SELECT BANCORP, INC. - FORM 10-Q

SELECT BANCORP, INC. - FORM 10-Q - May 13, 2011

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EX-31.1 - SECTION 302 CEO CERTIFICATION - SELECT BANCORP, INC.	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SELECT BANCORP, INC.	dex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - SELECT BANCORP, INC.	dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - SELECT BANCORP, INC.	dex322.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 March 31, 2011

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

For the transition period ended from to

Commission File Number 000-50400

New Century Bancorp, Inc.

(Exact name of Registrant as specified in its charter)


North Carolina		20-0218264
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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.

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

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


		Page No.

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements

	Consolidated Balance Sheets March 31, 2011 and December 31, 2010		3

	Consolidated Statements of Operations Three Months Ended March 31, 2011 and 2010		4

	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2011 and 2010		5

	Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010		6

	Notes to Consolidated Financial Statements		8

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 4 -	Controls and Procedures		40

Part II.	OTHER INFORMATION

Item 6 -	Exhibits		41

	Signatures		42

	Exhibit Index		43

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


	March 31, 2011 (Unaudited)			December 31, 2010*
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	11,303		$	8,630
Interest-earning deposits in other banks		31,446			20,089
Federal funds sold		17,043			7,183
Investment securities available for sale, at fair value		79,437			89,899

Loans		461,604			470,484
Allowance for loan losses		(10,118	)		(10,015	)


NET LOANS		451,486			460,469

Accrued interest receivable		2,396			2,488
Stock in Federal Home Loan Bank of Atlanta, at cost		1,448			1,448
Other non marketable securities		1,082			1,082
Foreclosed real estate		5,019			3,655
Premises and equipment, net		12,777			12,930
Bank owned life insurance		7,790			7,727
Core deposit intangible		660			699
Other assets		10,440			10,597


TOTAL ASSETS	$	632,327		$	626,896


LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits:
Demand	$	74,013		$	70,363
Savings		23,951			22,541
Money market and NOW		100,072			97,096
Time		344,235			344,599


TOTAL DEPOSITS		542,271			534,599

Other short term debt		23,295			23,666
Long term debt		14,372			16,372
Accrued interest payable		394			395
Accrued expenses and other liabilities		2,217			2,172


TOTAL LIABILITIES		582,549			577,204


Shareholders’ Equity
Common stock, $1 par value, 10,000,000 shares authorized; 6,913,636 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		6,914			6,914
Additional paid-in capital		41,958			41,887
Accumulated deficit		(166	)		(287	)
Accumulated other comprehensive income		1,072			1,178


TOTAL SHAREHOLDERS’ EQUITY		49,778			49,692


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	632,327		$	626,896

*	Derived from audited consolidated financial statements.

See accompanying notes.

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended March 31,
	2011			2010
	(In thousands, except share and per share data)

INTEREST INCOME
Loans	$	7,304		$	7,586
Federal funds sold and interest-earning deposits in other banks		18			6
Investments		593			741


TOTAL INTEREST INCOME		7,915			8,333


INTEREST EXPENSE
Money market, NOW and savings deposits		217			302
Time deposits		1,880			2,008
FHLB Advances and other short term debt		69			64
Long term debt		74			72


TOTAL INTEREST EXPENSE		2,240			2,446


NET INTEREST INCOME		5,675			5,887

PROVISION FOR LOAN LOSSES		1,164			1,270


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,511			4,617


NON-INTEREST INCOME
Fees from pre-sold mortgages		26			28
Service charges on deposit accounts		382			439
Other fees and income		233			200


TOTAL NON-INTEREST INCOME		641			667


NON-INTEREST EXPENSE
Personnel		2,391			2,311
Occupancy and equipment		362			380
Deposit insurance		263			236
Professional fees		630			484
Information systems		386			546
Net loss on sale and write downs of foreclosed real estate		203			1
Other		844			648


TOTAL NON-INTEREST EXPENSE		5,079			4,606


INCOME BEFORE INCOME TAXES		73			678
INCOME TAXES		(48	)		221


NET INCOME	$	121		$	457


NET INCOME PER COMMON SHARE
Basic	$	0.02		$	0.07

Diluted	$	0.02		$	0.07

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,913,636			6,837,952

Diluted		6,913,653			6,845,714

See accompanying notes.

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


					Additional paid-in		Retained earnings (Accumulated			Accumulated other comprehensive			Total Shareholders’
	Common stock				Additional paid-in		Retained earnings (Accumulated			Accumulated other comprehensive			Total Shareholders’
	Shares		Amount		capital		deficit)			income			equity
	(Amounts in thousands, except share data)

Balance at December 31, 2009		6,837,952	$	6,838	$	41,467	$	4,668		$	1,436		$	54,409

Net income		—		—		—		457			—			457

Other comprehensive gain, net		—		—		—		—			36			36

Stock based compensation		—		—		32		—			—			32


Balance at March 31, 2010		6,837,982	$	6,838	$	41,499	$	5,125		$	1,472		$	54,934


Balance at December 31, 2010		6,913,636	$	6,914	$	41,887	$	(287	)	$	1,178		$	49,692

Net income		—		—		—		121			—			121

Other comprehensive loss, net		—		—		—		—			(106	)		(106	)

Stock based compensation		—		—		71		—			—			71


Balance at March 31, 2011		6,913,636	$	6,914	$	41,958	$	(166	)	$	1,072		$	49,778

See accompanying notes.

