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SLCT Select Bancorp

Filed: 6 Nov 20, 4:35pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

or

Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended from                to              

Commission File Number    000-50400

Select Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

North Carolina

    

20-0218264

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

700 W. Cumberland Street

 

Dunn, North Carolina

28334

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (910) 892-7080

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

Title of each class

    

Trading
Symbol(s)

   

Name of each exchange on which registered

Common stock, par value $1.00 per share

SLCT

The NASDAQ Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No

As of  October 30, 2020, the registrant had outstanding 17,786,552 shares of Common Stock, $1.00 par value per share.

Part I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

September 30, 2020

December 31, 

    

(unaudited)

    

2019*

(In thousands, except share

and per share data)

ASSETS

Cash and due from banks

$

25,068

$

19,110

Interest-earning deposits in other banks

 

249,541

 

50,920

Federal funds sold

 

8,046

 

9,047

Investment securities available for sale, at fair value

 

87,434

 

72,367

Loans held for sale

 

2,945

 

928

Loans

 

1,283,457

 

1,029,975

Allowance for loan losses

 

(13,561)

 

(8,324)

NET LOANS

 

1,269,896

 

1,021,651

Accrued interest receivable

 

4,486

 

4,189

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

 

3,059

 

3,045

Other non-marketable securities

 

718

 

719

Foreclosed real estate

 

3,237

 

3,533

Premises and equipment, net

 

20,883

 

17,791

Right of use lease asset

8,756

8,596

Bank owned life insurance

 

30,271

 

29,789

Goodwill

 

41,914

 

24,579

Core deposit intangible (“CDI”)

 

1,677

 

1,610

Other assets

 

14,015

 

7,202

TOTAL ASSETS

$

1,771,946

$

1,275,076

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

  

Deposits:

 

  

 

  

Demand

$

408,209

$

240,305

Savings

 

51,629

 

43,128

Money market and NOW

 

610,275

 

280,145

Time

 

402,667

 

429,260

TOTAL DEPOSITS

 

1,472,780

 

992,838

Short-term debt

 

20,000

 

0

Long-term debt

 

37,372

 

57,372

Lease liability

9,089

8,813

Accrued interest payable

 

449

 

578

Accrued expenses and other liabilities

 

18,889

 

2,700

TOTAL LIABILITIES

 

1,558,579

 

1,062,301

Shareholders’ Equity

 

  

 

  

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

 

0

 

0

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

 

17,787

 

18,330

Additional paid-in capital

 

137,130

 

140,870

Retained earnings

 

56,917

 

52,675

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

 

(2,352)

 

(2,815)

Directors’ Deferred Compensation Plan Rabbi Trust

 

2,352

 

2,815

Accumulated other comprehensive income

 

1,533

 

900

TOTAL SHAREHOLDERS’ EQUITY

 

213,367

 

212,775

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

1,771,946

$

1,275,076

* Derived from audited consolidated financial statements.

See accompanying notes.

3

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

See accompanying notes.

4

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

2020

    

2019

(In thousands)

Net income

$

2,457

$

3,239

$

4,242

$

9,994

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

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

 

(161)

 

196

 

822

 

1,454

Tax effect

 

38

 

(48)

 

(189)

 

(334)

Total

 

(123)

 

148

 

633

 

1,120

Reclassification adjustment for (gains) included in net income

 

 

(48)

 

 

(48)

Tax effect

 

 

11

 

 

11

 

 

(37)

 

 

(37)

Total

 

(123)

 

111

 

633

 

1,083

Total comprehensive income

$

2,334

$

3,350

$

4,875

$

11,077

See accompanying notes.

5

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

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.

6

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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.

