SELECT BANCORP, INC. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - SELECT BANCORP, INC.	v439258_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SELECT BANCORP, INC.	v439258_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - SELECT BANCORP, INC.	v439258_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - SELECT BANCORP, INC.	v439258_ex31-2.htm

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

¨ 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

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer ¨

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

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

As of May 3, 2016, the Registrant had outstanding 11,592,045 shares of Common Stock, $1.00 par value per share.

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets March 31, 2016 and December 31, 2015	3

	Consolidated Statements of Operations Three Months Ended March 31, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2016 and 2015	5

	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2016 and 2015	6

	Consolidated Statements of Cash Flows Three Months Ended March 31, 2016 and 2015	7

	Notes to Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 4 -	Controls and Procedures	52

Part II.	OTHER INFORMATION

Item 6 -	Exhibits	53

	Signatures	54

	Exhibit Index	55

- 2 -

Part I. Financial Information

Item 1 - Financial Statements

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2016			December 31,
	(Unaudited)			2015*
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	10,795		$	12,567
Interest-earning deposits in other banks		56,401			49,842
Certificates of deposit		1,000			1,000
Investment securities available for sale, at fair value		77,122			80,709
Loans		629,619			617,398
Allowance for loan losses		(7,527	)		(7,021	)

NET LOANS		622,092			610,377

Accrued interest receivable		2,408			2,350
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		2,318			2,112
Other non-marketable securities		753			705
Foreclosed real estate		1,888			1,401
Premises and equipment, net		18,979			19,078
Bank owned life insurance		21,740			21,592
Goodwill		6,931			6,931
Core deposit intangible (“CDI”)		1,125			1,241
Assets held for sale		846			846
Other assets		5,997			6,264

TOTAL ASSETS	$	830,395		$	817,015

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	153,732		$	148,304
Savings		39,696			37,353
Money market and NOW		173,694			179,450
Time		300,532			286,054

TOTAL DEPOSITS		667,654			651,161

Short-term debt		31,218			29,673
Long-term debt		28,559			28,703
Accrued interest payable		252			232
Accrued expenses and other liabilities		3,502			2,544

TOTAL LIABILITIES		731,185			712,313
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 and 7,645 shares issued and outstanding at March 31, 2016 and December 31, 2015		-			7,645
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,584,011 and 11,583,011 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		11,584			11,583
Additional paid-in capital		69,251			69,061
Retained earnings		17,422			15,923
Common stock issued to deferred compensation trust, at cost; 260,838 and 253,538 shares at March 31, 2016 and December 31, 2015, respectively		(2,170	)		(2,139	)
Directors’ Deferred Compensation Plan Rabbi Trust		2,170			2,139
Accumulated other comprehensive income		953			490

TOTAL SHAREHOLDERS’ EQUITY		99,210			104,702

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	830,395		$	817,015

* Derived from audited consolidated financial statements.

See accompanying notes.

- 3 -

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended
	March 31,
	2016		2015
	(In thousands, except share
	and per share data)
INTEREST INCOME
Loans	$	7,965	$	7,749
Federal funds sold and interest-earning deposits in other banks		77		25
Investments		390		468

TOTAL INTEREST INCOME		8,432		8,242

INTEREST EXPENSE
Money market, NOW and savings deposits		99		99
Time deposits		661		721
Short-term debt		34		21
Long-term debt		133		98

TOTAL INTEREST EXPENSE		927		939

NET INTEREST INCOME		7,505		7,303

PROVISION FOR LOAN LOSSES		352		130

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,153		7,173

NON-INTEREST INCOME
Gain on the sale of securities		22		85
Service charges on deposit accounts		247		259
Other fees and income		597		519

TOTAL NON-INTEREST INCOME		866		863

NON-INTEREST EXPENSE
Personnel		3,202		3,061
Occupancy and equipment		574		547
Deposit insurance		126		161
Professional fees		235		355
CDI amortization		116		155
Information systems		509		363
Foreclosure-related expenses		39		24
Other		819		704

TOTAL NON-INTEREST EXPENSE		5,620		5,370

INCOME BEFORE INCOME TAX		2,399		2,666

INCOME TAXES		896		923

NET INCOME		1,503		1,743
DIVIDENDS ON PREFERRED STOCK		4		19

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,499	$	1,724

NET INCOME PER COMMON SHAREHOLDERS
Basic	$	0.13	$	0.15
Diluted	$	0.13	$	0.15

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		11,583,440		11,426,378
Diluted		11,626,609		11,510,147

See accompanying notes.

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

	Three Months Ended
	March 31,
	2016			2015
	(In thousands)

Net income	$	1,503		$	1,743

Other comprehensive income (loss):
Unrealized gain on investment securities available for sale		761			608
Tax effect		(284	)		(234	)
		477			374

Reclassification adjustment for gain included in net income		(22	)		(85	)
Tax effect		8			33
		(14	)		(52	)

Total		463			322

Total comprehensive income	$	1,966		$	2,065

See accompanying notes.

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

(in thousands, except share data)

																Common
																Stock						Accumulated
																Issued						Other
											Additional					to Deferred						Compre-		Total
	Preferred Stock						Common Stock				paid-in		Retained			Compensation			Deferred			hensive		Shareholders’
	Shares			Amount			Shares		Amount		Capital		Earnings			Trust			Comp Plan			Income		Equity
Balance at December 31, 2014		7,645		$	7,645			11,377,980	$	11,378	$	68,406	$	9,447		$	(2,121	)	$	2,121		$	809	$	97,685
Net income		-			-			-		-		-		1,743			-			-			-		1,743
Other comprehensive income, net		-			-			-		-		-		-			-			-			322		322
Preferred stock dividends paid		-			-			-		-		-		(19	)		-			-			-		(19	)
Stock option exercises		-			-			80,581		81		271		-			-			-			-		352
Stock based compensation		-			-			-		-		8		-			-			-			-		8
Director equity incentive plan, net		-			-			-		-		-		-			39			(39	)		-		-
Balance at March 31, 2015		7,645		$	7,645			11,458,561	$	11,459	$	68,685	$	11,171		$	(2,082	)	$	2,082		$	1,131	$	100,091

Balance at December 31, 2015		7,645		$	7,645			11,583,011	$	11,583	$	69,061	$	15,923		$	(2,139	)	$	2,139		$	490	$	104,702
Net income		-			-			-		-		-		1,503			-			-			-		1,503
Other comprehensive income, net		-			-			-		-		-		-			-			-			463		463
Preferred stock dividends paid		-			-			-		-		-		(4	)		-			-			-		(4	)
Preferred stock redemption		(7,645	)		(7,645	)		-		-		-		-			-			-			-		(7,645	)
Stock option exercises		-			-			1,000		1		172		-			-			-			-		173
Stock based compensation		-			-			-		-		18		-			-			-			-		18
Director equity incentive plan, net		-			-			-		-		-		-			(31	)		31			-		-
Balance at March 31, 2016		-		$	-			11,584,011	$	11,584	$	69,251	$	17,422		$	(2,170	)	$	2,170		$	953	$	99,210

See accompanying notes.

