received from acquisition | 21,229 | 15,406 | - | |||||||||
| Net change in other non-marketable securities | 191 | 159 | 50 | |||||||||
| Purchase of Bank owned life insurance | - | (10,000 | ) | - | ||||||||
| Proceeds from sale of foreclosed real estate | 635 | 1,440 | 1,138 | |||||||||
| Proceeds from the sale of premises and equipment | 1,159 | 18 | - | |||||||||
| Purchases of premises and equipment | (3,900 | ) | (735 | ) | (483 | ) | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | (16,960 | ) | 28,536 | 16,183 | ||||||||
See accompanying notes.
| - 54 - |
| SELECT BANCORP, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
| Years Ended December 31, 2015, 2014 and 2013 |
| 2015 | 2014 | 2013 | ||||||||||
| (Amounts in thousands) | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Net change in deposits | $ | 1,904 | $ | (51,303 | ) | $ | (50,101 | ) | ||||
| Proceeds from short-term debt | 48,111 | 6,717 | - | |||||||||
| Proceeds from long-term debt | 10,000 | - | - | |||||||||
| Repayments of short-term debt | (38,972 | ) | - | (11,543 | ) | |||||||
| Repayments of long-term debt | (6,711 | ) | (1,988 | ) | - | |||||||
| Preferred stock dividends paid | (77 | ) | (38 | ) | - | |||||||
| Proceeds from stock options exercised | 821 | 218 | 44 | |||||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 15,076 | (46,394 | ) | (61,600 | ) | |||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | 4,999 | (14,459 | ) | (40,739 | ) | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING | 58,410 | 72,869 | 113,608 | |||||||||
| CASH AND CASH EQUIVALENTS, ENDING | $ | 63,409 | $ | 58,410 | $ | 72,869 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest paid | $ | 3,586 | $ | 4,468 | $ | 5,314 | ||||||
| Income taxes paid | 2,983 | 213 | 1,624 | |||||||||
| Non-cash transactions: | ||||||||||||
| Change in fair value of investments securities available for sale, net of tax | (319 | ) | 917 | (1,186 | ) | |||||||
| Transfer from loans to foreclosed real estate | 590 | 1,197 | 632 | |||||||||
| Transfer from premises and equipment to assets held for sale | 846 | - | - | |||||||||
| Acquisition: | ||||||||||||
| Assets acquired (excluding goodwill) | 9,975 | 277,083 | - | |||||||||
| Liabilities assumed | 31,204 | 245,878 | - | |||||||||
| Other equity interests acquired | - | 36,517 | - | |||||||||
| Purchase price | 21,277 | 38,136 | - | |||||||||
| Goodwill recorded | - | 6,931 | - | |||||||||
See accompanying notes.
| - 55 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE A - ORGANIZATION AND OPERATIONS
Select Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation. In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve and the North Carolina Commissioner of Banks.
Select Bank & Trust Company was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. Legacy Select Bank & Trust Company was incorporated on July 30, 2004 and was merged with and into the Bank on July 25, 2014 in connection with the Company’s acquisition of Legacy Select. Select Bank & Trust Company 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 and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.
Reclassification
Certain items for prior years have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, business combinations and the valuation of other real estate owned.
Business Combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized.
| - 56 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
The acquired assets and assumed liabilities are recorded at estimated fair values. Management makes significant estimates and exercises significant judgment in accounting for business combinations. Management uses its judgment to assign risk ratings to loans based on credit quality, appraisals and estimated collateral values, and estimated expected cash flows to measure fair values for loans. Real estate acquired in settlement of loans is valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Core deposit intangibles are valued based on a weighted combination of the income and market approach where the income approach converts anticipated economic benefits to a present value and the market approach evaluates the market in which the asset is traded to find an indication of prices from actual transactions. Management uses quoted or current market prices to determine the fair value of investment securities. Fair values of deposits and borrowings are based on current market interest rates and are inclusive of any applicable prepayment penalties.
Cash and Due from Banks, Interest-Earning Deposits in Other Banks and Federal Funds Sold
For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks,” “Interest-earning deposits in other banks,” and “Federal funds sold.”
Certificates of Deposit
Certificates of deposit are cash instruments that management has the intent and ability to hold for the foreseeable future or until maturity and are reported at cost.
Investment Securities Available for Sale
Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
| - 57 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The acquired loans are segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings “purchased credit-impaired loans”.
In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristics within the following loan categories: 1-to-4 family residential loans other than junior liens, 1-to-4 family residential junior liens, construction and land development, farm land, commercial real estate (nonowner-occupied), commercial real estate (owner-occupied), commercial and industrial, and all other loan categories. Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. The Company’s policy for determining when to discontinue accruing interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described earlier.
Loans are deemed uncollectible at the discretion of the Chief Credit Officer, based on a variety of credit, collateral, documentation and other issues. In the case where a loan is unsecured and in default it is fully charged off.
Non-accrual Loans
Loans are placed on non-accrual when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require impairment. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.
| - 58 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level in light of the risk inherent in the loan portfolio. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due will not be collected in accordance with the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if the loan is collateral-dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case, interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
Decreases in expected cash flows of PCI loans after the acquisition date are recognized by recording an allowance for credit loss. For any significant increases in cash flows expected to be collected, the Company first adjusts any prior recorded allowance for loan and leases losses through a reversal of previously recognized allowance through provision expense, and then increases the amount of accretable yield to be recognized on a prospective basis over the pool’s remaining life. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by loan officers. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted average risk grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.
Stock in Federal Home Loan Bank of Atlanta
As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment was carried at cost at December 31, 2015 and 2014. The Company continually monitors the financial strength of the FHLB and evaluates the investment for potential impairment. There can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the Bank’s investment in FHLB stock.
Other Non-Marketable Securities
Other non-marketable securities are equity instruments that are reported at cost.
Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is recorded at fair value, less the estimated cost to sell, at the date of foreclosure. After foreclosure, management periodically performs valuations of the property and adjusts the value down when the carrying value of the property exceeds the estimated net realizable value. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.
| - 59 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 40 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.
Bank Owned Life Insurance
Bank Owned Life Insurance ("BOLI") is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefit proceeds received in excess of the policy's cash surrender value are recognized to income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of operations. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At December 31, 2015 and 2014, the Company held no loans against its BOLI cash surrender values.
Goodwill
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations. Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired.
In September 2011, the FASB issued ASU 2011-08, which gives entities the option of first performing a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit basis. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the two-step goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more likely than not that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required.
| - 60 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company performed the qualitative assessment as outlined in ASU 2011-08 in assessing the carrying value of goodwill related to its acquisitions as of October 5, 2015, its annual test date, and determined that it was unlikely that the fair value was less than the carrying amount and that no further testing or impairment charge was necessary. Should the Company’s future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the October 5, 2015 evaluation that caused the Company to perform an interim review of the carrying value of goodwill.
Core Deposit Intangible
The Company considers its core deposits to be intangible assets with finite lives. Core deposit intangibles are being amortized using the effective interest method.
Stock-Based Compensation
The Company has certain stock-based employee compensation plans, described more fully in Note Q. Generally accepted accounting principles (“GAAP”) require recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). GAAP also requires the compensation cost for all awards granted after the date of adoption and any unvested awards that remained outstanding as of the date of adoption to be measured based on the fair value of the award on the grant date.
Comprehensive Income
The Company reports as comprehensive income all changes in shareholders' equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.
Marketing
The Company focuses its marketing efforts on small to medium-sized businesses, professionals and retail clients, and on achieving certain strategic objectives, including increasing noninterest income and growing core deposits and loans. The Company promotes its brand through its traditional advertising and promotions, sponsorship of local events and other community-focused campaigns. The Bank also invests in bank-hosted events and client hospitality opportunities that foster relationship building and business development. The marketing and advertising charges for the Company are expensed as incurred.
Segment Information
The Company follows the provisions of (“ASC”) 280, Segment Reporting, which specifies guidelines for determining an entity’s operating segments and the type and level of financial information to be disclosed. Based on these guidelines, management has determined that the Bank operates as a single business segment; the providing of general commercial and retail financial services to customers located in the Company’s market areas. The various products, as well as the methods used to distribute them, are those generally offered by community banks.
| - 61 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income per Common Share and Common Shares Outstanding
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
| 2015 | 2014 | 2013 | ||||||||||
| Weighted average number of common shares used in computing basic net income per share | 11,502,800 | 8,870,114 | 6,918,814 | |||||||||
| Effect of dilutive stock options | 65,011 | 104,270 | 946 | |||||||||
| Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share | 11,567,811 | 8,974,384 | 6,919,760 | |||||||||
At December 31, 2015, 2014 and 2013, there were 97,800, 75,783 and 277,480 anti-dilutive options, respectively.
Recent Accounting Pronouncements
The following summarizes recent accounting pronouncements and their expected impact on the Company:
In September 2015, the FASB issued Accounting Standard Update 2015-16. Simplifying the Accounting for Measurement Period Adjustments (“ASU 2016-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015. The Company does not expect this guidance to have a material effect on its financial statements.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments included in this Update are effective immediately and transition guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This Update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in this Update are effective for periods beginning after December 15, 2016 and early adoption is not permitted. Adoption of this update is not expected to have a material impact on the Company’s financial position or results of operations because this ASU does not apply to financial instruments.
| - 62 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructuring by Creditors (Subtopic 310-40). This ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
The amendments in this ASU were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We adopted the guidance effective first quarter of 2015. The initial adoption did not have any effect on our consolidated financial position or consolidated results of operations. The new disclosures required by this ASU are included in Note E.
In August 2014, the FASB issued ASU 2014-11 Transfers and Servicing (Topic 860). This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The ASU requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The ASU also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.
The accounting changes in this ASU were effective for fiscal years beginning after December 15, 2014. In addition, the disclosure for certain transactions accounted for as a sale was effective for the fiscal period beginning after December 15, 2014, the disclosures for transactions accounted for as secured borrowings were required to be presented for fiscal periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. We adopted the guidance effective first quarter of 2015. The initial adoption did not have any effect on our consolidated financial position or consolidated results of operations. The new disclosures required by this ASU are included in Note J.
| - 63 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements amendment to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective for fiscal years beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
| - 64 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This Update is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets – referred to as “leases” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. A leasee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current guidelines, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lease primarily will depend on its classification as a finance or operating lease. However, the new ASU will require both types of leases to be recognized on the balance sheet. The Update also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets leased by the lease will remain largely unchanged from current guidance. The amendments are effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2018.Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
Note C – Business Combinations
On December 11, 2015 the Company acquired two branches from Yadkin Bank. The assets and liabilities of these branches, as of the effective date of the acquisition, are recorded at their respective fair values. For the acquisition the estimated fair values of assets acquired was approximately $10.0 million and liabilities assumed were $31.2 million based on the information that is available, and the Company believes this information provides a reasonable basis for determining fair values. Cash received from the transaction was $21.2 million.
On September 30, 2013, the Company executed a merger agreement with Legacy Select Bancorp, Inc. (“Select”), 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 $277.1 million in assets as of the merger date July 25, 2014. The merger expanded the Bank’s North Carolina presence with six branches in Greenville (two), Elizabeth City, Washington, Gibsonville and Burlington.
| - 65 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
Note C – Business Combinations (continued)
On July 25, 2014, New Century acquired Legacy Select, and its wholly-owned subsidiary, Select Bank & Trust Company, and assumed the name, Select Bancorp, Inc. Under the acquisition method, the assets and liabilities of Legacy Select, as of the effective date of the acquisition, are recorded at their respective fair values. For the acquisition of Legacy Select, estimated fair values of assets acquired and liabilities assumed are based on the information that is available, and the Company believes this information provides a reasonable basis for determining fair values.
Under the terms of the agreement, shareholders of Select common stock received 1.8264 shares of New Century common stock for each share of Select common stock, for a value of approximately $31.2 million in the aggregate, based on 2,418,347 shares of Select common stock outstanding and the $6.76 per share closing price of New Century common stock on July 25, 2014, valuing each share of Select common stock at $12.35.
Each share of Select’s issued and outstanding preferred stock was exchanged for one share of newly issued New Century preferred stock having terms substantially identical to Select’s preferred stock. As of December 31, 2015, all of the issued and outstanding shares of Select’s preferred stock are held by the Secretary of the United States Treasury and were issued in connection with Select’s participation in the Small Business Lending Fund. All outstanding shares of Select’s preferred stock were redeemed and cancelled in January 2016.
| - 66 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
Note C – Business Combinations (continued)
The following table provides the carrying value of acquired assets and assumed liabilities, as recorded by the Company, the fair value adjustments calculated at the time of the merger and the resulting fair value recorded by the Company.
| July 25, 2014 | ||||||||||||
| As recorded by | Fair Value | As recorded by | ||||||||||
| Legacy Select | adjustments | the Company | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 15,406 | $ | - | $ | 15,406 | ||||||
| Investment securities | 28,264 | (284 | ) | 27,980 | ||||||||
| Loans | 223,131 | (5,541 | ) | 217,590 | ||||||||
| Less: allowance for loan losses | (3,389 | ) | 3,389 | - | ||||||||
| Premises and equipment | 6,380 | 332 | 6,712 | |||||||||
| Accrued interest receivable | 864 | (132 | ) | 732 | ||||||||
| Other real estate owned | 71 | - | 71 | |||||||||
| Bank owned life insurance | 2,234 | - | 2,234 | |||||||||
| Goodwill | 1,488 | (1,488 | ) | - | ||||||||
| Core deposit intangible | 234 | 1,556 | 1,790 | |||||||||
| Other assets | 2,507 | 2,061 | 4,568 | |||||||||
| Total assets acquired | $ | 277,190 | $ | (107 | ) | $ | 277,083 | |||||
| Liabilities | ||||||||||||
| Deposits: | ||||||||||||
| Noninterest-bearing | $ | 42,507 | $ | - | $ | 42,507 | ||||||
| Interest-bearing | 177,525 | 2,175 | 179,700 | |||||||||
| Total deposits | 220,032 | 2,175 | 222,207 | |||||||||
| Borrowings | 22,198 | 908 | 23,106 | |||||||||
| Other liabilities | 565 | - | 565 | |||||||||
| Total liabilities assumed | $ | 242,795 | $ | 3,083 | $ | 245,878 | ||||||
| Fair value of net assets assumed | 31,205 | |||||||||||
| Value of preferred shares issued to Legacy Select shareholders | 7,645 | |||||||||||
| Value of common shares issued to Legacy Select shareholders | 29,857 | |||||||||||
| Additional consideration ensuing from stock options issued to Legacy Select shareholders | 634 | |||||||||||
| Goodwill recorded for Legacy Select | $ | 6,931 | ||||||||||
Goodwill recorded for Legacy Select represents future revenues to be derived from the existing customer base, including efficiencies that will result from combining operations.
| - 67 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
Note C – Business Combinations (continued)
On July 25, 2014, 202,842 Legacy Select stock options were converted to 370,278 Company stock options. At December 31, 2015, 122,169 of these converted options were outstanding and exercisable with an average weighted remaining contractual life of approximately 4.08 years and an aggregate intrinsic value of $428,000. There were 2,436 forfeitures and 245,673 options were exercised since the merger related to Legacy Select stock options.
