SELECT BANCORP, INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - SELECT BANCORP, INC.	v318218_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - SELECT BANCORP, INC.	v318218_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - SELECT BANCORP, INC.	v318218_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - SELECT BANCORP, INC.	v318218_ex31-2.htm

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

¨ 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		(I.R.S. Employer Identification No.)
incorporation or organization)

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

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

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

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

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

Large accelerated filer ¨		Accelerated filer ¨

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

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

As of August 1, 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
	June 30, 2012 and December 31, 2011	3

	Consolidated Statements of Operations
	Three Months and Six Months Ended June 30, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income (Loss)
	Three Months and Six Months Ended June 30, 2012 and 2011	5

	Consolidated Statements of Changes in Shareholders’ Equity
	Six Months Ended June 30, 2012 and 2011	6

	Consolidated Statements of Cash Flows
	Six Months Ended June 30, 2012 and 2011	7

	Notes to Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 4 -	Controls and Procedures	53

Part II.	OTHER INFORMATION

Item 4 -	Mine Safety Disclosures	54

Item 6 -	Exhibits	54

	Signatures	55

	Exhibit Index	56

- 2 -

Part I. Financial Information

Item 1 - Financial Statements

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31,
	(Unaudited)			2011*
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	15,731		$	18,478
Interest-earning deposits in other banks		56,558			55,590
Federal funds sold		3,028			3,028
Investment securities available for sale, at fair value		71,808			67,854

Loans		390,403			417,624
Allowance for loan losses		(8,510	)		(10,034	)

NET LOANS		381,893			407,590

Accrued interest receivable		1,628			2,003
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		1,034			1,248
Other non-marketable securities		1,075			1,080
Foreclosed real estate		3,859			3,031
Premises and equipment held for sale		-			1,113
Premises and equipment, net		11,096			11,243
Bank Owned Life Insurance (“BOLI”)		8,106			7,981
Core deposit intangible		356			545
Other assets		7,510			8,867

TOTAL ASSETS	$	563,682		$	589,651

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	72,683		$	74,569
Savings		23,985			24,461
Money market and NOW		95,374			92,600
Time		279,142			309,747

TOTAL DEPOSITS		471,184			501,377

Short-term debt		22,953			21,877
Long-term debt		12,372			14,372
Accrued interest payable		281			330
Accrued expenses and other liabilities		3,938			2,149

TOTAL LIABILITIES		510,728			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 June 30, 2012 and December 31, 2011, respectively		6,914			6,860
Additional paid-in capital		41,985			41,851
Retained earnings (accumulated deficit)		2,820			(450	)
Accumulated other comprehensive income		1,235			1,285

TOTAL SHAREHOLDERS’ EQUITY		52,954			49,546

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	563,682		$	589,651

* Derived from audited consolidated financial statements.

See accompanying notes.

- 3 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	5,887		$	7,251		$	12,042		$	14,555
Federal funds sold and interest-earning deposits in other banks		36			22			72			39
Investments		402			525			830			1,119

TOTAL INTEREST INCOME		6,325			7,798			12,944			15,713

INTEREST EXPENSE
Money market, NOW and savings deposits		127			180			228			397
Time deposits		1,451			1,873			3,007			3,753
Short-term debt		26			66			60			135
Long-term debt		80			74			162			148

TOTAL INTEREST EXPENSE		1,684			2,193			3,457			4,433

NET INTEREST INCOME		4,641			5,605			9,487			11,280

PROVISION (RECOVERY) FOR LOAN LOSSES		(649	)		2,542			(2,786	)		3,706

NET INTEREST INCOME AFTER
PROVISION (RECOVERY) FOR LOAN LOSSES		5,290			3,063			12,273			7,574

NON-INTEREST INCOME
Fees from pre-sold mortgages		75			61			113			87
Service charges on deposit accounts		291			376			609			758
Gain on branch sale		557			-			557			-
Other fees and income		276			455			547			688

TOTAL NON-INTEREST INCOME		1,199			892			1,826			1,533

NON-INTEREST EXPENSE
Personnel		2,047			2,284			4,008			4,675
Occupancy and equipment		311			358			670			720
Deposit insurance		187			235			381			497
Professional fees		470			503			940			1,133
Information systems		368			441			735			827
Foreclosure-related expenses		521			700			545			903
Other		744			818			1,586			1,662
TOTAL NON-INTEREST EXPENSE		4,648			5,339			8,865			10,417

INCOME BEFORE
INCOME TAX (BENEFIT)		1,841			(1,384	)		5,234			(1,310	)
INCOME TAX (BENEFIT)		683			(523	)		1,964			(570	)

NET INCOME (LOSS)	$	1,158		$	(861	)	$	3,270		$	(740	)

NET INCOME (LOSS) PER COMMON SHARE
Basic	$	.17		$	(.13	)	$	.47		$	(.11	)
Diluted	$	.17		$	(.13	)	$	.47		$	(.11	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Basic		6,913,636			6,913,636			6,886,417			6,913,636
Diluted		6,913,636			6,913,636			6,886,417			6,913,636

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands)

Net income (loss)	$	1,158		$	(861	)	$	3,270		$	(740	)

Other comprehensive income (loss):
Unrealized gain (loss) on investment
securities available for sale		(50	)		268			(198	)		130
Tax effect		19			(92	)		72			(50	)
		(31	)		176			(126	)		80

Reclassification adjustment for gain (loss)
included in net income		65			(2	)		123			(26	)
Tax effect		(25	)		1			(47	)		15
		40			(1	)		76			(11	)

Total		9			175			(50	)		69

Total comprehensive income (loss)	$	1,167		$	(686	)	$	3,220		$	(671	)

See accompanying notes.