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

	Three Months Ended
	March 31,
	2016			2015
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,503		$	1,743
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		352			130
Depreciation and amortization of premises and equipment		259			245
Amortization and accretion of investment securities		194			263
Amortization of deferred loan fees and costs		(114	)		(70	)
Amortization of core deposit intangible		116			155
Stock-based compensation		18			8
Accretion on acquired loans		(270	)		(572	)
Amortization of acquisition premium on time deposits		(203	)		(237	)
Net accretion of acquisition discount on borrowings		(77	)		(111	)
Increase in cash surrender value of bank owned life insurance		(148	)		(155	)
Net loss on sale and write-downs of foreclosed real estate		32			22
Net gain on investment security sales		(22	)		(85	)
Change in assets and liabilities:
Net change in accrued interest receivable		(58	)		143
Net change in other assets		(9	)		835
Net change in accrued expenses and other liabilities		978			340

NET CASH PROVIDED BY OPERATING ACTIVITIES		2,551			2,654

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption (purchase) of FHLB stock		(206	)		37
Redemption (purchase) of non-marketable security		(48	)		64
Purchase of investment securities available for sale		(1,518	)		(7,057	)
Maturities of investment securities available for sale		1,777			2,460
Mortgage-backed securities pay-downs		3,293			2,469
Proceeds from sale of investment securities available for sale		602			3,443
Net change in loans outstanding		(12,236	)		(6,298	)
Proceeds from sale of foreclosed real estate		34			376
Purchases of premises and equipment		(160	)		(37	)

NET CASH USED BY INVESTING ACTIVITIES		(8,462	)		(4,543	)

See accompanying notes.

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

	Three Months Ended
	March 31,
	2016			2015
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	16,696		$	(18,145	)
Proceeds from short-term debt		16,000			-
Repayments on short-term debt		(14,422	)		(1,754	)
Repayments on long-term debt		(100	)		(267	)
Preferred stock dividends paid		(4	)		(19	)
Redemption of preferred stock		(7,645	)		-
Proceeds from stock option exercises		173			352

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		10,698			(19,833	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		4,787			(21,722	)

CASH AND CASH EQUIVALENTS, BEGINNING		63,409			58,410

CASH AND CASH EQUIVALENTS, ENDING	$	68,196		$	36,688

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	907		$	991
Taxes		-			-

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		463			322
Transfers from loans to foreclosed real estate		553			-

See accompanying notes.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (“Company”) 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. The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve and the North Carolina Commissioner of Banks.

Select Bank & Trust Company was originally incorporated as New Century Bank on May 19, 2000 and began banking operations on May 24, 2000. Legacy Select Bank & Trust Company was incorporated on July 30, 2004 and was merged with and into the Bank on July 25, 2014 in connection with the Company’s acquisition of Legacy Select. Select Bank & Trust Company continues as the only banking subsidiary of the Company with its headquarters and operations center located in Dunn, NC. The Bank is engaged in general commercial and retail banking in central and eastern North Carolina and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2016 and 2015, 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-month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.

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 2015 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 24, 2016. 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, 2016 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

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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, 2016 and 2015 there were 121,300 and 111,080 anti-dilutive options outstanding, respectively.

	Three Months Ended
	March 31,
	2016		2015
Weighted average shares used for basic net income per share		11,583,440		11,426,378
Effect of dilutive stock options		43,169		83,769
Weighted average shares used for diluted net income per share		11,626,609		11,510,147

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

In September 2015, the FASB issued Accounting Standard Update 2015-16, Simplifying the Accounting for Measurement Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016 with no material effect on its financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments included in this Update are effective immediately and transition guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this Update provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This Update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in this Update are effective for periods beginning after December 15, 2016 and early adoption is not permitted. Adoption of this update is not expected to have a material impact on the Company’s financial position or results of operations because this ASU does not apply to financial instruments.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements. In March 2016, the FASB further amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic718): Improvements to Employee Share-based Payment Accounting, to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the expected impact of these amendments to its financial statements and expects a positive impact to net earnings at the time of adoption as recording of any excess tax benefit will be through the income statement rather than additional paid in capital.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company adopted this guidance as of January 1, 2016 with no material effect on its financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company adopted this guidance as of January 1, 2016 with no material effect on its financial statements.

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements amendment to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective for fiscal years beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016 with no material effect on its financial statements.

In November 2015, the FASB amended the Income Taxes topic of the Accounting Standards Codification to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This Update is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets – referred to as “leases” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. A leasee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current guidelines, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a leasee primarily will depend on its classification as a finance or operating lease. However, the new ASU will require both types of leases to be recognized on the balance sheet. The Update also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets leased by the lease will remain largely unchanged from current guidance. The amendments are effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2018. Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

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.

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.

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SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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 months ended March 31, 2016. Valuation techniques are consistent with techniques used in prior periods.

- 14 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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, 2016 and December 31, 2015 (in thousands):

Investment securities available for sale March 31, 2016	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies – GSE’s	$	21,243	$	-	$	21,243	$	-
Mortgage-backed securities - GSE’s		36,729		-		36,729		-
Municipal bonds		19,150		-		19,150		-

Total	$	77,122	$	-	$	77,122	$	-

Investment securities available for sale December 31, 2015	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies – GSE’s	$	21,226	$	-	$	21,226	$	-
Mortgage-backed securities - GSE’s		39,536		-		39,536		-
Municipal bonds		19,947		-		19,947		-

Total	$	80,709	$	-	$	80,709	$	-

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

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 an 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, 2016 and December 31, 2015, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance 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

- 15 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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, 2016, the discounts used are weighted between 4% 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 months ended March 31, 2016.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, 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, 2016, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended March 31, 2016.

Assets held for sale

During 2015, a branch facility was taken out service as part of the Company’s branch restructuring plan and reclassified as held for sale. The property is recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market.

