Select Bancorp (SLCT) 10-K 2006 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

¨ TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

COMMISSION FILE NUMBER 000-50400

NEW CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	20-0218264
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

700 W. Cumberland Street, Dunn, North Carolina	28334
(Address of Principal Executive Offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $1.00 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.

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.    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨            Accelerated filer  ¨            Non-accelerated filer  x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $ 72,853,377

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date. 6,505,177 shares outstanding as of April 9, 2007

Documents Incorporated by Reference.

Definitive Proxy Statement for the 2007 Annual Meeting of Shareholders as filed pursuant to Section 14 of the Securities Exchange Act of 1934

FORM 10-K CROSS-REFERENCE INDEX

	FORM 10-K	PROXY STATEMENT	ANNUAL REPORT
PART I
Item 1 – Business	3
Item 1A – Risk Factors	11
Item 1B – Unresolved Staff Comments	17
Item 2 – Properties	17
Item 3 – Legal Proceedings	18
Item 4 – Submission of Matters to a Vote of Security Holders	18
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6 – Selected Financial Data	20
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation	22
Item 7A – Quantitative and Qualitative Disclosures About Market Risk	42
Item 8 – Financial Statements and Supplementary Data	42
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	79
Item 9A – Controls and Procedures	79
Item 9B – Other Information	79
PART III
Item 10 – Directors, Executive Officers and Corporate Governance	79	X
Item 11 – Executive Compensation	79	X
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	79	X
Item 13 – Certain Relationships and Related Transactions, and Director Independence	80	X
Item 14 – Principal Accounting Fees and Services	80	X
PART IV
Item 15 – Exhibits, Financial Statement Schedules	81

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PART I

ITEM 1 –BUSINESS

General

New Century Bancorp, Inc. (the “Registrant”) was incorporated under the laws of the State of North Carolina on May 14, 2003, at the direction of the Board of Directors of New Century Bank, for the purpose of serving as the bank holding company for New Century Bank and became the holding company for New Century Bank on September 19, 2003. To become New Century Bank’s holding company, the Registrant received the approval of the Federal Reserve Board as well as New Century Bank’s shareholders. Upon receiving such approval, each share of $5.00 par value common stock of New Century Bank was exchanged on a one-for-one basis for one share of $1.00 par value common stock of the Registrant.

The Registrant operates for the primary purpose of serving as the holding company for its subsidiary depository institutions, New Century Bank and New Century Bank of South (collectively, the “Banks”). The Registrant’s headquarters are located at 700 West Cumberland Street, Dunn, North Carolina 28334.

New Century Bank was incorporated on May 19, 2000 as a North Carolina-chartered commercial bank, opened for business on May 24, 2000, and is located at 700 West Cumberland Street, Dunn, North Carolina.

New Century Bank South was incorporated on December 23, 2003 as a North Carolina-chartered commercial bank, opened for business on January 2, 2004, and is located at 2818 Raeford Road, Fayetteville NC 28303, Fayetteville, North Carolina.

The Banks operate for the primary purpose of serving the banking needs of individuals, and small to medium-sized businesses in their respective market areas. The Banks offer a range of banking services including checking and savings accounts, commercial, consumer, mortgage and personal loans, and other associated financial services.

Primary Market Area

The Registrant’s market area consists of Harnett, Bladen, Cumberland, Hoke, Johnston, Robeson, Sampson and Wayne Counties, North Carolina. The Registrant’s market area has a population of over 900,000 with an average household income of over $33,000.

The June 2006 total deposits in the Registrant’s market area exceeded $7.2 billion. The leading economic components of Harnett and Johnston Counties are services, manufacturing, and retail trade. In contrast, Cumberland County’s leading sector is federal military government, followed by services and retail trade. In Sampson County, leading employers include manufacturing, services, and state and local government. Wayne County’s leading sectors are federal military government, services and retail trade and agriculture. The largest employers in the Registrant’s market area include Kelly-Springfield Tires, Black & Decker, Bayer, Morganite, Inc. and the United States military.

Competition

Commercial banking in North Carolina is extremely competitive in large part due to statewide branching. Registrant competes in its market areas with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders

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engaged in the business of extending credit. Many of Registrant’s competitors have broader geographic markets and higher lending limits than Registrant and are also able to provide more services and make greater use of media advertising. As of June 30, 2006, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 212 offices of 23 other commercial and savings institutions (25 in Harnett County, 8 in Bladen County, 36 in Johnston County, 8 in Hoke County, 64 in Cumberland County, 31 in Robeson County, 15 in Sampson County, and 32 in Wayne County).

The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of Registrant’s competitors. In addition, as a result of interstate banking, out-of-state commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina.

Despite the competition in its market areas, Registrant believes that it has certain competitive advantages that distinguish it from its competition. Registrant believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. Registrant offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. Registrant offers many personalized services and intends to attract customers by being responsive and sensitive to their individualized needs. Registrant also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional media to attract new customers. To enhance a positive image in the community, Registrant supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.

Employees

As of December 31, 2006, the Registrant employed 156 full time equivalent employees. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes relations with its employees to be good.

REGULATION

Regulation of the Banks

The Banks are extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Registrant and the Banks.

State Law. The Banks are subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Banks are required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

Deposit Insurance. As member institutions of the FDIC, the Banks’ deposits are insured up to a per depositor maximum of $250,000 for retirement accounts and $100,000 for all other accounts through the

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Deposit Insurance Fund, administered by the FDIC, and each member institution is required to pay semi-annual deposit insurance premium assessments to the FDIC. The Deposit Insurance Fund assessment rates have a range of 0 cents to 27 cents for every $100 in assessable deposits. Banks with no premium are subject to an annual statutory minimum assessment.

Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2006, the Registrant was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 13.51% and 14.76%, respectively.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of board of director and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.

Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDIC Improvement Act”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement Act provides for, among other things:

• publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,

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• the establishment of uniform accounting standards by federal banking agencies,

• the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital,

• additional grounds for the appointment of a conservator or receiver, and

• restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.

The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.

A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.

Check 21. On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21. This law gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major provisions include:

• allowing check truncation without making it mandatory;

• demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

• legalizing substitutions for and replacements of paper checks without agreement from consumers;

• retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

• requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

• requiring recrediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

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International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA Patriot Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions. The USA Patriot Act of 2001 has not had a material impact on the Registrant’s operations.

Miscellaneous. The cash dividends that may be paid by the Banks are subject to legal limitations. In accordance with North Carolina banking law, cash dividends may not be paid by one of the Banks unless its capital surplus is at least 50% of its paid-in capital. Cash dividends may only be paid out of retained earnings.

The earnings of the Banks will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Banks.

The Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Banks’ operations.

Regulation of the Registrant

Federal Regulation. The Registrant is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.

The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.

The merger or consolidation of the Registrant with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a

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consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.

The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.

In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:

• making or servicing loans;

• performing certain data processing services;

• providing discount brokerage services;

• acting as fiduciary, investment or financial advisor;

• leasing personal or real property;

• making investments in corporations or projects designed primarily to promote

• community welfare; and

• acquiring a savings and loan association.

In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenceddenovo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.

However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.

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A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Registrant has not yet elected to become a financial holding company.

Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions. We cannot predict the full sweep of the new legislation.

Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:

• a leverage capital requirement expressed as a percentage of adjusted total assets;

• a risk-based requirement expressed as a percentage of total risk-weighted assets; and

• a Tier 1 leverage requirement expressed as a percentage of adjusted total assets.

The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.

Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.

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Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Banks. At present, the Registrant’s only source of income is dividends paid by the Banks and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Banks. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Banks to us will likely be limited to amounts needed to pay any separate expenses of the Registrant and/or to make required payments on our debt obligations, including the debentures which will fund the interest payments on our trust preferred securities.

The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.

In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable to the Registrant because it maintains two separate subsidiary depository institutions.

Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Banks, the Registrant, any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding

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company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.

Interstate Branching

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle Act”), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle Act. These mergers are also subject to similar aging and deposit concentration limits.

North Carolina “opted-in” to the provisions of the Riegle Act. Since July 1, 1995, an out-of-state bank that did not already maintain a branch in North Carolina was permitted to establish and maintain adenovo branch in North Carolina, or acquire a branch in North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank involved in the interstate merger transaction permit interstate merger.

Future Legislation

Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on Registrant’s operations.

Item 1A – RISK FACTORS

RISK FACTORS

An investment in the registrant’s common stock involves a number of risks. We urge you to read all of the information contained in this annual report on Form 10-K. In addition, we urge you to consider carefully the following factors before you invest in shares of the registrant’s common stock.

Risks Associated with our Continued Operations

We may not be able to maintain and manage our growth, which may adversely affect our results of operations and financial condition and the value of our common stock.

Our strategy has been to increase the size of our company by opening new offices, acquiring other banks and by pursuing business development opportunities. We have grown rapidly since we commenced operations. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our growth strategy. There can be no assurance that any additional expansion will be profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through successful expansion of our markets, or that we will be able to maintain capital sufficient to support our continued growth. If we grow too quickly, however, and are not able to control costs and maintain asset quality, rapid growth also could adversely affect our financial performance. We may acquire other banks as a means to expand into new markets or to capture

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additional market share. We are unable to predict whether or when any prospective acquisitions will occur or the likelihood of completing an acquisition on favorable terms and conditions. Any acquisition involves certain risks including, but not limited to:

• difficulties assimilating acquired operations and personnel;

• potential disruptions of our ongoing business;

• the diversion of resources and management time;

• the possibility that uniform standards, controls, procedures and policies may not be maintained;

• risks associated with entering new markets in which we have little or no experience;

• the potential impairment of relationships with employees or customers as a result of changes in management;

• difficulties in evaluating the historical or future financial performance of the acquired business; and

• brand awareness issues related to the acquired assets or customers.

If we decide to make additional acquisitions, there can be no assurance that the acquired institutions would perform as expected, which would affect our profitability and the price of our common stock.

Changes in interest rates may reduce our profitability.

Our profitability depends in large part on our net interest income, which is the difference between interest income from interest-earning assets, such as loans and mortgage-backed securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We believe that we are asset sensitive, which means that our net interest income will generally rise in higher interest rate environments and decline in lower interest rate environments. Our net interest income will be adversely affected if the market interest rate changes such that the interest we earn on loans and investments decreases faster than the interest we pay on deposits and borrowings. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective, which could adversely affect our financial condition and results of operations.

Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest income and, in turn, our profitability. In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. Interest rates also affect how much money we can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect our net interest income, asset quality, and loan origination volume.

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Our profitability depends significantly on economic conditions in our market area.

Our success depends to a large degree on the general economic conditions in our market area. If the communities in which we operate do not grow or if prevailing economic conditions, locally or nationally, are unfavorable, this may have a significant impact on the amount of loans that we make to our borrowers, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. An economic downturn would likely contribute to the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would have an adverse effect on our business. Interest received on loans represented approximately 80% of our gross revenues for the year ended December 31, 2006. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and performance.

If we experience greater loan losses than anticipated, it will have an adverse effect on our net income.

While the risk of nonpayment of loans is inherent in banking, if we experience greater nonpayment levels than we anticipate, our earnings and overall financial condition, as well as the value of our common stock, could be adversely affected.

We cannot assure you that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses. In addition, as a result of the rapid growth in our loan portfolio, loan losses may be greater than management’s estimates. Loan losses can cause insolvency and failure of a financial institution and, in such an event, our shareholders could lose their entire investment. In addition, future provisions for loan losses could materially and adversely affect our profitability. Any loan losses will reduce the loan loss allowance. A reduction in the loan loss allowance will be restored by an increase in our provision for loan losses. This would reduce our earnings which could have an adverse effect on our stock price.

The lack of seasoning of our loan portfolio makes it difficult to assess the adequacy of our loan loss reserves accurately.

We attempt to maintain an appropriate allowance for loan losses to provide for potential losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including:

• an ongoing review of the quality, mix, and size of our overall loan portfolio;

• our historical loan loss experience;

• evaluation of economic conditions;

• regular reviews of loan delinquencies and loan portfolio quality; and

• the amount and quality of collateral, including guarantees, securing the loans.

However, there is no precise method of predicting credit losses, since any estimate of loan losses is necessarily subjective and the accuracy depends on the outcome of future events. In addition, due to our

13

rapid growth over the past several years and our limited operating history, a large portion of the loans in our loan portfolio was originated recently. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually perform more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If charge-offs in future periods increase, we may be required to increase our provision for loan losses, which would decrease our net income and possibly our capital.

New or acquired bank office facilities and other facilities may not be profitable.

We may not be able to identify profitable locations for new bank offices. The costs to start up new bank offices or to acquire existing bank offices, and the additional costs to operate these facilities, may increase our non-interest expense and decrease our earnings in the short term. We are currently planning to open one new office in 2007 in addition to our acquisition of Progressive State Bank which added five new offices to our franchise in 2006. If offices of other banks become available for sale, we may acquire those offices. It may be difficult to adequately and profitably manage our growth through the establishment or purchase of additional bank offices. In addition, we can provide no assurance that any such offices will successfully attract enough deposits to offset the expenses of their operation.

We rely heavily on the services of key personnel.

William L Hedgepeth II, our President and Chief Executive Officer, and Lisa F. Campbell, our Executive Vice President and Chief Financial Officer, have substantial experience with our operations and have contributed significantly to our growth. The loss of the services of either of these officers, or of one or more of the key members of our executive management team, may have a material adverse effect on our operations. If Mr. Hedgepeth, Ms. Campbell or other members of our executive management team were no longer employed by us, our ability to implement our growth strategy could be impaired.

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand.

We may expand our banking network over the next several years, not just in our existing core market area, but also in other community markets throughout eastern North Carolina and other contiguous markets. To expand into new markets successfully, we must identify and retain experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we may expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from more established banks. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit, and retain talented personnel to manage new offices effectively would limit our growth and could materially adversely affect our business, financial condition, and results of operations.

In order to be profitable, we must compete successfully with other financial institutions which have greater resources and capabilities than we do.

The banking business in North Carolina in general is extremely competitive. Most of our competitors are larger and have greater resources than we do and have been in existence a longer period of time. We must overcome historical bank-customer relationships to attract customers away from our competition. We compete with the following types of institutions:

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•     other commercial banks	•     securities brokerage firms
•     savings banks	•     mortgage brokers
•     thrifts	•     insurance companies
•     credit unions	•     mutual funds
•     consumer finance companies	•     trust companies

Some of our competitors are not regulated as extensively as we are and, therefore, may have greater flexibility in competing for business. Some of these competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising-marketing budgets or other factors.

Our legal lending limit is determined by law. The size of the loans which we offer to our customers may be less than the size of the loans that larger competitors are able to offer. This limit may affect to some degree our success in establishing relationships with the larger businesses in our market.

