Select Bancorp (SLCT) 10-Q 2013 Q1 Quarterly report

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

xQuarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

or

¨Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period ended from              to                   

Commission File Number   000-50400   

New Century Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

North Carolina	20-0218264
(State or other jurisdiction of	(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. Yesx 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). YesxNo¨

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 companyx

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

As of May 1, 2013, the Registrant had outstanding 6,916,506 shares of Common Stock, $1 par value per share.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements(Unaudited)
	Consolidated Balance Sheets March 31, 2013 and December 31, 2012	3
	Consolidated Statements of Operations Three Months Ended March 31, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2013 and 2012	5
	Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2013 and 2012	6
	Consolidated Statements of Cash Flows Three Months Ended March 31, 2013 and 2012	7
	Notes to Consolidated Financial Statements	9
Item 2 -	Management’s Discussion and Analysis of Financial Condition andResults of Operations	37
Item 4 -	Controls and Procedures	47
Part II.	OTHER INFORMATION
Item 4 -	Mine Safety Disclosures	48
Item 6 -	Exhibits	48
	Signatures	49
	Exhibit Index	50

2

Part I.Financial Information

Item 1 - Financial Statements

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2013			December 31,
	(Unaudited)			2012*
	(In thousands, except share
	and per share data)
ASSETS
Cash and due from banks	$	15,665		$	13,498
Interest-earning deposits in other banks		91,547			97,081
Federal funds sold		3,029			3,029
Investment securities available for sale, at fair value		74,674			81,491
Loans held for sale, at fair value		432			-
Loans		360,431			367,892
Allowance for loan losses		(7,775	)		(7,897	)
NET LOANS		352,656			359,995
Accrued interest receivable		1,557			1,636
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost		796			973
Other non marketable securities		973			1,105
Foreclosed real estate		2,340			2,833
Premises and equipment, net		10,879			10,939
Bank owned life insurance		8,286			8,228
Core deposit intangible		269			298
Other assets		4,414			4,347
TOTAL ASSETS	$	567,517		$	585,453
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	83,591		$	92,265
Savings		22,919			22,139
Money market and NOW		128,317			122,727
Time		248,156			261,428
TOTAL DEPOSITS		482,983			498,559
Short term debt		14,658			17,848
Long term debt		12,372			12,372
Accrued interest payable		261			281
Accrued expenses and other liabilities		2,403			2,214
TOTAL LIABILITIES		512,677			531,274
Shareholders’ Equity
Common stock, $1 par value, 25,000,000 shares authorized; 6,916,506 and 6,913,636 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		6,917			6,914
Preferred stock, no par value, 10,000,000 shares authorized, none outstanding		-			-
Additional paid-in capital		42,021			42,000
Retained earnings		4,980			4,187
Accumulated other comprehensive income		922			1,078
TOTAL SHAREHOLDERS’ EQUITY		54,840			54,179
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	567,517		$	585,453

* Derived from audited consolidated financial statements.

See accompanying notes.

3

NEW CENTURY BANCORP, INC.

 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended
	March 31,
	2013			2012
	(In thousands, except share
	and per share data)
INTEREST INCOME
Loans	$	5,434		$	6,155
Federal funds sold and interest-earning deposits in other banks		57			36
Investments		387			428
TOTAL INTEREST INCOME		5,878			6,619
INTEREST EXPENSE
Money market, NOW and savings deposits		120			100
Time deposits		1,208			1,556
Short term debt		16			34
Long term debt		74			82
TOTAL INTEREST EXPENSE		1,418			1,772
NET INTEREST INCOME		4,460			4,847
RECOVERY OF LOAN LOSSES		(100	)		(2,136	)
NET INTEREST INCOME AFTER RECOVERY OF LOAN LOSSES		4,560			6,983
NON-INTEREST INCOME
Fees from pre-sold mortgages		62			39
Service charges on deposit accounts		272			318
Other fees and income		285			269
TOTAL NON-INTEREST INCOME		619			626
NON-INTEREST EXPENSE
Personnel		2,089			1,961
Occupancy and equipment		329			358
Deposit insurance		147			195
Professional fees		276			469
Information systems		338			367
Foreclosed real estate-related expense		122			131
Other		620			735
TOTAL NON-INTEREST EXPENSE		3,921			4,216
INCOME BEFORE INCOME TAX		1,258			3,393
INCOME TAXES		465			1,281
NET INCOME	$	793		$	2,112
NET INCOME PER COMMON SHARE
Basic	$	0.12		$	0.31
Diluted	$	0.12		$	0.31
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		6,914,934			6,859,196
Diluted		6,916,011			6,859,196

See accompanying notes.

4

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)
Net income	$	793		$	2,112
Other comprehensive loss:
Unrealized loss on investment securities available for sale		(275	)		(148	)
Tax effect		70			53
		(205	)		(95	)
Reclassification adjustment for loss included in net income		74			58
Tax effect		(25	)		(22	)
		49			36
Total		(156	)		(59	)
Total comprehensive income	$	637		$	2,053

See accompanying notes.

