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 March 31, 2012

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 May 8, 2012, 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 (Unaudited)
	Consolidated Balance Sheets March 31, 2012 and December 31, 2011		3
	Consolidated Statements of Operations Three Months Ended March 31, 2012 and 2011		4
	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2012 and 2011		5
	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2012 and 2011		6
	Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011		7
	Notes to Consolidated Financial Statements		9
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 4 -	Controls and Procedures		45
Part II.	OTHER INFORMATION
Item 4 -	Mine Safety Disclosures		46
Item 5 -	Other Information		46
Item 6 -	Exhibits		46
	Signatures		47
	Exhibit Index		48

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Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2012 (Unaudited)			December  31, 2011*
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	14,360		$	18,478
Interest-earning deposits in other banks		64,019			55,590
Federal funds sold		3,028			3,028
Investment securities available for sale, at fair value		72,901			67,854
Loans held for sale, at fair value		1,552			—
Loans		399,760			417,624
Allowance for loan losses		(9,568	)		(10,034	)
NET LOANS		390,192			407,590
Accrued interest receivable		1,797			2,003
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		1,248			1,248
Other non-marketable securities		1,118			1,080
Foreclosed real estate		2,391			3,031
Premises and equipment held for sale		1,113			1,113
Premises and equipment, net		11,175			11,243
Bank-Owned Life Insurance (“BOLI”)		8,044			7,981
Core deposit intangible		516			545
Other assets		7,542			8,867
TOTAL ASSETS	$	580,996		$	589,651
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	77,151		$	74,569
Savings		25,472			24,461
Money market and NOW		94,148			92,600
Time		293,195			309,747
TOTAL DEPOSITS		489,966			501,377
Short-term debt		23,301			21,877
Long-term debt		12,372			14,372
Accrued interest payable		307			330
Accrued expenses and other liabilities		3,273			2,149
TOTAL LIABILITIES		529,219			540,105
Shareholders’ Equity
Common stock, $1 par value, 25,000,000 shares authorized; 6,913,636 and 6,860,367 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		6,914			6,860
Additional paid-in capital		41,975			41,851
Retained earnings (accumulated deficit)		1,662			(450	)
Accumulated other comprehensive income		1,226			1,285
TOTAL SHAREHOLDERS’ EQUITY		51,777			49,546
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	580,996		$	589,651

* Derived from audited consolidated financial statements.

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	6,155		$	7,304
Federal funds sold and interest-earning deposits in other banks		36			18
Investments		428			593
TOTAL INTEREST INCOME		6,619			7,915
INTEREST EXPENSE
Money market, NOW and savings deposits		100			217
Time deposits		1,556			1,880
Short term debt		34			69
Long term debt		82			74
TOTAL INTEREST EXPENSE		1,772			2,240
NET INTEREST INCOME		4,847			5,675
PROVISION FOR LOAN LOSSES		(2,136	)		1,164
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,983			4,511
NON-INTEREST INCOME
Fees from pre-sold mortgages		39			26
Service charges on deposit accounts		318			382
Other fees and income		269			233
TOTAL NON-INTEREST INCOME		626			641
NON-INTEREST EXPENSE
Personnel		1,961			2,391
Occupancy and equipment		358			362
Deposit insurance		195			263
Professional fees		469			630
Information systems		367			386
Foreclosure-related expenses		131			299
Other		735			748
TOTAL NON-INTEREST EXPENSE		4,216			5,079
INCOME BEFORE INCOME TAX (BENEFIT)		3,393			73
INCOME TAX (BENEFIT)		1,281			(48	)
NET INCOME	$	2,112		$	121
NET INCOME PER COMMON SHARE
Basic	$	0.31		$	0.02
Diluted	$	0.31		$	0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,859,196			6,913,636
Diluted		6,859,196			6,913,653

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended March 31,
	2012			2011
	(In thousands)
Net income	$	2,112		$	121
Other comprehensive loss:
Unrealized losses on investment securities available for sale		(148	)		(185	)
Tax effect		53			64
		(95	)		(121	)
Reclassification adjustment for losses included in net income		58			24
Tax effect		(22	)		(9	)
		36			15
Total		(59	)		(106	)
Total comprehensive income	$	2,053		$	15

See accompanying notes.

- 5 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Common stock				Additional paid-in		Retained earnings (accumulated)			Accumulated other comprehensive			Total shareholders’
	Shares		Amount		capital		(deficit)			income			equity
	(In thousands, except share and per data share)
Balance at December 31, 2010		6,913,636	$	6,914	$	41,887	$	(287	)	$	1,178		$	49,692
Net income		—		—		—		121			—			121
Other comprehensive loss, net		—		—		—		—			(106	)		(106	)
Stock based compensation		—		—		71		—			—			71
Balance at March 31, 2011		6,913,636	$	6,914	$	41,958	$	(166	)	$	1,072		$	49,778
Balance at December 31, 2011		6,860,367	$	6,860	$	41,851	$	(450	)	$	1,285		$	49,546
Net income		—		—		—		2,112			—			2,112
Sale of common stock		53,269		54		111		—			—			165
Other comprehensive loss, net		—		—		—		—			(59	)		(59	)
Stock based compensation		—		—		13		—			—			13
Balance at March 31, 2012		6,913,636	$	6,914	$	41,975	$	1,662		$	1,226		$	51,777

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,112		$	121
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(2,136	)		1,164
Depreciation and amortization of premises and equipment		142			170
Amortization and accretion of investment securities		146			217
Amortization of deferred loan fees and costs		(51	)		(46	)
Amortization of core deposit intangible		28			39
Stock-based compensation		13			71
Loss on write-down on other assets		59			—
Increase in cash surrender value of bank-owned life insurance		(63	)		(63	)
Net loss on sale and write-downs of foreclosed real estate		24			203
Net loss on investment security sales		58			24
Change in assets and liabilities:
Net change in accrued interest receivable		206			92
Net change in other assets		1,245			199
Net change in accrued expenses and other liabilities		1,101			44
NET CASH PROVIDED BY OPERATING ACTIVITIES		2,884			2,235
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available for sale		(12,501	)		—
Maturities of investment securities available for sale		3,698			6,921
Mortgage-backed securities pay-downs		3,463			3,139
Net change in loans outstanding		17,600			6,175
Proceeds from sale of foreclosed real estate		1,049			123
Purchases of premises and equipment		(60	)		(4	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		13,249			16,354

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Three Months Ended March 31,
	2012			2011
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	(11,411	)	$	7,672
Proceeds from short-term debt		3,424			—
Repayments from short-term debt		(2,000	)		(371	)
Repayments from long-term debt		(2,000	)		(2,000	)
Proceeds from sale of common stock		165			—
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(11,822	)		5,301
NET CHANGE IN CASH AND CASH EQUIVALENTS		4,311			23,890
CASH AND CASH EQUIVALENTS, BEGINNING		77,096			35,902
CASH AND CASH EQUIVALENTS, ENDING	$	81,407		$	59,792
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	1,795		$	2,241
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		(59	)		(106	)
Transfers from loans to foreclosed real estate		433			1,690
Transfer from loans to loans held for sale, at fair value		1,552			—

See accompanying notes.

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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 month periods ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

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 2011 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 28, 2011. This quarterly report should be read in conjunction with the Annual Report.

Certain reclassifications have been made to conform prior year financial information to current period presentation. These reclassifications had no material impact on the unaudited consolidated financial statements.

NOTE B - PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At March 31, 2012 and 2011 there were 395,789 and 428,878 anti-dilutive options for each three month period, respectively.

	Three Months Ended March 31,
	2012		2011
Weighted average shares used for basic net income per share		6,859,196		6,913,636
Effect of dilutive stock options		—		17
Weighted average shares used for diluted net income per share		6,859,196		6,913,653

9

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

Accounting Standards Update (“ASU”) 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 became effective for the Company on January 1, 2012 and did not 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 add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholders’ equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. ASU 2011-04 became effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements.

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

Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“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.

10

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – 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, BOLI, 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.

11

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.

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

Investment securities available for sale March 31, 2012	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies	$	32,126	$	—	$	32,126	$	—
Mortgage-backed securities - Government Sponsored- Enterprises (“GSE’s”)		34,541		—		34,541		—
Municipal bonds		6,234		—		6,234		—
Total	$	72,901	$	—	$	72,901	$	—

Investment securities available for sale December 31, 2011	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies	$	26,412	$	—	$	26,412	$	—
Mortgage-backed securities - GSE’s		35,169		—		35,169		—
Municipal bonds		6,273		—		6,273		—
Total	$	67,854	$	—	$	67,854	$	—

12

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

The following is a description of valuation methodologies used for assets recorded at fair value on a 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 March 31, 2012 and December 31, 2011, 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. There were no transfers between levels from the prior reporting periods. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.

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. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior quarters.

