Part I. FINANCIAL INFORMATION
Item 1. Financial ~~Information~~Statements.
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

~~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

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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

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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

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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.

8

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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.

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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.
~~Select~~The 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 Legacy~~Company acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the ~~Bank changed its~~Bank’s legal name ~~from New Century Bank~~ to Select Bank & Trust Company. On December 15, 2017, the Company ~~following~~acquired 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 ~~and~~with 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 laws~~State of North Carolina, northwest South Carolina, and the ~~rules~~Virginia Beach-Norfolk-Newport News, VA-NC, metropolitan statistical area. The Bank is subject to the supervision and ~~regulations~~regulation 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 periods~~six months ended ~~September~~June 30, ~~2017~~2020 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 periods~~six months ended ~~September~~June 30, ~~2017~~2020 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 ~~2016~~2019 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 ~~September~~June 30, ~~2017~~2020 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.
COVID-19. The Company has evaluated for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of the disease caused by a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. Several programs are available to businesses impacted by COVID-19 such as loans available through the Paycheck Protection Program, deferrals on loan payments on existing loans and a reduced interest rate program available
9
9

~~SELECT BANCORP, INC.~~

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

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

NOTE B - PER SHARE RESULTS
Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 there were ~~152,300~~219,120 and ~~123,800~~172,120 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 staff~~currently 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 Flows~~Disclosure Requirements for Fair Value Measurement topic of the Accounting Standards ~~Codification to clarify how~~Codification. The amendments remove, modify, and add certain ~~cash receipts and cash payments are presented and classified~~fair 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 be~~are effective for ~~the Company~~all entities for fiscal years, ~~beginning after December 15, 2017 including~~and 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

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

In January 2017, the FASB ~~updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the~~issued 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 the~~Update ("ASU") 2017-04, Intangibles - Goodwill and Other ~~Topic of~~(Topic 350): Simplifying the ~~Accounting Standards Codification to simplify the accounting~~Test 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 be~~test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which athe carrying amount exceeds the reporting ~~unit’s carrying value exceeds its~~unit's fair ~~value,~~value; however, the loss recognized should not exceed the total amount of goodwill allocated to ~~exceed~~that 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 transition~~the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test. The Company adopted this ASU during the ~~technical corrections~~first quarter of 2020 with no impact to the consolidated financial position as a result of the adoption.

In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04 - Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides for temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The provisions of this ASU are elective and applicable to all entities that have contracts, hedging relationships and other transactions, subject to certain criteria, that reference LIBOR or another reference rate to be discontinued because of reference rate reform. There are practical expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedge accounting relationships affected by reference rate reform in order to facilitate a smoother transition to new reference rates. For contracts meeting certain criteria, a change in the contract's reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements. An entity will also be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform. The guidance will only apply to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This ASU is effective for ~~the Company for~~ ~~reporting periods beginning after~~March 12, 2020 through December ~~15, 2019.~~ ~~Early adoption is permitted for interim or annual goodwill~~

~~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 ~~does~~is still assessing this ASU but is not ~~expect these amendments~~expecting 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 changes~~an 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.

~~SELECT BANCORP, INC.~~

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

~~NOTED~~NOTE D - FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

·●

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

·●

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

·●

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020. Valuation techniques are consistent with techniques used in prior periods.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 (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

$
—
15
~~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 ~~September~~June 30, ~~2017~~2020 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 allowance~~a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At ~~September~~June 30, ~~2017,~~2020, the discounts

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SELECT BANCORP, INC.

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 ~~September~~June 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 ~~September~~June 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 ~~September~~June 30, ~~2017.~~2020.
~~Assets~~Loans held for sale
~~During 2015,~~The Company originates fixed and variable rate residential mortgage loans on a ~~branch facility~~service-release basis in the secondary market. Loans closed but not yet settled with an investor are carried in our loans held for sale portfolio. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was ~~taken out of service as part~~locked in with our customers. Therefore, these loans present very little market risk. The Company usually delivers to, and receives funding from, the investor within 30 to 60 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts” basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. Because of the ~~Company’s branch restructuring plan and reclassified as~~short-term nature of these derivative contracts, the fair value of the mortgage loans held for ~~sale. The property~~sale in most cases is ~~recorded~~materially the same as the value of the loan amount at its origination.
Mortgage loans originated and intended for sale in the secondary market are carried at the ~~remaining book balance~~lower of ~~the asset~~cost or an estimated ~~fair~~market 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 applied~~aggregate. Net unrealized losses are provided for in a valuation allowance by charges to ~~appraised values to account for expected liquidation~~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 ~~selling costs which ranged between 1% and 25% at September 30, 2017. There have been no changes~~are included in mortgage banking income in the ~~valuation techniques for the three months ended September 30, 2017.~~
16
~~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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 (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
14

~~SELECT BANCORP, INC.~~

~~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's~~Company’s financial instruments at ~~September~~June 30, ~~2017~~2020 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

15

~~SELECT BANCORP, INC.~~

~~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.~~

~~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 ~~September~~June 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.

