10-Q

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2011

or

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

For the transition period ended from              to             

Commission File Number 000-50400

New Century Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

North Carolina	20-0218264
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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

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

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

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

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

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

As of July 28, 2011, the Registrant had outstanding 6,913,636 shares of Common Stock, $1 par value per share.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements
	Consolidated Balance Sheets June 30, 2011 and December 31, 2010		3
	Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2011 and 2010		4
	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2011 and 2010		5
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010		6
	Notes to Consolidated Financial Statements		8
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 4 -	Controls and Procedures		45
Part II.	OTHER INFORMATION
Item 6 -	Exhibits		46
	Signatures		47
	Exhibit Index		48

2

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2011 (Unaudited)			December  31, 2010*
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	8,349		$	7,071
Interest-earning deposits in other banks		36,921			21,648
Federal funds sold		19,529			7,183
Investment securities available for sale, at fair value		76,813			89,899
Loans		458,523			470,484
Allowance for loan losses		(10,378	)		(10,015	)
NET LOANS		448,145			460,469
Accrued interest receivable		2,352			2,488
Stock in Federal Home Loan Bank of Atlanta, at cost		1,365			1,448
Other non marketable securities		1,082			1,082
Foreclosed real estate		3,380			3,655
Premises and equipment, net		12,650			12,930
Bank owned life insurance		7,854			7,727
Core deposit intangible		622			699
Other assets		10,073			10,597
TOTAL ASSETS	$	629,135		$	626,896
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	75,986		$	70,363
Savings		24,708			22,541
Money market and NOW		96,099			97,096
Time		342,019			344,599
TOTAL DEPOSITS		538,812			534,599
Other short term debt		23,746			23,666
Long term debt		14,372			16,372
Accrued interest payable		378			395
Accrued expenses and other liabilities		2,862			2,171
TOTAL LIABILITIES		580,170			577,203
Shareholders’ Equity
Common stock, $1 par value, 10,000,000 shares authorized; and 6,913,636 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		6,914			6,914
Common stock receivable		(242	)		—
Additional paid-in capital		42,072			41,887
Accumulated deficit		(1,026	)		(286	)
Accumulated other comprehensive income		1,247			1,178
TOTAL SHAREHOLDERS’ EQUITY		48,965			49,693
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	629,135		$	626,896

* Derived from audited consolidated financial statements.

See accompanying notes.

3

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	7,251		$	7,815	$	14,555		$	15,402
Federal funds sold and interest-earning deposits in other banks		22			18		39			23
Investments		525			691		1,119			1,432
TOTAL INTEREST INCOME		7,798			8,524		15,713			16,857
INTEREST EXPENSE
Money market, NOW and savings deposits		180			331		397			633
Time deposits		1,873			1,957		3,753			3,964
Other short term debt		66			72		135			136
Long term debt		74			74		148			146
TOTAL INTEREST EXPENSE		2,193			2,434		4,433			4,879
NET INTEREST INCOME		5,605			6,090		11,280			11,978
PROVISION FOR LOAN LOSSES		2,542			639		3,706			1,909
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		3,063			5,451		7,574			10,069
NON-INTEREST INCOME
Fees from pre-sold mortgages		61			54		87			81
Service charges on deposit accounts		376			438		758			877
Other fees and income		455			178		688			384
TOTAL NON-INTEREST INCOME		892			670		1,533			1,342
NON-INTEREST EXPENSE
Personnel		2,284			2,312		4,675			4,623
Occupancy and equipment		358			390		720			770
Deposit insurance		235			233		497			469
Professional fees		503			400		1,133			883
Information systems		441			355		827			901
Net loss on sale and write downs of foreclosed real estate		700			26		903			26
Other		818			781		1,662			1,439
TOTAL NON-INTEREST EXPENSE		5,339			4,497		10,417			9,111
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT)		(1,384	)		1,624		(1,310	)		2,300
INCOME TAXES (BENEFIT)		(523	)		549		(570	)		769
NET INCOME (LOSS)	$	(861	)	$	1,075	$	(740	)	$	1,531
NET INCOME (LOSS) PER COMMON SHARE
Basic	$	(.13	)	$	.16	$	(.11	)	$	.22
Diluted	$	(.13	)	$	.16	$	(.11	)	$	.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,913,636			6,846,437		6,913,636			6,842,218
Diluted		6,913,636			6,862,095		6,913,636			6,851,055

See accompanying notes.

4

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Common stock				Common stock receivable			Additional paid-in capital		Retained earnings (Accumulated deficit)			Accumulated other com- prehensive income		Total Shareholders’ equity
	Shares		Amount
	(Amounts in thousands, except share data)
Balance at December 31, 2009		6,837,952	$	6,838	$	—		$	41,467	$	4,668		$	1,436	$	54,409
Net income		—		—		—			—		1,531			—		1,531
Other comprehensive income, net		—		—		—			—		—			192		192
Exercise of stock options		53,832		54		—			177		—			—		231
Tax benefit from option exercises		—		—		—			16		—			—		16
Stock based compensation		—		—		—			63		—			—		63
Balance at June 30, 2010		6,891,784	$	6,892	$	—		$	41,723	$	6,199		$	1,628	$	56,442
Balance at December 31, 2010		6,913,636	$	6,914	$	—		$	41,887	$	(286	)	$	1,178	$	49,693
Net loss		—		—		—			—		(740	)		—		(740	)
Common stock receivable		—		—		(242	)		—		—			—		(242	)
Other comprehensive income, net		—		—		—			—		—			69		69
Stock based compensation		—		—		—			185		—			—		185
Balance at June 30, 2011		6,913,636	$	6,914	$	(242	)	$	42,072	$	(1,026	)	$	1,247	$	48,965

See accompanying notes.

5

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
	2011			2010
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(740	)	$	1,531
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		3,706			1,909
Depreciation and amortization of premises and equipment		336			381
Amortization and accretion of investment securities		410			424
Amortization of deferred loan fees and costs		(104	)		(80	)
Amortization of core deposit intangible		77			77
Stock-based compensation		185			63
Increase in cash surrender value of bank owned life insurance		(127	)		(131	)
Net loss on sale and write-downs of foreclosed real estate		903			26
Net loss on investment security sales		26			14
Change in assets and liabilities:
Net change in accrued interest receivable		136			(116	)
Net change in other assets		170			607
Net change in accrued expenses and other liabilities		673			(793	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,651			3,912
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank (“FHLB”) stock		—			(315	)
Redemption of FHLB stock		83			—
Purchase of investment securities available for sale		(7,256	)		—
Maturities of investment securities available for sale		14,237			4,000
Mortgage-backed securities pay-downs		5,274			6,096
Sale of investment securities available for sale		500			—
Net change in loans outstanding		6,970			(15,161	)
Proceeds from sale of loans		—			1,300
Proceeds from sale of foreclosed real estate		1,177			1,260
Purchases of premises and equipment		(32	)		(1,185	)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		20,953			(4,005	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		4,213			25,769
Net change in other short term debt		80			(426	)
Net change in long term debt		(2,000	)		6,000
Tax benefit from exercise of stock options		—			16
Proceeds from the exercise of stock options		—			231
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,293			31,590
NET CHANGE IN CASH AND CASH EQUIVALENTS		28,897			31,497
CASH AND CASH EQUIVALENTS, BEGINNING		35,902			28,935
CASH AND CASH EQUIVALENTS, ENDING	$	64,799		$	60,432

See accompanying notes.

6

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

	Six Months Ended June 30,
	2011			2010
	(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	4,450		$	4,830
Income taxes paid		—			939
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		69			192
Transfers from loans to foreclosed real estate		1,805			1,972
Common stock receivable		(242	)		—

See accompanying notes.

7

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A – BASIS OF PRESENTATION

New Century Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank (the “Bank”). The Bank is engaged in general commercial and retail banking and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended June 30, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2011. This quarterly report should be read in conjunction with the Annual Report.

NOTE B - PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. There were 431,274 and 414,644 anti-dilutive options for the three month period ending June 30, 2011 and 2010 and 428,878 and 424,336 anti-dilutive options for the six month period ending June 30, 2011 and 2010, respectively.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Weighted average shares used for basic net income per share		6,913,636		6,846,437		6,913,636		6,842,218
Effect of dilutive stock options		—		15,658		—		8,837
Weighted average shares used for diluted net income per share		6,913,636		6,862,095		6,913,636		6,851,055

8

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C – COMPREHENSIVE INCOME

A summary of comprehensive income (loss) is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
				(Amounts in thousands)
Net income (loss)	$	(861	)	$	1,075		$	(740	)	$	1,531
Other comprehensive income:
Unrealized gain on investment securities - available for sale		268			262			130			326
Reclassification adjustment for losses included in net income		(2	)		(10	)		(26	)		(14	)
Tax effect		(91	)		(97	)		(35	)		(120	)
Total		175			155			69			192
Total comprehensive income (loss)	$	(686	)	$	1,230		$	(671	)	$	1,723

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS

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

In April, 2011, the Financial Accounting Standards Board (“FASB”) issued A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring Accounting Standards Update (“ASU”) No. 2011-02. In an effort to increase comparability, ASU 2011-02 seeks to clarify when a creditor has granted a concession in a modification and whether a borrower is experiencing financial difficulty. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 are not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

ASU No. 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements.

9

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS (continued)

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 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

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 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

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.

NOTE E – 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 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.

10

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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

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

Fair Value Hierarchy

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

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

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

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

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

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds.

11

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (dollars in thousands):

Investment securities available for sale June 30, 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	$	38,273	$	—	$	38,273	$	—
Mortgage-backed securities - Government Sponsored Enterprises (“GSE’s”)		32,425		—		32,425		—
Municipal bonds		6,115		—		6,115		—
Total	$	76,813	$	—	$	76,813	$	—

Investment securities available for sale December 31, 2010	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	$	47,087	$	—	$	47,087	$	—
Mortgage-backed securities - GSE’s		35,512		—		35,512		—
Municipal bonds		7,300		—		7,300		—
Total	$	89,899	$	—	$	89,899	$	—

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011 and December 31, 2010, 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 2.

12

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. At June 30, 2011 and December 31, 2010 assets classified as foreclosed real estate totaled $3.4 million and $3.7 million, respectively.