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 March 31, 2012 and December 31, 2011 (dollars in thousands):

Asset Category March 31, 2012	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans held for sale, at fair value	$	1,552	$	—	$	—	$	1,552
Impaired loans		11,501		—		—		11,501
Foreclosed real estate		2,391		—		—		2,391
Premises and equipment held for sale		1,113		—		—		1,113
Total	$	16,557	$	—	$	—	$	16,557

13

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

Asset Category December 31, 2011	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans held for sale, at fair value	$	—	$	—	$	—	$	—
Impaired loans		13,353		—		—		13,353
Foreclosed real estate		3,031		—		—		3,031
Premises and equipment held for sale		1,113		—		—		1,113
Total	$	17,497	$	—	$	—	$	17,497

NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	March 31, 2012
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	14,360	$	14,360	$	14,360	$	—	$	—
Interest-earning deposits in other banks		64,019		64,019		64,019		—		—
Federal funds sold		3,028		3,028		3,028		—		—
Investment securities available for sale		72,901		72,901		—		72,901		—
Loans held for sale		1,552		1,552		—		—		1,552
Loans, net		390,192		405,606		—		—		405,606
Premises and equipment available for sale		1,113		1,113		—		—		1,113
Accrued interest receivable		1,797		1,797		—		—		1,797
Stock in the FHLB		1,248		1,248		—		—		1,248
Other non marketable securities		1,118		1,118		—		—		1,118
Bank owned life insurance		8,044		8,044		—		8,044		—
Financial liabilities:
Deposits	$	489,966	$	498,440	$	—	$	498,440	$	—
Short term debt		23,301		23,301		—		23,301		—
Long term debt		12,372		7,661		—		7,661		—
Accrued interest payable		307		307		—		—		307

14

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

	December 31, 2011
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	18,478	$	18,478	$	18,478	$	—	$	—
Interest-earning deposits in other banks		55,590		55,590		55,590		—		—
Federal funds sold		3,028		3,028		3,028		—		—
Investment securities available for sale		67,854		67,854		—		67,854		—
Loans held for sale		—		—		—		—		—
Loans, net		407,590		424,851		—		—		424,851
Premises and equipment available for sale		1,113		1,113		—		—		1,113
Accrued interest receivable		2,003		2,003		—		—		2,003
Stock in the FHLB		1,248		1,248		—		—		1,248
Other non marketable securities		1,080		1,080		—		—		1,080
Bank owned life insurance		7,981		7,981		—		7,981		—
Financial liabilities:
Deposits	$	501,377	$	509,454	$	—	$	509,454	$	—
Short term debt		21,877		21,877		—		21,877		—
Long term debt		14,372		9,661		—		9,661		—
Accrued interest payable		330		330		—		—		330

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

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

Investment Securities Available for Sale

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

Loans Held for Sale

Loans held for sale are carried at fair value which is determined by offers to purchase or expected value of future cash flows. Unrealized losses on loans held for sale are included in losses on sales of loans and leases in the consolidated statement of operations.

15

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.

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

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

16

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:

	March 31, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	12,491	$	77	$	—		$	12,568
After 1 year but within 5 years		19,377		207		(26	)		19,558
Mortgage-backed securities-GSE’s
Within 1 year		1,446		52		—			1,498
After 1 year but within 5 years		27,858		1,202		—			29,060
After 5 years but within 10 years		3,925		75		(17	)		3,983
Municipal bonds
Within 1 year		352		7		—			359
After 1 year but within 5 years		1,015		59		—			1,074
After 5 years but within 10 years		2,688		259		—			2,947
After 10 years		1,747		107		—			1,854
	$	70,899	$	2,045	$	(43	)	$	72,901

As of March 31, 2012, accumulated other comprehensive income included unrealized net gains of $2.0 million, net of deferred income taxes of $776,000.

	December 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	13,508	$	106	$	—		$	13,614
After 1 year but within 5 years		12,577		221		—			12,798
Mortgage-backed securities-GSE’s
Within 1 year		1,858		56		—			1,914
After 1 year but within 5 years		29,584		1,243		(11	)		30,816
After 5 years but within 10 years		2,429		17		(7	)		2,439
Municipal bonds
Within 1 year		—		—		—			—
After 1 year but within 5 years		1,369		70		—			1,439
After 5 years but within 10 years		2,691		287		—			2,978
After 10 years		1,747		109		—			1,856
	$	65,763	$	2,109	$	(18	)	$	67,854

17

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - INVESTMENT SECURITIES (continued)

As of December 31, 2011, accumulated other comprehensive income included unrealized net gains of $2.1 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 March 31, 2012 and December 31, 2011.

	March 31, 2012
	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	$	6,814	$	26	$	—	$	—	$	6,814	$	26
Mortgage-backed securities-GSE’s		3,101		17		—		—		3,101		17
Total temporarily impaired securities	$	9,915	$	43	$	—	$	—	$	9,915	$	43

At March 31, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies and three GSE’s had unrealized losses for less than twelve months totaling $43,000 at March 31, 2012. All unrealized losses are primarily attributable to the general trend of interest rates.

	December 31, 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:
Mortgage-backed securities-GSE’s	$	7,207	$	18	$	—	$	—	$	7,207	$	18
Total temporarily impaired securities	$	7,207	$	18	$	—	$	—	$	7,207	$	18

At December 31, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven GSE’s had unrealized losses for less than twelve months totaling $18,000 at December 31, 2011. All unrealized losses are primarily attributable to the general trend of interest rates.

18

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS

Following is a summary of loans at March 31, 2012 and December 31, 2011:

	2012						2011
	Amount			Percent of total			Amount			Percent of total
	(In thousands)
Real estate loans:
1-to-4 family residential	$	51,502			12.88	%	$	52,182			12.49	%
Commercial real estate		184,543			46.16	%		192,047			45.98	%
Multi-family residential		19,294			4.83	%		23,377			5.60	%
Construction		67,542			16.90	%		70,846			16.96	%
Home equity lines of credit (“HELOC”)		37,328			9.34	%		38,702			9.27	%
Total real estate loans		360,209			90.11	%		377,154			90.30	%
Other loans:
Commercial and industrial		31,580			7.90	%		33,146			7.94	%
Loans to individuals & overdrafts		8,317			2.08	%		7,671			1.84	%
Total other loans		39,897			9.98	%		40,817			9.78	%
Gross loans		400,106						417,971
Less deferred loan origination fees, net		(346	)		(.09	%)		(347	)		(.08	)%
Total loans		399,760			100.00	%		417,624			100.00	%
Allowance for loan losses		(9,568	)					(10,034	)
Total loans, net	$	390,192					$	407,590

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

At March 31, 2012, the Company had pre-approved but unused lines of credit totaling $54.4 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

19

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

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

Residential 1-to-4 Family Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

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

Construction Loans

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

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

20

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Home Equity Lines of Credit

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

Commercial and Industrial Loans

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

Loans to Individuals & Overdrafts

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

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

	March 31, 2012
	30+ Days Past Due		Non- Accrual Loans		Total Past Due		Current		Total Loans
	(In thousands)
Commercial and industrial	$	28	$	162	$	190	$	31,390	$	31,580
Construction		514		2,955		3,469		64,073		67,542
Multi-family residential		—		1,540		1,540		17,754		19,294
Commercial real estate		36		9,691		9,727		174,816		184,543
Loans to individuals & overdrafts		23		174		197		8,120		8,317
1-to-4 family residential		305		2,011		2,316		49,186		51,502
HELOC		27		1,018		1,045		36,283		37,328
Deferred loan (fees) cost, net										(346	)
	$	933	$	17,551	$	18,484	$	381,622	$	399,760

There was one loan in 1 to 4 family residential category totaling $81,000 that was over 90 days past due and still accruing interest at March 31, 2012.

21

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

	December 31, 2011
	30+ Days Past Due		Non- Accrual Loans		Total Past Due		Current		Total Loans
	(In thousands)
Commercial and industrial	$	48	$	171	$	219	$	32,927	$	33,146
Construction		568		4,072		4,640		66,206		70,846
Multi-family residential		1,540		—		1,540		21,837		23,377
Commercial real estate		1,013		10,425		11,438		180,609		192,047
Loans to individuals & overdrafts		10		176		186		7,485		7,671
1-to-4 family residential		735		1,875		2,610		49,572		52,182
HELOC		333		904		1,237		37,465		38,702
Deferred loan (fees) cost, net										(347	)
	$	4,247	$	17,623	$	21,870	$	396,101	$	417,624

At December 31, 2011 there were three loans totaling $108,000 that were 90 days or more past due and still accruing interest.

