8-K
First Bancorp /Nc/ (FBNC)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
Form 8-K
__________________
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
| Date of Report (Date of earliest event reported): | August 5, 2022 |
|---|
First Bancorp
(Exact Name of Registrant as Specified in its Charter)
| North Carolina | 0-15572 | 56-1421916 | ||||
|---|---|---|---|---|---|---|
| (State or Other Jurisdiction | (Commission | (I.R.S. Employer | ||||
| of Incorporation) | File Number) | Identification Number) | 300 SW Broad Street, | |||
| --- | --- | --- | ||||
| Southern Pines, | NC | 28387 | ||||
| (Address of Principal Executive Offices) | (Zip Code) |
(910) 246-2500
____________________
(Registrant’s telephone number, including area code)
Not Applicable
___________________
(Former Name or Former Address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | | --- | --- || ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | | --- | --- || ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | | --- | --- || ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | | --- | --- |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered:
Common Stock, No Par Value FBNC The Nasdaq Global Select Market
Explanatory Note
As previously disclosed in the Current Report on Form 8-K filed by First Bancorp with the Securities and Exchange Commission on October 18, 2021, First Bancorp, the holding company for First Bank, completed its acquisition of Select Bancorp, Inc. (“Select Bancorp”) the holding company for Select Bank & Trust Company (“Select Bank”) on October 15, 2021. As a result, Select Bancorp merged with and into First Bancorp, with First Bancorp as the surviving corporation; and Select Bank merged with and into First Bank, with First Bank as the surviving bank.
First Bancorp’s Registration Statement on Form S-4 included unaudited financial statements of the acquired business, and First Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 included audited financial statements for the business combination as of and for the 12 months ended December 31, 2021. Pursuant to Regulation S-X, no additional financial statements of the acquired business were required to be filed and accordingly there was no prescribed time period for doing so; however, First Bancorp has elected to voluntarily file the following supplementary financial statements relative to the acquired business:
a.Financial Statements of Businesses Acquired: Unaudited Financial Statements of Select Bancorp and the related Notes as of and for the nine months ended September 30, 2021 are included as Exhibit 99.1 herein.
b.Pro Forma Financial Information: Pro forma financial information, including the unaudited pro forma condensed consolidated balance sheet as of September 30, 2021 and the unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2021 and the year ended December 31, 2020, and the related Notes to the unaudited pro forma combined condensed consolidated financial information are included as Exhibit 99.2 herein.
Item 9.01 – Financial Statements and Exhibits
(d) Exhibits
Disclosures About Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” or other statements concerning opinions or judgments of First Bancorp and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of First Bancorp’s customers, First Bancorp’s level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about the factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of First Bancorp’s most recent annual report on Form 10-K. Forward-looking statements speak only as of the date they are made, and First Bancorp undertakes no obligation to update or revise forward-looking statements.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| First Bancorp | |||
|---|---|---|---|
| Date: | August 5, 2022 | By: | /s/ Richard H. Moore |
| Richard H. Moore | |||
| Chief Executive Officer |
3
Document
Exhibit 99.1
Select Bancorp, Inc.
Consolidated Balance Sheets
| ( in thousands) | December 31,<br>2020 | |
|---|---|---|
| ASSETS | ||
| Cash and due from banks | 23,403 | 23,324 |
| Interest earning deposits in other banks | 87,399 | |
| Certificates of deposit | — | |
| Federal funds sold | 5,364 | |
| CASH AND CASH EQUIVALENTS | 116,087 | |
| Investment securities available for sale, at fair value | 194,492 | |
| Loans held for sale | 2,064 | |
| Loans | 1,304,384 | |
| Allowance for loan losses | (14,108) | |
| NET LOANS | 1,290,276 | |
| Accrued interest receivable | 5,110 | |
| Stock in Federal Home Loan Bank ("FHLB"), at cost | 1,147 | |
| Other non-marketable securities | 709 | |
| Foreclosed real estate | 2,172 | |
| Premises and equipments, net | 20,587 | |
| Right of use lease asset | 8,558 | |
| Bank-owned life insurance | 30,432 | |
| Goodwill | 42,907 | |
| Core deposit intangible | 1,513 | |
| Other assets | 13,991 | |
| TOTAL ASSETS | 1,827,071 | 1,730,045 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Deposits: Demand | 475,636 | 395,916 |
| Savings | 51,843 | |
| Money market and NOW | 649,677 | |
| Time | 388,381 | |
| TOTAL DEPOSITS | 1,485,817 | |
| Long-term debt | 12,372 | |
| Lease liability | 8,930 | |
| Accrued interest payable | 246 | |
| Accrued expenses and other liabilities | 7,312 | |
| TOTAL LIABILITIES | 1,514,677 | |
| Shareholders' Equity | ||
| Preferred stock, no par value per share. 5,000,000 shares authorized; no preferred shares were | ||
| Issued and outstanding September 30, 2021 and December 31, 2020 | — | |
| Common stock, 1 par value. 50,000,000 shares authorized; 17,252,000 and 17,507,103 shares | ||
| Issued & outstanding at September 30, 2021 and December 31, 2020, respectively | 17,507 | |
| Additional paid in capital | 135,058 | |
| Retained earnings | 60,838 | |
| Common stock issued to deferred compensation trust, at cost; 272,509 and 274,956 shares | ||
| outstanding at September 30, 2021 and December 31, 2020, respectively | (2,416) | |
| Directors' Deferred Compensation Plan Rabbi Trust | 2,416 | |
| Accumulated other comprehensive (loss) income | 1,965 | |
| TOTAL SHAREHOLDERS' EQUITY | 215,368 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 1,827,071 | 1,730,045 |
All values are in US Dollars.
See accompanying notes to unaudited consolidated financial statements.
Select Bancorp, Inc.
Consolidated Statements of Operations (Unaudited)
| ($ in thousands, except share data-unaudited) | Nine Months Ended<br>September 30, | ||
|---|---|---|---|
| 2021 | 2020 | ||
| INTEREST INCOME | |||
| Loans | $ | 50,743 | 43,079 |
| Federal funds sold and interest-earning deposits in other banks | 139 | 255 | |
| Investments | 2,864 | 1,169 | |
| TOTAL INTEREST INCOME | 53,746 | 44,503 | |
| INTEREST EXPENSE | |||
| Money market, NOW, and savings deposits | 2,116 | 1,887 | |
| Time deposits | 2,457 | 4,922 | |
| Short-term debt | 48 | 373 | |
| Long-term debt | 204 | 896 | |
| TOTAL INTEREST EXPENSE | 4,825 | 8,078 | |
| NET INTEREST INCOME | 48,921 | 36,425 | |
| (Recovery of) provision for loan losses | (1,334) | 5,844 | |
| NET INTEREST INCOME AFTER (RECOVERY OF) PROVISION FOR LOAN LOSSES | 50,255 | 30,581 | |
| NONINTEREST INCOME | |||
| Service charges on deposit accounts | 759 | 801 | |
| Fees from sale of mortgages | 787 | 1,165 | |
| Fees from sale of SBA loans | 416 | — | |
| Other fees and income | 3,286 | 2,613 | |
| TOTAL NON-INTEREST INCOME | 5,248 | 4,579 | |
| NONINTEREST EXPENSES | |||
| Personnel | 18,042 | 17,160 | |
| Occupancy and equipment | 2,966 | 2,925 | |
| Deposit insurance | 866 | 434 | |
| Professional fees | 1,444 | 1,222 | |
| Core deposit intangible amortization | 422 | 553 | |
| Merger/acquisition related expenses | — | 755 | |
| Information systems | 3,152 | 3,053 | |
| Foreclosure-related expenses | 109 | 420 | |
| Other | 4,509 | 3,294 | |
| TOTAL NON-INTEREST EXPENSE | 31,510 | 29,816 | |
| INCOME BEFORE INCOME TAXES | 23,993 | 5,344 | |
| Income tax expense | 5,425 | 1,102 | |
| NET INCOME | $ | 18,568 | 4,242 |
| Earnings per common share: | |||
| Basic | $ | 1.07 | 0.24 |
| Diluted | 1.07 | 0.23 | |
| Weighted average common shares outstanding: | |||
| Basic | 17,281,656 | 18,038,345 | |
| Diluted | 17,329,035 | 18,062,170 |
See accompanying notes to unaudited consolidated financial statements.
Select Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
| ($ in thousands) | Nine Months Ended<br>September 30, | |||
|---|---|---|---|---|
| 2021 | 2020 | |||
| Net income | $ | 18,568 | 4,242 | |
| Other comprehensive (loss) income: | ||||
| Unrealized (loss) gains on investment securities-available for sale | (5,461) | 822 | ||
| Tax effect | 1,256 | (189) | ||
| Total | (4,205) | 633 | ||
| Total comprehensive income | $ | 14,363 | $ | 4,875 |
See accompanying notes to unaudited consolidated financial statements.
