UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-50400

NEW CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	20-0218264
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

700 W. Cumberland Street, Dunn, North Carolina	28334
(Address of Principal Executive Offices)	(Zip Code)

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

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

NONE

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

COMMON STOCK, PAR VALUE $1.00 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

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.

x Yes ¨ 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).  x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨  Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

¨ Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter $31,763,499.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date 6,916,506shares outstanding as ofMarch 18, 2013.

Documents Incorporated by Reference.

Definitive Proxy Statement for the 2013 Annual Meeting of Shareholders as filed pursuant to Section 14 of the Securities Exchange Act of 1934, incorporated into Part III of this Form 10-K

FORM 10-K CROSS-REFERENCE INDEX

part i		form 10-k	Proxy statement	ANNUAL REPORT
Item 1 –	Business	3
Item 2 –	Properties	18
Item 3 –	Legal Proceedings	19
Item 4 –	Mine Safety Disclosures	19
PART II
Item 5 –	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6 –	Selected Financial Data	20
Item 7 –	Management’s Discussion and Analysis of Financial Condition and Results of Operation	21
Item 7A –	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8 –	Financial Statements and Supplementary Data	42
Item 9 –	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
Item 9A –	Controls and Procedures	99
Item 9B –	Other Information	100
PART III
Item 10 –	Directors, Executive Officers and Corporate Governance	101	X
Item 11 –	Executive Compensation	101	X
Item 12 –	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102	X
Item 13 –	Certain Relationships and Related Transactions, and Director Independence	103	X
Item 14 –	Principal Accountant Fees and Services	103	X
PART IV
Item 15 –	Exhibits and Financial Statement Schedules	104

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Part I

Item 1 –Business

General

New Century Bancorp, Inc. (the “Registrant”) was incorporated under the laws of the State of North Carolina on May 14, 2003, at the direction of the Board of Directors of New Century Bank, for the purpose of serving as the bank holding company for New Century Bank and became the holding company for New Century Bank on September 19, 2003. To become New Century Bank’s holding company, the Registrant received the approval of the Federal Reserve Board as well as New Century Bank’s shareholders. Upon receiving such approval, each share of $5.00 par value common stock of New Century Bank was exchanged on a one-for-one basis for one share of $1.00 par value common stock of the Registrant.

The Registrant operates for the primary purpose of serving as the holding company for its subsidiary depository institution, New Century Bank (the “Bank”). The Registrant’s headquarters is located at 700 West Cumberland Street, Dunn, North Carolina 28334.

New Century Bank was incorporated on May 19, 2000 as a North Carolina-chartered commercial bank, opened for business on May 24, 2000, and is located at 700 West Cumberland Street, Dunn, North Carolina.

The Bank operates for the primary purpose of serving the banking needs of individuals and small to medium-sized businesses in its market area. The Bank offers a range of banking services including checking and savings accounts, commercial, consumer, mortgage and personal loans, and other associated financial services.

Primary Market Area

The Registrant’s market area consists of southeastern North Carolina which includes Cumberland, Sampson, Robeson, Wayne and Harnett. The Registrant’s market area has a population of over 767,089 with an average household income of over $45,000.

Total deposits in the Registrant’s market area exceeded $6.7 billion at June 30, 2012. The leading economic components of Harnett County are services, manufacturing, and retail trade. Cumberland County’s leading sector is federal government and military, followed by services and retail trade. In Sampson County, leading sectors include manufacturing, services, and state and local government. Wayne County’s leading sectors are federal government and military services, retail trade and agriculture. The largest employers in the Registrant’s market area include Goodyear Tire Company, Cape Fear Valley Medical Center, Smithfield Foods, Inc. and the United States Military.

Competition

Commercial banking in North Carolina is extremely competitive in large part due to early adoption of laws permitting statewide branching. Registrant competes in its market areas 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 Registrant’s competitors have broader geographic markets and higher lending limits than Registrant and are also able to provide more services and make greater use of media advertising. As of June 30, 2012, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 179 offices (27 in Harnett County, 69 in Cumberland County, 33 in Robeson County, 16 in Sampson County, and 34 in Wayne County).

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The enactment of legislation authorizing interstate banking caused great increases in the size and financial resources of some of Registrant’s competitors. In addition, as a result of interstate banking and the recent economic recession, out-of-state commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina.

Despite the competition in its market areas, Registrant believes that it has certain competitive advantages that distinguish it from its competition. Registrant believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. Registrant offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. Registrant offers many personalized services and intends to attract customers by being responsive and sensitive to their individualized needs. Registrant also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional media to attract new customers. To enhance a positive image in the community, Registrant supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.

Employees

As of December 31, 2012, the Registrant employed 111 full time equivalent employees. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes relations with its employees to be good.

Regulation

Regulation of the Bank

General. The Bank is a North Carolina chartered commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision, examination and regulation by the North Carolina Office of the Commissioner of Banks (“Commissioner”) and the FDIC and to North Carolina and federal statutory and regulatory provisions governing such matters as capital standards, mergers, subsidiary investments and establishment of branch offices. The FDIC also has the authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition and will be required to obtain regulatory approval prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

As a federally insured depository institution, the Bank is subject to various regulations promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”), including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).

The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank, and is intended primarily for the protection of the FDIC and the depositors of the Bank, rather than shareholders. Changes in the regulatory framework could have a material effect on the Bank that in turn, could have a material effect on the Registrant. Certain of the legal and regulatory requirements are applicable to the Bank and the Registrant. This discussion does not purport to be a complete explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.

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State Law. The Bank is subject to extensive supervision and regulation by the Commissioner. The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail its resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

North Carolina Banking Law Modernization Act. On October 1, 2012, as a result of the recommendations of the Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws, legislation went into effect that comprehensively modernizes North Carolina’s banking laws for the first time since the Great Depression. As a result of the legislation, Articles 1 through 10, 12, and 13 of Chapter 53 of the North Carolina General Statutes were repealed, and new Chapter 53C, entitled “Regulation of Banks,” became law. Major changes enacted by the law include: a comprehensive list of definitions enhancing the clarity and meaning of the various sections of North Carolina’s banking law, a broader reliance on the North Carolina Business Corporations Act, and incorporation of modern concepts of capital adequacy and regulatory supervision. On March 4, 2013, a bill was filed for consideration by the North Carolina General Assembly to make certain technical corrections and clarifications to Chapter 53C.

Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This law has significantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have significant discretion in drafting rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many years. The Dodd-Frank Act included, among other things:

· the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;

· the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

· the establishment of strengthened capital and prudential standards for banks and bank holding companies;

· enhanced regulation of financial markets, including derivatives and securitization markets;

· the elimination of certain trading activities by banks;

· a permanent increase of FDIC deposit insurance to $250,000 per depository category and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

· amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

· new disclosure and other requirements relating to executive compensation and corporate governance.

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The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of Tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). The Federal Reserve released a final rule in early 2011 which requires a “banking entity,” a term that is defined to include bank holding companies like the Registrant, to bring its proprietary trading activities and investments into compliance with the Dodd-Frank Act restrictions no later than two years after the earlier of: (1) July 21, 2012, or (2) 12 months after the date on which interagency final rules are adopted. Pursuant to the compliance date final rule, banking entities are permitted to request an extension of this timeframe from the Federal Reserve. In late 2011, the federal banking agencies released for comment proposed regulations implementing the Volcker Rule. The public comment period closed in early 2012. The proposed rules are highly complex and many aspects of their application remain uncertain. Due to the complexity of the new rules, the challenges of agency coordination, and the volume of public comments received, implementation of the Volcker Rule has been delayed. We do not currently anticipate that the Volcker Rule will have a material effect on our operations. However, until a final rule is adopted, the precise impact of the Volcker Rule on the Registrant cannot be determined.

A number of other provisions of the Dodd-Frank Act remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact our business. However, we believe that certain aspects of the legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.

Deposit Insurance. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (“DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio” or “DRR”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the DRR at 2.0%.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.

The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation went into effect April 1, 2011.

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On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in non-interest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program. The Bank elected to participate in the TAG Program and as a result, does not anticipate a material increase in its deposit insurance premiums. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010. It was subsequently extended again through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010. This change is expected to lower the Bank’s FDIC insurance expense.

On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions.

On December 30, 2009, the Bank paid a $3.1 million prepaid assessment, creating a prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the Bank will expense its regular quarterly assessment and record an offsetting credit to the prepaid assessment asset until the asset is exhausted. If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned to the Bank.

The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Registrant and the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.

Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

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A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant.

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks. The MOU represents an informal agreement between the Board of Directors of New Century Bank, the Regional Director of the FDIC’s Atlanta Regional Office and the North Carolina Commissioner of Banks and requires that New Century Bank’s management take certain actions to improve the bank’s lending function. The Memorandum also requires the Bank to maintain minimum Tier 1 Leverage and Total Risk Based Capital Ratios of 8.0% and 11.5%, respectively, during the life of the Memorandum.  The Memorandum also restricts the ability of the Bank to grow its total assets at a rate in excess of 10% per year or to declare cash dividends without the prior approval of the Commissioner and the FDIC. As of December 31, 2012, the Registrant was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.78%, 15.34%, and 16.60%, respectively. Also, as of December 31, 2012, the Bank was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.52%, 14.98%, and 16.24%, respectively.

On January 29, 2013, the MOU was resolved and terminated upon agreement of all parties.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of board of director and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.

In June 2012, the federal bank regulatory agencies jointly issued three proposed rules that would revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). While the regulatory agencies had initially proposed an effective date of January 1, 2013 for the new rules, the agencies have since confirmed that the implementation will be delayed as a result of the many industry participants, including community banks, that expressed concern over the impact of the proposed rules. When and if the proposed rules become effective, they would, among other things: revise the definition of regulatory capital components and related calculations, add a new common equity Tier 1 capital ratio, and increase the minimum Tier 1 Capital Ratio requirement from 4% to 6% percent. If the proposed rules are implemented as written, the amount of capital that the Bank would be required to hold would likely increase.

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Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy the minimum capital requirements discussed above, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.

Under the implementing regulations, the federal banking regulators, including the FDIC, generally measure an institution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets).

The following table shows the Bank’s actual capital ratios and the required capital ratios for the various prompt corrective action categories as of December 31, 2012.

										Regulatory
					Adequately				Significantly	Minimum
	Actual			Well Capitalized	Capitalized		Undercapitalized		Undercapitalized	Requirement
Total risk-based capital ratio		16.24	%	10.0% or more	8.0% or more		Less than 8.0%		Less than 6.0%	11.50% or more
Tier 1 risk-based capital ratio		14.98	%	6.0% or more	4.0% or more		Less than 4.0%		Less than 3.0%	8.00% or more
Leverage ratio		10.52	%	5.0% or more	4.0% or more	*	Less than 4.0%	*	Less than 3.0%	8.00% or more

* 3.0% if institution has the highest regulatory rating and meets certain other criteria.

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A “critically undercapitalized” institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. See Note I of the Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the “CDRI Act”), each federal banking agency was required to establish safety and soundness standards for institutions under its authority. The interagency guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business. The guidelines also establish certain basic standards for the documentation of loans, credit underwriting, interest rate risk exposure, asset growth, and information security. The guidelines further provide that depository institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the appropriate federal banking agency determines that a depository institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A depository institution must submit an acceptable compliance plan to its primary federal regulator within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Bank substantially meets all the standards adopted in the interagency guidelines.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure of a financial institution to comply with these sanctions could result in legal consequences for the institution.

Community Reinvestment Act. The Bank, like other financial institutions, is subject to the Community Reinvestment Act (“CRA”). The purpose of the CRA is to encourage financial institutions to help meet the credit needs of their entire communities, including the needs of low-and moderate-income neighborhoods.

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The federal banking agencies have implemented an evaluation system that rates an institution based on its asset size and actual performance in meeting community credit needs. Under these regulations, the institution is first evaluated and rated under two categories: a lending test and a community development test. For each of these tests, the institution is given a rating of either “outstanding,” “high satisfactory,” “low satisfactory,” “needs to improve,” or “substantial non-compliance.” A set of criteria for each rating has been developed and is included in the regulation. If an institution disagrees with a particular rating, the institution has the burden of rebutting the presumption by clearly establishing that the quantitative measures do not accurately present its actual performance, or that demographics, competitive conditions or economic or legal limitations peculiar to its service area should be considered. The ratings received under the three tests will be used to determine the overall composite CRA rating. The composite ratings currently given are: “outstanding,” “satisfactory,” “needs to improve” or “substantial non-compliance.”

The Bank’s CRA rating would be a factor to be considered by the FRB and the FDIC in considering applications submitted by the Bank to acquire branches or to acquire or combine with other financial institutions and take other actions and, if such rating was less than “satisfactory,” could result in the denial of such applications. During the Bank’s last compliance examination, the Bank received a satisfactory rating with respect to CRA compliance.

Federal Home Loan Bank System. The FHLB System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $973,000 at December 31, 2012. The FHLB of Atlanta serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It offers advances to members in accordance with policies and procedures established by the FHFA and the Board of Directors of the FHLB of Atlanta. Long-term advances may only be made for the purpose of providing funds for residential housing finance, small businesses, small farms and small agribusinesses.

Reserves. Pursuant to regulations of the FRB, the Bank must maintain average daily reserves equal to 3% on transaction accounts of $25.0 million up to $55.2 million, plus 10% on the remainder. This percentage is subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of December 31, 2012, the Bank met its reserve requirements.

The Bank is also subject to the reserve requirements of North Carolina commercial banks. North Carolina law requires state nonmember banks to maintain, at all times, a reserve fund in an amount set by the Commissioner.

Liquidity Requirements. FDIC policy requires that banks maintain an average daily balance of liquid assets (cash, certain time deposits, mortgage-backed securities, loans available for sale and specified United States government, state, or federal agency obligations) in an amount which it deems adequate to protect the safety and soundness of the bank. The FDIC currently has no specific level which it requires. The Bank maintains its liquidity position under policy guidelines based on liquid assets in relationship to deposits and short-term borrowings. Based on its policy calculation guidelines, the Bank’s calculated liquidity ratio was 26.7% of total deposits and short-term borrowings at December 31, 2012, which management believes is adequate.

Dividend Restrictions. Under FDIC regulations, the Bank is prohibited from making any capital distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. The FDIC and the Commissioner have the power to further restrict the payment of dividends by the Bank.

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Limits on Loans to One Borrower. The Bank generally is subject to both FDIC regulations and North Carolina law regarding loans to any one borrower, including related entities. Under applicable law, with certain limited exceptions, loans and extensions of credit by a state chartered nonmember bank to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15% of the unimpaired capital of the Bank. In addition, the Bank has an internal policy that loans and extensions of credit fully secured by readily marketable collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 10% of the unimpaired capital fund of the Bank. Under the internal policy, the Bank’s loans to one borrower were limited to $8.5 million at December 31, 2012.

Transactions with Related Parties. Transactions between a state nonmember bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state nonmember bank is any company or entity which controls, is controlled by or is under common control with the state nonmember bank. In a holding company context, the parent holding company of a state nonmember bank (such as the Registrant) and any companies which are controlled by such parent holding company are affiliates of the savings institution or state nonmember bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.

Loans to Directors, Executive Officers and Principal Stockholders. State nonmember banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the applicable regulations there under on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a state nonmember bank and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% stockholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.

State nonmember banks also are subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended (“BHCA”) prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

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Restrictions on Certain Activities. State chartered nonmember banks with deposits insured by the FDIC are generally prohibited from engaging in equity investments that are not permissible for a national bank. The foregoing limitation, however, does not prohibit FDIC-insured state banks from acquiring or retaining an equity investment in a subsidiary in which the bank is a majority owner. State chartered banks are also prohibited from engaging as a principal in any type of activity that is not permissible for a national bank and, subject to certain exceptions, subsidiaries of state chartered FDIC-insured banks may not engage as a principal in any type of activity that is not permissible for a subsidiary of a national bank, unless in either case, the FDIC determines that the activity would pose no significant risk to the DIF and the bank is, and continues to be, in compliance with applicable capital standards.

The Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank’s operations.

Regulation of the Registrant

Federal Regulation. The Registrant is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.

The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.

The merger or consolidation of the Registrant with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases, an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.

The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” and well-managed under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.

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In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:

- making or servicing loans;

- performing certain data processing services;

- providing discount brokerage services;

- acting as fiduciary, investment or financial advisor;

- leasing personal or real property;

- making investments in corporations or projects designed primarily to promote community welfare; and

- acquiring a savings and loan association.

In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.

However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.

A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Registrant has not yet elected to become a financial holding company.

Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.

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Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:

- leverage capital requirement expressed as a percentage of adjusted total assets;

- risk-based requirement expressed as a percentage of total risk-weighted assets; and

- Tier 1 leverage requirement expressed as a percentage of adjusted total assets.

The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.

Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.

Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Bank. At present, the Registrant’s only source of income is dividends paid by the Bank and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Bank. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings where the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.

The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.

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In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.

Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Registrant, any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.

Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant and the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.

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Future Legislation

Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on Registrant’s operations.

Item 1A – RISK FACTORS

Not required for smaller reporting companies.

Item 1B – UNRESOLVED STAFF COMMENTS

Not required for smaller reporting companies.

