SELECT BANCORP, INC. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - SELECT BANCORP, INC.	v466033_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SELECT BANCORP, INC.	v466033_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SELECT BANCORP, INC.	v466033_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SELECT BANCORP, INC.	v466033_ex31-1.htm

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period March 31, 2017

¨ 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 x

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

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

As of May 2, 2017, the Registrant had outstanding 11,661,721 shares of Common Stock, $1.00 par value per share.

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Consolidated Balance Sheets March 31, 2017 and December 31, 2016	3

	Consolidated Statements of Operations Three Months Ended March 31, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016	5

	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2017 and 2016	6

	Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016	7

	Notes to Consolidated Financial Statements	9

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

Item 3 -	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4 -	Controls and Procedures	53

Part II.	OTHER INFORMATION

Item 1 -	Legal Proceedings	55

Item 1A -	Risk Factors	55

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3 -	Defaults Upon Senior Securities	70

Item 4 -	Mine Safety Disclosures	70

Item 6 -	Exhibits	70

	Signatures	71

Part I. Financial Information

Item 1 - Financial Statements

SELECT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2017			December 31,
	(Unaudited)			2016*
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	13,619		$	14,372
Interest-earning deposits in other banks		46,169			40,342
Certificates of deposit		1,000			1,000
Investment securities available for sale, at fair value		60,408			62,257
Loans		706,758			677,195
Allowance for loan losses		(8,022	)		(8,411	)

NET LOANS		698,736			668,784

Accrued interest receivable		2,524			2,768
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		2,147			2,251
Other non-marketable securities		703			703
Foreclosed real estate		883			599
Premises and equipment, net		17,703			17,931
Bank owned life insurance		22,324			22,183
Goodwill		6,931			6,931
Core deposit intangible (“CDI”)		716			810
Assets held for sale		846			846
Other assets		4,915			4,863

TOTAL ASSETS	$	879,624		$	846,640

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	167,316		$	163,569
Savings		37,621			38,394
Money market and NOW		180,080			174,205
Time		328,121			303,493

TOTAL DEPOSITS		713,138			679,661

Short-term debt		33,306			37,090
Long-term debt		22,939			23,039
Accrued interest payable		212			221
Accrued expenses and other liabilities		3,467			2,356

TOTAL LIABILITIES		773,062			742,367
Shareholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized; 0 and 0 shares issued and outstanding at March 31, 2017 and December 31, 2016		-			-
Common stock, $1.00 par value, 25,000,000 shares authorized; 11,661,571 and 11,645,413 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		11,662			11,645
Additional paid-in capital		69,702			69,597
Retained earnings		24,788			22,673
Common stock issued to deferred compensation trust, at cost; 276,718 and 280,432 shares outstanding at March 31, 2017 and December 31, 2016, respectively		(2,300	)		(2,340	)
Directors’ Deferred Compensation Plan Rabbi Trust		2,300			2,340
Accumulated other comprehensive income		410			358

TOTAL SHAREHOLDERS’ EQUITY		106,562			104,273

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	879,624		$	846,640

* Derived from audited consolidated financial statements.

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended
	March 31,
	2017			2016
	(In thousands, except share
	and per share data)
INTEREST INCOME
Loans	$	8,707		$	7,965
Federal funds sold and interest-earning deposits in other banks		88			77
Investments		330			390

TOTAL INTEREST INCOME		9,125			8,432

INTEREST EXPENSE
Money market, NOW and savings deposits		103			99
Time deposits		759			661
Short-term debt		9			34
Long-term debt		176			133

TOTAL INTEREST EXPENSE		1,047			927

NET INTEREST INCOME		8,078			7,505

PROVISION FOR (RECOVERY OF) LOAN LOSSES		(194	)		352

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,272			7,153

NON-INTEREST INCOME
Gain on the sale of securities		-			22
Service charges on deposit accounts		215			247
Other fees and income		515			597

TOTAL NON-INTEREST INCOME		730			866

NON-INTEREST EXPENSE
Personnel		3,414			3,202
Occupancy and equipment		572			574
Deposit insurance		72			126
Professional fees		320			235
CDI amortization		93			116
Information systems		504			509
Foreclosure-related expenses		16			39
Other		814			819

TOTAL NON-INTEREST EXPENSE		5,805			5,620

INCOME BEFORE INCOME TAX		3,197			2,399

INCOME TAXES		1,082			896

NET INCOME		2,115			1,503
DIVIDENDS ON PREFERRED STOCK		-			4

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	2,115		$	1,499

NET INCOME PER COMMON SHAREHOLDERS
Basic	$	0.18		$	0.13
Diluted	$	0.18		$	0.13

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		11,652,612			11,583,440
Diluted		11,714,336			11,626,609

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended
	March 31,
	2017			2016
	(In thousands)

Net income	$	2,115		$	1,503

Other comprehensive income (loss):
Unrealized gain on investment securities available for sale		82			761
Tax effect		(30	)		(284	)
		52			477

Reclassification adjustment for gain included in net income		-			(22	)
Tax effect		-			8
		-			(14	)

Total		52			463

Total comprehensive income	$	2,167		$	1,966

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except share data)

																Common
																Stock						Accumulated
																Issued						Other
											Additional					to Deferred						Compre-		Total
	Preferred Stock						Common Stock				paid-in		Retained			Compensation			Deferred			hensive		Shareholders’
	Shares			Amount			Shares		Amount		Capital		Earnings			Trust			Comp Plan			Income		Equity
Balance at December 31, 2015		7,645		$	7,645			11,583,011	$	11,583	$	69,061	$	15,923		$	(2,139	)	$	2,139		$	490	$	104,702
Net income		-			-			-		-		-		1,503			-			-			-		1,503
Other comprehensive income, net		-			-			-		-		-		-			-			-			463		463
Preferred stock dividends paid		-			-			-		-		-		(4	)		-			-			-		(4	)
Preferred stock redemption		(7,645	)		(7,645	)		-		-		-		-			-			-			-		(7,645	)
Stock option exercises		-			-			1,000		1		172		-			-			-			-		173
Stock based compensation		-			-			-		-		18		-			-			-			-		18
Directors’ equity incentive plan, net		-			-			-		-		-		-			(31	)		31			-		-
Balance at March 31, 2016		-		$	-			11,584,011	$	11,584	$	69,251	$	17,422		$	(2,170	)	$	2,170		$	953	$	99,210

Balance at December 31, 2016		-		$	-			11,645,413	$	11,645	$	69,597	$	22,673		$	(2,340	)	$	2,340		$	358	$	104,273
Net income		-			-			-		-		-		2,115			-			-			-		2,115
Other comprehensive income, net		-			-			-		-		-		-			-			-			52		52
Stock option exercises		-			-			16,158		17		81		-			-			-			-		98
Stock based compensation		-			-			-		-		24		-			-			-			-		24
Directors’ equity incentive plan, net		-			-			-		-		-		-			40			(40	)		-		-
Balance at March 31, 2017		-		$	-			11,661,571	$	11,662	$	69,702	$	24,788		$	(2,300	)	$	2,300		$	410	$	106,562

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2017			2016
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,115		$	1,503
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		(194	)		352
Depreciation and amortization of premises and equipment		291			259
Amortization and accretion of investment securities		144			194
Amortization of deferred loan fees and costs		(150	)		(114	)
Amortization of core deposit intangible		93			116
Stock-based compensation		24			18
Accretion on acquired loans		(253	)		(270	)
Amortization of acquisition premium on time deposits		(90	)		(203	)
Net accretion of acquisition discount on borrowings		(44	)		(77	)
Increase in cash surrender value of bank owned life insurance		(141	)		(148	)
Net loss on sale and write-downs of foreclosed real estate		6			32
Gain on sale of premises and equipment		(8	)		-
Net gain on investment security sales		-			(22	)
Change in assets and liabilities:
Net change in accrued interest receivable		244			(58	)
Net change in other assets		(81	)		(9	)
Net change in accrued expenses and other liabilities		1,102			978

NET CASH PROVIDED BY OPERATING ACTIVITIES		3,058			2,551

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption (purchase) of FHLB stock		104			(206	)
Purchase of non-marketable security		-			(48	)
Purchase of investment securities available for sale		(759	)		(1,518	)
Maturities of investment securities available for sale		965			1,777
Mortgage-backed securities pay-downs		1,581			3,293
Proceeds from sale of investment securities available for sale		-			602
Net change in loans outstanding		(29,799	)		(12,236	)
Proceeds from sale of foreclosed real estate		154			34
Purchases of premises and equipment		(55	)		(160	)

NET CASH USED BY INVESTING ACTIVITIES		(27,809	)		(8,462	)

See accompanying notes.

SELECT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Three Months Ended
	March 31,
	2017			2016
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	33,567		$	16,696
Proceeds from short-term debt		-			16,000
Repayments on short-term debt		(3,740	)		(14,422	)
Repayments on long-term debt		(100	)		(100	)
Preferred stock dividends paid		-			(4	)
Redemption of preferred stock		-			(7,645	)
Proceeds from stock option exercises		98			173

NET CASH PROVIDED BY FINANCING ACTIVITIES		29,825			10,698

NET CHANGE IN CASH AND CASH EQUIVALENTS		5,074			4,787

CASH AND CASH EQUIVALENTS, BEGINNING		55,714			63,409

CASH AND CASH EQUIVALENTS, ENDING	$	60,788		$	68,196

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	1,056		$	907
Taxes		-			-

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		52			463
Transfers from loans to foreclosed real estate		444			553

See accompanying notes.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A - BASIS OF PRESENTATION

Select Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of Select Bank & Trust Company (referred to as the “Bank”). In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company is subject to the rules and regulations of the Board of Governors of the Federal Reserve and the North Carolina Commissioner of Banks.