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Three Months Ended March 31,
	2011			2010
	(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	121		$	457
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,164			1,270
Depreciation and amortization of premises and equipment		170			167
Amortization and accretion of investment securities		217			212
Amortization of deferred loan fees and costs		(46	)		(41	)
Amortization of core deposit intangible		39			38
Stock-based compensation		71			32
Increase in cash surrender value of bank owned life insurance		(63	)		(65	)
Net loss on sale and write-downs of foreclosed real estate		203			1
Loss on mortgage-backed securities pay-downs		24			5
Change in assets and liabilities:
Decrease in accrued interest receivable		92			11
Decrease in other assets		199			299
Increase in accrued expenses and other liabilities		44			2,673


NET CASH PROVIDED BY OPERATING ACTIVITIES		2,235			5,059


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank (“FHLB”) stock		—			(315	)
Maturities of investment securities available for sale		6,921			1,000
Mortgage-backed securities pay-downs		3,139			2,819
Net (increase) decrease in net loans outstanding		6,175			(15,780	)
Proceeds from sale of foreclosed real estate		123			1
Purchases of premises and equipment		(4	)		(193	)


NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		16,354			(12,468	)


CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		7,672			2,086
Decrease in other short term debt		(371	)		(820	)
Decrease in other long term debt		(2,000	)		—
Proceeds from short term FHLB advances		—			2,000
Proceeds from long term FHLB advances		—			6,000


NET CASH PROVIDED BY FINANCING ACTIVITIES		5,301			9,266


NET INCREASE IN CASH AND CASH EQUIVALENTS		23,890			1,857

CASH AND CASH EQUIVALENTS, BEGINNING		35,902			28,935


CASH AND CASH EQUIVALENTS, ENDING	$	59,792		$	30,792

See accompanying notes.

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)


	Three Months Ended March 31,
	2011			2010
	(In thousands)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	2,241		$	2,407
Income taxes paid		—			164
Non-cash transactions:
Unrealized gains (losses) on investment securities available for sale, net of tax		(106	)		36
Transfers from loans to foreclosed real estate		1,690			152

See accompanying notes.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE A – BASIS OF PRESENTATION

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

All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

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

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

NOTE B – PER SHARE RESULTS

Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. There were 428,878 and 427,846 anti-dilutive options as of March 31, 2011 and 2010, respectively.


	Three Months Ended March 31,
	2011		2010

Weighted average shares used for basic net income per share		6,913,636		6,837,952

Effect of dilutive stock options		17		7,762

Weighted average shares used for diluted net income per share		6,913,653		6,845,714

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE C – COMPREHENSIVE INCOME

A summary of comprehensive income is as follows:


	Three Months Ended March 31,
	2011			2010
	(Amounts in thousands)

Net income	$	121		$	457

Other comprehensive (loss) income:
Unrealized gains (losses) on investment securities available for sale		(161	)		59
Tax effect		55			(23	)

Total		(106	)		36


Total comprehensive income	$	15		$	493

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In July 2010, FASB issued (ASU 2010-20) entitled Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses which amends Accounting Standards Codification (“ASC”) No. 820-10. The update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for the periods beginning on or after December 15, 2010. The adoption of the activity disclosures within the standard did not have a material impact on our financial position or results of operation.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In January 2010, the FASB issued an ASU entitled Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements (“ASU 820”) which amends ASC 820-10. This ASU requires new disclosures: (i) of significant transfers in and out of Levels 1 and 2 with reasons for the transfers; and (ii) activity in Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a gross basis. In addition, the reporting entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about inputs and valuation techniques used to measure fair value of both recurring and nonrecurring fair value measurements. The ASU includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (ASC 715-20). These amendments change the terminology from major categories of assets to classes of assets and provide a cross reference to ASC 820-10 on how to determine the appropriate class in which to present fair value disclosures. This ASU is effective for interim and annual periods beginning after December 15, 2009, except disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 non-recurring fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. The adoption of ASU 820 did not have a material impact on the consolidated financial statements.

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

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

NOTE E – FAIR VALUE MEASUREMENTS

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

Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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

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

Fair Value Hierarchy

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

•

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

•

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

•

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

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

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

Investment securities, available-for-sale, are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage- backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

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


Investment securities available for sale March 31, 2011	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies	$	40,772	$	—	$	40,772	$	—
Mortgage-backed securities - Government Sponsored-Enterprises (“GSE’s”)		31,816		—		31,816		—
Municipal bonds		6,849		—		6,849		—


Total	$	79,437	$	—	$	79,437	$	—


Investment securities available for sale December 31, 2010	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies	$	47,087	$	—	$	47,087	$	—
Mortgage-backed securities - GSE’s		35,512		—		35,512		—
Municipal bonds		7,300		—		7,300		—


Total	$	89,899	$	—	$	89,899	$	—

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

Loans

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E – FAIR VALUE MEASUREMENTS (continued)

When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less, at the date acquired. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. At March 31, 2011 and December 31, 2010 total assets classified as foreclosed real estate totaled $5.0 million and $3.7 million, respectively.

