Part I. FINANCIAL INFORMATION

Item 1. Financial ~~Information~~Statements.
~~Item 1 - Financial Statements~~
SELECT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

September 30, 2020

December 31,


(unaudited)

2019*

(In thousands, except share

and per share data)

ASSETS

Cash and due from banks

$
25,068

$
19,110

Interest-earning deposits in other banks

249,541

50,920

Federal funds sold

8,046

9,047

Investment securities available for sale, at fair value

87,434

72,367

Loans held for sale

2,945

928

Loans

1,283,457

1,029,975

Allowance for loan losses

(13,561)

(8,324)

NET LOANS

1,269,896

1,021,651

Accrued interest receivable

4,486

4,189

Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost

3,059

3,045

Other non-marketable securities

718

719

Foreclosed real estate

3,237

3,533

Premises and equipment, net

20,883

17,791

Right of use lease asset

8,756

8,596

Bank owned life insurance

30,271

29,789

Goodwill

41,914

24,579

Core deposit intangible (“CDI”)

1,677

1,610

Other assets

14,015

7,202

TOTAL ASSETS

$
1,771,946

$
1,275,076

LIABILITIES AND SHAREHOLDERS’ EQUITY





Deposits:





Demand

$
408,209

$
240,305

Savings

51,629

43,128

Money market and NOW

610,275

280,145

Time

402,667

429,260

TOTAL DEPOSITS

1,472,780

992,838

Short-term debt

20,000

0

Long-term debt

37,372

57,372

Lease liability

9,089

8,813

Accrued interest payable

449

578

Accrued expenses and other liabilities

18,889

2,700

TOTAL LIABILITIES

1,558,579

1,062,301

Shareholders’ Equity





Preferred stock, 0 par value, 5,000,000 shares authorized; 0 preferred shares were issued and outstanding at September 30, 2020 and December 31, 2019

0

0

Common stock, $1 par value, 50,000,000 shares authorized; 17,786,552 and 18,330,058 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

17,787

18,330

Additional paid-in capital

137,130

140,870

Retained earnings

56,917

52,675

Common stock issued to deferred compensation trust, at cost; 263,377 and 319,753 shares outstanding at September 30, 2020 and December 31, 2019, respectively

(2,352)

(2,815)

Directors’ Deferred Compensation Plan Rabbi Trust

2,352

2,815

Accumulated other comprehensive income

1,533

900

TOTAL SHAREHOLDERS’ EQUITY

213,367

212,775

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,771,946

$
1,275,076

September 30, 2019 December 31,
(Unaudited) 2018*
(In thousands, except share and per share data)
ASSETS
Cash and due from banks $ 20,052 $ 17,059
Interest-earning deposits in other banks 53,093 121,303
Certificates of deposit 500 1,000
Federal funds sold 10,728 -
Investment securities available for sale, at fair value 76,941 51,533
Loans held for sale 1,714 580
Loans 1,014,928 986,040
Allowance for loan losses (8,056 ) (8,669 )

NET LOANS 1,006,872 977,371

Accrued interest receivable 3,902 3,889
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost 3,045 3,283
Other non-marketable securities 719 762
Foreclosed real estate 1,442 1,088
Premises and equipment, net 18,150 17,920
Right of use lease asset 8,776 -
Bank owned life insurance 29,621 29,117
Goodwill 24,579 24,579
Core deposit intangible (“CDI”) 1,803 2,085
Assets held for sale - 668
Other assets 7,697 6,288

TOTAL ASSETS $ 1,269,634 $ 1,258,525

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand $ 243,889 $ 247,007
Savings 43,355 51,811
Money market and NOW 283,414 254,482
Time 417,015 427,127

TOTAL DEPOSITS 987,673 980,427

Short-term debt - 7,000
Long-term debt 57,372 57,372
Lease liability 8,951 -
Accrued interest payable 596 667
Accrued expenses and other liabilities 2,993 3,448

TOTAL LIABILITIES 1,057,585 1,048,914
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018 - -
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,513,078 and 19,311,505 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively 18,513 19,312
Additional paid-in capital 142,878 150,718
Retained earnings 49,634 39,640
Common stock issued to deferred compensation trust, at cost; 312,956 and 303,239 shares outstanding at September 30, 2019 and December 31, 2018, respectively (2,730 ) (2,615 )
Directors’ Deferred Compensation Plan Rabbi Trust 2,730 2,615
Accumulated other comprehensive income (loss) 1,024 (59 )

TOTAL SHAREHOLDERS’ EQUITY 212,049 209,611

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,269,634 $ 1,258,525
* Derived from audited consolidated financial statements.

See accompanying notes.

3

Table of Contents

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019

(In thousands, except share and per share data)

(In thousands, except share and per share data)

INTEREST INCOME

Loans

$
15,404

$
13,924

$
43,079

$
40,481

Federal funds sold and interest-earning deposits in other banks

54

581

255

1,580

Investments

367

503

1,169

1,569

TOTAL INTEREST INCOME

15,825

15,008

44,503

43,630

INTEREST EXPENSE









Money market, NOW and savings deposits

891

433

1,887

1,196

Time deposits

1,415

2,248

4,922

5,986

Short-term debt

145

4

373

56

Long-term debt

263

455

896

1,370

TOTAL INTEREST EXPENSE

2,714

3,140

8,078

8,608

NET INTEREST INCOME

13,111

11,868

36,425

35,022

PROVISION FOR LOAN LOSSES

1,638

231

5,844

136

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

11,473

11,637

30,581

34,886

NON-INTEREST INCOME









Gain on the sale of securities

—

48

0

48

Service charges on deposit accounts

257

308

801

858

Fees from the sale of mortgages

517

218

1,165

605

Other fees and income

950

874

2,613

2,462

TOTAL NON-INTEREST INCOME

1,724

1,448

4,579

3,973

NON-INTEREST EXPENSE









Personnel

5,742

5,124

17,160

15,126

Occupancy and equipment

1,008

1,073

2,925

2,722

Deposit insurance

370

(30)

434

165

Professional fees

399

518

1,222

1,383

Core deposit intangible amortization

179

208

553

632

Merger/acquisition related expenses

7

128

755

235

Information systems

1,043

852

3,053

2,518

Foreclosure-related expenses

228

(9)

420

31

Other

1,091

1,067

3,294

3,234

TOTAL NON-INTEREST EXPENSE

10,067

8,931

29,816

26,046

INCOME BEFORE INCOME TAX

3,130

4,154

5,344

12,813

INCOME TAX

673

915

1,102

2,819

NET INCOME

2,457

3,239

4,242

9,994

Basic

$
0.14

$
0.17

$
0.24

$
0.52

Diluted

$
0.14

$
0.17

$
0.23

$
0.52

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING





Basic

17,847,913

19,028,572

18,038,345

19,219,820

Diluted

17,866,822

19,073,235

18,062,170

19,266,480

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
(In thousands, except share and per share data)
INTEREST INCOME
Loans $ 13,924 $ 13,609 $ 40,481 $ 40,293
Federal funds sold and interest-earning deposits in other banks 581 422 1,580 940
Investments 503 351 1,569 1,058
TOTAL INTEREST INCOME 15,008 14,382 43,630 42,291
INTEREST EXPENSE
Money market, NOW and savings deposits 433 338 1,196 977
Time deposits 2,248 1,665 5,986 4,508
Short-term debt 4 75 56 285
Long-term debt 455 452 1,370 1,036

TOTAL INTEREST EXPENSE 3,140 2,530 8,608 6,806
NET INTEREST INCOME 11,868 11,852 35,022 35,485
PROVISION FOR (RECOVERY OF) LOAN LOSSES 231 (459 ) 136 239

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,637 12,311 34,886 35,246
NON-INTEREST INCOME
Fees on the sale of mortgages 218 109 605 293
Gain on securities 48 - 48 -
Service charges on deposit accounts 308 309 858 830
Other fees and income 874 648 2,462 2,334

TOTAL NON-INTEREST INCOME 1,448 1,066 3,973 3,457
NON-INTEREST EXPENSE
Personnel 5,124 4,464 15,126 13,861
Occupancy and equipment 1,073 849 2,722 2,598
Deposit insurance (30 ) 239 165 617
Professional fees 518 322 1,383 1,012
CDI amortization 208 247 632 784
Merger/acquisition related expenses 128 - 235 1,826
Information systems 852 726 2,518 2,773
Foreclosure-related expenses (9 ) (22 ) 31 81
Other 1,067 975 3,234 3,134

TOTAL NON-INTEREST EXPENSE 8,931 7,800 26,046 26,686
INCOME BEFORE INCOME TAX 4,154 5,577 12,813 12,017
INCOME TAXES 915 1,256 2,819 2,689

NET INCOME $ 3,239 $ 4,321 $ 9,994 $ 9,328
NET INCOME PER COMMON SHARE
Basic $ 0.17 $ 0.27 $ 0.52 $ 0.64
Diluted $ 0.17 $ 0.27 $ 0.52 $ 0.63
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 19,028,572 15,858,455 19,219,820 14,636,576
Diluted 19,073,235 15,916,734 19,266,480 14,697,379

See accompanying notes.

4

Table of Contents

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019

(In thousands)

Net income

$
2,457

$
3,239

$
4,242

$
9,994

Other comprehensive income (loss):









Unrealized gains (loss) on investment securities-available for sale

(161)

196

822

1,454

Tax effect

38

(48)

(189)

(334)

Total

(123)

148

633

1,120

Reclassification adjustment for (gains) included in net income

—

(48)

—

(48)

Tax effect

—

11

—

11

—

(37)

—

(37)

Total

(123)

111

633

1,083

Total comprehensive income

$
2,334

$
3,350

$
4,875

$
11,077

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
(In thousands)
Net income $ 3,239 $ 4,321 $ 9,994 $ 9,328

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale 196 (222 ) 1,454 (1,029 )
Tax effect (48 ) 50 (334 ) 239
148 (172 ) 1,120 (790 )

Reclassification adjustment for gain included in net income (48 ) - (48 ) -
Tax effect 11 - 11 -
(37 ) - (37 ) -

Total 111 (172 ) 1,083 (790 )

Total comprehensive income $ 3,350 $ 4,149 $ 11,077 $ 8,538

See accompanying notes.

5

Table of Contents

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
~~(in thousands, except share data)~~

Common Stock

Issued

Accumulated

Additional

to Deferred

Other

Total

Preferred Stock

Common Stock

paid-in

Retained

Deferred

Compensation

Comprehensive

Shareholders’

Shares

Amount

Shares

Amount

Capital

Earnings

Comp Plan

Trust

Income

Equity
Balance at December 31, 2019

—

$
—

18,330,058

$
18,330

$
140,870

$
52,675

$
(2,815)

$
2,815

$
900

$
212,775
Net income

—

—

—

—

—

1,104

—

—

—

1,104
Other comprehensive income

—

—

—

—

—

—

—

—

562

562
Stock repurchases

—

—

(275,366)

(275)

(2,193)

—

—

—

—

(2,468)
Stock option exercises

—

—

1,000

1

6

—

—

—

—

7
Directors’ equity incentive plan, net

—

—

—

—

—

—

24

(24)

—

—
Stock-based compensation

—

—

—

—

105

—

—

—

—

105
Balance at March 31, 2020

—

$
—

18,055,692

$
18,056

$
138,788

$
53,779

$
(2,791)

$
2,791

$
1,462

$
212,085
Net income

—

—

—

—

—

681

—

—

—

681
Other comprehensive income

—

—

—

—

—

—

—

—

194

194
Stock repurchases

—

—

(193,138)

(193)

(1,328)

—

—

—

—

(1,521)
Stock option exercises

—

—

—

—

—

—

—

—

—

—
Directors’ equity incentive plan, net

—

—

—

—

—

—

238

(238)

—

—
Stock-based compensation

—

—

—

—

99

—

—

—

—

99
Balance at June 30, 2020

—

$
—

17,862,554

$
17,863

$
137,559

$
54,460

$
(2,553)

$
2,553

$
1,656

$
211,538
Net income

—

—

—

—

—

2,457

—

—

—

2,457
Other comprehensive (loss)

—

—

—

—

—

—

—

—

(123)

(123)
Stock repurchases

—

—

(76,002)

(76)

(490)

—

—

—

—

(566)
Directors’ equity incentive plan, net

—

—

—

—

—

—

201

(201)

—

—
Stock based compensation

—

—

—

—

61

—

—

—

—

61

Balance at September 30, 2020

—

$
—

17,786,552

$
17,787

$
137,130

$
56,917

$
(2,352)

$
2,352

$
1,533

$
213,367

Balance at December 31, 2018

—

—

19,311,505

19,312

150,718

39,640

(2,615)

2,615

(59)

209,611
Net income

—

—

—

—

—

3,307

—

—

—

3,307
Other comprehensive income

—

—

—

—

—

—

—

—

360

360
Stock option exercises

—

—

14,980

14

100

—

—

—

—

114
Directors’ equity incentive plan, net

—

—

—

—

—

—

(37)

37

—

—
Stock based compensation

—

—

—

—

59

—

—

—

—

59
Balance at March 31, 2019

—

—

19,326,485

19,326

150,877

42,947

(2,652)

2,652

301

213,451
Net income

—

—

—

—

—

3,448

—

—

—

3,448
Other comprehensive income

—

—

—

—

—

—

—

—

612

612
Stock repurchases

—

—

(64,496)

(64)

(662)

—

—

—

—

(726)
Stock option exercises

—

—

—

—

—

—

—

—

—

—
Stock based compensation

—

—

—

—

60

—

—

—

—

60
Balance at June 30, 2019

—

—

19,261,989

19,262

150,275

46,395

(2,652)

2,652

913

216,845
Net income

—

—

—

—

—

3,239

—

—

—

3,239
Other comprehensive income

—

—

—

—

—

—

—

—

111

111
Stock repurchases

—

—

(748,911)

(749)

(7,456)

—

—

—

—

(8,205)
Stock option exercises

—

—

—

—

—

—

—

—

—
Directors’ equity incentive plan, net

—

—

—

—

—

—

(78)

78

—

—
Stock based compensation

—

—

—

—

59

—

—

—

—

59
Balance at September 30, 2019

—

$
—

18,513,078

$
18,513

$
142,878

$
49,634

$
(2,730)

$
2,730

$
1,024

$
212,049
Common
Stock
Issued Accumulated
Additional to Deferred Other Total
Preferred Stock Common Stock paid-in Retained Compensation Deferred Comprehensive Shareholders’
Shares Amount Shares Amount Capital Earnings Trust Comp Plan Income (loss) Equity
Balance at December 31, 2018        - $           - 19,311,505 $ 19,312 $ 150,718 $ 39,640 $ (2,615 ) $ 2,615 $ (59 ) $ 209,611
Net income - - - - - 3,307 - - - 3,307
Other comprehensive income - - - - - - - - 360 360
Stock option exercises - - 14,980 14 100 - - - - 114
Stock based compensation - - - - 59 - - - - 59
Directors’ equity incentive plan, net - - - - - - (37 ) 37 - -
Balance at March 31, 2019 - $ - 19,326,485 $ 19,326 $ 150,877 $ 42,947 $ (2,652 ) $ 2,652 $ 301 $ 213,451
Net income - - - - - 3,448 - - - 3,448
Other comprehensive income - - - - - - - - 612 612
Stock repurchases - - (64,496 ) (64 ) (662 ) - - - - (726 )
Stock based compensation - - - - 60 - - - - 60
Balance at June 30, 2019 - $ - 19,261,989 $ 19,262 $ 150,275 $ 46,395 $ (2,652 ) $ 2,652 $ 913 $ 216,845
Net income - - - - - 3,239 - - - 3,239
Other comprehensive income - - - - - - - - 111 111
Stock repurchases - - (748,911 ) (749 ) (7,456 ) - - - - (8,205 )
Directors’ equity incentive plan, net - - - - - - (78 ) 78 - -
Stock based compensation - - - - 59 - - - - 59
Balance at September 30, 2019 - $ - 18,513,078 $ 18,513 $ 142,878 $ 49,634 $ (2,730 ) $ 2,730 $ 1,024 $ 212,049

See accompanying notes.

6

Table of Contents

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~CASH FLOWS (Unaudited)
~~(in thousands, except share data)~~

Nine Months Ended

September 30,


2020

2019

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$
4,242

$
9,994

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

5,844

136

Depreciation and amortization of premises and equipment

1,335

1,337

Amortization and accretion of investment securities

436

543

Amortization of right of use asset

941

810

Accretion of deferred loan fees and costs

(688)

(590)

Amortization of core deposit intangible

553

632

Accretion of acquisition premium on time deposits

(206)

(7)

Deferred income taxes

283

0

Stock-based compensation

265

178

Accretion on acquired loans

(1,075)

(679)

Increase in cash surrender value of bank owned life insurance

(482)

(504)

Proceeds from loans held for sale

43,904

25,388

Originations of loans held for sale

(44,756)

(25,917)

Gain on sales of loans held for sale

(1,165)

0

Net loss on sale and write-downs of foreclosed real estate

390

12

Fees on sale of mortgages

0

(605)

Gain on the sale of securities

0

(48)

Loss (gain) on sale of premises and equipment

0

8

Loss on assets held for sale

0

8

Change in assets and liabilities:

Net change in accrued interest receivable

41

(13)

Net change in other assets

(6,312)

(1,656)

Net change in accrued expenses and other liabilities

15,887

(408)

NET CASH PROVIDED BY OPERATING ACTIVITIES

19,437

8,619

CASH FLOWS FROM INVESTING ACTIVITIES



Redemption (purchase) of FHLB stock

(14)

238

Redemption of non-marketable security

1

43

Purchase of investment securities available for sale

(39,794)

(37,948)

Maturities of investment securities available for sale

10,511

2,883

Cash received from branch acquisition

60,234

24,093

Mortgage-backed securities pay-downs

14,602

9,367

Proceeds from sale of investment securities available for sale

0

1,125

Net change in loans outstanding

(149,341)

(28,837)

Proceeds from sale of foreclosed real estate

180

103

Proceeds from sale of premises and equipment

0

660

Purchases of premises and equipment

(1,531)

(1,167)

NET CASH USED IN INVESTING ACTIVITIES

(105,152)

(29,440)

Stock
Issued Accumulated
Additional to Deferred Other Total
Preferred Stock Common Stock paid-in Retained Compensation Deferred Comprehensive Shareholders’
Shares Amount Shares Amount Capital Earnings Trust Comp Plan Income (loss) Equity
Balance at December 31, 2017        - $        - 14,009,137 $ 14,009 $ 95,850 $ 25,858 $ (2,518 ) $ 2,518 $ 398 $ 136,115
Net income - - - - - 1,897 - - - 1,897
Other comprehensive income (loss) - - - - - - - - (410 ) (410 )
Stock option exercises - - 4,780 5 21 - - - - 26
Directors’ equity incentive plan, net - - - - - - 41 (41 ) - -
Stock based compensation - - - - 45 - - - - 45
Balance at March 31, 2018 - $ - 14,013,917 $ 14,014 $ 95,916 $ 27,755 $ (2,477 ) $ 2,477 $ (12 ) $ 137,673
Net income - - - - - 3,110 - - - 3,110
Other comprehensive loss - - - - - - - - (208 ) (208 )
Stock option exercises - - 10,970 11 72 - - - - 83
Stock based compensation - - - - 44 - - - - 44
Balance at June 30, 2018 - $ - 14,024,887 $ 14,025 $ 96,032 $ 30,865 $ (2,477 ) $ 2,477 $ (220 ) $ 140,702
Net income - - - - - 4,321 - - - 4,321
Other comprehensive loss - - - - - - - - (172 ) (172 )
Shares issued for capital raise, net - - 5,270,834 5,271 54,535 - - - - 59,806
Stock option exercises - - 400 - 4 - - - - 4
Directors’ equity incentive plan, net - - - - - - (80 ) 80 - -
Stock based compensation - - - - 44 - - - - 44
Balance at September 30, 2018 - $ - 19,296,121 $ 19,296 $ 150,615 $ 35,186 $ (2,557 ) $ 2,557 $ (392 ) $ 204,705

See accompanying notes.

7

Table of Contents

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

Nine Months Ended
September 30,
2019 2018
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,994 $ 9,328
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses 136 239
Depreciation and amortization of premises and equipment 2,147 1,305
Amortization and accretion of investment securities 543 455
Amortization of deferred loan fees and costs (590 ) (543 )
Amortization of core deposit intangible 632 784
Stock-based compensation 178 133
Accretion on acquired loans (679 ) (2,647 )
Amortization of acquisition premium on time deposits (7 ) (171 )
Net accretion of acquisition discount on borrowings - (11 )
Increase in cash surrender value of bank-owned life insurance (504 ) (513 )
Proceeds from loans held for sale 25,388 18,317
Originations of loans held for sale (25,917 ) (19,223 )
Fees on the sale of mortgages (605 ) (293 )
Net loss on sale and write-downs of foreclosed real estate 12 100
Loss on sale of premises and equipment 8 179
Net write-down on assets held for sale 8 178
Gain on sale of securities (48 ) -
Change in assets and liabilities:
Net change in accrued interest receivable (13 ) (26 )
Net change in other assets (1,656 ) 2,330
Net change in accrued expenses and other liabilities (408 ) (10,409 )

NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 8,619 (488 )

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption (purchase) of FHLB stock 238 (964 )
Redemption of non-marketable securities 43 219
Purchase of investment securities available for sale (37,948 ) -
Maturities of investment securities available for sale 2,883 1,400
Proceeds from the sale of securities 1,125 -
Cash received from branch acquisitions 24,093 -
Mortgage-backed securities pay-downs 9,367 8,626
Net change in loans outstanding (28,837 ) (7,493 )
Proceeds from sale of foreclosed real estate 103 657
Proceeds from sale of assets held for sale 660 -
Purchases of premises and equipment (1,167 ) (1,200 )

NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (29,440 ) 1,245
~~See accompanying notes.~~

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

Nine Months Ended
September 30,
2019 2018
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ (17,786 ) $ (20,712 )
Repayments on short-term debt (7,000 ) (17,266 )
Proceeds from long-term debt - 38,000
Repayment in lease liability (565 ) -
Proceeds from issuance of common stock - 63,250
Direct expenses related to capital transactions - (3,444 )
Repurchase of common stock (8,931 ) -
Proceeds from stock option exercises 114 113

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (34,168 ) 59,941

NET CHANGE IN CASH AND CASH EQUIVALENTS (54,989 ) 60,698

CASH AND CASH EQUIVALENTS, BEGINNING 139,362 62,695

CASH AND CASH EQUIVALENTS, ENDING $ 84,373 $ 123,393

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 8,679 $ 6,654
Income Taxes 2,496 1,529

Non-cash transactions:
Unrealized (losses) gains on investment securities available for sale, net of tax 1,120 (790 )
Transfers from loans to foreclosed real estate 469 519

Nine Months Ended

September 30,


2020

2019

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in deposits

$
294,665

$
(17,786)

Repayments of short-term debt

0

(7,000)

Repayment of lease liability

(825)

(565)

Repurchase of common stock

(4,556)

(8,931)

Proceeds from stock options exercised

7

114

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES

289,291

(34,168)

NET CHANGE IN CASH AND CASH EQUIVALENTS

203,578

(54,989)

CASH AND CASH EQUIVALENTS, BEGINNING

79,077

139,362

CASH AND CASH EQUIVALENTS, ENDING

$
282,655

$
84,373

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION





Cash paid during the period for:





Interest paid

$
8,207

$
8,679

Income taxes paid

3,202

2,496

Non-cash transactions:





Change in fair value of investment securities available for sale, net of tax

633

1,120

Transfer from loans to foreclosed real estate

274

469

Acquisition:





Assets acquired (excluding goodwill)

170,914

0

Liabilities assumed

186,416

0

Goodwill recorded

17,335

0

See accompanying notes.

