SELECT BANCORP, INC. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - SELECT BANCORP, INC.	v452218_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SELECT BANCORP, INC.	v452218_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SELECT BANCORP, INC.	v452218_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SELECT BANCORP, INC.	v452218_ex31-1.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 September 30, 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 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 November 8, 2016, the Registrant had outstanding 11,633,824 shares of Common Stock, $1.00 par value per share.

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements *(Unaudited)*

	Consolidated Balance Sheets September 30, 2016 and December 31, 2015	3

	Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2016 and 2015	5

	Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2016 and 2015	6

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2016 and 2015	7

	Notes to Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 4 -	Controls and Procedures	58

Part II.	OTHER INFORMATION

Item 6 -	Exhibits	59

	Signatures	60

	Exhibit Index	61

Part I. Financial Information

Item 1 - Financial Statements

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2016			December 31,
	(Unaudited)			2015*
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	15,538		$	12,567
Interest-earning deposits in other banks		57,456			49,842
Certificates of deposit		1,000			1,000
Investment securities available for sale, at fair value		65,662			80,709
Loans		651,743			617,398
Allowance for loan losses		(7,889	)		(7,021	)

NET LOANS		643,854			610,377

Accrued interest receivable		2,484			2,350
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		2,340			2,112
Other non-marketable securities		750			705
Foreclosed real estate		548			1,401
Premises and equipment, net		18,118			19,078
Bank owned life insurance		22,036			21,592
Goodwill		6,931			6,931
Core deposit intangible (“CDI”)		909			1,241
Assets held for sale		1,214			846
Other assets		5,934			6,264

TOTAL ASSETS	$	844,774		$	817,015

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	177,237		$	148,304
Savings		37,859			37,353
Money market and NOW		169,996			179,450
Time		292,029			286,054

TOTAL DEPOSITS		677,121			651,161

Short-term debt		38,175			29,673
Long-term debt		22,372			28,703
Accrued interest payable		190			232
Accrued expenses and other liabilities		3,725			2,544

TOTAL LIABILITIES		741,583			712,313
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 and 7,645 shares issued and outstanding at September 30, 2016 and December 31, 2015		-			7,645
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,632,192 and 11,583,011 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		11,632			11,583
Additional paid-in capital		69,475			69,061
Retained earnings		21,068			15,923
Common stock issued to deferred compensation trust, at cost; 271,892 and 253,538 shares at September 30, 2016 and December 31, 2015, respectively		(2,261	)		(2,139	)
Directors’ Deferred Compensation Plan Rabbi Trust		2,261			2,139
Accumulated other comprehensive income		1,016			490

TOTAL SHAREHOLDERS’ EQUITY		103,191			104,702

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	844,774		$	817,015

* Derived from audited consolidated financial statements.

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	8,369	$	7,990	$	24,576	$	23,528
Federal funds sold and interest-earning deposits in other banks		52		13		189		44
Investments		334		409		1,067		1,344
TOTAL INTEREST INCOME		8,755		8,412		25,832		24,916
INTEREST EXPENSE
Money market, NOW and savings deposits		98		99		291		294
Time deposits		642		630		1,950		1,965
Short-term debt		22		10		162		56
Long-term debt		147		139		345		337
TOTAL INTEREST EXPENSE		909		878		2,748		2,652
NET INTEREST INCOME		7,846		7,534		23,084		22,264
PROVISION FOR LOAN LOSSES		337		393		847		384
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,509		7,141		22,237		21,880
NON-INTEREST INCOME
Gain on sale of investment securities		-		-		22		219
Service charges on deposit accounts		249		274		742		796
Other fees and income		536		298		1,718		1,361
TOTAL NON-INTEREST INCOME		785		572		2,482		2,376
NON-INTEREST EXPENSE
Personnel		3,176		3,044		9,465		9,116
Occupancy and equipment		575		543		1,756		1,655
Deposit insurance		76		125		337		392
Professional fees		263		239		750		981
CDI amortization		105		125		332		429
Merger/acquisition related expenses		-		103		-		138
Information systems		510		527		1,543		1,412
Foreclosed-related expenses		140		97		203		156
Other		786		767		2,384		2,214
TOTAL NON-INTEREST EXPENSE		5,631		5,570		16,770		16,493
INCOME BEFORE INCOME TAX		2,663		2,143		7,949		7,763
INCOME TAXES		924		792		2,800		2,848
NET INCOME		1,739		1,351		5,149		4,915
DIVIDENDS AND ACCRETION OF PREFERRED STOCK		-		19		4		57
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,739	$	1,332	$	5,145	$	4,858
NET INCOME PER COMMON SHARE
Basic	$	0.15	$	0.12	$	0.44	$	0.42
Diluted	$	0.15	$	0.12	$	0.44	$	0.42
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		11,627,270		11,521,043		11,601,993		11,476,532
Diluted		11,666,280		11,582,724		11,647,915		11,547,581

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(In thousands)

Net income	$	1,739		$	1,351		$	5,149		$	4,915

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale		(259	)		595			840			523
Tax effect		97			(222	)		(300	)		(197	)
		(162	)		373			540			326
Reclassification adjustment for gain included in net income		-			-			(22	)		(219	)
Tax effect		-			-			8			78
		-			-			(14	)		(141	)

Total		(162	)		373			526			185

Total comprehensive income	$	1,577		$	1,724		$	5,675		$	5,100

See accompanying notes.

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		-			-			-		-		-		4,915			-			-		-		4,915
Other comprehensive income, net		-			-			-		-		-		-			-			-		185		185
Preferred stock dividends paid		-			-			-		-		-		(57	)		-			-		-		(57	)
Stock option exercises		-			-			199,131		199		592		-			-			-		-		791
Stock based compensation		-			-			-		-		26		-			-			-		-		26
Director equity incentive plan, net		-			-			-		-		-		-			(18	)		18		-		-
Balance at September 30, 2015		7,645		$	7,645			11,577,111	$	11,577	$	69,024	$	14,305		$	(2,139	)	$	2,139	$	994	$	103,545

Balance at December 31, 2015		7,645		$	7,645			11,583,011	$	11,583	$	69,061	$	15,923		$	(2,139	)	$	2,139	$	490	$	104,702
Net income		-			-			-		-		-		5,149			-			-		-		5,149
Other comprehensive income, net		-			-			-		-		-		-			-			-		526		526
Preferred stock dividends paid		-			-			-		-		-		(4	)		-			-		-		(4	)
Preferred stock redemption		(7,645	)		(7,645	)		-		-		-		-			-			-		-		(7,645	)
Stock option exercises		-			-			49,181		49		361		-			-			-		-		410
Stock based compensation		-			-			-		-		53		-			-			-		-		53
Director equity incentive plan, net		-			-			-		-		-		-			(122	)		122		-		-
Balance at September 30, 2016		-		$	-			11,632,192	$	11,632	$	69,475	$	21,068		$	(2,261	)	$	2,261	$	1,016	$	103,191