In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income prospectively.
PCI loans acquired totaled $28.6 million at estimated fair value and acquired performing loans totaling $189.0 million at estimated fair value. For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the closing date of the merger were:
| (Dollars in thousands) | July 25, 2014 | |||
| Contractually required payments | $ | 34,329 | ||
| Nonaccretable difference | 1,402 | |||
| Cash flows expected to be collected | 32,927 | |||
| Accretable yield | 4,360 | |||
| Fair value at acquisition date | $ | 28,567 | ||
Merger-related expense in 2014 and 2013 totaled $1.9 million and $428,000, respectively. These costs were recorded as noninterest expense as incurred. Expenses for acquisition activities in 2015 relate to two branches purchased during the year.
NOTE D - INVESTMENT SECURITIES
The amortized cost and fair value of available for sale investments (“AFS”), with gross unrealized gains and losses, follow:
| December 31, 2015 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government agencies – GSE’s | $ | 21,321 | $ | 101 | $ | (196 | ) | $ | 21,226 | |||||||
| Mortgage-backed securities – GSE’s | 39,123 | 475 | (62 | ) | 39,536 | |||||||||||
| Municipal bonds | 19,484 | 465 | (2 | ) | 19,947 | |||||||||||
| $ | 79,928 | $ | 1,041 | $ | (260 | ) | $ | 80,709 | ||||||||
As of December 31, 2015, accumulated other comprehensive gains included net unrealized gains totaling $781,000. Deferred tax liabilities resulting from these net unrealized gains totaled $291,000.
| - 68 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE D - INVESTMENT SECURITIES (Continued)
| December 31, 2014 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| U.S. government agencies – GSE’s | $ | 28,180 | $ | 61 | $ | (320 | ) | $ | 27,921 | |||||||
| Mortgage-backed securities – GSE’s | 52,278 | 1,115 | (89 | ) | 53,304 | |||||||||||
| Municipal bonds | 20,496 | 516 | (2 | ) | 21,010 | |||||||||||
| $ | 100,954 | $ | 1,692 | $ | (411 | ) | $ | 102,235 | ||||||||
As of December 31, 2014, accumulated other comprehensive gains included net unrealized gains totaling $1.3 million. Deferred tax liabilities resulting from these net unrealized gains totaled $481,000.
Securities with a carrying value of $45.2 million and $85.1 million at December 31, 2015 and 2014, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2015 and 2014.
| 2015 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | losses | value | losses | value | losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. government agencies – GSE’s | $ | 7,039 | $ | (70 | ) | $ | 7,615 | $ | (126 | ) | $ | 14,654 | $ | (196 | ) | |||||||||
| Mortgage-backed securities- GSE’s | 7,916 | (62 | ) | - | - | 7,916 | (62 | ) | ||||||||||||||||
| Municipal bonds | 111 | (2 | ) | - | - | 111 | (2 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 15,066 | $ | (134 | ) | $ | 7,615 | $ | (126 | ) | $ | 22,681 | $ | (260 | ) | |||||||||
At December 31, 2015, the Company had five AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agency GSE’s had unrealized losses for more than twelve months totaling $126,000 at December 31, 2015. Six U.S. government agency GSE’s, one municipal and seven mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $134,000 at December 31, 2015. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2015.
| - 69 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE D - INVESTMENT SECURITIES (Continued)
| 2014 | ||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | losses | value | losses | value | losses | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. government agencies – GSE’s | $ | 2,926 | $ | (24 | ) | $ | 12,731 | $ | (296 | ) | $ | 15,657 | $ | (320 | ) | |||||||||
| Mortgage-backed securities- GSE’s | 1,965 | (28 | ) | 4,590 | (61 | ) | 6,555 | (89 | ) | |||||||||||||||
| Municipal bonds | - | - | 112 | (2 | ) | 112 | (2 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 4,891 | $ | (52 | ) | $ | 17,433 | $ | (359 | ) | $ | 22,324 | $ | (411 | ) | |||||||||
At December 31, 2014, the Company had thirteen AFS securities with an unrealized loss for twelve or more consecutive months. Eight U.S. government agency GSE’s, one municipal and four mortgage-backed GSE’s had unrealized losses for more than twelve months totaling $359,000 at December 31, 2014. Two U.S. government agency GSE’s and one mortgage-backed GSE bonds had unrealized losses for less than twelve months totaling $52,000 at December 31, 2014. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. The Company incurred a $46,000 loss on one municipal security during 2014.
Since none of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold these securities to recovery, no other than temporary impairments were identified for these investments having unrealized losses for the periods ended December 31, 2015 and December 31, 2014. In 2015 the Company incurred gains of $332,000 on proceeds of $8.1 million related to the disposal of forty-three securities and in 2014 the Company incurred a loss of $46,000 on proceeds of $504,000 related to the disposal of one security.
| - 70 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE D - INVESTMENT SECURITIES (Continued)
The following table sets forth certain information regarding the amortized costs, carrying values and contractual maturities of the Company’s investment portfolio at December 31, 2015.
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (dollars in thousands) | ||||||||
| Securities available for sale: | ||||||||
| U.S. government agencies – GSE’s | ||||||||
| Due within one year | $ | 13 | $ | 13 | ||||
| Due after one but within five years | 11,605 | 11,630 | ||||||
| Due after five but within ten years | 9,703 | 9,583 | ||||||
| Due after ten years | - | - | ||||||
| 21,321 | 21,226 | |||||||
| Mortgage-backed securities – GSE’s | ||||||||
| Due within one year | 31 | 32 | ||||||
| Due after one but within five years | 37,058 | 37,467 | ||||||
| Due after five but within ten years | 2,034 | 2,037 | ||||||
| Due after ten years | - | - | ||||||
| 39,123 | 39,536 | |||||||
| Municipal bonds | ||||||||
| Due within one year | 1,317 | 1,322 | ||||||
| Due after one but within five years | 3,914 | 4,009 | ||||||
| Due after five but within ten years | 5,560 | 5,662 | ||||||
| Due after ten years | 8,693 | 8,954 | ||||||
| 19,484 | 19,947 | |||||||
| Total securities available for sale | ||||||||
| Due within one year | 1,361 | 1,367 | ||||||
| Due after one but within five years | 52,577 | 53,106 | ||||||
| Due after five but within ten years | 17,297 | 17,282 | ||||||
| Due after ten years | 8,693 | 8,954 | ||||||
| $ | 79,928 | $ | 80,709 | |||||
For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
| - 71 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS
The following is a summary of loans at December 31, 2015 and 2014:
| 2015 | 2014 | |||||||||||||||
| Percent | Percent | |||||||||||||||
| Amount | of total | Amount | of total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Real estate loans: | ||||||||||||||||
| 1- to- 4 family residential | $ | 87,955 | 14.25 | % | $ | 90,903 | 16.47 | % | ||||||||
| Commercial real estate | 259,259 | 41.99 | % | 233,630 | 42.32 | % | ||||||||||
| Multi-family residential | 40,738 | 6.60 | % | 42,224 | 7.65 | % | ||||||||||
| Construction | 107,688 | 17.44 | % | 83,593 | 15.14 | % | ||||||||||
| Home equity lines of credit (“HELOC”) | 42,002 | 6.80 | % | 38,093 | 6.90 | % | ||||||||||
| Total real estate loans | 537,642 | 87.08 | % | 488,443 | 88.48 | % | ||||||||||
| Other loans: | ||||||||||||||||
| Commercial and industrial | 73,491 | 11.90 | % | 58,217 | 10.55 | % | ||||||||||
| Loans to individuals | 7,207 | 1.17 | % | 5,953 | 1.08 | % | ||||||||||
| Overdrafts | 48 | 0.01 | % | 64 | 0.01 | % | ||||||||||
| Total other loans | 80,746 | 13.08 | % | 64,234 | 11.64 | % | ||||||||||
| Gross loans | 618,388 | 552,677 | ||||||||||||||
| Less deferred loan origination fees, net | (990 | ) | (.16 | )% | (639 | ) | (.12 | )% | ||||||||
| Total loans | 617,398 | 100.00 | % | 552,038 | 100.00 | % | ||||||||||
| Allowance for loan losses | (7,021 | ) | (6,844 | ) | ||||||||||||
| Total loans, net | $ | 610,377 | $ | 545,194 | ||||||||||||
Loans are primarily made in central and eastern North Carolina. Real estate loans can be affected by the condition of the local real estate market and can be affected by the local economic conditions.
At December 31, 2015, the Company had pre-approved but unused lines of credit totaling $144.9 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.
| - 72 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
A description of the various loan products provided by the Bank is presented below.
Residential 1-to-4 Family Loans
Residential 1-to-4 family loans are mortgage loans that typically convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas.
Commercial Real Estate Loans
Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts and the repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower's and guarantor's global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, market area, and risk grade.
Multi-family Residential Loans
Multi-family residential loans are typically nonfarm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependent on occupancy rates, rental rates, and property management.
Construction Loans
Construction loans are non-revolving extensions of credit secured by real property of which the proceeds are used to acquire and develop land and to construct commercial or residential buildings. The primary source of repayment for these types of loans is the sale of the improved property or permanent financing in which case the property is expected to generate the cash flow necessary for repayment on a permanent loan basis. Property cash flow may be supplemented with financial support from the borrowers/guarantors. Proper underwriting of a construction loan consists of the initial process of obtaining, analyzing, and approving various aspects of information pertaining to: the analysis of the permanent financing source, creditworthiness of the borrower and guarantors, ability of contractor to perform under the terms of the contract, and the feasibility, marketability, and valuation of the project.
Also, much consideration needs to be given to the cost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction loans are traditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, interest rates increasing beyond budget.
| - 73 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Home Equity Lines of Credit
Home equity lines of credit are consumer-purpose revolving extensions of credit which are secured by first or second liens on owner-occupied residential real estate. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established guidelines. The degree of utilization of revolving commitments within this loan segment is reviewed periodically to identify changes in the behavior of this borrowing group.
Commercial and Industrial Loans
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and the guarantors. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for repayment can be impacted by the borrower’s ability to collect amounts due from its customers.
Loans to Individuals
Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are clearly documented. Several factors are considered in making these decisions such as credit score, adjusted net worth, liquidity, debt ratio, disposable income, credit history, and loan-to-value of the collateral. This process combined with the relatively smaller loan amounts spreads the risk among many individual borrowers.
Overdrafts
Overdrafts on customer accounts are classified as loans for reporting purposes.
Related Parties
The Bank has loan transactions with its directors and executive officers in the regular course of business. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectability or present other unfavorable features. The following table represents loan transactions for directors and executive officers who held that position as of December 31, 2015 and 2014. A summary of related party loan transactions, is as follows:
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Balance at January 1 | $ | 3,397 | $ | 5,370 | ||||
| Exposure of directors/executive officers added | - | 2,020 | ||||||
| Borrowings | 7,115 | 3,208 | ||||||
| Directors/executive officers resigned or retired from board | (66 | ) | (4,631 | ) | ||||
| Loan repayments | (3,319 | ) | (2,570 | ) | ||||
| Balance at December 31 | $ | 7,127 | $ | 3,397 | ||||
At December 31, 2015, there was $3.9 million of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries.