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

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

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 2016 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2017. This quarterly report should be read in conjunction with the Annual Report.

Certain reclassifications of the information in prior periods were made to conform to the March 31, 2017 presentation. Such reclassifications had no effect on shareholders’ equity or net income as previously reported.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE B - PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At March 31, 2017 and 2016 there were 73,500 and 121,300 anti-dilutive options outstanding, respectively.

	Three Months Ended
	March 31,
	2017		2016
Weighted average shares used for basic net income per share		11,652,612		11,583,440

Effect of dilutive stock options		61,724		43,169
Weighted average shares used for diluted net income per share		11,714,336		11,626,609

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 addresses the recognition of revenue from contracts with customers with the core principle being for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to clarify guidance for identifying performance obligations and licensing implementation.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to clarify and improve the guidance for certain aspects of Topic 606. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

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

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting, to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, including the tax effect of forfeitures and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company has adopted these amendments to its financial statements during the first quarter of 2017 with a positive impact to net earnings as recording of any excess tax benefit of $4,000 is through the income statement rather than additional paid in capital.

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

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In January 2016, the FASB issued ASU 2016-01 amending the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification. For public business entities, the amendments in ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply. The Company has reviewed its outstanding lease agreements and has centrally documented the terms of its leases. The Company is currently evaluating the provisions of ASU 2016-02 in relation to its outstanding leases to determine the potential impact the new standard will have to the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has dedicated staff and resources in place evaluating the Company’s options including evaluating the appropriate model options and collecting and reviewing loan data for use in these models. The Company is still assessing the impact that this new guidance will have on its consolidated financial statements.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

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

In January 2017, the FASB issued guidance to simplify the accounting related to goodwill impairment. ASU 2017-04, Simplifying the Test for Goodwill Impairment, removes Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. All other goodwill impairment guidance will remain largely unchanged and entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The Company does not expect these amendments to have a material effect on its financial statements.

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

NOTE D - FAIR VALUE MEASUREMENTS

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

Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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

Fair Value Hierarchy

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

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

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

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

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

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the three months ended March 31, 2017. 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 March 31, 2017 and December 31, 2016 (in thousands):

Investment securities available for sale March 31, 2017	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	$	13,760	$	-	$	13,760	$	-
Mortgage-backed securities - GSE’s		31,132		-		31,132		-
Municipal bonds		15,516		-		15,516		-

Total	$	60,408	$	-	$	60,408	$	-

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

U.S. government agencies – GSE's	$	14,159	$	-	$	14,159	$	-
Mortgage-backed securities - GSE’s		32,363		-		32,363		-
Municipal bonds		15,735		-		15,735		-

Total	$	62,257	$	-	$	62,257	$	-

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 a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2017 and December 31, 2016, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At March 31, 2017, the discounts used are weighted between 6% and 61%. There were no transfers between levels from the prior reporting periods and there have been no changes in valuation techniques for the three months ended March 31, 2017.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value of the real estate collateral less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate is the discount applied to appraised values to account for expected liquidation and selling costs. At March 31, 2017, the discounts used ranged between 6% and 10%. There have been no changes in valuation techniques for the three months ended March 31, 2017.

Assets held for sale

During 2015, a branch facility was taken out of service as part of the Company’s branch restructuring plan and reclassified as held for sale. The property is recorded at the remaining book balance of the asset or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. The significant unobservable input used is the discount applied to appraised values to account for expected liquidation and selling costs ranged between 1% and 25 % at March 31, 2017 and December 31, 2016. There have been no changes in the valuation techniques.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016 (in thousands):

Asset Category March 31, 2017	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	$	4,586	$	-	$	-	$	4,586
Asset held for sale		846		-		-		846
Foreclosed real estate		883		-		-		883

Total	$	6,315	$	-	$	-	$	6,315

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Asset Category December 31, 2016	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans	$	5,805	$	-	$	-	$	5,805
Asset held for sale		846		-		-		846
Foreclosed real estate		599		-		-		599

Total	$	7,250	$	-	$	-	$	7,250

The following table presents the carrying values and estimated fair values of the Company's financial instruments at March 31, 2017 and December 31, 2016:

	March 31, 2017
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	13,619	$	13,619	$	13,619	$	-	$	-
Certificates of deposit		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		46,169		46,169		46,169		-		-
Investment securities available for sale		60,408		60,408		-		60,408		-
Loans, net		698,736		699,743		-		-		699,743
Accrued interest receivable		2,524		2,524		-		2,524		-
Stock in FHLB		2,147		2,147		-		-		2,147
Other non-marketable securities		703		703		-		-		703

Financial liabilities:
Deposits	$	713,138	$	711,181	$	-	$	711,181	$	-
Short-term debt		33,306		33,306		-		33,306		-
Long-term debt		22,939		17,974		-		17,974		-
Accrued interest payable		212		212		-		212		-

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

	December 31, 2016
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	14,372	$	14,372	$	14,372	$	-	$	-
Certificates of deposits		1,000		1,000		1,000		-		-
Interest-earning deposits in other banks		40,342		40,342		40,342		-		-
Investment securities available for sale		62,257		62,257		-		62,257		-
Loans, net		668,784		671,208		-		-		671,208
Accrued interest receivable		2,768		2,768		-		2,768		-
Stock in the FHLB		2,251		2,251		-		-		2,251
Other non-marketable securities		703		703		-		-		703
Assets held for sale		846		846		-		-		846


Financial liabilities:
Deposits	$	679,661	$	678,328	$	-	$	678,328	$	-
Short-term debt		37,090		37,177		-		37,177		-
Long-term debt		23,039		17,649		-		17,649		-
Accrued interest payable		221		221		-		221		-

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

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

Investment Securities Available for Sale

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

Loans

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

Stock in Federal Home Loan Bank of Atlanta

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Other Non-Marketable Securities

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

Assets Held for Sale

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

Deposits

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

Short-term Debt

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

Long-term Debt

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

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - INVESTMENT SECURITIES

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

	March 31, 2017
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	13,677	$	105	$	(22	)	$	13,760
Mortgage-backed securities – GSE’s		30,830		363		(61	)		31,132
Municipal bonds		15,257		260		(1	)		15,516

	$	59,764	$	728	$	(84	)	$	60,408

As of March 31, 2017, accumulated other comprehensive income included net unrealized gains totaling $644,000. Deferred tax liabilities resulting from these net unrealized gains totaled $234,000.

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

	December 31, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Securities available for sale:
U.S. government agencies - GSE’s	$	14,086	$	98	$	(25	)	$	14,159
Mortgage-backed securities - GSE’s		32,082		382		(101	)		32,363
Municipal bonds		15,527		209		(1	)		15,735

	$	61,695	$	689	$	(127	)	$	62,257

As of December 31, 2016, accumulated other comprehensive income included net unrealized gains totaling $562,000. Deferred tax liabilities resulting from these net unrealized gains totaled $204,000.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E- INVESTMENT SECURITIES (continued)

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

	March 31, 2017
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Securities available for sale:
Within 1 year	$	3,296	$	4	$	-		$	3,300
After 1 year but within 5 years		37,502		434		(74	)		37,862
After 5 years but within 10 years		7,870		107		(9	)		7,968
After 10 years		11,096		183		(1	)		11,278

	$	59,764	$	728	$	(84	)	$	60,408

	December 31, 2016
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(in thousands)
Securities available for sale:
Within 1 year	$	3,735	$	12	$	-		$	3,747
After 1 year but within 5 years		37,615		424		(110	)		37,929
After 5 years but within 10 years		10,695		109		(12	)		10,792
After 10 years		9,650		144		(5	)		9,789

	$	61,695	$	689	$	(127	)	$	62,257

Securities with a carrying value of $32.6 million and $34.3 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

None of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold these securities to recovery, no other than temporary impairments were identified for these investments having unrealized losses for the periods ended March 31, 2017 and December 31, 2016. In 2016 the Company realized a gain on the disposal of eleven securities and has not incurred any losses related to securities sales in 2017. The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2017 and December 31, 2016.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E- INVESTMENT SECURITIES (continued)

	March 31, 2017
	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-GSEs	$	2,435	$	(13	)	$	1,651	$	(9	)	$	4,086	$	(22	)
Mortgage-backed securities-GSEs		7,450		(61	)		-		-			7,450		(61	)
Municipal bonds		868		(1	)		-		-			868		(1	)

Total temporarily impaired securities	$	10,753	$	(75	)	$	1,651	$	(9	)	$	12,404	$	(84	)

At March 31, 2017, the Company had two U.S. government agency GSEs had unrealized losses for more than twelve months totaling $9,000. Two U.S. government agency GSEs, seven mortgage-backed GSEs, and two municipal bonds had unrealized losses for less than twelve months totaling $75,000 at March 31, 2017. All unrealized losses are attributable to the general trend of interest rates. During the first quarter of 2016 gross proceeds of investment sales amounted to $602,000 with gains of $22,000. During the first quarter of 2017 there were no sales.

	2016
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	value		losses			value		losses			value		losses
	(in thousands)
Securities available for sale:
U.S. government agencies - GSEs	$	2,748	$	(13	)	$	1,651	$	(12	)	$	4,399	$	(25	)
Mortgage-backed securities-GSEs		8,778		(101	)		-		-			8,778		(101	)
Municipal bonds		110		(1	)		-		-			110		(1	)
Total temporarily impaired securities	$	11,636	$	(115	)	$	1,651	$	(12	)	$	13,287	$	(127	)

At December 31, 2016, the Company had two U.S. government agency GSEs with unrealized losses for more than twelve months totaling $12,000. Two U.S. government agency GSEs, one municipal and eight mortgage-backed GSEs had unrealized losses for less than twelve months totaling $115,000 at December 31, 2016. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities. The Company did not incur a loss on any securities sold during 2016.