Select Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
| ( in thousands, except share data) | Common Stock | Additional paid-in capital | Retained<br>Earnings | Deferred Comp Plan | Common stock issued to Deferred Comp Trust | Accumulated<br>Other<br>Comprehensive<br>Income<br>(Loss) | Total<br>Shareholders’<br>Equity | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Amount | ||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||
| Balances, January 1, 2020 | 18,330,058 | $ | 18,330 | 140,870 | 52,675 | 2,815 | (2,815) | 900 | 212,775 | |
| Net income | 4,242 | 4,242 | ||||||||
| Directors' equity incentive plan, net | (463) | 463 | — | |||||||
| Stock repurchases | (544,506) | (544) | (4,011) | (4,555) | ||||||
| Stock option exercises | 1,000 | 1 | 6 | 7 | ||||||
| Stock-based compensation | 265 | 265 | ||||||||
| Other comprehensive income | 633 | 633 | ||||||||
| Balances, September 30, 2020 | 17,786,552 | $ | 17,787 | 137,130 | 56,917 | 2,352 | (2,352) | 1,533 | 213,367 | |
| Nine Months Ended September 30, 2021 | ||||||||||
| Balances, January 1, 2021 | 17,507,103 | $ | 17,507 | 135,058 | 60,838 | 2,416 | (2,416) | 1,965 | 215,368 | |
| Net income | 18.568 | 18,568 | ||||||||
| Directors' equity incentive plan, net | 33 | (33) | — | |||||||
| Stock repurchases | (286,799) | (287) | (2,907) | (3,194) | ||||||
| Stock option exercised | 31,696 | 32 | 253 | 285 | ||||||
| Stock-based compensation | 300 | 300 | ||||||||
| Other comprehensive loss | (4,205) | (4,205) | ||||||||
| Balances, September 30, 2021 | 17,252,000 | $ | 17,252 | 132,704 | 79,406 | 2,449 | (2,449) | (2,240) | 227,122 |
All values are in US Dollars.
See accompanying notes to unaudited consolidated financial statements.
Select Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
| ($ in thousands) | Nine Months Ended September 30, | ||
|---|---|---|---|
| 2021 | 2020 | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Net income | $ | 18,568 | 4,242 |
| Reconciliation of net income to net cash provided by operating activities: | |||
| (Recovery of) provision for credit losses | (1,334) | 5,844 | |
| Depreciation and amortization of premises and equipment | 1,066 | 1,335 | |
| Amortization and accretion of investment securities | 569 | 436 | |
| Amortization of right of use lease asset | 606 | 941 | |
| Accretion of deferred loan fees and costs | (3,522) | (688) | |
| Amortization of core deposit intangible | 422 | 553 | |
| Accretion of acquisition premium on time deposits | (183) | (206) | |
| Stock-based compensation | 300 | 265 | |
| Accretion on acquired loans | (1,300) | (1,075) | |
| Proceeds from loans held for sale | 42,628 | 43,904 | |
| Originations of loans held for sale | (39,361) | (44,756) | |
| Gain on sale of loans held for sale | (1,203) | (1,165) | |
| Net loss on sale and write downs of foreclosed real estate | 88 | 390 | |
| Increase in cash surrender value of bank owned life insurance | (469) | (482) | |
| Change in assets and liabilities: | — | — | |
| Net change in accrued interest receivable | 373 | 41 | |
| Net change in other assets | 349 | (6,029) | |
| Net change in accrued expenses and other liabilities | 6,148 | 15,889 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 23,745 | 19,439 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||
| Redemption (purchase) of FHLB stock | 285 | (14) | |
| Redemption of non-marketable security | — | 1 | |
| Purchase of investments securities available for sale | (54,537) | (39,794) | |
| Maturities of investment securities available for sale | 3,436 | 10,511 | |
| Proceeds from the sale of available for sale securities | 500 | — | |
| Cash received from branch acquisition | — | 60,234 | |
| Mortgage-backed securities pay-downs | 10,808 | 14,602 | |
| Net change in loans outstanding | 13,550 | (149,341) | |
| Proceed from sale of foreclosed real estate | 1,677 | 180 | |
| Purchases of premises and equipment | (38) | (1,531) | |
| NET CASH USED IN INVESTING ACTIVITIES | (24,319) | (105,152) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | |||
| Net change in deposits | 79,811 | 294,665 | |
| Repayment of lease liabilities | (504) | (825) | |
| Repurchase of common stock | (3,194) | (4,556) | |
| Proceeds from stock option exercised | 285 | 7 | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 76,398 | 289,291 | |
| NET CHANGE IN CASH AND CASH EQUIVALENTS | 75,824 | 203,578 | |
| CASH AND CASH EQUIVALENTS, BEGINNING | 116,087 | 79,077 | |
| CASH AND CASH EQUIVALENTS, ENDING | $ | 191,911 | 282,655 |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||
| Cash paid during the period for interest paid | $ | 4,966 | 8,207 |
| Cash paid during the period for income taxes paid | 2,933 | 3,202 | |
| Non-cash: Unrealized (loss) gain on securities available for sale, net of taxes | (4,205) | 633 | |
| Non-cash: Foreclosed loans transferred to other real estate | 2,023 | 274 | |
| Acquisition: | |||
| Assets acquired (excluding goodwill) | — | 170,914 | |
| Liabilities assumed | — | 186,416 | |
| Goodwill recorded | — | 17,335 |
See accompanying notes to consolidated financial statements.
SELECT BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company.
All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the nine months ended September 30, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2021. This quarterly report should be read in conjunction with the Annual Report.
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021.
As described in more detail in Note J to the consolidated financial statements, on June 1, 2021, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with First Bancorp, the holding company for First Bank, Southern Pines, North Carolina, pursuant to which the Company will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank.
COVID-19. Significant progress has been made to combat the outbreak of the coronavirus disease, or COVID-19, that was declared a global pandemic by the World Health Organization in March of 2020. However, the COVID-19 pandemic has adversely impacted a broad range of industries in which the Company’s customers operate and could still impair their ability to meet their financial obligations to the Company. The Company’s business depends upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. Although it appears that public health and economic conditions are trending in a positive direction as of September 30, 2021, a resurgence of COVID-19 could result in further adverse effects on the Company’s business, financial condition, results of operations, and cash flows. It is not possible to know the full extent of the impact of COVID-19 and the measures enacted to curtail its spread on the Company’s future operations.
NOTE B - EARNINGS PER SHARE
Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At September 30, 2021 and 2020 there were 98,100 and 243,120 anti-dilutive stock options outstanding, respectively.
| For the Nine Months Ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||
| ($ in thousands, except per share amount) | Income (Numerator) | Shares (Denominator) | Per Share Amount | Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||
| Net Income | $ | 18,568 | $ | 4,242 | ||||||
| Weighted Average number of common shares used in computing basic net income per share | 17,281,656 | $ | 1.07 | 18,038,345 | $ | 0.24 | ||||
| Effect of dilutive stock options | 47,379 | 23,825 | ||||||||
| Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share | 17,329,035 | $ | 1.07 | 18,062,170 | $ | 0.23 |
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
The following summarizes recent accounting pronouncements and their expected impact on the Company:
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, including loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to delay implementation of CECL until January 2023 for certain companies, including smaller reporting companies (as defined by the SEC). The Company currently qualifies as a smaller reporting company and is still assessing the impact that this new guidance will have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides for temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The provisions of this ASU are elective and applicable to all entities that have contracts, hedging relationships and other transactions, subject to certain criteria, that reference LIBOR or another reference rate to be discontinued because of reference rate reform. There are practical expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedge accounting relationships affected by reference rate reform in order to facilitate a smoother transition to new reference rates. For contracts meeting certain criteria, a change in the contract's reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements. An entity will also be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform. The guidance will only apply to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This ASU was effective upon issuance and generally can be applied through December 31, 2022. The Company has evaluated this ASU and does not expect it to have an impact on the Company’s consolidated financial position.
NOTE D - FAIR VALUE MEASUREMENTS
Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance
was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.
Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.
Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
● Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
● Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
● Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities ("GSEs"), and municipal bonds. There have been no changes in valuation techniques for the nine months ended September 30, 2021. Valuation techniques are consistent with techniques used in prior periods.
