Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2020 December 31,
(Unaudited) 2019*
(In thousands, except share
and per share data)
ASSETS
Cash and due from banks $ 20,030 $ 19,110
Interest-earning deposits in other banks 35,544 50,920
Federal funds sold 11,673 9,047
Investment securities available for sale, at fair value 64,738 72,367
Loans held for sale 1,606 928
Loans 1,039,514 1,029,975
Allowance for loan losses (10,586 ) (8,324 )
NET LOANS 1,028,928 1,021,651
Accrued interest receivable 3,839 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 3,737 3,533
Premises and equipment, net 17,868 17,791
Right of use lease asset 8,414 8,596
Bank-owned life insurance 29,950 29,789
Goodwill 24,579 24,579
Core deposit intangible (“CDI”) 1,431 1,610
Other assets 7,380 7,202
TOTAL ASSETS $ 1,263,494 $ 1,275,076
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand $ 250,031 $ 240,305
Savings 41,815 43,128
Money market and NOW 306,051 280,145
Time 384,754 429,260
TOTAL DEPOSITS 982,651 992,838
Short-term debt 20,000 -
Long-term debt 37,372 57,372
Lease liability 8,669 8,813
Accrued interest payable 536 578
Accrued expenses and other liabilities 2,181 2,700
TOTAL LIABILITIES 1,051,409 1,062,301
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares
issued and outstanding at March 31, 2020 and December 31, 2019 - -
Common stock, $1.00 par value, 50,000,000 shares authorized;
18,055,692 and 18,330,058 shares issued and outstanding
at March 31, 2020 and December 31, 2019, respectively 18,056 18,330
Additional paid-in capital 138,788 140,870
Retained earnings 53,779 52,675
Common stock issued to deferred compensation trust, at cost; 317,756
and 319,753 shares outstanding at March 31, 2020 and December 31, 2019, respectively (2,791 ) (2,815 )
Directors’ Deferred Compensation Plan Rabbi Trust 2,791 2,815
Accumulated other comprehensive income 1,462 900
TOTAL SHAREHOLDERS’ EQUITY 212,085 212,775
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,263,494 $ 1,275,076


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

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

* Derived from audited consolidated financial statements.

See accompanying notes.

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SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


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

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

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

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

Three Months Ended
March 31,
2020 2019
(In thousands, except share
and per share data)
INTEREST INCOME
Loans $ 13,589 $ 13,042
Federal funds sold and interest-earning deposits in other banks 168 543
Investments 421 465
TOTAL INTEREST INCOME 14,178 14,050
INTEREST EXPENSE
Money market, NOW and savings deposits 348 356
Time deposits 1,931 1,753
Short-term debt 87 26
Long-term debt 352 458
TOTAL INTEREST EXPENSE 2,718 2,593
NET INTEREST INCOME 11,460 11,457
PROVISION FOR LOAN LOSSES 2,273 112
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,187 11,345
NON-INTEREST INCOME
Fees on the sale of mortgages 293 157
Service charges on deposit accounts 338 266
Other fees and income 813 774
TOTAL NON-INTEREST INCOME 1,444 1,197
NON-INTEREST EXPENSE
Personnel 5,632 4,971
Occupancy and equipment 931 727
Deposit insurance (12 ) 105
Professional fees 372 382
CDI amortization 179 219
Merger/acquisition related expenses 39 -
Information systems 1,038 789
Foreclosure-related expenses 5 30
Other 1,063 1,081
TOTAL NON-INTEREST EXPENSE 9,247 8,304
INCOME BEFORE INCOME TAX 1,384 4,238
INCOME TAXES 280 931
NET INCOME $ 1,104 $ 3,307
NET INCOME PER COMMON SHARE
Basic $ 0.06 $ 0.17
Diluted $ 0.06 $ 0.17
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 18,255,351 19,315,686
Diluted 18,287,064 19,365,354

See accompanying notes.

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SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended
March 31,
2020 2019
(In thousands)
Net income $ 1,104 $ 3,307
Other comprehensive income:
Unrealized gain on investment securities available for sale 731 467
Tax effect (169 ) (107 )
562 360

Total comprehensive income $ 1,666 $ 3,667


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

		(In thousands)

Net income	$	2,457	$	3,239	$	4,242	$	9,994

Other comprehensive income (loss):
Unrealized gains (loss) on investment securities-available for sale		(161)		196		822		1,454
Tax effect		38		(48)		(189)		(334)
Total		(123)		148		633		1,120
Reclassification adjustment for (gains) included in net income		—		(48)		—		(48)
Tax effect		—		11		—		11
		—		(37)		—		(37)

Total		(123)		111		633		1,083

Total comprehensive income	$	2,334	$	3,350	$	4,875	$	11,077

See accompanying notes.

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SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Preferred Stock Common Stock Additional paid-in
Capital Retained
Earnings Common Stock Issued to Deferred Compensation
Trust Deferred Comp Plan Accumulated Other Comprehensive Income Total Shareholders
Equity

Shares Amount Shares Amount
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

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


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

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


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

See accompanying notes.

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SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended
March 31,
2020 2019
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,104 $ 3,307
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses 2,273 112
Depreciation and amortization of premises and equipment 422 622
Amortization and accretion of investment securities 171 142
Amortization of right of use lease asset 308 -
Amortization of deferred loan fees and costs (243 ) (217 )
Amortization of core deposit intangible 179 219
Stock-based compensation 105 59
Accretion on acquired loans (105 ) (200 )
Increase in cash surrender value of bank-owned life insurance (161 ) (165 )
Proceeds from loans held for sale 10,865 6,667
Originations of loans held for sale (11,250 ) (6,284 )
Gain on sales of loans held for sale (293 ) (157 )
Net loss on sale and write-downs of foreclosed real estate - 3
Amortization of deposit premium (7 ) -
Change in assets and liabilities:
Net change in accrued interest receivable 350 (231 )
Net change in other assets (346 ) (2,016 )
Net change in accrued expenses and other liabilities (561 ) 481

NET CASH PROVIDED BY OPERATING ACTIVITIES 2,811 2,342

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock (14 ) (59 )
Redemption of non-marketable security 1 24
Purchase of investment securities available for sale - (37,948 )
Maturities of investment securities available for sale 3,500 -
Mortgage-backed securities pay-downs 4,688 3,079
Net change in loans outstanding (9,406 ) (5,641 )
Proceeds from sale of foreclosed real estate - 65
Net purchases of premises and equipment (499 ) (417 )

NET CASH (USED IN) INVESTING ACTIVITIES (1,730 ) (40,897 )


	Nine Months Ended
	September 30,
	2020		2019

		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,242	$	9,994
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,844		136
Depreciation and amortization of premises and equipment		1,335		1,337
Amortization and accretion of investment securities		436		543
Amortization of right of use asset		941		810
Accretion of deferred loan fees and costs		(688)		(590)
Amortization of core deposit intangible		553		632
Accretion of acquisition premium on time deposits		(206)		(7)
Deferred income taxes		283		0
Stock-based compensation		265		178
Accretion on acquired loans		(1,075)		(679)
Increase in cash surrender value of bank owned life insurance		(482)		(504)
Proceeds from loans held for sale		43,904		25,388
Originations of loans held for sale		(44,756)		(25,917)
Gain on sales of loans held for sale		(1,165)		0
Net loss on sale and write-downs of foreclosed real estate		390		12
Fees on sale of mortgages		0		(605)
Gain on the sale of securities		0		(48)
Loss (gain) on sale of premises and equipment		0		8
Loss on assets held for sale		0		8
Change in assets and liabilities:
Net change in accrued interest receivable		41		(13)
Net change in other assets		(6,312)		(1,656)
Net change in accrued expenses and other liabilities		15,887		(408)
NET CASH PROVIDED BY OPERATING ACTIVITIES		19,437		8,619

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption (purchase) of FHLB stock		(14)		238
Redemption of non-marketable security		1		43
Purchase of investment securities available for sale		(39,794)		(37,948)
Maturities of investment securities available for sale		10,511		2,883
Cash received from branch acquisition		60,234		24,093
Mortgage-backed securities pay-downs		14,602		9,367
Proceeds from sale of investment securities available for sale		0		1,125
Net change in loans outstanding		(149,341)		(28,837)
Proceeds from sale of foreclosed real estate		180		103
Proceeds from sale of premises and equipment		0		660
Purchases of premises and equipment		(1,531)		(1,167)

NET CASH USED IN INVESTING ACTIVITIES		(105,152)		(29,440)

See accompanying notes.

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SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

Three Months Ended
March 31,
2020 2019
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ (10,180 ) $ (29,461 )
Repurchase of stock (2,468 ) -
Repayments of lease liability (270 ) (171 )
Proceeds from stock option exercises 7 114

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (12,911 ) (29,518 )

NET CHANGE IN CASH AND CASH EQUIVALENTS (11,830 ) (68,073 )

CASH AND CASH EQUIVALENTS, BEGINNING 79,077 139,362

CASH AND CASH EQUIVALENTS, ENDING $ 67,247 $ 71,289

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,760 $ 2,741
Taxes - -

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax 562 360
Transfers from loans to foreclosed real estate 204 26


	Nine Months Ended
	September 30,
	2020		2019

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	294,665	$	(17,786)
Repayments of short-term debt		0		(7,000)
Repayment of lease liability		(825)		(565)
Repurchase of common stock		(4,556)		(8,931)
Proceeds from stock options exercised		7		114

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES		289,291		(34,168)

NET CHANGE IN CASH AND CASH EQUIVALENTS		203,578		(54,989)

CASH AND CASH EQUIVALENTS, BEGINNING		79,077		139,362

CASH AND CASH EQUIVALENTS, ENDING	$	282,655	$	84,373

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	8,207	$	8,679
Income taxes paid		3,202		2,496

Non-cash transactions:
Change in fair value of investment securities available for sale, net of tax		633		1,120
Transfer from loans to foreclosed real estate		274		469

Acquisition:
Assets acquired (excluding goodwill)		170,914		0
Liabilities assumed		186,416		0
Goodwill recorded		17,335		0

See accompanying notes.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. On July 25, 2014, the Company changed its name from New Century Bancorp, Inc. to Select Bancorp, Inc. following its acquisition by merger of Select Bancorp, Inc., Greenville, North Carolina (which we refer to herein as “Legacy Select”). The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the North Carolina Commissioner of Banks.

The Bank was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. On July 25, 2014, the Company acquired Select Bank & Trust Company, Greenville, North Carolina, and changed the Bank’s legal name to Select Bank & Trust Company. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its subsidiary Carolina Premier Bank (“Carolina Premier”) through the merger of Premara with and into the Company, followed immediately by the merger of Carolina Premier with and into the Bank. The Bank continues as the only banking subsidiary of the Company with its headquarters and operations center located in Dunn, North Carolina. The Bank is engaged in general commercial and retail banking in ~~central and eastern North Carolina, as well as in Charlotte,~~the State of North Carolina, northwest South Carolina, and the Virginia Beach-Norfolk-Newport News, VA-NC, metropolitan statistical area. The Bank is subject to the supervision and regulation of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks.

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine months ended ~~March 31,~~September 30, 2020 and 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 months ended ~~March 31,~~September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 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 ~~March 31,~~September 30, 2020 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

~~COVID-19.~~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~~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 ~~Payroll~~Paycheck Protection Program, deferrals on loan payments on existing loans and a reduced interest rate program available

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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.

~~SELECT BANCORP, INC.~~

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

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 ~~March 31,~~September 30, 2020 and 2019 there were ~~219,120~~243,120 and ~~168,120~~172,120 anti-dilutive stock options outstanding, respectively.

Three Months Ended
March 31,
2020 2019
Weighted average shares used for basic net income per share 18,255,351 19,315,686
Effect of dilutive stock options 31,713 49,668
Weighted average shares used for diluted net income per share 18,287,064 19,365,354


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

Weighted average number of common shares used in computing basic net income per share	17,847,913	19,028,572	18,038,345	19,219,820

Effect of dilutive stock options	18,909	44,663	23,825	46,660

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	17,866,822	19,073,235	18,062,170	19,266,480

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

In 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”~~("CECL") model to estimate its lifetime ~~“expected~~"expected credit ~~loss”~~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~~standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to delay implementation of CECL until January 2023 for certain companies, including smaller reporting companies (as defined by the SEC). The Company currently qualifies as a smaller reporting company and is still assessing the impact that this new guidance will have on its consolidated financial statements.

In August 2018, the FASB amended ASU 2018-13- Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurementtopic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement,Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019.~~2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures

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Notes to Consolidated Financial Statements (Unaudited)

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

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

~~SELECT BANCORP, INC.~~

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

In March 2020, the FASB issued Accounting Standards Update ~~(“ASU”~~("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~~contract's reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements. An entity will also be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform. The guidance will only apply to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

This ASU is effective for March 12, 2020 through December 31, 2022. The Company is still assessing this ASU but is not expecting it to have an impact to the consolidated financial position.

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

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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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:

~~SELECT BANCORP, INC.~~

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

·●

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

·●

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

·●

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

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

Investment Securities Available-for-Sale(“AFS”)

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government 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 months ended ~~March 31,~~September 30, 2020. Valuation techniques are consistent with techniques used in prior periods.

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Notes to Consolidated Financial Statements (Unaudited)

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

Quoted Prices in Significant
Investment securities Active Markets Other Significant
available for sale for Identical Observable Unobservable
March 31, 2020 Fair value Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
U.S. government agencies- GSE’s $ 9,272 $ - $ 9,272 $ -
Mortgage-backed securities-GSE’s 44,482 - 44,482 -
Corporate bonds 2,214 - 2,214 -
Municipal bonds 8,770 - 8,770 -
Total investment for sale $ 64,738 $ - $ 64,738 $ -


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

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

Corporate Bonds		2,103		—		2,103		—

Municipal bonds		31,901		—		31,901		—

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


			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	$	—

~~SELECT BANCORP, INC.~~

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

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 for sale $ 72,367 $ - $ 72,367 $ -

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At ~~March 31,~~September 30, 2020 and December 31, 2019, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At ~~March 31,~~September 30, 2020, the

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Notes to Consolidated Financial Statements (Unaudited)

discounts used are weighted between 3% and 50%. There were no transfers between levels from the prior reporting periods, and there have been no changes in valuation techniques for the three and nine months ended ~~March 31,~~September 30, 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, 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 ~~March 31,~~September 30, 2020, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three and nine months ended ~~March 31,~~September 30, 2020.