5

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

							Retained			Accumulated
					Additional		earnings			other com-			Total
	Common stock				paid-in		(Accumulated			prehensive			shareholders’
	Shares		Amount		capital		deficit)			income			equity
	(Amounts in thousands, except share and per data share)
Balance at December 31, 2011		6,860,367	$	6,860	$	41,851	$	(450	)	$	1,285		$	49,546
Net income		-		-		-		2,112			-			2,112
Sale of common stock		53,269		54		111		-			-			165
Other comprehensive loss, net		-		-		-		-			(59	)		(59	)
Stock based compensation		-		-		13		-			-			13
Balance at March 31, 2012		6,913,636	$	6,914	$	41,975	$	1,662		$	1,226		$	51,777
Balance at December 31, 2012		6,913,636	$	6,914	$	42,000	$	4,187		$	1,078		$	54,179
Net income		-		-		-		793			-			793
Other comprehensive loss, net		-		-		-		-			(156	)		(156	)
Stock option exercises		2,870		3		12		-			-			15
Stock based compensation		-		-		9		-			-			9
Balance at March 31, 2013		6,916,506	$	6,917	$	42,021	$	4,980		$	922		$	54,840

See accompanying notes.

6

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	793		$	2,112
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery of loan losses		(100	)		(2,136	)
Depreciation and amortization of premises and equipment		128			142
Amortization and accretion of investment securities		162			146
Amortization of deferred loan fees and costs		(50	)		(51	)
Amortization of core deposit intangible		29			28
Stock-based compensation		9			13
Loss on write down on other assets		-			59
Increase in cash surrender value of bank owned life insurance		(58	)		(63	)
Net loss on sale and write-downs of foreclosed real estate		119			24
Net loss on investment security sales and pay-downs		74			58
Change in assets and liabilities:
Net change in accrued interest receivable		79			206
Net change in other assets		13			1,245
Net change in accrued expenses and other liabilities		169			1,101
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,367			2,884
CASH FLOWS FROM INVESTING ACTIVITIES
Redemption of FHLB stock		177			-
Redemption of non-marketable security		132			-
Purchase of investment securities available for sale		-			(12,501	)
Maturities of investment securities available for sale		2,850			3,698
Mortgage-backed securities pay-downs		3,495			3,463
Net change in loans outstanding		6,741			17,600
Proceeds from sale of foreclosed real estate		690			1,049
Purchases of premises and equipment		(68	)		(60	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		14,017			13,249

See accompanying notes.

7

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	$	(15,576	)	$	(11,411	)
Proceeds from short-term debt		-			3,424
Repayments on short-term debt		(3,190	)		(2,000	)
Repayments on long-term debt		-			(2,000	)
Proceeds from stock option exercises		15			-
Proceeds from sale of common stock		-			165
NET CASH USED IN FINANCING ACTIVITIES		(18,751	)		(11,822	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(3,367	)		4,311
CASH AND CASH EQUIVALENTS, BEGINNING		113,608			77,096
CASH AND CASH EQUIVALENTS, ENDING	$	110,241		$	81,407
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest paid	$	1,438		$	1,795
Non-cash transactions:
Unrealized gains on investment securities available for sale, net of tax		(156	)		(59	)
Transfers from loans to foreclosed real estate		316			433
Transfers from loans to loans held for sale, at fair value		432			1,552

See accompanying notes.

8

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 March 31, 2013 and for the three month periods ended March 31, 2013 and 2012, 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, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.

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 2012 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2013. 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 March 31, 2013 and 2012 there were 322,689 and 395,789 anti-dilutive options outstanding, respectively.

	Three Months Ended
	March 31,
	2013		2012
Weighted average shares used for basic net income per share		6,914,934		6,859,196
Effect of dilutive stock options		1,077		-
Weighted average shares used for diluted net income per share		6,916,011		6,859,196

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:

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). This guidance is the culmination of the FASB's deliberation on reporting reclassification adjustments from accumulated other comprehensive income ("AOCI"). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company has adopted the standard and the adoption of ASU 2013-02 did not have an impact on the Company's financial condition, results of operations, or cash flows, but did result in additional disclosures in Note H.

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 consolidated 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.

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:

10

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 March 31, 2013. Valuation techniques are consistent with techniques used in prior periods.

11

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 March 31, 2013 and December 31, 2012 (in thousands):

Investment securities available for sale March 31, 2013	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 - Government Sponsored-Enterprises (“GSE’s”)	$	34,428	$	-	$	34,428	$	-
Mortgage-backed securities - GSE’s		32,247		-		32,247		-
Municipal bonds		7,999		-		7,999		-
Total	$	74,674	$	-	$	74,674	$	-

Investment securities available for sale December 31, 2012	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. government agencies – GSE's	$	37,154	$	-	$	37,154	$	-
Mortgage-backed securities - GSE’s		35,954		-		35,954		-
Municipal bonds		8,383		-		8,383		-
Total	$	81,491	$	-	$	81,491	$	-

12

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE D – FAIR VALUE MEASUREMENTS (continued)

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

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 in the consolidated statement of operations.

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, 2013 and December 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as 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. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At March 31, 2013, the discounts used ranged between 6% and 55%. There were no transfers between levels from the prior reporting periods and there have been no changes in valuation techniques for the quarter ended March 31, 2013.

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. The significant unobservable input used in the fair value measurement of the Company’s impaired loans is the discount applied to appraised values to account for expected liquidation and selling costs. At March 31, 2013, the discounts used ranged between 16% and 20%. There have been no changes in valuation techniques for the quarter ended March 31, 2013.

13

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 March 31, 2013 and
December 31, 2012 (in thousands):

Asset Category March 31, 2013	Fair value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans held for sale, at fair value	$	432	$	-	$	-	$	432
Impaired loans		8,875		-		-		8,875
Foreclosed real estate		2,340		-		-		2,340
Total	$	11,647	$	-	$	-	$	11,647

Of the $18.0 million in impaired loans at March 31, 2013 there were $7.2 million in loans with specific reserves of $988,000 along with $2.6 million in loans without specific reserves which had been partially charged-off.