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Item 2 - Properties

The following table sets forth the location of the main office, branch offices, and operation centers of the Registrant’s subsidiary depository institution, New Century Bank, as well as certain information relating to these offices.

Office Location	Year Opened	Approximate Square Footage	Owned or Leased
New Century Bank Main Office 700 West Cumberland Street Dunn, NC 28334	2001	12,600	Owned
Clinton Office 111 Northeast Boulevard Clinton, NC 28328	2008	3,100	Owned
Goldsboro Office 431 North Spence Avenue Goldsboro, NC 27534	2005	6,300	Owned
Lillington Office 818 McKinney Parkway Lillington, NC 27546	2007	4,500	Owned
Greenville Loan Production Office 323 Clifton Street, Suite #8 Greenville, NC 27858	2009	500	Leased
Fayetteville Office 2818 Raeford Road Fayetteville, NC 28303	2004	10,000	Owned
Ramsey Street Office 6390 Ramsey Street Fayetteville, NC 28311	2007	2,500	Owned
Lumberton Office 4400 Fayetteville Road Lumberton, NC 28358	2006	3,500	Owned
Raleigh Loan Production Office 7951 Monument Lane, Suite #101 Raleigh, NC 27615	2012	1,451	Leased
Operations Center 861 Tilghman Drive Dunn, NC 28335	2010	7,500	Owned
Operations Center - Annex 863 Tilghman Drive Dunn, NC 28335	2010	5,000	Owned

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Item 3 - Legal Proceedings

As of December 31, 2012 there are no material pending legal proceedings to which the Registrant, or any of its subsidiaries, is a party, or of which any of their property is the subject.

Item 4 – mine safety disclosureS

None.

Part II

Item 5 - Market for registrant’s Common Equity, Related Stockholder Matters and ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the NASDAQ Global Market under the trading symbol “NCBC.” Raymond James & Associates, Inc., Morgan Keegan & Company, McKinnon & Company, Automated Trading Desk Financial Services, B-Trade Services, Citadel Securities, Domestic Securities, Hill Thompson Magid & Company, Hudson Securities, J. P. Morgan Securities, Knight Capital Americas, L.P., Monroe Securities, UBS Securities, Sandler O’Neill & Partners, L.P., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2012, there were 6,913,636 shares of common stock outstanding, which were held by 1,362 shareholders of record.

	Sales Prices
	High		Low
2012
First Quarter	$	3.34	$	1.89
Second Quarter		4.90		2.94
Third Quarter		5.75		4.52
Fourth Quarter		6.14		5.30
2011
First Quarter	$	6.00	$	4.35
Second Quarter		5.75		4.45
Third Quarter		4.99		3.00
Fourth Quarter		3.62		1.84

The Registrant did not declare or pay cash dividends during 2012 and 2011 and it is not currently anticipated that cash dividends will be declared and paid to shareholders at any time in the foreseeable future. See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.

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ITEM 6 – SELECTED FINANCIAL DATA

	At or for the year ended December 31,
	2012			2011			2010			2009			2008
	(dollars in thousands, except per share data)
Operating Data:
Total interest income	$	25,132		$	30,383		$	33,610		$	33,030		$	35,237
Total interest expense		6,632			8,425			9,680			13,122			17,372
Net interest income		18,500			21,958			23,930			19,908			17,865
Provision for loan losses		(2,597	)		6,218			15,634			5,472			4,283
Net interest income after provision for loan losses		21,097			15,740			8,296			14,436			13,582
Total non-interest income		3,598			2,817			2,678			3,098			3,124
Impairment of goodwill		-			-			-			8,674			-
Total non-interest expense		17,236			19,105			19,213			17,375			17,138
Income (loss) before income taxes		7,459			(548	)		(8,239	)		(8,515	)		(432	)
Provision for income taxes (benefit)		2,822			(385	)		(3,284	)		(73	)		(239	)
Net income (loss)	$	4,637		$	(163	)	$	(4,955	)	$	(8,442	)	$	(193	)
Per Share Data:
Earnings (loss) per share - basic	$	0.67		$	(.02	)	$	(.72	)	$	(1.24	)	$	(.03	)
Earnings (loss) per share - diluted		0.67			(.02	)		(.72	)		(1.24	)		(.03	)
Market Price
High		6.14			6.00			6.44			7.67			10.21
Low		1.89			1.84			3.19			3.81			4.90
Close		5.60			2.00			4.98			4.75			5.00
Book value		7.84			7.22			7.19			7.96			9.17
Tangible book value		7.79			7.14			7.09			7.83			7.76
Selected Year-End Balance Sheet Data:
Loans, gross of allowance	$	367,892		$	417,624		$	470,484		$	481,176		$	460,626
Allowance for loan losses		7,897			10,034			10,015			10,359			8,860
Other interest-earning assets		183,679			128,800			109,685			107,360			99,908
Goodwill and core deposit intangible		298			545			699			853			9,680
Total assets		585,453			589,651			626,896			630,419			605,767
Deposits		498,559			501,377			534,599			540,262			505,119
Borrowings		30,220			36,249			40,038			32,936			35,547
Shareholders’ equity		54,179			49,546			49,692			54,409			62,659
Selected Average Balances:
Total assets	$	574,616		$	624,015		$	644,904		$	630,521		$	599,913
Loans, gross of allowance		391,648			451,358			484,647			471,059			451,558
Total interest-earning assets		532,193			565,867			599,152			578,372			554,798
Goodwill and core deposit intangible		389			621			775			9,578			9,756
Deposits		481,387			533,000			548,768			527,844			504,188
Total interest-bearing liabilities		442,554			494,520			511,031			498,831			468,044
Shareholders’ equity		52,769			50,094			54,750			63,584			62,107
Selected Performance Ratios:
Return on average assets		0.81	%		(.03	)%		(.77	)%		(1.34	)%		(.03	)%
Return on average equity		8.79	%		(.33	)%		(9.05	)%		(13.28	)%		(.31	)%
Net interest margin (4)		3.57	%		3.91	%		4.03	%		3.49	%		3.27	%
Net interest spread (4)		3.34	%		3.70	%		3.75	%		3.12	%		2.69	%
Efficiency ratio (1)		78.00	%		77.10	%		72.71	%		75.52	%		81.00	%
Asset Quality Ratios:
Nonperforming loans to period-end loans (2)		3.27	%		4.70	%		2.60	%		3.34	%		1.85	%
Allowance for loan losses to period-end loans (3)		2.15	%		2.40	%		2.13	%		2.15	%		1.92	%
Net loan charge-offs (recoveries)  to average loans		(0.12	)%		1.37	%		3.30	%		0.84	%		0.82	%

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	At or for the year ended December 31,
	2012			2011			2010			2009			2008
	(dollars in thousands, except per share data)
Capital Ratios:
Total risk-based capital		16.60	%		13.49	%		13.04	%		13.89	%		14.43	%
Tier 1 risk-based capital		15.34	%		12.22	%		11.78	%		12.63	%		13.18	%
Leverage ratio		10.78	%		9.14	%		9.40	%		10.02	%		10.66	%
Tangible equity to assets		9.20	%		8.31	%		7.82	%		8.49	%		8.75	%
Equity to assets ratio		9.25	%		8.40	%		7.93	%		8.63	%		10.34	%
Other Data:
Number of banking offices		7			9			9			9			10
Number of full time equivalent employees		111			113			135			133			132

(1) Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income, excluding goodwill impairment.

(2) Nonperforming loans consist of non-accrual loans and restructured loans.

(3) Allowance for loan losses to period-end loans ratio excludes loans held for sale.

(4) Fully taxable equivalent basis.

Item 7 - ManageMent’s Discussion and Analysis of Financial Condition and Results of Operation

The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors, many of which are beyond our control. The following discussion is intended to assist in understanding the financial condition and results of operations of New Century Bancorp, Inc. Because New Century Bancorp, Inc. has no material operations and conducts no business on its own other than owning its consolidated subsidiary, New Century Bank, and its unconsolidated subsidiary, New Century Statutory Trust I, the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the bank subsidiary. However, for ease of reading and because the financial statements are presented on a consolidated basis, New Century Bancorp, Inc and, New Century Bank are collectively referred to herein as the Company unless otherwise noted.

DESCRIPTION OF BUSINESS

The Company is a commercial bank holding company that was incorporated on September 19, 2003 and has one wholly-owned banking subsidiary, New Century Bank (referred to as the “Bank”), which became a subsidiary of the Company as part of a holding company reorganization. In September 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 Bank. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company’s only business activity is the ownership of the Bank. Accordingly, 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 southeastern 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, 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.

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FINANCIAL CONDITION

DECEMBER 31, 2012 AND 2011

Overview

Total assets at December 31, 2012 were $585.5 million, which represents a decrease of $4.2 million or (0.7)% from December 31, 2011. Interest earning assets at December 31, 2012 totaled $549.5 million and consisted of $367.9 million in net loans, $81.5 million in investment securities, $97.1 million in overnight investments and interest-bearing deposits in other banks and $3.0 million in federal funds sold. Total deposits and shareholders’ equity at December 31, 2012 were $498.6 million and $54.2 million, respectively.

Investment Securities

Investment securities increased to $81.5 million from $67.9 million at December 31, 2012. The Company’s investment portfolio at December 31, 2012, which consisted of U.S. government agency securities, U.S. government sponsored entities agency securities (GSE’s), mortgage-backed securities and bank-qualified municipal securities, aggregated $81.5 million with a weighted average taxable equivalent yield of 2.25%. The Company also holds an investment of $973,000 in Federal Home Loan Bank Stock with a weighted average yield of 1.66%. The investment portfolio increased $13.6 million in 2012, the result of $42.1 million in purchases, $26.9 million of maturities and prepayments and a decrease of $1.1 million in the market value of securities held available for sale and net accretion of investment discounts. There was a sale of $500,000 to fund a Community Reinvestment Act (“CRA”) investment.

The following table summarizes the securities portfolio by major classification:

Securities Portfolio Composition

(dollars in thousands)

					Tax
	Amortized		Fair		Equivalent
	Cost		Value		Yield
U. S. government agency securities - GSE’s:
Due within one year		9,385		9,460		1.27	%
Due after one but within five years		16,947		17,047		0.68	%
Due after five but within ten years		6,003		5,958		2.02	%
Due after ten years		4,616		4,689		2.19	%
		36,951		37,154		1.24	%
Mortgage-backed securities:
Due within one year		1,085		1,152		4.85	%
Due after one but within five years		27,188		28,290		3.00	%
Due after five but within ten years		4,505		4,500		1.77	%
Due after ten years		2,016		2,012		2.16	%
		34,794		35,954		2.85	%
State and local governments:
Due within one year		350		351		4.10	%
Due after one but within five years		2,354		2,541		4.80	%
Due after five but within ten years		3,665		3,787		3.35	%
Due after ten years		1,601		1,704		6.03	%
		7,970		8,383		4.35	%
Total securities available for sale:
Due within one year		10,820		10,963		1.72	%
Due after one but within five years		46,489		47,878		2.25	%
Due after five but within ten years		14,173		14,245		2.28	%
Due after ten years		8,233		8,405		2.93	%
	$	79,715	$	81,491		2.25	%

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Loans Receivable

The loan portfolio at December 31, 2012 totaled $367.9 million and was comprised of $330.3 million in real estate loans, $29.3 million in commercial and industrial loans, and $8.7 million in loans to individuals. Also included in loans outstanding is $452,000 in net deferred loan fees.

The following table describes the Company’s loan portfolio composition by category:

	At December 31,
	2012						2011						2010						2009						2008
				% of						% of						% of						% of						% of
				Total						Total						Total						Total						Total
	Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans			Amount			Loans
										(dollars in thousands)
Real estate loans:
1 to 4 family residential	$	41,017			11.1	%	$	52,182			12.5	%	$	60,385			12.8	%	$	69,995			14.5	%	$	67,353			14.6	%
Commercial real estate		186,949			50.8	%		192,047			46.0	%		193,502			41.1	%		195,165			40.6	%		169,856			36.9	%
Multi-family residential		19,524			5.3	%		23,377			5.6	%		30,088			6.4	%		22,580			4.7	%		18,744			4.1	%
Construction		48,220			13.1	%		70,846			16.9	%		84,550			18.0	%		70,736			14.7	%		65,807			14.3	%
Home equity lines of credit		34,603			9.4	%		38,702			9.3	%		39,938			8.5	%		38,482			8.0	%		41,352			9.0	%
Total real estate loans		330,313			89.7	%		377,154			90.3	%		408,463			86.8	%		396,958			82.5	%		363,112			78.9	%
Other loans:
Commercial and industrial		29,297			8.0	%		33,146			8.0	%		49,437			10.5	%		70,747			14.7	%		76,936			16.7	%
Loans to individuals & overdrafts		8,734			2.4	%		7,671			1.8	%		12,967			2.8	%		13,766			2.9	%		20,916			4.5	%
Total other loans		38,031			10.4	%		40,817			9.8	%		62,404			13.3	%		84,513			17.6	%		97,852			21.2	%
Less:
Deferred loan origination (fees) cost, net		(452	)		(0.1	)%		(347	)		(.1	)%		(383	)		(.1	)%		(295	)		(0.1	)%		(338	)		(0.1	)%
Total loans		367,892			100	%		417,624			100	%		470,484			100.0	%		481,176			100.0	%		460,626			100.0	%
Allowance for loan losses		(7,897	)					(10,034	)					(10,015	)					(10,359	)					(8,860	)
Total loans,  net	$	359,995					$	407,590					$	460,469					$	470,817					$	451,766

During 2012, loans receivable decreased by $47.6 million, or 11.7%, to $360.0 million as of December 31, 2012. The decline in loans during the year is attributable to reduced loan demand in the Company’s markets.

The majority of the Company’s loan portfolio is comprised of real estate loans. This category, which includes both commercial and consumer loan balances, decreased from 90.3% of the portfolio at December 31, 2011 to 89.7% at December 31, 2012. The real estate loan category decreased by $46.8 million during the year as result of a $22.6 million decrease in construction loans, an $11.1 million decrease in 1 to 4 family residential loans, a $5.1 decrease in commercial real estate loans, a $4.1 million decrease in HELOC loans and a $3.9 million decrease in multi-family residential loans. The most significant shift in the overall portfolio was that of the construction loan category which was primarily the result of loan repayments that exceeded the loan demand from borrowers.

Management monitors trends in the loan portfolio that may indicate more than normal risk. A discussion of 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.

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Acquisition, Development and Construction Loans

The Company originates construction loans for the purpose of acquisition, development, and construction of both residential and commercial properties (“ADC” loans).

Acquisition, Development and Construction Loans

As of December 31, 2012

(dollars in thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	29,892		$	18,328		$	48,220
Average Loan Size	$	100		$	333
Percentage of total loans		8.13	%		4.98	%		13.11	%
Non-accrual loans	$	733		$	1,565		$	2,298

Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company’s market area.

Included in ADC loans and residential real estate loans as of December 31, 2012 were certain loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $8.3 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $8.6 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 25.7% of total risk-based capital as of December 31, 2012, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to soften for both market activity and collateral valuations.

Acquisition, Development and Construction Loans

As of December 31, 2011

(dollars in thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	49,958		$	20,888		$	70,846
Average Loan Size	$	174		$	307
Percentage of total loans		11.96	%		5.00	%		16.96	%
Non-accrual loans	$	596		$	3,172		$	3,768

Included in ADC loans and residential real estate loans as of December 31, 2011 were loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $13.3 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $12.5 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 43.8% of total risk-based capital as of December 31, 2011, which is less than the 100% maximum allowed.

Business Sector Concentrations

Loan concentrations in certain business sectors impacted by lower than normal retail sales, higher unemployment, higher vacancy rates, and weakened real estate market values may also pose additional risk to the Company’s capital position. The Company has established an internal commercial real estate guideline of 40% of Risk-Based Capital for any single product line.

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At December 31, 2012 and 2011 the Company exceeded the 40% guideline in one product line. The Office Building product type group represented 40% of Risk-Based Capital or $26.7 million at December 31, 2012. This total for this product line at December 31, 2011 was $27.4 million or 46% of Risk-Based Capital. All other commercial real estate groups were under the 40% threshold at both dates.

Geographic Concentrations

Certain risks exist arising from geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and home equity lines of credit (“HELOC”) loans at December 31, 2012.

	ADC Loans		Percent			HELOC		Percent
	(dollars in thousands)
Harnett County	$	4,404		9.13	%	$	6,839		19.76	%
Cumberland County		17,909		37.14	%		7,258		20.99	%
Johnston County		543		1.13	%		648		1.87	%
Pitt County		4,642		9.63	%		5		.01	%
Robeson County		1,602		3.32	%		3,775		10.91	%
Sampson County		614		1.27	%		1,686		4.87	%
Wake County		5,707		11.84	%		960		2.77	%
Wayne County		3,079		6.39	%		5,521		15.96	%
Hoke County		4,443		9.21	%		172		.50	%
All other locations		5,277		10.94	%		7,739		22.36	%
Total	$	48,220		100.00	%	$	34,603		100.0	%

Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2011.