~~SELECT BANCORP, INC.~~

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

Loans held for sale

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

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations as a component of mortgage banking income. Gains or losses on sales of loans are recognized when control over these assets are surrendered and are included in mortgage banking income in the consolidated statements of income.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of ~~March 31,~~September 30, 2020 and December 31, 2019 (in thousands):


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Asset Category September 30, 2020	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Impaired loans	$	7,695	$	—	$	—	$	7,695
Foreclosed real estate		3,237		—		—		3,237
Total	$	10,932	$	—	$	—	$	10,932

			Quoted Prices in		Significant
			Active Markets		Other		Significant
Asset Category			for Identical		Observable		Unobservable
March 31, 2020	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	$	7,201	$	-	$	-	$	7,201	$	5,941	$	—	$	—	$	5,941
Foreclosed real estate		3,737		-		-		3,727		3,533		—		—		3,533

Total	$	10,938	$	-	$	-	$	10,938	$	9,474	$	—	$	—	$	9,474

Quoted Prices in Significant
Active Markets Other Significant
Asset Category for Identical Observable Unobservable
December 31, 2019 Fair value Assets (Level 1) Inputs (Level 2) Inputs (Level 3)
Impaired loans $ 5,941 $ - $ - $ 5,941
Foreclosed real estate 3,533 - - 3,533
Total $ 9,474 $ - $ - $ 9,474

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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 ~~March 31,~~September 30, 2020 and December 31, 2019:


											September 30, 2020
											Carrying		Estimated
											Amount		Fair Value		Level 1		Level 2		Level 3
	March 31, 2020
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
											(dollars in thousands)
Financial assets:
Cash and due from banks	$	20,030	$	20,030	$	20,030	$	-	$	-	$	25,068	$	25,068	$	25,068	$	—	$	—
Interest-earning deposits in other banks		35,544		35,544		35,544		-		-		249,541		249,541		249,541		—		—
Federal funds sold		11,673		11,673		11,673		-		-		8,046		8,046		8,046		—		—
Investment securities available for sale		64,738		64,738		-		64,738		-		87,434		87,434		—		87,434		—
Loans held for sale		1,606		1,606				1,606		-		2,945		2,945		—		2,945		—
Loans, net		1,028,928		1,009,919		-		-		1,009,919		1,269,896		1,279,096		—		—		1,279,096
Accrued interest receivable		3,839		3,839		-		3,839		-		4,486		4,486		—		4,486		—
Stock in FHLB		3,059		3,059		-		-		3,059
Stock in the FHLB												3,059		3,059		—		—		3,059
Other non-marketable securities		718		718		-		-		718		718		718		—		—		718


Financial liabilities:
Deposits	$	982,651	$	985,248	$	-	$	985,248	$	-	$	1,472,780	$	1,476,441	$	—	$	—	$	1,476,441
Short-term debt		20,000		20,000		-		20,000		-		20,000		20,000		—		20,000		—
Long-term debt		37,372		35,291		-		35,291		-		37,372		34,163		—		34,163		—
Accrued interest payable		536		536		-		536		-		449		449		—		449		—


												December 31, 2019
												Carrying		Estimated
												Amount		Fair Value		Level 1		Level 2		Level 3
	December 31, 2019
	Carrying			Estimated
	Amount			Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
												(dollars in thousands)
Financial assets:
Cash and due from banks	$	19,110	��	$	19,110	$	19,110	$	-	$	-	$	19,110	$	19,110	$	19,110	$	—	$	—
Interest-earning deposits in other banks		50,920			50,920		50,920		-		-		50,920		50,920		50,920		—		—
Federal funds sold		9,047			9,047		9,047		-		-		9,047		9,047		9,047		—		—
Investment securities available for sale		72,367			72,367		-		72,367		-		72,367		72,367		—		72,367		—
Loans held for sale		928			928		-		928		-		928		928		—		928		—
Loans, net		1,021,651			1,016,239		-		-		1,016,239		1,021,651		1,016,239		—		—		1,016,239
Accrued interest receivable		4,189			4,189		-		4,189		-		4,189		4,189		—		4,189		—
Stock in the FHLB		3,045			3,045		-		-		3,045		3,045		3,045		—		—		3,045
Other non-marketable securities		719			719		-		-		719		719		719		—		—		719


Financial liabilities:
Deposits	$	992,838		$	995,056	$	-	$	995,056	$	-	$	992,838	$	995,056	$	—	$	995,056	$	—
Long-term debt		57,372			55,429		-		55,429		-		57,372		55,729		—		55,729		—
Accrued interest payable		578			578		-		578		-		578		578		—		578		—

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Notes to Consolidated Financial Statements (Unaudited)

NOTE E - INVESTMENT SECURITIES

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


										September 30, 2020
												Gross		Gross
										Amortized		unrealized		unrealized		Fair
										cost		gains		losses		value
	March 31, 2020
			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	$	9,038	$	236	$	(2	)	$	9,272	$	11,508	$	276	$	(24)	$	11,760
Mortgage-backed securities – GSE’s		42,987		1,506		(11	)		44,482		40,195		1,528		(53)		41,670
Corporate bonds		2,193		21		-			2,214		2,101		7		(5)		2,103
Municipal bonds		8,621		149		-			8,770		31,639		333		(71)		31,901
	$	62,839	$	1,912	$	(13	)	$	64,738

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

As of ~~March 31,~~September 30, 2020, accumulated other comprehensive income included net unrealized gains totaling ~~$1.9~~$2.0 million. Deferred tax assets resulting from these net unrealized losses totaled ~~$437,000.~~

$458,000.

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


										December 31, 2019
												Gross		Gross
										Amortized		unrealized		unrealized		Fair
										cost		gains		losses		value
	December 31, 2019
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
										(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	9,839	$	159	$	(2	)	$	9,996	$	9,839	$	159	$	(2)	$	9,996
Mortgage-backed securities – GSE’s		46,926		830		(13	)		47,743		46,926		830		(13)		47,743
Corporate bonds		2,282		17		-			2,299		2,282		17		—		2,299
Municipal bonds		12,152		177		-			12,329		12,152		177		—		12,329
	$	71,199	$	1,183	$	(15	)	$	72,367

										$	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 $269,000.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follow:

March 31, 2020
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(dollars in thousands)
Securities available for sale:
Within 1 year $ 9,208 $ 13 $ (6 ) $ 9,215
After 1 year but within 5 years 34,108 1,299 (6 ) 35,401
After 5 years but within 10 years 6,457 129 (1 ) 6,585
After 10 years 13,066 471 - 13,537
$ 62,839 $ 1,912 $ (13 ) $ 64,738


	September 30, 2020
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value

	(dollars in thousands)
Securities available for sale:
Due within one year	$	2,757	$	8	$	(1)	$	2,764
Due after one but within five years		26,947		1,268		(1)		28,214
Due after five but within ten years		5,565		81		(7)		5,639
Due after ten years		50,174		787		(144)		50,817
	$	85,443	$	2,144	$	(153)	$	87,434

December 31, 2019
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(dollars in thousands)
Securities available for sale:
Within 1 year $ 8,901 $ 19 $ (6 ) $ 8,914
After 1 year but within 5 years 40,954 695 (7 ) 41,642
After 5 years but within 10 years 4,568 94 (1 ) 4,661
After 10 years 16,776 375 (1 ) 17,150
$ 71,199 $ 1,183 $ (15 ) $ 72,367


	December 31, 2019
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value

	(dollars in thousands)
Securities available for sale:
Due within one year	$	8,901	$	19	$	(6)	$	8,914
Due after one but within five years		40,954		695		(7)		41,642
Due after five but within ten years		4,568		94		(1)		4,661
Due after ten years		16,776		375		(1)		17,150
	$	71,199	$	1,183	$	(15)	$	72,367

Securities with a carrying value of ~~$21.6~~$48.1 million and $18.4 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

None of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations. The Company has the intent and ability to hold these securities to recovery. No other than temporary impairments were identified for these investments having unrealized losses for the periods ended ~~March 31,~~September 30, 2020 and December 31, 2019. The Company has not incurred any losses related to securities sales in the first ~~three~~nine months of 2020 or during the year ended December 31, 2019.

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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 ~~March 31,~~September 30, 2020 and December 31, 2019.


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

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

March 31, 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- GSEs $ - $ - $ 565 $ (2 ) $ 565 $ (2 )
Mortgage-backed securities- GSEs 1,591 (6 ) 1,997 (5 ) 3,588 (11 )
Municipal bonds - - - - - -
Total temporarily impaired securities $ 1,591 $ (6 ) $ 2,562 $ (7 ) $ 4,153 $ (13 )

At ~~March 31,~~September 30, 2020, the Company had ~~three~~3 securities with an unrealized loss for more than twelve months of ~~$7,000~~$4,000 which consisted of ~~two~~2 U.S. government agencies-GSEs and ~~one~~1 mortgage-backed - GSE bond. ~~Two mortgage-backed GSEs~~NaN securities had unrealized losses for less than twelve months totaling ~~$6,000~~$149,000 at ~~March 31, 2020.~~September 30, 2020, which consisted of 9 Municipal bonds, 1 corporate bond, 1 U.S. government agencies - GSEs and 4 mortgage-backed - GSE bonds. All unrealized losses are attributable to the general trend of interest rates.


																December 31, 2019
																Less Than 12 Months				12 Months or More				Total
																Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
																value		losses		value		losses		value		losses
	December 31, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		losses			value		losses			value		losses
	(dollars in thousands)
																(dollars in thousands)
Securities available for sale:
U.S. government agencies- GSE’s	$	872	$	-		$	621	$	(2	)	$	1,493	$	(2	)
Mortgage-backed securities- GSE’s		2,672		(3	)		3,774		(10	)		6,446		(13	)
U.S. government agencies – GSE’s																$	872	$	—	$	621	$	(2)	$	1,493	$	(2)
Mortgage-backed securities–GSE’s																	2,672		(3)		3,774		(10)		6,446		(13)
Corporate bonds		-		-			-		-			-		-			—		—		—		—		—		—
Municipal bonds		-		-			-		-			-		-			—		—		—		—		—		—
Total temporarily impaired securities	$	3,544	$	(3	)	$	4,395	$	(12	)	$	7,939	$	(15	)	$	3,544	$	(3)	$	4,395	$	(12)	$	7,939	$	(15)

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

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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 ~~March 31,~~September 30, 2020 and December 31, 2019:


														September 30,					December 31,
														2020					2019
																Percent					Percent
														Amount		of total			Amount			of total
	March 31,							December 31,
Total Loans:	2020							2019
				Percent							Percent
	Amount			of total				Amount			of total
	(dollars in thousands)
														(dollars in thousands)
Real estate loans:
1-to-4 family residential	$	153,923			14.81	%		$	151,697			14.73	%	$	195,174		15.21	%	$	151,697		14.73	%
Commercial real estate		464,326			44.67	%			459,115			44.58	%		537,087		41.85	%		459,115		44.58	%
Multi-family residential		70,731			6.80	%			69,124			6.71	%		79,697		6.21	%		69,124		6.71	%
Construction		228,646			21.99	%			221,878			21.55	%		255,718		19.92	%		221,878		21.55	%
Home equity lines of credit (“HELOC”)		43,816			4.22	%			44,514			4.32	%		48,395		3.77	%		44,514		4.32	%

Total real estate loans		961,442			92.49	%			946,328			91.89	%		1,116,071		86.96	%		946,328		91.89	%


Other loans:
Commercial and industrial		72,227			6.95	%			75,748			7.35	%		165,766		12.91	%		75,748		7.35	%
Loans to individuals		7,767			0.75	%			9,779			0.95	%		7,017		0.55	%		9,779		0.95	%
Overdrafts		242			0.02	%			234			0.02	%		80		0.01	%		234		0.02	%
Total other loans		80,236			7.72	%			85,761			8.32	%		172,863		13.47	%		85,761		8.32	%


Gross loans		1,041,678					��		1,032,089						1,288,934					1,032,089
Less deferred loan origination fees, net		(2,164	)		(0.21	)%			(2,114	)		(0.21	)%		(5,477)		(0.43)	%		(2,114)		(0.21)	%
Total loans		1,039,514			100.00	%			1,029,975			100.00	%		1,283,457		100.00	%		1,029,975		100.00	%
Allowance for loan losses		(10,586	)						(8,324	)					(13,561)					(8,324)
Total loans, net	$	1,028,928						$	1,021,651					$	1,269,896				$	1,021,651

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

(dollars in thousands)	March 31, 2020		December 31, 2019

					September 30, 2020		December 31, 2019
Contractually required payments	$	18,983	$	20,598	$	38,279	$	20,598
Nonaccretable difference		1,574		1,694		3,401		1,694
Cash flows expected to be collected		17,409		18,904		34,878		18,904
Accretable yield		2,986		3,191		4,891		3,191
Carrying value	$	14,423	$	15,713	$	29,987	$	15,713

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

~~SELECT BANCORP, INC.~~

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

At ~~March 31,~~September 30, 2020, the Company had pre-approved but unused lines of credit for customers totaling ~~$174.2~~$230.2 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The Bank has originated 1,249 loans amounting to $97.0 million during 2020 under the Paycheck Protection Program (“PPP”) which are classified as Commercial and industrial loans in the loan portfolio. As of September 30, 2020 the Bank has 1,242 PPP loans amounting to $95.3 million. The PPP loan program is sponsored by the Small Business Administration (SBA) to primarily facilitate the continuation of paychecks to employees of businesses impacted by the COVID-19 pandemic. These loans are guaranteed by the SBA and can be forgiven and paid off by the SBA if all conditions of the program are met. Loans that do not meet the conditions of the PPP loan program could result in the Bank incurring a charge-off. The extent of this potential loss to the Bank is not known since the conditions of the program have changed and are subject to future changes.