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

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

14

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 March 31, 2013 and December 31, 2012:

	March 31, 2013
	Carrying		Estimated
	Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets:
Cash and due from banks	$	15,665	$	15,665	$	15,665	$	-	$	-
Interest-earning deposits in other banks		91,547		91,547		91,547		-		-
Federal funds sold		3,029		3,029		3,029		-		-
Investment securities available for sale		74,674		74,674		-		74,674		-
Loans held for sale		432		432		-		-		432
Loans, net		352,656		371,284		-		-		371,284
Accrued interest receivable		1,557		1,557		-		-		1,557
Stock in the FHLB		796		796		-		-		796
Other non-marketable securities		973		973		-		-		973
Financial liabilities:
Deposits	$	482,983	$	491,509	$	-	$	491,509	$	-
Short term debt		14,658		14,658		-		14,658		-
Long term debt		12,372		8,451				8,451		-
Accrued interest payable		261		261		-		-		261

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

15

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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.

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

16

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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.

NOTE F - INVESTMENT SECURITIES

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

	March 31, 2013
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
U.S. government agencies-GSE’s
Within 1 year	$	8,613	$	55	$	-		$	8,668
After 1 year but within 5 years		15,152		83		-			15,235
After 5 years but within 10 years		6,002		-		(79	)		5,923
After 10 years		4,577		25		-			4,602
Mortgage-backed securities-GSE’s
Within 1 year		843		60		-			903
After 1 year but within 5 years		25,951		1,043		(8	)		26,986
After 5 years but within 10 years		4,392		-		(34	)		4,358
Municipal bonds
Within 1 year		100		1		-			101
After 1 year but within 5 years		2,252		182		-			2,434
After 5 years but within 10 years		4,141		144		-			4,285
After 10 years		1,111		68		-			1,179
	$	73,134	$	1,661	$	(121	)	$	74,674

As of March 31, 2013, accumulated other comprehensive income included unrealized net gains of $1.5 million, net of deferred income taxes of $619,000.

In the first quarter of 2013 and 2012, the pay down of GSE’s resulted in gross realized gains of $1,000 and $3,000, respectively, and realized losses of $75,000 and $61,000, respectively for each period. These pay downs generated $3.5 million in proceeds during each of these respective periods.

17

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F - INVESTMENT SECURITIES (continued)

	December 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
	(In thousands)
Securities available for sale:
U.S. government agencies-GSE’s
Within 1 year	$	9,385	$	75	$	-		$	9,460
After 1 year but within 5 years		16,947		100		-			17,047
After 5 years but within 10 years		6,003		-		(45	)		5,958
After 10 years		4,616		73		-			4,689
Mortgage-backed securities-GSE’s
Within 1 year		1,085		68		-			1,153
After 1 year but within 5 years		27,188		1,122		(20	)		28,290
After 5 years but within 10 years		4,505		-		(6	)		4,499
After 10 years		2,016		-		(4	)		2,012
Municipal bonds
Within 1 year		350		1		-			351
After 1 year but within 5 years		2,354		187		-			2,541
After 5 years but within 10 years		3,665		122		-			3,787
After 10 years		1,601		103		-			1,704
	$	79,715	$	1,851	$	(75	)	$	81,491

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

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, 2013 and December 31, 2012.

	March 31, 2013
	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- GSE’s	$	5,923	$	79	$	-	$	-	$	5,923	$	79
Mortgage-backed securities- GSE’s		6,202		42		-		-	$	6,202	$	42
Total temporarily impaired securities	$	12,125	$	121	$	-	$	-	$	12,125	$	121

18

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE F- INVESTMENT SECURITIES (continued)

At March 31, 2013, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Eight GSE’s had unrealized losses for less than twelve months totaling $121,000 at March 31, 2013. All unrealized losses are attributable to the general trend of interest rates.

	December 31, 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 – GSE’s	$	5,959	$	45	$	-	$	-	$	5,959	$	45
Mortgage-backed securities-GSE’s		10,286		29		-		-		10,286		29
Municipal bonds		677		1		-		-		677		1
Total temporarily impaired securities	$	16,922	$	75	$	-	$	-	$	16,922	$	75

At December 31, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Ten GSE’s and one municipal bond had unrealized losses for less than twelve months totaling $75,000 at December 31, 2012. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.

NOTE G - LOANS

Following is a summary of the composition of the Company’s loan portfolio at March 31, 2013 and December 31, 2012:

	2013						2012
				Percent						Percent
	Amount			of total			Amount			of total
	(In thousands)
Real estate loans:
1 to 4 family residential	$	37,411			10.38	%	$	41,017			11.14	%
Commercial real estate		183,230			50.83	%		186,949			50.82	%
Multi-family residential		16,881			4.68	%		19,524			5.31	%
Construction		48,967			13.59	%		48,220			13.11	%
Home equity lines of credit (“HELOC”)		33,546			9.31	%		34,603			9.41	%
Total real estate loans		320,035			88.79	%		330,313			89.79	%
Other loans:
Commercial and industrial		32,291			8.96	%		29,297			7.96	%
Loans to individuals		8,561			2.38	%		8,615			2.34	%
Overdrafts		41			.01	%		119			.03	%
Total other loans		40,893			11.35	%		38,031			10.33	%
Gross loans		360,928						368,344
Less deferred loan origination fees, net		(497	)		(.14	)%		(452	)		(.12	)%
Total loans		360,431			100.00	%		367,892			100.00	%
Allowance for loan losses		(7,775	)					(7,897	)
Total loans, net	$	352,656					$	359,995

19

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

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

At March 31, 2013, the Company had pre-approved but unused lines of credit for customers totaling $66.8 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

1-to-4 Family Residential Loans

Residential 1-to-4 family loans are mortgage loans secured by residential real estate within the Bank’s market areas. These loans may also include loans that 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 thefeasibility, marketability, and valuation of the project.