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 June 30, 2011 and December 31, 2010 (dollars in thousands):

Asset Category June 30, 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	$	10,447	$	—	$	—	$	10,447
Foreclosed real estate		3,380		—		—		3,380
Total	$	13,827	$	—	$	—	$	13,827

Asset Category December 31, 2010	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	$	9,393	$	—	$	—	$	9,393
Foreclosed real estate		3,655		—		—		3,655
Total	$	13,048	$	—	$	—	$	13,048

13

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F – INVESTMENT SECURITIES

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

	June 30, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
			(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	19,152	$	110	$	—	$	19,262
After 1 year but within 5 years		18,666		354		8		19,012
U.S. agency sponsored mortgage-backed
Securities
Within 1 year		1,886		34		1		1,919
After 1 year but within 5 years		22,643		1,219		—		23,862
After 5 years but within 10 years		6,629		44		30		6,643
Municipal bonds
After 1 year but within 5 years		1,373		67		—		1,440
After 5 years but within 10 years		2,695		201		—		2,896
After 10 years		1,747		32		—		1,779
	$	74,791	$	2,061	$	39	$	76,813

As of June 30, 2011, accumulated other comprehensive income, net of deferred income taxes, included unrealized net gains of $2.0 million, net of deferred income taxes of $800,000.

	December 31, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
			(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	23,783	$	174	$	11	$	23,946
After 1 year but within 5 years		22,723		418		—		23,141
U.S. agency sponsored mortgage-backed
Securities
Within 1 year		2,538		118		75		2,581
After 1 year but within 5 years		27,614		1,131		—		28,745
After 5 years but within 10 years		4,150		36		—		4,186
Municipal bonds
Within 1 year		200		3		—		203
After 1 year but within 5 years		1,543		41		—		1,584
After 5 years but within 10 years		3,608		152		—		3,760
After 10 years		1,822		—		69		1,753
	$	87,981	$	2,073	$	155	$	89,899

As of December 31, 2010, accumulated other comprehensive income, net of deferred income taxes, included unrealized net gains of $1.9 million, net of deferred income taxes of $800,000.

14

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F – INVESTMENT SECURITIES (continued)

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010.

	June 30, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
					(In thousands)
Securities available for sale:
U.S. government agencies	$	2,027	$	8	$	—	$	—	$	2,027	$	8
Mortgage-backed securities GSE’s		3,056		31		—		—		3,056		31
Total temporarily impaired securities	$	5,083	$	39	$	—	$	—	$	5,083	$	39

At June 30, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. One U.S. government agency and four GSE bonds had unrealized losses for less than twelve months totaling $39,000 at June 30, 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.

	December 31, 2010
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
					(In thousands)
Securities available for sale:
U.S. government agencies	$	6,177	$	11	$	—	$	—	$	6,177	$	11
Mortgage-backed securities GSE’s		8,395		75		—		—		8,395		75
Municipal bonds		1,678		69		—		—		1,678		69
Total temporarily impaired securities	$	16,250	$	155	$	—	$	—	$	16,250	$	155

At December 31, 2010, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies, seven GSE’s and five municipal bonds had unrealized losses for less than twelve months totaling $155,000 at December 31, 2010. 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.

15

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS

Following is a summary of loans at June 30, 2011 and December 31, 2010:

	2011						2010
	Amount			Percent of total			Amount			Percent of total
	(In thousands)
Real estate loans:
1 to 4 family residential	$	59,504			12.98	%	$	60,385			12.83	%
Commercial Real Estate		204,412			44.59	%		193,502			41.13	%
Multi-family Residential		28,168			6.14	%		30,088			6.40	%
Construction		77,211			16.84	%		84,550			17.97	%
Home equity lines of credit		40,532			8.84	%		39,938			8.49	%
Total real estate loans		409,827			89.39	%		408,463			86.82	%
Other loans:
Commercial and Industrial		40,646			8.86	%		49,437			10.51	%
Loans to Individuals		8,311			1.81	%		12,860			2.73	%
Overdrafts		98			.02	%		107			0.02	%
Total other loans		49,055			10.69	%		62,404			13.26	%
Gross loans		458,882						470,867
Less deferred loan origination fees, net		(359	)		(0.08	)%		(383	)		(.08	)%
Total loans		458,523			100.00	%		470,484			100.00	%
Allowance for loan losses		(10,378	)					(10,015	)
Total loans, net	$	448,145					$	460,469

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 June 30, 2011, the Company had pre-approved but unused lines of credit totaling $66.7 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

16

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Non-Accrual and Past Due Loans

The tables below detail non-accrual loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	(In thousands)
1 to 4 Family Residential	$	3,078
Commercial Real Estate		8,472
Multi-family Residential		—
Construction		1,815
Home Equity Lines of Credit (“HELOC”)		442
Commercial and Industrial		93
Loans to Individuals & Overdrafts		182
Total	$	14,082
	December 31, 2010
	(In thousands)
1 to 4 Family Residential	$	3,122
Commercial Real Estate		5,789
Multi-family Residential		—
Construction		938
Home Equity Lines of Credit (“HELOC”)		98
Commercial and Industrial		435
Loans to Individuals & Overdrafts		180
Total	$	10,562

The average balance of non-accrual loans was $12.3 million and $14.5 million for the periods ended June 30, 2011 and December 31, 2010, respectively.

17

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

The following tables present an age analysis of past due loans, segregated by class of loans as of June 30, 2011 and December 31, 2010, respectively:

	June 30, 2011
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
					(In thousands)
Commercial and Industrial	$	50	$	93	$	143	$	40,503		$	40,646
Construction		470		1,815		2,285		74,926			77,211
Multi-family Residential		—		—		—		28,168			28,168
Commercial Real Estate		1,357		8,472		9,829		194,583			204,412
Loans to Individuals & Overdrafts		11		182		193		8,216			8,409
1 to 4 Family Residential and HELOCs		320		3,520		3,840		96,196			100,036
Deferred loan (fees) cost, net		—		—		—		(359	)		(359	)
	$	2,208	$	14,082	$	16,290	$	442,233		$	458,523
	December 31, 2010
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
					(In thousands)
Commercial and Industrial	$	1,227	$	435	$	1,662	$	47,775		$	49,437
Construction		103		938		1,041		83,509			84,550
Multi-family Residential		—		—		—		30,088			30,088
Commercial Real Estate		46		5,789		5,835		187,667			193,502
Loans to Individuals & Overdrafts		135		180		315		12,652			12,967
1 to 4 family residential and HELOCs		633		3,220		3,853		96,470			100,323
Deferred loan (fees) cost, net		—		—		—		(383	)		(383	)
	$	2,144	$	10,562	$	12,706	$	457,778		$	470,484

There were no loans that were 90 days past due and still accruing at June 30, 2011 or December 31, 2010.

18

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Impaired Loans

The following tables present information on loans that were considered to be impaired as of June 30, 2011 and December 31, 2010:

June 30, 2011

							Quarter To Date				Year To Date
	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized on Impaired Loans
							(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	269	$	403	$	—	$	320	$	6	$	213	$	6
Construction		1,892		2,682		—		1,190		49		981		49
Commercial Real Estate		9,732		10,890		—		7,115		73		5,929		93
Loans to Individuals & Overdrafts		150		214		—		171		—		165		—
Multi-family Residential		—		—		—		1,061		—		707		—
1 to 4 Family Residential and HELOCs		1,757		2,726		—		1,566		19		1,527		19
Subtotal:		13,800		16,915		—		11,423		147		9,522		167
With an allowance recorded:
Commercial and Industrial		269		339		191		457		4		437		9
Construction		437		600		106		962		—		862		2
Commercial Real Estate		3,915		4,558		761		3,868		—		4,360		57
Loans to individuals & overdrafts		63		63		46		171		—		136		1
Multi-family Residential		—		—		—		—		—		—		—
1 to 4 Family Residential and HELOCs		2,093		2,117		969		2,461		—		3,082		—
Subtotal:		6,777		7,677		2,073		7,919		4		8,877		69
Totals:
Commercial		16,514		19,472		1,058		13,912		132		12,782		216
Consumer		213		277		46		342		—		301		1
Residential		3,850		4,843		969		5,088		19		5,316		19
Grand Total:	$	20,577	$	24,592	$	2,073	$	19,342	$	151	$	18,399	$	236

Impaired loans at June 30, 2011 were approximately $20.6 million and were comprised of $14.1 million in non-accrual loans and $6.5 million in loans still in accruing status. Approximately, $6.8 million of the $20.6 million in impaired loans at June 30, 2011 had specific allowances provided while the remaining $13.8 million had no allowances recorded. Of the $13.8 million with no allowance recorded, $5.7 million of those loans had previous chargeoffs.

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. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest with all accrued interest being included in the provision for loan losses.

19

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

December 31, 2010

							Year To Date
	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
					(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	88	$	—	$	297	$	—
Construction		562		570		—		1,143		11
Commercial Real Estate		3,557		4,830		—		3,375		149
Loans to Individuals & Overdrafts		152		204		—		113		—
1 to 4 Family Residential and HELOCs		1,449		2,062		—		1,519		—
Subtotal:		5,720		7,754		—		6,447		160
With an allowance recorded:
Commercial and Industrial		396		429		132		567		—
Construction		662		1,048		159		529		—
Commercial Real Estate		5,346		5,746		1,317		4,068		32
Loans to Individuals & Overdrafts		67		67		13		96		—
1 to 4 Family Residential and HELOCs		4,324		4,779		1,697		3,056		12
Subtotal:		10,795		12,069		3,318		8,316		44
Totals:
Commercial		10,523		12,711		1,608		9,979		192
Consumer		219		271		13		209		—
Residential		5,773		6,841		1,697		4,575		12
Grand Total:	$	16,515	$	19,823	$	3,318	$	14,763	$	204

Impaired loans at December 31, 2010 were approximately $16.5 million and were comprised of $16.0 million in non-accrual loans and $0.5 million in loans still in accruing status. Approximately, $10.8 million of the $16.5 million in impaired loans at December 31, 2010 had specific allowances provided while the remaining $5.7 million had no allowances recorded.

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. Commercial 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 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) - This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

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

20

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

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

21

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

• Risk Grade 9 (Loss) - Loans classified 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.

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).

22

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

• Loans where adverse economic conditions that develop subsequent to the loan origination do not 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.

