Table of Contents

UNITED STATES

U.S. Securities and Exchange CommissionSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Form 10-Q

xQuarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020

or

Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017

or

¨Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended fromto

 

Commission File Number000-50400

Select Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

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)

Registrant'sRegistrant’s telephone number, including area codecode: (910) 892-7080

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

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common stock, par value $1.00 per share

SLCT

The NASDAQ Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo¨

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

Large accelerated filer¨

Accelerated filerx

Non-accelerated filer¨(Do not check if a smaller reporting company)

Smaller reporting company¨

Emerging growth company¨

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes¨Nox

As of November 3, 2017,August 5, 2020, the Registrantregistrant had outstanding 11,662,62117,862,554 shares of Common Stock, $1.00 par value per share.

Table of Contents

 

Page No.

Part I.

FINANCIAL INFORMATION

Item 1 -

Financial Statements(Unaudited)

Consolidated Balance Sheets September
June 30, 20172020 and December 31, 20162019

3

Consolidated Statements of Operations
Three Months and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

4

Consolidated Statements of Comprehensive Income
Three Months and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

5

Consolidated Statements of Changes in Shareholders’ Equity Nine
Three
Months Ended SeptemberMarch 31, 2020 and 2019 and Three Months Ended June 30, 20172020 and 20162019

6

Consolidated Statements of Cash Flows Nine
Six
Months Ended SeptemberJune 30, 20172020 and 20162019

7

Notes to Consolidated Financial Statements

9

Item 2 -

Management’s Discussion and Analysis of Financial Condition andResults of Operations

46

34

Item 3 -

Quantitative and Qualitative Disclosures about Market Risk

57

50

Item 4 -

Controls and Procedures

58

52

Part II.

OTHER INFORMATION

Item 1 -

Legal Proceedings

59

52

Item 1A -

Risk Factors

59

52

Item 2 -

Unregistered Sales of Equity Securities and Use of Proceeds

59

54

Item 3 -

Defaults Upon Senior Securities

59

55

Item 4 -

Mine Safety Disclosures

59

55

Item 5 -

Other Information

55

Item 6 -

Exhibits

60

56

Signatures

61

57

2

2

Part I. FINANCIAL INFORMATION

Item 1.  Financial InformationStatements.

SELECT BANCORP, INC.

Item 1 - Financial Statements

CONSOLIDATED BALANCE SHEETS

June 30, 2020

December 31, 

    

(unaudited)

    

2019*

(In thousands, except share

and per share data)

ASSETS

Cash and due from banks

$

24,037

$

19,110

Interest-earning deposits in other banks

 

157,521

 

50,920

Federal funds sold

 

9,726

 

9,047

Investment securities available for sale, at fair value

 

62,958

 

72,367

Loans held for sale

 

3,455

 

928

Loans

 

1,249,999

 

1,029,975

Allowance for loan losses

 

(12,054)

 

(8,324)

NET LOANS

 

1,237,945

 

1,021,651

Accrued interest receivable

 

4,400

 

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

 

3,561

 

3,533

Premises and equipment, net

 

20,893

 

17,791

Right of use lease asset

8,953

8,596

Bank owned life insurance

 

30,110

 

29,789

Goodwill

 

41,914

 

24,579

Core deposit intangible (“CDI”)

 

1,856

 

1,610

Other assets

 

7,854

 

7,202

TOTAL ASSETS

$

1,618,960

$

1,275,076

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Deposits:

 

  

 

  

Demand

$

400,098

$

240,305

Savings

 

52,597

 

43,128

Money market and NOW

 

495,609

 

280,145

Time

 

390,449

 

429,260

TOTAL DEPOSITS

 

1,338,753

 

992,838

Short-term debt

 

20,000

 

Long-term debt

 

37,372

 

57,372

Lease liability

9,243

8,813

Accrued interest payable

 

457

 

578

Accrued expenses and other liabilities

 

1,597

 

2,700

TOTAL LIABILITIES

 

1,407,422

 

1,062,301

Shareholders’ Equity

 

  

 

  

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

 

 

Common stock, $1 par value, 50,000,000 shares authorized; 17,862,554 and 18,330,058 shares issued and outstanding at June 30, 2020 and December 31, 2019 , respectively

 

17,863

 

18,330

Additional paid-in capital

 

137,559

 

140,870

Retained earnings

 

54,460

 

52,675

Common stock issued to deferred compensation trust, at cost; 289,611 and 319,753 shares outstanding at June 30, 2020 and December 31, 2019, respectively

 

(2,553)

 

(2,815)

Directors’ Deferred Compensation Plan Rabbi Trust

 

2,553

 

2,815

Accumulated other comprehensive income

 

1,656

 

900

TOTAL SHAREHOLDERS’ EQUITY

 

211,538

 

212,775

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

1,618,960

$

1,275,076

SELECT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

  September 30, 2017  December 31, 
  (Unaudited)  2016* 
  (In thousands, except share 
  and per share data) 
ASSETS        
Cash and due from banks $15,518  $14,372 
Interest-earning deposits in other banks  36,793   40,342 
Certificates of deposit  1,000   1,000 
Investment securities available for sale, at fair value  53,705   62,257 
Loans  763,432   677,195 
Allowance for loan losses  (8,647)  (8,411)
NET LOANS  754,785   668,784 
Accrued interest receivable  2,949   2,768 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost  1,712   2,251 
Other non-marketable securities  630   703 
Foreclosed real estate  2,093   599 
Premises and equipment, net  17,353   17,931 
Bank owned life insurance  22,610   22,183 
Goodwill  6,931   6,931 
Core deposit intangible (“CDI”)  547   810 
Assets held for sale  846   846 
Other assets  5,277   4,863 
TOTAL ASSETS $922,749  $846,640 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Deposits:        
Demand $173,231  $163,569 
Savings  34,214   38,394 
Money market and NOW  192,685   174,205 
Time  374,892   303,493 
TOTAL DEPOSITS  775,022   679,661 
Short-term debt  22,366   37,090 
Long-term debt  12,372   23,039 
Accrued interest payable  302   221 
Accrued expenses and other liabilities  2,868   2,356 
TOTAL LIABILITIES  812,930   742,367 
Shareholders’ Equity:        
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2017 and December 31, 2016  -   - 
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,662,621 and 11,645,413 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  11,663   11,645 
Additional paid-in capital  69,753   69,597 
Retained earnings  27,903   22,673 
Common stock issued to deferred compensation trust, at cost; 286,432 and 280,432 shares at September 30, 2017 and December 31, 2016, respectively  (2,413)  (2,340)
Directors’ Deferred Compensation Plan Rabbi Trust  2,413   2,340 
Accumulated other comprehensive income  500   358 
TOTAL SHAREHOLDERS’ EQUITY  109,819   104,273 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $922,749  $846,640 

* Derived from audited consolidated financial statements.

See accompanying notes.

3

3

Table of Contents

SELECT BANCORP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands, except share and per share data) 
INTEREST INCOME                
Loans $9,592  $8,369  $27,323  $24,576 
Federal funds sold and interest-earning deposits in other banks  143   52   350   189 
Investments  307   334   963   1,067 
TOTAL INTEREST INCOME  10,042   8,755   28,636   25,832 
INTEREST EXPENSE                
Money market, NOW and savings deposits  140   98   360   291 
Time deposits  1,010   642   2,649   1,950 
Short-term debt  177   22   295   162 
Long-term debt  30   147   297   345 
TOTAL INTEREST EXPENSE  1,357   909   3,601   2,748 
NET INTEREST INCOME  8,685   7,846   25,035   23,084 
PROVISION FOR LOAN LOSSES  202   337   1,091   847 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  8,483   7,509   23,944   22,237 
NON-INTEREST INCOME                
Gain on sale of investment securities  -   -   -   22 
Service charges on deposit accounts  237   249   668   742 
Other fees and income  541   536   1,618   1,718 
TOTAL NON-INTEREST INCOME  778   785   2,286   2,482 
NON-INTEREST EXPENSE                
Personnel  3,549   3,176   10,665   9,465 
Occupancy and equipment  555   575   1,619   1,756 
Deposit insurance  75   76   222   337 
Professional fees  211   263   782   750 
CDI amortization  82   105   263   332 
Merger/acquisition related expenses  278   -   278   - 
Information systems  569   510   1,607   1,543 
Foreclosed-related expenses  300   140   291   203 
Other  820   786   2,497   2,384 
TOTAL NON-INTEREST EXPENSE  6,439   5,631   18,224   16,770 
INCOME BEFORE INCOME TAX  2,822   2,663   8,006   7,949 
INCOME TAXES  1,043   924   2,776   2,800 
                 
NET INCOME  1,779   1,739   5,230   5,149 
                 
DIVIDENDS ON PREFERRED STOCK  -   -   -   4 
NET INCOME AVAILABLE                
TO COMMON SHAREHOLDERS $1,779  $1,739  $5,230  $5,145 
NET INCOME PER COMMON SHARE                
Basic $0.15  $0.15  $0.45  $0.44 
Diluted $0.15  $0.15  $0.45  $0.44 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                
Basic  11,662,580   11,627,270   11,659,139   11,601,993 
Diluted  11,717,533   11,666,280   11,711,830   11,647,915 

See accompanying notes.

4

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands) 
             
Net income $1,779  $1,739  $5,230  $5,149 
                 
Other comprehensive income (loss):                
Unrealized gain (loss) on investment securities available for sale  (11)  (259)  222   840 
Tax effect  5   97   (80)  (300)
   (6)  (162)  142   540 
Reclassification adjustment for gain included in net income  -   -   -   (22)
Tax effect  -   -   -   8 
   -   -   -   (14)
                 
Total  (6)  (162)  142   526 
                 
Total comprehensive income $1,773  $1,577  $5,372  $5,675 

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

2020

    

2019

(In thousands, except share and per share data)

(In thousands, except share and per share data)

INTEREST INCOME

Loans

$

14,086

$

13,515

$

27,675

$

26,557

Federal funds sold and interest-earning deposits in other banks

 

33

 

456

 

201

 

999

Investments

 

381

 

601

 

802

 

1,066

TOTAL INTEREST INCOME

 

14,500

 

14,572

 

28,678

 

28,622

INTEREST EXPENSE

 

  

 

  

 

  

 

  

Money market, NOW and savings deposits

 

648

 

407

 

996

 

763

Time deposits

 

1,576

 

1,985

 

3,507

 

3,738

Short-term debt

 

141

 

26

 

228

 

52

Long-term debt

 

281

 

457

 

633

 

915

TOTAL INTEREST EXPENSE

 

2,646

 

2,875

 

5,364

 

5,468

NET INTEREST INCOME

 

11,854

 

11,697

 

23,314

 

23,154

PROVISION FOR (RECOVERY OF) LOAN LOSSES

 

1,933

 

(207)

 

4,206

 

(95)

NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES

 

9,921

 

11,904

 

19,108

 

23,249

NON-INTEREST INCOME

 

  

 

  

 

  

 

  

Service charges on deposit accounts

 

206

 

284

 

544

 

550

Fees from the sale of mortgages

 

355

 

230

 

648

 

387

Other fees and income

 

850

 

814

 

1,663

 

1,588

TOTAL NON-INTEREST INCOME

 

1,411

 

1,328

 

2,855

 

2,525

NON-INTEREST EXPENSE

 

  

 

  

 

  

 

  

Personnel

 

5,786

 

5,031

 

11,418

 

10,002

Occupancy and equipment

 

986

 

922

 

1,917

 

1,649

Deposit insurance

 

76

 

90

 

64

 

195

Professional fees

 

451

 

483

 

823

 

865

Core deposit intangible amortization

 

195

 

205

 

374

 

424

Merger/acquisition related expenses

 

709

 

107

 

748

 

107

Information systems

 

972

 

877

 

2,010

 

1,666

Foreclosure-related expenses

 

187

 

10

 

192

 

40

Other

 

1,140

 

1,086

 

2,203

 

2,167

TOTAL NON-INTEREST EXPENSE

 

10,502

 

8,811

 

19,749

 

17,115

INCOME BEFORE INCOME TAX

 

830

 

4,421

 

2,214

 

8,659

INCOME TAX

 

149

 

973

 

429

 

1,904

NET INCOME

 

681

 

3,448

 

1,785

 

6,755

Basic

$

0.04

$

0.18

$

0.10

$

0.35

Diluted

$

0.04

$

0.18

$

0.10

$

0.35

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

  

 

 

  

Basic

 

18,013,863

 

19,318,358

 

18,134,607

 

19,317,029

Diluted

 

18,030,136

 

19,359,492

 

18,157,992

 

19,360,039

See accompanying notes.

5

4

Table of Contents

SELECT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except share data)SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

                    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  Equity 
Balance at December 31, 2015  7,645  $7,645   11,583,011  $11,583  $69,061  $15,923  $(2,139) $2,139  $490  $104,702 
Net income  -   -   -   -   -   5,149   -   -   -   5,149 
Other comprehensive income, net  -   -   -   -   -   -   -   -   526   526 
Preferred stock dividends paid  -   -   -   -   -   (4)  -   -   -   (4)
Preferred stock redemption  (7,645)  (7,645)  -   -   -   -   -   -   -   (7,645)
Stock option exercises  -   -   49,181   49   361   -   -   -   -   410 
Stock based compensation  -   -   -   -   53   -   -   -   -   53 
Director equity incentive plan, net  -   -   -   -   -   -   (122)  122   -   - 
Balance at September 30, 2016  -  $-   11,632,192  $11,632  $69,475  $21,068  $(2,261) $2,261  $1,016  $103,191 
                                         
                                         
Balance at December 31, 2016  -  $-   11,645,413  $11,645  $69,597  $22,673  $(2,340) $2,340  $358  $104,273 
Net income  -   -   -   -   -   5,230   -   -   -   5,230 
Other comprehensive income, net  -   -   -   -   -   -   -   -   142   142 
Stock option exercises  -   -   17,208   18   86   -   -   -   -   104 
Stock based compensation  -   -   -   -   70   -   -   -   -   70 
Director equity incentive plan, net  -   -   -   -   -   -   (73)  73   -   - 
Balance at September 30, 2017  -  $-   11,662,621  $11,663  $69,753  $27,903  $(2,413) $2,413  $500  $109,819 

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

2020

    

2019

(In thousands)

Net income

$

681

$

3,448

$

1,785

$

6,755

Other comprehensive income:

 

  

 

  

 

  

 

  

Unrealized gains on investment securities-available for sale

 

252

 

790

 

983

 

1,258

Tax effect

 

(58)

 

(178)

 

(227)

 

(286)

Total

 

194

 

612

 

756

 

972

Total comprehensive income

$

875

$

4,060

$

2,541

$

7,727

See accompanying notes.

6

5

Table of Contents

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

SELECT BANCORP, INC.

  Nine Months Ended 
  September 30, 
  2017  2016 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $5,230  $5,149 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  1,091   847 
Depreciation and amortization of premises and equipment  862   808 
Amortization and accretion of investment securities  419   579 
Amortization of deferred loan fees and costs  (438)  (346)
Amortization of core deposit intangible  263   332 
Stock-based compensation  70   53 
Accretion on acquired loans  (633)  (905)
Amortization of acquisition premium on time deposits  (229)  (542)
Net accretion of acquisition discount on borrowings  (87)  (212)
Increase in cash surrender value of bank owned life insurance  (427)  (444)
Net loss on sale and write-downs of foreclosed real estate  214   164 
Gain on sale of premises and equipment  (9)  - 
Net write-down on assets held for sale  -   13 
Net gain on investment security sales  -   (22)
Change in assets and liabilities:        
Net change in accrued interest receivable  (181)  (134)
Net change in other assets  (494)  17 
Net change in accrued expenses and other liabilities  593   1,139 
         
NET CASH PROVIDED BY OPERATING ACTIVITIES  6,244   6,496 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchase (redemption) of FHLB stock  539   (228)
Purchase (redemption) of non-marketable security  73   (45)
Purchase of investment securities available for sale  (759)  (1,517)
Maturities of investment securities available for sale  4,255   9,434 
Mortgage-backed securities pay-downs  4,859   6,788 
Proceeds from sale of investment securities available for sale  -   624 
Net change in loans outstanding  (88,516)  (34,215)
Proceeds from sale of foreclosed real estate  787   1,831 
Proceeds from sale of premises and equipment  -  400 
Purchases of premises and equipment  (275)  (629)
         
NET CASH USED BY INVESTING ACTIVITIES  (79,037)  (17,557)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Common Stock

Accumulated

Issued

Other

Additional

to Deferred

Comprehensive

Total

Preferred Stock

Common Stock

paid-in

Retained

Deferred

Compensation

Income

Shareholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Comp Plan

    

Trust

    

(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 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

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

Stock-based compensation

 

 

 

 

105

 

 

 

 

 

105

Directors’ equity incentive plan, net

 

 

 

 

 

 

24

 

(24)

 

 

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

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

99

 

 

 

 

 

99

Directors’ equity incentive plan, net

 

 

 

 

 

 

238

 

(238)

 

 

Balance at June 30, 2020

$

 

17,862,554

$

17,863

$

137,559

$

54,460

$

(2,553)

$

2,553

$

1,656

$

211,538

See accompanying notes.

7

6

Table of Contents

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

SELECT BANCORP, INC.