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, 2016 and December 31, 2015 (in thousands):

Asset Category March 31, 2016	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	6,594	$	-	$	-	$	6,594
Asset held for sale		846		-		-		846
Foreclosed real estate		1,888		-		-		1,888

Total	$	9,328	$	-	$	-	$	9,328

- 16 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Asset Category December 31, 2015	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	6,635	$	-	$	-	$	6,635
Assets held for sale		846		-		-		846
Foreclosed real estate		1,401		-		-		1,401

Total	$	8,882	$	-	$	-	$	8,882

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2016 and December 31, 2015:

	March 31, 2016
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	10,795	$	10,795	$	10,795	$	-	$	-
Certificates of deposit		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		56,401		56,401		56,401		-		-
Investment securities available for sale		77,122		77,122		-		77,122		-
Loans, net		622,092		629,596		-		-		629,596
Accrued interest receivable		2,408		2,408		-		-		2,408
Stock in FHLB		2,318		2,318		-		-		2,318
Other non-marketable securities		753		753		-		-		753

Financial liabilities:
Deposits	$	667,654	$	668,072	$	-	$	668,072	$	-
Short-term debt		31,218		31,218		-		31,218		-
Long-term debt		28,559		23,574		-		23,574		-
Accrued interest payable		252		252		-		252		-

- 17 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

	December 31, 2015
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	12,567	$	12,567	$	12,567	$	-	$	-
Certificates of deposits		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		49,842		49,842		49,842		-		-
Investment securities available for sale		80,709		80,709		-		80,709		-
Loans, net		610,377		615,754		-		-		615,754
Accrued interest receivable		2,350		2,350		-		-		2,350
Stock in the FHLB		2,112		2,112		-		-		2,112
Other non-marketable securities		705		705		-		-		705


Financial liabilities:
Deposits	$	651,161	$	651,255	$	-	$	651,255	$	-
Short-term debt		29,673		29,673		-		29,673		-
Long-term debt		28,703		23,718		-		23,718		-
Accrued interest payable		232		232		-		232		-

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

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

Investment Securities Available for Sale

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

Loans

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

Stock in Federal Home Loan Bank of Atlanta

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

- 18 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Other Non-Marketable Securities

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

Assets Held for Sale

The fair value of assets held for sale approximates the carrying value.

Deposits

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

Short-term Debt

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

Long-term Debt

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

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

- 19 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - INVESTMENT SECURITIES

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

	March 31, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	21,112	$	157	$	(26	)	$	21,243
Mortgage-backed securities – GSE’s		35,821		910		(2	)		36,729
Municipal bonds		18,669		521		(40	)		19,150

	$	75,602	$	1,588	$	(68	)	$	77,122

As of March 31, 2016, accumulated other comprehensive gains included net unrealized gains totaling $1.5 million. Deferred tax liabilities resulting from these net unrealized gains totaled $567,000.

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

	December 31, 2015
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	21,321	$	101	$	(196	)	$	21,226
Mortgage-backed securities – GSE’s		39,123		475		(62	)		39,536
Municipal bonds		19,484		465		(2	)		19,947

	$	79,928	$	1,041	$	(260	)	$	80,709

As of December 31, 2015, accumulated other comprehensive gains included net unrealized gains totaling $781,000. Deferred tax liabilities resulting from these net unrealized gains totaled $291,000.

- 20 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E- INVESTMENT SECURITIES (continued)

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

	March 31, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
Within 1 year	$	2,061	$	6	$	-		$	2,067
After 1 year but within 5 years		47,042		1,027		(27	)		48,042
After 5 years but within 10 years		18,666		257		(5	)		18,918
After 10 years		7,833		298		(36	)		8,095

	$	75,602	$	1,588	$	(68	)	$	77,122

As of March 31, 2016, accumulated other comprehensive income included net unrealized gains totaling $1.5 million. Deferred tax liabilities resulting from these unrealized gains totaled $567,000.

	December 31, 2015
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
Within 1 year	$	1,361	$	6	$	-		$	1,367
After 1 year but within 5 years		52,577		628		(99	)		53,106
After 5 years but within 10 years		17,297		146		(161	)		17,282
After 10 years		8,693		261		-			8,954

	$	79,928	$	1,041	$	(260	)	$	80,709

As of December 31, 2015, accumulated other comprehensive income included net unrealized gains totaling $781,000. Deferred tax liabilities resulting from these unrealized gains totaled $291,000.

Securities with a carrying value of $44.8 million and $45.2 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

Since none of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations and 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, 2016 and December 31, 2015. In 2015 the Company incurred a loss on the disposal of one security and has not realized any losses related to securities sales in 2016.

- 21 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E- INVESTMENT SECURITIES (continued)

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015.

	March 31, 2016
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		losses			value		losses			value		losses
	(In thousands)
Securities available for sale:
U.S. government agencies- GSE’s	$	1,008	$	(3	)	$	3,306	$	(23	)	$	4,314	$	(26	)
Mortgage-backed securities- GSE’s		1,049		(2	)		-		-			1,049		(2	)
Municipal bonds		755		(40	)		-		-			755		(40	)
Total temporarily impaired securities	$	2,812	$	(45	)	$	3,306	$	(23	)	$	6,118	$	(68	)

At March 31, 2016, the Company had three AFS securities with an unrealized loss for twelve or more consecutive months. Three U.S. government agency GSE’s had unrealized losses for more than twelve months totaling $23,000 at March 31, 2016. One U.S. government agency GSE, one mortgage-backed GSE, and two municipal bonds had unrealized losses for less than twelve months totaling $45,000 at March 31, 2016. All unrealized losses are attributable to the general trend of interest rates. During the first quarter of 2016 gross proceeds of investment sales amounted to $602,000 and gains of $22,000.

	2015
	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	$	7,039	$	(70	)	$	7,615	$	(126	)	$	14,654	$	(196	)
Mortgage-backed securities- GSE’s		7,916		(62	)		-		-			7,916		(62	)
Municipal bonds		111		(2	)		-		-			111		(2	)
Total temporarily impaired securities	$	15,066	$	(134	)	$	7,615	$	(126	)	$	22,681	$	(260	)

At December 31, 2015, the Company had five AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agency GSE’s had unrealized losses for more than twelve months totaling $126,000 at December 31, 2015. Six U.S. government agency GSE’s, one municipal and seven mortgage-backed GSE’s had unrealized losses for less than twelve months totaling $134,000 at December 31, 2015. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2015.

- 22 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS

Following is a summary of the composition of the Company’s loan portfolio at March 31, 2016 and December 31, 2015:

	March 31,						December 31,
Total Loans:	2016						2015
				Percent						Percent
	Amount			of total			Amount			of total
	(Dollars in thousands)
Real estate loans:
1-to-4 family residential	$	89,476			14.21	%	$	87,955			14.25	%
Commercial real estate		258,888			41.12	%		259,259			41.99	%
Multi-family residential		42,609			6.77	%		40,738			6.60	%
Construction		111,317			17.68	%		107,688			17.44	%
Home equity lines of credit (“HELOC”)		42,017			6.67	%		42,002			6.80	%

Total real estate loans		544,307			86.45	%		537,642			87.08	%

Other loans:
Commercial and industrial		77,984			12.39	%		73,491			11.90	%
Loans to individuals		8,347			1.32	%		7,207			1.17	%
Overdrafts		58			0.01	%		48			0.01	%
Total other loans		86,389			13.72	%		80,746			13.08	%

Gross loans		630,696						618,388
Less deferred loan origination fees, net		(1,077	)		(0.17	)%		(990	)		(0.16	)%
Total loans		629,619			100.00	%		617,398			100.00	%

Allowance for loan losses		(7,527	)					(7,021	)

Total loans, net	$	622,092					$	610,377

- 23 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Loans are primarily secured by real estate located in eastern and central North Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.