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth. Because of our relatively small size and short operating history, it will be difficult for us to replicate our historical earnings growth as we continue to expand. Consequently, our historical results of operations will not necessarily be indicative of our future operations. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by the North Carolina Office of the Commissioner of Banks, the FDIC, and the Federal Reserve Board. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We must also meet regulatory capital requirements. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity, and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed” for regulatory purposes could affect customer confidence, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on common stock, and our ability to make acquisitions.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. For example, new legislation or regulation could limit the manner in which we may conduct our business, including our ability to obtain financing, attract deposits, and make loans. Many of these regulations are intended to protect depositors, the public, and the FDIC, not shareholders. In addition, the burden imposed by these regulations may place us at a competitive disadvantage compared to competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies that apply to us have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Our cost of compliance could adversely affect our ability to operate profitably.

Our growth may require us to raise additional capital that may not be available when it is needed, or at all.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance.

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Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we issue additional equity capital, the interests of existing shareholders would be diluted.

Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. We have experienced, and we expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act. We expect these new rules and regulations to continue to increase our accounting, legal, and other costs, and to make some activities more difficult, time consuming, and costly. In the event that we are unable to achieve or maintain compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.

We are evaluating our internal control systems in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, or if we are unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal control over financial reporting, the trading price of our common stock could decline, our ability to obtain any necessary equity or debt financing could suffer, and, if accepted for listing, our common stock could ultimately be delisted from the NASDAQ Global Market. In this event, the liquidity of our common stock would be severely limited and the market price of our common stock would likely decline significantly.

In addition, the new rules adopted as a result of the Sarbanes-Oxley Act could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

Risks Related to an Investment in our Common Stock

We do not plan to pay cash dividends for the foreseeable future.

We do not expect to pay cash dividends on our common stock in the foreseeable future, as we intend to retain earnings to provide the capital necessary to fund our growth strategy. You should not invest in shares of our common stock if you need dividend income from your investment. Our ability to declare and pay cash dividends will be dependent upon, among other things, restrictions imposed by the reserve and capital requirements of North Carolina and federal banking regulations, our income and financial condition, tax considerations, and general business conditions. Therefore, investors should not purchase shares of our common stock with a view for a current return on their investment in the form of cash dividends.

We have implemented anti-takeover devices that could make it more difficult for another company to acquire us, even though such an acquisition may increase shareholder value.

In some cases, shareholders would receive a premium for their shares if we were acquired by another company. However, state and federal law and our articles of incorporation and bylaws make it difficult for anyone to acquire us without approval of our board of directors. For example, our articles of incorporation require a supermajority vote of two-thirds of our outstanding common stock in order to effect a sale or merger of the company in certain circumstances. Our articles of incorporation also divide

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the board of directors into three classes of directors serving staggered three-year terms with approximately one-third of the board of directors elected at each annual meeting of shareholders. The classification of directors makes it more difficult for shareholders to change the composition of the board of directors. As a result, at least two annual meetings of shareholders would be required for the shareholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities.

Our securities are not FDIC insured.

Our common stock is not a savings or deposit account or other obligation of the bank, and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency and is subject to investment risk, including the possible loss of principal.

The holder of our junior subordinated debenture has rights that are senior to those of our common shareholders.

We have supported our continued growth through the issuance of trust preferred securities from a special purpose trust and an accompanying sale of a $12.4 million junior subordinated debenture to this trust. Payments of the principal and interest on the trust preferred securities of this trust are conditionally guaranteed by us. Further, the accompanying junior subordinated debenture that we issued to the trust is senior to our shares of common stock. As a result, we must make payments on the junior subordinated debenture before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holder of the junior subordinated debenture must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on the junior subordinated debenture (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

ITEM 1B – UNRESOLVED STAFF COMMENTS

The Registrant is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act. The Registrant received no written comments from the Commission staff regarding its periodic or current reports under the Exchange Act during its fiscal year ended December 31, 2006.

ITEM 2 - PROPERTIES

The following table sets forth the location of the main and branch offices of the Registrant’s subsidiary depository institutions, New Century Bank and New Century Bank South, as well as certain information relating to these offices.

Office Location	Year Opened	Approximate Square Footage	Owned or Leased
New Century Bank Main Office 700 West Cumberland Street Dunn, NC 28334	2001	12,600	Owned
Clinton Office 506 South East Boulevard Clinton, NC 28328	2002	2,200	Leased
Sunset Avenue Office 1519 Sunset Avenue Clinton, NC 28328	2005	2,200	Leased

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Goldsboro Office 431 North Spence Avenue Goldsboro, NC 27534	2005	6,300	Owned
Lillington Office 1184 North Main Street Lillington, NC 27546	2006	2,000	Leased
New Century Bank South Main Office 2818 Raeford Road Fayetteville, NC 28303	2004	10,000	Owned
Lumberton Office 308 North Chestnut Street Lumberton, NC 28358	2006	17,000	Owned
Fayetteville Road Office 4400 Fayetteville Road Lumberton, NC 28358	2006	3,500	Owned
Pembroke Office 410 East Third Street Pembroke, NC 28372	2006	1,600	Owned
Raeford Office 720 Harris Avenue Raeford, NC 28376	2006	2,900	Owned
Dublin Office 7482 Albert Street Dublin, NC 28332	2006	1,300	Leased

ITEM 3 - LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Registrant, or any of its subsidiaries, is a party, or of which any of their property is the subject.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to security holders during the fourth quarter of 2006.

PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Out common stock is quoted on the NASDAQ Global Market under the trading symbol “NCBC.” Howe Barnes Hoefer & Arnett, Ryan Beck & Company, Morgan Keegan, McKinnon & Company, Sandler O’Neill & Partners, L.P., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2006, there were 6,497,022 shares of common stock outstanding, which were held by 1,509 shareholders of record.

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	Sales Prices(1)
	High		Low
2006
First Quarter	$	20.83	$	16.83
Second Quarter		17.50		15.75
Third Quarter		16.83		16.08
Fourth Quarter		20.06		16.04
2005
First Quarter	$	16.00	$	12.67
Second Quarter		16.13		13.33
Third Quarter		25.57		14.67
Fourth Quarter		28.50		24.75

(1) Adjusted for a 6-for-5 stock split effected in the form of a 20% stock dividend in December 2006, a 3-for-2 stock split effected in the form of a 50% stock dividend in July 2005 and an 11-for-10 stock split effected in the forms of a 10% stock dividend in June 2004.

See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.

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ITEM 6 – SELECTED FINANCIAL DATA

	At or for the year ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands, except per share data)
Operating Data:
Total interest income	$	35,812		$	24,679		$	15,408		$	9,360		$	7,125
Total interest expense		16,167			10,089			5,187			3,217			2,760
Net interest income		19,645			14,590			10,221			6,143			4,365
Provision for loan losses		2,779			2,172			1,684			1,042			872
Net interest income after provision for loan losses		16,866			12,418			8,537			5,101			3,493
Total non-interest income		3,278			2,496			1,692			1,134			731
Total non-interest expense		13,816			9,129			6,962			4,833			2,870
Income before income taxes		6,328			5,785			3,267			1,402			1,354
Provision for income taxes		2,358			2,164			1,173			496			496
Net income	$	3,970		$	3,621		$	2,094		$	906		$	858
Per Share Data:(1)
Earnings per share - basic	$	.69		$	.72		$	.42		$	.22		$	.31
Earnings per share - diluted		.65			.66			.40			.21			.30
Market Price
High		20.83			23.75			16.81			9.18			9.18
Low		15.75			10.56			8.02			6.89			5.01
Close		16.99			20.63			11.39			8.19			7.81
Book value		8.84			6.48			5.82			5.42			4.95
Tangible book value		7.30			6.48			5.82			5.42			4.95
Selected Year-End Balance Sheet Data:
Loans	$	429,500		$	326,852		$	262,750		$	151,930		$	100,008
Allowance for loan losses		7,496			5,298			3,598			2,355			1,546
Other interest-earning assets		86,259			90,877			51,051			31,059			19,917
Goodwill and core deposit intangible		9,988			—			—			—			—
Total assets		552,965			436,367			328,311			191,813			126,391
Deposits		464,117			367,003			270,230			151,971			105,482
Borrowings		28,813			34,115			27,057			11,714			2,131
Shareholders’ equity		57,439			32,974			29,444			27,266			17,343
Selected Average Balances:
Total assets	$	491,849		$	381,494		$	277,432		$	159,360		$	109,956
Loans		369,110			301,510			222,425			121,587			82,313
Total interest-earning assets		458,974			362,669			261,217			150,227			104,551
Goodwill and core deposit intangible		4,087			—			—			—			—
Deposits		412,077			317,648			231,510			131,852			91,459
Total interest-bearing liabilities		381,514			303,889			214,109			118,726			80,338
Shareholders’ equity		45,614			31,583			30,483			21,808			15,868
Selected Performance Ratios:
Return on average assets		.81	%		.95	%		.75	%		.57	%		.78	%
Return on average equity		8.70	%		11.47	%		6.87	%		4.15	%		5.41	%
Net interest margin		4.28	%		4.02	%		3.91	%		4.09	%		4.17	%
Net interest spread		3.57	%		3.48	%		3.48	%		3.52	%		3.38	%
Efficiency ratio(2)		60.27	%		53.43	%		58.44	%		66.41	%		56.32	%
Asset Quality Ratios:
Nonperforming loans to period-end loans(3)		.75	%		.26	%		.07	%		.08	%		.27	%
Allowance for loan losses to period-end loans(4)		1.75	%		1.65	%		1.37	%		1.58	%		1.57	%
Net loan charge-offs to average loans		.27	%		.16	%		.20	%		.19	%		.38	%

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	At or for the year ended December 31,
	2006		2005		2004		2003		2002
	(Dollars in thousands, except per share data)
Capital Ratios:
Total risk-based capital	14.63	%	14.54	%	16.76	%	18.61	%	18.24	%
Tier 1 risk-based capital	13.38	%	12.93	%	15.51	%	17.36	%	16.99	%
Leverage ratio	10.95	%	10.56	%	12.52	%	14.64	%	13.99	%
Equity to assets ratio	10.39	%	7.56	%	8.97	%	14.21	%	13.72	%
Other Data:
Number of banking offices	11		5		4		3		2
Number of full time equivalent employees	156		92		72		55		33

(1) Adjusted for all years presented to reflect the effects of a six-for-five stock split in the form of a 20% stock dividend in December 2006, a three-for-two stock split in July 2005 and three separate eleven-for-ten stock splits in the form of 10% stock dividends in June 2004, September 2003 and May 2002, respectively.

(2) Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income.

(3) Nonperforming loans consist of non-accrual loans and restructured loans.

(4) Allowance for loan losses to period-end loans ratio excludes loans held for sale

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ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors, many of which are beyond our control. The following discussion is intended to assist in understanding the financial condition and results of operations of New Century Bancorp, Inc. Because New Century Bancorp, Inc. has no material operations and conducts no business on its own other than owning its consolidated subsidiaries, New Century Bank, New Century Bank South and its unconsolidated subsidiary, New Century Statutory Trust I, the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the bank subsidiaries. However, for ease of reading and because the financial statements are presented on a consolidated basis, New Century Bancorp, Inc., New Century Bank and New Century Bank South are collectively referred to herein as the Company unless otherwise noted. All references in this Annual Report to net income per share, price per share, book value per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect three separate eleven-for-ten stock splits effected in the form of 10% stock dividends in May 2002, September 2003 and June 2004, a three-for-two stock split in July 2005, and a six-for-five stock split in December 2006.

DESCRIPTION OF BUSINESS

The Company is a commercial bank holding company that was incorporated on September 19, 2003 and has two banking subsidiaries, New Century Bank, which became a subsidiary of the Company as part of a holding company reorganization, and New Century Bank South, a de novo institution which commenced operations in January 2004 (collectively referred to as the “Banks”). In September 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of New Century Bank. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company’s only business activity is the ownership of the Banks. Accordingly, this discussion focuses primarily on the financial condition and operating results of the Banks.

At the close of business on July 13, 2006, the Company completed an acquisition of Progressive State Bank (“Progressive”), a North Carolina chartered bank headquartered in Lumberton, NC. Under the terms of the Agreement, Progressive was merged with and into New Century Bank South. At the time of the merger, Progressive operated five offices and, based on estimated fair values, had $65.9 in total assets, $33.7 in loans and $55.8 in deposits. Pursuant to the terms of the merger agreement, shareholders of Progressive received cash in the amount of $21.30 per share. The aggregate purchase price of the transaction was $17.2 million, consisting of $16.3 million in cash payments to Progressive shareholders and $828,000 in transaction costs. The acquisition was accounted for under the purchase method of accounting and, accordingly, the assets and liabilities of Progressive were recorded based on the estimated fair values as of July 13, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Progressive since July 13, 2006.

In order to fund this transaction and to provide additional capital for other general corporate purposes, the Company entered into an underwriting agreement in June 2006 for the public offering of 1,150,000 shares of common stock at $18.50 per share. Proceeds of the offering, which closed in early July, were $19.9 million, net of the underwriter’s discount.

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The Banks’ lending activities are oriented to the consumer/retail customer as well as to the small-to-medium sized businesses located in Bladen, Harnett, Hoke, Cumberland, Johnston, Robeson, Sampson, and Wayne counties. The Banks offer 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 Banks include small business and personal checking, savings accounts and certificates of deposit. The Banks concentrate on customer relationships in building their customer deposit base and compete aggressively in the area of transaction accounts.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

YEARS ENDED DECEMBER 31, 2006 AND 2005

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In thousands, except share and per share data)
2006
Interest Income	$	7,652	$	8,227	$	9,741	$	10,190
Interest Expense		3,321		3,719		4,341		4,785
Net Interest Income		4,331		4,508		5,400		5,405
Provision for loan losses		408		192		519		1,659
Net interest income after provision for loan losses		3,923		4,316		4,881		3,746
Non interest income		553		678		865		1,182
Non interest expense		2,738		3,014		4,029		4,035
Income before taxes		1,738		1,980		1,717		893
Income taxes		669		709		626		354
Net income	$	1,069	$	1,271	$	1,091	$	539
Net income per share
Basic	$	0.21	$	0.25	$	0.17	$	0.08
Diluted		0.20		0.23		0.16		0.08
Average shares outstanding
Basic		5,100,461		5,109,553		6,413,652		6,492,748
Diluted		5,480,726		5,459,821		6,739,230		6,799,966
2005
Interest Income	$	5,129	$	5,875	$	6,520	$	7,155
Interest Expense		1,901		2,419		2,740		3,028
Net Interest Income		3,228		3,456		3,780		4,127
Provision for loan losses		500		433		770		469
Net interest income after provision for loan losses		2,728		3,023		3,010		3,658
Non interest income		556		610		579		751
Non interest expense		2,062		2,141		2,368		2,558
Income before taxes		1,222		1,492		1,221		1,851
Income taxes		415		500		409		841
Net income	$	807	$	992	$	812	$	1,010
Net income per share
Basic	$	0.16	$	0.19	$	0.16	$	0.20
Diluted		0.15		0.18		0.15		0.18
Average shares outstanding
Basic		5,060,659		5,062,922		5,069,084		5,081,363
Diluted		5,366,059		5,376,824		5,459,326		5,507,994

The quarterly financial data may not aggregate to annual amounts due to rounding.