  Nine Months Ended 
  September 30, 
  2017  2016 
  (In thousands) 
CASH FLOWS FROM FINANCING ACTIVITIES        
Net change in deposits $95,590  $26,502 
Proceeds from short-term debt  -   22,000 
Repayments on short-term debt  (14,724)  (18,493)
Repayments on long-term debt  (10,580)  (1,124)
Preferred stock dividends paid  -   (4)
Redemption of preferred stock  -   (7,645)
Proceeds from stock option exercises  104   410 
         
NET CASH PROVIDED BY FINANCING ACTIVITIES  70,390   21,646 
         
NET CHANGE IN CASH AND CASH EQUIVALENTS  (2,403)  10,585 
         
CASH AND CASH EQUIVALENTS, BEGINNING  55,714   63,409 
         
CASH AND CASH EQUIVALENTS, ENDING $53,311  $73,994 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION        
Cash paid during the period for:        
Interest $3,520  $2,790 
Income Taxes  2,322   1,772 
         
Non-cash transactions:        
Unrealized gains on investment securities available for sale, net of tax  142   526 
Transfers from loans to foreclosed real estate  2,495   1,142 
Transfers from premises and equipment to assets held for sale  -   768 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended

June 30, 

    

2020

    

2019

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

1,785

$

6,755

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

Provision for (recovery of) loan losses

 

4,206

 

(95)

Depreciation and amortization of premises and equipment

 

869

 

862

Amortization and accretion of investment securities

 

307

 

324

Amortization of right of use asset

623

503

Amortization of deferred loan fees and costs

 

(458)

 

(400)

Amortization of core deposit intangible

 

374

 

424

Amortization of acquisition premium on time deposits

 

(109)

 

Stock-based compensation

 

204

 

119

Accretion on acquired loans

 

(620)

 

(468)

Increase in cash surrender value of bank owned life insurance

(321)

(334)

Proceeds from loans held for sale

 

26,583

 

15,707

Originations of loans held for sale

 

(28,462)

 

(15,566)

Gain on sales of loans held for sale

(648)

(387)

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

176

12

Write-down loss on assets held for sale

8

Change in assets and liabilities:

 

 

Net change in accrued interest receivable

 

127

 

(139)

Net change in other assets

 

95

 

(2,063)

Net change in accrued expenses and other liabilities

 

(1,397)

 

(753)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

3,334

 

4,509

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

Redemption (purchase) of FHLB stock

 

(14)

 

238

Redemption of non-marketable security

1

44

Purchase of investment securities available for sale

 

(4,563)

 

(37,948)

Maturities of investment securities available for sale

 

4,775

 

1,805

Cash received from branch acquisition

60,234

24,093

Mortgage-backed securities pay-downs

 

9,873

 

5,432

Net change in loans outstanding

 

(116,367)

 

(10,894)

Proceeds from sale of foreclosed real estate

 

 

77

Proceeds from sale of premises and equipment

 

 

660

Purchases of premises and equipment

 

(1,075)

 

(808)

NET CASH USED IN INVESTING ACTIVITIES

 

(47,136)

 

(17,301)

See accompanying notes.

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Table of Contents

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

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

Six Months Ended

June 30, 

    

2020

    

2019

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in deposits

$

160,541

$

24,784

Repayments of short-term debt

 

 

(7,000)

Repayment of lease liability

(550)

(300)

Repurchase of common stock

(3,989)

(726)

Proceeds from stock options exercised

 

7

 

114

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

156,009

 

16,872

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

112,207

 

4,080

CASH AND CASH EQUIVALENTS, BEGINNING

 

79,077

 

139,362

CASH AND CASH EQUIVALENTS, ENDING

$

191,284

$

143,442

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest paid

$

5,484

$

5,498

Income taxes paid

 

1,361

 

1,580

Non-cash transactions:

 

  

 

  

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

 

756

 

972

Transfer from loans to foreclosed real estate

 

204

 

469

Acquisition:

 

  

 

  

Assets acquired (excluding goodwill)

170,914

Liabilities assumed

 

186,416

 

Goodwill recorded

 

17,335

 

See accompanying notes.

8

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (“Company”(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.

SelectThe Bank & Trust Company was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25, 2014, in connection with the Company’s acquisition of LegacyCompany acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank changed itsBank’s legal name from New Century Bank to Select Bank & Trust Company. On December 15, 2017, the Company followingacquired Premara Financial, Inc. (“Premara”) and its subsidiary Carolina Premier Bank (“Carolina Premier”) through the merger of Premara with and into the two banking corporations.Company, followed immediately by the merger of Carolina Premier with and into the Bank. The Bank iscontinues as the only banking subsidiary of the Company andwith its headquarters and operations center are located in Dunn, NC.North Carolina. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina and operates under the banking lawsState of North Carolina, northwest South Carolina, and the rulesVirginia Beach-Norfolk-Newport News, VA-NC, metropolitan statistical area. The Bank is subject to the supervision and regulationsregulation of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

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 and nine month periodssix months ended SeptemberJune 30, 20172020 and 2016,2019, 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 and nine month periodssix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

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 20162019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2017.11, 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 SeptemberJune 30, 20172020 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

9

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

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 SeptemberJune 30, 20172020 and 20162019 there were 152,300219,120 and 123,800172,120 anti-dilutive stock options outstanding, respectively.

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
Weighted average shares used for basic net income available to common shareholders  11,662,580   11,627,270   11,659,139   11,601,993 
                 
Effect of dilutive stock options  54,953   39,010   52,691   45,922 
                 
Weighted average shares used for diluted net income available to common shareholders  11,717,533   11,666,280   11,711,830   11,647,915 

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

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

 

18,013,863

 

19,318,358

18,134,607

 

19,317,029

Effect of dilutive stock options

 

16,273

 

41,134

23,385

 

43,010

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

 

18,030,136

 

19,359,492

18,157,992

 

19,360,039

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, and ASU 2017-05 Other Income - Gains and losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets — In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The new guidance, which does not apply to financial instruments, provides that revenue should be recognized for the transfer of goods and services to customers in an amount equal to the consideration it receives or expects to receive. The guidance also includes expanded disclosure requirements that provide comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company currently plans to adopt the guidance using the modified retrospective method and without electing any of the practical expedients available. The Company has performed an analysis of the guidance and it is not expected to have a significant impact on the Company's financial position or results of operations but will increase disclosures of revenue.

10

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In March 2016, the FASB issued ASU 2016-09,Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting,to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, including the tax effect of forfeitures and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted these amendments to its financial statements during the first quarter of 2017 with a positive impact to net earnings as an excess tax benefit of $4,000 was recorded through the income statement rather than additional paid in capital.

In January 2016, FASB issued ASU No. 2016-01,Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The accounting guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is prohibited except for the presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk which may be early adopted. The guidance is not expected to have a significant impact on the Company's financial position, results of operations or disclosures.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). ASU 2016-02 applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.  For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018.   In transition, lessees and lessors are required to recognize and measure leases

11

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

at the beginning of the earliest period presented using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply.  The Company has reviewed its outstanding lease agreements and has centrally documented the terms of its leases.  The Company is currently evaluating the provisions of ASU 2016-02 in relation to its outstanding leases to determine the potential impact the new standard will have to the Company’s financial statements.

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 has dedicated staffcurrently qualifies as a smaller reporting company and resources in place evaluating the Company’s options including evaluating the appropriate model options and collecting and reviewing loan data for use in these models.  The Company is still assessing the impact that this new guidance will have on its consolidated financial statements.

In August 2016,2018, the FASB amended ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Statement of Cash FlowsDisclosure Requirements for Fair Value Measurement topic of the Accounting Standards Codification to clarify howCodification. The amendments remove, modify, and add certain cash receipts and cash payments are presented and classifiedfair value disclosure requirements based on the concepts in the statement of cash flows.FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments will beare effective for the Companyall entities for fiscal years, beginning after December 15, 2017 includingand interim periods within those fiscal years.years, beginning after December 15, 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 expectadoption of these amendments todid not have a material effect on its consolidated financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of theissued Accounting Standards Codification.  The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards.  The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted; however, it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

In January 2017, the FASB amended theUpdate ("ASU") 2017-04, Intangibles - Goodwill and Other Topic of(Topic 350): Simplifying the Accounting Standards Codification to simplify the accountingTest for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removesGoodwill Impairment. This ASU eliminates Step 2 offrom the goodwill impairment test. AUnder 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 will now betest 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 athe carrying amount exceeds the reporting unit’s carrying value exceeds itsunit's fair value,value; however, the loss recognized should not exceed the total amount of goodwill allocated to exceedthat reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of goodwill.  The effective date and transitionthe 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 technical correctionsfirst 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 the Company for reporting periods beginning afterMarch 12, 2020 through December 15, 2019. Early adoption is permitted for interim or annual goodwill

12

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

impairment tests performed on testing dates after January 1, 2017.31, 2022.  The Company doesis still assessing this ASU but is not expect these amendmentsexpecting it to have a material effect on its financial statements.

In February 2017, the FASB amended the Other Income Topic of the Accounting Standards Codification to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changesan impact to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on itsconsolidated financial statements.

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.

13

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

NOTEDNOTE 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.

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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.

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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 entities, and municipal bonds. There have been no changes in valuation techniques for the three and ninesix months ended SeptemberJune 30, 2017.2020. Valuation techniques are consistent with techniques used in prior periods.

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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 SeptemberJune 30, 20172020 and December 31, 20162019 (in thousands):

     Quoted Prices in  Significant    
Investment securities    Active Markets  Other  Significant 
available for sale    for Identical  Observable  Unobservable 
September 30, 2017 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
             
U.S. government agencies – GSE's $10,644  $-  $10,644  $- 
Mortgage-backed securities - GSE's  28,939   -   28,939   - 
Municipal bonds  14,122   -   14,122   - 
                 
Total $53,705  $-  $53,705  $- 

    

    

Quoted Prices in  

    

Significant 

    

Investment securities

Active Markets

Other

Significant

available for sale

for Identical

Observable

Unobservable

June 30, 2020

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

U.S. government agencies – GSE’s

$

9,086

$

$

9,086

$

Mortgage-backed securities – GSE’s

 

39,533

 

 

39,533

 

Corporate Bonds

 

2,206

 

 

2,206

 

Municipal bonds

 

12,133

 

 

12,133

 

Total investment available for sale

$

62,958

$

$

62,958

$

     Quoted Prices in  Significant    
Investment securities    Active Markets  Other  Significant 
available for sale    for Identical  Observable  Unobservable 
December 31, 2016 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
             
U.S. government agencies – GSE's $14,159  $-  $14,159  $- 
Mortgage-backed securities - GSE's  32,363   -   32,363   - 
Municipal bonds  15,735   -   15,735   - 
                 
Total $62,257  $-  $62,257  $- 

    

    

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

$

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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”. 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 SeptemberJune 30, 20172020 and December 31, 2016,2019, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowancea 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 SeptemberJune 30, 2017,2020, the discounts

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Notes to appraised value Consolidated Financial Statements (Unaudited)

used are weighted between 6%3% and 61%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 six months ended SeptemberJune 30, 2017.2020.

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 SeptemberJune 30, 2017,2020, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three and six months ended SeptemberJune 30, 2017.2020.

AssetsLoans held for sale

During 2015,The Company originates fixed and variable rate residential mortgage loans on a branch facilityservice-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 taken out of service as partlocked 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 Company’s branch restructuring plan and reclassified asshort-term nature of these derivative contracts, the fair value of the mortgage loans held for sale. The propertysale in most cases is recordedmaterially 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 remaining book balancelower of the assetcost or an estimated fairmarket value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. The significant unobservable input used is the discount appliedaggregate. Net unrealized losses are provided for in a valuation allowance by charges to appraised values to account for expected liquidationoperations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and selling costs which ranged between 1% and 25% at September 30, 2017. There have been no changesare included in mortgage banking income in the valuation techniques for the three months ended September 30, 2017.

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

consolidated statements of income.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of SeptemberJune 30, 20172020 and December 31, 20162019 (in thousands):

    Quoted Prices in Significant    
    Active Markets Other Significant 
Asset Category    for Identical Observable Unobservable 
September 30, 2017 Fair value  Assets (Level 1)  Inputs (Level 2)  Inputs (Level 3) 
         

    

    

Quoted Prices in 

    

Significant 

    

Active Markets 

Other  

Significant 

for Identical 

Observable

Unobservable 

Asset Category June 30, 2020

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Impaired loans $2,013  $-  $-  $2,013 

$

7,979

$

$

$

7,979

Asset held for sale  846   -   -   846 
Foreclosed real estate  2,093   -   -   2,093 

 

3,561

 

 

 

3,561

                
Total $4,952  $-  $-  $4,952 

$

11,540

$

$

$

11,540

    Quoted Prices in Significant    
    Active Markets Other Significant 
Asset Category    for Identical Observable Unobservable 
December 31, 2016 Fair value  Assets (Level 1)  Inputs (Level 2)  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 $5,805  $-  $-  $5,805 

$

5,941

$

$

$

5,941

Asset held for sale  846   -   -   846 
Foreclosed real estate  599   -   -   599 

 

3,533

 

 

 

3,533

                
Total $7,250  $-  $-  $7,250 

$

9,474

$

$

$

9,474

17

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Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

NOTE D – FAIR VALUE MEASUREMENTS (continued)SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the carrying values and estimated fair values of the Company'sCompany’s financial instruments at SeptemberJune 30, 20172020 and December 31, 2016:2019:

June 30, 2020

Carrying

Estimated

    

Amount

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

 September 30, 2017 
 Carrying Estimated        
 Amount  Fair Value  Level 1  Level 2  Level 3 
 (In thousands) 

(dollars in thousands)

Financial assets:                    

Cash and due from banks $15,518  $15,518  $15,518  $-  $- 

$

24,037

$

24,037

$

24,037

$

$

Certificates of deposit  1,000   1,000   1,000   -   - 
Interest-earning deposits in other banks  36,793   36,793   36,793   -   - 

 

157,521

 

157,521

 

157,521

 

 

Federal funds sold

9,726

9,726

9,726

Investment securities available for sale  53,705   53,705   -   53,705   - 

 

62,958

 

62,958

 

 

62,958

 

Loans held for sale

 

3,455

 

3,455

 

 

3,455

 

Loans, net  754,785   757,055   -   -   757,055 

 

1,237,945

 

1,239,667

 

 

 

1,239,667

Accrued interest receivable  2,949   2,949   -   2,949   - 

 

4,400

 

4,400

 

 

4,400

 

Stock in FHLB  1,712   1,712   -   -   1,712 

Stock in the FHLB

 

3,059

3,059

3,059

Other non-marketable securities  630   630   -   -   630 

 

718

718

718

                    

Financial liabilities:                    

 

 

 

  

 

  

 

  

Deposits $775,022  $773,189  $-  $773,189  $- 

$

1,338,753

$

1,342,114

$

$

1,342,114

$

Short-term debt  22,366   22,366   -   22,366   - 

 

20,000

 

20,000

 

 

20,000

 

Long-term debt  12,372   6,982   -   6,982   - 

 

37,372

 

33,932

 

 

33,932

 

Accrued interest payable  302   302   -   302   - 

 

457

 

457

 

 

457

 

December 31, 2019

Carrying

Estimated

    

Amount

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

 December 31, 2016 
 Carrying Estimated        
 Amount  Fair Value  Level 1  Level 2  Level 3 
 (in thousands) 

(dollars in thousands)

Financial assets:                    

Cash and due from banks $14,372  $14,372  $14,372  $-  $- 

$

19,110

$

19,110

$

19,110

$

$

Certificates of deposits  1,000   1,000   1,000   -   - 
Interest-earning deposits in other banks  40,342   40,342   40,342   -   - 

 

50,920

 

50,920

 

50,920

 

 

Federal funds sold

 

9,047

 

9,047

 

9,047

 

 

Investment securities available for sale  62,257   62,257   -   62,257   - 

 

72,367

 

72,367

 

 

72,367

 

Loans held for sale

 

928

 

928

 

 

928

 

Loans, net  668,784   671,208   -   -   671,208 

 

1,021,651

 

1,016,239

 

 

 

1,016,239

Accrued interest receivable  2,768   2,768   -   2,768   - 

 

4,189

 

4,189

 

 

4,189

 

Stock in the FHLB  2,251   2,251   -   -   2,251 

 

3,045

 

3,045

 

 

 

3,045

Other non-marketable securities  703   703   -   -   703 

 

719

 

719

 

 

 

719

                    

Financial liabilities:                    

 

  

 

  

 

  

 

  

 

  

Deposits $679,661  $678,328  $-  $678,328  $- 

$

992,838

$

995,056

$

$

995,056

$

Short-term debt  37,090   37,177   -   37,177   - 
Long-term debt  23,039   17,649   -   17,649   - 

 

57,372

 

55,729

 

 

55,729

 

Accrued interest payable  221   221   -   221   - 

 

578

 

578

 

 

578

 

18

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Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

NOTE D – FAIR VALUE MEASUREMENTS (continued)SELECT BANCORP, INC.

Cash and Due from Banks, Certificates of Deposit, Interest-Earning Deposits in Other Banks and Federal Funds Sold

The carrying amounts for cash and due from banks, certificates of deposit, interest-earning deposits in other banks and federal funds sold approximate fair value because of the short maturities of those instruments.

Investment Securities Available for Sale

Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using prices quoted for similar investments or quoted market prices obtained from independent pricing services.

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be madeNotes to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.Consolidated Financial Statements (Unaudited)

Stock in Federal Home Loan Bank of Atlanta

The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the FHLB stock.