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


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

Impaired loans	$	11,326	$	—	$	—	$	11,326

Foreclosed real estate		5,019		—		—		5,019


Total	$	16,345	$	—	$	—	$	16,345


Asset Category December 31, 2010	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans	$	9,393	$	—	$	—	$	9,393

Foreclosed real estate		3,655		—		—		3,655


Total	$	13,048	$	—	$	—	$	13,048

As of March 31, 2011, the Bank identified $18.1 million in impaired loans, of which $9.0 million required a specific allowance of $3.4 million. As of December 31, 2010, the Bank identified $16.5 million in impaired loans, of which $10.8 million required a specific allowance of $3.3 million.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F – INVESTMENT SECURITIES

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


	March 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	21,180	$	143	$	—	$	21,323
After 1 year but within 5 years		19,140		332		23		19,449

U.S. agency sponsored mortgage-backed Securities
Within 1 year		2,525		49		—		2,574
After 1 year but within 5 years		24,534		1,140		51		25,623
After 5 years but within 10 years		3,632		—		13		3,619

Municipal bonds
After 1 year but within 5 years		1,891		54		—		1,945
After 5 years but within 10 years		2,956		162		—		3,118
After 10 years		1,822		4		40		1,786


	$	77,680	$	1,884	$	127	$	79,437

As of March 31, 2011, accumulated other comprehensive income, net of deferred income taxes, included unrealized net gains of $1.8 million, net of deferred income taxes of $700,000.


	December 31, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government agencies
Within 1 year	$	23,783	$	163	$	11	$	23,946
After 1 year but within 5 years		22,723		418		—		23,141

U.S. agency sponsored mortgage-backed Securities
Within 1 year		2,538		43		75		2,581
After 1 year but within 5 years		27,614		1,131		—		28,745
After 5 years but within 10 years		4,150		36		—		4,186

Municipal bonds
Within 1 year		200		3				203
After 1 year but within 5 years		1,543		41		69		1,584
After 5 years but within 10 years		3,608		152		—		3,760
After 10 years		1,822		—		—		1,753

	$	87,981	$	2,073	$	155	$	89,899

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F – INVESTMENT SECURITIES (continued)

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

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


	March 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(In thousands)
Securities available for sale:
U.S. government agencies	$	7,163	$	23	$	—	$	—	$	7,163	$	23
Mortgage-backed securities GSE’s		7,938		64		—		—		7,938		64
Municipal bonds		1,099		40		—		—		1,099		40


Total temporarily impaired securities	$	16,200	$	127	$	—	$	—	$	16,200	$	127

At March 31, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Six U.S. government agencies, seven GSE’s and three municipal bonds had unrealized losses for less than twelve months totaling $127,000 at March 31, 2011. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.


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


Total temporarily impaired securities	$	16,250	$	155	$	—	$	—	$	16,250	$	155

At December 31, 2010, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies, seven GSE’s and five municipal bonds had unrealized losses for less than twelve months totaling $155,000 at December 31, 2010. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS

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


	2011						2010
	Amount			Percent of total			Amount			Percent of total
	(In thousands)
Real estate loans:
1 to 4 family residential	$	58,591			12.69	%	$	60,385			12.83	%
Commercial Real Estate		188,314			40.79	%		193,502			41.13	%
Multi-family Residential		29,983			6.50	%		30,088			6.40	%
Construction		85,963			18.62	%		84,550			17.97	%
Home equity lines of credit		39,780			8.62	%		39,938			8.49	%


Total real estate loans		402,631			87.22	%		408,463			86.82	%


Other loans:
Commercial and Industrial		47,250			10.24	%		49,437			10.51	%
Loans to Individuals		11,959			2.59	%		12,860			2.73	%
Overdrafts		131			0.03	%		107			0.02	%

Total other loans		59,340			12.86	%		62,404			13.26	%


Gross loans		461,971						470,867

Less deferred loan origination fees, net		(367	)		(.08	)%		(383	)		(.08	)%


Total loans		461,604			100.00	%		470,484			100.00	%


Allowance for loan losses		(10,118	)					(10,015	)


Total loans, net	$	451,486					$	460,469

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

At March 31, 2011, the Company had pre-approved but unused lines of credit totaling $79.3 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process, 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)

Non-Accrual and Past Due Loans

Non-accrual loans totaled $11.5 million and $10.6 million at March 31, 2011 and December 31, 2010, respectively.

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


	March 31, 2011
	(In thousands)

1 to 4 Family Residential	$	3,897
Commercial Real Estate		5,787
Multi-family Residential		—
Construction		522
Home Equity Lines of Credit (“HELOC”)		74
Commercial and Industrial		898
Loans to Individuals & Overdrafts		333

Total	$	11,511


	December 31, 2010
	(In thousands)

1 to 4 Family Residential	$	3,122
Commercial Real Estate		5,789
Multi-family Residential		—
Construction		938
Home Equity Lines of Credit (“HELOC”)		98
Commercial and Industrial		435
Loans to Individuals & Overdrafts		180

Total	$	10,562

The average balance of non-accrual loans was $11.6 million and $14.5 million for the periods ended March 31, 2011 and December 31, 2010, respectively.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

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


	March 31, 2011
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
	(In thousands)
Commercial and Industrial	$	196	$	898	$	1,094	$	46,156		$	47,250
Construction		—		522		522		85,441			85,963
Multi-family Residential		—		—		—		29,983			29,983
Commercial Real Estate		1,570		5,787		7,357		180,957			188,314
Loans to Individuals & Overdrafts		71		333		404		11,686			12,090
1 to 4 Family Residential and HELOCs		906		3,971		4,877		93,494			98,371
Deferred loan (fees) cost, net		—		—		—		(367	)		(367	)

	$	2,743	$	11,511	$	14,254	$	447,350		$	461,604


	December 31, 2010
	30-89 Days Past Due		Non- Accrual Loans		Total Past Due		Current			Total Loans
	(In thousands)

Commercial and Industrial	$	1,227	$	435	$	1,662	$	47,775		$	49,437
Construction		103		938		1,041		83,509			84,550
Multi-family Residential		—		—		—		30,088			30,088
Commercial Real Estate		46		5,789		5,835		187,667			193,502
Loans to Individuals & Overdrafts		135		180		315		12,652			12,967
1 to 4 family residential and HELOCs		633		3,220		3,853		96,470			100,323
Deferred loan (fees) cost, net		—		—		—		(383	)		(383	)

