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 facing the financial services sector, several regulatory and governmental actions have recently been announced including:

• On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the "ARRA") into law. The ARRA is a comprehensive economic stimulus package that includes, among other things, additional restrictions on executive compensation applicable to financial institutions participating in the TARP Capital Purchase Program.

The Company opted not to participate in the TARP Capital Purchase Program. The Company is participating in the TLGP's enhanced deposit insurance program and did 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 the second half of 2009 of FDIC premium expenses due to the increases in the deposit insurance coverage recently enacted:

• On December 16, 2008, the FDIC adopted a final rule increasing its risk-based deposit insurance assessment scale uniformly by seven (7) basis points for the first quarter of 2009. The assessment scale for first quarter of 2009 will range from twelve (12) basis points of assessable deposits for the strongest institutions to fifty (50) basis points for the weakest. The FDIC attributes the assessment increase to recent failures of FDIC-insured institutions. The FDIC's action applies only to the first quarter of 2009. The FDIC is considering further changes to the risk-based assessment scale effective April 1, 2009, designed to make the assessment system more risk sensitive and ensure that riskier institutions bear a greater share of the assessments. Proposed adjustments to the scale include: (i) adding a surcharge for certain institutions (institutions in the three riskiest categories for FDIC assessment purposes) that use brokered deposits to fund growth, (ii) providing a possible discount of up to two (2) basis points based on an institution's ratio of long-term unsecured debt, including senior unsecured and subordinated debt, to domestic deposits (for "small institutions" (generally, those with less than $10 billion in assets), the ratio could include a certain amount of Tier 1 capital) and (iii) adding a surcharge based upon an institution's ratio of secured liabilities (including Federal Home Loan Bank advances, securities sold under repurchase agreements, secured Federal Funds purchased and certain other secured borrowings) to domestic deposits, if greater than 15%.

• On February 27, 2009, the Board of Directors of the FDIC voted to amend the restoration plan for the Deposit Insurance Fund. The Board took action by imposing a special assessment on

• On March 5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special assessment from 20 basis points to 10 basis points. The approval of the cutback is contingent on whether Congress clears legislation that would expand the FDIC's line of credit with the Treasury to $100 billion. Legislation to increase the FDIC's borrowing authority on a permanent basis is also expected to advance to Congress, which should aid in reducing the burden on the industry.

Although it is likely that further regulatory actions will 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 and has one banking subsidiary, New Century Bank, (referred to as the "Bank") and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of the Bank. The Company's only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank's lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Hoke, Cumberland, Johnston, Robeson, Sampson, 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.

During the first three months of 2009, total assets grew by $23.0 million to $628.7 million as of March 31, 2009. Earning assets at March 31, 2009 totaled $584.0 million and consisted of $462.0 million in net loans, $90.2 million in investment securities, $29.7 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 first quarter were $523.5 million and $63.1 million, respectively.

Since the end of 2008, gross loans have increased by $9.2 million to $469.8 million as of March 31, 2009. Gross loans consisted of $77.0 million in commercial and industrial loans, $170.8 million in commercial real estate loans, $20.4 million in multi-family residential loans, $19.7 million in consumer loans, $109.0 million in residential real estate, and $72.9 million in construction loans.

At March 31, 2009, the Company had nearly $4.6 million in loans that were 30-89 days past due. This represented 0.98% of gross loans outstanding on that date. This is an increase from December 31, 2008 when there were $1.5 million in loans that were 30-89 days past due, or 0.32% of gross loans

outstanding. The increase in past dues is spread throughout each category of the loan portfolio and is due primarily to the continued weakening of economic conditions both locally and nationally. Non-accrual loans decreased $800,000 during the first three months of 2009 to $7.7 million as of March 31, 2009.

The percentage of non-performing loans (nonaccrual loans and loans that were 90 days or more past due but still in accruing status) to total loans decreased 20 basis points from 1.85% at December 31, 2008 to 1.65% at March 31, 2009. The Company had no loans that were considered troubled debt restructured loans.

There were $7.9 million of loans that were considered to be impaired due to management's assessment of the loans' current collateral valuations at March 31, 2009 of which $2.5 million required a specific reserve of $1.7 million. Of the $9.1 million classified as impaired at December 31, 2008, $4.2 million required a specific reserve of $3.4 million. The allowance for loan losses was $7.8 million at March 31, 2009 or 1.66% of gross loans outstanding. This is a decrease of 26 basis points from the 1.92% of gross loans at December 31, 2008. The allowance for loan losses at March 31, 2009 represented 98.50% of impaired loans. The decrease in the allowance resulted from net charge-offs of $1.8 million during the first three months of 2009, partially offset by provisions for loan losses of $685,000. Most of the loans charged-off in 2009 were classified as impaired at December 31, 2008 and had been specifically reserved for as part of the allowance for loan loss calculation. It is management's assessment that the allowance for loan losses as of March 31, 2009 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 March 31, 2009 and 2008:

                                                           Three Months Ended
                                                                March 31,
                                                            2009            2008
                                                         (Amounts in thousands)
    Allowance for loan losses at beginning of period   $        8,860      $ 8,314
    Provision for loan losses                                     685          873
    Charge-offs                                                (1,910 )       (190 )
    Recoveries                                                    157          145

    Allowance for loan losses at end of period         $        7,792      $ 9,142

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 March 31, 2009, federal funds sold were $15.9 million, an increase of $5.9 million from the $10.0 million at December 31, 2008. The Company also holds an investment of $1.2 million in the form of Federal Home Loan Bank stock with a minimal yield. Interest-earning deposits in other banks remained $13.8 million at March 31, 2009 compared with December 31, 2008. The Company's investment securities at March 31, 2009 were $90.2 million, an increase of $7.2 million from December 31, 2008. The investment portfolio as of March 31, 2009 consisted of $38.9 million in government agency debt securities, $42.4 million in mortgage-backed securities and $6.6 million in municipal securities. The unrealized gain on these securities was $2.3 million.

The Company also has an investment in bank owned life insurance of $7.3 million at March 31, 2009, which increased $65,000 from December 31, 2008 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 March 31, 2009, non-earning assets were $44.7 million, which reflects a decrease of $600,000 from the $45.3 million as of December 31, 2008. Non-earning assets as of March 31, 2009 included $8.7 million in cash and due from banks, bank premises and equipment of $11.6 million, goodwill of $8.7 million, core deposit intangible of $1.0 million, accrued interest receivable of $2.5 million, foreclosed real estate of $2.3 million, and other assets totaling $3.6 million. As indicated previously, goodwill amounted to $8.7 million at March 31, 2009. 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 was performed at December 31, 2008. Again management concluded that no impairment to goodwill existed at December 31, 2008. The Company's next annual testing date is June 30, 2009.

Total deposits at March 31, 2009 were $523.5 million and consisted of $62.4 million in non-interest-bearing demand deposits, $76.3 million in money market and NOW accounts, $26.6 million in savings accounts, and $358.2 million in time deposits. Total deposits grew by $18.4 million from $505.1 million as of December 31, 2008. Brokered deposits totaled $3.3 million or 0.64% of quarter-end deposits.

As of March 31, 2009, the Company had $27.4 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 March 31, 2009 was $63.1 million, an increase of $400,000 from $62.7 million as of December 31, 2008. Other comprehensive income relating to available for sale securities remained approximately the same, at $1.4 million for the quarter ended March 31, 2009. There were no stock options exercised for the quarter ending March 31, 2009. Other changes in shareholders' equity included $47,000 in stock-based compensation, and net income of $408,000.

Three months ended March 31, 2009 and 2008

General. During the first quarter of 2009, the Company had a net income of approximately $408,000 as compared with a loss of approximately $90,000 for the same quarter in 2008. Net income per share for the quarter was $.06 per share, basic and diluted, compared with a net loss per share of $(.01) per share, basic and diluted, for the first quarter of 2008. First quarter 2009 results were impacted by a lower provision for loan losses of $685,000, compared to $873,000 for the same period in 2008. The Company also experienced an increase in net interest margin of 11 basis points to 3.26% for the period ending March 31, 2009 as compared to the same period in 2008, as a result of the continuation of reductions in interest rates by the Federal Reserve due to the ongoing decline in economic conditions and concerns over the financial strength of the banking industry. Also in the first quarter of 2009, there was a $195,000 write down in OREO for the quarter ended March 31, 2009 as compared to no write down in the same quarter in 2008. For the quarter ending on March 31, 2008, there was a $357,000 loss on the repurchase of participation loans.

Net Interest Income. Net interest income increased by $237,000 to $4.6 million for the first quarter of 2009. 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 $570.2 million in the first quarter of 2009 compared with $552.8 million during the same period in 2008 and the yield on those assets decreased 96 basis points from 6.83% to 5.87%.

The Company's average interest-bearing liabilities grew by $18.9 million to $488.3 million for the quarter ended March 31, 2009 from $469.4 million for the same period one year earlier and the cost of those funds decreased from 4.32% to 3.05% or 127 basis points. During the first quarter of 2009, the Company's net interest margin was 3.26% and net interest spread was 2.82%. For the quarter ended March 31, 2008, net interest margin was 3.15% and net interest spread was 2.52%.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The Company recorded a $685,000 provision for loan losses in the first quarter of 2009, representing a decrease of $188,000 from the $873,000 provision made in the same period of 2008. In the first quarter of 2009, the Company had a higher level of net charge-offs, $1.7 million as compared to the same period in 2008, when $43,000 was charged-off. As mentioned previously, most of the loans that were charged off in the first quarter of 2009 were reserved for at December 31, 2008. Part of the increase in the provision for loan losses in 2009 was due to additional reserves for homogenous pools of loans or FAS 5 reserves that management felt were prudent in light of prevailing economic conditions.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2009 was $650,000, an increase of $163,000 from the first quarter of 2008. Although the non-interest income category for 2009 included a $195,000 write down in the value of OREO, it was higher than in the first quarter of 2008, when the Company had incurred a loss of $357,000 on the repurchase of a loan participation. All other categories of non-interest income remained fairly consistent with prior year levels.

