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

Recent Industry Developments

In response to the challenges the financial services sector, several regulatory and governmental actions have recently been announced including:

• The Emergency Economic Stabilization Act, approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the Securities and Exchange Commission to suspend the application of mark-to-market accounting, and temporarily raised the basic limit on FDIC deposit insurance from $100,000 to $250,000; the legislation contemplates a return to the $100,000 limit on December 31, 2009.

• On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;

• On October 14, 2008, the U.S. Treasury announced the creation of a new program, the TARP Capital Purchase Program that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are not negotiable;

• On October 14, 2008 the FDIC announced the creation of the Temporary Liquidity Guarantee Program (TLPG), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available to financial institutions:

• Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before June 30, 2009 and would provide protection until June 30, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and

• Unlimited deposit insurance for non-interest deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium on the incremental increase in insured deposits, in addition to the insurance premiums for standard insurance;

The Company evaluated the possibility of participation in the TARP Capital Purchase Program, but has determined that participation would not be in the best interests of shareholders. The Company intends to participate in the TLGP's enhanced deposit insurance program and will not opt out of the TLPG guarantee of unsecured debt, although there are no current plans to issue unsecured debt. The Company anticipates an increase in 2009 of FDIC premium expenses due to the increases in the deposit insurance coverage recently enacted.

Although it is likely that further regulatory actions may arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented would have or would be reasonably likely to have a material effect on liquidity, capital ratios, or results of operations.

The Company is a commercial bank holding company that was organized on September 19, 2003 and has one banking subsidiary, New Century Bank, which was acquired as part of the Bank's holding company reorganization (referred to as the "Bank"). 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. 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 the 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 Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank's lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Hoke, Cumberland, Johnston, Robeson, Sampson, and Wayne counties. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

In the fourth quarter of 2007, the Company consolidated its branch locations at 308 North Chestnut Street in Lumberton and 7482 Albert Street in Dublin into its location at 4400 Fayetteville Road in Lumberton. Also, in the fourth quarter of 2007, the Board of Directors of New Century Bancorp, as well as the boards of directors of New Century Bank and New Century Bank South, approved the merger of New Century Bank South into New Century Bank. This transaction was approved by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks and completed on March 28, 2008.

During the first nine months of 2008, total assets grew by $5.4 million to $596.5 million as of September 30, 2008. Earning assets at September 30, 2008 totaled $547.9 million and consisted of $450.6 million in net loans, $74.8 million in investment securities, $20.4 million in overnight investments and interest-bearing deposits in other banks and $2.1 million in non-marketable equity securities. Total deposits and shareholders' equity at the end of the third quarter were $501.8 million and $61.7 million, respectively.

Since the end of 2007, gross loans have increased by $14.9 million to $457.8 million as of September 30, 2008. Gross loans consisted of $88.7 million in commercial and industrial loans, $164.9 million in commercial real estate loans, $15.5 million in multi-family residential loans, $14.7 million in consumer loans, $110.3 million in residential real estate, and $63.7 million in construction loans. During the first quarter of 2008, the Company decided to not to sell the $3.9 million in loans held for sale as of December 31, 2007, and therefore transferred them to the held for investment portfolio and the Company also repurchased $11.2 million in participations that had previously been sold to another bank.

During 2007, prior to the merger of New Century Bank and New Century Bank South, the Company's management identified certain underwriting and credit administration weaknesses that existed at New Century Bank. Since then, management and the Board have taken actions to identify problem loans and

improve internal controls in the lending and credit administration areas. These actions included conducting extensive loan risk rating reviews; addressing problem loans and enhancing the credit administration department; improving loan documentation, policies and procedures; and addressing known violations of rules, regulations and policies.

At September 30, 2008, the Company had nearly $1.5 million in loans that were 30-89 days past due. This represented .34% of gross loans outstanding on that date. This is a decrease from December 31, 2007 when there were $5.8 million in loans that were 30-89 days past due, or 1.31% of gross loans outstanding. The decrease in past dues is due largely to a migration of loans from the 30-89 day past due category into the non-accrual status. Non-accrual loans increased $3.5 million during the first nine months of 2008 to $9.1 million as of September 30, 2008.

The percentage of non-performing loans (nonaccrual loans, restructured loans and loans that were 90 days or more past due but still in accruing status) to total loans excluding loans held for sale increased 87 basis points from 1.13% at December 31, 2007 to 2.00% at September 30, 2008. The Company had no loans that were considered troubled debt restructured loans.