At March 31, 2016, the Company had pre-approved but unused lines of credit for customers totaling $151.8 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.

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

1-to-4 Family Residential Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

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

Construction Loans

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

- 24 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

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

Home Equity Lines of Credit

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

Commercial and Industrial Loans

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

Loans to Individuals & Overdrafts

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

- 25 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

The following tables present an age analysis of past due loans, segregated by class of loans as of March 31, 2016 and December 31, 2015, respectively:

Total Loans:	March 31, 2016
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)

Commercial and industrial	$	315	$	41	$	356	$	77,628	$	77,984
Construction		113		431		544		110,773		111,317
Multi-family residential		25		370		395		42,214		42,609
Commercial real estate		892		4,448		5,340		253,548		258,888
Loans to individuals & overdrafts		5		-		5		8,400		8,405
1-to-4 family residential		1,404		900		2,304		87,172		89,476
HELOC		90		404		494		41,523		42,017
Deferred loan (fees) cost, net		-		-		-		-		(1,077	)

	$	2,844	$	6,594	$	9,438	$	621,258	$	629,619

There was one loan that amounted to $143,000 that was more than 90 days past due and still accruing interest at March 31, 2016.

	December 31, 2015
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(dollars in thousands)

Total Loans
Commercial and industrial	$	455	$	13	$	468	$	73,023	$	73,491
Construction		-		523		523		107,165		107,688
Multi-family residential		44		431		475		40,263		40,738
Commercial real estate		1,214		3,711		4,925		254,334		259,259
Loans to individuals & overdrafts		14		4		18		7,237		7,255
1-to-4 family residential		650		1,594		2,244		85,711		87,955
HELOC		124		359		483		41,519		42,002
Deferred loan (fees) cost, net		-		-		-		-		(990	)
	$	2,501	$	6,635	$	9,136	$	609,252	$	617,398

There was one loan in the amount of $142,000 greater than 90 days past due and still accruing interest at December 31, 2015.

- 26 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of
March 31, 2016 and December 31, 2015:

							Three months ended
			Contractual				March 31, 2016
			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	$	46	$	46	$	-	$	23	$	4
Construction		604		754		-		610		4
Commercial real estate		3,250		4,810		-		4,128		42
Loans to individuals & overdrafts		132		133		-		118		2
HELOC		693		864		-		696		8
1-to-4 family residential		1,263		1,786		-		1,662		17

Subtotal:		5,988		8,393		-		7,237		77
With an allowance recorded:
Commercial and industrial		-		-		-		-		-
Construction		-		-		-		-		-
Commercial real estate		3,136		3,783		149		2,172		14
HELOC		48		50		49		24		1
1-to-4 family residential		351		351		13		321		6
Subtotal:		3,535		4,184		211		2,517		21
Totals:
Commercial		7,036		9,393		149		6,933		64
Consumer		132		133		-		118		2
Residential		2,355		3,051		62		2,703		32

Grand Total:	$	9,523	$	12,577	$	211	$	9,754	$	98

Impaired loans at March 31, 2016 were approximately $9.5 million and were composed of $6.6 million in non-accrual loans and $2.9 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $3.5 million in impaired loans had specific allowances provided for them while the remaining $6.0 million had no specific allowances recorded at March 31, 2016. Of the $6.0 million with no allowance recorded, $1.5 million of those loans have had partial charge-offs recorded.

- 27 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Impaired Loans (continued)

							Three months ended
	As of December 31, 2015						March 31, 2015
			Contractual
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	105	$	106	$	-	$	541	$	3
Construction		615		764		-		1,177		13
Commercial real estate		5,006		7,229		-		2,712		73
Multi-family residential		-		-		-		2,216		22
HELOC		699		868		-		637		11
1-to-4 family residential		2,061		2,666		-		2,422		31

Subtotal:		8,486		11,633		-		9,705		153
With an allowance recorded:
Commercial and industrial		13		13		2		138		-
Construction		-		-		-		166		1
Commercial real estate		1,248		1,314		73		4,671		60
Loans to individuals & overdrafts		4		4		4		-		-
HELOC		-		-		-		283		-
1-to-4 family residential		290		290		15		545		5
Subtotal:		1,555		1,621		94		5,803		66
Totals:
Commercial		6,987		9,426		75		11,621		172
Consumer		4		4		4		-		-
Residential		3,050		3,824		15		3,887		47

Grand Total:	$	10,041	$	13,254	$	94	$	15,508	$	219

Impaired loans at December 31, 2015 were approximately $10.0 million and consisted of $6.6 million in non-accrual loans and $3.1 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately, $1.6 million of the $10.0 million in impaired loans at December 31, 2015 had specific allowances recorded while the remaining $8.5 million had no specific allowances recorded. Of the $8.5 million with no allowance recorded, $1.6 million of those loans have had partial charge-offs recorded.

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

- 28 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

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 2016 and 2015:

	Three months ended March 31, 2016						Three months ended March 31, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
	(Dollars in thousands)
Extended payment terms:
Commercial and industrial		1	$	46	$	46		-	$	-	$	-

Total		1	$	46	$	46		-	$	-	$	-

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 together with concessions made by loan class during the twelve month period ended March 31, 2016 and 2015:

	Twelve months ended				Twelve months ended
	March 31, 2016				March 31, 2015
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Below market interest rate:
1-to-4 family residential		1	$	1		-	$	-
Total		1		1		-		-

Extended payment terms:
Commercial and industrial		1		46		-		-
Multi-family residential		1		373		-		-
Commercial real estate		-		-		2		936
1-to-4 family residential		-		-		1		38
Total		2		419		3		974

Total		3	$	420		3	$	974

- 29 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Troubled Debt Restructurings (continued)

At March 31, 2016, the Bank had thirty-four loans with an aggregate balance of $4.3 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-one loans with a balance totaling $2.2 million were still accruing as of March 31, 2016. The remaining TDRs with balances totaling $2.1 million as of March 31, 2016 were in non-accrual status.

At March 31, 2015, the Bank had forty loans with an aggregate balance of $6.8 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-three loans with a balance totaling $4.0 million were still accruing as of March 31, 2015. The remaining TDRs with balances totaling $2.8 million as of March 31, 2015 were in non-accrual status.