Non-Interest Expenses. Non-interest expenses decreased by $200,000 to $3.9 million for the quarter ended March 31, 2009, from $4.1 million for the same period in 2008. The following are highlights of the significant changes in non-interest expenses from the first quarter of 2009 to the first quarter of 2008:

• Personnel expenses remained approximately the same at $2.2 million for both of the quarters ended March 31, 2009 and 2008.

• Professional service expenses decreased from $287,000 in 2008 to $209,000 in 2009, due to a decrease in outsourced services and other consulting fees that were incurred in 2008.

• Other non-interest expenses were impacted by a decrease of $97,000 to $763,000 for the quarter ended March 31,2009 from $860,000 for the same period in 2008, primarily as a result of general cost containment throughout the Company during this period of economic downturn.

Provision for Income Taxes. The Company's effective tax rate was 38.1% and (36.6%) for the quarters ended March 31, 2009 and 2008, respectively. The effective tax rate in the first quarter of 2008 was impacted by the net loss during the period.

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 20.5% of total assets at March 31, 2009.

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 $6.8 million in federal funds. It is currently anticipated that this line will be suspended as a result of the Company's principal correspondent bank, Silverton Bank having been closed by the Office of the Comptroller of the Currency and placed into FDIC receivership on May 1, 2009. The Company is currently evaluating other correspondent banks in order to establish alternative sources of liquidity. 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 $25.8 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 March 31, 2009, total borrowings consisted of securities sold under agreements to repurchase of $27.4 million and junior subordinated debentures of $12.4 million.

Total deposits were $523.5 million at March 31, 2009. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 68.4% of total deposits at March 31, 2009. Time deposits of $100,000 or more represented 32.0% of the Company's total deposits at March 31, 2009. At quarter end, the Company had $3.3 million in brokered time deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that current sources of funds provide adequate liquidity for our current cash flow needs.

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders' equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier 1 capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The Company's equity to assets ratio was 10.03% at March 31, 2009. As the following table indicates, at March 31, 2009, the Company and its bank subsidiary exceeded regulatory capital requirements.

                                                  At March 31, 2009
                                                Actual       Minimum
              New Century Bancorp, Inc.         Ratio      Requirement
              Total risk-based capital ratio     14.23 %          8.00 %
              Tier 1 risk-based capital ratio    12.98 %          4.00 %
              Leverage ratio                     10.56 %          4.00 %




                                                   At March 31, 2009
                                                                       Well-
                                         Actual       Minimum       Capitalized
       New Century Bank                  Ratio      Requirement     Requirement
       Total risk-based capital ratio     13.91 %          8.00 %         10.00 %
       Tier 1 risk-based capital ratio    12.66 %          4.00 %          6.00 %
       Leverage ratio                     10.31 %          4.00 %          5.00 %

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the trust preferred securities qualify as Tier 1 capital as of March 31, 2009. Management expects that the Company and the Bank will remain "well-capitalized" for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, or otherwise.

Effective December 27, 2007, the Board of Directors of the Bank entered into a Memorandum of Understanding with the FDIC and the North Carolina Commissioner of Banks. The Memorandum of Understanding represents an agreement between the Board of Directors of the Bank, the Regional Director of the FDIC's Atlanta Regional Office and the North Carolina Commissioner of Banks and requires that the Bank's management take certain actions to improve the Bank's lending function. Specifically, the Memorandum of Understanding required the Bank to address problem loans by charging off certain classified assets within 30 days and also required that the Bank accomplish the following within a 90 day time frame; formulate a proposal for the reduction or improvement of any classified lines of credit, conduct a reevaluation of the performance and abilities of the bank's loan officers and credit administration staff; improve loan documentation, policies and procedures; and correct known violations of rules, regulations and policies. The Memorandum of Understanding also required management to file various reports with the FDIC and the North Carolina Commissioner of Banks within 90 days, including a budget, earnings forecast and capital plan, with quarterly progress reports thereafter.

To date, the Bank has filed all reports required by the Memorandum of Understanding and has taken all actions required to be taken, with the exception of (i) two credits that have not been charged off due to improved collateral positions and/or credit risk profiles; and (ii) the correction of certain violations, which the Bank is actively addressing.

Specific additional actions taken have included the hiring of a new Chief Credit Officer, who started in 2008, with substantial experience; evaluation and . . .