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

NOTE F - LOANS

Following is a summary of the composition of the Company’s loan portfolio at March 31, 2017 and December 31, 2016:

	March 31,						December 31,
Total Loans:	2017						2016
				Percent						Percent
	Amount			of total			Amount			of total
	(Dollars in thousands)
Real estate loans:
1-to-4 family residential		96,434			13.64	%		97,978			14.47	%
Commercial real estate		292,895			41.44	%		281,723			41.60	%
Multi-family residential		59,225			8.38	%		56,119			8.29	%
Construction		115,262			16.31	%		100,911			14.90	%
Home equity lines of credit (“HELOC”)		42,840			6.06	%		41,158			6.08	%

Total real estate loans		606,656			85.83	%		577,889			85.34	%

Other loans:
Commercial and industrial		90,740			12.84	%		90,678			13.39	%
Loans to individuals		10,528			1.49	%		9,756			1.44	%
Overdrafts		112			0.02	%		71			0.01	%
Total other loans		101,380			14.35	%		100,505			14.84	%

Gross loans		708,036						678,394
Less deferred loan origination fees, net		(1,278	)		(0.18	)%		(1,199	)		(0.18	)%
Total loans		706,758			100.00	%		677,195			100.00	%

Allowance for loan losses		(8,022	)					(8,411	)

Total loans, net	$	698,736					$	668,784

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

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

At March 31, 2017, the Company had pre-approved but unused lines and letters of credit for customers totaling $146.8 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

1-to-4 Family Residential Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

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

Construction Loans

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

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

Home Equity Lines of Credit

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

Commercial and Industrial Loans

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

Loans to Individuals & Overdrafts

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

The following tables present an age analysis of past due loans, segregated by class of loans as of March 31, 2017 and December 31, 2016, respectively:

	March 31, 2017
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)
Total Loans
Commercial and industrial	$	23	$	50	$	73	$	90,667	$	90,740
Construction		73		97		170		115,092		115,262
Multi-family residential		-		48		48		59,177		59,225
Commercial real estate		-		3,472		3,472		289,423		292,895
Loans to individuals & overdrafts		11		45		56		10,584		10,640
1-to-4 family residential		1,331		508		1,839		94,595		96,434
HELOC		54		366		420		42,420		42,840
Deferred loan (fees) cost, net		-		-		-		-		(1,278	)

	$	1,492	$	4,586	$	6,078	$	701,958	$	706,758

There were four loans that amounted to $556,000 that were more than 90 days past due and still accruing interest at March 31, 2017.

	December 31, 2016
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(in thousands)

Total Loans
Commercial and industrial	$	1,459	$	73	$	1,532	$	89,146	$	90,678
Construction		221		151		372		100,539		100,911
Multi-family residential		46		346		392		55,727		56,119
Commercial real estate		589		3,807		4,396		277,327		281,723
Loans to individuals & overdrafts		23		46		69		9,758		9,827
1-to-4 family residential		631		602		1,233		96,745		97,978
HELOC		24		780		804		40,354		41,158
Deferred loan (fees) cost, net		-		-		-		-		(1,199	)
	$	2,993	$	5,805	$	8,798	$	669,596	$	677,195

There were three loans in the aggregate amount of $529,000 greater than 90 days past due and still accruing interest at December 31, 2016.

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of
March 31, 2017 and December 31, 2016:

							Three months ended
			Contractual				March 31, 2017
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(in thousands)
With no related allowance recorded:
Commercial and industrial	$	1,101	$	1,106	$	-	$	1,143	$	19
Construction		174		261		-		202		4
Commercial real estate		4,242		5,894		-		4,303		59
Multi-family residential		48		48		-		197		-
HELOC		659		838		-		850		10
1-to-4 family residential		822		1,024		-		911		13

Subtotal:		7,046		9,171		-		7,606		105
With an allowance recorded:
Commercial and industrial		-		-		-		-		-
Construction		-		-		-		-		-
Commercial real estate		2,227		2,887		357		2,362		11
HELOC		-		-		-		18		-
1-to-4 family residential		305		309		16		300		5
Subtotal:		2,532		3,196		373		2,680		16
Totals:
Commercial		7,792		10,196		357		8,207		93
Residential		1,786		2,171		16		2,079		28

Grand Total:	$	9,578	$	12,367	$	373	$	10,286	$	121

Impaired loans at March 31, 2017 were approximately $9.5 million and were composed of $4.6 million in non-accrual loans and $4.9 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan. Approximately $2.5 million in impaired loans had specific allowances provided for them while the remaining $7.0 million had no specific allowances recorded at March 31, 2017. Of the $7.0 million with no allowance recorded, $1.3 million of those loans have had partial charge-offs recorded.

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

NOTE F - LOANS (continued)

Impaired Loans (continued)

							Three months ended
	As of December 31, 2016						March 31, 2016
			Contractual
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(in thousands)
With no related allowance recorded:
Commercial and industrial	$	46	$	46	$	-	$	23	$	4
Construction		231		318		-		610		4
Commercial real estate		4,364		5,983		-		4,128		42
Loans to individuals & overdrafts		1,139		1,144		-		118		2
Multi-family residential		346		365		-		-		-
HELOC		1,041		1,378		-		696		8
1-to-4 family residential		1,000		1,278		-		1,662		17

Subtotal:		8,167		10,512		-		7,237		77
With an allowance recorded:
Commercial and industrial		-		-		-		-		-
Construction		-		-		-		-		-
Commercial real estate		2,496		2,905		80		2,172		14
Loans to individuals & overdrafts		1		1		1		-		-
Multi-family Residential		-		-		-		-		-
HELOC		34		35		19		24		1
1-to-4 family residential		296		296		17		321		6
Subtotal:		2,827		3,237		117		2,517		21
Totals:
Commercial		7,483		9,617		80		6,933		64
Consumer		1,140		1,145		1		118		2
Residential		2,371		2,987		36		2,703		32

Grand Total:	$	10,994	$	13,749	$	117	$	9,754	$	98

Impaired loans at December 31, 2016 were approximately $11.0 million and were comprised of $5.8 million in non-accrual loans and $5.2 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $2.8 million of the $11.0 million in impaired loans at December 31, 2016 had specific allowances aggregating $117,000 while the remaining $8.2 million had no specific allowances recorded. Of the $8.2 million with no allowance recorded, partial charge-offs to date amounted to $2.3 million.

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 F - LOANS (continued)

Troubled Debt Restructurings

The following table presents loans that were modified as troubled debt restructurings (“TDRs”) with a breakdown of the types of concessions made by loan class during the first quarter of 2017 and 2016:

	Three months ended March 31, 2017						Three months ended March 31, 2016
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
	(Dollars in thousands)
Extended payment terms:
Commercial and industrial		-	$	-	$	-		1	$	46	$	46

Total		-	$	-	$	-		1	$	46	$	46

The following table presents loans that were modified as TDRs within the past twelve months with a breakdown of the types for which there was a payment default during that period together with concessions made by loan class during the twelve month periods ended March 31, 2017 and 2016:

	Twelve months ended				Twelve months ended
	March 31, 2017				March 31, 2016
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Below market interest rate:
1-to-4 family residential		-	$	-		1	$	1
Total		-		-		1		1

Extended payment terms:
Commercial and industrial		3		996		1		46
Multi-family residential		-		-		1		373
Construction		1		62		-		-
Commercial real estate		1		899		-		-
1-to-4 family residential		2		125		-		-
Total		7		2,082		2		419

Total		7	$	2,082		3	$	420

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Troubled Debt Restructurings (continued)

At March 31, 2017, the Bank had thirty-one loans with an aggregate balance of $5.2 million that were considered to be troubled debt restructurings. Of those TDRs, twenty loans with a balance totaling $3.4 million were still accruing as of March 31, 2017. The remaining TDRs with balances totaling $1.8 million as of March 31, 2017 were in non-accrual status.

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

Credit Quality Indicators

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

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

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

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

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

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

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

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

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

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

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

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of March 31, 2017 and December 31, 2016, respectively:

Total loans:

March 31, 2017
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
			(In thousands)

Superior	$	309	$	-	$	-	$	-
Very good		1,177		244		450		-
Good		10,690		5,353		38,808		10,026
Acceptable		33,348		15,093		164,149		34,858
Acceptable with care		41,946		94,024		79,746		14,050
Special mention		3,000		311		4,109		-
Substandard		270		237		5,633		291
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	90,740	$	115,262	$	292,895	$	59,225

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

Pass	$	90,537	$	41,662
Special mention		2,973		123
Substandard		2,924		1,055
	$	96,434	$	42,840

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

Pass	$	10,629
Non pass		11
	$	10,640

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Total Loans:

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

Superior	$	435	$	-	$	-	$	-
Very good		326		245		460		-
Good		13,632		4,506		36,501		12,139
Acceptable		35,720		12,922		152,608		29,873
Acceptable with care		37,351		82,771		81,231		13,467
Special mention		2,905		173		4,868		-
Substandard		309		294		6,055		640
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	90,678	$	100,911	$	281,723	$	56,119

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

Pass	$	92,115	$	39,554
Special mention		3,015		439
Substandard		2,848		1,165
	$	97,978	$	41,158

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

Pass	$	9,820
Non-pass		7
	$	9,827

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

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

For PCI loans acquired from Legacy Select, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of March 31, 2017 was:

	March 31,
	2017
(in thousands)
Contractually required payments	$	21,612
Nonaccretable difference		1,334
Cash flows expected to be collected		20,278
Accretable yield		2,465
Fair value	$	17,813

The following table documents changes to the amount of the accretable yield on PCI loans for the three months ended March 31, 2017 and 2016 (dollars in thousands):

	2017			2016
	(in thousands)

Accretable yield, beginning of period	$	2,626		$	2,822
Accretion		(260	)		(270	)
Reclassification from nonaccretable difference		7			8
Other changes, net		92			97

Accretable yield, end of period	$	2,465		$	2,657

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves.