Other Non-Marketable Securities

The fair value of equity instruments in other non-marketable securities is assumed to approximate carrying value.

Deposits

The fair value of demand, savings, and money market and NOW deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using the rates currently offered for instruments of similar remaining maturities.

Short-term Debt

Short-term debt consists of repurchase agreements and FHLB advances with maturities of less than twelve months. The carrying values of these instruments is a reasonable estimate of fair value.

Long-term Debt

The fair values of long-term debt are based on discounted expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value because of the short maturities of these instruments.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.

NOTE E - INVESTMENT SECURITIES

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

June 30, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair

    

cost

    

gains

    

losses

    

value

 September 30, 2017 
  Gross  Gross   
 Amortized unrealized unrealized Fair 
 cost gains losses value 
 (dollars in thousands) 

(dollars in thousands)

Securities available for sale:                

U.S. government agencies – GSE’s $10,489  $168  $(13) $10,644 

$

8,811

$

278

$

(3)

$

9,086

Mortgage-backed securities – GSE’s  28,589   387   (37)  28,939 

 

37,916

 

1,620

 

(3)

 

39,533

Corporate bonds

 

2,193

 

13

 

 

2,206

Municipal bonds  13,842   280   -   14,122 

 

11,887

 

271

 

(25)

 

12,133

                
 $52,920  $835  $(50) $53,705 

$

60,807

$

2,182

$

(31)

$

62,958

As of SeptemberJune 30, 2017,2020, accumulated other comprehensive income included net unrealized gains totaling $785,000.$2.2 million. Deferred tax assets resulting from these net unrealized losses totaled $495,000.

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 $1.2 million. Deferred tax liabilities resulting from these net unrealized gains totaled $285,000.$269,000.

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Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of AFS investments with gross unrealized gains and losses, follow:

  December 31, 2016 
     Gross  Gross    
  Amortized  unrealized  unrealized  Fair 
  cost  gains  losses  value 
  (in thousands) 
Securities available for sale:                
U.S. government agencies – GSE’s $14,086  $98  $(25) $14,159 
Mortgage-backed securities – GSE’s  32,082   382   (101)  32,363 
Municipal bonds  15,527   209   (1)  15,735 
                 
  $61,695  $689  $(127) $62,257 

As of December 31, 2016, accumulated other comprehensive income included net unrealized gains totaling $562,000. Deferred tax liabilities resulting from these net unrealized gains totaled $204,000.

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

NOTE E - INVESTMENT SECURITIES (continued)

The scheduled maturities of  securities available for sale, with gross unrealized gains and losses, were as follows:follow:

  September 30, 2017 
     Gross  Gross    
  Amortized  unrealized  unrealized  Fair 
  cost  gains  losses  value 
  (In thousands) 
Securities available for sale:                
Within 1 year $877  $11  $-  $888 
After 1 year but within 5 years  41,013   575   (50)  41,538 
After 5 years but within 10 years  5,774   145   -   5,919 
After 10 years  5,256   104   -   5,360 
                 
  $52,920  $835  $(50) $53,705 

June 30, 2020

Gross

Gross

Amortized

unrealized

unrealized

Fair

    

cost

    

gains

    

losses

    

value

(dollars in thousands)

Securities available for sale:

 

  

 

  

 

  

 

  

Due within one year

$

6,289

$

11

$

(3)

$

6,297

Due after one but within five years

 

12,209

 

360

 

(1)

 

12,568

Due after five but within ten years

 

25,383

 

1,047

 

(2)

 

26,428

Due after ten years

 

16,926

 

764

 

(25)

 

17,665

$

60,807

$

2,182

$

(31)

$

62,958

  December 31, 2016 
     Gross  Gross    
  Amortized  unrealized  unrealized  Fair 
  cost  gains  losses  value 
  (in thousands) 
Securities available for sale:                
Within 1 year $3,735  $12  $-  $3,747 
After 1 year but within 5 years  37,615   424   (110)  37,929 
After 5 years but within 10 years  10,695   109   (12)  10,792 
After 10 years  9,650   144   (5)  9,789 
                 
  $61,695  $689  $(127) $62,257 

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 $1.9$37.8 million and $34.3$18.4 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, 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 and theobligations.  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 SeptemberJune 30, 20172020 and December 31, 2016. In 2016 the2019. The Company realized a gain on the disposal of eleven securities and has not soldincurred any losses related to securities sales in 2017.the first six months of 2020 or during the year ended December 31, 2019.

21

17

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

Table of Contents

NOTE E- INVESTMENT SECURITIES (continued)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 SeptemberJune 30, 20172020 and December 31, 2016.2019.

June 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

$

$

$

524

$

(3)

$

524

$

(3)

Mortgage-backed securities–GSE’s

 

1,703

 

(1)

 

1,999

 

(2)

 

3,702

 

(3)

Corporate bonds

 

758

 

 

 

 

758

 

Municipal bonds

 

3,029

 

(25)

 

 

 

3,029

 

(25)

Total temporarily impaired securities

$

5,490

$

(26)

$

2,523

$

(5)

$

8,013

$

(31)

  September 30, 2017 
  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 $1,420  $(13) $-  $-  $1,420  $(13)
Mortgage-backed securities- GSEs  6,660   (29)  479   (8)  7,139   (37)
Municipal bonds  110   -   -   -   110   - 
Total temporarily impaired securities $8,190  $(42) $479  $(8) $8,669  $(50)

One mortgage-backed GSEAt June 30, 2020, the Company had 3 securities with an unrealized lossesloss for more than twelve months totaling $8,000 at September 30, 2017. Oneof $5,000 which consisted of 2 U.S. government agencyagencies-GSEs and 1 mortgage-backed GSE one municipal and six mortgage-backed GSEsbond.  NaN securities had unrealized losses for less than twelve months totaling $42,000$26,000 at SeptemberJune 30, 2017.2020, which consisted of 2 Municipal bonds, 1 corporate bond and 1 mortgage-backed GSE bond . All unrealized losses are attributable to the general trend of interest rates. During the first nine months of 2017 there were no investment security sales. During the first quarter of 2016 gross proceeds of investment sales amounted to $624,000 and gains of $22,000. There were no sales of investment securities in the second or third quarters of 2016.

December 31, 2019

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

value

    

losses

    

value

    

losses

    

value

    

losses

 December 31, 2016 
 Less Than 12 Months  12 Months or More  Total 
 Fair Unrealized Fair Unrealized Fair Unrealized 
 value losses value losses value losses 
 (in thousands) 

(dollars in thousands)

Securities available for sale:                        

U.S. government agencies – GSEs $2,748  $(13) $1,651  $(12) $4,399  $(25)
Mortgage-backed securities- GSEs  8,778   (101)  -   -   8,778   (101)

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  110   (1)  -   -   110   (1)

 

 

 

 

 

 

Total temporarily impaired securities $11,636  $(115) $1,651  $(12) $13,287  $(127)

$

3,544

$

(3)

$

4,395

$

(12)

$

7,939

$

(15)

At December 31, 2016,2019, the Company had two2 mortgage-backed GSE’s 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 GSEs with unrealized losses for more than twelve months totaling $12,000. Two U.S. government agency GSEs, one municipalGSE and eight2 mortgage-backed GSEsGSE’s had unrealized losses for less than twelve months totaling $115,000$3,000 at December 31, 2016.2019. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreadsrates.

18

Table of all debt instrumentsContents

SELECT BANCORP, INC.

Notes to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2016.Consolidated Financial Statements (Unaudited)

22

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 SeptemberJune 30, 20172020 and December 31, 2016:2019:

June 30, 

December 31, 

2020

2019

 

Percent

Percent

 

    

Amount

    

of total

    

Amount

    

of total

 

 September 30, December 31, 
 2017 2016 
   Percent    Percent 
 Amount of total Amount of total 
 (dollars in thousands) 
Total Loans:                
                

(dollars in thousands)

 

Real estate loans:                

1-to-4 family residential $106,229   13.91% $97,978   14.47%

$

197,395

 

14.81

%  

$

151,697

 

14.73

%

Commercial real estate  301,555   39.50%  281,723   41.60%

 

516,112

 

44.67

%  

 

459,115

 

44.58

%

Multi-family residential  72,238   9.46%  56,119   8.29%

 

77,877

 

6.80

%  

 

69,124

 

6.71

%

Construction  147,557   19.33%  100,911   14.90%

 

245,937

 

21.99

%  

 

221,878

 

21.55

%

Home equity lines of credit (“HELOC”)  43,016   5.63%  41,158   6.08%

 

49,271

 

4.22

%  

 

44,514

 

4.32

%

                

Total real estate loans  670,595   87.83%  577,889   85.34%

 

1,086,592

 

92.49

%  

 

946,328

 

91.89

%

                

Other loans:                

 

 

 

  

 

  

Commercial and industrial  84,563   11.08%  90,678   13.39%

 

161,643

 

6.95

%  

 

75,748

 

7.35

%

Loans to individuals  9,518   1.25%  9,756   1.44%

 

7,469

 

0.75

%  

 

9,779

 

0.95

%

Overdrafts  68   0.01%  71   0.01%

 

71

 

0.02

%  

 

234

 

0.02

%

Total other loans  94,149   12.34%  100,505   14.84%

 

169,183

 

7.72

%  

 

85,761

 

8.32

%

                

Gross loans  764,744      678,394     

 

1,255,775

 

 

1,032,089

 

Less deferred loan origination fees, net  (1,312)  (0.17)%  (1,199)  (0.18)%

 

(5,776)

 

(0.21)

%  

 

(2,114)

 

(0.21)

%

Total loans  763,432   100.00%  677,195   100.00%

 

1,249,999

 

100.00

%  

 

1,029,975

 

100.00

%

                
Allowance for loan losses  (8,647)      (8,411)    

 

(12,054)

 

(8,324)

 

  

                
Total loans, net $754,785      $668,784     

$

1,237,945

$

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 June 30, 2020 and December 31, 2019 were:

    

June 30, 2020

    

December 31, 2019

Contractually required payments

$

40,025

$

20,598

Nonaccretable difference

3,421

1,694

Cash flows expected to be collected

36,604

18,904

Accretable yield

5,661

3,191

Carrying value

$

30,943

$

15,713

Loans are primarily secured by real estate located in easternthe State of North Carolina, southeastern Virginia and central Northnorthwestern South Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.

At SeptemberJune 30, 2017,2020, the Company had pre-approved but unused lines of credit for customers totaling $153.0$290.6 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 had originated 1,230 loans amounting to $96.5 million under the Paycheck Protection Program (“PPP”) which are classified as Commercial and industrial loans in the loan portfolio.  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 $109.3$105.6 million of loans was pledged to the FHLB to secure borrowings at SeptemberJune 30, 2017.

23

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

NOTE F - LOANS (continued)

A description of the various loan products provided by the Bank is presented below.

1-to-4 Family Residential Loans

Residential 1-to-4 family loans are mortgage loans secured by residential real estate within the Bank’s market areas. These loans may also include loans that convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas.

Commercial Real Estate Loans

Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts. The repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower's and guarantor's global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by a liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, cash flow, market area, and risk grade.

Multi-family Residential Loans

Multi-family residential loans are typically non-farm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependent on occupancy rates, rental rates, and property management.

Construction Loans

Construction loans are non-revolving extensions of credit secured by real property of which the proceeds are used to acquire and develop land and to construct commercial or residential buildings.The primary source of repayment for these types of loans is the sale of the improved property or permanent financing in which case the property is expected to generate the cash flow necessary for repayment on a permanent loan basis. Property cash flow may be supplemented with financial support from the borrowers/guarantors.Proper underwriting of a construction loan consists of the initial process of obtaining, analyzing, and approving various aspects of information pertaining to: the analysis of the permanent financing source, creditworthiness of the borrower and guarantors, ability of the contractor to perform under the terms of the contract, and thefeasibility, marketability, and valuation of the project.

24

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

NOTE F - LOANS (continued)

Also, consideration is given to thecost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction loans aretraditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can often be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, and interest rates increasing beyond budget.

Home Equity Lines of Credit

Home equity lines of credit are consumer-purpose revolving extensions of credit which are secured by first or second liens on owner-occupied residential real estate. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established guidelines. The degree of utilization of revolving commitments within this loan segment is reviewed periodically to identify changes in the behavior of this borrowing group.

Commercial and Industrial Loans

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and the guarantors. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for repayment can be impacted by the borrower’s ability to collect amounts due from its customers.

Loans to Individuals & Overdrafts

Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are required to be clearly documented. Several factors are considered in making these decisions such as credit score, adjusted net worth, liquidity, debt ratio, disposable income, credit history, and loan-to-value of the collateral. This process, combined with the relatively smaller loan amounts spreads the risk among many individual borrowers. Overdrafts on customer accounts are classified as loans for reporting purposes.

25

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

NOTE F - LOANS (continued)

2020.

The following tables present an age analysis of past due loans, segregated by class of loans as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively:

June 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, 2017 
 30+ Non- Total      
 Days Accrual Past   Total 
 Past Due Loans Due Current Loans 
 (dollars in thousands) 
           
Total Loans:                    
                    

(dollars in thousands)

Commercial and industrial $131  $82  $213  $84,350  $84,563 

$

586

$

$

$

3,126

$

3,712

$

157,931

$

161,643

Construction  809   184   993   146,564   147,557 

 

146

 

 

 

169

 

315

 

245,622

 

245,937

Multi-family residential  238   -   238   72,000   72,238 

 

 

 

 

 

 

77,877

 

77,877

Commercial real estate  827   551   1,378   300,177   301,555 

 

371

 

 

332

 

3,110

 

3,813

 

512,299

 

516,112

Loans to individuals & overdrafts  13   6   19   9,567   9,586 

 

11

 

9

 

 

145

 

165

 

7,375

 

7,540

1-to-4 family residential  630   856   1,486   104,743   106,229 

1‑to‑4 family residential

 

97

 

55

 

994

 

971

 

2,117

 

195,278

 

197,395

HELOC  230   334   564   42,452   43,016 

 

94

 

 

 

458

 

552

 

48,719

 

49,271

Deferred loan (fees) cost, net  -   -   -   -   (1,312)

 

 

 

 

 

 

 

(5,776)

                    
 $2,878  $2,013  $4,891  $759,853  $763,432 

$

1,305

$

64

$

1,326

$

7,979

$

10,674

$

1,245,101

$

1,249,999

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)

Total loans

Commercial and industrial

$

1,108

$

34

$

46

$

2,824

$

4,012

$

71,736

$

75,748

Construction

 

 

 

 

181

 

181

 

221,697

 

221,878

Multi-family residential

 

 

 

 

 

 

69,124

 

69,124

Commercial real estate

 

393

 

82

 

321

 

1,832

 

2,628

 

456,487

 

459,115

Loans to individuals & overdrafts

 

5

 

 

 

155

 

160

 

9,853

 

10,013

1‑to‑4 family residential

 

859

 

810

 

864

 

505

 

3,038

 

148,659

 

151,697

HELOC

 

168

 

 

 

444

 

612

 

43,902

 

44,514

Deferred loan (fees) cost, net

 

 

 

 

 

 

 

(2,114)

$

2,533

$

926

$

1,231

$

5,941

$

10,631

$

1,021,458

$

1,029,975

There were five loans that amounted to $663,000 that were more than 90 days past due and still accruing interest at September 30, 2017.

  December 31, 2016 
  30+  Non-  Total       
  Days  Accrual  Past     Total 
  Past Due  Loans  Due  Current  Loans 
  (in thousands) 
                
Total Loans                    
Commercial and industrial $1,459  $73  $1,532  $89,146  $90,678 
Construction  221   151   372   100,539   100,911 
Multi-family residential  46   346   392   55,727   56,119 
Commercial real estate  589   3,807   4,396   277,327   281,723 
Loans to individuals & overdrafts  23   46   69   9,758   9,827 
1-to-4 family residential  631   602   1,233   96,745   97,978 
HELOC  24   780   804   40,354   41,158 
Deferred loan (fees) cost, net  -   -   -   -   (1,199)
  $2,993  $5,805  $8,798  $669,596  $677,195 

There were three loans in the aggregate amount of $529,000 greater than 90 days past due and still accruing interest at December 31, 2016.