| - 74 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Non-Accrual and Past Due Loans
The following tables present as of December 31, 2015 and 2014 an age analysis of past due loans, segregated by class of loans:
| 30+ | Non- | Total | ||||||||||||||||||
| Days | Accrual | Past | Total | |||||||||||||||||
| 2015 | Past Due | Loans | Due | Current | Loans | |||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Total Loans | ||||||||||||||||||||
| Commercial and industrial | $ | 455 | $ | 13 | $ | 468 | $ | 73,023 | $ | 73,491 | ||||||||||
| Construction | - | 523 | 523 | 107,165 | 107,688 | |||||||||||||||
| Multi-family residential | 44 | 431 | 475 | 40,263 | 40,738 | |||||||||||||||
| Commercial real estate | 1,214 | 3,711 | 4,925 | 254,334 | 259,259 | |||||||||||||||
| Loans to individuals & overdrafts | 14 | 4 | 18 | 7,237 | 7,255 | |||||||||||||||
| 1 to 4 family residential | 650 | 1,594 | 2,244 | 85,711 | 87,955 | |||||||||||||||
| HELOC | 124 | 359 | 483 | 41,519 | 42,002 | |||||||||||||||
| Deferred loan (fees) cost, net | - | - | - | - | (990 | ) | ||||||||||||||
| $ | 2,501 | $ | 6,635 | $ | 9,136 | $ | 609,252 | $ | 617,398 | |||||||||||
| Loans- PCI | ||||||||||||||||||||
| Commercial and industrial | $ | - | $ | - | $ | - | $ | 580 | $ | 580 | ||||||||||
| Construction | - | - | - | 1,070 | 1,070 | |||||||||||||||
| Multi-family residential | - | - | - | 689 | 689 | |||||||||||||||
| Commercial real estate | 424 | - | 424 | 9,955 | 10,379 | |||||||||||||||
| Loans to individuals & overdrafts | - | - | - | 115 | 115 | |||||||||||||||
| 1 to 4 family residential | 133 | 142 | 275 | 7,808 | 8,083 | |||||||||||||||
| HELOC | - | - | - | 192 | 192 | |||||||||||||||
| $ | 557 | $ | 142 | $ | 699 | $ | 20,409 | $ | 21,108 | |||||||||||
| Loans- excluding PCI | ||||||||||||||||||||
| Commercial and industrial | $ | 455 | $ | 13 | $ | 468 | $ | 72,443 | $ | 72,911 | ||||||||||
| Construction | - | 523 | 523 | 106,095 | 106,618 | |||||||||||||||
| Multi-family residential | 44 | 431 | 475 | 39,574 | 40,049 | |||||||||||||||
| Commercial real estate | 790 | 3,711 | 4,501 | 244,379 | 248,880 | |||||||||||||||
| Loans to individuals & overdrafts | 14 | 4 | 18 | 7,122 | 7,140 | |||||||||||||||
| 1 to 4 family residential | 517 | 1,452 | 1,969 | 77,903 | 79,872 | |||||||||||||||
| HELOC | 124 | 359 | 483 | 41,327 | 41,810 | |||||||||||||||
| Deferred loan (fees) cost, net | - | - | - | - | (990 | ) | ||||||||||||||
| $ | 1,944 | $ | 6,493 | $ | 8,437 | $ | 588,843 | $ | 596,290 | |||||||||||
| - 75 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Non-Accrual and Past Due Loans
| 30+ | Non- | Total | ||||||||||||||||||
| Days | Accrual | Past | Total | |||||||||||||||||
| 2014 | Past Due | Loans | Due | Current | Loans | |||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Total Loans | ||||||||||||||||||||
| Commercial and industrial | $ | 141 | $ | 632 | $ | 773 | $ | 57,444 | $ | 58,217 | ||||||||||
| Construction | - | 816 | 816 | 82,777 | 83,593 | |||||||||||||||
| Multi-family residential | - | 901 | 901 | 41,323 | 42,224 | |||||||||||||||
| Commercial real estate | 3,377 | 2,576 | 5,953 | 227,677 | 233,630 | |||||||||||||||
| Loans to individuals & overdrafts | 22 | - | 22 | 5,995 | 6,017 | |||||||||||||||
| 1 to 4 family residential | 1,464 | 1,160 | 2,624 | 88,279 | 90,903 | |||||||||||||||
| HELOC | 14 | 853 | 867 | 37,226 | 38,093 | |||||||||||||||
| Deferred loan (fees) cost, net | - | - | - | - | (639 | ) | ||||||||||||||
| $ | 5,018 | $ | 6,938 | $ | 11,956 | $ | 540,721 | $ | 552,038 | |||||||||||
| Loans- PCI | ||||||||||||||||||||
| Commercial and industrial | $ | 2 | $ | - | $ | 2 | $ | 655 | $ | 657 | ||||||||||
| Construction | - | - | - | 1,463 | 1,463 | |||||||||||||||
| Multi-family residential | - | - | - | 2,724 | 2,724 | |||||||||||||||
| Commercial real estate | 562 | - | 562 | 11,341 | 11,903 | |||||||||||||||
| Loans to individuals & overdrafts | - | - | - | 128 | 128 | |||||||||||||||
| 1 to 4 family residential | 283 | - | 283 | 9,689 | 9,972 | |||||||||||||||
| HELOC | - | - | - | 188 | 188 | |||||||||||||||
| $ | 847 | $ | - | $ | 847 | $ | 26,188 | $ | 27,035 | |||||||||||
| Loans- excluding PCI | ||||||||||||||||||||
| Commercial and industrial | $ | 139 | $ | 632 | $ | 771 | $ | 56,789 | $ | 57,560 | ||||||||||
| Construction | - | 816 | 816 | 81,314 | 82,130 | |||||||||||||||
| Multi-family residential | - | 901 | 901 | 38,599 | 39,500 | |||||||||||||||
| Commercial real estate | 2,815 | 2,576 | 5,391 | 216,336 | 221,727 | |||||||||||||||
| Loans to individuals & overdrafts | 22 | - | 22 | 5,867 | 5,889 | |||||||||||||||
| 1 to 4 family residential | 1,181 | 1,160 | 2,341 | 78,590 | 80,931 | |||||||||||||||
| HELOC | 14 | 853 | 867 | 37,038 | 37,905 | |||||||||||||||
| Deferred loan (fees) cost, net | - | - | - | - | (639 | ) | ||||||||||||||
| $ | 4,171 | $ | 6,938 | $ | 11,109 | $ | 514,533 | $ | 525,003 | |||||||||||
There was one loan in the amount of $142,000 greater than 90 days past due and still accruing interest at December 31, 2015 and there was one loan in the amount of $2.2 million greater than 90 days past due and still accruing interest at December 31, 2014.
Loans are placed on non-accrual basis when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.
| - 76 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Impaired Loans
The following tables present information on loans, excluding PCI loans and loans evaluated collectively as a homogenous group, that were considered to be impaired as of December 31, 2015 and December 31, 2014:
| December 31, 2015 | ||||||||||||||||||||
| Contractual | Year to Date | |||||||||||||||||||
| Unpaid | Related | Average | Interest Income | |||||||||||||||||
| Recorded | Principal | Allowance | Recorded | Recognized on | ||||||||||||||||
| Investment | Balance | for Loan Losses | Investment | Impaired Loans | ||||||||||||||||
| 2015: | (dollars in thousands) | |||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial and industrial | $ | 105 | $ | 106 | $ | - | $ | 291 | $ | 11 | ||||||||||
| Construction | 615 | 764 | - | 957 | 18 | |||||||||||||||
| Commercial real estate | 5,006 | 7,229 | - | 3,830 | 246 | |||||||||||||||
| Loans to individuals & overdrafts | - | - | - | - | - | |||||||||||||||
| Multi-family residential | - | - | - | - | - | |||||||||||||||
| HELOC | 699 | 868 | - | 668 | 43 | |||||||||||||||
| 1 to 4 family residential | 2,061 | 2,666 | - | 2,181 | 89 | |||||||||||||||
| Subtotal: | 8,486 | 11,633 | - | 7,927 | 407 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial and industrial | 13 | 13 | 2 | 139 | 1 | |||||||||||||||
| Construction | - | - | - | 83 | - | |||||||||||||||
| Commercial real estate | 1,248 | 1,314 | 73 | 3,063 | 46 | |||||||||||||||
| Loans to individuals & overdrafts | 4 | 4 | 4 | 2 | - | |||||||||||||||
| Multi-family Residential | - | - | - | - | - | |||||||||||||||
| HELOC | - | - | - | 142 | - | |||||||||||||||
| 1 to 4 family residential | 290 | 290 | 15 | 370 | 18 | |||||||||||||||
| Subtotal: | 1,555 | 1,621 | 94 | 3,799 | 65 | |||||||||||||||
| Totals: | ||||||||||||||||||||
| Commercial | 6,987 | 9,426 | 75 | 8,363 | 322 | |||||||||||||||
| Consumer | 4 | 4 | 4 | 2 | - | |||||||||||||||
| Residential | 3,050 | 3,824 | 15 | 3,361 | 150 | |||||||||||||||
| Grand Total: | $ | 10,041 | $ | 13,254 | $ | 94 | $ | 11,726 | $ | 472 | ||||||||||
Impaired loans at December 31, 2015 were approximately $10.0 million and were comprised of $6.9 million in non-accrual loans and $3.1 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately, $1.6 million of the $10.0 million in impaired loans at December 31, 2015 had specific allowances provided while the remaining $8.5 million had no specific allowances recorded. Of the $8.5 million with no allowance recorded, $1.6 million of those loans have had partial charge-offs recorded amounting to $94,000.
| - 77 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Impaired Loans (Continued)
| December 31, 2014 | ||||||||||||||||||||
| Contractual | Year to Date | |||||||||||||||||||
| Unpaid | Related | Average | Interest Income | |||||||||||||||||
| Recorded | Principal | Allowance | Recorded | Recognized on | ||||||||||||||||
| Investment | Balance | for Loan Losses | Investment | Impaired Loans | ||||||||||||||||
| 2014: | (dollars in thousands) | |||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Commercial and industrial | $ | 478 | $ | 478 | $ | - | $ | 337 | $ | 26 | ||||||||||
| Construction | 1,300 | 1,525 | - | 1,679 | 81 | |||||||||||||||
| Commercial real estate | 2,652 | 3,536 | - | 3,329 | 184 | |||||||||||||||
| Loans to individuals & overdrafts | - | 2 | - | 1 | - | |||||||||||||||
| Multi-family residential | 2,232 | 2,515 | - | 2,308 | 125 | |||||||||||||||
| HELOC | 637 | 768 | - | 702 | 39 | |||||||||||||||
| 1 to 4 family residential | 2,301 | 2,750 | - | 2,928 | 147 | |||||||||||||||
| Subtotal: | 9,600 | 11,574 | - | 11,284 | 602 | |||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||
| Commercial and industrial | 265 | 267 | 64 | 266 | - | |||||||||||||||
| Construction | 167 | 168 | 80 | 247 | 1 | |||||||||||||||
| Commercial real estate | 4,878 | 5,761 | 419 | 5,287 | 214 | |||||||||||||||
| Loans to individuals & overdrafts | - | - | - | 1 | - | |||||||||||||||
| Multi-family Residential | - | - | - | - | - | |||||||||||||||
| HELOC | 284 | 526 | 50 | 418 | 8 | |||||||||||||||
| 1 to 4 family residential | 450 | 455 | 74 | 502 | 30 | |||||||||||||||
| Subtotal: | 6,044 | 7,177 | 687 | 6,721 | 253 | |||||||||||||||
| Totals: | ||||||||||||||||||||
| Commercial | 11,972 | 14,250 | 563 | 13,453 | 631 | |||||||||||||||
| Consumer | - | 2 | - | 2 | - | |||||||||||||||
| Residential | 3,672 | 4,499 | 124 | 4,550 | 224 | |||||||||||||||
| Grand Total: | $ | 15,644 | $ | 18,751 | $ | 687 | $ | 18,005 | $ | 855 | ||||||||||
Impaired loans at December 31, 2014 were approximately $15.6 million and were comprised of $6.9 million in non-accrual loans and $8.7 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately, $6.0 million of the $15.6 million in impaired loans at December 31, 2014 had specific allowances provided while the remaining $9.6 million had no specific allowances recorded. Of the $9.6 million with no allowance recorded, $1.6 million of those loans have had partial charge-offs recorded amounting to $687,000.
| - 78 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Troubled Debt Restructurings
The following tables presents loans that were modified as troubled debt restructurings (“TDRs”) within the previous twelve months with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2015 and 2014:
| Twelve Months Ended December 31, 2015 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| Number | Outstanding | Outstanding | ||||||||||
| of | Recorded | Recorded | ||||||||||
| loans | Investments | Investments | ||||||||||
| (dollars in thousands) | ||||||||||||
| Below market interest rate: | ||||||||||||
| Commercial and industrial | - | $ | - | $ | - | |||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | - | - | - | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | 1 | 51 | 3 | |||||||||
| HELOC | - | - | - | |||||||||
| Total | 1 | 51 | 3 | |||||||||
| Extended payment terms: | ||||||||||||
| Commercial and industrial | - | - | - | |||||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | - | - | - | |||||||||
| Multi-family residential | 1 | 431 | 431 | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | - | - | - | |||||||||
| HELOC | - | - | - | |||||||||
| Total | 1 | 431 | 431 | |||||||||
| Other: | ||||||||||||
| Commercial and industrial | - | - | - | |||||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | - | - | - | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | - | - | - | |||||||||
| HELOC | - | - | - | |||||||||
| Total | - | - | - | |||||||||
| Total | 2 | $ | 482 | $ | 434 | |||||||
As noted in the tables above, there were two loans that were considered TDRs at December 31, 2015, for reasons due to below market interest rates, extended terms or forgiveness of principal. These loans were renewed at terms that vary from those that the Company would enter into for new loans of this type.
| - 79 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Troubled Debt Restructurings (Continued)
| Twelve Months Ended December 31, 2014 | ||||||||||||
| Pre-Modification | Post-Modification | |||||||||||
| Number | Outstanding | Outstanding | ||||||||||
| of | Recorded | Recorded | ||||||||||
| loans | Investments | Investments | ||||||||||
| (dollars in thousands) | ||||||||||||
| Below market interest rate: | ||||||||||||
| Commercial and industrial | - | $ | - | $ | - | |||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | - | - | - | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | 1 | 21 | 20 | |||||||||
| HELOC | - | - | - | |||||||||
| Total | 1 | 21 | 20 | |||||||||
| Extended payment terms: | ||||||||||||
| Commercial and industrial | - | - | - | |||||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | 2 | 1,125 | 970 | |||||||||
| Multi-family residential | - | - | - | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | 1 | 45 | 40 | |||||||||
| HELOC | - | - | - | |||||||||
| Total | 3 | 1,170 | 1,010 | |||||||||
| Other: | ||||||||||||
| Commercial and industrial | - | - | - | |||||||||
| Construction | - | - | - | |||||||||
| Commercial real estate | - | - | - | |||||||||
| Loans to individuals and overdrafts | - | - | - | |||||||||
| 1 to 4 family residential | - | - | - | |||||||||
| HELOC | - | - | - | |||||||||
| Total | - | - | - | |||||||||
| Total | 4 | $ | 1,191 | $ | 1,030 | |||||||
As noted in the tables above, there were four loans that were considered TDRs at December 31, 2014, for reasons due to below market interest rates, extended terms or forgiveness of principal. These loans were renewed at terms that vary from those that the Company would enter into for new loans of this type.