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

Internal Factors

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

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

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

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

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

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

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

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

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

External Factors

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

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

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

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

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

SELECT BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - LOANS (continued)

Allowance for Loan Losses (continued)

Reserves are generally divided into three allocation segments:

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

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

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

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

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three month periods ended March 31, 2017 and
March 31, 2016, respectively (in thousands):

	Three months ended March 31, 2017
	Commercial									1-to-4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential			Total

Loans – excluding PCI
Balance, beginning of period	$	1,211		$	1,301		$	3,448		$	846		$	611		$	317		$	628		$	8,362
Provision for (recovery of) loan losses		(347	)		(129	)		265			(85	)		26			155			(47	)		(162	)
Loans charged-off		(2	)		-			(250	)		-			(69	)		(16	)		-			(337	)
Recoveries		96			5			-			9			21			9			2			142
Balance, end of period	$	958		$	1,177		$	3,463		$	770		$	589		$	465		$	583		$	8,005

PCI Loans
Balance, beginning of period	$	37		$	-		$	-		$	-		$	12		$	-		$	-		$	49
Provision for loan losses		(32	)		-			-			-			-			-			-			(32	)
Loans charged-off		-			-			-			-			-			-			-			-
Recoveries		-			-			-			-			-			-			-			-
Balance, end of period	$	5		$	-		$	-		$	-		$	12		$	-		$	-		$	17

Total Loans
Balance, beginning of period	$	1,248		$	1,301		$	3,448		$	846		$	623		$	317		$	628		$	8,411
Provision for (recovery of) loan losses		(379	)		(129	)		265			(85	)		26			155			(47	)		(194	)
Loans charged-off		(2	)		-			(250	)		-			(69	)		(16	)		-			(337	)
Recoveries		96			5			-			9			21			9			2			142
Balance, end of period	$	963		$	1,177		$	3,463		$	770		$	601		$	465		$	583		$	8,022

Ending Balance: individually evaluated for impairment	$	-		$	-		$	357		$	16		$	-		$	-		$	-		$	373
Ending Balance: collectively evaluated for impairment	$	963		$	1,177		$	3,106		$	754		$	601		$	465		$	583		$	7,649

Loans:
Ending Balance: collectively evaluated for impairment	$	89,639		$	115,088		$	286,426		$	95,307		$	42,181		$	10,640		$	59,177		$	698,458
Ending Balance: individually evaluated for impairment	$	1,101		$	174		$	6,469		$	1,127		$	659		$	-		$	48		$	9,578
Ending Balance	$	90,740		$	115,262		$	292,895		$	96,434		$	42,840		$	10,640		$	59,225		$	708,036

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

NOTE F - LOANS (continued)

Allowance for Loan Losses (Continued)

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

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

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

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

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

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

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

NOTE G – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents changes in accumulated other comprehensive income for the three months ended March 31, 2017 and 2016.

	Three Months Ended
	March 31,
	2017			2016
	(In thousands)

Beginning balance	$	358		$	490

Unrealized gain on investment securities available for sale		82			761
Tax benefit		(30	)		(284	)
Other comprehensive income before reclassification		52			477

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

Net current period other comprehensive income		52			463

Ending balance	$	410		$	953

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

NOTE H - REPURCHASE AGREEMENTS

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

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of available for sale investment securities pledged as collateral under repurchase agreements totaled $12.2 million and $12.0 million at March 31, 2017 and December 31, 2016, respectively.

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

NOTE H - REPURCHASE AGREEMENTS (continued)

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in short-term borrowings as of March 31, 2017 and December 31, 2016 is presented in the following tables.

	March 31, 2017
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. government agencies-GSE’s	$	5,465	$	-	$	-	$	-	$	5,465
Mortgage-backed Securities-GSEs		6,739		-		-		-		6,739
Total borrowings	$	12,204	$	-	$	-	$	-	$	12,204
Gross amount of recognized liabilities for repurchase agreements									$	11,263

	December 31, 2016
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
Repurchase agreements
U.S. government agencies-GSE’s	$	5,568	$	-	$	-	$	-	$	5,568
Mortgage-backed Securities-GSEs		6,496		-		-		-		6,496
Total borrowings	$	12,064	$	-	$	-	$	-	$	12,064
Gross amount of recognized liabilities for repurchase agreements									$	12,003

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

NOTE I – OTHER REAL ESTATE OWNED

The following table explains changes in other real estate owned during the three months ended March 31, 2017 and the year ended December 31, 2016:

	Three Months			Twelve Months
	Ended			Ended
	March 31,			December 31,
	2017			2016
	(in thousands)

Beginning balance January 1	$	599		$	1,401
Sales		(154	)		(2,062	)
Writedowns		(6	)		(158	)
Transfers		444			1,418
Ending balance	$	883		$	599

At March 31, 2017 and December 31, 2016, the Company had $883,000 and $599,000, respectively, of foreclosed residential real estate property in OREO. The Company did not have any recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at March 31, 2017 and December 31, 2016, respectively.

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

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

Overview

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

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small- to medium-sized businesses located in Harnett, Brunswick, Carteret, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake, Pasquotank, Martin, Alamance, and Wayne counties in North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

The Company was formerly known as New Century Bancorp, Inc. On July 25, 2014 New Century Bancorp, Inc. acquired Select Bancorp, Inc. (“Legacy Select”) by merger. The combined company is now known as Select Bancorp, Inc., which we refer to in this report as the Company. Legacy Select was a bank holding company headquartered in Greenville, North Carolina, whose wholly owned subsidiary, Select Bank & Trust Company, was a state-chartered commercial bank with approximately $276.9 million in assets. The merger expanded the Company’s North Carolina presence with the addition of six branches located in Greenville (two), Elizabeth City, Washington, Gibsonville, and Burlington. During 2015, Gibsonville and Burlington were combined into a new location in Burlington. As noted in the following discussion and analysis, the combination of the former New Century Bancorp and Legacy Select has had a significant impact on the Company’s financial condition and results of operations.

We closed our branch located at 6390 Ramsey Street, Fayetteville, North Carolina and transferred accounts to our Fayetteville branch located at 2818 Raeford Road during September 2015. The property that housed our former Ramsey Street branch is included in assets held for sale on the consolidated balance sheet as of March 31, 2017.

Comparison of Financial Condition at

March 31, 2017 and December 31, 2016

During the first three months of 2017, total assets increased by $33.0 million to $879.6 million as of March 31, 2017. The increase in assets was due primarily to loan growth funded from deposits. Earning assets at March 31, 2017 totaled $809.2 million and consisted of $698.7 million in net loans, $60.4 million in investment securities, $47.2 million in overnight investments and interest-bearing deposits in other banks and $2.9 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2017 were $713.1 million and $106.6 million, respectively.

Since the end of 2016, gross loans have increased by $29.6 million to $706.8 million as of March 31, 2017. At March 31, 2017, gross loans consisted of $90.7 million in commercial and industrial loans, $292.9 million in commercial real estate loans, $59.2 million in multi-family residential loans, $10.6 million in consumer loans, $96.4 million in residential real estate loans, $42.8 million in HELOCs, and $115.3 million in construction loans. Deferred loan fees, net of costs, on these loans were $1.3 million at March 31, 2017.

At March 31, 2017 and December 31, 2016, the Company held $0 in federal funds sold and $0 in repurchase agreements. Interest-earning deposits in other banks were $46.2 million at March 31, 2017, a $5.8 million increase from December 31, 2016. The Company’s investment securities at March 31, 2017 were $60.4 million, a decrease of $1.8 million from December 31, 2016. The investment portfolio as of March 31, 2017 consisted of $13.8 million in government agency debt securities, $31.1 million in mortgage-backed securities and $15.5 million in municipal securities. The net unrealized gain on these securities was $644,000.

At March 31, 2017, the Company had an investment of $2.1 million in the form of Federal Home Loan Bank (“FHLB”) stock, which decreased by $104,000 from December 31, 2016. Also, the Company had $703,000 in other non-marketable securities at both March 31, 2017 and December 31, 2016.

At March 31, 2017, non-earning assets were $48.1 million, a decrease of $1.0 million from $49.1 million as of December 31, 2016. Non-earning assets included $13.6 million in cash and due from banks, bank premises and equipment of $17.7 million, goodwill of $6.9 million, core deposit intangible of $716,000, accrued interest receivable of $2.5 million, foreclosed real estate of $883,000, and other assets totaling $4.9 million, including net deferred taxes of $2.8 million. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. The decrease in non-earning assets was due primarily to the reduction in cash and due from banks.

Total deposits at March 31, 2017 were $713.1 million and consisted of $167.3 million in non-interest-bearing demand deposits, $180.1 million in money market and NOW accounts, $37.6 million in savings accounts, and $328.1 million in time deposits. Total deposits increased by $33.5 million from $679.7 million as of December 31, 2016, due primarily to the increase in time deposits as a result of an advertising program. The Bank had $-0- in brokered demand deposits and $68.8 million in brokered time deposits as of March 31, 2017.

As of March 31, 2017, the Company had $11.3 million in repurchase agreements with local customers that are classified as short-term debt, $32.6 million (of which $10.6 million is identified as long-term debt) in FHLB borrowings, and $12.4 million in junior subordinated debentures that are classified as long-term debt.

Total shareholders’ equity at March 31, 2017 was $106.6 million, an increase of $2.3 million from $104.3 million as of December 31, 2016. Accumulated other comprehensive income relating to available for sale securities increased $52,000 during the three months ended March 31, 2017. Other changes in shareholders’ equity included net income of $2.1 million and $98,000 from the exercise of stock options.