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value ~~of AFS investments with gross unrealized gains and losses, follow:~~
December 31, 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.~~
20
~~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 ~~September~~June 30, ~~2017~~2020 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 the~~obligations. The Company has the intent and ability to hold these securities to recovery. No other than temporary impairments were identified for these investments having unrealized losses for the periods ended ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016. In 2016 the~~2019. The Company ~~realized a gain on the disposal of eleven securities and~~ has not ~~sold~~incurred 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 ~~September~~June 30, ~~2017~~2020 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 GSE~~At June 30, 2020, the Company had 3 securities with an unrealized ~~losses~~loss for more than twelve months ~~totaling $8,000 at September 30, 2017. One~~of $5,000 which consisted of 2 U.S. government ~~agency~~agencies-GSEs and 1 mortgage-backed GSE ~~one municipal and six mortgage-backed GSEs~~bond. NaN securities had unrealized losses for less than twelve months totaling ~~$42,000~~$26,000 at ~~September~~June 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 ~~two~~2 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 municipal~~GSE and ~~eight~~2 mortgage-backed ~~GSEs~~GSE’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 spreads~~rates.

Table of ~~all debt instruments~~Contents

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)

~~SELECT BANCORP, INC.~~

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

NOTE F - LOANS

Following is a summary of the composition of the Company’s loan portfolio at ~~September~~June 30, ~~2017~~2020 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 ~~eastern~~the State of North Carolina, southeastern Virginia and ~~central North~~northwestern South Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.
At ~~September~~June 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.

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 ~~September~~June 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 are~~traditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can 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 ~~September~~June 30, ~~2017~~2020 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, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 were approximately ~~$7.5~~$12.0 million and were composed of ~~$2.0~~$8.0 million in ~~nonaccrual~~non-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

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

remaining ~~$6.5~~$10.5 million had no specific allowances recorded at ~~September~~June 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, ~~2016~~2019 were approximately ~~$11.0~~$11.2 million and ~~consisted of $5.8~~included $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, ~~2016~~2019 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 date~~through 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017,~~2020, the Bank had ~~thirty-one~~forty-nine loans with an aggregate balance of ~~$4.7~~$10.3 million that were considered to be troubled debt restructurings. Of those TDRs, ~~nineteen~~thirty-two loans with a balance totaling ~~$4.1~~$6.4 million were still accruing as of ~~September~~June 30, ~~2017.~~2020. The remaining TDRs with balances totaling ~~$539,000~~$3.9 million as of ~~September~~June 30, ~~2017~~2020 were in non-accrual status. In

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 ~~September~~June 30, ~~2016,~~2019, the Bank had ~~thirty-three~~thirty-nine loans with an aggregate balance of ~~$4.1~~$7.8 million that were considered to be troubled debt restructurings. Of those TDRs, ~~twenty-two~~twenty-four loans with a balance totaling ~~$2.7~~$5.3 million were still accruing as of ~~September~~June 30, ~~2016.~~2019. The remaining TDRs with balances totaling ~~$1.4~~$1.8 million as of ~~September~~June 30, ~~2016~~2019 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:
o ~~Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.~~
o ~~Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).~~
o ~~Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.~~
· Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:
o General conformity to the Bank's policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.
o ~~Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.~~
o ~~Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.~~
· Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics:
o Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.
o Unproven, insufficient or marginal primary sources of repayment that appears sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.
o ~~Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.~~
· ~~Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:~~
o ~~Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.~~
o Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.
31
~~SELECT BANCORP, INC.~~
~~Notes to Consolidated Financial Statements (Unaudited)~~
~~NOTE F - LOANS (continued)~~
~~Credit Quality Indicators (continued)~~
o Loans 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:~~
o ~~Loans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.~~
o Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.
o Loans where adverse economic conditions that develop subsequent to the loan origination that don't jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.
· ~~Risk Grade 7 (Substandard) -~~A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
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 ~~September~~June 30, ~~2017~~2020 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

1‑to‑4 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

1‑to‑4 family

Assigned Grade

residential

HELOC

Pass

$
147,958

$
43,585
Special mention

1,246

76
Substandard

2,493

853

$
151,697

$
44,514

25

~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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:~~

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.