	$	2,144	$	10,562	$	12,706	$	457,778		$	470,484

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Impaired Loans

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


March 31, 2011	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	371		457	$	—	$	186	$	—
Construction		488		870		—		525		—
Commercial Real Estate		4,497		6,111		—		4,027		20
Loans to Individuals & Overdrafts		192		230		—		172		—
Multi-family Residential		2,122		2,122		—		1,061		—
1 to 4 Family Residential and HELOCs		1,375		2,030		—		1,411		—

Subtotal:		9,045		11,820		—		7,382		20

With an allowance recorded:
Commercial and Industrial		645		678		262		520		5
Construction		1,488		1,488		668		1,075		47
Commercial Real Estate		3,820		3,910		832		4,583		78
Loans to individuals & overdrafts		278		292		264		173		1
Multi-family Residential		—		—		—		—		—
1 to 4 Family Residential and HELOCs		2,829		3,103		1,419		3,577		1

Subtotal:		9,060		9,471		3,445		9,928		132

Totals:
Commercial		11,309		13,514		1,763		10,916		151
Consumer		470		522		264		345		—
Residential		6,326		7,255		1,418		6,049		1


Grand Total:	$	18,105	$	21,291	$	3,445	$	17,310	$	152

Impaired loans at March 31, 2011 were approximately $18.1 million and were comprised of $11.5 million in non-accrual loans and $6.6 million in loans still in accruing status.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)


December 31, 2010	Recorded Investment		Contractual Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized on Impaired Loans
	(In thousands)
With no related allowance recorded:
Commercial and Industrial	$	—		88	$	—	$	297	$	—
Construction		562		570		—		1,143		11
Commercial Real Estate		3,557		4,830		—		3,375		149
Loans to Individuals & Overdrafts		152		204				113		—
1 to 4 Family Residential and HELOCs		1,449		2,062		—		1,519		—

Subtotal:		5,720		7,754		—		6,447		160

With an allowance recorded:
Commercial and Industrial		396		429		132		567		—
Construction		662		1,048		159		529		—
Commercial Real Estate		5,346		5,746		1,317		4,068		32
Loans to Individuals & Overdrafts		67		67		13		96		—
1 to 4 Family Residential and HELOCs		4,324		4,779		1,697		3,056		12

Subtotal:		10,795		12,069		3,318		8,316		44

Totals:
Commercial		10,523		12,711		1,608		9,979		192
Consumer		219		271		13		209		—
Residential		5,773		6,841		1,697		4,575		12


Grand Total:	$	16,515	$	19,823	$	3,318	$	14,763	$	204

Impaired loans at December 31, 2010 were approximately $16.5 million and were comprised of $16.0 million in non-accrual loans and $0.5 million in loans still in accruing status.

Credit Quality Indicators

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

•

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

•

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

•

Risk Grade 3 (Good) - This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

•

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

•

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

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

Credit Quality Indicators (continued)

•

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

•

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

•

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

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


March 31, 2011
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
			(In thousands)

Superior	$	1,230	$	65	$	—	$	—
Very Good		171		128		324		—
Good		7,515		5,352		17,407		2,210
Acceptable		16,662		15,369		66,907		13,225
Acceptable with care		15,907		58,692		70,199		10,873
Special mention		4,021		2,704		21,976		—
Substandard		1,744		3,653		11,130		3,675
Doubtful		—		—		371		—
Loss		—		—		—		—

	$	47,250	$	85,963	$	188,314	$	29,983


Consumer Credit Exposure by Internally Assigned Grade	1 to 4 Family Residential and HELOCs

Pass	$	84,428
Special mention		7,121
Substandard		6,822

	$	98,371


Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts

Performing	$	11,757
Non Performing		333

	$	12,090

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)


December 31, 2010
Commercial Credit Exposure by Internally Assigned Grade	Commercial and Industrial		Construction		Commercial Real Estate		Multi-family Residential
			(In thousands)

Superior	$	1,298	$	67	$	—	$	—
Very Good		177		130		1,605		—
Good		7,744		5,159		20,444		2,959
Acceptable		17,707		15,467		67,322		13,432
Acceptable with care		18,232		58,056		71,854		9,750
Special mention		2,505		1,506		20,139		2,377
Substandard		1,765		4,165		11,756		1,570
Doubtful		9		—		382		—
Loss		—		—		—		—

	$	49,437	$	84,550	$	193,502	$	30,088


Consumer Credit Exposure by Internally Assigned Grade	1 to 4 Family Residential and HELOCs

Pass	$	86,262
Special mention		6,389
Substandard		7,672

	$	100,323


Consumer Credit Exposure based On Payment Activity	Loans to Individuals & Overdrafts

Performing	$	12,581
Non Performing		386

	$	12,967

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


	March 31, 2011		December 31, 2010
	(In thousands)

Non-accrual loans	$	11,511	$	10,562
Restructured loans		3,695		1,688

Total non-performing loans		15,206		12,250

Foreclosed real estate		5,019		3,655
Repossessed assets		—		—

Total non-performing assets	$	20,225	$	15,905

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

The average recorded investment in impaired loans was approximately $17.3 million and $14.7 million for the periods ended March 31, 2011 and December 31, 2010. Approximately, $9.0 million of the $18.1 million in impaired loans at March 31, 2011 had specific allowances provided while the remaining balance had no allowances recorded. Approximately $10.8 million of the $16.5 million in impaired loans at December 31, 2010 had specific allowances provided while the remaining balance had no allowances recorded. The allowance allocated for impaired loans for March 31, 2011 and December 31, 2010 was approximately $3.4 million and $3.3 million, respectively.