23

FINANCIAL CONDITION

DECEMBER 31, 2006 AND 2005

Overview

Total assets at December 31, 2006 were nearly $553.0 million, which represents an increase of $116.6 million or 26.7% from December 31, 2005. During 2006, the Company completed an acquisition of Progressive State Bank (“Progressive”), which added approximately $73.8 million in total assets, including intangible assets. Earning assets at December 31, 2006 totaled $515.6 million and consisted of $429.5 million in gross loans (which includes $1.6 million in loans held for sale), $63.9 million in investment securities, $20.7 million in overnight investments and interest-bearing deposits in other banks and $1.5 million in non-marketable equity securities. Total deposits and shareholders’ equity at December 31, 2006 were $464.1 million and $57.4 million, respectively.

Investment Securities

Investment securities increased to $63.9 million from $41.6 million at December 31, 2005. The Company’s investment portfolio at December 31, 2006, which consisted of U.S. government agency securities, mortgage-backed securities and bank-qualified municipal securities, aggregated $63.9 million with a weighted average yield of 4.83%. The Company also holds an investment of $1.4 million in the form of Federal Home Loan Bank Stock with a dividend yield of 5.90%. The investment portfolio increased $22.3 million in 2006, the result of purchases of $10.2 million in securities from Progressive, $27.3 million in other purchases, $15.7 million of maturities and prepayments and an increase of $500,000 in the market value of securities held available for sale and net accretion of investment discounts. There were no sales of investment securities during 2006.

The following table summarizes the securities portfolio by major classification:

Securities Portfolio Composition

($ in thousands)

	Amortized Cost		Fair Value		Weighted Average Yield
U. S. government agency securities
Due within one year	$	15,754	$	15,679	4.23	%
Due after one but within five years		19,996		20,006	4.89	%
		35,750		35,685	4.60	%
Mortgage-backed securities
Due within one year		139		138	3.97	%
Due after one but within five years		4,217		4,236	6.17	%
Due after five but within ten years		5,880		5,773	4.55	%
Due after ten years		11,569		11,654	5.59	%
		21,805		21,801	5.42	%
State and local governments
Due within one year		487		487	3.75	%
Due after one but within five years		704		715	3.81	%
Due after five but within ten years		1,135		1,155	3.91	%
Due after ten years		4,062		4,071	4.35	%
		6,388		6,428	4.17	%
Total securities available for sale
Due within one year		16,380		16,304	4.21	%
Due after one but within five years		24,917		24,957	5.08	%
Due after five but within ten years		7,015		6,928	4.44	%
Due after ten years		15,631		15,725	5.27	%
	$	63,943	$	63,914	4.83	%

24

Loans Receivable

Loans receivable increased by $102.6 million to $429.5 million as of December 31, 2006. This increase includes $33.7 million loans added in the Progressive merger. The remaining growth was due to the continued maturation of our existing markets and a successful home equity line campaign that took place in the second half of 2006. The loan portfolio at December 31, 2006 was comprised of $309.8 million in real estate loans, $88.6 million in commercial and industrial loans, and $30.8 million in loans to individuals. Also included in loans outstanding are $298,000 in deferred loan fees. As of year end, there was $1.6 million of loans held for sale. These loans are guaranteed by the Small Business Administration (“SBA”) and sold in the secondary market.

The following table describes our loan portfolio composition by category:

	At December 31,
	2006					2005					2004					2003					2002
	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans
	(dollars in thousands)
Real estate loans:
One-to-four family residential	$	59,867		13.95	%	$	47,531		14.54	%	$	39,417		15.00	%	$	24,805		16.33	%	$	18,219		18.22	%
Commerical		113,790		26.49	%		94,051		28.78	%		70,307		26.76	%		32,782		21.58	%		21,079		21.08	%
Multi-family residential		13,399		3.12	%		15,653		4.79	%		13,616		5.18	%		5,446		3.58	%		2,907		2.91	%
Construction		79,607		18.53	%		63,000		19.27	%		43,150		16.43	%		19,403		12.77	%		12,666		12.66	%
Home equity lines of credit		42,130		9.81	%		14,554		4.45	%		12,317		4.69	%		5,161		3.40	%		3,815		3.81	%
Real estate loans held for sale		990		0.23	%		4,251		1.30	%		—		0.00	%		2,107		1.39	%		630		0.63	%
Total real estate loans		309,783		72.13	%		239,040		73.13	%		178,807		68.06	%		89,704		59.05	%		59,316		59.31	%
Other loans:
Commercial and industrial		88,626		20.63	%		66,062		20.21	%		66,071		25.14	%		50,260		33.08	%		31,281		31.28	%
Loans to individuals		30,827		7.18	%		21,104		6.46	%		18,188		6.92	%		11,189		7.36	%		8,836		8.84	%
Other loans held for sale		562		0.13	%		931		0.28	%		—		0.00	%		937		0.62	%		685		0.68	%
Total other loans		120,015		27.94	%		88,097		26.95	%		84,259		32.06	%		62,386		41.06	%		40,802		40.80	%
Less:
Deferred loan origination fees, net		(298	)	-0.07	%		(285	)	-0.08	%		(316	)	-0.12	%		(160	)	-0.11	%		(110	)	-0.11	%
Total loans		429,500		100.00	%		326,852		100.00	%		262,750		100.00	%		151,930		100.00	%		100,008		100.00	%
Allowance for loan losses		(7,496	)				(5,298	)				(3,598	)				(2,355	)				(1,546	)
Total loans, net	$	422,004				$	321,554				$	259,152				$	149,575				$	98,462

25

The following table presents as of December 31, 2006 (i) the aggregate maturities of loans in the named categories of our loan portfolio and (ii) the aggregate amounts of such loans, by variable and fixed rates that mature within one year, after one year but within five years, and after five years:

	At December 31, 2006
	Due within one year		Due after one year but within five years		Due after five years		Total
	(dollars in thousands)
Fixed rate loans:
One-to-four family residential	$	8,916	$	28,462	$	2,607	$	39,985
Commercial real estate		7,438		36,703		7,580		51,721
Multi-family residential		581		2,573		510		3,664
Construction		4,617		7,003		1,845		13,465
Commercial and industrial		10,686		27,042		1,516		39,244
Loans to individuals		6,188		16,043		413		22,644
Total at fixed rates		38,426		117,826		14,471		170,723
Variable rate loans:
One-to-four family residential		10,152		8,914		821		19,887
Commercial real estate		14,206		44,760		3,305		62,271
Multi-family residential		688		9,072		—		9,760
Construction		53,089		12,193		515		65,797
Home equity lines of credit		3		—		42,127		42,130
Commercial and industrial		25,000		17,042		6,363		48,405
Loans to individuals		3,112		2,387		2,669		8,168
Total at variable rates		106,250		94,368		55,800		256,418
Subtotal		144,676		212,194		70,271		427,141
Nonaccrual loans		896		1,001		760		2,657
Gross loans	$	145,572	$	213,195	$	71,031	$	429,798
Deferred loan origination (fees) costs, net								(298	)
Total loans								429,500

At December 31, 2006, the Company had nearly $4.8 million in loans that were 30 days or more past due. This represented 1.12% of gross loans outstanding on that date. This is an increase from December 31, 2005 when there was $2.9 million in loans that were past due 30 days or more, or 0.90% of gross loans outstanding. Non-accrual loans increased $823,000 from December 31, 2005 to $2.7 million at December 31, 2006. The increase in non-accrual loans is attributed to a few large commercial credits being changed to non-accrual status in 2006.

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 loans past due 90 days or more and still accruing interest), and total non-performing assets.

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	As of December 31,
	2006			2005			2004			2003			2002
	(dollars in thousands)
Non-accrual loans	$	2,657		$	823		$	190		$	116		$	263
Restructured loans		562			—			—			—			—
Total non-performing loans	$	3,219		$	823		$	190		$	116		$	263
Real estate owned		164			443			135			218			—
Repossessed assets		—			5			—			—			—
Total non-performing assets	$	3,383		$	1,271		$	325		$	334		$	263
Accruing loans past due 90 days or more	$	1,197		$	189		$	—		$	29		$	124
Allowance for loan losses	$	7,496		$	5,298		$	3,598		$	2,355		$	1,546
Non-performing loans to period end loans		0.75	%		0.26	%		0.07	%		0.08	%		0.27	%
Non-performing loans and loans past due 90 days or more to period end loans		1.03	%		0.31	%		0.07	%		0.10	%		0.39	%
Allowance for loans losses to period end loans		1.75	%		1.65	%		1.37	%		1.58	%		1.57	%
Allowance for loan losses to non-performing loans		233	%		644	%		1894	%		2030	%		588	%
Allowance for loan losses to non-performing assets		222	%		417	%		1107	%		705	%		588	%
Allowance for loan losses to non-performing assets and loans past due 90 days or more		164	%		363	%		1107	%		649	%		399	%
Non-performing assets to total assets		0.61	%		0.29	%		0.10	%		0.17	%		0.21	%
Non-performing assets and loans past due 90 days or more to total assets		0.83	%		0.33	%		0.10	%		0.19	%		0.31	%

In addition to the nonperforming assets summarized above, the Company had $7.4 million in loans that were considered to be impaired for reasons other than their past due status. In total, there were $11.8 million of loans that were considered to be impaired at December 31, 2006, an increase of $7.8 million over the $3.9 million at December 31, 2005. The increase in the level of impaired loans during 2006 results primarily from nine loan relationships which represented $7.3 million or 62% of the total impaired loans of $11.8 million at December 31, 2006. Each of these relationships has been evaluated by management in accordance with SFAS 114 and impairment of $1.9 million has been included in the allowance for loan losses as of December 31, 2006.

The allowance for loan losses increased 10 basis points to 1.75% of gross loans, excluding loans held for sale, at December 31, 2006 from 1.65% at December 31, 2005. The increase in the allowance results primarily from the increase in the level of allowance required the aforementioned impaired loans. The allowance for loan losses allocable to impaired loans increased from $514,000 at December 31, 2005 to $3.2 million at December 31, 2006. The remainder of the increase in the allowance resulted primarily from the growth in the loan portfolio during 2006. The increases in the allowance for loan losses resulting from the recorded provision and from the allowance acquired from Progressive State Bank were partially offset by the $985,000 in net charge-offs, of which $869,000 is related to one large commercial credit.

Management believes the allowance for loan losses as of December 31, 2006 is adequate to absorb the probable losses inherent within the Company’s loan portfolio.

27

	At December 31,
	2006		% of		2005		% of		2004		% of		2003		% of		2002		% of
	(dollars in thousands)
	Total Loans				Total Loans				Total Loans				Total Loans				Total Loans
One-to-four family residential	$	133	13.95	%	$	209	14.54	%	$	99	15.00	%	$	185	16.33	%	$	137	18.22	%
Commercial real estate		2,078	26.49	%		1,786	28.78	%		816	26.76	%		478	21.58	%		309	21.08	%
Multi- family residential		241	3.12	%		196	4.79	%		170	5.18	%		95	3.58	%		51	2.91	%
Construction		1,593	18.53	%		1,235	19.27	%		867	16.43	%		340	12.77	%		222	12.66	%
Home equity lines of credit		169	9.81	%		35	4.45	%		28	4.69	%		39	3.40	%		29	3.81	%
Commercial and industrial		2,022	20.63	%		893	20.21	%		826	25.14	%		880	33.08	%		547	31.28	%
Loans to individuals		1,254	7.18	%		789	6.46	%		622	6.92	%		280	7.36	%		221	8.84	%
Loans held for sale & unearned income		—	0.29	%		—	1.50	%		—	-0.12	%		—	1.90	%		—	1.20	%
			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%
Total allocated		7,490				5,143				3,428				2,297				1,516
Unallocated		6				155				170				58				30
Total	$	7,496			$	5,298			$	3,598			$	2,355			$	1,546

The following table presents information regarding changes in the allowance for loan losses for the years indicated:

28

	Ended December 31,
	2006			2005			2004			2003			2002
	(dollars in thousands)
Allowance for loan losses at beginning of year	$	5,298		$	3,598		$	2,355		$	1,546		$	984
Provision for loan losses		2,779			2,172			1,684			1,042			872
		8,077			5,770			4,039			2,588			1,856
Loans charged off:
One-to-four family residential		(92	)		(235	)		(56	)		—			—
Multi-family residential and commercial		(29	)		(61	)		—			—			—
Construction		—			—			—			—			—
Home equity lines of credit		—			—			(25	)		—			—
Commercial and industrial		(835	)		(24	)		(312	)		(97	)		(280	)
Loans to individuals		(181	)		(208	)		(85	)		(136	)		(30	)
Total charge-offs		(1,137	)		(528	)		(478	)		(233	)		(310	)
Recoveries of loans previously charged off:
One-to-four family residential		28			1			3			—			—
Multi-family residential and commercial		—			—			—			—			—
Construction		—			—			—			—			—
Home equity lines of credit		—			—			—			—			—
Commercial and industrial		58			38			20			—			—
Loans to individuals		66			17			14			—			—
Total recoveries		152			56			37			—			—
Net charge-offs		(985	)		(472	)		(441	)		(233	)		(310	)
Allowance acquired from Progressive State Bank		404			—			—			—			—
Allowance for loan losses at end of year	$	7,496		$	5,298		$	3,598		$	2,355		$	1,546
Ratios:
Net charge-offs as a percent of average loans		0.27	%		0.16	%		0.20	%		0.19	%		0.38	%
Allowance for loan losses as a percent of loans at end of year		1.75	%		1.65	%		1.37	%		1.58	%		1.57	%

Other Assets

At December 31, 2006, non-earning assets were $38.2 million, which reflects a large increase from the $19.9 million as of December 31, 2005. This increase reflects a number of items that were recorded as part of the accounting for the purchase of Progressive State Bank, including $8.7 million in goodwill and $1.3 million in core deposit intangible. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. The Company estimates that the core deposit intangible of $1.3 million will be amortized on a straight line basis over nine years. The core deposit intangible represents 2.83% of Progressive’s core deposits as of July 13, 2006. Premises and equipment increased by $3.8 million since the end of 2005 to $9.9 million as of December 31, 2006. Of this increase, $2.7 million came from the Progressive merger. The Company also purchased land in Lillington to locate a permanent office to be built in 2007. This lot cost $750,000. Non-earning assets as of December 31, 2006 also included $12.1 million in cash and due from banks, accrued interest receivable of $3.2 million, and other assets of $2.8 million.