23

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of June 30, 2011 and December 31, 2010, respectively:

June 30, 2011
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
(In thousands)
Superior	$	990	$	63	$	—	$	—
Very good		166		8		439		—
Good		5,717		2,579		19,779		2,094
Acceptable		11,028		11,540		70,140		13,277
Acceptable with care		18,947		56,847		62,749		11,262
Special mention		3,112		2,556		30,414		—
Substandard		686		3,618		20,527		1,535
Doubtful		—		—		364		—
Loss		—		—		—		—
	$	40,646	$	77,211	$	204,412	$	28,168
Consumer Credit Exposure by Internally Assigned Grade	1 to 4 Family Residential and HELOCs
Pass	$	85,270
Special mention		6,277
Substandard		8,489
	$	100,036
Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts
Performing	$	8,100
Non performing		309
	$	8,409

24

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

December 31, 2010
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
(In thousands)
Superior	$	1,298	$	67	$	—	$	—
Very good		177		130		1,605		—
Good		7,744		5,159		20,444		2,959
Acceptable		17,707		15,467		67,322		13,432
Acceptable with care		18,232		58,056		71,854		9,750
Special mention		2,505		1,506		20,139		2,377
Substandard		1,765		4,165		11,756		1,570
Doubtful		9		—		382		—
Loss		—		—		—		—
	$	49,437	$	84,550	$	193,502	$	30,088
Consumer Credit Exposure by Internally Assigned Grade	1 to 4  Family Residential and HELOCs
Pass	$	86,262
Special mention		6,389
Substandard		7,672
	$	100,323
Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts
Performing	$	12,581
Non performing		386
	$	12,967

Nonperforming assets at June 30, 2011 and December 31, 2010 consist of the following:

	June 30, 2011		December 31, 2010
	(In thousands)
Non-accrual loans	$	14,082	$	10,562
Restructured loans		2,225		1,688
Total non-performing loans		16,307		12,250
Foreclosed real estate		3,380		3,655
Total non-performing assets	$	19,687	$	15,905

25

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Allowance for Loan Losses

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

Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment.

Loans are deemed uncollectible 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.

The following table presents a roll forward of the Company’s allowance for loan losses by loan category for the three and six month periods ended June 30, 2011 and the twelve month period ended December 31, 2010, respectively:

Three months ended June 30, 2011 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1-4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 03/31/2011	$	1,081		$	1,271		$	3,609		$	3,591		$	383		$	183		$	10,118
Provision for loan losses		203			570			1,864			146			(232	)		(9	)		2,542
Other		—			—			(53	)		—			—			—			(53	)
Loans charged-off		(3,880	)		(669	)		(926	)		(479	)		(65	)		—			(6,019	)
Recoveries		3,648			—			8			84			50			—			3,790
Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	3,342		$	136		$	174		$	10,378
Ending Balance: individually evaluated for impairment	$	191		$	106		$	761		$	969		$	46		$	—		$	2,073
Ending Balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	2,373		$	90		$	174		$	8,305
Loans:
Ending Balance	$	40,646		$	77,211		$	204,412		$	100,036		$	8,409		$	28,168		$	458,882
Ending Balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,850		$	213		$	—		$	20,577
Ending Balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	96,186		$	8,196		$	28,168		$	438,305

26

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Six months ended June 30, 2011 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 01/01/2011	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015
Provision for loan losses		160			1,714			3,133			527			(1,362	)		(466	)		3,706
Other		—			—			(53	)		—			—			—			(53	)
Loans charged-off		(3,880	)		(891	)		(1,699	)		(734	)		(87	)		—			(7,291	)
Recoveries		3,720			—			10			216			55			—			4,001
Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	3,342		$	136		$	174		$	10,378
Ending Balance: individually evaluated for impairment	$	191		$	106		$	761		$	969		$	46		$	—		$	2,073
Ending Balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	2,373		$	90		$	174		$	8,305
Loans:
Ending Balance	$	40,646		$	77,211		$	204,412		$	100,036		$	8,409		$	28,168		$	458,882
Ending Balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,850		$	213		$	—		$	20,577
Ending Balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	96,186		$	8,196		$	28,168		$	438,305
Twelve months ended December 31, 2010 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 01/01/2009	$	1,699		$	629		$	4,281		$	3,043		$	507		$	200		$	10,359
Provision for loan losses		10,199			47			(1,170	)		2,981			1,349			2,228			15,634
Other		—			—			—			—			—			—			—
Loans charged-off		(11,967	)		(464	)		—			(2,750	)		(421	)		(2,811	)		(18,413	)
Recoveries		1,121			137			—			59			95			1,023			2,435
Balance, end of period 12/31/2010	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015
Ending Balance: individually evaluated for impairment	$	132		$	159		$	1,317		$	1,697		$	13		$	—		$	3,318
Ending Balance: collectively evaluated for impairment	$	920		$	190		$	1,794		$	1,636		$	1,517		$	640		$	6,697
Loans:
Ending Balance	$	49,437		$	84,550		$	193,502		$	100,323		$	12,967		$	30,088		$	470,867
Ending Balance: individually evaluated for impairment	$	396		$	1,224		$	8,903		$	5,773		$	219		$	—		$	16,515
Ending Balance: collectively evaluated for impairment	$	49,041		$	83,326		$	184,599		$	94,550		$	12,748		$	30,088		$	454,352

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NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010:

	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	8,349	$	8,349	$	7,071	$	7,071
Interest-earning deposits in other banks		36,921		36,921		21,648		21,648
Federal funds sold		19,529		19,529		7,183		7,183
Investment securities available for sale		76,813		76,813		89,899		89,899
Loans, net		448,145		464,998		460,469		458,167
Accrued interest receivable		2,352		2,352		2,488		2,488
Stock in the Federal Home Loan Bank		1,365		1,365		1,448		1,448
Other non marketable securities		1,082		1,082		1,082		1,082
Bank owned life insurance		7,854		7,854		7,727		7,727
Financial liabilities:
Deposits	$	538,812	$	545,222	$	534,599	$	541,394
Short term debt		23,746		23,746		23,666		23,666
Long term debt		14,372		10,453		16,372		12,453
Accrued interest payable		378		378		395		395

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. Therefore, incremental market risks and liquidity discounts were subtracted to reflect illiquid and distressed conditions at June 30, 2011 and December 31, 2010. No liquidity discount is applied at June 30, 2011 due to lack of comparable metrics. The liquidity discount for December 31, 2010 was 0.5% based on local economic conditions impacting employment, volatile energy costs, and extended periods of time to sell or liquidate assets.

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NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Stock in Federal Home Loan Bank of Atlanta and Other Non Marketable Securities

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

Bank Owned Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits

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

Short Term Debt

The fair values of short term debt (sweep accounts that re-price daily and short term FHLB advances) 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.

29

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE I – RESOLUTION OF PARTICIPATION INTERESTS

During the quarter, the Company received insurance proceeds totaling $3,005,000 as a result of their claim related to losses incurred from a previously disclosed borrower fraud. Given that the Company’s loans related to this borrower fraud had been previously charged off against the allowance for loan losses, the receipt of these insurance proceeds, together with an additional $599,000 in third party insurance proceeds receivable were treated as a loan recovery.

In connection with the previously disclosed borrower fraud, the Company agreed to pay $3,700,000 to another financial institution which held a significant participation interest in loans related to the alleged borrower fraud. The Company also received from the participating institution certain rights to claims against the borrower, an interest in the participated loan balance, and 52,269 shares of Company common stock that was previously held as collateral against personal loans between the participating institution and the fraudulent borrower. Upon payment to the participating institution, the Company recorded a $3,700,000 charge-off of the participating interest that they obtained.

Also, in connection with the resolution of this downstream loan participation transaction that was related to the previously disclosed alleged borrower fraud, the Bank recorded a loss of approximately $96,500 at June 30, 2011, along with additional expenses of $144,839 relating to professional fees incurred in connection with the matter. In addition, the shares of the previously mentioned common stock receivable had a market value of approximately $242,005 as of June 30, 2011, and as a result, the resolution of this matter had no material impact on earnings for the fiscal quarter ended June 30, 2011.

For purposes of the Company’s financial statements as of and for the period ended June 30, 2011, these shares of the Company’s common stock have been deducted from Shareholders’ Equity as reflected in the Company’s Consolidated Balance Sheet and Statement of Changes in Shareholders’ Equity. In accordance with the requirements of Section 53-64 of the North Carolina General Statutes, the Bank intends to liquidate these securities within six months. Until such time as the shares are liquidated, they will be marked to market.

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

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

Overview

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

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Hoke, Cumberland, Johnston, Pitt, Robeson, Sampson, and Wayne counties in North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts and certificates of deposit. Deposit services are not offered in Pitt County. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

Comparison of Financial Condition at

June 30, 2011 and December 31, 2010

During the first six months of 2011, total assets grew by $2.2 million to $629.1 million as of June 30, 2011. Earning assets at June 30, 2011 totaled $583.8 million and consisted of $448.1 million in net loans, $76.8 million in investment securities, $56.5 million in overnight investments and interest-bearing deposits in other banks and $2.5 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the second quarter of 2011 were $538.8 million and $49.0 million, respectively.

Since the end of 2010, gross loans have decreased by $12.0 million to $458.5 million as of June 30, 2011 due to continued soft loan demand and efforts to reduce concentration levels in construction and commercial real estate loans. Gross loans consisted of $40.6 million in commercial and industrial loans, $204.4 million in commercial real estate loans, $28.2 million in multi-family residential loans, $8.4 million in consumer loans, $100.0 million in residential real estate, and $77.2 million in construction loans. The deferred loan fees and costs on these loans was ($359,000).

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At June 30, 2011, the Company held $19.5 million in federal funds sold, an increase of $12.3 million from December 31, 2010. Interest-earning deposits in other banks were $36.9 million at June 30, 2011, a $15.3 million increase from December 31, 2010. The Company’s investment securities at June 30, 2011 were $76.8 million, a decrease of $13.1 million from December 31, 2010. The investment portfolio as of June 30, 2011 consisted of $37.8 million in government agency debt securities, $31.2 million in mortgage-backed securities and $5.8 million in municipal securities. The unrealized gain on these securities was $2.0 million.

At June 30, 2011, the Company also held an investment of $1.4 million in the form of Federal Home Loan Bank stock and $1.1 million in other non marketable securities, each of which was approximately the same at December 31, 2010. The FHLB redeemed $83,000 in stock in 2011.

At June 30, 2011, non-earning assets were $45.3 million, which reflects an increase of $0.1 million from the $45.2 million as of December 31, 2010. Non-earning assets as of June 30, 2011 included $8.3 million in cash and due from banks, bank premises and equipment of $12.7 million, core deposit intangible of $622,000, accrued interest receivable of $2.3 million, foreclosed real estate of $3.4 million, and other assets which consisted of $7.9 million in bank owned life insurance (“BOLI”), $4.8 million in deferred tax assets, $1.6 million in taxes receivable, $2.2 million in prepaid expenses, and $1.5 million in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets.