8

Table of Contents

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

NOTE A - BASIS OF PRESENTATION
Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. On July 25, 2014, the Company changed its name from New Century Bancorp, Inc. to Select Bancorp, Inc. following its acquisition by merger of Select Bancorp, Inc., Greenville, NCNorth Carolina (which we refer to herein as “Legacy Select”). The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the North Carolina Commissioner of Banks.
The Bank was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25, 2014, the Company acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank’s legal name to Select Bank & Trust Company. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its subsidiary Carolina Premier Bank (“Carolina Premier”) through the merger of Premara with and into the Company, followed immediately by the merger of Carolina Premier with and into the Bank. The Bank continues as the only banking subsidiary of the Company with its headquarters and operations center located in Dunn, ~~NC.~~North Carolina. The Bank is engaged in general commercial and retail banking in ~~central and eastern North Carolina, as well as in Charlotte,~~the State of North Carolina, northwest South Carolina, and the Virginia ~~Beach, Virginia.~~Beach-Norfolk-Newport News, VA-NC, metropolitan statistical area. The Bank is subject to the supervision and regulation of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks.
All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the ~~three-~~three and ~~nine-month periods~~nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the ~~three-~~three and ~~nine-month periods~~nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2019.~~
2020.
The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s ~~2018~~2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March ~~15, 2019.~~11, 2020. This quarterly report should be read in conjunction with the Annual Report.
Certain reclassifications of the information in prior periods were made to conform to the September 30, ~~2019~~2020 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.
COVID-19. The Company has evaluated for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of the disease caused by a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company��s customers operate and impair their ability to fulfill their financial obligations to the Company. Several programs are available to businesses impacted by COVID-19 such as loans available through the Paycheck Protection Program, deferrals on loan payments on existing loans and a reduced interest rate program available

9

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

to financial institutions through the Federal Reserve Bank. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of COVID-19, economic uncertainties have arisen which are likely to negatively impact net interest income and noninterest income. Other financial impact could occur though such potential impact is unknown at this time.

NOTE B - PER SHARE RESULTS
Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At September 30, ~~2019~~2020 and ~~2018~~2019 there were ~~172,120~~243,120 and ~~119,800~~172,120 anti-dilutive stock options outstanding, respectively.

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
Weighted average shares used for basic net income available to common shareholders 19,028,572 15,858,455 19,219,820 14,636,576

Effect of dilutive stock options 44,663 58,279 46,660 60,803

Weighted average shares used for diluted net income available to common shareholders 19,073,235 15,916,734 19,266,480 14,697,379

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019

2020

2019

Weighted average number of common shares used in computing basic net income per share

17,847,913

19,028,572

18,038,345

19,219,820

Effect of dilutive stock options

18,909

44,663

23,825

46,660

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share

17,866,822

19,073,235

18,062,170

19,266,480

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
The following summarizes recent accounting pronouncements and their expected impact on the Company:
~~In February 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (“ASU”) 2016-02,~~~~Leases~~ (Topic 842). ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.  For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018.  The Company adopted this standard during the first quarter of 2019. The impact was an increase to the Consolidated Balance Sheet for ROU assets and associated lease liabilities, as well as resulting depreciation expense of the ROU assets and expense of the lease liabilities in the Consolidated Statements of Income. Additionally, adding these assets to the balance sheet impacted total risk-weighted assets used to determine the regulatory capital levels.
In July 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to make narrow amendments to clarify how to apply certain aspects of the new standard. The amendments are effective for reporting periods beginning after December 15, 2018.
The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of ASU 2016-02 resulted in the recognition of lease liabilities totaling $9,013,900 and the recognition of ROU assets totaling $9,013,900 as of the date of adoption. The adoption of this standard did not impact beginning retained earnings. Total risk-based capital was adversely impacted by 13 basis points due to the increase in risk-weighted assets, see Note J. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. The initial balance sheet gross up upon adoption was primarily related to operating leases of certain real estate properties. The Company has a finance lease and no material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases.

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, including loans and available-for-sale debt securities.  ~~The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted.~~ Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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 August 2018, the FASB amended ASU 2018-13- Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurementtopic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement,Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019.~~2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures

10

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The ~~Company does not expect~~adoption of these amendments todid not have a material effect on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test. The Company adopted this ASU during the first quarter of 2020 with no impact to the consolidated financial position as a result of the adoption.

In March 2020, the FASB issued Accounting Standards Update ("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 is effective for March 12, 2020 through December 31, 2022. The Company is still assessing this ASU but is not expecting it to have an impact to the consolidated financial position.

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

~~NOTED~~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.

11

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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(“AFS”)

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government ~~agency securities,~~agencies, mortgage-backed securities issued by ~~government-sponsored~~government sponsored entities, ~~(“GSEs”),~~ and municipal bonds. There have been no changes in valuation techniques for the three and nine months ended September 30, ~~2019.~~2020. Valuation techniques are consistent with techniques used in prior periods.

12

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):

Investment securities
available for sale
September 30, 2019 Fair value Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs (Level 3)
U.S. government agencies-GSEs $ 10,381 $           - $ 10,381 $           -
Mortgage-backed securities-GSEs 52,104 - 52,104 -
Corporate bonds 1,553 - 1,553 -
Municipal bonds 12,903 - 12,903 -
Total investment AFS $ 76,941 $ - $ 76,941 $ -




Quoted Prices in

Significant


Investment securities

Active Markets

Other

Significant
available for sale

for Identical

Observable

Unobservable
September 30, 2020

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)
U.S. government agencies – GSE’s

$
11,760

$
—

$
11,760

$
—

Mortgage-backed securities – GSE’s

41,670

—

41,670

—

Corporate Bonds

2,103

—

2,103

—

Municipal bonds

31,901

—

31,901

—

Total investment available for sale

$
87,434

$
—

$
87,434

$
—

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




Quoted Prices in

Significant


Investment securities

Active Markets

Other

Significant
available for sale

for Identical

Observable

Unobservable
December 31, 2019

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)
U.S. government agencies – GSE’s

$
9,996

$
—

$
9,996

$
—

Mortgage-backed securities – GSE’s

47,743

—

47,743

—

Corporate Bonds

2,299

—

2,299

—

Municipal bonds

12,329

—

12,329

—

Total investment available for sale

$
72,367

$
—

$
72,367

$
—

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 ana 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.”~~“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, ~~2019~~2020 and December 31, ~~2018,~~2019, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where ~~an allowance~~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, ~~2019,~~2020, the ~~discounts~~

13

Table of Contents

SELECT BANCORP, INC.

Notes to ~~appraised value~~Consolidated Financial Statements (Unaudited)

discounts used are weighted between 3% and 50%. There were no transfers between levels from the prior reporting periods, and there have been no changes in valuation techniques for the three and nine months ended September 30, ~~2019.~~2020.

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
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.~~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, ~~2019,~~2020, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three and nine months ended September 30, ~~2019.~~2020.
~~Assets Held for Sale~~
~~During 2015, a branch facility was taken out of service as part of the Company’s branch restructuring plan and reclassified as~~Loans held for sale. The property is recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, assets held for sale ~~is classified within Level 3 of the hierarchy.~~
~~Loans Held for Sale~~
The Company originates fixed and variable rate residential mortgage loans on a ~~servicing-released~~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. ~~Therefore, loans held for sale are classified within Level 2 of the hierarchy.~~ Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in ~~fees on the sale of mortgages~~mortgage banking income in the consolidated statements of income.

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
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, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):

Asset Category
September 30, 2019 Fair value Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs (Level 3)




Quoted Prices in

Significant


Active Markets

Other

Significant

for Identical

Observable

Unobservable
Asset Category September 30, 2020

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)
Impaired loans $ 9,083 $           - $ - $ 9,083

$
7,695

$
—

$
—

$
7,695
Loans held for sale 1,714 - 1,714 -
Foreclosed real estate 1,442 - - 1,442

3,237

—

—

3,237
Total $ 12,239 $ - $ 1,714 $ 10,525

$
10,932

$
—

$
—

$
10,932

Asset Category
December 31, 2018
Fair value Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs (Level 3)

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

  Observable

Unobservable
Asset Category December 31, 2019

Fair value

   Assets (Level 1)

  Inputs (Level 2)

Inputs (Level 3)
Impaired loans $ 7,257 $             - $ - $ 7,257

$
5,941

$
—

$
—

$
5,941
Loans held for sale 580 - 580               -
Assets held for sale 668 -             - 668
Foreclosed real estate 1,088 - - 1,088

3,533

—

—

3,533
Total $ 9,593 $ - $ 580 $ 9,013

$
9,474

$
—

$
—

$
9,474

14

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the carrying values and estimated fair values of the ~~Company's~~Company’s financial instruments at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30, 2020

Carrying

Estimated


Amount

Fair Value

Level 1

Level 2

Level 3
September 30, 2019
Carrying Estimated
Amount Fair Value Level 1 Level 2 Level 3
(In thousands)

(dollars in thousands)
Financial assets:

Cash and due from banks $ 20,052 $ 20,052 $ 20,052 $ - $ -

$
25,068

$
25,068

$
25,068

$
—

$
—
Certificates of deposit 500 500 500 - -
Interest-earning deposits inother banks 53,093 53,093 53,093 - -

249,541

249,541

249,541

—

—
Federal funds sold 10,728 10,728 10,728 - -

8,046

8,046

8,046

—

—
Investment securities availablefor sale 76,941 76,941 - 76,941 -

87,434

87,434

—

87,434

—
Loans held for sale 1,714 1,714 1,714 -

2,945

2,945

—

2,945

—
Loans, net 1,006,872 998,827 - - 998,827

1,269,896

1,279,096

—

—

1,279,096
Accrued interest receivable 3,902 3,902 - 3,902 -

4,486

4,486

—

4,486

—
Stock in FHLB 3,045 3,045 - - 3,045
Stock in the FHLB

3,059

3,059

—

—

3,059
Other non-marketable securities 719 719 - - 719

718

718

—

—

718

Financial liabilities:






Deposits $ 987,673 $ 989,577 $ - $ 989,577 $ -

$
1,472,780

$
1,476,441

$
—

$
—

$
1,476,441
Short-term debt

20,000

20,000

—

20,000

—
Long-term debt 57,372 55,941 - 55,941 -

37,372

34,163

—

34,163

—
Accrued interest payable 596 596 - 596 -

449

449

—

449

—

December 31, 2019

Carrying

Estimated


Amount

Fair Value

Level 1

Level 2

Level 3
December 31, 2018
Carrying Estimated
Amount Fair Value Level 1 Level 2 Level 3
(dollars in thousands)

(dollars in thousands)
Financial assets:

Cash and due from banks $ 17,059 $ 17,059 $ 17,059 $ - $ -

$
19,110

$
19,110

$
19,110

$
—

$
—
Certificates of deposits 1,000 1,000 1,000 - -
Interest-earning deposits in other banks 121,303 121,303 121,303 - -

50,920

50,920

50,920

—

—
Federal funds sold

9,047

9,047

9,047

—

—
Investment securities available for sale 51,533 51,533 - 51,533 -

72,367

72,367

—

72,367

—
Loans held for sale 580 580 - 580 -

928

928

—

928

—
Loans, net 977,371 970,330 - - 970,330

1,021,651

1,016,239

—

—

1,016,239
Accrued interest receivable 3,889 3,889 - 3,889 -

4,189

4,189

—

4,189

—
Stock in the FHLB 3,283 3,283 - - 3,283

3,045

3,045

—

—

3,045
Other non-marketable securities 762 762 - - 762

719

719

—

—

719
Assets held for sale 668 668 - - 668

Financial liabilities:










Deposits $ 980,427 $ 979,570 $ - $ 979,570 �� $ -

$
992,838

$
995,056

$
—

$
995,056

$
—
Short-term debt 7,000 7,000 - 7,000 -
Long-term debt 57,372 55,504 - 55,504 -

57,372

55,729

—

55,729

—
Accrued interest payable 667 667 - 667 -

578

578

—

578

—

15

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

September 30, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair


cost

gains

losses

value

September 30, 2019
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(dollars in thousands)

(dollars in thousands)

Securities available for sale:

U.S. government agencies – GSEs $ 10,181 $ 202 $ (2 ) $ 10,381
Mortgage-backed securities – GSEs 51,200 919 (15 ) 52,104
U.S. government agencies – GSE’s

$
11,508

$
276

$
(24)

$
11,760

Mortgage-backed securities – GSE’s

40,195

1,528

(53)

41,670

Corporate bonds 1,532 21 - 1,553

2,101

7

(5)

2,103

Municipal bonds 12,698 205 - 12,903

31,639

333

(71)

31,901

$ 75,611 $ 1,347 $ (17 ) $ 76,941

$
85,443

$
2,144

$
(153)

$
87,434

As of September 30, 2020, accumulated other comprehensive income included net unrealized gains totaling $2.0 million. Deferred tax assets resulting from these net unrealized losses totaled $458,000.
The amortized cost and fair value of “AFS” investments, with gross unrealized gains and losses, follow:

December 31, 2019

Gross

Gross

Amortized

unrealized

unrealized

Fair


cost

gains

losses

value

(dollars in thousands)

Securities available for sale:









U.S. government agencies – GSE’s

$
9,839

$
159

$
(2)

$
9,996

Mortgage-backed securities – GSE’s

46,926

830

(13)

47,743

Corporate bonds

2,282

17

—

2,299

Municipal bonds

12,152

177

—

12,329

$
71,199

$
1,183

$
(15)

$
72,367

As of December 31, 2019, accumulated other comprehensive income included net unrealized gains totaling ~~$1.3~~$1.2 million. Deferred tax liabilities resulting from these net unrealized gains totaled ~~$300,000.~~$269,000.

16

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value ~~of AFS investments, with gross unrealized gains and losses, follow:~~
December 31, 2018
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSEs $ 9,852 $ 36 $ (51 ) $ 9,837
Mortgage-backed securities – GSEs 23,150 62 (229 ) 22,983
Corporate bonds 1,697 25 - 1,722
Municipal bonds 16,910 105 (24 ) 16,991

$ 51,609 $ 228 $ (304 ) $ 51,533
~~As of December 31, 2018, accumulated other comprehensive loss included net unrealized losses totaling $76,000. Deferred tax assets resulting from these net unrealized losses totaled $17,000.~~
18
~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
~~The scheduled maturities~~ of securities available for sale, with gross unrealized gains and losses, ~~were as follows:~~follow:

September 30, 2019
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(In thousands)
Securities available for sale:
Within 1 year $ 8,114 $ 23 $ (7 ) $ 8,130
After 1 year but within 5 years 45,902 728 (10 ) 46,620
After 5 years but within 10 years 14,083 423 - 14,506
After 10 years 7,512 173 �� - 7,685

$ 75,611 $ 1,347 $ (17 ) $ 76,941

September 30, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair


cost

gains

losses

value

(dollars in thousands)
Securities available for sale:








Due within one year

$
2,757

$
8

$
(1)

$
2,764
Due after one but within five years

26,947

1,268

(1)

28,214
Due after five but within ten years

5,565

81

(7)

5,639
Due after ten years

50,174

787

(144)

50,817

$
85,443

$
2,144

$
(153)

$
87,434

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

$ 51,609 $ 228 $ (304 ) $ 51,533

December 31, 2019

Gross

Gross

Amortized

unrealized

unrealized

Fair


cost

gains

losses

value

(dollars in thousands)
Securities available for sale:








Due within one year

$
8,901

$
19

$
(6)

$
8,914
Due after one but within five years

40,954

695

(7)

41,642
Due after five but within ten years

4,568

94

(1)

4,661
Due after ten years

16,776

375

(1)

17,150

$
71,199

$
1,183

$
(15)

$
72,367

Securities with a carrying value of ~~$21.8~~$48.1 million and ~~$6.4~~$18.4 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.
None of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations. The Company has the intent and ability to hold these securities to recovery. No other than temporary impairments were identified for these investments having unrealized losses for the periods ended September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The Company ~~did~~has not ~~sell~~incurred any losses related to securities ~~in 2018 and sold two securities for a gain of $48,000~~sales in the first nine months of 2020 or during the year ended December 31, 2019.

17

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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, ~~2019~~2020 and December 31, ~~2018.~~2019.

September 30, 2020

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


value

losses

value

losses

value

losses

(dollars in thousands)

Securities available for sale:

U.S. government agencies – GSE’s

$
3,478

$
(22)

$
479

$
(2)

$
3,957

$
(24)

Mortgage-backed securities–GSE’s

8,044

(51)

1,999

(2)

10,043

(53)

Corporate bonds

753

(5)

—

—

753

(5)

Municipal bonds

10,578

(71)

—

—

10,578

(71)

Total temporarily impaired securities

$
22,853

$
(149)

$
2,478

$
(4)

$
25,331

$
(153)

September 30, 2019
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSEs $ - $ - $ 627 $ (2 ) $ 627 $ (2 )
Mortgage-backed securities-GSEs 3,150 (3 ) 3,784 (12 ) 6,934 (15 )
Total temporarily impaired securities $ 3,150 $ (3 ) $ 4,411 $ (14 ) $ 7,561 $ (17 )

At September 30, ~~2019,~~2020, the Company had ~~four~~3 securities inwith an unrealized loss ~~position~~ for more than twelve months of ~~$4.4 million. There were three~~$4,000 which consisted of 2 U.S. government agencies-GSEs and 1 mortgage-backed ~~GSEs in an~~- GSE bond. NaN securities had unrealized ~~loss position~~losses for less than twelve months totaling ~~$3.2 million~~$149,000 at September 30, 2020, which consisted of 9 Municipal bonds, 1 corporate bond, 1 U.S. government agencies - GSEs and 4 mortgage-backed - GSE bonds. All unrealized losses are attributable to the general trend of interest rates.

December 31, 2019

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


value

losses

value

losses

value

losses

(dollars in thousands)

Securities available for sale:

U.S. government agencies – GSE’s

$
872

$
—

$
621

$
(2)

$
1,493

$
(2)

Mortgage-backed securities–GSE’s

2,672

(3)

3,774

(10)

6,446

(13)

Corporate bonds

—

—

—

—

—

—

Municipal bonds

—

—

—

—

—

—

Total temporarily impaired securities

$
3,544

$
(3)

$
4,395

$
(12)

$
7,939

$
(15)

At December 31, 2019, the Company had 1 mortgage-backed GSE and 1 U.S Government agency – GSE with an unrealized loss for twelve or more consecutive months totaling $12,000. The Company had 3 securities with a loss for twelve months or less at December 31, 2019. NaN U.S. government agency GSE and 2 mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $3,000 at December 31, 2019. All unrealized losses are attributable to the general trend of interest rates. ~~There were two investment securities sold during the first nine months~~

18

Table of ~~2019 at a gain of $48,000.~~Contents

December 31, 2018
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSEs $ 1,224 $ (6 ) $ 4,086 $ (45 ) $ 5,310 $ (51 )
Mortgage-backed securities-GSEs 200 - 16,932 (229 ) 17,132 (229 )
Municipal bonds 1,007 (2 ) 1,740 (22 ) 2,747 (24 )
Total temporarily impaired securities $ 2,431 $ (8 ) $ 22,758 $ (296 ) $ 25,189 $ (304 )
At December 31, 2018, the Company had twenty-four AFS mortgage-backed GSEs, four municipals and six U.S Government agencies – GSEs with an unrealized loss for twelve or more consecutive months totaling $296,000. The Company had six AFS securities with a loss for twelve months or less. Three U.S. government agency GSEs, two municipals and one mortgage-backed GSE had unrealized losses for less than twelve months totaling $8,000 at December 31, 2018. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. There were no sales of investment securities available for sale during 2018.

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

NOTE F - LOANS
Following is a summary of the composition of the Company’s loan portfolio at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30,

December 31,

2020

2019

Percent

Percent


Amount

of total

Amount

of total

September 30, December 31,
2019 2018
Percent Percent
Amount of total Amount of total
(dollars in thousands)

(dollars in thousands)

Real estate loans:

1-to-4 family residential $ 153,862 15.16 % $ 159,597 16.19 %

$
195,174

15.21
%
$
151,697

14.73
%

Commercial real estate 452,644 44.60 % 457,611 46.41 %

537,087

41.85
%

459,115

44.58
%

Multi-family residential 62,080 6.12 % 63,459 6.44 %

79,697

6.21
%

69,124

6.71
%

Construction 212,677 20.95 % 170,404 17.28 %

255,718

19.92
%

221,878

21.55
%

Home equity lines of credit (“HELOC”) 46,221 4.55 % 49,713 5.04 %

48,395

3.77
%

44,514

4.32
%

Total real estate loans 927,484 91.38 % 900,784 91.36 %

1,116,071

86.96
%

946,328

91.89
%

Other loans:





Commercial and industrial 79,686 7.85 % 74,181 7.52 %

165,766

12.91
%

75,748

7.35
%

Loans to individuals 9,539 0.94 % 12,597 1.28 %

7,017

0.55
%

9,779

0.95
%

Overdrafts 180 0.02 % 217 0.02 %

80

0.01
%

234

0.02
%

Total other loans 89,405 8.81 % 86,995 8.82 %

172,863

13.47
%

85,761

8.32
%

Gross loans 1,016,889 987,779

1,288,934

1,032,089

Less deferred loan origination fees, net (1,961 ) (0.19 )% (1,739 ) (0.18 )%

(5,477)

(0.43)
%

(2,114)

(0.21)
%

Total loans 1,014,928 100.00 % 986,040 100.00 %

1,283,457

100.00
%

1,029,975

100.00
%

Allowance for loan losses (8,056 ) (8,669 )

(13,561)

(8,324)



Total loans, net $ 1,006,872 $ 977,371

$
1,269,896

$
1,021,651



For Purchased Credit Impaired, or PCI loans, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were:

(dollars in thousands) September 30,
2019 December 31,
2018


September 30, 2020

December 31, 2019
Contractually required payments $ 20,999 $ 24,823

$
38,279

$
20,598
Nonaccretable difference 1,659 1,962

3,401

1,694
Cash flows expected to be collected 19,340 22,861

34,878

18,904
Accretable yield 3,305 3,593

4,891

3,191
Carrying value $ 16,035 $ 19,268

$
29,987

$
15,713

Loans are primarily secured by real estate located in ~~eastern and central~~the State of 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, ~~2019,~~2020, the Company had pre-approved but unused lines of credit for customers totaling ~~$178.2~~$230.2 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.