26

20

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

Table of Contents

NOTE F - LOANS (continued)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 June 30, 20172020 and December 31, 2016:2019:

As of June 30, 2020

    

Three Months Ended

Six Months Ended

Contractual

June 30, 2020

June 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

   Three months ended Nine months ended 
 As of September  30, 2017 September 30, 2017 September 30, 2017 
    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) 

(dollars in thousands)

2020 :

With no related allowance recorded:                            

Commercial and industrial $1,043  $1,053  $-  $1,048  $12  $1,114  $51 

$

3,394

$

3,893

$

$

3,667

$

71

$

2,951

$

108

Construction  253   337   -   209   9   242   15 

 

428

 

529

 

 

432

 

6

 

434

 

11

Commercial real estate  3,226   4,663   -   3,564   33   3,909   147 

 

5,794

 

6,104

 

 

5,679

 

38

 

5,690

 

88

Loans to individuals & overdrafts  -   -   -   -   -   -   - 

 

262

 

280

 

 

259

 

3

 

273

 

13

Multi-family residential  -   -   -   24   -   173   - 

 

 

 

 

 

 

99

 

21

1-to-4 family residential  1,159   1,378   -   1,191   16   1,080   49 
HELOC  746   934   -   697   10   893   32 

 

546

 

677

 

 

671

 

10

 

610

 

20

1‑to‑4 family residential

 

90

 

186

 

 

109

 

18

 

86

 

Subtotal:  6,427   8,365   -   6,733   80   7,411   294 

 

10,514

 

11,669

 

 

10,817

 

146

 

10,143

 

261

With an allowance recorded:                            

Commercial and industrial  -   -   -   -   -   1   - 

 

649

 

649

 

344

 

649

 

11

 

649

 

19

Construction  -   -   -   -   -   -   - 

 

 

 

 

 

 

 

Commercial real estate  766   822   6   698   18   1,631   38 

 

556

 

572

 

392

 

278

 

16

 

278

 

31

Loans to individuals & overdrafts  -   -   -   -   -      - 

 

 

 

 

 

 

 

Multi-family residential  -   -   -   -   -   -   - 
1-to-4 family residential  283   282   14   291   2   289   12 

Multi-family Residential

 

 

 

 

 

 

 

HELOC  33   35   -   33   -   34   - 

 

 

 

 

 

 

 

1‑to‑4 family residential

 

241

 

255

 

4

 

246

 

14

 

283

 

22

Subtotal:  1,082   1,139   20   1,022   20   1,955   50 

 

1,446

 

1,476

 

740

 

1,173

 

41

 

1,210

 

72

Totals:                            

 

 

 

 

 

 

 

Commercial  5,288   6,875   6   5,543   72   7,070   251 

 

10,821

 

11,747

 

736

 

10,705

 

142

 

10,101

 

257

Consumer  -   -   -   -   -   -   - 

 

262

 

280

 

 

259

 

3

 

273

 

13

Residential  2,221   2,629   14   2,212   28   2,296   93 

 

877

 

1,118

 

4

 

1,026

 

42

 

979

 

63

Grand Total: $7,509  $9,504  $20  $7,755  $100  $9,366  $344 

$

11,960

$

13,145

$

740

$

11,990

$

187

$

11,353

$

333

Impaired loans at SeptemberJune 30, 20172020 were approximately $7.5$12.0 million and were composed of $2.0$8.0 million in nonaccrualnon-accrual loans and $5.5 $4.0million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $1.0$1.5 million in impaired loans had specific allowances provided for them while the

21

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

remaining $6.5$10.5 million had no specific allowances recorded at SeptemberJune 30, 2017.2020. Of the $6.5$10.5 million with no allowance recorded, $1.2 million$373,000 of those loans have had partial charge-offs recorded.

27

    

As of December 31, 2019

Three Months Ended

Six Months Ended

Contractual

June 30, 2019

June 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

$

$

3,298

$

54

$

4,189

$

64

Construction

 

440

 

537

 

 

1,419

 

3

 

1,428

 

8

Commercial real estate

 

5,585

 

6,750

 

 

7,988

 

82

 

6,823

 

148

Loans to individuals & overdrafts

 

197

 

197

 

 

99

 

5

 

92

 

6

Multi-family residential

 

284

 

293

 

 

209

 

4

 

211

 

7

HELOC

 

543

 

678

 

 

625

 

23

 

658

 

39

1‑to‑4 family residential

 

395

 

1,816

 

 

874

 

11

 

952

 

26

Subtotal:

 

10,240

 

14,322

 

 

14,512

 

182

 

14,353

 

298

With an allowance recorded:

Commercial and industrial

 

731

 

1,056

 

403

 

964

 

37

 

635

 

43

Construction

 

 

 

 

 

 

13

 

Commercial real estate

 

 

 

 

 

 

 

Loans to individuals & overdrafts

 

 

 

 

10

 

 

77

 

Multi-family Residential

 

 

 

 

 

 

 

HELOC

 

160

 

222

 

 

517

 

9

 

91

 

7

1‑to‑4 family residential

 

81

 

94

 

10

 

262

 

1

 

213

 

10

Subtotal:

 

972

 

1,372

 

413

 

1,753

 

47

 

1,029

 

60

Totals:

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

9,749

 

12,591

 

403

 

13,878

 

180

 

13,299

 

270

Consumer

 

284

 

293

 

 

109

 

5

 

169

 

6

Residential

 

1,179

 

2,810

 

10

 

2,278

 

44

 

1,914

 

82

Grand Total:

$

11,212

$

15,694

$

413

$

16,265

$

229

$

15,382

$

358

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

NOTE F - LOANS (continued)

Impaired Loans (continued)

  As of December 31, 2016  Three months ended
September 30, 2016
  Nine months ended
September 30, 2016
 
     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 $46  $46  $-  $307  $4  $175  $12 
Construction  231   318   -   505   1   557   7 
Commercial real estate  4,364   5,983   -   3,685   34   4,313   107 
Loans to individuals & overdrafts  1,139   1,144   -   -   -   -   - 
Multi-family residential  346   365   -   363   7   394   14 
1-to-4 family residential  1,000   1,278   -   1,129   15   1,534   67 
HELOC  1,041   1,378   -   620   10   658   28 
Subtotal:  8,167   10,512   -   6,609   71   7,631   235 
With an allowance recorded:                            
Commercial and industrial  -   -   -   35   -   9   - 
Construction  -   -   -   -   -   -   - 
Commercial real estate  2,496   2,905   80   2,765   8   1,848   27 
Loans to individuals & overdrafts  1   1   1   -   -   2   - 
Multi-family residential  -   -   -   -   -   -   - 
1-to-4 family residential  296   296   17   280   3   287   11 
HELOC  34   35   19   33   -   16   - 
Subtotal:  2,827   3,237   117   3,113   11   2,162   38 
Totals:                            
Commercial  7,483   9,617   80   7,660   54   7,296   167 
Consumer  1,140   1,145   1   -   -   2   - 
Residential  2,371   2,987   36   2,062   28   2,495   106 
Grand Total: $10,994  $13,749  $117  $9,722  $82  $9,793  $273 

Impaired loans at December 31, 20162019 were approximately $11.0$11.2 million and consisted of $5.8included $5.9 million in non-accrual loans and $5.2$6.2 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $2.8 million$972,000 of the $11.0$11.2 million in impaired loans at December 31, 20162019 had specific allowances aggregating $117,000$413,000 while the remaining $8.2$10.2 million had no specific allowances recorded. Of the $8.2$10.2 million with no allowance recorded, partial charge-offs to datethrough December 31, 2019 amounted to $2.3$4.1 million.

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

28

22

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

Table of Contents

NOTE F - LOANS (continued)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 ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:

Three Months Ended June 30, 2020

Six Months Ended June 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, 2017 Nine months ended September 30, 2017 
    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  $14  $14 

 

2

 

$

139

 

$

92

5

 

$

632

 

$

384

HELOCs  1   126   126   1   126   126 

Commercial real estate

 

 

 

 

 

Construction

1

157

138

2

417

396

HELOC

 

1

 

190

 

185

2

 

240

 

235

Commercial & industrial  -   -   -   1   41   41 

6

2,665

2,539

                        

Total  1  $126  $126   3  $181  $181 

 

4

$

486

$

415

15

$

3,954

$

3,554

  Three months ended September 30, 2016  Nine months ended September 30, 2016 
     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  -  $-  $-   2  $100  $48 
Commercial & industrial  -   -   -   3   296   188 
Construction  1   139   68   1   139   68 
Loans to individuals  -   -   -   1   4   1 
                         
Total  1  $139  $68   7  $539  $305 

Three Months Ended June 30, 2019

Six Months Ended June 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

 

$

35

 

$

18

2

 

$

59

 

$

40

Commercial real estate

 

 

 

1

 

752

 

752

1‑to‑4 family residential

 

2

 

747

 

747

3

 

828

 

827

Total

 

3

$

782

$

765

6

$

1,639

$

1,619

Loans may be considered troubled debt restructurings for reasons other than below market interest rates, extended payment terms or forgiveness of principal.

29

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

NOTE F - LOANS (continued)

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 periods ended SeptemberJune 30, 20172020 and 2016:2019:

Twelve months ended

Twelve months ended

June 30, 2020

June 30, 2019

Number

Recorded

Number

Recorded

    

of loans

    

investment

    

of loans

    

investment

 Twelve months ended Twelve months ended 
 September 30, 2017 September 30, 2016 
 Number Recorded Number Recorded 
 of loans investment of loans investment 
 (Dollars in thousands) 

(dollars in thousands)

(dollars in thousands)

Extended payment terms:                

 

  

 

  

  

 

  

Commercial and industrial

 

2

 

$

1,510

3

 

$

827

Commercial real estate  -  $-   3  $188 

 

 

2

 

1,058

Loans to individuals & overdrafts  -   -   1   1 
Construction  -   -   1   68 

1

 

138

 

Commercial & Industrial  2   78   -   - 
Multi-family residential  -   -   1   364 

HELOC

1

 

186

 

1-to-4 family residential  1   14   1   48 

2

92

2

40

Total  3  $92   7  $669 

 

6

$

1,926

7

$

1,925

At SeptemberJune 30, 2017,2020, the Bank had thirty-oneforty-nine loans with an aggregate balance of $4.7$10.3 million that were considered to be troubled debt restructurings. Of those TDRs, nineteenthirty-two loans with a balance totaling $4.1$6.4 million were still accruing as of SeptemberJune 30, 2017.2020. The remaining TDRs with balances totaling $539,000$3.9 million as of SeptemberJune 30, 20172020 were in non-accrual status. In

23

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

response to the impact of COVID-19 payment deferrals were granted on 491 loans totaling $240.2 million through June 30, 2020.  The Bank has chosen to apply the CARES Act election for the accounting of TDRs. As permitted by applicable regulatory guidance, these 491 loans were not classified as TDRs at June 30, 2020.

At SeptemberJune 30, 2016,2019, the Bank had thirty-threethirty-nine loans with an aggregate balance of $4.1$7.8 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-twotwenty-four loans with a balance totaling $2.7$5.3 million were still accruing as of SeptemberJune 30, 2016.2019. The remaining TDRs with balances totaling $1.4$1.8 million as of SeptemberJune 30, 20162019 were in non-accrual status.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. All non-consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of these nine different risk grades is as follows:

·Risk Grade 1 (Superior) - Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

·Risk Grade 2 (Very Good) - This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

30

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

·Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

oConformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

oGeneral conformity to the Bank's policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.  

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.  Loans assigned this grade may demonstrate some or all of the following characteristics:

oAdditional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank.  Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.

oUnproven, insufficient or marginal primary sources of repayment that appears sufficient to service the debt at this time.  Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.

oMarginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

·Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:

oLoans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.

oExtending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

31

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

oLoans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

·Risk Grade 7 (Substandard) -A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action.

·Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

·Risk Grade 9 (Loss) -Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:

·Risk Grades 1 – 5 (Pass) – The loans in this category range from loans secured by cash with no risk of principal deterioration (Risk Grade 1) to loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss (Risk Grade 5).

·Risk Grade 6 (Watch List or Special Mention) -Watch List or Special Mention loans include the following characteristics:

oLoans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.

oExtending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

oLoans where adverse economic conditions that develop subsequent to the loan origination that don't jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

·Risk Grade 7 (Substandard) -A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

32

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

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

·Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

·Risk Grade 9 (Loss) -Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.

33

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

NOTE F - LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively:

Total loans:

September 30, 2017

June 30, 2020

June 30, 2020

Commercial         

Credit         

Exposure By Commercial     Commercial    

 

Commercial

 

Commercial

Internally and     real Multi-family 

 

and

 

 

real

Multi-family

Assigned Grade industrial  Construction  estate  residential 

     

industrial

     

Construction

     

estate

     

residential

(In thousands)
         

(dollars in thousands)

Superior $570  $-  $-  $- 

$

96,774

$

$

212

$

Very good  1,132   145   431   - 

 

163

 

193

 

1,624

 

Good  9,753   11,004   39,394   10,831 

 

4,463

 

3,299

 

71,967

 

6,632

Acceptable  30,727   22,648   164,391   42,710 

 

18,612

 

26,854

 

276,479

 

43,569

Acceptable with care  40,314   112,706   89,080   18,460 

 

35,426

 

214,840

 

156,928

 

27,676

Special mention  1,780   736   4,717   - 

 

394

 

582

 

2,089

 

Substandard  287   318   3,542   237 

 

5,811

 

169

 

6,813

 

Doubtful  -   -   -   - 

 

 

 

 

Loss  -   -   -   - 

 

 

 

 

 $84,563  $147,557  $301,555  $72,238 

$

161,643

$

245,937

$

516,112

$

77,877

Consumer Credit      

    

Exposure By     

Internally 1-to-4 family    

 

1to4 family

Assigned Grade residential  HELOC 

    

residential

    

HELOC

     

Pass $100,543  $41,356 

$

194,067

$

48,173

Special mention  2,932   581 

 

1,165

 

222

Substandard  2,754   1,079 

 

2,163

 

876

 $106,229  $43,016 

$

197,395

$

49,271

Consumer Credit   
Exposure Based Loans to 
On Payment individuals & 
Activity overdrafts 
    
Pass $9,576 
Non–pass  10 
  $9,586 

34

24

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

Table of Contents

NOTE F - LOANS (continued)SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Total Loans:            
December 31, 2016
Commercial            
Credit            
Exposure By Commercial    Commercial     
Internally and    real    Multi-family  
Assigned Grade industrial  Construction  estate  residential 
(dollars in thousands)
             
Superior $435  $-  $-  $- 
Very good  326   245   460   - 
Good  13,632   4,506   36,501   12,139 
Acceptable  35,720   12,922   152,608   29,873 
Acceptable with care  37,351   82,771   81,231   13,467 
Special mention  2,905   173   4,868   - 
Substandard  309   294   6,055   640 
Doubtful  -   -   -   - 
Loss  -   -   -   - 
  $90,678  $100,911  $281,723  $56,119 

Consumer Credit

Exposure Based

 

Loans to

On Payment

 

individuals &

Activity

    

overdrafts

Pass

$

7,268

Special mention

 

272

$

7,540

Consumer Credit      
Exposure By      
Internally 1-to-4 family    
Assigned Grade residential  HELOC 
       
Pass $92,115  $39,554 
Special mention  3,015   439 
Substandard  2,848   1,165 
  $97,978  $41,158 

Consumer Credit   
Exposure Based Loans to 
On Payment individuals & 
Activity overdrafts 
    
Pass $9,820 
Non-pass  7 
  $9,827 

Total Loans:

35

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

 

1to4 family

Assigned Grade

    

residential

    

HELOC

Pass

$

147,958

$

43,585

Special mention

 

1,246

 

76

Substandard

 

2,493

 

853

$

151,697

$

44,514

25

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

Table of Contents

NOTE F - LOANS (continued)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 Purchased Credit Impaired (PCI)PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired company.

The following table documents changes to the amount of the accretable yield on PCI loans for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016 (dollars in thousands):2019:

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2020

    

2019

2020

    

2019

(dollars in thousands)

(dollars in thousands)

Accretable yield, beginning of period

$

2,986

$

3,721

$

3,191

$

3,593

Additions

 

2,949

 

 

2,949

 

Accretion

 

(442)

 

(290)

 

(722)

 

(578)

Reclassification from nonaccretable difference

 

11

 

131

 

43

 

248

Other changes, net

 

157

 

(81)

 

200

 

218

Accretable yield, end of period

$

5,661

$

3,481

$

5,661

$

3,481

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (In thousands) 
             
Accretable yield, beginning of period $2,280  $2,568  $2,626  $2,822 
Accretion  (262)  (252)  (782)  (787)
Reclassification from (to) nonaccretable difference  (1)  248   78   250 
Other changes, net  169   188   264   467 
                 
Accretable yield, end of period $2,186  $2,752  $2,186  $2,752 

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.

Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves.

36

26

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

Table of Contents

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

The Company’s allowance for loan losses model calculates historical loss rates by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using the twelve quarter look back period, loss factors are calculated for each risk-graded pool. The model incorporates various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors utilized by the Company in the model for all loan classes are as follows:

Internal Factors

·Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio.
·Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines.
·Compliance exceptions – Measures the risk derived from granting terms outside of regulatory guidelines.
·Document exceptions – Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections.
·Financial information monitoring – Measures the risk associated with not having current borrower financial information.
·Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status.
·Delinquency – Reflects the increased risk deriving from higher delinquency rates.
·Personnel turnover – Reflects staff competence in various types of lending.
·Portfolio growth – Measures the impact of growth and potential risk derived from new loan production.

External Factors

·GDP growth rate – Impact of general economic factors that affect the portfolio.
·North Carolina unemployment rate – Impact of local economic factors that affect the portfolio.
·Peer group delinquency rate – Measures risk associated with the credit requirements of competitors.
·Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate.

Each pool is assigned an adjustment to the potential loss percentage by assessing its characteristics against each of the factors listed above.

Reserves are generally divided into three allocation segments:

1.Individual reserves. These are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to be most likely impaired.  All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off.

37

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

NOTE F – LOANS (continued)

Allowance for Loan Losses (continued)

2.Formula reserves. Formula reserves are held against loans evaluated collectively. Loans are grouped by type or by risk grade, or some combination of the two. Loss estimates are based on historical loss rates for each respective loan group. Formula reserves represent the Company’s best estimate of losses that may be inherent, or embedded, within the group of loans, even if it is not apparent at this time which loans within any group or pool represent those embedded losses.

3.Qualitative and external reserves. If individual reserves represent estimated losses tied to specific loans, and formula reserves represent estimated losses tied to a pool of loans but not yet to any specific loan, then these reserves represent an estimate of likely incurred losses, but are not yet tied to any loan or group of loans.