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

At March 31, 2017, the Company had $1.5 million in loans that were 30 to 89 days past due. This represented 0.21% of gross loans outstanding on that date. This is a decrease from December 31, 2016 when there were $3.0 million in loans that were 30-89 days past due or 0.44% of gross loans outstanding. Non-accrual loans decreased from $5.8 million at December 31, 2016 to $4.6 million at March 31, 2017.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 1.47% at December 31, 2016 to 1.20% at March 31, 2017. The Company had a decrease of $1.2 million in non-accruals from $5.8 million at December 31, 2016 and a decrease in accruing troubled debt restructurings from $3.6 million at December 31, 2016 to $3.4 million as of March 31, 2017. Of the non-accrual loans as of March 31, 2017, nine commercial real estate loans comprised $3.5 million, three construction loans totaled $97,000, one commercial loan was $50,000, multi-family loan was $48,000 and 1-to-4 family residential loans, HELOC and consumer made up the remaining balance.

At March 31, 2017, the Company had thirty-one loans totaling $5.2 million that were considered to be troubled debt restructurings. Twenty of these loans totaling $3.4 million were still in accruing status with the remaining TDRs included in non-accrual loans. All TDRs are considered impaired loans regardless of accrual status and have been included as non-performing assets in the table below.

The table below sets forth, for the periods indicated, information about the Company’s non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus accruing TDRs), and total non-performing assets.

	For Periods Ended
	March 31,			December 31,
	2017			2016
	(Dollars in thousands)

Non-accrual loans	$	4,586		$	5,805
Accruing TDRs		3,370			3,625
Total non-performing loans		7,956			9,430
Foreclosed real estate		883			599
Total non-performing assets	$	8,839		$	10,029

Accruing loans past due 90 days or more	$	556		$	529
Allowance for loan losses	$	8,022		$	8,411

Non-performing loans to period end loans		1.13	%		1.39	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		1.20	%		1.47	%
Allowance for loan losses to period end loans		1.14	%		1.24	%
Allowance for loan losses to non-performing loans		101	%		89	%
Allowance for loan losses to non-performing assets		91	%		84	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		85	%		80	%
Non-performing assets to total assets		1.00	%		1.18	%
Non-performing assets and accruing loans past due 90 days or more to total assets		1.07	%		1.25	%

Total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at March 31, 2017 and December 31, 2016 were $8.8 million and $10.0 million, respectively. The allowance for loan losses at March 31, 2017 represented 91% of non-performing assets compared to 84% at December 31, 2016.

Total impaired loans at March 31, 2017 were $9.6 million. This includes $4.6 million in loans that were classified as impaired because they were in non-accrual status and $5.0 million in loans that were determined to be impaired for other reasons. Of these loans, $2.5 million required a specific reserve of $373,000 at March 31, 2017.

Total impaired loans at December 31, 2016 were $11.0 million. This includes $5.8 million in loans that were considered to be impaired due to being in non-accrual status and $3.6 million in loans that were deemed to be impaired for other reasons. Of these loans, $2.8 million required a specific reserve of $117,000 at December 31, 2016.

The allowance for loan losses was $8.0 million at March 31, 2017 or 1.14% of gross loans outstanding as compared to 1.24% reported as a percentage of gross loans at December 31, 2016. This decrease resulted primarily from changes in qualitative factors related to interest rates and economic performance indicators. The Legacy Select loans were recorded at estimated fair value as of the acquisition date and the related credit risk is reflected as a fair value adjustment rather than separately in the allowance for losses as required in acquisition accounting. This required accounting under generally accepted accounting principles has resulted in a lower percentage of the allowance for loan losses to gross loans. The allowance for loan losses at March 31, 2017 represented 101% of non-performing loans compared to 89% at December 31, 2016. It is management’s assessment that the allowance for loan losses as of March 31, 2017 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be given that further adjustments to the allowance for loan losses may not be deemed necessary in the future.

Contractual Obligations

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

	March 31, 2017
(in thousands)	1 Year or Less		Over 1 to 3 Years		Over 3 to 5 Years		More Than 5 Years		Total

Time deposits	$	268,852	$	33,570	$	25,331	$	368	$	328,121
Short-term borrowings		33,306		-		-		-		33,306
Long-term debt		567		10,000		-		12,372		22,939
Operating leases		296		620		546		212		1,674
Total contractual obligations	$	303,021	$	44,190	$	25,877	$	12,952	$	386,040

Other Lending Risk Factors

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

Regulatory Loan to Value Ratios

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

At March 31, 2017 and December 31, 2016, the Company had $20.5 million and $21.7 million in non-1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2017 and December 31, 2016, the Company had $4.7 million and $4.8 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 22.1% and 23.6% of total risk-based capital as of March 31, 2017 and December 31, 2016, which is less than the 100% maximum allowed. These loans may represent more than ordinary risk to the Company if the real estate market weakens in terms of market activity or collateral valuations.

Business Sector Concentrations

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

At March 31, 2017, the Company had two product type groups which exceeded this guideline; Real Estate Construction – Speculative and Presold, which represented 101% of risk-based capital, or $115.0 million and Multi-family Residential category represented 50% of Risk-Based Capital or $56.7 million. All other commercial real estate groups were at or below the 40% threshold. At December 31, 2016, the Company exceeded the 40% guideline in two product types. The 1-to-4 Family Residential Rental category represented 66% of Risk-Based Capital or $74.2 million and the Multi-family Residential category represented 49% of Risk-Based Capital or $54.5 million at December 31, 2016. All other commercial real estate product types were under the 40% threshold.

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

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of
March 31, 2017 and December 31, 2016.

	Acquisition, Development and Construction Loans
	(Dollars in thousands)
	March 31, 2017									December 31, 2016
				Land and Land									Land and Land
	Construction			Development			Total			Construction			Development			Total

Total ADC loans	$	88,978		$	26,284		$	115,262		$	76,037		$	24,874		$	100,911

Average Loan Size	$	181		$	329					$	166		$	350

Percentage of total Loans		12.59	%		3.72	%		16.31	%		11.23	%		3.67	%		14.90	%

Non-accrual loans	$	140		$	21		$	161		$	151		$	-		$	151

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

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at
March 31, 2017 and December 31, 2016.

	March 31, 2017										December 31, 2016
	ADC Loans		Percent			HELOC		Percent			ADC Loans		Percent			HELOC		Percent
	(Dollars in thousands)

Harnett County	$	4,504		3.91	%	$	5,792		13.52	%	$	4,505		4.46	%	$	5,817		14.13	%
Alamance County		985		0.86	%		1,328		3.10	%		1,169		1.16	%		1,065		2.59	%
Beaufort County		174		0.15	%		1,014		2.37	%		182		0.18	%		1,026		2.49	%
Brunswick County		6,917		6.00	%		1,681		3.93	%		4,506		4.47	%		1,899		4.61	%
Carteret County		2,238		1.94	%		2,302		5.37	%		585		0.58	%		2,350		5.71	%
Cumberland County		23,364		20.27	%		4,614		10.77	%		22,610		22.40	%		5,278		12.82	%
Pasquotank County		1,014		0.88	%		1,332		3.11	%		947		0.94	%		1,258		3.06	%
Pitt County		14,568		12.64	%		6,513		15.20	%		13,697		13.57	%		5,151		12.52	%
Robeson County		822		0.71	%		4,041		9.43	%		803		0.80	%		3,709		9.01	%
Sampson County		-		-%			1,679		3.92	%		71		0.07	%		1,574		3.83	%
Wake County		15,712		13.63	%		1,488		3.47	%		15,689		15.55	%		1,536		3.73	%
Wayne County		9,876		8.57	%		4,161		9.71	%		9,734		9.65	%		4,281		10.40	%
All other locations		35,088		30.44	%		6,895		16.10	%		26,413		26.17	%		6,214		15.10	%

Total	$	115,262		100.00	%	$	42,840		100.00	%	$	100,911		100.00	%	$	41,158		100.00	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2017, the Company had $179.7 million in loans that had terms permitting interest only payments. This represented 25.4% of the total loan portfolio. At December 31, 2016, the Company had $156.1 million in loans that had terms permitting interest only payments. This represented 25.3% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $62.7 million, or 8.9% of total loans, at March 31, 2017 compared to $62.9 million, or 8.4% of total loans, at December 31, 2016. The Company’s ten largest customer relationships totaled $82.7 million, or 11.7% of total loans, at March 31, 2017 compared to $80.9 million, or 11.9% of total loans, at December 31, 2016. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

Comparison of Results of Operations for the

Three months ended March 31, 2017 and 2016

General. During the first quarter of 2017, the Company had net income of $2.1 million as compared with net income of $1.5 million for the first quarter of 2016. Net income per common share for the first quarter of 2017 was $0.18, basic and diluted, compared with net income per common share of $0.13, basic and diluted, for the first quarter of 2016. Results of operations for the first quarter of 2017 were primarily impacted by an increase of $693,000 in interest income offset by an increase in non-interest expense of $185,000, which was primarily related to increased personnel expense of $212,000 and professional fees expense of $85,000, offset by a reduction in deposit insurance premiums fees of $54,000. The Company recorded a reverse provision for loan losses of $194,000 for the first quarter of 2017 compared to a provision of $352,000 in the first quarter of 2016. Net interest margin of 4.25% in the first quarter of 2017 increased 11 basis points from the same period in 2016.

Net Interest Income. Net interest income increased to $8.1 million for the first quarter of 2017 from $7.5 million for the first quarter of 2016. The Company’s total interest income was affected by the increase in loan balances due to loan growth in established branches and from our expanded market footprint for branches acquired in December 2015. Average total interest-earning assets were $776.5 million in the first quarter of 2017 compared with $734.9 million during the same period in 2016, while the average yield on those assets increased 15 basis points from 4.65% to 4.80% which was primarily due to higher loan yield offset by a reduction of discount accretion on loans acquired in the merger with Legacy Select.