The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):
| Investment securities available for sale September 30, 2021 | Fair Value | Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) | Significant Other<br>Observable Inputs<br>(Level 2) | Significant<br>Unobservable Inputs<br>(Level 3) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. government agencies GSE's | $ | 51,127 | $ | — | 51,127 | — | ||||||||
| Mortgage-backed securities - GSE's | 84,843 | — | 84,843 | — | ||||||||||
| Corporate bonds | 1,750 | — | 1,750 | — | ||||||||||
| Municipal bonds | 90,535 | — | 90,535 | — | ||||||||||
| Total investment available for sale | $ | 228,255 | — | 228,255 | — | Investment securities available for sale December 31, 2020 | Fair Value | Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) | Significant Other<br>Observable Inputs<br>(Level 2) | Significant<br>Unobservable Inputs<br>(Level 3) | ||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||
| U.S. government agencies GSE's | $ | 50,232 | $ | — | 50,232 | — | ||||||||
| Mortgage-backed securities - GSE's | 48,931 | — | 48,931 | — | ||||||||||
| Corporate bonds | 2,350 | — | 2,350 | — | ||||||||||
| Municipal bonds | 92,979 | — | 92,979 | — | ||||||||||
| Total investment available for sale | $ | 194,492 | — | 194,492 | — |
The following is a description of valuation methodologies used for assets recorded at fair value on a non-recurring basis.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2021 and December 31, 2020, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At September 30, 2021 and December 31, 2020, the discounts used are weighted between 3% and 20%. There were no transfers between levels from the prior reporting periods, and there have been no changes in valuation techniques for the nine months ended September 30, 2021.
Foreclosed Real Estate
Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value of the real estate collateral less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling
costs. At September 30, 2021 and December 31, 2020, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the nine months ended September 30, 2021.
Loans held for sale
The Company originates fixed and variable rate residential mortgage loans on a service-release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with our customers. Therefore, these loans present very little market risk. The Company usually delivers to, and receives funding from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets is surrendered and such gains or losses are included in mortgage banking income in the consolidated statements of income.
The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):
| Asset Category - September 30, 2021 | Fair Value | Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) | Significant Other<br>Observable Inputs<br>(Level 2) | Significant<br>Unobservable Inputs<br>(Level 3) | |
|---|---|---|---|---|---|
| Impaired loans | $ | 3,688 | — | — | 3,688 |
| Foreclosed real estate | 2,409 | — | — | 2,409 | |
| Total | $ | 6,097 | — | — | 6,097 |
| Asset Category - December 31, 2020 | Fair Value | Quoted Prices in<br>Active Markets for<br>Identical Assets<br>(Level 1) | Significant Other<br>Observable Inputs<br>(Level 2) | Significant<br>Unobservable Inputs<br>(Level 3) | |
| --- | --- | --- | --- | --- | --- |
| Impaired loans | $ | 6,790 | — | — | 6,790 |
| Foreclosed real estate | 2,172 | — | — | 2,172 | |
| Total | $ | 8,962 | — | — | 8,962 |
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020:
| September 30, 2021 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | Carrying<br>Amount | Estimated<br>Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 23,403 | $ | 23,403 | $ | 23,403 | $ | — | — | |||||||||||
| Certificates of deposit | 250 | 250 | 250 | — | — | |||||||||||||||
| Interest-earning deposits in other banks | 165,863 | 165,863 | 165,863 | — | — | |||||||||||||||
| Federal funds sold | 2,395 | 2,395 | 2,395 | — | — | |||||||||||||||
| Investment securities available for sale | 228,255 | 228,255 | — | 228,255 | — | |||||||||||||||
| Loans held for sale | — | — | — | — | — | |||||||||||||||
| Loans, net | 1,280,880 | 1,261,154 | — | — | 1,261,154 | |||||||||||||||
| Accrued interest receivable | 4,737 | 4,737 | — | 4,737 | — | |||||||||||||||
| Stock in the FHLB | 862 | 862 | — | — | 862 | |||||||||||||||
| Other non-marketable securities | 655 | 655 | — | — | 655 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | 1,565,445 | $ | 1,566,430 | $ | — | $ | — | 1,566,430 | ||||||||||||
| Long-term debt | 12,372 | 10,997 | — | 10,997 | — | |||||||||||||||
| Accrued interest payable | 105 | 105 | — | 105 | — | December 31, 2020 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| ($ in thousands) | Carrying<br>Amount | Estimated<br>Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and due from banks | $ | 23,324 | $ | 23,324 | $ | 23,324 | $ | — | — | |||||||||||
| Certificates of deposit | — | — | — | — | — | |||||||||||||||
| Interest-earning deposits in other banks | 87,399 | 87,399 | 87,399 | — | — | |||||||||||||||
| Federal funds sold | 5,364 | 5,364 | 5,364 | — | — | |||||||||||||||
| Investment securities available for sale | 194,492 | 194,492 | — | 194,492 | — | |||||||||||||||
| Loans held for sale | 2,064 | 2,064 | — | 2,064 | — | |||||||||||||||
| Loans, net | 1,290,276 | 1,294,552 | — | — | 1,294,552 | |||||||||||||||
| Accrued interest receivable | 5,110 | 5,110 | — | 5,110 | — | |||||||||||||||
| Stock in the FHLB | 1,147 | 1,147 | — | — | 1,147 | |||||||||||||||
| Other non-marketable securities | 709 | 709 | — | — | 709 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | 1,485,817 | $ | 1,489,220 | $ | — | $ | — | 1,489,220 | ||||||||||||
| Long-term debt | 12,372 | 9,965 | — | 9,965 | — | |||||||||||||||
| Accrued interest payable | 246 | 246 | — | 246 | — |
NOTE E - INVESTMENT SECURITIES
The amortized cost and fair value of available for sale investments, with gross unrealized gains and losses as of September 30, 2021, and December 31, 2020 as follow:
| ( in thousands) | September 30, 2021 | December 31, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unrealized | Fair<br>Value | Amortized<br>Cost | Unrealized | Fair<br>Value | |||||||||||||
| Gains | (Losses) | Gains | (Losses) | ||||||||||||||
| Securities available for sale: | |||||||||||||||||
| U.S. government agencies - GSE's | $ | 52,508 | 228 | (1,609) | 51,127 | 50,304 | 270 | (342) | 50,232 | ||||||||
| Mortgage-backed securities - GSE's | 85,831 | 720 | (1,708) | 84,843 | 47,658 | 1,320 | (47) | 48,931 | |||||||||
| Corporate bonds | 1,750 | — | — | 1,750 | 2,343 | 7 | — | 2,350 | |||||||||
| Municipal bonds | 91,075 | 541 | (1,081) | 90,535 | 91,635 | 1,417 | (73) | 92,979 | |||||||||
| Total | $ | 231,164 | 1,489 | (4,398) | 228,255 | 191,940 | 3,014 | (462) | 194,492 |
All values are in US Dollars.
As of September 30, 2021 and December 31, 2020, accumulated other comprehensive income included net unrealized losses totaling $2.9 million and net unrealized gains totaling $2.6 million, respectively. As of September 30, 2021 and December 30, 2020, deferred tax assets resulting from these net unrealized losses totaled $669,000 and $875,000, respectively.
Securities with a carrying value of $73.0 million and $68.4 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.
None of the unrealized losses relate to the credit quality of the securities or the issuer’s ability to honor redemption obligations. The Company has the intent to hold these securities to recovery, and it is not more than likely than not that the Company will be required to sell these securities before recovery. No other than temporary impairments were identified for these investments having unrealized losses for the periods ended September 30, 2021 and December 31, 2020. The Company has not incurred any losses related to securities sales in the first nine months of 2021 or during the year ended December 31, 2020.
The following tables show the gross unrealized losses and fair value of the Company’s investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020.
| September 30, 2021 | |||||||
|---|---|---|---|---|---|---|---|
| Securities in an Unrealized<br>Loss Position for<br>Less than 12 Months | Securities in an Unrealized<br>Loss Position for<br>More than 12 Months | Total | |||||
| ($ in thousands) | Fair Value | Unrealized<br>Losses | Fair Value | Unrealized<br>Losses | Fair Value | Unrealized<br>Losses | |
| U.S. government agencies - GSE's | $ | 29,787 | (1,013) | 15,104 | (596) | 44,891 | (1,609) |
| Mortgage-backed securities - GSE's | 60,958 | (1,528) | 5,293 | (180) | 66,251 | (1,708) | |
| Municipal bonds | 53,606 | (972) | 3,729 | (109) | 57,335 | (1,081) | |
| Total temporarily impaired securities | $ | 144,351 | (3,513) | 24,126 | (885) | 168,477 | (4,398) |
At September 30, 2021, the Company had 12 securities with an unrealized loss for more than twelve months totaling $885,000. Seventy-five securities had unrealized losses for less than twelve months totaling $3.5 million at September 30, 2021, which consisted of forty municipal bonds, nine U.S. government agencies - GSE's and twenty-six Mortgage-backed - GSE's bonds. All unrealized losses are attributable to the general trend of interest rates.
| December 31, 2020 | |||||||
|---|---|---|---|---|---|---|---|
| Securities in an Unrealized<br>Loss Position for<br>Less than 12 Months | Securities in an Unrealized<br>Loss Position for<br>More than 12 Months | Total | |||||
| ($ in thousands) | Fair Value | Unrealized<br>Losses | Fair Value | Unrealized<br>Losses | Fair Value | Unrealized<br>Losses | |
| U.S. government agencies - GSE's | $ | 42,159 | (340) | 420 | (2) | 42,579 | (342) |
| Mortgage-backed securities - GSE's | 19,297 | (46) | 1,999 | (1) | 21,296 | (47) | |
| Municipal bonds | 10,105 | (73) | — | — | 10,105 | (73) | |
| Total temporarily impaired securities | $ | 71,561 | (459) | 2,419 | (3) | 73,980 | (462) |
At December 31, 2020, the Company had one Mortgage-backed security - GSE's and two U.S. government agencies - GSE's with an unrealized loss for more than twelve months totaling $3,000. The Company had thirty securities with an unrealized losses for less than twelve months totaling $459,000 at December 31, 2020. All unrealized losses are attributable to the general trend of interest rates.