There were $9.1 million of loans that were considered to be impaired due to management's assessment of the loans current asset valuations at September 30, 2008 of which $3.4 million required a specific reserve of $1.7 million. The $12.1 million classified as impaired at December 31, 2007 required a specific reserve $2.3 million. The allowance for loan losses was $7.1 million at September 30, 2008 or 1.56% of gross loans outstanding. This is a decrease of 32 basis points from the 1.88% of gross loans, excluding loans held for sale, at December 31, 2007. The allowance for loan losses at September 30, 2008 represented 78.46% of impaired loans. The decrease in the allowance resulted from net charge-offs of $3.3 million during the first nine months of 2008, partially offset by provisions for loan losses of $2.1 million. Most of the loans charged-off in 2008 were classified as impaired at December 31, 2007 and had been specifically reserved for as part of the allowance for loan loss calculation. It is management's assessment that the allowance for loan losses as of September 30, 2008 is appropriate in light of the risk inherent within the Company's loan portfolio. The following is a roll forward of the Company's allowance for loan losses as of September 30, 2008 and 2007:

                                                      Three Months Ended          Nine Months Ended
                                                         September 30,              September 30,
                                                       2008          2007         2008          2007
                                                                  (Amounts in thousands)
Allowance for loan losses at beginning of period    $    6,483      $ 6,682     $   8,314     $  7,496
Provision for loan losses                                  895        2,474         2,141        5,518
Charge-offs                                               (489 )       (813 )      (3,816 )     (4,796 )
Recoveries                                                 251          293           501          418

Allowance for loan losses at end of period          $    7,140      $ 8,836     $   7,140     $  8,636

Management strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. This is achieved primarily in the form of federal funds sold on an overnight basis and an investment portfolio that includes a laddered maturity schedule. At September 30, 2008, federal funds sold were $6.7 million, a decrease of $19.3 million from the $26.0 million at December 31, 2007, of which $13.0 million was transferred to the FHLB overnight interest bearing account, during the third quarter of 2008. The Company also holds an investment of $1.2 million in the form of Federal Home Loan Bank stock with an annualized yield of 2.89%. Interest-earning deposits in other banks increased from $748,000 at December 31, 2007 to $13.8 million as of September 30, 2008 as $13.0 million was placed in the Bank's FHLB account from federal funds sold. The Company's investment securities at September 30, 2008 were $74.8 million, a decrease of $1.7 million from December 31, 2007. The investment portfolio as of September 30, 2008 consisted of $28.9 million in government agency debt securities, $39.6 million in mortgage-backed securities and $6.7 million in municipal securities. The unrealized loss on these securities was $330,000.

The Company also has an investment in bank owned life insurance of $7.1 million, which increased $202,000 from December 31, 2007 due to an increase 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.

At September 30, 2008, non-earning assets were $42.3 million, which reflects an increase of $1.0 million from the $41.3 million as of December 31, 2007. Non-earning assets as of September 30, 2008 included $12.6 million in cash and due from banks, bank premises and equipment of $12.0 million, goodwill of $8.7 million, core deposit intangible of $1.0 million, accrued interest receivable of $2.6 million, and other assets totaling $6.4 million. As indicated previously, goodwill amounted to $8.7 million at June 30, 2008. Under purchase accounting, goodwill may become impaired under certain conditions. At June 30, 2008, management performed an annual expanded review of the existing goodwill value to test for impairment. Based on this analysis, management concluded that no impairment to goodwill existed at June 30, 2008. A follow-up review of the value of existing goodwill will be performed at December 31, 2008.

Total deposits at September 30, 2008 were $501.8 million and consisted of $68.3 million in non-interest-bearing demand deposits, $68.0 million in money market and NOW accounts, $29.1 million in savings accounts, and $336.4 million in time deposits. Total deposits grew by $3.7 million from $498.1 million as of December 31, 2007. Brokered deposits totaled $1.6 million or .32% of quarter-end deposits.

As of September 30, 2008, the Company had $17.9 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of repurchase agreements with local customers. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004. The proceeds of the junior subordinated debentures have provided capital for the expansion of the Bank.