All information related to the calculation of the three segments, including data analysis, assumptions, and calculations are documented. Assigning specific individual reserve amounts, formula reserve factors, or unallocated amounts based on unsupported assumptions or conclusions is not permitted.

38

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and ninesix month periods ended SeptemberJune 30, 2017, respectively:2020 and June 30, 2019, respectively (dollars in thousands):

 Three months ended September 30, 2017 
 Commercial       1 to 4     Loans to Multi-    
 and     Commercial family     individuals & family    

Three Months Ended June 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 industrial  Construction  real estate  residential  HELOC  overdrafts  residential  Total 

 (Dollars in thousands) 
Loans – excluding PCI                                

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, beginning of period $895  $1,292  $3,913  $923  $563  $142  $732  $8,460 
Provision for loan losses  301   366   (840)  50   89   219   25   210 

Balance, beginning of period 04/01/2020

$

1,834

$

2,125

$

3,558

$

1,714

$

398

$

143

$

546

$

10,318

Provision for (recovery of) loan losses

 

1,306

 

159

 

625

 

(49)

 

(51)

 

(39)

 

75

 

2,026

Loans charged-off  -   -   -   -   (60)  (45)  -   (105)

 

(519)

 

 

 

 

 

(3)

 

 

(522)

Recoveries  18   10   4   18   1   11   -   62 

 

2

 

 

1

 

6

 

41

 

7

 

 

57

Balance, end of period $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 
                                

Balance, end of period 6/30/2020

$

2,623

$

2,284

$

4,184

$

1,671

$

388

$

108

$

621

$

11,879

PCI Loans                                

 

 

 

 

 

  

 

  

 

  

 

Balance, beginning of period $-  $-  $12  $16  $-  $-  $-  $28 
Provision for loan losses  -   -   (6)  (2)  -   -   -   (8)

Balance, beginning of period 04/01/2020

$

199

$

7

$

14

$

43

$

$

$

5

$

268

Provision for (recovery of) loan losses

 

(176)

4

 

30

 

32

 

9

 

4

 

4

 

(93)

Loans charged-off  -   -   -   -   -   -   -   - 

 

 

 

 

 

 

 

 

Recoveries  -   -   -   -   -   -   -   - 

 

 

 

 

 

 

 

 

Balance, end of period $-  $-  $6  $14  $-  $-  $-  $20 
                                

Balance, end of period 6/30/2020

$

23

$

11

$

44

$

75

$

9

$

4

$

9

$

175

Total Loans                                

 

 

 

 

  

 

  

 

  

 

  

 

Balance, beginning of period $895  $1,292  $3,925  $939  $563  $142  $732  $8,488 
Provision for loan losses  301   366   (846)  48   89   219   25   202 

Balance, beginning of period 04/01/2020

$

2,033

$

2,132

$

3,572

$

1,757

$

398

$

143

$

551

$

10,586

Provision for (recovery of) loan losses

 

1,130

 

163

 

655

 

(17)

 

(42)

 

(35)

 

79

 

1,933

Loans charged-off  -   -   -   -   (60)  (45)  -   (105)

 

(519)

 

 

 

 

 

(3)

 

 

(522)

Recoveries  18   10   4   18   1   11   -   62 

 

2

 

 

1

 

6

 

41

 

7

 

 

57

Balance, end of period $1,214  $1,668  $3,083  $1,005  $593  $327  $757  $8,647 
                                

Balance, end of period 6/30/2020

$

2,646

$

2,295

$

4,228

$

1,746

$

397

$

112

$

630

$

12,054

Ending Balance: individually evaluated for impairment $-  $-  $6  $14  $-  $-  $-  $20 

$

344

$

$

392

$

4

$

$

$

$

740

Ending Balance: collectively evaluated for impairment $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 

$

2,302

$

2,295

$

3,836

$

1,742

$

397

$

112

$

630

$

11,314

                                

Loans:                                

 

 

 

  

 

  

 

  

 

  

 

  

 

Ending Balance: collectively evaluated for impairment $83,520  $147,304  $297,562  $104,788  $42,237  $9,586  $72,238  $757,235 

Ending Balance: collectively evaluated for impairment non PCI loans

$

155,443

$

243,887

$

497,112

$

184,805

$

48,034

$

7,128

$

76,463

$

1,212,872

Ending Balance: collectively evaluated for impairment PCI loans

$

1,659

$

1,622

$

13,148

$

12,259

$

691

$

150

$

1,414

$

30,943

Ending Balance: individually evaluated for impairment $1,043  $253  $3,993  $1,441  $779  $-  $-  $7,509 

$

4,541

$

428

$

5,852

$

331

$

546

$

262

$

$

11,960

Ending Balance $84,563  $147,557  $301,555  $106,229  $43,016  $9,586  $72,238  $764,744 

$

161,643

$

245,937

$

516,112

$

197,395

$

49,271

$

7,540

$

77,877

$

1,255,775

39

27

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 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

 

2,023

 

553

 

1,345

 

218

 

18

 

(59)

 

202

 

4,300

Loans charged-off

 

(530)

 

 

 

 

 

(19)

 

 

(549)

Recoveries

 

3

 

 

2

 

16

 

41

 

11

 

 

73

Balance, end of period 6/30/2020

$

2,623

$

2,284

$

4,184

$

1,671

$

388

$

108

$

621

$

11,879

PCI Loans

 

 

 

 

 

  

 

  

 

  

 

Balance, beginning of period 01/01/2020

$

178

$

6

$

14

$

56

$

$

$

15

$

269

Provision for (recovery of) loan losses

 

(155)

 

5

 

30

 

19

 

9

 

4

 

(6)

 

(94)

Loans charged-off

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

Balance, end of period 6/30/2020

$

23

$

11

$

44

$

75

$

9

$

4

$

9

$

175

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

 

1,868

 

558

 

1,375

 

237

 

27

 

(55)

 

196

 

4,206

Loans charged-off

 

(530)

 

 

 

 

 

(19)

 

 

(549)

Recoveries

 

3

 

 

2

 

16

 

41

 

11

 

 

73

Balance, end of period 6/30/2020

$

2,646

$

2,295

$

4,228

$

1,746

$

397

$

112

$

630

$

12,054

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

  Nine months ended September 30, 2017 
  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 $1,211  $1,301  $3,448  $846  $611  $317  $628  $8,362 
Provision for loan losses  (165)  348   241   108   87   80   127   826 
Loans charged-off  (37)  -   (623)  -   (129)  (95)  -   (884)
Recoveries  205   19   11   37   24   25   2   323 
Balance, end of period $1,214  $1,668  $3,077  $991  $593  $327  $757  $8,627 
                                 
PCI Loans                                
Balance, beginning of period $37  $-  $-  $-  $12  $-  $-  $49 
Provision for loan losses  (37)  -   300   14   (12)  -   -   265 
Loans charged-off  -   -   (294)  -   -   -   -   (294)
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $-  $-  $6  $14  $-  $-  $-  $20 
                                 
Total Loans                                
Balance, beginning of period $1,248  $1,301  $3,448  $846  $623  $317  $628  $8,411 
Provision for loan losses  (202)  348   541   122   75   80   127   1,091 
Loans charged-off  (37)  -   (917)  -   (129)  (95)  -   (1,178)
Recoveries  205   19   11   37   24   25   2   323 
Balance, end of period $1,214  $1,668  $3,083  $1,005  $593  $327  $757  $8,647 

40

28

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended June 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 04/01/2019

$

730

$

1,572

$

3,395

$

1,211

$

439

$

177

$

408

$

7,932

Provision for (recovery of) loan losses

 

85

 

(102)

 

(601)

 

324

 

44

 

129

 

(25)

 

(146)

Loans charged-off

 

(6)

 

 

(10)

 

 

(51)

 

(5)

 

 

(72)

Recoveries

 

5

 

17

 

34

 

8

 

 

8

 

 

72

Balance, end of period 6/30/2019

$

814

$

1,487

$

2,818

$

1,543

$

432

$

309

$

383

$

7,786

PCI Loans

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, beginning of period 04/01/2019

$

46

$

23

$

233

$

246

$

2

$

$

28

$

578

Provision for (recovery of) loan losses

 

252

 

(17)

 

(91)

 

(184)

 

(1)

 

 

(20)

 

(61)

Loans charged-off

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

Balance, end of period 6/30/2019

$

298

$

6

$

142

$

62

$

1

$

$

8

$

517

Total Loans

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, beginning of period 04/01/2019

$

776

$

1,595

$

3,628

$

1,457

$

441

$

177

$

436

$

8,510

Provision for (recovery of) loan losses

 

337

 

(119)

 

(692)

 

140

 

43

 

129

 

(45)

 

(207)

Loans charged-off

 

(6)

 

 

(10)

 

 

(51)

 

(5)

 

 

(72)

Recoveries

 

5

 

17

 

34

 

8

 

 

8

 

 

72

Balance, end of period 6/30/2019

$

1,112

$

1,493

$

2,960

$

1,605

$

433

$

309

$

391

$

8,303

Ending Balance: individually evaluated for impairment

$

254

$

$

$

6

$

52

$

12

$

$

324

Ending Balance: collectively evaluated for impairment

$

858

$

1,493

$

2,960

$

1,599

$

381

$

297

$

391

$

7,979

Loans:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Ending Balance: collectively evaluated for impairment non PCI loans

$

73,377

$

187,906

$

434,939

$

153,461

$

46,725

$

10,200

$

59,541

$

966,149

Ending Balance: collectively evaluated for impairment PCI loans

$

1,426

$

687

$

6,302

$

7,556

$

47

$

$

918

$

16,936

Ending Balance: individually evaluated for impairment

$

3,557

$

2,295

$

7,968

$

653

$

1,014

$

95

$

206

$

15,788

Ending Balance

$

78,360

$

190,888

$

449,209

$

161,670

$

47,786

$

10,295

$

60,665

$

998,873

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

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, 2016, respectively:

  Three months ended September 30, 2016 
  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 $1,086  $1,511  $3,113  $772  $493  $169  $523  $7,667 
Provision for loan losses  113   (13)  102   7   60   78   (31)  316 
Loans charged-off  (136)  -   (4)  -   (25)  (13)  -   (178)
Recoveries  8   6   2   9   9   4   -   38 
Balance, end of period $1,071  $1,504  $3,213  $788  $537  $238  $492  $7,843 
                                 
PCI Loans                                
Balance, beginning of period $16  $-  $-  $-  $9  $-  $-  $25 
Provision for loan losses  21   -   -   -   -   -   -   21 
Loans charged-off  -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $37  $-  $-  $-  $9  $-  $-  $46 
                                 
Total Loans                                
Balance, beginning of period $1,102  $1,511  $3,113  $772  $502  $169  $523  $7,692 
Provision for loan losses  134   (13)  102   7   60   78   (31)  337 
Loans charged-off  (136)  -   (4)  -   (25)  (13)  -   (178)
Recoveries  8   6   2   9   9   4   -   38 
Balance, end of period $1,108  $1,504  $3,213  $788  $546  $238  $492  $7,889 
                                 
Ending Balance: individually evaluated for impairment $4  $-  $85  $15  $-  $-  $-  $104 
Ending Balance: collectively evaluated for impairment $1,104  $1,505  $3,128  $773  $545  $238  $492  $7,785 
                                 
Loans:                                
Ending Balance: collectively evaluated for impairment $82,352  $115,788  $255,732  $92,534  $40,727  $9,073  $47,526  $643,732 
Ending Balance: individually evaluated for impairment $248  $499  $6,068  $1,291  $650  $-  $360  $9,116 
Ending Balance $82,600  $116,287  $261,800  $93,825  $41,377  $9,073  $47,886  $652,848 

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Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2019

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 01/01/2019

$

762

$

1,385

$

3,024

$

1,663

$

555

$

206

$

471

$

8,066

Provision for (recovery of) loan losses

 

299

 

84

 

(245)

 

(137)

 

(36)

 

114

 

(88)

 

(9)

Loans charged-off

 

(257)

 

 

(10)

 

 

(100)

 

(24)

 

 

(391)

Recoveries

 

10

 

18

 

49

 

17

 

13

 

13

 

 

120

Balance, end of period 6/30/2019

$

814

$

1,487

$

2,818

$

1,543

$

432

$

309

$

383

$

7,786

PCI Loans

 

 

 

 

 

  

 

  

 

  

 

Balance, beginning of period 01/01/2019

$

214

$

$

385

$

4

$

$

$

$

603

Provision for (recovery of) loan losses

 

84

 

6

 

(243)

 

58

 

1

 

 

8

 

(86)

Loans charged-off

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

Balance, end of period 6/30/2019

$

298

$

6

$

142

$

62

$

1

$

$

8

$

517

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

 

383

 

90

 

(488)

 

(79)

 

(35)

 

114

 

(80)

 

(95)

Loans charged-off

 

(257)

 

 

(10)

 

 

(100)

 

(24)

 

 

(391)

Recoveries

 

10

 

18

 

49

 

17

 

13

 

13

 

 

120

Balance, end of period 6/30/2019

$

1,112

$

1,493

$

2,960

$

1,605

$

433

$

309

$

391

$

8,303

NOTE F -G – LOANS (continued)HELD FOR SALE

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

AllowanceMortgage loans originated and intended for Loan Losses (Continued)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 –BUSINESS COMBINATIONS

  Nine months ended September 30, 2016 
  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 $922  $1,386  $3,005  $605  $564  $137  $393  $7,012 
Provision for loan losses  310   103   321   (107)  (36)  119   99   809 
Loans charged-off  (177)  (2)  (189)  -   (26)  (31)  -   (425)
Recoveries  15   17   76   290   35   13   -   446 
Balance, end of period $1,070  $1,504  $3,213  $788  $537  $238  $492  $7,842 
                                 
PCI Loans                                
Balance, beginning of period $-  $-  $-  $-  $9  $-  $-  $9 
Provision for loan losses  38   -   -   -   -   -   -   38 
Loans charged-off  -   -   -   -   -   -   -   - 
Recoveries  -   -   -   -   -   -   -   - 
Balance, end of period $38  $-  $-  $-  $9  $-  $-  $47 
                                 
Total Loans                                
Balance, beginning of period $922  $1,386  $3,005  $605  $573  $137  $393  $7,021 
Provision for loan losses  348   103   321   (107)  (36)  119   99   847 
Loans charged-off  (177)  (2)  (189)  -   (26)  (31)  -   (425)
Recoveries  15   17   76   290   35   13   -   446 
Balance, end of period $1,108  $1,504  $3,213  $788  $546  $238  $492  $7,889 

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

42

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Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

On April 17, 2020, Select completed its previously announced acquisition of 3 branches located in western North Carolina and pursuant to the terms of the purchase agreement. The branches had approximately $170.9 million in assets and $186.4 million in liabilities as of the acquisition date, April 17, 2020.  The purchase expanded the Bank’s North Carolina presence with branches in Sylva, Franklin and Highlands, North Carolina.

NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOME

The purchase of the branches was accounted for under the acquisition method.  The assets and liabilities of the branches, as of the effective date of the acquisition, are recorded at their respective fair values.  For the acquisition of the branches, estimated fair values of assets acquired and liabilities assumed are based on the information that is available, and the Company believes this information provides a reasonable basis for determining fair values.  

The following table presents changes in accumulated other comprehensive income forprovides the three and nine months ended September 30, 2017 and 2016.

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
     (In thousands)    
             
Beginning balance $506  $1,178  $358  $490 
                 
Unrealized gain (loss) on investment securities available for sale  (11)  (259)  222   840 
Tax effect  5   97   (80)  (300)
Other comprehensive gain (loss) before reclassification  (6)  (162)  142   540 
Amounts reclassified from accumulated comprehensive income:                
Realized gains on investment securities included in net income  -   -   -   (22)
Tax effect  -   -   -   8 
Total reclassifications net of tax  -   -   -   (14)
                 
Net current period other comprehensive income (loss)  (6)  (162)  142   526 
                 
Ending balance $500  $1,016  $500  $1,016 

The income statement line items impacted by the reclassifications of realized gains (losses) on investment securities are the gain on the sale of securities and income tax expense line items in the consolidated statement of operations.

NOTE H - REPURCHASE AGREEMENTS

We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and secure long-term funding needs. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates the Company to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected as short-term borrowings.

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from our general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. During the third quarter of 2017 the Bank eliminated and no longer offered Repurchase Agreements to its customers. The carrying value of availableacquired 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 sale investment securities pledged as collateral under repurchase agreements totaled none and $12.0 million at September 30, 2017 and December 31, 2016, respectively.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

43

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Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates loans into pools of loans with common risk characteristics.  Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income prospectively.

NOTE H - REPURCHASE AGREEMENTS (continued)PCI loans acquired totaled $17.0 million at estimated fair value and acquired performing loans totaling $86.2 million at estimated fair value. For PCI loans acquired from First Citizens, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the closing date of the merger were:

(Dollars in thousands)

April 17, 2020

Contractually required payments

$

26,718

Nonaccretable difference

6,745

Cash flow expected to be collected

19,973

Accretable yield

2,949

Fair value at acquisition date

$

17,024

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

The remaining contractual maturityfollowing tables reflect the pro forma total net interest income, noninterest income and net income for the six months ended June 30, 2020 and 2019 as though the acquisition of the securities sold under agreementsbranches had taken place on January 1, 2019.  The pro forma results have not been adjusted to repurchase by classremove non-recurring acquisition-related expenses, and are not necessarily indicative of collateral pledged included in short-term borrowings asthe results of December 31, 2016 is presented inoperations that would have occurred had the following tables.acquisition actually taken place on January 1, 2019, nor of future results of operations.