Credit Quality Indicators

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

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

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

Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). Loans assigned this risk grade will demonstrate the following characteristics:

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

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

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

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

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

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

- 30 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

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

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

- 31 -

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

- 32 -

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

NOTE F - LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of March 31, 2016 and December 31, 2015, respectively:

Total loans:

March 31, 2016
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
			(In thousands)

Superior	$	1,076	$	-	$	-	$	-
Very good		1,348		355		296		-
Good		9,029		5,429		28,874		2,404
Acceptable		26,667		18,570		140,460		27,867
Acceptable with care		38,841		86,111		74,946		11,703
Special mention		855		248		8,201		-
Substandard		168		604		6,111		635
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	77,984	$	111,317	$	258,888	$	42,609

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

Pass	$	82,970	$	40,758
Special mention		3,528		424
Substandard		2,978		835
	$	89,476	$	42,017

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

Pass	$	8,391
Non –pass		14
	$	8,405

- 33 -

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

NOTE F - LOANS (continued)

Total Loans:

December 31, 2015
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
(dollars in thousands)

Superior	$	730	$	-	$	-	$	-
Very good		1,314		355		114		-
Good		8,241		5,827		26,538		-
Acceptable		25,014		19,059		144,717		32,355
Acceptable with care		37,980		79,817		74,169		7,685
Special mention		58		2,015		7,657		-
Substandard		154		615		6,064		698
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	73,491	$	107,688	$	259,259	$	40,738

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

Pass	$	80,596	$	40,770
Special mention		3,678		448
Substandard		3,681		784
	$	87,955	$	42,002

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

Pass	$	7,236
Non-pass		19
	$	7,255

- 34 -

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

NOTE F - LOANS (continued)

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.

For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as March 31, 2016 was:

	March 31,
	2016
(Dollars in thousands)
Contractually required payments	$	24,903
Nonaccretable difference		1,390
Cash flows expected to be collected		23,513
Accretable yield		2,657
Fair value	$	20,856

For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as March 31, 2016 was:

	2016			2015
	(dollars in thousands)

Accretable yield, beginning of period	$	2,822		$	3,762
Accretion		(270	)		(328	)
Reclassification from nonaccretable difference		8			-
Other changes, net		97			-

Accretable yield, end of period	$	2,657		$	3,434

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

- 35 -

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

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

Internal Factors

Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio.

Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines.

Compliance exceptions– Measures the risk derived from granting terms outside of regulatory guidelines.

Document exceptions– Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections.

Financial information monitoring – Measures the risk associated with not having current borrower financial information.

Non-accrual – Reflects increased risk of loans with characteristics that merit non-accrual status.

Delinquency – Reflects the increased risk deriving from higher delinquency rates.

Personnel turnover – Reflects staff competence in various types of lending.

Portfolio growth – Measures the impact of growth and potential risk derived from new loan production.

External Factors

GDP growth rate – Impact of general economic factors that affect the portfolio.

North Carolina unemployment rate – Impact of local economic factors that affect the portfolio.

Peer group delinquency rate – Measures risk associated with the credit requirements of competitors.

Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate.

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

- 36 -

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

Reserves are generally divided into three allocation segments:

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

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

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

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

- 37 -

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three month periods ended March 31, 2016 and March 31, 2015, respectively:

	Three months ended March 31, 2016
	Commercial								1-to-4					Loans to			Multi-
	and						Commercial		family					individuals &			family
Allowance for loan losses	industrial			Construction			real estate		residential			HELOC		overdrafts			residential		Total

Loans – excluding PCI
Balance, beginning of period	$	922		$	1,386		$	3,005	$	605		$	564	$	137		$	393	$	7,012
Provision for loan losses		132			9			170		(13	)		6		19			29		352
Loans charged-off		(1	)		(1	)		-		-			-		(9	)		-		(11	)
Recoveries		2			7			42		96			15		3			-		165
Balance, end of period	$	1,055		$	1,401		$	3,217	$	688		$	585	$	150		$	422	$	7,518

PCI Loans
Balance, beginning of period	$	-		$	-		$	-	$	-		$	9	$	-		$	-	$	9
Provision for loan losses		-			-			-		-			-		-			-		-
Loans charged-off		-			-			-		-			-		-			-		-
Recoveries		-			-			-		-			-		-			-		-
Balance, end of period	$	-		$	-		$	-	$	-		$	9	$	-		$	-	$	9

Total Loans
Balance, beginning of period	$	922		$	1,386		$	3,005	$	605		$	573	$	137		$	393	$	7,021
Provision for loan losses		132			9			170		(13	)		6		19			29		352
Loans charged-off		(1	)		(1	)		-		-			-		(9	)		-		(11	)
Recoveries		2			7			42		96			15		3			-		165
Balance, end of period	$	1,055		$	1,401		$	3,217	$	688		$	594	$	150		$	422	$	7,527

Ending Balance: individually evaluated for impairment	$	-		$	-		$	149	$	13		$	49	$	-		$	-	$	211
Ending Balance: collectively evaluated for impairment	$	1,055		$	1,401		$	3,068	$	675		$	545	$	150		$	422	$	7,316

Loans:
Ending Balance: collectively evaluated for impairment	$	77,938		$	110,713		$	252,502	$	87,862		$	41,276	$	8,273		$	42,609	$	621,173
Ending Balance: individually evaluated for impairment	$	46		$	604		$	6,386	$	1,614		$	741	$	132		$	-	$	9,523
Ending Balance	$	77,984		$	111,317		$	258,888	$	89,476		$	42,017	$	8,405		$	42,609	$	630,696

- 38 -

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

	Three months ended March 31, 2015
	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	$	803	$	1,103	$	2,914		$	630		$	930		$	185		$	279		$	6,844
Provision for loan losses		173		102		(40	)		(40	)		(42	)		(3	)		(20	)		130
Loans charged-off		-		-		(29	)		-			(40	)		(24	)		-			(93	)
Recoveries		6		4		-			16			3			9			-			38
Balance, end of period	$	982	$	1,209	$	2,845		$	606		$	851		$	167		$	259		$	6,919

PCI Loans
Balance, beginning of period	$	-	$	-	$	-		$	-		$	-		$	-		$	-		$	-
Provision for loan losses		-		-		-			-			-			-			-			-
Loans charged-off		-		-		-			-			-			-			-			-
Recoveries		-		-		-			-			-			-			-			-
Balance, end of period	$	-	$	-	$	-		$	-		$	-		$	-		$	-		$	-

Total Loans
Balance, beginning of period	$	803	$	1,103	$	2,914		$	630		$	930		$	185		$	279		$	6,844
Provision for loan losses		173		102		(40	)		(40	)		(42	)		(3	)		(20	)		130
Loans charged-off		-		-		(29	)		-			(40	)		(24	)		-			(93	)
Recoveries		6		4		-			16			3			9			-			38
Balance, end of period	$	982	$	1,209	$	2,845		$	606		$	851		$	167		$	259		$	6,919

Ending Balance: individually evaluated for impairment	$	2	$	79	$	354		$	90		$	50		$	-		$	-		$	575
Ending Balance: collectively evaluated for impairment	$	980	$	1,130	$	2,491		$	516		$	801		$	167		$	259		$	6,344

Loans:
Ending Balance: collectively evaluated for impairment	$	65,414	$	84,747	$	227,521		$	84,090		$	37,560		$	5,775		$	39,119		$	544,226
Ending Balance: individually evaluated for impairment	$	615	$	1,221	$	7,233		$	3,183		$	921		$	-		$	2,200		$	15,373
Ending Balance	$	66,029	$	85,968	$	234,754		$	87,273		$	38,481		$	5,775		$	41,319		$	559,599

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

NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents changes in accumulated other comprehensive income for the three months ended March 31, 2016 and 2015.