NOTE F - LOANS
Following is a summary of the composition of the Company’s loan portfolio at September 30, 2021 and December 31, 2020:
| ($ in thousands) | September 30, 2021 | December 31, 2020 | |||||
|---|---|---|---|---|---|---|---|
| Amount | Percentage | Amount | Percentage | ||||
| Real estate loans: | |||||||
| 1 to 4 family residential | $ | 165,774 | 12.82 | % | 194,031 | 14.88 | % |
| Commercial real estate | 683,276 | 52.82 | % | 608,482 | 46.65 | % | |
| Multi-family residential | 83,892 | 6.49 | % | 82,508 | 6.32 | % | |
| Construction | 217,727 | 16.83 | % | 236,735 | 18.15 | % | |
| Home equity line of credit ("HELOC") | 57,858 | 4.47 | % | 53,806 | 4.12 | % | |
| Total real estate loans | 1,208,527 | 93.43 | % | 1,175,562 | 90.12 | % | |
| Other loans: | |||||||
| Commercial and industrial | 85,218 | 6.59 | % | 125,700 | 9.64 | % | |
| Loans to individuals | 3,776 | 0.29 | % | 6,629 | 0.51 | % | |
| Overdrafts | 91 | 0.01 | % | 493 | 0.04 | % | |
| Total other loans | 89,085 | 6.89 | % | 132,822 | 10.19 | % | |
| Gross loans | 1,297,612 | 1,308,384 | |||||
| Less deferred loan originations fees, net | (4,178) | (0.32) | % | (4,000) | (0.31) | % | |
| Total loans | 1,293,434 | 100.00 | % | 1,304,384 | 100.00 | % | |
| Allowance for loan losses | (12,554) | (14,108) | |||||
| Total loans, net | $ | 1,280,880 | 1,290,276 |
For purchased credit-impaired ("PCI") loans acquired from Legacy Select, Premara and First Citizens, the contractually required payments including principal and interest, cash flows expected to be collected as of September 30, 2021 and December 31, 2020 were:
| ($ in thousands) | September 30, 2021 | December 31, 2020 | |
|---|---|---|---|
| Contractually required payments | $ | 30,303 | 37,241 |
| Nonaccretable difference | 3,273 | 3,586 | |
| Cash flows expected to be collected | 27,030 | 33,655 | |
| Accretable yield | 4,490 | 4,622 | |
| Carry value | $ | 22,540 | 29,033 |
Loans are primarily secured by real estate located in North Carolina, southeastern Virginia and northwestern South Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.
At September 30, 2021, the Company had pre-approved but unused lines of credit for customers totaling $368.0 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.
During 2020 and 2021 some of the Paycheck Protection Program (“PPP”) loans were forgiven and as of September 30, 2021 and December 31, 2020 the Bank had $20.1 million and $55.5 million outstanding, respectively. The PPP loan program is sponsored by the U.S. Small Business Administration (the “SBA”) primarily to facilitate the continuation of paychecks to employees of businesses impacted by the COVID-19 pandemic. These loans are guaranteed by the SBA and can be forgiven and paid off by the SBA if all conditions of the program are met. Loans that do not meet the conditions of the PPP loan program could result in the Bank incurring a charge-off. The extent of this potential loss to the Bank is not known since the conditions of the program have changed and are subject to future changes.
The Company pledged $77.7 million of loans to the Federal Home Loan Bank to secure borrowings at September 30, 2021.
The following tables present an age analysis of past due loans, segregated by class of loans as of September 30, 2021 and December 31, 2020, respectively:
| September 30, 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Accruing | Nonaccrual<br>Loans | Total Past Due | Total Current | Loans | |
| Commercial and industrial | $ | — | 64 | — | 4,151 | 4,215 | 81,003 | 85,218 |
| Construction | 2 | 466 | — | 235 | 703 | 217,024 | 217,727 | |
| Multi-family residential | — | — | — | — | — | 83,892 | 83,892 | |
| Commercial real estate | 590 | — | 56 | 17 | 663 | 682,613 | 683,276 | |
| Loans to individuals & overdrafts | 11 | — | — | 2 | 13 | 3,854 | 3,867 | |
| 1 to 4 family residential | 209 | 448 | — | 985 | 1,642 | 164,132 | 165,774 | |
| HELOC | 37 | 336 | — | — | 373 | 57,485 | 57,858 | |
| Deferred loan (fees) costs, net | — | — | — | — | — | — | (4,178) | |
| $ | 849 | 1,314 | 56 | 5,390 | 7,609 | 1,290,003 | 1,293,434 | |
| December 31, 2020 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ($ in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Accruing | Nonaccrual<br>Loans | Total Past Due | Total Current | Loans | |
| Commercial and industrial | $ | 11 | 1,003 | 2 | 3,601 | 4,617 | 121,083 | 125,700 |
| Construction | 8 | — | — | 154 | 162 | 236,573 | 236,735 | |
| Multi-family residential | — | 1,533 | — | — | 1,533 | 80,975 | 82,508 | |
| Commercial real estate | 1,880 | — | 9 | 2,008 | 3,897 | 604,585 | 608,482 | |
| Loans to individuals & overdrafts | 10 | — | — | 145 | 155 | 6,967 | 7,122 | |
| 1 to 4 family residential | 700 | — | 760 | 655 | 2,115 | 191,916 | 194,031 | |
| HELOC | 67 | — | 31 | 227 | 325 | 53,481 | 53,806 | |
| Deferred loan (fees) costs, net | — | — | — | — | — | — | (4,000) | |
| $ | 2,676 | 2,536 | 802 | 6,790 | 12,804 | 1,295,580 | 1,304,384 |
Impaired Loans
The following tables present information on loans that were considered to be impaired as of September 30, 2021, December 31, 2020 and September 30, 2020:
| As of September 30, 2021 | Nine Months Ended September 30, 2021 | |||||
|---|---|---|---|---|---|---|
| ($ in thousands) | Recorded<br>Investment | Contractual Unpaid<br>Principal<br>Balance | Related<br>Allowance for Loan Losses | Average<br>Recorded<br>Investment | Interest Income Recognized on Impaired Loans | |
| With no related allowance recorded: | ||||||
| Commercial and industrial | $ | 3,488 | 3,488 | — | 3,748 | 135 |
| Construction | 235 | 235 | — | 251 | 6 | |
| Commercial real estate | 2,575 | 2,575 | — | 2,642 | 162 | |
| HELOC | 413 | 413 | — | 398 | 22 | |
| 1 to 4 family residential | 1,246 | 1,246 | — | 1,183 | 31 | |
| Subtotal: | 7,957 | 7,957 | — | 8,222 | 356 | |
| With an allowance recorded: | ||||||
| Commercial and industrial | 1,960 | 2,160 | 1,192 | 1,728 | 11 | |
| Commercial real estate | 1,660 | 1,660 | 342 | 1,260 | 42 | |
| Loans to individuals & overdrafts | 2 | 2 | 2 | 1 | — | |
| HELOC | 66 | 66 | 3 | 65 | 3 | |
| Subtotal: | 3,688 | 3,888 | 1,539 | 3,054 | 56 | |
| Totals: | ||||||
| Commercial | 9,918 | 10,118 | 1,534 | 9,629 | 356 | |
| Consumer | 2 | 2 | 2 | 1 | — | |
| Residential | 1,725 | 1,725 | 3 | 1,646 | 56 | |
| Grand Total: | $ | 11,645 | 11,845 | 1,539 | 11,276 | 412 |
Impaired loans at September 30, 2021 were approximately $8.9 million and were composed of $5.4 million in non-accrual loans and $6.3 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $3.7 million in impaired loans had specific allowances provided for them while the remaining $8.0 million had no specific allowances recorded at September 30, 2021. Of the $8.0 million with no allowance recorded, no loans have had partial charge-offs recorded.