	ADC Loans		Percent			HELOC		Percent
	(dollars in thousands)
Harnett County	$	5,637		7.95	%	$	7,432		19.20	%
Cumberland County		18,424		26.01	%		6,652		17.18	%
Johnston County		1,410		1.99	%		622		1.61	%
Pitt County		4,631		6.54	%		-		-
Robeson County		2,021		2.85	%		3,377		8.72	%
Sampson County		730		1.03	%		1,645		4.25	%
Wake County		12,696		17.92	%		1,322		3.42	%
Wayne County		4,474		6.32	%		5,769		14.91	%
Hoke County		2,626		3.71	%		111		.29	%
All other locations		18,197		25.68	%		11,772		30.42	%
Total	$	70,846		100.0	%	$	38,702		100.0	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At December 31, 2012, the Company had $84.4 million in loans that had terms permitting interest only payments. This represented 22.9% of the total loan portfolio. At December 31, 2011, the Company had $125.8 million in loans that had terms permitting interest only payments. This represented 30.1% 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 are interest only payments during the acquisition, development, and construction phases of such projects.

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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 concentrations totaled $43.2 million or 11.7% of total loans at December 31, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company’s ten largest customer loan relationship concentrations totaled $61.0 million, or 16.6% of total loans, at December 31, 2012 compared to $68.3 million, or 16.4% of total loans at December 31, 2011. 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 capital position of the Company.

Maturities and Sensitivities of Loans to Interest Rates

The following table presents the maturity distribution of the Company’s loans at December 31, 2012. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate:

	At December 31, 2012
			Due after one
	Due within		year but within		Due after
	one year		five years		five years		Total
	(dollars in thousands)
Fixed rate loans:
1 to 4 family residential	$	16,802	$	14,580	$	1,999	$	33,381
Commercial real estate		34,091		64,752		41,501		140,344
Multi-family residential		6,532		4,052		39		10,623
Construction		4,167		7,099		182		11,448
Home equity lines of credit		29		-		208		237
Commercial and industrial		2,231		9,480		3,117		14,828
Loans to individuals & overdrafts		3,198		2,387		97		5,682
Total at fixed rates		67,050		102,350		47,143		216,543
Variable rate loans:
1 to 4 family residential		1,891		3,984		700		6,575
Commercial real estate		10,164		27,483		4,585		42,232
Multi-family residential		1,271		6,148		-		7,419
Construction		26,566		7,379		529		34,474
Home equity lines of credit		5		110		33,669		33,784
Commercial and industrial		10,268		2,361		1,522		14,151
Loans to individuals & overdrafts		1,678		681		681		3,040
Total at variable rates		51,843		48,146		41,686		141,675
Subtotal		118,893		150,496		88,829		358,218
Non-accrual loans		6,170		3,319		637		10,126
Gross loans	$	125,063	$	153,815	$	89,466		368,344
Deferred loan origination (fees) costs, net								(452	)
Total loans							$	367,892

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The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company’s best interest. In such instances, the Company generally requires payment of accrued interest and may require a principal reduction or modify other terms of the loan at the time of renewal.

Past Due Loans and Nonperforming Assets

At December 31, 2012, the Company had $1.2 million in loans that were 30 days or more past due. This represented 0.32% of gross loans outstanding on that date. This is a decrease from December 31, 2011 when there were $4.1 million in loans that were past due 30 days or more, or 1.02% of gross loans outstanding. Non-accrual loans decreased by $7.5 million to $10.1 million at December 31, 2012. As of December 31, 2012, the Company had thirty-three loans totaling $6.6 million that were considered to be troubled debt restructurings, of which fourteen loans totaling $1.9 million were still accruing interest. At December 31, 2011, the Company had twenty-one loans totaling $9.1 million that were considered to be troubled debt restructurings, of which eight loans totaling $2.0 million were still accruing. There were no loans that were over 90 days past due and still accruing interest at December 31, 2012. There were three loans totaling $108,000 that were 90 days or more past due and still in accruing at December 31, 2011.

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 restructured loans), and total non-performing assets.

	As December 31,
	2012			2011			2010			2009			2008
	(dollars in thousands)
Non-accrual loans	$	10,126		$	17,623		$	10,562		$	16,048		$	8,630
Restructured loans		1,904			2,013			1,688			-			-
Total non-performing loans		12,030			19,636			12,250			16,048			8,630
Foreclosed real estate		2,833			3,031			3,655			2,530			2,799
Repossessed assets		-			-			-			-			-
Total non-performing assets	$	14,863		$	22,667		$	15,905		$	18,578		$	11,429
Accruing loans past due 90 days  or more	$	-		$	108		$	-		$	-		$	-
Allowance for loan losses	$	7,897		$	0,034		$	10,015		$	10,359		$	8,860
Non-performing loans to period  end loans		3.27	%		4.70	%		2.60	%		3.34	%		1.87	%
Non-performing loans and accruing  loans past due 90 days or more to  period end loans		3.27	%		4.73	%		2.60	%		3.34	%		1.87	%
Allowance for loan losses to period  end loans		2.15	%		2.40	%		2.13	%		2.15	%		1.92	%
Allowance for loan losses to  non-performing loans		66	%		51	%		82	%		65	%		103	%
Allowance for loan losses to  non-performing assets		53	%		44	%		63	%		56	%		78	%
Allowance for loan losses to  non-performing assets and accruing   loans past due 90 days or more		53	%		44	%		63	%		56	%		78	%
Non-performing assets to total assets		2.53	%		3.84	%		2.54	%		2.95	%		1.89	%
Non-performing assets and accruing
loans past due 90 days or more to
total assets		2.53	%		3.86	%		2.54	%		2.95	%		1.89	%

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In addition to the above, the Company had $7.7 million in loans that were considered to be impaired for reasons other than their past due, accrual or restructured status. In total, there were $19.7 million of loans that were considered to be impaired at December 31, 2012 which is a $5.0 million decrease from the $24.8 million that was impaired at December 31, 2011. Impaired loans have been evaluated by management in accordance with Accounting Standards Codification (“ASC”) 310 and $909,000 has been included in the allowance for loan losses as of December 31, 2012 for these loans. All troubled debt restructurings and other non-performing loans are included within impaired loans as of December 31, 2012.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to expense and represents management’s best estimate of probable loans losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflect loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices. Included in the allowance are specific reserves on loans that are considered to be impaired which are identified and measured in accordance with ASC 310.

The following table presents the Company’s allowance for loan losses as a percentage of loans at December 31 for the years indicated.

	At December 31,
			% of					% of					% of					% of					% of
			Total					Total					Total					Total					Total
	2012		loans			2011		loans			2010		loans			2009		loans			2008		loans
	(dollars in thousands)
1 to 4 family residential	$	1,070		11.10	%	$	1,597		12.49	%	$	2,483		12.83	%	$	1,854		14.55	%	$	1,437		14.62	%
Commercial real estate		4,946		50.80	%		4,771		45.98	%		3,111		41.13	%		4,281		40.56	%		2,761		36.88	%
Multi- family residential		106		5.30	%		127		5.60	%		640		6.40	%		200		4.69	%		115		4.07	%
Construction		798		13.10	%		1,540		16.96	%		349		17.97	%		629		14.70	%		1,039		14.29	%
Home equity lines of credit		627		9.40	%		1,186		9.27	%		850		8.49	%		1,189		8.00	%		499		8.97	%
Commercial and industrial		278		8.00	%		719		7.94	%		1,052		10.51	%		1,699		14.70	%		2,381		16.70	%
Loans to individuals & overdrafts		72		2.40	%		94		1.84	%		1,530		2.76	%		501		2.86	%		563		4.54	%
Deferred loan origination (fees) cost, net		-		(0.1	)%		-		(0.08	)%		-		(0.09	)%		-		(0.06	)%		-		(0.07	)%
				100.00	%				100.00	%				100.00	%				100.00	%				100.00	%
Total allocated		7,897					10,034					10,015					10,353					8,795
Unallocated		-					-					-					6					65
Total	$	7,897				$	10,034				$	10,015				$	10,359				$	8,860

The allowance for loan losses as a percentage of gross loans outstanding decreased by 0.25% during 2012 to 2.15% of gross loans at December 31, 2012. The change in the allowance during 2012 resulted from net recoveries of $460,000, largely due to a $2.6 million recovery on the previously reported loan fraud by a large relationship borrower. General reserves totaled $7.0 million or 1.90% of gross loans outstanding as of December 31, 2012, a decrease from year-end 2011 when they totaled $8.5 million or 2.04% of loans outstanding. At December 31, 2012, specific reserves on impaired loans constituted $909,000 or 0.25% of gross loans outstanding compared to $1.5 million or 0.36% of loans outstanding as of December 31, 2011.

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The following table presents information regarding changes in the allowance for loan losses in detail for the years indicated:

	As of December 31,
	2012			2011			2010			2009			2008
	(dollars in thousands)
Allowance for loan losses at  beginning of year	$	10,034		$	10,015		$	10,359		$	8,860		$	8,314
Provision for loan losses		(2,597	)		6,218			15,634			5,472			4,283
		7,437			16,233			25,993			14,332			12,597
Loans charged off:
Commercial and industrial		(193	)		(4,116	)		(11,967	)		(2,932	)		(2,836	)
Construction		(720	)		(993	)		(464	)		(168	)		(118	)
Commercial real estate		(1,580	)		(2,970	)		(2,811	)		-			-
Multi-family residential		-			-			-			-			-
Home equity lines of credit		(459	)		(661	)		(496	)		(404	)		(448	)
1 to 4 family residential		(232	)		(1,512	)		(2,254	)		(567	)		(678	)
Loans to individuals & overdrafts		(70	)		(170	)		(421	)		(352	)		(270	)
Total charge-offs		(3,254	)		(10,422	)		(18,413	)		(4,423	)		(4,350	)
Recoveries of loans previously charged off:
Commercial and industrial		2,714			3,765			1,121			325			373
Construction		317			12			137			12			33
Multi-family residential		-			-			-			-			-
Commercial real estate		287			60			1,023			-			-
Home equity lines of credit		74			52			44			7			-
1 to 4 family residential		232			247			15			69			145
Loans to individuals & overdrafts		90			87			95			37			62
Total recoveries		3,714			4,223			2,435			450			613
Net recoveries (charge-offs)		460			(6,199	)		(15,978	)		(3,973	)		(3,737	)
Allowance for loan losses at  end of year	$	7,897		$	10,034		$	10,015		$	10,359		$	8,860
Ratios:
Net charge-offs (recoveries) as a percent of  average loans		(0.12	)%		1.37	%		3.30	%		0.84	%		0.83	%
Allowance for loan losses as a percent of loans at end of year		2.15	%		2.40	%		2.13	%		2.15	%		1.92	%

While the Company believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making determinations regarding the allowance.

Management believes the level of the allowance for loan losses as of December 31, 2012 is appropriate in light of the risk inherent within the Company’s loan portfolio.

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Other Assets

At December 31, 2012, non-earning assets totaled $41.1 million, a decrease of $12.1 million from $53.2 million at December 31, 2011. Non-earning assets at December 31, 2012 consisted of: cash and due from banks of $13.5 million, premises and equipment totaling $10.9 million, foreclosed real estate totaling $2.8 million, accrued interest receivable of $1.6 million, bank owned life insurance of $8.2 million and other assets totaling $4.4 million, which includes a $723,000 net prepayment in FDIC deposit insurance for the year 2012 and net deferred taxes of $2.5 million.

The Company has an investment in bank owned life insurance of $8.2 million, which increased $0.2 million from December 31, 2011 due to an increase in cash surrender value. Since the income on this investment is included in non-interest income, the asset is not included in the Company’s calculation of earning assets.

Deposits

Total deposits at December 31, 2012 were $498.6 million and consisted of $92.3 million in non-interest-bearing demand deposits, $122.7 million in money market and NOW accounts, $22.2 million in savings accounts, and $261.4 million in time deposits. Total deposits decreased by $2.8 million from $501.4 million as of December 31, 2011. Non-interest-bearing demand deposits increased by $17.7 million from $74.6 million as of December 31, 2011. MMDA and NOW accounts increased by $30.1 million from $92.6 million as of December 31, 2011. Savings accounts decreased by $2.3 million from $24.5 million as of December 31, 2011. Time deposits decreased by $48.3 million during 2012.

The following table shows historical information regarding the average balances outstanding and average interest rates for each major category of deposits:

	For the Period Ended December 31,
	2012					2011					2010					2009					2008
	Average		Average			Average		Average			Average		Average			Average		Average			Average		Average
	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
	(dollars in thousands)
Savings, NOW and money market deposits	$	124,583		0.42	%	$	120,363		0.53	%	$	124,974		0.94	%	$	108,240		1.22	%	$	96,191		1.68	%
Time deposits > $100,000		144,029		2.24	%		167,689		2.32	%		172,120		2.36	%		166,641		3.19	%		153,619		4.38	%
Other time deposits		137,566		1.78	%		168,172		2.00	%		175,830		2.19	%		187,687		3.11	%		187,247		4.30	%
Total interest-bearing  deposits		406,178		1.53	%		456,224		1.73	%		472,924		1.92	%		462,568		2.70	%		437,057		3.75	%
Noninterest-bearing  deposits		75,659		-			76,776		-			75,844		-			65,276		-			67,131		-
Total deposits	$	481,837		1.29	%	$	533,000		1.48	%	$	548,768		1.66	%	$	527,844		2.36	%	$	504,188		3.25	%

Short Term and Long Term Debt

As of December 31 2012, the Company had $17.8 million in short-term debt, which included $15.8 million in repurchase agreements and $2.0 million in FHLB Advances, and $12.4 million in long-term debt, which was $12.4 million in junior subordinated debentures issued to New Century Statutory Trust I in connection with the Company’s trust preferred securities.

Shareholders’ Equity

Total shareholders’ equity at December 31, 2012 was $54.2 million, an increase of $4.6 million from $49.6 million as of December 31, 2011. Changes in shareholders’ equity included $4.6 million in net income, $38,000 in stock based compensation, proceeds from the sale of $165,000 in common stock, and a $207,000 decrease in accumulated other comprehensive income.

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RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

Overview

During 2012, New Century Bancorp had net income of $4.6 million compared to a net loss of $163,000 for 2011. Both basic and diluted net income per share for the year ended December 31, 2012 were $0.67, compared with a basic and diluted net loss per share of $0.02 for 2011.

Net Interest Income

Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.

Net interest income decreased by $3.5 million to $18.5 million for the year ended December 31, 2012. The Company’s total interest income was impacted by a decrease in interest earning assets and a low interest rate environment in 2012. Average total interest-earnings assets were $523.0 million in 2012 compared with $565.9 million in 2011. The yield on those assets decreased by 56 basis points from 5.40% in 2011 to 4.84% in 2012. Earning asset yields in both years were adversely impacted by income reversed when loans were placed into non-accrual status. These income reversals were approximately $120,000 in 2012 and $240,000 in 2011. Meanwhile, average interest-bearing liabilities decreased by $51.9 million from $494.5 million for the year ended December 31, 2011 to $442.6 million for the year ended December 31, 2012. Cost of funds decreased by 20 basis points in 2012 to 1.50% from 1.70% in 2011. In 2012, the Company’s net interest margin was 3.57% and net interest spread was 3.34%. In 2011, net interest margin was 3.91% and net interest spread was 3.70%.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.

In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent eight consecutive quarters. In determining the appropriate level of the allowance for loan losses at December 31, 2012, the loss history was expanded to ten consecutive quarters of net charge-offs. Since the most recent quarters contain a declining amount of charge offs coupled with a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a $564,000 increase to our loan loss reserves as compared to the methodology previously used. Loan loss provisions in 2012 have also been affected by the decline in overall loan balances during the year.

The Company recorded a $2.6 million negative provision for loan losses in 2012, a decrease of $8.8 million from the $6.2 million provision that was recorded in 2011. For more information on changes in the allowance for loan losses, refer to Note D of the financial statements in the section titled Allowance for Loan Losses.

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Non-Interest Income

Non-interest income for the year ended December 31, 2012 was $3.6 million, up $781,000 from 2011. This increase is due to a one-time gain of $557,000 related to the sale of two branches in 2012 and increases in fees from pre-sold mortgages of $113,000 and other non-interest income of $386,000. These increases were partially offset by a decrease in deposit service fees and charges of $275,000

Non-Interest Expenses

Non-interest expenses decreased by $1.9 million or 9.8% to $17.2 million for the year ended December 31, 2012, from $19.1 million for the same period in 2011. The following are highlights of the significant changes in non-interest expenses from 2011 to 2012. Many of these changes were due to the sale of two branches in April 2012.

· Personnel expenses decreased $0.5 million to $8.3 million due to reductions in staffing.

· Occupancy and equipment expenses decreased $72,000 to $1.3 million

· Foreclosure-related expenses decreased to $1.2 million in 2012 from $1.8 million in 2011, a $700,000 or 36.7% decrease.

· Deposit insurance expense decreased by approximately $147,000 or 16.2% in 2012 due to a lower deposit base and assessment rates.

· Other operating expense increased slightly by $73,000 or 2.3%.

Provision for Income Taxes

The Company’s effective tax rate in 2012 was 37.8%, compared to a 70.3% tax benefit in 2011. This change resulted from net operating income in 2012 versus a net operating loss in 2011. For further discussion pertaining to the Company’s tax position, see the section titled Deferred Tax Asset under Critical Accounting Policies.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

Overview

During 2011, New Century Bancorp incurred a net loss of $163,000 compared to a net loss of $5.0 million for 2010. Both basic and diluted loss per share for the year ended December 31, 2011 were $0.02, compared with basic and diluted loss per share of $0.72 for 2010. The decrease in net loss is primarily due to a reduction in provision for loan loss from 2010 when the Company reported a $10.8 million charge-off from the loan fraud previously reported in 2010.