7

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

Nine Months Ended

September 30, 

    

2020

    

2019

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in deposits

$

294,665

$

(17,786)

Repayments of short-term debt

 

0

 

(7,000)

Repayment of lease liability

(825)

(565)

Repurchase of common stock

(4,556)

(8,931)

Proceeds from stock options exercised

 

7

 

114

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES

 

289,291

 

(34,168)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

203,578

 

(54,989)

CASH AND CASH EQUIVALENTS, BEGINNING

 

79,077

 

139,362

CASH AND CASH EQUIVALENTS, ENDING

$

282,655

$

84,373

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest paid

$

8,207

$

8,679

Income taxes paid

 

3,202

 

2,496

Non-cash transactions:

 

  

 

  

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

 

633

 

1,120

Transfer from loans to foreclosed real estate

 

274

 

469

Acquisition:

 

  

 

  

Assets acquired (excluding goodwill)

170,914

0

Liabilities assumed

 

186,416

 

0

Goodwill recorded

 

17,335

 

0

See accompanying notes.

8

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. On July 25, 2014, the Company changed its name from New Century Bancorp, Inc. to Select Bancorp, Inc. following its acquisition by merger of Select Bancorp, Inc., Greenville, 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 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 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 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 September 30, 2020 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

COVID-19. The Company has evaluated for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of the disease caused by a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company��s customers operate and impair their ability to fulfill their financial obligations to the Company. Several programs are available to businesses impacted by COVID-19 such as loans available through the Paycheck Protection Program, deferrals on loan payments on existing loans and a reduced interest rate program available

9

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

NOTE B - PER SHARE RESULTS

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

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") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses.  ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, including loans and available-for-sale debt securities.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to delay implementation of CECL until January 2023 for certain companies, including smaller reporting companies (as defined by the SEC).  The Company currently qualifies as a smaller reporting company and is still assessing the impact that this new guidance will have on its consolidated financial statements.

In August 2018, the FASB amended ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement topic 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. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04 - Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides for temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The provisions of this ASU are elective and applicable to all entities that have contracts, hedging relationships and other transactions, subject to certain criteria, that reference LIBOR or another reference rate to be discontinued because of reference rate reform. There are practical expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedge accounting relationships affected by reference rate reform in order to facilitate a smoother transition to new reference rates. For contracts meeting certain criteria, a change in the contract's reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements. An entity will also be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform. The guidance will only apply to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This ASU is effective for March 12, 2020 through December 31, 2022.  The Company is still assessing this ASU but is not expecting it to have an impact to the consolidated financial position.

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

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:

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 September 30, 2020. Valuation techniques are consistent with techniques used in prior periods.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of September 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

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

$

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 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 September 30, 2020, the

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SELECT BANCORP, INC.

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 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 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 September 30, 2020.

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 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

for Identical

  Observable

Unobservable 

Asset Category 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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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

September 30, 2020

Carrying

Estimated

    

Amount

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

(dollars in thousands)

Financial assets:

Cash and due from banks

$

25,068

$

25,068

$

25,068

$

$

Interest-earning deposits in other banks

 

249,541

 

249,541

 

249,541

 

 

Federal funds sold

8,046

8,046

8,046

Investment securities available for sale

 

87,434

 

87,434

 

 

87,434

 

Loans held for sale

 

2,945

 

2,945

 

 

2,945

 

Loans, net

 

1,269,896

 

1,279,096

 

 

 

1,279,096

Accrued interest receivable

 

4,486

 

4,486

 

 

4,486

 

Stock in the FHLB

 

3,059

3,059

3,059

Other non-marketable securities

 

718

718

718

Financial liabilities:

 

 

 

  

 

  

 

  

Deposits

$

1,472,780

$

1,476,441

$

$

$

1,476,441

Short-term debt

 

20,000

 

20,000

 

 

20,000

 

Long-term debt

 

37,372

 

34,163

 

 

34,163

 

Accrued interest payable

 

449

 

449

 

 

449

 

December 31, 2019

Carrying

Estimated

    

Amount

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

(dollars in thousands)

Financial assets:

Cash and due from banks

$

19,110

$

19,110

$

19,110

$

$

Interest-earning deposits in other banks

 

50,920

 

50,920

 

50,920

 

 

Federal funds sold

 

9,047

 

9,047

 

9,047

 

 

Investment securities available for sale

 

72,367

 

72,367

 

 

72,367

 

Loans held for sale

 

928

 

928

 

 

928

 

Loans, net

 

1,021,651

 

1,016,239

 

 

 

1,016,239

Accrued interest receivable

 