| As of December 31, 2020 | Nine Months Ended September 30, 2020 | |||||
|---|---|---|---|---|---|---|
| ($ in thousands) | Recorded<br>Investment | Contractual Unpaid<br>Principal<br>Balance | Related<br>Allowance for Loan Losses | Average<br>Recorded<br>Investment | Interest Income Recognized on Impaired Loans | |
| With no related allowance recorded: | ||||||
| Commercial and industrial | $ | 2,231 | 2,525 | — | 4,475 | 152 |
| Construction | 252 | 440 | — | 291 | 17 | |
| Commercial real estate | 5,090 | 5,426 | — | 5,661 | 127 | |
| Loans to individuals & overdrafts | 250 | 287 | — | 273 | 14 | |
| Multi-family residential | — | — | — | 99 | — | |
| HELOC | 383 | 478 | — | 575 | 22 | |
| 1 to 4 family residential | 206 | 259 | — | 292 | — | |
| Subtotal: | 8,412 | 9,415 | — | 11,666 | 332 | |
| With an allowance recorded: | ||||||
| Commercial and industrial | 1,641 | 1,918 | 419 | 576 | 18 | |
| Commercial real estate | 415 | 415 | 323 | 208 | 46 | |
| HELOC | 82 | 83 | 7 | 264 | 6 | |
| 1 to 4 family residential | 14 | 16 | 9 | 64 | 6 | |
| Subtotal: | 2,152 | 2,432 | 758 | 1,112 | 76 | |
| Totals: | ||||||
| Commercial | 9,629 | 10,724 | 742 | 11,310 | 360 | |
| Consumer | 250 | 287 | — | 273 | 14 | |
| Residential | 685 | 836 | 16 | 1,195 | 34 | |
| Grand Total: | $ | 10,564 | 11,847 | 758 | 12,778 | 408 |
Impaired loans at December 31, 2020 were approximately $10.6 million and included $6.8 million in non-accrual loans and $3.8 million in loans still in accruing status. Recorded investment represents the current principal balance of the loan. Approximately $2.2 million of the $10.6 million in impaired loans at December 31, 2020 had specific allowances aggregating $0.8 million while the remaining $8.4 million had no specific allowances recorded. Of the $8.4 million with no allowance recorded, partial charge-offs through December 31, 2020 amounted to $81,000.
Loans are placed on non-accrual status when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.
Troubled Debt Restructurings
The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the nine months ended September 30, 2021 and 2020:
| ($ in thousands) | Nine Months Ended September 30, 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Number of<br>Contracts | Pre-<br>Modification<br>Outstanding Recorded Investments | Post-<br>Modification<br>Outstanding Recorded Investments | ||||||||
| Extended payment terms: | ||||||||||
| Commercial real estate | 1 | $ | 1,046 | 1,039 | ||||||
| Commercial & industrial | 2 | 383 | 279 | |||||||
| Total | 3 | $ | 1,429 | 1,318 | ($ in thousands) | Nine Months Ended September 30, 2020 | ||||
| --- | --- | --- | --- | --- | ||||||
| Number of<br>Contracts | Pre-<br>Modification<br>Outstanding Recorded Investments | Post-<br>Modification<br>Outstanding Recorded Investments | ||||||||
| Extended payment terms: | ||||||||||
| 1 to 4 family residential | 6 | $ | 797 | 537 | ||||||
| Construction | 1 | 157 | 13 | |||||||
| HELOC | 2 | 240 | 232 | |||||||
| Commercial & industrial | 4 | 1,091 | 1,083 | |||||||
| Loans to individuals | 1 | 14 | 9 | |||||||
| Total | 14 | $ | 2,299 | 1,874 |
The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default during that period together with concessions made by loan class during the twelve month periods ended September 30, 2021 and 2020:
| ($ in thousands) | Twelve Months Ended September 30, 2021 | Twelve Months Ended September 30, 2020 | ||||
|---|---|---|---|---|---|---|
| Number of<br>Contracts | Recorded<br>Investment | Number of<br>Contracts | Recorded<br>Investment | |||
| Extended payment terms: | ||||||
| Commercial and industrial | 2 | $ | 279 | 4 | $ | 2,203 |
| Commercial real estate | — | — | — | — | ||
| Construction | — | — | 2 | 208 | ||
| 1 to 4 family residential | 1 | 374 | 1 | 10 | ||
| Total | 3 | $ | 653 | 7 | $ | 2,421 |
At September 30, 2021, the Bank had 48 loans with an aggregate balance of $11.8 million that were considered to be troubled debt restructurings. Of those TDRs, 33 loans with a balance totaling $7.6 million were still accruing as of September 30, 2021. The remaining TDRs with balances totaling $4.2 million as of September 30, 2021 were in non-accrual status.
The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of September 30, 2021 and December 31, 2020, respectively, as defined in the Company's Annual Report for Form 10-K, Note E-Loans, filed with the SEC on March 11, 2021:
| September 30, 2021 | ||||
|---|---|---|---|---|
| ( in thousands) | ||||
| Commercial Credit Exposure By Internally Assigned Grade | Construction | Commercial real estate | Multi-family residential | |
| Superior | 20,709 | — | 338 | — |
| Very good | 333 | 4,045 | — | |
| Good | 2,168 | 108,847 | 4,417 | |
| Acceptable | 10,386 | 313,955 | 46,617 | |
| Acceptable with care | 204,466 | 249,526 | 32,858 | |
| Special mention | 139 | 5,189 | — | |
| Substandard | 235 | 1,376 | — | |
| Doubtful | — | — | — | |
| Loss | — | — | — | |
| 85,218 | 217,727 | 683,276 | 83,892 |
All values are in US Dollars.
| Consumer Credit Exposure By Internally Assigned Grade | 1 to 4 family residential | HELOC | ||
|---|---|---|---|---|
| Pass | $ | 163,976 | 57,106 | |
| Special mention | 664 | 233 | ||
| Substandard | 1,134 | 519 | ||
| $ | 165,774 | 57,858 | ||
| Consumer Credit Exposure Based On Payment Activity | Loans to individuals & overdrafts | |||
| --- | --- | --- | ||
| Pass | $ | 3,863 | ||
| Special mention | 4 | |||
| $ | 3,867 | |||
| December 31, 2020 | ||||
| --- | --- | --- | --- | --- |
| ( in thousands) | ||||
| Commercial Credit Exposure By Internally Assigned Grade | Construction | Commercial real estate | Multi-family residential | |
| Superior | 56,510 | — | 123 | — |
| Very good | 70 | 8,129 | — | |
| Good | 1,770 | 80,401 | 2,086 | |
| Acceptable | 18,084 | 308,200 | 46,820 | |
| Acceptable with care | 216,418 | 203,008 | 32,068 | |
| Special mention | 239 | 4,344 | 1,534 | |
| Substandard | 154 | 4,277 | — | |
| Doubtful | — | — | — | |
| Loss | — | — | — | |
| 125,700 | 236,735 | 608,482 | 82,508 |
All values are in US Dollars.
| Consumer Credit Exposure By Internally Assigned Grade | 1 to 4 family residential | HELOC | |||||
|---|---|---|---|---|---|---|---|
| Pass | $ | 190,975 | 52,756 | ||||
| Special mention | 633 | 226 | |||||
| Substandard | 2,423 | 824 | |||||
| $ | 194,031 | 53,806 | Consumer Credit Exposure Based On Payment Activity | Loans to individuals & overdrafts | |||
| --- | --- | --- | |||||
| Pass | $ | 6,845 | |||||
| Special mention | 277 | ||||||
| $ | 7,122 |
Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired company.