20

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Also much consideration needs to be given to thecost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding.Construction loans aretraditionally 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.

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.

21

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, 2013 and December 31, 2012, respectively:

	March 31, 2013
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)
Commercial and industrial	$	144	$	240	$	384	$	31,907	$	32,291
Construction		43		2,115		2,158		46,809		48,967
Multi-family residential		-		-		-		16,881		16,881
Commercial real estate		2,291		3,262		5,553		177,677		183,230
Loans to individuals & overdrafts		30		13		43		8,559		8,602
1-to-4 family residential		311		1,163		1,474		35,937		37,411
HELOC		15		356		371		33,175		33,546
Deferred loan (fees) cost, net										(497	)
	$	2,834	$	7,149	$	9,983	$	350,945	$	360,431

At March 31, 2013, there were no loans that were more than 90 days past due and still accruing interest.

	December 31, 2012
	30+		Non-		Total
	Days		Accrual		Past				Total
	Past Due		Loans		Due		Current		Loans
	(In thousands)
Commercial and industrial	$	215	$	319	$	534	$	28,763	$	29,297
Construction		138		2,298		2,436		45,784		48,220
Multi-family residential		-		1,482		1,482		18,042		19,524
Commercial real estate		241		4,373		4,614		182,335		186,949
Loans to individuals & overdrafts		19		11		30		8,704		8,734
1 to 4 family residential		536		1,061		1,597		39,420		41,017
HELOC		30		582		612		33,991		34,603
Deferred loan (fees) cost, net										(452	)
	$	1,179	$	10,126	$	11,305	$	357,039	$	367,892

There were no loans greater than 90 days past due and still accruing interest at December 31, 2012.

22

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 asof March 31, 2013 and December 31, 2012:

							Three months ended
							March 31, 2013
			Contractual						Interest Income
			Unpaid				Average		Recognized on
	Recorded		Principal		Related		Recorded		Impaired
	Investment		Balance		Allowance		Investment		Loans
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	340	$	402	$	-	$	443	$	5
Construction		2,073		2,563		-		2,224		2
Commercial real estate		3,779		4,266		-		5,100		23
Loans to individuals & overdrafts		1		1		-		2		-
Multi-family residential		1,414		1,414		-		1,428		39
1 to 4 family residential		2,876		3,136		-		2,800		33
HELOC		311		397		-		476		1
Subtotal:		10,794		12,179		-		12,473		103
With an allowance recorded:
Commercial and industrial		159		340		90		112		-
Construction		380		380		70		323		2
Commercial real estate		5,903		6,331		626		5,204		59
Loans to individuals & overdrafts		22		22		8		22		-
Multi-family residential		-		-		-		20		-
1 to 4 family residential		652		666		107		789		7
HELOC		134		134		87		156		-
Subtotal:		7,250		7,873		988		6,626		68
Totals:
Commercial		14,048		15,696		786		14,854		130
Consumer		23		23		8		24		-
Residential		3,973		4,333		194		4,221		41
Grand Total:	$	18,044	$	20,052	$	988	$	19,099	$	171

Impaired loans at March 31, 2013 were approximately $18.0 million and were comprised of $7.1 million in nonaccrual loans and $10.9 million in loans that were still accruing interest. Recorded investment represents the current principal balance of the loan(s). Approximately $7.2 million in impaired loans had specific allowances provided for them while the remaining $10.8 million had no specific allowances recorded at March 31, 2013. Of the $10.8 million with no allowance recorded, $2.6 million of those loans had partial charge-offs recorded.

23

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Impaired Loans (continued)

							Three months ended
	As of December 31, 2012						March 31, 2012
			Contractual
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(In thousands)
2012:
With no related allowance recorded:
Commercial and industrial	$	545	$	810	$	-	$	464	$	7
Construction		2,376		2,940		-		1,483		15
Commercial real estate		5,987		6,475		-		10,566		88
Loans to individuals & overdrafts		3		13		-		197		1
Multi-family residential		1,442		1,442		-		1,540		-
HELOC		641		821		-		890		8
1 to 4 family residential		2,725		2,995		-		1,984		4
Subtotal:		13,719		15,496		-		17,124		123
With an allowance recorded:
Commercial and industrial		65		66		51		60		2
Construction		266		266		64		2,529		1
Commercial real estate		4,505		5,474		581		3,837		36
Loans to individuals & overdrafts		21		21		4		36		-
Multi-family Residential		40		40		9		-		-
HELOC		179		179		43		371		-
1 to 4 family residential		926		926		157		756		10
Subtotal:		6,002		6,972		909		7,589		49
Totals:
Commercial		15,226		17,513		705		20,479		149
Consumer		24		34		4		233		1
Residential		4,471		4,921		200		4,001		22
Grand Total:	$	19,721	$	22,468	$	909	$	24,713	$	172

��

Impaired loans at December 31, 2012 were approximately $19.7 million and were comprised of $10.1 million in nonaccrual loans and $9.6 million in loans that were still accruing interest. Approximately $6.0 million in impaired loans had specific allowances provided for them while the remaining $13.7 million had no specific allowances recorded at December 31, 2012. Of the $13.7 million with no allowance recorded, $3.0 million of those loans had partial charge-offs recorded.