A floating lien of ~~$108.6~~$112.6 million of loans was pledged to the FHLB to secure borrowings at ~~March 31,~~September 30, 2020.

The following tables present an age analysis of past due loans, segregated by class of loans as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively:


																September 30, 2020
																30-59		60-89		90+		Non-		Total
																Days		Days		Days		Accrual		Past		Total
																Past Due		Past Due		Accruing		Loans		Due		Current		Loans
	March 31, 2020
	30-59		60-89		90+		Non-		Total
	Days		Days		Days		Accrual		Past				Total
	Past Due		Past Due		Accruing		Loans		Due		Current		Loans
					(dollars in thousands)
																(dollars in thousands)
Commercial and industrial	$	58	$	977	$	46	$	3,746	$	4,827	$	67,400	$	72,227		$	2	$	105	$	543	$	3,687	$	4,337	$	161,429	$	165,766
Construction		-		-		-		177		177		228,469		228,646			0		0		0		161		161		255,557		255,718
Multi-family residential		-		-		-		-		-		70,731		70,731			0		0		0		0		—		79,697		79,697
Commercial real estate		2,321		5		323		1,766		4,415		459,911		464,326			210		0		336		2,489		3,035		534,052		537,087
Loans to individuals & overdrafts		4		-		-		148		152		7,857		8,009			9		0		0		145		154		6,943		7,097
1-to-4 family residential		883		34		813		922		2,652		151,271		153,923
1‑to‑4 family residential																	200		13		669		950		1,832		193,342		195,174
HELOC		170		-		-		442		612		43,204		43,816			95		31		0		263		389		48,006		48,395
Deferred loan (fees) cost, net		-		-		-		-		-		-		(2,164	)		0		0		0		0		—		0		(5,477)
	$	3,436	$	1,016	$	1,182	$	7,201	$	12,835	$	1,028,843	$	1,039,514

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


																December 31, 2019
																30-59		60-89		90+		Non-		Total
																Days		Days		Days		Accrual		Past				Total
																Past Due		Past Due		Accruing		Loans		Due		Current		Loans
	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
																(dollars in thousands)

Commercial and industrial	$	1,108	$	34	$	46	$	2,824	$	4,012	$	71,736	$	75,748		$	1,108	$	34	$	46	$	2,824	$	4,012	$	71,736	$	75,748
Construction		-		-		-		181		181		221,697		221,878			0		0		0		181		181		221,697		221,878
Multi-family residential		-		-		-		-		-		69,124		69,124			0		0		0		0		0		69,124		69,124
Commercial real estate		393		82		321		1,832		2,628		456,487		459,115			393		82		321		1,832		2,628		456,487		459,115
Loans to individuals & overdrafts		5		-		-		155		160		9,853		10,013			5		0		0		155		160		9,853		10,013
1-to-4 family residential		859		810		864		505		3,038		148,659		151,697
1‑to‑4 family residential																	859		810		864		505		3,038		148,659		151,697
HELOC		168		-		-		444		612		43,902		44,514			168		0		0		444		612		43,902		44,514
Deferred loan (fees) cost, net		-		-		-		-		-		-		(2,114	)		0		0		0		0		0		0		(2,114)
	$	2,533	$	926	$	1,231	$	5,941	$	10,631	$	1,021,458	$	1,029,975

																$	2,533	$	926	$	1,231	$	5,941	$	10,631	$	1,021,458	$	1,029,975

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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 ~~March 31,~~September 30, 2020 and December 31, 2019:


											As of September 30, 2020						Three Months Ended				Nine Months Ended
													Contractual				September 30, 2020				September 30, 2020
													Unpaid		Related		Average		Interest Income		Average		Interest Income
											Recorded		Principal		Allowance		Recorded		Recognized on		Recorded		Recognized on
											Investment		Balance		for Loan Losses		Investment		Impaired Loans		Investment		Impaired Loans
							Three months ended
	As of March 31, 2020						March 31, 2020
			Contractual
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(dollars in thousands)
											(dollars in thousands)
2020 :
With no related allowance recorded:
Commercial and industrial	$	2,688	$	4,181	$	-	$	3,684	$	44	$	3,635	$	5,466	$	—	$	4,818	$	25	$	4,475	$	152
Construction		436		535		-		438		5		262		366		—		345		6		291		17
Commercial real estate		4,925		5,744		-		5,504		65		5,175		5,448		—		5,265		38		5,661		127
Loans to individuals & overdrafts												261		279		—		271		—		273		14
Multi-family residential		-		-		-		269		11		—		—		—		—		—		99		—
Loans to individuals		255		270		-		99		-
HELOC		750		953		-		734		12		411		553		—		453		2		575		22
1-to-4 family residential		360		1,792		-		1,735		12
1‑to‑4 family residential												197		207		—		202		22		292		—

Subtotal:		9,414		13,475		-		12,463		149		9,941		12,319		—		11,354		93		11,666		332
With an allowance recorded:
Commercial and industrial		1,128		1,133		601		1,037		-		502		521		162		576		19		576		18
Construction												—		—		—		—		—		—		—
Commercial real estate		140		140		96		70		-		977		1,032		325		986		15		208		46
Loans to individuals & overdrafts												—		—		—		—		—		—		—
Multi-family Residential												—		—		—		—		—		—		—
HELOC		-		-		-		-		-		119		150		9		122		5		264		6
1-to-4 family residential		71		70		5		71		10
1‑to‑4 family residential												39		107		10		103		—		64		6
Subtotal:		1,339		1,343		702		1,178		10		1,637		1,810		506		1,787		39		1,112		76
Totals:
Commercial		9,317		11,733		697		10,832		114		10,551		12,833		487		11,990		103		11,310		360
Consumer		255		270		-		269		11		261		279		—		271		—		273		14
Residential		1,181		2,815		5		2,540		34		766		1,017		19		880		29		1,195		34

Grand Total:	$	10,753	$	14,818	$	702	$	13,641	$	159	$	11,578	$	14,129	$	506	$	13,141	$	132	$	12,778	$	408

Impaired loans at ~~March 31,~~September 30, 2020 were approximately ~~$10.8~~$11.6 million and were composed of ~~$7.2~~$7.7 million in non-accrual loans and ~~$3.6~~ $3.9million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately ~~$1.3~~$1.6 million in impaired loans had specific allowances provided for them while the

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

remaining ~~$9.4~~$9.9 million had no specific allowances recorded at ~~March 31,~~September 30, 2020. Of the ~~$9.4~~$9.9 million with no allowance recorded, ~~$373,000~~$307,000 of those loans have had partial charge-offs recorded.


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

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

~~SELECT BANCORP, INC.~~

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

Three months ended
As of December 31, 2019 March 31, 2019
Contractual
Unpaid Related Average Interest Income
Recorded Principal Allowance Recorded Recognized on
Investment Balance for Loan Losses Investment Impaired Loans
(dollars in thousands)
With no related allowance recorded:
Commercial and industrial $ 2,796 $ 4,051 $ - $ 3,853 $ 4
Construction 440 537 - 552 5
Commercial real estate 5,585 6,750 - 5,843 66
Multi-family residential 197 197 - 213 3
Loans to individuals & overdrafts 284 293 - 109 -
HELOC 543 678 - 957 15
1-to-4 family residential 395 1,816 - 990 16
Subtotal: 10,240 14,322 - 12,517 109
With an allowance recorded:
Commercial and industrial 731 1,056 403 232 6
Construction - - - - -
HELOC 160 222 - - -
1-to-4 family residential 81 94 10 134 7
Subtotal: 972 1,307 413 366 13
Totals:
Commercial 9,749 12,591 403 10,693 84
Consumer 284 293 - 109 -
Residential 1,179 2,810 10 2,081 38
Grand Total: $ 11,212 $ 15,694 $ 413 $ 12,883 $ 122

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

$438,000.

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

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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 ~~first quarter of~~three and nine months ended September 30, 2020 and 2019:


													Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
														Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
													Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
													of	Recorded		Recorded		of	Recorded		Recorded
													loans	Investments		Investments		loans	Investments		Investments
	Three months ended March 31, 2020						Three months ended March 31, 2019
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
					(dollars in thousands)
													(dollars in thousands)					(dollars in thousands)
Extended payment terms:
Commercial and industrial		5	$	2,455	$	2,360		4	$	1,365	$	1,275
Commercial real estate		-		-		-		3		1,283		1,015
1-to-4 family residential		2		209		184		2		432		409	2	$	339	$	325	6	$	797	$	537
Construction		1		259		259		-		-		-	—		—		—	1		157		13
HELOC		1		50		50		-		-		-	—		—		—	2		240		232
Commercial & industrial													2		146		139	4		1,091		1,083
Loans to individuals		-		-		-		1		1		1	—		—		—	1		14		9

Total		9	$	2,973	$	2,853		10	$	3,081	$	2,700	4	$	485	$	464	14	$	2,299	$	1,874


	Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
	of	Recorded		Recorded		of	Recorded		Recorded
	loans	Investments		Investments		loans	Investments		Investments

	(dollars in thousands)					(dollars in thousands)
Extended payment terms:
Commercial and industrial	1	$	103	$	71	4	$	931	$	899
Commercial real estate	—		—		—	1		752		702
Construction	1		259		259	1		259		259
1‑to‑4 family residential	1		174		173	3		233		211

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

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 ~~March 31,~~September 30, 2020 and 2019:


									Twelve months ended			Twelve months ended
									September 30, 2020			September 30, 2019
									Number	Recorded		Number	Recorded
									of loans	investment		of loans	investment
	Twelve months ended				Twelve months ended
	March 31, 2020				March 31, 2019
	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		3	$	2,209		8	$	1,591	4	$	2,203	—	$	—
Construction		-		-		1		34	2		208	—		—
Commercial real estate		-		-		3		697
Loans to Individuals		-		-		1		1
1-to-4 family residential		-		-		4		128	1		10	1		16
Total		3	$	2,209		17	$	2,451	7	$	2,421	1	$	16

At ~~March 31,~~September 30, 2020, the Bank had ~~forty-three~~NaN loans with an aggregate balance of ~~$9.3~~$10.3 million that were considered to be troubled debt restructurings. Of those TDRs, ~~twenty-eight~~NaN loans with a balance totaling ~~$3.6~~$3.9 million were still accruing as of ~~March 31,~~September 30, 2020. The remaining TDRs with balances totaling ~~$5.7~~$6.4 million as of ~~March 31,~~September 30, 2020 were in non-accrual status. In response to the impact of ~~COVID – 19~~COVID-19, payment deferrals were granted on ~~290~~497 loans totaling ~~$167.3~~ $252.3

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

million through ~~May 5,~~September 30, 2020 of which 114 loans amounting to $65.6 million remained on deferral at quarter end. The Bank has chosen to apply the CARES Act election for the accounting of TDRs. As permitted by applicable regulatory guidance, these loans were not classified as TDRs at September 30, 2020.

At ~~March 31,~~September 30, 2019, the Bank had ~~thirty-nine~~NaN loans with an aggregate balance of ~~$7.7~~$8.2 million that were considered to be troubled debt restructurings. Of those TDRs, ~~twenty-two~~NaN loans with a balance totaling ~~$5.2~~$6.5 million were still accruing as of ~~March 31,~~September 30, 2019. The remaining TDRs with balances totaling ~~$2.5~~$1.7 million as of ~~March 31,~~September 30, 2019 were in non-accrual status.

~~SELECT BANCORP, INC.~~

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

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of ~~March 31,~~September 30, 2020 and December 31, 2019, respectively:

Total loans:

March 31, 2020

September 30, 2020									September 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
	(dollars in thousands)
										(dollars in thousands)

Superior	$	2,517	$	-	$	534	$	-		$	96,415	$	—	$	76	$	—
Very good		244		107		1,566		-			368		162		7,812		—
Good		5,554		8,445		59,285		6,422			5,538		2,196		67,996		4,866
Acceptable		19,928		17,821		257,167		37,544			22,173		24,718		270,857		50,771
Acceptable with care		37,540		201,837		139,746		26,765			35,331		228,132		181,384		24,060
Special mention		742		259		1,479		-			390		349		2,363		—
Substandard		5,702		177		4,549		-			5,551		161		6,599		—
Doubtful		-		-		-		-			—		—		—		—
Loss		-		-		-		-			—		—		—		—
	$	72,227	$	228,646	$	464,326	$	70,731
										$	165,766	$	255,718	$	537,087	$	79,697


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

Pass	$	150,325	$	42,703	$	191,984	$	47,300
Special mention		1,133		292		445		205
Substandard		2,465		821		2,745		890
	$	153,923	$	43,816
					$	195,174	$	48,395

Consumer Credit
Exposure Based Loans to
On Payment individuals &
Activity overdrafts
Pass $ 7,735
Special mention 274
$ 8,009

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)


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

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

Total Loans:


December 31, 2019	December 31, 2019									December 31, 2019
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
		(dollars in thousands)
											(dollars in thousands)

Superior		$	4,014	$	-	$	337	$	-		$	4,014	$	—	$	337	$	—
Very good			349		110		1,245		-			349		110		1,245		—
Good			5,976		8,674		62,643		4,839			5,976		8,674		62,643		4,839
Acceptable			19,197		16,249		255,751		41,113			19,197		16,249		255,751		41,113
Acceptable with care			40,579		196,228		133,190		23,172			40,579		196,228		133,190		23,172
Special mention			242		436		1,490		-			242		436		1,490		—
Substandard			5,391		181		4,459		-			5,391		181		4,459		—
Doubtful			-		-		-		-			—		—		—		—
Loss			-		-		-		-			—		—		—		—
		$	75,748	$	221,878	$	459,115	$	69,124
											$	75,748	$	221,878	$	459,115	$	69,124


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

Pass	$	147,958	$	43,585	$	147,958	$	43,585
Special mention		1,246		76		1,246		76
Substandard		2,493		853		2,493		853
	$	151,697	$	44,514
					$	151,697	$	44,514

Consumer Credit
Exposure Based Loans to
On Payment individuals &
Activity overdrafts
Pass $ 9,727
Special mention 286
$ 10,013