The following table presents changes in the accretable yield for PCI loans for the nine months ended September 30, 2021 and 2020:
| ($ in thousands) | For the Nine Months Ended September 30, 2021 | For the Nine Months Ended September 30, 2020 | |
|---|---|---|---|
| Accretable yield, beginning of period | $ | 4,622 | 3,191 |
| Additions | — | 2,949 | |
| Accretion | (1,349) | (1,209) | |
| Reclassification from nonaccretable difference | 553 | 67 | |
| Other changes, net | 664 | (107) | |
| Accretable yield, end of period | $ | 4,490 | 4,891 |
The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the nine months ended September 30, 2021 and September 30, 2020, respectively:
| Nine Months Ended September 30, 2021 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| ($ in thousands) | Commercial and industrial | Construction | Commercial real estate | 1 to 4 family residential | HELOC | Loans to individuals & overdrafts | Multi-family residential | Total | |
| Allowance for loan losses | |||||||||
| Loans - excluding PCI | |||||||||
| Balance, beginning of period 1/1/21 | $ | 3,302 | 2,334 | 5,472 | 1,365 | 371 | 109 | 820 | 13,773 |
| Provision for (recovery of) loan losses | (139) | (623) | (92) | (470) | (6) | (34) | (191) | (1,555) | |
| Loans charged-off | (198) | — | (332) | (8) | — | (52) | — | (590) | |
| Recoveries | 213 | 69 | 37 | 20 | 5 | 26 | — | 370 | |
| Balance, end of period 9/30/21 | $ | 3,178 | 1,780 | 5,085 | 907 | 370 | 49 | 629 | 11,998 |
| PCI Loans | |||||||||
| Balance, beginning of period 1/1/21 | $ | 203 | 31 | 4 | 85 | 1 | — | 11 | 335 |
| Provision for (recovery of) loan losses | 308 | (31) | 41 | (85) | (1) | — | (11) | 221 | |
| Loans charged-off | — | — | — | — | — | — | — | — | |
| Recoveries | — | — | — | — | — | — | — | — | |
| Balance, end of period 9/30/21 | $ | 511 | — | 45 | — | — | — | — | 556 |
| Total Loans | |||||||||
| Balance, beginning of period 1/1/21 | $ | 3,505 | 2,365 | 5,476 | 1,450 | 372 | 109 | 831 | 14,108 |
| Provision for (recovery of) loan losses | 169 | (654) | (51) | (555) | (7) | (34) | (202) | (1,334) | |
| Loans charged-off | (198) | — | (332) | (8) | — | (52) | — | (590) | |
| Recoveries | 213 | 69 | 37 | 20 | 5 | 26 | — | 370 | |
| Balance, end of period 9/30/21 | $ | 3,689 | 1,780 | 5,130 | 907 | 370 | 49 | 629 | 12,554 |
| Nine Months Ended September 30, 2020 | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ($ in thousands) | Commercial and industrial | Construction | Commercial real estate | 1 to 4 family residential | HELOC | Loans to individuals & overdrafts | Multi-family residential | Total | |
| Allowance for loan losses | |||||||||
| Loans - excluding PCI | |||||||||
| Balance, beginning of period 1/1/20 | $ | 1,127 | 1,731 | 2,837 | 1,437 | 329 | 175 | 419 | 8,055 |
| Provision for (recovery of) loan losses | 3,591 | 765 | 1,670 | (352) | (31) | (55) | 286 | 5,874 | |
| Loans charged-off | (628) | — | (70) | — | — | (42) | — | (740) | |
| Recoveries | 43 | — | 3 | 23 | 42 | 18 | 4 | 133 | |
| Balance, end of period 9/30/21 | $ | 4,133 | 2,496 | 4,440 | 1,108 | 340 | 96 | 709 | 13,322 |
| PCI Loans | |||||||||
| Balance, beginning of period 1/1/20 | $ | 178 | 6 | 14 | 56 | — | — | 15 | 269 |
| Provision for (recovery of) loan losses | (178) | (6) | (14) | 183 | — | — | (15) | (30) | |
| Loans charged-off | — | — | — | — | — | — | — | — | |
| Recoveries | — | — | — | — | — | — | — | — | |
| Balance, end of period 9/30/21 | $ | — | — | — | 239 | — | — | — | 239 |
| Total Loans | |||||||||
| Balance, beginning of period 1/1/20 | $ | 1,305 | 1,737 | 2,851 | 1,493 | 329 | 175 | 434 | 8,324 |
| Provision for (recovery of) loan losses | 3,413 | 759 | 1,656 | (169) | (31) | (55) | 271 | 5,844 | |
| Loans charged-off | (628) | — | (70) | — | — | (42) | — | (740) | |
| Recoveries | 43 | — | 3 | 23 | 42 | 18 | 4 | 133 | |
| Balance, end of period 9/30/21 | $ | 4,133 | 2,496 | 4,440 | 1,347 | 340 | 96 | 709 | 13,561 |
NOTE G - OTHER REAL ESTATE OWNED
The following table explains changes in other real estate owned ("OREO") during the nine months ended September 30, 2021 and 2020:
| ($ in thousands) | Nine Months ended September 30, 2021 | Nine Months ended September 30, 2020 | |
|---|---|---|---|
| Beginning balance at January 1 | $ | 2,172 | 3,533 |
| Sales proceeds | (1,677) | (180) | |
| Write-downs and loss on sales, net | (88) | (390) | |
| Transfers | 2,002 | 274 | |
| Ending balance | $ | 2,409 | 3,237 |
At September 30, 2021 and 2020, the Company had $2.4 million and $3.2 million, respectively, of foreclosed real estate property in OREO. The Company had no loans in the process of foreclosure at September 30, 2021. At September 30, 2020, the Company had two loans with recorded investment in the amount of $428,000 in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure.
NOTE H - LEASES
The Company has operating leases for branches and certain equipment. The Company’s leases have remaining lease terms of 1 year to 15 years which may include options to extend the leases for up to 5 years per option period. The Company has some leases that are month to month or expire within 1 year that are not included below.
At September 30, 2021, the Company did not have any leases that had not yet commenced for which we had created a right-of-use asset and a lease liability. For the operating leases the Company has elected the practical expedient of not separating lease components from non-lease components and instead to account for each separate lease component and the non-lease components associated with that lease as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the lease agreements include periodic rate adjustments for inflation.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in determining the value of the ROU and lease liability.
The components of lease expense were as follows:
| ($ in thousands) | As of and for the Nine Months Ended September 30, 2021 | As of and for the Nine Months Ended September 30, 2020 | |
|---|---|---|---|
| Operating lease cost | $ | 951 | 941 |
| Supplemental cash flow information related to lease was as follows: | |||
| Operating cash flows from operating leases | 951 | 941 | |
| Right-of-use assets obtained in exchange for lease obligations: | |||
| Operating leases | 7,952 | 8,756 |
The following table presents the remaining weighted average lease terms and discount rates as of September 30, 2021:
| September 20, 2021 | ||
|---|---|---|
| Weighted average remaining lease term operating leases | 11.2 years | |
| Weighted average discount rate operating leases | 6.0 | % |
Maturities of lease liabilities were as follows:
| ( in thousands) | |
|---|---|
| October 1, 2021 to December 31, 2021 | 192 |
| 2022 | |
| 2023 | |
| 2024 | |
| 2025 | |
| Thereafter | |
| Lease payments | |
| Amount representing interest | |
| Present value of Net Future Minimum Lease Payments | 8,426 |
All values are in US Dollars.
NOTE I - BUSINESS COMBINATIONS
On June 1, 2021, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with First Bancorp, pursuant to which the Company will merge with and into First Bancorp and the Bank will merge with and into First Bank. As of September 1, 2021, the aggregate merger consideration had an estimated total value of approximately $325.8 million, or $18.80 per share.
Subject to the terms and conditions of the Merger Agreement, the Company’s shareholders will have the right to receive 0.408 of a share of First Bancorp common stock for each share of the Company’s common stock. Additionally, at closing each outstanding and unexercised option to acquire shares of the Company’s common stock, whether or not previously vested, will be cancelled in exchange for a cash payment of $18.00 minus the exercise price for each share of the Company’s common stock subject to such stock option.
The Merger Agreement has been unanimously approved by the boards of directors of each of the Company and First Bancorp and by Company’s shareholders and First Bancorp’s shareholders. The requisite regulatory approvals have been obtained. See Note J, Subsequent Events, for more information.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety be reference to the Merger Agreement.
NOTE J - SUBSEQUENT EVENTS
Effective October 15, 2021, First Bancorp, the holding company for First Bank, headquartered in Southern Pines, North Carolina, completed its acquisition by merger of the Company (the “Merger”). The Company merged with and into First Bancorp, with First Bancorp as the surviving entity. The Merger was completed pursuant to the Merger Agreement.
23
Document
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed combined financial statements present the pro forma consolidated financial position and results of operations of First Bancorp following the completion of the merger with Select Bancorp, Inc. (“Select”) the holding company for Select Bank & Trust Company. The unaudited pro forma condensed combined financial statements are based upon the historical financial statements of First Bancorp and Select, as applicable, after giving effect to the merger and adjustments described in the footnotes following the proforma financial statements, and are intended to reflect the impact of the proposed merger on First Bancorp.
The accompanying unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and should be read in conjunction with the separate historical audited consolidated financial statements of First Bancorp and Select. The unaudited pro forma condensed combined financial statements do not reflect the realization of potential cost savings, revenue synergies or any potential restructuring costs. Certain cost savings and revenue synergies may result from the merger. However, there can be no assurance that these cost savings or revenue synergies will be achieved. Cost savings, if achieved, could result from, among other things, the reduction of operating expenses, changes in corporate infrastructure and governance, the elimination of duplicative operating systems, and the combination of regulatory and financial reporting requirements. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the merger been completed at the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of the combined company after completion of the merger.
The unaudited pro forma condensed combined balance sheet relating to the merger reflect the merger as if it had been consummated on September 30, 2021 and includes transaction accounting adjustments for valuations of certain tangible and intangible assets by First Bancorp management pursuant to certain purchase accounting guidance. The unaudited pro forma condensed combined statements of operations reflect the merger as if it had been consummated on January 1, 2020 and combine First Bancorp’s historical results for the nine months ended September 30, 2021 and the year ended December 31, 2020 with Select’s historical results for the same periods. The merger will be accounted for using the acquisition method of accounting, in accordance with the provisions of FASB ASC Topic 805-10, Business Combinations (“ASC 805”).