Total shareholders' equity at September 30, 2008 was $61.7 million, an increase of $480,000 from $61.2 million as of December 31, 2007. Other comprehensive income relating to available for sale securities decreased $417,000 and shareholders' equity increased $489,000 from the exercise of stock options. As a result of the initial adoption of EITF 06-4, the Company recorded a decrease in opening retained earnings of $233,000. Other changes in shareholders' equity included $141,000 in stock-based compensation with a $27,000 tax benefit from stock options that were exercised, and net income of $473,000.

Three months ended September 30, 2008 and 2007

General. During the third quarter of 2008, the Company had a net income of approximately $159,000 as compared with a loss of approximately $274,000 for the same quarter in 2007. Net income per share for the quarter was $.02 per share, basic and diluted, compared with a net loss per share of $(.04) per share, basic and diluted, for the third quarter of 2007. Third quarter 2008 results were impacted by a lower provision for loan losses of $895,000, compared to $2.5 million for the same period in 2007. The decrease in the specific reserves established on impaired loans from $2.3 million at December 31, 2007 to $1.7 million at September 30, 2008 was due to management's continual review and reassessment of the valuations on impaired loans combined with net charge-offs of $3.0 million for the nine months ended September 30, 2008 while at the same time providing adequate loss coverage which also resulted in the percentage decrease in the overall allowance to 1.56% at September 30, 2008 from 1.88% at December 31, 2007. The Company also experienced a decrease in net interest margin resulting from its asset-sensitive position coupled with the recent reductions in interest rates by the Federal Reserve. Additionally, there was a $125,000 refund of SBA premiums during the third quarter of 2008.

Net Interest Income. Net interest income decreased by $675,000 to $4.6 million for the third quarter of 2008. The Company's total interest income was affected by a reduction in the yield on interest-earning assets, partially offset by growth in those assets. Average total interest-earning assets were $551.4 million in the third quarter of 2008 compared with $544.9 million during the same period in 2007 and the yield on those assets decreased 142 basis points from 7.66% to 6.24%.

The Company's average interest-bearing liabilities grew by $7.1 million to $461.4 million for the quarter ended September 30, 2008 from $454.3 million for the same period one year earlier and the cost of those funds decreased from 4.62% to 3.48% or 114 basis points. During the third quarter of 2008, the Company's net interest margin was 3.34% and net interest spread was 2.77%. For the quarter ended September 30, 2007, net interest margin was 3.81% and net interest spread was 3.04%.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The Company recorded an $895,000 provision for loan losses in the third quarter of 2008, representing a decrease of $1.6 million from the $2.5 million provision made in the same period of 2007. In both the third quarter of 2008 and 2007, the Company had a high level of net charge-offs, $238,000 in 2008 as compared to $520,000 for the same period in 2007.

Non-Interest Income. Non-interest income for the quarter ended September 30, 2008 was $620,000, a decrease of $279,000 from the third quarter of 2007. The primary reasons for the decline in non-interest income compared to the third quarter of last year were the $125,000 refund of SBA premiums, received for loans previously sold that went into early default, and lower fees earned from pre-sold mortgages which declined by $42,000 to $111,000. Also, in the third quarter of 2007, the Company had $64,000 in gains on the sale of loans available for sale, as compared to no gains for the same period in 2008.

Non-Interest Expenses. Non-interest expenses decreased by $48,000 to $4.1 million for the quarter ended September 30, 2008, from $4.2 million for the same period in 2007. The following are highlights of the significant changes in non-interest expenses from the third quarter of 2007 to the third quarter of 2008:

• Personnel expenses decreased to $2.2 million for the quarter ended September 30, 2008 as compared to $2.3 million in the same period in 2007.

• Professional service expenses decreased from $363,000 in 2007 to $338,000 in 2008, due to a decrease in outsourced services and other consulting fees that were incurred in 2007 to address the aforementioned loan underwriting matters.

• Other non-interest expenses were impacted by FDIC insurance expense which was $143,000 for the third quarter of 2008 compared to $77,000 for the same period in 2007.

Provision for Income Taxes. The Company's effective tax rate was 36.9% and (34.9%) for the quarters ended September 30, 2008 and 2007, respectively. The effective tax rate in the third quarter of 2007 was impacted by the net loss during the period.