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.

24

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”) with a breakdown of the types of concessions made by loan class during the first quarter of 2013 and 2012:

	Three months ended March 31, 2013						Three months ended March 31, 2012
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
	(In thousands)
Below market interest rate:
Commercial and industrial		-	$	-	$	-		-	$	-	$	-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		-		-		-		-		-		-
Extended payment terms:
Commercial and industrial		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		1		287		287
Loans to individuals & overdrafts		-		-		-		-		-		-
1-to-4 family residential		-		-		-		-		-		-
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		-		-		-		1		287		287
Other:
Commercial and industrial		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-		-		-
1- to-4 family residential		1		59		59		-		-		-
Multi-family residential		-		-		-		-		-		-
HELOC		-		-		-		-		-		-
Total		1		59		59		-		-		-
Total		1	$	59	$	59		1	$	287	$	287

25

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 for which there was a payment default together with concessions made by loan class during the twelve month period ended March 31, 2013 and 2012:

	Twelve months ended				Twelve months ended
	March 31, 2013				March 31, 2012
	Number		Recorded		Number		Recorded
	of loans		investment		of loans		investment
	(In thousands)
Below market interest rate:
Commercial and industrial		-	$	-		-	$	-
Construction		-		-		-		-
Commercial real estate		-		-		-		-
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		-		-
Extended payment terms:
Commercial and industrial		-		-		1		211
Construction		-		-		4		2,329
Commercial real estate		-		-		14		5,161
Loans to individuals & overdrafts		-		-		-		-
1-to-4 family residential		2		96		5		447
Multi-family residential		1		1,514		-		-
HELOC		-		-		-		-
Total		3		1,610		24		8,148
Forgiveness of principal:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		-		-		1		635
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		-		-		1		635
Other:
Commercial and industrial		-		-		-		-
Construction		-		-		-		-
Commercial real estate		1		91		-		-
Loans to individuals and overdrafts		-		-		-		-
1-to-4 family residential		-		-		-		-
Multi-family residential		-		-		-		-
HELOC		-		-		-		-
Total		1		91		-		-
Total	$	4	$	1,701	$	25	$	8,783

26

NEW CENTURY BANCORP, INC.

Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Troubled Debt Restructurings (continued)

As noted in the table above, there was a loan that was considered a troubled debt restructuring for reasons other than below market interest rates, extended terms or forgiveness of principal. Loans in the “Other” category are those that were renewed at terms that vary from those that the Bank would enter into for new loans of the same type.

The following table presents, as of March 31, 2013, the successes and failures by type of modification for all TDRs modified the last twelve months ending March 31, 2013:

	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		1,570		1		40		-		-
Forgiveness of principal		-		-		-		-		-		-		-		-
Other		-		-		8		1,104		-		-		1		91
Total		-	$	-		10	$	2,674		1	$	40		1	$	91

At March 31, 2013, the Bank had thirty-two loans with a balance of $6.4 million that were considered to be troubled debt restructurings. Of those TDRs, nineteen loans with a balance totaling $4.0 million were still accruing as of March 31, 2013. The remaining TDRs with balances totaling $2.4 million as of March 31, 2013 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).

27

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

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

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

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

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

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

28

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:

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

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

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

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

· 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.

29

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Credit Quality Indicators (continued)

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

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

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

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

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

30

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, 2013 and December 31, 2012, respectively:

March 31, 2013
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
			(In thousands)
Superior	$	195	$	48	$	-	$	-
Very good		3		1		-		-
Good		5,475		607		20,869		2,104
Acceptable		9,714		3,243		65,186		6,589
Acceptable with care		10,980		41,916		65,680		6,774
Special mention		5,349		596		21,183		-
Substandard		575		2,556		10,312		1,414
Doubtful		-		-		-		-
Loss		-		-		-		-
	$	32,291	$	48,967	$	183,230	$	16,881

Consumer Credit
Exposure By
Internally	1-to-4 family
Assigned Grade	residential		HELOC
Pass	$	31,012	$	31,663
Special mention		2,197		969
Substandard		4,202		914
	$	37,411	$	33,546

Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts
Pass	$	8,513
Non –pass		89
	$	8,602

31

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

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

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

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

32

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 loan 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.

In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge off history for most recent eight consecutive quarters. For the March 31, 2013 allowance for loan losses, the loss history was expanded to eleven consecutive quarters of net charge offs. Since the most recent quarters have contained a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a nearly $900,000 million increase to our loan loss reserves as compared to the methodology previously used.

Individual reservesare 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.

33

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 period ended March 31, 2013 and March 31, 2012, respectively:

	Three months ended March 31, 2013
	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 1/1/2013	$	278		$	798		$	4,946		$	1,070		$	627		$	72		$	106		$	7,897
Provision (recovery) for loan losses		32			(175	)		205			(123	)		14			(19	)		(34	)		(100	)
Loans charged-off		(46	)		-			(43	)		(40	)		(10	)		(27	)		-			(166	)
Recoveries		75			3			2			13			4			47			-			144
Balance, end of period 3/31/2013	$	339		$	626		$	5,110		$	920		$	635		$	73		$	72		$	7,775
Ending balance: individually evaluated for impairment	$	90		$	70		$	626		$	107		$	87		$	8		$	-		$	988
Ending balance: collectively evaluated for impairment	$	249		$	556		$	4,484		$	813		$	548		$	65		$	72		$	6,787
Loans:
Ending balance	$	32,291		$	48,967		$	183,230		$	37,411		$	33,546		$	8,602		$	16,881		$	360,928
Ending balance: individually evaluated for impairment	$	499		$	2,453		$	9,682		$	3,528		$	445		$	23		$	1,414		$	18,044
Ending balance: collectively evaluated for impairment	$	31,792		$	46,514		$	173,548		$	33,883		$	33,101		$	8,579		$	15,467		$	342,884

34

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

NOTE G - LOANS (continued)

Allowance for Loan Losses (continued)

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

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

35

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

NOTE H – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents changes in accumulated other comprehensive income for the three months ended March 31, 2013 and 2012.