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)


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

Pass	$	9,727
Special mention		286
	$	10,013

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

The following table documents changes to the amount of the accretable yield on PCI loans for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:


							Three Months Ended				Nine Months Ended
							September 30,				September 30,
							2020		2019		2020		2019
	2020			2019
	(dollars in thousands)
							(dollars in thousands)				(dollars in thousands)

Accretable yield, beginning of period	$	3,191		$	3,593		$	5,661	$	3,481	$	3,191	$	3,593
Additions								—		—		2,949		—
Accretion		(280	)		(288	)		(487)		(277)		(1,209)		(855)
Reclassification from (to) nonaccretable difference		32			117
Reclassification from nonaccretable difference								24		45		67		293
Other changes, net		43			299			(307)		56		(107)		274
Accretable yield, end of period	$	2,986		$	3,721		$	4,891	$	3,305	$	4,891	$	3,305

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended ~~March 31,~~September 30, 2020 and ~~March 31,~~September 30, 2019, respectively (dollars in thousands):

	Three months ended March 31, 2020
	Commercial							1-to-4					Loans to			Multi-
	and					Commercial		family					individuals &			family

																						Three Months Ended September 30, 2020
																						Commercial						1 to 4				Loans to		Multi-
																						and				Commercial		family				individuals &		family
2020																						industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total
Allowance for loan losses	industrial			Construction		real estate		residential			HELOC		overdrafts			residential			Total
Loans – excluding PCI
Balance, beginning of period	$	1,127		$	1,731	$	2,837	$	1,437		$	329	$	175		$	419		$	8,055
Balance, beginning of period 07/01/2020																						$	2,623	$	2,284	$	4,184	$	1,671	$	388	$	108	$	621	$	11,879
Provision for (recovery of) loan losses		717			394		720		267			69		(20	)		127			2,274			1,568		212		325		(570)		(49)		4		84		1,574
Loans charged-off		(11	)		-		-		-			-		(16	)		-			(27	)		(98)		0		(70)		0		0		(23)		0		(191)
Recoveries		1			-		1		10			-		4			-			16			40		0		1		7		1		7		4		60
Balance, end of period	$	1,834		$	2,125	$	3,558	$	1,714		$	398	$	143		$	546		$	10,318
Balance, end of period 9/30/2020																						$	4,133	$	2,496	$	4,440	$	1,108	$	340	$	96	$	709	$	13,322

PCI Loans
Balance, beginning of period	$	178		$	6	$	14	$	56		$	-	$	-		$	15		$	269
Balance, beginning of period 07/01/2020																						$	23	$	11	$	44	$	75	$	9	$	4	$	9	$	175
Provision for (recovery of) loan losses		21			1		-		(13	)		-		-			(10	)		(1	)		(23)		(11)		(44)		164		(9)		(4)		(9)		64
Loans charged-off		-			-		-		-			-		-			-			-			0		0		0		0		0		0		0		0
Recoveries		-			-		-		-			-		-			-			-			0		0		0		0		0		0		0		0
Balance, end of period	$	199		$	7	$	14	$	43		$	-	$	-		$	5		$	268
Balance, end of period 9/30/2020																						$	0	$	0	$	0	$	239	$	0	$	0	$	0	$	239

Total Loans
Balance, beginning of period	$	1,305		$	1,737	$	2,851	$	1,493		$	329	$	175		$	434		$	8,324
Balance, beginning of period 07/01/2020																						$	2,646	$	2,295	$	4,228	$	1,746	$	397	$	112	$	630	$	12,054
Provision for (recovery of) loan losses		738			395		720		254			69		(20	)		117			2,273			1,545		201		281		(406)		(58)		0		75		1,638
Loans charged-off		(11	)		-		-		-			-		(16	)		-			(27	)		(98)		0		(70)		0		0		(23)		0		(191)
Recoveries		1			-		1		10			-		4			-			16			40		0		1		7		1		7		4		60
Balance, end of period	$	2,033		$	2,132	$	3,572	$	1,757		$	398	$	143		$	551		$	10,586
Balance, end of period 9/30/2020																						$	4,133	$	2,496	$	4,440	$	1,347	$	340	$	96	$	709	$	13,561

Ending Balance: individually evaluated for impairment	$	601		$	-	$	96	$	5		$	-	$	-		$	-		$	702		$	162	$	0	$	325	$	10	$	9	$	0	$	0	$	506
Ending Balance: collectively evaluated for impairment	$	1,432		$	2,132	$	3,476	$	1,752		$	398	$	143		$	551		$	9,884		$	3,971	$	2,496	$	4,115	$	1,337	$	331	$	96	$	709	$	13,055

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans	$	67,312		$	227,538	$	453,592	$	147,444		$	43,017	$	7,754		$	69,845		$	1,016,502		$	159,585	$	253,851	$	518,462	$	182,926	$	47,190	$	6,709	$	78,646	$	1,247,369
Ending Balance: collectively evaluated for impairment PCI loans	$	1,099		$	672	$	5,669	$	6,048		$	49	$	-		$	886		$	14,423		$	1,557	$	1,605	$	12,959	$	12,013	$	675	$	127	$	1,051	$	29,987
Ending Balance: individually evaluated for impairment	$	3,816		$	436	$	5,065	$	431		$	750	$	255		$	-		$	10,753		$	4,624	$	262	$	5,666	$	235	$	530	$	261	$	0	$	11,578
Ending Balance	$	72,227		$	228,646	$	464,326	$	153,923		$	43,816	$	8,009		$	70,731		$	1,041,678		$	165,766	$	255,718	$	537,087	$	195,174	$	48,395	$	7,097	$	79,697	$	1,288,934

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)


	Nine Months Ended September 30, 2020

	Commercial						1 to 4				Loans to		Multi-
	and				Commercial		family				individuals &		family
2020	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total
Allowance for loan losses
Loans – excluding PCI
Balance, beginning of period 01/01/2020	$	1,127	$	1,731	$	2,837	$	1,437	$	329	$	175	$	419	$	8,055
Provision for (recovery of) loan losses		3,591		765		1,670		(352)		(31)		(55)		286		5,874
Loans charged-off		(628)		0		(70)		0		0		(42)		0		(740)
Recoveries		43		0		3		23		42		18		4		133
Balance, end of period 9/30/2020	$	4,133	$	2,496	$	4,440	$	1,108	$	340	$	96	$	709	$	13,322

PCI Loans
Balance, beginning of period 01/01/2020	$	178	$	6	$	14	$	56	$	0	$	0	$	15	$	269
Provision for (recovery of) loan losses		(178)		(6)		(14)		183		0		0		(15)		(30)
Loans charged-off		0		0		0		0		0		0		0		0
Recoveries		0		0		0		0		0		0		0		0
Balance, end of period 9/30/2020	$	0	$	0	$	0	$	239	$	0	$	0	$	0	$	239

Total Loans
Balance, beginning of period 01/01/2020	$	1,305	$	1,737	$	2,851	$	1,493	$	329	$	175	$	434	$	8,324
Provision for (recovery of) loan losses		3,413		759		1,656		(169)		(31)		(55)		271		5,844
Loans charged-off		(628)		0		(70)		0		0		(42)		0		(740)
Recoveries		43		0		3		23		42		18		4		133
Balance, end of period 9/30/2020	$	4,133	$	2,496	$	4,440	$	1,347	$	340	$	96	$	709	$	13,561

Three months ended March 31, 2019
Commercial 1-to-4 Loans to Multi-
and Commercial family individuals & family
Allowance for loan losses industrial Construction real estate residential HELOC overdrafts residential Total
Loans – excluding PCI
Balance, beginning of period $ 762 $ 1,385 $ 3,024 $ 1,663 $ 555 $ 206 $ 471 $ 8,066
Provision for (recovery of) loan losses 214 186 356 (461 ) (80 ) (15 ) (63 ) 137
Loans charged-off (251 ) - - - (49 ) (19 ) - (319 )
Recoveries 5 1 15 9 13 5 - 48
Balance, end of period $ 730 $ 1,572 $ 3,395 $ 1,211 $ 439 $ 177 $ 408 $ 7,932
PCI Loans
Balance, beginning of period $ 214 $ - $ 385 $ 4 $ - $ - $ - $ 603
Provision for (recovery of) loan losses (168 ) 23 (152 ) 242 2 - 28 (25 )
Loans charged-off - - - - - - - -
Recoveries - - - - - - - -
Balance, end of period $ 46 $ 23 $ 233 $ 246 $ 2 $ - $ 28 $ 578
Total Loans
Balance, beginning of period $ 976 $ 1,385 $ 3,409 $ 1,667 $ 555 $ 206 $ 471 $ 8,669
Provision for (recovery of) loan losses 46 209 204 (219 ) (78 ) (15 ) (35 ) 112
Loans charged-off (251 ) - - - (49 ) (19 ) - (319 )
Recoveries 5 1 15 9 13 5 - 48
Balance, end of period $ 776 $ 1,595 $ 3,628 $ 1,457 $ 441 $ 177 $ 436 $ 8,510
Ending Balance: individually evaluated for impairment $ 75 $ - $ - $ 7 $ - $ - $ - $ 82
Ending Balance: collectively evaluated for impairment $ 701 $ 1,595 $ 3,628 $ 1,450 $ 441 $ 177 $ 436 $ 8,428
Loans:
Ending Balance: collectively evaluated for impairment non PCI loans $ 75,481 $ 179,872 $ 444,893 $ 148,073 $ 47,853 $ 11,313 $ 56,092 $ 963,577
Ending Balance: collectively evaluated for impairment PCI loans $ 1,481 $ 747 $ 7,587 $ 8,011 $ 50 $ - $ 927 $ 18,803
Ending Balance: individually evaluated for impairment $ 2,767 $ 543 $ 6,008 $ 648 $ 857 $ 117 $ 211 $ 11,151
Ending Balance $ 79,729 $ 181,162 $ 458,488 $ 156,732 $ 48,760 $ 11,430 $ 57,230 $ 993,531

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)


	Three Months Ended September 30, 2019
	Commercial						1 to 4				Loans to		Multi-
	and				Commercial		family				individuals &		family
2019	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total
Allowance for loan losses
Loans – excluding PCI
Balance, beginning of period 07/01/2019	$	814	$	1,487	$	2,818	$	1,543	$	432	$	309	$	383	$	7,786
Provision for (recovery of) loan losses		123		212		(44)		(111)		18		9		11		218
Loans charged-off		(48)		0		0		0		(50)		(155)		0		(253)
Recoveries		2		0		1		8		21		5		0		37
Balance, end of period 9/30/2019	$	891	$	1,699	$	2,775	$	1,440	$	421	$	168	$	394	$	7,788

PCI Loans
Balance, beginning of period 07/01/2019	$	298	$	6	$	142	$	62	$	1	$	0	$	8	$	517
Provision for (recovery of) loan losses		10		0		0		(10)		0		13		0		13
Loans charged-off		(249)		0		0		0		0		(13)		0		(262)
Recoveries		0		0		0		0		0		0		0		0
Balance, end of period 9/30/2019	$	59	$	6	$	142	$	52	$	1	$	0	$	8	$	268

Total Loans
Balance, beginning of period 07/01/2019	$	1,112	$	1,493	$	2,960	$	1,605	$	433	$	309	$	391	$	8,303
Provision for (recovery of) loan losses		133		212		(44)		(121)		18		22		11		231
Loans charged-off		(297)		0		0		0		(50)		(168)		0		(515)
Recoveries		2		0		1		8		21		5		0		37
Balance, end of period 9/30/2019	$	950	$	1,705	$	2,917	$	1,492	$	422	$	168	$	402	$	8,056

Ending Balance: individually evaluated for impairment	$	230	$	0	$	0	$	6	$	48	$	0	$	0	$	284
Ending Balance: collectively evaluated for impairment	$	720	$	1,705	$	2,917	$	1,486	$	374	$	168	$	402	$	7,772

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans	$	74,658	$	209,464	$	440,244	$	145,645	$	45,170	$	9,634	$	60,970	$	985,785
Ending Balance: collectively evaluated for impairment PCI loans	$	1,154	$	682	$	6,033	$	7,479	$	47	$	0	$	908	$	16,303
Ending Balance: individually evaluated for impairment	$	3,874	$	2,531	$	6,367	$	738	$	1,004	$	85	$	202	$	14,801

Ending Balance	$	79,686	$	212,677	$	452,644	$	153,862	$	46,221	$	9,719	$	62,080	$	1,016,889

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Nine Months Ended September 30, 2019

Commercial





1 to 4



Loans to

Multi-


and

Commercial

family

individuals &

family

2019

industrial

Construction

real estate

residential

HELOC

overdrafts

residential

Total
Allowance for loan losses

Loans – excluding PCI
















Balance, beginning of period 01/01/2019

$
762

$
1,385

$
3,024

$
1,663

$
555

$
206

$
471

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

422

296

(289)

(248)

(18)

123

(77)

209
Loans charged-off

(305)

0

(10)

0

(150)

(179)

0

(644)
Recoveries

12

18

50

25

34

18

0

157
Balance, end of period 9/30/2019

$
891

$
1,699

$
2,775

$
1,440

$
421

$
168

$
394

$
7,788

PCI Loans







Balance, beginning of period 01/01/2019

$
214

$
0

$
385

$
4

$
0

$
0

$
0

$
603
Provision for (recovery of) loan losses

94

6

(243)

48

1

13

8

(73)
Loans charged-off

(249)

0

0

0

0

(13)

0

(262)
Recoveries

0

0

0

0

0

0

0

0
Balance, end of period 9/30/2019

$
59

$
6

$
142

$
52

$
1
��
$
0

$
8

$
268

Total Loans









—
Balance, beginning of period 01/01/2019

$
976

$
1,385

$
3,409

$
1,667

$
555

$
206

$
471

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

516

302

(532)

(200)

(17)

136

(69)

136
Loans charged-off

(554)

0

(10)

0

(150)

(192)

0

(906)
Recoveries

12

18

50

25

34

18

0

157
Balance, end of period 9/30/2019

$
950

$
1,705

$
2,917

$
1,492

$
422

$
168

$
402

$
8,056

NOTE G – LOANS HELD FOR SALE

The Company originates fixed and variable rate residential mortgage loans on a service release basis in the secondary market. Loans closed but not yet settled with an investor are carried in 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.