29

The Company also has an investment in bank owned life insurance of $6.7 million, which increased $2.4 million from December 31, 2005 due to an additional purchase of $600,000 earlier in 2006, an increase of $1.7 million from the Progressive merger and an increase of $211,000 in cash surrender value. Since the income on this investment is included in non-interest income, the asset is not included in the Company’s calculation of earning assets.

Deposits

Total deposits at December 31, 2006 were $464.1 million and consisted of $70.2 million in non-interest-bearing demand deposits, $49.9 million in money market and NOW accounts, $45.6 million in savings accounts, and $298.4 million in time deposits. Total deposits grew by $97.1 million from $367.0 million as of December 31, 2005. Of this increase, $55.8 million came from the Progressive merger. Non-interest-bearing demand deposits increased by $16.9 million from $53.3 million as of December 31, 2005. The merger with Progressive added approximately $12.0 million in non-interest-bearing demand deposits. At December 31, 2005, the Company was holding escrow deposits for three unaffiliated proposed banks. During the first six months of 2006, all of these banks opened and withdrew their deposits. Net deposits withdrawn from money market and NOW accounts by these banks during this period were $19.5 million. Money market and NOW accounts further decreased during 2006 due to a shift from these accounts to a premium savings account product that was introduced in early 2006, but the merger added $1.5 million, partially offsetting the decline. Savings accounts grew by $35.3 million due to the new premium savings account product and the addition of $5.8 million in savings from Progressive. Time deposits grew by $64.3 million during 2006, including approximately $27.0 million from the merger. Brokered deposits totaled $4.5 million or less than 1% of year end deposits. The following table shows historical information regarding the average balances outstanding and average interest rates for each major category of deposits:

	For the Period Ended December 31,
	2006				2005				2004				2003				2002
	(dollars in thousands)
	Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate
Savings, NOW and money market deposits	$	87,264	2.56	%	$	56,378	1.54	%	$	55,888	1.14	%	$	31,064	1.42	%	$	21,955	2.00	%
Time deposits > $100,000		107,855	4.31	%		73,238	4.12	%		39,917	3.20	%		28,376	3.33	%		18,484	4.28	%
Other time deposits		154,864	4.89	%		143,547	3.50	%		104,040	2.83	%		53,958	3.17	%		37,909	3.93	%
Total interest-bearing deposits		349,983	4.13	%		273,163	3.26	%		199,845	2.40	%		113,398	2.73	%		78,348	3.47	%
Noninterest-bearing deposits		62,094	—			44,485	—			31,665	—			18,455	—			13,111	—
Total deposits	$	412,077	3.51	%	$	317,648	2.80	%	$	231,510	2.07	%	$	131,853	2.35	%	$	91,459	2.98	%

30

Short Term and Long Term Debt

As of December 31 2006, the Company had $16.4 million in short-term debt and $12.4 million in long-term debt. Short term debt includes repurchase agreements of $8.4 million and $8.0 million in advances outstanding on a line of credit with the Federal Home Loan Bank (FHLB) of Atlanta. These advances are due as follows: $2.5 million in June 2007, $3.5 million in July 2007, and $2.0 million in August 2007. The FHLB advances are collateralized by a lien on 1-4 family first mortgage loans. Long-term debt consists of $12.4 million of junior subordinated debentures issued in September 2004.

Shareholders’ Equity

Total shareholders’ equity at December 31, 2006 was $57.4 million, an increase of $24.4 million from $33.0 million as of December 31, 2005. The majority of this increase was due to the sale of 1.15 million shares of common stock at $18.50 per share in a fully underwritten public offering. This offering, which closed in July 2006, was intended to fund the acquisition of Progressive and to provide additional capital for other general corporate purposes. Proceeds of the offering were $19.9 million, net of the underwriter’s discount and offering expenses. Other changes in shareholders’ equity include $3.97 million in net income, an increase of $166,000 from other issuances of common stock, an increase of $166,000 from stock based compensation, and $258,000 in other comprehensive income.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

Overview

During 2006, New Century Bancorp generated net income of $3.97 million compared to net income of $3.6 million for 2005, an increase of 10%. Basic earnings per share and diluted earnings per share for the year ended December 31, 2006 were $.69 and $.65, respectively, compared with basic earnings per share of $.72 and diluted earnings per share of $.66 for 2005. The increase in net income is due to higher net interest income and higher non-interest income partially offset by a higher provision for loan losses and higher non-interest expenses. A portion of the increase in net income is due to the additional income from the acquisition of Progressive State Bank which was partially offset by $329,000 in one-time systems conversion expenses that were related to the merger but which could not be capitalized as goodwill under the purchase accounting rules.

Net Interest Income

Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.

Net interest income increased by $5.1 million to $19.6 million for the year ended December 31, 2006. The Company’s total interest income benefited from continued growth in interest earning assets and the level of interest rates throughout 2006. Average total interest-earnings assets were $459.0 million in 2006 compared with $362.7 million in 2005. Also, the yield on those assets increased by 100 basis points from 6.80% in 2005 to 7.80% in 2006. Meanwhile, average interest-bearing liabilities increased by $77.6

31

million from $303.9 million for the year ended December 31, 2005 to $381.5 million for the year ended December 31, 2006. Cost of funds increased by 92 basis points to 4.24% from 3.32% in 2005. In 2006, the Company’s net interest margin was 4.28% and net interest spread was 3.57%. In 2005, net interest margin was 4.02% and net interest spread was 3.48%.

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 losses, current delinquency and impairment levels, adverse situations that may affect a borrower’s ability to repay, estimated value of underlying collateral, prevailing economic conditions and other relevant factors.

The Company recorded a $2.8 million provision for loan losses in 2006, an increase of $607,000 from the $2.2 million provision that was recorded in 2005. In 2006, the level of provision resulted from an increase in impaired assets of $7.8 million and loan growth of $106.3 million. A portion of the loan growth came from the Company’s acquisition of Progressive State Bank. These increases were partially offset by net charge-offs of $985,000, including $869,000 in charge-offs on one large commercial relationship. In 2005, the provision for loan losses was made principally in response to loan growth, as loans grew by $110.8 million, and an increase in the level of impaired assets.

Non-Interest Income

Non-interest income for the year ended December 31, 2006 was $3.3 million, an increase of $782,000 over the year ended December 31, 2005. Aided by the additional deposits acquired in the Progressive merger in July 2006, deposit service charges increased by $378,000 to $1.4 million in 2006. In addition to this additional income, there were increases in fees from pre-sold mortgages of $25,000, and other non-interest income of $402,000. Included in other non-interest income is income from bank-owned life insurance, which increased by $130,000 from 2005 to $211,000 in 2006 due to additional investments that were purchased by the Company at the end of 2005 and in 2006. These increases were partially offset by a decline in the commissions from the sale of loans guaranteed by the Small Business Administration.

Non-Interest Expenses

Non-interest expenses increased by $4.7 million to $13.8 million for the year ended December 31, 2006 from $9.1 million for the same period in 2005. Like non-interest income, there was a general increase in all categories of non-interest expenses due to the additional offices acquired in the Progressive merger. Salaries and benefits increased to $8.2 million in 2006 from $5.5 million in 2005 due mostly to the increase in personnel from 92 full-time equivalents at December 31, 2005 to 156 at the end of 2006. This increase in staff is due not only to the merger, but also to the opening of two new branch locations in 2006 and additional operations personnel. In addition, there was an increase of $183,000 in 401k expense due to a Board approved increase in the employer match of employee contributions and $166,000 in stock compensation expense related to the vesting of stock options in 2006. The stock option expense was recorded in accordance with the provisions of SFAS No. 123R, which was adopted on January 1, 2006 using the modified prospective method. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB Opinion No. 25 and, as a result, had not recognized compensation expense for options granted with exercise prices equal to the fair market value of the Company’s stock on the date of grant. Occupancy and equipment expenses increased by $500,000 to $1.2 million in 2006 due to the opening of the new branch location, addition of the Progressive branches and a full year of expenses related to expansion of operations facilities in August 2005. Data processing and other outsourced services expense increased from $794,000 for the year ended December 31, 2005 to $1.2 million for the year ended December 31, 2006 due to in part to $193,000 in merger-related systems conversion

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costs. The following highlight other changes in non-interest expenses, which grew from $2.1 million in 2005 to $3.2 million in 2006:

• Postage, printing and office supplies increased from $277,000 in 2005 to $459,000 in 2006 due to the addition of new office and the operations center, as well as the general growth of the Company.

• Advertising and promotions expenses increased from $274,000 to $356,000 due to the new offices and a home equity campaign in 2006.

• As part of the home equity campaign, the Company paid $227,000 in closing costs in 2006, compared to $54,000 paid in 2005.

• During 2006, the Company recorded approximately $71,000 in amortization of the core deposit intangible asset acquired in the Progressive merger.

Provision for Income Taxes

The Company’s effective tax rate was 37.3% in 2006 and 37.4% in 2005.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Overview

During 2005, New Century Bancorp generated net income of $3.6 million compared with net income of $2.1 million for the year ended December 31, 2004. Net income per share in 2005 was $.72 basic and $.66 diluted compared with net income per share of $.42 basic and $.40 diluted in 2004. This increase is primarily due to the growth in interest-earning assets during 2005 and the resulting increase in net interest income, and also to the strong growth in non-interest income. These increases were partially offset by increases in the provision for loan losses and non-interest expense.

Net Interest Income

Net interest income increased $4.4 million to $14.6 million for the year ended December 31, 2005. The Company’s total interest income benefited from strong growth in interest-earning assets, and higher interest-earning asset yields. Average total interest-earning assets were $362.7 million in 2005 compared with $261.2 million during 2004, while the yield on those assets increased 91 basis points from 5.89% to 6.80%. The Company’s average interest-bearing liabilities grew by $89.8 million to $303.9 million in 2005, while the cost of those funds increased from 2.42% to 3.32%, or 90 basis points. For the year ended December 31, 2005, our net interest margin was 4.02% and our net interest spread was 3.48%. For the year ended December 31, 2004, net interest margin was 3.91% and net interest spread was 3.48%.

Provision for Loan Losses

The Company recorded a provision of approximately $2.2 million for loan losses in 2005, representing an increase of $488,000 over the $1.7 million provision made in 2004. 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 both 2005 and 2004, the provision for loan losses was made principally in response to growth in loans, as total loans outstanding increased by $64.1 million in 2005 and by $110.8 million in 2004. In addition, net loan charge-offs increased to $472,000 in 2005 as compared to $441,000 in 2004. At December 31, the allowance for loan losses was $5.3 million for 2005 and $3.6 million for 2004, representing 1.62% and

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1.37%, respectively, of loans outstanding. This increase in the percentage of the allowance for loan losses is in response to the maturation and seasoning of the Company’s loan portfolio and lending processes. There were $823,000 and $190,000 of non-accrual loans at December 31, 2005 and 2004, respectively.

Non-Interest Income

Non-interest income for the year ended December 31, 2005 was $2.5 million, an increase of $804,000 over the year ended December 31, 2004. This increase is primarily due to an increase in deposit service fees and charges of $146,000 and an increase of $271,000 in mortgage program commissions. Additionally, there was an increase of $328,000 in commissions from the sales of SBA loans, which is a program that the Company began participating in during the fourth quarter of 2004. The growth in service fees and charges is directly related to the growth in transaction accounts during 2005 and to the growth in an overdraft protection product tied to qualifying demand deposit accounts.

Non-Interest Expenses

Non-interest expense increased by $2.1 million to $9.1 million for the year ended December 31, 2005, from $7.0 million for the year ended December 31, 2004. Salaries and employee benefits increased to $5.5 million from $4.1 million in 2004 due to the increase of Company personnel from 72 to 92 full time equivalent employees. The expansion into a new operations center in downtown Dunn, a new bank building in Goldsboro and another office in Clinton has resulted in an increase of $177,000 in occupancy and equipment expenses to a total of $717,000 for the year ended December 31, 2005. Data processing and other outsourced services expense grew from $574,000 in 2005 to $794,000 due to increased volume of loans and deposits. Other non-interest expense increased to $2.1 million in 2005 compared with $1.8 million for the year ended December 31, 2004. The following are included in other non-interest expenses:

• Postage, printing and office supplies increased from $220,000 in 2004 to $254,000 in 2005, largely due to the increasing growth in all areas of the Company.

• Advertising and promotion expenses increased from $196,000 in 2004 to $274,000 in 2005, due in part to promotions and deposit related marketing campaigns in all of the Banks’ markets.

• Data processing and other outsourced service expenses increased by $188,000 to $817,000 in 2005. Most of this increase is in core processing, networking and items processing expenses.

• Professional service expenses increased from $323,000 in 2004 to $432,000 in 2005. A large part of this increase is in legal fees and other professional fees.

• Other operating expenses increased $151,000 to approximately $1.2 million in 2005, largely due to additional expenses related to general corporate expenses, the opening of new offices and the general growth of the Company.

Provision for Income Taxes

The Company’s effective tax rate was 37.4% in 2005 and 35.9% in 2004.

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NET INTEREST INCOME

The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Nonaccrual loans have been included in determining average loans.

	For the Years Ended December 31,
	2006							2005							2004
	Average balance			Interest		Average rate		Average balance			Interest		Average rate		Average balance			Interest		Average rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans, net of allowance	$	363,201		$	31,291	8.62	%	$	297,045		$	22,406	7.54	%	$	219,257		$	14,422	6.58	%
Investment securities		54,003			2,475	4.58	%		33,006			1,236	3.74	%		17,360			591	3.40	%
Other interest-earning assets		41,770			2,046	4.90	%		32,618			1,037	3.18	%		24,600			395	1.61	%
Total interest-earning assets		458,974			35,812	7.80	%		362,669			24,679	6.80	%		261,217			15,408	5.89	%
Other assets		32,875							18,825							16,215
Total assets	$	491,849						$	381,494						$	277,432
INTEREST-BEARING LIABILITIES:
Deposits:
Savings, NOW and money market	$	87,264			2,235	2.56	%	$	56,378			869	1.54	%	$	55,888			635	1.14	%
Time deposits over $100,000		107,855			4,653	4.31	%		73,238			3,016	4.12	%		39,917			1,279	3.20	%
Other time deposits		154,864			7,566	4.89	%		143,547			5,021	3.5	%		104,040			2,870	2.76	%
Borrowings		31,531			1,713	5.43	%		30,726			1,183	3.85	%		14,264			403	2.73	%
Total interest-bearing liabilities		381,514			16,167	4.24	%		303,889			10,089	3.32	%		214,109			5,187	2.41	%
Non-interest-bearing deposits		62,094							44,485							31,665
Other liabilities		2,627							1,537							1,175
Shareholders' equity		45,614							31,583							30,483
Total liabilities and shareholders' equity	$	491,849						$	381,494						$	277,432
Net interest income/interest rate spread				$	19,645	3.57	%				$	14,590	3.48	%				$	10,221	3.48	%
Net interest margin						4.28	%						4.02	%						3.91	%
Ratio of interest-earning assets to interest-bearing liabilities		120.30	%						119.34	%						122.00	%

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RATE/VOLUME ANALYSIS

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.