4,189

 

4,189

 

 

4,189

 

Stock in the FHLB

 

3,045

 

3,045

 

 

 

3,045

Other non-marketable securities

 

719

 

719

 

 

 

719

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

992,838

$

995,056

$

$

995,056

$

Long-term debt

 

57,372

 

55,729

 

 

55,729

 

Accrued interest payable

 

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

(dollars in thousands)

Securities available for sale:

U.S. government agencies – GSE’s

$

11,508

$

276

$

(24)

$

11,760

Mortgage-backed securities – GSE’s

 

40,195

 

1,528

 

(53)

 

41,670

Corporate bonds

 

2,101

 

7

 

(5)

 

2,103

Municipal bonds

 

31,639

 

333

 

(71)

 

31,901

$

85,443

$

2,144

$

(153)

$

87,434

As of September 30, 2020, accumulated other comprehensive income included net unrealized gains totaling $2.0 million. Deferred tax assets resulting from these net unrealized losses totaled $458,000.

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

December 31, 2019

Gross

Gross

Amortized

unrealized

unrealized

Fair

    

cost

    

gains

    

losses

    

value

(dollars in thousands)

Securities available for sale:

 

  

 

  

 

  

 

  

U.S. government agencies – GSE’s

$

9,839

$

159

$

(2)

$

9,996

Mortgage-backed securities – GSE’s

 

46,926

 

830

 

(13)

 

47,743

Corporate bonds

 

2,282

 

17

 

 

2,299

Municipal bonds

 

12,152

 

177

 

 

12,329

$

71,199

$

1,183

$

(15)

$

72,367

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

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Notes to Consolidated Financial Statements (Unaudited)

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

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:

 

  

 

  

 

  

 

  

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 $48.1 million and $18.4 million at 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 September 30, 2020 and December 31, 2019. The Company has not incurred any losses related to securities sales in the first 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 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)

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

December 31, 2019

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

value

    

losses

    

value

    

losses

    

value

    

losses

(dollars in thousands)

Securities available for sale:

U.S. government agencies – GSE’s

$

872

$

$

621

$

(2)

$

1,493

$

(2)

Mortgage-backed securities–GSE’s

 

2,672

 

(3)

 

3,774

 

(10)

 

6,446

 

(13)

Corporate bonds

 

 

 

 

 

 

Municipal bonds

 

 

 

 

 

 

Total temporarily impaired securities

$

3,544

$

(3)

$

4,395

$

(12)

$

7,939

$

(15)

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

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Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS

Following is a summary of the composition of the Company’s loan portfolio at September 30, 2020 and December 31, 2019:

September 30, 

December 31, 

2020

2019

 

Percent

Percent

 

    

Amount

    

of total

    

Amount

    

of total

 

(dollars in thousands)

 

Real estate loans:

1-to-4 family residential

$

195,174

 

15.21

%  

$

151,697

 

14.73

%

Commercial real estate

 

537,087

 

41.85

%  

 

459,115

 

44.58

%

Multi-family residential

 

79,697

 

6.21

%  

 

69,124

 

6.71

%

Construction

 

255,718

 

19.92

%  

 

221,878

 

21.55

%

Home equity lines of credit (“HELOC”)

 

48,395

 

3.77

%  

 

44,514

 

4.32

%

Total real estate loans

 

1,116,071

 

86.96

%  

 

946,328

 

91.89

%

Other loans:

 

 

 

  

 

  

Commercial and industrial

 

165,766

 

12.91

%  

 

75,748

 

7.35

%

Loans to individuals

 

7,017

 

0.55

%  

 

9,779

 

0.95

%

Overdrafts

 

80

 

0.01

%  

 

234

 

0.02

%

Total other loans

 

172,863

 

13.47

%  

 

85,761

 

8.32

%

Gross loans

 

1,288,934

 

 

1,032,089

 

Less deferred loan origination fees, net

 

(5,477)

 

(0.43)

%  

 

(2,114)

 

(0.21)

%

Total loans

 

1,283,457

 

100.00

%  

 

1,029,975

 

100.00

%

Allowance for loan losses

 