NOTE H –BUSINESS COMBINATIONS

On December 20, 2019, the Bank entered into a Branch Purchase and Assumption Agreement (the “Purchase Agreement”) with Entegra Bank (“Entegra”), by which the Bank assumed the deposits and acquired the majority of the loans, property, equipment and other selected assets associated with 3 existing Entegra branch offices. Entegra was merged with and

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

~~NOTE H – REVENUE RECOGNITION~~

~~The table below presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2020 and 2019.~~

Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
(dollars in thousands)
Service Charges on Deposit Accounts $ 338 $ 266
Other 507 502
Noninterest Income (in-scope of Topic 606) 845 768
Noninterest Income (out-of-scope of Topic 606) 599 429
Total Non-interest Income $ 1,444 $ 1,197

~~The~~into First-Citizens Bank & Trust Company ~~does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of March 31, 2020 and~~(“First-Citizens Bank”) on December 31, 2019, and First-Citizens Bank assumed the rights and obligations of Entegra under the Purchase Agreement with the Bank.

On April 17, 2020, the Bank completed the acquisition of the 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.

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 ~~did not have any significant contract balances.~~

believes this information provides a reasonable basis for determining fair values.

The following table provides the carrying value of acquired assets and assumed liabilities, as recorded by the Company, ~~utilizes~~ the ~~practical expedient which allows entities~~fair value adjustments calculated at the time of the merger and the resulting fair value recorded by the Company.


	April 17, 2020
	As recorded by		Fair Value		As recorded by
	First Citizens		adjustments		the Company
(Dollars in thousands)
Assets
Cash and cash equivalents	$	60,234	$	—	$	60,234
Loans		108,236		(4,977)		103,259
Premises and equipment		2,106		790		2,896
Accrued interest receivable		338		—		338
Core deposit intangible		—		620		620
Other assets		—		974		974
Total assets acquired	$	170,914	$	(2,593)	$	168,321


Liabilities
Deposits:
Noninterest-bearing	$	41,398	$	—	$	41,398
Interest-bearing		144,845		(760)		144,085
Total deposits		186,243		(760)		185,483
Other liabilities		173		—		173
Total liabilities assumed	$	186,416	$	(760)	$	185,656
Goodwill recorded for branches acquisition					$	17,335

Goodwill recorded for the branches represents future revenues to ~~immediately expense contract acquisition costs when~~be derived from the ~~asset~~existing customer base, including efficiencies that ~~would have resulted~~will result from ~~capitalizing these costs would have been amortized in~~combining operations. The fair value adjustments remain subject to adjustment within the one year measurement period if there happens to be notable changes in the factors determining the fair value of the assets or ~~less. Upon adoption~~liabilities.

In determining the acquisition date fair value of ~~Topic 606,~~purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company ~~did not capitalize any contract acquisition cost.~~generally aggregates loans into pools of loans with common risk characteristics. Expected cash flows at the

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income prospectively.

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


(Dollars in thousands)	April 17, 2020

Contractually required payments	$	22,046
Nonaccretable difference		2,073
Cash flow expected to be collected		19,973
Accretable yield		2,949
Fair value at acquisition date	$	17,024

Merger-related expense in 2020 totaled $755,000 which were recorded as noninterest expense as incurred.

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

Nine Months Ended September 30

2020

2019

(Dollars in thousands, except per share)

Net interest income

$
38,130

$
37,350

Non-interest income

4,717

4,161

Net income available to common shareholders

4,834

10,802

Earnings per share, basic

$
0.27

$
0.56

Earnings per share, diluted

$
0.27

$
0.56

Weighted average common shares outstanding, basic

18,038,345

19,219,820

Weighted average common shares outstanding, diluted

18,062,170

19,266,480

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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 ~~three~~nine months ended ~~March 31,~~September 30, 2020 and ~~the year ended December 31,~~ 2019:


						Nine Months		Nine Months
						Ended		Ended
						September 30,		September 30,
						2020		2019
	Three Months		Twelve Months
	Ended		Ended
	March 31,		December 31,
	2020		2019
	(dollars in thousands)
						(Dollars in thousands)

Beginning balance January 1	$	3,533	$	1,088		$	3,533	$	1,088
Sales		-		(120	)		(180)		(103)
Write-downs		-		(49	)
Write-downs and loss on sales							(390)		(12)
Transfers		204		2,614			274		469
Ending balance	$	3,737	$	3,533		$	3,237	$	1,442

At ~~March 31,~~September 30, 2020 and December 31, 2019, the Company had ~~$3.7~~$3.2 million and $3.5 million, respectively, of which $379,000 is foreclosed residential real estate property in OREO. The Company had ~~two~~2 loans with a recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure in the aggregate amount of $428,000 at ~~March 31,~~September 30, 2020. At December 31, 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.

NOTE J – ~~LEASES~~

The Company has operating leases for branches and certain equipment. The Company’s leases have remaining lease terms of 1 year to 15 years which may include options to extend the leases for up to 5 years per option period. The Company has some leases that are month to month or expire within 1 year that are not included below.

At March 31, 2020, the Company did not have any leases that had not yet commenced for which we had created a right-of-use asset and a lease liability. For the operating leases the Company has elected the practical expedient of not separating lease components from non-lease components and instead to account for each separate lease component and the non-lease components associated with that lease as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the lease agreements include periodic rate adjustments for inflation.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 25 years. The exercise of lease renewal options is at our sole discretion. When it is reasonably certain that the Company will exercise the option to renew or extend the lease term, that option is included in determining the value of the ROU and lease liability.

~~SELECT BANCORP, INC.~~

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

~~The components of lease expense were as follows:~~

Three Months Three Months
Ended Ended
March 31, March 31,
2020 2019
(dollars in thousands)
Operating lease cost $ 308 $ 261

Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 308 $ 261

Right-of-use assets obtained in exchange for lease obligations:

Operating leases 8,414 9,013

~~The following table presents the remaining weighted average lease terms and discount rates as of March 31, 2020 and 2019:~~

March 31, 2020 March 31, 2019
Weighted Average Remaining Lease Term Operating Leases 6.7 years 7.3 years

Weighted Average Discount Rate Operating Leases 6.0% 6.0%

~~Maturities of lease liabilities were as follows:~~

~~(In thousands)~~

Operating
Year Ending December 31, Leases
2020 (excluding the three months ended March 31, 2020) $ 442
2021 649
2022 722
2023 702
2024 675
Thereafter 5,479
Total lease payments $ 8,669

~~NOTE K –~~ SUBSEQUENT EVENTS

The Company has evaluated for subsequent events through the date and time the financial statements were issued and has determined there are ~~two~~no reportable subsequent events. ~~On April 17, 2020 the Company’s wholly owned subsidiary Select Bank & Trust acquired three branches located in western North Carolina from First Citizens Bank with carrying values~~

Table of approximately $107 million in loans, $2 million in fixed assets and $185 million in deposits. In addition, approximately 1,100 of Select Bank & Trust’s customers participated in the Paycheck Protection Program (PPP) under the CARES Act in which approximately $91 million of PPP loans were approved by the Small Business Administration which is intended to provide economic relief to small businesses adversely impacted by COVID – 19 as of May 5, 2020.Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of 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, 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, changes in the interest rate environment, breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; and adverse changes in credit quality 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, 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. On December 15, 2017, the Company acquired Premara Financial, Inc. (“Premara”) and its banking subsidiary Carolina Premier Bank (“Carolina Premier”) ~~located~~headquartered in Charlotte, North Carolina. At the time of the acquisition, Carolina Premier had approximately $279 million in assets and four-full service offices, including a presence in upstate South Carolina. The Bank acquired three branches located in the cities of ~~Rock Hill, Blacksburg~~Sylva, Franklin and ~~Six Mile, South Carolina.~~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

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

During the first ~~three~~nine months of 2020, total assets ~~decreased~~increased by ~~$11.6~~$496.9 million to ~~$1.3~~$1.8 billion as of ~~March 31,~~September 30, 2020. The ~~decrease~~increase in assets was due primarily to ~~cash used to pay down wholesale deposits.~~the acquisition of three branches located in western North Carolina and loans originated by the Bank in connection with its participation in the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”). Earning assets at ~~March 31,~~September 30, 2020 totaled ~~$1.1~~$1.6 billion and consisted of ~~$1.0~~$1.3 billion in net loans, ~~$64.7~~$87.4 million in investment securities, ~~$35.5~~$274.6 million in cash, overnight investments and interest-bearing deposits in other banks, ~~$11.7~~$8.0 million in federal funds sold and $3.8 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the ~~first~~third quarter of 2020 were ~~$982.7~~$1.5 billion and $213.4 million, ~~and $212.1 million,~~ respectively.

Since the end of 2019, gross loans have increased by ~~$9.5~~$253.5 million to ~~$1.0~~$1.3 billion as of ~~March 31,~~September 30, 2020. The increase in gross loans was due primarily to normal customer ~~demand.~~demand, the PPP loan program and the aforementioned acquisition of branches. At ~~March 31,~~September 30, 2020, gross loans consisted of ~~$72.2~~$165.8 million in commercial and industrial loans ~~$464.3~~(which includes 1,249 PPP loans in the amount of $97.0 million), $537.1 million in commercial real estate loans, ~~$70.7~~$79.7 million in multi-family residential loans, ~~$8.0~~$7.1 million in consumer loans, ~~$153.9~~$195.2 million in residential real estate loans, ~~$43.8~~$48.4 million in HELOCs, and ~~$228.6~~$255.7 million in construction loans. Deferred loan fees, net of costs, on these loans were ~~$2.2~~$5.5 million (which includes $3.1 million in net fees related to PPP loans) at ~~March 31,~~September 30, 2020.

At ~~March 31,~~September 30, 2020 the Company held ~~$11.7~~$8.0 million in federal funds sold compared to $9.0 million in federal funds sold at December 31, 2019. Interest-earning deposits in other banks were ~~$35.5~~$249.5 million at ~~March 31,~~September 30, 2020, a ~~$15.4~~$198.6 million ~~decrease~~increase from December 31, 2019. The Company’s investment securities at ~~March 31,~~September 30, 2020 were ~~$64.7~~$87.4 million, ~~a decrease~~an increase of ~~$7.6~~$15.1 million from December 31, 2019. The investment portfolio as of ~~March 31,~~September 30, 2020 consisted of ~~$9.3~~$11.8 million in government agency debt securities, ~~$44.5~~$41.7 million in mortgage-backed securities, ~~$2.2~~$2.1 million in corporate bonds and ~~$8.8~~$31.9 million in municipal securities. The net unrealized gain on these securities was ~~$1.9~~$2.0 million as of ~~March 31,~~September 30, 2020.

At ~~March 31,~~September 30, 2020, the Company had an investment of $3.1 million in Federal Home Loan Bank (“FHLB”) stock, which increased by $14,000 from December 31, 2019. Also, the Company had $718,000 in other non-marketable securities at ~~March 31,~~September 30, 2020 compared to $719,000 at December 31, 2019.

At ~~March 31,~~September 30, 2020, non-earning assets were ~~$87.3~~$120.0 million, ~~a decrease~~an increase of ~~$669,000~~$33.4 milllion from $86.6 million as of December 31, 2019. Non-earning assets included ~~$20.0~~$25.1 million in cash and due from banks, bank premises and equipment of ~~$17.9~~$20.9 million, goodwill of ~~$24.6~~$41.9 million, core deposit intangible of ~~$1.4~~$1.7 million, accrued interest receivable of ~~$3.8~~$4.5 million, right of use lease asset of ~~$8.4~~$8.8 million, foreclosed real estate of ~~$3.7~~$3.2 million, and other assets totaling ~~$7.4~~$14.0 million, including net deferred taxes of ~~$2.6~~$3.6 million. Since the income on bank-owned life insurance is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The ~~decrease~~increase in non-earning assets was due primarily to the ~~reduction~~increase in goodwill, cash and due from banks.

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Total deposits at ~~March 31,~~September 30, 2020 were ~~$982.7 million~~$1.5 billion and consisted of ~~$250.0~~$408.2 million in non-interest-bearing demand deposits, ~~$306.1~~$610.3 million in money market and negotiable order of withdrawal, or NOW, accounts, ~~$41.8~~$51.6 million in savings accounts, and ~~$384.8~~$402.7 million in time deposits. Total deposits ~~decreased~~increased by ~~$10.2~~$479.9 million from $992.8 million as of December 31, 2019, due primarily to the ~~decrease~~acquisition of the three branches in ~~brokered time deposits.~~western North Carolina and deposits related to the PPP loan program. The Bank had $0$1.5 million in brokered demand deposits and ~~$19.5~~$3.1 million in brokered time deposits as of ~~March 31,~~September 30, 2020. The Bank had $0 million in brokered demand deposits and $45.0 million in brokered time deposits as of December 31, 2019.

As of ~~March 31,~~September 30, 2020, the Company had $45.0 million (of which $20.0 million is identified as short-term borrowings and $25.0 million is identified as long-term debt) in FHLB borrowings, and $12.4 million in junior subordinated debentures that are classified as long-term debt.

Total shareholders’ equity at ~~March 31,~~September 30, 2020 was ~~$212.1~~$213.4 million, ~~a decrease~~an increase of ~~$690,000~~$592,000 from $212.8 million as of December 31, 2019. Accumulated other comprehensive income relating to available for sale securities increased ~~$562,000~~$633,000 during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. ~~Other changes~~Also contributing to the increase in shareholders’ equity ~~included~~were net income of ~~$1.1 million, stock repurchase of $2.5~~$4.2 million and $7,000 from the exercise of stock ~~options.~~options, which were offset by stock repurchases totaling $4.4 million.