Impaired Loans

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

			Contractual				March 31, 2012 Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	448	$	840	$	—	$	464	$	7
Construction		1,956		2,558		—		1,483		15
Commercial real estate		11,937		13,004		—		10,566		88
Loans to individuals & overdrafts		177		196		—		197		1
Multi-family residential		1,540		1,540		—		1,540		—
1-to-4 family residential		1,868		2,676		—		1,984		4
HELOC		1,050		1,210		—		890		8
Subtotal:		18,976		22,024		—		17,124		123
With an allowance recorded:
Commercial and industrial		121		121		24		60		2
Construction		1,694		1,694		302		2,529		1
Commercial real estate		2,635		3,712		662		3,837		36
Loans to individuals & overdrafts		55		55		23		36		—
Multi-family Residential		—		—		—		—		—
1-to-4 family residential		775		807		206		756		10
HELOC		335		335		168		371		—
Subtotal:		5,615		6,724		1,385		7,589		49
Totals:
Commercial		20,331		23,469		988		20,479		149
Consumer		232		251		23		233		1
Residential		4,028		5,028		374		4,001		22
Grand Total:	$	24,591	$	28,748	$	1,385	$	24,713	$	172

22

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Impaired Loans (continued)

			Contractual				December 31, 2011 Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	478	$	808	$	—	$	290	$	25
Construction		1,011		1,166		—		1,539		23
Commercial real estate		9,195		10,085		—		7.889		158
Loans to individuals & overdrafts		217		234		—		175		4
Multi-family residential		1,540		1,540		—		1,041		102
1-to-4 family residential		2,100		2,930		—		1,746		33
HELOC		730		823		—		406		—
Subtotal:		15,271		17,586		—		13,086		345
With an allowance recorded:
Commercial and industrial		—		—		—		272		—
Construction		3,365		4,085		674		1,269		4
Commercial real estate		5,039		5.929		498		4,043		71
Loans to individuals & overdrafts		16		16		15		102		1
Multi-family Residential		—		—		—		—		—
1-to-4 family residential		736		774		170		1,999		35
HELOC		408		435		158		321		10
Subtotal:		9,564		11,239		1,515		8,006		121
Totals:
Commercial		20,628		23,613		1,172		16,343		383
Consumer		233		250		15		277		5
Residential		3,974		4,962		328		4,472		78
Grand Total:	$	24,835	$	28,825	$	1,515	$	21,092	$	466

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.

23

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings

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

	Three months ended March 31, 2012						Twelve months ended March 31, 2012
	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(In thousands)
Below market interest rate:		—	$	—	$	—		—	$	—	$	—
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		—		—		—
HELOC		—		—		—		—		—		—
Total		—		—		—		—		—		—
Extended payment terms:
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		1		287		287		5		3,592		3,506
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		1		110		109
HELOC		—		—		—		—		—		—
Total		1		287		287		6		3,702		3,615
Forgiveness of principal:
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		—		—		—		1		938		635
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		—		—		—
HELOC		—		—		—		—		—		—
Total		—		—		—		1		938		635
Total		1	$	287	$	287		7	$	4,640	$	4,250

24

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

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

	Three months ended March 31, 2012				Twelve months ended March 31, 2012
	Number of loans		Recorded investment		Number of loans		Recorded investment
	(In thousands)
Below market interest rate:
Commercial and Industrial		—	$	—		—	$	—
Construction		—		—		—		—
Commercial real estate		—		—		—		—
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		—		—
HELOC		—		—		—		—
Total		—		—		—		—
Extended payment terms:
Commercial and Industrial		1		114		1		211
Construction		2		294		4		2,329
Commercial real estate		4		1,165		14		5,161
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		5		447
HELOC		—		—		—		—
Total		7		1,573		24		8,148
Forgiveness of principal:
Commercial and Industrial		—		—		—		—
Construction		—		—		—		—
Commercial real estate		—		—		1		635
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		—		—
HELOC		—		—		—		—
Total		—		—		1		635
Total		7	$	1,573		25	$	8,783

25

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

The following table presents the successes and failures of the types of modifications within the previous three months as of March 31, 2012:

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
							(In thousands)
Below market interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		3		408		3		878		1		287
Forgiveness of principal		—		—		—		—		—		—		—		—
Total		—	$	—		3	$	408		3	$	878		1	$	287

At March 31, 2012, the Company had 25 loans with a balance of $7.2 million that were considered to be troubled debt restructured. Of those TDRs, 11 loans with a balance totaling $1.7 million were still accruing as of March 31, 2012. The remaining 14 TDRs with a balance totaling $5.5 million as of March 31, 2012 were in nonaccrual status.

Credit Quality Indicators

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

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

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

• Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

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

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

26

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

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

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

27

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

• 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.

28

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

• Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

• 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.

29

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 March 31, 2012 and December 31, 2011, respectively:

March 31, 2012
Commercial Credit Exposure By Internally Assigned Grade	Commercial and industrial		Construction		Commercial real estate		Multi-family residential
			(In thousands)
Superior	$	588	$	56	$	—	$	—
Very good		37		5		311		—
Good		3,416		1,599		14,604		1,710
Acceptable		9,157		7,637		63,902		8,624
Acceptable with care		16,017		52,111		61,571		7,298
Special mention		1,789		2,105		28,755		122
Substandard		576		4,029		15,400		1,540
Doubtful		—		—		—		—
Loss		—		—		—		—
	$	31,580	$	67,542	$	184,543	$	19,294

Consumer Credit Exposure By Internally Assigned Grade	1-to-4 Family residential		HELOC
Pass	$	44,004	$	34,245
Special mention		2,537		1,239
Substandard		4,961		1,844
	$	51,502	$	37,328

Consumer Credit Exposure Based On Payment Activity	Loans to individuals & overdrafts
Pass	$	8,074
Non –pass		243
	$	8,317

30

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

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

Consumer Credit Exposure By Internally Assigned Grade	1-to-4 Family residential		HELOC
Pass	$	43,647	$	35,127
Special mention		2,925		1,391
Substandard		5,610		2,184
	$	52,182	$	38,708

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

Nonperforming assets at March 31, 2012 and December 31, 2011 consist of the following:

	March 31, 2012		December 31, 2011
	(In thousands)
Non-accrual loans	$	17,551	$	17,623
Restructured loans		1,719		2,013
Total non-performing loans		19,270		19,636
Foreclosed real estate		2,391		3,031
Total non-performing assets	$	21,661	$	22,667

31

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.

32

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three month periods ended March 31, 2012 and March 31, 2011, respectively:

	Three months ended March 31, 2012
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 01/01/2012	$	719		$	1,540		$	4,771		$	1,661		$	1,122		$	94		$	127		$	10,034
Provision for loan losses		(2,547	)		56			334			(94	)		175			(40	)		(20	)		(2,136	)
Loans charged-off		(47	)		(458	)		(312	)		(45	)		(208	)		(9	)		—			(1,079	)
Recoveries		2,430			173			11			63			12			60			—			2,749
Balance, end of period 3/31/2012	$	555		$	1,311		$	4,804		$	1,585		$	1,101		$	105		$	107		$	9,568
Ending balance: individually evaluated for impairment	$	24		$	302		$	662		$	206		$	168		$	23		$	—		$	1,385
Ending balance: collectively evaluated for impairment	$	531		$	1,009		$	4,142		$	1,379		$	933		$	82		$	107		$	8,183
Loans:
Ending balance	$	31,580		$	67,542		$	184,543		$	51,502		$	37,328		$	8,317		$	19,294		$	400,106
Ending balance: individually evaluated for impairment	$	569		$	3,650		$	14,572		$	2,643		$	1,385		$	232		$	1,540		$	24,591
Ending balance: collectively evaluated for impairment	$	31,011		$	63,892		$	169,971		$	48,859		$	35,943		$	8,085		$	17,754		$	375,515

During the three months ended March 31, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $2.7 million. These recoveries were primarily a result of a $2.4 million recovery on commercial and industrial loans. These recoveries combined with the decrease in total loans outstanding at March 31, 2012 resulted in a $2.1 million reversal in the provision.

33

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

	December 31, 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)
Loans:
Ending Balance	$	33,146	$	70,846	$	192,047	$	52,182	$	38,702	$	7,671	$	23,377	$	417,971
Ending Balance: individually evaluated for impairment	$	478	$	4,376	$	14,234	$	2,836	$	1,138	$	233	$	1,540	$	24,835
Ending Balance: collectively evaluated for impairment	$	32,668	$	66,470	$	177,813	$	49,346	$	37,564	$	7,438	$	21,837	$	393,136

	Three months ended March 31, 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		$	1,985		$	1,348		$	1,530		$	640		$	10,015
Provision for loan losses		(43	)		1,144			1,269			526			(145	)		(1,130	)		(457	)		1,164
Loans charged-off		—			(222	)		(773	)		(190	)		(65	)		(22	)		—			(1,272	)
Recoveries		72			—			2			130			2			5			—			211
Balance, end of period 3/31/2011	$	1,081		$	1,271		$	3,609		$	2,451		$	1,140		$	383		$	183		$	10,118
Ending Balance: individually evaluated for impairment	$	262		$	668		$	832		$	1,157		$	262		$	264		$	—		$	3,445
Ending Balance: collectively evaluated for impairment	$	819		$	603		$	2,777		$	1,294		$	878		$	119		$	183		$	6,673
Loans:
Ending Balance	$	47,250		$	85,963		$	188,314		$	58,590		$	39,781		$	12,090		$	29,983		$	461,971
Ending Balance: individually evaluated for impairment	$	1,016		$	1,976		$	8,317		$	2,504		$	1,700		$	470		$	2,122		$	18,105
Ending Balance: collectively evaluated for impairment	$	46,234		$	83,987		$	179,997		$	56,086		$	38,081		$	11,620		$	27,861		$	443,866

34

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H –BRANCH SALE

On April 6, 2012, the Bank sold all deposits and selected assets associated with two branch offices located in Pembroke and Raeford, North Carolina, respectively. The transaction was consummated pursuant to a definitive purchase and assumption agreement with Lumbee Guaranty Bank, Pembroke, North Carolina, which was entered into on December 20, 2011. The purchase price under the terms of the purchase and assumption agreement was $1.8 million which included $1.1 million for all real property and equipment and $691,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $134,000 on these deposits resulting in a net gain of $557,000 for the Company from this transaction. Lumbee Guarantee Bank assumed $14.6 million in deposits from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $340,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. Separate payment for these loans was not included in the $1.8 million purchase price.