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.

Following is a summary of activity in the allowance for loan losses for the periods indicated:


	March 31, 2011			December 31, 2010
	(In thousands)
Allowance for loan losses at beginning of year	$	10,015		$	10,359
Provision for loan losses		1,164			15,634

		11,179			25,993

Loans charged-off:
Commercial and Industrial		(773	)		(11,967	)
Construction		(222	)		(464	)
HELOCs		(65	)		(496	)
1 to 4 Family Residential		(190	)		(2,254	)
Multi-family Residential		—			(2,811	)
Loans to Individuals & Overdrafts		(22	)		(421	)

Total charge-offs		(1,272	)		(18,413	)

Recoveries of loans previously charged-off:
Commercial and Industrial		74			1,121
Construction		—			137
HELOCs		2			44
1 to 4 Family Residential		130			15
Multi-family Residential		—			1,023
Loans to Individuals & Overdrafts		5			95

Total recoveries		211			2,435

Net charge-offs		(1,061	)		(15,978	)

Allowance for loan losses at end of year	$	10,118		$	10,015

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G – LOANS (continued)

The following table presents a roll forward of the Company’s allowance for loan losses by loan category for the periods ended March 31, 2011 and December 31, 2010, respectively:


March 31, 2011 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi- family Residential			Total
	(In thousands)

Balance, beginning of period 01/01/2011	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015
Provision for loan losses		(43	)		1,144			1,269			381			(1,130	)		(457	)		1,164
Loans charged-off		—			(222	)		(773	)		(255	)		(22	)		—			(1,272	)
Recoveries		72			—			2			132			5			—			211

Balance, end of period 3/31/2011	$	1,081		$	1,271		$	3,609		$	3,591		$	383		$	183		$	10,118


Ending Balance: individually evaluated for impairment	$	262		$	668		$	832		$	1,419		$	264		$	—		$	3,445

Ending Balance: collectively evaluated for impairment	$	819		$	603		$	2,777		$	2,172		$	119		$	183		$	6,673


Loans:
Ending Balance	$	47,250		$	85,963		$	188,314		$	98,371		$	12,090		$	29,983		$	461,971

Ending Balance: individually evaluated for impairment	$	1,016		$	1,976		$	8,317		$	4,204		$	470		$	2,122		$	18,105

Ending Balance: collectively evaluated for impairment	$	46,234		$	83,987		$	179,997		$	94,167		$	11,620		$	27,861		$	443,866


December 31, 2010 Allowance for loan losses	Commercial and Industrial			Construction			Commercial Real Estate			1 to 4 Family Residential & HELOCs			Loans to Individuals & Overdrafts			Multi- family Residential			Total
	(In thousands)

Balance, beginning of period 01/01/2009	$	1,699		$	629		$	4,281		$	3,043		$	507		$	200		$	10,359
Provision for loan losses		10,199			47			(1,170	)		2,981			1,349			2,228			15,634
Loans charged-off		(11,967	)		(464	)		—			(2,750	)		(421	)		(2,811	)		(18,413	)
Recoveries		1,121			137			—			59			95			1,023			2,435

Balance, end of period 12/31/2010	$	1,052		$	349		$	3,111		$	3,333		$	1,530		$	640		$	10,015


Ending Balance: individually evaluated for impairment	$	132		$	159		$	1,317		$	1,697		$	13		$	—		$	3,318

Ending Balance: collectively evaluated for impairment	$	920		$	190		$	1,794		$	1,636		$	1,517		$	640		$	6,697


Loans:
Ending Balance	$	49,437		$	84,550		$	193,502		$	100,323		$	12,967		$	30,088		$	470,867

Ending Balance: individually evaluated for impairment	$	396		$	1,224		$	8,903		$	5,773		$	219		$	—		$	16,515

Ending Balance: collectively evaluated for impairment	$	49,041		$	83,326		$	184,599		$	94,550		$	12,748		$	30,088		$	454,352

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS

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


	2011				2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	11,303	$	11,303	$	8,630	$	8,630
Interest-earning deposits in other banks		31,446		31,446		20,089		20,089
Federal funds sold		17,043		17,043		7,183		7,183
Investment securities available for sale		79,437		79,437		89,899		89,899
Loans, net		451,486		449,229		460,469		458,167
Accrued interest receivable		2,396		2,396		2,488		2,488
Stock in the Federal Home Loan Bank		1,448		1,448		1,448		1,448
Other non marketable securities		1,082		1,082		1,082		1,082
Bank owned life insurance		7,790		7,790		7,727		7,727

Financial liabilities:
Deposits	$	542,271	$	549,164	$	534,599	$	541,394
Short term debt		23,295		23,295		23,666		23,666
Long term debt		14,372		10,453		16,372		12,453
Accrued interest payable		394		394		395		395

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

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

Investment Securities Available for Sale

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

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions. Therefore, incremental market risks and liquidity discounts were subtracted to reflect illiquid and distressed conditions at March 31, 2011 and December 31, 2010. The liquidity discount for both March 31, 2011 and December 31, 2010 was 0.5% based on local economic conditions impacting employment, rising energy costs, and extended periods of time to sell or liquidate assets.