	Three Months Ended
	March 31,
	2016			2015
	(In thousands)

Beginning balance	$	490		$	809

Unrealized gain on investment securities available for sale		761			608
Tax benefit		(284	)		(234	)
Other comprehensive income before reclassification		477			374

Amounts reclassified from accumulated comprehensive income:
Realized (gain) loss on investment securities included in net income		(22	)		(85	)
Tax effect		8			33
Total reclassifications net of tax		(14	)		(52	)

Net current period other comprehensive income		463			322

Ending balance	$	953		$	1,131

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

NOTE H - REPURCHASE AGREEMENTS

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

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements totaled $9.9 million and $12.1 million at March 31, 2016 and December 31, 2015, respectively.

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

NOTE H - REPURCHASE AGREEMENTS (continued)

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in short-term borrowings as of March 31, 2016 and December 31, 2015 is presented in the following tables.

	March 31, 2016
	Remaining Contractual Maturity of the Agreements
(Dollars in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. government agencies-GSE’s	$	5,004	$	-	$	-	$	-	$	5,004
Mortgage-backed Securities-GSEs		4,889		-		-		-		4,889
Total borrowings	$	9,893	$	-	$	-	$	-	$	9,893
Gross amount of recognized liabilities for repurchase agreements									$	9,893

	December 31, 2015
	Remaining Contractual Maturity of the Agreements
(Dollars in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. government agencies-GSE’s	$	4,206	$	-	$	-	$	-	$	4,206
Mortgage-backed Securities-GSEs		7,943		-		-		-		7,943
Total borrowings	$	12,149	$	-	$	-	$	-	$	12,149
Gross amount of recognized liabilities for repurchase agreements									$	12,149

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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 during the three months ended March 31, 2016 and 2015 (dollars in thousands):

	Three Months			Twelve Months
	Ended			Ended
	March 31,			December31,
	2016			2015
	(Dollars in thousands)

Beginning balance January 1	$	1,401		$	1,585
Sales		(39	)		(635	)
Writedowns		(27	)		(139	)
Transfers		553			590
Ending balance	$	1,888		$	1,401

At March 31, 2016 and December 31, 2015, the Company had $1.9 million and $1.4 million, respectively, of foreclosed residential real estate property in OREO. The Company did not have any recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at March 31, 2016 and December 31, 2015, respectively.

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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 changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.

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, Carteret, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake, Pasquotank, Martin, Alamance, and Wayne counties in North Carolina. 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 addition of six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville, and Burlington. During 2015 Gibsonville and Burlington were combined into a new location in Burlington. As noted in the following discussion and analysis, the combination of the former New Century Bancorp and Legacy Select has had a significant impact on the Company’s financial condition and results of operations.

The Company completed construction of a new branch at 416 South Hughes Boulevard, Elizabeth City, North Carolina in October 2015. The Company’s branch at 100 Nance Court relocated to this location. In addition, we acquired two new branches located at 1101 New Pointe Boulevard, Leland, North Carolina and 168 NC Highway 24, Morehead City, North Carolina in December 2015.

In August 2015, we closed our branches located at 220 Burlington Street, Gibsonville, North Carolina and 523 S. Worth Street, Burlington, North Carolina and transferred accounts to our new Burlington branch located at 3158 South Church Street. In addition, we closed our branch located at 6390 Ramsey Street, Fayetteville, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The closed properties are included in assets held for sale on the consolidated balance sheet as of March 31, 2016.

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Comparison of Financial Condition at

March 31, 2016 and December 31, 2015

During the first three months of 2016, total assets increased by $13.4 million to $830.4 million as of March 31, 2016. The increase in assets was due primarily to loan growth funded from deposits. Earning assets at March 31, 2016 totaled $759.7 million and consisted of $622.1 million in net loans, $77.1 million in investment securities, $57.4 million in overnight investments and interest-bearing deposits in other banks and $3.1 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2016 were $667.7 million and $99.2 million, respectively.

Since the end of 2015, gross loans have increased by $12.2 million to $629.6 million as of March 31, 2016. At March 31, 2016, gross loans consisted of $78.0 million in commercial and industrial loans, $258.9 million in commercial real estate loans, $42.6 million in multi-family residential loans, $8.4 million in consumer loans, $89.5 million in residential real estate loans, $42.0 million in HELOCs, and $111.3 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.1 million at March 31, 2016.

At March 31, 2016 and December 31, 2015, the Company held $0 in federal funds sold and $0 in repurchase agreements. Interest-earning deposits in other banks were $56.4 million at March 31, 2016, a $6.6 million increase from December 31, 2015. The Company’s investment securities at March 31, 2016 were $77.1 million, a decrease of $3.6 million from December 31, 2015. The investment portfolio as of March 31, 2016 consisted of $21.2 million in government agency debt securities, $36.7 million in mortgage-backed securities and $19.2 million in municipal securities. The net unrealized gain on these securities was $1.5 million.

At March 31, 2016, the Company had an investment of $2.3 million in the form of Federal Home Loan Bank (“FHLB”) stock, which increased by $206,000 from December 31, 2015. Also, the Company had $753,000 in other non-marketable securities at March 31, 2016, which increased by $48,000 from December, 31, 2015 due to a reinvested distribution.

At March 31, 2016, non-earning assets were $48.1 million, a decrease of $5.4 million from $53.5 million as of December 31, 2015. Non-earning assets included $10.8 million in cash and due from banks, bank premises and equipment of $19.0 million, goodwill of $6.9 million, core deposit intangible of $1.1 million, accrued interest receivable of $2.4 million, foreclosed real estate of $1.9 million, and other assets totaling $6.0 million, with net deferred taxes of $4.1 million. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The decrease in non-earning assets was due primarily to the reduction in cash and due from banks.

Total deposits at March 31, 2016 were $667.7 million and consisted of $153.7 million in non-interest-bearing demand deposits, $173.7 million in money market and NOW accounts, $40.0 million in savings accounts, and $300.5 million in time deposits. Total deposits increased by $16.5 million from $651.2 million as of December 31, 2015, due primarily to the increase in non-interest bearing deposits and time deposits. The Bank had $497,000 in brokered demand deposits and $39.4 million in brokered time deposits as of March 31, 2016.

As of March 31, 2016, the Company had $9.9 million in repurchase agreements with local customers that are classified as short-term debt, $37.5 million (of which $16.2 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.

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Total shareholders’ equity at March 31, 2016 was $99.2 million, a decrease of $5.5 million from $104.7 million as of December 31, 2015. This was primarily due to the full redemption of the SBLF preferred stock of $7.6 million on January 20, 2016. Accumulated other comprehensive income relating to available for sale securities increased $463,000 during the three months ended March 31, 2016. Other changes in shareholders’ equity included increases of $18,000 in stock-based compensation, net income of $1.5 million, and $173,000 from the exercise of stock options.