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NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

										Retained			Accumulated
					Common			Additional		earnings			other com-			Total
	Common stock				stock			paid-in		(accumulated			prehensive			shareholders’
	Shares		Amount		receivable			capital		Deficit)			income			equity
	(Amounts in thousands, except share data)

Balance at December 31, 2010		6,913,636	$	6,914	$	-		$	41,887	$	(286	)	$	1,178		$	49,693

Net loss		-		-		-			-		(740	)		-			(740	)

Common stock receivable		-		-		(242	)		-		-			-			(242	)

Other comprehensive income, net		-		-		-			-		-			69			69

Stock based compensation		-		-		-			185		-			-			185

Balance at June 30, 2011		6,913,636	$	6,914	$	(242	)	$	42,072	$	(1,026	)	$	1,247		$	48,965

Balance at December 31, 2011		6,860,367	$	6,860	$	-		$	41,851	$	(450	)	$	1,285		$	49,546

Net income		-		-		-			-		3,270			-			3,270

Sale of common stock		53,269		54		-			111		-			-			165

Other comprehensive loss, net		-		-		-			-		-			(50	)		(50	)

Stock based compensation		-		-		-			23		-			-			23

Balance at June 30, 2012		6,913,636	$	6,914	$	-		$	41,985	$	2,820		$	1,235		$	52,954

See accompanying notes.

- 6 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2012			2011
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,270		$	(740	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision (recovery) for loan losses		(2,785	)		3,706
Depreciation and amortization of premises and equipment		286			336
Amortization and accretion of investment securities		281			410
Amortization of deferred loan fees and costs		(96	)		(104	)
Amortization of core deposit intangible		57			77
Stock-based compensation		23			185
Net gain on branch sale		(557	)		-
Increase in cash surrender value of bank owned life insurance		(125	)		(127	)
Net loss on sale and write-downs of foreclosed real estate		545			903
Net (gains) loss on sale of investments		123			(26	)
Change in assets and liabilities:
Net change in accrued interest receivable		373			136
Net change in other assets		1,916			222
Net change in accrued expenses and other liabilities		1,745			673

NET CASH PROVIDED BY OPERATING ACTIVITIES		5,056			5,651

CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of FHLB stock		214			83
Purchase of investment securities available for sale		(19,372	)		(7,256	)
Maturities of investment securities available for sale		8,021			14,237
Mortgage-backed securities pay-downs		6,417			5,274
Sale of investment securities available for sale		500			500
Net cash payment on branch sale		(13,001	)		-
Net change in loans outstanding		24,602			6,970
Proceeds from sale of foreclosed real estate		2,265			1,177
Purchases of premises and equipment		(109	)		(32	)

NET CASH PROVIDED BY INVESTING ACTIVITIES		9,537			20,953

See accompanying notes.

- 7 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Six Months Ended
	June 30,
	2012			2011
	(In thousands)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	(15,613	)	$	4,213
Proceeds from short-term debt		3,424			80
Repayments on short-term debt		(2,348	)		-
Repayments on long-term debt		(2,000	)		(2,000	)
Proceeds from sale of common stock		165			-

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(16,372	)		2,293

NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,779	)		28,897

CASH AND CASH EQUIVALENTS, BEGINNING		77,096			35,902

CASH AND CASH EQUIVALENTS, ENDING	$	75,317		$	64,799

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	3,506		$	4,450

Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		(50	)		69
Transfers from loans to foreclosed real estate		3,638			1,805
Common stock receivable		-			(242	)

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 and six month periods ended June 30, 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 and six month periods ended June 30, 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, 2012. This quarterly report should be read in conjunction with the Annual Report.

NOTE B - PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At June 30, 2012 and 2011 there were 371,883 and 431,274 anti-dilutive options for each three month period and 372,883 and 428,878 anti-dilutive options for each six month period, respectively.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Weighted average shares used for basic net income per share		6,913,636		6,913,636		6,886,417		6,913,636

Effect of dilutive stock options		-		-		-		-

Weighted average shares used for diluted net income per share		6,913,636		6,913,636		6,886,417		6,913,636

- 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 IFRS. 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 shareholders’ 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 shareholders’ 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.

- 10 -

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (continued)

ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. ASU 2011-12 amends Topic 220 to allow the Financial Accounting Standards Board (“FASB”) time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities are required to apply these requirements for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company has adopted the standard and the adoption of ASU 2011-12 did not have an impact on the Company’s financial condition, results of operations, or cash flows.

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

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

NOTE D – FAIR VALUE MEASUREMENTS

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

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:

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NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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 June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

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NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (dollars in thousands):

			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
June 30, 2012	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
U.S. government agencies	$	32,631	$	-	$	32,631	$	-
Mortgage-backed securities - Government Sponsored- Enterprises (“GSE’s”)		32,594		-		32,594		-
Municipal bonds		6,583		-		6,583		-
Total	$	71,808	$	-	$	71,808	$	-

			Quoted Prices in		Significant
Investment securities			Active Markets		Other		Significant
available for sale			for Identical		Observable		Unobservable
December 31, 2011	Fair value		Assets (Level 1)		Inputs (Level 2)		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	$	-

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 non-recurring basis.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 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 non-recurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3. There were no transfers between levels from the prior reporting periods. There have been no changes in valuation techniques for the quarter ended June 30, 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 June 30, 2012. Valuation techniques are consistent with techniques used in prior quarters.

Premises and Equipment Held for Sale

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of June 30, 2012 and
December 31, 2011 (dollars in thousands):

			Quoted Prices in		Significant
			Active Markets		Other		Significant
Asset Category			for Identical		Observable		Unobservable
June 30, 2012	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)

Impaired loans	$	11,394	$	-	$	-	$	11,394
Foreclosed real estate		3,859		-		-		3,859

Total	$	15,253	$	-	$	-	$	15,253

Of the $11.4 million in impaired loans at June 30, 2012 there were $3.1 million in loans with specific reserves of $520,000 along with $8.8 million in loans without specific reserves which had been partially charged-off.