  December 31, 2016 
  Remaining Contractual Maturity of the Agreements 
  Overnight and  Up to 30  30-90  Greater than    
(in thousands) continuous  Days  Days  90 Days  Total 
Repurchase agreements                    
U.S. government agencies-GSE’s $5,568  $-  $-  $-  $5,568 
Mortgage-backed Securities-GSEs  6,496   -   -   -   6,496 
Total borrowings $12,064  $-  $-  $-  $12,064 
Gross amount of recognized liabilities for repurchase agreements  $12,003 

Six Months Ended June 30

2020

2019

(Dollars in thousands, except per share)

Net interest income

$

24,235

$

24,697

Non-interest income

2,929

2,650

Net income available to common shareholders

2,105

7,291

Earnings per share, basic

$

0.12

$

0.38

Earnings per share, diluted

$

0.12

$

0.38

Weighted average common shares outstanding, basic

18,134,607

19,317,029

Weighted average common shares outstanding, diluted

18,157,992

19,360,039

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Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE I – OTHER REAL ESTATE OWNED

The following table explains changes in other real estate owned, or OREO, during the ninesix months ended SeptemberJune 30, 20172020 and 2016 (dollars in thousands):the year ended December 31, 2019:

Six Months

Six Months

Ended

Ended

    

June 30, 

    

June 30, 

2020

2019

 Nine Months Nine Months 
 Ended Ended 
 September 30, September 30, 
 2017 2016 
 (Dollars in thousands) 
     

(Dollars in thousands)

Beginning balance January 1 $599  $1,401 

$

3,533

$

1,088

Sales  (787)  (1,831)

 

 

(77)

Write-downs  (214)  (164)

Write-downs and loss on sales

 

(176)

 

(12)

Transfers  2,495   1,142 

 

204

 

469

Ending balance $2,093  $548 

$

3,561

$

1,468

At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had $2.1$3.6 million and $599,000,$3.5 million, respectively, of 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 $461,000 and nonein the aggregate amount of $428,000 at SeptemberJune 30, 2017 and2020. At December 31, 2016, respectively.2019, the Company had 3 loans with recorded investment in the amount of $114,000 in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure.

44

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

NOTE J – MERGERS AND ACQUISITIONS

Proposed Merger with Premara Financial, Inc.

SUBSEQUENT EVENTS

The Company and Bank entered into an Agreement and Plan of Merger and Reorganization dated as of July 20, 2017, with Premara Financial, Inc. (“Premara”) and its subsidiary bank, Carolina Premier Bank, Charlotte, NC. Pursuant to the terms of the merger agreement, the Company would acquire Carolina Premier Bankhas evaluated for subsequent events through the merger of Premara withdate and intotime the Company, with the Company as the surviving corporation. Immediately following the parent company merger, Carolina Premier Bank would be merged with and into the Bank, with the Bank as the surviving banking corporation in the bank merger. The transaction is subject to various closing conditions, including the receipt of requisite shareholder approvals and required approvals of State and Federal banking regulators.

If the merger is completed, each share of Premara common stockfinancial statements were issued and outstanding will be converted into the right to receive 1.0463 shareshas determined there are no reportable subsequent events.

33

NOTE K – SUBSEQUENT EVENTS

Litigation related to the Proposed Merger

On October 12, 2017, a purported class action complaint captionedSharpenter v. Premara Financial, Inc., et al., Case# 3:17-cv-00607-GCM, was filed by an alleged shareholder of Premara on behalf of himself and similarly situated shareholders against Premara and Carolina Premier Bank and each of the entities’ individual directors in the U.S. District Court for the Western District of North Carolina. The complaint also names the Company and the Bank as defendants in the action. The complaint alleges, among other things, that Premara and the individually named directors (by virtue of their positions as officers and/or directors of Premara) omitted material facts related to the proposed merger from the Form S-4 Registration Statement that was filed in connection with the merger on September 27, 2017, and that as a result of such omissions, certain statements in the Registration Statement were materially false or misleading. The complaint alleges that the Company and the Bank, by virtue of their position of control over the composition of the Registration Statement, are also liable for the omissions alleged in the complaint. Plaintiff seeks to enjoin closing of the merger and have the Court direct the defendants to disseminate a Registration Statement that does not contain any alleged untrue statements of material fact and that states all material facts necessary to make such statements not false or misleading. In the event that the proposed merger is consummated, the plaintiff seeks to rescind it or set it aside or receive an award of unspecified damages. Plaintiff seeks to recover all costs of the lawsuit, including attorneys’ fees and experts’ fees.

45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.

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, andas 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 changechanges in credit quality trends; the receipt of required shareholder and regulatory approvals for the announced merger with Premara Financial, Inc. may not be obtained or may be delayed or take longer than anticipated; and diversion of management’s time and attention to merger-related issues.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.Carolina, York 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. The combined company is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, North Carolina, whose wholly owned subsidiary, Select Bank & Trust Company, was a state-chartered commercial bank with approximately $276.9 million in assets. The merger expanded the Company’s North Carolina presence with the

34

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.

We closed our branch located at 6390 Ramsey Street, Fayetteville, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The property that housed our former Ramsey Street branch is included in assets held for sale on the consolidated balance sheet as of September 30, 2017.

46

On July 21,December 15, 2017, the Company announced that it had entered into a definitive merger agreement withacquired Premara Financial, Inc., (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”) headquartered in Charlotte, North Carolina (“Premara”) pursuant to whichCarolina.  At the Company would acquire Premara and its subsidiary bank,time of the acquisition, Carolina Premier Bank. Please see Note J tohad 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 Company’s Notes to Consolidated Financial Statements above for additional discussion.cities of Sylva, Franklin and Highlands, North Carolina on April 17, 2020.  The acquisition of these branches, which were acquired from First-Citizens Bank & Trust Company, Raleigh, North Carolina, added approximately $103 million in loans and $185 million in deposits as of the acquisition date.

35

Comparison of Financial Condition at

SeptemberJune 30, 20172020 and December 31, 2016

2019

During the first ninesix months of 2017,2020, total assets increased by $76.1$343.9 million to $922.7 million$1.6 billion as of SeptemberJune 30, 2017.2020. The increase in assets was due primarily to loan growth fundedthe acquisition of three branches located in western North Carolina and loans originated by demand deposit accounts and time deposits.the Bank in connection with its participation in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”). Earning assets at SeptemberJune 30, 20172020 totaled $848.6 million$1.4 billion and consisted of $754.8 million$1.2 billion in net loans, $53.7$63.0 million in investment securities, $37.8$181.6 million in cash, overnight investments and interest-bearing deposits in other banks, $9.7 million in federal funds sold and $2.3$3.8 million in non-marketable equity securities, of which $1.7 million is FHLB stock.securities. Total deposits and shareholders’ equity at the end of the thirdsecond quarter of 20172020 were $775.0$1.3 billion and $211.5 million, and $109.8 million, respectively.

Since the end of 2016,2019, gross loans have increased by $86.2$220.0 million to $763.4 million$1.2 billion as of SeptemberJune 30, 2017.2020. The increase in gross loans was due primarily to normal customer demand, the PPP loan program and the aforementioned acquisition of  branches. At SeptemberJune 30, 2017,2020, gross loans consisted of $84.6$161.6 million in commercial and industrial loans $301.6(which includes 1,230 PPP loans in the amount of $96.5 million), $516.1 million in commercial real estate loans, $72.2$77.9 million in multi-family residential loans, $9.6$7.5 million in consumer loans, to individuals, $106.2$197.4 million in 1-to4 family residential real estate loans, $43.0$49.3 million in HELOCs, and $147.6$245.9 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.3$5.8 million (which includes $3.5 million in net fees related to PPP loans) at SeptemberJune 30, 2017.

2020.

At SeptemberJune 30, 2017 and December 31, 2016, there were no2020 the Company held $9.7 million in federal funds sold and no repurchase agreements.compared to $9.0 million in federal funds sold at December 31, 2019. Interest-earning deposits in other banks were $36.8$181.6 million at SeptemberJune 30, 2017,2020, a $3.5$111.5 million decreaseincrease from December 31, 2016.2019. The Company’s investment securities at SeptemberJune 30, 20172020 were $53.7$63.0 million, a decrease of $8.6$9.4 million from December 31, 2016 in order to provide funding for higher yielding loans.2019. The investment portfolio as of SeptemberJune 30, 20172020 consisted of $10.6$9.1 million in government agency debt securities, $28.9$39.5 million in mortgage-backed securities, $2.2 million in corporate bonds and $14.1$12.1 million in municipal securities. The net unrealized gain on these securities was $2.2 million as of SeptemberJune 30, 2017 was $785,000.

2020.

At SeptemberJune 30, 2017,2020, the Company had an investment of $1.7$3.1 million in FHLBFederal Home Loan Bank (“FHLB”) stock, which decreasedincreased by $539,000$15,000 from December 31, 2016 due to the effect of the repayment of advances during 2017 on the stock calculation.2019. Also, the Company had $630,000$718,000 in other non-marketable securities at SeptemberJune 30, 2017, which decreased by $73,000 from2020 compared to $719,000 at December 31, 2016.

2019.

At SeptemberJune 30, 2017,2020, non-earning assets were $74.1$113.5 million, an increase of $2.8 million$26.9 milllion from $71.3$86.6 million as of December 31, 2016.2019. Non-earning assets included $15.5$24.0 million in cash and due from banks, bank premises and equipment of $17.4$20.9 million, goodwill of $6.9$41.9 million, core deposit intangible of $547,000,$1.9 million, accrued interest receivable of $2.9$4.4 million, right of use lease asset of $9.0 million, foreclosed real estate of $2.1$3.6 million, $22.6 million in bank owned life insurance (“BOLI”), $846,000 of assets held for sale, and other assets totaling $7.8 million, including net deferred taxes of $5.3 million which included $2.7 million in deferred tax assets.$3.6 million. Since the income on BOLIbank-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 deposits.cash and due from banks.

36

Total deposits at SeptemberJune 30, 20172020 were $775.0 million$1.3 billion and consisted of $173.2$400.1 million in non-interest-bearing demand deposits, $192.7$495.6 million in money market and negotiable order of withdrawal, or NOW, accounts, $34.2$52.6 million in savings accounts, and $374.9$390.4 million in time deposits. Total deposits increased by $95.4$345.9 million from $679.7$992.8 million as of December 31, 2016,2019, due primarily to an increasethe acquisition of the three branches in DDAwestern North Carolina and deposits and a CD marketingrelated to the PPP loan program. The Bank had no$1.6 million in brokered demand deposits and $61.7$5.6 million in brokered time deposits as of SeptemberJune 30, 2017.

47

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 SeptemberJune 30, 2017,2020, the Company had $22.4$45.0 million of(of which $20.0 million is identified as short-term debt of which wasborrowings and $25.0 million is identified as long-term debt) in FHLB advances,borrowings, and $12.4 million in long-term debt which is junior subordinated debentures that are classified as long-term debt.

Total shareholders’ equity at SeptemberJune 30, 20172020 was $109.8$211.5 million, an increasea decrease of $5.5$1.2 million from $104.3$212.8 million as of December 31, 2016.2019. Accumulated other comprehensive income relating to available for sale securities increased $142,000$756,000 during the ninesix months ended SeptemberJune 30, 2017. Other changes2020. Contributing to the reduction in shareholders’ equity included increaseswere stock repurchases totaling $3.9 million, which were partially offset by net income of $70,000 in stock-based compensation, earnings of $5.2$1.8 million and $104,000$7,000 from the exercise of stock options.

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

At SeptemberJune 30, 2017,2020, the Company had $2.9$1.3 million in loans that were 30 to 59 days past due and $64,000 in loans that were 30 to 89 days past due. This represented 0.38%0.11% of gross loans outstanding on that date. This is a decrease from December 31, 20162019 when there were $3.0$1.4 million in loans that were 30-89 days past due or 0.44%0.11% of gross loans outstanding. Non-accrual loans decreasedincreased from $5.8$5.9 million at December 31, 20162019 to $2.0$8.0 million at SeptemberJune 30, 2017.

2020.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 1.39%1.18% at December 31, 20162019 to 0.81%1.15% at SeptemberJune 30, 2017.2020. The Company has experienced a decreasehad an increase of $2.0 million in non-accruals from $5.8$5.9 million at December 31, 2016 to $2.0 million as of September 30, 20172019 and an increase in accruing troubled debt restructurings or TDRs, from $3.6$6.2 million at December 31, 20162019 to $4.1$6.4 million as of SeptemberJune 30, 2017.2020. Of the non-accrual loans as of June 30, 2020, four commercial real estate loans totaled $2.6 million, two construction loans totaled $169,000, fourteen commercial loans totaled $3.8 million, decrease in non-accrualsix HELOC loans intotaled $458,000, twelve 1-to-4 family residential loans totaled $971,000 and consumer made up the first nine months of the year, the decrease is related to loans primarily in Multifamily Residential, HELOCS and Commercial Real Estate loan pool classifications.

remaining balance.

At SeptemberJune 30, 2017,2020, the CompanyBank had thirty-oneforty-nine loans totaling $4.7$10.3 million that were considered to be troubled debt restructurings, or TDRs. NineteenThirty-two of these loans totaling $4.1$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

The table below sets forth, as offor the datesperiods 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.

  As of 
  September 30,  December 31, 
  2017  2016 
  (Dollars in thousands) 
       
Non-accrual loans $2,013  $5,805 
Accruing TDRs  4,140   3,625 
Total non-performing loans  6,153   9,430 
Foreclosed real estate  2,093   599 
Total non-performing assets $8,246  $10,029 
         
Accruing loans past due 90 days or more $663  $529 
Allowance for loan losses $8,647  $8,411 
         
Non-performing loans to period end loans  0.81%  1.39%
Non-performing loans and accruing loans past due 90 days or more to period end loans  0.89%  1.47%
Allowance for loans losses to period end loans  1.13%  1.24%
Allowance for loan losses to non-performing loans  141%  89%
Allowance for loan losses to non-performing assets  105%  84%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more  97%  80%
Non-performing assets to total assets  0.89%  1.18%
Non-performing assets and accruing loans past due 90 days or more to total assets  0.97%  1.25%

48

For Periods Ended

June 30, 

December 31, 

    

2020

    

2019

    

Non-accrual loans

$

7,979

$

5,941

Accruing TDRs

 

6,420

 

6,207

Total non-performing loans

 

14,399

 

12,148

Foreclosed real estate

 

3,561

 

3,533

Total non-performing assets

$

17,960

$

15,681

Accruing loans past due 90 days or more

$

1,326

$

1,231

Allowance for loan losses

$

12,054

$

8,324

Non-performing loans to period end loans

 

1.15

%  

 

1.18

%  

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

 

1.26

%  

 

1.30

%  

Allowance for loan losses to period end loans

 

0.96

%  

 

0.81

%  

Allowance for loan losses to non-performing loans

 

84

%  

 

69

%  

Allowance for loan losses to non-performing assets

 

67

%  

 

53

%  

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

 

63

%  

 

49

%  

Non-performing assets to total assets

 

1.11

%  

 

1.23

%  

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

 

1.19

%  

 

1.33

%  

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at SeptemberJune 30, 20172020 and December 31, 20162019 were $8.2$18.0 million and $10.0$15.7 million, respectively. The allowance for loan losses at SeptemberJune 30, 20172020 represented 105%67% of non-performing assets compared to 84%53% at December 31, 2016.

2019.

Total impaired loans at SeptemberJune 30, 20172020 were $7.5$12.0 million. This includes $2.0included $8.0 million in loans that were classified as impaired because they were in non-accrual status and $7.0$6.4 million in accruing TDRs. Of these loans, $1.4 million required a specific reserve of $740,000 at June 30, 2020.

Total impaired loans at December 31, 2019 were $11.2 million. This included $5.9 million in loans that were determined to beclassified as impaired for other reasons.because they were in non-accrual status and $6.2 million in accruing TDRs. Of these loans, $1.0 million required a specific reserve of $20,000 at September 30, 2017.

Total impaired loans$413,000 at December 31, 2016 were $11.0 million. This includes $5.8 million in loans that were considered to be impaired due to being in non-accrual status and $5.2 million in loans that were deemed to be impaired for other reasons. Of these loans, $2.8 million required a specific reserve of $117,000 at December 31, 2016.

2019.

The allowance for loan losses was $8.6$12.1 million at SeptemberJune 30, 20172020 or 1.13%0.96% of gross loans outstanding. This is a decrease from the 1.24%outstanding as compared to 0.81% reported as a percentage of gross loans at December 31, 2016.2019. This increase resulted primarily from changes in loans requiring a specific reserve plus qualitative factors related to COVID-19 and economic performance indicators. The Legacy Select loans, 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 for losses as required in acquisition accounting. This required accounting under generally accepted accounting

38

principles has resulted in a lower percentage of the allowance for loan losses to gross loans at September 30, 2017 for all periods post acquisition of Legacy Select.loans. The allowance for loan losses at SeptemberJune 30, 2017 and2020 represented 84% of non-performing loans compared to 69% at December 31, 2016 represented 141% and 89%, respectively, of non-performing loans.2019. It is management’s assessment that the allowance for loan losses as of SeptemberJune 30, 20172020 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 increased volatility in the Company’s allowance for loan losses and related provision expense during subsequent quarters in 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 491 loans amounting to $240.2 million during the quarter of which 137 loans totaling $83.1 million remained on modification as of June 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.