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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. The Company’s only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, 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

March 31, 2012 and December 31, 2011

During the first three months of 2012, total assets decreased by $8.7 million to $581.0 million as of March 31, 2012. Earning assets at March 31, 2012 totaled $534.1 million and consisted of $390.2 million in net loans, $1.6 million in loans held for sale, $72.9 million in investment securities, $67.0 million in overnight investments and interest-bearing deposits in other banks and $2.4 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2012 were $490.0 million and $51.8 million, respectively.

Since the end of 2011, gross loans have decreased by $17.9 million to $399.8 million as of March 31, 2012 due to continued soft loan demand and efforts to reduce concentration levels of construction and commercial real estate loans. Gross loans consisted of $31.6 million in commercial and industrial loans, $184.5 million in commercial real estate loans, $19.3 million in multi-family residential loans, $8.3 million in consumer loans, $51.5 million in residential real estate, $37.3 million in HELOC, and $67.6 million in construction loans. The deferred loan fees and costs on these loans were ($346,000). During the first quarter of 2012 there was one loan within the commercial real estate loan group totaling approximately $1.6 million that was moved to loans held for sale and reported at fair market value as of March 31, 2012.

36

At March 31, 2012 and December 31, 2011, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $64.0 million at March 31, 2012, an $8.4 million increase from December 31, 2011. The Company’s investment securities at March 31, 2012 were $72.9 million, an increase of $5.0 million from December 31, 2011. The investment portfolio as of March 31, 2012 consisted of $31.9 million in government agency debt securities, $33.2 million in mortgage-backed securities and $5.8 million in municipal securities. The unrealized gain on these securities was $2.0 million.

At March 31, 2012, the Company also held an investment of $1.2 million in the form of Federal Home Loan Bank (“FHLB”) stock and $1.1 million in other non marketable securities, each of which was approximately the same at December 31, 2011.

At March 31, 2012, non-earning assets were $46.9 million, which reflects a decrease of $6.4 million from the $53.3 million as of December 31, 2011. Non-earning assets as of March 31, 2012 included $14.4 million in cash and due from banks, bank premises and equipment of $11.2 million, $1.1 million in bank premises and equipment available for sale, core deposit intangible of $516,000, accrued interest receivable of $1.8 million, foreclosed real estate of $2.4 million, and other assets which consisted of $8.0 million in bank owned life insurance (“BOLI”), $5.2 million in deferred tax assets, $1.5 million in prepaid expenses, and $800,000 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 March 31, 2012 were $490.0 million and consisted of $77.2 million in non-interest-bearing demand deposits, $94.1 million in money market and NOW accounts, $25.5 million in savings accounts, and $293.2 million in time deposits. Total deposits decreased by $11.4 million from $501.4 million as of December 31, 2011. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of March 31, 2012.

As of March 31, 2012, the Company had $23.3 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of $21.3 million of repurchase agreements with local customers and $2.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004.

Total shareholders’ equity at March 31, 2012 was $51.8 million, an increase of $2.2 million from $49.6 million as of December 31, 2011. Accumulated other comprehensive income relating to available for sale securities decreased $59,000 for the three months ended March 31, 2012. Other changes in shareholders’ equity included increases of $13,000 in stock-based compensation, and a net income of $2.1 million for the three months ending March 31, 2012, and $165,000 from the proceeds of the sale of common stock.

Past Due Loans, Nonperforming Assets, and Asset Quality

At March 31, 2012, the Company had $933,000 in loans that were past due with $852,000 being 30-89 days past due and $81,000 being 90 or more days past due and still accruing. This represented 0.23% of gross loans outstanding on that date. This is an decrease from December 31, 2011 when there were $4.1 million in loans that were 30-89 days past due and $109,000 in loans that were 90 days or more past due and still accruing. This represented 1.02% of gross loans outstanding. Non-accrual loans remained approximately the same at $17.6 million for the periods ended March 31, 2012 and December 31, 2012.

The percentage of non-performing loans (non-accrual loans and restructured loans) to total loans increased 12 basis points from 4.70% at December 31, 2011 to 4.82% at March 31, 2012.

The Company had eleven loans totaling $1.7 million that were considered troubled debt restructurings (“TDRs”) that were not included in nonaccrual loans at March 31, 2012.

37

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
	March 31, 2012			December 31, 2011
	(In thousands)
Non-accrual loans	$	17,551		$	17,623
Restructured loans		1,719			2,013
Total non-performing loans		19,270			19,636
Foreclosed real estate		2,391			3,031
Repossessed assets		—			—
Total non-performing assets	$	21,661		$	22,667
Accruing loans past due 90 days or more	$	81		$	109
Allowance for loan losses	$	9,568		$	10,034
Non-performing loans to period end loans		4.82	%		4.70	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		4.84	%		4.73	%
Allowance for loans losses to period end loans		2.39	%		2.40	%
Allowance for loan losses to non-performing loans		49.65	%		51.10	%
Allowance for loan losses to non-performing assets		44.17	%		44.27	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		44.01	%		44.06	%
Non-performing assets to total assets		3.73	%		3.84	%
Non-performing assets and accruing loans past due 90 days or more to total assets		3.74	%		3.86	%

The total non-performing assets (non-accrual loans, restructured loans, and foreclosed real estate), at March 31, 2012 and December 31, 2011 were $21.7 million and $22.7 million. The allowance for loan losses at March 31, 2012 represented 44.17% of non-performing assets compared to 44.27% at December 31, 2011.

Total impaired loans at March 31, 2012 were $24.6 million, this includes $17.6 million in loans that were classified as impaired because they were in non-accrual and $7.0 million in loans that were determined to be impaired for other reasons. Of these loans, $5.6 million required a specific reserve of $1.4 million at March 31, 2012. Total impaired loans at December 31, 2011 were $24.8 million. This includes $17.6 million in loans that were considered to be impaired due to being in non-accrual status and $7.2 million in loans that were deemed to be impaired for other reasons. Of these loans, $9.6 million required a specific reserve of $1.5 million at December 31, 2011.

The allowance for loan losses was $9.6 million at March 31, 2012 or 2.39% of gross loans outstanding. This is a decrease of 1 basis point from the 2.40% of gross loans at December 31, 2011. The allowance for loan losses at March 31, 2012 represented 38.91% of impaired loans compared to 40.40% at December 31, 2011. This decrease in the allowance for the three months of 2012 resulted primarily from net recoveries of $1.7 million. It is management’s assessment that the allowance for loan losses as of March 31, 2012 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.

38

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”) ratios.

At March 31, 2012 and December 31, 2011 the Company had $13.2 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2012 and December 31, 2011 the Company had $11.3 million and $12.5 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 40.5% and 43.8% of total risk based capital as of March 31, 2012 and December 31, 2011, 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 March 31, 2012 (In thousands)		% of Risk Based Capital
1-to-4 Family Rental	$	21,086		35	%
Office Building	$	27,440		45	%

At March 31, 2012 the Company exceeded this guideline in the Office Buildings product type. The Office Buildings were 45% of Risk-Based Capital or $27.4 million. All other commercial real estate groups were under the 40% threshold. The reduced concentration within these categories from December 31, 2011 to March 31, 2012 resulted from the increase in capital combined with reduced loan balances.

	At December  31, 2011 (In thousands)		% of Risk Based Capital
1-to-4 Family Rental	$	26,992		42	%
Office Building	$	30,265		47	%

At December 31, 2011 the Company had two product type groups which exceeded this guideline; 1-to-4 Family Rental and Office Buildings. The 1-to-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.

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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 March 31, 2012

(Dollars in thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	49,741		$	17,801		$	67,542
Average Loan Size	$	174		$	307
Percentage of total loans		12.43	%		4.46	%		16.89	%
Nonaccrual loans	$	825		$	2,131		$	2,956

At March 31, 2012, total ADC loans represented 16.89% or $67.5 million of the total loan portfolio, of which $3.0 million of the ADC loan portfolio is in nonaccrual status. This represents 4.4% of all 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, 2011

(Dollars in thousands)

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

At December 31, 2011, total ADC loans represented 16.96% or $70.8 million of the total loan portfolio, of which $3.8 million of the ADC portfolio is in nonaccrual status. This represents 5.3% of all 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.