~~SELECT BANCORP, INC.~~

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

~~NOTE F – LOANS (continued)~~

~~Allowance for Loan Losses (continued)~~

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.

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.

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 ~~nine~~six month periods ended ~~September~~June 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
41
29

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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.
~~Allowance~~Mortgage 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
30

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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 for~~provides 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 ~~available~~acquired assets and assumed liabilities, as recorded by the Company, the fair value adjustments calculated at the time of the merger and the resulting fair value recorded by the Company.

April 17, 2020

As recorded by

Fair Value

As recorded by

First Citizens

adjustments

the Company
(Dollars in thousands)

Assets

Cash and cash equivalents

$
60,234

$
—

$
60,234
Loans

108,236

(4,977)

103,259
Premises and equipment

2,106

790

2,896
Accrued interest receivable

338

—

338
Core deposit intangible

—

620

620
Other assets

—

974

974
Total assets acquired

$
170,914

$
(2,593)

$
168,321

Liabilities

Deposits:

Noninterest-bearing

$
41,398

$
—

$
41,398
Interest-bearing

144,845

(760)

144,085
Total deposits

186,243

(760)

185,483
Other liabilities

173

—

173
Total liabilities assumed

$
186,416

$
(760)

$
185,656
Goodwill recorded for branches acquisition

$
17,335

Goodwill recorded for ~~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
31

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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 maturity~~following tables reflect the pro forma total net interest income, noninterest income and net income for the six months ended June 30, 2020 and 2019 as though the acquisition of the ~~securities sold under agreements~~branches had taken place on January 1, 2019. The pro forma results have not been adjusted to ~~repurchase by class~~remove non-recurring acquisition-related expenses, and are not necessarily indicative of ~~collateral pledged included in short-term borrowings as~~the results of ~~December 31, 2016 is presented in~~operations 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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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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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 none~~in the aggregate amount of $428,000 at ~~September~~June 30, ~~2017 and~~2020. 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 with~~date and ~~into~~time 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 stock~~financial statements were issued and ~~outstanding will be converted into the right to receive 1.0463 shares~~has determined there are no reportable subsequent events.

Table of Company common stock or $12.65 in cash, with 948,080 shares of Premara common stock (equivalent to 30% of Premara’s outstanding shares of common stock as of the date of the merger agreement) being converted to the per share cash consideration and the balance of the outstanding shares of Premara common stock being converted into Company common stock. Based on the Company’s closing price of $11.89 per share on July 20, 2017, the day before the proposed transaction was publicly announced, the estimated aggregate purchase price payable by the Company was approximately $40 million.Contents

~~NOTE K – SUBSEQUENT EVENTS~~
~~Litigation related to the Proposed Merger~~
~~On October 12, 2017, a purported class action complaint captioned~~~~Sharpenter 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 ~~Operations~~Operations.
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, ~~and~~as well as assumptions made by, and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include, among other things: the impact of the novel coronavirus and the associated COVID-19 disease pandemic on the business, financial condition and results of operations of the Company and its customers, changes in national, regional and local market conditions; changes in legislative and regulatory ~~conditions;~~conditions, changes in the interest rate ~~environment;~~environment, breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and adverse ~~change~~changes in credit quality trends; 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

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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.

On ~~July 21,~~December 15, 2017, the Company ~~announced that it had entered into a definitive merger agreement with~~acquired Premara Financial, Inc., (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”) headquartered in Charlotte, North ~~Carolina (“Premara”) pursuant to which~~Carolina. At the ~~Company would acquire Premara and its subsidiary bank,~~time of the acquisition, Carolina Premier ~~Bank. Please see Note J to~~had approximately $279 million in assets and four-full service offices, including a presence in upstate South Carolina. The Bank acquired three branches located in the ~~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.

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Comparison of Financial Condition at

~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~

2019

During the first ~~nine~~six months of ~~2017,~~2020, total assets increased by ~~$76.1~~$343.9 million to ~~$922.7 million~~$1.6 billion as of ~~September~~June 30, ~~2017.~~2020. The increase in assets was due primarily to ~~loan growth funded~~the 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 ~~September~~June 30, ~~2017~~2020 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 ~~third~~second quarter of ~~2017~~2020 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 ~~September~~June 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 ~~September~~June 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 ~~September~~June 30, ~~2017.~~

2020.