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)

(dollars in thousands)

Time deposits

$

272,403

$

108,291

$

9,274

$

481

$

390,449

Short-term debt

 

20,000

 

 

 

 

20,000

Long-term debt

 

 

 

25,000

 

12,372

 

37,372

Operating leases

645

1,513

1,429

5,656

9,243

Total contractual obligations

$

293,048

$

109,804

$

35,703

$

18,509

$

457,064

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

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 SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had $23.1$42.7 million and $21.7$27.7 million in non 1-to-4non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had $11.3$11.1 million and $4.8$10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 29.4%32.5% and 23.6%23.2% of total risk-based capital as of SeptemberJune 30, 20172020 and December 31, 2016,2019, which is less than the 100% maximum allowed. These loans may presentrepresent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

49

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 SeptemberJune 30, 20172020, the Company had fourfive product type groups thatwhich exceeded this guideline; Real EstateOffice Building, which represented 53% of risk-based capital or $88.5 million; Commercial Construction, which represented 54%74% of risk-based capital or $63.8 million, Real Estate Construction – Speculative and Presold,$123.5 million; 1-to-4 Family Rental property, which represented 42%58% of risk-based capital or $49.5$96.9 million, 1-4 Family Rental,Retail property, which represented 54%50.0% of risk-based capital or $63.8$82.3 million, and Multifamily Residential,Apartment Complex/Multi-Family, which represented 60%46% of risk-based capital or $69.9$75.7 million. All other commercial real estate groups were at or below the 40% threshold. The internal guideline levels heighten the level of Company monitoring of such loans in underwriting and ongoing servicing activities.

At December 31, 2016,2019, the Company had three product types that exceeded the 40% guidelineguideline. The following product types were in two product types. The 1-to-4 Family Residential Rental category represented 66%excess of risk-based capital or $74.2 millionthe 40% guidelines; apartments, commercial construction and the Multi-family Residential category represented 49% of risk-based capital or $54.5 million at December 31, 2016.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 SeptemberJune 30, 20172020 and December 31, 2016.2019.

40

Acquisition, Development and Construction Loans

(Dollarsdollars in thousands)

 September 30, 2017  December 31, 2016 
    Land and Land       Land and Land    
 Construction  Development  Total  Construction  Development  Total 
             

June 30, 2020

December 31, 2019

Land and Land 

 

Land and Land 

 

    

Construction

    

Development

    

Total

 

    

Construction

    

Development

    

Total

 

Total ADC loans $120,245  $27,312  $147,557  $76,037  $24,874  $100,911 

$

211,014

$

34,923

$

245,937

$

186,038

$

35,840

$

221,878

                        
Average Loan Size $226  $294      $166  $350     

$

313

$

592

 

  

$

331

$

607

 

  

                        
Percentage of total loans  15.75%  3.58%  19.33%  11.23%  3.67%  14.90%

 

16.88

%  

 

2.79

%  

 

19.67

%

 

18.06

%  

 

3.48

%  

 

21.55

%

                        
Non-accrual loans $248  $-  $248  $151  $-  $151 

$

169

$

$

169

$

181

$

$

181

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, spec-to-presold ratios and performance of similar loans in the Company’s market area.

50

Geographic Concentrations

Certain risks exist 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 SeptemberJune 30, 20172020 and December 31, 2016.2019.

 September 30, 2017  December 31, 2016 
 ADC Loans  Percent  HELOC  Percent  ADC Loans  Percent  HELOC  Percent 
 (Dollars in thousands) 
                 

June 30, 2020

December 31, 2019

    

ADC Loans

    

Percent

    

HELOC

    

Percent

 

ADC Loans

    

Percent

    

HELOC

    

Percent

 

(dollars in thousands)

 

Harnett County $6,293   4.26% $5,894   13.70% $4,505   4.46% $5,817   14.13%

$

7,129

2.90

%

$

4,629

9.40

%

$

9,637

4.34

%

$

5,156

11.58

%

Alamance County  2,016   1.37%  1,190   2.77%  1,169   1.16%  1,065   2.59%

 

546

 

0.22

%

 

987

2.00

%

 

845

 

0.38

%

 

1,072

2.41

%

Beaufort County  156   0.11%  1,502   3.49%  182   0.18%  1,026   2.49%
Brunswick County  8,808   5.97%  1,754   4.08%  4,506   4.46%  1,899   4.61%

 

15,979

 

6.50

%

 

1,547

3.14

%

 

15,456

 

6.97

%

 

1,629

3.67

%

Carteret County  3,027   2.05%  2,404   5.59%  585   0.58%  2,350   5.71%

 

4,780

 

1.94

%

 

1,716

3.48

%

 

5,352

 

2.41

%

 

2,190

4.92

%

Craven County  930   0.63%  442   1.03%  -   -%  -   -%

Cherokee County (SC)

 

 

%

 

37

0.08

%

 

 

%

 

22

0.05

%

Cumberland County  22,468   15.23%  4,211   9.79%  22,610   22.41%  5,278   12.82%

 

25,060

 

10.19

%

 

2,127

4.32

%

 

24,601

 

11.09

%

 

2,285

5.13

%

Durham County

6,271

 

2.55

%

 

71

0.14

%

 

%

 

%

Forsyth County

1,302

 

0.53

%

 

%

 

%

 

%

Jackson County

4,651

 

1.89

%

 

2,047

4.15

%

 

%

 

%

Macon County

9,412

 

3.83

%

 

5,100

10.35

%

 

%

 

%

Mecklenburg County

 

16,675

 

6.78

%

 

3,633

7.37

%

 

18,142

 

8.18

%

 

2,689

6.04

%

New Hanover County

 

36,992

 

15.04

%

 

2,911

5.91

%

 

40,518

 

18.26

%

 

2,885

6.48

%

Pasquotank County  1,030   0.70%  1,398   3.25%  947   0.94%  1,258   3.06%

 

3,186

 

1.30

%

 

1,621

3.29

%

 

1,997

 

0.90

%

 

1,693

3.80

%

Pitt County  15,702   10.64%  6,334   14.72%  13,697   13.57%  5,151   12.52%

 

17,920

 

7.29

%

 

4,727

9.59

%

 

16,098

 

7.25

%

 

5,442

12.23

%

Robeson County  703   0.48%  3,671   8.53%  803   0.80%  3,709   9.01%

 

342

 

0.14

%

 

3,068

6.23

%

 

1,165

 

0.53

%

 

2,939

6.60

%

Sampson County  26   0.02%  1,650   3.84%  71   0.07%  1,574   3.83%

 

373

 

0.15

%

 

1,624

3.30

%

 

23

 

0.01

%

 

1,743

3.92

%

Virginia Beach County (VA)

 

2,348

 

0.95

%

 

150

0.30

%

 

142

 

0.06

%

 

99

0.22

%

Wake County  22,363   15.15%  1,367   3.18%  15,689   15.55%  1,536   3.73%

 

18,028

 

7.33

%

 

1,605

3.26

%

 

23,407

 

10.56

%

 

1,640

3.68

%

Wayne County  9,996   6.77%  4,384   10.19%  9,734   9.65%  4,281   10.40%

 

3,176

 

1.29

%

 

3,038

6.17

%

 

1,572

 

0.71

%

 

3,183

7.15

%

Wilson County

 

470

 

0.19

%

 

49

0.10

%

 

477

 

0.21

%

 

72

0.16

%

York County (SC)

 

2,102

 

0.86

%

 

1,021

2.07

%

 

1,931

 

0.87

%

 

1,123

2.52

%

All other locations  54,039   36.62%  6,815   15.84%  26,413   26.17%  6,214   15.10%

 

69,195

 

28.13

%

 

7,563

15.35

%

 

60,515

 

27.27

%

 

8,652

19.44

%

                                

 

  

 

 

  

 

  

 

  

 

  

  

Total $147,557   100.00% $43,016   100.00% $100,911   100.00% $41,158   100.00%

$

245,937

 

100.00

%

$

49,271

100.00

%

$

221,878

 

100.00

%

$

44,514

100.00

%

41

Interest OnlyInterest-Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest onlyinterest-only payment terms. At SeptemberJune 30, 2017,2020, the Company had $211.3$266.2 million in loans that had terms permitting interest-only payments. This represented 21.3% of the total loan portfolio. At December 31, 2019, the Company had $249.9 million in loans that had terms permitting interest only payments. This represented 27.7%24.3% of the total loan portfolio. At December 31, 2016, the Company had $161.5 million in loans that had terms permitting interest only payments. This represented 23.8% of the total loan portfolio as of such date. NotwithstandingRecognizing the risk inherent with interest onlyinterest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest onlyinterest-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 $66.8$85.8 million, or 8.8%6.9% of total loans, at SeptemberJune 30, 20172020 compared to $62.9$82.0 million, or 9.3%8.0% of total loans, at December 31, 2016.2019. The Company’s ten largest customer relationships totaled $89.9$147.6 million, or 11.8% of total loans, at SeptemberJune 30, 20172020 compared to $80.9$129.5 million, or 11.9%12.6% of total loans, at December 31, 2016.2019. 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.

51

Comparison of Results of Operations for the

Three months ended SeptemberJune 30, 20172020 and 2016

2019

General. During the thirdsecond quarter of 2017,2020, the Company hadreported net income of $1.8 million$681,000 as compared with net income of $1.7$3.5 million for the thirdsecond quarter of 2016.2019. Net income per common share for the thirdsecond quarter of 20172020 was $0.15,$0.04 basic and diluted, compared with net income per common share of $0.15,$0.18 basic and diluted, for the thirdsecond quarter of 2016.2019. Results of operations for the thirdsecond quarter of 20172020 were primarily impacted by an increase of $839,000$157,000 in net interest income and an increase in non-interest expense of $1.7 million, which was primarily related to increases in occupancy expenses of $64,000, and information systems expenses of $95,000, merger related expenses of $602,000, foreclosed real estate expense of $177,000, personnel expense of $755,000 which were offset by a decrease in non-interest incomedeposit insurance expense of $7,000$14,000, and professional fees of $32,000. The Company recorded a decrease in the provision for loan losses of $135,000 versus the comparative three-month period in 2016. Noninterest expenses increased $808,000 which were primarily related to increased personnel expense of $373,000, merger related expenses of $278,000, foreclosure related expenses of $160,000, information system expenses of $59,000 and other expenses of $34,000 which was partially offset by a reduction in professional fees of $52,000, core deposit intangible amortization of $23,000 and a $20,000 decrease in occupancy expenses. The Company recorded a provision of loan losses of $202,000$1.9 million for the thirdsecond quarter of 20172020 compared to a recovery of provision of $337,000$207,000 in the thirdsecond quarter of 2016. Net interest margin of 4.19% in2019, which increased provision expense had a significant impact on the thirdreduced net income reported for the 2020 second quarter of 2017 decreased 8 basis points fromas compared to the samecomparative period in 2016 resulting from the accretion of the credit mark associated with the acquired Legacy Select loan portfolio and increased deposit costs.

2019.

Net Interest Income. Net interest income increased to $8.7 millionremained basically unchanged for the thirdsecond quarter of 20172020 from $7.8 million for the thirdsecond quarter of 2016.2019. The Company’s total interest income was affected by thean increase in loanearning loans, which was offset by a reduction in earning balances dueof federal funds sold and investments in addition to growth.the interest rate reductions. Average total interest-earning assets were $826.6 million$1.4 billion in the thirdsecond quarter of 20172020 compared with $737.2 million$1.2 billion during the same period in 2016,2019, while the average yield on those assets increased 8decreased 76 basis points from 4.76%4.98% to 4.84%4.22%, which was primarily due to the increase inreduction of interest rates on recently originated loans.loans due to modifications related to COVID-19, reduced rates on overnight interest earning assets and reduced investment securities.

42

The Company’s average interest-bearing liabilities increased by $80.2$147.4 million to $630.9$935.8 million for the quarter ended SeptemberJune 30, 20172020 from $550.7$788.1 million for the same period one year earlier and the cost of those funds increaseddecreased from 0.66%1.39% to 0.85%1.14%, or 1925 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 thirdsecond quarter of 2017,2020, the Company’s net interest margin was 4.19%3.45% and net interest spread was 3.98%3.08%. In the same quarter ended one year earlier, net interest margin was 4.27%4.06% and net interest spread was 4.10%3.59%.

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. TheIn determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, isthe Company uses loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the thirdsecond quarter of 2017,2020, the Company recorded a provision for loan losses of $202,000 based primarily on loan growth and improving credit metrics$1.9 million, as compared to a provisionthe recovery of $337,000$207,000 that was recorded in the thirdsecond quarter of 2016. This trend of improving credit metrics had been consistently maintained in 2017.

2019.

Non-Interest Income. Non-interest income for the quarter ended SeptemberJune 30, 20172020 was $778,000, a slight decrease$1.4 million, an increase of $83,000 from $785,000 in the thirdsecond quarter of 2016.2019. Service charges on deposit accounts decreased $12,000$78,000 to $237,000$206,000 for the quarter ended SeptemberJune 30, 20172020 from $249,000$284,000 for the same period in 2016.2019. Other non-deposit fees and income increased $5,000$36,000 from the thirdsecond quarter of 20162019 to the thirdsecond quarter of 20172020 due primarily to debit card fee transactions.increases in various items. Fees from the sale of mortgages increased from $125,000 for the quarter ended June 30, 2019 to $850,000 for the second quarter of 2020. The Company did not sell any investmenthave sales of securities induring the third quarter of 2017three months ended June 30, 2020 or 2016.

2019, respectively.

Non-Interest Expenses. Non-interest expenses increased by $808,000$1.7 million to $6.4$10.5 million for the quarter ended SeptemberJune 30, 2017,2020, from $5.6$8.8 million for the same period in 2016.2019. In general, most categories of non-interest expenses increased primarily due to changes in the Company’s branch network. The following are highlights of the significant categories of non-interest expenses during the thirdsecond quarter of 2017 compared to2020 versus the same period in 2016:

2019:

·Personnel expenses increased $373,000$755,000 to $3.5$5.8 million, due to increased staff.

52

·Foreclosed real estate-related expense increased $160,000, primarily due to write downs on a large real estate owned property.additional personnel and cost of living increases.
·There was an increase of $59,000 of information systemOccupancy expenses incurred in the third quarter of 2017increased $64,000, primarily due to complianceadditional branches, repairs and cyber security needs.maintenance and increased rent expense due to normal rent escalation.
·Integration related expenses increased $602,000 due to the acquisition of the three branches in western North Carolina.

43

CDI expense decreased $10,000 due to the amortization.
Information systems expense increased by $95,000 due to increased expenses related to the new mobile banking platform and security cost for the core processing system.
Professional fees decreased by $52,000$32,000 to $211,000, due to internal audit procedures being performed by staff.$451,000.
·Occupancy and equipmentDeposit insurance expenses decreased by $20,000 to $555,000,$14,000 due to branch restructuring.increased premium credit earned.
·Merger expenses increased by $278,000 due to announced acquisition.
·Other non-interest expenses increased by $34,000, primarily due to an increase in administrative related non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 37.0%22.0% and 34.7%22.0% for the quarters ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The effective tax rate for the third quarter of 2017 compared to the same quarter in 2016 was impacted by an adjustment to reduce the Company’s deferred tax asset resulting from enacted lower corporate tax rates for the State of North Carolina in 2016.

As of SeptemberJune 30, 20172020 and December, 31, 2016,2019, the Company had a net deferred tax asset in the amount of $2.7$3.6 million and $3.1$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 SeptemberJune 30, 20172020 and December 31, 2016,2019, 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

net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans.