			Quoted Prices in		Significant
			Active Markets		Other		Significant
Asset Category			for Identical		Observable		Unobservable
December 31, 2011	Fair value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)

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

Of the $13.4 million in impaired loans at December 31, 2011 there were $9.6 million in loans with specific reserves of $1.5 million along with $5.3 million in loans without specific reserves which had been partially charged-off.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying values and estimated fair values of the Company's financial instruments at June 30, 2012 and December 31, 2011:

	June 30, 2012
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	15,731	$	15,731	$	15,731	$	-	$	-
Interest-earning deposits in other banks		56,558		56,558		56,558		-		-
Federal funds sold		3,028		3,028		3,028		-		-
Investment securities available for sale		71,808		71,808		-		71,808		-
Loans, net		381,220		398,540		-		-		398,540
Accrued interest receivable		1,628		1,628		-		-		1,628
Stock in the FHLB		1,034		1,034		-		-		1,034
Other non-marketable securities		1,075		1,075		-		-		1,075

Financial liabilities:
Deposits	$	471,184	$	479,845	$	-	$	479,845	$	-
Short-term debt		22,953		22,953		-		22,953		-
Long-term debt		12,372		7,661		-		7,661		-
Accrued interest payable		281		281		-		-		281

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

	December 31, 2011
	Carrying		Estimated
	Amount		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, net		407,590		424,851		-		-		424,851
Premises and equipment held for sale		1,113		1,113		-		-		1,113
Accrued interest receivable		2,003		2,003		-		-		2,003
Stock in the FHLB		1,248		1,248		-		-		1,248
Other non-marketable securities		1,080		1,080		-		-		1,080

Financial liabilities:
Deposits	$	501,377	$	509,454	$	-	$	509,454	$	-
Short-term debt		21,877		21,877		-		21,877		-
Long-term debt		14,372		9,661		-		9,661		-
Accrued interest payable		330		330		-		-		330

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

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

Investment Securities Available for Sale

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

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.

Premises and Equipment Held for Sale

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

Deposits

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

Short-term Debt

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.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - INVESTMENT SECURITIES

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

	June 30, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	12,021	$	59	$	-		$	12,080
After 1 year but within 5 years		20,391		169		(9	)		20,551

Mortgage-backed securities-GSE’s
Within 1 year		1,196		46		-			1,242
After 1 year but within 5 years		24,747		1,183		-			25,930
After 5 years but within 10 years		5,281		141		-			5,422

Municipal bonds
Within 1 year		352		4		-			356
After 1 year but within 5 years		2,358		209		-			2,567
After 5 years but within 10 years		1,846		127		(12	)		1,961
After 10 years		1,601		98		-			1,699

	$	69,793	$	2,036	$	(21	)	$	71,808

As of June 30, 2012, accumulated other comprehensive income included unrealized net gains of $2.0 million, net of deferred income taxes of $780,000.

For the second quarter 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $3,000 and $5,000, respectively, and realized losses of $49,000 and $20,000, respectively for each period. These investment sales generated $3.5 million and $2.6 million in proceeds during these respective periods. For the six months ended June 30, 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $6,000 and $12,000, respectively, and realized losses of $129,000 and $38,000, respectively, for each period. These investment sales generated $6.9 million and $5.8 million in proceeds during these respective periods.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F- INVESTMENT SECURITIES (continued)

	December 31, 2011
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			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.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F- INVESTMENT SECURITIES (continued)

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2012 and December 31, 2011.

	June 30, 2012
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(In thousands)
Securities available for sale:
U.S. government agencies	$	8,357	$	9	$	-	$	-	$	8,357	$	9
Municipal bonds		669		12		-		-		669		12

Total temporarily impaired securities	$	9,026	$	21	$	-	$	-	$	9,026	$	21

At June 30, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven U.S. government agencies and one municipal bond had unrealized losses for less than twelve months totaling $21,000 at June 30, 2012. All unrealized losses are attributable to the general trend of interest rates.

	December 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
	(In thousands)
Securities available for sale:
Mortgage-backed securities- GSE’s	$	7,207	$	18	$	-	$	-	$	7,207	$	18
Total temporarily impaired securities	$	7,207	$	18	$	-	$	-	$	7,207	$	18

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS

Following is a summary of loans at June 30, 2012 and December 31, 2011:

	2012						2011
				Percent						Percent
	Amount			of total			Amount			of total
	(In thousands)
Real estate loans:
1-to-4 family residential	$	48,487			12.42	%	$	52,182			12.49	%
Commercial real estate		193,221			49.48	%		192,047			45.98	%
Multi-family residential		19,501			5.00	%		23,377			5.60	%
Construction		54,716			14.02	%		70,846			16.96	%
Home equity lines of credit (“HELOC”)		36,771			9.42	%		38,702			9.27	%

Total real estate loans		352,696			90.34	%		377,154			90.30	%

Other loans:
Commercial and industrial		31,044			7.95	%		33,146			7.94	%
Loans to individuals & overdrafts		7,070			1.81	%		7,671			1.84	%
Total other loans		38,114			9.76	%		40,817			9.78	%

Gross loans		390,810						417,971

Less deferred loan origination fees, net		(407	)		(.10	)%		(347	)		(.08	)%

Total loans		390,403			100.00	%		417,624			100.00	%

Allowance for loan losses		(8,510	)					(10,034	)

Total loans, net	$	381,893					$	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 June 30, 2012, the Company had pre-approved but unused lines of credit for customers totaling $60.0 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.

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.

1-to-4 Family Residential 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 a liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, market area, and risk grade.

Multi-family Residential Loans

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

Construction Loans

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

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

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 June 30, 2012 and December 31, 2011, respectively:

	June 30, 2012
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)

Commercial and industrial	$	1,923	$	259	$	2,182	$	28,862	$	31,044
Construction		366		2,649		3,015		51,701		54,716
Multi-family residential		43		1,508		1,551		17,950		19,501
Commercial real estate		63		7,685		7,748		185,473		193,221
Loans to individuals & overdrafts		18		124		142		6,928		7,070
1-to-4 family residential		472		1,627		2,099		46,388		48,487
HELOC		113		824		937		35,834		36,771
Deferred loan (fees) cost, net										(407	)
	$	2,998	$	14,676	$	17,674	$	373,136	$	390,403

At June 30, 2012 there were no loans that were more than 90 days past due and still accruing interest.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

	December 31, 2011
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		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 June 30, 2012 and December 31, 2011:

							Three months ended				Six months ended
							June 30, 2012				June 30, 2012
			Contractual						Interest Income				Interest Income
			Unpaid				Average		Recognized on		Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired		Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	512	$	777	$	-	$	480	$	6	$	480	$	13
Construction		2,312		2,915		-		2,134		6		1,760		6
Commercial real estate		13,683		15,187		-		12,810		196		11,605		284
Loans to individuals & overdrafts		121		138		-		149		1		171		1
Multi-family residential		1,508		1,508		-		1,524		-		1,529		-
1 to 4 family residential		1,683		1,932		-		1,776		9		1,884		13
HELOC		1,336		1,556		-		1,193		7		1,039		15
Subtotal:		21,155		24,013		-		20,066		225		18,468		332
With an allowance recorded:
Commercial and industrial		7		7		2		64		-		43		-
Construction		1,192		1,192		167		1,443		11		2,083		12
Commercial real estate		852		1,114		75		1,744		13		2,842		13
Loans to individuals & overdrafts		15		16		7		35		-		29		-
Multi-family residential		43		43		10		21		1		14		1
1 to 4 family residential		810		1,133		162		792		14		774		24
HELOC		181		181		97		258		5		308		5
Subtotal:		3,100		3,686		520		4,357		44		6,093		55
Totals:
Commercial		20,109		22,743		254		20,220		233		20,356		329
Consumer		136		154		7		184		1		200		1
Residential		4,010		4,802		259		4,019		35		4,005		57
Grand Total:	$	24,255	$	27,699	$	520	$	24,423	$	269	$	24,561	$	387

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Impaired Loans (continued)

							December 31, 2011
			Contractual				Year to Date
			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized on
	Investment		Balance		Allowance		Investment		Impaired Loans
	(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 status when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.

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 previous twelve months:

	Twelve months ended June 30, 2012
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded
	of loans		Investment		Investment
	(Dollars in thousands)

Below market interest rate:
Commercial and industrial		-	$	-	$	-
Construction		-		-		-
Commercial real estate		-		-		-
Loans to individuals & overdrafts		-		-		-
1-to-4 family residential		-		-		-
HELOC		-		-		-
Total		-		-		-

Extended payment terms:
Commercial and industrial		2		327		325
Construction		2		2,057		2,036
Commercial real estate		5		3,111		2,974
Loans to individuals & overdrafts		-		-		-
1-to-4 family residential		2		151		143
HELOC		-		-		-
Total		11		5,646		5,478

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

Total		11	$	5,646	$	5,478

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 and six months ended June 30, 2012:

	Three months ended				Six months ended
	June 30, 2012				June 30, 2012
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(Dollars in thousands)
Below market interest rate:
Commercial and industrial		-	$	-		-	$	-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		-		-

Extended payment terms:
Commercial and industrial		-		-		1		114
Construction		-		-		2		290
Commercial real estate		-		-		4		1,144
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		7		1,548

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

Other:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		2		849		2		849
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		4		165		4		165
HELOC		-		-		-		-
Total		6		1,014		6		1,014

Total		6	$	1,014		13	$	2,562

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

All loans extended to borrowers that are considered TDRs and have characteristics that are not within the normal lending guidelines and practices when extending credit are included in the Other category.

The following table presents the successes and failures of the types of modifications within the previous six months as of June 30, 2012:

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number		Recorded		Number		Recorded		Number		Recorded		Number		Recorded
	of loans		Investment		of loans		Investment		of loans		Investment		of loans		Investment
	(In thousands)

Below market interest rate		-	$	-		-	$	-		-	$	-		-	$	-
Extended payment terms		-		-		2		290		4		975		1		283
Forgiveness of principal		-		-		-		-		-		-		-		-
Other		-		-		6		1,014		-		-		-		-

Total		-	$	-		8	$	1,304		4	$	975		1	$	283

At June 30, 2012, the Company had 31 loans with a balance of $9.0 million that were considered to be troubled debt restructurings. Of those TDRs, 14 loans with a balance totaling $1.9 million were still accruing as of June 30, 2012. The remaining 17 TDRs with a balance totaling $7.1 million as of June 30, 2012 were in non-accrual status.

Credit Quality Indicators

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

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

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

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

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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:

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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:

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

Risk Grade 9 (Loss) - Loans classified 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.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of June 30, 2012 and December 31, 2011, respectively:

June 30, 2012
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
(In thousands)

Superior	$	764	$	55	$	-	$	-
Very good		32		4		307		-
Good		3,067		655		14,303		1,687
Acceptable		9,870		5,049		63,276		5,793
Acceptable with care		15,441		40,670		74,336		10,470
Special mention		1,339		4,629		23,338		-
Substandard		531		3,654		17,661		1,551
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	31,044	$	54,716	$	193,221	$	19,501

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

Pass	$	41,324	$	33,746
Special mention		3,528		1,200
Substandard		3,635		1,825
	$	48,487	$	36,771

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

Pass	$	6,888
Non –pass		182
	$	7,070

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

December 31, 2011
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		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	1-to-4 family
Assigned Grade	residential		HELOC

Pass	$	43,647	$	35,127
Special mention		2,925		1,391
Substandard		5,610		2,184
	$	52,182	$	38,702

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

Pass	$	7,447
Non-pass		224
	$	7,671

Non-performing assets at June 30, 2012 and December 31, 2011 consist of the following:

	June 30, 2012		December 31, 2011
	(In thousands)

Non-accrual loans	$	14,676	$	17,623
Accruing TDRs		1,903		2,013
Total non-performing loans		16,579		19,636
Foreclosed real estate		3,859		3,031
Total non-performing assets	$	20,438	$	22,667

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.