Net Interest Income

Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.

- 32 -

Net interest income decreased by $2.0 million to $22.0 million for the year ended December 31, 2011. The Company’s total interest income was impacted by a decrease in interest earning assets and a low interest rate environment in 2011. Average total interest-earnings assets were $565.9 million in 2011 compared with $599.2 million in 2010. The yield on those assets decreased by 25 basis points from 5.65% in 2010 to 5.40% in 2011. Earning asset yields in both years were adversely impacted by income reversed when loans were placed into non-accrual status. These income reversals were approximately $240,000 in 2011 and $313,000 in 2010. Meanwhile, average interest-bearing liabilities decreased by $16.5 million from $511.0 million for the year ended December 31, 2010 to $494.5 million for the year ended December 31, 2011. Cost of funds decreased by 19 basis points in 2011 to 1.70% from 1.89% in 2010. In 2011, the Company’s net interest margin was 3.91% and net interest spread was 3.70%. In 2010, net interest margin was 4.03% and net interest spread was 3.75%.

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 light of the risk inherent in the loan portfolio. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan losses, current delinquency and impairment levels, adverse situations that may affect a borrower’s ability to repay, estimated value of underlying collateral, prevailing economic conditions and other relevant factors.

The Company recorded a $6.2 million provision for loan losses in 2011, a decrease of $9.4 million from the $15.6 million provision that was recorded in 2010. For more information on changes in the allowance for loan losses, refer to Note D of the financial statements in the section titled Allowance for Loan Losses.

Non-Interest Income

Non-interest income for the year ended December 31, 2011 was $2.8 million an increase of $139,000 from 2010. When compared to last year, the Company had a decrease in deposit service fees and charges of $166,000, or 10.1%. Fees from pre-sold mortgages decreased to $183,000 in 2011, a decline of $43,000 or 19.0% as compared to 2010, primarily as a result of continued softness in the real estate market. Other non-interest income increased approximately $348,000 during 2011 primarily as a result of a one time gain of $242,000 related to common stock received as collateral on loan default.

Non-Interest Expenses

Non-interest expenses decreased by $108,000 or 0.6% to $19.1 million for the year ended December 31, 2011, from $19.2 million for the same period in 2010. Salaries and employee benefits decreased $0.5 million to $8.8 million for the year ended December 31, 2011 as compared to the same period in 2010 primarily as a result of staff reductions. Occupancy and equipment expenses decreased $139,000 to $1.4 million for the year ended December 31, 2011. The following highlights other changes in non-interest expenses from 2010 to 2011:

· Foreclosure-related expenses increased to $1.8 million in 2011 from $1.0 million in 2010, an $800,000 or 86.9% increase.

· FDIC assessments decreased by approximately $46,000 or 4.8% in 2011 to $910,000 as compared to the same period in 2010.

· Other operating expense remained approximately the same at $2.6 million for the years 2011 and 2010.

Provision for Income Taxes

The Company’s effective tax rate in 2011 was a tax benefit of 70.3%. This is the result of a net operating loss in addition to non taxable income in 2011, as compared to a 39.9% benefit offset by non taxable income. For further discussion pertaining to the Company’s deferred tax analysis see the section titled Deferred Tax Asset under Critical Accounting Policies.

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NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans.

	For the Years Ended December 31,
	2012								2011								2010
	(dollars in thousands)
	Average					Average			Average					Average			Average					Average
	balance			Interest		rate			balance			Interest		rate			balance			Interest		rate
Interest-earning assets:
Loans, net of allowance	$	382,431		$	23,420		6.12	%	$	441,207		$	28,183		6.39	%	$	474,849		$	30,908		6.51	%
Investment securities		69,491			1,715		2.47	%		77,038			2,284		2.96	%		87,261			2,870		3.29	%
Other interest-earning assets		71,054			164		0.23	%		47,622			109		0.23	%		37,042			66		.18	%
Total interest-earning assets		522,976			25,299		4.84	%		565,867			30,576		5.40	%		599,152			33,844		5.65	%
Other assets		51,648								58,148								48,704
Total assets	$	574,624							$	624,015							$	647,856
Interest-bearing liabilities:
Deposits:
Savings, NOW and money  market	$	124,583			522		0.42	%	$	120,363			643		0.53	%	$	124,974			1,180		.94	%
Time deposits over $100,000		144,029			3,232		2.24	%		167,694			3,885		2.32	%		172,120			4,068		2.36	%
Other time deposits		137,566			2,446		1.78	%		168,168			3,370		2.00	%		175,830			3,853		2.19	%
Borrowings		36,375			432		1.19	%		38,296			527		1.38	%		38,107			579		1.52	%
Total interest-bearing  liabilities		442,553			6,632		1.50	%		494,521			8,425		1.70	%		511,031			9,680		1.89	%
Non-interest-bearing deposits		75,659								76,775								75,843
Other liabilities		3,643								2,625								6,232
Shareholders' equity		52,769								50,094								54,750
Total liabilities and shareholders' equity	$	574,624							$	624,015							$	647,856
Net interest income/interest rate spread(taxable-equivalent basis)				$	18,667		3.34	%				$	22,151		3.70	%				$	24,164		3.75	%
Net interest margin (taxable-equivalent basis)							3.57	%							3.91	%							4.03	%
Ratio of interest-earning assets to interest-bearing liabilities		118.17	%							114.43	%							117.24	%
Reported net interest income
Net interest income/net interest margin(taxable-equivalent basis) Less:				$	18,667		3.57	%				$	22,151		3.91	%				$	24,164		4.03	%
taxable-equivalent adjustment					167								193								234
Net Interest Income				$	18,500							$	21,958							$	23,930

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RATE/VOLUME ANALYSIS

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.

	Year Ended									Year Ended									Year Ended
	December 31, 2012 vs. 2011									December 31, 2011 vs. 2010									December 31, 2010 vs. 2009
	Increase (Decrease) Due to									Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
	(dollars in thousands)
Interest income:
Loans	$	(3,677	)	$	(1,087	)	$	(4,764	)	$	(2,169	)	$	(554	)	$	(2,723	)	$	815		$	384		$	1,199
Investment securities		(205	)		(363	)		(568	)		(320	)		(267	)		(587	)		(159	)		(505	)		(664	)
Other interest-earning assets		54			1			55			22			19			41			23			-			23
Total interest income (taxable-equivalent basis)		(3,828	)		(1,449	)		(5,277	)		(2,467	)		(802	)		(3,269	)		679			(121	)		558
Interest expense:
Deposits:
Savings, NOW and  money market		20			(141	)		(121	)		(34	)		(503	)		(537	)		181			(318	)		(137	)
Time deposits over $100,000		(540	)		(113	)		(653	)		(104	)		(79	)		(183	)		152			(1,396	)		(1,244	)
Other time deposits		(578	)		(346	)		(924	)		(161	)		(322	)		(483	)		(314	)		(1,676	)		(1,990	)
Borrowings		(25	)		(70	)		(95	)		3			(55	)		(52	)		31			(102	)		(71	)
Total interest expense		(1,123	)		(670	)		(1,793	)		(296	)		(959	)		(1,255	)		50			(3,492	)		(3,442	)
Net interest income
Increase/(decrease)
(taxable-equivalent basis)	$	(2,705	)	$	(779	)		(3,484	)	$	(2,171	)	$	157			(2,014	)	$	629		$	3,371			4,000
Less:
Taxable-equivalent adjustment								26									42									22
Net interest income
Increase/(decrease)							$	(3,458	)							$	(1,972	)							$	4,022

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LIQUIDITY

Market and public confidence in the Company’s financial strength and in the strength of financial institutions in general will largely determine the Company’s access to appropriate levels of liquidity. This confidence depends significantly on the Company’s ability to maintain sound asset quality and appropriate levels of capital resources. The term “liquidity” refers to the Company’s ability to generate adequate amounts of cash to meet current needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures the Company’s liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.

Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 33.3% and 24.6% of total assets at December 31, 2012 and 2011, respectively.

The Company has been a net seller of federal funds, maintaining liquidity sufficient to fund new loan demand. When the need arises, the Company has the ability to sell securities classified as available for sale, sell loan participations to other banks, or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $44.0 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 10% of assets, subject to our available collateral. A floating lien of $24.0 million on qualifying loans is pledged to FHLB to secure such borrowings. In addition, the Company may borrow at the Federal Reserve discount window and has pledged $1.0 million in securities for that purpose. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2012, borrowings consisted of securities sold under agreements to repurchase of $15.8 million and FHLB advances of $2.0 million.

At December 31, 2012, the Company’s outstanding commitments to extend credit totaled $55.2 million and consisted of loan commitments and undisbursed lines of credit of $53.8 million, and letters of credit of $1.4 million. The Company believes that its combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Total deposits were $498.6 million and $501.4 million at December 31, 2012 and 2011, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 52.4% and 61.8% of total deposits at December 31, 2012 and 2011, respectively. Time deposits of $100,000 or more represented 25.4% and 31.2%, respectively, of the total deposits at December 31, 2012 and 2011. Management believes most other time deposits are relationship-oriented. While competitive rates will need to be paid to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, management 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 Bank’s parent company (“New Century Bancorp”) maintains minimal cash balances. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for New Century Bancorp’s current cash flow needs.

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CAPITAL

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 (including trust preferred securities), and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines that require a financial institution to maintain capital as a percent of its assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier 1 capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 9.25% at December 31, 2012. As the following table indicates, at December 31, 2012, the Company and its bank subsidiary exceeded regulatory capital requirements.

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks. The MOU represents an informal agreement between the Board of Directors of New Century Bank, the Regional Director of the FDIC’s Atlanta Regional Office and the North Carolina Commissioner of Banks and requires that New Century Bank’s management take certain actions to improve the bank’s lending function. The Memorandum also requires the Bank to maintain minimum Tier 1 Leverage and Total Risk-Based Capital Ratios of 8.0% and 11.5%, respectively, during the life of the Memorandum.  The Memorandum also restricts the ability of the Bank to grow its total assets at a rate in excess of 10% per year or to declare cash dividends without the prior approval of the Commissioner and the FDIC. As of December 31, 2012, the Registrant was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.78%, 15.34%, and 16.60%, respectively. Also, as of December 31, 2012, the Bank was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.52%, 14.98%, and 16.24%, respectively.

On January 29, 2013, the MOU was resolved and terminated upon agreement of all parties.

	At December 31, 2012
	Actual			Minimum			Regulatory Minimum
	Ratio			Requirement			Requirement
New Century Bancorp, Inc.
Total risk-based capital ratio		16.60	%		8.00	%		N/A
Tier 1 risk-based capital ratio		15.34	%		4.00	%		N/A
Leverage ratio		10.78	%		4.00	%		N/A
New Century Bank
Total risk-based capital ratio		16.24	%		8.00	%		11.50	%
Tier 1 risk-based capital ratio		14.98	%		4.00	%		8.00	%
Leverage ratio		10.52	%		4.00	%		8.00	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a special purpose subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds provided additional capital for the expansion of the Bank. Under the current applicable regulatory guidelines, all of the debentures qualify as Tier 1 capital. Management expects that the Company and 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.

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ASSET/LIABILITY MANAGEMENT

The Company’s results of operations depend substantially on its net interest income. Like most financial institutions, the Company’s interest income and cost of funds are affected by general economic conditions and by competition in the marketplace.

The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company’s earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. The Company maintains, and has complied with, a Board approved asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analyses: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Company’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies, mortgage-backed securities and municipal obligations. The securities portfolio contributes to the Company’s income and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.

In reviewing the needs of the Company with regard to proper management of its asset/liability program, the Company’s management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and forecasted interest rate changes.

The analysis of an institution’s interest rate gap (the difference between the re-pricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2012, of which are projected to re-price or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which re-price or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate re-pricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

- 38 -

	Terms to Re-pricing at December 31, 2012
				More Than			More Than
	1 Year			1 Year to			3 Years to			More Than
	or Less			3 Years			5 Years			5 Years			Total
	(dollars in thousands)
Interest-earning assets:
Loans	$	226,222		$	87,214		$	30,411		$	24,045		$	367,892
Securities, available for sale		28,396			31,224			11,230			10,943			81,793
Interest-earning deposits in other banks		97,081			-			-			-			97,081
Federal funds sold		3,029			-			-			-			3,029
Stock in the Federal Home Loan Bank of Atlanta		973			-			-			-			973
Other non marketable securities		1,105			-			-			-			1,105
Total interest-earning assets	$	356,806		$	118,438		$	41,641		$	34,988		$	551,873
Interest-bearing liabilities:
Deposits:
Savings, NOW and money market	$	81,014		$	63,852		$	-		$	-		$	144,866
Time		50,275			34,296			41,724			-			126,295
Time over $100,000		41,829			44,837			48,467			-			135,133
Short term debt		17,848			-			-			-			17,848
Long term debt		12,372			-			-			-			12,372
Total interest-bearing liabilities	$	203,338		$	142,985		$	90,191		$	-		$	436,514
Interest sensitivity gap per period	$	153,468		$	(24,547	)	$	(48,550	)	$	34,988		$	115,539
Cumulative interest sensitivity gap	$	153,468		$	128,921		$	80,371		$	115,359		$	115,359
Cumulative gap as a percentage of total interest-earning assets		43.00	%		27.14	%		15.55	%		20.90	%		20.90	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		175.47	%		137.22	%		118.41	%		126.43	%		126.43	%

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both very important to the portrayal of the Company's financial condition and results, and requires management's most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. The following is a summary of the Company’s most complex and judgmental accounting policies: the allowance for loan losses and deferred tax asset.

Asset Quality and the Allowance for Loan Losses

The financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on a non-accrual basis. Loans are placed on a non-accrual basis when there are serious doubts about the collectability of principal or interest. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or which the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. See the previous section titled “Past Due Loans and Nonperforming Assets” for a discussion on past due loans, non-performing assets and other impaired loans.

- 39 -

The allowance for loan losses is maintained at a level considered appropriate in light of the risk inherent within the Company’s loan portfolio, based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. Additional information regarding the Company’s allowance for loan losses and loan loss experience are presented above in the discussion of the allowance for loan losses and in Note D to the accompanying financial statements.

Deferred Tax Asset

The Company’s net deferred tax asset was $2.5 million at December 31, 2012 and $5.1 million at December 31, 2011, respectively. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality. As of December 31 2012, management concluded that the Company’s net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations, or other factors could impact the realization of the deferred tax asset in the future.

The Company has no history of expiration of loss carry forwards. Management believes the Company’s forecasted earnings support a conclusion that a valuation allowance is not needed. Management closely monitors the previous twelve quarters of income (loss) before income taxes in evaluating the need for a deferred tax asset valuation allowance. This is referred to as the cumulative loss test. This test excludes the net charge-off relating to the previously reported fraud in 2010, as the loss is of infrequent nature stemming from aberrations rather than continuing conditions. As of December 31, 2012, the Company passed the cumulative loss test by $6.4 million excluding the previously mentioned one-time non-recurring charge-off pertaining to the previously reported loan fraud by a large relationship borrower. The Company also passed the cumulative loss test by $2.2 million as of December 31, 2011, due to the exclusion of goodwill impairment and the previously mentioned one-time non-recurring charge-off pertaining to the previously reported loan fraud. The Company feels confident that deferred tax assets are more likely than not to be realized.

OFF-BALANCE SHEET ARRANGEMENTS

Information about the Company’s off-balance sheet risk exposure is presented in Note J to the accompanying financial statements.  During 2004, the Company formed an unconsolidated subsidiary trust to which the Company has issued $12.4 million of junior subordinated debentures (see Note G to the consolidated financial statements).  Otherwise, as part of its ongoing business, the Company has not participated in, nor does it anticipate participating in, transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (“SPE”), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

See Note B to the Company’s audited financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

- 40 -

IMPACT OF INFLATION AND CHANGING PRICES

A commercial bank has an asset and liability make-up that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of a commercial bank’s assets are monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. The following table reflects contractual obligations of the Company outstanding as of December 31, 2012.

	Payments Due by Period
	(dollars in thousands)
			On Demand
			Or Within						After
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		5 Years
	(dollars are in thousands)
Short term debt	$	17,848	$	17,848	$	-	$	-	$	-
Long term debt		12,372		-		-		-		12,372
Lease obligations		1,651		122		221		218		1,090
Deposits		498,559		265,384		142,984		90,191		-
Total contractual cash obligations	$	530,430	$	283,354	$	143,205	$	90,409	$	13,462

The following table reflects other commitments outstanding as of December 31, 2012.

	Amount of Commitment Expiration Per Period
	(dollars in thousands)
	Total
	Amounts		Less than						After
Other Commitments	Committed		1 Year		1-3 Years		4-5 Years		5 Years
Undisbursed home equity credit lines	$	23,276	$	145	$	41	$	656	$	22,434
Other commitments and credit lines		13,099		9,844		240		143		2,872
Un-disbursed portion of constructions loans		17,500		16,494		265		741		-
Letters of credit		1,366		1,274		27		-		65
Total loan commitments	$	55,241	$	27,757	$	573	$	1,540	$	25,371

- 41 -

FORWARD-LOOKING INFORMATION

Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein; as well as the Company’s results of operations in future periods; could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services.