The Company’s average interest-bearing liabilities increased by $13.7 million to $583.7 million for the quarter ended March 31, 2017 from $570.0 million for the same period one year earlier and the cost of those funds increased from 0.65% to 0.73%, or 8 basis points. The increase in interest-bearing liabilities was a primary result of deposit growth within our markets and acquiring brokered deposits. During the first quarter of 2017, the Company’s net interest margin was 4.25% and net interest spread was 4.07%. In the same quarter ended one year earlier, net interest margin was 4.14% and net interest spread was 4.00%.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company previously used loss history based on the weighted average net charge off history for the most recent fourteen consecutive quarters, based on the risk-graded pool to which the loss was assigned. Historical loss rates are now calculated by using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool. During the first quarter of 2017, the Company recorded a reverse provision for loan losses of $194,000, as compared to the provision of $352,000 that was recorded in the first quarter of 2016. In both 2017 and 2016, the relatively small provision expense and recovery resulted from a low level of net charge-offs.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2017 was $730,000, a decrease of $136,000 from the first quarter of 2016. Service charges on deposit accounts decreased $32,000 to $215,000 for the quarter ended March 31, 2017 from $247,000 for the same period in 2016. Other non-deposit fees and income decreased $82,000 from the first quarter of 2016 to the first quarter of 2017 due to decreases in various items. The Company recognized $22,000 in gains on sales of securities during the three-months ended March 31, 2016 compared to none for the same period in 2017.

Non-Interest Expenses. Non-interest expenses increased by $185,000 to $5.8 million for the quarter ended March 31, 2017, from $5.6 million for the same period in 2016. In general, most categories of non-interest expenses decreased, offset by increases in salaries of $212,000 and professional fees of $85,000. The following are highlights of the significant categories of non-interest expenses during the first quarter of 2017 versus the same period in 2016:

Personnel expenses increased $212,000 to $3.4 million, due to additions in personnel and cost of living increases.

Foreclosed real estate-related expense decreased $23,000, primarily due to a reduction of properties in our other real estate owned portfolio.

Information systems expense decreased by $5,000.

Professional fees increased by $85,000 to $320,000, due to growth initiatives.

Deposit insurance expenses decreased by $54,000 to $72,000, due to federal revisions in the premium structure.

Provision for Income Taxes. The Company’s effective tax rate was 33.8% and 37.3% for the quarters ended March 31, 2017 and 2016, respectively. The effective tax rate for the first quarter of 2017 and 2016 was impacted by an adjustment resulting from enacted lower corporate tax rates for the State of North Carolina.

As of March 31, 2017 and December, 31, 2016, the Company had a net deferred tax asset in the amount of $2.8 million and $3.1 million, respectively. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of March 31, 2017 and December 31, 2016, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) represented 13.8% of total assets at March 31, 2017 as compared to 13.9% as of December 31, 2016.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of March 31, 2017, the Company had existing credit lines with other financial institutions to purchase up to $91.0 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 $86.1 million of qualifying loans is pledged to the FHLB to secure borrowings. At March 31, 2017, the Company had $32.6 million in FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At March 31, 2017, in addition to FHLB advances, total borrowings consisted of securities sold under agreements to repurchase of $11.3 million and junior subordinated debentures of $12.4 million.

Total deposits were $713.1 million at March 31, 2017. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 46.0% of total deposits at March 31, 2017. Time deposits of $250,000 or more represented 9.2% of the Company’s total deposits at March 31, 2017. At quarter-end, the Company had $55.1 million in brokered time deposits and $-0- in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

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

Capital Resources

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions and holding companies were subject to the phase-in of BASEL III requirements starting in the first quarter of 2015. The BASEL III capital ratios profile includes the Common Equity Tier 1 risk-based ratio which does not include limited life components such as trust preferred securities and SBLF preferred stock in this calculation. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 12.11% at March 31, 2017.

As the following table indicates, at March 31, 2017, the Company and the Bank both exceeded minimum regulatory capital requirements as specified below.

	Actual			Minimum
Select Bancorp, Inc.	Ratio			Requirement

Total risk-based capital ratio		14.76	%		8.00	%
Tier 1 risk-based capital ratio		13.77	%		6.00	%
Leverage ratio		13.04	%		4.00	%
Common Equity Tier 1 risk-based capital ratio		12.27	%		4.50	%

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

Total risk-based capital ratio		14.21	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		13.21	%		6.00	%		8.00	%
Leverage ratio		12.51	%		4.00	%		5.00	%
Common Equity Tier 1 risk-based capital ratio		13.21	%		4.50	%		6.50	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of March 31, 2017. On January 20, 2016, all outstanding shares of the Company’s Series A preferred stock were redeemed. While the redemption reduced the capital ratios for the Company and the Bank by approximately 1.2% for each ratio, both the Company and the Bank continue to meet the definition of “well-capitalized”.

Management expects that the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company intends to reach its strategic financial objectives through the effective management of market risk. Like many financial institutions, the Company’s most significant market risk exposure is interest rate risk. The Company's primary goal in managing interest rate risk is to minimize the effect that changes in market interest rates have on earnings and capital. This goal is accomplished through the active management of the balance sheet. The goal of these activities is to structure the maturity and repricing of assets and liabilities to produce stable net interest income despite changing interest rates. The Company's overall interest rate risk position is governed by policies approved by the Board of Directors and guidelines established and monitored by the Bank’s Asset/Liability Committee (“ALCO”).

To measure, monitor, and report on interest rate risk, the Company begins with two models: (1) net interest income ("NII") at risk, which measures the impact on NII over the next twelve and twenty-four months to immediate changes in interest rates and (2) net economic value of equity ("EVE"), which measures the impact on the present value of net assets to immediate changes in interest rates. NII at risk is designed to measure the potential short-term impact of changes in interest rates on NII. EVE is a long-term measure of interest rate risk to the Company's balance sheet, or equity. Gap analysis, which is the difference between the amount of balance sheet assets and liabilities repricing within a specified time period, is used as a secondary measure of the Company's interest rate risk position. All of these models are subject to ALCO guidelines and are monitored regularly.

In calculating NII at risk, the Company begins with a base amount of NII that is projected over the next twelve and twenty-four months, assuming that the balance sheet is static and the yield curve remains unchanged over the period. The current yield curve is then “shocked,” or moved immediately, ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent in a parallel fashion, or at all points along the yield curve. New twelve-month and twenty four-month NII projections are then developed using the same balance sheet but with the new yield curves, and these results are compared to the base scenario. The Company also models other scenarios to evaluate potential NII at risk such as a gradual ramp in interest rates, a flattening yield curve, a steepening yield curve, and others that management deems appropriate.

EVE at risk is based on the change in the present value of all assets and liabilities under different interest rate scenarios. The present value of existing cash flows with the current yield curve serves as the base case. The Company then applies an immediate parallel shock to that yield curve of ±1.0 percent, ±2.0 percent, ±3.0 percent and ±4.0 percent and recalculates the cash flows and related present values.

Key assumptions used in the models described above include the timing of cash flows, the maturity and repricing of assets and liabilities, changes in market conditions, and interest-rate sensitivities of the Company's non-maturity deposits with respect to interest rates paid and the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NII or predict the impact of changes in interest rates on NII and EVE. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management strategies, among other factors. Projections of NII are assessed as part of the Company's forecasting process.

NII and EVE Analysis. The following table presents the estimated exposure to NII for the next twelve months due to immediate changes in interest rates and the estimated exposure to EVE due to immediate changes in interest rates. All information is presented as of December 31, 2016.

	December 31, 2016
	Estimated			Estimated
	Exposure to			Exposure
(Dollars in thousands)	NII			to EVE

Immediate change in interest rates:
+ 4.0%		17.9	%		10.0	%
+ 3.0%		7.56			8.2
+ 2.0%		4.92			6.0
+ 1.0%		2.21			3.1
No change		-			-
- 1.0%		(4.8	)		(5.4	)

While the measures presented in the table above are not a prediction of future NII or EVE valuations, they do suggest that if all other variables remained constant, immediate increases in interest rates at all points on the yield curve may produce higher NII in the short term. Other important factors that impact the levels of NII are balance sheet size and mix, interest rate spreads, the slope of the yield curve, the speed of interest rates changes, and management actions taken in response to the preceding conditions.

Item 4. Controls and Procedures

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

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the first quarter of 2017. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter of 2017 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

An investment in the Company’s common stock involves certain risks. The following discussion highlights the risks that management believes are material for the Company, but does not necessarily include all the risks that we may face. Additional risks and uncertainties that are not currently known or that management does not currently deem material could also have a material adverse impact on our business, results of our operations and financial condition. You should carefully consider the risk factors and uncertainties described below and elsewhere in this Report in evaluating an investment in the Company’s common stock.

Risks Related to Our Business

We may experience unexpected credit losses in connection with the loans we make, which could have a material adverse effect on our capital, financial condition, and results of operations.

As a lender, we face the risk that our borrowers will not repay their loans and guarantors or other related parties will also fail to perform in accordance with the loan terms. A borrower’s failure to repay us is usually preceded by missed monthly payments. In some instances, however, a borrower may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender’s recovery of the credit extended is often limited. Since many of our loans are secured by collateral, we may attempt to seize the collateral if and when a borrower defaults on a loan. However, the value of the collateral might not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our borrower. The resolution of nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management, which can be detrimental to the performance of their other responsibilities, and which expose us to additional legal costs. Elevated levels of loan delinquencies and bankruptcies in our market areas, generally, and among our borrowers specifically, can be precursors of future charge-offs and may require us to increase our allowance for loan losses. Higher charge-off rates, delays in the foreclosure process or in obtaining judgments against defaulting borrowers or an increase in our allowance for loan losses may negatively impact our overall financial performance, may increase our cost of funds, and could materially adversely affect our business, results of operations and financial condition.