19

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The Bank has originated 1,249 loans amounting to $97.0 million during 2020 under the Paycheck Protection Program (“PPP”) which are classified as Commercial and industrial loans in the loan portfolio. As of September 30, 2020 the Bank has 1,242 PPP loans amounting to $95.3 million. The PPP loan program is sponsored by the Small Business Administration (SBA) to primarily 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.
A floating lien of $112.6 million of loans was pledged to the FHLB to secure borrowings at September 30, ~~2019.~~

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
2020.
The following tables present an age analysis of past due loans, segregated by class of loans as of
September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:

September 30, 2020

30-59

60-89

90+

Non-

Total

Days

Days

Days

Accrual

Past

Total


Past Due

Past Due

Accruing

Loans

Due

Current

Loans

September 30, 2019
30-59 60-89 90+ Non- Total
Days Days Days Accrual Past Total
Past Due Past Due Accruing Loans Due Current Loans
(dollars in thousands)

(dollars in thousands)

Commercial and industrial $ 80 $ - $ 1,362 $ 3,664 $ 5,106 $ 74,580 $ 79,686

$
2

$
105

$
543

$
3,687

$
4,337

$
161,429

$
165,766

Construction 166 - - 2,272 2,438 210,239 212,677

0

0

0

161

161

255,557

255,718

Multi-family residential - - - - 62,080 62,080

0

0

0

0

—

79,697

79,697

Commercial real estate 6 88 - 2,020 2,114 450,530 452,644

210

0

336

2,489

3,035

534,052

537,087

Loans to individuals &overdrafts 31 - - - 31 9,688 9,719

9

0

0

145

154

6,943

7,097

1-to-4 family residential 51 474 934 382 1,841 152,021 153,862
1‑to‑4 family residential

200

13

669

950

1,832

193,342

195,174

HELOC - - - 745 745 45,476 46,221

95

31

0

263

389

48,006

48,395

Deferred loan (fees)cost, net - - - - - - (1,961 )

0

0

0

0

—

0

(5,477)

$ 334 $ 562 $ 2,296 $ 9,083 $ 12,275 $ 1,004,614 $ 1,014,928

$
516

$
149

$
1,548

$
7,695

$
9,908

$
1,279,026

$
1,283,457

December 31, 2019

30-59

60-89

90+

Non-

Total

Days

Days

Days

Accrual

Past

Total


Past Due

Past Due

Accruing

Loans

Due

Current

Loans

(dollars in thousands)

Commercial and industrial

$
1,108

$
34

$
46

$
2,824

$
4,012

$
71,736

$
75,748

Construction

0

0

0

181

181

221,697

221,878

Multi-family residential

0

0

0

0

0

69,124

69,124

Commercial real estate

393

82

321

1,832

2,628

456,487

459,115

Loans to individuals & overdrafts

5

0

0

155

160

9,853

10,013

1‑to‑4 family residential

859

810

864

505

3,038

148,659

151,697

HELOC

168

0

0

444

612

43,902

44,514

Deferred loan (fees) cost, net

0

0

0

0

0

0

(2,114)

$
2,533

$
926

$
1,231

$
5,941

$
10,631

$
1,021,458

$
1,029,975

20

Table of Contents

December 31, 2018
30-59 60-89 90+ Non- Total
Days Days Days Accrual Past Total
Past Due Past Due Accruing Loans Due Current Loans
(dollars in thousands)
Commercial and industrial $ 27 $ 203 $ 1,665 $ 4,170 $ 6,065 $ 68,116 $ 74,181
Construction - - 69 587 656 169,748 170,404
Multi-family residential - - - - - 63,459 63,459
Commercial real estate 103 483 - 1,074 1,660 455,951 457,611
Loans to individuals & overdrafts 1 24 - - 25 12,789 12,814
1-to-4 family residential 502 505 1,433 386 2,826 156,771 159,597
HELOC - 43 - 1,040 1,083 48,630 49,713
Deferred loan (fees) cost, net - - - - - - (1,739 )
$ 633 $ 1,258 $ 3,167 $ 7,257 $ 12,315 $ 975,464 $ 986,040

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

Impaired Loans
The following tables present information on loans that were considered to be impaired as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

As of September 30, 2020

Three Months Ended

Nine Months Ended

Contractual

September 30, 2020

September 30, 2020

Unpaid

Related

Average

Interest Income

Average

Interest Income

Recorded

Principal

Allowance

Recorded

Recognized on

Recorded

Recognized on


Investment

Balance

for Loan Losses

Investment

Impaired Loans

Investment

Impaired Loans

(dollars in thousands)

2020 :

With no related allowance recorded:

Commercial and industrial

$
3,635

$
5,466

$
—

$
4,818

$
25

$
4,475

$
152

Construction

262

366

—

345

6

291

17

Commercial real estate

5,175

5,448

—

5,265

38

5,661

127

Loans to individuals & overdrafts

261

279

—

271

—

273

14

Multi-family residential

—

—

—

—

—

99

—

HELOC

411

553

—

453

2

575

22

1‑to‑4 family residential

197

207

—

202

22

292

—

Subtotal:

9,941

12,319

—

11,354

93

11,666

332

With an allowance recorded:

Commercial and industrial

502

521

162

576

19

576

18

Construction

—

—

—

—

—

—

—

Commercial real estate

977

1,032

325

986

15

208

46

Loans to individuals & overdrafts

—

—

—

—

—

—

—

Multi-family Residential

—

—

—

—

—

—

—

HELOC

119

150

9

122

5

264

6

1‑to‑4 family residential

39

107

10

103

—

64

6

Subtotal:

1,637

1,810

506

1,787

39

1,112

76

Totals:

Commercial

10,551

12,833

487

11,990

103

11,310

360

Consumer

261

279

—

271

—

273

14

Residential

766

1,017

19

880

29

1,195

34

Grand Total:

$
11,578

$
14,129

$
506

$
13,141

$
132

$
12,778

$
408

Three months ended Nine months ended
As of September 30, 2019 September 30, 2019 September 30, 2019
Contractual Interest Income Interest Income
Unpaid Average Recognized on Average Recognized on
Recorded Principal Related Recorded Impaired Recorded Impaired
Investment Balance Allowance Investment Loans Investment Loans
(In thousands)
With no related allowance recorded:
Commercial and industrial $ 3,142 $ 4,530 $ - $ 4,010 $ 32 $ 4,397 $ 100
Construction 2,531 2,635 - 2,413 12 1,546 20
Commercial real estate 6,366 7,601 - 7,167 70 6,022 218
Loans to individuals & overdrafts 85 89 - 84 6 93 6
Multi-family residential 202 202 - 205 3 209 10
1-to-4 family residential 658 1,843 - 1,205 21 1,202 61
HELOC 845 1,044 - 861 11 944 36
Subtotal: 13,829 17,944 - 15,945 155 14,413 451
With an allowance recorded:
Commercial and industrial 731 1,056 230 882 1 572 41
Construction - - - - - 13 -
Commercial real estate - - - - - - -
Loans to individuals & overdrafts - - - - - - -
Multi-family residential - - - - - - -
1-to-4 family residential 81 94 6 546 14 563 7
HELOC 160 222 48 162 4 212 10
Subtotal: 972 1,372 284 1,590 19 1,360 58
Totals:
Commercial 12,972 16,024 230 14,677 118 12,759 389
Consumer 85 89 - 84 6 93 6
Residential 1,744 3,203 54 2,774 50 2,921 114
Grand Total: $ 14,801 $ 19,316 $ 284 $ 17,535 $ 174 $ 15,773 $ 509

Impaired loans at September 30, ~~2019~~2020 were approximately ~~$14.8~~$11.6 million and were composed of ~~$9.1~~$7.7 million in ~~nonaccrual~~non-accrual loans and ~~$5.7~~ $3.9million in loans that were still accruing interest. ~~Certain PCI loans are redirected and are not included in the table above.~~ Recorded investment represents the current principal balance of the loan. Approximately ~~$972,000~~$1.6 million in impaired loans had specific allowances provided for them while the

21

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

remaining ~~$13.8~~$9.9 million had no specific allowances recorded at September 30, ~~2019.~~2020. Of the ~~$13.8~~$9.9 million with no allowance recorded, $307,000 of those loans have had partial charge-offs ~~through September 30, 2019 amounted to $844,000.~~recorded.


As of December 31, 2019

Three Months Ended

Nine Months Ended

Contractual

September 30, 2019

September 30, 2019

Unpaid

Related

Average

Interest Income

Average

Interest Income

Recorded

Principal

Allowance

Recorded

Recognized on

Recorded

Recognized on


Investment

Balance

for Loan Losses

Investment

Impaired Loans

Investment

Impaired Loans

(dollars in thousands)

2019 :

With no related allowance recorded:

Commercial and industrial

$
2,796

$
4,051

$
—

$
4,010

$
32

$
4,397

$
100

Construction

440

537

—

2,413

12

1,546

20

Commercial real estate

5,585

6,750

—

7,167

70

6,022

218

Loans to individuals & overdrafts

197

197

—

84

6

93

6

Multi-family residential

284

293

—

205

3

209

10

HELOC

543

678

—

1,205

21

1,202

61

1‑to‑4 family residential

395

1,816

—

861

11

944

36

Subtotal:

10,240

14,322

—

15,945

155

14,413

451

With an allowance recorded:

Commercial and industrial

731

1,056

403

882

1

572

41

Construction

—

—

—

—

—

13

—

Commercial real estate

—

—

—

—

—

—

—

Loans to individuals & overdrafts

—

—

—

—

—

—

—

Multi-family Residential

—

—

—

—

—

—

—

HELOC

160

222

—

546

14

563

7

1‑to‑4 family residential

81

94

10

162

4

212

10

Subtotal:

972

1,372

413

1,590

19

1,360

58

Totals:















Commercial

9,749

12,591

403

14,677

118

12,759

389

Consumer

284

293

—

84

6

93

6

Residential

1,179

2,810

10

2,774

50

2,921

114

Grand Total:

$
11,212

$
15,694

$
413

$
17,535

$
174

$
15,773

$
509

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
Three months ended Nine months ended
As of December 31, 2018 September 30, 2018 September 30, 2018
Contractual Interest Income Interest Income
Unpaid Average Recognized on Average Recognized on
Recorded Principal Related Recorded Impaired Recorded Impaired
Investment Balance Allowance Investment Loans Investment Loans
(In thousands)
With no related allowance recorded:
Commercial and industrial $ 4,210 $ 4,495 $ - $ 3,789 $ - $ 2,178 $ 108
Construction 561 647 - 481 8 486 10
Commercial real estate 4,744 6,903 - 5,361 84 4,789 238
Loans to individuals & overdrafts 215 215 - 66 1 66 1
Multi-family residential 101 109 - 223 5 227 11
1-to-4 family residential 1,040 1,204 - 782 10 829 35
HELOC 572 732 - 896 9 803 34
Subtotal: 11,443 14,305 - 11,598 117 9,378 437
With an allowance recorded:
Commercial and industrial 127 325 51 386 19 387 20
Construction 27 27 14 26 - - -
Commercial real estate - - - - - - -
Loans to individuals & overdrafts - - - 2 - -      -
Multi-family residential - - - - - - -
1-to-4 family residential 137 555 22 145 - 172 6
HELOC - - - 142 3 - -
Subtotal: 291 907 87 701 22 559 26
Totals:
Commercial 10,007 12,612 65 10,266 116 8,067 387
Consumer 101 109 - 68 1 66 1
Residential 1,626 2,491 22 1,965 22 1,804 75
Grand Total: $ 11,734 $ 15,212 $ 87 $ 12,299 $ 139 $ 9,937 $ 463

Impaired loans at December 31, ~~2018~~2019 were approximately ~~$11.7~~$11.2 million and ~~were comprised of $7.3~~included $5.9 million in non-accrual loans and ~~$4.4~~$6.2 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately ~~$291,000~~$972,000 of the ~~$11.7~~$11.2 million in impaired loans at December 31, ~~2018~~2019 had specific allowances aggregating ~~$87,000~~$413,000 while the remaining ~~$11.4~~$10.2 million had no specific allowances recorded. Of the ~~$11.4~~$10.2 million with no allowance recorded, partial charge-offs through December 31, ~~2018~~2019 amounted to ~~$3.5 million.~~
$438,000.
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.

22

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructurings
The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Number

Outstanding

Outstanding

Number

Outstanding

Outstanding

of

Recorded

Recorded

of

Recorded

Recorded


loans

Investments

Investments

loans

Investments

Investments

Three months ended September 30, 2019 Nine months ended September 30, 2019
Pre- Post- Pre- Post-
Modification Modification Modification Modification
Outstanding Outstanding Outstanding Outstanding
Number Recorded Recorded Number Recorded Recorded
of loans Investment Investment of loans Investment Investment
(Dollars in thousands)

(dollars in thousands)

(dollars in thousands)

Extended payment terms:













1-to-4 family residential 1 $ 174 $ 173 3 $ 233 $ 211

2

$
339

$
325

6

$
797

$
537

Commercial real estate - - - 1 752 702
Construction 1 259 259 1 259 259

—

—

—

1

157

13

HELOC

—

—

—

2

240

232

Commercial & industrial 1 103 71 4 931 899

2

146

139

4

1,091

1,083

Loans to individuals

—

—

—

1

14

9

Total 3 $ 536 $ 503 9 $ 2,175 $ 2,071

4

$
485

$
464

14

$
2,299

$
1,874

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Number

Outstanding

Outstanding

Number

Outstanding

Outstanding

of

Recorded

Recorded

of

Recorded

Recorded


loans

Investments

Investments

loans

Investments

Investments

(dollars in thousands)

(dollars in thousands)
Extended payment terms:












Commercial and industrial

1

$
103

$
71

4

$
931

$
899
Commercial real estate

—

—

—

1

752

702
Construction

1

259

259

1

259

259
1‑to‑4 family residential

1

174

173

3

233

211

Total

3

$
536

$
503

9

$
2,175

$
2,071

Three months ended September 30, 2018 Nine months ended September 30, 2018
Pre- Post- Pre- Post-
Modification Modification Modification Modification
Outstanding Outstanding Outstanding Outstanding
Number Recorded Recorded Number Recorded Recorded
of loans Investment Investment of loans Investment Investment
(Dollars in thousands)
Extended payment terms:
1-to-4 family residential 1 $ 17 $ 16 2 $ 426 $ 413
Commercial real estate 1 392 350 3 1,283 1,123
Commercial & industrial 1 74 74 7 1,653 1,625

Total 3 $ 483 $ 440 12 $ 3,362 $ 3,161
~~Loans may be considered troubled debt restructurings for reasons including, but not limited to, below market interest rates, extended payment terms or forgiveness of principal.~~
25
~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
~~Troubled Debt Restructurings (continued)~~

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~~twelve month periods ended September 30, ~~2019~~2020 and ~~2018:~~2019:

Twelve months ended

Twelve months ended

September 30, 2020

September 30, 2019

Number

Recorded

Number

Recorded


of loans

investment

of loans

investment

(dollars in thousands)

(dollars in thousands)

Extended payment terms:









Commercial and industrial

4

$
2,203

—

$
—

Construction

2

208

—

—

1-to-4 family residential

1

10

1

16

Total

7

$
2,421

1

$
16

At September 30, 2020, the Bank had NaN loans with an aggregate balance of $10.3 million that were considered to be troubled debt restructurings. Of those TDRs, NaN loans with a balance totaling $3.9 million were still accruing as of September 30, 2020. The remaining TDRs with balances totaling $6.4 million as of September 30, 2020 were in non-accrual status. In response to the impact of COVID-19, payment deferrals were granted on 497 loans totaling $252.3
Twelve months ended Twelve months ended
September 30, 2019 September 30, 2018
Number Recorded Number Recorded
of loans investment of loans investment
(Dollars in thousands)
Extended payment terms:
Commercial & industrial - $ - 5 $ 1,512
Commercial real estate - - 2 724
1-to-4 family residential 1 16 2 461

Total 1 $ 16 9 $ 2,697

23

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

million through September 30, 2020 of which 114 loans amounting to $65.6 million remained on deferral at quarter end. The Bank has chosen to apply the CARES Act election for the accounting of TDRs. As permitted by applicable regulatory guidance, these loans were not classified as TDRs at September 30, 2020.
At September 30, 2019, the Bank had ~~forty-one~~NaN loans with an aggregate balance of $8.2 million that were considered to be troubled debt restructurings. Of those TDRs, ~~twenty-eight~~NaN loans with a balance totaling $6.5 million were still accruing as of September 30, 2019. The remaining TDRs with balances totaling $1.7 million as of September 30, 2019 were in non-accrual status.
At September 30, 2018, the Bank had forty-one loans with an aggregate balance of $7.5 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-three loans with a balance totaling $4.5 million were still accruing as of September 30, 2018. The remaining TDRs with balances totaling $3.0 million as of September 30, 2018 were in non-accrual status.

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:
Total loans:

September 30, 2020
Commercial

Credit

Exposure By

Commercial

Commercial

Internally

and

real

Multi-family
Assigned Grade

industrial

Construction

estate

residential

(dollars in thousands)

Superior

$
96,415

$
—

$
76

$
—
Very good

368

162

7,812

—
Good

5,538

2,196

67,996

4,866
Acceptable

22,173

24,718

270,857

50,771
Acceptable with care

35,331

228,132

181,384

24,060
Special mention

390

349

2,363

—
Substandard

5,551

161

6,599

—
Doubtful

—

—

—

—
Loss

—

—

—

—

$
165,766

$
255,718

$
537,087

$
79,697

September 30, 2019
Commercial
Credit
Exposure By Commercial Commercial
Internally and real Multi-family
Assigned Grade industrial Construction estate residential
(In thousands)
Superior $ 1,602 $ - $ 232 $ -
Very good 670 153 1,121 -
Good 4,122 8,849 60,135 4,884
Acceptable 22,853 19,978 246,804 38,784
Acceptable with care 44,004 180,985 137,263 18,412
Special mention 1,499 441 1,885 -
Substandard 4,936 2,271 5,204 -
Doubtful - - - -
Loss - - - -
$ 79,686 $ 212,677 $ 452,644 $ 62,080

Consumer Credit



Exposure By

Internally

1‑to‑4 family

Assigned Grade

residential

HELOC

Pass

$
191,984

$
47,300
Special mention

445

205
Substandard

2,745

890

$
195,174

$
48,395
Consumer Credit
Exposure By
Internally 1-to-4 family
Assigned Grade residential HELOC
Pass $ 149,883 $ 44,990
Special mention 1,550 76
Substandard 2,429 1,155
$ 153,862 $ 46,221
Consumer Credit
Exposure Based Loans to
On Payment individuals &
Activity overdrafts ��
Pass $ 9,593
Special mention 10
Substandard 116
$ 9,719
27
24

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Consumer Credit

Exposure Based

Loans to
On Payment

individuals &
Activity

overdrafts

Pass

$
6,806
Special mention

291

$
7,097

Total Loans:

December 31, 2019
Commercial

Credit

Exposure By

Commercial

Commercial

Internally

and

real

Multi-family
Assigned Grade

industrial

Construction

estate

residential

(dollars in thousands)

Superior

$
4,014

$
—

$
337

$
—
Very good

349

110

1,245

—
Good

5,976

8,674

62,643

4,839
Acceptable

19,197

16,249

255,751

41,113
Acceptable with care

40,579

196,228

133,190

23,172
Special mention

242

436

1,490

—
Substandard

5,391

181

4,459

—
Doubtful

—

—

—

—
Loss

—

—

—

—

$
75,748

$
221,878

$
459,115

$
69,124

Consumer Credit



Exposure By

Internally

1‑to‑4 family

Assigned Grade

residential

HELOC

Pass

$
147,958

$
43,585
Special mention

1,246

76
Substandard

2,493

853

$
151,697

$
44,514

25

Table of Contents

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

Pass $ 10,891
Special mention 1,923
$ 12,814

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

Consumer Credit

Exposure Based

Loans to
On Payment

individuals &
Activity

overdrafts

Pass

$
9,727
Special mention

286

$
10,013

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 ~~companies.~~
company.
The following table documents changes to the amount of the accretable yield on PCI loans for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
(dollars in thousands)

(dollars in thousands)

(dollars in thousands)

Accretable yield, beginning of period $ 3,481 $ 3,102 $ 3,593 $ 3,307

$
5,661

$
3,481

$
3,191

$
3,593

Additions

—

—

2,949

—

Accretion (277 ) (540 ) (855 ) (1,242 )

(487)

(277)

(1,209)

(855)

Reclassification from (to) nonaccretable difference 45 15 293 78
Reclassification from nonaccretable difference

24

45

67

293

Other changes, net 56 35 274 469

(307)

56

(107)

274

Accretable yield, end of period $ 3,305 $ 2,612 $ 3,305 $ 2,612

$
4,891

$
3,305

$
4,891

$
3,305

26

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2020 and September 30, 2019, ~~respectively:~~respectively (dollars in thousands):

Three Months Ended September 30, 2020

Commercial





1 to 4



Loans to

Multi-


and

Commercial

family

individuals &

family

2020

industrial

Construction

real estate

residential

HELOC

overdrafts

residential

Total

Allowance for loan losses

Loans – excluding PCI

















Balance, beginning of period 07/01/2020

$
2,623

$
2,284

$
4,184

$
1,671

$
388

$
108

$
621

$
11,879

Provision for (recovery of) loan losses

1,568

212

325

(570)

(49)

4

84

1,574

Loans charged-off

(98)

0

(70)

0

0

(23)

0

(191)

Recoveries

40

0

1

7

1

7

4

60

Balance, end of period 9/30/2020

$
4,133

$
2,496

$
4,440

$
1,108

$
340

$
96

$
709

$
13,322

PCI Loans







Balance, beginning of period 07/01/2020

$
23

$
11

$
44

$
75

$
9

$
4

$
9

$
175

Provision for (recovery of) loan losses

(23)

(11)

(44)

164

(9)

(4)

(9)

64

Loans charged-off

0

0

0

0

0

0

0

0

Recoveries

0

0

0

0

0

0

0

0

Balance, end of period 9/30/2020

$
0

$
0

$
0

$
239

$
0

$
0

$
0

$
239

Total Loans









Balance, beginning of period 07/01/2020

$
2,646

$
2,295

$
4,228

$
1,746

$
397

$
112

$
630

$
12,054

Provision for (recovery of) loan losses

1,545

201

281

(406)

(58)

0

75

1,638

Loans charged-off

(98)

0

(70)

0

0

(23)

0

(191)

Recoveries

40

0

1

7

1

7

4

60

Balance, end of period 9/30/2020

$
4,133

$
2,496

$
4,440

$
1,347

$
340

$
96

$
709

$
13,561

Ending Balance: individually evaluated for impairment

$
162

$
0

$
325

$
10

$
9

$
0

$
0

$
506

Ending Balance: collectively evaluated for impairment

$
3,971

$
2,496

$
4,115

$
1,337

$
331

$
96

$
709

$
13,055

Loans:











Ending Balance: collectively evaluated for impairment non PCI loans

$
159,585

$
253,851

$
518,462

$
182,926

$
47,190

$
6,709

$
78,646

$
1,247,369

Ending Balance: collectively evaluated for impairment PCI loans

$
1,557

$
1,605

$
12,959

$
12,013

$
675

$
127

$
1,051

$
29,987

Ending Balance: individually evaluated for impairment

$
4,624

$
262

$
5,666

$
235

$
530

$
261

$
0

$
11,578

Ending Balance

$
165,766

$
255,718

$
537,087

$
195,174

$
48,395

$
7,097

$
79,697

$
1,288,934

Three months ended September 30, 2019
Commercial 1 to 4 Loans to Multi-
and Commercial family individuals & family
Allowance for loan losses industrial Construction real estate residential HELOC overdrafts residential Total
(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period $ 814 $ 1,487 $ 2,818 $ 1,543 $ 432 $ 309 $ 383 $ 7,786
Provision for (recovery of) loan losses 123 212 (44 ) (111 ) 18 9 11 218
Loans charged-off (48 ) - - - (50 ) (155 ) - (253 )
Recoveries 2 - 1 8 21 5 - 37
Balance, end of period $ 891 $ 1,699 $ 2,775 $ 1,440 $ 421 $ 168 $ 394 $ 7,788

PCI Loans
Balance, beginning of period $ 298 $ 6 $ 142 $ 62 $ 1 $ - $ 8 $ 517
Provision for (recovery of) loan losses 10 - - (10 ) - 13 - 13
Loans charged-off (249 ) - - - - (13 ) - (262 )
Recoveries - - - - - - - -
Balance, end of period $ 59 $ 6 $ 142 $ 52 $ 1 $ - $ 8 $ 268