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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

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

Bank Owned Life Insurance

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

Deposits

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

Short Term Debt

The fair values of short term debt (sweep accounts that re-price daily and short term FHLB advances) are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Long Term Debt

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

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

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

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

Overview

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

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

Comparison of Financial Condition at

March 31, 2011 and December 31, 2010

During the first three months of 2011, total assets grew by $5.4 million to $632.3 million as of March 31, 2011. Earning assets at March 31, 2011 totaled $581.9 million and consisted of $451.5 million in net loans, $79.4 million in investment securities, $48.5 million in overnight investments and interest-bearing deposits in other banks and $2.5 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter were $542.3 million and $49.8 million, respectively.

Since the end of 2010, gross loans have decreased by $8.9 million to $461.6 million as of March 31, 2011. Gross loans consisted of $47.3 million in commercial and industrial loans, $188.3 million in commercial real estate loans, $30.0 million in multi-family residential loans, $12.1 million in consumer loans, $98.3 million in residential real estate, and $86.0 million in construction loans.

At March 31, 2011, the Company held $17.0 million in federal funds sold, an increase of $9.9 million from December 31, 2010. Interest-earning deposits in other banks were $31.4 million at March 31, 2011, an $11.4 million increase from December 31, 2010. The Company’s investment securities at March 31, 2011 were $79.4 million, a decrease of $10.5 million from December 31, 2010. The investment portfolio

as of March 31, 2011 consisted of $40.3 million in government agency debt securities, $30.7 million in mortgage-backed securities and $6.7 million in municipal securities. The unrealized gain on these securities was $1.7 million.

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

At March 31, 2011, non-earning assets were $50.4 million, which reflects an increase of $3.7 million from the $46.7 million as of December 31, 2010. Non-earning assets as of March 31, 2011 included $11.3 million in cash and due from banks, bank premises and equipment of $12.8 million, core deposit intangible of $0.7 million, accrued interest receivable of $2.4 million, foreclosed real estate of $5.0 million, and other assets totaling $18.2 million, which consisted of $7.8 million bank owned life insurance (“BOLI”), $4.9 million in deferred tax assets, $2.0 million in taxes receivable, $2.5 million in prepaid expenses, and $1.0 million in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets.

Total deposits at March 31, 2011 were $542.3 million and consisted of $74.0 million in non-interest-bearing demand deposits, $100.1 million in money market and NOW accounts, $24.0 million in savings accounts, and $344.2 million in time deposits. Total deposits grew by $7.7 million from $534.6 million as of December 31, 2010. The Bank had $4.0 million in brokered deposits as of March 31, 2011.

As of March 31, 2011, the Company had $23.3 million in short-term debt and $14.4 million in long-term debt. Short-term debt consisted of $19.3 million of repurchase agreements with local customers and $4.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004 and $2.0 million in FHLB advances.

Total shareholders’ equity at March 31, 2011 was $49.8 million, an increase of $0.1 million from $49.7 million as of December 31, 2010. Other comprehensive income relating to available for sale securities decreased $106,000 to $1.1 million for the quarter ended March 31, 2011. Other changes in shareholders’ equity included increases of $71,000 in stock-based compensation, and net income of $121,000 for the three months ending March 31, 2011.

Past Due Loans, Nonperforming Assets, and Asset Quality

Management continues to take necessary actions to identify problem loans and maintain proper internal controls in the lending and credit administration areas. These actions include conducting ongoing loan risk rating reviews; addressing problem loans while enhancing the credit administration process; improving loan documentation, ongoing lender training, enhanced collection efforts, and ongoing updating of policies and procedures.

At March 31, 2011, the Company had $2.7 million in loans that were 30-89 days past due. This represented 0.59% of gross loans outstanding on that date. This is an increase from December 31, 2010 when there were $2.1 million in loans that were 30-89 days past due, or 0.46% of gross loans outstanding. The increase in past dues is spread throughout each category of the loan portfolio and is due primarily to the continued weakening of economic conditions both locally and nationally. Non-accrual loans increased $950,000 million during the first three months of 2011 to $11.5 million as of March 31, 2011.

The percentage of non-performing loans (non-accrual loans and restructured loans) to total loans increased 69 basis points from 2.60% at December 31, 2010 to 3.29% at March 31, 2011. The Company

had four loans totaling $3.7 million that were considered troubled debt restructured loans at March 31, 2011.

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


	For Periods Ended
	March 31, 2011			December 31, 2010
	(In thousands)

Non-accrual loans	$	11,511		$	10,562
Restructured loans		3,695			1,688

Total non-performing loans		15,206			12,250

Foreclosed real estate		5,019			3,655
Repossessed assets		—			—

Total non-performing assets	$	20,225		$	15,905


Accruing loans past due 90 days or more	$	—		$	—
Allowance for loan losses	$	10,118		$	10,015

Non-performing loans to period end loans		3.29	%		2.60	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		3.29	%		2.60	%
Allowance for loans losses to period end loans		2.19	%		2.13	%
Allowance for loan losses to non-performing loans		67	%		82	%
Allowance for loan losses to non-performing assets		50	%		63	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		50	%		63	%
Non-performing assets to total assets		3.20	%		2.54	%
Non-performing assets and accruing loans past due 90 days or more to total assets		3.20	%		2.54	%

The total non-performing assets, (non-accrual loans, restructured loans, and foreclosed real estate), at March 31, 2011 and December 31, 2010 were $20.2 million and $15.9 million. The allowance for loan losses at March 31, 2011 represented 50% of non-performing assets compared to 63% at December 31, 2010.

Total impaired loans at March 31, 2011 were $18.1 million, this includes $11.5 million in loans that were classified as impaired because they were in non-accrual and $6.6 million in loans that were determined to be impaired for other reasons. Of these loans, $9.0 million required a specific reserve of $3.4 million at March 31, 2011. Total impaired loans at December 31, 2010 were $16.5 million. This includes $10.6 million in loans that were considered to be impaired due to being in non-accrual status and $5.9 million in loans that were deemed to be impaired for other reasons. Of these loans, $10.8 required a specific reserve of $3.3 million at December 31, 2010.