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2016			2015
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,149		$	4,915
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		847			384
Depreciation and amortization of premises and equipment		808			798
Amortization and accretion of investment securities		579			721
Amortization of deferred loan fees and costs		(346	)		(216	)
Amortization of core deposit intangible		332			429
Stock-based compensation		53			26
Accretion on acquired loans		(905	)		(1,102	)
Amortization of acquisition premium on time deposits		(542	)		(641	)
Net accretion of acquisition discount on borrowings		(212	)		(299	)
Increase in cash surrender value of bank owned life insurance		(444	)		(469	)
Net loss on sale and write-downs of foreclosed real estate		164			117
Net write-down on asset held for sale		13			271
Net gain on investment security sales and pay-downs		(22	)		(219	)
Change in assets and liabilities:
Net change in accrued interest receivable		(134	)		108
Net change in other assets		17			461
Net change in accrued expenses and other liabilities		1,139			237

NET CASH PROVIDED BY OPERATING ACTIVITIES		6,496			5,521

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of FHLB stock		(228	)		(525	)
Purchase (redemption) of non-marketable security		(45	)		133
Purchase of investment securities available for sale		(1,517	)		(7,322	)
Maturities of investment securities available for sale		9,434			12,430
Mortgage-backed securities pay-downs		6,788			7,165
Proceeds from sale of investment securities available for sale		624			5,640
Net change in loans outstanding		(34,215	)		(44,908	)
Proceeds from sale of foreclosed real estate		1,831			560
Disposal of premises and equipment		400			-
Purchases of premises and equipment		(629	)		(2,500	)

NET CASH USED BY INVESTING ACTIVITIES		(17,557	)		(29,327	)

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Nine Months Ended
	September 30,
	2016			2015
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	26,502		$	1,674
Proceeds from short-term debt		22,000			17,883
Repayments on short-term debt		(18,493	)		(7,812	)
Repayments on long-term debt		(1,124	)		3,472
Preferred stock dividends paid		(4	)		(57	)
Redemption of preferred stock		(7,645	)		-
Proceeds from stock option exercises		410			791

NET CASH PROVIDED BY FINANCING ACTIVITIES		21,646			15,951

NET CHANGE IN CASH AND CASH EQUIVALENTS		10,585			(7,855	)

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

CASH AND CASH EQUIVALENTS, ENDING	$	73,994		$	50,555

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	2,790		$	2,724
Income Taxes		1,772			1,847

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		526			185
Transfers from loans to foreclosed real estate		1,142			99
Transfers from premises and equipment to assets held for sale		768			1,056

See accompanying notes.

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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 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 September 30, 2016 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

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 September 30, 2016 and 2015 there were 123,800 and 111,080 anti-dilutive options outstanding, respectively.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Weighted average shares used for basic net income available to common shareholders		11,627,270		11,521,043		11,601,993		11,476,532

Effect of dilutive stock options		39,010		61,681		45,922		71,049

Weighted average shares used for diluted net income available to common shareholders		11,666,280		11,582,724		11,647,915		11,547,581

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. This guidance was adopted as of January 1, 2016 with no material effect on its financial statements.

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.

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting, to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments 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 but generally 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.

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 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance was 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 were 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 was 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.

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

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 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.

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 “leasee” – 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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

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.

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

NOTED 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.

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

Fair Value Hierarchy

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

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

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

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

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

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three months ended September 30, 2016. Valuation techniques are consistent with techniques used in prior periods.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):

Investment securities available for sale September 30, 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	$	15,211	$	-	$	15,211	$	-
Mortgage-backed securities - GSE’s		33,862		-		33,862		-
Municipal bonds		16,589		-		16,589		-
Total	$	65,662	$	-	$	65,662	$	-

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	$	-

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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

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 September 30, 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 appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At September 30, 2016, the discounts to appraised value 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 September 30, 2016.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at estimated fair value less estimated selling costs. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling costs. At September 30, 2016, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended September 30, 2016.

Assets held for sale

During 2015, a branch facility was taken out of service as part of the Company’s branch restructuring plan and reclassified as held for sale. In the second quarter of 2016 an undeveloped lot that was intended for the site of a future branch was under contract for sale and closed in July 2016. During the third quarter of 2016 the land and building for our Washington branch was under contract for sale and closed in October 2016. The Bank entered into a three year lease for approximately 20% of the square footage of the building for the Washington branch. The properties are 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 significant unobservable input used is the discount applied to appraised values to account for expected liquidation and selling costs ranged between 1% and 25 % at September 30, 2016. There have been no changes in the valuation techniques for the three months ended September 30, 2016.

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 non-recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):

Asset Category September 30, 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	$	4,876	$	-	$	-	$	4,876
Assets held for sale		1,214		-		-		1,214
Foreclosed real estate		548		-		-		548
Total	$	6,638	$	-	$	-	$	6,638

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

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

The following table presents the carrying values and estimated fair values of the Company's financial instruments at September 30, 2016 and December 31, 2015:

	September 30, 2016
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	15,538	$	15,538	$	15,538	$	-	$	-
Certificates of deposit		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		57,456		57,456		57,456		-		-
Investment securities available for sale		65,662		65,662		-		65,662		-
Loans, net		643,854		650,901		-		-		650,901
Accrued interest receivable		2,484		2,484		-		2,484		-
Stock in FHLB		2,340		2,340		-		-		2,340
Other non-marketable securities		750		750		-		-		750

Financial liabilities:
Deposits	$	677,121	$	676,615	$	-	$	676,615	$	-
Short-term debt		38,175		38,175		-		38,175		-
Long-term debt		22,372		17,387		-		17,387		-
Accrued interest payable		190		190		-		190		-

	December 31, 2015
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(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		-

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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.

Other Non-Marketable Securities

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

Deposits

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

Short-term Debt

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

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Long-term Debt

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

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

NOTE E - INVESTMENT SECURITIES

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

	September 30, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	15,045	$	178	$	(12	)	$	15,211
Mortgage-backed securities – GSE’s		32,900		962		-			33,862
Municipal bonds		16,097		492		-			16,589

	$	64,042	$	1,632	$	(12	)	$	65,662

As of September 30, 2016, accumulated other comprehensive income included net unrealized gains totaling $1.6 million. Deferred tax liabilities resulting from these net unrealized gains totaled $604,000.

	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 income included net unrealized gains totaling $781,000. Deferred tax liabilities resulting from these net unrealized gains totaled $291,000.