Nine months ended September 30, 2008 and 2007

General. During the first nine months of 2008, the Company realized a net profit of approximately $473,000 as compared with net income of approximately $798,000 for the same period in 2007. Net income per share for first nine months of 2008 was $.07 per share, basic and diluted, compared with net

income per share of $.12 per share, basic and diluted, for the first three quarters of 2007. Nine month 2008 results were impacted by a lower provision for loan losses of $2.1 million, compared to $5.5 million for the same period in 2007. The Company also experienced a decrease in net interest margin resulting from its asset-sensitive position coupled with the recent reductions in interest rates by the Federal Reserve. Also, there was a nonrecurring loss of $357,000 related to the purchase of loans that had previously been participated to another bank. This nonrecurring item is included in non-interest income. Additionally, the Bank recorded losses of $139,000 on write downs of foreclosed real estate and refunded $125,000 in SBA premiums as previously discussed.

Net Interest Income. Net interest income decreased by nearly $2.4 million to $13.5 million for the first three quarters of 2008. The Company's total interest income was affected by a reduction in the yield on interest-earning assets, partially offset by growth in those assets. Average total interest-earning assets were $552.2 million in the nine months of 2008 compared with $536.3 million during the same period in 2007 and the yield on those assets decreased 128 basis points from 7.77% to 6.49%.

The Company's average interest-bearing liabilities grew by $18.9 million to $465.6 million for the three quarters ended September 30, 2008 from $446.7 million for the same period one year earlier and the cost of those funds decreased from 4.59% to 3.87% or 72 basis points. During the first three quarters of 2008, the Company's net interest margin was 3.26% and net interest spread was 2.66%. For the three quarters ended September 30, 2007, net interest margin was 3.95% and net interest spread was 3.19%.

Provision for Loan Losses. The Company recorded a $2.1 million provision for loan losses in the first three quarters of 2008, representing a decrease of $3.4 million from the $5.5 million provision made in the same period of 2007. In both 2008 and 2007, the Company had a high level of net charge-offs, $3.3 million in the first nine months of 2008 as compared to $4.4 million for the same period in 2007.

Non-Interest Income. Non-interest income for the three quarters ended September 30, 2008 was $1.7 million, a decrease of $1.3 million from the same period of 2007. The primary reasons for the decline in non-interest income compared to the same three quarters of last year were the non-recurring loss of $357,000 that the Company recorded related to the purchase of loans that had previously been participated to another bank, loss on foreclosed real estate write downs of $139,000, a decrease of $186,000 in fees from pre-sold mortgages, a reduction in gains on sale of loans held for sale of $438,000 and a refund of $125,000 in SBA premiums, as previously discussed. These decreases were partially offset by increases in deposit service fees and charges of $71,000.

Non-Interest Expenses. Non-interest expenses increased by $193,000 to $12.4 million for the three quarters ended September 30, 2008, from $12.2 million for the same period in 2007. The following are highlights of the significant changes in non-interest expenses from the first three quarters of 2007 to the first three quarters of 2008:

• Personnel expenses declined from $7.0 million to $6.6 million, in part due to the branch consolidation that took place in the fourth quarter of 2007 and lower compensation for executive management.

• Occupancy and equipment expense increased $130,000 for the first nine months of 2008 as compared to the same period in 2007.

• Information systems expense increased $147,000 in the first three quarters of 2008 to $1.2 million as compared to $1.0 million for the same period in 2007. Approximately $37,000 of this increase related to a system conversion.

• Other non-interest expense increased to $2.2 million for the nine months ended September 30, 2008, compared to $1.9 million for the same period in 2007, an increase of $282,000. This increase is primarily due to a $194,000 increase in FDIC insurance and other smaller increases in various other expenses.

Provision for Income Taxes. The Company's effective tax rate was 34.4% and 34.4% for the three quarters ended September 30, 2008 and 2007, respectively.

The Company's liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 18.07% of total assets at September 30, 2008.

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise; the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $12.8 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (FHLB), the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $16.2 million of qualifying loans is pledged to the FHLB to secure borrowings. Another source of short-term borrowings is securities sold under agreements to repurchase. At September 30, 2008, total borrowings consisted of securities sold under agreements to repurchase of $17.9 million and junior subordinated debentures of $12.4 million.

Total deposits were $501.8 million at September 30, 2008. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 67.0% of total deposits at September 30, 2008. Time deposits of $100,000 or more represented 29.7% of the Company's total deposits at September 30, 2008. At quarter end, the . . .