At ~~September~~June 30, ~~2017 and December 31, 2016, there were no~~2020 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 ~~September~~June 30, ~~2017,~~2020, a ~~$3.5~~$111.5 million ~~decrease~~increase from December 31, ~~2016.~~2019. The Company’s investment securities at ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017 was $785,000.~~

2020.

At ~~September~~June 30, ~~2017,~~2020, the Company had an investment of ~~$1.7~~$3.1 million in ~~FHLB~~Federal Home Loan Bank (“FHLB”) stock, which ~~decreased~~increased 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 ~~September~~June 30, ~~2017, which decreased by $73,000 from~~2020 compared to $719,000 at December 31, ~~2016.~~

2019.

At ~~September~~June 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 ~~BOLI~~bank-owned life insurance is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The increase in non-earning assets was due primarily to the increase in ~~deposits.~~cash and due from banks.

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Total deposits at ~~September~~June 30, ~~2017~~2020 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 increase~~the acquisition of the three branches in ~~DDA~~western North Carolina and deposits ~~and a CD marketing~~related 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 ~~September~~June 30, ~~2017.~~

2020. The Bank had $0 million in brokered demand deposits and $45.0 million in brokered time deposits as of December 31, 2019.

As of ~~September~~June 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 was~~borrowings 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 ~~September~~June 30, ~~2017~~2020 was ~~$109.8~~$211.5 million, ~~an increase~~a 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 ~~nine~~six months ended ~~September~~June 30, ~~2017. Other changes~~2020. Contributing to the reduction in shareholders’ equity ~~included increases~~were 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 ~~September~~June 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, ~~2016~~2019 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 ~~decreased~~increased from ~~$5.8~~$5.9 million at December 31, ~~2016~~2019 to ~~$2.0~~$8.0 million at ~~September~~June 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, ~~2016~~2019 to ~~0.81%~~1.15% at ~~September~~June 30, ~~2017.~~2020. The Company ~~has experienced a decrease~~had 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, 2017~~2019 and an increase in accruing troubled debt restructurings or TDRs, from ~~$3.6~~$6.2 million at December 31, ~~2016~~2019 to ~~$4.1~~$6.4 million as of ~~September~~June 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-accrual~~six 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 ~~September~~June 30, ~~2017,~~2020, the ~~Company~~Bank had ~~thirty-one~~forty-nine loans totaling ~~$4.7~~$10.3 million that were considered to be troubled debt restructurings, or TDRs. ~~Nineteen~~Thirty-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.

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

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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 were ~~$8.2~~$18.0 million and ~~$10.0~~$15.7 million, respectively. The allowance for loan losses at ~~September~~June 30, ~~2017~~2020 represented ~~105%~~67% of non-performing assets compared to ~~84%~~53% at December 31, ~~2016.~~
2019.
Total impaired loans at ~~September~~June 30, ~~2017~~2020 were ~~$7.5~~$12.0 million. This ~~includes $2.0~~included $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 be~~classified 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 ~~September~~June 30, ~~2017~~2020 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

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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 ~~September~~June 30, ~~2017 and~~2020 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 ~~September~~June 30, ~~2017~~2020 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be given that further adjustments to the allowance for loan losses may not be deemed necessary in the future. The current economic and business disruptions in the Bank’s markets, and in the national and global markets more generally, are unprecedented, as state, local, and national governing bodies attempt to address the public health emergency caused by COVID-19. Management expects the Company’s customers, including its borrowers, will continue to experience the financial impacts of COVID-19 over the balance of the 2020 fiscal year. Depending on the length of financial impact and the effectiveness of the various governmental programs put in place to stabilize economic conditions, the Company’s management would expect to see 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.

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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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the Company had ~~$23.1~~$42.7 million and ~~$21.7~~$27.7 million in ~~non 1-to-4~~non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, which is less than the 100% maximum allowed. These loans may ~~present~~represent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

Business Sector Concentrations

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

At ~~September~~June 30, ~~2017~~2020, the Company had ~~four~~five product type groups ~~that~~which exceeded this guideline; ~~Real Estate~~Office 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% ~~guideline~~guideline. 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 million~~the 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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019.

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Acquisition, Development and Construction Loans

(~~Dollars~~dollars 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.