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

At ~~March 31,~~September 30, 2020, the Company had ~~$3.4 million~~$516,000 in loans that were 30 to 59 days past due and ~~$1.0 million~~$149,000 in loans that were 30 to 89 days past due. This represented ~~0.43%~~0.12% of gross loans outstanding on that date. This is ~~an increase~~a decrease from December 31, 2019 when there were ~~$3.4~~$3.5 million in loans that were 30-89 days past due or 0.34% of gross loans outstanding. Non-accrual loans increased from $5.9 million at December 31, 2019 to ~~$7.2~~$7.7 million at ~~March 31,~~September 30, 2020.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans ~~increased~~decreased from 1.18% at December 31, 2019 to ~~1.23%~~1.07% at ~~March 31,~~September 30, 2020. The Company had an increase of ~~$1.3~~$1.8 million in non-accruals from $5.9 million at December 31, 2019 and a decrease in accruing troubled debt restructurings or TDRs, from $6.2 million at December 31, 2019 to ~~$5.6~~$6.0 million as of ~~March 31,~~September 30, 2020. Of the non-accrual loans as of ~~March 31,~~September 30, 2020, ~~four~~two commercial real estate loans totaled ~~$1.3~~$2.0 million, two construction loans totaled ~~$177,000, sixteen~~$161,000, twelve commercial loans totaled ~~$4.2~~$4.3 million, five HELOC loans totaled ~~$442,000, ten~~$263,000, eleven 1-to-4 family residential loans totaled ~~$922,000~~$950,000 and consumer made up the remaining balance.

At ~~March 31,~~September 30, 2020, the Bank had ~~forty-three~~forty-nine loans totaling ~~$9.3~~$10.3 million that were considered to be troubled debt ~~restructurings. Twenty-eight~~restructurings, or TDRs. Thirty-two of these loans totaling ~~$5.6~~$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, for the periods indicated, information about the Company’s non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus accruing TDRs), and total non-performing assets.

For Periods Ended
March 31, December 31,
2020 2019
(dollars in thousands)
Non-accrual loans $ 7,201 $ 5,941
Accruing TDRs 5,619 6,207
Total non-performing loans 12,820 12,148
Foreclosed real estate 3,737 3,533
Total non-performing assets $ 16,557 $ 15,681
Accruing loans past due 90 days or more $ 1,182 $ 1,231
Allowance for loan losses $ 10,586 $ 8,324
Non-performing loans to period end loans 1.23 % 1.18 %
Non-performing loans and accruing loans past due 90 days or more to period end loans 1.35 % 1.30 %
Allowance for loan losses to period end loans 1.02 % 0.81 %
Allowance for loan losses to non-performing loans 83 % 69 %
Allowance for loan losses to non-performing assets 64 % 53 %
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more 60 % 49 %
Non-performing assets to total assets 1.31 % 1.23 %
Non-performing assets and accruing loans past due 90 days or more to total assets 1.40 % 1.33 %


	For Periods Ended
	September 30,			December 31,
	2020			2019


Non-accrual loans	$	7,695		$	5,941
Accruing TDRs		6,044			6,207
Total non-performing loans		13,739			12,148
Foreclosed real estate		3,237			3,533
Total non-performing assets	$	16,976		$	15,681
Accruing loans past due 90 days or more	$	1,548		$	1,231
Allowance for loan losses	$	13,561		$	8,324
Non-performing loans to period end loans		1.07	%		1.18	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		1.19	%		1.30	%
Allowance for loan losses to period end loans		1.06	%		0.81	%
Allowance for loan losses to non-performing loans		99	%		69	%
Allowance for loan losses to non-performing assets		80	%		53	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		73	%		49	%
Non-performing assets to total assets		0.96	%		1.23	%
Non-performing assets and accruing loans past due 90 days or more to total assets		1.05	%		1.33	%

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at ~~March 31,~~September 30, 2020 and December 31, 2019 were ~~$16.6~~$17.0 million and $15.7 million, respectively. The allowance for loan losses at ~~March 31,~~September 30, 2020 represented ~~64%~~80% of non-performing assets compared to 53% at December 31, 2019.

Total impaired loans at ~~March 31,~~September 30, 2020 were ~~$10.7~~$11.6 million. This included ~~$7.2~~$7.7 million in loans that were classified as impaired because they were in non-accrual status and ~~$3.5~~$3.9 million in accruing ~~TDRs.~~loans. Of these loans, ~~$1.3~~$1.6 million required a specific reserve of ~~$702,000~~$506,000 at ~~March 31,~~September 30, 2020.

Total impaired loans at December 31, 2019 were $11.2 million. This included $5.9 million in loans that were classified as impaired 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 $413,000 at December 31, 2019.

The allowance for loan losses was ~~$10.6~~$13.6 million at ~~March 31,~~September 30, 2020 or ~~1.02%~~1.06% of gross loans outstanding as compared to 0.81% reported as a percentage of gross loans at December 31, 2019. This increase resulted primarily from changes in loans requiring a specific reserve plus qualitative factors related to ~~interest rates~~COVID-19 and economic performance indicators. The Legacy Select loans, ~~and~~ Carolina Premier and First Citizens Bank loans were recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance

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for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. The allowance for loan losses at ~~March 31,~~September 30, 2020 represented ~~83%~~99% of non-performing loans compared to 69% at December 31, 2019. It is management’s assessment that the allowance for loan losses as of ~~March 31,~~September 30, 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, ~~Company~~the Company’s management would expect to see ~~increased~~continued volatility in the Company’s allowance for loan losses and related provision expense during ~~subsequent quarters in~~the remainder of 2020. The CARES Act provided an opportunity for loan customers to request a temporary modification of the payment terms on their loans granting the customer time to address cashflow issues. The Bank entered into modifications on 497 loans amounting to $252.3 million during 2020 of which 114 loans totaling $65.6 million remained on modification as of September 30, 2020. See Item 1A (Risk Factors) later in this report for additional discussion of COVID-19.

Contractual Obligations

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

	March 31, 2020
							More
	1 Year		Over 1 to		Over 3 to		Than

											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)	or Less		3 Years		5 Years		5 Years		Total		(dollars in thousands)
Time deposits	$	288,269	$	90,258	$	6,227	$	-	$	384,754	$	310,379	$	82,598	$	9,612	$	78	$	402,667
Short-term borrowings		20,000		-		-		-		20,000
Short-term debt												20,000		—		—		—		20,000
Long-term debt		-		-		25,000		12,372		37,372		—		—		25,000		12,372		37,372
Operating leases		599		1,408		1,365		5,297		8,669		663		1,503		1,466		5,457		9,089
Total contractual obligations	$	308,868	$	91,666	$	32,592	$	17,669	$	450,795	$	331,042	$	84,101	$	36,078	$	17,907	$	469,128

Other Lending Risk Factors

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

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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 ~~March 31,~~September 30, 2020 and December 31, 2019, the Company had ~~$27.8~~$40.4 million and $27.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At ~~March 31,~~September 30, 2020 and December 31, 2019, the Company had ~~$10.4~~$7.8 million and $10.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented ~~21.0%~~28.3% and 23.2% of total risk-based capital as of ~~March 31,~~September 30, 2020 and December 31, 2019, which is less than the 100% maximum allowed. These loans may 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 ~~March 31,~~September 30, 2020, the Company had ~~four~~five product type groups which exceeded this ~~guideline;~~guideline: Office Building, which represented ~~44%~~59% of risk-based capital or ~~$79.7~~$100.8 million; Commercial Construction, which represented ~~56%~~79% of risk-based capital or ~~$102.0~~$134.4 million; 1-to-4 Family Rental property, which represented ~~42%~~62% of risk-based capital or ~~$76.5 million~~$105.7 million; Retail property, which represented 47% of risk-based capital or $80.6 million; and Apartment Complex/Multi-Family, which represented ~~42%~~46% of risk-based capital or ~~$76.5~~$78.3 million. All other commercial real estate groups were at or below the 40% threshold. The internal guideline levels heighten the level of Company monitoring of such loans in underwriting and ongoing servicing activities.

At December 31, 2019, the Company had three product types that exceeded the 40% guideline. The following product types were in excess of the 40% ~~guidelines;~~guidelines at such date: apartments, commercial construction and office buildings. All other commercial and residential real estate product types were under the 40% 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 ~~March 31,~~September 30, 2020 and December 31, 2019.

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Acquisition, Development and Construction Loans

(dollars in thousands)

	March 31, 2020									December 31, 2019
				Land and Land									Land and Land
	Construction			Development			Total			Construction			Development			Total

																			September 30, 2020									December 31, 2019
																						Land and Land									Land and Land
																			Construction			Development			Total			Construction			Development			Total
Total ADC loans	$	194,070		$	34,576		$	228,646		$	186,038		$	35,840		$	221,878		$	219,576		$	36,142		$	255,718		$	186,038		$	35,840		$	221,878
Average Loan Size	$	322		$	576					$	331		$	607					$	315		$	592					$	331		$	607
Percentage of total loans		18.67	%		3.33	%		22.00	%		18.06	%		3.48	%		21.55	%		17.11	%		2.82	%		19.93	%		18.06	%		3.48	%		21.55	%
Non-accrual loans	$	177		$	-		$	177		$	181		$	-		$	181		$	169		$	—		$	169		$	181		$	—		$	181

Management 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 ~~March 31,~~September 30, 2020 and December 31, 2019.

	March 31, 2020										December 31, 2019
	ADC Loans		Percent			HELOC		Percent			ADC Loans		Percent			HELOC		Percent
	(dollars in thousands)

																					September 30, 2020								December 31, 2019
																					ADC Loans		Percent		HELOC		Percent		ADC Loans		Percent		HELOC		Percent

																					(dollars in thousands)
Harnett County	$	5,793		2.53	%	$	4,761		10.87	%	$	9,637		4.34	%	$	5,156		11.58	%	$	8,683	3.40	%	$	4,528	9.36	%	$	9,637	4.34	%	$	5,156	11.58	%
Alamance County		674		0.30	%		1,200		2.74	%		845		0.38	%		1,072		2.41	%		511	0.20	%		1,062	2.20	%		845	0.38	%		1,072	2.41	%
Beaufort County		-		-	%				-	%		-		-	%		-		-	%
Brunswick County		15,432		6.75	%		1,599		3.65	%		15,456		6.97	%		1,629		3.67	%		15,188	5.94	%		1,642	3.39	%		15,456	6.97	%		1,629	3.67	%
Carteret County		5,550		2.43	%		2,308		5.27	%		5,352		2.41	%		2,190		4.92	%		4,483	1.75	%		2,242	4.63	%		5,352	2.41	%		2,190	4.92	%
Cherokee County		-		-	%		21		0.05	%		-		-	%		22		0.05	%
Craven County		-		-	%		-		-	%		-		-	%		-		-	%
Cherokee County (SC)																						—	—	%		34	0.07	%		—	—	%		22	0.05	%
Cumberland County		25,449		11.13	%		2,271		5.18	%		24,601		11.09	%		2,285		5.13	%		25,098	9.83	%		1,975	4.08	%		24,601	11.09	%		2,285	5.13	%
Durham County		-		-	%		61		0.14	%		-		-	%		-		-	%		6,621	2.59	%		159	0.33	%		—	—	%		—	—	%
Forsyth County																						2,225	0.87	%		—	—	%		—	—	%		—	—	%
Jackson County																						4,770	1.87	%		2,106	4.35	%		—	—	%		—	—	%
Macon County																						10,507	4.11	%		4,779	9.87	%		—	—	%		—	—	%
Mecklenburg County		15,224		6.66	%		3,724		8.50	%		18,142		8.18	%		2,689		6.04	%		23,011	9.00	%		4,171	8.62	%		18,142	8.18	%		2,689	6.04	%
New Hanover County		41,781		18.27	%		2,454		5.60	%		40,518		18.26	%		2,885		6.48	%		34,737	13.58	%		2,564	5.30	%		40,518	18.26	%		2,885	6.48	%
Pasquotank County		2,401		1.05	%		1,607		3.67	%		1,997		0.90	%		1,693		3.80	%		2,978	1.16	%		1,636	3.38	%		1,997	0.90	%		1,693	3.80	%
Pitt County		18,703		8.18	%		5,507		12.57	%		16,098		7.25	%		5,442		12.23	%		17,655	6.90	%		3,343	6.91	%		16,098	7.25	%		5,442	12.23	%
Robeson County		672		0.29	%		3,332		7.60	%		1,165		0.53	%		2,939		6.60	%		35	0.01	%		2,568	5.31	%		1,165	0.53	%		2,939	6.60	%
Sampson County		101		0.04	%		1,761		4.02	%		23		0.01	%		1,743		3.92	%		236	0.09	%		1,841	3.80	%		23	0.01	%		1,743	3.92	%
Virginia Beach		1,398		0.61	%		96		0.22	%		142		0.06	%		99		0.22	%
Virginia Beach County (VA)																						3,361	1.31	%		395	0.82	%		142	0.06	%		99	0.22	%
Wake County		22,377		9.79	%		1,628		3.71	%		23,407		10.56	%		1,640		3.68	%		21,871	8.55	%		1,541	3.18	%		23,407	10.56	%		1,640	3.68	%
Wayne County		2,278		1.00	%		3,120		7.12	%		1,572		0.71	%		3,183		7.15	%		3,207	1.25	%		2,904	6.00	%		1,572	0.71	%		3,183	7.15	%
Wilson County		473		0.21	%		84		0.19	%		477		0.21	%		72		0.16	%		759	0.30	%		57	0.12	%		477	0.21	%		72	0.16	%
York County		2,019		0.88	%		880		2.01	%		1,931		0.87	%		1,123		2.52	%
York County (SC)																						3,197	1.25	%		1,028	2.12	%		1,931	0.87	%		1,123	2.52	%
All other locations		68,321		29.88	%		7,402		16.89	%		60,515		27.27	%		8,652		19.44	%		66,585	26.04	%		7,820	16.16	%		60,515	27.27	%		8,652	19.44	%
																							—
Total	$	228,646		100.00	%	$	43,816		100.00	%	$	221,878		100.00	%	$	44,514		100.00	%	$	255,718	100.00	%	$	48,395	100.00	%	$	221,878	100.00	%	$	44,514	100.00	%