	Year Ended						Year Ended						Year Ended
	December 31, 2006 vs. 2005						December 31, 2005 vs. 2004						December 31, 2004 vs. 2003
	Increase (Decrease) Due to						Increase (Decrease) Due to						Increase (Decrease) Due to
	Volume		Rate		Total		Volume		Rate		Total		Volume		Rate			Total
	(Dollars in thousands)
Interest income:
Loans	$	5,345	$	3,540	$	8,885	$	5,492	$	2,492	$	7,984	$	6,860	$	(1,066	)	$	5,794
Investment securities		874		365		1,239		551		58		645		126		(99	)		27
Other interest-earning assets		370		639		1,009		196		482		642		106		121			227
Total interest income		6,589		4,544		11,133		6,239		3,032		9,271		7,092		(1,044	)		6,048
Interest expense:
Deposits:
Savings, NOW and money market		634		732		1,366		7		227		234		317		(122	)		195
Time deposits over $100,000		1,459		178		1,637		1,220		517		1,737		377		(44	)		333
Other time deposits		474		2,071		2,545		1,236		915		2,151		1,486		(329	)		1,157
Borrowings		37		493		530		549		231		780		225		60			285
Total interest expense		2,604		3,474		6,078		3,012		1,890		4,902		2,405		(435	)		1,970
Net interest income increase (decrease)	$	3,983	$	1,072	$	5,055	$	3,227	$	1,142	$	4,369	$	4,687	$	(609	)	$	4,078

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 Company’s 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 17.5% and 22.4% of total assets at December 31, 2006 and 2005.

The Company has been a net seller of federal funds, maintaining liquidity sufficient to fund new loan demand. When the need arises, the Company has the ability to sell securities classified as available for sale, sell loan participations to other banks, or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $31.1 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 30% of our assets, subject to our available collateral. A floating lien of $15.4 million on qualifying loans is pledged to FHLB to secure borrowings. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2006, borrowings consisted of securities sold under agreements to repurchase of $8.4 million and FHLB advances totaling $8.0 million.

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Total deposits were $464.1 million and $367.0 million at December 31, 2006 and 2005, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 64.3% and 63.8% of total deposits at December 31, 2006 and 2005, respectively. Time deposits of $100,000 or more represented 27.3% and 25.9%, respectively, of the total deposits at December 31, 2006 and 2005. At December 31, 2006, the Company had $4.5 million in brokered time deposits. Management believes most other time deposits are relationship-oriented. While the competitive rates will need to be paid to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, management 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 Company’s current cash flow needs.

CAPITAL

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 (including trust preferred securities), 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 that require a financial institution to maintain capital as a percent of its assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier 1 capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 10.39% at December 31, 2006. As the following table indicates, at December 31, 2006, the Company and its two bank subsidiaries exceeded regulatory capital requirements.

	At December 31, 2006
	Actual Ratio		Minimum Requirement		Well-Capitalized Requirement
New Century Bancorp, Inc.
Total risk-based capital ratio	14.63	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	13.38	%	4.00	%	6.00	%
Leverage ratio	10.96	%	4.00	%	5.00	%
New Century Bank
Total risk-based capital ratio	14.25	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	12.99	%	4.00	%	6.00	%
Leverage ratio	10.74	%	4.00	%	5.00	%
New Century Bank South
Total risk-based capital ratio	11.65	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	10.64	%	4.00	%	6.00	%
Leverage ratio	9.10	%	4.00	%	5.00	%

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

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expects that the Company and both Banks will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, or otherwise.

ASSET/LIABILITY MANAGEMENT

The Company’s results of operations depend substantially on its net interest income. Like most financial institutions, the Company’s interest income and cost of funds are affected by general economic conditions and by competition in the market place.

The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company’s earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. The Company maintains, and has complied with, a Board approved asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Company’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies, mortgage-backed securities and municipal obligations. The securities portfolio contributes to the Company’s profits and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.

In reviewing the needs of the Company with regard to proper management of its asset/liability program, the Company’s management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and forecasted interest rate changes.

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2006, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

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	Terms to Repricing at December 31, 2006
	1 Year or Less			More Than 1 Year to 3 Years			More Than 3 Years to 5 Years			More Than 5 Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans:
Adjustable rate	$	257,130		$	—		$	—		$	—		$	257,130
Fixed rate		38,791			63,641			55,029			14,909			172,370
Securities available for sale		17,304			19,832			5,022			21,756			63,914
Interest-earning deposits in other banks		1,605			—			—			—			1,605
Federal funds sold		19,112			—			—			—			19,112
Stock in FHLB of Atlanta		—			—			—			1,427			1,427
Stock in The Bankers Bank		—			—			—			51			51
Total interest-earning assets	$	333,942		$	83,473		$	60,051		$	38,143		$	515,609
Interest-bearing liabilities:
Deposits:
Savings, NOW and money market	$	95,514		$	—		$	—		$	—		$	95,514
Time		115,975			51,244			1,872			53			169,144
Time over $100,000		88,333			38,701			2,239			—			129,273
Short term debt		16,441			—			—			—			16,441
Long term debt		12,372			—			—			—			12,372
Total interest-bearing liabilities	$	328,635		$	89,945		$	4,111		$	53		$	422,744
Interest sensitivity gap per period	$	5,307		$	(6,472	)	$	55,940		$	38,090		$	92,865
Cumulative interest sensitivity gap	$	5,307		$	(1,165	)	$	54,775		$	92,865		$	92,865
Cumulative gap as a percentage of total interest-earning assets		1.03	%		(.23	)%		10.62	%		18.01	%		18.01	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		101.61	%		99.72	%		112.96	%		121.97	%		121.97	%

Loans maturing or repricing after December 31, 2006 are comprised of $133.6 million of fixed rate loans.

CRITICAL ACCOUNTING POLICY

The Company’s most significant critical accounting policy is the determination of its allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain.

ASSET QUALITY AND THE ALLOWANCE FOR LOAN LOSSES

The Financial Statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when there are serious doubts about the collectibility of principal or interest. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction

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of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The Company’s impaired loans totaled $10.5 million at December 31, 2006 and were comprised of $3.2 million in non-accrual and restructured loans, $1.2 million in loans that were 90 days or more past due and still accruing and $6.1 million in other loans that management has classified as impaired for other reasons.

The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Additional information regarding the Company’s allowance for loan losses and loan loss experience are presented in Note D to the accompanying financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

Information about the Company’s off-balance sheet risk exposure is presented in Note N to the accompanying financial statements. During 2004 the Company formed an unconsolidated subsidiary trust to which the Company has issued $12.4 million of junior subordinated debentures (see Note J to the consolidated financial statements). Otherwise, as part of its ongoing business, the Company has not participated in, nor does it anticipate participating in, transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note B to the financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

IMPACT OF INFLATION AND CHANGING PRICES

A commercial bank has an asset and liability make-up that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of a commercial bank’s assets are monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following tables set forth additional information regarding the composition of our contractual obligations and commitments.

Contractual Obligations and Commitments

($ in thousands)

In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table reflects contractual obligations of the Company outstanding as of December 31, 2006

	Payments Due by Period
Contractual Obligations	Total		On Demand or Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Short tem debt	$	16,441	$	16,441	$	—	$	—	$	—
Long term debt		12,372		—		—		—		12,372
Lease obligations		1,491		188		440		130		733
Deposits		464,117		370,008		94,015		41		53
Total contractual cash obligations	$	494,421	$	386,637	$	94,455	$	171	$	13,158

The following table reflects other commitments outstanding as of December 31, 2006.

	Amount of Commitment Expiration Per Period
Contractual Obligations	Total Amounts Committed		Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Undisbursed portion of ready reserve lines	$	2,877	$	—	$	—	$	—	$	2,877
Undisbursed portion of home equity lines		46,857		—		—		—		46,857
Other commitments and credit lines		36,890		30,589		627		1,879		3,795
Undisbursed portion of constructions loans		35,377		28,468		1,158		5,661		90
Letters of credit		3,025		3,025		—		—		—
Total commercial commitments	$	125,026	$	62,082	$	1,785	$	7,540	$	53,619

FORWARD-LOOKING INFORMATION

Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principals, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services.

41

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in the diminished current market values and/or reduced potential net interest income in future periods. The Company’s market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account, nor is it subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Banks’ asset/liability management functions. The following table presents information about the contractual maturities, average interest rates and estimated fair values of the Company's financial instruments that are considered market risk sensitive.

Expected Maturities of Market Sensitive Instruments Held at December 31, 2006

($ in thousands)

	2007		2008		2009		2010		2011		Beyond 5 Years		Total		Average Interest Rate		Estimated Fair Value
Financial Assets
Interest-earning deposits in other banks	$	1,605	$	—	$	—	$	—	$	—	$	—	$	1,605	5.15	%	$	1,605
Federal funds sold		19,112		—		—		—		—		—		19,112	5.16	%		19,112
Investment securities		16,304		15,708		4,227		2,800		2,222		22,653		63,914	4.83	%		63,914
Loans
Fixed rate		38,791		24,911		38,730		22,235		32,795		14,909		172,371	8.41	%		165,636
Variable rate		152,395		25,550		29,388		20,068		19,284		10,444		257,129	8.81	%		257,129
Total loans		191,186		50,461		68,118		42,303		52,079		25,353		429,500	8.65	%		422,765
Financial Liabilities
Deposits	$	370,008	$	80,684	$	9,261	$	4,070	$	41	$	53	$	464,117	3.74	%	$	464,302
Short term debt		16,441		—		—		—		—		—		16,441	4.90	%		16,408
Long term debt		—		—		—		—		—		12,372		12,372	7.52	%		12,372

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors

New Century Bancorp, Inc.

Dunn, North Carolina

We have audited the accompanying consolidated balance sheets of New Century Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Bancorp, Inc. and subsidiaries at December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes PLLC

Raleigh, North Carolina

April 11, 2007

43

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

	2006			2005
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	12,108		$	8,453
Interest-earning deposits in other banks		1,605			3,284
Federal funds sold		19,112			44,744
Investment securities available for sale, at fair value (Note C)		63,914			41,604
Loans (Note D)		429,500			326,852
Allowance for loan losses (Note D)		(7,496	)		(5,298	)
NET LOANS		422,004			321,554
Accrued interest receivable		3,220			2,072
Stock in Federal Home Loan Bank of Atlanta, at cost		1,427			1,094
Stock in The Bankers Bank		51			51
Foreclosed real estate		164			443
Premises and equipment (Note E)		9,855			6,018
Bank owned life insurance		6,672			4,186
Goodwill (Note F)		8,674			—
Core deposit intangible (Note F)		1,314			—
Other assets		2,845			2,864
TOTAL ASSETS	$	552,965		$	436,367
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	70,186		$	53,315
Savings		45,570			10,253
Money market and NOW		49,944			69,280
Time (Note G)		298,417			234,155
TOTAL DEPOSITS		464,117			367,003
Short term debt (Notes H and I)		16,441			21,743
Long term debt (Note J)		12,372			12,372
Accrued interest payable		890			486
Accrued expenses and other liabilities		1,706			1,789
TOTAL LIABILITIES		495,526			403,393
Commitments (Note N)
Shareholder’s Equity (Note M)
Common stock, $1 par value, 10,000,000 shares authorized; 6,497,022 and 4,241,040 shares issued and outstanding at December 31, 2006 and 2005, respectively		6,497			4,241
Additional paid-in capital		39,177			21,196
Retained earnings		11,785			7,815
Accumulated other comprehensive loss		(20	)		(278	)
TOTAL SHAREHOLDERS’ EQUITY		57,439			32,974
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	552,965		$	436,367

See accompanying notes.

44

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

	2006		2005		2004
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	31,291	$	22,406	$	14,422
Investments		2,475		1,236		591
Federal funds sold and interest-earning deposits		2,046		1,037		395
TOTAL INTEREST INCOME		35,812		24,679		15,408
INTEREST EXPENSE
Money market, NOW and savings deposits		2,235		869		635
Time deposits		12,219		8,037		4,149
Short term debt		767		371		93
Long term debt		946		812		310
TOTAL INTEREST EXPENSE		16,167		10,089		5,187
NET INTEREST INCOME		19,645		14,590		10,221
PROVISION FOR LOAN LOSSES (Note D)		2,779		2,172		1,684
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		16,866		12,418		8,537
NON-INTEREST INCOME
Service fees and charges		1,380		1,002		856
Fees from presold mortgages		704		679		408
Commissions from SBA loans		416		439		100
Other		778		376		328
TOTAL NON-INTEREST INCOME		3,278		2,496		1,692
NON-INTEREST EXPENSE
Salaries and employee benefits (Note P)		8,180		5,480		4,050
Occupancy and equipment (Note E)		1,217		717		540
Data processing and other outsourced services (Note E)		1,223		794		574
Other (Note L)		3,196		2,138		1,798
TOTAL NON-INTEREST EXPENSE		13,816		9,129		6,962
INCOME BEFORE INCOME TAXES		6,328		5,785		3,267
INCOME TAXES (Note K)		2,358		2,164		1,173
NET INCOME	$	3,970	$	3,621	$	2,094
NET INCOME PER COMMON SHARE
Basic	$	.69	$	.72	$	.42
Diluted	$	.65	$	.66	$	.40
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		5,784,671		5,061,791		5,032,478
Diluted		6,115,709		5,478,658		5,286,427

See accompanying notes.

45

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
	(Amounts in thousands)
NET INCOME	$	3,970		$	3,621		$	2,094
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized loss on investment securities available for sale arising during the year		392			(516	)		(139	)
Tax effect		(134	)		188			46
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		258			(328	)		(93	)
COMPREHENSIVE INCOME	$	4,228		$	3,293		$	2,001

See accompanying notes.