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 and six month periods ended June 30, 2012 and June 30, 2011, respectively:

	Three months ended
	June 30, 2012
	Commercial									1-to-4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential		Total
	(In thousands)

Balance, beginning of period 3/31/2012	$	555		$	1,311		$	4,804		$	1,585		$	1,101		$	105		$	107	$	9,568
Provision (recovery) for loan losses		(409	)		(967	)		1,024			(275	)		(41	)		3			16		(649	)
Loans charged-off		(4	)		-			(670	)		(54	)		(168	)		(45	)		-		(940	)
Recoveries		244			138			70			58			5			17			-		532

Balance, end of period 6/30/2012	$	386		$	482		$	5,228		$	1,314		$	897		$	80		$	123	$	8,510

Ending balance: individually evaluated for impairment	$	2		$	167		$	75		$	162		$	97		$	7		$	10	$	520
Ending balance: collectively evaluated for impairment	$	384		$	315		$	5,153		$	1,152		$	800		$	73		$	113	$	7,990

Loans:
Ending balance	$	31,044		$	54,716		$	193,221		$	48,487		$	36,771		$	7,070		$	19,501	$	390,810
Ending balance: individually evaluated for impairment	$	519		$	3,504		$	14,535		$	2,493		$	1,517		$	136		$	1,551	$	24,255
Ending balance: collectively evaluated for impairment	$	30,525		$	51,212		$	178,686		$	45,994		$	35,254		$	6,934		$	17,950	$	366,555

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (Continued)

	Six months ended
	June 30, 2012
	Commercial									1-to-4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential			Total
	(In thousands)

Balance, beginning of period 1/1/2012	$	719		$	1,540		$	4,771		$	1,661		$	1,122		$	94		$	127		$	10,034
Provision (recovery) for loan losses		(2,956	)		(911	)		1,357			(369	)		134			(37	)		(4	)		(2,786	)
Loans charged-off		(51	)		(458	)		(981	)		(99	)		(376	)		(54	)		-			(2,019	)
Recoveries		2,674			311			81			121			17			77			-			3,281

Balance, end of period 6/30/2012	$	386		$	482		$	5,228		$	1,314		$	897		$	80		$	123		$	8,510

Ending balance: individually evaluated for impairment	$	2		$	167		$	75		$	162		$	97		$	7		$	10		$	520
Ending balance: collectively evaluated for impairment	$	384		$	315		$	5,153		$	1,152		$	800		$	73		$	113		$	7,990

Loans:
Ending balance	$	31,044		$	54,716		$	193,221		$	48,487		$	36,771		$	7,070		$	19,501		$	390,810
Ending balance: individually evaluated for impairment	$	519		$	3,504		$	14,535		$	2,493		$	1,517		$	136		$	1,551		$	24,255
Ending balance: collectively evaluated for impairment	$	30,525		$	51,212		$	178,686		$	45,994		$	35,254		$	6,934		$	17,950		$	366,555

During the six months ended June 30, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $3.3 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 June 30, 2012 resulted in a $2.8 million recovery in the provision for loan losses.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

	December 31, 2011
	Commercial						1-to-4				Loans to		Multi-
	and				Commercial		family				individuals &		family
Allowance for loan losses	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total
	(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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

	Three months ended
	June 30, 2011
	Commercial									1-to-4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential			Total
	(In thousands)

Balance, beginning of period 3/31/2011	$	1,081		$	1,271		$	3,609		$	2,451		$	1,140		$	383		$	183		$	10,118
Provision (recovery) for loan losses		203			570			1,864			(230	)		376			(232	)		(9	)		2,542
Other		-			-			(53	)		-			-			-			-			(53	)
Loans charged-off		(3,880	)		(669	)		(926	)		(410	)		(69	)		(65	)		-			(6,019	)
Recoveries		3,648			-			8			81			3			50			-			3,790

Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	1,892		$	1,450		$	136		$	174		$	10,378

Ending balance: individually evaluated for impairment	$	191		$	106		$	761		$	701		$	268		$	46		$	-		$	2,073
Ending balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	1,191		$	1,182		$	90		$	174		$	8,305

Loans:
Ending balance	$	40,646		$	77,211		$	204,412		$	59,504		$	40,532		$	8,409		$	28,168		$	458,882
Ending balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,408		$	442		$	213		$	-		$	20,577
Ending balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	56,096		$	40,090		$	8,196		$	28,168		$	438,305

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

	Six months ended
	June 30, 2011
	Commercial									1-to-4						Loans to			Multi-
	and						Commercial			family						individuals &			family
Allowance for loan losses	industrial			Construction			real estate			residential			HELOC			overdrafts			residential			Total
	(In thousands)

Balance, beginning of period 1/1/2011	$	1,052		$	349		$	3,111		$	1,985		$	1,348		$	1,530		$	640		$	10,015
Provision (recovery) for loan losses		160			1,714			3,133			296			231			(1,362	)		(466	)		3,706
Other		-			-			(53	)		-			-			-			-			(53	)
Loans charged-off		(3,880	)		(891	)		(1,699	)		(600	)		(134	)		(87	)		-			(7,291	)
Recoveries		3,720			-			10			211			5			55			-			4,001

Balance, end of period 6/30/2011	$	1,052		$	1,172		$	4,502		$	1,892		$	1,450		$	136		$	174		$	10,378

Ending balance: individually evaluated for impairment	$	191		$	106		$	761		$	701		$	268		$	46		$	-		$	2,073
Ending balance: collectively evaluated for impairment	$	861		$	1,066		$	3,741		$	1,191		$	1,182		$	90		$	174		$	8,305

Loans:
Ending balance	$	40,646		$	77,211		$	204,412		$	59,504		$	40,532		$	8,409		$	28,168		$	458,882
Ending balance: individually evaluated for impairment	$	538		$	2,329		$	13,647		$	3,408		$	442		$	213		$	-		$	20,577
Ending balance: collectively evaluated for impairment	$	40,108		$	74,882		$	190,765		$	56,096		$	40,090		$	8,196		$	28,168		$	438,305

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. 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 $688,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $131,000 on these deposits resulting in a net gain of $557,000 for the Company from this transaction. Lumbee Guarantee Bank assumed $14.6 million in deposits plus accrued interest of $5,000 from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $338,000 plus accrued interest of $2,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. There was a separate payment for the loans purchased that was not included in the $1.8 million purchase price.