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)
Beginning balance	$	1,078		$	1,285
Unrealized loss on investment securities available for sale		(275	)		(148	)
Tax benefit		70			53
Other comprehensive loss before reclassification		(205	)		(95	)
Amounts reclassified from accumulated comprehensive income:
Realized loss on investment securities included in net income		74			58
Tax effect		(25	)		(22	)
Total reclassifications net of tax		49			36
Net current period other comprehensive loss		(156	)		(59	)
Ending balance	$	922		$	1,226

The income statement line items impacted by the reclassifications of realized gains (losses) on investment securities is the other non-interest expense and income tax expense line items in the income statement.

NOTE I – 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 Guaranty 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 loans secured by time deposits. There was a separate payment for the loans purchased that was not included in the $1.8 million purchase price.

36

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, Wake 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 or Wake Counties. 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, 2013 and December 31, 2012

During the first three months of 2013, total assets decreased by $17.9 million to $567.5 million as of March 31, 2013. Earning assets at March 31, 2013 totaled $523.7 million and consisted of $352.7 million in net loans, $74.7 million in investment securities, $94.6 million in overnight investments and interest-bearing deposits in other banks and $1.8 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2013 were $483.0 million and $54.8 million, respectively.

37

Since the end of 2012, gross loans have decreased by $7.5 million to $360.4 million as of March 31, 2013 due to continued soft loan demand. Gross loans consisted of $32.2 million in commercial and industrial loans, $183.2 million in commercial real estate loans, $16.9 million in multi-family residential loans, $8.6 million in consumer loans, $37.4 million in residential real estate, $33.5 million in HELOC, and $49.0 million in construction loans. Deferred loan fees, net of costs, on these loans were $497,000.

At March 31, 2013 and December 31, 2012, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $91.5 million at March 31, 2013, a $5.5 million increase from December 31, 2012. The Company’s investment securities at March 31, 2013 were $74.7 million, a decrease of $6.8 million from December 31, 2012. The investment portfolio as of March 31, 2013 consisted of $34.4 million in government agency debt securities, $31.2 million in mortgage-backed securities and $7.6 million in municipal securities. The net unrealized gain on these securities was $1.5 million.

At March 31, 2013, the Company held an investment of $796,000 in the form of Federal Home Loan Bank (“FHLB”) stock a decrease of $177,000 from December 31, 2012 due to a redemption by the FHLB. Also, the Company had $973,000 in other non-marketable securities, down slightly from $1.1 million at December, 31, 2012.

At March 31, 2013, non-earning assets were $43.4 million, a decrease of $8.3 million from the $51.7 million as of December 31, 2012. Non-earning assets included $15.7 million in cash and due from banks, bank premises and equipment of $10.9 million, core deposit intangible of $269,000, accrued interest receivable of $1.6 million, foreclosed real estate of $2.3 million, $8.3 million in bank owned life insurance (“BOLI”), $2.6 million in deferred tax assets, and $1.7 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, 2013 were $483.0 million and consisted of $83.6 million in non-interest-bearing demand deposits, $128.3 million in money market and NOW accounts, $22.9 million in savings accounts, and $248.2 million in time deposits. Total deposits decreased by $15.6 million from $498.6 million as of December 31, 2012. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of March 31, 2013.

As of March 31, 2013, the Company had $14.7 million in short-term debt and $12.4 million in long-term debt. All short-term debt was repurchase agreements with local customers. Long-term debt consisted of $12.4 million of junior subordinated debentures.

Total shareholders’ equity at March 31, 2013 was $54.8 million, an increase of $673,000 from $54.2 million as of December 31, 2012. Accumulated other comprehensive income relating to available for sale securities decreased $156,000 during the three months ended March 31, 2013. Other changes in shareholders’ equity included increases of $9,000 in stock-based compensation, net income of $793,000, and $15,000 from the exercise of stock options.

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

At March 31, 2013, the Company had $2.8 million in loans that were 30 to 89 days past due. This represented 0.79% of gross loans outstanding on that date. This is an increase from December 31, 2012 when there were $1.2 million in loans that were 30-89 days past due or 0.32% of gross loans outstanding. Non-accrual loans decreased from $10.1 million at December 31, 2012 to $7.1 million at March 31, 2013.

38

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased from 3.27% at December 31, 2012 to 3.10% at March 31, 2013.