Total Loans
Balance, beginning of period $ 1,112 $ 1,493 $ 2,960 $ 1,605 $ 433 $ 309 $ 391 $ 8,303
Provision for (recovery of) loan losses 133 212 (44 ) (121 ) 18 22 11 231
Loans charged-off (297 ) - - - (50 ) (168 ) - (515 )
Recoveries 2 - 1 8 21 5 - 37
Balance, end of period $ 950 $ 1,705 $ 2,917 $ 1,492 $ 422 $ 168 $ 402 $ 8,056

Ending Balance: individually evaluated for impairment $ 230 $ - $ - $ 6 $ 48 $ - $ - $ 284
Ending Balance: collectively evaluated for impairment $ 720 $ 1,705 $ 2,917 $ 1,486 $ 374 $ 168 $ 402 $ 7,772

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans $ 74,658 $ 209,464 $ 440,244 $ 145,645 $ 45,170 $ 9,634 $ 60,970 $ 985,785
Ending Balance: collectively evaluated for impairment PCI loans $ 1,154 $ 682 $ 6,033 $ 7,479 $ 47 $ - $ 908 $ 16,303
Ending Balance: individually evaluated for impairment $ 3,874 $ 2,531 $ 6,367 $ 738 $ 1,004 $ 85 $ 202 $ 14,801
Ending Balance $ 79,686 $ 212,677 $ 452,644 $ 153,862 $ 46,221 $ 9,719 $ 62,080 $ 1,016,889
30
27

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Nine Months Ended September 30, 2020

Commercial





1 to 4



Loans to

Multi-


and

Commercial

family

individuals &

family

2020

industrial

Construction

real estate

residential

HELOC

overdrafts

residential

Total
Allowance for loan losses

Loans – excluding PCI
















Balance, beginning of period 01/01/2020

$
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)

0

(70)

0

0

(42)

0

(740)
Recoveries

43

0

3

23

42

18

4

133
Balance, end of period 9/30/2020

$
4,133

$
2,496

$
4,440

$
1,108

$
340

$
96

$
709

$
13,322

PCI Loans







Balance, beginning of period 01/01/2020

$
178

$
6

$
14

$
56

$
0

$
0

$
15

$
269
Provision for (recovery of) loan losses

(178)

(6)

(14)

183

0

0

(15)

(30)
Loans charged-off

0

0

0

0

0

0

0

0
Recoveries

0

0

0

0

0

0

0

0
Balance, end of period 9/30/2020

$
0

$
0

$
0

$
239

$
0

$
0

$
0

$
239

Total Loans









Balance, beginning of period 01/01/2020

$
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)

0

(70)

0

0

(42)

0

(740)
Recoveries

43

0

3

23

42

18

4

133
Balance, end of period 9/30/2020

$
4,133

$
2,496

$
4,440

$
1,347

$
340

$
96

$
709

$
13,561

28

Table of Contents

Nine months ended September 30, 2019
Commercial 1 to 4 Loans to Multi-
and Commercial family individuals & family
Allowance for loan losses industrial Construction real estate residential HELOC overdrafts residential Total
(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period $ 762 $ 1,385 $ 3,024 $ 1,663 $ 555 $ 206 $ 471 $ 8,066
Provision for (recovery of) loan losses 422 296 (289 ) (248 ) (18 ) 123 (77 ) 209
Loans charged-off (305 ) - (10 ) - (150 ) (179 ) - (644 )
Recoveries 12 18 50 25 34 18 - 157
Balance, end of period $ 891 $ 1,699 $ 2,775 $ 1,440 $ 421 $ 168 $ 394 $ 7,788

PCI Loans
Balance, beginning of period $ 214 $ - $ 385 $ 4 $ - $ - $ - $ 603
Provision for (recovery of) loan losses 94 6 (243 ) 48 1 13 8 (73 )
Loans charged-off (249 ) - - - - (13 ) - (262 )
Recoveries - - - - - - - -
Balance, end of period $ 59 $ 6 $ 142 $ 52 $ 1 $ - $ 8 $ 268

Total Loans
Balance, beginning of period $ 976 $ 1,385 $ 3,409 $ 1,667 $ 555 $ 206 $ 471 $ 8,669
Provision for (recovery of) loan losses 516 302 (532 ) (200 ) (17 ) 136 (69 ) 136
Loans charged-off (554 ) - (10 ) - (150 ) (192 ) - (906 )
Recoveries 12 18 50 25 34 18 - 157
Balance, end of period $ 950 $ 1,705 $ 2,917 $ 1,492 $ 422 $ 168 $ 402 $ 8,056
The Company periodically reviews and updates its qualitative factors for changes in current conditions. During the three months ended September 30, 2019, the Company adjusted several factors, including reducing the factors relating to exceptions, accuracy, and delinquency for certain loan types resulting in a reduction of $270,000 of the allowance for loan losses.

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

Three Months Ended September 30, 2019

Commercial





1 to 4



Loans to

Multi-


and

Commercial

family

individuals &

family

2019

industrial

Construction

real estate

residential

HELOC

overdrafts

residential

Total

Allowance for loan losses

Loans – excluding PCI

Balance, beginning of period 07/01/2019

$
814

$
1,487

$
2,818

$
1,543

$
432

$
309

$
383

$
7,786

Provision for (recovery of) loan losses

123

212

(44)

(111)

18

9

11

218

Loans charged-off

(48)

0

0

0

(50)

(155)

0

(253)

Recoveries

2

0

1

8

21

5

0

37

Balance, end of period 9/30/2019

$
891

$
1,699

$
2,775

$
1,440

$
421

$
168

$
394

$
7,788

PCI Loans

















Balance, beginning of period 07/01/2019

$
298

$
6

$
142

$
62

$
1

$
0

$
8

$
517

Provision for (recovery of) loan losses

10

0

0

(10)

0

13

0

13

Loans charged-off

(249)

0

0

0

0

(13)

0

(262)

Recoveries

0

0

0

0

0

0

0

0

Balance, end of period 9/30/2019

$
59

$
6

$
142

$
52

$
1

$
0

$
8

$
268

Total Loans

















Balance, beginning of period 07/01/2019

$
1,112

$
1,493

$
2,960

$
1,605

$
433

$
309

$
391

$
8,303

Provision for (recovery of) loan losses

133

212

(44)

(121)

18

22

11

231

Loans charged-off

(297)

0

0

0

(50)

(168)

0

(515)

Recoveries

2

0

1

8

21

5

0

37

Balance, end of period 9/30/2019

$
950

$
1,705

$
2,917

$
1,492

$
422

$
168

$
402

$
8,056

Ending Balance: individually evaluated for impairment

$
230

$
0

$
0

$
6

$
48

$
0

$
0

$
284

Ending Balance: collectively evaluated for impairment

$
720

$
1,705

$
2,917

$
1,486

$
374

$
168

$
402

$
7,772

Loans:

















Ending Balance: collectively evaluated for impairment non PCI loans

$
74,658

$
209,464

$
440,244

$
145,645

$
45,170

$
9,634

$
60,970

$
985,785

Ending Balance: collectively evaluated for impairment PCI loans

$
1,154

$
682

$
6,033

$
7,479

$
47

$
0

$
908

$
16,303

Ending Balance: individually evaluated for impairment

$
3,874

$
2,531

$
6,367

$
738

$
1,004

$
85

$
202

$
14,801

Ending Balance

$
79,686

$
212,677

$
452,644

$
153,862

$
46,221

$
9,719

$
62,080

$
1,016,889

29

Table of Contents

~~The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2018, respectively:~~

Three months ended September 30, 2018
Commercial 1 to 4 Loans to Multi-
and Commercial family individuals & family
Allowance for loan losses industrial Construction real estate residential HELOC overdrafts residential Total
(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period $ 781 $ 1,768 $ 3,926 $ 1,421 $ 618 $ 320 $ 588 $ 9,422
Provision for (recovery of) loan losses (178 ) (295 ) 163 (36 ) (105 ) - (41 ) (492 )
Loans charged-off - - (2 ) - (20 ) (79 ) - (101 )
Recoveries 26 - 6 7 14 68 - 121
Balance, end of period $ 629 $ 1,473 $ 4,093 $ 1,392 $ 507 $ 309 $ 547 $ 8,950

PCI Loans
Balance, beginning of period $ 54 $ - $ 52 $ - $ - $ - $ - $ 106
Provision for (recovery of) loan losses 61 - (52 ) 24 - - - 33
Loans charged-off - - - - - - - -
Recoveries - - - - - - - -
Balance, end of period $ 115 $ - $ - $ 24 $ - $ - $ - $ 139

Total Loans
Balance, beginning of period $ 835 $ 1,768 $ 3,978 $ 1,421 $ 618 $ 320 $ 588 $ 9,528
Provision for (recovery of) loan losses (117 ) (295 ) 111 (12 ) (105 ) - (41 ) (459 )
Loans charged-off - - (2 ) - (20 ) (79 ) - (101 )
Recoveries 26 - 6 7 14 68 - 121
Balance, end of period $ 744 $ 1,473 $ 4,093 $ 1,416 $ 507 $ 309 $ 547 $ 9,089

Ending Balance: individually evaluated for impairment $ 115 $ - $ - $ 24 $ - $ - $ - $ 139
Ending Balance: collectively evaluated for impairment $ 629 $ 1,473 $ 4,093 $ 1,392 $ 507 $ 309 $ 547 $ 8,950
Loans:
Ending Balance: collectively evaluated for impairment non PCI loans $ 76,355 $ 161,323 $ 447,676 $ 155,648 $ 49,409 $ 12,124 $ 64,062 $ 966,597
Ending Balance: collectively evaluated for impairment PCI loans $ 621 $ 935 $ 7,529 $ 6,790 $ 50 $ - $ 1,012 $ 16,937
Ending Balance: individually evaluated for impairment $ 3,362 $ 615 $ 5,151 $ 807 $ 634 $ 132 �� $ 220 $ 10,921
Ending Balance $ 80,338 $ 162,873 $ 460,356 $ 163,245 $ 50,093 $ 12,256 $ 65,294 $ 994,455

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

Nine Months Ended September 30, 2019

Commercial





1 to 4



Loans to

Multi-


and

Commercial

family

individuals &

family

2019

industrial

Construction

real estate

residential

HELOC

overdrafts

residential

Total
Allowance for loan losses

Loans – excluding PCI
















Balance, beginning of period 01/01/2019

$
762

$
1,385

$
3,024

$
1,663

$
555

$
206

$
471

$
8,066
Provision for (recovery of) loan losses

422

296

(289)

(248)

(18)

123

(77)

209
Loans charged-off

(305)

0

(10)

0

(150)

(179)

0

(644)
Recoveries

12

18

50

25

34

18

0

157
Balance, end of period 9/30/2019

$
891

$
1,699

$
2,775

$
1,440

$
421

$
168

$
394

$
7,788

PCI Loans







Balance, beginning of period 01/01/2019

$
214

$
0

$
385

$
4

$
0

$
0

$
0

$
603
Provision for (recovery of) loan losses

94

6

(243)

48

1

13

8

(73)
Loans charged-off

(249)

0

0

0

0

(13)

0

(262)
Recoveries

0

0

0

0

0

0

0

0
Balance, end of period 9/30/2019

$
59

$
6

$
142

$
52

$
1
��
$
0

$
8

$
268

Total Loans









—
Balance, beginning of period 01/01/2019

$
976

$
1,385

$
3,409

$
1,667

$
555

$
206

$
471

$
8,669
Provision for (recovery of) loan losses

516

302

(532)

(200)

(17)

136

(69)

136
Loans charged-off

(554)

0

(10)

0

(150)

(192)

0

(906)
Recoveries

12

18

50

25

34

18

0

157
Balance, end of period 9/30/2019

$
950

$
1,705

$
2,917

$
1,492

$
422

$
168

$
402

$
8,056

Nine months ended September 30, 2018
Commercial 1 to 4 Loans to Multi-
and Commercial family individuals & family
Allowance for loan losses industrial Construction real estate residential HELOC overdrafts residential Total
(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period $ 742 $ 1,955 $ 3,304 $ 1,058 $ 549 $ 305 $ 791 $ 8,704
Provision for loan losses (151 ) (488 ) 775 309 4 26 (244 ) 231
Loans charged-off (9 ) - (2 ) - (68 ) (107 ) - (186 )
Recoveries 47 6 16 25 22 85 - 201
Balance, end of period $ 629 $ 1,473 $ 4,093 $ 1,392 $ 507 $ 309 $ 547 $ 8,950

PCI Loans
Balance, beginning of period $ 65 $ - $ 66 $ - $ - $ - $ - $ 131
Provision for loan losses 50 - (66 ) 24 - - - 8
Loans charged-off - - - - - - - -
Recoveries - - - - - - - -
Balance, end of period $ 115 $ - $ - $ 24 $ - $ - $ - $ 139

Total Loans
Balance, beginning of period $ 807 $ 1,955 $ 3,370 $ 1,058 $ 549 $ 305 $ 791 $ 8,835
Provision for loan losses (101 ) (488 ) 709 333 4 26 (244 ) 239
Loans charged-off (9 ) - (2 ) - (68 ) (107 ) - (186 )
Recoveries 47 6 16 25 22 85 - 201
Balance, end of period $ 744 $ 1,473 $ 4,093 $ 1,416 $ 507 $ 309 $ 547 $ 9,089

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
NOTE G – LOANS HELD FOR SALE
~~We originate~~The Company originates fixed and variable rate residential mortgage loans on a ~~servicing-released~~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. WeThe Company usually ~~deliver~~delivers to, and receive funding from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. ~~We are~~The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is materially the same as the value of the loan amount at its origination.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of operations.
NOTE H ~~– REVENUE RECOGNITION~~
–BUSINESS COMBINATIONS
On ~~January 1, 2018,~~December 20, 2019, the ~~Company adopted ASU No. 2014-09~~~~Revenue from Contracts~~Bank entered into a Branch Purchase and Assumption Agreement (the “Purchase Agreement”) with ~~Customers (Topic 606)~~Entegra Bank (“Entegra”), by which the Bank assumed the deposits and ~~all subsequent ASUs that modified Topic 606. The implementation~~acquired the majority of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjustedloans, property, equipment and ~~continue to be reported in accordance with our historic accounting under Topic 605.~~
~~Topic 606 does not apply to revenue~~other selected assets associated with ~~financial instruments, including revenue from loans~~3 existing Entegra branch offices. Entegra was merged with and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope

30

Table of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.Contents

~~Service Charges on Deposit Accounts~~

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

into First-Citizens Bank & Trust Company (“First-Citizens Bank”) on December 31, 2019, and First-Citizens Bank assumed the rights and obligations of Entegra under the Purchase Agreement with the Bank.
~~Other Fees~~On April 17, 2020, the Bank completed the acquisition of the 3 branches located in western North Carolina and ~~Income~~
Other fees and income primarily consist of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income primarily consists of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Other fees and income also includes other recurring revenue streams such as safe deposit box rental fees and other miscellaneous revenue streams. Safe deposit box rental fees are chargedpursuant to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the durationterms of the ~~performance obligation.~~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 ~~presents~~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

31

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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 Bank, 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

$
22,046
Nonaccretable difference

2,073
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 $755,000 which were recorded as noninterest expense as incurred.
The following tables reflect the pro forma total net interest income, noninterest income ~~segregated by revenue streams in-scope~~ and ~~out-of-scope of Topic 606,~~net income for the ~~three and~~ nine months ended September 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 ~~2018.~~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.

Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30
2019 2018 2019 2018
(dollars in thousands)
Service Charges on Deposit Accounts $ 308 $ 309 $ 858 $ 830
Other 584 349 1,618 1,119
Noninterest Income (in-scope of Topic 606) 892 658 2,476 1,949
Noninterest Income (out-of-scope of Topic 606) 556 408 1,497 1,508

Total Non-interest Income $ 1,448 $ 1,066 $ 3,973 $ 3,457

Nine Months Ended September 30

2020

2019

(Dollars in thousands, except per share)

Net interest income

$
38,130

$
37,350

Non-interest income

4,717

4,161

Net income available to common shareholders

4,834

10,802

Earnings per share, basic

$
0.27

$
0.56

Earnings per share, diluted

$
0.27

$
0.56

Weighted average common shares outstanding, basic

18,038,345

19,219,820

Weighted average common shares outstanding, diluted

18,062,170

19,266,480

~~Contract Balances~~

32

Table of Contents

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

~~Contract Acquisition Costs~~
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
NOTE I – OTHER REAL ESTATE OWNED
The following table explains changes in other real estate owned, ~~(“OREO”)~~or OREO, during the nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

Nine Months

Nine Months

Ended

Ended

September 30,

September 30,

2020

2019

Nine Months Nine Months
Ended Ended
September 30, September 30,
2019 2018
(Dollars in thousands)

(Dollars in thousands)

Beginning balance January 1 $ 1,088 $ 1,258

$
3,533

$
1,088

Sales (103 ) (657 )

(180)

(103)

Write-downs (12 ) (100 )
Write-downs and loss on sales

(390)

(12)

Transfers 469 519

274

469

Ending balance $ 1,442 $ 1,020

$
3,237

$
1,442

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~$1.4~~$3.2 million and ~~$1.1~~$3.5 million, respectively, of which $379,000 is foreclosed residential real estate property in OREO. The Company had 2 loans with a recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure ~~totaled $233,000~~in the aggregate amount of $428,000 at September 30, ~~2019.~~2020. At December 31, ~~2018,~~2019, the Company had 3 loans with recorded investment in the amount of ~~$376,000~~$114,000 in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure.

~~Note~~NOTE J – ~~LEASES~~
SUBSEQUENT EVENTS
The Company has ~~operating leases~~evaluated for ~~branches~~subsequent events through the date and ~~certain equipment. The Company’s leases have remaining lease terms~~time the financial statements were issued and has determined there are no reportable subsequent events.

33

Table 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.Contents

At September 30, 2019, the Company did not have any leases that had not yet commenced for which we had created a ROU 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.

~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in determining the value of the ROU asset and lease liability.
~~The components of lease expense were as follows:~~
Three Months Nine Months
Ended Ended
September 30, September 30,
2019 2019
(Dollars in thousands)
Operating lease cost $ 268 $ 787
~~Supplemental cash flow information related to leases was as follows:~~
Three Months Nine Months
Ended Ended
September 30, September 30,
2019 2019
(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 268 $ 787

Right-of-use assets obtained in exchange for lease obligations:
Operating leases - 8,776
~~The following table presents the remaining weighted average lease terms and discount rates as of September 30, 2019:~~
~~Weighted Average Remaining Lease Term~~
~~Operating leases~~ ~~7.0 years~~
~~Weighted Average Discount Rate~~
~~Operating leases~~ ~~6.0~~ %
~~Maturities of lease liabilities were as follows:~~
~~(In thousands)~~
Operating
Leases
Year Ending December 31,

2019 (excluding the nine months ended September 30, 2019) $ 138
2020 586
2021 649
2022 722
2023 702
Thereafter 6,154
Lease payments 8,951
Amounts representing interest (274 )
Present Value of Net Future Minimum Lease Payments 8,677

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, ~~and~~as well as assumptions made by, and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include, among other things: the impact of the novel coronavirus and the associated COVID-19 disease pandemic on the business, financial condition and results of operations of the Company and its customers, changes in national, regional and local market conditions; changes in legislative and regulatory ~~conditions;~~conditions, changes in the interest rate ~~environment;~~environment, breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and adverse ~~change~~changes in credit quality ~~trends; and diversion of management’s time and attention to our merger-related, acquisition, or divestiture activities.~~trends.
Overview
The Company is a commercial bank holding company and has one banking subsidiary, Select Bank & Trust Company (referred to as the “Bank”), and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company’s only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.
The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small- to medium-sized businesses located in Harnett, Brunswick, New Hanover, Carteret, Cumberland, Jackson, Johnston, Macon, Mecklenburg, Pitt, Robeson, Sampson, Wake, Pasquotank, ~~Martin,~~ Alamance, and Wayne counties in North Carolina, ~~and~~ York ~~Pickens~~ and Cherokee counties in South Carolina, and Virginia Beach, Virginia. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts, and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.
The Company was formerly known as New Century Bancorp, Inc. On July 25, 2014, New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. ~~In connection with that merger the~~The combined company ~~changed its legal name to~~is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, North Carolina, whose wholly owned subsidiary, Select Bank & Trust Company, was a state-chartered commercial bank with approximately $276.9 million in assets. The merger expanded the Company’s North Carolina presence with the

34

Table of Contents

addition of six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville, and Burlington. During 2015, the Gibsonville and Burlington branches were combined into a new location in Burlington. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”)~~, located~~ headquartered in Charlotte, North Carolina. At the time of the acquisition, Carolina Premier had approximately $279 million in assets and four-full service offices, including a presence in upstate South Carolina. The Bank acquired three branches located in the cities of ~~Rock Hill, Blacksburg~~Sylva, Franklin and ~~Six Mile, South Carolina. Under the terms~~Highlands, North Carolina on April 17, 2020. The acquisition of ~~that acquisition, Premara was merged with~~these branches, which were acquired from First-Citizens Bank & Trust Company, Raleigh, North Carolina, added approximately $103 million in loans and ~~into the Company, Carolina Premier was merged with and into the Bank, and shareholders of Premara received 1.0463 shares~~$185 million in deposits as of the ~~Company’s common stock or $12.65 in cash for each outstanding share~~acquisition date.

35

Table of ~~Premara common stock, with approximately 70% of such shares being exchanged for shares of the Company’s common stock and 30% being exchanged for cash.~~Contents

On January 29, 2019, the Bank entered into a Purchase and Assumption Agreement with City National Bank of West Virginia pursuant to which the Bank assumed the majority of deposits and acquired the equipment and other selected assets associated with City National Bank of West Virginia’s branch located at 621 Nevan Road, Virginia Beach, Virginia. The purchase and assumption transaction closed on June 28, 2019 resulting in the assumption of $25.7 million in deposits.

On June 4, 2019, the Bank entered into a Purchase and Assumption Agreement with Pickens Savings and Loan Association, FA (“Pickens”), pursuant to which Pickens will assume the majority of deposits and acquire selected assets associated with the Bank’s branch located at 115 North Main Street, Six Mile, South Carolina. The transaction is expected to close in the fourth quarter of 2019 pending satisfaction of customary closing conditions.

Comparison of Financial Condition at

September 30, ~~2019~~2020 and December 31, ~~2018~~

2019

During the first nine months of ~~2019,~~2020, total assets increased by ~~$11.1~~$496.9 million to ~~$1.3~~$1.8 billion as of September 30, ~~2019.~~2020. The increase in assets was due primarily to the acquisition of three branches located in western North Carolina and loans originated by the Bank in connection with its participation in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”). Earning assets at September 30, ~~2019~~2020 totaled ~~$1.2~~$1.6 billion and consisted of ~~$1.0~~$1.3 billion in net loans, ~~$76.9~~$87.4 million in investment securities, ~~$64.3~~$274.6 million in cash, overnight investments and interest-bearing deposits in other banks, $8.0 million in federal funds sold and $3.8 million in non-marketable equity ~~securities, of which $3.0 million is FHLB stock.~~securities. Total deposits and shareholders’ equity at the end of the third quarter of ~~2019~~2020 were ~~$987.7~~$1.5 billion and $213.4 million, ~~and $212.0 million,~~ respectively.

