SELECT BANCORP, INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - SELECT BANCORP, INC.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - SELECT BANCORP, INC.	v385351_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - SELECT BANCORP, INC.	v385351_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - SELECT BANCORP, INC.	v385351_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - SELECT BANCORP, INC.	v385351_ex31-2.htm

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended from to

Commission File Number 000-50400

Select Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

Large accelerated filer ¨		Accelerated filer ¨

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

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

As of August 1, 2014, the Registrant had outstanding 11,347,668 shares of Common Stock, $1 par value per share.

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2014 and December 31, 2013		3

	Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2014 and 2013		4

	Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2014 and 2013		5

	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2014 and 2013		6

	Consolidated Statements of Cash Flows Six Months Ended June 30, 2014 and 2013		7

	Notes to Consolidated Financial Statements		9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44

Item 4 -	Controls and Procedures		55

Part II.	OTHER INFORMATION

Item 6 -	Exhibits		56

	Signatures		57

	Exhibit Index		58

- 2 -

Part I. Financial Information

Item 1 - Financial Statements

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2014			December 31,
	(Unaudited)			2013*
	(In thousands, except share
	and per share data)
ASSETS

Cash and due from banks	$	23,678		$	20,151
Interest-earning deposits in other banks		46,740			49,690
Federal funds sold		3,028			3,028
Investment securities available for sale, at fair value		79,904			83,836

Loans		333,868			346,500
Allowance for loan losses		(6,447	)		(7,054	)

NET LOANS		327,421			339,446

Accrued interest receivable		1,466			1,650
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		562			796
Other non marketable securities		1,041			1,055
Foreclosed real estate		1,169			2,008
Premises and equipment, net		10,930			10,900
Bank owned life insurance		8,578			8,463
Core deposit intangible		124			182
Other assets		3,641			4,441

TOTAL ASSETS	$	508,282		$	525,646

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	82,030		$	85,347
Savings		17,315			16,597
Money market and NOW		118,833			124,635
Time		210,556			221,879

TOTAL DEPOSITS		428,734			448,458

Short term debt		7,179			6,305
Long term debt		12,372			12,372
Accrued interest payable		207			225
Accrued expenses and other liabilities		2,239			2,282

TOTAL LIABILITIES		450,731			469,642

Shareholders’ Equity
Preferred stock, no par value, 10,000,000 shares authorized, none outstanding		-			-
Common stock, $1 par value, 25,000,000 shares authorized; 6,931,168 and 6,921,352 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		6,931			6,922
Additional paid-in capital		42,132			42,062
Retained earnings		8,013			7,128
Accumulated other comprehensive income (loss)		475			(108	)

TOTAL SHAREHOLDERS’ EQUITY		57,551			56,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	508,282		$	525,646

* Derived from audited consolidated financial statements.

See accompanying notes.

- 3 -

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	4,816		$	5,543		$	9,689		$	10,978
Federal funds sold and interest-earning deposits in other banks		31			54			58			111
Investments		414			371			827			758

TOTAL INTEREST INCOME		5,261			5,968			10,574			11,847

INTEREST EXPENSE
Money market, NOW and savings deposits		59			118			117			239
Time deposits		959			1,154			1,934			2,362
Short term debt		7			9			13			25
Long term debt		73			74			144			147

TOTAL INTEREST EXPENSE		1,098			1,355			2,208			2,773

NET INTEREST INCOME		4,163			4,613			8,366			9,074

PROVISION FOR (RECOVERY OF) LOAN LOSSES		(427	)		(375	)		(476	)		(475	)

NET INTEREST INCOME AFTER RECOVERY OF LOAN LOSSES		4,590			4,988			8,842			9,549

NON-INTEREST INCOME
Fees from pre-sold mortgages		-			12			-			73
Service charges on deposit accounts		226			276			453			548
Other fees and income		339			467			737			752

TOTAL NON-INTEREST INCOME		565			755			1,190			1,373

NON-INTEREST EXPENSE
Personnel		2,101			1,997			4,256			4,086
Occupancy and equipment		396			372			780			701
Deposit insurance		103			61			206			209
Professional fees		310			342			593			618
Information systems		320			326			668			664
Foreclosed real estate related expense		40			67			311			190
Merger and restructuring related expenses		237			-			398			-
Other		647			591			1,394			1,210

TOTAL NON-INTEREST EXPENSE		4,154			3,756			8,606			7,678

INCOME BEFORE INCOME TAX		1,001			1,987			1,426			3,244

INCOME TAXES		388			728			541			1,192

NET INCOME	$	613		$	1,259		$	885		$	2,052

NET INCOME PER COMMON SHARE
Basic	$	0.09		$	0.18		$	0.13		$	0.30
Diluted	$	0.09		$	0.18		$	0.13		$	0.30

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,923,640			6,921,352			6,922,651			6,916,233
Diluted		6,928,428			6,922,942			6,926,318			6,917,471

See accompanying notes.

- 4 -

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands)

Net income	$	613		$	1,259		$	885		$	2,052

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities available for sale		482			(1,171	)		718			(1,480	)
Tax effect		(180	)		398			(267	)		503
		302			(773	)		451			(977	)
Reclassification adjustment for loss included in net income		65			63			211			136
Tax effect		(24	)		(21	)		(79	)		(46	)
		41			42			132			90

Total		343			(731	)		583			(887	)

Total comprehensive income	$	956		$	528		$	1,468		$	1,165

See accompanying notes.

- 5 -

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

									Accumulated
					Additional				other			Total
	Common stock				paid-in		Retained		comprehensive			shareholders’
	Shares		Amount		capital		earnings		income (loss)			equity
	(Amounts in thousands, except share and per data share)

Balance at December 31, 2012		6,913,636	$	6,914	$	42,000	$	4,187	$	1,078		$	54,179

Net income		-		-		-		2,052		-			2,052

Other comprehensive loss, net		-		-		-		-		(887	)		(887	)

Stock option exercises		7,716		8		36		-		-			44

Stock based compensation		-		-		15		-		-			15

Balance at June 30, 2013		6,921,352	$	6,922	$	42,051	$	6,239	$	191		$	55,403

Balance at December 31, 2013		6,921,352	$	6,922	$	42,062	$	7,128	$	(108	)	$	56,004

Net income		-		-		-		885		-			885

Other comprehensive income, net		-		-		-		-		583			583

Stock option exercises		9,816		9		59		-		-			68

Stock based compensation		-		-		11		-		-			11

Balance at June 30, 2014		6,931,168	$	6,931	$	42,132	$	8,013	$	475		$	57,551

See accompanying notes.

- 6 -

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

	Six Months Ended
	June 30,
	2014			2013
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	885		$	2,052
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery of loan losses		(476	)		(475	)
Depreciation and amortization of premises and equipment		281			255
Amortization and accretion of investment securities		238			311
Amortization of deferred loan fees and costs		(152	)		(120	)
Amortization of core deposit intangible		58			58
Stock-based compensation		11			15
Increase in cash surrender value of bank owned life insurance		(115	)		(117	)
Net loss on sale and write-downs of foreclosed real estate		273			168
Net loss on investment security sales and pay-downs		211			136
Change in assets and liabilities:
Net change in accrued interest receivable		184			106
Net change in other assets		453			466
Net change in accrued expenses and other liabilities		(61	)		391

NET CASH PROVIDED BY OPERATING ACTIVITIES		1,790			3,246

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of FHLB stock		234			177
Redemption of non-marketable security		14			65
Purchase of investment securities available for sale		(7,445	)		(1,821	)
Maturities of investment securities available for sale		7,102			6,351
Mortgage-backed securities pay-downs		4,206			6,432
Sale of investment securities available for sale		550			-
Net change in loans outstanding		11,993			11,302
Proceeds from sale of foreclosed real estate		1,226			744
Purchases of premises and equipment		(311	)		(210	)

NET CASH PROVIDED BY INVESTING ACTIVITIES		17,569			23,040

See accompanying notes.