| - 80 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (continued)
Troubled Debt Restructurings (Continued)
The following tables presents loans that were modified as TDRs within the previous twelve months for which there was a payment default together with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2015 and 2014:
| Twelve months ended | ||||||||
| December 31, 2015 | ||||||||
| Number | Recorded | |||||||
| of loans | investment | |||||||
| (dollars in thousands) | ||||||||
| Below market interest rate: | ||||||||
| Commercial and industrial | - | $ | - | |||||
| Construction | - | - | ||||||
| Commercial real estate | - | - | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| 1 to 4 family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | - | - | ||||||
| Extended payment terms: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | - | - | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| Multi-family residential | 1 | 431 | ||||||
| 1 to 4 family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | 1 | 431 | ||||||
| Forgiveness of principal: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | - | - | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| 1 to 4 family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | - | - | ||||||
| Other: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | - | |||||||
| Loans to individuals and overdrafts | - | - | ||||||
| 1-to-4 family residential | - | - | ||||||
| Multi-family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | - | - | ||||||
| Total | 1 | $ | 431 | |||||
| - 81 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (continued)
Troubled Debt Restructurings (Continued)
| Twelve months ended | ||||||||
| December 31, 2014 | ||||||||
| Number | Recorded | |||||||
| of loans | investment | |||||||
| (dollars in thousands) | ||||||||
| Below market interest rate: | ||||||||
| Commercial and industrial | - | $ | - | |||||
| Construction | - | - | ||||||
| Commercial real estate | - | - | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| 1 to 4 family residential | 1 | 21 | ||||||
| HELOC | - | - | ||||||
| Total | 1 | 21 | ||||||
| Extended payment terms: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | 1 | 947 | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| Multi-family residential | - | - | ||||||
| 1 to 4 family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | 1 | 947 | ||||||
| Forgiveness of principal: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | - | - | ||||||
| Loans to individuals and overdrafts | - | - | ||||||
| 1 to 4 family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | - | - | ||||||
| Other: | ||||||||
| Commercial and industrial | - | - | ||||||
| Construction | - | - | ||||||
| Commercial real estate | - | |||||||
| Loans to individuals and overdrafts | -- | |||||||
| 1-to-4 family residential | - | - | ||||||
| Multi-family residential | - | - | ||||||
| HELOC | - | - | ||||||
| Total | - | - | ||||||
| Total | 2 | $ | 968 | |||||
| - 82 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Troubled Debt Restructurings (Continued)
At December 31, 2015, the Company had thirty-seven loans with an aggregate balance of $5.1 million that were considered to be troubled debt restructurings. Of those TDRs, twenty loans with a balance totaling $2.1 million were still accruing as of December 31, 2015. The remaining seventeen TDRs with a balance totaling $3.0 million were in non-accrual status. All TDRs are included in non-performing assets and impaired loans.
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. All non-consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of these nine different risk grades is as follows:
| · | Risk Grade 1 (Superior) - Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist. |
| · | Risk Grade 2 (Very Good) - This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). |
| · | Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: |
| o | Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). |
| o | Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. |
| o | Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. |
| · | Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: |
| o | General conformity to the Bank's policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors. |
| o | Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. |
| o | Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. |
| - 83 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
| · | Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics: |
| o | Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors. |
| o | Unproven, insufficient or marginal primary sources of repayment that appears sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance. |
| o | Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor. |
| · | Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics: |
| o | Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors. |
| o | Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices. |
| o | Loans where adverse economic conditions that develop subsequent to the loan origination that don't jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating. |
| · | Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. |
| · | Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. |
| · | Risk Grade 9 (Loss) - Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future. |
| - 84 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:
| · | Risk Grades 1 – 5 (Pass) – The loans in this category range from loans secured by cash with no risk of principal deterioration (Risk Grade 1) to loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss (Risk Grade 5). |
| · | Risk Grade 6 (Watch List or Special Mention) - Watch list or Special Mention loans include the following characteristics: |
| o | Loans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors. |
| o | Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices. |
| o | Loans where adverse economic conditions that develop subsequent to the loan origination that don't jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating. |
| · | Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
| · | Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. |
| · | Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. |
| - 85 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of December 31, 2015 and 2014:
Total Loans:
| December 31, 2015 | ||||||||||||||||
| Commercial | ||||||||||||||||
| Credit | ||||||||||||||||
| Exposure By | Commercial | Commercial | ||||||||||||||
| Internally | and | real | Multi-family | |||||||||||||
| Assigned Grade | industrial | Construction | estate | residential | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Superior | $ | 730 | $ | - | $ | - | $ | - | ||||||||
| Very good | 1,314 | 355 | 114 | - | ||||||||||||
| Good | 8,241 | 5,827 | 26,538 | - | ||||||||||||
| Acceptable | 25,014 | 19,059 | 144,717 | 32,355 | ||||||||||||
| Acceptable with care | 37,980 | 79,817 | 74,169 | 7,685 | ||||||||||||
| Special mention | 58 | 2,015 | 7,657 | - | ||||||||||||
| Substandard | 154 | 615 | 6,064 | 698 | ||||||||||||
| Doubtful | - | - | - | - | ||||||||||||
| Loss | - | - | - | - | ||||||||||||
| $ | 73,491 | $ | 107,688 | $ | 259,259 | $ | 40,738 | |||||||||
| Consumer Credit | ||||||||||||||||
| Exposure By | ||||||||||||||||
| Internally | 1-to-4 family | |||||||||||||||
| Assigned Grade | residential | HELOC | ||||||||||||||
| Pass | $ | 80,596 | $ | 40,770 | ||||||||||||
| Special mention | 3,678 | 448 | ||||||||||||||
| Substandard | 3,681 | 784 | ||||||||||||||
| $ | 87,955 | $ | 42,002 | |||||||||||||
| Consumer Credit | ||||||||||||||||
| Exposure Based | Loans to | |||||||||||||||
| On Payment | individuals & | |||||||||||||||
| Activity | overdrafts | |||||||||||||||
| Pass | $ | 7,236 | ||||||||||||||
| Non-pass | 19 | |||||||||||||||
| $ | 7,255 | |||||||||||||||
| - 86 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Credit Quality Indicators (Continued)
Total Loans:
| December 31, 2014 | ||||||||||||||||
| Commercial | ||||||||||||||||
| Credit | ||||||||||||||||
| Exposure By | Commercial | Commercial | ||||||||||||||
| Internally | and | real | Multi-family | |||||||||||||
| Assigned Grade | industrial | Construction | estate | residential | ||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Superior | $ | 1,241 | $ | - | $ | - | $ | - | ||||||||
| Very good | 1,110 | - | - | - | ||||||||||||
| Good | 5,282 | 2,705 | 15,276 | - | ||||||||||||
| Acceptable | 26,132 | 13,579 | 128,056 | 31,619 | ||||||||||||
| Acceptable with care | 23,404 | 65,717 | 75,554 | 8,374 | ||||||||||||
| Special mention | 221 | 384 | 8,036 | 1,330 | ||||||||||||
| Substandard | 827 | 1,208 | 6,708 | 901 | ||||||||||||
| Doubtful | - | - | - | - | ||||||||||||
| Loss | - | - | - | - | ||||||||||||
| $ | 58,217 | $ | 83,593 | $ | 233,630 | $ | 42,224 | |||||||||
| Consumer Credit | ||||||||||||||||
| Exposure By | ||||||||||||||||
| Internally | 1-to-4 family | |||||||||||||||
| Assigned Grade | residential | HELOC | ||||||||||||||
| Pass | $ | 82,794 | $ | 36,357 | ||||||||||||
| Special mention | 3,978 | 695 | ||||||||||||||
| Substandard | 4,131 | 1,041 | ||||||||||||||
| $ | 90,903 | $ | 38,093 | |||||||||||||
| Consumer Credit | ||||||||||||||||
| Exposure Based | Loans to | |||||||||||||||
| On Payment | individuals & | |||||||||||||||
| Activity | overdrafts | |||||||||||||||
| Pass | $ | 5,969 | ||||||||||||||
| Non-pass | 48 | |||||||||||||||
| $ | 6,017 | |||||||||||||||
| - 87 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
The process of determining the allowance for credit losses is driven by the risk grade system and the loss experience on non-risk graded homogeneous types of loans. The Bank’s allowance for credit losses is calculated and determined, at a minimum, each fiscal quarter end. The allowance for credit losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for credit losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment is based on discounted expected cash flows using the loan’s initial effective interest rate or the fair value of the collateral (less selling costs) for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. The Credit Management Committee of the Board of Directors has responsibility for oversight.
Management believes the allowance for credit losses of $7.0 million at December 31, 2015 is adequate to provide for inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.
Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired company.
In 2014, the Company implemented a methodology for calculating the credit marks for loans acquired in the merger with Legacy Select to cover estimated credit losses on those loans. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed.
| - 88 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the closing date of the merger and December 31, 2015 were:
| July 25, | December 31, | December 31, | ||||||||||
| 2014 | 2014 | 2015 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Contractually required payments | $ | 34,329 | $ | 32,233 | $ | 25,341 | ||||||
| Nonaccretable difference | 1,402 | 1,436 | 1,411 | |||||||||
| Cash flows expected to be collected | 32,927 | 30,797 | 23,930 | |||||||||
| Accretable yield | 4,360 | 3,762 | 2,822 | |||||||||
| Fair value | $ | 28,567 | $ | 27,035 | $ | 21,108 | ||||||
The following table documents changes to the amount of the PCI accretable yield from the acquisition date to December 31, 2015 (dollars in thousands):
| 2014 | 2015 | |||||||
| (dollars in thousands) | ||||||||
| Accretable yield, beginning of period | $ | - | $ | 3,762 | ||||
| Addition from Legacy Select acquisition | 4,360 | - | ||||||
| Accretion | (598 | ) | (1,220 | ) | ||||
| Reclassification from nonaccretable difference | - | 163 | ||||||
| Other changes, net | - | 117 | ||||||
| Accretable yield, end of period | $ | 3,762 | $ | 2,822 | ||||
Allowance for Loan Losses
The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of loans losses inherent within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur The provision for loan losses reflects loan quality trends, including the levels of, and trends related to, past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.
Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves.
As of March 31, 2014, the Company elected to change the allowance for loan loss model it uses to calculate historical loss rates and qualitative and environmental factors in its allowance for loan losses.
| - 89 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
The Company elected to change the model used for allowance for loan losses in order to utilize the loss migration, improve the objectivity of loss projections, and increase reliability of identifying losses inherent in the portfolio. The impact of the change to the model resulted in a $177,000 increase to our loan loss reserves as of the time of the change. In determining the loss history to be applied to its ASC
450 loan pools within the allowance for loan losses, the Company previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool.
The model continues to incorporate various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors utilized by the Company in the new model for all loan classes are as follows:
Internal Factors
| · | Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio. |
| · | Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines. |
| · | Compliance exceptions– Measures the risk derived from granting terms outside of regulatory guidelines. |
| · | Document exceptions– Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections. |
| · | Risk grade monitoring – Measures the risk associated with not having current borrower financial information. |
| · | Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status. |
| · | Delinquency – Reflects the increased risk deriving from higher delinquency rates. |
| · | Personnel turnover – Reflects staff competence in various types of lending. |
| · | Portfolio growth – Measures the impact of growth and potential risk derived from new loan production. |
External Factors
| · | GDP growth rate – Impact of general economic factors that affect the portfolio. |
| · | North Carolina unemployment rate – Impact of local economic factors that affect the portfolio. |
| · | Peer group delinquency rate – Measures risk associated with the credit requirements of competitors. |
| · | Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate. |
| - 90 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
Each pool is assigned an adjustment to the potential loss percentage by assessing its characteristics against each of the factors listed above.
Reserves are generally divided into three allocation segments:
| 1. | Individual reserves. These are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off. |
| 2. | Formula reserves. Formula reserves are held against loans evaluated collectively. Loans are grouped by type or by risk grade, or some combination of the two. Loss estimates are based on historical loss rates for each respective loan group. Formula reserves represent the Company’s best estimate of losses that may be inherent, or embedded, within the group of loans, even if it is not apparent at this time which loans within any group or pool represent those embedded losses. |
| 3. | Qualitative and external reserves. If individual reserves represent estimated losses tied to specific loans, and formula reserves represent estimated losses tied to a pool of loans but not yet to any specific loan, then these reserves represent an estimate of losses that are expected, but are not yet tied to any loan or group of loans. |
All information related to the calculation of the three segments, including data analysis, assumptions, calculations, etc., are documented. Assigning specific individual reserve amounts, formula reserve factors, or unallocated amounts based on unsupported assumptions or conclusions is not permitted.