Since the end of ~~2018,~~2019, gross loans have increased by ~~$28.9~~$253.5 million to ~~$1.0~~$1.3 billion as of September 30, ~~2019.~~2020. The increase in gross loans was due primarily to normal customer demand, the PPP loan program and the aforementioned acquisition of branches. At September 30, ~~2019,~~2020, gross loans consisted of ~~$79.7~~$165.8 million in commercial and industrial loans ~~$452.6~~(which includes 1,249 PPP loans in the amount of $97.0 million), $537.1 million in commercial real estate loans, ~~$62.1~~$79.7 million in multi-family residential loans, ~~$9.7~~$7.1 million in consumer loans, ~~to individuals, $153.9~~$195.2 million in ~~1-to-4 family~~ residential real estate loans, ~~$46.2~~$48.4 million in HELOCs, and ~~$212.7~~$255.7 million in construction loans. Deferred loan fees, net of costs, on these loans were ~~$2.0~~$5.5 million (which includes $3.1 million in net fees related to PPP loans) at September 30, ~~2019.~~

2020.

At September 30, ~~2019, there were $10.7~~2020 the Company held $8.0 million ofin federal funds sold compared to no$9.0 million in federal funds sold at December 31, ~~2018. At September 30, 2019 and December 31, 2018 there were no repurchase agreements.~~2019. Interest-earning deposits in other banks were ~~$53.6~~$249.5 million at September 30, ~~2019,~~2020, a ~~$68.7~~$198.6 million ~~decrease~~increase from December 31, ~~2018 primarily due to investment purchases and loan growth.~~2019. The Company’s investment securities at September 30, ~~2019~~2020 were ~~$76.9~~$87.4 million, an increase of ~~$25.4~~$15.1 million from December 31, ~~2018. These securities are used to provide funding for higher yielding loans and reduce wholesale funding reliance.~~2019. The investment portfolio as of September 30, ~~2019~~2020 consisted of ~~$10.4~~$11.8 million in government agency debt securities, ~~$52.1~~$41.7 million in mortgage-backed securities, ~~$1.6~~$2.1 million in corporate ~~securities~~bonds and ~~$12.9~~$31.9 million in municipal securities. The net unrealized gain on these securities was $2.0 million as of September 30, ~~2019 was $1.3 million.~~

2020.

At September 30, ~~2019,~~2020, the Company had an investment of ~~$3.0~~$3.1 million in ~~FHLB~~Federal Home Loan Bank (“FHLB”) stock, which ~~decreased~~increased by ~~$239,000~~$14,000 from December 31, ~~2018 due to the repayment of advances during 2019 on the stock calculation.~~2019. Also, the Company had ~~$719,000~~$718,000 in other non-marketable securities at September 30, ~~2019, which decreased by $43,000 from~~2020 compared to $719,000 at December 31, ~~2018.~~

2019.

At September 30, ~~2019,~~2020, non-earning assets were ~~$107.2~~$120.0 million, an increase of ~~$509,000~~$33.4 milllion from ~~$106.7~~$86.6 million as of December 31, ~~2018.~~2019. Non-earning assets included ~~$20.1~~$25.1 million in cash and due from banks, bank premises and equipment of ~~$18.1 million, right of use asset of $8.8~~$20.9 million, goodwill of ~~$24.6~~$41.9 million, core deposit intangible of ~~$1.8~~$1.7 million, accrued interest receivable of ~~$3.9~~$4.5 million, right of use lease asset of $8.8 million, foreclosed real estate of ~~$1.4~~$3.2 million, ~~$29.6 million in bank-owned life insurance (“BOLI”),~~ and other assets totaling $14.0 million, including net deferred taxes of ~~$7.7 million, which included $3.3 million in deferred tax assets.~~$3.6 million. Since the income on ~~BOLI~~bank-owned life insurance is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The increase in non-earning assets was due primarily to the increase in goodwill, cash and due from banks.

36

Table of Contents

Total deposits at September 30, ~~2019~~2020 were ~~$987.7 million~~$1.5 billion and consisted of ~~$243.9~~$408.2 million in non-interest-bearing demand deposits, ~~$283.4~~$610.3 million in money market and negotiable order of withdrawal, or NOW, accounts, ~~$43.4~~$51.6 million in savings accounts, and ~~$417.0~~$402.7 million in time deposits. Total deposits increased by ~~$7.2~~$479.9 million from ~~$980.4~~$992.8 million as of December 31, ~~2018,~~2019, due primarily to ~~an increase~~the acquisition of the three branches in ~~money market~~western North Carolina and deposits ~~which was offset by decreases in DDAs, savings and wholesale CDs.~~related to the PPP loan program. The Bank had no$1.5 million in brokered demand deposits and ~~$13.5~~$3.1 million in brokered time deposits as of September 30, 2020. The Bank had $0 million in brokered demand deposits and $45.0 million in brokered time deposits as of December 31, 2019.

As of September 30, ~~2019,~~2020, the Company had no$45.0 million (of which $20.0 million is identified as short-term ~~debt~~borrowings and ~~$57.4~~$25.0 million ofis identified as long-term ~~debt, including $45.0 million~~debt) in FHLB borrowings, and $12.4 million in junior subordinated ~~debentures.~~

debentures that are classified as long-term debt.

Total shareholders’ equity at September 30, ~~2019~~2020 was ~~$212.0~~$213.4 million, an increase of ~~$2.4 million~~$592,000 from ~~$209.6~~$212.8 million as of December 31, ~~2018.~~2019. Accumulated other comprehensive income relating to available for sale securities increased ~~$1.1 million~~$633,000 during the nine months ended September 30, ~~2019. Other changes~~2020. Also contributing to the increase in shareholders’ equity ~~included increases~~were net income of ~~$178,000 in stock-based compensation, earnings of $10.0~~$4.2 million and ~~$114,000~~$7,000 from the exercise of stock ~~options. These increases~~options, which were offset by ~~the repurchase of $8.9 million in common~~ stock of the Company. The Company’s historical financial performance and well-capitalized status enable us to return value to our shareholders through the repurchase plan by focusing on creating shareholder value over the long term. We believe that the Company's share repurchases ~~continue to be an effective part of the Company’s overall capital management strategies.~~totaling $4.4 million.

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

At September 30, ~~2019,~~2020, the Company had ~~$334,000~~$516,000 in loans that were 30 to 59 days past due and ~~$562,000~~$149,000 in loans that were 6030 to 89 days past due. This represented ~~0.33% and 0.55%, respectively,~~0.12% of gross loans outstanding on that date. This is a decrease from December 31, ~~2018~~2019 when there were ~~$633,000 in loans that were 30-59 days past due or 0.64% of gross loans outstanding and $1.3~~$3.5 million in loans that were ~~60-89~~30-89 days past due or ~~0.13%~~0.34% of gross loans outstanding. Non-accrual loans increased from ~~$7.3~~$5.9 million at December 31, ~~2018~~2019 to ~~$9.1~~$7.7 million at September 30, ~~2019.~~

2020.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans ~~increased~~decreased from ~~1.50%~~1.18% at December 31, ~~2018~~2019 to ~~1.76%~~1.07% at September 30, ~~2019.~~2020. The Company ~~has experienced~~had an increase of $1.8 million in non-accruals from ~~$7.3~~$5.9 million at December 31, ~~2018~~2019 and a decrease in accruing troubled debt restructurings or TDRs, from $6.2 million at December 31, 2019 to ~~$9.1~~$6.0 million as of September 30, ~~2019 and an increase in accruing troubled debt restructurings from $4.4 million at December 31, 2018 to $6.5 million as of September 30, 2019.~~2020. Of the non-accrual loans as of September 30, ~~2019, seven~~2020, two commercial real estate loans totaled $2.0 million, ~~five~~two construction loans totaled ~~$2.3 million, eight~~$161,000, twelve commercial loans totaled ~~$1.5~~$4.3 million, ~~six~~five HELOC loans totaled ~~$745,000, eight agricultural loans totaled $500,000 and ten~~$263,000, eleven 1-to-4 family residential ~~real estate~~ loans totaled $950,000 and consumer made up the remaining balance.

At September 30, ~~2019,~~2020, the ~~Company~~Bank had ~~forty-one~~forty-nine loans totaling ~~$8.2~~$10.3 million that were considered to be troubled debt restructurings, or TDRs. ~~Twenty-eight~~Thirty-two of these loans totaling ~~$6.5~~$6.4 million were still in accruing status with the remaining TDRs included in non-accrual loans. All TDRs are considered impaired loans regardless of accrual status and have been included as non-performing assets in the table below.

37

Table of Contents

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

For Periods Ended
September 30, December 31,
2019 2018
(dollars in thousands)
Non-accrual loans $ 9,083 $ 7,257
Accruing TDRs 6,477 4,378
Total non-performing loans 15,560 11,635
Foreclosed real estate 1,442 1,088
Total non-performing assets $ 17,002 $ 12,723

Accruing loans past due 90 days or more $ 2,296 $ 3,167
Allowance for loan losses $ 8,056 $ 8,669

Non-performing loans to period end loans 1.53 % 1.18 %
Non-performing loans and accruing loans past due 90 days or more to period end loans 1.76 % 1.50 %
Allowance for loans losses to period end loans 0.79 % 0.88 %
Allowance for loan losses to non-performing loans 52 % 75 %
Allowance for loan losses to non-performing assets 47 % 68 %
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more 42 % 55 %
Non-performing assets to total assets 1.34 % 1.01 %
Non-performing assets and accruing loans past due 90 days or more to total assets 1.52 % 1.26 %

For Periods Ended

September 30,

December 31,


2020

2019


Non-accrual loans

$
7,695

$
5,941

Accruing TDRs

6,044

6,207

Total non-performing loans

13,739

12,148

Foreclosed real estate

3,237

3,533

Total non-performing assets

$
16,976

$
15,681

Accruing loans past due 90 days or more

$
1,548

$
1,231

Allowance for loan losses

$
13,561

$
8,324

Non-performing loans to period end loans

1.07
%

1.18
%

Non-performing loans and accruing loans past due 90 days or more to period end loans

1.19
%

1.30
%

Allowance for loan losses to period end loans

1.06
%

0.81
%

Allowance for loan losses to non-performing loans

99
%

69
%

Allowance for loan losses to non-performing assets

80
%

53
%

Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more

73
%

49
%

Non-performing assets to total assets

0.96
%

1.23
%

Non-performing assets and accruing loans past due 90 days or more to total assets

1.05
%

1.33
%

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 were $17.0 million and ~~$12.7~~$15.7 million, respectively. The allowance for loan losses at September 30, ~~2019~~2020 represented ~~47%~~80% of non-performing assets compared to ~~68%~~53% at December 31, ~~2018.~~
2019.
Total impaired loans at September 30, ~~2019~~2020 were ~~$15.6~~$11.6 million. This ~~includes $9.1~~included $7.7 million in loans that were classified as impaired because they were in non-accrual status and ~~$6.5~~$3.9 million in ~~loans that were determined to be impaired for other reasons.~~accruing loans. Of these loans, ~~$972,000~~$1.6 million required a specific reserve of ~~$284,000~~$506,000 at September 30, ~~2019.~~
2020.
Total impaired loans at December 31, ~~2018~~2019 were ~~$11.7~~$11.2 million. This included ~~$7.3~~$5.9 million in loans that were classified as impaired because they were in non-accrual status and ~~$4.4~~$6.2 million in accruing TDRs. Of these loans, ~~$291,000~~$1.0 million required a specific reserve of ~~$87,000~~$413,000 at December 31, ~~2018.~~
2019.
The allowance for loan losses was ~~$8.1~~$13.6 million at September 30, ~~2019~~2020 or ~~0.79%~~1.06% of gross loans outstanding as compared to ~~0.88%~~0.81% reported as a percentage of gross loans at December 31, ~~2018.~~2019. This ~~decrease~~increase resulted primarily from ~~reductions~~changes in loans requiring a specific reserve plus qualitative factors related to ~~interest rates, document exceptions~~COVID-19 and economic performance indicators. The Legacy Select loans, ~~and~~ Carolina Premier and First Citizens Bank loans were recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance

38

Table of Contents

for losses as required in acquisition accounting. This required accounting under ~~GAAP~~generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. In the last few quarters past dues, nonaccruals and impaired loans have increased and those loans have been assessed for loss and charged offs have been incurred specifically on those loans for the respective expected loss. The allowance for loan losses at September 30, ~~2019~~2020 represented ~~52%~~99% of non-performing loans as compared to ~~75%~~69% at December 31, ~~2018.~~2019. It is management’s assessment that the allowance for loan losses as of September 30, ~~2019~~2020 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be given that further adjustments to the allowance for loan losses may not be deemed necessary in the future. The current economic and business disruptions in the Bank’s markets, and in the national and global markets more generally, are unprecedented, as state, local, and national governing bodies attempt to address the public health emergency caused by COVID-19. Management expects the Company’s customers, including its borrowers, will continue to experience the financial impacts of COVID-19 over the balance of the 2020 fiscal year. Depending on the length of financial impact and the effectiveness of the various governmental programs put in place to stabilize economic conditions, the Company’s management would expect to see continued volatility in the Company’s allowance for loan losses and related provision expense during the remainder of 2020. The CARES Act provided an opportunity for loan customers to request a temporary modification of the payment terms on their loans granting the customer time to address cashflow issues. The Bank entered into modifications on 497 loans amounting to $252.3 million during 2020 of which 114 loans totaling $65.6 million remained on modification as of September 30, 2020. See Item 1A (Risk Factors) later in this report for additional discussion of COVID-19.

Contractual Obligations

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

	September 30, 2019

											Payments Due by Period
																		More
												1 Year	Over 1 to			Over 3 to		Than
											or Less		3 Years		5 Years		5 years		Total

(dollars in thousands)	1 Year or Less		Over 1 to 3 Years		Over 3 to 5 Years		More Than 5 Years		Total		(dollars in thousands)
Time deposits	$	304,206	$	106,056	$	6,753	$	-	$	417,015	$	310,379	$	82,598	$	9,612	$	78	$	402,667
Short-term debt												20,000		—		—		—		20,000
Long-term debt		-		20,000		25,000		12,372		57,372		—		—		25,000		12,372		37,372
Lease liability		573		1,334		1,389		5,655		8,951
Operating leases												663		1,503		1,466		5,457		9,089
Total contractual obligations	$	304,779	$	127,390	$	33,142	$	18,527	$	483,338	$	331,042	$	84,101	$	36,078	$	17,907	$	469,128

Other Lending Risk Factors

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

39

Table of Contents

Regulatory Loan to Value Ratios

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

At September30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~$33.8~~$40.4 million and $27.7 million in ~~non 1-to-4~~non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~$10.9~~$7.8 million and $10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented ~~25.9%~~28.3% and 23.2% of total risk-based capital as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, which is less than the 100% maximum allowed. These loans may ~~present~~represent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

Business Sector Concentrations

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

At September 30, ~~2019~~2020, the Company had ~~two~~five product type groups which exceeded this ~~threshold;~~guideline: Office Building, which represented 59% of risk-based capital or $100.8 million; Commercial Construction, which represented 79% of risk-based capital or $134.4 million; 1-to-4 Family Rental property, which represented 62% of risk-based capital or $105.7 million; Retail property, which represented 47% of risk-based capital or $80.6 million; and Apartment Complex/Multi-Family, which represented 46% of risk-based capital or ~~$79.7 million and Commercial Construction, which represented 46% of risk-based capital or $79.9~~$78.3 million. All other commercial real estate groups were at or below the 40% threshold. The internal guideline levels heighten the level of Company monitoring of such loans in underwriting and ongoing servicing activities.

At December 31, ~~2018,~~2019, the Company ~~did not exceed~~had three product types that exceeded the 40% ~~guideline~~guideline. The following product types were in ~~any product types.~~excess of the 40% guidelines at such date: apartments, commercial construction and office buildings. All other commercial and residential real estate product types were under the 40% ~~threshold.~~

threshold as of such date.

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

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

40

Table of Contents

Acquisition, Development and Construction Loans

(dollars in thousands)

September 30, 2020

December 31, 2019

Land and Land

Land and Land


Construction

Development

Total


Construction

Development

Total

Total ADC loans

$
219,576

$
36,142

$
255,718

$
186,038

$
35,840

$
221,878

Average Loan Size

$
315

$
592



$
331

$
607



Percentage of total loans

17.11
%

2.82
%

19.93
%

18.06
%

3.48
%

21.55
%
Non-accrual loans

$
169

$
—

$
169

$
181

$
—

$
181

September 30, 2019 December 31, 2018
Land and Land Land and Land
Construction Development Total Construction Development Total
Total ADC loans $ 178,499 $ 34,178 $ 212,677 $ 145,736 $ 24,668 $ 170,404

Average Loan Size $ 301 $ 510 $ 267 $ 308

Percentage of total loans 17.59 % 3.37 % 20.95 % 14.78 % 2.50 % 17.28 %

Non-accrual loans $ 2,272 $ - $ 2,272 $ 587 $ - $ 587

Management ~~closely~~ monitors the ADC portfolio by reviewing funding based on project completeness, monthly and quarterly inspections as required by the project, collateral value, geographic concentrations, ~~speculative-to-presold~~spec-to-presold ratios and performance of similar loans in the Company’s market area.
Geographic Concentrations
Certain risks exist ~~arise~~arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

September 30, 2020

December 31, 2019


ADC Loans

Percent

HELOC

Percent

ADC Loans

Percent

HELOC

Percent

(dollars in thousands)

Harnett County

$
8,683

3.40
%
$
4,528

9.36
%
$
9,637

4.34
%
$
5,156

11.58
%

Alamance County

511

0.20
%

1,062

2.20
%

845

0.38
%

1,072

2.41
%

Brunswick County

15,188

5.94
%

1,642

3.39
%

15,456

6.97
%

1,629

3.67
%

Carteret County

4,483

1.75
%

2,242

4.63
%

5,352

2.41
%

2,190

4.92
%

Cherokee County (SC)

—

—
%

34

0.07
%

—

—
%

22

0.05
%

Cumberland County

25,098

9.83
%

1,975

4.08
%

24,601

11.09
%

2,285

5.13
%

Durham County

6,621

2.59
%

159

0.33
%

—

—
%

—

—
%

Forsyth County

2,225

0.87
%

—

—
%

—

—
%

—

—
%

Jackson County

4,770

1.87
%

2,106

4.35
%

—

—
%

—

—
%

Macon County

10,507

4.11
%

4,779

9.87
%

—

—
%

—

—
%

Mecklenburg County

23,011

9.00
%

4,171

8.62
%

18,142

8.18
%

2,689

6.04
%

New Hanover County

34,737

13.58
%

2,564

5.30
%

40,518

18.26
%

2,885

6.48
%

Pasquotank County

2,978

1.16
%

1,636

3.38
%

1,997

0.90
%

1,693

3.80
%

Pitt County

17,655

6.90
%

3,343

6.91
%

16,098

7.25
%

5,442

12.23
%

Robeson County

35

0.01
%

2,568

5.31
%

1,165

0.53
%

2,939

6.60
%

Sampson County

236

0.09
%

1,841

3.80
%

23

0.01
%

1,743

3.92
%

Virginia Beach County (VA)

3,361

1.31
%

395

0.82
%

142

0.06
%

99

0.22
%

Wake County

21,871

8.55
%

1,541

3.18
%

23,407

10.56
%

1,640

3.68
%

Wayne County

3,207

1.25
%

2,904

6.00
%

1,572

0.71
%

3,183

7.15
%

Wilson County

759

0.30
%

57

0.12
%

477

0.21
%

72

0.16
%

York County (SC)

3,197

1.25
%

1,028

2.12
%

1,931

0.87
%

1,123

2.52
%

All other locations

66,585

26.04
%

7,820

16.16
%

60,515

27.27
%

8,652

19.44
%



—











Total

$
255,718

100.00
%
$
48,395

100.00
%
$
221,878

100.00
%
$
44,514

100.00
%

September 30, 2019 December 31, 2018
ADC Loans Percent HELOC Percent ADC Loans Percent HELOC Percent
(dollars in thousands)
Harnett County $ 10,126 4.76 % $ 5,126 11.09 % $ 5,389 3.16 % $ 5,367 10.80 %
Alamance County 693 0.33 % 1,214 2.63 % 740 0.43 % 1,350 2.72 %
Beaufort County 3,287 1.54 % 975 2.11 % 908 0.53 % 1,113 2.24 %
Brunswick County 14,061 6.61 % 1,670 3.61 % 8,440 4.95 % 1,492 3.00 %
Carteret County 4,033 1.90 % 2,876 6.22 % 1,544 0.91 % 2,676 5.38 %
Cherokee County - -% 23 0.05 % - -% 52 0.11 %
Craven County 1,278 0.60 % 337 0.73 % 1,060 0.62 % 319 0.64 %
Cumberland County 26,236 12.34 % 2,503 5.42 % 21,019 12.34 % 3,116 6.27 %
Mecklenburg County 17,306 8.14 % 2,734 5.92 % 24,853 14.59 % 3,635 7.31 %
New Hanover County 37,300 17.54 % 3,070 6.64 % 23,396 13.73 % 2,721 5.47 %
Pasquotank County 1,533 0.72 % 1,754 3.79 % 1,145 0.67 % 1,915 3.85 %
Pickens County - - % 96 0.21 % - - % 99 0.20 %
Pitt County 16,724 7.86 % 5,515 11.93 % 10,574 6.21 % 6,334 12.74 %
Robeson County 850 0.40 % 2,835 6.13 % 1,076 0.63 % 3,505 7.05 %
Sampson County 176 0.08 % 1,699 3.68 % 149 0.09 % 1,835 3.69 %
Virginia Beach 142 0.07 % 103 0.22 % - - % - - %
Wake County 19,373 9.11 % 2,192 4.74 % 18,528 10.87 % 1,744 3.51 %
Wayne County 1,689 0.79 % 3,134 6.78 % 2,212 1.30 % 3,457 6.95 %
Wilson County 481 0.23 % 96 0.21 % 392 0.23 % 73 0.15 %
York County 1,881 0.88 % 788 1.70 % 124 0.07 % 1,053 2.12 %
All other locations 55,508 26.10 % 7,481 16.19 % 48,855 28.67 % 7,857 15.80 %

Total $ 212,677 100.00 % $ 46,221 100.00 % $ 170,404 100.00 % $ 49,713 100.00 %

41

Table of Contents

Interest-Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest-only payment terms. At September 30, ~~2019,~~2020, the Company had ~~$225.8~~$300.0 million in loans that had terms permitting interest-only payments. This represented ~~22.2%~~23.4% of the total loan portfolio. At December 31, ~~2018,~~2019, the Company had ~~$224.6~~$249.9 million in loans that had terms permitting interest-only payments. This represented ~~22.8%~~24.3% of the total loan portfolio. Recognizing the risk inherent with interest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest-only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled ~~$77.6~~$85.1 million, or ~~7.6%~~6.6% of total loans, at September 30, ~~2019~~2020 compared to ~~$70.6~~$82.0 million, or ~~7.2%~~8.0% of total loans, at December 31, ~~2018.~~2019. The Company’s ten largest customer relationships totaled ~~$125.8~~$149.8 million, or ~~12.4%~~11.7% of total loans, at September 30, ~~2019~~2020 compared to ~~$106.8~~$129.5 million, or ~~10.8%~~12.6% of total loans, at December 31, ~~2018.~~2019. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

Comparison of Results of Operations for the

Three months ended September 30, ~~2019~~2020 and ~~2018~~

2019

General. During the third quarter of ~~2019,~~2020, the Company ~~had~~reported net income of ~~$3.2~~$2.5 million as compared with net income of ~~$4.3~~$3.2 million for the third quarter of ~~2018.~~2019. Net income per common share for the third quarter of ~~2019~~2020 was ~~$0.17,~~$0.14 basic and diluted, compared with net income per common share of ~~$0.27,~~$0.17 basic and diluted, for the third quarter of ~~2018.~~2019. Results of operations for the third quarter of ~~2019~~2020 were primarily impacted by an increase of ~~$16,000~~$1.2 million in net interest income and an increase in non-interest ~~income~~expense of ~~$382,000 and an~~$1.1 million. The increase in ~~the provision for loan losses of $690,000 versus the comparative three-month period in 2018. Noninterest expenses increased $1.1 million which~~non-interest expense was primarily related to ~~increased personnel expense of $660,000, occupancy~~increases in information systems expenses of $224,000, information system expenses of $126,000, integration related expenses of $128,000, foreclosure related expenses of $13,000, professional fees of $196,000, and other expenses of $92,000 which was partially offset by a reduction in$191,000, deposit insurance expense of ~~$269,000~~$400,000, foreclosed real estate expense of $237,000, and ~~core deposit intangible amortization~~personnel expense of ~~$39,000.~~$618,000, which were offset by a decrease in merger-related expenses of $121,000, occupancy expenses of $65,000 and professional fees of $119,000. The Company recorded a provision for loan losses of ~~$231,000~~$1.6 million for the third quarter of ~~2019~~2020 compared to a ~~recovery~~provision of ~~losses of $459,000 in the third quarter of 2018. Net interest margin of 3.94%~~$231,000 in the third quarter of 2019, ~~decreased 26 basis points from~~which increased provision expense had a significant impact on the ~~same~~reduced net income reported for the 2020 third quarter as compared to the comparative period in ~~2018.~~

44

2019.