- 7 -

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

	Six Months Ended
	June 30,
	2014			2013
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	(19,724	)	$	(33,070	)
Proceeds from short-term debt		874			-
Repayments on short-term debt		-			(3,990	)
Proceeds from stock option exercises		68			44

NET CASH USED IN FINANCING ACTIVITIES		(18,782	)		(37,016	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		577			(10,730	)

CASH AND CASH EQUIVALENTS, BEGINNING		72,869			113,608

CASH AND CASH EQUIVALENTS, ENDING	$	73,446		$	102,878

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	2,226		$	2,813
Taxes		10			526

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		451			(887	)
Transfers from loans to foreclosed real estate		660			49
Transfers from loans held for sale to loans, at fair value		-			406

See accompanying notes.

- 8 -

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

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (the “Bank”). The Bank is engaged in general commercial and retail banking 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.

On July 25, 2014, New Century Bancorp, Inc. (“New Century”) acquired Select Bancorp, Inc., and its wholly-owned subsidiary, Select Bank & Trust Company, and assumed the name, Select Bancorp, Inc. on that date. The financial data reported here is solely the financial information of the entity formerly known as New Century. Commencing in the third quarter of 2014, consolidated financial information of the former New Century and Select entities will be reported upon the July 25, 2014 closing of the merger.

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 six month periods ended June 30, 2014 and 2013, 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 three and six month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014.

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 2013 Annual Report for the former New Century Bancorp, Inc. on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 20, 2014. This quarterly report should be read in conjunction with the Annual Report.

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 June 30, 2014 and 2013 there were 91,183 and 308,909 anti-dilutive options outstanding, respectively.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Weighted average shares used for basic net income per share		6,923,640		6,921,352		6,922,651		6,916,233

Effect of dilutive stock options		4,788		1,590		3,667		1,238

Weighted average shares used for diluted net income per share		6,928,428		6,922,942		6,926,318		6,917,471

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

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the Financial Accounting Standards Board’s (“FASB”) deliberation on reporting reclassification adjustments from accumulated other comprehensive income (“AOCI”). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of the amounts reclassified out of the AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. The standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company has adopted the standard and the adoption of ASU 2013-02 did not have any impact on the Company’s financial condition, results of operations, or cash flows, but did result in additional disclosures in Note H.

ASU 2014-04, Troubled Debt Restructurings by Creditors (Subtopic 310-40): "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." This pronouncement clarifies the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. 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.

NOTE D - FAIR VALUE MEASUREMENTS

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

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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 flows models and similar techniques.

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

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the six months ended June 30, 2014. Valuation techniques are consistent with techniques used in prior periods.

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

NOTE D – FAIR VALUE MEASUREMENTS (continued)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):

Investment securities available for sale June 30, 2014	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	$	27,159	$	-	$	27,159	$	-
Mortgage-backed securities - GSE’s		45,199		-		45,199		-
Municipal bonds		7,546		-		7,546		-
Total	$	79,904	$	-	$	79,904	$	-

Investment securities available for sale December 31, 2013	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	$	34,665	$	-	$	34,665	$	-
Mortgage-backed securities - GSE’s		41,065		-		41,065		-
Municipal bonds		8,106		-		8,106		-
Total	$	83,836	$	-	$	83,836	$	-

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 June 30, 2014 and December 31, 2013, 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 June 30, 2014, the discounts used ranged between 5% and 40%. 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 June 30, 2014.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At June 30, 2014, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended June 30, 2014.

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 June 30, 2014 and December 31, 2013 (in thousands):

Asset Category June 30, 2014	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	$	4,947	$	-	$	-	$	4,947
Foreclosed real estate		1,169		-		-		1,169

Total	$	2,511	$	-	$	-	$	2,511

As of June 30, 2014, the Bank identified $14.5 million in impaired loans, of which $4.9 million were carried at fair value on a non-recurring basis which included $4.1 million in loans that required a specific reserve of $776,000, and an additional $1.6 million in other loans without specific reserves that had partial charge-offs.

Asset Category December 31, 2013	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	$	8,477	$	-	$	-	$	8,477

Foreclosed real estate		2,008		-		-		2,008

Total	$	10,485	$	-	$	-	$	10,485

As of December 31, 2013, the Bank identified $19.0 million in impaired loans, of which $9.9 million were carried at fair value on a non-recurring basis which included $7.4 million in loans that required a specific reserve of $1.1 million, and an additional $2.1 million in other loans without specific reserves that had charge-offs.

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

NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying values and estimated fair values of the Company's financial instruments at June 30, 2014 and December 31, 2013:

	June 30, 2014
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	23,678	$	23,678	$	23,678	$	-	$	-
Interest-earning deposits in other banks		46,740		46,740		46,740		-		-
Federal funds sold		3,028		3,028		3,028		-		-
Investment securities available for sale		79,904		79,904		-		79,904		-
Loans, net		327,421		335,098		-		-		335,098
Accrued interest receivable		1,466		1,466		-		-		1,466
Stock in FHLB		562		562		-		-		562
Other non-marketable securities		1,041		1,041		-		-		1,041

Financial liabilities:
Deposits	$	428,734	$	431,907	$	-	$	431,907	$	-
Short term debt		7,179		7,179		-		7,179		-
Long term debt		12,372		7,517		-		7,517		-
Accrued interest payable		207		207		-		-		207

	December 31, 2013
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	20,151	$	20,151	$	20,151	$	-	$	-
Interest-earning deposits in other banks		49,690		49,690		49,690		-		-
Federal funds sold		3,028		3,028		3,028		-		-
Investment securities available for sale		83,836		83,836		-		83,836		-
Loans, net		339,446		353,439		-		-		353,439
Accrued interest receivable		1,650		1,650		-		-		1,650
Stock in the FHLB		796		796		-		-		796
Other non-marketable securities		1,055		1,055		-		-		1,055

Financial liabilities:
Deposits	$	448,458	$	452,529	$	-	$	452,529	$	-
Short-term debt		6,305		6,305		-		6,305		-
Long-term debt		12,372		7,517		-		7,517		-
Accrued interest payable		225		225		-		-		225

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

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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

The carrying amounts for cash and due from banks, 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

The fair value 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 and Other Non-marketable Securities

The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the FHLB. The fair value of stock in other non-marketable securities is assumed to approximate carrying value.

Deposits

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

Short term Debt

The fair values of short-term debt (sweep accounts that re-price daily) are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Long term Debt

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

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

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

NOTE F - INVESTMENT SECURITIES

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

	June 30, 2014
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
U.S. government agencies-GSE’s
Within 1 year	$	9,770	$	21	$	-		$	9,791
After 1 year but within 5 years		2,437		4		(7	)		2,434
After 5 years but within 10 years		11,821		9		(308	)		11,522
After 10 years		3,466		-		(54	)		3,412

Mortgage-backed securities-GSE’s
Within 1 year		46		3		-			49
After 1 year but within 5 years		23,995		901		-			24,896
After 5 years but within 10 years		20,326		75		(147	)		20,254

Municipal bonds
Within 1 year		577		10		-			587
After 1 year but within 5 years		2,529		169		-			2,698
After 5 years but within 10 years		3,369		83		(5	)		3,447
After 10 years		811		9		(6	)		814

	$	79,147	$	1,284	$	(527	)	$	79,904

As of June 30, 2014, accumulated other comprehensive income included net unrealized gains totaling $757,000. Deferred tax liabilities resulting from these unrealized gains totaled $346,000.