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

At March 31, 2016, the Company had $2.8 million in loans that were 30 to 89 days past due. This represented 0.45% of gross loans outstanding on that date. This is an increase from December 31, 2015 when there were $2.5 million in loans that were 30-89 days past due or 0.40% of gross loans outstanding. Non-accrual loans remained stable at $6.6 million at December 31, 2015 compared to March 31, 2016.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 1.41% at December 31, 2015 to 1.39% at March 31, 2016. The Company had a decrease of $41,000 in non-accruals from $6.6 million at December 31, 2015 and an increase in accruing troubled debt restructurings from $2.1 million at December 31, 2015 to $2.2 million as of March 31, 2016. Of the non-accrual loans as of March 31, 2016, fifteen commercial real estate loans comprised $4.5 million, five construction loans totaled $431,000, one commercial loan $41,000, multi-family $370,000 and 1-to-4 family residential loans made up the remaining balance.

At March 31, 2016, the Company had thirty-four loans totaling $4.3 million that were considered to be troubled debt restructurings. Twenty-one of these loans totaling $2.2 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.

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,
	2016			2015
	(Dollars in thousands)

Non-accrual loans	$	6,594		$	6,635
Accruing TDRs		2,156			2,077
Total non-performing loans		8,750			8,712
Foreclosed real estate		1,888			1,401
Total non-performing assets	$	10,638		$	10,113

Accruing loans past due 90 days or more	$	143		$	142
Allowance for loan losses	$	7,527		$	7,021

Non-performing loans to period end loans		1.39	%		1.41	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		1.41	%		1.43	%
Allowance for loans losses to period end loans		1.20	%		1.14	%
Allowance for loan losses to non-performing loans		86	%		81	%
Allowance for loan losses to non-performing assets		71	%		69	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		70	%		68	%
Non-performing assets to total assets		1.28	%		1.24	%
Non-performing assets and accruing loans past due 90 days or more to total assets		1.30	%		1.26	%

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Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at March 31, 2016 and December 31, 2015 were $10.6 million and $10.1 million, respectively. The allowance for loan losses at March 31, 2016 represented 71% of non-performing assets compared to 69% at December 31, 2015.

Total impaired loans at March 31, 2016 were $9.5 million. This includes $6.6 million in loans that were classified as impaired because they were in non-accrual status and $2.9 million in loans that were determined to be impaired for other reasons. Of these loans, $3.5 million required a specific reserve of $211,000 at March 31, 2016.

Total impaired loans at December 31, 2015 were $10.0 million. This includes $6.6 million in loans that were considered to be impaired due to being in non-accrual status and $3.4 million in loans that were deemed to be impaired for other reasons. Of these loans, $1.6 million required a specific reserve of $94,000 at December 31, 2015.

The allowance for loan losses was $7.5 million at March 31, 2016 or 1.20% of gross loans outstanding as compared to 1.14% reported as a percentage of gross loans at December 31, 2015. This increase resulted primarily from changes in qualitative factors related to interest rates and economic performance indicators. The Legacy Select loans have been recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. The allowance for loan losses at March 31, 2016 represented 86% of non-performing loans compared to 81% at December 31, 2015. It is management’s assessment that the allowance for loan losses as of March 31, 2016 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.

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.

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, 2016 and December 31, 2015, the Company had $19.2 million and $16.7 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2016 and December 31, 2015, the Company had $4.9 million and $5.0 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 22.8% and 19.4% of total risk-based capital as of March 31, 2016 and December 31, 2015, 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.

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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, 2016, the Company had one product type group which exceeded this guideline; Real Estate Construction – Speculative and Presold, which represented 105% of risk-based capital, or $111.4 million. All other commercial real estate groups were at or below the 40% threshold. At December 31, 2015, the Company exceeded the 40% guideline in one product type. The 1-to-4 Family Residential category represented 62% of Risk-Based Capital, or $68.8 million, at December 31, 2015. All other commercial real estate product types were under the 40% threshold. These two product types exceeded established guidelines as a result of loans acquired in the merger with Legacy Select.

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, 2016 and December 31, 2015.

Acquisition, Development and Construction Loans

(Dollars in thousands)

	March 31, 2016									December 31, 2015
				Land and Land									Land and Land
	Construction			Development			Total			Construction			Development			Total

Total ADC loans	$	93,833		$	17,485		$	111,317		$	90,805		$	16,883		$	107,688

Average Loan Size	$	187		$	282					$	171		$	268

Percentage of total loans		14.90	%		2.78	%		17.68	%		14.71	%		2.73	%		17.44	%

Non-accrual loans	$	431		$	-		$	431		$	523		$	-		$	523

Management closely monitors the ADC portfolio by reviewing funding based on project completeness, monthly and quarterly inspections as required by the project, collateral value, geographic concentrations, spec-to-presold ratios and performance of similar loans in the Company’s market area.

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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, 2016 and December 31, 2015.

	March 31, 2016										December 31, 2015
	ADC Loans		Percent			HELOC		Percent			ADC Loans		Percent			HELOC		Percent
	(Dollars in thousands)

Harnett County	$	12,623		11.34	%	$	5,974		14.22	%	$	10,120		9.40	%	$	6,008		14.30	%
Alamance County		964		0.87	%		689		1.64	%		1,128		1.05	%		565		1.35	%
Beaufort County		2,551		2.29	%		1,146		2.73	%		2,542		2.36	%		1,220		2.90	%
Brunswick County		1,551		1.39	%		2,112		5.03	%		1,784		1.66	%		2,427		5.78	%
Carteret County		834		0.75	%		2,326		5.54	%		919		0.85	%		2,297		5.47	%
Cumberland County		24,898		22.36	%		5,346		12.72	%		23,117		21.47	%		5,412		12.88	%
Pasquotank County		1,112		1.00	%		1,224		2.91	%		1,250		1.16	%		1,008		2.40	%
Pitt County		18,573		16.69	%		4,443		10.57	%		19,486		18.09	%		4,903		11.67	%
Robeson County		118		0.11	%		3,885		9.25	%		198		0.18	%		3,720		8.86	%
Sampson County		88		0.08	%		1,476		3.51	%		406		0.38	%		1,457		3.47	%
Wake County		19,951		17.92	%		1,033		2.46	%		19,484		18.09	%		1,191		2.83	%
Wayne County		4,400		3.95	%		4,147		9.87	%		3,715		3.45	%		4,391		10.46	%
All other locations		23,654		21.25	%		8,216		19.55	%		23,539		21.86	%		7,403		17.63	%

Total	$	111,317		100.00	%	$	42,017		100.00	%	$	107,688		100.00	%	$	42,002		100.00	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2016, the Company had $168.6 million in loans that had terms permitting interest only payments. This represented 26.8% of the total loan portfolio. At December 31, 2015, the Company had $156.1 million in loans that had terms permitting interest only payments. This represented 25.3% 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 $59.1 million, or 9.4% of total loans, at March 31, 2016 compared to $51.6 million, or 8.4% of total loans, at December 31, 2015. The Company’s ten largest customer relationships totaled $82.8 million, or 13.2% of total loans, at March 31, 2016 compared to $85.1 million, or 13.8% of total loans, at December 31, 2015. 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, 2016 and 2015