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 ~~September~~June 30, ~~2017~~2020 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	%

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~~Interest Only~~Interest-Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with ~~interest only~~interest-only payment terms. At ~~September~~June 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. Notwithstanding~~Recognizing the risk inherent with ~~interest only~~interest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit ~~interest only~~interest-only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled ~~$66.8~~$85.8 million, or ~~8.8%~~6.9% of total loans, at ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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.

Comparison of Results of Operations for the

Three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~

2019

General. During the ~~third~~second quarter of ~~2017,~~2020, the Company ~~had~~reported net income of ~~$1.8 million~~$681,000 as compared with net income of ~~$1.7~~$3.5 million for the ~~third~~second quarter of ~~2016.~~2019. Net income per common share for the ~~third~~second quarter of ~~2017~~2020 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 ~~third~~second quarter of ~~2016.~~2019. Results of operations for the ~~third~~second quarter of ~~2017~~2020 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 income~~deposit 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 ~~third~~second quarter of ~~2017~~2020 compared to a recovery of provision of ~~$337,000~~$207,000 in the ~~third~~second quarter of ~~2016. Net interest margin of 4.19% in~~2019, which increased provision expense had a significant impact on the ~~third~~reduced net income reported for the 2020 second quarter ~~of 2017 decreased 8 basis points from~~as compared to the ~~same~~comparative 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 million~~remained basically unchanged for the ~~third~~second quarter of ~~2017~~2020 from ~~$7.8 million for~~ the ~~third~~second quarter of ~~2016.~~2019. The Company’s total interest income was affected by ~~the~~an increase in ~~loan~~earning loans, which was offset by a reduction in earning balances ~~due~~of 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 ~~third~~second quarter of ~~2017~~2020 compared with ~~$737.2 million~~$1.2 billion during the same period in ~~2016,~~2019, while the average yield on those assets ~~increased 8~~decreased 76 basis points from ~~4.76%~~4.98% to ~~4.84%~~4.22%, which was primarily due to the ~~increase in~~reduction 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.

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The Company’s average interest-bearing liabilities increased by ~~$80.2~~$147.4 million to ~~$630.9~~$935.8 million for the quarter ended ~~September~~June 30, ~~2017~~2020 from ~~$550.7~~$788.1 million for the same period one year earlier and the cost of those funds ~~increased~~decreased 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 ~~third~~second 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. ~~The~~In 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 ~~third~~second 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 provision~~the recovery of ~~$337,000~~$207,000 that was recorded in the ~~third~~second 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 ~~September~~June 30, ~~2017~~2020 was ~~$778,000, a slight decrease~~$1.4 million, an increase of $83,000 from ~~$785,000 in~~ the ~~third~~second quarter of ~~2016.~~2019. Service charges on deposit accounts decreased ~~$12,000~~$78,000 to ~~$237,000~~$206,000 for the quarter ended ~~September~~June 30, ~~2017~~2020 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 ~~third~~second quarter of ~~2016~~2019 to the ~~third~~second quarter of ~~2017~~2020 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 investment~~have sales of securities induring the ~~third quarter of 2017~~three 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 ~~September~~June 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 ~~third~~second quarter of ~~2017 compared to~~2020 versus the same period in ~~2016:~~

2019:

·●

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

~~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 system~~Occupancy expenses ~~incurred in the third quarter of 2017~~increased $64,000, primarily due to ~~compliance~~additional 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.

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●

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 equipment~~Deposit 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 ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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,

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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
~~Nine~~Six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~
2019
General. During the first ~~nine~~six months of ~~2017,~~2020, the Company ~~had~~reported net income of ~~$5.2~~$1.8 million as compared with net income of ~~$5.1~~$6.8 million for the first ~~nine~~six months of ~~2016.~~2019. Net income per common share for the first ~~nine~~six months of ~~2017~~2020 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 ~~nine~~six months of ~~2016.~~2019. Results of operations for the ~~first nine months~~second quarter of ~~2017 compared to 2016 was~~2020 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 ~~nine~~six months of ~~2017 decreased 2 basis points from~~2019, which the ~~same~~increased 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 million~~remained basically unchanged for the first ~~nine~~six months of ~~2017~~2020 from ~~$23.1 million for~~ the first ~~nine~~six months of ~~2016.~~2019. The Company’s total interest income was affected by ~~the~~ an

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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 ~~nine~~six months of ~~2017~~2020 compared with ~~$737.1 million~~$1.1 billion during the same period in ~~2016,~~2019, while the average yield on those assets ~~increased 8~~decreased 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$560.9~~$780.1 million for the same period one year earlier and the cost of those funds ~~increased~~decreased 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 ~~nine~~six 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 ~~period~~quarter 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.~~