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

NOTE E - INVESTMENT SECURITIES (continued)

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

	September 30, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
Within 1 year	$	4,497	$	22	$	-		$	4,519
After 1 year but within 5 years		39,011		1,078		-			40,089
After 5 years but within 10 years		11,742		204		(12	)		11,934
After 10 years		8,792		328		-			9,120

	$	64,042	$	1,632	$	(12	)	$	65,662

	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

Securities with a carrying value of $35.1 million and $45.2 million at September 30, 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 September 30, 2016 and December 31, 2015. In 2015, the Company did not incur a loss on the disposal of any security and it has not realized any losses related to the sale of securities in 2016.

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

NOTE E- INVESTMENT SECURITIES (continued)

The following tables show the gross unrealized losses and fair value of the Company’s investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015.

	September 30, 2016
	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	$	-	$	-	$	1,702	$	(12	)	$	1,702	$	(12	)
Total temporarily impaired securities	$	-	$	-	$	1,702	$	(12	)	$	1,702	$	(12	)

At September 30, 2016, the Company had two AFS securities with an unrealized loss for twelve or more consecutive months. Two U.S. government agency GSE’s had unrealized losses for more than twelve months totaling $12,000 at September 30, 2016. There were no securities that had losses for less than twelve months at September 30, 2016. All unrealized losses are attributable to the general trend of interest rates. During the third quarter of 2016 there were no sales of investment securities. During the first nine months of 2016 gross proceeds of investment sales amounted to $624,000 with gains of $22,000.

	December 31, 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.

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

NOTE F - LOANS

Following is a summary of the composition of the Company’s loan portfolio at September 30, 2016 and December 31, 2015:

	September 30,						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	$	93,825			14.39	%	$	87,955			14.25	%
Commercial real estate		261,800			40.17	%		259,259			41.99	%
Multi-family residential		47,886			7.35	%		40,738			6.60	%
Construction		116,287			17.84	%		107,688			17.44	%
Home equity lines of credit (“HELOC”)		41,377			6.35	%		42,002			6.80	%

Total real estate loans		561,175			86.10	%		537,642			87.08	%

Other loans:
Commercial and industrial		82,600			12.67	%		73,491			11.90	%
Loans to individuals		8,924			1.37	%		7,207			1.17	%
Overdrafts		149			0.02	%		48			0.01	%
Total other loans		91,673			14.06	%		80,746			13.08	%

Gross loans		652,848						618,388
Less deferred loan origination fees, net		(1,105	)		(0.16	)%		(990	)		(0.16	)%
Total loans		651,743			100.00	%		617,398			100.00	%

Allowance for loan losses		(7,889	)					(7,021	)

Total loans, net	$	643,854					$	610,377

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 September 30, 2016, the Company had pre-approved but unused lines of credit for customers totaling $127.6 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

A floating lien of $95.9 million of loans was pledged to the FHLB to secure borrowings at September 30, 2016.

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

NOTE F - LOANS (continued)

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

1-to-4 Family Residential Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

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

Construction Loans

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

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

NOTE F - LOANS (continued)

Also, consideration is 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.

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 September 30, 2016 and December 31, 2015, respectively:

Total Loans:	September 30, 2016
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(dollars in thousands)

Commercial and industrial	$	35	$	126	$	161	$	82,439	$	82,600
Construction		79		413		492		115,795		116,287
Multi-family residential		303		360		663		47,223		47,886
Commercial real estate		-		2,969		2,969		258,831		261,800
Loans to individuals & overdrafts		32		-		32		9,041		9,073
1-to-4 family residential		252		653		905		92,920		93,825
HELOC		319		355		674		40,703		41,377
Deferred loan (fees) cost, net		-		-		-		-		(1,105	)

	$	1,020	$	4,876	$	5,896	$	646,952	$	651,743

There were two loans that amounted to $431,000 that were more than 90 days past due and still accruing interest at September 30, 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.

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
September 30, 2016 and December 31, 2015:

							Three months ended				Nine months ended
	As of September 30, 2016						September 30, 2016				September 30, 2016
			Contractual						Interest Income				Interest Income
			Unpaid				Average		Recognized on		Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired		Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	244	$	246	$	-	$	307	$	4	$	175	$	12
Construction		499		622		-		505		1		557		7
Commercial real estate		3,620		5,208		-		3,685		34		4,313		107
Loans to individuals & overdrafts		-		-		-		-		-		-		-
Multi-family residential		360		375		-		363		7		394		14
1-to-4 family residential		1,008		1,282		-		1,129		15		1,534		67
HELOC		617		786		-		620		10		658		28
Subtotal:		6,348		8,519		-		6,609		71		7,631		235
With an allowance recorded:
Commercial and industrial		4		4		4		35		-		9		-
Construction		-		-		-		-		-		-		-
Commercial real estate		2,448		2,857		85		2,765		8		1,848		27
Loans to individuals & overdrafts		-		-		-		-		-		2		-
Multi-family residential		-		-		-		-		-		-		-
1-to-4 family residential		283		309		15		280		3		287		11
HELOC		33		35		-		33		-		16		-
Subtotal:		2,768		3,205		104		3,113		11		2,162		38
Totals:
Commercial		7,175		9,312		89		7,660		54		7,296		167
Consumer		-		-		-		-		-		2		-
Residential		1,941		2,412		15		2,062		28		2,495		106
Grand Total:	$	9,116	$	11,724	$	104	$	9,722	$	82	$	9,793	$	273

Impaired loans at September 30, 2016 were approximately $9.1 million and were composed of $4.9 million in nonaccrual loans and $4.2 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $2.8 million in impaired loans had specific allowances provided for them while the remaining $6.3 million had no specific allowances recorded at September 30, 2016. Of the $6.3 million with no allowance recorded, $1.3 million of those loans have had partial charge-offs recorded.

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

NOTE G - LOANS (continued)

Impaired Loans (continued)

							Three months ended				Nine months ended
	As of December 31, 2015						September 30, 2015				September 30, 2015
			Contractual						Interest Income				Interest Income
			Unpaid				Average		Recognized on		Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired		Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	105	$	106	$	-	$	640	$	6	$	630	$	40
Construction		615		764		-		1,070		10		1,070		12
Commercial real estate		5,006		7,229		-		2,556		49		3,136		130
Loans to individuals & overdrafts		-		-		-		-		-		-		-
Multi-family residential		-		-		-		1,769		21		1,779		59
1 to 4 family residential		2,061		2,666		-		2,485		28		2,201		77
HELOC		699		868		-		641		9		648		30
Subtotal:		8,486		11,633		-		9,161		123		9,464		348
With an allowance recorded:
Commercial and industrial		13		13		2		11		-		133		-
Construction		-		-		-		166		1		96		2
Commercial real estate		1,248		1,314		73		4,436		19		3,869		88
Loans to individuals & overdrafts		4		4		4		-		-		-		-
Multi-family residential		-		-		-		-		-		-		-
1 to 4 family residential		290		290		15		495		6		442		13
HELOC		-		-		-		288		-		142		-
Subtotal:		1,555		1,621		94		5,396		26		4,682		103
Totals:
Commercial		6,987		9,426		75		10,648		106		10,713		331
Consumer		4		4		4		-		-		-		-
Residential		3,050		3,824		15		3,909		43		3,433		120
Grand Total:	$	10,041	$	13,254	$	94	$	14,557	$	149	$	14,146	$	451

Impaired loans at December 31, 2015 were approximately $10.0 million and consisted of $6.6 million in non-accrual loans and $3.4 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $1.5 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.