The Company does not undertake a duty to update any forward-looking statements in this report.

ITEM 7A – Quantitative and qualitative disclosure about market risk

Not required for smaller reporting companies.

Item 8 - Financial Statements AND SUPPLEMEnTARY DATA

- 42 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors

New Century Bancorp, Inc.

Dunn, North Carolina

We have audited the accompanying consolidated balance sheets of New Century Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Bancorp, Inc. and subsidiary at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Raleigh, North Carolina

March 28, 2013

- 43 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2012 and 2011

	2012			2011
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	13,498		$	18,478
Interest-earning deposits in other banks		97,081			55,590
Federal funds sold		3,029			3,028
Investment securities available for sale, at fair value		81,491			67,854
Loans		367,892			417,624
Allowance for loan losses		(7,897	)		(10,034	)
NET LOANS		359,995			407,590
Accrued interest receivable		1,636			2,003
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		973			1,248
Other non marketable securities		1,105			1,080
Foreclosed real estate		2,833			3,031
Premises and equipment held for sale		-			1,113
Premises and equipment, net		10,939			11,243
Bank owned life insurance		8,228			7,981
Core deposit intangible		298			545
Other assets		4,347			8,867
TOTAL ASSETS	$	585,453		$	589,651
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	92,265		$	74,569
Savings		22,139			24,461
Money market and NOW		122,727			92,600
Time		261,428			309,747
TOTAL DEPOSITS		498,559			501,377
Short term debt		17,848			21,877
Long term debt		12,372			14,372
Accrued interest payable		281			330
Accrued expenses and other liabilities		2,214			2,149
TOTAL LIABILITIES		531,274			540,105
Shareholders’ Equity
Common stock, $1 par value, 25,000,000 shares authorized; 6,913,636 and 6,860,367 shares issued and outstanding at December 31, 2012 and 2011, respectively		6,914			6,860
Preferred stock, no par value, 10,000,000 shares authorized, none outstanding		-			-
Additional paid-in capital		42,000			41,851
Retained earnings (accumulated deficit)		4,187			(450	)
Accumulated other comprehensive income		1,078			1,285
TOTAL SHAREHOLDERS’ EQUITY		54,179			49,546
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	585,453		$	589,651

See accompanying notes.

- 44 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2012, 2011 and 2010

	2012			2011			2010
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	23,405		$	28,172		$	30,896
Federal funds sold and interest-earning deposits in other banks		164			109			68
Investments		1,563			2,102			2,646
TOTAL INTEREST INCOME		25,132			30,383			33,610
INTEREST EXPENSE
Money market, NOW and savings deposits		522			643			1,180
Time deposits		5,678			7,255			7,921
Short term debt		113			228			276
Long term debt		319			299			303
TOTAL INTEREST EXPENSE		6,632			8,425			9,680
NET INTEREST INCOME		18,500			21,958			23,930
PROVISION FOR LOAN LOSSES		(2,597	)		6,218			15,634
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		21,097			15,740			8,296
NON-INTEREST INCOME
Fees from pre-sold mortgages		296			183			226
Service charges on deposit accounts		1,200			1,475			1,641
Gain on branch sale		557			-			-
Other fees and income		1,545			1,159			811
TOTAL NON-INTEREST INCOME		3,598			2,817			2,678
NON-INTEREST EXPENSE
Personnel		8,318			8,842			9,370
Occupancy and equipment		1,346			1,418			1,557
Deposit insurance		763			910			956
Professional fees		1,495			1,861			2,141
Information systems		1,429			1,586			1,625
Foreclosure related expenses		1,165			1,841			985
Other		2,720			2,647			2,579
TOTAL NON-INTEREST EXPENSE		17,236			19,105			19,213
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)		7,459			(548	)		(8,239	)
INCOME TAX (BENEFIT)		2,822			(385	)		(3,284	)
NET INCOME (LOSS)	$	4,637		$	(163	)	$	(4,955	)
NET INCOME (LOSS) PER COMMON SHARE
Basic	$	0.67		$	(.02	)	$	(.72	)
Diluted	$	0.67		$	(.02	)	$	(.72	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,898,147			6,887,168			6,875,845
Diluted		6,898,377			6,887,168			6,875,845

See accompanying notes.

- 45 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2012, 2011 and 2010

	2012			2011			2010
	(Amounts in thousands)
Net income (loss)	$	4,637		$	(163	)	$	(4,955	)
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities- available for sale		(91	)		286			(348	)
Tax effect		31			(104	)		116
		(60	)		182			(232	)
Reclassification adjustment for losses included in net income (loss)		(223	)		(113	)		(37	)
Tax effect		76			38			11
		(147	)		(75	)		(26	)
Total		(207	)		107			(258	)
Total comprehensive income (loss)	$	4,430		$	(56	)	$	(5,213	)

See accompanying notes.

- 46 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2012, 2011 and 2010

										Retained			Accumulated
							Additional			earnings			other			Total
	Common stock						paid-in			(accumulated)			comprehensive			shareholders’
	Shares			Amount			capital			(deficit)			income			equity
	(Amounts in thousands, except share and per data share)
Balance at December 31, 2009		6,837,952		$	6,838		$	41,467		$	4,668		$	1,436		$	54,409
Net loss		-			-			-			(4,955	)		-			(4,955	)
Other comprehensive loss, net		-			-			-			-			(258	)		(258	)
Exercise of stock options		75,684			76			256			-			-			332
Tax benefit from stock option exercises		-			-			16			-			-			16
Stock based compensation		-			-			148			-			-			148
Balance at December 31, 2010		6,913,636			6,914			41,887			(287	)		1,178			49,692
Net loss		-			-			-			(163	)		-			(163	)
Common stock received as collateral on loan default		(53,269	)		(54	)		(111	)		-			-			(165	)
Other comprehensive income, net		-			-			-			-			107			107
Stock based compensation		-			-			75			-			-			75
Balance at December 31, 2011		6,860,367			6,860			41,851			(450	)		1,285			49,546
Net income		-			-			-			4,637			-			4,637
Sale of common stock		53,269			54			111			-			-			165
Other comprehensive loss, net		-			-			-			-			(207	)		(207	)
Stock based compensation		-			-			38			-			-			38
Balance at December 31, 2012		6,913,636		$	6,914		$	42,000		$	4,187		$	1,078		$	54,179

See accompanying notes.

- 47 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2012, 2011 and 2010

	2012			2011			2010
	(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	4,637		$	(163	)	$	(4,955	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Recovery of (provision for) loan losses		(2,597	)		6,218			15,634
Depreciation and amortization of premises and equipment		581			659			751
Amortization and accretion of investment securities		546			718			836
Amortization of deferred loan fees and costs		(197	)		(200	)		(176	)
Amortization of core deposit intangible		115			153			154
Loss on sale of premises and equipment		-			-			11
Deferred income taxes		2,784			(366	)		(2,405	)
Stock-based compensation		38			75			148
Loss on write down on other assets		-			82			-
Gain on sale of branches		(557	)		-			-
Increase in cash surrender value of bank owned life insurance		(247	)		(254	)		(262	)
Net loss on sale and write-downs of foreclosed real estate		960			1,423			656
Net loss on investment security sales and paydowns		223			113			37
Change in assets and liabilities:
Net change in accrued interest receivable		367			485			102
Net change in other assets		1,781			1,733			(1,444	)
Net change in accrued expenses and other liabilities		16			(90	)		(242	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		8,450			10,586			8,845
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock		-			-			(315	)
Redemption of FHLB stock		275			200			-
Purchase of investment securities available for sale		(42,148	)		(16,209	)		(21,836	)
Maturities of investment securities available for sale		14,122			25,836			15,796
Mortgage-backed securities pay-downs		12,805			11,261			11,104
Proceeds from sale of investment securities available for sale		500			500			-
Net change in loans outstanding		45,227			44,051			(11,223	)
Cash paid on sale of branches		(12,621	)		-			-
Purchase of other non-marketable securities		(138	)		(50	)		(100	)
Redemption of other-non-marketable securities		113			52			-
Proceeds from sale of loans		342			-			2,618
Proceeds from sale of foreclosed real estate		4,058			2,011			1,712
Proceeds from the sale of premises and equipment		-			1			5
Retirement of premises and equipment		19			-			-
Purchases of premises and equipment		(231	)		(34	)		(1,426	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		22,323			67,619			(3,665	)

See accompanying notes.

- 48 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2012, 2011 and 2010

	2012			2011			2010
	(Amounts in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	11,603		$	(33,222	)	$	(5,663	)
Proceeds from short term debt		6,666			2,184			2,000
Repayments from short term debt		(10,695	)		(3,973	)		1,102
Proceeds from long term debt		-			-			6,000
Repayments from long term debt		(2,000	)		(2,000	)		(2,000	)
Proceeds from sale of common stock		165			-			-
Tax benefit from exercise of stock options		-			-			16
Proceeds from the exercise of stock options		-			-			332
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		5,739			(37,011	)		1,787
NET CHANGE IN CASH AND CASH EQUIVALENTS		36,512			41,194			6,967
CASH AND CASH EQUIVALENTS, BEGINNING		77,096			35,902			28,935
CASH AND CASH EQUIVALENTS, ENDING	$	113,608		$	77,096		$	35,902
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	6,681		$	8,490		$	9,634
Income taxes paid		-			-			939
Non-cash transactions:
Unrealized gains (losses) on investments securities available for sale, net of tax		(207	)		107			(258	)
Transfer from loans to foreclosed real estate		4,820			2,810			3,495
Transfer from foreclosed real estate to premises and equipment		-			-			960
Transfer from premises and equipment to premises and equipment held for sale		-			1,113			-
Common stock received as collateral on loan default		-			(165	)		-

See accompanying notes.

- 49 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE A - ORGANIZATION AND OPERATIONS

New Century Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank (referred to as the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation. 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.

New Century Bank was incorporated on May 19, 2000 and began banking operations on May 24, 2000. New Century Bank South began operations on January 2, 2004. The two banks merged on March 28, 2008 and New Century Bank continues as the only banking subsidiary of New Century Bancorp with the headquarters and operations center located in Dunn, NC. The Bank is engaged in general commercial and retail banking in southeastern 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.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of other real estate owned.

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

For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks,” “Interest-earning deposits in other banks,” and “Federal funds sold.”

Investment Securities Available for Sale

Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method.

- 50 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans held for sale are held at the lower of cost or fair market value until sold.

Non-accrual Loans

Loans are placed on non-accrual basis 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. 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 impairment. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.

Allowance for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due will not be collected in accordance with the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if readily determinable. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case, interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

- 51 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost at December 31, 2012 and 2011. The Company continually monitors the financial strength of the FHLB and evaluates the investment for potential impairment. There can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the Bank’s investment in FHLB stock.

Other Non Marketable Securities

Other non marketable securities are equity instruments that are reported at cost.

Foreclosed Real Estate

Real estate acquired through, or in lieu of, loan foreclosure is recorded at the lower of cost or net realizable value, less the estimated cost to sell, at the date of foreclosure. After foreclosure, management periodically performs valuations of the property and adjusts the value down when the carrying value of the property exceeds the estimated net realizable value. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 40 years for buildings and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.

Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market value.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

- 52 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Bank Owned Life Insurance

Bank Owned Life Insurance ("BOLI") is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefit proceeds received in excess of the policy's cash surrender value are recognized to income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of operations. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At December 31, 2012 and 2011, the Company held no policy loans against its BOLI cash surrender values or restrictions on the use of the proceeds.

Intangible Assets

Intangible assets with finite lives include core deposits and other intangibles. Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performed an impairment test of the core deposit intangible at December 31, 2012 and found no impairment to exist. The Company’s core deposit intangible is amortized using the straight-line method over nine years. The gross amount of the core deposit intangible is $1.4 million with $1.1 million being amortized to date, leaving a remaining net balance of $0.3 million as of December 31, 2012.

The table below summarizes the remaining core deposit intangible amortization (dollars in thousands):

2013	$	116
2014		116
2015		66
	$	298

Stock-Based Compensation

The Company has certain stock-based employee compensation plans, described more fully in Note L. Generally accepted accounting principles (“GAAP”) require recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). GAAP also requires the compensation cost for all awards granted after the date of adoption and any unvested awards that remained outstanding as of the date of adoption to be measured based on the fair value of the award on the grant date.

Comprehensive Income

The Company reports as comprehensive income all changes in shareholders' equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.

- 53 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income, continued

For the years ended December 31, 2012, 2011 and 2010, total comprehensive income (loss) was $4.4 million, ($56,000) and ($5.2 million), respectively. The deferred tax liability related to the components of comprehensive income amounted to $699,000 and $806,000 as of December 31, 2012 and 2011, respectively. The accumulated balance of other comprehensive income was $1.1 million and $1.2 million at December 31, 2012 and 2011, respectively.

Segment Information

The Company follows the provisions of accounting standards codification (“ASC”) 280, Segment Reporting, which specifies guidelines for determining an entity’s operating segments and the type and level of financial information to be disclosed. Based on these guidelines, management has determined that the Bank operates as a single business segment; the providing of general commercial and retail financial services to customers located in the Company’s market areas. The various products, as well as the methods used to distribute them, are those generally offered by community banks.

Net Income per Common Share and Common Shares Outstanding

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:

	2012		2011		2010
Weighted average number of common shares used in computing basic net income per share		6,898,147		6,887,168		6,875,845
Effect of dilutive stock options		230		-		-
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share		6,898,377		6,887,168		6,875,845

At December 31, 2012, there were 360,931 anti-dilutive options. All options were anti-dilutive at December 31, 2011, and 2010.

- 54 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

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

Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements upon adoption on January 1, 2012.

ASU 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 became effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements upon adoption on January 1, 2012.

ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. ASU 2011-12 amends Topic 220 to allow the Financial Accounting Standards Board (“FASB”) time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities were required to apply these requirements for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company has adopted the standard and the adoption of ASU 2011-12 did not have an impact on the Company’s financial condition, results of operations, or cash flows.

ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (“AOCI”). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of the amounts reclassified out of the AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. The standard is effective prospectively for annual and interim reporting periods

- 55 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

beginning after December 15, 2012. The Company has adopted the standard and the adoption of ASU 2013-02 did not have any impact on the Company’s financial condition, results of operations, or cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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

- 56 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE C - INVESTMENT SECURITIES

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

	December 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s (“Government Sponsored Entities”)	$	36,951	$	248	$	(45	)	$	37,154
Mortgage-backed securities – GSE’s		34,794		1,189		(29	)		35,954
Municipal bonds		7,970		414		(1	)		8,383
	$	79,715	$	1,851	$	(75	)	$	81,491

As of December 31, 2012, accumulated other comprehensive income included net gains of $1.8 million, net of deferred income taxes of $699,000.

	December 31, 2011
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s (“Government Sponsored Entities”)	$	26,085	$	327	$	-		$	26,412
Mortgage-backed securities – GSE’s		33,871		1,316		(18	)		35,169
Municipal bonds		5,807		466		-			6,273
	$	65,763	$	2,109	$	(18	)	$	67,854

As of December 31, 2011, accumulated other comprehensive income included net gains of $2.1 million, net of deferred income taxes of $806,000.

During the year ended December 31, 2012 and 2011, the pay down of GSE’s resulted in gross realized gains of $10,000 and $24,000, respectively, and realized losses of $233,000 and $137,000, respectively for each period. These pay downs generated $12.8 million and $11.3 million in proceeds during these respective periods.

Securities with a carrying value of $39.5 million and $41.8 million at December 31, 2012 and 2011, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

The following tables show 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 as of December 31, 2012 and 2011.

- 57 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE C - INVESTMENT SECURITIES (Continued)

	2012
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s	$	5,959	$	45	$	-	$	-	$	5,959	$	45
Mortgage-backed securities- GSE’s		10,286		29		-		-		10,286		29
Municipal bonds		677		1		-		-		677		1
Total temporarily impaired securities	$	16,922	$	75	$	-	$	-	$	16,922	$	75

At December 31, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Ten GSE’s and one municipal bond had unrealized losses for less than twelve months totaling $75,000 at December 31, 2012. 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.

	2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(dollars in thousands)
Securities available for sale:
Mortgage-backed securities- GSE’s	$	7,207	$	18	$	-	$	-	$	7,207	$	18
Total temporarily impaired securities	$	7,207	$	18	$	-	$	-	$	7,207	$	18

At December 31, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven GSE’s had unrealized losses for less than twelve months totaling $18,000 at December 31, 2011. 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.

Since none of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold these securities to recovery, no other than temporary impairments were identified for these investments having unrealized losses for the periods ended December 31, 2012 and December 31, 2011.

- 58 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE C - INVESTMENT SECURITIES (Continued)

The following table sets forth certain information regarding the amortized costs, carrying values and contractual maturities of the Company’s investment portfolio at December 31, 2012.