Total deposits at June 30, 2011 were $538.8 million and consisted of $76.0 million in non-interest-bearing demand deposits, $96.1 million in money market and NOW accounts, $24.7 million in savings accounts, and $342.0 million in time deposits. Total deposits increased by $4.2 million from $534.6 million as of December 31, 2010. The Bank had $4.0 million in brokered demand deposits and no brokered time deposits as of June 30, 2011.

As of June 30, 2011, the Company had $23.7 million in short-term debt and $14.4 million in long-term debt. Short-term debt consisted of $19.7 million of repurchase agreements with local customers and $4.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004 and $2.0 million in FHLB advances.

Total shareholders’ equity at June 30, 2011 was $49.0 million, a decrease of $0.7 million from $49.7 million as of December 31, 2010. Other comprehensive income relating to available for sale securities increased $69,000 for the six months ended June 30, 2011. Other changes in shareholders’ equity included increases of $185,000 in stock-based compensation, and a net loss of $740,000 for the six months ending June 30, 2011, and the addition of $242,000 in common stock receivable.

Past Due Loans, Nonperforming Assets, and Asset Quality

At June 30, 2011, the Company had $2.2 million in loans that were 30-89 days past due. This represented 0.48% of gross loans outstanding on that date. This is a slight increase from December 31, 2010 when there were $2.1 million in loans that were 30-89 days past due, or 0.46% of gross loans outstanding. The increase in past dues is due primarily to the continued weak economic conditions. Non-accrual loans increased $3.5 million during the first six months of 2011 to $14.1 million as of June 30, 2011.

The percentage of non-performing loans (non-accrual loans and restructured loans) to total loans increased 96 basis points from 2.60% at December 31, 2010 to 3.56% at June 30, 2011. The Company had three loans totaling $2.2 million that were considered troubled debt restructured loans that were not included in nonaccrual loans at June 30, 2011.

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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.

	For Periods Ended
	June 30, 2011			December 31, 2010
	(In thousands)
Non-accrual loans	$	14,082		$	10,562
Restructured loans		2,225			1,688
Total non-performing loans		16,307			12,250
Foreclosed real estate		3,380			3,655
Repossessed assets		—			—
Total non-performing assets	$	19,687		$	15,905
Accruing loans past due 90 days or more	$	—		$	—
Allowance for loan losses	$	10,378		$	10,015
Non-performing loans to period end loans		3.56	%		2.60	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		3.56	%		2.60	%
Allowance for loans losses to period end loans		2.26	%		2.13	%
Allowance for loan losses to non-performing loans		63.64	%		81.76	%
Allowance for loan losses to non-performing assets		52.71	%		62.97	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		52.71	%		62.97	%
Non-performing assets to total assets		3.13	%		2.54	%
Non-performing assets and accruing loans past due 90 days or more to total assets		3.13	%		2.54	%

The total non-performing assets (non-accrual loans, restructured loans, and foreclosed real estate), at June 30, 2011 and December 31, 2010 were $19.7 million and $15.9 million. The allowance for loan losses at June 30, 2011 represented 52.71% of non-performing assets compared to 62.97% at December 31, 2010.

Total impaired loans at June 30, 2011 were $20.6 million, this includes $14.1 million in loans that were classified as impaired because they were in non-accrual and $6.5 million in loans that were determined to be impaired for other reasons. Of these loans, $6.8 million required a specific reserve of $2.1 million at June 30, 2011. Total impaired loans at December 31, 2010 were $16.5 million. This includes $10.6 million in loans that were considered to be impaired due to being in non-accrual status and $5.9 million in loans that were deemed to be impaired for other reasons. Of these loans, $10.8 required a specific reserve of $3.3 million at December 31, 2010.

The allowance for loan losses was $10.4 million at June 30, 2011 or 2.26% of gross loans outstanding. This is an increase of 13 basis points from the 2.13% of gross loans at December 31, 2010. The allowance for loan losses at June 30, 2011 represented 50.43% of impaired loans compared to 60.64% at December 31, 2010. This increase in the allowance for the six months of 2011 resulted from provisions

33

for loan losses of $3.7 million, partially offset by net charge-offs of $3.3 million. It is management’s assessment that the allowance for loan losses as of June 30, 2011 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

Other Lending Risk Factors

Besides monitoring nonperforming loans and past due loans, Management also 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.

Regulatory Loan to Value

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

The Company had $11.9 million at June 30, 2011 and $6.9 million at December 31, 2010 in non 1-4 family residential loans that exceeded the regulatory LTV limits and $15.6 million at June 30, 2011 and $12.7 million at December 31, 2010 of 1-4 family residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 46.8% and 30.7% of total risk based capital as of June 30, 2011 and December 31, 2010, 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 weaken in terms of both market activity and collateral valuations.

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.

The tables below set forth, for the periods indicated, information about the Company’s business sector concentrations.

	At June 30, 2011 (In thousands)		% of Risk Based Capital
1 to 4 Family Rental	$	24,061		41	%
Office Building	$	27,742		47	%
Real Estate Construction Speculative and Presold	$	24,544		42	%
Real Estate Multifamily Residential	$	23,740		40	%

At June 30, 2011 the Company had four product type groups which exceeded this guideline; 1-4 Family Rental, Office Buildings, Real Estate Construction Speculative and Presold and Real Estate Multifamily Residential. The 1-4 Family Rental group represented 41% of Risk-Based Capital or $24.1 million, Office Buildings were 47% of Risk-Based Capital or $27.8 million, Real Estate Construction Speculative and Presold were 42% of Risk-Based Capital or $24.5 million and Real Estate Multifamily Residential were 40% of Risk-Based Capital or $23.7 million. All other commercial real estate groups were under the 40% threshold.

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	At December  31, 2010 (In thousands)		% of Risk Based Capital
1 to 4 Family Rental	$	26,992		42	%
Office Building	$	30,265		47	%
Real Estate Construction Speculative and Presold	$	24,546		38	%
Real Estate Multifamily Residential	$	23,814		37	%

At December 31, 2010 the Company had two product type groups which exceeded this guideline; 1-4 Family Rental and Office Buildings. The 1-4 Family Rental group represented 42% of Risk-Based Capital or $27.0 million and Office Buildings were 47% of Risk-Based Capital or $30.3 million. All other commercial real estate groups were under the 40% threshold.

The Company’s concentration in the 1–4 Family Rental group decreased from 42% of Risk- Based Capital at December 31, 2010 to 41% of Risk-Based Capital at June 30, 2011.

The Company’s concentration in the Office Building group remained approximately the same at 47% of Risk-Based Capital at June 30, 2011 compared to December 31, 2010.

The Company’s concentration in the Real Estate Construction Speculative and Presold group increased from 38% of Risk- Based Capital at December 31, 2010 to 42% of Risk-Based Capital at June 30, 2011.

The Company’s concentration in the Real Estate Multifamily Residential group increased from 37% of Risk- Based Capital at December 31, 2010 to 40% of Risk-Based Capital at June 30, 2011.

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

The table below sets forth construction loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties.

ADC Loans

As of June 30, 2011

(Dollars in thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	52,721		$	24,490		$	77,211
Average Loan Size	$	168		$	299		$	—
Percentage of total loans		11.50	%		5.34	%		16.84	%
Nonaccrual loans	$	723		$	1,092		$	1,815

At June 30, 2011 the ADC portfolio consisted of $52.7 million in construction loans and $24.5 million in land and land development loans. The average loan size is less than $0.2 million for construction loans and $0.3 million for land and land development loans. Total ADC loans represent 16.84% or $77.2 million of the total loan portfolio. Nonaccrual loans in the ADC category total $1.8 million or 2.4% of

35

ADC loans. 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.

ADC Loans

As of December 31, 2010

(Dollars in thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	60,043		$	24,507		$	84,550
Average Loan Size	$	170		$	345		$	—
Percentage of total loans		12.76	%		5.21	%		17.97	%
Nonaccrual loans	$	510		$	428		$	938

At December 31, 2010 the ADC portfolio consisted of $60.0 million in construction loans and $24.5 million in land and land development loans. The average loan size is less than $0.2 million for construction loans and $0.4 million for land and land development loans. At December 31, 2010, total ADC loans represented 17.97% or $84.6 million of the total loan portfolio. $0.9 million of the ADC portfolio was in non-accrual status as of December 31, 2010. This represents 1.11% of all ADC loans at December 31, 2010.

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at June 30, 2011.

	ADC Loans		Percent			HELOC		Percent
	(In thousands)
Harnett County	$	7,513		10	%	$	8,036		20	%
Cumberland County		22,847		29	%		5,978		15	%
All other locations		46,851		61	%		26,518		65	%
Total	$	77,211		100.0	%	$	40,532		100.0	%

Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2010.

	ADC Loans		Percent			HELOC		Percent
	(In thousands)
Harnett County	$	6,029		7.1	%	$	7,572		19.0	%
Cumberland County		26,113		30.9	%		5,142		12.9	%
All other locations		52,408		62.0	%		27,224		68.1	%
Total	$	84,550		100.0	%	$	39,938		100.0	%

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Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At June 30, 2011, the Company had $140.3 million in loans that had terms permitting interest only payments. This represented 30.6% of the total loan portfolio. At December 31, 2010, the Company had $107.4 million in loans that had terms permitting interest only payments. This represented 22.8% 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 require interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $51.8 million or 11.3% of total loans at June 30, 2011 compared to $52.1 million or 11.1% of total loans at December 31, 2010. The Company’s ten largest customer relationships totaled $69.0 million or 15.0% of total loans at June 30, 2011 compared to $72.1 million or 15.3% of total loans at December 31, 2010. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

Comparison of Results of Operations for the

Three months ended June 30, 2011 and 2010

General. During the second quarter of 2011, the Company had net a net loss of $861,000 as compared with net income of $1.1 million for the same quarter in 2010. Net loss per share for the second quarter of 2011 was $0.13 per share, basic and diluted, compared with net income per share of $0.16 per share, basic and diluted, for the second quarter of 2010. Second quarter 2011 results were impacted by a higher net loss and write downs of foreclosed real estate of $700,000, compared to $26,000 for the same period in 2010 and a higher provision for loan losses of $2.5 million for the second quarter 2011 compared to $639,000 for the same period in 2010. The Company also experienced a decrease in net interest margin of 13 basis points to 3.89% for the period ending June 30, 2011 as compared to the same period in 2010.