The allowance for loan losses was $10.1 million at March 31, 2011 or 2.19% of gross loans outstanding. This is an increase of 6 basis points from the 2.13% of gross loans at December 31, 2010. The allowance for loan losses at March 31, 2011 represented 55.88% of impaired loans compared to 60.64% at December 31, 2010. This increase in the allowance for the first three months of 2011 resulted from provisions for loan losses of $1.2 million, partially offset by net charge-offs of $1.1 million. Most of the loans charged-off in the first quarter of 2011 were classified as impaired at December 31, 2010 and had been specifically reserved for as part of the allowance for loan loss calculation. It is management’s assessment that the allowance for loan losses as of March 31, 2011 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

Other Lending Risk Factors

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

Regulatory Loan to Value

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

The Company had $15.7 million at March 31, 2011 and $6.9 million at December 31, 2010 in non 1-4 family residential loans that exceeded the regulatory LTV limits and $11.1 million at March 31, 2011 and $12.7 million at December 31, 2010 of 1-4 family residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 43.3% and 30.7% of total risk based capital as of March 31, 2011 and December 31, 2010, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to weaken in terms of both market activity and collateral valuations.

Business Sector Concentrations

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

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


	At March 31, 2011 (In thousands)		% of Risk Based Capital
1 to 4 Family Rental	$	24,755		41	%
Office Building	$	28,119		47	%
Real Estate Construction Speculative and Presold	$	26,750		44	%

At March 31, 2011 the Company had three product type groups which exceeded this guideline; 1-4 Family Rental, Office Buildings, and Real Estate Construction Speculative and Presold. The 1-4 Family

Rental group represented 41% of Risk-Based Capital or $24.8 million, Office Buildings were 47% of Risk-Based Capital or $28.1 million, and Real Estate Construction Speculative and Presold were 44% of Risk-Based Capital or $26.8 million. All other commercial real estate groups were under the 40% threshold.


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

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

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

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

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

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

ADC Loans

As of March 31, 2011

(In thousands)


	Construction			Land and Land Development			Total

Total ADC loans	$	60,913		$	25,050		$	85,963

Average Loan Size	$	162		$	343		$	—

Percentage of total loans		13.20	%		5.43	%		18.62	%

Non-accrual loans	$	186		$	336		$	522

At March 31, 2011 the ADC portfolio consisted of $60.9 million in construction loans and $25.1 million in land and land development loans. The average loan size is less than $0.2 million for construction loans and $0.4 million for land and land development loans. Total ADC loans represent 18.62% or $86.0 million of the total loan portfolio. Nonaccrual loans in the ADC category total $0.5 million or 0.6% of ADC loans. Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company’s market area.

ADC Loans

As of December 31, 2010

(In thousands)


	Construction			Land and Land Development			Total

Total ADC loans	$	60,043		$	24,507		$	84,550

Average Loan Size	$	170		$	345		$	—

Percentage of total loans		12.76	%		5.21	%		17.97	%

Non-accrual loans	$	510		$	428		$	938

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

Geographic Concentrations

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at March 31, 2011.


	ADC Loans		Percent			HELOC		Percent
	(In thousands)

Harnett County	$	6,437		7.5	%	$	7,397		18.6	%
Cumberland County		28,104		32.7	%		5,783		14.5	%
All other locations		51,422		59.8	%		26,600		66.9	%


Total	$	85,963		100.0	%	$	39,780		100.0	%

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


	ADC Loans		Percent			HELOC		Percent
	(In thousands)

Harnett County	$	6,029		7.1	%	$	7,572		19.0	%
Cumberland County		26,113		30.9	%		5,142		12.9	%
All other locations		52,408		62.0	%		27,224		68.1	%


Total	$	84,550		100.0	%	$	39,938		100.0	%

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2011, the Company had $141.3 million in loans that had terms permitting interest only payments. This represented 30.6% of the total loan portfolio. At December 31, 2010, the Company had $107.4 million in loans that had terms permitting interest only payments. This represented 22.8% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio require interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $52.0 million or 11.3% of total loans at March 31, 2011 compared to $52.1 million or 11.1% of total loans at December 31, 2010. The Company’s ten largest customer relationships totaled $72.1 million or 15.6% of total loans at March 31, 2011 compared to $72.1 million or 15.3% of total loans at December 31, 2010. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company’s capital position.

Comparison of Results of Operations for the

Three months ended March 31, 2011 and 2010

General. During the first quarter of 2011, the Company had net income of $121,000 as compared with net income of $457,000 for the same quarter in 2010. Net income per share for the first quarter of 2011 was $0.02 per share, basic and diluted, compared with net income per share of $0.07 per share, basic and diluted, for the first quarter of 2010. First quarter 2011 results were impacted by a higher net loss and write downs of foreclosed real estate of $203,000, compared to $1,000 for the same period in 2010. The Company also experienced a decrease in net interest margin of 14 basis points to 3.94% for the period ending March 31, 2011 as compared to the same period in 2010.

Net Interest Income. Net interest income decreased by $0.2 million to $5.7 million for the first quarter of 2011. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets, partially offset by growth in those assets. Average total interest-earning assets were $581.1 million in the first quarter of 2011 compared with $585.3 million during the same period in 2010 and the yield on those assets decreased 30 basis points from 5.82% to 5.52%. Total interest income reversed on loans transferred to non-accrual status for the three months ended March 31, 2011 and 2010 was $72,000 and $132,000, respectively, or 1 and 2 basis points on average interest-earning assets for the respective periods mentioned.