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. ~~The~~In 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. ~~The~~During the first half of 2020, the Company recorded a provision for loan losses of ~~$1.1~~$4.2 million, ~~for~~as compared to the recovery of $95,000 that was recorded in the first ~~nine months~~half 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 ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 was ~~$2.3~~$2.9 million, ~~a decrease~~an increase of ~~$196,000~~$330,000 from the first ~~nine~~six months of ~~2016.~~2019. Service charges on deposit accounts ~~decreased $74,000~~increased $6,000 to ~~$668,000~~$544,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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 $100,000~~increased $75,000 from the first ~~nine~~six months of ~~2016~~2019 to the first ~~nine~~six months of ~~2017, primarily~~2020 due to ~~decreases~~increases in ~~debit card activity. The Company recognized a gain on~~various items. Fees from the sale of ~~investment securities of $22,000~~mortgages increased from $550,000 for the six months ended June 30, 2019 to $648,000 for the first ~~nine~~six months of ~~2016 compared to no gains for~~2020. The Company did not have sales of securities during the first ~~nine~~six 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 ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, from ~~$16.8~~$17.1 million for the same period in ~~2016. Non-interest~~2019. In general, most categories of non-interest expenses ~~were also impacted~~increased 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 ~~nine~~six months of ~~2017~~2020 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.

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●

Occupancy expenses increased $268,000, primarily due to additional branches, repairs and maintenance and increased rent expense due to normal rent escalation.

·●

~~Occupancy and equipment~~Integration 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 insurance~~Information systems expense ~~decreased $115,000~~increased 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 due~~Professional fees decreased by $42,000 to ~~compliance and cybersecurity initiatives.~~$823,000.

·●

~~Merger related~~Deposit insurance expenses ~~increased~~decreased 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 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 ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, management concluded that the net deferred tax ~~asset was~~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

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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

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and investment securities classified as available for sale) represented ~~11.6%~~15.7% of total assets at ~~September~~June 30, ~~2017 which was a decrease~~2020 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 ~~September~~June 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 ~~September~~June 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 ~~September~~June 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 ~~September~~June 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 ~~September~~June 30, ~~2017.~~2020. Time deposits of $250,000 or more represented ~~11.8%~~29.2% of the Company’s total deposits at ~~September~~June 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 ~~September~~June 30, ~~2017.~~2020.

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

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

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

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

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

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

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

Item 4. Controls and ~~Procedures~~Procedures.
Disclosure Controls and Procedures.At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule ~~13a-14.~~
13a-15.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in internal control over financial reporting.Management of the Company has evaluated, with the participation of the ~~Company's~~Company’s Chief Executive Officer and Chief Financial Officer, changes in the ~~Company's~~Company’s internal controls over financial reporting (as defined in Rule ~~13a−~~13a−15(f) and ~~15d−~~15d−15(f) of the Exchange Act) during the ~~third~~second 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 ~~third~~second quarter of ~~2017~~2020 that have materially affected or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

58
Part II. OTHER INFORMATION
Item 1. Legal ~~Proceedings~~Proceedings.
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 are~~There have been no material changes ~~from~~in the Company’s risk factors ~~set forth under Part II, Item 1A. “Risk Factors”~~from those disclosed in ~~our~~the 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 ~~quarter~~quarterly period ended ~~March~~June 30, 2020.

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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;

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●

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 ~~Proceeds~~Proceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

~~The~~On September 17, 2019, the Company announced that its Board of Directors approved a new stock repurchase ~~program on August 31, 2016, by which management was~~plan (the “2019 Repurchase Plan”). Under the 2019 Repurchase Plan, the Company is authorized to repurchase up to ~~581,518~~937,248 outstanding shares of ~~Company~~its common stock in the open market ~~and~~or through privately negotiated transactions. ~~There were no share~~

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Share repurchase ~~transactions conducted~~activity 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

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Item 6. ~~Exhibits~~Exhibits.
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

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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, 2017~~August 7, 2020
By:
/s/ William L. Hedgepeth II

William L. Hedgepeth II

President and Chief Executive Officer

Date: ~~November 9, 2017~~August 7, 2020
By:
/s/ Mark A. Jeffries

Mark A. Jeffries

Executive Vice President and Chief Financial Officer

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


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


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

Non-accelerated filer¨~~(Do not check if a smaller reporting company)~~☐	Smaller reporting company¨☒
	Emerging growth company¨☐


Large accelerated filer¨☐	Accelerated filerx☒