Our allowance for loan losses may be insufficient and significant loan losses could require us to increase our allowance for loan losses through a charge to earnings.

To account for the risk that our borrowers will not repay their loans, we maintain an allowance for loan losses, which is a reserve established through a charge to earnings. This allowance represents management’s best estimate of probable losses based on those that have been incurred within the existing portfolio of loans. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality and trends; present economic, political, and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates and assumptions regarding current credit risks and future trends, all of which may undergo material changes. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount recorded in our allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the allowance for loan losses. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. Furthermore, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Downturns in the national economy and the local economies of the areas in which our loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss provisions in future periods. If charge-offs in future periods exceed the allowance for probable loan losses; we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.

In addition, our determination as to the amount of our allowance for loan losses is subject to review by our primary regulators, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”), as part of their examination process, which may result in the establishment of an additional allowance based upon the judgment of either of these regulators after a review of the information available at the time of their examination. Our allowance for loan losses amounted to $8.0 million and $7.5 million, or 1.14% and 1.20% of total loans outstanding and 101% and 86% of nonperforming loans, at March 31, 2017 and 2016, respectively. See Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note F to our consolidated financial statements presented under Item 1 of Part I of this Form 10-Q, for further discussion related to our process for determining the appropriate level of the allowance for probable loan losses.

An increase in our nonperforming assets will negatively affect our earnings.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or other real estate owned. We must reserve for probable losses, which is established through a current period charge to the provision for loan losses, and, from time to time as appropriate, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract them from other responsibilities. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly, which would decrease our net income and may have a material adverse effect on our financial condition and results of operations.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

Nearly all of our loans are secured by real estate or made to businesses in our market area of central and eastern North Carolina which includes Alamance, Beaufort, Brunswick, Carteret, Cumberland, Harnett, Johnston, Martin, Pasquotank, Pitt, Robeson, Sampson, Wake and Wayne counties. As a result of this geographic concentration, our results may correlate to the economic conditions in these areas. Declines in these markets’ economic conditions may adversely affect the quality of our loan portfolio and the demand for our products and services, and accordingly, our results of operations. Adverse conditions in the local economy such as inflation, unemployment, recession or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our financial condition and results of operations.

A decline in local economic conditions could adversely affect the values of real property used as collateral for our loans. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. At March 31, 2017, approximately 85.8% of the Bank’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If the value of real estate in our market area were to decline materially, a significant portion of our loan portfolio could become under collateralized and/or cause us to realize a loss in the event of a foreclosure. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

A significant portion of our loan portfolio consists of loans for commercial real estate and construction, which carry greater historical credit risk than residential mortgage loans.

We originate commercial real estate loans and commercial and industrial loans, most often secured by commercial properties, and construction loans primarily within our market area. These loans tend to involve larger loan balances to a single borrower or groups of related borrowers, more complex underlying collateral, and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had greater credit risk than residential real estate other loans for the following reasons:

Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of March 31, 2017, commercial real estate loans were approximately 41.4% of the Bank’s total loan portfolio.

Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be more difficult to liquidate than residential real estate, or fluctuate in value based on the success of the business. As of March 31, 2017, commercial and industrial loans were approximately 12.8% of the Bank’s total loan portfolio.

Construction Loans. Repayment is dependent on completion of the project and the subsequent financing of the completed project as a commercial real estate or residential real estate loan, and in some instances on the rent or sale of the underlying project. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of March 31, 2017, construction loans were approximately 16.3% of the Bank’s total loan portfolio.

Our commercial real estate loans include both owner and non-owner occupied properties. Non-owner occupied properties expose us to a greater risk of non-payment and loss than loans secured by owner-occupied properties because repayment of such loans depends primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream, or other events beyond the borrower’s control. In addition, the physical condition of non-owner-occupied properties is often below that of owner-occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner-occupied borrowers have more than one loan outstanding with us, which may expose us to a greater risk of loss compared to residential and commercial borrowers with only one loan.

We are exposed to risks in connection with residential mortgage loans.

We originate fixed and adjustable rate loans secured by one- to four-family residential real estate. As of March 31, 2017, we had $96.4 million residential mortgage loans, which was 13.6% of total loans. The residential loans in our loan portfolio are sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Residential loans with high combined loan-to-value ratios generally are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which could in turn adversely affect our financial condition and results of operations.

We depend on the accuracy and completeness of information about clients and counterparties.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with GAAP or are materially misleading.

We may be forced to foreclose on the collateral property securing our loans and own the underlying real estate, which may subject us to the increased costs associated with the ownership of real property.

We originate loans secured by real estate and from time to time are forced to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, which exposes us to the inherent risks of real property ownership. The amount that we, as a lender, may realize after a default is dependent upon factors outside of our control, including, but not limited to:

general or local economic conditions;

environmental cleanup liability;

neighborhood values;

interest rates;

real estate tax rates;

operating expenses of the mortgaged properties;

supply of and demand for rental units or properties;

ability to obtain and maintain adequate occupancy of the properties;

zoning laws;

governmental rules, regulations and fiscal policies; and

natural or other disasters.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss. This may result in reduced net income, which may have a material adverse effect on our financial condition and results of operations.

We may be subject to environmental liability associated with our lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

Changes in interest rates affect our profitability and the value of our interest-earning assets.

The Bank derives its income primarily from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowed funds and other interest-bearing liabilities. In general, the larger the spread, the more the Bank earns. When market rates of interest change, the interest the Bank receives on its assets and the interest the Bank pays on its liabilities will fluctuate. Changes in market interest rates could adversely affect our interest rate spread and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our interest rate spread to expand or contract. Our liabilities are shorter in duration than our assets, so they will adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs will rise faster than the yield we earn on our assets, causing our interest rate spread to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—will also reduce our interest rate spread. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities are shorter in duration than our assets, when the yield curve flattens or even inverts, we will experience pressure on our interest rate spread as our cost of funds increases relative to the yield we can earn on our assets. In addition, our mortgage banking income is sensitive to changes in interest rates. During periods of rising and relatively higher interest rates, mortgage originations for purchased homes can decline considerably and refinanced mortgage activity can severely decrease. During periods of falling and relatively lower interest rates, the opposite effects can occur.

Changes in market interest rates could reduce the value of the Bank’s financial assets. Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decrease in value as interest rates rise. In addition, interest rates affect how much money the Bank lends. For example, when interest rates rise, the cost of borrowing increases and the loan originations tend to decrease.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee of the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits. Rates have been historically low for a long period of time and at this point, should rates rise steadily, we will be operating in an environment different from that in which we have been operating for the last decade. This change could pressure our margins if we are unable to adjust our business practices. If the Bank is unsuccessful in managing the effects of changes in interest rates, the financial condition and results of operations could suffer. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations.

We are subject to extensive regulation that could restrict our activities, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. The Company is subject to Federal Reserve Board regulation, and the Bank is subject to extensive regulation, supervision, and examination by the FDIC and the Commissioner. The Bank must also comply with rules issued by the Consumer Financial Protection Bureau (the “CFPB”). In addition, as a member of the FHLB of Atlanta, the Bank must comply with applicable regulations of the Federal Housing Finance Board and the FHLB. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.

Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. Federal and state regulators have the ability to impose substantial sanctions, restrictions, and requirements on us if they identify violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, written supervisory agreements, cease-and-desist orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings. Any of these consequences could damage our reputation, restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations.

Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes. The Dodd-Frank Act granted various federal agencies significant discretion in drafting the implementing rules and regulations. Although some of these regulations have been promulgated, additional regulations are expected to be issued in 2017 and thereafter.

The Dodd-Frank Act and other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect us in substantial and unpredictable ways, including, among other things, subjecting us to increased capital requirements, liquidity and risk management requirements, creating additional costs, limiting the types of financial services and products we may offer and/or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the extent to which additional legislation will be enacted or the extent we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes or scrutiny could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations, and other institutions.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs, conduct enhanced customer due diligence, and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the U.S. Treasury’s Office of Foreign Assets Control. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from liability to a borrower for failing to make the necessary determinations. It is our policy not to make predatory loans and to determine borrowers’ ability to repay in accordance with CFPB standards, but the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

The Federal Reserve Board may require us to commit capital resources to support the Bank.

The Federal Reserve Board requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to our Bank if the Bank experiences financial distress.

A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting which would harm our business and the trading price of our securities.

If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from NASDAQ. This could have a material adverse effect on our business, financial condition and results of operations, and could subject us to litigation.

Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.

We are also subject to the accounting rules and regulations of the Securities and Exchange Commission (the “SEC”) and the Financial Accounting Standards Board (the “FASB”). From time to time the SEC and the FASB, update accounting principles generally accepted in the United States (“GAAP”) that govern the preparation of our financial statements and may also require extraordinary efforts or additional costs to implement. Any of these rules or regulations may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and liabilities, among other items. If the assumptions or estimates are incorrect, we may experience unexpected material adverse consequences that could negatively affect our business, results of operations and financial condition.

The FASB has recently issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

In June 2016, the FASB issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected over the contractual life of the financial instrument. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us on January 1, 2020. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.

We may be required to raise additional capital in the future, including to comply with increased minimum capital thresholds established by our regulators as part of their implementation of Basel III, but that capital may not be available when it is needed and could be dilutive to our existing shareholders, which could adversely affect our financial condition and results of operations.