Net Interest Income. Net interest income ~~was $11.9~~increased by $1.2 million for the third quarter of ~~2019, which was a $16,000 increase~~2020 from the ~~comparative~~ third quarter of ~~2018.~~2019. The Company’s total interest income was affected by ~~the~~an increase in earning loans, which was offset by a reduction in earning balances of federal funds sold and investments in addition to the interest ~~rates and loan balances due to growth.~~rate reductions. Average total interest-earning assets were ~~$1.2~~$1.4 billion in the third quarter of ~~2019~~2020 compared with ~~$1.1~~$1.2 billion during the same period in ~~2018,~~2019, while the average yield on those assets ~~increased 41~~decreased 48 basis points from ~~5.09%~~5.05% to ~~5.50%~~4.50%, which was primarily due to the ~~increase in~~reduction of interest rates on ~~recently originated~~ loans due to modifications related to COVID-19, reduced rates on ~~a comparative quarter basis~~overnight interest earning assets and ~~accretion from acquired loans.~~reduced yield on investment securities.

42

Table of Contents

The Company’s average interest-bearing liabilities ~~decreased~~increased by ~~$1.6~~$234.2 million to ~~$818.6 million~~$1.1 billion for the quarter ended September 30, ~~2019~~2020 from ~~$820.2~~$818.6 million for the same period one year earlier and the cost of those funds ~~increased~~decreased from ~~1.22%~~1.52% to ~~1.52%~~1.03%, or 3049 basis points. The increase in interest-bearing liabilities was a primary result of increased savings, money market and time deposits from the acquisition of three branches offset by a reduction in wholesale deposits. During the third quarter of ~~2019,~~2020, the Company’s net interest margin was ~~3.94%~~3.73% and net interest spread was ~~3.46%~~3.47%. In the same quarter ended one year earlier, net interest margin was ~~4.20%~~3.94% and net interest spread was ~~3.87%~~3.46%.

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. ~~Historical~~In determining the loss ~~rates are calculated by using a~~history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company uses loss ~~migration analysis associating losses to~~history based on the weighted average net charge off history for the most recent twelve consecutive quarters, based on the risk-graded pool to which ~~they relate for each of~~ the ~~previous twelve quarters.~~loss was assigned. Then, using ~~a twelve quarter~~the look back period, loss factors are calculated for each risk-graded pool. During the third quarter of ~~2019,~~2020, the Company recorded a provision for loan losses of $231,000, based primarily on adjustments to qualitative loan factors related to the underlying risk in loan portfolio. On a comparative quarter basis, the Company had a $459,000 recovery for the third quarter of 2018. The Company, has seen a slight deterioration of credit metrics primarily related to past dues, non-accruals of acquired loans, and TDRs during the third quarter of 2019,$1.6 million, as compared to ~~the second quarter~~a provision of ~~2019, where the Company~~$231,000 that was recorded ~~a recovery of loan losses of $207,000 based primarily on qualitative loan factors. As a result of the estimated deterioration the Company incurred charge-offs of $515,000~~ in the third quarter of 2019.

Non-Interest Income. Non-interest income for the quarter ended September 30, ~~2019~~2020 was ~~$1.4~~$1.7 million, an increase of $276,000 from ~~$382,000 in~~ the third quarter of ~~2018.~~2019. Service charges on deposit accounts decreased ~~$1,000~~$51,000 to $257,000 for the quarter ended September 30, 2020 from $308,000 for the same period in 2019. Other non-deposit fees and income increased $76,000 from the third quarter of 2019 to the third quarter of 2020. Fees from the sale of mortgages increased from $218,000 for the quarter ended September 30, 2019 ~~from $309,000~~to $517,000 for ~~the same period in 2018. Other non-deposit fees and income increased $226,000 from~~ the third quarter of ~~2018~~2020 due to ~~the third quarter of 2019. Fees from presold mortgages~~ increased ~~non-interest income by $109,000 in the third quarter of 2019 to $218,000 from $109,000 in the third quarter of 2018.~~volume. The Company did not have sales of securities during the three months ended September 30, 2020 and in 2019 sold ~~two investment~~ securities ~~in the third quarter of 2019~~ for a gain of $48,000. ~~The Company did not sell any investment securities in the third quarter of 2018.~~

Non-Interest Expenses. Non-interest expenses increased by $1.1 million to ~~$8.9~~$10.1 million for the quarter ended September 30, ~~2019,~~2020, from ~~$7.8~~$8.9 million for the same period in ~~2018.~~2019. In general, most categories of non-interest expenses increased primarily due to changes in the Company’s branch network and the acquisition of the branches in western North Carolina. The following are highlights of the significant categories of non-interest expenses during the third quarter of ~~2019 compared to~~2020 versus the same period in ~~2018:~~

2019:

·●

Personnel expenses increased ~~$660,000~~$618,000 to ~~$5.1~~$5.7 million, due to ~~increased staff for new branches, employment taxes~~additional personnel and ~~benefits costs.~~cost of living increases.

·●

~~Foreclosed real estate-related expense increased $13,000,~~Occupancy expenses decreased $65,000, primarily due to the reduction in repairs and maintenance ~~expenses and property taxes.~~which was offset by increased rent expense due to normal rent escalation.

·●

~~There was an increase of $126,000 in information system~~Integration-related expenses ~~in the third quarter of 2019 primarily due to additional software and security costs.~~decreased $121,000.

·●

~~Professional fees~~CDI expense reduced $29,000 due to amortization.

43

Table of Contents

●

Information systems expense increased by ~~$196,000 to $518,000, primarily~~$191,000 due to increased expenses ~~associated with branch purchases~~related to the new mobile banking platform, increase in customer accounts and ~~divestures.~~

·

~~Deposit insurance expense decreased by $269,000, due to receiving a credit from~~security cost for the ~~FDIC as a result regulatory changes in the premium calculation.~~core processing system.

·●

~~Occupancy and equipment expense increased~~Professional fees decreased by ~~$224,000~~$119,000 to ~~$1.1 million, due to repairs and maintenance and branch addition.~~$399,000.

·●

~~Integration related~~Deposit insurance expenses increased by ~~$128,000 for branch purchase and divestures.~~

·

~~Other non-interest expenses increased by $92,000, primarily~~$400,000 due to ~~an increase in various administrative related non-interest expenses.~~increased asset base.

Provision for Income Taxes. The Company’s effective tax rate was ~~22.0%~~21.5% and ~~22.5%~~22.0% for the quarters ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

As of September 30, ~~2019~~2020 and December, 31, ~~2018,~~2019, the Company had a net deferred tax asset in the amount of ~~$3.3~~$3.6 million and ~~$3.7~~$2.8 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including, among other things, recent earnings trends, projected earnings, and asset quality. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income,

44

Table of Contents

net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans. ~~The table is presented on a taxable equivalent basis where applicable.~~

For the quarter ended

For the quarter ended

September 30, 2020

September 30, 2019

(dollars in thousands)

Average

Average

Average

Average


balance

Interest

rate

balance

Interest

rate


INTEREST-EARNING ASSETS:

Loans, gross of allowance

$
1,255,027

$
15,415

4.89
%
$
982,876

$
13,529

5.52
%

Investment securities

64,685

386

2.37
%

85,781

630

2.95
%

Other interest-earning assets

83,394

54

0.26
%

91,730

456

1.99
%

Total interest-earning assets

1,403,106

15,855

4.50
%

1,160,387

14,615

5.05
%

Other assets

280,068

101,585





Total assets

$
1,683,174

$
1,261,972





INTEREST-BEARING LIABILITIES:













Deposits:













Savings, NOW and money market

$
602,943

891

0.59
%
$
314,099

407

0.52
%

Time deposits over $100,000

277,435

1,033

1.48
%

293,635

1,491

2.04
%

Other time deposits

115,042

382

1.32
%

116,167

494

1.71
%

Borrowings

57,372

408

2.83
%

64,196

483

3.02
%

Total interest-bearing liabilities

1,052,792

2,714

1.03
%

788,097

2,875

1.15
%

Non-interest-bearing deposits

404,420

246,117





Other liabilities

11,685

12,036





Shareholders’ equity

214,277

215,722





Total liabilities and shareholders’ equity

$
1,683,174

$
1,261,972





Net interest income/interest rate spread (taxable-equivalent basis)

$
13,141

3.47
%

$
11,740

3.59
%

Net interest margin (taxable-equivalent basis)

3.73
%





4.06
%

Ratio of interest-earning assets to interest-bearing liabilities

133.27
%

147.24
%





Reported net interest income













Net interest income/net interest margin (taxable-equivalent basis)

$
13,141

3.72
%

$
11,740

4.19
%

Less:













taxable-equivalent adjustment

(30)



(39)



Net Interest Income

$
13,111



$
11,701



For the quarter ended For the quarter ended
September 30, 2019 September 30, 2018
(dollars in thousands)
Average Average Average Average
balance Interest rate balance Interest rate
Interest-earning assets:
Loans, gross of allowance $ 1,005,170 $ 13,935 5.50 % $ 978,928 $ 13,615 5.52 %
Investment securities 80,503 527 2.60 % 55,318 382 2.74 %
Other interest-earning assets 111,593 581 2.07 % 89,092 442 1.88 %
Total interest-earning assets 1,197,266 15,043 4.98 % 1,123,338 14,419 5.09 %

Other assets 102,871 104,921

Total assets $ 1,300,137 $ 1,228,259
Interest-bearing liabilities:
Deposits:
Savings, NOW and money market $ 327,737 433 0.52 % $ 310,697 338 0.43 %
Time deposits over $100,000 317,310 1,720 2.15 % 318,822 1,282 1.60 %
Other time deposits 116,191 528 1.80 % 115,796 383 1.31 %
Borrowings 57,372 459 3.17 % 74,916 527 2.79 %

Total interest-bearing liabilities 818,610 3,140 1.52 % 820,231 2,530 1.22 %

Non-interest-bearing deposits 252,266 240,859
Other liabilities 12,705 4,370
Shareholders' equity 216,556 162,799

Total liabilities and shareholders' equity $ 1,300,137 $ 1,228,259

Net interest income/interest rate spread (taxable-equivalent basis) $ 11,903 3.46 % $ 11,889 3.87 %

Net interest margin
(taxable-equivalent basis) 3.94 % 4.20 %

Ratio of interest-earning assets to interest-bearing liabilities 146.26 % 136.95 %

Reported net interest income
Net interest income/net interestmargin (taxable-equivalent basis) $ 11,903 $ 11,889
Less:
taxable-equivalent adjustment (39 ) (37 )

Net Interest Income $ 11,864 3.93 % $ 11,852 4.19 %

Comparison of Results of Operations for the
Nine months ended September 30, ~~2019~~2020 and ~~2018~~
2019
General. During the first nine months of ~~2019,~~2020, the Company ~~had~~reported net income of ~~$10.0~~$4.2 million as compared with net income of ~~$9.3~~$10.0 million for the first nine months of ~~2018.~~2019. Net income per common share for the first nine months of ~~2019~~2020 was ~~$0.52 for~~$0.24 basic and $0.23 diluted, compared with net income per common share of ~~$0.64 for~~$0.52 basic and ~~$0.63~~ diluted, for the first nine months of ~~2018.~~2019. Results of operations for the nine months ended September 30, 2020 were primarily impacted by an increase of $1.4 million in net interest income and an increase in non-interest expense of $3.8 million. The increase in non-interest expense was primarily related to increases in occupancy expenses of $203,000, foreclosed real estate expense of $389,000, deposit insurance expense of $131,000, merger-related expenses of $520,000, information systems expenses of $535,000, and personnel expense of $2.0 million, which were offset by a decrease in professional fees of $161,000 and CDI amortization of $79,000. The Company recorded a provision for loan losses of $5.8 million for the first nine months of ~~2019~~2020 compared to 2018 were primarily impacted by a decrease of $463,000 in net interest income, a decrease in provision for loan losses of $103,000, an increase of $516,000 in non-interest income and a decrease in non-interest expenses of $640,000. Net interest margin of 4.03%$136,000 in the first nine months of 2019, ~~decreased 26 basis points from~~which increased provision expense had a significant impact on the ~~same~~reduced net income reported for the first nine months of 2020 as compared to the comparative period in ~~2018.~~2019.

45

Table of Contents

Net Interest Income. Net interest income ~~decreased to $35.0~~increased by $1.4 million for the first nine months of ~~2019~~2020 from ~~$35.5 million for~~ the first nine months of ~~2018.~~2019. The Company’s total interest income was affected by ~~the~~an increase in ~~loan balances.~~earning loans, which was offset by a reduction in earning balances of federal funds sold and investments in addition to the interest rate reductions. Average total interest-earning assets were ~~$1.2~~$1.3 billion ~~for~~in the first nine months of ~~2019~~2020 compared with ~~$1.1~~$1.2 billion during the same period in ~~2018,~~2019, while the average yield on those assets decreased 938 basis points from ~~5.11%~~5.02% to ~~5.02%~~4.64%, which was primarily due to the ~~decrease in~~reduction of interest rates on ~~recently originated~~ loans, federal funds purchased and ~~accretion from acquired loans.~~

reduced investment securities.

The Company’s average interest-bearing liabilities ~~decreased~~increased by ~~$37.0~~$136.0 million to ~~$793.1~~$926.1 million for the nine months ended September 30, ~~2019~~2020 from ~~$830.1~~$793.1 million for the same period one year earlier and the cost of those funds ~~increased~~decreased from ~~1.10%~~1.45% to ~~1.45%~~1.17%, or 3528 basis points. The increase in interest-bearing liabilities was a primary result of increased savings, money market and time deposits acquired in the acquisition of branches offset by reduced wholesale deposits. During the first nine months of ~~2019,~~2020, the Company’s net interest margin was 3.80% and net interest spread was 3.47%. In the same quarter ended one year earlier, net interest margin was 4.03% and net interest spread was 3.57%. In the same period ended one year earlier, net interest margin was 4.29% and net interest spread was 4.01%. The increase in the interest rates of deposits was the primary driver of a lower net interest margin in 2019.

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. ~~Historical~~In determining the loss ~~rates are calculated by using a~~history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company uses loss ~~migration analysis associating losses to~~history based on the weighted average net charge off history for the most recent twelve consecutive quarters, based on the risk-graded pool to which ~~they relate for each of~~ the ~~previous twelve quarters.~~loss was assigned. Then, using ~~a twelve quarter look~~the back period, loss factors are calculated for each risk-graded pool. During the first nine months of ~~2019,~~2020, the Company recorded a provision for loan losses of ~~$136,000~~$5.8 million, as compared to ~~$239,000 in the first nine months~~a provision of ~~2018. This reduction~~$136,000 that was based primarily on the reduction of qualitative loan factors associated with concentration ratios on CRE and Construction loans exceeding regulatory concentration guidelines. The reduction in these concentration ratios occurred as a result of downstreaming $25.0 million in capital to the Bank from the common stock offering completed in August of 2018. The provision decreased approximately $103,000 compared to the provision for loan losses recorded in the first nine months of 2018. The Company periodically reviews and updates it qualitative factors for changes in current conditions. The Company has seen a slight deterioration of credit metrics primarily related to past dues, non-accruals and TDRs during 2019 compared to the same period of 2018; however, management considers the allowance for loan losses to be appropriate.2019.

Non-Interest Income. Non-interest income for the nine months ended September 30, ~~2019~~2020 was ~~$4.0~~$4.6 million, an increase of ~~$516,000~~$606,000 from the first nine months of ~~2018.~~2019. Service charges on deposit accounts decreased $57,000 to $801,000 for the nine months ended September 30, 2020 from $858,000 for the same period in 2019. Other non-deposit fees and income increased ~~$28,000~~$151,000 from the first nine months of 2019 to ~~$858,000~~the first nine months of 2020 due to increases in various items. Fees from the sale of mortgages increased from $605,000 for the nine months ended September 30, 2019 ~~from $830,000~~to $1.2 million for ~~the same period in 2018. Other non-deposit fees and income increased $128,000 from~~ the first nine months of 2018 to the first nine months of 2019. Fees from presold mortgages increased non-interest income $312,000 in the nine months of 2019 to $605,000 from $293,000 for the same period in 2018. The Company sold two investment securities for a gain of $48,000 in the first nine months of 2019.2020. The Company did not ~~sell any investment~~have sales of securities during the first nine months of ~~2018.~~

September 30, 2020 and in 2019 sold securities reflecting a gain of $48,000, respectively.

Non-Interest Expenses. Non-interest expenses ~~decreased~~increased by ~~$640,000~~$3.8 million to ~~$26.0~~$29.8 million for the nine months ended September 30, ~~2019,~~2020, from ~~$26.7~~$26.0 million for the same period in ~~2018.~~2019. In general, most categories of non-interest expenses increased primarily due to changes in the Company’s branch

46

Table of Contents

network. The following are highlights of the significant categories of non-interest expenses during the first nine months of ~~2019~~2020 versus the same period in ~~2018:~~

2019:

	·●	Personnel expenses increased ~~$1.3~~$2.0 million to ~~$15.1~~$17.1 million, due to ~~additions in branch staff, employment taxes~~additional personnel and ~~benefit costs.~~
	·	~~Occupancy~~cost of living increases and ~~equipment expenses increased by $124,000 due to branch~~ acquisition ~~and repairs and maintenance expenses.~~of three branches.

·●

~~CDI amortization~~Occupancy expenses increased $203,000, primarily due to additional branches, repairs and maintenance and increased rent expense ~~decreased by $152,000 in the first nine months of 2019~~ due to normal ~~amortization.~~rent escalation.

·●

~~Deposit insurance expense decreased $452,000 due to receiving a credit from the FDIC as a result regulatory changes in the premium calculation.~~Integration-related expenses increased $520,000.

·●

~~Information systems~~CDI expense decreased ~~$255,000~~$79,000 due to ~~expense elimination associated with assumed contracts from~~ the ~~Premara merger for similar services.~~amortization.

·●

~~Merger/integration~~Information systems expense increased by $535,000 due to increased expenses related ~~expenses decreased by $1.6 million compared~~ to the ~~non-recurring 2018 merger~~new mobile banking platform and security cost ~~associated with~~for the ~~Premara acquisition.~~core processing system.

·●

~~Foreclosed real estate expenses~~Professional fees decreased ~~$50,000 due~~by $161,000 to ~~decreased HOA dues and write downs in 2019.~~$1.2 million.

·●

~~Other non-interest~~Deposit insurance expenses increased by ~~$100,000,~~$269,000 due to ~~small increases in several categories of other non-interest expenses.~~increased asset base.

Provision for Income Taxes. The Company’s effective tax rate was ~~22.0%~~20.6% and ~~22.4%~~22.0% for the nine months ended September 30, 2020 and 2019, ~~and 2018,~~ respectively.

As of September 30, ~~2019~~2020 and December, 31, ~~2018,~~2019, the Company had a net deferred tax asset in the amount of ~~$3.3~~$3.6 million and ~~$3.7~~$2.8 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income,

47

Table of Contents

net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average ~~loans. The table is presented on a taxable equivalent basis where applicable.~~loans

For the nine months ended

For the nine months ended

September 30, 2020

September 30, 2019

(dollars in thousands)

Average

Average

Average

Average


balance

Interest

rate

balance

Interest

rate

INTEREST-EARNING ASSETS:

Loans, gross of allowance

$
1,156,906

$
43,113

4.98
%
$
988,268

$
40,510

5.48
%
Investment securities

65,322

1,224

2.50
%

77,674

1,653

2.85
%
Other interest-earning assets

60,857

255

0.56
%

99,966

1,580

2.11
%
Total interest-earning assets

1,283,085

44,592

4.64
%

1,165,908

43,743

5.02
%
Other assets

204,098

101,558





Total assets

$
1,487,183

$
1,267,466




��

INTEREST-BEARING LIABILITIES:













Deposits:













Savings, NOW and money market

$
468,630

1,887

0.54
%
$
315,349

1,196

0.51
%
Time deposits over $100,000

289,516

3,709

1.71
%

299,092

4,516

2.02
%
Other time deposits

110,579

1,213

1.47
%

116,710

1,470

1.68
%
Borrowings

57,394

1,269

2.95
%

61,954

1,426

3.08
%
Total interest-bearing liabilities

926,119

8,078

1.17
%

793,105

8,608

1.45
%
Non-interest-bearing deposits

335,108

247,087





Other liabilities

11,764

12,452





Shareholders’ equity

214,192

214,822





Total liabilities and shareholders’ equity

$
1,487,183

$
1,267,466





Net interest income/interest rate spread (taxable-equivalent basis)

$
36,514

3.47
%

$
35,135

3.57
%
Net interest margin (taxable-equivalent basis)

3.80
%





4.03
%
Ratio of interest-earning assets to interest-bearing liabilities

138.54
%

147.01
%





Reported net interest income













Net interest income/net interest margin (taxable-equivalent basis)

$
36,514

3.79
%

$
35,135

4.02
%
Less:













taxable-equivalent adjustment

(89)



(113)



Net Interest Income

$
36,425



$
35,022



For the nine months ended For the nine months ended
September 30, 2019 September 30, 2018
(dollars in thousands)
Average Average Average Average
balance Interest rate balance Interest rate
Interest-earning assets:
Loans, gross of allowance $ 988,268 $ 40,510 5.48 % $ 976,862 $ 40,315 5.52 %
Investment securities 77,674 1,653 2.85 % 59,139 1,153 2.61 %
Other interest-earning assets 99,966 1,580 2.11 % 73,821 940 1.70 %
Total interest-earning assets 1,165,908 43,743 5.02 % 1,109,822 42,408 5.11 %

Other assets 101,558 105,644

Total assets $ 1,267,466 $ 1,215,466
Interest-bearing liabilities:
Deposits:
Savings, NOW and money market $ 315,349 1,196 0.51 % $ 317,303 977 0.41 %
Time deposits over $100,000 299,092 4,516 2.02 % 326,037 3,453 1.42 %
Other time deposits 116,710 1,470 1.68 % 115,028 1,055 1.23 %
Borrowings 61,954 1,426 3.08 % 71,771 1,321 2.46 %

Total interest-bearing liabilities 793,105 8,608 1.45 % 830,139 6,806 1.10 %

Non-interest-bearing deposits 247,087 232,366
Other liabilities 12,452 6,300
Shareholders' equity 214,822 146,661

Total liabilities and shareholders' equity $ 1,267,466 $ 1,215,466
Net interest income/interest rate spread (taxable-equivalent basis) $ 35,135 3.57 % $ 35,602 4.01 %

Net interest margin
(taxable-equivalent basis) 4.03 % 4.29 %

Ratio of interest-earning assets to interest-bearing liabilities 147.01 % 133.69 %

Reported net interest income
Net interest income/net interestmargin (taxable-equivalent basis) $ 35,135 $ 35,602
Less:
taxable-equivalent adjustment (113 ) (117 )

Net Interest Income $ 35,022 4.02 % $ 34,485 4.27 %
50
Liquidity
~~Liquidity~~
The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a ~~cost-effective~~cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) represented ~~12.7%~~20.9% of total assets at September 30, ~~2019 and decreased~~2020 as compared to ~~15.2%~~11.9% as of December 31, ~~2018.~~2019.