Transaction Accounting Adjustments
Transaction accounting adjustments are necessary to reflect the estimated purchase price of Select, including issuance of newly issued shares of our common stock pursuant to the merger, amounts related to Select’s net tangible and intangible assets at an amount equal to the preliminary estimate of their fair values, along with the amortization expense related to the estimated identifiable intangible assets and stock-based compensation, changes in depreciation and amortization expense resulting from the estimated fair value adjustments to net tangible assets and to reflect the income tax effect related to the transaction accounting adjustments. Transaction accounting adjustments are included only to the extent they are (i) directly attributable to the acquisition, (ii) factually supportable, (iii) with respect to the unaudited pro forma combined condensed consolidated statement of income, expected to have a continuing impact on the combined results.
The transaction adjustments reflecting the completion of the merger is based upon the acquisition method of accounting in accordance with ASC 805 and upon the assumptions set forth in the notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the preliminary allocation of the estimated purchase price to identifiable net assets acquired. The estimated purchase price was calculated based upon $45.88 per share, the closing trading price of First Bancorp’s common stock on October 15, 2021. The final allocation of the purchase price will be determined after the completion of the merger. The purchase price allocation adjustments and related amortization reflected in the following unaudited pro forma combined financial statements are based on management’s best estimates, using the information available at the date of acquisition, including the use of third-party valuation specialists. The purchase price allocation adjustments and related amortization reflected in the following unaudited pro forma combined financial statements are preliminary and have been made solely for the purpose of preparing these statements. See Note II for details of the transaction consideration calculation and the purchase accounting allocation.
The impact of applying Current Expected Credit Loss (“CECL”) methodology to Select has been included in the Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2021. In addition, the impact of the expected nonrecurring direct professional service costs associated with the merger is included. See Note 10 below for additional discussion of merger expenses expected to be incurred in connection with the merger. The unaudited pro forma condensed combined financial statements do not reflect indirect costs of integration activities, or benefits that may result from synergies that may be derived from any integration activities.
The unaudited pro forma condensed combined financial information is presented for illustrative purposes only. You should read this information in conjunction with the accompanying notes to the unaudited pro forma combined financial statements which follow; the separate historical audited consolidated financial statements of First Bancorp as of December 31, 2020 and 2019, and for each of the three years ended December 31, 2020; and the separate historical audited consolidated financial statements of Select as of December 31, 2020 and 2019, and for each of the three years ended December 31, 2020.
| FIRST BANCORP | |||||
|---|---|---|---|---|---|
| Unaudited Pro Forma Condensed Combined Balance Sheet | |||||
| As of September 30, 2021 | |||||
| ($ in thousands) | First Bancorp | Select | Transaction Accounting Adjustment | Notes | Pro Forma Combined |
| ASSETS | |||||
| Cash & due from banks, noninterest-bearing | $80,090 | 23,403 | — | 103,493 | |
| Due from banks, interest-bearing | 314,103 | 168,508 | (1,430) | 1 | 481,181 |
| Total cash and cash equivalents | 394,193 | 191,911 | (1,430) | 584,674 | |
| Securities available for sale | 2,305,075 | 228,255 | — | 2,533,330 | |
| Securities held to maturity | 367,893 | — | — | 367,893 | |
| Loans and leases held for sale | 18,264 | — | — | 18,264 | |
| Loans | 4,869,841 | 1,293,434 | (9,310) | 2 | 6,153,965 |
| Allowance for credit losses on loans | (63,628) | (12,554) | (6,452) | 3 | (82,634) |
| Net loans | 4,806,213 | 1,280,880 | (15,762) | 6,071,331 | |
| Premises and equipment | 124,391 | 19,559 | 1,971 | 4 | 145,921 |
| Operating right-of-use assets | 16,900 | 7,952 | — | 24,852 | |
| Foreclosed properties | 1,819 | 2,409 | — | 4,228 | |
| Goodwill | 231,906 | 42,907 | 85,311 | 5 | 360,124 |
| Other intangible assets | 10,173 | 1,091 | 8,079 | 6 | 19,343 |
| Bank-owned life insurance | 133,919 | 30,901 | — | 164,820 | |
| Other | 78,620 | 21,206 | 7,204 | 7 | 107,030 |
| Total assets | 8,489,366 | 1,827,071 | 85,373 | 10,401,810 | |
| LIABILITIES | |||||
| Deposits: Demand - noninterest-bearing | 2,765,360 | 475,636 | — | 3,240,996 | |
| Interest-bearing | 4,667,405 | 1,089,809 | (664) | 8 | 5,756,550 |
| Total deposits | 7,432,765 | 1,565,445 | (664) | 8,997,546 | |
| Borrowings | 60,764 | 12,372 | (1,334) | 9 | 71,802 |
| Operating lease liabilities | 17,323 | 8,426 | — | 25,749 | |
| Other liabilities | 48,764 | 13,706 | 10,007 | 10 | 72,477 |
| Total liabilities | 7,559,616 | 1,599,949 | 8,009 | 9,167,574 | |
| SHAREHOLDERS’ EQUITY | |||||
| Common stock | 398,058 | 17,252 | 307,137 | 11 | 722,447 |
| Additional paid-in-capital | — | 132,704 | (132,704) | 12 | — |
| Retained earnings | 529,474 | 79,406 | (99,309) | 13 | 509,571 |
| Stock in directors' rabbi trust assumed in acquisition | (1,791) | (2,449) | 2,449 | 14 | (1,791) |
| Directors' deferred fee obligation | 1,791 | 2,449 | (2,449) | 14 | 1,791 |
| Accumulated other comprehensive income (loss) | 2,218 | (2,240) | 2,240 | 12 | 2,218 |
| Total shareholders’ equity | 929,750 | 227,122 | 77,364 | 1,234,236 | |
| Total liabilities and shareholders’ equity | 8,489,366 | 1,827,071 | 85,373 | 10,401,810 |
See accompanying notes to pro forma balance sheet.
| FIRST BANCORP | |||||
|---|---|---|---|---|---|
| Unaudited Pro Forma Condensed Combined Income Statement | |||||
| For the Nine Months Ended September 30, 2021 | |||||
| ($ in thousands, except per share data) | First Bancorp | Select | Transaction Accounting Adjustments | Notes | First Bancorp and Select - Pro Forma Combined |
| Interest income | |||||
| Interest and fees on loans | $154,325 | 50,743 | 1,469 | 15 | 206,537 |
| Interest on investment securities | 23,568 | 2,864 | 390 | 16 | 26,822 |
| Other, principally overnight investments | 1,809 | 139 | — | 1,948 | |
| Total interest income | 179,702 | 53,746 | 1,859 | 235,307 | |
| Interest expense | |||||
| Savings, checking and money market accounts | 3,353 | 2,116 | — | 5,469 | |
| Time deposits | 2,660 | 2,457 | 126 | 17 | 5,243 |
| Borrowings | 1,139 | 252 | 74 | 18 | 1,465 |
| Total interest expense | 7,152 | 4,825 | 200 | 12,177 | |
| Net interest income | 172,550 | 48,921 | 1,659 | 223,130 | |
| Provision (reversal) for loan losses | (1,400) | (1,334) | — | (2,734) | |
| Provision for unfunded commitments | 2,988 | — | — | 2,988 | |
| Total provision (reversal) for credit losses | 1,588 | (1,334) | — | 254 | |
| Net interest income after provision (reversal) for loan losses | 170,962 | 50,255 | 1,659 | 222,876 | |
| Noninterest income | |||||
| Service charges on deposit accounts | 8,766 | 759 | — | 9,525 | |
| Other charges, commissions and fees | 18,482 | 2,660 | — | 21,142 | |
| Mortgage banking income | 8,914 | 787 | — | 9,701 | |
| Commissions from sales of insurance and financial products | 5,854 | — | — | 5,854 | |
| SBA consulting fees | 6,079 | — | — | 6,079 | |
| SBA loan sale gains | 6,981 | 416 | — | 7,397 | |
| Bank-owned life insurance income | 1,945 | 469 | — | 2,414 | |
| Securities gains (losses) | — | — | — | — | |
| Other gain (losses) | 1,533 | 157 | — | 1,690 | |
| Total noninterest income | 58,554 | 5,248 | — | 63,802 | |
| Noninterest expenses | |||||
| Salaries and employee benefits | 75,074 | 18,042 | — | 93,116 | |
| Occupancy and equipment expense | 11,413 | 2,966 | 55 | 19 | 14,434 |
| Merger and acquisition expense | 665 | — | — | 665 | |
| Intangibles amortization | 2,437 | 422 | 1,052 | 20 | 3,911 |
| Foreclosed property losses (gains) | 7 | 109 | — | 116 | |
| Other | 32,271 | 9,971 | — | 42,242 | |
| Total noninterest expenses | 121,867 | 31,510 | 1,107 | 154,484 | |
| Income before income taxes | 107,649 | 23,993 | 552 | 132,194 | |
| Income taxes | 22,527 | 5,425 | 127 | 21 | 28,079 |
| Net income | 85,122 | 18,568 | 425 | 104,115 | |
| Basic earnings per share | 2.99 | 1.07 | 2.94 | ||
| Diluted earnings per share | 2.99 | 1.07 | 2.93 | ||
| Weighted average common shares - basic | 28,358,393 | 17,281,656 | (10,211,285) | 22 | 35,428,764 |
| Weighted average common shares - diluted | 28,514,405 | 17,329,035 | (10,258,664) | 22 | 35,584,776 |
See accompanying notes to pro forma income statement.