Net Interest Income. Net interest income decreased by $0.5 million to $5.6 million for the second quarter of 2011. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets, partially offset by growth in those assets. Average total interest-earning assets were $582.2 million in the second quarter of 2011 compared with $607.8 million during the same period in 2010 and the yield on those assets decreased 23 basis points from 5.63% to 5.40%. Total interest income reversed on loans transferred to non-accrual status for the three months ended June 30, 2011 and 2010 was $58,000 and $51,000, respectively, or 1 basis point on average interest-earning assets for both periods mentioned.

The Company’s average interest-bearing liabilities decreased by $13.3 million to $501.3 million for the quarter ended June 30, 2011 from $514.6 million for the same period one year earlier and the cost of those funds decreased from 1.90% to 1.75% or 15 basis points. During the second quarter of 2011, the Company’s net interest margin was 3.89% and net interest spread was 3.65%. For the quarter ended June 30, 2010, net interest margin was 4.02% and net interest spread was 3.73%

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. The Company recorded a $2.5 million provision for loan losses in the second

37

quarter of 2011, representing an increase of $1.9 million from the $0.6 million provision made in the same period of 2010. The second quarter 2011 provision for loan losses was impacted by the downgrading of loans, resulting from both internal and external loan reviews and an increase in the level of non-performing loans resulting in changes in the specific reserves provided on these loans.

Non-Interest Income. Non-interest income for the quarter ended June 30, 2011 was $892,000, an increase of $222,000 from the second quarter of 2010. Service charges on deposit accounts decreased $62,000 to $376,000 for the quarter ended June 30, 2011 as compared to $438,000 for the same period for 2010. Mortgage fee income increased $7,000 to $61,000 for the quarter ended June 30, 2011 as compared to the same period in 2010. Other non-deposit fees and income increased $277,000 to $455,000 for the quarter ended June 30, 2011 as compared to the same period in 2010 primarily as a result of $242,000 in common stock receivable as consideration in the resolution of a loan participation interest pertaining to the alleged borrower fraud.

Non-Interest Expenses. Non-interest expenses increased by $842,000 to $5.3 million for the quarter ended June 30, 2011, from $4.5 million for the same period in 2010. The following are highlights of the significant differences in non-interest expenses during the second quarter of 2010 versus the second quarter of 2011:

• Personnel expenses were approximately the same at $2.3 million for the both quarters ended June 30, 2011 and 2010.

• FDIC insurance expense was $235,000 for the quarter ended June 30, 2011 compared to $233,000 for the same quarter in 2010.

• Professional fees increased $103,000 to $503,000 for the quarter ended June 30, 2011 compared to $400,000 for the quarter ended June 30, 2010, primarily as a result of increased legal expenses relating to the resolution of problem loans and liquidation of foreclosed real estate.

• Information systems expenses increased by $86,000 to $441,000 for the quarter ending June 30, 2011 compared to the same period in 2010 primarily as a result of the costs pertaining to software application exit and de-conversion fees.

• Net loss on sale and write downs of foreclosed real estate increased by $674,000 to $700,000 for the quarter ending June 30, 2011 compared to the same period for 2010, primarily as a result of obtaining current market appraisals and accelerated liquidation of foreclosed real estate.

Provision for Income Taxes. The Company’s effective tax rate was (37.8%) for the quarter ended June 30, 2011 as a result of permanent tax differences that were in excess of taxable income and 33.8% for the quarter ended June 30, 2010.

In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of June 30, 2011 and December 31 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

38

Comparison of Results of Operations for the

Six months ended June 30, 2011 and 2010

General. During the first six months of 2011, the Company had a net loss of $740,000 as compared with net income of $1.5 million for the same period in 2010. Net loss per share for the first two quarters of 2011 was $0.11 per share, basic and diluted, compared with net income per share of $0.22 per share, basic and diluted, for the same periods in 2010. Six month 2011 results were impacted by a higher net loss and write downs of foreclosed real estate of $903,000, compared to $26,000 for the same period in 2010 and a higher provision for loan losses of $3.7 million for the two quarters ended June 30, 2011 compared to $1.9 million for the same period in 2010. The Company also experienced a decrease in net interest margin of 12 basis points to 3.94% for the six month period ending June 30, 2011 compared to the same period in 2010.

Net Interest Income. Net interest income decreased by $0.7 million to $11.3 million for the six month period ended June 30, 2011. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets and a decrease in those assets. Average total interest-earning assets were $582.5 million in the first six months of 2011 compared with $595.5 million during the same period in 2010 and the yield on those assets decreased 24 basis points from 5.71% to 5.47%. Total interest income reversed on loans transferred to non-accrual status for the six months ended June 30, 2011 and 2010 was $130,000 and $183,000, respectively, or 5 and 6 basis points on average interest-earning assets for the respective periods mentioned.

The Company’s average interest-bearing liabilities decreased by $3.2 million to $502.7 million for the two quarters ended June 30, 2011 from $505.9 million for the same period one year earlier and the cost of those funds decreased from 1.94% to 1.78% or 16 basis points. During the first six months of 2011, the Company’s net interest margin was 3.94% and net interest spread was 3.70%. For the same quarters in 2010, net interest margin was 4.06% and net interest spread was 3.76%

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. The Company recorded a $3.7 million provision for loan losses in the two quarters of 2011, representing an increase of $1.8 million from the $1.9 million provision made in the same period of 2010. The provision for loan losses during the six months ended June 30, 2011 was impacted by the downgrading of loans, resulting from both internal and external loan reviews and an increase in the level of non-performing loans resulting in changes in the specific reserves provided on these loans.

Non-Interest Income. Non-interest income for the six months ended June 30, 2011 was $1.5 million, an increase of $191,000 from the same period in 2010. Service charges on deposit accounts decreased $119,000 to $758,000 for the two quarters ended June 30, 2011 compared to $877,000 for the same period for 2010. Mortgage fee income increased $6,000 to $87,000 for the two quarters ended June 30, 2011 as compared to the same period in 2010. Other non-deposit fees and income increased $304,000 to $688,000 for the two quarters ended June 30, 2011 as compared to the same period in 2010, primarily as a result of a $242,000 in consideration received in connection with the resolution of a loan participation transaction that was related to the previously disclosed alleged borrower fraud. The Bank intends to continue to pursue all possible avenues of collection.

39

Non-Interest Expenses. Non-interest expenses increased by $1.3 million to $10.4 million for the six months ended June 30, 2011, from $9.1 million for the same period in 2010. The following are highlights of the significant differences in non-interest expenses during the first six months of 2010 versus the same period 2011:

• Personnel expenses increased $52,000 to $4.7 million for the two quarters ended June 30, 2011 compared to $4.6 million for the same period in 2010.

• FDIC insurance expense was $497,000 for the two quarters ended June 30, 2011 compared to $469,000 for the same periods in 2010.

• Professional fees increased $250,000 to $1.1 million for the two quarters ended June 30, 2011 compared to $0.9 million for the same quarters in 2010, primarily as a result of increased legal fees pertaining to an alleged fraud by a large relationship borrower and increased expenses in the managing and liquidation of foreclosed real estate and other problem loans.

• Information systems expenses decreased by $74,000 to $827,000 for the two quarters ending June 30, 2011 as compared to the same period in 2010 primarily as a result of the 2010 costs pertaining to the Company’s core processing system conversion not being a recurring expense.

• Net loss on sale and write downs of foreclosed real estate increased by $877,000 to $903,000 for the six months ending June 30, 2011 compared to the same period for 2010, primarily as a result of obtaining current market appraisals and accelerated liquidation of foreclosed real estate.

Provision for Income Taxes. The Company’s effective tax rate was (43.5%) for the two quarters ended June 30, 2011 as a result of permanent tax differences that were in excess of taxable income and 33.4% for the same period in 2010.

In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of June 30, 2011 and December 31 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 22.50% of total assets at June 30, 2011.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. The Company has established, as of June 30, 2011, new 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 total assets, subject to available collateral. A floating lien of $28.2 million of qualifying loans is pledged to the FHLB to secure borrowings. At June 30, 2011, the Company had $6.0 million outstanding in FHLB advances. Another source of short-term borrowings is securities sold under agreements to repurchase. At June 30,

40

2011, total borrowings consisted of securities sold under agreements to repurchase of $19.7 million and junior subordinated debentures of $12.4 million.

Total deposits were $538.8 million at June 30, 2011. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 63.48% of total deposits at June 30, 2011. Time deposits of $100,000 or more represented 31.58% of the Company’s total deposits at June 30, 2011. At quarter end, the Company had no brokered time deposits and $4.0 million in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that current sources of funds provide adequate liquidity for the Bank’s current cash flow needs. The 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. Chapter 53, Article 7 of the North Carolina General Statutes prohibits banks from declaring and paying dividends at any time during the period that a bank has an accumulated deficit. At June 30, 2011, the Bank has an accumulated deficit of $1.8 million.

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Capital Resources

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 7.8% at June 30, 2011.

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a 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.

The Bank intends to comply fully with all terms of the MOU.

As the following table indicates, at June 30, 2011, the Company and related Bank subsidiary both exceeded minimum regulatory capital requirements as specified in the tables below.

New Century Bancorp, Inc.	Actual Ratio			Minimum Requirement
Total risk-based capital ratio		12.27	%		8.00	%
Tier 1 risk-based capital ratio		11.01	%		4.00	%
Leverage ratio		8.70	%		4.00	%

New Century Bank	Actual Ratio			Regulatory Minimum Requirement			Well- Capitalized Requirement
Total risk-based capital ratio		11.95	%		11.50	%		10.00	%
Tier 1 risk-based capital ratio		10.69	%		8.00	%		6.00	%
Leverage ratio		8.43	%		8.00	%		5.00	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the trust preferred securities qualify as Tier 1 capital as of June 30, 2011.

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 near future.

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Legal Proceedings

The Company is currently not engaged in any material legal proceedings. From time to time, the Bank is a party to legal proceedings within the ordinary course of business wherein it enforces its security interest in loans, and other matters of similar nature.

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REGULATORY MATTERS

Item 4. Controls and Procedures

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.