(13,561)

 

(8,324)

 

  

Total loans, net

$

1,269,896

$

1,021,651

 

  

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

    

September 30, 2020

    

December 31, 2019

Contractually required payments

$

38,279

$

20,598

Nonaccretable difference

3,401

1,694

Cash flows expected to be collected

34,878

18,904

Accretable yield

4,891

3,191

Carrying value

$

29,987

$

15,713

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

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

19

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

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

The following tables present an age analysis of past due loans, segregated by class of loans as of 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

(dollars in thousands)

Commercial and industrial

$

2

$

105

$

543

$

3,687

$

4,337

$

161,429

$

165,766

Construction

 

0

 

0

 

0

 

161

 

161

 

255,557

 

255,718

Multi-family residential

 

0

 

0

 

0

 

0

 

 

79,697

 

79,697

Commercial real estate

 

210

 

0

 

336

 

2,489

 

3,035

 

534,052

 

537,087

Loans to individuals & overdrafts

 

9

 

0

 

0

 

145

 

154

 

6,943

 

7,097

1‑to‑4 family residential

 

200

 

13

 

669

 

950

 

1,832

 

193,342

 

195,174

HELOC

 

95

 

31

 

0

 

263

 

389

 

48,006

 

48,395

Deferred loan (fees) cost, net

 

0

 

0

 

0

 

0

 

 

0

 

(5,477)

$

516

$

149

$

1,548

$

7,695

$

9,908

$

1,279,026

$

1,283,457

December 31, 2019

30-59

60-89

90+

Non-

Total

Days

Days

Days

Accrual

Past

Total

    

Past Due

    

Past Due

    

Accruing

    

Loans

    

Due

    

Current

    

Loans

(dollars in thousands)

Commercial and industrial

$

1,108

$

34

$

46

$

2,824

$

4,012

$

71,736

$

75,748

Construction

 

0

 

0

 

0

 

181

 

181

 

221,697

 

221,878

Multi-family residential

 

0

 

0

 

0

 

0

 

0

 

69,124

 

69,124

Commercial real estate

 

393

 

82

 

321

 

1,832

 

2,628

 

456,487

 

459,115

Loans to individuals & overdrafts

 

5

 

0

 

0

 

155

 

160

 

9,853

 

10,013

1‑to‑4 family residential

 

859

 

810

 

864

 

505

 

3,038

 

148,659

 

151,697

HELOC

 

168

 

0

 

0

 

444

 

612

 

43,902

 

44,514

Deferred loan (fees) cost, net

 

0

 

0

 

0

 

0

 

0

 

0

 

(2,114)

$

2,533

$

926

$

1,231

$

5,941

$

10,631

$

1,021,458

$

1,029,975

20

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of September 30, 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

(dollars in thousands)

2020 :

With no related allowance recorded:

Commercial and industrial

$

3,635

$

5,466

$

$

4,818

$

25

$

4,475

$

152

Construction

 

262

 

366

 

 

345

 

6

 

291

 

17

Commercial real estate

 

5,175

 

5,448

 

 

5,265

 

38

 

5,661

 

127

Loans to individuals & overdrafts

 

261

 

279

 

 

271

 

 

273

 

14

Multi-family residential

 

 

 

 

 

 

99

 

HELOC

 

411

 

553

 

 

453

 

2

 

575

 

22

1‑to‑4 family residential

 

197

 

207

 

 

202

 

22

 

292

 

Subtotal:

 

9,941

 

12,319

 

 

11,354

 

93

 

11,666

 

332

With an allowance recorded:

Commercial and industrial

 

502

 

521

 

162

 

576

 

19

 

576

 

18

Construction

 

 

 

 

 

 

 

Commercial real estate

 

977

 

1,032

 

325

 

986

 

15

 

208

 

46

Loans to individuals & overdrafts

 

 

 

 

 

 

 

Multi-family Residential

 

 

 

 

 

 

 

HELOC

 

119

 

150

 

9

 

122

 

5

 

264

 

6

1‑to‑4 family residential

 

39

 

107

 

10

 

103

 

 

64

 

6

Subtotal:

 

1,637

 