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

NOTE G - 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 three and nine months ended September 30, 2016 and 2015:

	Three months ended September 30, 2016						Nine months ended September 30, 2016
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
	(Dollars in thousands)
Extended payment terms:
1-to-4 family residential		-	$	-	$	-		2	$	100	$	48
Commercial & industrial		-		-		-		3		296		188
Construction		1		139		68		1		139		68
Loans to individuals & overdrafts		-		-		-		1		4		1

Total		1	$	139	$	68		7	$	539	$	305

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

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

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default together with concessions made by loan class during the twelve month period ended September 30, 2016 and 2015:

	Twelve months ended				Twelve months ended
	September 30, 2016				September 30, 2015
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Extended payment terms:
Commercial real estate		3	$	188		1	$	145
Loans to individuals & overdrafts		1		1		-		-
Construction		1		68		-		-
Multi-family residential		1		364		-		-
1-to-4 family residential		1		48		-		-
Total		7	$	669		1	$	145

At September 30, 2016, the Bank had thirty-three loans with an aggregate balance of $4.1 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-two loans with a balance totaling $2.7 million were still accruing as of September 30, 2016. The remaining TDRs with balances totaling $1.4 million as of September 30, 2016 were in non-accrual status.

At September 30, 2015, the Bank had thirty-nine loans with an aggregate balance of $6.4 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-three loans with a balance totaling $3.6 million were still accruing as of September 30, 2015. The remaining TDRs with balances totaling $2.9 million as of September 30, 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).

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

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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.

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.

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

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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.

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.

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

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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.

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

NOTE G - LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of September 30, 2016 and December 31, 2015, respectively:

Total loans:

September 30, 2016
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(In thousands)

Superior	$	347	$	-	$	-	$	-
Very good		256		298		470		-
Good		13,363		7,035		32,473		3,147
Acceptable		27,317		17,162		141,495		30,101
Acceptable with care		39,333		91,051		76,208		13,975
Special mention		1,657		180		5,387		-
Substandard		327		561		5,767		663
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	82,600	$	116,287	$	261,800	$	47,886

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

Pass	$	87,994	$	39,627
Special mention		2,971		435
Substandard		2,860		1,315
	$	93,825	$	41,377

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

Pass	$	9,062
Non –pass		11
	$	9,073

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

NOTE G - 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

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

NOTE G - LOANS (continued)

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

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

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

Accretable yield, beginning of period	$	2,568		$	2,822
Accretion		(252	)		(787	)
Reclassification from (to) nonaccretable difference		248			250
Other changes, net		188			467
Accretable yield, end of period	$	2,752		$	2,752

Allowance for Loan Losses

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

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

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

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

Internal Factors

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

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

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

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

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

Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status.

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

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

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

External Factors

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

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

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

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

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

Reserves are generally divided into three allocation segments:

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

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.

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

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

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

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

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

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2016, respectively:

	Three months ended September 30, 2016
	Commercial									1 to 4					Loans to			Multi-
	and						Commercial			family					individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential		HELOC			overdrafts			residential			Total
	(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period	$	1,086		$	1,511		$	3,113		$	772	$	493		$	169		$	523		$	7,667
Provision for loan losses		113			(13	)		102			7		60			78			(31	)		316
Loans charged-off		(136	)		-			(4	)		-		(25	)		(13	)		-			(178	)
Recoveries		8			6			2			9		9			4			-			38
Balance, end of period	$	1,071		$	1,504		$	3,213		$	788	$	537		$	238		$	492		$	7,843

PCI Loans
Balance, beginning of period	$	16		$	-		$	-		$	-	$	9		$	-		$	-		$	25
Provision for loan losses		21			-			-			-		-			-			-			21
Loans charged-off		-			-			-			-		-			-			-			-
Recoveries		-			-			-			-		-			-			-			-
Balance, end of period	$	37		$	-		$	-		$	-	$	9		$	-		$	-		$	46

Total Loans
Balance, beginning of period	$	1,102		$	1,511		$	3,113		$	772	$	502		$	169		$	523		$	7,692
Provision for loan losses		134			(13	)		102			7		60			78			(31	)		337
Loans charged-off		(136	)		-			(4	)		-		(25	)		(13	)		-			(178	)
Recoveries		8			6			2			9		9			4			-			38
Balance, end of period	$	1,108		$	1,504		$	3,213		$	788	$	546		$	238		$	492		$	7,889

Ending Balance: individually evaluated for impairment	$	4		$	-		$	85		$	15	$	-		$	-		$	-		$	104
Ending Balance: collectively evaluated for impairment	$	1,104		$	1,505		$	3,128		$	773	$	545		$	238		$	492		$	7,785

Loans:
Ending Balance: collectively evaluated for impairment	$	82,352		$	115,788		$	255,732		$	92,534	$	40,727		$	9,073		$	47,526		$	643,732
Ending Balance: individually evaluated for impairment	$	248		$	499		$	6,068		$	1,291	$	650		$	-		$	360		$	9,116
Ending Balance	$	82,600		$	116,287		$	261,800		$	93,825	$	41,377		$	9,073		$	47,886		$	652,848

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

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Nine months ended September 30, 2016
	Commercial									1 to 4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential		Total
	(Dollars in thousands)
Loans – excluding PCI
Balance, beginning of period	$	922		$	1,386		$	3,005		$	605		$	564		$	137		$	393	$	7,012
Provision for loan losses		310			103			321			(107	)		(36	)		119			99		809
Loans charged-off		(177	)		(2	)		(189	)		-			(26	)		(31	)		-		(425	)
Recoveries		15			17			76			290			35			13			-		446
Balance, end of period	$	1,070		$	1,504		$	3,213		$	788		$	537		$	238		$	492	$	7,842

PCI Loans
Balance, beginning of period	$	-		$	-		$	-		$	-		$	9		$	-		$	-	$	9
Provision for loan losses		38			-			-			-			-			-			-		38
Loans charged-off		-			-			-			-			-			-			-		-
Recoveries		-			-			-			-			-			-			-		-
Balance, end of period	$	38		$	-		$	-		$	-		$	9		$	-		$	2	$	47