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Interest-Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest-only payment terms. At ~~March 31,~~September 30, 2020, the Company had ~~$266.2~~$300.0 million in loans that had terms permitting interest-only payments. This represented ~~25.6%~~23.4% of the total loan portfolio. At December 31, 2019, the Company had $249.9 million in loans that had terms permitting ~~interest only~~interest-only payments. This represented 24.3% of the total loan portfolio. Recognizing the risk inherent with interest-only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest-only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled ~~$81.3~~$85.1 million, or ~~7.8%~~6.6% of total loans, at ~~March 31,~~September 30, 2020 compared to $82.0 million, or 8.0% of total loans, at December 31, 2019. The Company’s ten largest customer relationships totaled ~~$128.2~~$149.8 million, or ~~12.3%~~11.7% of total loans, at ~~March 31,~~September 30, 2020 compared to $129.5 million, or 12.6% of total loans, at December 31, 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 ~~March 31,~~September 30, 2020 and 2019

General. During the ~~first~~third quarter of 2020, the Company ~~had~~reported net income of ~~$1.1~~$2.5 million as compared with net income of ~~$3.3~~$3.2 million for the ~~first~~third quarter of 2019. Net income per common share for the ~~first~~third quarter of 2020 was ~~$0.06~~$0.14 basic and diluted, compared with net income per common share of $0.17 basic and diluted, for the ~~first~~third quarter of 2019. Results of operations for the ~~first~~third quarter of 2020 were primarily impacted by an increase of ~~$3,000~~$1.2 million in net interest income and an increase in non-interest expense of ~~$943,000, which~~$1.1 million. The increase in non-interest expense was primarily related to increases in ~~occupancy expenses of $204,000, and~~ information systems expenses of ~~$249,000,~~$191,000, deposit insurance expense of $400,000, foreclosed real estate expense of $237,000, and personnel expense of ~~$661,000~~$618,000, which were offset by a decrease in ~~deposit insurance expense~~merger-related expenses of ~~$117,000~~$121,000, occupancy expenses of $65,000 and ~~foreclosed real estate expense~~professional fees of ~~$25,000.~~$119,000. The Company recorded a provision for loan losses of ~~$2.3~~$1.6 million for the ~~first~~third quarter of 2020 compared to a provision of ~~$112,000~~$231,000 in the ~~first~~third quarter of 2019, which increased provision expense had a significant impact on the reduced net income reported for the 2020 ~~first~~third quarter as compared to the comparative period in 2019.

Net Interest Income. Net interest income ~~remained basically unchanged~~increased by $1.2 million for the ~~first~~third quarter of 2020 from the ~~first~~third quarter of 2019. The Company’s total interest income was affected by an increase in earning loans, which was offset by a reduction in earning balances of federal funds sold and investments in addition to the interest rate reductions. Average total interest-earning assets were ~~$1.1~~$1.4 billion in the ~~first~~third quarter of 2020 compared with ~~$1.1~~$1.2 billion during the same period in 2019, while the average yield on those assets decreased 448 basis points from ~~5.02%~~5.05% to ~~4.98%~~4.50%, which was primarily due to the reduction of interest rates on ~~federal funds purchased~~loans due to modifications related to COVID-19, reduced rates on overnight interest earning assets and reduced yield on investment securities.

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The Company’s average interest-bearing liabilities increased by ~~$16.8~~$234.2 million to ~~$788.4 million~~$1.1 billion for the quarter ended ~~March 31,~~September 30, 2020 from ~~$771.6~~$818.6 million for the same period one year earlier and the cost of those funds ~~increased~~decreased from ~~1.36%~~1.52% to ~~1.39%~~1.03%, or 349 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 ~~reduced advances.~~a reduction in wholesale deposits. During the ~~first~~third quarter of 2020, the Company’s net interest margin was ~~4.03%~~3.73% and net interest spread was ~~3.59%~~3.47%. In the same quarter ended one year earlier, net interest margin was ~~4.09%~~3.94% and net interest spread was ~~3.65%~~3.46%.

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company uses loss history based on the weighted average net charge off history for the most recent ~~fourteen~~twelve 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~~the look back period, loss factors are calculated for each risk-graded pool. During the ~~first~~third quarter of 2020, the Company recorded a provision for loan losses of ~~$2.3~~$1.6 million, as compared to ~~the~~a provision of ~~$112,000~~$231,000 that was recorded in the ~~first~~third quarter of 2019.

Non-Interest Income.Non-interest income for the quarter ended ~~March 31,~~September 30, 2020 was ~~$1.4~~$1.7 million, an increase of ~~$247,000~~$276,000 from the ~~first~~third quarter of 2019. Service charges on deposit accounts ~~increased $72,000~~decreased $51,000 to ~~$338,000~~$257,000 for the quarter ended ~~March 31,~~September 30, 2020 from ~~$266,000~~$308,000 for the same period in 2019. Other non-deposit fees and income increased ~~$39,000~~$76,000 from the ~~first~~third quarter of 2019 to the ~~first~~third quarter of ~~2020 due to increases in various items.~~2020. Fees from the sale of mortgages increased from ~~$157,000~~$218,000 for the quarter ended ~~March 31,~~September 30, 2019 to ~~$293,000~~$517,000 for the ~~first~~third quarter of ~~2020.~~2020 due to increased volume. The Company did not have sales of securities during the three months ended ~~March 31,~~September 30, 2020 orand in 2019 ~~respectively.~~sold securities for a gain of $48,000.

Non-Interest Expenses. Non-interest expenses increased by ~~$943,000~~$1.1 million to ~~$9.2~~$10.1 million for the quarter ended ~~March 31,~~September 30, 2020, from ~~$8.3~~$8.9 million for the same period in 2019. In general, most categories of non-interest expenses increased primarily due to changes in the Company’s branch ~~network.~~network and the acquisition of the branches in western North Carolina. The following are highlights of the significant categories of non-interest expenses during the ~~first~~third quarter of 2020 versus the same period in 2019:

·●

Personnel expenses increased ~~$661,000~~$618,000 to ~~$5.6~~$5.7 million, due to additional personnel and cost of living increases.

·●

Occupancy expenses ~~increased $204,000,~~decreased $65,000, primarily due to ~~additional branches,~~the reduction in repairs and maintenance ~~and~~which was offset by increased rent expense due to normal rent escalation.

·●

~~Integration related~~Integration-related expenses ~~increased $39,000.~~decreased $121,000.

·●

CDI expense ~~decreased $40,000~~reduced $29,000 due to ~~the~~ amortization.

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·●

Information systems expense increased by ~~$249,000~~$191,000 due to increased expenses related to the new mobile banking platform, increase in customer accounts and security cost for the core processing system.

·●

Professional fees decreased by ~~$10,000~~$119,000 to ~~$372,000.~~$399,000.

·●

Deposit insurance expenses ~~decreased~~increased by ~~$117,000~~$400,000 due to increased ~~premium credit earned.~~asset base.

Provision for Income Taxes. The Company’s effective tax rate was ~~20.2%~~21.5% and 22.0% for the quarters ended ~~March 31,~~September 30, 2020 and 2019, respectively.

As of ~~March 31,~~September 30, 2020 and December, 31, 2019, the Company had a net deferred tax asset in the amount of ~~$2.6~~$3.6 million and $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 ~~March 31,~~September 30, 2020 and December 31, 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.

	March 31, 2020								March 31, 2019
	(dollars in thousands)
	Average					Average			Average					Average
	balance			Interest		rate			balance			Interest		rate
Interest-earning assets:

																	For the quarter ended							For the quarter ended
																	September 30, 2020							September 30, 2019
																	(dollars in thousands)
																	Average					Average		Average					Average
																	balance			Interest		rate		balance			Interest		rate

INTEREST-EARNING ASSETS:
Loans, gross of allowance	$	1,020,630		$	13,600		5.36	%	$	976,420		$	13,050		5.42	%	$	1,255,027		$	15,415	4.89	%	$	982,876		$	13,529	5.52	%
Investment securities		68,174			439		2.59	%		66,576			496		3.02	%		64,685			386	2.37	%		85,781			630	2.95	%
Other interest-earning assets		58,827			168		1.15	%		95,705			543		2.30	%		83,394			54	0.26	%		91,730			456	1.99	%
Total interest-earning assets		1,147,631			14,207		4.98	%		1,138,701			14,089		5.02	%		1,403,106			15,855	4.50	%		1,160,387			14,615	5.05	%

Other assets		108,312								100,146								280,068							101,585

Total assets	$	1,255,943							$	1,238,847							$	1,683,174						$	1,261,972
Interest-bearing liabilities:

INTEREST-BEARING LIABILITIES:
Deposits:
Savings, NOW and money market	$	323,049			348		0.43	%	$	303,781			356		0.48	%	$	602,943			891	0.59	%	$	314,099			407	0.52	%
Time deposits over $100,000		303,087			1,499		1.99	%		285,980			1,304		1.85	%		277,435			1,033	1.48	%		293,635			1,491	2.04	%
Other time deposits		104,895			432		1.66	%		117,463			449		1.55	%		115,042			382	1.32	%		116,167			494	1.71	%
Borrowings		57,372			439		3.08	%		64,372			484		3.05	%		57,372			408	2.83	%		64,196			483	3.02	%

Total interest-bearing liabilities		788,403			2,718		1.39	%		771,596			2,593		1.36	%		1,052,792			2,714	1.03	%		788,097			2,875	1.15	%

Non-interest-bearing deposits		241,131								242,547								404,420							246,117
Other liabilities		11,907								12,574								11,685							12,036
Shareholders' equity		214,502								212,130

Total liabilities and shareholders' equity	$	1,255,943							$	1,238,847

Shareholders’ equity																		214,277							215,722
Total liabilities and shareholders’ equity																	$	1,683,174						$	1,261,972
Net interest income/interest rate spread(taxable-equivalent basis)				$	11,489		3.59	%				$	11,496		3.65	%				$	13,141	3.47	%				$	11,740	3.59	%

Net interest margin (taxable-equivalent basis)							4.03	%							4.09	%						3.73	%						4.06	%

Ratio of interest-earning assets to interest-bearing liabilities		145.56	%							147.58	%							133.27	%						147.24	%

Reported net interest income Net interest income/net interest margin (taxable-equivalent basis)				$	11,489		4.02	%				$	11,496		4.08	%

Reported net interest income
Net interest income/net interest margin (taxable-equivalent basis)																				$	13,141	3.72	%				$	11,740	4.19	%
Less:
taxable-equivalent adjustment					29								39								(30)							(39)

Net Interest Income				$	11,460							$	11,457							$	13,111						$	11,701

Comparison of Results of Operations for the

Nine months ended September 30, 2020 and 2019

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

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Net Interest Income. Net interest income increased by $1.4 million for the first nine months of 2020 from the first nine months of 2019. The Company’s total interest income was affected by an increase in earning loans, which was offset by a reduction in earning balances of federal funds sold and investments in addition to the interest rate reductions. Average total interest-earning assets were $1.3 billion in the first nine months of 2020 compared with $1.2 billion during the same period in 2019, while the average yield on those assets decreased 38 basis points from 5.02% to 4.64%, 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 $136.0 million to $926.1 million for the nine months ended September 30, 2020 from $793.1 million for the same period one year earlier and the cost of those funds decreased from 1.45% to 1.17%, or 28 basis points. The increase in interest-bearing liabilities was a primary result of increased savings, money market and time deposits acquired in the acquisition of branches offset by reduced wholesale deposits. During the first nine months of 2020, the Company’s net interest margin was 3.80% and net interest spread was 3.47%. In the same quarter ended one year earlier, net interest margin was 4.03% and net interest spread was 3.57%.

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. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company uses loss history based on the weighted average net charge off history for the most recent twelve consecutive quarters, based on the risk-graded pool to which the loss was assigned. Then, using the back period, loss factors are calculated for each risk-graded pool. During the first nine months of 2020, the Company recorded a provision for loan losses of $5.8 million, as compared to a provision of $136,000 that was recorded in the first nine months of 2019.

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

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

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

42●

Personnel expenses increased $2.0 million to $17.1 million, due to additional personnel and cost of living increases and acquisition of three branches.

●

Occupancy expenses increased $203,000, primarily due to additional branches, repairs and maintenance and increased rent expense due to normal rent escalation.

●

Integration-related expenses increased $520,000.

●

CDI expense decreased $79,000 due to the amortization.

●

Information systems expense increased by $535,000 due to increased expenses related to the new mobile banking platform and security cost for the core processing system.

●

Professional fees decreased by $161,000 to $1.2 million.

●

Deposit insurance expenses increased by $269,000 due to increased asset base.

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

As of September 30, 2020 and December, 31, 2019, the Company had a net deferred tax asset in the amount of $3.6 million and $2.8 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of September 30, 2020 and December 31, 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

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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 nine months ended							For the nine months ended
	September 30, 2020							September 30, 2019
	(dollars in thousands)
	Average					Average		Average					Average
	balance			Interest		rate		balance			Interest		rate

INTEREST-EARNING ASSETS:
Loans, gross of allowance	$	1,156,906		$	43,113	4.98	%	$	988,268		$	40,510	5.48	%
Investment securities		65,322			1,224	2.50	%		77,674			1,653	2.85	%
Other interest-earning assets		60,857			255	0.56	%		99,966			1,580	2.11	%
Total interest-earning assets		1,283,085			44,592	4.64	%		1,165,908			43,743	5.02	%
Other assets		204,098							101,558
Total assets	$	1,487,183						$	1,267,466					��

INTEREST-BEARING LIABILITIES:
Deposits:
Savings, NOW and money market	$	468,630			1,887	0.54	%	$	315,349			1,196	0.51	%
Time deposits over $100,000		289,516			3,709	1.71	%		299,092			4,516	2.02	%
Other time deposits		110,579			1,213	1.47	%		116,710			1,470	1.68	%
Borrowings		57,394			1,269	2.95	%		61,954			1,426	3.08	%
Total interest-bearing liabilities		926,119			8,078	1.17	%		793,105			8,608	1.45	%
Non-interest-bearing deposits		335,108							247,087
Other liabilities		11,764							12,452
Shareholders’ equity		214,192							214,822
Total liabilities and shareholders’ equity	$	1,487,183						$	1,267,466
Net interest income/interest rate spread (taxable-equivalent basis)				$	36,514	3.47	%				$	35,135	3.57	%
Net interest margin (taxable-equivalent basis)						3.80	%						4.03	%
Ratio of interest-earning assets to interest-bearing liabilities		138.54	%						147.01	%
Reported net interest income
Net interest income/net interest margin (taxable-equivalent basis)				$	36,514	3.79	%				$	35,135	4.02	%
Less:
taxable-equivalent adjustment					(89)							(113)
Net Interest Income				$	36,425						$	35,022

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 and investment securities classified as available for sale) represented ~~10.4%~~20.9% of total assets at ~~March 31,~~September 30, 2020 as compared to 11.9% as of December 31, 2019.