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

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) and 15d–15(f) of the Exchange Act) during the second quarter of 2011. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the second quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 6. Exhibits

Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL(eXtensible Business Reporting Language)*

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

45

SIGNATURES

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

	NEW CENTURY BANCORP, INC.
Date: August 12, 2011	By:	/s/    WILLIAM L. HEDGEPETH II
		William L. Hedgepeth II
		President and Chief Executive Officer
Date: August 12, 2011	By:	/s/    LISA F. CAMPBELL
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer and Chief Operating Officer

46

EXHIBIT INDEX

Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL(eXtensible Business Reporting Language)*

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

47

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William L. Hedgepeth II, certify that:

(1) I have reviewed this quarterly report for the quarter ended June 30, 2011 on Form 10-Q of New Century Bancorp, Inc. (the “Registrant”);

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

(4) The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

(5) The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 12, 2011	/s/ William L. Hedgepeth II
	William L. Hedgepeth II President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lisa F. Campbell, certify that:

(1) I have reviewed this quarterly report for the quarter ended June 30, 2011 on Form 10-Q of New Century Bancorp, Inc. (the “Registrant”);

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

(4) The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

(5) The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: August 12, 2011	/s/ Lisa F. Campbell
	Lisa F. Campbell Executive Vice President and Chief Financial Officer and Chief Operating Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that (i) the Form 10-Q filed by New Century Bancorp, Inc. (the “Issuer”) for the quarter ended June 30, 2011, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: August 12, 2011	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II President and Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that (i) the Form 10-Q filed by New Century Bancorp, Inc. (the “Issuer”) for the quarter ended June 30, 2011, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: August 12, 2011	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell Executive Vice President and Chief Financial Officer and Chief Operating Officer

XML



Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	6,913,636	6,913,636
Common stock, shares outstanding	6,913,636	6,913,636

XML



Consolidated Statements Of Operations (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
INTEREST INCOME
Loans	$ 7,251	$ 7,815	$ 14,555	$ 15,402
Federal funds sold and interest-earning deposits in other banks	22	18	39	23
Investments	525	691	1,119	1,432
TOTAL INTEREST INCOME	7,798	8,524	15,713	16,857
INTEREST EXPENSE
Money market, NOW and savings deposits	180	331	397	633
Time deposits	1,873	1,957	3,753	3,964
Other short term debt	66	72	135	136
Long term debt	74	74	148	146
TOTAL INTEREST EXPENSE	2,193	2,434	4,433	4,879
NET INTEREST INCOME	5,605	6,090	11,280	11,978
PROVISION FOR LOAN LOSSES	2,542	639	3,706	1,909
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	3,063	5,451	7,574	10,069
NON-INTEREST INCOME
Fees from pre-sold mortgages	61	54	87	81
Service charges on deposit accounts	376	438	758	877
Other fees and income	455	178	688	384
TOTAL NON-INTEREST INCOME	892	670	1,533	1,342
NON-INTEREST EXPENSE
Personnel	2,284	2,312	4,675	4,623
Occupancy and equipment	358	390	720	770
Deposit insurance	235	233	497	469
Professional fees	503	400	1,133	883
Information systems	441	355	827	901
Net loss on sale and write downs of foreclosed real estate	700	26	903	26
Other	818	781	1,662	1,439
TOTAL NON-INTEREST EXPENSE	5,339	4,497	10,417	9,111
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)	(1,384)	1,624	(1,310)	2,300
INCOME TAXES (BENEFIT)	(523)	549	(570)	769
NET INCOME (LOSS)	$ (861)	$ 1,075	$ (740)	$ 1,531
NET INCOME (LOSS) PER COMMON SHARE
Basic	$ (0.13)	$ 0.16	$ (0.11)	$ 0.22
Diluted	$ (0.13)	$ 0.16	$ (0.11)	$ 0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	6,913,636	6,846,437	6,913,636	6,842,218
Diluted	6,913,636	6,862,095	6,913,636	6,851,055

XML



Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Jul. 28, 2011
Document And Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Entity Registrant Name	NEW CENTURY BANCORP INC
Entity Central Index Key	0001263762
Entity Filer Category	Smaller Reporting Company
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		6,913,636

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Investment Securities

6 Months Ended

Jun. 30, 2011

Investment Securities

Investment Securities

NOTE F – INVESTMENT SECURITIES

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

	June 30, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
			(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	19,152	$	110	$	—	$	19,262
After 1 year but within 5 years		18,666		354		8		19,012
U.S. agency sponsored mortgage-backed
Securities
Within 1 year		1,886		34		1		1,919
After 1 year but within 5 years		22,643		1,219		—		23,862
After 5 years but within 10 years		6,629		44		30		6,643
Municipal bonds
After 1 year but within 5 years		1,373		67		—		1,440
After 5 years but within 10 years		2,695		201		—		2,896
After 10 years		1,747		32		—		1,779
	$	74,791	$	2,061	$	39	$	76,813

As of June 30, 2011, accumulated other comprehensive income, net of deferred income taxes, included unrealized net gains of $2.0 million, net of deferred income taxes of $800,000.

	December 31, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
			(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	23,783	$	174	$	11	$	23,946
After 1 year but within 5 years		22,723		418		—		23,141
U.S. agency sponsored mortgage-backed
Securities
Within 1 year		2,538		118		75		2,581
After 1 year but within 5 years		27,614		1,131		—		28,745
After 5 years but within 10 years		4,150		36		—		4,186
Municipal bonds
Within 1 year		200		3		—		203
After 1 year but within 5 years		1,543		41		—		1,584
After 5 years but within 10 years		3,608		152		—		3,760
After 10 years		1,822		—		69		1,753
	$	87,981	$	2,073	$	155	$	89,899

As of December 31, 2010, accumulated other comprehensive income, net of deferred income taxes, included unrealized net gains of $1.9 million, net of deferred income taxes of $800,000.

The following tables show investments' gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010.

	June 30, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
					(In thousands)
Securities available for sale:
U.S. government agencies	$	2,027	$	8	$	—	$	—	$	2,027	$	8
Mortgage-backed securities GSE's		3,056		31		—		—		3,056		31
Total temporarily impaired securities	$	5,083	$	39	$	—	$	—	$	5,083	$	39

At June 30, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. One U.S. government agency and four GSE bonds had unrealized losses for less than twelve months totaling $39,000 at June 30, 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.

	December 31, 2010
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
					(In thousands)
Securities available for sale:
U.S. government agencies	$	6,177	$	11	$	—	$	—	$	6,177	$	11
Mortgage-backed securities GSE's		8,395		75		—		—		8,395		75
Municipal bonds		1,678		69		—		—		1,678		69
Total temporarily impaired securities	$	16,250	$	155	$	—	$	—	$	16,250	$	155

At December 31, 2010, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies, seven GSE's and five municipal bonds had unrealized losses for less than twelve months totaling $155,000 at December 31, 2010. 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.

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Per Share Results

6 Months Ended

Jun. 30, 2011

Per Share Results

Per Share Results

NOTE B - PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. There were 431,274 and 414,644 anti-dilutive options for the three month period ending June 30, 2011 and 2010 and 428,878 and 424,336 anti-dilutive options for the six month period ending June 30, 2011 and 2010, respectively.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Weighted average shares used for basic net income per share		6,913,636		6,846,437		6,913,636		6,842,218
Effect of dilutive stock options		—		15,658		—		8,837
Weighted average shares used for diluted net income per share		6,913,636		6,862,095		6,913,636		6,851,055

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Fair Value Of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Value Of Financial Instruments

Fair Value Of Financial Instruments

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying values and estimated fair values of the Company's financial instruments at June 30, 2011 and December 31, 2010:

	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	8,349	$	8,349	$	7,071	$	7,071
Interest-earning deposits in other banks		36,921		36,921		21,648		21,648
Federal funds sold		19,529		19,529		7,183		7,183
Investment securities available for sale		76,813		76,813		89,899		89,899
Loans, net		448,145		464,998		460,469		458,167
Accrued interest receivable		2,352		2,352		2,488		2,488
Stock in the Federal Home Loan Bank		1,365		1,365		1,448		1,448
Other non marketable securities		1,082		1,082		1,082		1,082
Bank owned life insurance		7,854		7,854		7,727		7,727
Financial liabilities:
Deposits	$	538,812	$	545,222	$	534,599	$	541,394
Short term debt		23,746		23,746		23,666		23,666
Long term debt		14,372		10,453		16,372		12,453
Accrued interest payable		378		378		395		395

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. Therefore, incremental market risks and liquidity discounts were subtracted to reflect illiquid and distressed conditions at June 30, 2011 and December 31, 2010. No liquidity discount is applied at June 30, 2011 due to lack of comparable metrics. The liquidity discount for December 31, 2010 was 0.5% based on local economic conditions impacting employment, volatile energy costs, and extended periods of time to sell or liquidate assets.

 Stock in Federal Home Loan Bank of Atlanta and Other Non Marketable Securities

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

Bank Owned Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits

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

Short Term Debt

The fair values of short term debt (sweep accounts that re-price daily and short term FHLB advances) 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.

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Resolution Of Participation Interests

6 Months Ended

Jun. 30, 2011

Resolution Of Participation Interests

Resolution Of Participation Interests

NOTE I – RESOLUTION OF PARTICIPATION INTERESTS

During the quarter, the Company received insurance proceeds totaling $3,005,000 as a result of their claim related to losses incurred from a previously disclosed borrower fraud. Given that the Company's loans related to this borrower fraud had been previously charged off against the allowance for loan losses, the receipt of these insurance proceeds, together with an additional $599,000 in third party insurance proceeds receivable were treated as a loan recovery.

In connection with the previously disclosed borrower fraud, the Company agreed to pay $3,700,000 to another financial institution which held a significant participation interest in loans related to the alleged borrower fraud. The Company also received from the participating institution certain rights to claims against the borrower, an interest in the participated loan balance, and 52,269 shares of Company common stock that was previously held as collateral against personal loans between the participating institution and the fraudulent borrower. Upon payment to the participating institution, the Company recorded a $3,700,000 charge-off of the participating interest that they obtained.

Also, in connection with the resolution of this downstream loan participation transaction that was related to the previously disclosed alleged borrower fraud, the Bank recorded a loss of approximately $96,500 at June 30, 2011, along with additional expenses of $144,839 relating to professional fees incurred in connection with the matter. In addition, the shares of the previously mentioned common stock receivable had a market value of approximately $242,005 as of June 30, 2011, and as a result, the resolution of this matter had no material impact on earnings for the fiscal quarter ended June 30, 2011.

For purposes of the Company's financial statements as of and for the period ended June 30, 2011, these shares of the Company's common stock have been deducted from Shareholders' Equity as reflected in the Company's Consolidated Balance Sheet and Statement of Changes in Shareholders' Equity. In accordance with the requirements of Section 53-64 of the North Carolina General Statutes, the Bank intends to liquidate these securities within six months. Until such time as the shares are liquidated, they will be marked to market.