In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent ten consecutive quarters prior to December 31, 2013. In determining the appropriate level of the allowance for loan losses at December 31, 2013, the loss history was expanded to fourteen consecutive quarters of net charge-offs. Since the most recent quarters contain a declining amount of charge offs coupled with a large number of recoveries and thus have a lower loss history than quarters from 2011 and 2012, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a $1.2 million increase to our 2013 loan loss reserves as compared to the methodology previously used. Loan loss provisions in 2013 were also affected by the decline in overall loan balances during the year.
| - 91 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
The following tables present a roll forward
of the Company’s allowance for loan losses by loan segment for the twelve month periods ended
December 31, 2015, 2014 and 2013, respectively (in thousands):
| 2015 | Commercial | 1 to 4 | Loans to | Multi- | ||||||||||||||||||||||||||||
| and | Commercial | family | individuals & | family | ||||||||||||||||||||||||||||
| Allowance for loan losses | industrial | Construction | real estate | residential | HELOC | overdrafts | residential | Total | ||||||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2015 | $ | 803 | $ | 1,103 | $ | 2,914 | $ | 630 | $ | 930 | $ | 185 | $ | 279 | $ | 6,844 | ||||||||||||||||
| Provision for loan losses | 212 | 333 | 670 | (57 | ) | (272 | ) | (18 | ) | 13 | 881 | |||||||||||||||||||||
| Loans charged-off | (141 | ) | (79 | ) | (663 | ) | (70 | ) | (115 | ) | (54 | ) | (5 | ) | (1,127 | ) | ||||||||||||||||
| Recoveries | 48 | 29 | 84 | 102 | 21 | 24 | 106 | 414 | ||||||||||||||||||||||||
| Total | $ | 922 | $ | 1,386 | $ | 3,005 | $ | 605 | $ | 564 | $ | 137 | $ | 393 | $ | 7,012 | ||||||||||||||||
| PCI Loans | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2015 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
| Provision for loan losses | - | - | - | - | 9 | - | - | 9 | ||||||||||||||||||||||||
| Loans charged-off | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Recoveries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | 9 | $ | - | $ | - | $ | 9 | ||||||||||||||||
| Total Loans | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2015 | $ | 803 | $ | 1,103 | $ | 2,914 | $ | 630 | $ | 930 | $ | 185 | $ | 279 | $ | 6,844 | ||||||||||||||||
| Provision for loan losses | 212 | 333 | 670 | (57 | ) | (263 | ) | (18 | ) | 13 | 890 | |||||||||||||||||||||
| Loans charged-off | (141 | ) | (79 | ) | (663 | ) | (70 | ) | (115 | ) | (54 | ) | (5 | ) | (1,127 | ) | ||||||||||||||||
| Recoveries | 48 | 29 | 84 | 102 | 21 | 24 | 106 | 414 | ||||||||||||||||||||||||
| Balance, end of period 12/31/2015 | $ | 922 | $ | 1,386 | $ | 3,005 | $ | 605 | $ | 573 | $ | 137 | $ | 393 | $ | 7,021 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 2 | $ | - | $ | 73 | $ | 15 | $ | - | $ | 4 | $ | - | $ | 94 | ||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 920 | $ | 1,386 | $ | 2,932 | $ | 590 | $ | 573 | $ | 133 | $ | 393 | $ | 6,927 | ||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 73,373 | $ | 107,073 | $ | 253,005 | $ | 85,604 | $ | 41,303 | $ | 7,251 | $ | 40,738 | $ | 608,397 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 118 | $ | 615 | $ | 6,254 | $ | 2,351 | $ | 699 | $ | 4 | $ | - | $ | 10,041 | ||||||||||||||||
| Ending Balance | $ | 73,491 | $ | 107,688 | $ | 259,259 | $ | 87,955 | $ | 42,002 | $ | 7,255 | $ | 40,738 | $ | 618,388 | ||||||||||||||||
Not included in this table are $21.1 million of acquired loans with deteriorated credit quality.
| - 92 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
| 2014 | Commercial | 1 to 4 | Loans to | Multi- | ||||||||||||||||||||||||||||
| and | Commercial | family | individuals & | family | ||||||||||||||||||||||||||||
| Allowance for loan losses | industrial | Construction | real estate | residential | HELOC | overdrafts | residential | Total | ||||||||||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2014 | $ | 245 | $ | 565 | $ | 4,599 | $ | 826 | $ | 680 | $ | 65 | $ | 74 | $ | 7,054 | ||||||||||||||||
| Provision for loan losses | 589 | 479 | (1,899 | ) | (262 | ) | 499 | 195 | 205 | (194 | ) | |||||||||||||||||||||
| Loans charged-off | (63 | ) | (4 | ) | (150 | ) | (26 | ) | (327 | ) | (98 | ) | - | (668 | ) | |||||||||||||||||
| Recoveries | 32 | 63 | 364 | 92 | 78 | 23 | - | 652 | ||||||||||||||||||||||||
| Total | $ | 803 | $ | 1,103 | $ | 2,914 | $ | 630 | $ | 930 | $ | 185 | $ | 279 | $ | 6,844 | ||||||||||||||||
| PCI Loans | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2014 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
| Provision for loan losses | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Loans charged-off | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Recoveries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
| Total Loans | ||||||||||||||||||||||||||||||||
| Balance, beginning of period 01/01/2014 | $ | 245 | $ | 565 | $ | 4,599 | $ | 826 | $ | 680 | $ | 65 | $ | 74 | $ | 7,054 | ||||||||||||||||
| Provision for loan losses | 589 | 479 | (1,899 | ) | (262 | ) | 499 | 195 | 205 | (194 | ) | |||||||||||||||||||||
| Loans charged-off | (63 | ) | (4 | ) | (150 | ) | (26 | ) | (327 | ) | (98 | ) | - | (668 | ) | |||||||||||||||||
| Recoveries | 32 | 63 | 364 | 92 | 78 | 23 | - | 652 | ||||||||||||||||||||||||
| Balance, end of period 12/31/2014 | $ | 803 | $ | 1,103 | $ | 2,914 | $ | 630 | $ | 930 | $ | 185 | $ | 279 | $ | 6,844 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 64 | $ | 80 | $ | 419 | $ | 74 | $ | 50 | $ | - | $ | - | $ | 687 | ||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 739 | $ | 1,023 | $ | 2,495 | $ | 556 | $ | 880 | $ | 185 | $ | 279 | $ | 6,157 | ||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 57,474 | $ | 82,126 | $ | 226,100 | $ | 88,152 | $ | 37,172 | $ | 6,017 | $ | 39,992 | $ | 537,033 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 743 | $ | 1,467 | $ | 7,530 | $ | 2,751 | $ | 921 | $ | - | $ | 2,232 | $ | 15,644 | ||||||||||||||||
| Ending Balance | $ | 58,217 | $ | 83,593 | $ | 233,630 | $ | 90,903 | $ | 38,093 | $ | 6,017 | $ | 42,224 | $ | 552,677 | ||||||||||||||||
Not included in this table are $28.5 million of acquired loans with deteriorated credit quality.
| - 93 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE E - LOANS (Continued)
| 2013 | 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 | ||||||||||||||||||||||||
| Balance, beginning of period 01/01/2013 | $ | 278 | $ | 798 | $ | 4,946 | $ | 1,070 | $ | 627 | $ | 72 | $ | 106 | $ | 7,897 | ||||||||||||||||
| Provision for loan losses | (35 | ) | (230 | ) | (59 | ) | (317 | ) | 288 | 60 | (32 | ) | (325 | ) | ||||||||||||||||||
| Loans charged-off | (135 | ) | (28 | ) | (384 | ) | (325 | ) | (316 | ) | (135 | ) | - | (1,323 | ) | |||||||||||||||||
| Recoveries | 137 | 25 | 96 | 398 | 81 | 68 | - | 805 | ||||||||||||||||||||||||
| Balance, end of period 12/31/2013 | $ | 245 | $ | 565 | $ | 4,599 | $ | 826 | $ | 680 | $ | 65 | $ | 74 | $ | 7,054 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 63 | $ | 91 | $ | 541 | $ | 88 | $ | 320 | $ | - | $ | - | $ | 1,103 | ||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 182 | $ | 474 | $ | 4,058 | $ | 738 | $ | 360 | $ | 65 | $ | 74 | $ | 5,951 | ||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Ending Balance | $ | 29,166 | $ | 53,325 | $ | 169,176 | $ | 35,006 | $ | 31,863 | $ | 8,775 | $ | 19,739 | $ | 347,050 | ||||||||||||||||
| Ending Balance: individually evaluated for impairment | $ | 463 | $ | 2,387 | $ | 9,443 | $ | 2,980 | $ | 1,320 | $ | 5 | $ | 2,384 | $ | 18,982 | ||||||||||||||||
| Ending Balance: collectively evaluated for impairment | $ | 28,703 | $ | 50,938 | $ | 159,733 | $ | 32,026 | $ | 30,543 | $ | 8,770 | $ | 17,355 | $ | 328,068 | ||||||||||||||||
| - 94 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE F– OTHER REAL ESTATE OWNED
The following table explains changes in other real estate owned during the years ended December 31, 2015 and 2014 (dollars in thousands):
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| (Dollars in thousands) | ||||||||
| Beginning balance January 1 | $ | 1,585 | $ | 2,008 | ||||
| Sales | (635 | ) | (1,440 | ) | ||||
| Write-downs and loss on sales | (139 | ) | (251 | ) | ||||
| Transfers | 590 | 1,268 | ||||||
| Ending balance | $ | 1,401 | $ | 1,585 | ||||
At December 31, 2015 and December 31, 2014, the Company had $1.4 million and $1.6 million, respectively, of foreclosed residential real estate property in OREO. The Company did not have any recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at December 31, 2015 and 2014, respectively.
NOTE G - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2015 and 2014:
| 2015 | 2014 | |||||||
| (dollars in thousands) | ||||||||
| Land | $ | 5,520 | $ | 5,097 | ||||
| Buildings | 14,841 | 13,615 | ||||||
| Furniture and equipment | 5,249 | 4,743 | ||||||
| Leasehold improvements | 144 | 144 | ||||||
| Construction in progress | - | 64 | ||||||
| 25,754 | 23,663 | |||||||
| Less accumulated depreciation | 6,676 | 6,064 | ||||||
| Total | $ | 19,078 | $ | 17,599 | ||||
Depreciation amounting to approximately $1.0 million, $736,000, and $522,000 for the years ended December 31, 2015, 2014, and 2013, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.
| - 95 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE G - PREMISES AND EQUIPMENT (Continued)
The Company has operating leases for its corporate offices and branches that expire at various times through 2026. Future minimum lease payments under the leases for years subsequent to December 31, 2015 are as follows:
| Total Lease Payments | ||||
| (dollars in thousands) | ||||
| 2016 | $ | 257 | ||
| 2017 | 188 | |||
| 2018 | 181 | |||
| 2019 | 193 | |||
| 2020 | 193 | |||
| Years thereafter | 794 | |||
| $ | 1,806 | |||
During 2015, 2014, and 2013, payments under operating leases were approximately $401,000, $290,000, and $185,000, respectively. Lease expense was accounted for on a straight line basis. Rental income earned on office space leased to third parties was $161,000 for 2015 and $84,000 for 2014. There was no rental income in 2013. Future rental income is expected to be immaterial to the consolidated financial statements of the Company.
NOTE H – GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes the changes in carrying amounts of goodwill and other intangibles (core deposit intangibles) for the periods presented.
| Core Deposit Intangible | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Goodwill | Gross | Amortization | Net | |||||||||||||
| (In thousands) | ||||||||||||||||
| Balance at January 1, 2013 | $ | - | $ | 1,269 | $ | (971 | ) | $ | 298 | |||||||
| Amortization expense | - | - | (116 | ) | (116 | ) | ||||||||||
| Balance at December 31, 2013 | - | 1,269 | (1,087 | ) | 182 | |||||||||||
| Goodwill and core deposit intangible resulting from merger | 6,931 | 1,790 | - | 1,790 | ||||||||||||
| Amortization expense | - | - | (347 | ) | (347 | ) | ||||||||||
| Balance at December 31, 2014 | 6,931 | 3,059 | (1,434 | ) | 1,625 | |||||||||||
| Core deposit intangible resulting from branch acquisition | - | 160 | - | 160 | ||||||||||||
| Amortization expense | - | - | (544 | ) | (544 | ) | ||||||||||
| Balance at December 31, 2015 | $ | 6,931 | $ | 3,219 | $ | (1,978 | ) | $ | 1,241 | |||||||
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of accounting.
| - 96 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE H – GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The value of acquired core deposit relationships was determined using the present value of the difference between a market participant's cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The Company’s core deposit intangible is amortized using the effective yield method over six years. The gross amount of the core deposit intangible is $3.2 million with $2.0 million being amortized and impaired to date, leaving a remaining net balance of $1.2 million as of December 31, 2015.
The table below summarizes the remaining core deposit intangible amortization (dollars in thousands):
| 2016 | $ | 432 | ||
| 2017 | 339 | |||
| 2018 | 246 | |||
| 2019 | 154 | |||
| 2020 | 61 | |||
| Thereafter | 9 | |||
| $ | 1,241 |
NOTE I – DEPOSITS
The scheduled maturities of time deposits at December 31, 2015 are as follows:
| Total Time Deposits | ||||
| (dollars in thousands) | ||||
| 2016 | $ | 180,772 | ||
| 2017 | 77,555 | |||
| 2018 | 15,911 | |||
| 2019 | 4,867 | |||
| 2020 | 6,949 | |||
| Thereafter | - | |||
| $ | 286,054 | |||
Time deposits with balances of $250,000 or more were $61.6 million and $58.9 million at December 31, 2015 and 2014, respectively.
NOTE J - REPURCHASE AGREEMENTS
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and secure long-term funding needs. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates the Company to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected as short-term borrowings.
| - 97 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE J - REPURCHASE AGREEMENTS (Continued)
We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements totaled $12.1 million and $15.7 million at December 31, 2015 and 2014, respectively.
The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in short-term borrowings as of December 31, 2015 and 2014 is presented in the following tables.
| December 31, 2015 | ||||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| (Dollars in thousands) | Overnight and continuous | Up to 30 Days | 30-90 Days | Greater than 90 Days | Total | |||||||||||||||
| Repurchase agreements | ||||||||||||||||||||
| Government agency | $ | 4,206 | $ | - | $ | - | $ | - | $ | 4,206 | ||||||||||
| Mortgage-backed Securities | 7,943 | - | - | - | 7,943 | |||||||||||||||
| Total borrowings | $ | 12,149 | $ | - | $ | - | $ | - | $ | 12,149 | ||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | 12,149 | ||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| (Dollars in thousands) | Overnight and continuous | Up to 30 Days | 30-90 Days | Greater than 90 Days | Total | |||||||||||||||
| Repurchase agreements | ||||||||||||||||||||
| Government agency | $ | 4,909 | $ | - | $ | - | $ | - | $ | 4,909 | ||||||||||
| Mortgage-backed Securities | 8,228 | - | - | - | 8,228 | |||||||||||||||
| Municipals | 2,526 | - | - | - | 2,526 | |||||||||||||||
| Total borrowings | $ | 15,663 | $ | - | $ | - | $ | - | $ | 15,663 | ||||||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | 15,663 | ||||||||||||||||||
| - 98 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE K – SHORT-TERM AND LONG-TERM DEBT
At December 31, 2015, the Company had $29.7 million in short-term debt and $28.7 million in long-term debt. Short-term debt consisted of $12.4 million in Federal Home Loan Bank advances. Advances from the Federal Home Loan Bank are collateralized with loans as of December 31, 2015. Long-term debt consisted of $12.4 million in junior subordinated debentures and $20.7 million in Federal Home Loan Bank advances. The Federal Home Loan Bank advances are collateralized by $78.6 million of loans.