For the quarter ended

For the quarter ended

June 30, 2020

June 30, 2019

(dollars in thousands)

Average

Average

Average

Average

    

balance

    

Interest

    

rate

    

balance

    

Interest

    

rate

    

INTEREST-EARNING ASSETS:

Loans, gross of allowance

$

1,193,985

$

14,097

4.75

%  

$

982,876

$

13,529

5.52

%  

Investment securities

 

63,113

 

399

 

2.54

%  

 

85,781

 

630

 

2.95

%  

Other interest-earning assets

 

127,288

 

33

 

0.10

%  

 

91,730

 

456

 

1.99

%  

Total interest-earning assets

 

1,384,386

 

14,529

 

4.22

%  

 

1,160,387

 

14,615

 

5.05

%  

Other assets

 

135,892

 

 

 

101,585

 

  

 

  

Total assets

$

1,520,278

$

1,261,972

 

  

 

  

INTEREST-BEARING LIABILITIES:

 

  

 

  

  

 

  

 

  

 

  

Deposits:

 

  

 

  

  

 

  

 

  

 

  

Savings, NOW and money market

$

478,422

 

648

0.54

%  

$

314,099

 

407

 

0.52

%  

Time deposits over $100,000

 

295,014

 

1,177

1.60

%  

 

293,635

 

1,491

 

2.04

%  

Other time deposits

 

104,895

 

399

1.53

%  

 

116,167

 

494

 

1.71

%  

Borrowings

 

57,438

 

422

2.95

%  

 

64,196

 

483

 

3.02

%  

Total interest-bearing liabilities

 

935,769

 

2,646

1.14

%  

 

788,097

 

2,875

 

1.15

%  

Non-interest-bearing deposits

 

359,012

 

 

246,117

 

  

 

  

Other liabilities

 

11,701

 

 

12,036

 

  

 

  

Shareholders’ equity

 

213,796

 

 

215,722

 

  

 

  

Total liabilities and shareholders’ equity

$

1,520,278

$

1,261,972

 

  

 

  

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

$

11,883

3.08

%  

 

$

11,740

 

3.59

%  

Net interest margin (taxable-equivalent basis)

 

 

3.45

%  

 

  

 

  

 

4.06

%  

Ratio of interest-earning assets to interest-bearing liabilities

 

147.94

%

 

 

147.24

%

 

  

 

  

Reported net interest income

 

  

 

  

  

 

  

 

  

 

  

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

$

11,883

3.44

%

 

$

11,740

 

4.19

%  

Less:

 

  

 

  

  

 

  

 

  

 

  

taxable-equivalent adjustment

 

 

(29)

 

  

 

(39)

 

  

Net Interest Income

$

11,854

 

  

$

11,701

 

  

Comparison of Results of Operations for the

NineSix months ended SeptemberJune 30, 20172020 and 2016

2019

General. During the first ninesix months of 2017,2020, the Company hadreported net income of $5.2$1.8 million as compared with net income of $5.1$6.8 million for the first ninesix months of 2016.2019. Net income per common share for the first ninesix months of 20172020 was $0.45,$0.10 basic and diluted, compared with net income per common share of $0.44,$0.35 basic and diluted, for the first ninesix months of 2016.2019. Results of operations for the first nine monthssecond quarter of 2017 compared to 2016 was2020 were primarily impacted by an increase of $2.0 million$160,000 in net interest income, an increase in provision for loan losses of $244,000, a decrease of $196,000 in non-interest income and an increase in non-interest expense of $2.6 million, which was primarily related to increases in occupancy expenses of $1.5 million. Net interest margin$268,000, foreclosed real estate expense of 4.20%$152,000, merger related expenses of $641,000, information systems expenses of $344,000, and personnel expense of $1.4 million, which were offset by a decrease in deposit insurance expense of $131,000 and professional fees of $42,000. The Company recorded a provision for loan losses of $4.2 million for the first six months of 2020 compared to a recovery of $95,000 in the first ninesix months of 2017 decreased 2 basis points from2019, which the sameincreased provision expense had a significant impact on the reduced net income reported for the 2020 first six months of 2020 as compared to the comparative period in 2016.

2019.

Net Interest Income. Net interest income increased to $25.0 millionremained basically unchanged for the first ninesix months of 20172020 from $23.1 million for the first ninesix months of 2016.2019. The Company’s total interest income was affected by the an

45

increase in total 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 $800.9 million$1.3 billion in the first ninesix months of 20172020 compared with $737.1 million$1.1 billion during the same period in 2016,2019, while the average yield on those assets increased 8decreased 49 basis points from 4.72%5.03% to 4.80%.

4.54%, which was primarily due to the reduction of interest rates on loans, federal funds purchased and reduced investment securities.

The Company’s average interest-bearing liabilities increased by $46.3$85.0 million to $607.2$865.1 million for the ninesix months ended SeptemberJune 30, 20172020 from $560.9$780.1 million for the same period one year earlier and the cost of those funds increaseddecreased from 0.65%1.41% to 0.79%1.25%, or 1416 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 ninesix months of 2017,2020, the Company’s net interest margin was 4.20%3.69% and net interest spread was 4.00%3.29%. In the same periodquarter ended one year earlier, net interest margin was 4.22%4.07% and net interest spread was 4.07%3.59%. The increase in the cost of funds was the primary driver of lower net interest margin in 2017.

53

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. TheIn determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, isthe Company uses loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. TheDuring the first half of 2020, the Company recorded a provision for loan losses of $1.1$4.2 million, foras compared to the recovery of $95,000 that was recorded in the first nine monthshalf of 2017 compared to $847,000 for the first nine months of 2016. Loan growth was the primary contributor to the increased 2017 provision expense. Improving credit metrics have been consistently maintained in 2016 and 2017.

2019.

Non-Interest Income. Non-interest income for the ninesix months ended SeptemberJune 30, 20162020 was $2.3$2.9 million, a decreasean increase of $196,000$330,000 from the first ninesix months of 2016.2019. Service charges on deposit accounts decreased $74,000increased $6,000 to $668,000$544,000 for the ninesix months ended SeptemberJune 30, 20172020 from $742,000$550,000 for the same period in 2016, primarily due to a decrease in overdraft charges.2019. Other non-deposit fees and income decreased $100,000increased $75,000 from the first ninesix months of 20162019 to the first ninesix months of 2017, primarily2020 due to decreasesincreases in debit card activity. The Company recognized a gain onvarious items. Fees from the sale of investment securities of $22,000mortgages increased from $550,000 for the six months ended June 30, 2019 to $648,000 for the first ninesix months of 2016 compared to no gains for2020. The Company did not have sales of securities during the first ninesix months of 2017.

June 30, 2020 or 2019, respectively.

Non-Interest Expenses. Non-interest expenses increased by $1.5$2.6 million to $18.2$19.7 million for the ninesix months ended SeptemberJune 30, 2017,2020, from $16.8$17.1 million for the same period in 2016. Non-interest2019. In general, most categories of non-interest expenses were also impactedincreased primarily due to changes in 2017 by $278,000 in merger related expenses for our announced acquisition of Premara.the Company’s branch network. The following are highlights of the significant categories of non-interest expenses during the first ninesix months of 20172020 versus the same period in 2016:

2019:

·Personnel expenses increased $1.2$1.4 million to $10.7$11.4 million, due to additions in staff.additional personnel and cost of living increases and acquisition of three branches.

46

Occupancy expenses increased $268,000, primarily due to additional branches, repairs and maintenance and increased rent expense due to normal rent escalation.
·Occupancy and equipmentIntegration related expenses decreased by $137,000 due to branch repositioning.increased $641,000.
·CDI amortization expense decreased by $69,000 in the first nine months of 2017$50,000 due to scheduled reductions.the amortization.
·Deposit insuranceInformation systems expense decreased $115,000increased by $344,000 due to rate reductions.increased expenses related to the new mobile banking platform and security cost for the core processing system.
·Information systems expense increased $64,000 dueProfessional fees decreased by $42,000 to compliance and cybersecurity initiatives.$823,000.
·Merger relatedDeposit insurance expenses increaseddecreased by $278,000$131,000 due to an announced acquisition.increased premium credit earned.
·Foreclosed real estate increased $88,000 due to write downs on a large property.
·Other non-interest expenses increased by $113,000, due to small increases in several categories of other non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 34.7%19.4% and 35.2%22.0% for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The effective tax rate for the first nine months of 2017 was impacted by North Carolina corporate income tax rate reductions compared to 2016 tax rates.

As of SeptemberJune 30, 20172020 and December, 31, 2016,2019, the Company had a net deferred tax asset in the amount of $2.7$3.6 million and $3.1$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 SeptemberJune 30, 20172020 and December 31, 2016,2019, management concluded that the net deferred tax asset wasassets 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,

54

47

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

Liquidity

For the six month ended

For the six month ended

June 30, 2020

June 30, 2019

(dollars in thousands)

Average

Average

Average

Average

    

balance

    

Interest

    

rate

    

balance

    

Interest

    

rate

INTEREST-EARNING ASSETS:

Loans, gross of allowance

$

1,107,307

$

27,697

5.03

%  

$

979,669

$

26,579

5.74

%  

Investment securities

 

65,643

 

838

 

2.57

%  

 

76,236

 

1,126

 

2.98

%  

Other interest-earning assets

 

99,518

 

201

 

0.41

%  

 

93,981

 

999

 

2.14

%  

Total interest-earning assets

 

1,272,468

 

28,736

 

4.54

%  

 

1,149,886

 

28,704

 

5.03

%  

Other assets

 

115,642

 

 

 

100,889

 

  

 

  

Total assets

$

1,388,110

$

1,250,775

 

  

 

  

INTEREST-BEARING LIABILITIES:

 

  

 

  

  

 

  

 

  

 

  

Deposits:

 

  

 

  

  

 

  

 

  

 

  

Savings, NOW and money market

$

400,735

 

996

0.50

%  

$

309,053

 

763

 

0.50

%  

Time deposits over $100,000

 

298,622

 

2,676

1.80

%  

 

289,829

 

2,797

 

1.95

%  

Other time deposits

 

108,324

 

831

1.54

%  

 

116,975

 

941

 

1.62

%  

Borrowings

 

57,405

 

861

3.02

%  

 

64,284

 

967

 

3.03

%  

Total interest-bearing liabilities

 

865,086

 

5,364

1.25

%  

 

780,141

 

5,468

 

1.41

%  

Non-interest-bearing deposits

 

300,071

 

 

244,378

 

  

 

  

Other liabilities

 

8,804

 

 

12,317

 

  

 

  

Shareholders’ equity

 

214,149

 

 

213,939

 

  

 

  

Total liabilities and shareholders’ equity

$

1,388,110

$

1,250,775

 

  

 

  

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

$

23,372

3.29

%  

 

$

23,236

 

3.62

%  

Net interest margin (taxable-equivalent basis)

 

 

3.69

%  

 

  

 

  

 

4.07

%  

Ratio of interest-earning assets to interest-bearing liabilities

 

147.09

%

 

 

147.39

%

 

  

 

  

Reported net interest income

 

  

 

  

  

 

  

 

  

 

  

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

$

23,372

3.68

%

 

$

23,236

 

4.06

%  

Less:

 

  

 

  

  

 

  

 

  

 

  

taxable-equivalent adjustment

 

 

(59)

 

  

 

(78)

 

  

Net Interest Income

$

23,313

 

  

$

23,158

 

  

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 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

48

and investment securities classified as available for sale) represented 11.6%15.7% of total assets at SeptemberJune 30, 2017 which was a decrease2020 as compared to 13.9%11.9% as of December 31, 2016. This reduction in liquid assets to total assets resulted primarily from loan growth and letting higher rate deposits roll off.

2019.

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. 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 SeptemberJune 30, 2017,2020, the Company had existing credit lines with other financial institutions to purchase up to $153.0$261.2 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 25%10% of total assets, subject to available collateral. A floating lien of $109.3$105.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At SeptemberJune 30, 2017,2020, the Company had $22.4$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 SeptemberJune 30, 2017,2020, in addition to FHLB advances, total borrowings also consisted of junior subordinated debentures of $12.4 million.

Total deposits were $775.0 million$1.3 billion at SeptemberJune 30, 2017.2020. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 48.4%29.2% of total deposits at SeptemberJune 30, 2017.2020. Time deposits of $250,000 or more represented 11.8%29.2% of the Company’s total deposits at SeptemberJune 30, 2017.2020. At quarter-end, the Company had $61.7$5.6 million in brokered time deposits and no$1.6 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 the BASEL III capital requirements. A new part of the capital ratios profile under the Basel III rules is the common equityThe Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and SBLF preferred stock in 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 11.9%13.06% at SeptemberJune 30, 2017.2020.

55

49

As the following table indicates, at SeptemberJune 30, 2017,2020, the Company and the Bank both exceeded minimum regulatory capital requirements as specified in the tables below.

 Actual Minimum 

Actual

Minimum

 

Ratio

Requirement

 

Select Bancorp, Inc. Ratio  Requirement 

     
Total risk-based capital ratio  14.18%  8.00%

14.84

%  

8.00

%

Tier 1 risk-based capital ratio  13.18%  6.00%

13.89

%  

6.00

%

Leverage ratio  12.57%  4.00%

12.06

%  

4.00

%

Common equity Tier 1 risk-based capital ratio  11.79%  4.50%

12.96

%  

4.50

%

Actual

Minimum

 

Well_Capitalized

 

Ratio

Requirement

 

Requirement

 

Select Bank & Trust

Total risk-based capital ratio

12.97

%  

8.00

%

10.00

%

Tier 1 risk-based capital ratio

12.02

%  

6.00

%

8.00

%

Leverage ratio

10.44

%  

4.00

%

5.00

%

Common equity Tier 1 risk-based capital ratio

12.02

%  

4.50

%

6.50

%

     Regulatory    
  Actual  Minimum  Well-Capitalized 
Select Bank & Trust Ratio  Requirement  Requirement 
          
Total risk-based capital ratio  13.56%  8.00%  10.00%
Tier 1 risk-based capital ratio  12.56%  6.00%  8.00%
Leverage ratio  11.98%  4.00%  5.00%
Common equity Tier 1 risk-based capital ratio  12.56%  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 SeptemberJune 30, 2017.

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.

56

Item 3. Quantitative and Qualitative Disclosures about Market RiskRisk.

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'sCompany’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 of assets and liabilities to produce stable net interest income despite changing interest rates. The Company'sCompany’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

EVE is a long-term measure of interest rate risk to the Company'sCompany’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'sCompany’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'sCompany’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'sCompany’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, 2017.March 31, 2020.

March 31, 2020

 

(Dollars in thousands)

    

Estimated Effect on NII

    

Estimated Effect on EVE

 

Immediate change in interest rates:

+ 4.0%

7.3

%  

15.1

%

+ 3.0%

4.6

 

11.9

+ 2.0%

1.8

 

8.2

+ 1.0%

0.5

 

4.3

No change

 

- 1.0%

0.2

 

(3.6)

57

  June 30, 2017 
(Dollars in thousands) 

Estimated

Exposure to

NII

  

Estimated

Exposure

to EVE

 
       
Immediate change in interest rates:        
+ 4.0%  14.4%  6.0%
+ 3.0%  11.6   5.4 
+ 2.0%  8.3   4.2 
+ 1.0%  4.1   2.3 
No change  -   - 
- 1.0%  (5.0)  (4.8)

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

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 ProceduresProcedures.

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'sCompany’s Chief Executive Officer and Chief Financial Officer, changes in the Company'sCompany’s internal controls over financial reporting (as defined in Rule 13a−13a15(f) and 15d−15d15(f) of the Exchange Act) during the thirdsecond quarter of 2017.2020. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the thirdsecond quarter of 20172020 that have materially affected or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.

58

Part II. OTHER INFORMATION

Item 1. Legal ProceedingsProceedings.

The discussion under the subheading “Litigation Related to the Proposed Merger” under “Note K – Subsequent Events” in the accompanying Notes to Consolidated Financial Statements included in Part I of this Report is incorporated herein by reference.

Except as noted in the immediately prior paragraph, 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

We face additional risk of litigation due to our acquisition strategy.Factors.

In addition to the ordinary risk of litigation that we face in connection with our day-to-day banking activities, we also face litigation risk in connection with our strategy to grow through acquisition of other financial institutions. The Company, as well as our directors and officers and the companies we seek to acquire, may face claims from shareholders related to transaction disclosures or alleged breaches of fiduciary duties in connection with entering into such acquisition transactions. The defense or settlement of any such lawsuit or claims, or the delay that any such lawsuit may cause on the strategic acquisitions that we pursue, may adversely affect the Company’s business, financial condition, results of operations and cash flows.

Except as noted in the immediately prior paragraph, there areThere have been no material changes fromin the Company’s risk factors set forth under Part II, Item 1A. “Risk Factors”from those disclosed in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the Company’s Quarterly Report on Form 10-Q for the quarterquarterly period ended MarchJune 30, 2020.

52

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 rising 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;
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;

53

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, 2017.2019.

Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

TheOn September 17, 2019, the Company announced that its Board of Directors approved a new stock repurchase program on August 31, 2016, by which management wasplan (the “2019 Repurchase Plan”). Under the 2019 Repurchase Plan, the Company is authorized to repurchase up to 581,518937,248 outstanding shares of Companyits common stock in the open market andor through privately negotiated transactions. There were no share

54

Share repurchase transactions conductedactivity for the 2019 Repurchase Plan during the three-month period covered by this Report.three months ended June 30, 2020 was as follows:

    

    

    

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)

April 2020

 

$

 

275,366

 

235,140

Beginning Date: 4/1

Ending Date: 4/30

 

  

 

  

 

  

 

  

May 2020

 

38,395

 

7.21

 

313,761

 

196,745

Beginning Date: 5/1

Ending Date: 5/31

 

  

 

  

 

  

 

  

June 2020

 

154,743

 

8.04

 

468,504

 

42,002

Beginning Date: 6/1

Ending Date: 6/30

Item 3. Defaults Upon Senior Securities

Securities.

None.

Item 4. Mine Safety Disclosures

Disclosures.

Not applicable.

Item 5. Other Information.

None.

59

55

Item 6. ExhibitsExhibits.

Exhibit Index

    

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit No. Description of Exhibit Form Exhibit Filing
Date
 

SEC

File No.

           
2.1 Agreement and Plan of Merger and Reorganization by and among Select Bancorp, Inc., Select Bank & Trust Company, Premara Financial, Inc., and Carolina Premier Bank dated as of July 20, 2017 8-K 2.1 07/26/17 000-50400
           
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, 2017, in XBRL (eXtensible Business Reporting Language)     Filed herewith  

60

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 June 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019 and the Three Months Ended June 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the Six Months Ended June 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

56

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 9, 2017August 7, 2020

By:

/s/ William L. Hedgepeth II

William L. Hedgepeth II

President and Chief Executive Officer

Date: November 9, 2017August 7, 2020

By:

/s/ Mark A. Jeffries

Mark A. Jeffries

Executive Vice President and Chief Financial Officer

61

57