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Loans

6 Months Ended

Jun. 30, 2011

Loans

Loans

NOTE G – LOANS

Following is a summary of loans at June 30, 2011 and December 31, 2010:

	2011						2010
	Amount			Percent of total			Amount			Percent of total
	(In thousands)
Real estate loans:
1 to 4 family residential	$	59,504			12.98	%	$	60,385			12.83	%
Commercial Real Estate		204,412			44.59	%		193,502			41.13	%
Multi-family Residential		28,168			6.14	%		30,088			6.40	%
Construction		77,211			16.84	%		84,550			17.97	%
Home equity lines of credit		40,532			8.84	%		39,938			8.49	%
Total real estate loans		409,827			89.39	%		408,463			86.82	%
Other loans:
Commercial and Industrial		40,646			8.86	%		49,437			10.51	%
Loans to Individuals		8,311			1.81	%		12,860			2.73	%
Overdrafts		98			.02	%		107			0.02	%
Total other loans		49,055			10.69	%		62,404			13.26	%
Gross loans		458,882						470,867
Less deferred loan origination fees, net		(359	)		(0.08	)%		(383	)		(.08	)%
Total loans		458,523			100.00	%		470,484			100.00	%
Allowance for loan losses		(10,378	)					(10,015	)
Total loans, net	$	448,145					$	460,469

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 June 30, 2011, the Company had pre-approved but unused lines of credit totaling $66.7 million. In management's opinion, these commitments, and undisbursed proceeds on construction loans in process represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

Non-Accrual and Past Due Loans

The tables below detail non-accrual loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	(In thousands)
1 to 4 Family Residential	$	3,078
Commercial Real Estate		8,472
Multi-family Residential		—
Construction		1,815
Home Equity Lines of Credit ("HELOC")		442
Commercial and Industrial		93
Loans to Individuals & Overdrafts		182
Total	$	14,082
	December 31, 2010
	(In thousands)
1 to 4 Family Residential	$	3,122
Commercial Real Estate		5,789
Multi-family Residential		—
Construction		938
Home Equity Lines of Credit ("HELOC")		98
Commercial and Industrial		435
Loans to Individuals & Overdrafts		180
Total	$	10,562

The average balance of non-accrual loans was $12.3 million and $14.5 million for the periods ended June 30, 2011 and December 31, 2010, respectively.

The following tables present an age analysis of past due loans, segregated by class of loans as of June 30, 2011 and December 31, 2010, respectively:

	June 30, 2011
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
					(In thousands)
Commercial and Industrial	$	50	$	93	$	143	$	40,503		$	40,646
Construction		470		1,815		2,285		74,926			77,211
Multi-family Residential		—		—		—		28,168			28,168
Commercial Real Estate		1,357		8,472		9,829		194,583			204,412
Loans to Individuals & Overdrafts		11		182		193		8,216			8,409
1 to 4 Family Residential and HELOCs		320		3,520		3,840		96,196			100,036
Deferred loan (fees) cost, net		—		—		—		(359	)		(359	)
	$	2,208	$	14,082	$	16,290	$	442,233		$	458,523
	December 31, 2010
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
					(In thousands)
Commercial and Industrial	$	1,227	$	435	$	1,662	$	47,775		$	49,437
Construction		103		938		1,041		83,509			84,550
Multi-family Residential		—		—		—		30,088			30,088
Commercial Real Estate		46		5,789		5,835		187,667			193,502
Loans to Individuals & Overdrafts		135		180		315		12,652			12,967
1 to 4 family residential and HELOCs		633		3,220		3,853		96,470			100,323
Deferred loan (fees) cost, net		—		—		—		(383	)		(383	)
	$	2,144	$	10,562	$	12,706	$	457,778		$	470,484

There were no loans that were 90 days past due and still accruing at June 30, 2011 or December 31, 2010.

Impaired Loans

The following tables present information on loans that were considered to be impaired as of June 30, 2011 and December 31, 2010:

June 30, 2011

							Quarter To Date				Year To Date
	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized on Impaired Loans
							(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	269	$	403	$	—	$	320	$	6	$	213	$	6
Construction		1,892		2,682		—		1,190		49		981		49
Commercial Real Estate		9,732		10,890		—		7,115		73		5,929		93
Loans to Individuals & Overdrafts		150		214		—		171		—		165		—
Multi-family Residential		—		—		—		1,061		—		707		—
1 to 4 Family Residential and HELOCs		1,757		2,726		—		1,566		19		1,527		19
Subtotal:		13,800		16,915		—		11,423		147		9,522		167
With an allowance recorded:
Commercial and Industrial		269		339		191		457		4		437		9
Construction		437		600		106		962		—		862		2
Commercial Real Estate		3,915		4,558		761		3,868		—		4,360		57
Loans to individuals & overdrafts		63		63		46		171		—		136		1
Multi-family Residential		—		—		—		—		—		—		—
1 to 4 Family Residential and HELOCs		2,093		2,117		969		2,461		—		3,082		—
Subtotal:		6,777		7,677		2,073		7,919		4		8,877		69
Totals:
Commercial		16,514		19,472		1,058		13,912		132		12,782		216
Consumer		213		277		46		342		—		301		1
Residential		3,850		4,843		969		5,088		19		5,316		19
Grand Total:	$	20,577	$	24,592	$	2,073	$	19,342	$	151	$	18,399	$	236

Impaired loans at June 30, 2011 were approximately $20.6 million and were comprised of $14.1 million in non-accrual loans and $6.5 million in loans still in accruing status. Approximately, $6.8 million of the $20.6 million in impaired loans at June 30, 2011 had specific allowances provided while the remaining $13.8 million had no allowances recorded. Of the $13.8 million with no allowance recorded, $5.7 million of those loans had previous chargeoffs.

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. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest with all accrued interest being included in the provision for loan losses.

December 31, 2010

							Year To Date
	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
					(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	88	$	—	$	297	$	—
Construction		562		570		—		1,143		11
Commercial Real Estate		3,557		4,830		—		3,375		149
Loans to Individuals & Overdrafts		152		204		—		113		—
1 to 4 Family Residential and HELOCs		1,449		2,062		—		1,519		—
Subtotal:		5,720		7,754		—		6,447		160
With an allowance recorded:
Commercial and Industrial		396		429		132		567		—
Construction		662		1,048		159		529		—
Commercial Real Estate		5,346		5,746		1,317		4,068		32
Loans to Individuals & Overdrafts		67		67		13		96		—
1 to 4 Family Residential and HELOCs		4,324		4,779		1,697		3,056		12
Subtotal:		10,795		12,069		3,318		8,316		44
Totals:
Commercial		10,523		12,711		1,608		9,979		192
Consumer		219		271		13		209		—
Residential		5,773		6,841		1,697		4,575		12
Grand Total:	$	16,515	$	19,823	$	3,318	$	14,763	$	204

Impaired loans at December 31, 2010 were approximately $16.5 million and were comprised of $16.0 million in non-accrual loans and $0.5 million in loans still in accruing status. Approximately, $10.8 million of the $16.5 million in impaired loans at December 31, 2010 had specific allowances provided while the remaining $5.7 million had no allowances recorded.

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. Commercial 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 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) - This grade is reserved for the Bank's top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Risk Grade 9 (Loss) - Loans classified 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.

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:

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

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

• Loans where adverse economic conditions that develop subsequent to the loan origination do not 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.

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of June 30, 2011 and December 31, 2010, respectively:

June 30, 2011
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
(In thousands)
Superior	$	990	$	63	$	—	$	—
Very good		166		8		439		—
Good		5,717		2,579		19,779		2,094
Acceptable		11,028		11,540		70,140		13,277
Acceptable with care		18,947		56,847		62,749		11,262
Special mention		3,112		2,556		30,414		—
Substandard		686		3,618		20,527		1,535
Doubtful		—		—		364		—
Loss		—		—		—		—
	$	40,646	$	77,211	$	204,412	$	28,168
Consumer Credit Exposure by Internally Assigned Grade	1 to 4 Family Residential and HELOCs
Pass	$	85,270
Special mention		6,277
Substandard		8,489
	$	100,036
Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts
Performing	$	8,100
Non performing		309
	$	8,409

December 31, 2010
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
(In thousands)
Superior	$	1,298	$	67	$	—	$	—
Very good		177		130		1,605		—
Good		7,744		5,159		20,444		2,959
Acceptable		17,707		15,467		67,322		13,432
Acceptable with care		18,232		58,056		71,854		9,750
Special mention		2,505		1,506		20,139		2,377
Substandard		1,765		4,165		11,756		1,570
Doubtful		9		—		382		—
Loss		—		—		—		—
	$	49,437	$	84,550	$	193,502	$	30,088
Consumer Credit Exposure by Internally Assigned Grade	1 to 4  Family Residential and HELOCs
Pass	$	86,262
Special mention		6,389
Substandard		7,672
	$	100,323
Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts
Performing	$	12,581
Non performing		386
	$	12,967

Nonperforming assets at June 30, 2011 and December 31, 2010 consist of the following:

	June 30, 2011		December 31, 2010
	(In thousands)
Non-accrual loans	$	14,082	$	10,562
Restructured loans		2,225		1,688
Total non-performing loans		16,307		12,250
Foreclosed real estate		3,380		3,655
Total non-performing assets	$	19,687	$	15,905

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 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.

Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment.

Loans are deemed uncollectible 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.