At March 31, 2013, the Company had thirty-two loans totaling $6.4 million that were considered to be troubled debt restructuring. Nineteen loans of these loans totaling $4.0 million were still in accruing status 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
	March 31,			December 31,
	2013			2012
	(In thousands)
Non-accrual loans	$	7,149		$	10,126
Accruing TDRs		4,031			1,904
Total non-performing loans		11,180			12,030
Foreclosed real estate		2,340			2,833
Total non-performing assets	$	13,520		$	14,863
Accruing loans past due 90 days or more	$	-		$	-
Allowance for loan losses	$	7,775		$	7,897
Non-performing loans to period end loans		3.10	%		3.27	%
Non-performing loans and accruing loans past due 90 days or more to period end loans		3.10	%		3.27	%
Allowance for loans losses to period end loans		2.16	%		2.15	%
Allowance for loan losses to non-performing loans		70	%		66	%
Allowance for loan losses to non-performing assets		58	%		53	%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more		58	%		53	%
Non-performing assets to total assets		2.38	%		2.53	%
Non-performing assets and accruing loans past due 90 days or more to total assets		2.38	%		2.53	%

The total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate) at March 31, 2013 and December 31, 2012 were $13.5 million and $14.9 million. The allowance for loan losses at March 31, 2013 represented 58% of non-performing assets compared to 53% at December 31, 2012.

Total impaired loans at March 31, 2013 were $18.0 million. This includes $7.1 million in loans that were classified as impaired because they were in non-accrual and $10.9 million in loans that were determined to be impaired for other reasons. Of these loans, $7.2 million required a specific reserve of $988,000 at March 31, 2013.

Total impaired loans at December 31, 2012 were $19.7 million. This includes $10.1 million in loans that were considered to be impaired due to being in non-accrual status and $9.6 million in loans that were deemed to be impaired for other reasons. Of these loans, $7.0 million required a specific reserve of $909,000 at December 31, 2012.

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The allowance for loan losses was $7.8 million at March 31, 2013 or 2.16% of gross loans outstanding. This is consistent with the 2.15% as a percentage of gross loans at December 31, 2012. The allowance for loan losses at March 31, 2013 represented 43.1% of impaired loans compared to 40.0% at December 31, 2012. It is management’s assessment that the allowance for loan losses as of March 31, 2013 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 certain 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 forloan to value (“LTV”) ratios.

At March 31, 2013 and December 31, 2012 the Company had $2.6 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2013 and December 31, 2012 the Company had $8.7 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 3.9% and 13.1% of total risk based capital as of March 31, 2013 and December 31, 2012, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to 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.

At December 31, 2012 the Company had one product type group which exceeded this guideline; Office Buildings, which represented 40% of risk-based capital or $26.7 million. All other commercial real estate groups were under the 40% threshold.

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

The tables below provide information regarding loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties as of March 31, 2013 and December 31, 2012.

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Acquisition, Development and Construction Loans
As of March 31, 2013
(In thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	31,978		$	16,990		$	48,968
Average Loan Size	$	95		$	315
Percentage of total loans		8.86	%		4.71	%		13.57	%
Non-accrual loans	$	630		$	1,485		$	2,115

Acquisition, Development and Construction Loans

As of December 31, 2012

(In thousands)

	Construction			Land and Land Development			Total
Total ADC loans	$	28,892		$	18,328		$	47,220
Average Loan Size	$	100		$	333
Percentage of total loans		8.13	%		4.98	%		13.11	%
Non-accrual loans	$	733		$	1,565		$	2,298

Management monitors the ADC portfolio by reviewing funding based on project completeness, monthly and quarterly inspections as required by the project, collateral value, geographic concentrations, spec-to-presold ratios and 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 March 31, 2013.

	ADC Loans		Percent			HELOC		Percent
	(In thousands)
Harnett County	$	4,142		8.46	%	$	6,771		20.19	%
Cumberland County		17,047		34.81	%		6,932		20.66	%
Johnston County		397		.81	%		554		1.65	%
Pitt County		5,358		10.94	%		45		.13	%
Robeson County		1,628		3.33	%		3,618		10.79	%
Sampson County		310		.63	%		1,795		5.35	%
Wake County		6,463		13.20	%		896		2.67	%
Wayne County		3,064		6.26	%		5,510		16.43	%
Hoke County		4,496		9.18	%		162		.48	%
All other locations		6,063		12.38	%		7,263		21.65	%
Total	$	48,968		100.00	%	$	33,546		100.0	%

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Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2012.

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

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2013, the Company had $86.9 million in loans that had terms permitting interest only payments. This represented 24.7% of the total loan portfolio. At December 31, 2012, the Company had $84.4 million in loans that had terms permitting interest only payments. This represented 22.9% of the total loan portfolio. 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 $45.1 million or 12.5% of total loans at March 31, 2013 compared to $43.2 million or 11.7% of total loans at December 31, 2012. The Company’s ten largest customer relationships totaled $61.3 million or 17.0% of total loans at March 31, 2013 compared to $61.0 million or 16.6% of total loans at December 31, 2012. 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.

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Comparison of Results of Operations for the

Three months ended March 31, 2013 and 2012

General. During the first quarter of 2013, the Company had net income of $793,000 as compared with net income of $2.1 million for the first quarter in 2012. Net income per share for the first quarter of 2013 was $0.12, basic and diluted, compared with net income per share of $0.31, basic and diluted, for the first quarter of 2012. Results of operations for the first quarter of 2013 were primarily impacted by a significantly smaller recovery of loan losses of $100,000 compared to $2.0 million in the first quarter of 2012 resulting from $2.4 million recovery on a previously reported loan fraud. The Company also experienced a decrease in net interest margin of 28 basis points to 3.38% in the first quarter of 2013 from the same period in 2012. These items were partially offset by a decline of $295,000 in non-interest expenses.