At December 31, 2014, the Company had $20.7 million in short-term debt and $25.6 million in long-term debt. Short-term debt consisted of $15.7 million in securities sold under agreements to repurchase and a $5.0 million Federal Home Loan Bank advance. Advances from the Federal Home Loan Bank are collateralized with loans as of December 31, 2014. Long-term debt consisted of $12.4 million in junior subordinated debentures and $13.2 million in Federal Home Loan Bank advances. The Federal Home Loan Bank advances are collateralized by $116.7 million of loans.
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date and are classified as short-term debt. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements are collateralized by U. S. Government agency obligations and all are floating rate. The following table presents certain information for securities sold under agreements to repurchase:
| 2015 | 2014 | |||||||
| (Dollars in thousands) | ||||||||
| Balance at December 31 | $ | 12,149 | $ | 15,663 | ||||
| Weighted average interest rate at December 31 | 0.34 | % | 0.34 | % | ||||
| Maximum amount outstanding at any month-end during the year | $ | 13,405 | $ | 15,663 | ||||
| Average daily balance outstanding during the year | $ | 13,337 | $ | 9,957 | ||||
| Average annual interest rate paid during the year | 0.31 | % | 0.35 | % | ||||
| - 99 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE K – SHORT-TERM AND LONG TERM-DEBT (Continued)
At December 31, 2015, the Company had $33.9 million in advances from the Federal Home Loan Bank of Atlanta and no borrowings from the Federal Reserve Bank discount window. The advances include a premium on borrowings acquired of $344,000. Advances consisted of the following at December 31, 2015:
| Date | Amount | Rate | Maturity | |||||||
| (dollars in thousands) | ||||||||||
| Advance type: | ||||||||||
| Fixed rate credit | $ | 12,000 | 0.34 | % | 1/29/2016 | |||||
| Fixed rate hybrid | $ | 5,080 | 3.47 | % | 8/08/2016 | |||||
| Principal Reducing | 444 | 0.57 | % | 8/15/2016 | ||||||
| Convertible | 5,263 | 4.63 | % | 6/28/2017 | ||||||
| Fixed rate credit | 10,000 | 1.38 | % | 7/30/2018 | ||||||
| Principal Reducing | 1,067 | 1.09 | % | 8/13/2018 | ||||||
On September 20, 2004, $12.4 million of junior subordinated debentures were issued to New Century Statutory Trust I (“the Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. All of the Trust’s common equity is owned by the Company. The junior subordinated debentures are included in long-term debt and the Company’s equity interest in the Trust is included in other assets.
The Company pays interest on the junior subordinated debentures at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The debentures are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The trust preferred securities qualify as Tier 1 capital for regulatory capital purposes subject to certain limitations, none of which were applicable at December 31, 2015.
Lines of credit amounted to $153.7 million with various correspondent banks with $33.5 million outstanding and $126.1 million available. Some of the lines of credit are secured and others unsecured with a variety of rates and terms.
NOTE L - INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31, 2015, 2014 and 2013 are as follows:
| 2015 | 2014 | 2013 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Current tax provision: | ||||||||||||
| Federal | $ | 2,094 | $ | 1,067 | $ | 823 | ||||||
| State | 354 | 240 | 227 | |||||||||
| Total current tax provision | 2,448 | 1,307 | 1,050 | |||||||||
| Deferred tax provision: | ||||||||||||
| Federal | 752 | 123 | 526 | |||||||||
| State | 218 | 7 | 227 | |||||||||
| Total deferred tax provision | 970 | 130 | 753 | |||||||||
| Net income tax provision | $ | 3,418 | $ | 1,437 | $ | 1,803 | ||||||
| - 100 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE L - INCOME TAXES (Continued)
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
| 2015 | 2014 | 2013 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Income tax at federal statutory rate | $ | 3,390 | $ | 1,290 | $ | 1,613 | ||||||
| Increase (decrease) resulting from: | ||||||||||||
| State income taxes, net of federal tax effect | 377 | 164 | 300 | |||||||||
| Tax-exempt interest income | (172 | ) | (116 | ) | (66 | ) | ||||||
| Income from life insurance | (213 | ) | (92 | ) | (80 | ) | ||||||
| Incentive stock option expense | 13 | 18 | 9 | |||||||||
| Merger expenses | - | 151 | - | |||||||||
| Other permanent differences | 23 | 22 | 27 | |||||||||
| Provision for income taxes | $ | 3,418 | $ | 1,437 | $ | 1,803 | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2015 and 2014 are as follows:
| 2015 | 2014 | |||||||
| (dollars in thousands) | ||||||||
| Deferred tax assets relating to: | ||||||||
| Allowance for loan losses | $ | 2,572 | $ | 2,553 | ||||
| Deferred compensation | 305 | 281 | ||||||
| Supplemental executive retirement plan | 58 | 59 | ||||||
| Acquisition accounting | 1,624 | 2,710 | ||||||
| Write-downs on foreclosed real estate | 92 | 170 | ||||||
| Other | 157 | 98 | ||||||
| Total deferred tax assets | 4,808 | 5,871 | ||||||
| Deferred tax liabilities relating to: | ||||||||
| Premises and equipment | (1,285 | ) | (1,207 | ) | ||||
| Deferred loan fees/costs | (57 | ) | (35 | ) | ||||
| Unrealized gains on available-for-sale securities | (292 | ) | (481 | ) | ||||
| Core deposit intangible | 61 | (91 | ) | |||||
| Other | (39 | ) | (80 | ) | ||||
| Total deferred tax liabilities | (1,612 | ) | (1,894 | ) | ||||
| Net recorded deferred tax asset, included in other assets | $ | 3,196 | $ | 3,977 | ||||
The Company’s policy is to report interest and penalties, if any, related to uncertain tax positions in income tax expense in the Consolidated Statements of Operations. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2012. As of December 31, 2015 and 2014, the Company has no uncertain tax provisions.
| - 101 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE L - INCOME TAXES (Continued)
Deferred Tax Asset
The Company’s net deferred tax asset was $3.2 million and $4.0 million at December 31, 2015 and 2014. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of December 31, 2015, management concluded that the Company’s net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations or other factors could impact the realization of the deferred tax asset in the future.
NOTE M – ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in accumulated other comprehensive income for the years ended December 31, 2015 and 2014.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (In thousands) | ||||||||
| Beginning balance | $ | 809 | $ | (108 | ) | |||
| Unrealized (gain) loss on investment securities available for sale | (176 | ) | 1,408 | |||||
| Tax effect | 65 | (520 | ) | |||||
| Other comprehensive income (loss) before reclassification | (111 | ) | 888 | |||||
| Amounts reclassified from accumulated comprehensive income: | ||||||||
| Realized (gain) loss on investment securities included in net income | (332 | ) | 46 | |||||
| Tax effect | 124 | (17 | ) | |||||
| Total reclassifications net of tax | (208 | ) | 29 | |||||
| Net current period other comprehensive income (loss) | (319 | ) | 917 | |||||
| Ending balance | $ | 490 | $ | 809 | ||||
| - 102 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE N - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2015, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in Select Bank & Trust Company and New Century Statutory Trust I.
Regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The North Carolina Commissioner of Banks and the FDIC are also authorized to prohibit the payment of dividends under certain other circumstances.
A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions and holding companies became subject to the new Basel III capital requirements beginning on January 1, 2015. A new part of the capital ratios profile is the Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and Small Business Lending Fund (“SBLF”) preferred stock. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets).
As the following tables indicate, at December 31, 2015 and 2014, the Company and its Bank subsidiary both exceeded minimum regulatory capital requirements as specified in the tables below.
| Minimum for capital | ||||||||||||||||
| Actual | adequacy purposes | |||||||||||||||
| The Company: | Amount | Ratio | Amount | Ratio | ||||||||||||
| December 31, 2015: | (dollars in thousands) | |||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 115,805 | 16.01 | % | $ | 57,852 | 8.00 | % | ||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 108,784 | 15.04 | % | 43,389 | 6.00 | % | ||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | 89,139 | 12.33 | % | 32,542 | 4.50 | % | ||||||||||
| Tier 1 Capital (to Average Assets) | 108,784 | 13.81 | % | 31,505 | 4.00 | % | ||||||||||
| Minimum for capital | ||||||||||||||||
| Actual | adequacy purposes | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| December 31, 2014: | (dollars in thousands) | |||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 107,018 | 17.70 | % | $ | 48,302 | 8.00 | % | ||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 100,174 | 16.56 | % | 24,191 | 4.00 | % | ||||||||||
| Tier 1 Capital (to Average Assets) | 100,174 | 13.10 | % | 30,659 | 4.00 | % | ||||||||||
| - 103 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE N - REGULATORY MATTERS (Continued)
Select Bank & Trust Company’s actual capital amounts and ratios are presented in the table below as of December 31, 2015 and 2014:
| Minimum to be well | ||||||||||||||||||||||||
| Minimum for capital | capitalized under prompt | |||||||||||||||||||||||
| Actual | adequacy purposes | corrective action provisions | ||||||||||||||||||||||
| The Bank: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| December 31, 2015: | (dollars in thousands) | |||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 111,773 | 15.47 | % | $ | 57,809 | 8.00 | % | 72,261 | 10.00 | % | |||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 104,752 | 14.50 | % | 43,357 | 6.00 | % | 57,809 | 8.00 | % | |||||||||||||||
| Common equity Tier 1 (to Risk-Weight Assets) | 104,752 | 14.50 | % | 32,517 | 4.50 | % | 46,970 | 6.50 | % | |||||||||||||||
| Tier 1 Capital (to Average Assets) | 104,752 | 13.31 | % | 31,483 | 4.00 | % | 39,354 | 5.00 | % | |||||||||||||||
| Minimum to be well | ||||||||||||||||||||||||
| Minimum for capital | capitalized under prompt | |||||||||||||||||||||||
| Actual | adequacy purposes | corrective action provisions | ||||||||||||||||||||||
| The Bank: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
| December 31, 2014: | (dollars in thousands) | |||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | $ | 103,495 | 17.13 | % | $ | 48,340 | 8.00 | % | 60,425 | 10.00 | % | |||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 96,651 | 16.00 | % | 24,170 | 4.00 | % | 36,255 | 6.00 | % | |||||||||||||||
| Tier 1 Capital (to Average Assets) | 96,651 | 12.64 | % | 30,659 | 4.00 | % | 38,324 | 5.00 | % | |||||||||||||||
During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of December 31, 2015.
Management expects that the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the future.
NOTE O - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.
| - 104 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE O - OFF-BALANCE SHEET RISK (Continued)
The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of December 31, 2015 is as follows:
| Financial instruments whose contract amounts represent credit risk: | (In thousands) | |||
| Undisbursed commitments | $ | 143,127 | ||
| Letters of credit | 1,723 | |||
The Company has legally binding delayed equity commitments to private investment funds. These commitments are not expected to be called, and therefore, are not reflected in the financial statements. The amount of these commitments at December 31, 2015 and 2014 was $200,000.
NOTE P – FAIR VALUE MEASUREMENTS
ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.
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. |
| - 105 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
|
|
· | Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques. |
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies – GSE’s, mortgage-backed securities issued by GSE’s and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.
The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of December 31, 2015 and December 31, 2014 (dollars in thousands):
Investment securities available for sale December 31, 2015 | Fair value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| U.S. government agencies – GSE's | $ | 21,226 | $ | - | $ | 21,226 | $ | - | ||||||||
| Mortgage-backed securities - GSE’s | 39,536 | - | 39,536 | - | ||||||||||||
| Municipal bonds | 19,947 | - | 19,947 | - | ||||||||||||
| Total | $ | 80,709 | $ | - | $ | 80,709 | $ | - | ||||||||
| - 106 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
Investment securities December 31, 2014 | Fair value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs | ||||||||||||
| U.S. government agencies – GSE's | $ | 27,921 | $ | - | $ | 27,921 | $ | - | ||||||||
| Mortgage-backed securities - GSE’s | 53,304 | - | 53,304 | - | ||||||||||||
| Municipal bonds | 21,010 | - | 21,010 | - | ||||||||||||
| Total | $ | 102,235 | $ | - | $ | 102,235 | $ | - | ||||||||
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, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2015, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans range between 4 - 50% and 5-47% discount from appraisals for expected liquidation and sales costs at December 31, 2015 and 2014, respectively.
Foreclosed Real Estate
Foreclosed real estate are properties recorded at the lower of cost or net realizable value, less the estimated costs to sell, at the date of foreclosure. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market adjusted for certain discounts. 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 range between 6 – 10% and 5 – 90% discount from appraisals for expected liquidation and sales costs at December 31, 2015 and 2014, respectively.