48

Table of Contents

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. ~~Federal funds sold was $10.7 million at September 30, 2019.~~ Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of September 30, ~~2019,~~2020, the Company had existing credit lines with other financial institutions to purchase up to ~~$243.2~~$243.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of ~~$112.6~~$87.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At September 30, ~~2019,~~2020, the Company had $45.0 million in FHLB advances outstanding. Another source of short-term borrowings available to the Bank is securities sold under agreements to repurchase. At September 30, ~~2019,~~2020, in addition to FHLB advances, total borrowings consisted of junior subordinated debentures of $12.4 million.

Total deposits were ~~$987.7 million~~$1.5 billion at September 30, ~~2019.~~2020. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented ~~42.2%~~27.3% of total deposits at September 30, ~~2019.~~2020. Time deposits of $250,000 or more represented ~~16.0%~~9.6% of the Company’s total deposits at September 30, ~~2019.~~2020. At quarter-end, the Company had ~~$13.5~~$3.1 million in brokered time deposits and no$1.5 in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

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

Capital Resources

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Commencing in the first quarter of 2015, financial institutions and their holding companies became subject to a revised set of regulatory capital requirements, due in part to agreements reached by the Basel Committee on Banking Supervision. Under the revised capital rules, theThe Common Equity Tier 1 risk-based ratio ~~which~~ does not include limited life components such as trust preferred securities ~~and SBLF preferred stock~~ in ~~the calculation, was added as part on an institution’s capital ratio profile.~~this calculation. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 12.04% at September 30, 2020.

49

Table of Contents

As the following table indicates, at September 30, ~~2019,~~2020, the Company and the Bank both exceeded minimum regulatory capital requirements as specified ~~in the tables~~ below.

Actual

Minimum

Ratio

Requirement

Select Bancorp, Inc.

Total risk-based capital ratio

14.71
%
8.00
%

Tier 1 risk-based capital ratio

13.68
%
6.00
%

Leverage ratio

11.00
%
4.00
%

Common equity Tier 1 risk-based capital ratio

12.77
%
4.50
%

Actual

Minimum

Well-Capitalized

Ratio

Requirement

Requirement

Select Bank & Trust

Total risk-based capital ratio

13.00
%
8.00
%
10.00
%
Tier 1 risk-based capital ratio

11.97
%
6.00
%
8.00
%
Leverage ratio

9.58
%
4.00
%
5.00
%
Common equity Tier 1 risk-based capital ratio

11.97
%
4.50
%
6.50
%
Actual Minimum
Select Bancorp, Inc. Ratio Requirement
Total risk-based capital ratio 18.39 % 8.00 %
Tier 1 risk-based capital ratio 17.67 % 6.00 %
Leverage ratio 15.39 % 4.00 %
Common equity Tier 1 risk-based capital ratio 16.58 % 4.50 %
Regulatory
Actual Minimum Well-Capitalized
Select Bank & Trust Ratio Requirement Requirement
Total risk-based capital ratio 15.62 % 8.00 % 10.00 %
Tier 1 risk-based capital ratio 14.89 % 6.00 % 8.00 %
Leverage ratio 12.97 % 4.00 % 5.00 %
Common equity Tier 1 risk-based capital ratio 14.89 % 4.50 % 6.50 %

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of September 30, 2019. During the third quarter of 2018 the Company completed a common stock offering netting $59.8 million which resulted in an increase in capital ratios for the holding company. Shortly after the receipt of the common stock offering proceeds, $25.0 million was downstreamed to the Bank, increasing its capital ratios.
2020.
Management expects that the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the future.

~~The Company’s equity to assets ratio was 16.7% at September 30, 2019.~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company intends to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Company’s most significant market risk exposure is interest rate risk. The ~~Company's~~Company’s primary goal in managing interest rate risk is to minimize the effect that changes in market interest rates have on earnings and capital. This goal is accomplished through the active management of the balance sheet. The goal of these activities is to structure the maturity and repricing ofassets and liabilities to produce stable net interest income despite changing interest rates. The ~~Company's~~Company’s overall interest rate risk position is governed by policies approved by the Board of Directors and guidelines established and monitored by the Bank’s Asset/Liability Committee (“ALCO”).
To measure, monitor, and report on interest rate risk, the Company begins with two models: (1) net interest income ~~("NII"~~(“NII”) at risk, which measures the impact on NII over the next twelve and twenty-four months to immediate changes in interest rates and (2) net economic value of equity ~~("EVE"~~(“EVE”), which measures the impact on the present value of net assets to immediate changes in interest rates. NII at risk is designed to measure the potential short-term impact of changes in interest rates on NII.

50

Table of Contents

EVE is a long-term measure of interest rate risk to the ~~Company's~~Company’s balance sheet, or equity. Gap analysis, which is the difference between the amount of balance sheet assets and liabilities repricing within a specified time period, is used as a secondary measure of the ~~Company's~~Company’s interest rate risk position. All of these models are subject to ALCO guidelines and are monitored regularly.

In calculating NII at risk, the Company begins with a base amount of NII that is projected over the next twelve and twenty-four months, assuming that the balance sheet is static and the yield curve remains unchanged over the period. The current yield curve is then “shocked,” or moved immediately, ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent in a parallel fashion, or at all points along the yield curve. New twelve-month and twenty four-month NII projections are then developed using the same balance sheet but with the new yield curves, and these results are compared to the base scenario. The Company also models other scenarios to evaluate potential NII at risk such as a gradual ramp in interest rates, a flattening yield curve, a steepening yield curve, and others that management deems appropriate.

EVE at risk is based on the change in the present value of all assets and liabilities under different interest rate scenarios. The present value of existing cash flows with the current yield curve serves as the base case. The Company then applies an immediate parallel shock to that yield curve of ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent and recalculates the cash flows and related present values.

Key assumptions used in the models described above include the timing of cash flows, the maturity and repricing of assets and liabilities, changes in market conditions, and interest-rate sensitivities of the ~~Company's~~Company’s non-maturity deposits with respect to interest rates paid and the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NII or predict the impact of changes in interest rates on NII and EVE. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management strategies, among other factors. Projections of NII are assessed as part of the ~~Company's~~Company’s forecasting process.

NII and EVE Analysis. The following table presents the estimated exposure to NII for the next twelve months due to immediate changes in interest rates and the estimated exposure to EVE due to immediate changes in interest rates. All information is presented as of June 30, ~~2019.~~2020.

June 30, 2020

(Dollars in thousands)

Estimated Effect on NII

Estimated Effect on EVE

Immediate change in interest rates:

+ 4.0%

13.1
%
30.1
%
+ 3.0%

9.0

23.4

+ 2.0%

4.9

16.0

+ 1.0%

2.0

8.3

No change

—

—

- 1.0%

1.5

(2.4)

June 30, 2019
(Dollars in thousands) Estimated
Exposure to
NII Estimated
Exposure to
EVE
Immediate change in interest rates:
+ 4.0% 12.4 % 13.3 %
+ 3.0% 9.7 10.8
+ 2.0% 6.7 8.0
+ 1.0% 3.4 4.3
No change - -
- 1.0% (2.5 ) (5.3 )

While the measures presented in the table above are not a prediction of future NII or EVE valuations, they do suggest that if all other variables remained constant, immediate increases in interest rates at all points on the yield curve may produce higher NII in the short term. Other important factors that

51

Table of Contents

impact the levels of NII are balance sheet size and mix, interest rate spreads, the slope of the yield curve, the speed of interest rates changes, and management actions taken in response to the preceding conditions.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures.At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule ~~13a-14.~~

13a-15.

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

Changes in internal control over financial reporting.Management of the Company has evaluated, with the participation of the ~~Company's~~Company’s Chief Executive Officer and Chief Financial Officer, changes in the ~~Company's~~Company’s internal controls over financial reporting (as defined in Rule ~~13a−~~13a−15(f) and ~~15d−~~15d−15(f) of the Exchange Act) during the third quarter of ~~2019.~~2020. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the third quarter of ~~2019~~2020 that have materially affected or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

53

Part II. OTHER INFORMATION

Item 1. Legal ~~Proceedings~~Proceedings.

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

Item 1A. Risk ~~Factors~~

Factors.

There have been no material changes toin the Company’s risk factors ~~that we have previously~~from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019, except as set forth in our Quarterly Report on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020.

52

Table of Contents

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to elevated unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of factors impacting us or our borrowers, customers or business partners, including but not limited to:

●

demand for our products and services may decline, making it difficult to grow assets and income;

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

●

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

●

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

●

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;

53

Table of Contents

●

we rely on third-party vendors for certain services and the unavailability of a critical service (such as information technology network and data processing services) due to the COVID-19 outbreak could have an adverse effect on us;

●

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;

●

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions; and

●

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity.

Additionally, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of these factors could negatively impact our business, financial condition, and results of operations and prospects. These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel and developing work-from-home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

54

Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
~~The Company announced a repurchase plan on August 31, 2016 (the “2016 Repurchase Plan”), by which management was authorized to repurchase up to 581,518 shares of Company common stock~~Set forth in the ~~open market and through privately negotiated transactions. During~~table below is the Company’s repurchase activity during the three ~~months~~month period ended September 30, 2019, the Company exhausted its available repurchases under the 2016 Repurchase Plan. On September 17, 2019, the Company announced that its Board of Directors approved a new stock repurchase plan (the “2019 Repurchase Plan”). Under the 2019 Repurchase Plan, the Company is authorized to repurchase up to 937,248 outstanding shares of its common stock in the open market or through privately negotiated transactions.2020:






Total number of shares

Maximum number of

Total number

Average

purchased as part of

shares that may yet be

of shares

price paid

publicly announced

purchased under the
Period

purchased

per share

plans or programs⁽²⁾

plans or programs⁽²⁾
July 2020

—

$
—

468,504

42,002
Beginning Date: 7/1

Ending Date: 7/31








August 2020

14,616

7.72

14,616

27,386
Beginning Date: 8/1

Ending Date: 8/31








September 2020

61,386

7.37

61,386

841,000
Beginning Date: 9/1

Ending Date: 9/30

~~Share repurchase activity for the 2016 Repurchase Plan during the three months ended September 30, 2019 was as follows:~~
(1) Reflects the number of shares of the Company’s common stock repurchased during the referenced period under both publicly announced repurchase plans or programs and those made not pursuant to publicly announced plans or programs. All repurchases made during the quarterly period were made pursuant to publicly announced repurchased plans.
(2) Reflects aggregate shares repurchased during the referenced period under publicly announced repurchase plans. The Company’s 2019 repurchase plan, which was announced on September 17, 2019 and authorized the repurchase of up to 937,438 shares of common stock, terminated during the period covered b the report, as all repurchases had been completed. On September 22, 2020, the Company publicly announced a new repurchase plan, which authorizes the repurchase of up to 875,000 shares of Company common stock.

~~Issuer Purchases of Equity Securities~~
Period Total number of
Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan
July 1-31, 2019 - - - 517,022
August 1-31, 2019 428,492 10.78 428,492 88,530
September 1-30, 2019 (Plan 1) 88,530 10.90 517,022 -
September 17-30, 2019 (Plan 2) 231,889 11.30 231,889 705,359
Item 3. Defaults Upon Senior ~~Securities~~
Securities.
None.

Item 4. Mine Safety ~~Disclosures~~
Disclosures.
Not applicable.

Item 5. Other ~~Information~~
Information.
None.

55

Table of Contents

Item 6. Exhibits.
Exhibit Index

Incorporated by Reference
(Unless Otherwise Indicated)
Exhibit
No.
Description of Exhibit
Form
Exhibit
Filing
Date
SEC
File No.

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

Filed
herewith

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

Filed
herewith

32.1

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

Furnished
herewith

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

Furnished
herewith

101

Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the Three Months and Nine Months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019, Three Months Ended June 30, 2020 and 2019 and the Three Months Ended September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019; and (vi) Notes to Consolidated Financial Statements.

Filed
herewith

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

Filed
herewith

Incorporated by Reference
(Unless Otherwise Indicated)
Exhibit No. Description of Exhibit Form Exhibit Filing
Date
SEC
File No.

10.1 2019 Supplemental Executive Retirement Agreement dated September 23, 2019, with William L. Hedgepeth II 8-K 10.1 09/24/19 000-50400

10.2 2019 Supplemental Executive Retirement Agreement dated September 23, 2019, with Lynn L. Johnson 8-K 10.2 09/24/19 000-50400

31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Filed herewith

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Filed herewith

32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Furnished herewith

32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Furnished herewith

101 Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, in XBRL (eXtensible Business Reporting Language) Filed herewith

5556

Table of Contents

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.


	SELECT BANCORP, INC.


Date: November 6, ~~2019~~2020	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer


Date: November 6, ~~2019~~2020	By:	/s/ Mark A. Jeffries
		Mark A. Jeffries
		Executive Vice President and Chief Financial Officer

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

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


Large accelerated filer ¨	☐	Accelerated filer x☒

Non-accelerated filer ¨☐	Smaller reporting company x☒
	Emerging growth company ¨☐

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements(Unaudited)

	Consolidated Balance Sheets September 30, ~~2019~~2020 and December 31, ~~2018~~2019	3

	Consolidated Statements of Operations Three Months and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	4

	Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	5

	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, ~~2019~~2020 and ~~2018,~~2019, Three Months Ended June 30, ~~2019~~2020 and ~~2018~~2019 and Three Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	6

	Consolidated Statements of Cash Flows Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	8 7

	Notes to Consolidated Financial Statements	10 9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38 34

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	53 50

Item 4 -	Controls and Procedures	53 52

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	54 52

Item 1A -	Risk Factors	54 52

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	54 55

Item 3 -	Defaults Upon Senior Securities	54 55

Item 4 -	Mine Safety Disclosures	54 55

Item 5-5 -	Other Information	55

Item 6 -	Exhibits	55 56

	Signatures	56 57


	September 30, 2020		December 31,
	(unaudited)		2019*

	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	25,068	$	19,110
Interest-earning deposits in other banks		249,541		50,920
Federal funds sold		8,046		9,047
Investment securities available for sale, at fair value		87,434		72,367
Loans held for sale		2,945		928
Loans		1,283,457		1,029,975
Allowance for loan losses		(13,561)		(8,324)
NET LOANS		1,269,896		1,021,651
Accrued interest receivable		4,486		4,189
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		3,059		3,045
Other non-marketable securities		718		719
Foreclosed real estate		3,237		3,533
Premises and equipment, net		20,883		17,791
Right of use lease asset		8,756		8,596
Bank owned life insurance		30,271		29,789
Goodwill		41,914		24,579
Core deposit intangible (“CDI”)		1,677		1,610
Other assets		14,015		7,202
TOTAL ASSETS	$	1,771,946	$	1,275,076
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	408,209	$	240,305
Savings		51,629		43,128
Money market and NOW		610,275		280,145
Time		402,667		429,260
TOTAL DEPOSITS		1,472,780		992,838
Short-term debt		20,000		0
Long-term debt		37,372		57,372
Lease liability		9,089		8,813
Accrued interest payable		449		578
Accrued expenses and other liabilities		18,889		2,700
TOTAL LIABILITIES		1,558,579		1,062,301
Shareholders’ Equity
Preferred stock, 0 par value, 5,000,000 shares authorized; 0 preferred shares were issued and outstanding at September 30, 2020 and December 31, 2019		0		0
Common stock, $1 par value, 50,000,000 shares authorized; 17,786,552 and 18,330,058 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		17,787		18,330
Additional paid-in capital		137,130		140,870
Retained earnings		56,917		52,675
Common stock issued to deferred compensation trust, at cost; 263,377 and 319,753 shares outstanding at September 30, 2020 and December 31, 2019, respectively		(2,352)		(2,815)
Directors’ Deferred Compensation Plan Rabbi Trust		2,352		2,815
Accumulated other comprehensive income		1,533		900
TOTAL SHAREHOLDERS’ EQUITY		213,367		212,775
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,771,946	$	1,275,076

	September 30, 2019			December 31,
	(Unaudited)			2018*
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	20,052		$	17,059
Interest-earning deposits in other banks		53,093			121,303
Certificates of deposit		500			1,000
Federal funds sold		10,728			-
Investment securities available for sale, at fair value		76,941			51,533
Loans held for sale		1,714			580
Loans		1,014,928			986,040
Allowance for loan losses		(8,056	)		(8,669	)

NET LOANS		1,006,872			977,371

Accrued interest receivable		3,902			3,889
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		3,045			3,283
Other non-marketable securities		719			762
Foreclosed real estate		1,442			1,088
Premises and equipment, net		18,150			17,920
Right of use lease asset		8,776			-
Bank owned life insurance		29,621			29,117
Goodwill		24,579			24,579
Core deposit intangible (“CDI”)		1,803			2,085
Assets held for sale		-			668
Other assets		7,697			6,288

TOTAL ASSETS	$	1,269,634		$	1,258,525

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	243,889		$	247,007
Savings		43,355			51,811
Money market and NOW		283,414			254,482
Time		417,015			427,127

TOTAL DEPOSITS		987,673			980,427

Short-term debt		-			7,000
Long-term debt		57,372			57,372
Lease liability		8,951			-
Accrued interest payable		596			667
Accrued expenses and other liabilities		2,993			3,448

TOTAL LIABILITIES		1,057,585			1,048,914
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018		-			-
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,513,078 and 19,311,505 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		18,513			19,312
Additional paid-in capital		142,878			150,718
Retained earnings		49,634			39,640
Common stock issued to deferred compensation trust, at cost; 312,956 and 303,239 shares outstanding at September 30, 2019 and December 31, 2018, respectively		(2,730	)		(2,615	)
Directors’ Deferred Compensation Plan Rabbi Trust		2,730			2,615
Accumulated other comprehensive income (loss)		1,024			(59	)

TOTAL SHAREHOLDERS’ EQUITY		212,049			209,611

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,269,634		$	1,258,525


	Three Months Ended				Nine Months Ended
		September 30,			September 30,
	2020		2019		2020		2019

	(In thousands, except share and per share data)				(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	15,404	$	13,924	$	43,079	$	40,481
Federal funds sold and interest-earning deposits in other banks		54		581		255		1,580
Investments		367		503		1,169		1,569
TOTAL INTEREST INCOME		15,825		15,008		44,503		43,630

INTEREST EXPENSE
Money market, NOW and savings deposits		891		433		1,887		1,196
Time deposits		1,415		2,248		4,922		5,986
Short-term debt		145		4		373		56
Long-term debt		263		455		896		1,370
TOTAL INTEREST EXPENSE		2,714		3,140		8,078		8,608
NET INTEREST INCOME		13,111		11,868		36,425		35,022
PROVISION FOR LOAN LOSSES		1,638		231		5,844		136
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,473		11,637		30,581		34,886

NON-INTEREST INCOME
Gain on the sale of securities		—		48		0		48
Service charges on deposit accounts		257		308		801		858
Fees from the sale of mortgages		517		218		1,165		605
Other fees and income		950		874		2,613		2,462
TOTAL NON-INTEREST INCOME		1,724		1,448		4,579		3,973
NON-INTEREST EXPENSE
Personnel		5,742		5,124		17,160		15,126
Occupancy and equipment		1,008		1,073		2,925		2,722
Deposit insurance		370		(30)		434		165
Professional fees		399		518		1,222		1,383
Core deposit intangible amortization		179		208		553		632
Merger/acquisition related expenses		7		128		755		235
Information systems		1,043		852		3,053		2,518
Foreclosure-related expenses		228		(9)		420		31
Other		1,091		1,067		3,294		3,234
TOTAL NON-INTEREST EXPENSE		10,067		8,931		29,816		26,046
INCOME BEFORE INCOME TAX		3,130		4,154		5,344		12,813
INCOME TAX		673		915		1,102		2,819
NET INCOME		2,457		3,239		4,242		9,994
Basic	$	0.14	$	0.17	$	0.24	$	0.52
Diluted	$	0.14	$	0.17	$	0.23	$	0.52
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		17,847,913		19,028,572		18,038,345		19,219,820
Diluted		17,866,822		19,073,235		18,062,170		19,266,480

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019		2018
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	13,924		$	13,609		$	40,481	$	40,293
Federal funds sold and interest-earning deposits in other banks		581			422			1,580		940
Investments		503			351			1,569		1,058
TOTAL INTEREST INCOME		15,008			14,382			43,630		42,291
INTEREST EXPENSE
Money market, NOW and savings deposits		433			338			1,196		977
Time deposits		2,248			1,665			5,986		4,508
Short-term debt		4			75			56		285
Long-term debt		455			452			1,370		1,036

TOTAL INTEREST EXPENSE		3,140			2,530			8,608		6,806
NET INTEREST INCOME		11,868			11,852			35,022		35,485
PROVISION FOR (RECOVERY OF) LOAN LOSSES		231			(459	)		136		239

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,637			12,311			34,886		35,246
NON-INTEREST INCOME
Fees on the sale of mortgages		218			109			605		293
Gain on securities		48			-			48		-
Service charges on deposit accounts		308			309			858		830
Other fees and income		874			648			2,462		2,334

TOTAL NON-INTEREST INCOME		1,448			1,066			3,973		3,457
NON-INTEREST EXPENSE
Personnel		5,124			4,464			15,126		13,861
Occupancy and equipment		1,073			849			2,722		2,598
Deposit insurance		(30	)		239			165		617
Professional fees		518			322			1,383		1,012
CDI amortization		208			247			632		784
Merger/acquisition related expenses		128			-			235		1,826
Information systems		852			726			2,518		2,773
Foreclosure-related expenses		(9	)		(22	)		31		81
Other		1,067			975			3,234		3,134

TOTAL NON-INTEREST EXPENSE		8,931			7,800			26,046		26,686
INCOME BEFORE INCOME TAX		4,154			5,577			12,813		12,017
INCOME TAXES		915			1,256			2,819		2,689

NET INCOME	$	3,239		$	4,321		$	9,994	$	9,328
NET INCOME PER COMMON SHARE
Basic	$	0.17		$	0.27		$	0.52	$	0.64
Diluted	$	0.17		$	0.27		$	0.52	$	0.63
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		19,028,572			15,858,455			19,219,820		14,636,576
Diluted		19,073,235			15,916,734			19,266,480		14,697,379