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Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at March 31, 2012.

	ADC Loans		Percent			HELOC		Percent
			(Dollars in thousands)
Harnett County	$	5,088		7.5	%	$	7,584		20.3	%
Cumberland County		20,727		30.7	%		6,225		16.7	%
All other locations		41,727		61.8	%		23,519		63.0	%
Total	$	67,542		100.0	%	$	37,328		100.0	%

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

	ADC Loans		Percent			HELOC		Percent
			(Dollars in thousands)
Harnett County	$	5,637		8.0	%	$	7,432		19.2	%
Cumberland County		18,424		26.0	%		6,652		17.2	%
All other locations		46,785		66.0	%		24,618		63.6	%
Total	$	70,846		100.0	%	$	38,702		100.0	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2012, the Company had $102.9 million in loans that had terms permitting interest only payments. This represented 25.7% of the total loan portfolio. At December 31, 2011, the Company had $125.8 million in loans that had terms permitting interest only payments. This represented 30.1% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio 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 $48.4 million or 14.2% of total loans at March 31, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company’s ten largest customer relationships totaled $69.3 million or 20.4% of total loans at March 31, 2012 compared to $68.3 million or 16.4% of total loans at December 31, 2011. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

Comparison of Results of Operations for the

Three months ended March 31, 2012 and 2011

General. During the first quarter of 2012, the Company had net income of $2.1 million as compared with net income of $121,000 for the same quarter in 2011. Net income per share for the first quarter of 2012 was $0.31 per share, basic and diluted, compared with net income per share of $0.02 per share, basic and diluted, for the first quarter of 2011. First quarter 2012 results were impacted by a reversal in the

41

provision for loan losses of $2.1 million primarily as a result of net recoveries of $1.7 million. The Company experienced a decrease in net interest margin of 30 basis points to 3.64% from 3.94% for the period ending March 31, 2012 as compared to the same period in 2011.

Net Interest Income. Net interest income decreased by $828,000 to $4.8 million for the first quarter of 2012. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets combined with a decrease in those assets. Average total interest-earning assets were $531.4 million in the first quarter of 2012 compared with $581.1 million during the same period in 2011 and the yield on those assets decreased 51 basis points from 5.52% to 5.01%. Total interest income reversed on loans transferred to non-accrual status for the three months ended March 31, 2012 and 2011 was comparable at $77,000 and $72,000, respectively, or 1 basis point on average interest-earning assets for both periods mentioned.

The Company’s average interest-bearing liabilities decreased by $47.1 million to $457.1 million for the quarter ended March 31, 2012 from $504.2 million for the same period one year earlier and the cost of those funds decreased from 1.80% to 1.54%, or 26 basis points. During the first quarter of 2012, the Company’s net interest margin was 3.65% and net interest spread was 3.47%. For the quarter ended March 31, 2011, net interest margin was 3.96% and net interest spread was 3.72%

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. During the three months ended March 31, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $2.7 million. These recoveries were primarily a result of a $2.4 million recovery in commercial and industrial loans. This recovery combined with a reduction in loan balances at March 31, 2012 compared to March 31, 2011 resulted in a $2.1 million reversal in the provision for loan losses for the three months ended March 31, 2012. This reversal represented a decrease of $3.3 million from the $1.2 million provision made in the same period of 2011.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2012 was $626,000, a decrease of $15,000 from the first quarter of 2011. Service charges on deposit accounts decreased $64,000 to $318,000 for the quarter ended March 31, 2012 as compared to $382,000 for the same period in 2011. Mortgage fee income increased $13,000 to $39,000 for the quarter ended March 31, 2012 compared to the same period in 2012. Other non-deposit fees and income increased $36,000 to $269,000 for the quarter ended March 31, 2012 compared to the same period in 2011.

Non-Interest Expenses. Non-interest expenses decreased by $863,000 to $4.2 million for the quarter ended March 31, 2012, from $5.1 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the first quarter of 2011 versus the first quarter of 2012:

• Personnel expenses decreased $430,000 to $2.0 million in the first quarter of 2012 as compared to the same period of 2011 primarily as the result of a decrease in staff size to 117 at March 31, 2012 from 125 at March 31, 2011.

• FDIC insurance expense was $195,000 for the quarter ended March 31, 2012 down from $263,000 for the same quarter in 2011.

• Professional fees decreased $161,000 to $469,000 for the quarter ended March 31, 2012 from to $630,000 for the quarter ended March 31, 2011.

• Foreclosure-related expenses decreased by $168,000 to $131,000 for the quarter ending March 31, 2012 compared to the same period for 2011.

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Provision for Income Taxes. The Company’s effective tax rate was 37.7% for the quarter ended March 31, 2012 and (65.8%) for the quarter ended March 31, 2011 as a result of permanent tax differences that were in excess of taxable income resulting in lower effective tax rates.

As of March 31, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million, compared to $4.9 million at March 31, 2011. 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 March 31, 2012 and March 31, 2011, 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 26.56% of total assets at March 31, 2012.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of March 31, 2012 the Company had existing credit lines with other financial institutions to purchase up to $44.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $27.6 million of qualifying loans is pledged to the FHLB to secure borrowings. At March 31, 2012, the Company had $2.0 million outstanding in FHLB advances. Another source of short-term borrowings is securities sold under agreements to repurchase. At March 31, 2012, total borrowings consisted of securities sold under agreements to repurchase of $21.3 million and junior subordinated debentures of $12.4 million.

Total deposits were $490.0 million at March 31, 2012. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 59.84% of total deposits at March 31, 2012. Time deposits of $100,000 or more represented 30.08% of the Company’s total deposits at March 31, 2012. At quarter-end, the Company had no brokered time deposits and $498,000 in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

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

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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 8.91% at March 31, 2012.

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks. The MOU 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 March 31, 2012, 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		14.39	%		8.00	%
Tier 1 risk-based capital ratio		13.13	%		4.00	%
Leverage ratio		9.81	%		4.00	%

New Century Bank	Actual Ratio			Regulatory Minimum Requirement			Well-Capitalized Requirement
Total risk-based capital ratio		14.02	%		11.50	%		10.00	%
Tier 1 risk-based capital ratio		12.76	%		8.00	%		6.00	%
Leverage ratio		9.52	%		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 proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of March 31, 2012. The Company is currently required to obtain prior regulatory approval before making interest payments on its outstanding junior subordinated debentures.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-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 first quarter of 2012. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

On April 6, 2012, the Bank sold all deposits and selected assets associated with two branch offices located in Pembroke and Raeford, North Carolina, respectively. The transaction was consummated pursuant to a definitive purchase and assumption agreement with Lumbee Guaranty Bank, Pembroke, North Carolina, which was entered into on December 20, 2011. The purchase price under the terms of the purchase and assumption agreement was $1.8 million which included $1.1 million for all real property and equipment and $691,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $134,000 on these deposits resulting in a net gain of $557,000 for the Company from this transaction. Lumbee Guarantee Bank assumed $14.6 million in deposits from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $340,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. Separate payment for these loans was not included in the $1.8 million purchase price.

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 March 31, 2012, 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.

46

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: May 11, 2012	By:
		William L. Hedgepeth II
		President and Chief Executive Officer
Date: May 11, 2012	By:
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer and Chief Operating Officer

47

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 March 31, 2012, 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.

48

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 March 31, 2012 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: May 11, 2012	By:
	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 March 31, 2012 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: May 11, 2012	By:
	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 March 31, 2012, 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: May 11, 2012	By:
		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 March 31, 2012, 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: May 11, 2012	By:
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer and Chief Operating Officer

XML

Per Share Results

3 Months Ended

Mar. 31, 2012

Per Share Results [Abstract]

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. At March 31, 2012 and 2011 there were 395,789 and 428,878 anti-dilutive options for each three month period, respectively.

	Three Months Ended March 31,
	2012		2011
Weighted average shares used for basic net income per share		6,859,196		6,913,636
Effect of dilutive stock options		—		17
Weighted average shares used for diluted net income per share		6,859,196		6,913,653

XML

Basis Of Presentation

3 Months Ended

Mar. 31, 2012

Basis Of Presentation [Abstract]

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 month periods ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America ("GAAP").

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

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 2011 Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 28, 2011. This quarterly report should be read in conjunction with the Annual Report.

Certain reclassifications have been made to conform prior year financial information to current period presentation. These reclassifications had no material impact on the unaudited consolidated financial statements.