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

NOTE F - INVESTMENT SECURITIES (continued)

	December 31, 2013
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
U.S. government agencies-GSE’s
Within 1 year	$	10,520	$	25	$	-		$	10,545
After 1 year but within 5 years		8,820		17		(10	)		8,827
After 5 years but within 10 years		7,376		-		(549	)		6,827
After 10 years		8,524		11		(69	)		8,466

Mortgage-backed securities-GSE’s
Within 1 year		133		7		-			140
After 1 year but within 5 years		35,352		659		(155	)		35,856
After 5 years but within 10 years		5,316		-		(247	)		5,069


Municipal bonds
Within 1 year		100		1		-			101
After 1 year but within 5 years		3,036		196		-			3,232
After 5 years but within 10 years		3,306		30		(112	)		3,224
After 10 years		1,526		54		(31	)		1,549

	$	84,009	$	1,000	$	(1,173	)	$	83,836

As of December 31, 2013, accumulated other comprehensive loss included net unrealized losses totaling $173,000. Deferred tax assets resulting from these unrealized losses totaled $65,000.

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2014 and December 31, 2013.

	June 30, 2014
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		losses			value		losses			value		losses
	(In thousands)
Securities available for sale:
U.S. government agencies-GSE’s	$	9,162	$	(101	)	$	5,732	$	(268	)	$	14,894	$	(369	)
Mortgage-backed securities-GSE’s		8,761		(48	)		4,905		(99	)		13,666		(147	)
Municipal bonds		1,752		(3	)		522		(8	)		2,274		(11	)

Total temporarily impaired securities	$	19,675	$	(152	)	$	11,159	$	(375	)	$	30,834	$	(527	)

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

NOTE F- INVESTMENT SECURITIES (continued)

At June 30, 2014, the Company had nine AFS securities with an unrealized loss for twelve or more consecutive months. Three U.S. government agency GSE’s, four mortgage-backed GSE’s, and two municipal bonds had unrealized losses for more than twelve months totaling $375,000 at June 30, 2014. Six U.S. government agency GSE’s, five mortgage-backed GSE’s, and one municipal bond had unrealized losses for less than twelve months totaling $152,000 at June 30, 2014. All unrealized losses are attributable to the general trend of interest rates.

	December 31, 2013
	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	$	11,908	$	(239	)	$	3,611	$	(389	)	$	15,519	$	(628	)
Mortgage-backed securities-GSE’s		21,762		(312	)		1,777		(90	)		23,539		(402	)
Municipal bonds		2,719		(143	)		-		-			2,719		(143	)
Total temporarily impaired securities	$	36,389	$	(694	)	$	5,388	$	(479	)	$	41,777	$	(1,173	)

At December 31, 2013, the Company had three AFS securities with an unrealized loss for twelve or more consecutive months. Two U.S. government agency GSE’s and one mortgage-backed GSE had unrealized losses for more than twelve months totaling $479,000 at December 31, 2013. Eight U.S. government agency GSE’s, nineteen mortgage-backed GSE’s, and three municipal bonds had unrealized losses for less than twelve months totaling $694,000 at December 31, 2013. All unrealized losses are attributable to the general trend of interest rates.

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

NOTE G - LOANS

Following is a summary of the composition of the Company’s loan portfolio at June 30, 2014 and December 31, 2013:

	June 30,						December 31,
	2014						2013
				Percent						Percent
	Amount			of total			Amount			of total
	(Dollars in thousands)
Real estate loans:
1 to 4 family residential	$	30,669			9.19	%	$	35,006			10.10	%
Commercial real estate		156,971			47.02	%		169,176			48.82	%
Multi-family residential		18,436			5.52	%		19,739			5.70	%
Construction		60,541			18.13	%		53,325			15.39	%
Home equity lines of credit (“HELOC”)		30,561			9.15	%		31,863			9.20	%

Total real estate loans		297,178			89.01	%		309,109			89.21	%

Other loans:
Commercial and industrial		31,660			9.48	%		29,166			8.42	%
Loans to individuals		5,504			1.65	%		8,584			2.48	%
Overdrafts		155			0.05	%		191			0.05	%
Total other loans		37,319			11.18	%		37,941			10.95	%

Gross loans		334,497						347,050

Less deferred loan origination fees, net		(629	)		(0.19	)%		(550	)		(0.16	)%

Total loans		333,868			100.00	%		346,500			100.00	%

Allowance for loan losses		(6,447	)					(7,054	)

Total loans, net	$	327,421					$	339,446

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Loans are primarily made in southeastern North Carolina. Real estate loans can be affected by the condition of the local real estate market and by local economic conditions.

At June 30, 2014, the Company had pre-approved but unused lines of credit for customers totaling $98.7 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

1-to-4 Family Residential Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

Multi-family residential loans are typically non-farm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependant 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 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 G - LOANS (continued)

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

Home Equity Lines of Credit

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

Commercial and Industrial Loans

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

Loans to Individuals & Overdrafts

Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are 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 G - LOANS (continued)

The following tables present an age analysis of past due loans, segregated by class of loans as of June 30, 2014 and December 31, 2013, respectively:

	June 30, 2014
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)

Commercial and industrial	$	173	$	265	$	438	$	31,222	$	31,660
Construction		18		889		907		59,634		60,541
Multi-family residential		-		955		955		17,481		18,436
Commercial real estate		2		3,208		3,210		153,761		156,971
Loans to individuals & overdrafts		12		22		34		5,625		5,659
1-to-4 family residential		286		1,282		1,568		29,101		30,669
HELOC		22		986		1,008		29,553		30,561
Deferred loan (fees) cost, net										(629	)

	$	513	$	7,607	$	8,120	$	326,377	$	333,868

There were no loans that were more than 90 days past due and still accruing interest at June 30, 2014.

	December 31, 2013
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)

Commercial and industrial	$	70	$	330	$	400	$	28,766	$	29,166
Construction		36		1,206		1,242		52,083		53,325
Multi-family residential		-		1,004		1,004		18,735		19,739
Commercial real estate		446		4,441		4,887		164,289		169,176
Loans to individuals & overdrafts		4		5		9		8,766		8,775
1 to 4 family residential		318		1,092		1,410		33,596		35,006
HELOC		-		1,241		1,241		30,622		31,863
Deferred loan (fees) cost, net										(550	)

	$	874	$	9,319	$	10,193	$	336,857	$	346,500

There were no loans greater than 90 days past due and still accruing interest at December 31, 2013.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of June 30, 2014 and December 31, 2013:

							Three months ended				Six months ended
	As of June 30, 2014						June 30, 2014				June 30, 2014
			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	$	122	$	122	$	-	$	124	$	2	$	159	$	5
Construction		1,634		1,848		-		1,706		20		1,846		43
Commercial real estate		3,271		4,441		-		3,363		37		3,639		107
Loans to individuals & overdrafts		2		5		-		2		-				2
Multi-family residential		2,331		2,605		-		2,335		36		2,358		75
1 to 4 family residential		2,379		2,804		-		2,421		25		2,967		64
HELOC		659		774		-		707		12		713		21
Subtotal:		10,398		12,599		-		10,658		132		11,684		315
With an allowance recorded:
Commercial and industrial		266		266		66		265		-		266		-
Construction		168		168		81		168		-		248		-
Commercial real estate		2,715		3,434		426		2,693		31		4,205		42
Loans to individuals & overdrafts		20		20		20		10		-				11
Multi-family residential		-		-		-		-		-		-		-
1 to 4 family residential		569		574		43		496		13		561		20
HELOC		400		643		140		473		4		477		9
Subtotal:		4,138		5,105		776		4,105		48		5,768		71
Totals:
Commercial		10,507		12,884		573		10,654		126		12,721		272
Consumer		22		25		20		12		-		13		-
Residential		4,007		4,795		183		4,097		54		4,718		114
Grand Total:	$	14,536	$	17,704	$	776	$	14,763	$	180	$	17,452	$	386

Impaired loans at June 30, 2014 were approximately $14.5 million and were composed of $7.6 million in nonaccrual loans and $6.9 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $4.1 million in impaired loans had specific allowances provided for them while the remaining $10.4 million had no specific allowances recorded at June 30, 2014. Of the $10.4 million with no allowance recorded, $1.6 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				Six months ended
	As of December 31, 2013						June 30, 2013				June 30, 2013
			Contractual						Interest Income				Interest Income
			Unpaid		Related		Average		Recognized on		Average		Recognized on
	Recorded		Principal		Allowance		Recorded		Impaired		Recorded		Impaired
	Investment		Balance		for Loan Losses		Investment		Loans		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	196	$	257	$	-	$	500	$	17	$	515	$	21
Construction		2,059		2,311		-		1,881		2		2,046		4
Commercial real estate		3,748		4,971		-		5,812		124		5,870		147
Loans to individuals & overdrafts		3		3		-		1		-		2		-
Multi-family residential		2,384		2,384		-		1,911		33		1,755		72
1 to 4 family residential		2,427		2,731		-		396		2		477		4
HELOC		767		854		-		2,707		31		2,713		64
Subtotal:		11,584		13,511		-		13,208		209		13,378		312

With an allowance recorded:
Commercial and industrial		267		267		63		79		-		75		-
Construction		328		406		91		472		5		403		7
Commercial real estate		5,695		5,695		541		3,972		-		4,150		30
Loans to individuals & overdrafts		2		2		-		13		-		16		-
Multi-family residential		-		-		-		-		-		13		-
1 to 4 family residential		553		553		320		947		20		940		28
HELOC		553		553		88		316		1		270		1
Subtotal:		7,398		7,476		1,103		5,799		26		5,867		66
Totals:
Commercial		14,677		16,291		695		14,627		181		14,827		281
Consumer		5		5		-		14		-		18		-
Residential		4,300		4,691		408		4,366		54		4,400		97
Grand Total:	$	18,982	$	20,987	$	1,103	$	19,007	$	235	$	19,245	$	378

Impaired loans at December 31, 2013 were approximately $19.0 million and were composed of $9.3 million in non-accrual loans and $9.7 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan, fees, and accrued interest. Approximately, $7.4 million of the $19.0 million in impaired loans at December 31, 2013 had specific allowances provided while the remaining $11.6 million had no specific allowances recorded. Of the $11.6 million with no allowance recorded, $2.1 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 six months ended 2014 and 2013:

	Three months ended June 30, 2014						Six months ended June 30, 2014
			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)
Below market interest rate:
Commercial and industrial		-	$	-	$	-		-	$	-	$	-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		-		-		-		1		22		22
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		-		-		-		1		22		22

Extended payment terms:
Commercial and industrial		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		1		46		42		1		46		42
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		1		947		942		1		947		942
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-
Total		2		993		984		2		993		984

Other:
Commercial and industrial		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		-		-		-		-		-		-

Total		2	$	993	$	984		3	$	1,015	$	1,006

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

	Three months ended June 30, 2013						Six months ended June 30, 2013
			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)
Below market interest rate:
Commercial and industrial		-	$	-	$	-		-	$	-	$	-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		-		-		-		-		-		-

Extended payment terms:
Commercial and industrial		4		537		536		4		537		536
Construction		2		134		134		2		134		134
Commercial real estate		1		645		645		1		645		645
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		2		139		139		2		139		139
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		9		1,455		1,454		9		1,455		1,454

Other:
Commercial and industrial		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		2		2,454		2,454		2		2,454		2,454
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		1		76		74		2		135		132
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		3		2,530		2,528		4		2,589		2,586

Total		12	$	3,985	$	3,982		13	$	4,044	$	4,040

As noted in the tables above, there were loans that were considered troubled debt restructurings for reasons other than below market interest rates, extended payment terms or forgiveness of principal. Loans in the “Other” category are those that were renewed at terms that vary from those that the Bank would enter into for new loans of the same type.

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 three and six month periods ended June 30, 2014 and 2013:

	Three months ended				Six months ended
	June 30, 2014				June 30, 2014
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Below market interest rate:
Commercial and industrial		-	$	-		-	$	-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		1		22
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		1		22

Extended payment terms:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		1		947		1		947
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		1		947		1		947

Forgiveness of principal:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		-		-

Other:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		1		68
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		1		68

Total		1	$	947		3	$	1,037

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

	Three months ended				Six months ended
	June 30, 2013				June 30, 2013
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Below market interest rate:
Commercial and industrial		-	$	-		-	$	-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		-		-

Extended payment terms:
Commercial and industrial		2		163		2		163
Construction		2		133		2		133
Commercial real estate		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		1		47		1		47
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		5		343		5		343

Forgiveness of principal:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		-		-

Other:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		1		163		1		163
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		1		59
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		1		163		2		222

Total		6	$	506		7	$	565

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

At June 30, 2014, the Bank had forty-three loans with an aggregate balance of $8.1 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-four loans with a balance totaling $5.3 million were still accruing as of June 30, 2014. The remaining TDRs with balances totaling $2.8 million as of June 30, 2014 were in non-accrual status.

At June 30, 2013, the Bank had forty-one loans with an aggregate balance of $9.8 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-four loans with a balance totaling $7.4 million were still accruing as of June 30, 2013. The remaining TDRs with balances totaling $2.4 million as of June 30, 2013 were in non-accrual status.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators

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

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

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

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

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

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

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

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

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

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

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

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.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators

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

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

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

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

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

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

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

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

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

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 June 30, 2014 and December 31, 2013, respectively:

June 30, 2014
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(In thousands)

Superior	$	835	$	35	$	-	$	-
Very good		-		-		-		-
Good		3,589		235		15,887		4,158
Acceptable		16,874		1,831		59,526		7,922
Acceptable with care		9,761		56,480		65,397		4,024
Special mention		185		641		11,711		1,356
Substandard		416		1,319		4,450		976
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	31,660	$	60,541	$	156,971	$	18,436

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

Pass	$	25,725	$	29,290
Special mention		1,301		103
Substandard		3,643		1,168
	$	30,669	$	30,561

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

Pass	$	5,611
Non –pass		48
	$	5,659

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

December 31, 2013
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
(dollars in thousands)

Superior	$	830	$	40	$	-	$	-
Very good		-		-		-		-
Good		5,793		1,133		19,301		4,203
Acceptable		11,572		2,838		63,447		6,812
Acceptable with care		5,307		46,597		57,768		6,340
Special mention		5,122		1,126		21,305		1,380
Substandard		542		1,591		7,355		1,004
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	29,166	$	53,325	$	169,176	$	19,739

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

Pass	$	29,364	$	30,116
Special mention		1,632		245
Substandard		4,010		1,502
	$	35,006	$	31,863

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

Pass	$	7,629
Non-pass		1,146
	$	8,775

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

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 reflect 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.