													Common Stock
													Issued		Accumulated
							Additional						to Deferred		Other		Total
	Preferred Stock			Common Stock			paid-in		Retained		Deferred		Compensation		Comprehensive		Shareholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Comp Plan		Trust		Income		Equity
Balance at December 31, 2019	—	$	—	18,330,058	$	18,330	$	140,870	$	52,675	$	(2,815)	$	2,815	$	900	$	212,775
Net income	—		—	—		—		—		1,104		—		—		—		1,104
Other comprehensive income	—		—	—		—		—		—		—		—		562		562
Stock repurchases	—		—	(275,366)		(275)		(2,193)		—		—		—		—		(2,468)
Stock option exercises	—		—	1,000		1		6		—		—		—		—		7
Directors’ equity incentive plan, net	—		—	—		—		—		—		24		(24)		—		—
Stock-based compensation	—		—	—		—		105		—		—		—		—		105
Balance at March 31, 2020	—	$	—	18,055,692	$	18,056	$	138,788	$	53,779	$	(2,791)	$	2,791	$	1,462	$	212,085
Net income	—		—	—		—		—		681		—		—		—		681
Other comprehensive income	—		—	—		—		—		—		—		—		194		194
Stock repurchases	—		—	(193,138)		(193)		(1,328)		—		—		—		—		(1,521)
Stock option exercises	—		—	—		—		—		—		—		—		—		—
Directors’ equity incentive plan, net	—		—	—		—		—		—		238		(238)		—		—
Stock-based compensation	—		—	—		—		99		—		—		—		—		99
Balance at June 30, 2020	—	$	—	17,862,554	$	17,863	$	137,559	$	54,460	$	(2,553)	$	2,553	$	1,656	$	211,538
Net income	—		—	—		—		—		2,457		—		—		—		2,457
Other comprehensive (loss)	—		—	—		—		—		—		—		—		(123)		(123)
Stock repurchases	—		—	(76,002)		(76)		(490)		—		—		—		—		(566)
Directors’ equity incentive plan, net	—		—	—		—		—		—		201		(201)		—		—
Stock based compensation	—		—	—		—		61		—		—		—		—		61

Balance at September 30, 2020	—	$	—	17,786,552	$	17,787	$	137,130	$	56,917	$	(2,352)	$	2,352	$	1,533	$	213,367


Balance at December 31, 2018	—		—	19,311,505		19,312		150,718		39,640		(2,615)		2,615		(59)		209,611
Net income	—		—	—		—		—		3,307		—		—		—		3,307
Other comprehensive income	—		—	—		—		—		—		—		—		360		360
Stock option exercises	—		—	14,980		14		100		—		—		—		—		114
Directors’ equity incentive plan, net	—		—	—		—		—		—		(37)		37		—		—
Stock based compensation	—		—	—		—		59		—		—		—		—		59
Balance at March 31, 2019	—		—	19,326,485		19,326		150,877		42,947		(2,652)		2,652		301		213,451
Net income	—		—	—		—		—		3,448		—		—		—		3,448
Other comprehensive income	—		—	—		—		—		—		—		—		612		612
Stock repurchases	—		—	(64,496)		(64)		(662)		—		—		—		—		(726)
Stock option exercises	—		—	—		—		—		—		—		—		—		—
Stock based compensation	—		—	—		—		60		—		—		—		—		60
Balance at June 30, 2019	—		—	19,261,989		19,262		150,275		46,395		(2,652)		2,652		913		216,845
Net income	—		—	—		—		—		3,239		—		—		—		3,239
Other comprehensive income	—		—	—		—		—		—		—		—		111		111
Stock repurchases	—		—	(748,911)		(749)		(7,456)		—		—		—		—		(8,205)
Stock option exercises			—	—		—		—		—		—		—		—		—
Directors’ equity incentive plan, net	—		—	—		—		—		—		(78)		78		—		—
Stock based compensation	—		—	—		—		59		—		—		—		—		59
Balance at September 30, 2019	—	$	—	18,513,078	$	18,513	$	142,878	$	49,634	$	(2,730)	$	2,730	$	1,024	$	212,049

																Common
																Stock
																Issued					Accumulated
											Additional					to Deferred					Other			Total
	Preferred Stock				Common Stock						paid-in			Retained		Compensation			Deferred		Comprehensive			Shareholders’
	Shares		Amount		Shares			Amount			Capital			Earnings		Trust			Comp Plan		Income (loss)			Equity
Balance at December 31, 2018		-	$	-		19,311,505		$	19,312		$	150,718		$	39,640	$	(2,615	)	$	2,615	$	(59	)	$	209,611
Net income		-		-		-			-			-			3,307		-			-		-			3,307
Other comprehensive income		-		-		-			-			-			-		-			-		360			360
Stock option exercises		-		-		14,980			14			100			-		-			-		-			114
Stock based compensation		-		-		-			-			59			-		-			-		-			59
Directors’ equity incentive plan, net		-		-		-			-			-			-		(37	)		37		-			-
Balance at March 31, 2019		-	$	-		19,326,485		$	19,326		$	150,877		$	42,947	$	(2,652	)	$	2,652	$	301		$	213,451
Net income		-		-		-			-			-			3,448		-			-		-			3,448
Other comprehensive income		-		-		-			-			-			-		-			-		612			612
Stock repurchases		-		-		(64,496	)		(64	)		(662	)		-		-			-		-			(726	)
Stock based compensation		-		-		-			-			60			-		-			-		-			60
Balance at June 30, 2019		-	$	-		19,261,989		$	19,262		$	150,275		$	46,395	$	(2,652	)	$	2,652	$	913		$	216,845
Net income		-		-		-			-			-			3,239		-			-		-			3,239
Other comprehensive income		-		-		-			-			-			-		-			-		111			111
Stock repurchases		-		-		(748,911	)		(749	)		(7,456	)		-		-			-		-			(8,205	)
Directors’ equity incentive plan, net		-		-		-			-			-			-		(78	)		78		-			-
Stock based compensation		-		-		-			-			59			-		-			-		-			59
Balance at September 30, 2019		-	$	-		18,513,078		$	18,513		$	142,878		$	49,634	$	(2,730	)	$	2,730	$	1,024		$	212,049

Investment securities available for sale September 30, 2019	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies-GSEs	$	10,381	$	-	$	10,381	$	-
Mortgage-backed securities-GSEs		52,104		-		52,104		-
Corporate bonds		1,553		-		1,553		-
Municipal bonds		12,903		-		12,903		-
Total investment AFS	$	76,941	$	-	$	76,941	$	-


			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
September 30, 2020	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
U.S. government agencies – GSE’s	$	11,760	$	—	$	11,760	$	—

Mortgage-backed securities – GSE’s		41,670		—		41,670		—

Corporate Bonds		2,103		—		2,103		—

Municipal bonds		31,901		—		31,901		—

Total investment available for sale	$	87,434	$	—	$	87,434	$	—

Asset Category September 30, 2019	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

											Quoted Prices in		Significant
											Active Markets		Other		Significant
											for Identical		Observable		Unobservable
Asset Category September 30, 2020									Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	9,083	$	-	$	-	$	9,083	$	7,695	$	—	$	—	$	7,695
Loans held for sale		1,714		-		1,714		-
Foreclosed real estate		1,442		-		-		1,442		3,237		—		—		3,237
Total	$	12,239	$	-	$	1,714	$	10,525	$	10,932	$	—	$	—	$	10,932

Asset Category December 31, 2018	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

											Quoted Prices in		Significant
											Active Markets		Other		Significant
											for Identical		Observable		Unobservable
Asset Category December 31, 2019									Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	7,257	$	-	$	-	$	7,257	$	5,941	$	—	$	—	$	5,941
Loans held for sale		580		-		580		-
Assets held for sale		668		-		-		668
Foreclosed real estate		1,088		-		-		1,088		3,533		—		—		3,533
Total	$	9,593	$	-	$	580	$	9,013	$	9,474	$	—	$	—	$	9,474


											September 30, 2020
											Carrying		Estimated
											Amount		Fair Value		Level 1		Level 2		Level 3
	September 30, 2019
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
											(dollars in thousands)
Financial assets:
Cash and due from banks	$	20,052	$	20,052	$	20,052	$	-	$	-	$	25,068	$	25,068	$	25,068	$	—	$	—
Certificates of deposit		500		500		500		-		-
Interest-earning deposits inother banks		53,093		53,093		53,093		-		-		249,541		249,541		249,541		—		—
Federal funds sold		10,728		10,728		10,728		-		-		8,046		8,046		8,046		—		—
Investment securities availablefor sale		76,941		76,941		-		76,941		-		87,434		87,434		—		87,434		—
Loans held for sale		1,714		1,714				1,714		-		2,945		2,945		—		2,945		—
Loans, net		1,006,872		998,827		-		-		998,827		1,269,896		1,279,096		—		—		1,279,096
Accrued interest receivable		3,902		3,902		-		3,902		-		4,486		4,486		—		4,486		—
Stock in FHLB		3,045		3,045		-		-		3,045
Stock in the FHLB												3,059		3,059		—		—		3,059
Other non-marketable securities		719		719		-		-		719		718		718		—		—		718


Financial liabilities:
Deposits	$	987,673	$	989,577	$	-	$	989,577	$	-	$	1,472,780	$	1,476,441	$	—	$	—	$	1,476,441
Short-term debt												20,000		20,000		—		20,000		—
Long-term debt		57,372		55,941		-		55,941		-		37,372		34,163		—		34,163		—
Accrued interest payable		596		596		-		596		-		449		449		—		449		—


												December 31, 2019
												Carrying		Estimated
												Amount		Fair Value		Level 1		Level 2		Level 3
	December 31, 2018
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2			Level 3
	(dollars in thousands)
												(dollars in thousands)
Financial assets:
Cash and due from banks	$	17,059	$	17,059	$	17,059	$	-		$	-	$	19,110	$	19,110	$	19,110	$	—	$	—
Certificates of deposits		1,000		1,000		1,000		-			-
Interest-earning deposits in other banks		121,303		121,303		121,303		-			-		50,920		50,920		50,920		—		—
Federal funds sold													9,047		9,047		9,047		—		—
Investment securities available for sale		51,533		51,533		-		51,533			-		72,367		72,367		—		72,367		—
Loans held for sale		580		580		-		580			-		928		928		—		928		—
Loans, net		977,371		970,330		-		-			970,330		1,021,651		1,016,239		—		—		1,016,239
Accrued interest receivable		3,889		3,889		-		3,889			-		4,189		4,189		—		4,189		—
Stock in the FHLB		3,283		3,283		-		-			3,283		3,045		3,045		—		—		3,045
Other non-marketable securities		762		762		-		-			762		719		719		—		—		719
Assets held for sale		668		668		-		-			668


Financial liabilities:
Deposits	$	980,427	$	979,570	$	-	$	979,570	��	$	-	$	992,838	$	995,056	$	—	$	995,056	$	—
Short-term debt		7,000		7,000		-		7,000			-
Long-term debt		57,372		55,504		-		55,504			-		57,372		55,729		—		55,729		—
Accrued interest payable		667		667		-		667			-		578		578		—		578		—


										September 30, 2020
												Gross		Gross
										Amortized		unrealized		unrealized		Fair
										cost		gains		losses		value
	September 30, 2019
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
										(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSEs	$	10,181	$	202	$	(2	)	$	10,381
Mortgage-backed securities – GSEs		51,200		919		(15	)		52,104
U.S. government agencies – GSE’s										$	11,508	$	276	$	(24)	$	11,760
Mortgage-backed securities – GSE’s											40,195		1,528		(53)		41,670
Corporate bonds		1,532		21		-			1,553		2,101		7		(5)		2,103
Municipal bonds		12,698		205		-			12,903		31,639		333		(71)		31,901

	$	75,611	$	1,347	$	(17	)	$	76,941

										$	85,443	$	2,144	$	(153)	$	87,434


	September 30, 2020
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses

	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	3,478	$	(22)	$	479	$	(2)	$	3,957	$	(24)
Mortgage-backed securities–GSE’s		8,044		(51)		1,999		(2)		10,043		(53)
Corporate bonds		753		(5)		—		—		753		(5)
Municipal bonds		10,578		(71)		—		—		10,578		(71)
Total temporarily impaired securities	$	22,853	$	(149)	$	2,478	$	(4)	$	25,331	$	(153)

	September 30, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		losses			value		losses			value		losses
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSEs	$	-	$	-		$	627	$	(2	)	$	627	$	(2	)
Mortgage-backed securities-GSEs		3,150		(3	)		3,784		(12	)		6,934		(15	)
Total temporarily impaired securities	$	3,150	$	(3	)	$	4,411	$	(14	)	$	7,561	$	(17	)

(dollars in thousands)	September 30, 2019		December 31, 2018

					September 30, 2020		December 31, 2019
Contractually required payments	$	20,999	$	24,823	$	38,279	$	20,598
Nonaccretable difference		1,659		1,962		3,401		1,694
Cash flows expected to be collected		19,340		22,861		34,878		18,904
Accretable yield		3,305		3,593		4,891		3,191
Carrying value	$	16,035	$	19,268	$	29,987	$	15,713


																September 30, 2020
																30-59		60-89		90+		Non-		Total
																Days		Days		Days		Accrual		Past		Total
																Past Due		Past Due		Accruing		Loans		Due		Current		Loans
	September 30, 2019
	30-59		60-89		90+		Non-		Total
	Days		Days		Days		Accrual		Past				Total
	Past Due		Past Due		Accruing		Loans		Due		Current		Loans
		(dollars in thousands)
																(dollars in thousands)
Commercial and industrial	$	80	$	-	$	1,362	$	3,664	$	5,106	$	74,580	$	79,686		$	2	$	105	$	543	$	3,687	$	4,337	$	161,429	$	165,766
Construction		166		-		-		2,272		2,438		210,239		212,677			0		0		0		161		161		255,557		255,718
Multi-family residential		-				-		-		-		62,080		62,080			0		0		0		0		—		79,697		79,697
Commercial real estate		6		88		-		2,020		2,114		450,530		452,644			210		0		336		2,489		3,035		534,052		537,087
Loans to individuals &overdrafts		31		-		-		-		31		9,688		9,719			9		0		0		145		154		6,943		7,097
1-to-4 family residential		51		474		934		382		1,841		152,021		153,862
1‑to‑4 family residential																	200		13		669		950		1,832		193,342		195,174
HELOC		-		-		-		745		745		45,476		46,221			95		31		0		263		389		48,006		48,395
Deferred loan (fees)cost, net		-		-		-		-		-		-		(1,961	)		0		0		0		0		—		0		(5,477)

	$	334	$	562	$	2,296	$	9,083	$	12,275	$	1,004,614	$	1,014,928

																$	516	$	149	$	1,548	$	7,695	$	9,908	$	1,279,026	$	1,283,457


	As of September 30, 2020						Three Months Ended				Nine Months Ended
			Contractual				September 30, 2020				September 30, 2020
			Unpaid		Related		Average		Interest Income		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans		Investment		Impaired Loans

	(dollars in thousands)
2020 :
With no related allowance recorded:
Commercial and industrial	$	3,635	$	5,466	$	—	$	4,818	$	25	$	4,475	$	152
Construction		262		366		—		345		6		291		17
Commercial real estate		5,175		5,448		—		5,265		38		5,661		127
Loans to individuals & overdrafts		261		279		—		271		—		273		14
Multi-family residential		—		—		—		—		—		99		—
HELOC		411		553		—		453		2		575		22
1‑to‑4 family residential		197		207		—		202		22		292		—

Subtotal:		9,941		12,319		—		11,354		93		11,666		332
With an allowance recorded:
Commercial and industrial		502		521		162		576		19		576		18
Construction		—		—		—		—		—		—		—
Commercial real estate		977		1,032		325		986		15		208		46
Loans to individuals & overdrafts		—		—		—		—		—		—		—
Multi-family Residential		—		—		—		—		—		—		—
HELOC		119		150		9		122		5		264		6
1‑to‑4 family residential		39		107		10		103		—		64		6
Subtotal:		1,637		1,810		506		1,787		39		1,112		76
Totals:
Commercial		10,551		12,833		487		11,990		103		11,310		360
Consumer		261		279		—		271		—		273		14
Residential		766		1,017		19		880		29		1,195		34

Grand Total:	$	11,578	$	14,129	$	506	$	13,141	$	132	$	12,778	$	408

							Three months ended				Nine months ended
	As of September 30, 2019						September 30, 2019				September 30, 2019
			Contractual						Interest Income				Interest Income
			Unpaid				Average		Recognized on		Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired		Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	3,142	$	4,530	$	-	$	4,010	$	32	$	4,397	$	100
Construction		2,531		2,635		-		2,413		12		1,546		20
Commercial real estate		6,366		7,601		-		7,167		70		6,022		218
Loans to individuals & overdrafts		85		89		-		84		6		93		6
Multi-family residential		202		202		-		205		3		209		10
1-to-4 family residential		658		1,843		-		1,205		21		1,202		61
HELOC		845		1,044		-		861		11		944		36
Subtotal:		13,829		17,944		-		15,945		155		14,413		451
With an allowance recorded:
Commercial and industrial		731		1,056		230		882		1		572		41
Construction		-		-		-		-		-		13		-
Commercial real estate		-		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
1-to-4 family residential		81		94		6		546		14		563		7
HELOC		160		222		48		162		4		212		10
Subtotal:		972		1,372		284		1,590		19		1,360		58
Totals:
Commercial		12,972		16,024		230		14,677		118		12,759		389
Consumer		85		89		-		84		6		93		6
Residential		1,744		3,203		54		2,774		50		2,921		114
Grand Total:	$	14,801	$	19,316	$	284	$	17,535	$	174	$	15,773	$	509


	As of December 31, 2019						Three Months Ended				Nine Months Ended
			Contractual				September 30, 2019				September 30, 2019
			Unpaid		Related		Average		Interest Income		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans		Investment		Impaired Loans

	(dollars in thousands)
2019 :
With no related allowance recorded:
Commercial and industrial	$	2,796	$	4,051	$	—	$	4,010	$	32	$	4,397	$	100
Construction		440		537		—		2,413		12		1,546		20
Commercial real estate		5,585		6,750		—		7,167		70		6,022		218
Loans to individuals & overdrafts		197		197		—		84		6		93		6
Multi-family residential		284		293		—		205		3		209		10
HELOC		543		678		—		1,205		21		1,202		61
1‑to‑4 family residential		395		1,816		—		861		11		944		36
Subtotal:		10,240		14,322		—		15,945		155		14,413		451
With an allowance recorded:
Commercial and industrial		731		1,056		403		882		1		572		41
Construction		—		—		—		—		—		13		—
Commercial real estate		—		—		—		—		—		—		—
Loans to individuals & overdrafts		—		—		—		—		—		—		—
Multi-family Residential		—		—		—		—		—		—		—
HELOC		160		222		—		546		14		563		7
1‑to‑4 family residential		81		94		10		162		4		212		10
Subtotal:		972		1,372		413		1,590		19		1,360		58
Totals:
Commercial		9,749		12,591		403		14,677		118		12,759		389
Consumer		284		293		—		84		6		93		6
Residential		1,179		2,810		10		2,774		50		2,921		114
Grand Total:	$	11,212	$	15,694	$	413	$	17,535	$	174	$	15,773	$	509

							Three months ended					Nine months ended
	As of December 31, 2018						September 30, 2018				September 30, 2018
			Contractual						Interest Income					Interest Income
			Unpaid				Average		Recognized on			Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired			Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans			Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	4,210	$	4,495	$	-	$	3,789	$	-		$	2,178	$	108
Construction		561		647		-		481		8			486		10
Commercial real estate		4,744		6,903		-		5,361		84			4,789		238
Loans to individuals & overdrafts		215		215		-		66		1			66		1
Multi-family residential		101		109		-		223		5			227		11
1-to-4 family residential		1,040		1,204		-		782		10			829		35
HELOC		572		732		-		896		9			803		34
Subtotal:		11,443		14,305		-		11,598		117			9,378		437
With an allowance recorded:
Commercial and industrial		127		325		51		386		19			387		20
Construction		27		27		14		26		-			-		-
Commercial real estate		-		-		-		-		-			-		-
Loans to individuals & overdrafts		-		-		-		2		-			-		-
Multi-family residential		-		-		-		-		-			-		-
1-to-4 family residential		137		555		22		145		-			172		6
HELOC		-		-		-		142		3			-		-
Subtotal:		291		907		87		701		22			559		26
Totals:
Commercial		10,007		12,612		65		10,266		116			8,067		387
Consumer		101		109		-		68		1			66		1
Residential		1,626		2,491		22		1,965		22			1,804		75
Grand Total:	$	11,734	$	15,212	$	87	$	12,299	$	139		$	9,937	$	463


													Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
														Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
													Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
													of	Recorded		Recorded		of	Recorded		Recorded
													loans	Investments		Investments		loans	Investments		Investments
	Three months ended September 30, 2019						Nine months ended September 30, 2019
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
		(Dollars in thousands)
													(dollars in thousands)					(dollars in thousands)
Extended payment terms:
1-to-4 family residential		1	$	174	$	173		3	$	233	$	211	2	$	339	$	325	6	$	797	$	537
Commercial real estate		-		-		-		1		752		702
Construction		1		259		259		1		259		259	—		—		—	1		157		13
HELOC													—		—		—	2		240		232
Commercial & industrial		1		103		71		4		931		899	2		146		139	4		1,091		1,083

Loans to individuals													—		—		—	1		14		9

Total		3	$	536	$	503		9	$	2,175	$	2,071	4	$	485	$	464	14	$	2,299	$	1,874

	Three months ended September 30, 2018						Nine months ended September 30, 2018
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
		(Dollars in thousands)
Extended payment terms:
1-to-4 family residential		1	$	17	$	16		2	$	426	$	413
Commercial real estate		1		392		350		3		1,283		1,123
Commercial & industrial		1		74		74		7		1,653		1,625

Total		3	$	483	$	440		12	$	3,362	$	3,161


	Twelve months ended			Twelve months ended
	September 30, 2020			September 30, 2019
	Number	Recorded		Number	Recorded
	of loans	investment		of loans	investment

	(dollars in thousands)			(dollars in thousands)
Extended payment terms:
Commercial and industrial	4	$	2,203	—	$	—
Construction	2		208	—		—
1-to-4 family residential	1		10	1		16
Total	7	$	2,421	1	$	16

	Twelve months ended				Twelve months ended
	September 30, 2019				September 30, 2018
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
		(Dollars in thousands)
Extended payment terms:
Commercial & industrial		-	$	-		5	$	1,512
Commercial real estate		-		-		2		724
1-to-4 family residential		1		16		2		461

Total		1	$	16		9	$	2,697


September 30, 2020
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(dollars in thousands)

Superior	$	96,415	$	—	$	76	$	—
Very good		368		162		7,812		—
Good		5,538		2,196		67,996		4,866
Acceptable		22,173		24,718		270,857		50,771
Acceptable with care		35,331		228,132		181,384		24,060
Special mention		390		349		2,363		—
Substandard		5,551		161		6,599		—
Doubtful		—		—		—		—
Loss		—		—		—		—
	$	165,766	$	255,718	$	537,087	$	79,697

September 30, 2019
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
		(In thousands)
Superior	$	1,602	$	-	$	232	$	-
Very good		670		153		1,121		-
Good		4,122		8,849		60,135		4,884
Acceptable		22,853		19,978		246,804		38,784
Acceptable with care		44,004		180,985		137,263		18,412
Special mention		1,499		441		1,885		-
Substandard		4,936		2,271		5,204		-
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	79,686	$	212,677	$	452,644	$	62,080


Consumer Credit
Exposure By
Internally	1‑to‑4 family
Assigned Grade	residential		HELOC

Pass	$	191,984	$	47,300
Special mention		445		205
Substandard		2,745		890
	$	195,174	$	48,395

Consumer Credit
Exposure By
Internally	1-to-4 family
Assigned Grade	residential		HELOC
Pass	$	149,883	$	44,990
Special mention		1,550		76
Substandard		2,429		1,155
	$	153,862	$	46,221


Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts

Pass	$	6,806
Special mention		291
	$	7,097