46

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2006, 2005 and 2004

				Additional paid-in capital			Retained earnings		Accumulated other com- prehensive income (loss)			Total shareholders’ equity
	Common stock
	Shares	Amount
	(Amounts in thousands, except share data)
Balance at December 31, 2003	2,541,655	$	2,542	$	22,481		$	2,100	$	143		$	27,266
Net income	—		—		—			2,094		—			2,094
Other comprehensive loss	—		—		—			—		(93	)		(93	)
Stock options exercises	5,849		6		42			—		—			48
Shares issued to directors’ deferred compensation plan	10,294		10		119			—		—			129
Eleven-for-ten stock split	253,679		253		(253	)		—		—			—
Balance at December 31, 2004	2,811,477		2,811		22,389			4,194		50			29,444
Net income	—		—		—			3,621		—			3,621
Other comprehensive loss	—		—		—			—		(328	)		(328	)
Stock option exercises	20,654		21		99			—		—			120
Shares issued for directors’ deferred compensation plan	2,505		2		53			—		—			55
Tax benefit from option exercises	—		—		62			—		—			62
Three-for-two stock split	1,406,404		1,407		(1,407	)		—		—			—
Balance at December 31, 2005	4,241,040		4,241		21,196			7,815		(278	)		32,974
Net income	—		—		—			3,970		—			3,970
Other comprehensive income	—		—		—			—		258			258
Sale of common stock	1,150,000		1,150		18,717			—		—			19,867
Shares issued to directors’ deferred compensation plan	1,496		2		26			—		—			28
Stock options exercises	23,090		23		115			—		—			138
Compensation expense recognized	—		—		166			—		—			166
Tax benefit from option exercises	—		—		38			—		—			38
Six-for-five stock split	1,081,396		1,081		(1,081	)		—		—			—
Balance at December 31, 2006	6,497,022	$	6,497	$	39,177		$	11,785	$	(20	)	$	57,439

See accompanying notes.

47

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
	(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,970		$	3,621		$	2,094
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		481			392			305
Loss (gain) on disposal of premises and equipment		(8	)		11			—
Provision for loan losses		2,779			2,172			1,684
Deferred income taxes		(652	)		(667	)		(331	)
Stock based compensation expense		166			—			—
Origination of loans held for sale		(10,960	)		(16,927	)		—
Proceeds from loans held for sale		14,590			11,745			3,044
Loss on sale of foreclosed real estate		15			14			—
Gain on sale of real estate held for sale		—			(39	)		—
Increase in cash surrender value of BOLI		(211	)		(81	)		(86	)
Amortization of core deposit intangible		71			—			—
Change in assets and liabilities:
Increase in accrued interest receivable		(870	)		(719	)		(562	)
Increase (decrease) in other assets		97			(642	)		(278	)
Increase (decrease) in accrued expenses and other liabilities		(542	)		695			718
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		8,926			(425	)		6,588
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities		(27,266	)		(25,534	)		(15,640	)
Maturities and prepayments of investment securities		15,733			8,264			3,201
Net increase in gross loans outstanding		(73,190	)		(59,392	)		(114,440	)
Purchase of bank owned life insurance		(600	)		(1,901	)		—
Purchase of Federal Home Loan Bank stock		(216	)		(306	)		(338	)
Purchase of The Bankers Bank stock		—			(2	)		—
Purchase of real estate held for sale		—			(58	)		(928	)
Proceeds from real estate held for sale		—			1,025			—
Proceeds from sale of foreclosed real estate		468			41			206
Proceeds from the sale of premises and equipment		15			—			—
Purchases of premises and equipment		(1,788	)		(1,589	)		(1,763	)
Purchase of Progressive State Bank		(1,864	)		—			—
Investment in trust subsidiary		—			—			(372	)
NET CASH USED BY INVESTING ACTIVITIES		(88,708	)		(79,452	)		(130,074	)

See accompanying notes.

48

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
	(Amounts in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		41,357			96,773			118,259
Net increase (decrease) in repurchase obligations classified as short term debt		(802	)		3,558			2,971
Proceeds from issuance of FHLB advances classified according to maturity		8,000			8,500			—
Repayments of FHLB advances classified according to maturity		(12,500	)		(5,000	)		—
Proceeds from issuances of junior subordinated debentures classified as long term debt		—			—			12,372
Tax benefit from employee stock option plans		38			62			—
Net proceeds from issuance of common stock in secondary offering		19,867			—			—
Proceeds from stock options exercises		138			120			48
Proceeds from shares issued to directors’ deferred plan		28			55			129
NET CASH PROVIDED BY FINANCING ACTIVITIES		56,126			104,068			133,779
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(23,656	)		24,191			10,293
CASH AND CASH EQUIVALENTS, BEGINNING		56,481			32,290			21,997
CASH AND CASH EQUIVALENTS, ENDING	$	32,825		$	56,481		$	32,290
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	15,763		$	9,864		$	5,069
Income tax paid		2,744			2,520			1,240
Net unrealized gain (loss) on investments available for sale, net of tax		258			(328	)		(93	)
Transfer from loans to foreclosed real estate		97			363			135
Progressive State Bank Merger:
Fair value of assets acquired	$	73,797		$	—		$	—
Cash paid		17,177			—			—
Liabilities assumed	$	56,620		$	—		$	—

See accompanying notes.

49

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE A - ORGANIZATION AND OPERATIONS

New Century Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank and New Century Bank South (collectively referred to as the “Banks”). All significant intercompany transactions and balances have been eliminated in consolidation. In 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company is subject to the rules and regulations of the Federal Reserve Bank and the North Carolina Commissioner of Banks.

New Century Bank was incorporated on May 15, 2000 and began banking operations on May 24, 2000. New Century Bank South began operations on January 2, 2004. The Banks are engaged in general commercial and retail banking in Bladen, Cumberland, Harnett, Hoke, Johnston, Robeson, Sampson, and Wayne counties and operate 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 Banks undergo periodic examinations by those regulatory authorities. At the close of business on July 13, 2006, Progressive State Bank (“Progressive”) was acquired and was merged into New Century Bank South as discussed in Note F and for purposes of these consolidated financial statements, is considered to be part of New Century Bancorp since that time.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks,” “Interest-earning deposits in other banks,” and “Federal funds sold.”

Investment Securities Available for Sale

Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method. Declines in the fair value of held to maturity securities and available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

50

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loans held for sale are held at the lower of cost or fair market value until sold.

Allowance for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due will not be collected in accordance with the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if readily determinable. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Foreclosed Real Estate

Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, management periodically performs valuations of the property and the real estate is carried at the lower of cost or fair value minus estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 40 years for buildings, 5 to 10 years for furniture, fixtures and equipment and 3 years for computers and related equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.

51

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals cost and that this investment was not impaired at December 31, 2006.

Stock in The Bankers Bank

The Company invests in stock of The Bankers Bank. This investment is carried at the lower of cost or fair value and was not impaired as of December 31, 2006.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

Bank Owned Life Insurance

Bank Owned Life Insurance ("BOLI") is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefit proceeds received in excess of the policy's cash surrender value are recognized to income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of operations. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At December 31, 2006, the Company held no policy loans against its BOLI cash surrender values or restrictions on the use of the proceeds.

Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased intangible assets that can be separately distinguished from goodwill. Goodwill impairment testing is performed annually, or more frequently if events and circumstances indicate possible impairment. Since the Company’s acquisition of Progressive in July 2006, there has been no indication of possible impairment of the $8.7 million in goodwill created as a result of the merger. Intangible assets with finite lives include core deposits and other intangibles. Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company’s core deposit intangible is amortized using the straight-line method over nine years. Note F contains additional information regarding goodwill and other intangible assets.

52

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation

At December 31, 2006, the Company had certain stock-based compensation plans, described more fully in Note P. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” and supercedes APB Opinion No. 25 “Accounting for Stock Issued to Employees.” Statement of Financial Accounting Standards (“SFAS”) No. 123,Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allowed an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees,whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within the operating section.

The Company adopted SFAS No. 123R using the modified prospective method as permitted under SFAS 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the vested portion of previously granted awards that remain outstanding at the date of adoption.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB Opinion No. 25 and, as a result, had not recognized compensation expense for options granted with exercise prices equal to the fair market value of the Company’s stock on the date of grant.

The following table presents pro forma disclosures of net income and earnings per share for the years ended December 31, 2005 and 2004 as if the fair value based method of accounting had been applied to options granted prior to January 1, 2006.

	2005		2004
	(Amounts in thousands, except per share data)
Net income:
As reported	$	3,621	$	2,094
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		56		224
Pro forma	$	3,565	$	1,870
Basic net income per share:
As reported	$	.72	$	.42
Pro forma		.70		.37
Diluted net income per share:
As reported	$	.66	$	.40
Pro forma		.65		.35

53

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income.The Company reports as comprehensive income all changes in shareholders' equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.

Segment Information

The Company follows the provisions of SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, which specifies guidelines for determining an entity’s operating segments and the type and level of financial information to be disclosed. Based on these guidelines, management has determined that the Banks’ operate as one business segment, the providing of general commercial and retail financial services to customers located in the Company’s market areas. The various products, as well as the methods used to distribute them, are those generally offered by community banks.

Net Income Per Common Share and Common Shares Outstanding

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options.

All references in these financial statements to net income per common share, weighted average common and common equivalent shares outstanding, outstanding stock options and option exercise prices have been adjusted to reflect three separate eleven-for-ten stock splits effected in the form of 10% stock dividends in June 2004, September 2003, and May 2002, a three-for-two stock split in July 2005, and a six-for-five stock split in December 2006.

Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:

	2006	2005	2004
Weighted average number of common shares used in computing basic net income per share	5,784,671	5,061,791	5,032,478
Effect of dilutive stock options	331,038	416,867	253,949
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	6,115,709	5,478,658	5,286,427

As of December 31, 2006, the Company had no anti-dilutive stock options.

54

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

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

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of SFAS No. 133 and 140” provides entities relief from the requirement to separately determine the fair value of an embedded derivative that would otherwise be bifurcated from the host contract under SFAS 133. This statement allows an irrevocable election on an instrument-by-instrument basis to measure such a hybrid financial instrument at fair value. This statement is effective for all financial instruments acquired or issued after the beginning of the fiscal years beginning after September 15, 2006. The Company has evaluated this statement and does not believe it will have a material effect on the Company’s financial position, results of operations and cash flows.

SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of SFAS No. 140” requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits (but does not require) subsequent measurement of servicing assets and liabilities at fair value. This statement is effective for fiscal years beginning after September 15, 2006. The Company has evaluated this statement and does not believe it will have a material effect on the Company’s financial position, results of operations and cash flows.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for the Company in the first quarter of fiscal 2008. The Company does not expect FIN 48 to have a material effect on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FAS 157, fair value measurements are disclosed by level within that hierarchy. While FAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting FAS 157 on its consolidated financial statements.

55

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R) (FAS 158), requires an employer to: (a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization. The requirement by FAS 158 to recognize the funded status of a benefit plan and the disclosure requirements of FAS 158 are effective as of the end of the fiscal year ending after December 15, 2006 for entities with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company does not expect the adoption of FAS 158 to have a material effect on its financial position at December 31, 2006.

In September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements (SAB No. 108). SAB No. 108 addresses the diversity in practice by registrants when quantifying the effect of an error on the financial statements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements and is effective for annual periods ending after November 15, 2006. The provisions of SAB No. 108 are effective December 31, 2006. The Company currently believes that the SAB No. 108 will not have a material financial impact on its consolidated financial statements.

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.

Reclassifications

Certain amounts in the 2004 and 2005 consolidated financial statements have been reclassified to conform to the presentation adopted for 2006. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

56

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE C - INVESTMENT SECURITIES

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

	December 31, 2006
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	35,750	$	76	$	141	$	35,685
Mortgage-backed securities		21,805		194		198		21,801
Municipal bonds		6,388		84		44		6,428
	$	63,943	$	354	$	383	$	63,914
	December 31, 2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	29,594	$	15	$	273	$	29,336
Mortgage-backed securities		9,429		10		243		9,196
Municipal bonds		3,003		69		—		3,072
	$	42,026	$	94	$	516	$	41,604

Securities with a carrying value of $21.8 million and $16.0 million at December 31, 2006 and 2005, respectively, were pledged to secure public monies on deposit as required by law and customer repurchase agreements.

The following tables show 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 as of December 31, 2006 and 2005. For the 58 investment securities with unrealized losses at December 31, 2006, 24 agency securities and 19 mortgage backed securities had continuous unrealized losses for more than twelve months. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold these securities to maturity, none of the securities are deemed to be other than temporarily impaired.

57

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE C - INVESTMENT SECURITIES (Continued)

	2006
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(In thousands)
Securities available for sale:
Agency securities	$	3,970	$	13	$	15,486	$	128	$	19,456	$	141
Mortgage-backed securities		1,738		9		6,970		189		8,708		198
Municipal bonds		1,871		44		—		—		1,871		44
Total temporarily impaired securities	$	7,579	$	66	$	22,456	$	317	$	30,035	$	383
	2005
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(In thousands)
Securities available for sale:
Agency securities	$	17,573	$	141	$	9,245	$	132	$	26,818	$	273
Mortgage-backed securities		5,650		142		3,177		101		8,827		243
Total temporarily impaired securities	$	23,223	$	283	$	12,422	$	233	$	35,645	$	516

58

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE C - INVESTMENT SECURITIES (Continued)

The following table sets forth certain information regarding the amortized costs, carrying values, and contractual maturities of the Company’s investment portfolio at December 31, 2006.

	Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
U.S. government agency securities
Due within one year	$	15,754	$	15,679
Due after one but within five years		19,996		20,006
		35,750		35,685
Mortgage-backed securities
Due within one year		139		138
Due after one but within five years		4,217		4,236
Due after five but within ten years		5,880		5,773
Due after ten years		11,569		11,654
		21,805		21,801
Municipal bonds
Due within one year		487		487
Due after one but within five years		704		715
Due after five but within ten years		1,135		1,155
Due after ten years		4,062		4,071
		6,388		6,428
Total securities available for sale
Due within one year		16,380		16,304
Due after one but within five years		24,917		24,957
Due after five but within ten years		7,015		6,928
Due after ten years		15,631		15,725
	$	63,943	$	63,914

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

59

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE D - LOANS

Following is a summary of loans at December 31, 2006 and 2005:

	2006					2005
	Amount			Percent of total		Amount			Percent of total
	(Dollars in thousands)
Real estate loans:
One to four family residential	$	59,867		13.95	%	$	47,531		14.54	%
Commercial		113,790		26.49	%		94,051		28.78	%
Multi-family residential		13,399		3.12	%		15,653		4.79	%
Construction		79,607		18.53	%		63,000		19.27	%
Home equity lines of credit		42,130		9.81	%		14,554		4.45	%
Real estate loans held for sale		990		.23	%		4,251		1.30	%
Total real estate loans		309,783		72.13	%		239,040		73.13	%
Other loans:
Commercial and industrial		88,626		20.63	%		66,062		20.21	%
Loans to individuals		30,827		7.18	%		21,104		6.46	%
Other loans held for sale		562		.13	%		931		0.28	%
Total other loans		120,015		27.94	%		88,097		26.95	%
Gross loans		429,798					327,137
Less deferred loan origination fees, net		(298	)	(.07	)%		(285	)	(.08	)%
Total loans		429,500		100.00	%		326,852		100.00	%
Allowance for loan losses		(7,496	)				(5,298	)
Total loans, net	$	422,004				$	321,554

Loans are primarily made in Harnett, Sampson, Johnston, Wayne, Cumberland, Robeson, Hoke, and Bladen Counties, North Carolina. Real estate loans can be affected by the condition of the local real estate market. Commercial and installment loans can be affected by the local economic conditions.