As of March 31, 2014, the Company elected to change the allowance for loan loss model it uses to calculate historical loss rates and qualitative and environmental factors in its allowance for loan losses. The Company elected to change the model used for allowance for loan losses in order to utilize the loss migration, improve the objectivity of loss projections, and increase reliability of identifying losses inherent in the portfolio. The impact of the change to the model resulted in a $177,000 increase to our loan loss reserves as at the time of the change. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has 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 new model continues to incorporate 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 new model for all loan classes are as follows:

Internal Factors

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

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

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

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

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

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

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

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

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 most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off.

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

Qualitative and external reserves. If individual reserves represent estimated losses tied to any specific loan, 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 losses that are expected, 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, calculations, etc. 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 month and six month periods ended June 30, 2014 and June 30, 2013, respectively:

	Three months ended June 30, 2014
	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
	(In thousands)

Balance, beginning of period 3/31/2014	$	513		$	889	$	3,283		$	585		$	1,293		$	171		$	291		$	7,025
Provision (recovery) for loan losses		(4	)		110		(384	)		(9	)		(106	)		(9	)		(25	)		(427	)
Loans charged-off		-			-		-			-			(231	)		(13	)		-			(244	)
Recoveries		14			3		4			12			53			7			-			93

Balance, end of period 6/30/2014	$	523		$	1,002	$	2,903		$	588		$	1,009		$	156		$	266		$	6,447

Ending balance: individually evaluated for impairment	$	66		$	81	$	426		$	43		$	140		$	20		$	-		$	776
Ending balance: collectively evaluated for impairment	$	457		$	921	$	2,477		$	545		$	869		$	136		$	266		$	5,671

Loans:
Ending balance	$	31,660		$	60,541	$	156,971		$	30,669		$	30,561		$	5,659		$	18,436		$	334,497
Ending balance: individually evaluated for impairment	$	388		$	1,802	$	5,986		$	2,948		$	1,059		$	22		$	2,331		$	14,536
Ending balance: collectively evaluated for impairment	$	31,272		$	58,739	$	150,985		$	27,721		$	29,502		$	5,637		$	16,105		$	319,961

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Six months ended June 30, 2014
	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
	(In thousands)

Balance, beginning of period 1/1/2014	$	245		$	565	$	4,599		$	826		$	680		$	65		$	74	$	7,054
Provision (recovery) for loan losses		318			376		(1,724	)		(274	)		539			97			192		(476	)
Loans charged-off		(63	)		-		-			(1	)		(271	)		(19	)		-		(354	)
Recoveries		23			61		28			37			61			13			-		223

Balance, end of period 6/30/2014	$	523		$	1,002	$	2,903		$	588		$	1,009		$	156		$	266	$	6,447

Ending balance: individually evaluated for impairment	$	66		$	81	$	426		$	43		$	140		$	20		$	-	$	776
Ending balance: collectively evaluated for impairment	$	457		$	921	$	2,477		$	545		$	869		$	136		$	266	$	5,671

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Three months ended June 30, 2013
	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
	(In thousands)

Balance, beginning of period 3/31/2013	$	339		$	626		$	5,110		$	920		$	635		$	73		$	72		$	7,775
Provision (recovery) for loan losses		42			(15	)		(458	)		198			(68	)		(60	)		(14	)		(375	)
Loans charged-off		(83	)		-			(137	)		(81	)		(29	)		(17	)		-			(347	)
Recoveries		(48	)		(3	)		70			8			72			66			-			165

Balance, end of period 6/30/2013	$	250		$	608		$	4,585		$	1,045		$	610		$	62		$	58		$	7,218

Ending balance: individually
evaluated for impairment	$	-		$	79		$	223		$	322		$	197		$	5		$	-		$	826
Ending balance: collectively
evaluated for impairment	$	250		$	529		$	4,362		$	723		$	413		$	57		$	58		$	6,392

Loans:
Ending balance	$	31,710		$	51,758		$	182,233		$	35,464		$	32,579		$	7,657		$	14,760		$	356,161
Ending balance: individually evaluated for impairment	$	660		$	2,388		$	9,454		$	4,091		$	1,030		$	16		$	2,407		$	20,046
Ending balance: collectively evaluated for impairment	$	31,050		$	49,370		$	172,779		$	31,373		$	31,549		$	7,641		$	12,353		$	336,115

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

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Six months ended June 30, 2013
	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
	(In thousands)

Balance, beginning of period 1/1/2013	$	278		$	798		$	4,946		$	1,070		$	627		$	72		$	106		$	7,897
Provision (recovery) for loan losses		74			(190	)		(253	)		75			(54	)		(79	)		(48	)		(475	)
Loans charged-off		(129	)		-			(180	)		(121	)		(39	)		(44	)		-			(513	)
Recoveries		27			-			72			21			76			113			-			309

Balance, end of period 6/30/2013	$	250		$	608		$	4,585		$	1,045		$	610		$	62		$	58		$	7,218

Ending balance: individually evaluated for impairment	$	-		$	79		$	223		$	322		$	197		$	5		$	-		$	826
Ending balance: collectively evaluated for impairment	$	250		$	529		$	4,362		$	723		$	413		$	57		$	58		$	6,392

During the three months ended June 30, 2013 the Company recorded net charge-offs of $182,000. Total loans outstanding during the second quarter of 2013 decreased, resulting in a $375,000 recovery in the provision for loan losses.

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 months and six months ended June 30, 2014 and 2013.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(In thousands)

Beginning balance	$	132		$	922		$	(108	)	$	1,078

Unrealized gain (loss) on investment securities available for sale		482			(1,171	)		718			(1,480	)
Tax effect		(180	)		398			(267	)		503
Other comprehensive gain (loss) before reclassification		302			(773	)		451			(977	)

Amounts reclassified from accumulated comprehensive income:
Realized loss on investment securities included in net income		65			63			211			136
Tax effect		(24	)		(21	)		(79	)		(46	)
Total reclassifications net of tax		41			42			132			90

Net current period other comprehensive income (loss)		343			(731	)		583			(887	)

Ending balance	$	475		$	191		$	475		$	191

The income statement line items impacted by the reclassifications of realized gains (losses) on investment securities is the other non-interest expense and income tax expense line items in the consolidated statement of operations. The balance of accumulated other comprehensive income, net of tax, at June 30, 2014, is comprised of $302 of unrealized gains on securities available for sale. There was a reclassification of other comprehensive income, net of tax of $41, as of June 30, 2014, related to realized losses on available for sale securities during the period.

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

NOTE I – MERGER WITH SELECT BANCORP, INC.

On September 30, 2013, the Company signed a merger agreement with Select Bancorp, Inc. (Legacy Select), 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 $265.3 million in assets. The merger, which closed July 25, 2014, expanded the Bank’s North Carolina presence with six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville and Burlington.

Under the terms of the merger agreement, former shareholders of Legacy Select common stock received 1.8264 shares of the Company’s common stock for each share of Legacy Select common stock. The Company issued approximately 4,416,668 shares of common stock in the merger.

