BUSINESS COMBINATIONS

6 Months Ended

Jun. 30, 2020

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

NOTE H –BUSINESS COMBINATIONS

On December 20, 2019, Select Bank & Trust Company (“Select Bank”), a wholly owned subsidiary of Select Bancorp, Inc. (the “Company”), entered into a Branch Purchase and Assumption Agreement (the “Purchase Agreement”) with Entegra Bank (“Entegra”), whereby Select Bank will assume the deposits and acquire the majority of the loans, property,

equipment and other selected assets associated with three existing Entegra branch offices (the “Acquired Branches”). The Acquired Branches are being divested as required under agreements with the U.S. Department of Justice, Antitrust Division, and the Federal Reserve in connection with the proposed merger of Entegra Financial Corp. and its wholly owned subsidiary Entegra with First-Citizens Bank & Trust Company, Raleigh, North Carolina (“First-Citizens”). The transaction is contingent upon the completion of Entegra Financial Corp.’s and Entegra’s merger with First-Citizens.  

On April 17, 2020, Select completed its previously announced acquisition of three branches located in western North Carolina and pursuant to the terms of the purchase agreement. The branches had approximately $170.9 million in assets and $186.4 million in liabilities as of the acquisition date, April 17, 2020.  The purchase expanded the Bank’s North Carolina presence with branches in Sylva, Franklin and Highlands, North Carolina.

The purchase of the branches was accounted for under the acquisition method.  The assets and liabilities of the branches, as of the effective date of the acquisition, are recorded at their respective fair values.  For the acquisition of the branches, 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.  

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.

	April 17, 2020
	As recorded by		Fair Value		As recorded by
	First Citizens		adjustments		the Company
(Dollars in thousands)
Assets
Cash and cash equivalents	$	60,234	$	—	$	60,234
Loans		108,236		(4,977)		103,259
Premises and equipment		2,106		790		2,896
Accrued interest receivable		338		—		338
Core deposit intangible		—		620		620
Other assets		—		974		974
Total assets acquired	$	170,914	$	(2,593)	$	168,321
Liabilities
Deposits:
Noninterest-bearing	$	41,398	$	—	$	41,398
Interest-bearing		144,845		(760)		144,085
Total deposits		186,243		(760)		185,483
Other liabilities		173		—		173
Total liabilities assumed	$	186,416	$	(760)	$	185,656
Goodwill recorded for branches acquisition					$	17,335

Goodwill recorded for the branches represents future revenues to be derived from the existing customer base, including efficiencies that will result from combining operations.  The fair value adjustments remain subject to adjustment within

the one year measurement period if there happens to be notable changes in the factors determining the fair value of the assets or liabilities.

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 $17.0 million at estimated fair value and acquired performing loans totaling $86.2 million at estimated fair value. For PCI loans acquired from First Citizens, 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)	April 17, 2020
Contractually required payments	$	26,718
Nonaccretable difference		6,745
Cash flow expected to be collected		19,973
Accretable yield		2,949
Fair value at acquisition date	$	17,024

Merger-related expense in 2020 totaled $748,000 which were recorded as noninterest expense as incurred.

The following tables reflect the pro forma total net interest income, noninterest income and net income for the six months ended June 30, 2020 and 2019 as though the acquisition of the branches had taken place on January 1, 2019.  The pro forma results have not been adjusted to remove non-recurring acquisition-related expenses, and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2019, nor of future results of operations.

	Six Months Ended June 30
	2020		2019
	(Dollars in thousands, except per share)
Net interest income	$	24,235	$	24,697
Non-interest income		2,929		2,650
Net income available to common shareholders		2,105		7,291
Earnings per share, basic	$	0.12	$	0.38
Earnings per share, diluted	$	0.12	$	0.38
Weighted average common shares outstanding, basic		18,134,607		19,317,029
Weighted average common shares outstanding, diluted		18,157,992		19,360,039