Notes to Unaudited Pro Forma Condensed Combined Financial Statement
($ in thousands except per share data)
Note I – Transaction Accounting Adjustments
The following transaction accounting adjustments have been reflected in the unaudited pro forma combined consolidated financial information. Adjustments are based on assumptions and valuations determined as of the October 15, 2021 transaction closing and as included in the December 31, 2021 audited financial statements of the Company.
1.This represents the payment of cash for the value of the existing Select stock options in accordance with the terms of the merger agreement in the amount of $1,404 plus the payment for fractional shares of $26.
2.This represents the adjustment to loans to reflect fair value adjustments, which include lifetime credit loss expectations for loans, current interest rates and liquidity, as well as the gross up of purchased credit deteriorated (“PCD”) loans. The adjustment includes the following:
| Reversal of historical Select loan fair value adjustments | $5,049 |
|---|---|
| Estimate of loan fair value adjustments | (19,254) |
| Gross up of PCD loans for credit mark | 4,895 |
| Total adjustments to loans | $(9,310) |
3.The adjustments to the allowance for credit losses on loans includes the following:
| Reversal of historical Select allowance for loan losses | $12,554 |
|---|---|
| Estimate of lifetime credit losses for PCD loans | (4,895) |
| Estimate of lifetime credit losses for non-PCD loans (Day 2) | (14,111) |
| Total adjustments to allowance for credit losses | $(6,452) |
In the above table, the adjustment for non-PCD loans (Day 2) is recorded as a provision for credit losses on loans that will be recorded immediately following the closing of the transaction as a charge to earnings. This is reflected as an adjustment to retained earnings (tax-effected) on the proforma balance sheet.
4.This is the fair market value adjustment to Select’s land and buildings, based on First Bancorp’s evaluation and current appraisals. The adjustment is comprised of a $2,194 write-up on buildings and a ($223) write-down on land. Also see Note 19.
5.This is the estimated amount of goodwill to be recorded related to this acquisition of $128,187, less Select’s historical goodwill amount of $42,907. Also see Note II below.
6.This is the core deposit intangible asset related to acquired core deposit accounts amounting to $9,170, less Select’s historical core deposit intangible of $1,091. Also see Note 20.
7.This represents the current tax benefit and deferred tax assets related to the fair value adjustments (net of reversal of Select’s historical deferred taxes) and the merger-related expenses at a blended federal and state rate of 22.98%, except for merger and acquisition expenses that are not tax deductible.
8.This is the fair value adjustment associated with Select’s time deposits. Also see Note 17.
9.This is the fair market value adjustment associated with Select’s borrowings. Also see Note 18.
10.This represents two items: i) a provision for credit-losses on unfunded commitments of $3,982 that will be recorded immediately following the transaction as a charge to earnings (Day 2) related to lifetime expected losses on unfunded loan commitments, and ii) a liability for expected nonrecurring direct professional service costs associated with the merger of $6,025 to be incurred immediately following the legal close. These are reflected as adjustments to retained earnings (tax-effected) on the proforma balance sheet.
In addition to the $6,025 in expected nonrecurring direct professional service costs associated with the merger and included in the transaction accounting adjustments, First Bancorp estimates that an additional $14,975 in merger expenses will be recorded in connection with the merger, which will result in a total of $21,000 in merger expenses expected to be incurred, as follows:
| Merger Transaction Costs Schedule | ||
|---|---|---|
| Professional fees - direct | $ | 6,025 |
| Professional fees – other | 1,000 | |
| Salaries and employee benefits | 8,000 | |
| Contract termination fess | 5,000 | |
| Other noninterest expense | 975 | |
| Total merger related costs | $ | 21,000 |
11.This adjustment represents the value of the 7,070,371 shares of First Bancorp common stock issued to Select shareholders, based on the $45.88 closing price of First Bancorp common stock on October 15, 2021 totaling $324,389, less the adjustment for Select’s $17,252 in common stock.
12.Additional paid-in-capital and accumulated other comprehensive loss of Select is eliminated as part of the accounting entries to reflect the merger transaction.
13.This adjustment reflects the change in retained earnings, computed as follows:
| Provision for credit losses for non-PCD loans (Day 2) | $ | (14,111) |
|---|---|---|
| Provision for credit losses on unfunded loan commitments (Day 2) | (3,982) | |
| Non-recurring merger expenses (Day 2) | (6,025) | |
| Tax benefit associated with the adjustments above | 4,215 | |
| Reversal of historical Select retained earnings | (79,406) | |
| Total adjustments to retained earnings | $ | (99,309) |
14.This adjustment reflects liquidation of Select’s rabbi trust as of the acquisition date.
15.This reflects the expected discount accretion associated with the fair market value adjustment related to loans, less the historical acquisition-related discount accretion recorded by Select during the respective periods. The loan fair value adjustment is amortized using the sum-of-the-years-digits method over 5 years.
16.This reflects the expected discount accretion associated with the unrealized losses of Select’s available for sale securities. The fair market value adjustment is assumed to be amortized on a straight-line basis over the estimated average remaining life of the securities, which is approximately 5.6 years.
17.This is the estimate of amortization expense associated with the fair market value adjustment related to time deposits. The fair market value adjustment is assumed to be amortized on an effective interest method over the estimated life of the time deposits.
18.This is the estimate of amortization expense associated with the fair market value adjustment related to borrowings. The fair market value adjustment is assumed to be amortized on a straight-line basis over the remaining life of the related borrowing, which is approximately 13.5 years.
19.This is the estimate of depreciation expense associated with the fair market value adjustment related to buildings. The fair market value adjustment is assumed to be amortized on a straight-line basis over the remaining life of the buildings, which is approximately 30 years. Also see Note 4.
20.This is the estimated incremental amortization expense of the core deposit intangible arising in this transaction and is based on the sum-of-the-years-digits method over 7 years.
21.This is the estimated impact on income tax expense related to the transaction accounting adjustments at a blended federal and state rate of 22.98%.
22.This is the adjustment necessary to eliminate the weighted-average shares of Select stock and to record the expected number of First Bancorp shares of to be issued as merger consideration of 7,070,371 based on the exchange ratio of 0.408 per share. Also see Note II below.
Note II – Preliminary Purchase Accounting Allocation
The unaudited pro forma combined consolidated financial information reflects the pro forma issuance of 7,070,371 shares of First Bancorp common stock with an aggregate value of $324,389 based on the October 15, 2021 closing stock price of $45.88, as well as cash consideration of $1,430.
The merger will be accounted for using the acquisition method of accounting; accordingly, First Bancorp’s cost to acquire Select will be allocated to the assets (including identifiable intangible assets) and liabilities of Select at their respective estimated fair values as of the merger date. Accordingly, the proforma purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values, as summarized in the following table.
| (Dollars in thousands, except per share data) | ||
|---|---|---|
| Transaction Pro Forma Consideration: | ||
| Number of Select shares outstanding at balance sheet date | 17,329,341 | |
| Merger exchange ratio | 0.408 | |
| Number of First Bancorp shares to be issued in merger | 7,070,371 | |
| First Bancorp share price | $ | 45.88 |
| Purchase price of Select common shares | $ | 324,389 |
| Number of Select stock options outstanding at balance sheet date | 193,419 | |
| Cash out price per merger agreement | $ | 18.00 |
| Weighted average exercise price | 10.74 | |
| Cash out value per stock option | 7.26 | |
| Cash out of all stock options | 1,404 | |
| Cash paid in lieu of fractional shares to be issued | 26 | |
| Total purchase price of Select common stock and stock options | $ | 325,819 |
| Equity of Select at balance sheet date | 227,122 | |
| Preliminary goodwill | $ | 98,697 |
| Fair Value Adjustments: | ||
| Loan mark, net | (9,310) | |
| Allowance for credit losses, net | 7,659 | |
| Core deposit intangibles and servicing right adjustment | 8,079 | |
| Premises | 1,971 | |
| Time Deposit interest rate mark, net | 664 | |
| Borrowing mark | 1,334 | |
| Deferred taxes associated with fair value adjustments | 2,989 | |
| Proforma Goodwill adjustment | 85,311 | |
| Add: Select goodwill reversal | 42,907 | |
| Total Goodwill | $ | 128,218 |
8