60

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE D - LOANS (Continued)

Impaired loans at December 31, 2006 and 2005 consisted of loans of approximately $11.8 million and $3.9 million respectively. Impaired loans at December 31, 2006 were comprised of $3.2 million in non-accrual and restructured loans, $1.2 million in loans that were 90 days or more past due and still accruing and $7.4 million in other loans that management has classified as impaired for other reasons. Impaired loans at December 31, 2005 consisted of $823,000 in non-accrual loans, $189,000 in loans that were 90 days past due and still accruing, and approximately $2.9 million in loans that management had classified as impaired for other reasons.

The average recorded investment in impaired loans was approximately $5.4 million and $327,000 for the years ended December 31, 2006 and 2005, respectively. The allowance allocated for impaired loans for 2006 and 2005 was approximately $3.2 million and $514,000, respectively.

At December 31, 2006, the Company had two loans totaling $562,000 that were considered troubled debt restructures due to concessions made to reduce the rates on those loans to below market rates. The Company had no troubled debt restructures prior to 2006.

At December 31, 2006 and 2005, the amount of non-accrual loans was $2.7 million and $823,000, respectively. The average balance of non-accrual loans was $1.4 million and $531,000 for the years ended December 31, 2006 and 2005, respectively. In 2006, interest forgone on non-accrual loans was approximately $142,000. Non-accrual loans did not materially affect interest income for the years ended December 31, 2005 and 2004.

At December 31, 2006, the Company had $1.6 million in loans held for sale to the Small Business Administration. At December 31, 2005, the Company had $5.2 million in loans held for sale to two unaffiliated banks in organization. These loans were originated by the Company under repurchase agreements and were sold to those banks when they commenced operations in 2006.

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

	At December 31,
	2006			2005			2004
	(In thousands)
Allowance for loan losses at beginning of year	$	5,298		$	3,598		$	2,355
Provision for loan losses		2,779			2,172			1,684
		8,077			5,770			4,039
Loans charged-off:
Commercial and industrial		(835	)		(24	)		(312	)
Home equity lines of credit		—			—			(25	)
One-to-four family residential		(92	)		(235	)		(56	)
Multi-family residential		(29	)		(61	)		—
Loans to individuals		(181	)		(208	)		(85	)
Total charge-offs		(1,137	)		(528	)		(478	)
Recoveries of loans previously charged-off:
Commercial and industrial		58			38			20
One-to-four family residential		28			1			3
Loans to individuals		66			17			14
Total recoveries		152			56			37
Net charge-offs		(985	)		(472	)		(441	)
Allowance acquired in Progressive State Bank merger		404			—			—
Allowance for loan losses at end of year	$	7,496		$	5,298		$	3,598

61

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE D - LOANS (Continued)

At December 31, 2006 the Company had pre-approved but unused lines of credit totaling $125.0 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

The Banks have had loan transactions with its directors and executive officers. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectibility or present other unfavorable features. A summary of related party loan transactions, in thousands, is as follows:

Balance at January 1, 2006 (95 loans)	$	9,385
Borrowings		11,961
Loan repayments		(9,290	)
Balance at December 31, 2006 (95 loans)	$	12,056

At December 31, 2006, there was $3.0 million of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries.

NOTE E - PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2006 and 2005:

	2006		2005
	(In thousands)
Land	$	3,118	$	1,448
Buildings		5,323		3,668
Furniture and equipment		2,332		1,893
Leasehold improvements		123		87
Construction in progress		651		11
		11,547		7,107
Less accumulated depreciation		1,692		1,089
Total	$	9,855	$	6,018

Depreciation amounting to $622,468, $361,622 and $246,464 for the years ended December 31, 2006, 2005 and 2004, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.

62

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE E - PREMISES AND EQUIPMENT (Continued)

The Company has operating leases for its corporate offices and branches that expire at various times through 2023. Future minimum lease payments under the leases for years subsequent to December 31, 2006 are as follows:

2007	$	187,468
2008		164,718
2009		152,568
2010		122,568
2011		75,000
Thereafter		788,210
	$	1,490,532

During 2006, 2005, and 2004, payments under operating leases were approximately $249,000, $127,000 and $134,000, respectively.

NOTE F - PROGRESSIVE STATE BANK MERGER

At the close of business on July 13, 2006, the Company completed the acquisition of Progressive State Bank, a North Carolina chartered bank headquartered in Lumberton, NC, whereby Progressive was merged into New Century Bank South. At the time of the merger, Progressive operated five offices and, based on estimated fair values, had $65.9 million in total assets, $33.7 million in loans and $55.8 million in deposits. In order to fund this transaction and to provide additional capital for other corporate purposes, the Company entered into an underwriting agreement in June 2006 for the sale of 1,150,000 shares of common stock at $18.50 per share. Proceeds of the sale, which closed in early July, were $19.9 million, net of the underwriter’s discount and offering expenses.

Pursuant to the terms of the merger agreement, shareholders of Progressive received cash in the amount of $21.30 per share. The aggregate purchase price of the transaction was $17.2 million, consisting of $16.3 million in cash payments to Progressive shareholders and $828,000 in transaction costs. The acquisition was accounted for under the purchase method of accounting and, accordingly, the assets and liabilities of Progressive were recorded based on their estimated fair values as of July 13, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Progressive since July 13, 2006.

63

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE F - PROGRESSIVE STATE BANK MERGER (Continued)

The estimated fair values of the Progressive assets acquired and liabilities assumed at the date of the merger are as follows:

	July 13, 2006
	(in thousands)
Cash and cash equivalents	$	15,313
Investment securities available for sale		10,243
Stock in FHLB of Atlanta		117
Loans receivable, net		33,669
Premises and equipment		2,679
Core deposit intangible		1,384
Bank owned life insurance		1,675
Other real estate owned		107
Accrued interest receivable		278
Other assets		244
Goodwill		8,674
Deposits		(55,757	)
Deferred taxes		(586	)
Other liabilities		(863	)
Total purchase price	$	17,177

The Company estimates that the core deposit intangible of $1.4 million will be amortized on a straight line basis over nine years. The core deposit intangible represents 2.83% of Progressive’s core deposits as of July 13, 2006. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for tax purposes. Discounts that resulted from recording the Progressive assets and liabilities at their respective fair values are being amortized using methods that approximate an effective yield over the life of the assets and liabilities. The net amortization increased pre-tax income by $34,000 for the year ended December 31, 2006.

The following unaudited pro forma financial information presents the combined results of operations of the Company and Progressive as if the merger had occurred as of the beginning of the period for each period presented, after giving effect to certain adjustments, including the amortization of the core deposit intangible and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Progressive constituted a single entity during such periods.

	Year ended December 31,
	2006		2005		2004
	(In thousands)
Net interest income	$	21,059	$	17,310	$	13,021
Non-interest income		3,710		3,179		2,330
Net Income		4,283		4,226		2,646
Net Income per common share:
Basic	$	.74	$	.83	$	.53
Diluted		.70		.77		.50

64

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE G - DEPOSITS

At December 31, 2006, the scheduled maturities of time deposits are as follows:

	Less than $100,000		$100,000 or more		Total
	(In thousands)
Three months or less	$	28,553	$	19,636	$	48,189
Over three months through twelve months		87,422		68,697		156,119
Over one year through three years		51,244		38,701		89,945
Over three years		1,925		2,239		4,164
	$	169,144	$	129,273	$	298,417

Included in this total were brokered time deposits of $4.5 million at December 31, 2006.

NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date and are classified as short term debt. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements are collateralized by U. S. Government agency obligations. The following table presents certain information for securities sold under agreements to repurchase:

	2006			2005
	($ in thousands)
Balance at December 31	$	8,441		$	9,243
Weighted average interest rate at December 31		4.18	%		3.25	%
Maximum amount outstanding at any month-end during the year	$	9,777		$	9,243
Average daily balance outstanding during the year	$	8,383		$	6,403
Average annual interest rate paid during the year		3.84	%		2.00	%

NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK

At December 31, 2006, the Company had available lines of credit totaling approximately $31.1 million with various financial institutions for borrowing on a short-term basis. These lines are subject to annual renewals with varying interest rates. Also, as a member of the Federal Home Loan Bank of Atlanta, the Company may obtain advances of up to 10% of assets, subject to available collateral.

65

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)

Advances from the Federal Home Loan Bank of Atlanta consisted of the following at December 31, 2006 and 2005:

Maturity	Interest Rate		2006		2005
			(In thousands)
December 29, 2006	4.03	%	$	—	$	2,500
June 28, 2007	5.72	%		2,500		2,500
July 30, 2007	5.52	%		3,500		3,500
August 24, 2007	5.30	%		2,000		4,000
			$	8,000	$	12,500

Pursuant to collateral agreements with the Federal Home Loan Bank, at December 31, 2006 advances are secured by loans with a carrying amount of $15.4 million, which approximates market value. Advances are considered either short term debt or long term debt based on contractual maturity. All of the advances held at December 31, 2006 are considered short term debt.

NOTE J - JUNIOR SUBORDINATED DEBENTURES

On September 20, 2004, $12.4 million of junior subordinated debentures were issued to New Century Statutory Trust I (“the Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. All of the Trust’s common equity is owned by the Company. The junior subordinated debentures are included in long term debt and the Company’s equity interest in the Trust is included in other assets.

The Company pays interest on the junior subordinated debentures at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The debentures are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities qualify as Tier 1 capital for regulatory capital purposes subject to certain limitations, none of which were applicable at December 31, 2006.

66

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE K - INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006			2005			2004
	(In thousands)
Current tax provision:
Federal	$	2,466		$	2,300		$	1,235
State		544			531			269
Total current tax provision		3,010			2,831			1,504
Deferred tax provision:
Federal		(537	)		(548	)		(255	)
State		(115	)		(119	)		(76	)
Total deferred tax benefit		(652	)		(667	)		(331	)
Net provision for income taxes	$	2,358		$	2,164		$	1,173

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:

	2006			2005			2004
	(In thousands)
Income tax at federal statutory rate	$	2,152		$	1,967		$	1,111
Increase (decrease) resulting from:
State income taxes, net of federal tax effect		283			257			127
Tax-exempt interest income		(51	)		(47	)		(39	)
Income from life insurance		(72	)		(28	)		(29	)
Incentive stock option expense		57			—			—
Other permanent differences		(10	)		15			3
Provision for income taxes	$	2,358		$	2,164		$	1,173

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2006 and 2005 are as follows:

	2006			2005
	(In thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	2,321		$	1,754
Pre-opening costs and expenses		25			37
Deferred Compensation		225			84
Unrealized loss on available-for-sale securities		10			144
Supplemental executive retirement plan		101			—
Fair market value adjustment – loans acquired from Progressive		144			—
Other		164			41
Total deferred tax assets		2,990			2,060
Deferred tax liabilities relating to:
Premises and equipment		(625	)		(240	)
Deferred loan fees		(146	)		(22	)
Unrealized gain on available-for-sale securities		—			—
Core deposit intangible		(507	)
Other		(83	)		(17	)
Total deferred tax liabilities		(1,361	)		(279	)
Net recorded deferred tax asset, included in other assets	$	1,629		$	1,781

67

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE L - OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006		2005		2004
	(In thousands)
Postage, printing and office supplies	$	459	$	277	$	220
Advertising and promotion		356		274		196
Professional services		520		432		323
Other		1,861		1,155		1,059
Total	$	3,196	$	2,138	$	1,798

NOTE M - REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2006, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in New Century Bank, New Century Bank South and New Century Statutory Trust I.

As of December 31, 2006 and 2005, the most recent notification from the FDIC categorized both Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum amounts and ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Banks’ category.

Neither of the Banks may declare or pay a cash dividend, or repurchase any of its respective capital stock, unless its capital surplus is equal to at least 50% of its paid-in capital. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The North Carolina Commissioner of Banks and the FDIC are also authorized to prohibit the payment of dividends under certain other circumstances.

68

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE M - REGULATORY MATTERS (Continued)

The Company’s actual capital amounts and ratios are presented in the table below as of December 31, 2006 and 2005:

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2006:
Total Capital (to Risk-Weighted Assets)	$	65,051	14.63	%	$	35,568	8.00	%	$	44,460	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		59,470	13.38	%		17,784	4.00	%		26,676	6.00	%
Tier 1 Capital (to Average Assets)		59,470	10.95	%		21,726	4.00	%		27,157	5.00	%
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	49,523	14.54	%	$	27,251	8.00	%	$	34,064	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		44,042	12.93	%		13,626	4.00	%		20,439	6.00	%
Tier 1 Capital (to Average Assets)		44,042	10.56	%		16,678	4.00	%		20,848	5.00	%

New Century Bank’s actual capital amounts and ratios are presented in the table below as of December 31, 2006 and 2005:

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2006:
Total Capital (to Risk-Weighted Assets)	$	41,453	14.25	%	$	23,374	8.00	%	$	29,092	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		37,789	12.99	%		11,637	4.00	%		17,455	6.00	%
Tier 1 Capital (to Average Assets)		37,789	10.74	%		14,075	4.00	%		17,594	5.00	%
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	39,006	15.11	%	$	20,649	8.00	%	$	25,811	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		35,769	13.86	%		10,325	4.00	%		15,487	6.00	%
Tier 1 Capital (to Average Assets)		35,769	11.19	%		12,791	4.00	%		15,989	5.00	%

New Century Bank South’s actual capital amounts and ratios are presented in the table below as of December 31, 2006 and 2005:

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2006:
Total Capital (to Risk-Weighted Assets)	$	18,992	11.65	%	$	13,045	8.00	%	$	16,307	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		17,343	10.64	%		6,523	4.00	%		9,784	6.00	%
Tier 1 Capital (to Average Assets)		17,343	9.10	%		7,624	4.00	%		9,530	5.00	%
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	9,901	12.06	%	$	6,569	8.00	%	$	8,212	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)		8,872	10.80	%		3,285	4.00	%		4,927	6.00	%
Tier 1 Capital (to Average Assets)		8,872	9.19	%		3,862	4.00	%		4,828	5.00	%

69

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE M - REGULATORY MATTERS (Continued)

The reserve balance required to be maintained under the requirements of the Federal Reserve was approximately $50,000 at December 31, 2006.