1,810

 

506

 

1,787

 

39

 

1,112

 

76

Totals:

 

 

 

 

 

 

 

Commercial

 

10,551

 

12,833

 

487

 

11,990

 

103

 

11,310

 

360

Consumer

 

261

 

279

 

 

271

 

 

273

 

14

Residential

 

766

 

1,017

 

19

 

880

 

29

 

1,195

 

34

Grand Total:

$

11,578

$

14,129

$

506

$

13,141

$

132

$

12,778

$

408

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

21

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

remaining $9.9 million had no specific allowances recorded at September 30, 2020. Of the $9.9 million with no allowance recorded, $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

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 $438,000.

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

22

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructurings

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

(dollars in thousands)

(dollars in thousands)

Extended payment terms:

 

  

 

  

 

  

  

 

  

 

  

1-to-4 family residential

 

2

 

$

339

 

$

325

6

 

$

797

 

$

537

Construction

1

157

13

HELOC

 

 

 

2

 

240

 

232

Commercial & industrial

2

146

139

4

1,091

1,083

Loans to individuals

1

14

9

Total

 

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 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

(dollars in thousands)

(dollars in thousands)

Extended payment terms:

 

  

 

  

  

 

  

Commercial and industrial

 

4

 

$

2,203

 

$

Construction

2

 

208

 

1-to-4 family residential

1

10

1

16

Total

 

7

$

2,421

1

$

16

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

23

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

Total loans:

September 30, 2020

Commercial

Credit

Exposure By

 

Commercial

 

Commercial

Internally

 

and

 

 

real

Multi-family

Assigned Grade

     

industrial

     

Construction

     

estate

     

residential

(dollars in thousands)

Superior

$

96,415

$

$

76

$

Very good

 

368

 

162

 

7,812

 

Good

 

5,538

 

2,196

 

67,996

 

4,866

Acceptable

 

22,173

 

24,718

 

270,857

 

50,771

Acceptable with care

 

35,331

 

228,132

 

181,384

 

24,060

Special mention

 

390

 

349

 

2,363

 

Substandard

 

5,551

 

161

 

6,599

 

Doubtful

 

 

 

 

Loss

 

 

 

 

$

165,766

$

255,718

$

537,087

$

79,697

Consumer Credit

    

Exposure By

Internally

 

1to4 family

Assigned Grade

    

residential

    

HELOC

Pass

$

191,984

$

47,300

Special mention

 

445

 

205

Substandard

 

2,745

 

890

$

195,174

$

48,395

24

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Consumer Credit

Exposure Based

 

Loans to

On Payment

 

individuals &

Activity

    

overdrafts

Pass

$

6,806

Special mention

 

291

$

7,097

Total Loans:

December 31, 2019

Commercial

Credit

Exposure By

 

Commercial

 

Commercial

Internally

 

and

 

 

real

Multi-family

Assigned Grade

    

industrial

    

Construction

    

estate

    

residential

(dollars in thousands)

Superior

$

4,014

$

$

337

$

Very good

 

349

 

110

 

1,245

 

Good

 

5,976

 

8,674

 

62,643

 

4,839

Acceptable

 

19,197

 

16,249

 

255,751

 

41,113

Acceptable with care

 

40,579

 

196,228

 

133,190

 

23,172

Special mention

 

242

 

436

 

1,490

 

Substandard

 

5,391

 

181

 

4,459

 

Doubtful

 

 

 

 

Loss

 

 

 

 

$

75,748

$

221,878

$

459,115

$

69,124

Consumer Credit

    

Exposure By

Internally

 

1to4 family

Assigned Grade

    

residential

    

HELOC

Pass

$

147,958

$

43,585

Special mention

 

1,246

 

76

Substandard

 

2,493

 

853

$

151,697

$

44,514

25

Table of Contents

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 September 30, 2020 and 2019:

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

    

2019

2020

    

2019

(dollars in thousands)

(dollars in thousands)

Accretable yield, beginning of period

$

5,661

$

3,481

$

3,191

$

3,593

Additions

 

 

 

2,949

 

Accretion

 

(487)

 

(277)