General. During the first quarter of 2016, the Company had net income of $1.5 million as compared with net income of $1.7 million for the first quarter of 2015. Net income per common share for the first quarter of 2016 was $0.13, basic and diluted, compared with net income per common share of $0.15, basic and diluted, for the first quarter of 2015. Results of operations for the first quarter of 2016 were primarily impacted by an increase of $190,000 in interest income and an increase in non-interest expense of $250,000, which was primarily related to increased personnel expense of $141,000, information systems expense of $146,000 and other expenses of $114,000 which was offset by a reduction in professional fees of $120,000. The Company recorded a provision for loan losses of $352,000 for the first quarter of 2016 compared to a provision of $130,000 in the first quarter of 2015. Net interest margin of 4.14% in the first quarter of 2016 decreased 16 basis points from the same period in 2015.

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Net Interest Income. Net interest income increased to $7.5 million for the first quarter of 2016 from $7.3 million for the first quarter of 2015. The Company’s total interest income was affected by the increase in loan balances due to loan growth and branches acquired in 2015. Average total interest-earning assets were $734.9 million in the first quarter of 2016 compared with $688.6 million during the same period in 2015, while the average yield on those assets decreased 20 basis points from 4.85% to 4.65% which was primarily due to lower loan yield and a reduction of discount accretion on loans acquired in the merger with Legacy Select.

The Company’s average interest-bearing liabilities increased by $49.6 million to $570.0 million for the quarter ended March 31, 2016 from $520.4 million for the same period one year earlier and the cost of those funds decreased from 0.73% to 0.65%, or 8 basis points. The increase in interest-bearing liabilities was a result of the branches acquired in December 2015. During the first quarter of 2016, the Company’s net interest margin was 4.14% and net interest spread was 4.00%. In the same quarter ended one year earlier, net interest margin was 4.30% and net interest spread was 4.12%.

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 previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the first quarter of 2016, the Company recorded a provision for loan losses of $352,000, as compared to the provision of $130,000 that was recorded in the first quarter of 2015. In both 2016 and 2015, the relatively small provision expense and recovery resulted from a low level of net charge-offs.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2016 was $866,000, an increase of $3,000 from the first quarter of 2015. Service charges on deposit accounts decreased $12,000 to $247,000 for the quarter ended March 31, 2016 from $259,000 for the same period in 2015. Other non-deposit fees and income increased $78,000 from the first quarter of 2015 to the first quarter of 2016 due to increases in various items. The Company recognized $22,000 in gains on sales of securities during the three-months ended March 31, 2016 compared to $85,000 for the same period in 2015.

Non-Interest Expenses. Non-interest expenses increased by $250,000 to $5.6 million for the quarter ended March 31, 2016, from $5.4 million for the same period in 2015. In general, most categories of non-interest expenses increased, offset by decreases in FDIC deposit insurance of $35,000, professional fees of $120,000 and $39,000 in core deposit intangible amortization related to the acquisition of Legacy Select. The following are highlights of the significant categories of non-interest expenses during the first quarter of 2016 versus the same period in 2015:

Personnel expenses increased $141,000 to $3.2 million, due to additions in personnel related to December 2015 branch acquisitions and other growth.

Foreclosed real estate-related expense increased $15,000, primarily due to write-downs in the other real estate owned portfolio.

Information systems expense increased by $146,000 due to cyber-security initiatives and processing program upgrades.

Professional fees decreased by $120,000 to $235,000, due to normalized operations.

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Occupancy and equipment expenses increased by $27,000 to $574,000, due to branch closure expenses.

Other non-interest expenses increased by $114,000, due to small increases in several categories of other non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 37.3% and 34.6% for the quarters ended March 31, 2016 and 2015, respectively. The effective tax rate for the first quarter of 2015 was impacted by an adjustment to reduce the Company’s deferred tax asset resulting from enacted lower corporate tax rates for the State of North Carolina.

As of March 31, 2016 and December, 31, 2015, the Company had a net deferred tax asset in the amount of $4.1 million and $3.2 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, 2016 and December 31, 2015, 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.

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 17.5% of total assets at March 31, 2016 as compared to 17.6% as of December 31, 2015.

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, 2016, the Company had existing credit lines with other financial institutions to purchase up to $93.5 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 $78.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At March 31, 2016, the Company had $37.5 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At March 31, 2016, in addition to FHLB advances, total borrowings consisted of securities sold under agreements to repurchase of $9.9 million and junior subordinated debentures of $12.4 million.

Total deposits were $667.7 million at March 31, 2016. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 45.0% of total deposits at March 31, 2016. Time deposits of $250,000 or more represented 9.2% of the Company’s total deposits at March 31, 2016. At quarter-end, the Company had $39.4 million in brokered time deposits and $497,000 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.

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

Capital Resources

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions and holding companies are subject to the new BASEL III requirements starting the first quarter of 2015. A new part of the capital ratios profile is the Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and SBLF preferred stock in this calculation. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 11.95% at March 31, 2016.

As the following table indicates, at March 31, 2016, the Company and the Bank both exceeded minimum regulatory capital requirements as specified in the tables below.

	Actual			Minimum
Select Bancorp, Inc.	Ratio			Requirement

Total risk-based capital ratio		14.81	%		8.00	%
Tier 1 risk-based capital ratio		13.80	%		6.00	%
Leverage ratio		12.46	%		4.00	%
Common equity Tier 1 risk-based capital ratio		12.19	%		4.50	%

				Regulatory
	Actual			Minimum			Well-Capitalized
Select Bank & Trust	Ratio			Requirement			Requirement

Total risk-based capital ratio		14.23	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		13.22	%		6.00	%		8.00	%
Leverage ratio		11.93	%		4.00	%		5.00	%
Common equity Tier 1 risk-based capital ratio		13.22	%		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, 2016. On January 20, 2016, all outstanding shares of the Company’s Series A stock were redeemed. While the redemption reduced the capital ratios for the Company and the Bank by approximately 1.2% for each ratio, both the Company and the Bank continue to meet the definition of “well-capitalized”.

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.

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.

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Item 4. Controls and Procedures

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

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−15(f) and 15d−15(f) of the Exchange Act) during the first quarter of 2016. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter of 2016 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II.

OTHER INFORMATION

Item 6.

Exhibits

Exhibit Number		Description of Exhibit

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, in XBRL (eXtensible Business Reporting Language)

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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 13, 2016	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: May 13, 2016	By:	/s/ Mark A. Jeffries
		Mark A. Jeffries
		Executive Vice President and Chief Financial Officer

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Exhibit Index

Exhibit Number		Description of Exhibit


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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, in XBRL (eXtensible Business Reporting Language)

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