	Amortized		Fair
	Cost		Value
	(dollars in thousands)
Securities available for sale:
U.S. government agencies – GSE’s
Due within one year	$	9,385	$	9,460
Due after one but within five years		16,947		17,047
Due after five but within ten years		6,003		5,958
Due after ten years		4,616		4,689
		36,951		37,154
Mortgage-backed securities – GSE’s
Due within one year		1,085		1,152
Due after one but within five years		27,188		28,290
Due after five but within ten years		4,505		4,500
Due after ten years		2,016		2,012
		34,794		35,954
Municipal bonds
Due within one year		350		351
Due after one but within five years		2,354		2,541
Due after five but within ten years		3,665		3,787
Due after ten years		1,601		1,704
		7,970		8,383
Total securities available for sale
Due within one year		10,820		10,963
Due after one but within five years		46,489		47,878
Due after five but within ten years		14,173		14,245
Due after ten years		8,233		8,405
	$	79,715	$	81,491

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

- 59 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS

The following is a summary of loans at December 31, 2012 and 2011:

	2012						2011
				Percent						Percent
	Amount			of total			Amount			of total
	(dollars in thousands)
Real estate loans:
1 to 4 family residential	$	41,017			11.14	%	$	52,182			12.49	%
Commercial real estate		186,949			50.82	%		192,047			45.98	%
Multi-family residential		19,524			5.31	%		23,377			5.60	%
Construction		48,220			13.11	%		70,846			16.96	%
Home equity lines of credit (“HELOC”)		34,603			9.41	%		38,702			9.27	%
Total real estate loans		330,313			89.79	%		377,154			90.30	%
Other loans:
Commercial and industrial		29,297			7.96	%		33,146			7.94	%
Loans to individuals		8,615			2.34	%		7,583			1.82	%
Overdrafts		119			.03	%		88			.02	%
Total other loans		38,031			10.33	%		40,817			9.78	%
Gross loans		368,344						417,971
Less deferred loan origination fees, net		(452	)		(.12	)%		(347	)		(.08	)%
Total loans		367,892			100.00	%		417,624			100.00	%
Allowance for loan losses		(7,897	)					(10,034	)
Total loans, net	$	359,995					$	407,590

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

At December 31, 2012, the Company had pre-approved but unused lines of credit totaling $55.2 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

- 60 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

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

Residential 1 to 4 Family Loans

Residential 1 to 4 family loans are mortgage loans that typically convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas.

Commercial Real Estate Loans

Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts and the repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower's and guarantor's global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by 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 nonfarm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependant on occupancy rates, rental rates, and property management.

Construction Loans

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

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 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, interest rates increasing beyond budget.

- 61 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

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

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

Overdrafts

Overdrafts on customer accounts are classified as loans for reporting purposes.

Related Parties

The Bank has had loan transactions with its directors and executive officers. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectability or present other unfavorable features. The following table represents loan transactions for directors and executive officers who held that position as of December 31, 2012. A summary of related party loan transactions, in thousands, is as follows:

Balance at January 1, 2012	$	14,262
Exposure of directors/executive officers added in 2012		92
Borrowings		3,227
Directors, resigned or retired from board in 2012		(4,066	)
Loan repayments		(10,699	)
Balance at December 31, 2012	$	2,816

At December 31, 2012, there was $1.1 million of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries.

- 62 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Non-Accrual and Past Due Loans

The following tables present as of December 31, 2012 and 2011 an age analysis of past due loans, segregated by class of loans:

	30+		Non-		Total
	Days		Accrual		Past				Total
2012	Past Due		Loans		Due		Current		Loans
	(dollars in thousands)
Commercial and industrial	$	215	$	319	$	534	$	28,763	$	29,297
Construction		138		2,298		2,436		45,784		48,220
Multi-family residential		-		1,482		1,482		18,042		19,524
Commercial real estate		241		4,373		4,614		182,335		186,949
Loans to individuals & overdrafts		19		11		30		8,704		8,734
1 to 4 family residential		536		1,061		1,597		39,420		41,017
HELOC		30		582		612		33,991		34,603
Deferred loan (fees) cost, net										(452	)
	$	1,179	$	10,126	$	11,305	$	357,039	$	367,892

	30+		Non-		Total
	Days		Accrual		Past				Total
2011	Past Due		Loans		Due		Current		Loans
	(dollars in thousands)
Commercial and industrial	$	48	$	171	$	219	$	32,927	$	33,146
Construction		568		4,072		4,640		66,206		70,846
Multi-family residential		1,540		-		1,540		21,837		23,377
Commercial real estate		1,013		10,425		11,438		180,609		192,047
Loans to individuals & overdrafts		10		176		186		7,485		7,671
1 to 4 family residential		735		1,875		2,610		49,572		52,182
HELOC		333		904		1,237		37,465		38,702
Deferred loan (fees) cost, net										(347	)
	$	4,247	$	17,623	$	21,870	$	396,101	$	417,624

There were no loans greater than 90 days past due and still accruing interest at December 31, 2012. At December 31, 2011 there were three loans totaling $108,000 that were 90 or more days past due and still accruing interest.

Loans are placed on non-accrual basis 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. 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. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.

- 63 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of
December 31, 2012 and December 31, 2011:

							December 31, 2012
			Contractual				Year to Date
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
2012:	(dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	545	$	810	$	-	$	496	$	20
Construction		2,376		2,940		-		2,088		20
Commercial real estate		5,987		6,475		-		9,988		195
Loans to individuals & overdrafts		3		13		-		123		-
Multi-family residential		1,442		1,442		-		1,501		-
HELOC		641		821		-		891		6
1 to 4 family residential		2,725		2,995		-		1,985		123
Subtotal:		13,719		15,496		-		17,072		364
With an allowance recorded:
Commercial and industrial		65		66		51		80		5
Construction		266		266		64		1,358		6
Commercial real estate		4,505		5,474		581		3,433		298
Loans to individuals & overdrafts		21		21		4		27		1
Multi-family Residential		40		40		9		25		-
HELOC		179		179		43		235		10
1 to 4 family residential		926		926		157		1,089		56
Subtotal:		6,002		6,972		909		6,247		376
Totals:
Commercial		15,226		17,513		705		18,969		544
Consumer		24		34		4		150		1
Residential		4,471		4,921		200		4,200		195
Grand Total:	$	19,721	$	22,468	$	909	$	23,319	$	740

Impaired loans at December 31, 2012 were approximately $19.7 million and were comprised of $10.1 million in non-accrual loans and $9.6 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately, $6.0 million of the $19.7 million in impaired loans at December 31, 2012 had specific allowances provided while the remaining $13.7 million had no specific allowances recorded. Of the $13.7 million with no allowance recorded, $3.0 million of those loans had partial charge-offs recorded.

- 64 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Impaired Loans (Continued)

							December 31, 2011
			Contractual				Year to Date
			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized on
	Investment		Balance		Allowance		Investment		Impaired Loans
2011:	(dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	478	$	808	$	-	$	290	$	25
Construction		1,011		1,166		-		1,539		23
Commercial real estate		9,195		10,085		-		7,889		158
Loans to individuals & overdrafts		217		234		-		175		4
Multi-family residential		1,540		1,540		-		1,041		102
1 to 4 family residential		2,100		2,929		-		1,747		33
HELOC		730		824		-		405		-
Subtotal:		15,271		17,586		-		13,086		345
With an allowance recorded:
Commercial and industrial		-		-		-		272		-
Construction		3,365		4,085		674		1,269		4
Commercial real estate		5,039		5,929		498		4,043		71
Loans to individuals & overdrafts		16		16		15		102		1
Multi-family Residential		-		-		-		-		-
1 to 4 family residential		736		774		170		2,000		35
HELOC		408		435		158		320		10
Subtotal:		9,564		11,239		1,515		8,006		121
Totals:
Commercial		20,628		23,613		1,172		16,343		383
Consumer		233		250		15		277		5
Residential		3,974		4,962		328		4,472		78
Grand Total:	$	24,835	$	28,825	$	1,515	$	21,092	$	466

Impaired loans at December 31, 2011 were approximately $24.8 million and were comprised of $17.6 million in non-accrual loans and $7.2 million in loans still in accruing status. Approximately, $9.6 million of the $24.8 million in impaired loans at December 31, 2011 had specific allowances provided while the remaining $15.3 million had no specific allowances recorded. Of the $15.3 million with no allowance recorded, $5.3 million of those loans had partial charge-offs recorded.

- 65 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Troubled Debt Restructurings

The following table presents loans that were modified as TDRs within the previous twelve months with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2012 and 2011:

	Twelve Months Ended December 31, 2012
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	loans		investments		investments
	(dollars in thousands)
Below market interest rate:
Commercial and Industrial	$	-	$	-	$	-
Construction		-		-		-
Commercial real estate		-		-		-
Loans to individuals and overdrafts		-		-		-
1 to 4 family residential		-		-		-
HELOC		-		-		-
Total		-		-		-
Extended payment terms:
Commercial and Industrial		1		116		114
Construction		2		294		284
Commercial real estate		4		1,281		863
Multi-family residential		1		1,524		1,514
Loans to individuals and overdrafts		-		-		-
1 to 4 family residential		2		100		96
HELOC		-		-		-
Total		10		3,315		2,871
Other:
Commercial and Industrial		-		-		-
Construction		-		-		-
Commercial real estate		2		849		837
Loans to individuals and overdrafts		-		-		-
1 to 4 family residential		-		-		-
HELOC		6		306		301
Total		8		1,155		1,138
Total		18	$	4,470	$	4,009

- 66 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Troubled Debt Restructurings (Continued)

As noted in the table above, there were eight loans that were considered troubled debt restructures for reasons other than below market interest rates, extended terms or forgiveness of principal. These loans were renewed at terms that vary from those that the Company would enter into for new loans of this type.

	Twelve Months Ended December 31, 2011
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	loans		investments		investments
	(dollars in thousands)
Below market interest rate:
Commercial and Industrial		-	$	-	$	-
Construction		-		-		-
Commercial real estate		-		-		-
Loans to individuals and overdrafts		-		-		-
1 to 4 family residential		-		-		-
HELOC		-		-		-
Total		-		-		-
Extended payment terms:
Commercial and Industrial		1		211		211
Construction		3		3,226		3,226
Commercial real estate		11		6,502		6,473
Loans to individuals and overdrafts		-		-		-
1 to 4 family residential		5		456		453
HELOC		-		-		-
Total		20		10,395		10,363
Forgiveness of principal:
Commercial and Industrial		-		-		-
Construction		-		-		-
Commercial real estate		1		938		635
Loans to individuals and overdrafts		-		-		-
Multi-family residential		-		-		-
1 to 4 family residential		-		-		-
HELOC		-		-		-
Total		1		938		635
Total		21	$	11,333	$	10,998

- 67 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (continued)

Troubled Debt Restructurings (Continued)

The following table presents loans that were modified as troubled debt restructurings (“TDRs”) within the previous twelve months for which there was a payment default together with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2012 and 2011:

	Twelve months ended
	December 31, 2012
	Number		Recorded
	of loans		investment
	(dollars in thousands)
Below market interest rate:
Commercial and Industrial		-	$	-
Construction		-		-
Commercial real estate		-		-
Loans to individuals and overdrafts		-		-
1 to 4 family residential		-		-
HELOC		-		-
Total		-		-
Extended payment terms:
Commercial and Industrial		1		114
Construction		-		-
Commercial real estate		5		2,377
Loans to individuals and overdrafts		-		-
Multi-family residential		-		-
1 to 4 family residential		2		96
HELOC		-		-
Total		8		2,587
Forgiveness of principal:
Commercial and Industrial		-		-
Construction		-		-
Commercial real estate		-		-
Loans to individuals and overdrafts		-		-
1 to 4 family residential		-		-
HELOC		-		-
Total		-		-
Other:
Commercial and industrial		-		-
Construction		-		-
Commercial real estate		-		-
Loans to individuals and overdrafts		-		-
1-to-4 family residential		-		-
Multi-family residential		-		-
HELOC		-		-
Total		-		-
Total		8	$	2,587

- 68 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (continued)

Troubled Debt Restructurings (Continued)

	Twelve months ended
	December 31, 2011
	Number		Recorded
	of loans		investment
	(dollars in thousands)
Below market interest rate:
Commercial and Industrial		-	$	-
Construction		-		-
Commercial real estate		-		-
Loans to individuals and overdrafts		-		-
1 to 4 family residential		-		-
HELOC		-		-
Total		-		-
Extended payment terms:
Commercial and Industrial		1		211
Construction		1		1,170
Commercial real estate		1		1,472
Loans to individuals and overdrafts		-		-
1 to 4 family residential		-		-
HELOC		-		-
Total		3		2,853
Forgiveness of principal:
Commercial and Industrial		-		-
Construction		-		-
Commercial real estate		1		635
Loans to individuals and overdrafts		-		-
1 to 4 family residential		-		-
HELOC		-		-
Total		1		635
Total		4	$	3,488

The following table presents the successes and failures of the types of modifications within the previous twelve months as of December 31, 2012 and 2011:

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number		Recorded		Number		Recorded		Number		Recorded		Number		Recorded
	of loans		Investment		of loans		Investment		of loans		Investment		of loans		Investment
	(dollars in thousands)
2012
Below market interest rate		-	$	-		-	$	-		-	$	-		-	$	-
Extended payment terms		-		-		7		2,694		1		40		2		137
Forgiveness of principal		-		-		-		-		-		-		-		-
Other		-		-		8		1,138		-		-		-		-
Total		-	$	-		15	$	3,832		1	$	40		2	$	137

- 69 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Troubled Debt Restructurings (Continued)

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number		Recorded		Number		Recorded		Number		Recorded		Number		Recorded
	of loans		Investment		of loans		Investment		of loans		Investment		of loans		Investment
	(dollars in thousands)
2011
Below market interest rate		-	$	-		-	$	-		-	$	-		-	$	-
Extended payment terms		-		-		7		1,379		10		6,131		3		2,853
Forgiveness of principal		-		-		-		-		-		-		1		635
Total		-	$	-		7	$	1,379		10	$	6,131		4	$	3,488

At December 31, 2012, the Company had thirty-three loans with a balance of $6.6 million that were considered to be troubled debt restructurings. Of those TDRs, fourteen loans with a balance totaling $1.9 million were still accruing as of December, 2012. The remaining nineteen TDRs with a balance totaling $4.7 million were in non-accrual status. All troubled debt restructures are included in non-performing assets and impaired loans.

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:

o Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

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

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

· Risk Grade 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:

o 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.

- 70 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Credit Quality Indicators

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

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

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

o 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.

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

o 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:

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

o 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.

o 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.

- 71 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Credit Quality Indicators (Continued)

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

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

Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 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:

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

o 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.

o 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.

· 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 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.

- 72 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Credit Quality Indicators (Continued)

The following tables presents information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of December 31, 2012 and 2011:

December 31, 2012
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(dollars in thousands)
Superior	$	296	$	49	$	-	$	-
Very good		7		2		300		-
Good		7,406		715		19,623		-
Acceptable		7,482		3,818		66,716		7,320
Acceptable with care		12,803		37,625		70,895		9,704
Special mention		691		3,233		18,278		1,018
Substandard		612		2,778		11,137		1,482
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	29,297	$	48,220	$	186,949	$	19,524

Consumer Credit
Exposure By
Internally	1-to-4 family
Assigned Grade	residential		HELOC
Pass	$	33,944	$	32,347
Special mention		2,839		1,103
Substandard		4,234		1,153
	$	41,017	$	34,603

Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts
Pass	$	8,634
Non-pass		100
	$	8,734

- 73 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Credit Quality Indicators (Continued)

December 31, 2011
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(dollars in thousands)
Superior	$	722	$	59	$	-	$	-
Very good		154		6		429		-
Good		5,184		2,369		16,510		1,064
Acceptable		8,224		6,685		67,922		12,828
Acceptable with care		15,048		54,087		60,604		7,820
Special mention		3,062		2,671		27,177		125
Substandard		752		4,969		19,405		1,540
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	33,146	$	70,846	$	192,047	$	23,377

Consumer Credit
Exposure By
Internally	1-to-4 family
Assigned Grade	residential		HELOC
Pass	$	43,647	$	35,127
Special mention		2,925		1,391
Substandard		5,610		2,184
	$	52,182	$	38,702

Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts
Pass	$	7,447
Non-pass		224
	$	7,671

- 74 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of probable loans 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.

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.

In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent eight consecutive quarters. In determining the appropriate level of the allowance for loan losses at December 31, 2012, the loss history was expanded to ten consecutive quarters of net charge-offs. Since the most recent quarters contain a declining amount of charge offs coupled with a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a $564,000 increase to our loan loss reserves as compared to the methodology previously used. Loan loss provisions in 2012 have also been affected by the decline in overall loan balances during the year.

Loans are deemed uncollectible at the discretion of the Chief Credit Officer, 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.