The following table presents a roll forward of the Company's allowance for loan losses by loan category for the three and six month periods ended June 30, 2011 and the twelve month period ended December 31, 2010, respectively:

Three months ended June 30, 2011 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1-4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 03/31/2011	$	1,081		$	1,271		$	3,609		$	3,591		$	383		$	183		$	10,118
Provision for loan losses		203			570			1,864			146			(232	)		(9	)		2,542
Other		—			—			(53	)		—			—			—			(53	)
Loans charged-off		(3,880	)		(669	)		(926	)		(479	)		(65	)		—			(6,019	)
Recoveries		3,648			—			8			84			50			—			3,790
Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	3,342		$	136		$	174		$	10,378
Ending Balance: individually evaluated for impairment	$	191		$	106		$	761		$	969		$	46		$	—		$	2,073
Ending Balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	2,373		$	90		$	174		$	8,305
Loans:
Ending Balance	$	40,646		$	77,211		$	204,412		$	100,036		$	8,409		$	28,168		$	458,882
Ending Balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,850		$	213		$	—		$	20,577
Ending Balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	96,186		$	8,196		$	28,168		$	438,305

Six months ended June 30, 2011 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 01/01/2011	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015
Provision for loan losses		160			1,714			3,133			527			(1,362	)		(466	)		3,706
Other		—			—			(53	)		—			—			—			(53	)
Loans charged-off		(3,880	)		(891	)		(1,699	)		(734	)		(87	)		—			(7,291	)
Recoveries		3,720			—			10			216			55			—			4,001
Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	3,342		$	136		$	174		$	10,378
Ending Balance: individually evaluated for impairment	$	191		$	106		$	761		$	969		$	46		$	—		$	2,073
Ending Balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	2,373		$	90		$	174		$	8,305
Loans:
Ending Balance	$	40,646		$	77,211		$	204,412		$	100,036		$	8,409		$	28,168		$	458,882
Ending Balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,850		$	213		$	—		$	20,577
Ending Balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	96,186		$	8,196		$	28,168		$	438,305
Twelve months ended December 31, 2010 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi-family Residential			Total
	(In thousands)
Balance, beginning of period 01/01/2009	$	1,699		$	629		$	4,281		$	3,043		$	507		$	200		$	10,359
Provision for loan losses		10,199			47			(1,170	)		2,981			1,349			2,228			15,634
Other		—			—			—			—			—			—			—
Loans charged-off		(11,967	)		(464	)		—			(2,750	)		(421	)		(2,811	)		(18,413	)
Recoveries		1,121			137			—			59			95			1,023			2,435
Balance, end of period 12/31/2010	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015
Ending Balance: individually evaluated for impairment	$	132		$	159		$	1,317		$	1,697		$	13		$	—		$	3,318
Ending Balance: collectively evaluated for impairment	$	920		$	190		$	1,794		$	1,636		$	1,517		$	640		$	6,697
Loans:
Ending Balance	$	49,437		$	84,550		$	193,502		$	100,323		$	12,967		$	30,088		$	470,867
Ending Balance: individually evaluated for impairment	$	396		$	1,224		$	8,903		$	5,773		$	219		$	—		$	16,515
Ending Balance: collectively evaluated for impairment	$	49,041		$	83,326		$	184,599		$	94,550		$	12,748		$	30,088		$	454,352

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Consolidated Statements Of Cash Flows (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ (740)	$ 1,531
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses	3,706	1,909
Depreciation and amortization of premises and equipment	336	381
Amortization and accretion of investment securities	410	424
Amortization of deferred loan fees and costs	(104)	(80)
Amortization of core deposit intangible	77	77
Stock-based compensation	185	63
Increase in cash surrender value of bank owned life insurance	(127)	(131)
Net loss on sale and write-downs of foreclosed real estate	903	26
Net loss on investment security sales	26	14
Change in assets and liabilities:
Net change in accrued interest receivable	136	(116)
Net change in other assets	170	607
Net change in accrued expenses and other liabilities	673	(793)
NET CASH PROVIDED BY OPERATING ACTIVITIES	5,651	3,912
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank ("FHLB") stock		(315)
Redemption of FHLB stock	83
Purchase of investment securities available for sale	(7,256)
Maturities of investment securities available for sale	14,237	4,000
Mortgage-backed securities pay-downs	5,274	6,096
Sale of investment securities available for sale	500
Net change in loans outstanding	6,970	(15,161)
Proceeds from sale of loans		1,300
Proceeds from sale of foreclosed real estate	1,177	1,260
Purchases of premises and equipment	(32)	(1,185)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	20,953	(4,005)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	4,213	25,769
Net change in other short term debt	80	(426)
Net change in long term debt	(2,000)	6,000
Tax benefit from exercise of stock options		16
Proceeds from the exercise of stock options		231
NET CASH PROVIDED BY FINANCING ACTIVITIES	2,293	31,590
NET CHANGE IN CASH AND CASH EQUIVALENTS	28,897	31,497
CASH AND CASH EQUIVALENTS, BEGINNING	35,902	28,935
CASH AND CASH EQUIVALENTS, ENDING	64,799	60,432
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	4,450	4,830
Income taxes paid		939
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax	69	192
Transfers from loans to foreclosed real estate	1,805	1,972
Common stock receivable	$ (242)

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Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income

Comprehensive Income

NOTE C – COMPREHENSIVE INCOME

A summary of comprehensive income (loss) is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
				(Amounts in thousands)
Net income (loss)	$	(861	)	$	1,075		$	(740	)	$	1,531
Other comprehensive income:
Unrealized gain on investment securities - available for sale		268			262			130			326
Reclassification adjustment for losses included in net income		(2	)		(10	)		(26	)		(14	)
Tax effect		(91	)		(97	)		(35	)		(120	)
Total		175			155			69			192
Total comprehensive income (loss)	$	(686	)	$	1,230		$	(671	)	$	1,723

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Recent Accounting Pronouncements

Recent Accounting Pronouncements

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS

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

In April, 2011, the Financial Accounting Standards Board ("FASB") issued A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring Accounting Standards Update ("ASU") No. 2011-02. In an effort to increase comparability, ASU 2011-02 seeks to clarify when a creditor has granted a concession in a modification and whether a borrower is experiencing financial difficulty. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 are not expected to have a material impact on the Company's financial condition, results of operations or liquidity.

ASU No. 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company's financial statements.

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 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company's financial statements.

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 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company's financial statements.

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.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

NOTE E – 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 reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument.

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

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

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available-for-Sale ("AFS")

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (dollars in thousands):

Investment securities available for sale June 30, 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	$	38,273	$	—	$	38,273	$	—
Mortgage-backed securities - Government Sponsored Enterprises ("GSE's")		32,425		—		32,425		—
Municipal bonds		6,115		—		6,115		—
Total	$	76,813	$	—	$	76,813	$	—

Investment securities available for sale December 31, 2010	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	$	47,087	$	—	$	47,087	$	—
Mortgage-backed securities - GSE's		35,512		—		35,512		—
Municipal bonds		7,300		—		7,300		—
Total	$	89,899	$	—	$	89,899	$	—

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, "Receivables". The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011 and December 31, 2010, 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 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.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property's market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. At June 30, 2011 and December 31, 2010 assets classified as foreclosed real estate totaled $3.4 million and $3.7 million, respectively.

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 June 30, 2011 and December 31, 2010 (dollars in thousands):

Asset Category June 30, 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	$	10,447	$	—	$	—	$	10,447
Foreclosed real estate		3,380		—		—		3,380
Total	$	13,827	$	—	$	—	$	13,827

Asset Category December 31, 2010	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	$	9,393	$	—	$	—	$	9,393
Foreclosed real estate		3,655		—		—		3,655
Total	$	13,048	$	—	$	—	$	13,048

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Consolidated Statements Of Changes In Shareholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Common Stock Receivable [Member]	Additional Paid-In Capital [Member]	Retained Earnings (Accumulated Deficit) [Member]	Accumulated Other Comprehensive Income [Member]	Total
Balance, value at Dec. 31, 2009	$ 6,838		$ 41,467	$ 4,668	$ 1,436	$ 54,409
Balance, shares at Dec. 31, 2009	6,837,952
Net income (loss)				1,531		1,531
Other comprehensive income, net					192	192
Exercise of stock options, shares	53,832
Exercise of stock options, value	54		177			231
Tax benefit from option exercises			16			16
Stock based compensation			63			63
Balance, value at Jun. 30, 2010	6,892		41,723	6,199	1,628	56,442
Balance, shares at Jun. 30, 2010	6,891,784
Balance, value at Dec. 31, 2010	6,914		41,887	(286)	1,178	49,693	[1]
Balance, shares at Dec. 31, 2010	6,913,636
Net income (loss)				(740)		(740)
Common stock receivable		(242)				(242)
Other comprehensive income, net					69	69
Stock based compensation			185			185
Balance, value at Jun. 30, 2011	$ 6,914	$ (242)	$ 42,072	$ (1,026)	$ 1,247	$ 48,965
Balance, shares at Jun. 30, 2011	6,913,636

[1] Derived from audited consolidated financial statements.

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Basis Of Presentation

6 Months Ended

Jun. 30, 2011

Basis Of Presentation

Basis Of Presentation

NOTE A – BASIS OF PRESENTATION

New Century Bancorp, Inc. (the "Company") is a bank holding company whose principal business activity consists of ownership of New Century Bank (the "Bank"). The Bank is engaged in general commercial and retail banking and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

All significant inter-company transactions and balances have been eliminated in consolidation. In management's opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended June 30, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America ("GAAP").

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company's 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on April 1, 2011. This quarterly report should be read in conjunction with the Annual Report.

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Consolidated Balance Sheets (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash and due from banks	$ 8,349	$ 7,071	[1]
Interest-earning deposits in other banks	36,921	21,648	[1]
Federal funds sold	19,529	7,183	[1]
Investment securities available for sale, at fair value	76,813	89,899	[1]
Loans	458,523	470,484	[1]
Allowance for loan losses	(10,378)	(10,015)	[1]
NET LOANS	448,145	460,469	[1]
Accrued interest receivable	2,352	2,488	[1]
Stock in Federal Home Loan Bank of Atlanta, at cost	1,365	1,448	[1]
Other non marketable securities	1,082	1,082	[1]
Foreclosed real estate	3,380	3,655	[1]
Premises and equipment, net	12,650	12,930	[1]
Bank owned life insurance	7,854	7,727	[1]
Core deposit intangible	622	699	[1]
Other assets	10,073	10,597	[1]
TOTAL ASSETS	629,135	626,896	[1]
Liabilities and Shareholders' Equity
Demand deposits	75,986	70,363	[1]
Savings deposits	24,708	22,541	[1]
Money market and NOW deposits	96,099	97,096	[1]
Time deposits	342,019	344,599	[1]
TOTAL DEPOSITS	538,812	534,599	[1]
Other short term debt	23,746	23,666	[1]
Long term debt	14,372	16,372	[1]
Accrued interest payable	378	395	[1]
Accrued expenses and other liabilities	2,862	2,171	[1]
TOTAL LIABILITIES	580,170	577,203	[1]
Shareholders' Equity
Common stock, $1 par value, 10,000,000 shares authorized; and 6,913,636 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	6,914	6,914	[1]
Common stock receivable	(242)
Additional paid-in capital	42,072	41,887	[1]
Accumulated deficit	(1,026)	(286)	[1]
Accumulated other comprehensive income	1,247	1,178	[1]
TOTAL SHAREHOLDERS' EQUITY	48,965	49,693	[1]
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 629,135	$ 626,896	[1]

[1] Derived from audited consolidated financial statements.