Total Loans
Balance, beginning of period	$	922		$	1,386		$	3,005		$	605		$	573		$	137		$	393	$	7,021
Provision for loan losses		348			103			321			(107	)		(36	)		119			99		847
Loans charged-off		(177	)		(2	)		(189	)		-			(26	)		(31	)		-		(425	)
Recoveries		15			17			76			290			35			13			-		446
Balance, end of period	$	1,108		$	1,504		$	3,213		$	788		$	546		$	238		$	492	$	7,889

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three and nine month periods ended September 30, 2015, respectively (in thousands):

	Three months ended September 30, 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	$	1,077		$	1,313		$	2,573		$	602		$	764		$	153		$	292		$	6,774
Provision for loan losses		(56	)		118			388			16			(74	)		11			49			452
Loans charged-off		(11	)		(69	)		(119	)		(26	)		(75	)		(11	)		-			(311	)
Recoveries		7			5			59			23			8			6			-			108
Balance, end of period	$	1,017		$	1,367		$	2,901		$	615		$	623		$	159		$	341		$	7,023

PCI Loans
Balance, beginning of period	$	-		$	-		$	57		$	-		$	9		$	-		$	2		$	68
Provision for loan losses		-			-			(57	)		-			-			-			(2	)		(59	)
Loans charged-off		-			-			-			-			-			-			-			-
Recoveries		-			-			-			-			-			-			-			-
Balance, end of period	$	-		$	-		$	-		$	-		$	9		$	-		$	-		$	9

Total Loans
Balance, beginning of period	$	1,077		$	1,313		$	2,630		$	602		$	773		$	153		$	294		$	6,842
Provision for loan losses		(56	)		118			331			16			(74	)		11			47			393
Loans charged-off		(11	)		(69	)		(119	)		(26	)		(75	)		(11	)		-			(311	)
Recoveries		7			5			59			23			8			6			-			108
Balance, end of period	$	1,017		$	1,367		$	2,901		$	615		$	632		$	159		$	341		$	7,032

Ending Balance: individually evaluated for impairment	$	-		$	8		$	316		$	59		$	-		$	1		$	-		$	384
Ending Balance: collectively evaluated for impairment	$	1,017		$	1,359		$	2,585		$	556		$	632		$	158		$	341		$	6,648

Loans:
Ending Balance: collectively evaluated for impairment	$	73,928		$	103,946		$	237,886		$	83,252		$	37,723		$	5,967		$	43,506		$	586,208
Ending Balance: individually evaluated for impairment	$	566		$	863		$	6,696		$	2,537		$	659		$	1		$	1,326		$	12,648
Ending Balance	$	74,494		$	104,809		$	244,582		$	85,789		$	38,382		$	5,968		$	44,832		$	598,856

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Nine months ended September 30, 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		309			320			65			(69	)		(211	)		-			(39	)		375
Loans charged-off		(141	)		(69	)		(148	)		(26	)		(115	)		(46	)		(5	)		(550	)
Recoveries		46			13			70			80			19			20			106			354
Balance, end of period	$	1,017		$	1,367		$	2,901		$	615		$	623		$	159		$	341		$	7,023

PCI Loans
Balance, beginning of period	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Provision for loan losses		-			-			-			-			9			-			-			9
Loans charged-off		-			-			-			-			-			-			-			-
Recoveries		-			-			-			-			-			-			-			-
Balance, end of period	$	-		$	-		$	-		$	-		$	9		$	-		$	2		$	9

Total Loans
Balance, beginning of period	$	803		$	1,103		$	2,914		$	630		$	930		$	185		$	279		$	6,844
Provision for loan losses		309			320			65			(69	)		(202	)		-			(39	)		384
Loans charged-off		(141	)		(69	)		(148	)		(26	)		(115	)		(46	)		(5	)		(550	)
Recoveries		46			13			70			80			19			20			106			354
Balance, end of period	$	1,017		$	1,367		$	2,901		$	615		$	632		$	159		$	341		$	7,032

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents changes in accumulated other comprehensive income for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(In thousands)

Beginning balance	$	1,178		$	621		$	490		$	809

Unrealized gain (loss) on investment securities available for sale		(259	)		595			840			523
Tax effect		97			(222	)		(300	)		(197	)
Other comprehensive gain (loss) before reclassification		(162	)		373			540			326
Amounts reclassified from accumulated comprehensive income:
Realized gains on investment securities included in net income		-			-			(22	)		(219	)
Tax effect		-			-			8			78
Total reclassifications net of tax		-			-			(14	)		(141	)

Net current period other comprehensive income (loss)		(162	)		373			526			185

Ending balance	$	1,016		$	994		$	1,016		$	994

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

NOTE I - REPURCHASE AGREEMENTS

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

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from our general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements totaled $10.3 million and $12.1 million at September 30, 2016 and December 31, 2015, respectively.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE I - 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 September 30, 2016 and December 31, 2015 is presented in the following tables.

	September 30, 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	$	4,409	$	-	$	-	$	-	$	4,409
Mortgage-backed Securities-GSEs		5,868		-		-		-		5,868
Total borrowings	$	10,277	$	-	$	-	$	-	$	10,277
Gross amount of recognized liabilities for repurchase agreements									$	10,277

	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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE J – OTHER REAL ESTATE OWNED

The following table explains changes in other real estate owned during the nine months ended September 30, 2016 and 2015 (dollars in thousands):

	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2016			2015
	(Dollars in thousands)

Beginning balance January 1	$	1,401		$	1,585
Sales		(1,831	)		(560	)
Writedowns		(164	)		(117	)
Transfers		1,142			99
Ending balance	$	548		$	1,007

At September 30, 2016 and December 31, 2015, the Company had $99,000 and $1.4 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure totaled $436,000 and none at September 30, 2016 and December 31, 2015, respectively.

NOTE K – SUBSEQUENT EVENT

The Company entered into a contract to sell the Washington, North Carolina branch building during the third quarter of this year. The contract was closed on October 14, 2016 and the Bank entered into a lease with the new owner for a period of three years. As of September 30, 2016 the real estate related to the Washington property was classified as Assets held for Sale and the immaterial loss on sale was recorded.

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

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include, among other things, 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. On April 29, 2016 we closed our branch located at 3800 10^th Street, Greenville, North Carolina but the property will be held and used. In July 2016 an undeveloped lot previously intended for branch expansion was sold. In August our branch property located in Washington, North Carolina was placed under contract with the branch remaining open in the property under a lease for three years. The closed properties are included in assets held for sale on the consolidated balance sheet as of September 30, 2016.

The Company is assessing the effect, if any, of Hurricane Matthew on the customers and markets it serves. While no material adverse effect on the Company’s financial condition or results of operations are currently anticipated, the Company intends to assess in future periods the effect, if any, on customers affected by the hurricane on October 8, 2016.