- 75 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan segment for the twelve month periods ended December 31, 2012 and 2011, respectively (in thousands):

2012	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
Balance, beginning of period 01/01/2012	$	719		$	1,540		$	4,771		$	1,661		$	1,122		$	94		$	127		$	10,034
Provision for loan losses		(2,962	)		(339	)		1,468			(591	)		(110	)		(42	)		(21	)		(2,597	)
Loans charged-off		(193	)		(720	)		(1,580	)		(232	)		(459	)		(70	)		-			(3,254	)
Recoveries		2,714			317			287			232			74			90			-			3,714
Balance, end of period 12/31/2012	$	278		$	798		$	4,946		$	1,070			627		$	72		$	106		$	7,897
Ending Balance: individually evaluated for impairment	$	51		$	64		$	581		$	157		$	43		$	4		$	9		$	909
Ending Balance: collectively evaluated for impairment	$	227		$	734		$	4,365		$	913		$	584		$	68		$	97		$	6,988
Loans:
Ending Balance	$	29,297		$	48,220		$	186,949		$	41,017		$	34,603		$	8,734		$	19,524		$	368,344
Ending Balance: individually evaluated for impairment	$	611		$	2,642		$	10,492		$	3,651		$	819		$	24		$	1,482		$	19,721
Ending Balance: collectively evaluated for impairment	$	28,686		$	45,578		$	176,457		$	37,366		$	33,784		$	8,710		$	18,042		$	348,623

2011	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
Balance, beginning of period 01/01/2011	$	1,052		$	349		$	3,111		$	1,900		$	1,433		$	1,530		$	640		$	10,015
Provision for loan losses		18			2,172			4,570			1,026			298			(1,353	)		(513	)		6,218
Loans charged-off		(4,116	)		(993	)		(2,970	)		(1,512	)		(661	)		(170	)		-			(10,422	)
Recoveries		3,765			12			60			247			52			87			-			4,223
Balance, end of period 12/31/2011	$	719		$	1,540		$	4,771		$	1,661		$	1,122		$	94		$	127		$	10,034
Ending Balance: individually evaluated for impairment	$	-		$	674		$	498		$	170		$	158		$	15		$	-		$	1,515
Ending Balance: collectively evaluated for impairment	$	719		$	866		$	4,273		$	1,491		$	964		$	79		$	127		$	8,519
Loans:
Ending Balance	$	33,146		$	70,846		$	192,047		$	52,182		$	38,702		$	7,671		$	23,377		$	417,971
Ending Balance: individually evaluated for impairment	$	478		$	4,376		$	14,234		$	2,836		$	1,138		$	233		$	1,540		$	24,835
Ending Balance: collectively evaluated for impairment	$	32,668		$	66,470		$	177,813		$	49,346		$	37,564		$	7,438		$	21,837		$	393,136

- 76 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE D - LOANS (Continued)

Allowance for Loan Losses (Continued)

The negative provision for the commercial and industrial category in 2012 was due primarily to a $2.6 million recovery on the previously reported loan fraud by a large relationship borrower. Negative provisions in the construction, and 1 to 4 family and HELOC categories were the result of declines in outstanding loan balances from 2011 to 2012.

NOTE E - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 2012 and 2011:

	2012		2011
	(dollars in thousands)
Land	$	3,105	$	3,105
Buildings		9,068		9,104
Furniture and equipment		3,592		3,424
Leasehold improvements		29		29
Construction in progress		-		19
		15,794		15,681
Less accumulated depreciation		4,855		4,438
Total	$	10,939	$	11,243

Depreciation amounting to approximately $581,000, $659,000, and $751,000 for the years ended December 31, 2012, 2011 and 2010, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.

As of December 31, 2011, the Company had a total of $1.1 million in premises and equipment which were classified as held for sale. There was no premises and equipment classified as held for sale as of December 31, 2012.

The Company has operating leases for its corporate offices and branches that expire at various times through 2027. Future minimum lease payments under the leases for years subsequent to December 31, 2012 are as follows (dollars in thousands):

2013	$	122
2014		112
2015		109
2016		109
2017		109
Years thereafter		1,090
	$	1,651

During 2012, 2011, and 2010, payments under operating leases were approximately $131,000, $140,000, and $213,000, respectively. Lease expense was accounted for on a straight line basis.

- 77 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE F - DEPOSITS

At December 31, 2012 the Company had $498.6 million in total deposits which was comprised of $92.3 million in non-interest bearing deposits and $406.3 million in interest bearing deposits. Of the $406.3 million in interest bearing deposits, $22.2 million were in savings accounts, $122.7 million were in money market and NOW accounts, and $261.4 million were in time deposits.

The scheduled maturities of time deposits at December 31, 2012 are as follows:

	Total Time Deposits
	(dollars in thousands)
Three months or less	$	27,384
Over three months through twelve months		54,301
Over one year through two years		36,782
Over two years through three years		47,273
Over three years through four years		48,433
Over four years through five years		46,596
Over five years		659
	$	261,428

Time deposits with balances of $100,000 or more at December 31, 2012 were $134.6 million.

NOTE G - SHORT TERM AND LONG TERM DEBT

At December 31, 2012, the Company had $17.8 million in short term debt and $12.4 million in long term debt. Short term debt consisted of $15.8 million in securities sold under agreements to repurchase and FHLB advances with less than one year to maturity of $2.0 million. Long term debt consisted solely of $12.4 million in junior subordinated debentures.

At December 31, 2011, short term debt totaled $21.9 million and long term debt totaled $14.4 million. Short term debt consisted of $19.9 million in securities sold under agreements to repurchase and FHLB advances of $2.0 million with less than one year to maturity. Long term debt consisted of $12.4 million in junior subordinated debentures and FHLB advances of $2.0 million with more than one year to maturity.

- 78 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE G - SHORT TERM AND LONG TERM DEBT (Continued)

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date and are classified as short term debt. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements are collateralized by U. S. Government agency obligations and all are floating rate. The following table presents certain information for securities sold under agreements to repurchase:

	2012			2011
	(Dollars in thousands)
Balance at December 31	$	15,848		$	19,877
Weighted average interest rate at December 31		0.27	%		0.39	%
Maximum amount outstanding at any month-end during the year	$	24,923		$	22,843
Average daily balance outstanding during the year	$	21,636		$	20,192
Average annual interest rate paid during the year		0.33	%		0.76	%

At December 31, 2012 and 2011, the Company had $2.0 million and $4.0 million in advances from the Federal Home Loan Bank of Atlanta or borrowings from the Federal Reserve Bank discount window. The $2.0 million in FHLB advances at December 31, 2012 were classified as short term borrowings.

On September 20, 2004, $12.4 million of junior subordinated debentures were issued to New Century Statutory Trust I (“the Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. All of the Trust’s common equity is owned by the Company. The junior subordinated debentures are included in long term debt and the Company’s equity interest in the Trust is included in other assets.

The Company pays interest on the junior subordinated debentures at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The debentures are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities qualify as Tier 1 capital for regulatory capital purposes subject to certain limitations, none of which were applicable at December 31, 2012.

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NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE H - INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows:

	2012		2011			2010
	(dollars in thousands)
Current tax provision:
Federal	$	38	$	(19	)	$	(879	)
State		-		-			-
Total current tax provision (benefit)		38		(19	)		(879	)
Deferred tax provision:
Federal		2,217		(355	)		(1,876	)
State		567		(11	)		(529	)
Total deferred tax provision (benefit)		2,784		(366	)		(2,405	)
Net income tax provision (benefit)	$	2,822	$	(385	)	$	(3,284	)

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:

	2012			2011			2010
	(dollars in thousands)
Income tax at federal statutory rate	$	2,536		$	(186	)	$	(2,801	)
Increase (decrease) resulting from:
State income taxes, net of federal tax effect		374			(7	)		(349	)
Tax-exempt interest income		(68	)		(72	)		(89	)
Income from life insurance		(84	)		(87	)		(89	)
Incentive stock option expense		13			26			50
Other permanent differences		51			(59	)		(6	)
Provision for income taxes	$	2,822		$	(385	)	$	(3,284	)

- 80 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE H - INCOME TAXES (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2012 and 2011 are as follows:

	2012			2011
	(dollars in thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	3,044		$	3,869
Deferred compensation		401			404
Supplemental executive retirement plan		61			61
Net operating loss/net economic loss		295			2,140
Write-downs on foreclosed real estate		107			354
AMT tax credit		58			58
Other		71			142
Total deferred tax assets		4,037			7,028
Deferred tax liabilities relating to:
Premises and equipment		(730	)		(750	)
Deferred loan fees/costs		(22	)		(18	)
Unrealized gain on available-for-sale securities		(699	)		(806	)
Core deposit intangible		(115	)		(210	)
Other		-			(95	)
Total deferred tax liabilities		(1,566	)		(1,879	)
Net recorded deferred tax asset, included in other assets	$	2,471		$	5,149

The Company’s policy is to report interest and penalties, if any, related to uncertain tax positions in income tax expense in the Consolidated Statements of Operations. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009. As of December 31, 2012 and 2011 the Company has no uncertain tax provisions.

- 81 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE H - INCOME TAXES (Continued)

Deferred Tax Asset

The Company’s net deferred tax asset was $2.5 million at December 31, 2012 and $5.1 million at December 31, 2011, respectively. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of December 31, 2012, management concluded that the Company’s net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations or other factors could impact the realization of the deferred tax asset in the future.

The Company has no history of expiration of loss carry forwards. Management believes the Company’s forecasted earnings support a conclusion that a valuation allowance is not needed. Management closely monitors the previous twelve quarters of income (loss) before income taxes in evaluating the need for a deferred tax asset valuation allowance. This is referred to as the cumulative loss test.

As of December 31, 2012, the Company passed the cumulative loss test by $6.4 million excluding the one-time non-recurring charge-off pertaining to the previously reported loan fraud by a large relationship borrower and a large recovery on the same loan fraud. The Company feels confident that deferred tax assets are more likely than not to be realized.

NOTE I - REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2012, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in New Century Bank and New Century Statutory Trust I.

- 82 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE I - REGULATORY MATTERS (Continued)

Regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The North Carolina Commissioner of Banks and the FDIC are also authorized to prohibit the payment of dividends under certain other circumstances.

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 9.25% at December 31, 2012.

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks. The MOU represented an informal agreement between the Board of Directors of New Century Bank, the Regional Director of the FDIC’s Atlanta Regional Office and the North Carolina Commissioner of Banks and required that New Century Bank’s management take certain actions to improve the bank’s lending function. The Memorandum also required the Bank to maintain minimum Tier 1 Leverage and Total Risk-Based Capital Ratios of 8.0% and 11.5%, respectively, during the life of the Memorandum.  The Memorandum also restricted the ability of the Bank to grow its total assets at a rate in excess of 10% per year or to declare cash dividends without the prior approval of the Commissioner and the FDIC.

On January 29, 2013, the MOU was resolved and terminated upon agreement of all parties.

- 83 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE I - REGULATORY MATTERS (Continued)

As the following tables indicate, at December 31, 2012, the Company and related Bank subsidiary both exceeded minimum regulatory capital requirements as specified in the tables below.

						Minimum for capital
	Actual					adequacy purposes
The Company:	Amount		Ratio			Amount		Ratio
December 31, 2012:	(dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	67,443		16.60	%	$	32,175		8.00	%
Tier 1 Capital (to Risk-Weighted Assets)		62,229		15.34	%		16,359		4.00	%
Tier 1 Capital (to Average Assets)		62,229		10.78	%		23,013		4.00	%

						Minimum for capital
	Actual					adequacy purposes
	Amount		Ratio			Amount		Ratio
December 31, 2011:	(dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	60,600		13.49	%	$	35,947		8.00	%
Tier 1 Capital (to Risk-Weighted Assets)		54,929		12.22	%		17,973		4.00	%
Tier 1 Capital (to Average Assets)		54,929		9.14	%		24,033		4.00	%

There are no well capitalized minimum requirements on holding companies like the Company.

New Century Bank’s actual capital amounts and ratios are presented in the table below as of December 31, 2012 and 2011:

											Minimum to be well
						Minimum for capital					capitalized under prompt
	Actual					adequacy purposes					corrective action provisions
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2012:	(dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	65,917		16.24	%	$	32,584		8.00	%	$	46,840		11.50	%
Tier 1 Capital (to Risk-Weighted Assets)		60,791		14.98	%		16,294		4.00	%		32,588		8.00	%
Tier 1 Capital (to Average Assets)		60,791		10.52	%		22,995		4.00	%		57,489		8.00	%

											Minimum to be well
						Minimum for capital					capitalized under prompt
	Actual					adequacy purposes					corrective action provisions
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011:	(Dollars in thousands)
Total Capital (to Risk-Weighted Assets)	$	58,931		13.14	%	$	35,868		8.00	%	$	51,560		11.50	%
Tier 1 Capital (to Risk-Weighted Assets)		53,272		11.88	%		17,934		4.00	%		35,868		8.00	%
Tier 1 Capital (to Average Assets)		53,272		8.87	%		24,033		4.00	%		48,066		8.00	%

The minimum requirements to be well capitalized at December 31, 2012 and 2011 are the regulatory minimum requirements outlined in the previously mentioned MOU.

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 December 31, 2012.

- 84 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE I - REGULATORY MATTERS (Continued)

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 near future.

NOTE J - OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of December 31, 2012 is as follows:

Financial instruments whose contract amounts represent credit risk:	(In thousands)
Undisbursed commitments	$	53,875
Letters of credit		1,366

NOTE K – FAIR VALUE MEASUREMENTS

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.

Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. 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

- 85 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – FAIR VALUE MEASUREMENTS (Continued)

reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available-for-Sale

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 – GSE’s, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

- 86 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – 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 December 31, 2012 and December 31, 2011 (dollars in thousands):

Investment securities available for sale December 31, 2012	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	$	37,154	$	-	$	37,154	$	-
Mortgage-backed securities - GSE’s		35,954		-		35,954		-
Municipal bonds		8,383		-		8,383		-
Total	$	81,491	$	-	$	81,491	$	-

Investment securities available for sale December 31, 2011	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	$	26,412	$	-	$	26,412	$	-
Mortgage-backed securities - GSE’s		35,169		-		35,169		-
Municipal bonds		6,273		-		6,273		-
Total	$	67,854	$	-	$	67,854	$	-

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310,”Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, 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 December 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level

- 87 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – FAIR VALUE MEASUREMENTS (Continued)

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 nonrecurring Level 3.

The significant unobservable input used in the fair value measurement of the Company’s impaired loans range between 6 - 55% discount from appraisals for expected liquidation and sales costs.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the lower of cost or net realizable value, less the estimated costs to sell, at the date of foreclosure. 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. At December 31, 2012 total assets classified as foreclosed real estate totaled $2.8 million.

The significant unobservable input used in the fair value measurement of the Company’s foreclosed real estate range between 16 – 20% discount from appraisals for expected liquidation and sales costs.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of December 31, 2012 and December 31, 2011 (dollars in thousands):

Asset Category December 31, 2012	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	8,104	$	-	$	-	$	8,104
Foreclosed real estate		2,833		-		-		2,833
Total	$	10,937	$	-	$	-	$	10,937

Asset Category December 31, 2011	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	$	13,353	$	-	$	-	$	13,353
Foreclosed real estate		3,031		-		-		3,031
Total	$	16,384	$	-	$	-	$	16,384

- 88 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – FAIR VALUE MEASUREMENTS (Continued)

As of December 31, 2012, the Bank identified $19.7 million in impaired loans, of which $8.1 million were carried at fair value on a non-recurring basis which included $6.0 million in loans that required a specific reserve of $909,000, and an additional $3.0 million in other loans without specific reserves that had charge-offs. As of December 31, 2011, the Bank identified $24.8 million in impaired loans, of which $13.4 million were carried at fair value on a non-recurring basis which included $9.6 million in loans that required a specific reserve of $1.5 million, and an additional $5.3 million in other loans without specific reserves that had charge-offs.

The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2012 and 2011:

	December 31, 2012
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	13,498	$	13,498	$	13,498	$	-	$	-
Interest-earning deposits in other banks		97,081		97,081		97,081		-		-
Federal funds sold		3,029		3,029		3,029		-		-
Investment securities available for sale		81,491		81,491		-		81,491		-
Loans, net		359,995		377,591		-		-		377,591
Accrued interest receivable		1,636		1,636		-		-		1,636
Stock in the FHLB		973		973		-		-		973
Other non-marketable securities		1,105		1,105		-		-		1,105
Financial liabilities:
Deposits	$	498,559	$	507,478	$	-	$	507,478	$	-
Short-term debt		17,848		17,848		-		17,848		-
Long-term debt		12,372		8,451		-		8,451		-
Accrued interest payable		281		281		-		-		281

- 89 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – FAIR VALUE MEASUREMENTS (Continued)

	December 31, 2011
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets:
Cash and due from banks	$	18,478	$	18,478	$	18,478	$	-	$	-
Interest-earning deposits in other banks		55,590		55,590		55,590		-		-
Federal funds sold		3,028		3,028		3,028		-		-
Investment securities available for sale		67,854		67,854		-		67,854		-
Loans, net		407,590		424,851		-		-		424,851
Premises and equipment held for sale		1,113		1,113		-		-		1,113
Accrued interest receivable		2,003		2,003		-		-		2,003
Stock in the FHLB		1,248		1,248		-		-		1,248
Other non-marketable securities		1,080		1,080		-		-		1,080
Financial liabilities:
Deposits	$	501,377	$	509,454	$	-	$	509,454	$	-
Short-term debt		21,877		21,877		-		21,877		-
Long-term debt		14,372		9,661		-		9,661		-
Accrued interest payable		330		330		-		-		330

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

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

Investment Securities Available for Sale

Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

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

Stock in Federal Home Loan Bank of Atlanta

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

- 90 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE K – FAIR VALUE MEASUREMENTS (Continued)

Other Non Marketable Securities

The fair value of stock in other non marketable securities is assumed to approximate carrying value.

Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market 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 includes FHLB advances with maturities of one year or less and sweep accounts. The fair value of short term FHLB advances is assumed to be approximate carrying value. The fair values of short term debt (sweep accounts that re-price weekly) are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Long Term Debt

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

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.