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 14,360	$ 18,478
Interest-earning deposits in other banks	64,019	55,590
Federal funds sold	3,028	3,028
Investment securities available for sale, at fair value	72,901	67,854
Loans held for sale, at fair value	1,552
Loans	399,760	417,624
Allowance for loan losses	(9,568)	(10,034)
NET LOANS	390,192	407,590
Accrued interest receivable	1,797	2,003
Stock in Federal Home Loan Bank of Atlanta ("FHLB"), at cost	1,248	1,248
Other non marketable securities	1,118	1,080
Foreclosed real estate	2,391	3,031
Premises and equipment held for sale	1,113	1,113
Premises and equipment, net	11,175	11,243
Bank-Owned Life Insurance ("BOLI")	8,044	7,981
Core deposit intangible	516	545
Other assets	7,542	8,867
TOTAL ASSETS	580,996	589,651
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand	77,151	74,569
Savings	25,472	24,461
Money market and NOW	94,148	92,600
Time	293,195	309,747
TOTAL DEPOSITS	489,966	501,377
Short-term debt	23,301	21,877
Long-term debt	12,372	14,372
Accrued interest payable	307	330
Accrued expenses and other liabilities	3,273	2,149
TOTAL LIABILITIES	529,219	540,105
Shareholders' Equity
Common stock, $1 par value, 25,000,000 shares authorized; 6,913,636 and 6,860,367 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	6,914	6,860
Additional paid-in capital	41,975	41,851
Retained earnings (accumulated deficit)	1,662	(450)
Accumulated other comprehensive income	1,226	1,285
TOTAL SHAREHOLDERS' EQUITY	51,777	49,546
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 580,996	$ 589,651

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Consolidated Statements Of Changes In Shareholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings (Accumulated) (Deficit) [Member]	Accumulated Other Comprehensive Income [Member]	Total
Balance at Dec. 31, 2010	$ 6,914	$ 41,887	$ (287)	$ 1,178	$ 49,692
Balance, shares at Dec. 31, 2010	6,913,636
Net income			121		121
Other comprehensive loss, net				(106)	(106)
Stock based compensation		71			71
Balance at Mar. 31, 2011	6,914	41,958	(166)	1,072	49,778
Balance, shares at Mar. 31, 2011	6,913,636
Balance at Dec. 31, 2011	6,860	41,851	(450)	1,285	49,546
Balance, shares at Dec. 31, 2011	6,860,367
Net income			2,112		2,112
Sale of common stock	54	111			165
Sale of common stock, shares	53,269
Other comprehensive loss, net				(59)	(59)
Stock based compensation		13			13
Balance at Mar. 31, 2012	$ 6,914	$ 41,975	$ 1,662	$ 1,226	$ 51,777
Balance, shares at Mar. 31, 2012	6,913,636

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 2,112	$ 121
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	(2,136)	1,164
Depreciation and amortization of premises and equipment	142	170
Amortization and accretion of investment securities	146	217
Amortization of deferred loan fees and costs	(51)	(46)
Amortization of core deposit intangible	28	39
Stock-based compensation	13	71
Loss on write-down on other assets	59
Increase in cash surrender value of bank-owned life insurance	(63)	(63)
Net loss on sale and write-downs of foreclosed real estate	24	203
Net loss on investment security sales	58	24
Change in assets and liabilities:
Net change in accrued interest receivable	206	92
Net change in other assets	1,245	199
Net change in accrued expenses and other liabilities	1,101	44
NET CASH PROVIDED BY OPERATING ACTIVITIES	2,884	2,235
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available for sale	(12,501)
Maturities of investment securities available for sale	3,698	6,921
Mortgage-backed securities pay-downs	3,463	3,139
Net change in loans outstanding	17,600	6,175
Proceeds from sale of foreclosed real estate	1,049	123
Purchases of premises and equipment	(60)	(4)
NET CASH PROVIDED BY INVESTING ACTIVITIES	13,249	16,354
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	(11,411)	7,672
Proceeds from short-term debt	3,424
Repayments from short-term debt	(2,000)	(371)
Repayments from long-term debt	(2,000)	(2,000)
Proceeds from sale of common stock	165
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	(11,822)	5,301
NET CHANGE IN CASH AND CASH EQUIVALENTS	4,311	23,890
CASH AND CASH EQUIVALENTS, BEGINNING	77,096	35,902
CASH AND CASH EQUIVALENTS, ENDING	81,407	59,792
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	1,795	2,241
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax	(59)	(106)
Transfers from loans to foreclosed real estate	433	1,690
Transfer from loans to loans held for sale, at fair value	$ 1,552

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Consolidated Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Common stock, par value	$ 1	$ 1
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	6,913,636	6,860,367
Common stock, shares outstanding	6,913,636	6,860,367

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Document And Entity Information	3 Months Ended
	Mar. 31, 2012	May 08, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
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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Consolidated Statements Of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
INTEREST INCOME
Loans	$ 6,155	$ 7,304
Federal funds sold and interest-earning deposits in other banks	36	18
Investments	428	593
TOTAL INTEREST INCOME	6,619	7,915
INTEREST EXPENSE
Money market, NOW and savings deposits	100	217
Time deposits	1,556	1,880
Short term debt	34	69
Long term debt	82	74
TOTAL INTEREST EXPENSE	1,772	2,240
NET INTEREST INCOME	4,847	5,675
PROVISION FOR LOAN LOSSES	(2,136)	1,164
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	6,983	4,511
NON-INTEREST INCOME
Fees from pre-sold mortgages	39	26
Service charges on deposit accounts	318	382
Other fees and income	269	233
TOTAL NON-INTEREST INCOME	626	641
NON-INTEREST EXPENSE
Personnel	1,961	2,391
Occupancy and equipment	358	362
Deposit insurance	195	263
Professional fees	469	630
Information systems	367	386
Foreclosure-related expenses	131	299
Other	735	748
TOTAL NON-INTEREST EXPENSE	4,216	5,079
INCOME BEFORE INCOME TAX (BENEFIT)	3,393	73
INCOME TAX (BENEFIT)	1,281	(48)
NET INCOME	$ 2,112	$ 121
NET INCOME PER COMMON SHARE
Basic	$ 0.31	$ 0.02
Diluted	$ 0.31	$ 0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	6,859,196	6,913,636
Diluted	6,859,196	6,913,653

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Fair Value Of Financial Instruments

3 Months Ended

Mar. 31, 2012

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	March 31, 2012
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	14,360	$	14,360	$	14,360	$	—	$	—
Interest-earning deposits in other banks		64,019		64,019		64,019		—		—
Federal funds sold		3,028		3,028		3,028		—		—
Investment securities available for sale		72,901		72,901		—		72,901		—
Loans held for sale		1,552		1,552		—		—		1,552
Loans, net		390,192		405,606		—		—		405,606
Premises and equipment available for sale		1,113		1,113		—		—		1,113
Accrued interest receivable		1,797		1,797		—		—		1,797
Stock in the FHLB		1,248		1,248		—		—		1,248
Other non marketable securities		1,118		1,118		—		—		1,118
Bank owned life insurance		8,044		8,044		—		8,044		—
Financial liabilities:
Deposits	$	489,966	$	498,440	$	—	$	498,440	$	—
Short term debt		23,301		23,301		—		23,301		—
Long term debt		12,372		7,661		—		7,661		—
Accrued interest payable		307		307		—		—		307

	December 31, 2011
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	18,478	$	18,478	$	18,478	$	—	$	—
Interest-earning deposits in other banks		55,590		55,590		55,590		—		—
Federal funds sold		3,028		3,028		3,028		—		—
Investment securities available for sale		67,854		67,854		—		67,854		—
Loans held for sale		—		—		—		—		—
Loans, net		407,590		424,851		—		—		424,851
Premises and equipment available for sale		1,113		1,113		—		—		1,113
Accrued interest receivable		2,003		2,003		—		—		2,003
Stock in the FHLB		1,248		1,248		—		—		1,248
Other non marketable securities		1,080		1,080		—		—		1,080
Bank owned life insurance		7,981		7,981		—		7,981		—
Financial liabilities:
Deposits	$	501,377	$	509,454	$	—	$	509,454	$	—
Short term debt		21,877		21,877		—		21,877		—
Long term debt		14,372		9,661		—		9,661		—
Accrued interest payable		330		330		—		—		330

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

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

Investment Securities Available for Sale

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

Loans Held for Sale

Loans held for sale are carried at fair value which is determined by offers to purchase or expected value of future cash flows. Unrealized losses on loans held for sale are included in losses on sales of loans and leases in the consolidated statement of operations.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions.

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

The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the 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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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

NOTE D – 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, BOLI, 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. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.

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

Investment securities available for sale March 31, 2012	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies	$	32,126	$	—	$	32,126	$	—
Mortgage-backed securities - Government Sponsored- Enterprises ("GSE's")		34,541		—		34,541		—
Municipal bonds		6,234		—		6,234		—
Total	$	72,901	$	—	$	72,901	$	—

Investment securities available for sale December 31, 2011	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies	$	26,412	$	—	$	26,412	$	—
Mortgage-backed securities - GSE's		35,169		—		35,169		—
Municipal bonds		6,273		—		6,273		—
Total	$	67,854	$	—	$	67,854	$	—

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 March 31, 2012 and December 31, 2011, 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. There were no transfers between levels from the prior reporting periods. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.

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. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior quarters.