Comparison of Financial Condition at

September 30, 2016 and December 31, 2015

During the first nine months of 2016, total assets increased by $27.8 million to $844.8 million as of September 30, 2016. The increase in assets was due primarily to loan growth funded by DDA deposits and time deposits. Earning assets at September 30, 2016 totaled $771.1 million and consisted of $643.9 million in net loans, $65.7 million in investment securities, $58.5 million in overnight investments and interest-bearing deposits in other banks and $3.1 million in non-marketable equity securities, of which $2.3 million is FHLB stock. Total deposits and shareholders’ equity at the end of the third quarter of 2016 were $677.1 million and $103.2 million, respectively.

Since the end of 2015, gross loans have increased by $34.3 million to $651.7 million as of September 30, 2016. At September 30, 2016, gross loans consisted of $82.6 million in commercial and industrial loans, $261.8 million in commercial real estate loans, $47.9 million in multi-family residential loans, $9.1 million in consumer loans, $93.8 million in residential real estate loans, $41.4 million in HELOCs, and $116.3 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.1 million at September 30, 2016.

At September 30, 2016 and December 31, 2015, there were no federal funds sold and no repurchase agreements. Interest-earning deposits in other banks were $57.5 million at September 30, 2016, a $7.6 million increase from December 31, 2015. The Company’s investment securities at September 30, 2016 were $65.7 million, a decrease of $15.0 million from December 31, 2015 in order to provide funding for higher yielding loans. The investment portfolio as of September 30, 2016 consisted of $15.2 million in government agency debt securities, $33.9 million in mortgage-backed securities and $16.6 million in municipal securities. The net unrealized gain on these securities as of September 30, 2016 was $1.6 million.

At September 30, 2016, the Company had an investment of $2.3 million in Federal Home Loan Bank (“FHLB”) stock, which increased by $228,000 from December 31, 2015. Also, the Company had $750,000 in other non-marketable securities at September 30, 2016, which increased by $45,000 from December 31, 2015.

At September 30, 2016, non-earning assets were $73.7 million, an increase of $2.3 million from $71.4 million as of December 31, 2015. Non-earning assets included $15.5 million in cash and due from banks, bank premises and equipment of $18.1 million, goodwill of $6.9 million, core deposit intangible of $909,000, accrued interest receivable of $2.5 million, foreclosed real estate of $548,000, $22.0 million in bank owned life insurance (“BOLI”), $1.2 million of assets held for sale, and other assets of $5.9 million which included $4.1 million in deferred tax assets. 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 increase in non-earning assets was due primarily to the increase in deposits and the corresponding increase in on-balance sheet cash.

Total deposits at September 30, 2016 were $677.1 million and consisted of $177.2 million in non-interest-bearing demand deposits, $170.0 million in money market and NOW accounts, $37.9 million in savings accounts, and $292.0 million in time deposits. Total deposits increased by $26.0 million from $651.2 million as of December 31, 2015, due primarily to an increase in DDA deposits. The Bank had $497,000 in brokered demand deposits and $43.8 million in brokered time deposits as of September 30, 2016.

As of September 30, 2016, the Company had $38.2 million of short-term debt of which $10.3 million was repurchase agreements with local customers, $22.4 million in long-term debt (of which $10.0 million is identified as FHLB borrowings) and $12.4 million in junior subordinated debentures that are classified as long-term debt.

Total shareholders’ equity at September 30, 2016 was $103.2 million, a decrease of $1.5 million from $104.7 million as of December 31, 2015. This decrease is primarily due the full redemption of $7.6 million of SBLF preferred stock on January 20, 2016 which is netted against year to date earnings of $5.1 million. Accumulated other comprehensive income relating to available for sale securities increased $526,000 during the nine months ended September 30, 2016. Other changes in shareholders’ equity included increases of $53,000 in stock-based compensation and $410,000 from the exercise of stock options.

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

At September 30, 2016, the Company had $1.0 million in loans that were 30 to 89 days past due. This represented 0.16% of gross loans outstanding on that date. This is a decrease from December 31, 2015 when there were $2.5 million in loans that were 30-89 days past due or 0.41% of gross loans outstanding. Non-accrual loans decreased from $6.6 million at December 31, 2015 to $4.9 million at September 30, 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 1.16% at September 30, 2016. The Company has experienced a decrease in non-accruals from $6.6 million at December 31, 2015 to $4.9 million as of September 30, 2016 and an increase in accruing troubled debt restructurings from $2.1 million at December 31, 2015 to $2.7 million as of September 30, 2016. Of the $1.8 million decrease in non-accrual loans in the first nine months of the year, the decrease is related to loans primarily in 1-to-4 Family Residential and Commercial Real Estate loan pool classifications.

At September 30, 2016, the Company had thirty-three loans totaling $4.1 million that were considered to be troubled debt restructurings. Twenty-two of these loans totaling $2.7 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
	September 30,			December 31,
	2016			2015
	(Dollars in thousands)

Non-accrual loans	$	4,876		$	6,635
Accruing TDRs		2,689			2,077
Total non-performing loans		7,565			8,712
Foreclosed real estate		548			1,401
Total non-performing assets	$	8,113		$	10,113

Accruing loans past due 90 days or more	$	431		$	142
Allowance for loan losses	$	7,889		$	7,021

Non-performing loans to period end loans		1.16	%		1.41	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		1.23	%		1.43	%
Allowance for loans losses to period end loans		1.21	%		1.14	%
Allowance for loan losses to non-performing loans		104	%		81	%
Allowance for loan losses to non-performing assets		97	%		69	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		92	%		68	%
Non-performing assets to total assets		0.96	%		1.24	%
Non-performing assets and accruing loans past due 90 days or more to total assets		1.01	%		1.26	%

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at September 30, 2016 and December 31, 2015 were $8.1 million and $10.1 million, respectively. The allowance for loan losses at September 30, 2016 represented 97% of non-performing assets compared to 69% at December 31, 2015.

Total impaired loans at September 30, 2016 were $9.1 million. This includes $4.9 million in loans that were classified as impaired because they were in non-accrual status and $4.2 million in loans that were determined to be impaired for other reasons. Of these loans, $2.8 million required a specific reserve of $104,000 at September 30, 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 $7.9 million at September 30, 2016 or 1.21% of gross loans outstanding. This is an increase from the 1.14% reported as a percentage of gross loans at December 31, 2015.

The Legacy Select loans were recorded at estimated fair value as of the acquisition date and the related credit risk 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 at September 30, 2016 for all periods post acquisition of Legacy Select. The allowance for loan losses at September 30, 2016 and December 31, 2015 represented 104% and 81%, respectively, of non-performing loans.