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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 ~~March 31,~~September 30, 2020, the Company had existing credit lines with other financial institutions to purchase up to ~~$239.2~~$243.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of ~~$108.6~~$87.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At ~~March 31,~~September 30, 2020, the Company had $45.0 million in FHLB advances outstanding. Another source of short-term borrowings available to the Bank is securities sold under agreements to repurchase. At ~~March 31,~~September 30, 2020, in addition to FHLB advances, total borrowings consisted of junior subordinated debentures of $12.4 million.

Total deposits were ~~$982.7 million~~$1.5 billion at ~~March 31,~~September 30, 2020. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented ~~39.2%~~27.3% of total deposits at ~~March 31,~~September 30, 2020. Time deposits of $250,000 or more represented ~~14.3%~~9.6% of the Company’s total deposits at ~~March 31,~~September 30, 2020. At quarter-end, the Company had ~~$19.5~~$3.1 million in brokered time deposits and $0$1.5 in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that current sources of funds provide adequate liquidity for the Bank’s current cash flow needs. The Company maintains 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. The Common Equity Tier 1 risk-based ratio does not include limited life components such as trust preferred securities 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 ~~16.79%~~12.04% at ~~March 31,~~September 30, 2020.

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As the following table indicates, at ~~March 31,~~September 30, 2020, the Company and the Bank both exceeded minimum regulatory capital requirements as specified below.

	Actual			Minimum

							Actual		Minimum
							Ratio		Requirement

Select Bancorp, Inc.	Ratio			Requirement
Total risk-based capital ratio		18.16	%		8.00	%	14.71	%	8.00	%
Tier 1 risk-based capital ratio		17.23	%		6.00	%	13.68	%	6.00	%
Leverage ratio		15.98	%		4.00	%	11.00	%	4.00	%
Common Equity Tier 1 risk-based capital ratio		16.18	%		4.50	%
Common equity Tier 1 risk-based capital ratio							12.77	%	4.50	%

							Actual		Minimum		Well-Capitalized
							Ratio		Requirement		Requirement

Select Bank & Trust
Total risk-based capital ratio							13.00	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio							11.97	%	6.00	%	8.00	%
Leverage ratio							9.58	%	4.00	%	5.00	%
Common equity Tier 1 risk-based capital ratio							11.97	%	4.50	%	6.50	%

Regulatory
Actual Minimum Well-Capitalized
Select Bank & Trust Ratio Requirement Requirement
Total risk-based capital ratio 15.92 % 8.00 % 10.00 %
Tier 1 risk-based capital ratio 14.99 % 6.00 % 8.00 %
Leverage ratio 13.90 % 4.00 % 5.00 %
Common Equity Tier 1 risk-based capital ratio 14.99 % 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 ~~March 31,~~September 30, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company intends to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Company’s most significant market risk exposure is interest rate risk. The Company’s 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 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”) 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”), 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 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 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 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 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 ~~December 31, 2019.~~June 30, 2020.

	December 31, 2019
	Estimated			Estimated
	Change to			Change to

							June 30, 2020
(Dollars in thousands)	NII			EVE			Estimated Effect on NII		Estimated Effect on EVE
Immediate change in interest rates:
+ 4.0%		8.9	%		9.7	%	13.1	%	30.1	%
+ 3.0%		6.8			8.0		9.0		23.4
+ 2.0%		4.4			5.9		4.9		16.0
+ 1.0%		1.9			3.1		2.0		8.3
No change		-			-		—		—
- 1.0%		(1.3	)		(4.0	)	1.5		(2.4)

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.

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-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 Chief Executive Officer and Chief Financial Officer, changes in the 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 ~~first~~third quarter of 2020. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the ~~first~~third quarter of 2020 that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

Table of ~~the following:~~Contents

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

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

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

·●

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

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·●

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

·●

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

·●

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

·●

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

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

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

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

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

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

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On September 17, 2019, the Company announced that its Board of Directors approved a new stock repurchase plan (the “2019 Repurchase Plan”). Under the 2019 Repurchase Plan, the Company is authorized to repurchase up to 937,248 outstanding shares of its common stockSet forth in the ~~open market or through privately negotiated transactions.~~

~~Share~~table below is the Company’s repurchase activity ~~for the 2019 Repurchase Plan~~ during the three ~~months~~month period ended ~~March 31, 2020 was as follows:~~September 30, 2020:

Issuer Purchases of Equity Securities
Period Total number of
Shares
Purchased Average Price
Paid Per Share Total Number of
Shares Purchased
as Part of Publicly
Announced Plan Shares approved Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan
January 1-31, 2020
(Plan 2) 11,972 11.66 11,972 498,534
February 1-29, 2020
(Plan 2) 58,872 11.58 70,844 439,662
March 1-31, 2020
(Plan 2) 204,522 8.05 275,366 235,140


				Total number of shares	Maximum number of
	Total number	Average		purchased as part of	shares that may yet be
	of shares	price paid		publicly announced	purchased under the
Period	purchased	per share		plans or programs⁽²⁾	plans or programs⁽²⁾
July 2020	—	$	—	468,504	42,002
Beginning Date: 7/1
Ending Date: 7/31

August 2020	14,616		7.72	14,616	27,386
Beginning Date: 8/1
Ending Date: 8/31

September 2020	61,386		7.37	61,386	841,000
Beginning Date: 9/1
Ending Date: 9/30

(1)

Reflects the number of shares of the Company’s common stock repurchased during the referenced period under both publicly announced repurchase plans or programs and those made not pursuant to publicly announced plans or programs. All repurchases made during the quarterly period were made pursuant to publicly announced repurchased plans.

(2)

Reflects aggregate shares repurchased during the referenced period under publicly announced repurchase plans. The Company’s 2019 repurchase plan, which was announced on September 17, 2019 and authorized the repurchase of up to 937,438 shares of common stock, terminated during the period covered b the report, as all repurchases had been completed. On September 22, 2020, the Company publicly announced a new repurchase plan, which authorizes the repurchase of up to 875,000 shares of Company common stock.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit Index


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

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

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

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

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

101	Interactive data files ~~providing financial information from the Registrant’s Quarterly Report on Form 10-Q~~pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Operations for the ~~quarterly period~~Three Months and Nine Months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the Three Months and Nine Months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019, Three Months Ended June 30, 2020 and 2019 and the Three Months Ended September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019; and (vi) Notes to Consolidated Financial Statements.			Filed herewith

104	Cover Page Interactive Data File (formatted in Inline XBRL ~~(eXtensible Business Reporting Language)~~and contained in Exhibit 101)			Filed herewith

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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: ~~May 11,~~November 6, 2020	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: ~~May 11,~~November 6, 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~~	Trading Symbol(s)	Name of each exchange on which registered
	~~Symbol(s)~~
Common stock, par value ~~$1.00~~$1.00 per share	~~SLCT~~	SLCT	The NASDAQ Stock Market LLC


Large accelerated filer¨☐		Accelerated filerx☒
Non-accelerated filer¨☐	Smaller reporting companyx	☒
		Emerging growth company¨☐

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements(Unaudited)

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

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

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

	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2020 and 2019,	4

	~~Consolidated Statements of Comprehensive Income~~ Three Months Ended ~~March 31,~~June 30, 2020 and 2019	5

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

	Consolidated Statements of Cash Flows ~~Three~~ Nine Months Ended ~~March 31,~~September 30, 2020 and 2019	7

	Notes to Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33 34

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	44 50

Item 4 -	Controls and Procedures	46 52

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	47 52

Item 1A -	Risk Factors	47 52

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	49 55

Item 3 -	Defaults Upon Senior Securities	49 55

Item 4 -	Mine Safety Disclosures	49 55

Item 5 -	Other Information	49 55

Item 6 -	Exhibits	49 56

	Signatures	51 57

	March 31, 2020			December 31,
	(Unaudited)			2019*
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	20,030		$	19,110
Interest-earning deposits in other banks		35,544			50,920
Federal funds sold		11,673			9,047
Investment securities available for sale, at fair value		64,738			72,367
Loans held for sale		1,606			928
Loans		1,039,514			1,029,975
Allowance for loan losses		(10,586	)		(8,324	)
NET LOANS		1,028,928			1,021,651
Accrued interest receivable		3,839			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		3,737			3,533
Premises and equipment, net		17,868			17,791
Right of use lease asset		8,414			8,596
Bank-owned life insurance		29,950			29,789
Goodwill		24,579			24,579
Core deposit intangible (“CDI”)		1,431			1,610
Other assets		7,380			7,202
TOTAL ASSETS	$	1,263,494		$	1,275,076
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	250,031		$	240,305
Savings		41,815			43,128
Money market and NOW		306,051			280,145
Time		384,754			429,260
TOTAL DEPOSITS		982,651			992,838
Short-term debt		20,000			-
Long-term debt		37,372			57,372
Lease liability		8,669			8,813
Accrued interest payable		536			578
Accrued expenses and other liabilities		2,181			2,700
TOTAL LIABILITIES		1,051,409			1,062,301
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019		-			-
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,055,692 and 18,330,058 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		18,056			18,330
Additional paid-in capital		138,788			140,870
Retained earnings		53,779			52,675
Common stock issued to deferred compensation trust, at cost; 317,756 and 319,753 shares outstanding at March 31, 2020 and December 31, 2019, respectively		(2,791	)		(2,815	)
Directors’ Deferred Compensation Plan Rabbi Trust		2,791			2,815
Accumulated other comprehensive income		1,462			900
TOTAL SHAREHOLDERS’ EQUITY		212,085			212,775
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,263,494		$	1,275,076

	Preferred Stock				Common Stock						Additional paid-in Capital			Retained Earnings		Common Stock Issued to Deferred Compensation Trust			Deferred Comp Plan			Accumulated Other Comprehensive Income			Total Shareholders Equity




	Shares		Amount		Shares			Amount
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

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

							Three months ended
	As of December 31, 2019						March 31, 2019
			Contractual
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	2,796	$	4,051	$	-	$	3,853	$	4
Construction		440		537		-		552		5
Commercial real estate		5,585		6,750		-		5,843		66
Multi-family residential		197		197		-		213		3
Loans to individuals & overdrafts		284		293		-		109		-
HELOC		543		678		-		957		15
1-to-4 family residential		395		1,816		-		990		16
Subtotal:		10,240		14,322		-		12,517		109
With an allowance recorded:
Commercial and industrial		731		1,056		403		232		6
Construction		-		-		-		-		-
HELOC		160		222		-		-		-
1-to-4 family residential		81		94		10		134		7
Subtotal:		972		1,307		413		366		13
Totals:
Commercial		9,749		12,591		403		10,693		84
Consumer		284		293		-		109		-
Residential		1,179		2,810		10		2,081		38
Grand Total:	$	11,212	$	15,694	$	413	$	12,883	$	122

Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts
Pass	$	7,735
Special mention		274
	$	8,009


	Nine Months Ended September 30
	2020		2019

	(Dollars in thousands, except per share)
Net interest income	$	38,130	$	37,350
Non-interest income		4,717		4,161
Net income available to common shareholders		4,834		10,802

Earnings per share, basic	$	0.27	$	0.56
Earnings per share, diluted	$	0.27	$	0.56

Weighted average common shares outstanding, basic		18,038,345		19,219,820
Weighted average common shares outstanding, diluted		18,062,170		19,266,480

	March 31, 2020		March 31, 2019
Weighted Average Remaining Lease Term Operating Leases		6.7 years		7.3 years

Weighted Average Discount Rate Operating Leases		6.0%		6.0%

	Operating
Year Ending December 31,	Leases
2020 (excluding the three months ended March 31, 2020)	$	442
2021		649
2022		722
2023		702
2024		675
Thereafter		5,479
Total lease payments	$	8,669

	For Periods Ended
	March 31,			December 31,
	2020			2019
	(dollars in thousands)
Non-accrual loans	$	7,201		$	5,941
Accruing TDRs		5,619			6,207
Total non-performing loans		12,820			12,148
Foreclosed real estate		3,737			3,533
Total non-performing assets	$	16,557		$	15,681
Accruing loans past due 90 days or more	$	1,182		$	1,231
Allowance for loan losses	$	10,586		$	8,324
Non-performing loans to period end loans		1.23	%		1.18	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		1.35	%		1.30	%
Allowance for loan losses to period end loans		1.02	%		0.81	%
Allowance for loan losses to non-performing loans		83	%		69	%
Allowance for loan losses to non-performing assets		64	%		53	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		60	%		49	%
Non-performing assets to total assets		1.31	%		1.23	%
Non-performing assets and accruing loans past due 90 days or more to total assets		1.40	%		1.33	%

				Regulatory
	Actual			Minimum			Well-Capitalized
Select Bank & Trust	Ratio			Requirement			Requirement
Total risk-based capital ratio		15.92	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		14.99	%		6.00	%		8.00	%
Leverage ratio		13.90	%		4.00	%		5.00	%
Common Equity Tier 1 risk-based capital ratio		14.99	%		4.50	%		6.50	%

Issuer Purchases of Equity Securities
Period	Total number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Shares approved	Maximum Number of Shares that May Yet Be Purchased Under the Plan
January 1-31, 2020 (Plan 2)		11,972		11.66		11,972			498,534
February 1-29, 2020 (Plan 2)		58,872		11.58		70,844			439,662
March 1-31, 2020 (Plan 2)		204,522		8.05		275,366			235,140