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 March 31, 2012 and December 31, 2011 (dollars in thousands):

Asset Category March 31, 2012	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans held for sale, at fair value	$	1,552	$	—	$	—	$	1,552
Impaired loans		11,501		—		—		11,501
Foreclosed real estate		2,391		—		—		2,391
Premises and equipment held for sale		1,113		—		—		1,113
Total	$	16,557	$	—	$	—	$	16,557

Asset Category December 31, 2011	Fair value		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans held for sale, at fair value	$	—	$	—	$	—	$	—
Impaired loans		13,353		—		—		13,353
Foreclosed real estate		3,031		—		—		3,031
Premises and equipment held for sale		1,113		—		—		1,113
Total	$	17,497	$	—	$	—	$	17,497

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Branch Sale

3 Months Ended

Mar. 31, 2012

Branch Sale [Abstract]

Branch Sale

NOTE H –BRANCH SALE

On April 6, 2012, the Bank sold all deposits and selected assets associated with two branch offices located in Pembroke and Raeford, North Carolina, respectively. The transaction was consummated pursuant to a definitive purchase and assumption agreement with Lumbee Guaranty Bank, Pembroke, North Carolina, which was entered into on December 20, 2011. The purchase price under the terms of the purchase and assumption agreement was $1.8 million which included $1.1 million for all real property and equipment and $691,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $134,000 on these deposits resulting in a net gain of $557,000 for the Company from this transaction. Lumbee Guarantee Bank assumed $14.6 million in deposits from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $340,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. Separate payment for these loans was not included in the $1.8 million purchase price.

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Investment Securities

3 Months Ended

Mar. 31, 2012

Investment Securities [Abstract]

Investment Securities

NOTE F - INVESTMENT SECURITIES

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

	March 31, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	12,491	$	77	$	—		$	12,568
After 1 year but within 5 years		19,377		207		(26	)		19,558
Mortgage-backed securities-GSE's
Within 1 year		1,446		52		—			1,498
After 1 year but within 5 years		27,858		1,202		—			29,060
After 5 years but within 10 years		3,925		75		(17	)		3,983
Municipal bonds
Within 1 year		352		7		—			359
After 1 year but within 5 years		1,015		59		—			1,074
After 5 years but within 10 years		2,688		259		—			2,947
After 10 years		1,747		107		—			1,854
	$	70,899	$	2,045	$	(43	)	$	72,901

As of March 31, 2012, accumulated other comprehensive income included unrealized net gains of $2.0 million, net of deferred income taxes of $776,000.

	December 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	13,508	$	106	$	—		$	13,614
After 1 year but within 5 years		12,577		221		—			12,798
Mortgage-backed securities-GSE's
Within 1 year		1,858		56		—			1,914
After 1 year but within 5 years		29,584		1,243		(11	)		30,816
After 5 years but within 10 years		2,429		17		(7	)		2,439
Municipal bonds
Within 1 year		—		—		—			—
After 1 year but within 5 years		1,369		70		—			1,439
After 5 years but within 10 years		2,691		287		—			2,978
After 10 years		1,747		109		—			1,856
	$	65,763	$	2,109	$	(18	)	$	67,854

As of December 31, 2011, accumulated other comprehensive income included unrealized net gains of $2.1 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 March 31, 2012 and December 31, 2011.

	March 31, 2012
	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	$	6,814	$	26	$	—	$	—	$	6,814	$	26
Mortgage-backed securities-GSE's		3,101		17		—		—		3,101		17
Total temporarily impaired securities	$	9,915	$	43	$	—	$	—	$	9,915	$	43

At March 31, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies and three GSE's had unrealized losses for less than twelve months totaling $43,000 at March 31, 2012. All unrealized losses are primarily attributable to the general trend of interest rates.

	December 31, 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:
Mortgage-backed securities-GSE's	$	7,207	$	18	$	—	$	—	$	7,207	$	18
Total temporarily impaired securities	$	7,207	$	18	$	—	$	—	$	7,207	$	18

At December 31, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven GSE's had unrealized losses for less than twelve months totaling $18,000 at December 31, 2011. All unrealized losses are primarily attributable to the general trend of interest rates.

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Loans

3 Months Ended

Mar. 31, 2012

Loans [Abstract]

Loans

NOTE G - LOANS

Following is a summary of loans at March 31, 2012 and December 31, 2011:

	2012						2011
	Amount			Percent of total			Amount			Percent of total
	(In thousands)
Real estate loans:
1-to-4 family residential	$	51,502			12.88	%	$	52,182			12.49	%
Commercial real estate		184,543			46.16	%		192,047			45.98	%
Multi-family residential		19,294			4.83	%		23,377			5.60	%
Construction		67,542			16.90	%		70,846			16.96	%
Home equity lines of credit ("HELOC")		37,328			9.34	%		38,702			9.27	%
Total real estate loans		360,209			90.11	%		377,154			90.30	%
Other loans:
Commercial and industrial		31,580			7.90	%		33,146			7.94	%
Loans to individuals & overdrafts		8,317			2.08	%		7,671			1.84	%
Total other loans		39,897			9.98	%		40,817			9.78	%
Gross loans		400,106						417,971
Less deferred loan origination fees, net		(346	)		(.09	%)		(347	)		(.08	)%
Total loans		399,760			100.00	%		417,624			100.00	%
Allowance for loan losses		(9,568	)					(10,034	)
Total loans, net	$	390,192					$	407,590

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

At March 31, 2012, the Company had pre-approved but unused lines of credit totaling $54.4 million. In management's opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

Residential 1-to-4 Family Loans

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

Commercial Real Estate Loans

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

Multi-family Residential Loans

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

Construction Loans

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

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

Home Equity Lines of Credit

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

Commercial and Industrial Loans

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

Loans to Individuals & Overdrafts

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

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

	March 31, 2012
	30+ Days Past Due		Non- Accrual Loans		Total Past Due		Current		Total Loans
	(In thousands)
Commercial and industrial	$	28	$	162	$	190	$	31,390	$	31,580
Construction		514		2,955		3,469		64,073		67,542
Multi-family residential		—		1,540		1,540		17,754		19,294
Commercial real estate		36		9,691		9,727		174,816		184,543
Loans to individuals & overdrafts		23		174		197		8,120		8,317
1-to-4 family residential		305		2,011		2,316		49,186		51,502
HELOC		27		1,018		1,045		36,283		37,328
Deferred loan (fees) cost, net										(346	)
	$	933	$	17,551	$	18,484	$	381,622	$	399,760

There was one loan in 1 to 4 family residential category totaling $81,000 that was over 90 days past due and still accruing interest at March 31, 2012.

	December 31, 2011
	30+ Days Past Due		Non- Accrual Loans		Total Past Due		Current		Total Loans
	(In thousands)
Commercial and industrial	$	48	$	171	$	219	$	32,927	$	33,146
Construction		568		4,072		4,640		66,206		70,846
Multi-family residential		1,540		—		1,540		21,837		23,377
Commercial real estate		1,013		10,425		11,438		180,609		192,047
Loans to individuals & overdrafts		10		176		186		7,485		7,671
1-to-4 family residential		735		1,875		2,610		49,572		52,182
HELOC		333		904		1,237		37,465		38,702
Deferred loan (fees) cost, net										(347	)
	$	4,247	$	17,623	$	21,870	$	396,101	$	417,624

At December 31, 2011 there were three loans totaling $108,000 that were 90 days or more past due and still accruing interest.

Impaired Loans

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

			Contractual				March 31, 2012 Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	448	$	840	$	—	$	464	$	7
Construction		1,956		2,558		—		1,483		15
Commercial real estate		11,937		13,004		—		10,566		88
Loans to individuals & overdrafts		177		196		—		197		1
Multi-family residential		1,540		1,540		—		1,540		—
1-to-4 family residential		1,868		2,676		—		1,984		4
HELOC		1,050		1,210		—		890		8
Subtotal:		18,976		22,024		—		17,124		123
With an allowance recorded:
Commercial and industrial		121		121		24		60		2
Construction		1,694		1,694		302		2,529		1
Commercial real estate		2,635		3,712		662		3,837		36
Loans to individuals & overdrafts		55		55		23		36		—
Multi-family Residential		—		—		—		—		—
1-to-4 family residential		775		807		206		756		10
HELOC		335		335		168		371		—
Subtotal:		5,615		6,724		1,385		7,589		49
Totals:
Commercial		20,331		23,469		988		20,479		149
Consumer		232		251		23		233		1
Residential		4,028		5,028		374		4,001		22
Grand Total:	$	24,591	$	28,748	$	1,385	$	24,713	$	172

			Contractual				December 31, 2011 Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	478	$	808	$	—	$	290	$	25
Construction		1,011		1,166		—		1,539		23
Commercial real estate		9,195		10,085		—		7.889		158
Loans to individuals & overdrafts		217		234		—		175		4
Multi-family residential		1,540		1,540		—		1,041		102
1-to-4 family residential		2,100		2,930		—		1,746		33
HELOC		730		823		—		406		—
Subtotal:		15,271		17,586		—		13,086		345
With an allowance recorded:
Commercial and industrial		—		—		—		272		—
Construction		3,365		4,085		674		1,269		4
Commercial real estate		5,039		5.929		498		4,043		71
Loans to individuals & overdrafts		16		16		15		102		1
Multi-family Residential		—		—		—		—		—
1-to-4 family residential		736		774		170		1,999		35
HELOC		408		435		158		321		10
Subtotal:		9,564		11,239		1,515		8,006		121
Totals:
Commercial		20,628		23,613		1,172		16,343		383
Consumer		233		250		15		277		5
Residential		3,974		4,962		328		4,472		78
Grand Total:	$	24,835	$	28,825	$	1,515	$	21,092	$	466

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.