Assets held for sale
During 2015 two branch facilities were taken out service as part of the Company’s branch restructuring plan and reclassified as held for sale. The properties are recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market.
| - 107 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
The following tables summarize quantitative
disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of December
31, 2015 and
December 31, 2014 (dollars in thousands):
Asset Category December 31, 2015 | Fair value | Quoted Prices in Active Markets Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Impaired loans | $ | 6,635 | $ | - | $ | - | $ | 6,635 | ||||||||
| Assets held for sale | 846 | - | - | 846 | ||||||||||||
| Foreclosed real estate | 1,401 | - | - | 1,401 | ||||||||||||
| Total | $ | 8,882 | $ | - | $ | - | $ | 8,882 | ||||||||
Asset Category December 31, 2014 | Fair value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Impaired loans | $ | 6,896 | $ | - | $ | - | $ | 6,896 | ||||||||
| Foreclosed real estate | 1,585 | - | - | 1,585 | ||||||||||||
| Total | $ | 8,481 | $ | - | $ | - | $ | 8,481 | ||||||||
As of December 31, 2015, the Bank identified $10.0 million in impaired loans, of which $10.0 million were carried at fair value on a non-recurring basis which included $1.6 million in loans that required a specific reserve of $94,000, and an additional $1.6 million in other loans without specific reserves that had charge-offs. As of December 31, 2014, the Bank identified $15.6 million in impaired loans, of which $7.6 million were carried at fair value on a non-recurring basis which included $6.0 million in loans that required a specific reserve of $687,000, and an additional $1.6 million in other loans without specific reserves that had charge-offs.
| - 108 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments, the estimated values of which are disclosed. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2015 and 2014:
| December 31, 2015 | ||||||||||||||||||||
| Carrying | Estimated | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 12,567 | $ | 12,567 | $ | 12,567 | $ | - | $ | - | ||||||||||
| Certificates of deposits | 1,000 | 1,000 | 1,000 | - | - | |||||||||||||||
| Interest-earning deposits in other banks | 49,842 | 49,842 | 49,842 | - | - | |||||||||||||||
| Investment securities available for sale | 80,709 | 80,709 | - | 80,709 | - | |||||||||||||||
| Loans, net | 610,377 | 615,754 | - | - | 615,754 | |||||||||||||||
| Accrued interest receivable | 2,350 | 2,350 | - | - | 2,350 | |||||||||||||||
| Stock in the FHLB | 2,112 | 2,112 | - | - | 2,112 | |||||||||||||||
| Other non-marketable securities | 705 | 705 | - | - | 705 | |||||||||||||||
| Assets held for sale | 846 | 846 | - | - | 846 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 651,161 | $ | 651,255 | $ | - | $ | 651,255 | $ | - | ||||||||||
| Short-term debt | 29,673 | 29,673 | - | 29,673 | - | |||||||||||||||
| Long-term debt | 28,703 | 23,718 | - | 23,718 | - | |||||||||||||||
| Accrued interest payable | 232 | 232 | - | 232 | - | |||||||||||||||
| - 109 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
| December 31, 2014 | ||||||||||||||||||||
| Carrying | Estimated | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 14,417 | $ | 14,417 | $ | 14,417 | $ | - | $ | - | ||||||||||
| Certificates of deposits | 1,000 | 1,000 | 1,000 | - | - | |||||||||||||||
| Interest-earning deposits in other banks | 22,810 | 22,810 | 22,810 | - | - | |||||||||||||||
| Federal funds sold and repurchase agreements | 20,183 | 20,183 | 20,183 | - | - | |||||||||||||||
| Investment securities available for sale | 102,235 | 102,235 | - | 102,235 | - | |||||||||||||||
| Loans, net | 545,194 | 555,736 | - | - | 555,736 | |||||||||||||||
| Accrued interest receivable | 2,416 | 2,416 | - | - | 2,416 | |||||||||||||||
| Stock in the FHLB | 1,524 | 1,524 | - | - | 1,524 | |||||||||||||||
| Other non-marketable securities | 896 | 896 | - | - | 896 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 618,902 | $ | 621,049 | $ | - | $ | 621,049 | $ | - | ||||||||||
| Short-term debt | 20,733 | 20,593 | - | 20,593 | - | |||||||||||||||
| Long-term debt | 25,591 | 20,771 | - | 20,771 | - | |||||||||||||||
| Accrued interest payable | 276 | 276 | - | 276 | - | |||||||||||||||
Cash and Due from Banks, Certificates of Deposits, Interest-Earning Deposits in Other Banks and Federal Funds Sold
The carrying amounts for cash and due from banks, certificates of deposit, interest-earning deposits in other banks and federal funds sold approximate fair value because of the short maturities of those instruments.
Investment Securities Available for Sale
Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans
For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.
Stock in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the Federal Home Loan Bank.
| - 110 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE P – FAIR VALUE MEASUREMENTS (Continued)
Other Non-Marketable Securities
The fair value of equity instruments in other non-marketable securities is assumed to approximate carrying value.
Assets Held for Sale
The fair value of assets held for sale approximates the carrying value.
Deposits
The fair value of demand deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using the rates currently offered for instruments of similar remaining maturities.
Short Term Debt
Short term debt consists of repurchase agreements and FHLB advances with maturities of less than twelve months. The carrying values of these instruments is a reasonable estimate of fair value.
Long Term Debt
The fair values of long term debt are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.
NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Plan
The Company has a 401(k) Plan and substantially all employees participate in the Plan. The Company matches 100% of the first 6% of an employee’s compensation contributed to the plan. Expenses attributable to the Plan amounted to $365,000, $318,000, and $267,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
Employment Agreements
The Company has entered into employment agreements with five executive officers to promote a stable and competent management base. These agreements provide for benefits as specified in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers' right to
| - 111 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
receive certain vested rights, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will generally be bound by the terms of those contracts.
Supplemental Executive Retirement Plans
The Company implemented a nonqualified supplemental executive retirement plan for the former Chief Executive Officer during 2003. Benefits accrued and vested during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $130,000, $15,000, and $17,000 were expensed for future benefits to be provided under this plan during 2015, 2014 and 2013, respectively. In conjunction with the implementation of this plan, the Company has purchased life insurance on certain key officers to help offset plan accruals. The life insurance policies provide the payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2015 and 2014 was $345,000 and $275,000, respectively.
As part of the acquisition of Progressive State Bank (“Progressive”), the Company assumed a liability for the supplemental early retirement plan for Progressive’s Chief Executive Officer. Provisions of $18,000, $18,000, and $19,000 and were expensed in 2015, 2014 and 2013, resulting in a total liability of $345,000 and $362,000 as of December 31, 2015 and 2014, respectively. Corresponding to this liability, Progressive had purchased a life insurance policy on a key officer to help offset the expense associated with future benefit payments. This policy was acquired by the Company upon its acquisition of Progressive.
Directors Deferred Compensation
The Company has instituted a Directors’ Deferral Plan (“Deferral Plan”) whereby individual directors may elect annually to defer receipt of all or a designated portion of their directors’ fees for the coming year. Amounts so deferred are used to purchase shares of the Company’s common stock on the open market by the administrator of the Deferral Plan or to issue shares from the Company’s authorized but unissued shares, with such deferred compensation disbursed in the future as specified by the director at the time of his or her deferral election. All deferral amounts and matching contributions, if any, are paid into a rabbi trust with a separate account for each participant under the plan. Net compensation and other expenses attributable to this plan for the years ended December 31, 2015, 2014 and 2013 were $18,000, $145,000, and $199,000, respectively. The Directors’ Deferral Plan was amended and restated on September 22, 2015 to ensure compliance with applicable regulations and to provide that the eventual payment of compensation deferred under the plan may be made only in the form of the Registrant’s common stock. A liability of $2.1 million and $2.1 million related to this plan is included in shareholders’ equity for December 31, 2015 and 2014, respectively.
| - 112 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plans
The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary.
| · | On May 11, 2010, the shareholders of the Company approved the implementation of the New Century Bancorp, Inc. 2010 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights. Incentive stock options under the Omnibus Plan vest over a five-year period with none vested at the time of grant. Officers and other full-time employees of the Company and the Bank, including executive officers and directors, are eligible to receive awards under the Omnibus Plan. However, no projections have been made as to specific award terms or recipients. There were 40,000 incentive stock options granted in 2015 and no incentive stock options granted under this plan in 2014. |
| - 113 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plans (Continued)
In 2014 the Company did not grant any stock options. For years when stock options were granted the estimated weighted average fair market value of each option awarded, using the Black-Scholes option pricing model, together with the assumptions used in estimating those weighted average fair values, are displayed below:
| 2015 | 2014 | 2013 | ||||||||||
| Estimated fair value of options granted | $ | 3.74 | $ | - | $ | 3.40 | ||||||
| Assumptions in estimating average option values: | ||||||||||||
| Risk-free interest rate | 1.87 | % | -% | 1.34 | % | |||||||
| Dividend yield | -% | -% | 0 | % | ||||||||
| Volatility | 48.13 | % | -% | 49.28 | % | |||||||
| Expected life (in years) | 8.00 | - | 8.00 | |||||||||
A summary of the Company’s option plans as of and for the year ended December 31, 2015 is as follows:
| Outstanding Options | Exercisable Options | |||||||||||||||||||
| Shares | Weighted | Weighted | ||||||||||||||||||
| Available | Average | Average | ||||||||||||||||||
| for Future | Number | Exercise | Number | Exercise | ||||||||||||||||
| Grants | Outstanding | Price | Outstanding | Price | ||||||||||||||||
| At December 31, 2014 | 634,741 | 444,218 | $ | 5.78 | 429,922 | $ | 5.79 | |||||||||||||
| Options authorized | - | - | - | - | - | |||||||||||||||
| Options acquired | - | - | - | - | - | |||||||||||||||
| Options granted/vested | (40,000 | ) | 40,000 | 6.92 | 6,100 | 5.38 | ||||||||||||||
| Options exercised | 205,031 | (205,031 | ) | 4.01 | (205,031 | ) | 4.01 | |||||||||||||
| Options expired | 8,281 | (8,281 | ) | 10.99 | (8,281 | ) | 10.99 | |||||||||||||
| Options forfeited | 23,049 | (23,049 | ) | 6.16 | (22,569 | ) | $ | 6.40 | ||||||||||||
| At December 31, 2015 | 831,102 | 247,857 | $ | 7.22 | 200,141 | $ | 7.34 | |||||||||||||
The aggregate intrinsic value of options outstanding as of December 31, 2015 and 2014 was $558,000 and $1.2 million, respectively. The aggregate intrinsic value of options exercisable as of December 31, 2015 and 2014 was $493,000 and $1.1 million, respectively. The unrecognized compensation expense for outstanding options at December 31, 2015, 2014, and 2013 was $29,000, $30,000, and $47,000, respectively. As of December 31, 2015, this cost is expected to be recognized over a weighted average period of 1.68 years.
| - 114 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE Q - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plans (Continued)
The weighted average remaining life of options outstanding and options exercisable as of December 31, 2015 was 4.33 years and 3.30 years, respectively. The weighted average remaining life of options outstanding and options exercisable as of December 31, 2014 was 3.43 years and 3.21 years, respectively. Information regarding the stock options outstanding at December 31, 2015 is summarized below:
| Number | Number | |||||||
| of options | of options | |||||||
| Range of Exercise Prices | outstanding | exercisable | ||||||
| $2.25 - $7.07 | 193,057 | 145,341 | ||||||
| $7.08 - $10.69 | 10,000 | 10,000 | ||||||
| $10.70 - $16.22 | 44,800 | 44,800 | ||||||
| Outstanding at end of year | 247,857 | 200,141 | ||||||
A summary of the status of the Company’s non-vested options as of December 31, 2015 and changes during the year ended December 31, 2015, is presented below:
| Weighted-Average | ||||||||
| Grant Date | ||||||||
| Non-vested Options | Options | Fair Value | ||||||
| Non-vested at December 31, 2014 | 14,295 | $ | 2.87 | |||||
| Granted | 40,000 | 3.74 | ||||||
| Vested | (6,100 | ) | 2.80 | |||||
| Expired | - | - | ||||||
| Forfeited | (480 | ) | 5.25 | |||||
| Non-vested at December 31, 2015 | 47,715 | 3.62 | ||||||
For the years ended December 31, 2015, 2014 and 2013, the intrinsic value of options exercised was $836,000, $81,000 and $8,000, respectively. For the years ended December 31, 2015, 2014 and 2013, the grant-date fair value of options vested was $17,000, $21,000, and $31,000, respectively. In addition, vested stock options acquired in the merger had a fair value of $634,000. For the year ended December 31, 2015 and 2014, $821,000 and $218,000 in cash was received from stock option exercises, respectively.
| - 115 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE R - PARENT COMPANY FINANCIAL DATA
Following are the condensed balance sheets of Select Bancorp as of and for the years ended December 31, 2015 and 2014 and the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2015:
Condensed Balance Sheets
December 31, 2015 and 2014
(dollars in thousands)
| 2015 | 2014 | |||||||
| Assets | ||||||||
| Cash balances with Select Bank & Trust | $ | 126 | $ | 2,990 | ||||
| Investment in Select Bank & Trust | 112,670 | 106,162 | ||||||
| Investment in New Century Statutory Trust I | 540 | 531 | ||||||
| Other assets | 3,931 | 556 | ||||||
| Total Assets | $ | 117,267 | $ | 110,239 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Junior subordinated debentures | $ | 12,372 | $ | 12,372 | ||||
| Accrued interest and other liabilities | 193 | 182 | ||||||
| Total Liabilities | 12,565 | 12,554 | ||||||
| Shareholders’ equity: | ||||||||
| Preferred stock | 7,645 | 7,645 | ||||||
| Common stock | 11,583 | 11,378 | ||||||
| Additional paid-in capital | 69,061 | 68,406 | ||||||
| Retained earnings | 15,923 | 9,447 | ||||||
| Common stock issued to deferred compensation trust | (2,139 | ) | (2,121 | ) | ||||
| Directors’ Deferred Compensation Plan Rabbi Trust | 2,139 | 2,121 | ||||||
| Accumulated other comprehensive income | 490 | 809 | ||||||
| Total Shareholders’ Equity | 104,702 | 97,685 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 117,267 | $ | 110,239 | ||||
Condensed Statements of Operations
Years Ended December 31, 2015, 2014 and 2013
(dollars in thousands)
| 2015 | 2014 | 2013 | ||||||||||
| Equity in earnings of subsidiaries | $ | 7,084 | $ | 2,715 | $ | 3,211 | ||||||
| Operating expense | (805 | ) | (526 | ) | (404 | ) | ||||||
| Income tax benefit | 274 | 168 | 134 | |||||||||
| Net income | $ | 6,553 | $ | 2,357 | $ | 2,941 | ||||||
| - 116 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE R - PARENT COMPANY FINANCIAL DATA (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2015, 2014 and 2013
(dollars in thousands)
| 2015 | 2014 | 2013 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 6,553 | $ | 2,357 | $ | 2,941 | ||||||
| Equity in undistributed income of subsidiaries | (6,836 | ) | (2,715 | ) | (3,211 | ) | ||||||
| Stock based compensation | 39 | 91 | - | |||||||||
| Net change in other assets | (3,375 | ) | (272 | ) | (174 | ) | ||||||
| Net change in other liabilities | 11 | 25 | 10 | |||||||||
| Net cash used in operating activities | (3,608 | ) | (514 | ) | (434 | ) | ||||||
| CASH FLOW FROM INVESTING ACTIVITIES | ||||||||||||
| Cash received from acquisition | - | 2,056 | - | |||||||||
| Net cash provided by investing activities - | 2,056 | - | ||||||||||
| CASH FLOW FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from stock option issuance | 821 | 218 | 44 | |||||||||
| Dividends | (77 | ) | (38 | ) | 221 | |||||||
| Net cash provided by financing activities | 744 | 180 | 265 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (2,864 | ) | 1,722 | (169 | ) | |||||||
| Cash and cash equivalents at beginning of year | 2,990 | 1,268 | 1,437 | |||||||||
| Cash and cash equivalents, end of year | $ | 126 | $ | 2,990 | $ | 1,268 | ||||||
NOTE S - RELATED PARTY TRANSACTIONS
The Bank has had, and expects to have in the future, banking and other transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers and associates. All such transactions are made on substantially that same terms, including interest rates, repayment terms and collateral, as those prevailing for comparable transactions with persons not related to the lender, and do not involve more than the normal risk of collection or present other unfavorable features.