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

June 30, 2012 and December 31, 2011

During the first six months of 2012, total assets decreased by $26.0 million to $563.7 million as of June 30, 2012. Earning assets at June 30, 2012 totaled $515.4 million and consisted of $381.9 million in net loans, $71.8 million in investment securities, $59.6 million in overnight investments and interest-bearing deposits in other banks and $2.1 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the second quarter of 2012 were $471.2 million and $53.0 million, respectively. In the second quarter of 2012 the Company completed the sale of two branches which resulted in decreases of $14.6 million in deposits, $338,000 in loans, and $1.1 million in real property and equipment which resulted in a net decrease in cash of $13.0 million.

Since the end of 2011, gross loans have decreased by $27.2 million to $390.4 million as of June 30, 2012 due to continued soft loan demand and efforts to reduce concentration levels within certain loan categories.. Gross loans consisted of $31.0 million in commercial and industrial loans, $193.2 million in commercial real estate loans, $19.5 million in multi-family residential loans, $7.1 million in consumer loans, $48.5 million in residential real estate, $36.8 million in HELOC, and $54.7 million in construction loans. Deferred loan fees, net of costs, on these loans were $407,000.

At June 30, 2012 and December 31, 2011, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $56.6 million at June 30, 2012, a $1.0 million increase from December 31, 2011. The Company’s investment securities at June 30, 2012 were $71.8 million, an increase of $3.9 million from December 31, 2011. The investment portfolio as of June 30, 2012 consisted of $32.6 million in government agency debt securities, $32.6 million in mortgage-backed securities and $6.6 million in municipal securities. The net unrealized gain on these securities was $2.0 million.

At June 30, 2012, the Company also held an investment of $1.0 million in the form of Federal Home Loan Bank (“FHLB”) stock a decrease of $214,000 from December 31, 2011 due to redemptions during the second quarter of 2012. Also, the Company had $1.1 million in other non-marketable securities, which was approximately the same at December 31, 2011.

At June 30, 2012, non-earning assets were $48.3 million, which reflects a decrease of $5.0 million from the $53.3 million as of December 31, 2011. Non-earning assets as of June 30, 2012 included $15.7 million in cash and due from banks, bank premises and equipment of $11.1 million, core deposit intangible of $356,000, accrued interest receivable of $1.6 million, foreclosed real estate of $3.9 million, and other assets which consisted of $8.1 million in Bank Owned Life Insurance (“BOLI”), $5.2 million in deferred tax assets, and $2.3 million in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. During the second quarter of 2012 the Company experienced a decrease in cash and cash equivalents of $6.1 million due to the previously mentioned branch sale.

Total deposits at June 30, 2012 were $471.2 million and consisted of $72.7 million in non-interest-bearing demand deposits, $95.4 million in money market and NOW accounts, $24.0 million in savings accounts, and $279.1 million in time deposits. Total deposits decreased by $30.2 million from $501.4 million as of December 31, 2011. Of this decrease, $14.6 million is related to the previously mentioned branch sale. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of June 30, 2012.

As of June 30, 2012, the Company had $23.0 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of $21.0 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 June 30, 2012 was $53.0 million, an increase of $3.5 million from $49.5 million as of December 31, 2011. Accumulated other comprehensive income relating to available for sale securities decreased $50,000 for the six months ended June 30, 2012. Other changes in shareholders’ equity included increases of $23,000 in stock-based compensation, net income of $3.3 million for the six months ending June 30, 2012, and $165,000 from the proceeds of the sale of common stock.

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

At June 30, 2012, the Company had $3.0 million in loans that were 30 to 89 days past due. This represented 0.77% of gross loans outstanding on that date. This is a decrease from December 31, 2011 when there were $4.2 million in loans that were 30-89 days past due and $108,000 in loans that were 90 days or more past due and still accruing. This represented 1.01% of gross loans outstanding. Non-accrual loans decreased from $17.6 million at December 31, 2011 to $14.7 million for the period ended June 30, 2012.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased 45 basis points from 4.70% at December 31, 2011 to 4.25% at June 30, 2012.

The Company had fourteen loans totaling $1.9 million that were considered troubled debt restructurings (“TDRs”) that were still in accruing status at June 30, 2012 with the remaining TDRs included in non-accrual loans. All TDRs are considered non-performing loans regardless of accrual status.

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

	For Periods Ended
	June 30,			December 31,
	2012			2011
	(Dollars in thousands)

Non-accrual loans	$	14,676		$	17,623
Accruing TDRs		1,903			2,013
Total non-performing loans		16,579			19,636
Foreclosed real estate		3,859			3,031
Repossessed assets		-			-
Total non-performing assets	$	20,438		$	22,667

Accruing loans past due 90 days or more	$	-		$	109
Allowance for loan losses	$	8,510		$	10,034

Non-performing loans to period end loans		4.25	%		4.70	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		4.25	%		4.73	%
Allowance for loans losses to period end loans		2.18	%		2.40	%
Allowance for loan losses to non-performing loans		51.33	%		51.10	%
Allowance for loan losses to non-performing assets		41.64	%		44.27	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		41.64	%		44.06	%
Non-performing assets to total assets		3.63	%		3.84	%
Non-performing assets and accruing loans past due 90 days or more to total assets		3.63	%		3.86	%

The total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate), at June 30, 2012 and December 31, 2011 were $20.4 million and $22.7 million. The allowance for loan losses at June 30, 2012 represented 41.64% of non-performing assets compared to 44.27% at December 31, 2011.

Total impaired loans at June 30, 2012 were $24.3 million, this includes $14.7 million in loans that were classified as impaired because they were in non-accrual and $9.6 million in loans that were determined to be impaired for other reasons. Of these loans, $3.1 million required a specific reserve of $520,000 at June 30, 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 $8.5 million at June 30, 2012 or 2.18% of gross loans outstanding. This is a decrease of 22 basis points from the 2.40% of gross loans at December 31, 2011. The allowance for loan losses at June 30, 2012 represented 35.09% of impaired loans compared to 40.40% at December 31, 2011. This decrease in the allowance for the six months of 2012 resulted primarily from net recoveries of $1.3 million which included a $2.4 million recovery on commercial and industrial loans during the first quarter of 2012, management’s concerted effort to charge off impairments on collateral dependant impaired loans, and an overall decrease in loan balances. It is management’s assessment that the allowance for loan losses as of June 30, 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.