In addition, each share of Legacy Select’s issued and outstanding preferred stock will be exchanged for one newly issued share of the Company’s preferred stock having terms substantially identical to the Legacy Select preferred stock. All of the issued and outstanding shares of Legacy Select’s preferred stock are held by the Secretary of the United States Treasury and were issued in connection with Legacy Select’s participation in the Small Business Lending Fund.

On July 25, 2014, New Century Bancorp acquired Select Bancorp, Inc., and its wholly-owned subsidiary, Select Bank & Trust Company and assumed the name, Select Bancorp, Inc. on that date. The financial data reported here is solely the financial information of the entity formerly known as New Century Bancorp. Commencing in the third quarter of 2014, consolidated financial information of the former New Century and Select entities will be reported upon the July 25, 2014 closing of the merger.

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

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Select Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.

Overview

The Company is a commercial bank holding company and has one banking subsidiary, Select Bank & Trust Company (referred to as the “Bank”) and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company’s only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small- to medium-sized businesses located in Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake 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. In October 2013, the Bank opened a full service office in Wake County. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

Comparison of Financial Condition at

June 30, 2014 and December 31, 2013

During the first six months of 2014, total assets decreased by $17.4 million to $508.3 million as of June 30, 2014. Earning assets at June 30, 2014 totaled $458.7 million and consisted of $327.4 million in net loans, $79.9 million in investment securities, $49.8 million in overnight investments and interest-bearing deposits in other banks and $1.6 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the second quarter of 2014 were $428.7 million and $57.6 million, respectively.

Since the end of 2013, gross loans have decreased by $12.6 million to $333.9 million as of June 30, 2014 due to continued soft loan demand. Gross loans consisted of $31.7 million in commercial and industrial loans, $157.0 million in commercial real estate loans, $18.4 million in multi-family residential loans, $5.7 million in consumer loans, $30.7 million in residential real estate, $30.6 million in HELOC, and $60.5 million in construction loans. Deferred loan fees, net of costs, on these loans were $629,000.

At June 30, 2014 and December 31, 2013, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $46.7 million at June 30, 2014, a $3.0 million decrease from December 31, 2013. The Company’s investment securities at June 30, 2014 were $79.9 million, a decrease of $3.9 million from December 31, 2013. The investment portfolio as of June 30, 2014 consisted of $27.2 million in government agency debt securities, $45.2 million in mortgage-backed securities and $7.5 million in municipal securities. The net unrealized gain on these securities was $757,000.

At June 30, 2014, the Company held an investment of $562,000 in the form of Federal Home Loan Bank (“FHLB”) stock, which decreased by $234,000 from December 31, 2013 due to a redemption by the FHLB. Also, the Company had $1.0 million in other non-marketable securities at June 30, 2014, which decreased by $14,000 from December, 31, 2013 due to a security redemption.

At June 30, 2014, non-earning assets were $49.6 million, an increase of $1.8 million from the $47.8 million as of December 31, 2013. Non-earning assets included $23.7 million in cash and due from banks, bank premises and equipment of $10.9 million, core deposit intangible of $124,000, accrued interest receivable of $1.5 million, foreclosed real estate of $1.2 million, $8.6 million in bank owned life insurance (“BOLI”), $2.2 million in deferred tax assets, and $1.4 million in all other 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.

Total deposits at June 30, 2014 were $428.7 million and consisted of $82.0 million in non-interest-bearing demand deposits, $118.8 million in money market and NOW accounts, $17.3 million in savings accounts, and $210.6 million in time deposits. Total deposits decreased by $19.7 million from $448.5 million as of December 31, 2013. The Bank had $497,000 in brokered demand deposits and no brokered time deposits as of June 30, 2014. Overall deposits decreased due to reduced funding needs as a result of lower asset balances.

As of June 30, 2014, the Company had $7.2 million in repurchase agreements with local customers that are classified as short-term debt and $12.4 million in junior subordinated debentures that are classified as long-term debt.

Total shareholders’ equity at June 30, 2014 was $57.6 million, an increase of $1.6 million from $56.0 million as of December 31, 2013. Accumulated other comprehensive income relating to available for sale securities increased $583,000 during the six months ended June 30, 2014. Other changes in shareholders’ equity included increases of $11,000 in stock-based compensation, net income of $885,000, and $68,000 from the exercise of stock options.

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

At June 30, 2014, the Company had $513,000 in loans that were 30 to 89 days past due. This represented 0.15% of gross loans outstanding on that date. This is a decrease from December 31, 2013 when there were $874,000 in loans that were 30-89 days past due or 0.25% of gross loans outstanding. Non-accrual loans decreased from $9.3 million at December 31, 2013 to $7.6 million at June 30, 2014.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 4.58% at December 31, 2013 to 3.88% at June 30, 2014, due to a decrease in accruing troubled debt restructurings and non-accruals and reduced loan balances.

At June 30, 2014, the Company had forty-three loans totaling $8.1 million that were considered to be troubled debt restructurings. Twenty-four of these loans totaling $5.3 million were still in accruing status with the remaining TDRs included in non-accrual loans. All TDRs are considered non-performing loans regardless of accrual status.

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
	June 30,			December 31,
	2014			2013
	(Dollars in thousands)

Non-accrual loans	$	7,607		$	9,319

Accruing TDRs		5,345			6,537
Total non-performing loans		12,952			15,856
Foreclosed real estate		1,169			2,008

Total non-performing assets	$	14,121		$	17,864

Accruing loans past due 90 days or more	$	-		$	-
Allowance for loan losses	$	6,447		$	7,054

Non-performing loans to period end loans		3.88	%		4.58	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		3.88	%		4.58	%
Allowance for loans losses to period end loans		1.93	%		2.04	%
Allowance for loan losses to non-performing loans		50	%		44	%
Allowance for loan losses to non-performing assets		46	%		39	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		46	%		39	%
Non-performing assets to total assets		2.78	%		3.40	%
Non-performing assets and accruing loans past due 90 days or more to total assets		2.78	%		3.40	%

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at June 30, 2014 and December 31, 2013 were $14.1 million and $17.9 million, respectively. The allowance for loan losses at June 30, 2014 represented 46% of non-performing assets compared to 39% at December 31, 2013.

Total impaired loans at June 30, 2014 were $14.5 million. This includes $7.6 million in loans that were classified as impaired because they were in non-accrual and $6.9 million in loans that were determined to be impaired for other reasons. Of these loans, $4.1 million required a specific reserve of $776,000 at June 30, 2014.

Total impaired loans at December 31, 2013 were $19.0 million. This includes $9.3 million in loans that were considered to be impaired due to being in non-accrual status and $9.7 million in loans that were deemed to be impaired for other reasons. Of these loans, $7.4 million required a specific reserve of $1.1 million at December 31, 2013.

The allowance for loan losses was $6.4 million at June 30, 2014 or 1.93% of gross loans outstanding. This is a decrease from the 2.04% reported as a percentage of gross loans at December 31, 2013. The allowance for loan losses at June 30, 2014 represented 44.4% of impaired loans compared to 37.2% at December 31, 2013. It is management’s assessment that the allowance for loan losses as of June 30, 2014 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made 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 June 30, 2014 and December 31, 2013 the Company had $3.5 million and $3.7 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At June 30, 2014 and December 31, 2013 the Company had $5.7 million and $6.1 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 12.8% and 13.8% of total risk-based capital as of June 30, 2014 and December 31, 2013, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market weakens in terms of both market activity and 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 June 30, 2014 the Company had one product type group which exceeded this guideline; Real Estate Construction – Speculative and Presold, which represented 41% of risk-based capital, or $29.4 million. All other commercial real estate groups were under the 40% threshold. At December 31, 2013, there were no product types exceeding this internal guideline.