The Company’s average interest-bearing liabilities grew by $7.2 million to $504.2 million for the quarter ended March 31, 2011 from $497.1 million for the same period one year earlier and the cost of those funds decreased from 2.00% to 1.80% or 20 basis points. During the first quarter of 2011, the Company’s net interest margin was 3.96% and net interest spread was 3.72%. For the quarter ended March 31, 2010, net interest margin was 4.12% and net interest spread was 3.82%

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The Company recorded a $1.2 million provision for loan losses in the first

quarter of 2011, representing a decrease of $0.1 million from the $1.3 million provision made in the same period of 2010. The first quarter 2011 provision for loan losses was impacted by the downgrading of loans, resulting from both internal and external loan reviews and an increase in the level of non-performing loans resulting in changes in the specific reserves provided on these loans.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2011 was $641,000, a decrease of $26,000 from the first quarter of 2010. Service charges on deposit accounts decreased $57,000 to $382,000 for the quarter ended March 31, 2011 as compared to $439,000 for the same period for 2010. Mortgage fee income declined $2,000 to $26,000 for the quarter ended March 31, 2011 as compared to the same period in 2010. Other non-deposit fees and income increased $33,000 to $233,000 for the quarter ended March 31, 2011 as compared to the same period in 2010 primarily as a result of a $21,000 increase in dividends on FHLB stock and other non-marketable securities.

Non-Interest Expenses. Non-interest expenses increased by $473,000 to $5.1 million for the quarter ended March 31, 2011, from $4.6 million for the same period in 2010. The following are highlights of the significant differences in non-interest expenses during the first quarter of 2010 versus the first quarter of 2011:

•

Personnel expenses increased $80,000 to $2.4 million for the quarter ended March 31, 2011 compared to $2.3 million for the same quarter in 2010.

•

FDIC insurance expense was $263,000 for the quarter ended March 31, 2011 compared to $236,000 for the same quarter in 2010.

•

Professional fees increased $146,000 to $630,000 for the quarter ended March 31, 2011 compared to $484,000 for the quarter ended March 31, 2010, primarily as a result of increased legal fees pertaining to an alleged fraud by a large relationship borrower and increased expenses in the managing and liquidation of foreclosed real estate.

•

Information systems expenses decreased by $160,000 to $386,000 for the quarter ending March 31, 2011 as compared to the same period in 2010 primarily as a result of the 2010 costs pertaining to the Company’s core processing system conversion not being a recurring expense.

•

Other non-interest expenses increased $452,000 to $1.2 million for the quarter ended March 31, 2011 from $0.8 million for the same period in 2010 primarily as a result of $203,000 in losses and write-downs on foreclosed real estate, a $100,000 loan litigation settlement, and $96,000 in other costs relating to the management and liquidation of foreclosed real estate.

Provision for Income Taxes. The Company’s effective tax rate was (65.8%) for the quarter ended March 31, 2011 as a result of permanent tax differences that were in excess of taxable income and 32.6% for the quarter ended December 31, 2010.

The Company’s net deferred tax asset was $4.9 million at March 31, 2011 and December 31, 2010. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of March 31, 2011 and December 31 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid

deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 22.02% of total assets at March 31, 2011.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. The Company has established, as of March 31, 2011, new credit lines with other financial institutions to purchase up to $44.0 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (FHLB), the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $29.9 million of qualifying loans is pledged to the FHLB to secure borrowings. At March 31, 2011, the Company had $6.0 million outstanding in FHLB advances. Another source of short-term borrowings is securities sold under agreements to repurchase. At March 31, 2011, total borrowings consisted of securities sold under agreements to repurchase of $19.3 million and junior subordinated debentures of $12.4 million. In addition, the Company has $2.0 million of securities pledged to the Federal Reserve to be able to access the discount window.

Total deposits were $542.3 million at March 31, 2011. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 63.48% of total deposits at March 31, 2011. Time deposits of $100,000 or more represented 31.42% of the Company’s total deposits at March 31, 2011. At quarter end, the Company had no brokered time deposits and $4.0 million in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that current sources of funds provide adequate liquidity for the Bank’s current cash flow needs. The parent company (“New Century Bancorp”) maintains minimal cash balances. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for New Century Bancorp’s current cash flow needs. Chapter 53, Article 7 of the North Carolina General Statutes prohibits banks from declaring and paying dividends at any time during the period that a bank has an accumulated deficit. At March 31, 2011 the Bank has an accumulated deficit of $1.0 million.

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). A financial institution is required to maintain, at a minimum, Tier 1 capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 7.9% at March 31, 2011.

As the following table indicates, at March 31, 2011, the Company and its bank subsidiary exceeded minimum regulatory capital requirements.


New Century Bancorp, Inc.	Actual Ratio			Minimum Requirement

Total risk-based capital ratio		12.38	%		8.00	%
Tier 1 risk-based capital ratio		11.12	%		4.00	%
Leverage ratio		9.00	%		4.00	%


New Century Bank	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement

Total risk-based capital ratio		12.02	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		10.76	%		4.00	%		6.00	%
Leverage ratio		8.67	%		4.00	%		5.00	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the trust preferred securities qualify as Tier 1 capital as of March 31, 2011.

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

Legal Proceedings

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

REGULATORY MATTERS

Item 4. Controls and Procedures

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

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

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the first quarter of 2011. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first 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 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: May 11, 2011	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer

Date: May 11, 2011	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)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company