Other Lending Risk Factors

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

Regulatory Loan to Value

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

At June 30, 2012 and December 31, 2011 the Company had $10.1 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At June 30, 2012 and December 31, 2011 the Company had $10.3 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 32.6% and 43.8% of total risk based capital as of June 30, 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
	June 30,		% of
	2012		Risk Based
	(In thousands)		Capital
1-to-4 Family Rental	$	19,554		31	%
Office Building	$	29,565		47	%

At June 30, 2012 the Company exceeded this guideline in the Office Buildings product type. The Office Buildings were 47% of risk-based capital or $29.6 million. All other commercial real estate groups were under the 40% threshold. The reduced concentration within these categories from December 31, 2011 to June 30, 2012 resulted from the increase in capital combined with reduced loan balances.

	At
	December 31,		% of
	2011		Risk Based
	(In thousands)		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.

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

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

ADC Loans

As of June 30, 2012

(Dollars in thousands)

				Land and Land
	Construction			Development			Total

Total ADC loans	$	37,272		$	17,444		$	54,716

Average Loan Size	$	138		$	311

Percentage of total loans		9.55	%		4.47	%		14.02	%

Non-accrual loans	$	210		$	2,189		$	2,399

At June 30, 2012, total ADC loans represented 14.02%, or $54.7 million, of the total loan portfolio, of which $2.4 million of the ADC loan portfolio is in non-accrual status. This represents 4.4% of all ADC loans. Management 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)

				Land and Land
	Construction			Development			Total

Total ADC loans	$	49,958		$	20,888		$	70,846

Average Loan Size	$	174		$	307

Percentage of total loans		11.96	%		5.00	%		16.96	%

Non-accrual loans	$	596		$	3,172		$	3,768

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 non-accrual status. This represents 5.3% of all ADC loans. Management 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.

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at June 30, 2012.

	ADC Loans		Percent			HELOC		Percent
	(Dollars in thousands)

Harnett County	$	6,224		11.4	%	$	7,301		19.8	%
Cumberland County		16,452		30.1	%		7,768		21.1	%
Johnston County		749		1.4	%		584		1.6	%
Pitt County		3,784		6.9	%		25		0.1	%
Robeson County		1,755		3.2	%		3,458		9.4	%
Sampson County		733		1.3	%		1,464		4.0	%
Wayne County		3,045		5.6	%		5,586		15.2	%
Hoke County		2,907		5.3	%		250		0.7	%
All other locations		19,067		34.8	%		10,335		28.1	%

Total	$	54,716		100.0	%	$	36,771		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	%
Johnston County		1,410		2.0	%		622		1.6	%
Pitt County		4,631		6.5	%		-		0.0	%
Robeson County		2,021		2.9	%		3,377		8.7	%
Sampson County		730		1.0	%		1,645		4.3	%
Wayne County		4,474		6.3	%		5,769		14.9	%
Hoke County		2,626		3.7	%		111		0.3	%
All other locations		30,893		43.6	%		13,094		33.8	%

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 June 30, 2012, the Company had $97.6 million in loans that had terms permitting interest only payments. This represented 25.0% 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 permit interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $51.2 million or 13.1% of total loans at June 30, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company’s ten largest customer relationships totaled $75.2 million or 19.3% of total loans at June 30, 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 June 30, 2012 and 2011

General. During the second quarter of 2012, the Company had net income of $1.2 million as compared with net loss of ($861,000) for the same quarter in 2011. Net income per share for the second quarter of 2012 was $0.17, basic and diluted, compared with net loss per share of ($0.13), basic and diluted, for the second quarter of 2011. Results of operations for the second quarter of 2012 were primarily impacted by a recovery in the provision for loan losses of $649,000 due to a reduction in loan balances and lower loan charge-offs. The Company experienced a decrease in net interest margin of 21 basis points to 3.68% in the second quarter of 2012from the same period in 2011.

Net Interest Income. Net interest income decreased by $964,000 to $4.6 million for the second 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 $511.9 million in the second quarter of 2012 compared with $582.2 million during the same period in 2011 and the yield on those assets decreased 40 basis points from 5.40% to 5.00%. Total interest income reversed on loans transferred to non-accrual status for the three months ended June 30, 2012 and 2011 was $20,000 and $58,000, respectively, or approximately 1 basis point on average interest-earning assets for both periods mentioned.

The Company’s average interest-bearing liabilities decreased by $66.3 million to $435.0 million for the quarter ended June 30, 2012 from $501.3 million for the same period one year earlier and the cost of those funds decreased from 1.75% to 1.56%, or 19 basis points. During the second quarter of 2012, the Company’s net interest margin was 3.68% and net interest spread was 3.44%. For the quarter ended June 30, 2011, net interest margin was 3.89% and net interest spread was 3.65%

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 second quarter, the Company recorded a recovery for loan losses of $649,000 which is a decrease of $3.2 million from the provision that was recorded in the second quarter of 2011. This decrease in the allowance for the three months ended June 30, 2012 resulted primarily from an overall decrease in loan balances and net charge-offs of $408,000.

Non-Interest Income. Non-interest income for the quarter ended June 30, 2012 was $1.2 million, an increase of $287,000 from the second quarter of 2011. This increase was primarily due to a $557,000 gain on the sale of two branches during the second quarter of 2012. Service charges on deposit accounts decreased $85,000 to $291,000 for the quarter ended June 30, 2012 as compared to $376,000 for the same period in 2011. Mortgage fee income increased $14,000 to $75,000 for the quarter ended June 30, 2012 compared to the same period in 2011. Other non-deposit fees and income decreased $199,000 to $256,000 as compared to the same period in 2011.