 

(1,209)

 

(855)

Reclassification from nonaccretable difference

 

24

 

45

 

67

 

293

Other changes, net

 

(307)

 

56

 

(107)

 

274

Accretable yield, end of period

$

4,891

$

3,305

$

4,891

$

3,305

26

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

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

Three Months Ended September 30, 2020

Commercial

    

    

    

1 to 4

    

    

Loans to

    

Multi-

    

and

Commercial

family

individuals &

family

2020

    

industrial

    

Construction

    

real estate

    

residential

    

HELOC

    

overdrafts

    

residential

    

Total

Allowance for loan losses

Loans – excluding PCI

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, beginning of period 07/01/2020

$

2,623

$

2,284

$

4,184

$

1,671

$

388

$

108

$

621

$

11,879

Provision for (recovery of) loan losses

 

1,568

 

212

 

325

 

(570)

 

(49)

 

4

 

84

 

1,574

Loans charged-off

 

(98)

 

0

 

(70)

 

0

 

0

 

(23)

 

0

 

(191)

Recoveries

 

40

 

0

 

1

 

7

 

1

 

7

 

4

 

60

Balance, end of period 9/30/2020

$

4,133

$

2,496

$

4,440

$

1,108

$

340

$

96

$

709

$

13,322

PCI Loans

 

 

 

 

 

  

 

  

 

  

 

Balance, beginning of period 07/01/2020

$

23

$

11

$

44

$

75

$

9

$

4

$

9

$

175

Provision for (recovery of) loan losses

 

(23)

(11)

 

(44)

 

164

 

(9)

 

(4)

 

(9)

 

64

Loans charged-off

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Recoveries

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Balance, end of period 9/30/2020

$

0

$

0

$

0

$

239

$

0

$

0

$

0

$

239

Total Loans

 

 

 

 

  

 

  

 

  

 

  

 

Balance, beginning of period 07/01/2020

$

2,646

$

2,295

$

4,228

$

1,746

$

397

$

112

$

630

$

12,054

Provision for (recovery of) loan losses

 

1,545

 

201

 

281

 

(406)

 

(58)

 

0

 

75

 

1,638

Loans charged-off

 

(98)

 

0

 

(70)

 

0

 

0

 

(23)

 

0

 

(191)

Recoveries

 

40

 

0

 

1

 

7

 

1

 

7

 

4

 

60

Balance, end of period 9/30/2020

$

4,133

$

2,496

$

4,440

$

1,347

$

340

$

96

$

709

$

13,561

Ending Balance: individually evaluated for impairment

$

162

$

0

$

325

$

10

$

9

$

0

$

0

$

506

Ending Balance: collectively evaluated for impairment

$

3,971

$

2,496

$

4,115

$

1,337

$

331

$

96

$

709

$

13,055

Loans:

 

 

 

  

 

  

 

  

 

  

 

  

 

Ending Balance: collectively evaluated for impairment non PCI loans

$

159,585

$

253,851

$

518,462

$

182,926

$

47,190

$

6,709

$

78,646

$

1,247,369

Ending Balance: collectively evaluated for impairment PCI loans

$

1,557

$

1,605

$

12,959

$

12,013

$

675

$

127

$

1,051

$

29,987

Ending Balance: individually evaluated for impairment

$

4,624

$

262

$

5,666

$

235

$

530

$

261

$

0

$

11,578

Ending Balance

$

165,766

$

255,718

$

537,087

$

195,174

$

48,395

$

7,097

$

79,697

$

1,288,934

27

Table of Contents

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Nine Months Ended September 30, 2020

Commercial

    

    

    

1 to 4

    

    

Loans to

    

Multi-

    

and

Commercial

family

individuals &

family

2020

    

industrial

    

Construction

    

real estate

    

residential

    

HELOC

    

overdrafts

    

residential

    

Total

Allowance for loan losses

Loans – excluding PCI

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, beginning of period 01/01/2020

$

1,127

$

1,731

$

2,837

$

1,437

$

329

$

175

$

419

$

8,055

Provision for (recovery of) loan losses

 

3,591

 

765

 

1,670

 

(352)