It is management’s assessment that the allowance for loan losses as of September 30, 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

The Company monitors its exposure to loans that exceed the guidelines established by regulators for loan to value (“LTV”) ratios.

At September 30, 2016 and December 31, 2015, the Company had $20.2 million and $16.7 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At September 30, 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 September 30, 2016 and December 31, 2015, which is less than the 100% maximum allowed. These loans may present more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

Business Sector Concentrations

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

At September 30, 2016 the Company had one product type group which exceeded this guideline; Real Estate Construction – Speculative and Presold, which represented 106% of risk-based capital, or $116.2 million. The following groups were above policy guidelines Real Estate – Residential Rental, Real Estate – Multifamily and Real Estate – Construction and 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 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.

Acquisition, Development, and Construction Loans (“ADC”)

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of September 30, 2016 and December 31, 2015.

Acquisition, Development and Construction Loans

(Dollars in thousands)

	September 30, 2016									December 31, 2015
				Land and Land									Land and Land
	Construction			Development			Total			Construction			Development			Total

Total ADC loans	$	91,757		$	24,530		$	116,287		$	90,805		$	16,883		$	107,688

Average Loan Size	$	195		$	345					$	171		$	268

Percentage of total loans		14.08	%		3.76	%		17.84	%		14.71	%		2.73	%		17.44	%

Non-accrual loans	$	414		$	-		$	414		$	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.

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at September 30, 2016 and December 31, 2015.

	September 30, 2016										December 31, 2015
	ADC Loans		Percent			HELOC		Percent			ADC Loans		Percent			HELOC		Percent
	(Dollars in thousands)

Harnett County	$	4,783		4.11	%	$	5,788		13.99	%	$	10,120		9.40	%	$	6,008		14.30	%
Alamance County		766		0.66	%		970		2.34	%		1,128		1.05	%		565		1.35	%
Beaufort County		2,369		2.04	%		1,193		2.88	%		2,542		2.36	%		1,220		2.90	%
Brunswick County		3,739		3.22	%		2,131		5.15	%		1,784		1.66	%		2,427		5.78	%
Carteret County		456		0.39	%		2,296		5.55	%		919		0.85	%		2,297		5.47	%
Cumberland County		25,840		22.22	%		5,143		12.43	%		23,117		21.47	%		5,412		12.88	%
Pasquotank County		1,146		0.99	%		1,261		3.05	%		1,250		1.16	%		1,008		2.40	%
Pitt County		16,529		14.21	%		5,182		12.52	%		19,486		18.09	%		4,903		11.67	%
Robeson County		709		0.61	%		3,641		8.80	%		198		0.18	%		3,720		8.86	%
Sampson County		76		0.06	%		1,695		4.10	%		406		0.38	%		1,457		3.47	%
Wake County		21,396		18.40	%		1,495		3.61	%		19,484		18.09	%		1,191		2.83	%
Wayne County		10,042		8.64	%		4,455		10.77	%		3,715		3.45	%		4,391		10.46	%
All other locations		28,436		24.45	%		6,127		14.81	%		23,539		21.86	%		7,403		17.63	%

Total	$	116,287		100.00	%	$	41,377		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 September 30, 2016, the Company had $163.8 million in loans that had terms permitting interest only payments. This represented 25.1% 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. Notwithstanding 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 $57.6 million, or 8.8% of total loans, at September 30, 2016 compared to $51.6 million, or 8.4% of total loans, at December 31, 2015. The Company’s ten largest customer relationships totaled $80.7 million, or 12.4% of total loans, at September 30, 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 September 30, 2016 and 2015

General. During the third quarter of 2016, the Company had net income of $1.7 million as compared with net income of $1.4 million for the third quarter of 2015. Net income per common share for the third quarter of 2016 was $0.15, basic and diluted, compared with net income per common share of $0.12, basic and diluted, for the third quarter of 2015. Results of operations for the third quarter of 2016 were primarily impacted by an increase of $312,000 in net interest income, and an increase in non-interest income of $213,000 and a decrease in the provision for loan losses of $56,000. Noninterest expenses increased $61,000 which was primarily related to increased personnel expense of $132,000, professional fees of $24,000 and occupancy expense of $32,000 which was offset by a reduction in deposit insurance of $49,000 and core deposit intangible amortization of $20,000 and other associated expenses. The Company recorded a provision of loan losses of $337,000 for the third quarter of 2016 compared to a provision of $393,000 in the third quarter of 2015. Net interest margin of 4.27% in the third quarter of 2016 decreased 7 basis points from the same period in 2015 resulting from the accretion of the credit mark associated with the acquired loan portfolio.

Net Interest Income. Net interest income increased to $7.8 million for the third quarter of 2016 from $7.5 million for the third quarter of 2015. The Company’s total interest income was affected by the increase in loan balances due to growth. Average total interest-earning assets were $737.2 million in the third quarter of 2016 compared with $689.2 million during the same period in 2015, while the yield on those assets decreased 8 basis points from 4.84% to 4.76% which was primarily due to the yield accretion on loans acquired in the merger with Legacy Select and the reduction of rates on recently originated loans.

The Company’s average interest-bearing liabilities increased by $18.4 million to $550.7 million for the quarter ended September 30, 2016 from $532.3 million for the same period one year earlier and the cost of those funds decreased from 0.67% to 0.66%, or 1 basis point. During the third quarter of 2016, the Company’s net interest margin was 4.27% and net interest spread was 4.10%. In the same quarter ended one year earlier, net interest margin was 4.34% and net interest spread was 4.18%.

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 calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the third quarter of 2016, the Company recorded a provision for loan losses of $337,000 based primarily on loan growth and improving credit metrics as compared to a provision of $393,000 in the third quarter of 2015. This trend of improving credit metrics had been consistently maintained in 2016.

Non-Interest Income. Non-interest income for the quarter ended September 30, 2016 was $785,000, an increase from $572,000 in the third quarter of 2015. Service charges on deposit accounts decreased $25,000 to $249,000 for the quarter ended September 30, 2016 from $274,000 for the same period in 2015. Other non-deposit fees and income increased $238,000 from the third quarter of 2015 to the third quarter of 2016 due primarily to debit card fees and the branch impairment charge taken in the third quarter of 2015. The Company did not sell any investment securities in the third quarter of 2016 or 2015.

Non-Interest Expenses. Non-interest expenses increased by $61,000 to $5.6 million for the quarter ended September 30, 2016, from $5.6 million for the same period in 2015. In general, categories of non-interest expenses that increased were offset by decreases in other areas. The following are highlights of the significant categories of non-interest expenses during the third quarter of 2016 compared to the same period in 2015:

Personnel expenses increased $132,000 to $3.2 million, due to increased staff.

Foreclosed real estate-related expense increased $43,000, primarily due to the loss on the sale of a large real estate owned property.