Non-Interest Expenses. Non-interest expenses decreased by $710,000 to $4.6 million for the quarter ended June 30, 2012, from $5.3 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the second quarter of 2012 versus the second quarter of 2011:

Personnel expenses decreased $237,000 to $2.0 million in the second quarter of 2012 due to a decrease in staff size to 111 at June 30, 2012 from 125 at June 30, 2011.

Deposit insurance expense was $187,000 for the quarter ended June 30, 2012 down from $235,000.

Professional fees decreased $33,000 to $470,000 for the quarter ended June 30, 2012 from to $503,000 for the quarter ended June 30, 2011.

Foreclosure-related expenses decreased by $179,000 to $521,000 for the quarter ending June 30, 2012 compared to the same period for 2011.

Provision for Income Taxes. The Company’s effective tax rate was 37.1% for the quarter ended June 30, 2012 and (37.8%) for the quarter ended June 30, 2011 as a result of permanent tax differences that were in excess of taxable income resulting in lower effective tax rates.

As of June 30, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million, compared to $4.9 million at June 30, 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, projected earnings, and asset quality. As of June 30, 2012 and June 30, 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.

Comparison of Results of Operations for the

Six months ended June 30, 2012 and 2011

General. During the first six months of 2012, the Company had net income of $3.3 million compared with net loss of ($740,000) for the same period in 2011. Net income per share for the first two quarters of 2012 was $0.47 per share, basic and diluted, compared with net loss per share of ($0.11), basic and diluted, for the same period in 2011. Results of operations for the first six months of 2012 were primarily impacted by a recovery in the provision for loan losses of $2.8 million, which was a $6.5 million decrease from the same period in 2011. The Company experienced a decrease in net interest margin of 26 basis points to 3.68% for the first six months of 2012 from 3.94% for the same period in 2011.

Net Interest Income. Net interest income decreased by $1.8 million to $9.5 million for the six month period ended June 30, 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 $522.4 million in the first six months of 2012 compared with $582.5 million during the same period in 2011 and the yield on those assets decreased 46 basis points from 5.47% to 5.01%. Total interest income reversed on loans transferred to non-accrual status for the six months ended June 30, 2012 and 2011 was $98,000 and $130,000, respectively, or approximately 1 basis point on average interest-earning assets for both periods mentioned.

The Company’s average interest-bearing liabilities decreased by $56.7 million to $446.0 million for the two quarters ended June 30, 2012 from $502.7 million for the same period one year earlier and the cost of those funds decreased from 1.78% to 1.56%, or 22 basis points. During the first six months of 2012, the Company’s net interest margin was 3.68% and net interest spread was 3.45%. For the same period in 2011, net interest margin was 3.94% and net interest spread was 3.70%

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors including net recoveries. The decrease in the allowance for loan losses for the six months ended June 30, 2012 of $1.5 million resulted primarily from net recoveries of $1.3 million which included a $2.4 million recovery on commercial and industrial loans during the first quarter of 2012, management’s concerted effort to charge off impairments on collateral dependant impaired loans, and an overall decrease in loan balances.

Non-Interest Income. Non-interest income for the six months ended June 30, 2012 was $1.8 million, an increase of $273,000 from the same period in 2011. This increase was primarily due to a $557,000 gain on the sale of two branches during the second quarter of 2012. Service charges on deposit accounts decreased $149,000 to $609,000 for the two quarters ended June 30, 2012 from $758,000 for the two quarters ended June 30, 2011. Mortgage fee income increased $26,000 to $113,000 for the two quarters ended June 30, 2012 compared to the same period in 2011. Other non-deposit fees and income decreased $161,000 to $527,000 for the two quarters ended June 30, 2012 compared to the same period in 2011.

Non-Interest Expenses. Non-interest expenses decreased by $1.6 million to $8.8 million for the six months ended June 30, 2012, from $10.4 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the first six months of 2012 versus the same period in 2011:

Personnel expenses decreased $667,000 to $4.0 million for the two quarters ended June 30, 2012 due to a decrease in staff size to 111 at June 30, 2012 from 125 at June 30, 2011.

Deposit insurance expense was $381,000 for the two quarters ended June 30, 2012 down from $497,000 for the same period in 2011.

Professional fees decreased $193,000 to $940,000 for the two quarters ended June 30, 2012 from $1.1 million.

Foreclosure-related expenses decreased by $358,000 to $545,000 for the six months ended June 30, 2012 compared to the same period for 2011.

Provision for Income Taxes. The Company’s effective tax rate was 37.5% for the two quarters ended June 30, 2012 as a result of permanent tax differences that were in excess of taxable income and (43.5%) for the same period in 2011.

As of June 30, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of June 30, 2012, 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 26.10% of total assets at June 30, 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 June 30, 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 $30.4 million of qualifying loans is pledged to the FHLB to secure borrowings. At June 30, 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 June 30, 2012, total borrowings consisted of securities sold under agreements to repurchase of $23.0 million and junior subordinated debentures of $12.4 million.

Total deposits were $471.2 million at June 30, 2012. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 59.24% of total deposits at June 30, 2012. Time deposits of $100,000 or more represented 30.49% of the Company’s total deposits at June 30, 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.

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 9.39% at June 30, 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 June 30, 2012, the Company and related Bank subsidiary both exceeded minimum regulatory capital requirements as specified in the tables below.

	Actual			Minimum
New Century Bancorp, Inc.	Ratio			Requirement

Total risk-based capital ratio		14.95	%		8.00	%
Tier 1 risk-based capital ratio		13.69	%		4.00	%
Leverage ratio		10.42	%		4.00	%

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

Total risk-based capital ratio		14.57	%		11.50	%		10.00	%
Tier 1 risk-based capital ratio		13.31	%		8.00	%		6.00	%
Leverage ratio		10.13	%		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 June 30, 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.

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 second 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 second quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II. OTHER INFORMATION

Item 4. Mine Safety Disclosures

None.

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)

SIGNATURES

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

	NEW CENTURY BANCORP, INC.

Date: August 10, 2012	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: August 10, 2012	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer and Chief Operating Officer

Exhibit Index

Exhibit Number		Description of Exhibit


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

31.2		Certification of Principal 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)

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