NOTE N - OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of December 31, 2006 is as follows:

	(In thousands)
Financial instruments whose contract amounts represent credit risk:
Undisbursed lines of credit	$	122,001
Letters of credit		3,025

NOTE O - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

70

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE O - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

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:

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

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

Investment Securities Available for Sale

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

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Stock in Federal Home Loan Bank of Atlanta and The Bankers Bank

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

Bank Owned Life Insurance

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

Deposits

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

Short Term Debt

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

71

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE O - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Long Term Debt

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

Accrued Interest Receivable and Accrued Interest Payable

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

Financial Instruments with Off-Balance Sheet Risk

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

The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2006 and 2005.

	2006				2005
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	12,108	$	12,108	$	8,453	$	8,453
Interest-earning deposits in other banks		1,605		1,605		3,284		3,284
Federal funds sold		19,112		19,112		44,744		44,744
Investment securities available for sale		63,914		63,914		41,604		41,604
Loans, net		422,004		422,765		321,554		321,305
Accrued interest receivable		3,220		3,220		2,072		2,072
Stock in the Federal Home Loan Bank		1,427		1,427		1,094		1,094
Stock in The Banker’s Bank		51		51		51		51
Bank owned life insurance		6,672		6,672		4,186		4,186
Financial liabilities:
Deposits	$	464,117	$	464,302	$	367,003	$	366,272
Short term debt		16,441		16,408		21,743		21,356
Long term debt		12,372		12,372		12,372		12,372
Accrued interest payable		890		890		486		486

72

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE P - EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) Plan

The Company has a 401(k) Plan and substantially all employees participate in the Plan. In 2004 and 2005, the Company made matching contributions equal to 50 percent of the first 6% of an employee’s compensation contributed to the Plan. In December 2005, the Board of Directors approved the matching of 100% of the first 6% of an employee’s compensation contributed to the plan. This increase was implemented in January of 2006. Matching contributions vest to the employee equally over a four-year period. Expenses attributable to the Plan amounted to $266,523, $83,894 and $62,961 for the years ended December 31, 2006, 2005 and 2004, respectively. Effective January 1, 2007, the Company approved an amendment to the plan to allow for immediate vesting of matching contributions.

To help offset the increased cost of the 401(k) match, the Company purchased $1.9 million in Bank owned life insurance on certain key officers in 2005 and another $600,000 in 2006 to provide funding for the increased 401(k) expense. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age.

Employment Agreements

The Company has entered into employment agreements with its six executive officers and three of its senior officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers' right to receive certain vested rights, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound to the terms of those contracts.

Supplemental Executive Retirement Plans

The Company implemented a supplemental executive retirement plan for the Chief Executive Officer during 2003. Benefits will accrue and vest during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $92,000, $89,000 and $89,000 were expensed for future benefits to be provided under this plan during 2006, 2005 and 2004, respectively. In conjunction with the implementation of this plan, the Company has purchased life insurance on certain key officers to provide future funding of benefit payments. The life insurance policies provide the payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2006 and 2005 was $311,000 and $219,000, respectively.

As part of the acquisition of Progressive State Bank, the Company assumed a liability for the supplemental early retirement plan for Progressive’s Chief Executive Officer. At the time of the merger, a liability of $267,000 was recorded and $6,000 in expense has been recorded since then, resulting in a total liability of $273,000 as of December 31, 2006. Corresponding to this liability, Progressive had purchased a life insurance policy on certain key officers to provide future funding of benefit payments. This policy was acquired by the Company upon its acquisition of Progressive. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age.

73

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE P - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Directors Deferred Compensation

The Company has instituted a Directors’ Deferral Plan whereby individual directors may elect annually to defer receipt of all or a designated portion of their fees for the coming year. Amounts so deferred are used to purchase shares of the Company’s common stock on the open market by the administrator of the Deferral Plan or to issue shares from the Company’s authorized but unissued shares, with such deferred compensation disbursed in the future as specified by the director at the time of his or her deferral election. Compensation and other expenses attributable to this plan for the years ended December 31, 2006, 2005 and 2004 were $151,245, $120,126, and $88,550, respectively.

Stock Option Plans

The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary banks. Options granted to directors under the 2000 Nonqualified Plan typically vest immediately at the time of grant. During the year ended December 31, 2006, the Company granted 36,600 options to employees under the 2000 Incentive Plan. These options will vest over a three-year period with none vested at the time of grant. Also in 2006, the Company granted 75,600 options to employees under the 2004 Incentive Stock Option Plan, which vest over a five-year period with none vested at the time of grant.

74

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE P - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

The fair market value of each option awarded is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair value for options granted during the year ended December 31, 2006 was $7.51 which was determined using a risk-free rate of 4.91%, a dividend rate of 0%, volatility of 33.38%, and an expected life of 7.18 years. The Company granted 20,961 options during the year ended December 31, 2005 with a fair value of $7.43 per option which was determined using a risk-free rate of 3.96%, a dividend rate of 0%, volatility of 62.5% and an expected life of 7.0 years.

A summary of the Company’s option plans as of and for the years ended December 31, 2006, 2005 and 2004 is as follows:

			Outstanding Options				Exercisable Options
	Shares Available for Future Grants		Number Outstanding		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
At December 31, 2003	13,501		451,792		$	4.63	450,197		$	4.63
Options authorized	472,658		—			—	—			—
Options granted/vesting	(318,463	)	318,463			7.08	237,890			4.63
Options exercised	—		(10,529	)		4.59	(10,529	)		6.88
At December 31, 2004	167,696		759,726			5.72	677,558			4.71
Options authorized	—		—			—	—			—
Options granted/vesting	(20,962	)	20,962			11.48	27,390			11.48
Options exercised	—		(25,584	)		4.68	(25,584	)		4.68
At December 31, 2005	146,735		755,104			5.84	679,364			5.58
Options authorized	—		—			—	—			—
Options granted/vesting	(112,200	)	112,200			16.22	33,056			7.99
Options exercised	—		(26,545	)		5.19	(26,545	)		5.19
Options forfeited	8,430		(8,430	)		13.21	—			—
At December 31, 2006	42,965		832,329		$	7.20	685,875		$	5.70

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2006 was $8.2 million and $7.7 million, respectively.

75

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE P - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Information regarding the stock options outstanding at December 31, 2006 is summarized below:

		Options Outstanding			Options Exercisable
Exercise Price	Number of options outstanding	Weighted average exercise price		Weighted average contractual life	Number of options exercisable	Weighted Average Exercise Price
$  4.59	378,371	$	4.59	3.50	378,371	$	4.59
5.01	4,792		5.01	4.22	4,792		5.01
5.97	9,692		5.97	6.47	9,692		5.97
7.07	313,993		7.07	7.44	287,593		7.07
10.69	14,031		10.69	8.06	4,677		10.69
13.44	2,250		13.44	8.54	750		13.44
16.21	109,200		16.21	9.60	—		16.21
Total/Average	832,329	$	7.20	5.92	685,875	$	5.70

For the years ended December 31, 2006 and 2005, the intrinsic value of options exercised was $333,000 and $379,000, respectively, and the grant-date fair value of options vested was $166,000 and $96,000, respectively. Cash received from stock option exercises for the year ended December 31, 2006 was approximately $138,000. The actual tax benefit in shareholders’ equity realized for the tax deductions from option exercises was approximately $38,000.

As of December 31, 2006, there was approximately $794,000 of total unrecognized compensation expense related to the Company’s stock option plans. This cost is expected to be recognized over a weighted average period of 2.7 years.

76

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE Q - PARENT COMPANY FINANCIAL DATA

Following are the condensed balance sheets of New Century Bancorp as of and for the years ended December 31, 2006 and 2005 and the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2006 (amounts in thousands):

Condensed Balance Sheets

December 31, 2006 and 2005

	2006			2005
Assets
Cash balances with New Century Bank	$	3,755		$	285
Investment in New Century Bank		37,734			35,577
Investment in New Century Bank South		27,367			8,786
Investment in New Century Statutory Trust I		372			372
Other asset		661			373
Total Assets	$	69,889		$	45,393
Liabilities and Shareholders’ Equity
Junior subordinated debentures	$	12,372		$	12,372
Accrued interest payable		78			47
Shareholders’ equity:
Common stock		6,497			4,241
Additional paid-in capital		39,177			21,196
Retained earnings		11,785			7,815
Accumulated other comprehensive income		(20	)		(278	)
Total Shareholders’ Equity		57,439			32,974
Total Liabilities and Shareholders’ Equity	$	69,889		$	45,393

Condensed Statements of Operations

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Dividends	$	668		$	673		$	140
Equity in earnings of subsidiaries		3,965			3,431			2,094
Operating expense		(973	)		(732	)		(140	)
Income tax benefit		310			249			—
Net income	$	3,970		$	3,621		$	2,094

77

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

NOTE Q - PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statements of Cash Flows

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,970		$	3,621		$	2,094
Equity in undistributed earnings of subsidiaries		(3,965	)		(3,431	)		(2,094	)
Increase in other assets		(288	)		(348	)		—
Increase in other liabilities		31			28			—
Net cash used by operating activities		(252	)		(130	)		—
CASH FLOW FROM INVESTING ACTIVITIES
Payments for investments in and advances to subsidiaries		(16,349	)		—			(20,872	)
Net cash used by investing activities		(16,349	)		—			(20,872	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from advances from subsidiaries		—			—			8,500
Proceeds from issuance of junior subordinated debentures		—			—			12,372
Proceeds from issuance of common stock in secondary offering		19,867			—			—
Proceeds from other issuance of common stock		166			237			178
Tax benefit from stock option exercises		38			—			—
Net cash provided by financing activities		20,071			237			21,050
Net increase in cash and cash equivalents		3,470			107			178
Cash and cash equivalents at beginning of year		285			178			—
Cash and cash equivalents, end of year	$	3,755		$	285		$	178

NOTE R - RELATED PARTY TRANSACTIONS

During 2006, the Company purchased various insurance policies from a company owned by one of the directors of New Century Bank. Premiums paid totaled approximately $122,000 for these policies, which include a three-year policy for directors and officers liability coverage, a three-year policy for fidelity bond coverage as well as commercial property and other insurance policies. All such policies were purchased on terms at least as favorable to the Company as could be obtained from an unaffiliated third party.

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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A – CONTROLS AND PROCEDURES

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2006. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, the Company did maintain effective disclosure controls and procedures, except for the following matter. The Company’s management has determined that certain controls related to lending and loan underwriting were not operating effectively and that these control deficiencies represent a material weakness. Management is addressing this matter and is in the process of implementing new controls which are expected to fully remediate this material weakness by the end of the third quarter of 2007. With the exception of this matter, there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s fourth quarter of 2006 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

On April 11, 2007, B. Darrell Fowler resigned as Executive Vice President and Branch Administrator of New Century Bancorp, Inc., Dunn, North Carolina and New Century Bank, Dunn, North Carolina.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference from pages 4 through 9 and 20 through 22 of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

The Registrant has adopted a code of ethics that applies, among others to its principal executive offices and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, New Century Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28334.

ITEM 11 - EXECUTIVE COMPENSATION

Incorporated by reference from pages 7 through 20 of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated by reference from pages 2 through 4 of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

In 2000, the shareholders of New Century Bank approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the

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2004 Annual Meeting of Shareholders, the shareholders approved amendments to 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 478,627 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Incentive Plan is 278,102 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon exercise of outstanding options granted under the 2004 Incentive Plan is 75,600. Option prices for each of the plans are established at market value at the time of grant.

The following chart contains details of the grants:

Plan Category	Number of securities to be issued upon exercise of outstanding options,	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	832,329	$	7.20	42,965
Equity compensation plans not approved by security holders	None		N/A	None
Total	832,329	$	7.20	42,965

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference from pages 5 and 7 of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference from page 20 through 22 of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders.

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PART IV

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

3(i)	Articles of Incorporation of Registrant*
3(ii)	Bylaws of Registrant*
4	Form of Stock Certificate*
10(i)	2000 Incentive Stock Option Plan**
10(ii)	2000 Nonqualified Stock Option Plan for Directors**
10(iii)	Employment Agreement of John Q. Shaw*
10(iv)	Employment Agreement of Lisa F. Campbell*
10(v)	Salary Continuation Agreement with John Q. Shaw*
10(vi)	2004 Incentive Stock Option Plan**
10(vii)	Employment Agreement of William L. Hedgepeth II ***
21	Subsidiaries (Filed herewith)
23	Consent of Dixon Hughes PLLC (Filed herewith)
31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
31(ii)	Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
32(ii)	Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
99(i)	Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders (Filed with the Securities and Exchange Commission pursuant to Rule 14a-6)

* Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.

** Incorporated by reference from Registrant's Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.

*** Incorporated by reference from Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2006.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities 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.
	Registrant
	By:	/s/ William L. Hedgepeth, II
		William L. Hedgepeth, II
Date: April 16, 2007		President and Chief Executive Officer

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Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ William L. Hedgepeth II William L. Hedgepeth, II., President, Chief Executive Officer and Director	April 16, 2007
/s/ Lisa F. Campbell Lisa F. Campbell, Executive Vice President and Chief Financial Officer	April 16, 2007
John Q. Shaw, Jr., Director	April 16, 2007
/s/ J. Gary Ciccone J. Gary Ciccone, Director	April 16, 2007
/s/ John W. McCauley John W. McCauley, Director	April 16, 2007
/s/ Oscar N. Harris Oscar N. Harris, Director	April 16, 2007
/s/ Clarence L. Tart, Jr. Clarence L. Tart, Jr., Director	April 16, 2007
/s/ Gerald W. Hayes, Jr. Gerald W. Hayes, Jr., Director	April 16, 2007
/s/ Thurman C. Godwin, Jr. Thurman C. Godwin, Jr., Director	April 16, 2007
Carlie C. McLamb, Director	April 16, 2007
Anthony Rand, Director	April 16, 2007

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EXHIBIT INDEX

Exhibit Number	Exhibit
3(i)	Articles of Incorporation.	*
3(ii)	Bylaws	*
4	Form of Stock Certificate	*
10(i)	2000 Incentive Stock Option Plan	**
10(ii)	2000 Nonstatutory Stock Option Plan	**
10(iii)	Employment Agreement of John Q. Shaw	*
10(iv)	Employment Agreement of Lisa F. Campbell	*
10(v)	Executive Supplemental Retirement Plan Agreement With John Q. Shaw, Jr.	*
10(vi)	2004 Incentive Stock Option Plan	**
10(vii)	Employment Agreement of William L. Hedgepeth	***
21	Subsidiaries	Filed herewith
23	Consent of Dixon Hughes PLLC	Filed herewith
31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
31(ii)	Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith
32(ii)	Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith
99(i)	Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders	****

* Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.

** Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.

*** Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2006.

**** Filed with the Securities and Exchange Commission pursuant to Rule 14a-6.

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