Net Interest Income. Net interest income decreased by $387,000 from $4.8 million in the first quarter of 2012 to $4.5 million for the first quarter of 2013. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets. Average total interest-earning assets were $534.4 million in the first quarter of 2013 compared with $531.4 million during the same period in 2012 while the yield on those assets decreased 58 basis points from 4.98% to 4.40%.

The Company’s average interest-bearing liabilities decreased by $22.3 million to $434.8 million for the quarter ended March 31, 2013 from $457.1 million for the same period one year earlier and the cost of those funds decreased from 1.54% to 1.29%, or 25 basis points. During the first quarter of 2013, the Company’s net interest marginwas 3.38% and net interest spread was 3.11%. In the same quarter ended one year earlier, net interest margin was 3.66% and net interest spread was 3.38%.

Provision for Loan Losses.Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge off history for most recent eight consecutive quarters. The Company expanded the historical loss period and used ten quarters of loss history for the allowance calculation as of December 31, 2012. For the March 31, 2013 allowance for loan losses, the loss history was expanded again to eleven consecutive quarters of net charge offs. Since the most recent quarters have contained a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in nearly a $900,000 increase to our loan loss reserves as compared to the methodology previously used. During the first quarter, the Company recorded a recovery of loan losses of $100,000 which is a smaller recovery than the recovery that was recorded in the first quarter of 2012. In 2013, the recovery resulted from a low level of net charge-offs coupled with a reduction in overall loan balances. In 2012, the recovery resulted primarily from a $2.4 million recovery on the previously disclosed large loan fraud. Loan loss provisions in 2012 were also affected by a decline in loan balances during the period.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2013 was $619,000, a slight decrease from the first quarter of 2012. This decrease was primarily due to a decline in service charges on deposit accounts that was partially offset by increases in other categories of non-interest income. Service charges on deposit accounts decreased $46,000 to $272,000 for the quarter ended March 31, 2013 from $318,000 for the same period in 2012. Fees from presold mortgages increased $23,000 to $62,000 for the quarter ended March 31, 2013 from the same period in 2012. During the first quarter, the Company decided to close its mortgage division while more efficient and profitable ways to generate income from the 1-4 family mortgage market are evaluated. Other non-deposit fees and income increased $16,000 from the first quarter of 2012 to the first quarter of 2013 due largely to an increase in loan servicing fees.

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Non-Interest Expenses. Non-interest expenses decreased by $295,000 to $3.9 million for the quarter ended March 31, 2013, from $4.2 million for the same period in 2012. In general, an increase in personnel expenses were offset by decreases in all other categories of non-interest expenses. Non-interest expenses were also impacted by the April 2012 sale of two branches. The following are highlights of the significant categories of non-interest expenses during the first quarter of 2013 versus the same period in 2012:

· Personnel expenses increased $128,000 to $2.1 million due to higher salary, employer taxes, 401K and mortgage commission expenses.

· Deposit insurance expense decreased $48,000 due to lower deposit balances.

· Professional fees decreased $193,000 due to 2012 expenses related to the previously mentioned 2012 branch sale and also due to lower legal expenses related to lending activities.

· Other non-interest expenses declined by $115,000 due to reductions in several categories of other non-interest expenses including foreclosed property and collections expenses.

Provision for Income Taxes. The Company’s effective tax rate was 37.0% and 37.8% for the quarters ended March 31, 2013and 2012, respectively.

As of March 31, 2013 and December, 31, 2012, the Company had a net deferred tax asset in the amount of $2.6 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 March 31, 2013 and December 31, 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 32.6% of total assets at March 31, 2013.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise, the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of March 31, 2013 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 $22.8 million of qualifying loans is pledged to the FHLB to secure borrowings. At March 31, 2013, the Company had no FHLB advances outstanding. Another source of short-term borrowings is securities sold under agreements to repurchase. At March 31, 2013, total borrowings consisted of securities sold under agreements to repurchase of $14.7 million and junior subordinated debentures of $12.4 million.

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Total deposits were $483.0 million at March 31, 2013. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 51.4% of total deposits at March 31, 2013. Time deposits of $100,000 or more represented 26.3% of the Company’s total deposits at March 31, 2013. 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 minimalcash balances at the parent holding company level. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for the Company’s current cash flow needs.

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Capital Resources

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 9.66% at March 31, 2013.

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

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

As the following table indicates, at March 31, 2013, the Company and the Bank 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		17.62	%		8.00	%
Tier 1 risk-based capital ratio		16.36	%		4.00	%
Leverage ratio		11.38	%		4.00	%

				Regulatory
	Actual			Minimum			Well-Capitalized
New Century Bank	Ratio			Requirement			Requirement
Total risk-based capital ratio		17.26	%		10.00	%		10.00	%
Tier 1 risk-based capital ratio		16.01	%		6.00	%		6.00	%
Leverage ratio		11.13	%		5.00	%		5.00	%

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of March 31, 2013.

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

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Legal Proceedings

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

Item 4. Controls and Procedures

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

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

Changes in internal control over financial reporting.Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the first quarter of 2013. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the third quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 4. Mine Safety Disclosures

None.

Item 6. Exhibits

Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, in XBRL(eXtensible Business Reporting Language)*

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

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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 15, 2013	By:	/s/ William L. Hedgepeth II
		William L. Hedgepeth II
		President and Chief Executive Officer
Date: May 15, 2013	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell
		Executive Vice President and Chief Financial Officer and
		Chief Operating Officer

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Exhibit Index

Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
32.2	Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, in XBRL(eXtensible Business Reporting Language)*

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

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