- 91 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE L - EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) Plan

The Company has a 401(k) Plan and substantially all employees participate in the Plan. The Company matches 100% of the first 6% of an employee’s compensation contributed to the plan. Expenses attributable to the Plan amounted to $251,000, $311,000, and $319,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

Employment Agreements

The Company has entered into employment agreements with three  executive officers to promote a stable and competent management base. These agreements provide for benefits as specified in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers' right to receive certain vested rights, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will generally be bound by the terms of those contracts.

Supplemental Executive Retirement Plans

The Company implemented a nonqualified supplemental executive retirement plan for the former Chief Executive Officer during 2003. Benefits accrued and vested during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $18,000, $71,000, and $26,000 were expensed for future benefits to be provided under this plan during 2012, 2011 and 2010, respectively. In conjunction with the implementation of this plan, the Company has purchased life insurance on certain key officers to help offset plan accruals. The life insurance policies provide the payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2012 and 2011 was $359,000 and $429,000, respectively.

As part of the acquisition of Progressive State Bank (“Progressive”), the Company assumed a liability for the supplemental early retirement plan for Progressive’s Chief Executive Officer. Provisions of $20,000, $57,000, and $21,000 and were expensed in 2012, 2011 and 2010, resulting in a total liability of $394,000 and $409,000 as of December 31, 2012 and 2011, respectively. Corresponding to this liability, Progressive had purchased a life insurance policy on a key officer to help offset the expense associated with future benefit payments. This policy was acquired by the Company upon its acquisition of Progressive.

Directors Deferred Compensation

The Company has instituted a Directors’ Deferral Plan whereby individual directors may elect annually to defer receipt of all or a designated portion of their directors’ fees for the coming year. Amounts so deferred are used to purchase shares of the Company’s common stock on the open market by the administrator of the Deferral Plan or to issue shares from the Company’s authorized but unissued shares, with such deferred compensation disbursed in the future as specified by the director at the time of his or her deferral election. All deferral amounts and matching contributions, if any, are paid into a rabbi trust with a separate account for each participant under the plan. Compensation and other expenses attributable to this plan for the years ended December 31, 2012, 2011 and 2010 were $220,000, $207,000, and $245,000, respectively. The Directors’ Deferral Plan was amended and restated on November 16, 2011 to ensure compliance with applicable regulations and to provide that the eventual payment of compensation deferred under the plan may be made only in the form of the Registrant’s common stock.

- 92 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE L - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans

The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary.

· Options granted under the 2004 Incentive Stock Option Plan vested over a five-year period with none vested at the time of grant. In 2012, 2011 and 2010, 5,750, 6,000 and 10,000 incentive stock options were granted under the 2004 Incentive Stock Option Plan, respectively.

· On May 11, 2010, the shareholders of the Company approved the implementation of the New Century Bancorp, Inc. 2010 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights. Incentive stock options under the Omnibus Plan vest over a five-year period with none vested at the time of grant. Officers and other full-time employees of the Company and the Bank, including executive officers and directors, are eligible to receive awards under the Omnibus Plan. However, no projections have been made as to specific award terms or recipients. There were no incentive stock options granted under this plan in 2012. In 2011, 37,500 incentive stock options were granted under the 2010 Omnibus Plan. There were no incentive stock options granted under this plan in 2010.

The estimated weighted average fair market value of each option awarded, using the Black-Scholes option pricing model, together with the assumptions used in estimating those weighted average fair values, are displayed below:

	2012			2011			2010
Estimated fair value of options granted	$	2.61		$	2.43		$	3.07
Assumptions in estimating average option values:
Risk-free interest rate		1.49	%		2.55	%		3.49	%
Dividend yield		0	%		0	%		0	%
Volatility		49.85	%		47.06	%		50.29	%
Expected life (in years)		8.00			7.25			8.00

- 93 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE L - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

A summary of the Company’s option plans as of and for the year ended December 31, 2012 is as follows:

				Outstanding Options					Exercisable Options
	Shares						Weighted					Weighted
	Available						Average					Average
	for Future			Number			Exercise		Number			Exercise
	Grants			Outstanding			Price		Outstanding			Price
At December 31, 2011		285,942			422,739		$	8.58		359,123		$	9.04
Options authorized		-			-			-		-			-
Options granted/vested		(5,750	)		5,750			4.77		18,204			7.28
Options exercised		-			-			-		-			-
Options forfeited		64,147			(64,147	)		8.48		(49,566	)	$	(10.54	)
At December 31, 2012		344,339			364,342		$	8.53		327,761		$	8.90

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2012 was $21,000 and $5,000, respectively. Outstanding and exercisable options had no intrinsic value as of December 31, 2011 or 2010. The unrecognized compensation expense for outstanding options at December 31, 2012, 2011, and 2010 was $69,000, $147,000, and $237,000, respectively. As of December 31, 2012, this cost is expected to be recognized over a weighted average period of 1.48 years.

The weighted average remaining life of options outstanding and options exercisable as of December 31, 2012 was 2.94 years and 2.38 years, respectively. The weighted average remaining life of options outstanding and options exercisable as of December 31, 2011 was 4.03 years and 3.28 years, respectively. Information regarding the stock options outstanding at December 31, 2012 is summarized below:

	Number		Number
	of options		of options
Range of Exercise Prices	outstanding		Exercisable
$2.25 - $7.07		272,562		236,881
$7.08 - $10.69		22,330		21,430
$10.70 - $16.22		69,450		69,450
Outstanding at end of year		364,342		327,761

- 94 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE L - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

A summary of the status of the Company’s non-vested options as of December 31, 2012 and changes during the year ended December 31, 2012, is presented below:

				Weighted-Average
				Grant Date
Non-vested Options	Options			Fair Value
Non-vested at December 31, 2011		63,616		$	2.87
Granted		5,750			2.61
Vested		31,362			2.30
Forfeited		(64,147	)		2.91
Non-vested at December 31, 2012		36,581			2.64

For the years ended December 31, 2012, 2011 and 2010, the intrinsic value of options exercised was $0, $0, and $96,000, respectively, and the grant-date fair value of options vested was $38,000, $75,000, $148,000, respectively. No cash was received from stock option exercises for the years ended December 31, 2012 or 2011.

- 95 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE M - PARENT COMPANY FINANCIAL DATA

Following are the condensed balance sheets of New Century Bancorp as of and for the years ended December 31, 2012 and 2011 and the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2012:

Condensed Balance Sheets

December 31, 2012 and 2011

(dollars in thousands)

	2012		2011
Assets
Cash balances with New Century Bank	$	1,437	$	1,053
Investment in New Century Bank		64,639		59,889
Investment in New Century Statutory Trust I		513		503
Other assets		109		776
Total Assets	$	66,698	$	62,221
Liabilities and Shareholders’ Equity
Junior subordinated debentures	$	12,372	$	12,372
Accrued interest and other liabilities		147		303
Shareholders’ equity:
Common stock		6,914		6,860
Additional paid-in capital		42,000		41,851
Retained earnings (accumulated deficit)		4,187		(450	)
Accumulated other comprehensive income		1,078		1,285
Total Shareholders’ Equity		54,179		49,546
Total Liabilities and Shareholders’ Equity	$	66,698	$	62,221

Condensed Statements of Operations

Years Ended December 31, 2012, 2011 and 2010

(dollars in thousands)

	2012			2011			2010
Dividends	$	-		$	-		$	233
Equity in earnings (losses) of subsidiaries		4,929			115			(4,904	)
Operating expense		(437	)		(417	)		(425	)
Income tax benefit		145			139			141
Net income (loss)	$	4,637		$	(163	)	$	(4,955	)

- 96 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE M - PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statements of Cash Flows

Years Ended December 31, 2012, 2011 and 2010

(dollars in thousands)

	2012			2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	4,637		$	(163	)	$	(4,955	)
Equity in undistributed (income) losses of subsidiaries		(4,929	)		(115	)		4,904
Net change in other assets		667			647			(124	)
Net change in other liabilities		(156	)		177			(8	)
Net cash provided (used) by operating activities		219			546			(183	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from sale of common stock		165			-			-
Proceeds from other issuance of common stock		-			-			332
Tax benefit from stock option exercises		-			-			16
Net cash provided by financing activities		165			-			348
Net increase in cash and cash equivalents		384			546			165
Cash and cash equivalents at beginning of year		1,053			507			342
Cash and cash equivalents, end of year	$	1,437		$	1,053		$	507

NOTE N - RELATED PARTY TRANSACTIONS

During 2012 and 2011, there were no related party transactions other than loan transactions with the Company’s officers and directors as discussed in Note D.

During 2010, the Company purchased various insurance policies from a company owned by a former director of New Century Bancorp. Premiums paid totaled approximately $30,000 for these policies, which include one-year policies for directors and officers liability coverage. All such policies were purchased on terms at least as favorable to the Company as could be obtained from an unaffiliated third party.

All related party transactions are “arms length” transactions.

- 97 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2012, 2011 and 2010

NOTE O – PREVIOUSLY REPORTED LOAN FRAUD

In 2010, the Bank discovered loan fraud in connection with one of the Bank’s largest loan relationships. The previously reported loan fraud included multiple loans to the same borrower and related entities and had been committed over a period of years.

In September 2010, $10.8 million in loans were charged-off pertaining to this previously reported loan fraud. The Bank is committed to employing every legal remedy available to recover losses arising from this loan fraud. During the years ended December 31, 2012, 2011 and 2010, $2.6 million, $3.7 million and $777,000 of losses were recovered on these loans. Additionally, there were $47,000, $361,000 and $211,000 in legal and investigative fees incurred in the years ended December 31, 2012, 2011 and 2010 to determine the extent of the fraud and the potential for any additional losses or recoveries.

NOTE P –BRANCH SALE

On April 6, 2012, the Bank sold all deposits and selected assets associated with two branch offices located in Pembroke and Raeford, North Carolina. The transaction was consummated pursuant to a definitive purchase and assumption agreement with Lumbee Guarantee Bank (“Lumbee”), Pembroke, North Carolina, which was entered into on December 20, 2011. The purchase price under the terms of the purchase and assumption agreement was $1.8 million which included $1.1 million for all real property and equipment and $688,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $131,000 on these deposits resulting in a net gain of $557,000. Lumbee assumed $14.6 million in deposits plus accrued interest of $5,000 from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $338,000 plus accrued interest of $2,000 in loans associated with deposit accounts which included overdraft protection loans and loans secured by time deposits. There was a separate payment for the loans purchased that was not included in the $1.8 million purchase price.

NOTE Q – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date and time the financial statements were issued and determined there are no subsequent events to disclose.

- 98 -

ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A – CONTROLS AND PROCEDURES

Evaluation of 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.

Management's Annual Report on Internal Control over Financial Reporting

Management is responsible for preparing the Company’s annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even systems that are deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has made a comprehensive review, evaluation and assessment of the Company's internal control over financial reporting as of December 31, 2012. In making its assessment of internal control over financial reporting, Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control−Integrated Framework.

Based on this assessment, Management has concluded that that the Company’s internal control over financial reporting as of December 31, 2012 was effective based on those criteria.

- 99 -

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

Date: March 28, 2013	/s/ William L. Hedgepeth II
	William L. Hedgepeth II
	President and Chief Executive Officer
Date: March 28, 2013	/s/ Lisa F. Campbell
	Lisa F. Campbell
	Executive Vice President, Chief Operating Officer
	and Chief Financial Officer

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 fourth quarter of 2012. Management has concluded that there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s fourth quarter of 2012 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

None.

- 100 -

Part III

Item 10 – Directors, Executive Officers AND CORPORATE GOVERNANCE

Incorporated by reference to the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

The Registrant has adopted a code of ethics that applies, among others to its principal executive officer and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, New Century Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28334.

Item 11 - Executive Compensation

Incorporated by reference to the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

- 101 -

Item 12 - Security Ownership of Certain Beneficial Owners and Management AND RELATED STOCKHOLDER MATTERS

Incorporated by reference to the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

In 2000, the shareholders of New Century Bank approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders approved amendments to the 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 478,627 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Incentive Plan is 278,102 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon exercise of outstanding options granted under the 2004 Incentive Plan is 75,600. Option prices for each of the plans are established at market value at the time of grant.

On May 11, 2010, the shareholders of the Company approved the implementation of the New Century Bancorp, Inc. 2010 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights. Officers and other full-time employees of the Company and the Bank, including executive officers and directors, are eligible to receive awards under the Omnibus Plan. The maximum number of shares reserved for issuance in connection with equity awards granted under the Omnibus Plan is 250,000 (adjusted for stock dividends).

The following chart contains details of the grants:

					Number of securities
					remaining available
			Weighted-average		for future issuance
	Number of securities		exercise price of		under equity
	to be issued upon		outstanding		compensation plans
	exercise of		options,		(excluding securities
Plan Category	outstanding options,		warrants and rights		reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		422,739	$	8.58		612,171
Equity compensation plans not approved by security holders		none		n/a		none
Total		422,739	$	8.58		612,171

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Item 13 - Certain Relationships and Related Transactions, AND DIRECTOR INDEPENDENCE

Incorporated by reference to the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference to the Registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

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PART IV

Item 15 – Exhibits and FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

1. Financial statements required to be filed by Item 8 of this Form:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2012 and 2011

Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2012, 2011 and 2010

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

Notes to Consolidated Financial Statements.

2. Financial statement schedules required to be filed by Item 8 of this Form:

None

3. Exhibits

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Exhibits
	3(i)	Articles of Incorporation of Registrant(1)
	3(ii)	Bylaws of Registrant(1)
	4	Form of Stock Certificate(1)
	10(i)	2000 Incentive Stock Option Plan, a compensatory plan(2)
	10(ii)	2000 Nonstatutory Stock Option Plan, a compensatory plan(2)
	10(iii)	Employment Agreement of William L. Hedgepeth II, a management contract(3)
	10(iv)	Employment Agreement of Lisa F. Campbell, a management contract(1)
	10(v)	2004 Incentive Stock Option Plan, a compensatory plan(2)
	10(vi)	Directors’ Deferral Plan, as amended and restated(4)
	10(vii)	2010 Omnibus Stock Ownership and Long Term Incentive Plan(5)
	10(viii)	Employment Agreement of D. Richard Tobin, Jr., a management contract (Filed herewith)
	21	Subsidiaries (Filed herewith)
	23	Consent of Dixon Hughes Goodman LLP (Filed herewith)
	31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
	31(ii)	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
	32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
	32(ii)	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)

1.	Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.
2.	Incorporated by reference from Registrant's Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.
3.	Incorporated by reference from Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2008.
4.	Incorporated by reference from Registrant’s Current Report on 8-K, filed with the Securities and Exchange Commission on November 22, 2011.
5.	Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 2, 2010.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	NEW CENTURY BANCORP, INC.
	Registrant
	By:	/s/ William L. Hedgepeth, II
		William L. Hedgepeth, II
Date: March 28, 2013		President and Chief Executive Office

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Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ William L. Hedgepeth, II	March 28, 2013
William L. Hedgepeth, II., President,
Chief Executive Officer and Director
/s/Lisa F. Campbell	March 28, 2013
Lisa F. Campbell, Executive Vice President,
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/J. Gary Ciccone	March 28, 2013
J. Gary Ciccone, Director
/s/John W. McCauley	March 28, 2013
John W. McCauley, Director
/s/Oscar N. Harris	March 28, 2013
Oscar N. Harris, Director
/s/Clarence L. Tart, Jr.	March 28, 2013
Clarence L. Tart, Jr., Director
/s/Gerald W. Hayes, Jr.	March 28, 2013
Gerald W. Hayes, Jr., Director
/s/ D. Ralph Huff, III	March 28, 2013
D. Ralph Huff III, Director
/s/Tracy L. Johnson	March 28, 2013
Tracy L. Johnson, Director
	March 28, 2013
/s/J. Larry Keen
J. Larry Keen, Ed. D., Director
/s/Carlie C. McLamb Jr.	March 28, 2013
Carlie C. McLamb Jr., Director
/s/Michael S. McLamb	March 28, 2013
Michael S. McLamb, Director
/s/Anthony Rand	March 28, 2013
Anthony Rand, Director

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/s/Sharon L. Raynor	March 28, 2013
Sharon L. Raynor, Director
/s/W. Lyndo Tippett	March 28, 2013
W. Lyndo Tippett, Director
/s/Dan K. McNeill	March 28, 2013
Dan K. McNeill, Director

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EXHIBIT INDEX

Exhibit Number	Exhibit
3(i)	Articles of Incorporation.	*
3(ii)	Bylaws	*
4	Form of Stock Certificate	*
10(i)	2000 Incentive Stock Option Plan	*
10(ii)	2000 Nonstatutory Stock Option Plan	*
10(iii)	Employment Agreement with William L. Hedgepeth II	*
10(iv)	Employment Agreement of Lisa F. Campbell	*
10(v)	2004 Incentive Stock Option Plan	*
10(vi)	Directors’ Deferral Plan, as amended and restated	*
10(vii)	2010 Omnibus Stock Ownership and Long Term Incentive Plan	*
10(viii)	Employment Agreement of D. Richard Tobin, Jr.	Filed herewith
21	Subsidiaries	Filed herewith
23	Consent of Dixon Hughes Goodman LLP	Filed herewith
31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
31(ii)	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith
32(ii)	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith

* Incorporated by reference

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