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 June 30, 2014 and December 31, 2013.

Acquisition, Development and Construction Loans

(Dollars in thousands)

	June 30, 2014									December 31, 2013
				Land and Land									Land and Land
	Construction			Development			Total			Construction			Development			Total

Total ADC loans	$	49,930		$	16,610		$	60,541		$	37,932		$	15,393		$	53,325

Average Loan Size	$	126		$	346					$	128		$	358

Percentage of total loans		13.16	%		4.98	%		18.13	%		10.95	%		4.44	%		15.39	%

Non-accrual loans	$	664		$	224		$	889		$	660		$	546		$	1,206

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

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at
June 30, 2014 and December 31, 2013.

	June 30, 2014										December 31, 2013
	ADC Loans		Percent			HELOC		Percent			ADC Loans		Percent			HELOC		Percent
	(Dollars in thousands)

Harnett County	$	4,755		7.85	%	$	6,088		19.92	%	$	3,862		7.24	%	$	6,258		19.64	%
Cumberland County		26,751		44.19	%		6,350		20.78	%		20,737		38.89	%		6,416		20.13	%
Johnston County		1,261		2.08	%		453		1.48	%		653		1.22	%		494		1.55	%
Pitt County		4,602		7.60	%		105		0.34	%		5,825		10.92	%		268		0.84	%
Robeson County		849		1.40	%		3,508		11.48	%		1,083		2.03	%		3,546		11.13	%
Sampson County		148		0.25	%		1,571		5.14	%		357		0.67	%		1,745		5.48	%
Wake County		10,422		17.21	%		823		2.69	%		7,863		14.75	%		709		2.23	%
Wayne County		1,834		3.03	%		5,435		17.78	%		2,716		5.09	%		5,469		17.16	%
Hoke County		2,771		4.58	%		138		0.45	%		3,084		5.78	%		166		0.52	%
All other locations		7,148		11.81	%		6,090		19.93	%		7,145		13.41	%		6,792		21.32	%

Total	$	60,541		100.00	%	$	30,561		100.00	%	$	53,325		100.00	%	$	31,863		100.00	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At June 30, 2014, the Company had $92.6 million in loans that had terms permitting interest only payments. This represented 27.7% of the total loan portfolio. At December 31, 2013, the Company had $89.6 million in loans that had terms permitting interest only payments. This represented 25.9% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $47.1 million, or 14.1% of total loans, at June 30, 2014 compared to $44.7 million, or 12.9% of total loans, at December 31, 2013. The Company’s ten largest customer relationships totaled $63.6 million, or 19.0% of total loans, at June 30, 2014 compared to $62.1 million, or 17.9% of total loans, at December 31, 2013. 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 June 30, 2014 and 2013

General. During the second quarter of 2014, the Company had net income of $613,000 as compared with net income of $1.3 million for the second quarter of 2013. Net income per share for the second quarter of 2014 was $0.09, basic and diluted, compared with net income per share of $0.18, basic and diluted, for the second quarter of 2013. Results of operations for the second quarter of 2014 were primarily impacted by an increase of $398,000 in non-interest expense, merger expenses of $237,000, a decrease of $727,000 in loan interest income, and a larger recovery of loan losses of $427,000 compared to a recovery of $375,000 in the second quarter of 2013. Net interest margin of 3.64% in the second quarter of 2014 decreased 1 basis point from the same period in 2013.

Net Interest Income. Net interest income declined to $4.6 million for the second quarter of 2014 from $5.0 million for the second quarter of 2013. The Company’s total interest income was affected by a reduction in the balances and yield on interest-earning assets due to continued soft loan demand. Average total interest-earning assets were $463.8 million in the second quarter of 2014 compared with $511.1 million during the same period in 2013, while the yield on those assets decreased 18 basis points from 4.72% to 4.54%.

The Company’s average interest-bearing liabilities decreased by $47.8 million to $371.5 million for the quarter ended June 30, 2014 from $419.3 million for the same period one year earlier and the cost of those funds decreased from 1.30% to 1.20%, or 10 basis points. During the second quarter of 2014, the Company’s net interest margin was 3.64% and net interest spread was 3.34%. In the same quarter ended one year earlier, net interest margin was 3.65% and net interest spread was 3.42%.

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 has previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the second quarter, the Company recorded a recovery of loan losses of $427,000 which is a larger recovery than the recovery that was recorded in the second quarter of 2013. In both 2014 and 2013, the recovery resulted from a low level of net charge-offs coupled with a reduction in overall loan balances.

Non-Interest Income. Non-interest income for the quarter ended June 30, 2014 was $565,000, a decrease of $190,000 from the second quarter of 2013. Service charges on deposit accounts decreased $50,000 to $226,000 for the quarter ended June 30, 2014 from $276,000 for the same period in 2013, primarily due to a decline in overdraft charges. Fees from presold mortgages decreased $12,000 to $0 for the quarter ended June 30, 2014 from the same period in 2013. During the first quarter of 2013, the Company decided to close its mortgage division, while more efficient and profitable ways to generate income from the 1-4 family mortgage market are evaluated. Other non-deposit fees and income decreased $128,000 from the second quarter of 2013 to the second quarter of 2014 due to a decrease in income from non-marketable securities.

Non-Interest Expenses. Non-interest expenses increased by $398,000 to $4.2 million for the quarter ended June 30, 2014, from $3.8 million for the same period in 2013. In general, most categories of non-interest expenses increased, offset by decreases in professional fees, information systems and foreclosed real estate-related expenses. Non-interest expenses were also impacted by $237,000 in merger and restructuring charges related to the acquisition of Select Bancorp, Inc., and by the opening of the Raleigh branch in the fourth quarter of 2013. The following are highlights of the significant categories of non-interest expenses during the second quarter of 2014 versus the same period in 2013:

Personnel expenses increased $104,000 to $2.1 million, due to additions in personnel.

Foreclosed real estate-related expense decreased $27,000, primarily due to declining balances in the other real estate owned portfolio.

Merger related expenses incurred in the second quarter of 2014 were $237,000.

Other non-interest expenses increased by $33,000, due to small increases in several categories of other non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 38.8% and 36.6% for the quarters ended June 30, 2014 and 2013, respectively. The effective tax rate for the second quarter of 2014 was impacted by non-deductible merger expenses incurred in the second quarter of 2014.

As of June 30, 2014 and December, 31, 2013, the Company had a net deferred tax asset in the amount of $2.2 million and $2.5 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 June 30, 2014 and December 31, 2013, 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

Six months ended June 30, 2014 and 2013

General. During the first six months of 2014, the Company had net income of $885,000 as compared with net income of $2.1 million for the first six months of 2013. Net income per share for the first six months of 2014 was $0.13, basic and diluted, compared with net income per share of $0.30, basic and diluted, for the first six months of 2013. Results of operations for the first six months of 2014 were primarily impacted by an increase of $928,000 in non-interest expense, an increase in foreclosure-related expenses of $121,000, merger related expenses of $398,000, and lower interest income on loans of $9.7 million compared to $11.0 million in the first six months of 2013. Net interest margin of 3.58% in the first six months of 2014 increased 5 basis points from the same period in 2013.