| - 117 - |
| SELECT BANCORP, INC |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Years Ended December 31, 2015, 2014 and 2013 |
NOTE T – CAPITAL TRANSACTIONS
Common Stock
During 2014 the capital of the Company increased primarily due to the acquisition of Legacy Select on July 25, 2014. The Company issued 4,416,500 shares of common stock in connection with the acquisition, based on an exchange ratio of 1.8264 shares for each outstanding share of Legacy Select common stock. Based on 202,842 shares of Legacy Select common stock underlying stock options outstanding on July 25, 2014, the Company reserved an additional 370,278 shares of its common stock for issuance under the converted stock options, which were converted into stock options covering shares of the Company’s common stock using the same exchange ratio.
Preferred Stock
As part of the merger with Legacy Select, the Company amended its Articles of Incorporation to authorize the issuance of 5,000,000 shares of preferred stock, no par value per share. The Company’s amended Articles of Incorporation authorize the Company’s Board from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the preferences, limitations and relative rights of such shares of preferred stock, subject to certain limitations.
On August 9, 2011, Legacy Select Bancorp issued 7,645 shares of Series A stock for $7.645 million to the U.S. Treasury as a condition to its participation in the U.S. Treasury’s Small Business Lending Fund (SBLF) program. The Select Bancorp Series A stock is non-voting, other than having class voting rights on certain matters. The Select Bancorp Series A stock pays dividends quarterly. During the first nine quarters following the date of the initial investment, the quarterly dividend rate fluctuates between an annualized rate of 1% to 5% based on changes in the level of qualified small business lending of Select Bank. The current annualized dividend rate on the Select Bancorp Series A stock is 1%. The dividend rate on the Series A stock will be fixed at a rate between 1% to 7% for the period covering the 10th quarter through the date that is 4.5 years following the date of the initial investment. This fixed dividend rate is based on Select Bank’s qualified small business lending. Following the 4.5-year anniversary of the initial investment, the dividend rate on the Series A stock is increased to 9% per annum. The Treasury is the sole holder of the Select Bancorp Series A stock.
As a condition of the issuance of the Series A stock under the SBLF program, Select Bancorp may not pay a cash dividend on its common stock if it is delinquent on its payment of the dividends to the U.S.
Treasury. The shares of Series A stock are redeemable at the option of Select Bancorp, upon receipt of any required regulatory approvals. As noted below, all outstanding shares of the Series A stock were redeemed subsequent to December 31, 2015.
NOTE U – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date and time the financial statements were issued. On January 20, 2016, the 7,645 shares of Series A stock issued under the SBLF program were repaid in full at par.
| - 118 - |
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for preparing the Company’s annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even systems that are deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive review, evaluation and assessment of the Company's internal control over financial reporting as of December 31, 2015. In making its assessment of internal control over financial reporting as of December 31, 2015, Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control−Integrated Framework (2013) (the “2013 Framework”).
Based on this assessment, Management has concluded that that the Company’s internal control over financial reporting as of December 31, 2015 was effective based on those criteria.
In May of 2013, COSO released an updated version of its Internal Control—Integrated Framework (the “2013 Framework”). The 2013 Framework is intended to address changes in the business, operating, and regulatory environment that have occurred since COSO issued the 1992 Framework. COSO considers the 1992 Framework to have been superseded by the 2013 Framework after December 15, 2015. As noted above, Management’s assessment of the Company’s internal control over financial reporting as of December 31, 2015 was based on the 2013 Framework.
| - 119 - |
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
| Date: March 24, 2016 | /s/ William L. Hedgepeth II |
| William L. Hedgepeth II | |
| President and Chief Executive Officer | |
| Date: March 24, 2016 | /s/ Mark A. Jeffries |
| Mark A. Jeffries | |
| Executive Vice President, Chief Financial Officer |
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the fourth quarter of 2015. Management has concluded that there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s fourth quarter of 2015 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
None.
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Item 10 – Directors, Executive Officers AND CORPORATE GOVERNANCE
Incorporated by reference to the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
The Registrant has adopted a code of ethics that applies, among others to its principal executive officer and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, Select Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28334.
Item 11 - Executive Compensation
Incorporated by reference to the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
Item 12 - Security Ownership of Certain Beneficial Owners and Management AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
In 2000, the shareholders of Select Bank & Trust approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders approved amendments to the 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 478,627 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Incentive Plan is 278,102 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon exercise of outstanding options granted under the 2004 Incentive Plan is 75,600. Option prices for each of the plans are established at market value at the time of grant.
On May 11, 2010, the shareholders of the Company approved the implementation of the New Century Bancorp, Inc. 2010 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights. Officers and other full-time employees of the Company and the Bank, including executive officers and directors, are eligible to receive awards under the Omnibus Plan. The maximum number of shares reserved for issuance in connection with equity awards granted under the Omnibus Plan is 250,000 (adjusted for stock dividends).
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The following chart contains details of the grants:
| Number of securities | ||||||||||||
| remaining available | ||||||||||||
| Weighted-average | for future issuance | |||||||||||
| Number of securities | exercise price of | under equity | ||||||||||
| to be issued upon | outstanding | compensation plans | ||||||||||
| exercise of | options, | (excluding securities | ||||||||||
| Plan Category | outstanding options, | warrants and rights | reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by security holders | 247,857 | $ | 7.22 | 831,102 | ||||||||
| Equity compensation plans not approved by security holders | none | n/a | none | |||||||||
| Total | 247,857 | $ | 7.22 | 831,102 | ||||||||
Item 13 - Certain Relationships and Related Transactions, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
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Item 15 – Exhibits and FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this report: |
| 1. | Financial statements required to be filed by Item 8 of this Form: |
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the
years ended
December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements.
| 2. | Financial statement schedules required to be filed by Item 8 of this Form: |
None
| 3. | Exhibits |
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Exhibits
| 2(i) | Agreement and Plan of Merger and Reorganization dated September 30, 2013, by and between New Century Bancorp, Inc., New Century Bank, Select Bancorp, Inc. and Select Bank & Trust Company(7) |
| 3(i) | Articles of Incorporation of Registrant(1) |
| 3(ii) | Articles of Amendment of Registrant(8) |
| 3(iii) | Bylaws of Registrant(1) |
| 4 | Form of Stock Certificate(1) |
| 10(i) | 2000 Incentive Stock Option Plan, a compensatory plan(2) |
| 10(ii) | 2000 Nonstatutory Stock Option Plan, a compensatory plan(2) |
| 10(iii) | Employment Agreement of William L. Hedgepeth II, a management contract(3) |
| 10(iv) | 2004 Incentive Stock Option Plan, a compensatory plan(2) |
| 10(v) | Directors’ Deferral Plan, as amended and restated(4) |
| 10(vi) | 2010 Omnibus Stock Ownership and Long Term Incentive Plan(5) |
| 10(vii) | Employment Agreement of D. Richard Tobin, Jr., a management contract(9) |
| 10(viii) | Employment Agreement of Gary J. Brock, a management contract(10) |
| 10(ix) | Employment Agreement of Lynn H. Johnson, a management contract |
| 10(x) | Employment Agreement of Mark A. Jeffries, a management contract |
| 10(xi) | Small Business Lending Fund – Securities Purchase Agreement dated August 9, 2011(10) |
| 10(xii) | Post-Merger Side Letter dated July 25, 2014(10) |
| 21 | Subsidiaries (Filed herewith) |
| 23 | Consent of Dixon Hughes Goodman LLP (Filed herewith) |
| 31(i) | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith) |
| 31(ii) | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith) |
| 32(i) | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith) |
| - 124 - |
| 32(ii) | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith) |
| 101 | The following financial information formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of December 31, 2015 and 2014; (ii) the Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013; (ii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013; (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. |
| 1. | Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004. |
| 2. | Incorporated by reference from Registrant's Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004. |
| 3. | Incorporated by reference from Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2008. |
| 4. | Incorporated by reference from Registrant’s Current Report on 8-K, filed with the Securities and Exchange Commission on November 22, 2011. |
| 5. | Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 2, 2010. |
| 6. | Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 23, 2011. |
| 7. | Incorporated by reference from the Registrant’s Registration Statement on Form S-4, filed with the Securities and Exchange Commission on January 15, 2014. |
| 8. | Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 26, 2011. |
| 9. | Incorporated by reference from the Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 28, 2013. |
| 10. | Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 29, 2014. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| SELECT BANCORP, INC. | ||
| Registrant | ||
| By: | /s/ William L. Hedgepeth II | |
| William L. Hedgepeth, II | ||
| Date: March 24, 2016 | President and Chief Executive Officer | |
| - 126 - |
Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ William L. Hedgepeth, II | March 24, 2016 | |
| William L. Hedgepeth, II., President, | ||
| Chief Executive Officer and Director | ||
| /s/ Mark A. Jeffries | March 24, 2016 | |
| Mark A. Jeffries, Executive Vice President, | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| /s/ J. Gary Ciccone | March 24, 2016 | |
| J. Gary Ciccone, Director | ||
| /s/ John W. McCauley | March 24, 2016 | |
| John W. McCauley, Director | ||
| /s/ Oscar N. Harris | March 24, 2016 | |
| Oscar N. Harris, Director | ||
| /s/ James H. Glen, Jr. | March 24, 2016 | |
| James H. Glen, Jr. Director | ||
| /s/ Gerald W. Hayes, Jr. | March 24, 2016 | |
| Gerald W. Hayes, Jr., Director | ||
| /s/ Alicia S. Hawk | March 24, 2016 | |
| Alicia S. Hawk, Director | ||
| /s/ Ronald V. Jackson | March 24, 2016 | |
| Ronald V. Jackson, Director | ||
| /s/ V. Parker Overton | March 24, 2016 | |
| V. Parker Overton, Director | ||
| /s/ Carlie C. McLamb Jr. | March 24, 2016 | |
| Carlie C. McLamb Jr., Director | ||
| /s/ K. Clark Stallings | March 24, 2016 | |
| K. Clark Stallings, Director |
| - 127 - |
| /s/ Anthony E. Rand | March 24, 2016 | |
| Anthony E. Rand, Director | ||
| /s/ Sharon L. Raynor | March 24, 2016 | |
| Sharon L. Raynor, Director | ||
| /s/ W. Lyndo Tippett | March 24, 2016 | |
| W. Lyndo Tippett, Director |
| - 128 - |
EXHIBIT INDEX
| Exhibit Number | Exhibit | ||
| 2(i) | Agreement and Plan of Merger and Reorganization dated September 30, 2013, by and between New Century Bancorp, Inc., New Century Bank, Select Bancorp, Inc. and Select Bank & Trust Company | * | |
| 3(i) | Articles of Incorporation | * | |
| 3(ii) | Articles of Amendment | * | |
| 3(iii) | Bylaws | * | |
| 4 | Form of Stock Certificate | * | |
| 10(i) | 2000 Incentive Stock Option Plan | * | |
| 10(ii) | 2000 Nonstatutory Stock Option Plan | * | |
| 10(iii) | Employment Agreement with William L. Hedgepeth II | * | |
| 10(iv) | 2004 Incentive Stock Option Plan | * | |
| 10(v) | Directors’ Deferral Plan, as amended and restated | * | |
| 10(vi) | 2010 Omnibus Stock Ownership and Long Term Incentive Plan | * | |
| 10(vii) | Employment Agreement of D. Richard Tobin, Jr. | * | |
| 10(viii) | Employment Agreement of Gary J. Brock, a management contract | * | |
| 10(ix) | Employment Agreement of Lynn H. Johnson, a management contract | * | |
| 10(x) | Employment Agreement of Mark A. Jeffries, a management contract | * | |
| 10(xi) | Small Business Lending Fund – Securities Purchase Agreement dated August 9, 2011 | * | |
| 10(xii) | Post-Merger Side Letter dated July 25, 2014 | * | |
| 21 | Subsidiaries | Filed herewith | |
| 23 | Consent of Dixon Hughes Goodman LLP | Filed herewith | |
| 31(i) | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act | Filed herewith |
| - 129 - |
| 31(ii) | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act | Filed herewith | |
| 32(i) | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act | Filed herewith | |
| 32(ii) | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act | Filed herewith | |
| 101 | The following financial information formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of December 31, 2015 and 2014; (ii) the Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013; (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text | Filed herewith |
| * | Incorporated by reference |
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