In July 2013, the Federal Reserve, FDIC and Office of the Comptroller of the Currency approved final rules that established an integrated regulatory capital framework that addressed perceived shortcomings in certain capital requirements. The rules implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the rule applicable to the Company are:

The rule implements higher minimum capital requirements, includes a new common equity Tier1 capital requirement, and establishes criteria that instruments must meet in order to be considered Common Equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements are intended to both improve the quality and increase the quantity of capital required to be held by banking organizations. The minimum capital to risk-weighted assets (“RWA”) requirements under the rule are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0%, which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The rule maintains the general structure of the current prompt corrective action, or PCA, framework while incorporating these increased minimum requirements.

The rule implements changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (“MSAs”), deferred tax assets (“DTAs”), and certain investments in the capital of unconsolidated financial institutions. In addition, the rule requires that certain regulatory capital deductions be made from common equity Tier 1 capital.

Under the rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to RWA. A three-year phase-in of the capital conservation buffer requirements began on January 1, 2016. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds.

The rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

Compliance by the Company and the Bank with these capital requirements affects their respective operations by increasing the amount of capital required to conduct operations. In order to support the operations at the Bank, we may need to raise capital in the future. Our ability to raise capital will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we may be unable to raise capital on terms acceptable to us if at all. If we cannot raise capital when needed, our ability to operate or further expand our operations could be materially impaired. In addition, if we decide to raise equity capital under such conditions, the interests of our shareholders could be diluted.

We may need additional access to capital, which we may be unable to obtain on attractive terms or at all.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth, to fund losses or additional provision for loan losses in the future, or to strengthen our capital ratios. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our stock price could be negatively affected. In addition, if we decide to raise additional equity capital, our current shareholders’ interests could be diluted.

Liquidity is essential to our business.

The primary sources of our Bank’s funds are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions.

Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate, which could have a material adverse effect on our earnings and financial condition.

Increases in FDIC insurance premiums may adversely affect the Registrant’s net income and profitability.

The last economic recession caused a high level of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. We are generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are bank or financial institution failures that exceed the FDIC’s expectations, the Bank may be required to pay higher FDIC premiums than those currently in force. Any future increases or required prepayments of FDIC insurance premiums may adversely impact the Registrant’s earnings and financial condition.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as internet connections, network access, core application processing, and operational software. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Any such failures could damage our reputation, which could negatively affect our operating results. Replacing these third party vendors could also entail significant delay and expense.

Security breaches and other information system disruptions, such as cyber-attacks, could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

The banking industry has experienced increasing efforts on the part of third parties, including through cyber-attacks, to breach data security at financial institutions or with respect to financial transactions. There have been several recent instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. In addition, because the techniques used to cause such security breaches change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures. The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches.

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, and personally identifiable information of our customers and employees, on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any failure, interruption, or breach in security or operational integrity of these systems could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our financial condition, revenues and competitive position.

Failure to keep pace with technological change could adversely affect our business.

The banking industry undergoes frequent technological changes with introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in continuous technological improvements than we do. We may not be able to quickly deploy these new products and services or be successful in marketing these products and services to our customers. Additionally, the implementation of changes and maintenance to current systems may cause service interruptions, transaction processing errors and system conversion delays. Failure to successfully keep pace with technological change affecting the banking industry while avoiding interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.

We generally outsource a portion of the operational and technological modifications and improvements we make to third parties and they may experience errors or disruptions that could adversely impact us and over which we may have limited control. In addition, these third parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into our existing businesses.

We may not be able to realize the remaining benefit of our deferred tax assets.

As of March 31, 2017 and December 31, 2016, we had a net deferred tax asset of $2.8 million and $2.8 million, respectively. A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of the total deferred tax asset will not be realized. In assessing the future ability of the Company to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

On April 5, 2017, the North Carolina Senate passed Senate Bill 325, or the “Billion Dollar Middle Class Tax Cut”. Currently the North Carolina state corporate income tax rate is 3%. Senate Bill 325 would reduce this rate further over the next two years to 2.75% for 2018 and 2.5% for 2019. The tax rate change to 2.75% would be effective for taxable years beginning on or after January 1, 2018. The tax rate change to 2.5% would be effective for taxable years beginning on or after January 1, 2019. In addition, the United States Congress and the President have indicated an interest in reforming the Internal Revenue Code. Possible approaches include lowering the federal corporate income tax rate and limiting or eliminating various other deductions, tax credits, and other tax preferences.

Our deferred tax asset is carried at its value based on the current rates within the tax code and therefore its value may be adversely affected by such changes to the Internal Revenue Code and state corporate tax. It is not possible at this time to determine what changes may be made and to quantify either the one-time impacts from the re-measurement of our deferred tax assets and liabilities that might result from tax reform or the ongoing impact reform proposals might have on income tax expense.

If our goodwill becomes impaired, we may be required to record a significant charge to earnings.

We have goodwill recorded on our balance sheet as an asset with a carrying value as of March 31, 2017 of $6.9 million. Under GAAP, goodwill is required to be tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The test for goodwill impairment involves comparing the fair value of a company’s reporting units to their respective carrying values. The Bank is our only reporting unit. The price of our common stock is one of several factors available for estimating the fair value of our reporting units. Although the price of our common stock is currently trading above book value, for most of the last several years, it has traded below book value. Subject to the results of other valuation techniques, if this situation were to return and persist, it could indicate that a portion of our goodwill is impaired. Accordingly, for this reason or other reasons that indicate that the goodwill at any of our reporting units is impaired, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which could have a negative impact on our results of operations.

We may not be able to effectively compete with larger financial institutions for business.

Commercial banking in North Carolina is extremely competitive. The Bank competes in the North Carolina market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of these competitors have broader geographic markets, higher lending limits, more services, and more media advertising. We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that historically would have been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as peer-to-peer payments, paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits resulting in reduced liquidity and loss of income generated from those deposits. Additionally, our customer base of consumers and small businesses has increasing non-bank options for credit. Now that credit is available through the Internet, competition for small balance loans is expected to increase. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people and the lack of sufficient talent could adversely impact our operations.

Our success depends in part on our ability to retain key executives and to attract and retain additional qualified management personnel who have experience both in sophisticated banking matters and in operating a small- to mid-size bank. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require. Consequently the loss of one or more members of our executive management team may have a material adverse effect on our operations.

Hurricanes or other adverse weather events could disrupt our operations, which could have an adverse effect on our business or results of operations.

North Carolina’s coastal region and inland areas of eastern North Carolina are affected, from time to time, by adverse weather events, particularly hurricanes. We cannot predict whether, or to what extent, damage caused by future hurricanes or other weather events will affect our operations. Weather events could cause a disruption in our day-to-day business activities and could have a material adverse effect on our business, results of operations and financial condition.

Our business reputation is important and any damage to it could have a material adverse effect on our business.

Our reputation is very important to sustain our business, as we rely on our relationships with our current, former and potential customers and shareholders, and the industries that we serve. Any damage to our reputation, whether arising from legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to an Investment in Our Common Stock

An investment in our common stock is not an insured deposit and may lose value.

Shares of our common stock are not savings accounts, deposits or other obligations of any depository institution and are not insured or guaranteed by the FDIC or any other governmental agency or instrumentality, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section. As a result, if you acquire shares of our common stock, you may lose some or all of your investment.

The low trading volume in our common stock may adversely affect your ability to resell shares at prices that you find attractive or at all.

Our common stock is listed for quotation on the Nasdaq Global Market under the ticker symbol “SLCT”. The average daily trading volume for our common stock is less than that of larger financial institutions. Due to its relatively low trading volume, sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.

The market price of our common stock may be volatile and subject to fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

actual or anticipated fluctuation in our operating results;

changes in interest rates;

changes in the legal or regulatory environment in which we operate;

press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;

changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

future sales of our common stock;

changes in economic conditions in our market, general conditions in the U.S. economy, financial markets or the banking industry; and

other developments affecting our competitors or us.

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent a shareholder from selling common stock at or above the current market price. These factors may also adversely affect our ability to raise capital in the open market if needed. In addition, we cannot say with any certainty that a more active and liquid trading market for its common stock will develop.

Additional issuances of common stock or securities convertible into common stock may dilute holders of our common stock.

We may, in the future, determine that it is advisable, or we may encounter circumstances where it is determined that it is necessary, to issue additional shares of common stock, securities convertible into, exchangeable for or that represent an interest in common stock, or common stock-equivalent securities to fund strategic initiatives or other business needs or to build additional capital. Our board of directors is authorized to cause us to issue additional shares of common stock from time to time for adequate consideration without any additional action on the part of our shareholders in some cases. The market price of our common stock could decline as a result of other offerings, as well as other sales of a large block of common stock or the perception that such sales could occur.

Offerings of debt, which would rank senior to our common stock upon liquidation, may adversely affect the market price of our common stock.

We may attempt to increase our capital resources or, if regulatory capital ratios fall below the required minimums, we could be forced to raise additional capital by making additional offerings of debt or equity securities, senior or subordinated notes, preferred stock and common stock. Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive distributions of available assets prior to the holders of our common stock.

Anti-takeover provisions could adversely affect our shareholders.

In some cases, shareholders would receive a premium for their shares if we were acquired by another company. However, state and federal law and our articles of incorporation and bylaws make it difficult for anyone to acquire us without approval of our board of directors. For example, our articles of incorporation require a supermajority vote of two-thirds of our outstanding common stock in order to effect a sale or merger of the Company in certain circumstances. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities.

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

The Company announced a repurchase program on August 31, 2016, by which management was authorized to repurchase up to 581,518 shares of Company common stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the three months ended March 31, 2017.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 6. Exhibits

Exhibit Number		Description of Exhibit

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

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

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

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

101		Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, in XBRL (eXtensible Business Reporting Language)

SIGNATURES

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

	SELECT BANCORP, INC.

Date: May 10, 2017	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: May 10, 2017	By:	/s/ Mark A. Jeffries
		Mark A. Jeffries
		Executive Vice President and Chief Financial Officer

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