Net Interest Income. Net interest income declined to $8.4 million for the first six months of 2014 from $9.1 million for the first six months of 2013. The Company’s total interest income was affected by a reduction in the balances and yield on interest-earning assets due to continued soft loan demand. Average total interest-earning assets were $467.5 million in the first six months of 2014 compared with $523.1 million during the same period in 2013, while the yield on those assets decreased 4 basis points from 4.60% to 4.56%.

The Company’s average interest-bearing liabilities decreased by $52.0 million to $375.0 million for the six months ended June 30, 2014 from $427.0 million for the same period one year earlier and the cost of those funds decreased from 1.31% to 1.22%, or 9 basis points. During the first six months of 2014, the Company’s net interest margin was 3.58% and net interest spread was 3.34%. In the same quarter ended one year earlier, net interest margin was 3.53% and net interest spread was 3.29%.

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 has previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the first six months of 2014, the Company recorded a recovery of loan losses of $476,000 which is a slightly larger recovery than the recovery that was recorded in the first six months of 2013. In both 2014 and 2013, the recovery resulted from a low level of net charge-offs coupled with a reduction in overall loan balances.

Non-Interest Income. Non-interest income for the six months ended June 30, 2014 was $1.2 million, a decrease of $183,000 from the first six months of 2013. Service charges on deposit accounts decreased $95,000 to $453,000 for the six months ended June 30, 2014 from $548,000 for the same period in 2013, primarily due to a decline in overdraft charges. Fees from presold mortgages decreased $73,000 to $0 for the six months ended June 30, 2014 from the same period in 2013. During the first quarter of 2013, the Company decided to close its mortgage division, while more efficient and profitable ways to generate income from the 1-4 family mortgage market are evaluated. Other non-deposit fees and income decreased $15,000 from the first six months of 2013 to the first six months of 2014 due to a decrease in income from non-marketable securities.

Non-Interest Expenses. Non-interest expenses increased by $928,000 to $8.6 million for the six months ended June 30, 2014, from $7.7 million for the same period in 2013. In general, most categories of non-interest expenses increased, offset by decreases in marketing and advertising and professional fees. Non-interest expenses were also impacted by $398,000 in merger and restructuring charges related to the acquisition of Select Bancorp, Inc., and by the opening of the Raleigh branch in the fourth quarter of 2013. The following are highlights of the significant categories of non-interest expenses during the first six months of 2014 versus the same period in 2013:

Personnel expenses increased $170,000 to $4.3 million, due to additions in personnel.

Foreclosed real estate-related expense increased $121,000, primarily due to a large loss on one property in the other real estate owned portfolio.

Merger related expenses incurred in the first six months of 2014 were $398,000.

Other non-interest expenses increased by $200,000, due to small increases in several categories of other non-interest expenses.

Provision for Income Taxes. The Company’s effective tax rate was 37.9% and 36.7% for the six months ended June 30, 2014 and 2013, respectively. The effective tax rate for the first six months of 2014 was impacted by non-deductible merger expenses incurred in 2014.

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) comprised 30.2% of total assets at June 30, 2014.

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 June 30, 2014, the Company had existing credit lines with other financial institutions to purchase up to $59.0 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 $26.4 million of qualifying loans is pledged to the FHLB to secure borrowings. At June 30, 2014, the Company had no FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At June 30, 2014, total borrowings consisted of securities sold under agreements to repurchase of $7.2 million and junior subordinated debentures of $12.4 million.

Total deposits were $428.7 million at June 30, 2014. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 49.1% of total deposits at June 30, 2014. Time deposits of $100,000 or more represented 25.9% of the Company’s total deposits at June 30, 2014. At quarter-end, the Company had no 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. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 11.32% at June 30, 2014.

As the following table indicates, at June 30, 2014, the Company and the Bank both exceeded minimum regulatory capital requirements as specified in the tables below.

	Actual			Minimum
Former New Century Bancorp, Inc.	Ratio			Requirement

Total risk-based capital ratio		20.09	%		8.00	%
Tier 1 risk-based capital ratio		18.84	%		4.00	%
Leverage ratio		13.44	%		4.00	%

				Regulatory
	Actual			Minimum			Well-Capitalized
New Century Bank	Ratio			Requirement			Requirement

Total risk-based capital ratio		19.69	%		10.00	%		10.00	%
Tier 1 risk-based capital ratio		18.44	%		6.00	%		6.00	%
Leverage ratio		13.12	%		5.00	%		5.00	%

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 June 30, 2014.

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.

Accounting and regulatory matters. On July 9, 2013, the FDIC joined the Federal Reserve and the Office of the Comptroller of the Currency in adopting a final rule that will revise the current risk-based and leverage capital requirements for banking organizations. The final rule is a continuation of joint notices of proposed rulemaking originally published in the Federal Register during August, 2012.

The final rule implements a revised definition of regulatory capital, a new common equity tier 1 minimum capital requirement, and a higher overall minimum tier 1 capital requirement, incorporating these new requirements into the existing prompt corrective action (PCA) framework. It also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. This additional capital is referred to as the "capital conservation buffer". The “countercyclical capital buffer” provisions from the proposed rule have also been adopted, however, they apply only to large financial institutions (banks and bank holding companies with total consolidated assets of $250 billion or more) implementing the "advanced approaches" framework and are not applicable to the Company or its subsidiary Bank.

The final rule permanently grandfathers the tier 1 capital treatment for certain non-qualifying capital instruments, including trust preferred securities, outstanding as of May 19, 2010.

Under the proposed rules released last August, banking organizations would have been required to recognize in regulatory capital all components of accumulated other comprehensive income (excluding accumulated net gains and losses on cash-flow hedges that relate to the hedging of items that are not recognized at fair value on the balance sheet). The final rule carries this requirement forward, with an exception for smaller banking organizations, such as the Company, which are not subject to the "advanced approaches" rule. Such organizations may make a one-time election not to include most elements of accumulated other comprehensive income (including unrealized gains and losses on securities designated as available-for-sale) in regulatory capital under the final rule. Organizations making this election will be permitted to use the currently existing treatment under the general risk-based capital rules that exclude most accumulated other comprehensive income elements from regulatory capital. The election must be made with the first call report or FR Y-9 report filed after the banking organization becomes subject to the final rule (January 2015 in the Company’s case).

The new rule also amends the existing methodologies for determining risk-weighted assets for all banking organizations. Specifically, the final rule assigns a 50% or 100% risk weight to mortgage loans secured by one-to-four family residential properties. Generally, residential mortgage loans secured by a first lien on a one- to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weight. All other one-to-four family residential mortgage loans, including loans secured by a junior lien on residential property, are assigned a 100% risk weight.

The mandatory compliance date for the Company and its subsidiary Bank will be January 1, 2015, with a transition period for the capital conservation buffer until January 1, 2016, and additional transition periods for certain other measures under the new rule.

Management will continue to evaluate the potential effect of the new final rule over the coming quarters. As of the date of this report, management is not aware of any other known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or other operations.

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 Principal Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.

Based upon that evaluation, the Chief Executive Officer and Principal Accounting 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 Principal Accounting 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 Principal Accounting 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 second quarter of 2014. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter 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 (Filed herewith)

31.2		Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)

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

32.2		Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, in XBRL (eXtensible Business Reporting Language)*

*Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

SIGNATURES

Under 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: August 11, 2014	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: August 11, 2014	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell
		Executive Vice President and Principal Accounting Officer

Exhibit Index

Exhibit Number		Description of Exhibit

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

31.2		Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)

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

32.2		Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, in XBRL (eXtensible Business Reporting Language)*

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