Troubled Debt Restructurings

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

	Three months ended March 31, 2012						Twelve months ended March 31, 2012
	Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(In thousands)
Below market interest rate:		—	$	—	$	—		—	$	—	$	—
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		—		—		—
HELOC		—		—		—		—		—		—
Total		—		—		—		—		—		—
Extended payment terms:
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		1		287		287		5		3,592		3,506
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		1		110		109
HELOC		—		—		—		—		—		—
Total		1		287		287		6		3,702		3,615
Forgiveness of principal:
Commercial and Industrial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial real estate		—		—		—		1		938		635
Loans to individuals and overdrafts		—		—		—		—		—		—
1-to-4 family residential		—		—		—		—		—		—
HELOC		—		—		—		—		—		—
Total		—		—		—		1		938		635
Total		1	$	287	$	287		7	$	4,640	$	4,250

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

	Three months ended March 31, 2012				Twelve months ended March 31, 2012
	Number of loans		Recorded investment		Number of loans		Recorded investment
	(In thousands)
Below market interest rate:
Commercial and Industrial		—	$	—		—	$	—
Construction		—		—		—		—
Commercial real estate		—		—		—		—
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		—		—
HELOC		—		—		—		—
Total		—		—		—		—
Extended payment terms:
Commercial and Industrial		1		114		1		211
Construction		2		294		4		2,329
Commercial real estate		4		1,165		14		5,161
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		5		447
HELOC		—		—		—		—
Total		7		1,573		24		8,148
Forgiveness of principal:
Commercial and Industrial		—		—		—		—
Construction		—		—		—		—
Commercial real estate		—		—		1		635
Loans to individuals and overdrafts		—		—		—		—
1-to-4 family residential		—		—		—		—
HELOC		—		—		—		—
Total		—		—		1		635
Total		7	$	1,573		25	$	8,783

The following table presents the successes and failures of the types of modifications within the previous three months as of March 31, 2012:

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
							(In thousands)
Below market interest rate		—	$	—		—	$	—		—	$	—		—	$	—
Extended payment terms		—		—		3		408		3		878		1		287
Forgiveness of principal		—		—		—		—		—		—		—		—
Total		—	$	—		3	$	408		3	$	878		1	$	287

At March 31, 2012, the Company had 25 loans with a balance of $7.2 million that were considered to be troubled debt restructured. Of those TDRs, 11 loans with a balance totaling $1.7 million were still accruing as of March 31, 2012. The remaining 14 TDRs with a balance totaling $5.5 million as of March 31, 2012 were in nonaccrual status.

Credit Quality Indicators

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

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

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

• Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

• 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 March 31, 2012 and December 31, 2011, respectively:

March 31, 2012
Commercial Credit Exposure By Internally Assigned Grade	Commercial and industrial		Construction		Commercial real estate		Multi-family residential
			(In thousands)
Superior	$	588	$	56	$	—	$	—
Very good		37		5		311		—
Good		3,416		1,599		14,604		1,710
Acceptable		9,157		7,637		63,902		8,624
Acceptable with care		16,017		52,111		61,571		7,298
Special mention		1,789		2,105		28,755		122
Substandard		576		4,029		15,400		1,540
Doubtful		—		—		—		—
Loss		—		—		—		—
	$	31,580	$	67,542	$	184,543	$	19,294

Consumer Credit Exposure By Internally Assigned Grade	1-to-4 Family residential		HELOC
Pass	$	44,004	$	34,245
Special mention		2,537		1,239
Substandard		4,961		1,844
	$	51,502	$	37,328

Consumer Credit Exposure Based On Payment Activity	Loans to individuals & overdrafts
Pass	$	8,074
Non –pass		243
	$	8,317

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

Consumer Credit Exposure By Internally Assigned Grade	1-to-4 Family residential		HELOC
Pass	$	43,647	$	35,127
Special mention		2,925		1,391
Substandard		5,610		2,184
	$	52,182	$	38,708

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

Nonperforming assets at March 31, 2012 and December 31, 2011 consist of the following:

	March 31, 2012		December 31, 2011
	(In thousands)
Non-accrual loans	$	17,551	$	17,623
Restructured loans		1,719		2,013
Total non-performing loans		19,270		19,636
Foreclosed real estate		2,391		3,031
Total non-performing assets	$	21,661	$	22,667

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 tables present a roll forward of the Company's allowance for loan losses by loan class for the three month periods ended March 31, 2012 and March 31, 2011, respectively:

	Three months ended March 31, 2012
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 01/01/2012	$	719		$	1,540		$	4,771		$	1,661		$	1,122		$	94		$	127		$	10,034
Provision for loan losses		(2,547	)		56			334			(94	)		175			(40	)		(20	)		(2,136	)
Loans charged-off		(47	)		(458	)		(312	)		(45	)		(208	)		(9	)		—			(1,079	)
Recoveries		2,430			173			11			63			12			60			—			2,749
Balance, end of period 3/31/2012	$	555		$	1,311		$	4,804		$	1,585		$	1,101		$	105		$	107		$	9,568
Ending balance: individually evaluated for impairment	$	24		$	302		$	662		$	206		$	168		$	23		$	—		$	1,385
Ending balance: collectively evaluated for impairment	$	531		$	1,009		$	4,142		$	1,379		$	933		$	82		$	107		$	8,183
Loans:
Ending balance	$	31,580		$	67,542		$	184,543		$	51,502		$	37,328		$	8,317		$	19,294		$	400,106
Ending balance: individually evaluated for impairment	$	569		$	3,650		$	14,572		$	2,643		$	1,385		$	232		$	1,540		$	24,591
Ending balance: collectively evaluated for impairment	$	31,011		$	63,892		$	169,971		$	48,859		$	35,943		$	8,085		$	17,754		$	375,515

During the three months ended March 31, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $2.7 million. These recoveries were primarily a result of a $2.4 million recovery on commercial and industrial loans. These recoveries combined with the decrease in total loans outstanding at March 31, 2012 resulted in a $2.1 million reversal in the provision.

	December 31, 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)
Loans:
Ending Balance	$	33,146	$	70,846	$	192,047	$	52,182	$	38,702	$	7,671	$	23,377	$	417,971
Ending Balance: individually evaluated for impairment	$	478	$	4,376	$	14,234	$	2,836	$	1,138	$	233	$	1,540	$	24,835
Ending Balance: collectively evaluated for impairment	$	32,668	$	66,470	$	177,813	$	49,346	$	37,564	$	7,438	$	21,837	$	393,136

	Three months ended March 31, 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		$	1,985		$	1,348		$	1,530		$	640		$	10,015
Provision for loan losses		(43	)		1,144			1,269			526			(145	)		(1,130	)		(457	)		1,164
Loans charged-off		—			(222	)		(773	)		(190	)		(65	)		(22	)		—			(1,272	)
Recoveries		72			—			2			130			2			5			—			211
Balance, end of period 3/31/2011	$	1,081		$	1,271		$	3,609		$	2,451		$	1,140		$	383		$	183		$	10,118
Ending Balance: individually evaluated for impairment	$	262		$	668		$	832		$	1,157		$	262		$	264		$	—		$	3,445
Ending Balance: collectively evaluated for impairment	$	819		$	603		$	2,777		$	1,294		$	878		$	119		$	183		$	6,673
Loans:
Ending Balance	$	47,250		$	85,963		$	188,314		$	58,590		$	39,781		$	12,090		$	29,983		$	461,971
Ending Balance: individually evaluated for impairment	$	1,016		$	1,976		$	8,317		$	2,504		$	1,700		$	470		$	2,122		$	18,105
Ending Balance: collectively evaluated for impairment	$	46,234		$	83,987		$	179,997		$	56,086		$	38,081		$	11,620		$	27,861		$	443,866

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Consolidated Statements Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements Of Comprehensive Income (Loss) [Abstract]
Net income	$ 2,112	$ 121
Other comprehensive loss:
Unrealized losses on investment securities available for sale	(148)	(185)
Tax effect	53	64
Unrealized losses on investment securities available for sale, Net of tax	(95)	(121)
Reclassification adjustment for losses included in net income	58	24
Tax effect	(22)	(9)
Reclassification adjustment for losses included in net loss, Net of tax	36	15
Total	(59)	(106)
Total comprehensive income	$ 2,053	$ 15

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS

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

Accounting Standards Update ("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 became effective for the Company on January 1, 2012 and did not 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 add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity's shareholders' equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. ASU 2011-04 became effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company's financial statements.

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

Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board ("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.