There was a decrease of $49,000 of deposit insurance expenses incurred in the third quarter of 2016 due to a regulatory rate reduction.

Professional fees increased by $24,000 to $263,000, due to contracted internal audit expenses.

Occupancy and equipment increased by $32,000 to $575,000, due to branch restructuring.

Other non-interest expenses decreased by $121,000, primarily due to a decrease in acquisition related non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 34.7% and 37.0% for the quarters ended September 30, 2016 and 2015, respectively. The effective tax rate for the third quarter of 2016 compared to the same quarter in 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 in 2015.

As of September 30, 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 September 30, 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.

Comparison of Results of Operations for the

Nine months ended September 30, 2016 and 2015

General. During the first nine months of 2016, the Company had net income of $5.1 million as compared with net income of $4.9 million for the first nine months of 2015. Net income per share for the first nine months of 2016 was $0.44, basic and diluted, compared with net income per share of $0.42, basic and diluted, for the first nine months of 2015. Results of operations for the first nine months of 2016 compared to 2015 was primarily impacted by an increase of $820,000 in net interest income, an increase in provision for loan losses of $463,000, an increase of $106,000 in non-interest income and an increase in non-interest expenses of $277,000. Net interest margin of 4.22% in the first nine months of 2016 decreased 18 basis points from the same period in 2015.

Net Interest Income. Net interest income increased to $23.1 million for the first nine months of 2016 from $22.3 million for the first nine months of 2015. The Company’s total interest income was affected by the increase in total loan balances. Average total interest-earning assets were $737.1 million in the first nine months of 2016 compared with $677.2 million during the same period in 2015, while the yield on those assets decreased 20 basis points from 4.92% to 4.72%.

The Company’s average interest-bearing liabilities increased by $44.2 million to $560.9 million for the nine months ended September 30, 2016 from $516.7 million for the same period one year earlier and the cost of those funds decreased from 0.69% to 0.65%, or 4 basis points. During the first nine months of 2016, the Company’s net interest margin was 4.22% and net interest spread was 4.07%. In the same period ended one year earlier, net interest margin was 4.40% and net interest spread was 4.23%. The decrease in loan yields was the primary driver of lower net interest margin in 2016.

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. The Company recorded a provision of $847,000 for the first nine months of 2016 compared to $384,000 for the first nine months of 2015. Loan growth was the primary contributor to the 2016 provision expense. Improving credit metrics have been consistently maintained in 2015 and 2016.

Non-Interest Income. Non-interest income for the nine months ended September 30, 2016 was $2.5 million, an increase of $106,000 from the first nine months of 2015. Service charges on deposit accounts decreased $54,000 to $742,000 for the nine months ended September 30, 2016 from $796,000 for the same period in 2015, primarily due to a decrease in overdraft charges. Other non-deposit fees and income increased $357,000 from the first nine months of 2015 to the first nine months of 2016, primarily due to increases in debit card activity and the branch impairment charge taken in the third quarter of 2015. The Company recognized a gain on sale of investment securities of $22,000 for the first nine months of 2016 compared to a gain of $219,000 for the first nine months of 2015.

Non-Interest Expenses. Non-interest expenses increased by $277,000 to $16.8 million for the nine months ended September 30, 2016, from $16.5 million for the same period in 2015. Non-interest expenses were also impacted in 2015 by $138,000 in branch acquisition charges. The following are highlights of the significant categories of non-interest expenses during the first nine months of 2016 versus the same period in 2015:

Personnel expenses increased $349,000 to $9.5 million, due to additions in staff.

Occupancy and equipment expenses increased by $101,000 due to branch acquisitions.

Professional fees decreased by $231,000 in the first nine months of 2016 to $750,000 compared to $981,000 in the 2015 period primarily due to a reduction in contracted internal audit and consulting fees.

Information systems expense increased $131,000 due to cybersecurity initiatives.

Deposit insurance decreased $55,000 due to a reduction in regulatory rates.

Foreclosed real estate increased $47,000 due to the loss on sale of a large property.

Other non-interest expenses increased by $73,000, due to small increases in several categories of other non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 35.2% and 36.7% for the nine months ended September 30, 2016 and 2015, respectively. The effective tax rate for the first nine months of 2015 was impacted by non-deductible merger expenses incurred in 2015.

As of September 30, 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 September 30, 2016 and December 31, 2015, management concluded that the net deferred tax asset was 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 16.5% of total assets at September 30, 2016 and decreased as compared to 17.6% as of December 31, 2015. This reduction in liquid assets to total assets resulted primarily from letting higher rate deposits roll off and investing proceeds of maturing securities in higher earning loans.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of September 30, 2016, the Company had existing credit lines with other financial institutions to purchase up to $80.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $95.9 million of qualifying loans is pledged to the FHLB to secure borrowings. At September 30, 2016, the Company had $37.9 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At September 30, 2016, in addition to FHLB advances, total borrowings consisted of securities sold under agreements to repurchase of $10.3 million and junior subordinated debentures of $12.4 million.

Total deposits were $677.1 million at September 30, 2016. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 43.1% of total deposits at September 30, 2016. Time deposits of $250,000 or more represented 8.5% of the Company’s total deposits at September 30, 2016. At quarter-end, the Company had $43.8 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.

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 were 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 12.22% at September 30, 2016.

A new capital conservation buffer was established and phased in beginning January 1, 2016 at 0.625 percent above minimum risk-based capital requirements and will increase each subsequent year by 0.625 percent until reaching it final level of 2.50 percent on January 1, 2019. Select Bancorp, Inc. and Select Bank & Trust had capital conservation buffers above minimum risk-based capital requirements of 7.34% and 6.65%, respectively, at September 30, 2016. The buffer exceeds the 0.625 percent requirement and, therefore, results in no limit on distributions.

As the following table indicates, at September 30, 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		15.34	%		8.00	%
Tier 1 risk-based capital ratio		14.29	%		6.00	%
Leverage ratio		13.28	%		4.00	%
Common equity Tier 1 risk-based capital ratio		12.69	%		4.50	%

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

Total risk-based capital ratio		14.65	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		13.60	%		6.00	%		8.00	%
Leverage ratio		12.64	%		4.00	%		5.00	%
Common equity Tier 1 risk-based capital ratio		13.60	%		4.50	%		6.50	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of September 30, 2016. On January 20, 2016, all outstanding shares of the Company’s Series A preferred 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.

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 third 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 third quarter of 2016 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

32.1		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 September 30, 2016, in XBRL (eXtensible Business Reporting Language)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SELECT BANCORP, INC.

Date: November 14, 2016	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: November 14, 2016	By:	/s/ Mark A. Jeffries
		Mark A. Jeffries
		Executive Vice President and Chief Financial Officer

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

32.1		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 September 30, 2016, in XBRL (eXtensible Business Reporting Language)

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