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.

The Company is a commercial bank holding company and has one banking subsidiary, New Century Bank (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 six months of 2009, total assets grew by $23.2 million to $629.0 million as of June 30, 2009. Earning assets at June 30, 2009 totaled $574.0 million and consisted of $459.4 million in net loans, $91.7 million in investment securities, $20.9 million in overnight investments and interest-bearing deposits in other banks and $2.0 million in non-marketable equity securities. Total deposits and shareholders' equity at the end of the second quarter were $527.6 million and $62.9 million, respectively.

Since the end of 2008, gross loans have increased by $7.3 million to $467.9 million as of June 30, 2009. Gross loans consisted of $79.2 million in commercial and industrial loans, $177.4 million in commercial real estate loans, $19.2 million in multi-family residential loans, $18.3 million in consumer loans, $105.5 million in residential real estate, and $68.3 million in construction loans.

At June 30, 2009, the Company had nearly $2.4 million in loans that were 30-89 days past due. This represented 0.51% 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 increased $4.8 million during the first six months of 2009 to $13.4 million as of June 30, 2009, primarily as a result of five loan relationships of $500,000 or more totaling $4.7 million that were reclassified from past due status to non-accrual.

The percentage of non-performing loans (non-accrual loans and loans that were 90 days or more past due but still in accruing status) to total loans increased 100 basis points from 1.85% at December 31, 2008 to 2.85% at June 30, 2009, primarily as a result of the five large relationships totaling $4.7 million, previously mentioned as being reclassified from past due status to non-accrual. The Company had no loans that were considered troubled debt restructured loans.

As of June 30, 2009, there were $13.8 million of loans that were considered to be impaired as a result of $13.4 million being placed in non-accrual status and another $400,000 continuing to accrue interest while delinquent more than 90 days. $5.8 million of these impaired loans required a specific reserve of $2.1 million at June 30, 2009. 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 $8.5 million at June 30, 2009 or 1.82% of gross loans outstanding. This is a decrease of 10 basis points from the 1.92% of gross loans at December 31, 2008. The allowance for loan losses at June 30, 2009 represented 61.73% of impaired loans. The decrease in the allowance resulted from net charge-offs of $2.4 million during the first six months of 2009, partially offset by provisions for loan losses of $2.1 million. 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 June 30, 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 June 30, 2009 and 2008:

                                                     Three Months Ended            Six Months Ended
                                                          June 30,                     June 30,
                                                     2009           2008          2009          2008
                                                                 (Amounts in thousands)
Allowance for loan losses at beginning of period   $   7,792      $  9,142      $  8,860      $  8,314
Provision for loan losses                              1,414           374         2,100         1,247
Charge-offs                                             (711 )      (3,138 )      (2,622 )      (3,328 )
Recoveries                                                24           105           181           250

Allowance for loan losses at end of period         $   8,519      $  6,483      $  8,519      $  6,483

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 June 30, 2009, the Company held no federal funds sold, a decrease of $10.0 million from December 31, 2008. This decrease was the result of the reallocation of all funds previously invested both directly an indirectly with Silverton Bridge Bank into a non-interest bearing, 100% FDIC insured transaction account at Silverton. This transaction account balance, at Silverton Bridge Bank, will be transferred to other correspondent banks in the third quarter of 2009 for compensating balances for services, funds for item clearings, and federal funds sold as principal or agent. The Company also holds an investment of $1.1 million in the form of Federal Home Loan Bank stock, of which dividends were discontinued in the fourth quarter of 2008 as a capital preservation measure. On August 12, 2009, the Board of Directors of the Federal Home Loan Bank of Atlanta reinstated the dividend and approved an annualized dividend rate of 0.84% for the

second quarter of 2009. Interest-earning deposits in other banks were $20.9 million at June 30, 2009, a $7.1 million increase from December 31, 2008. The Company's investment securities at June 30, 2009 were $91.7 million, an increase of $8.8 million from December 31, 2008. The investment portfolio as of June 30, 2009 consisted of $44.3 million in government agency debt securities, $41.0 million in mortgage-backed securities and $6.4 million in municipal securities. The unrealized gain on these securities was $2.4 million.

The Company also has an investment in bank owned life insurance of $7.3 million at June 30, 2009, which increased $131,000 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 June 30, 2009, non-earning assets were $56.0 million, which reflects an increase of $9.7 million from the $45.3 million as of December 31, 2008. Non-earning assets as of June 30, 2009 included $19.2 million in cash and due from banks, bank premises and equipment of $11.7 million, goodwill of $8.7 million, core deposit intangible of $0.9 million, accrued interest receivable of $2.5 million, foreclosed real estate of $2.2 million, and other assets totaling $3.4 million. As indicated previously, goodwill amounted to $8.7 million at June 30, 2009.

Under the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (Statement 142), the Company is required to perform an impairment test each year to determine if goodwill is impaired. Since we adopted Statement 142, the annual impairment tests have been conducted as of June 30 each year, and have not indicated impairment exists.

Statement 142 provides a two-step method to evaluate and calculate impairment. The first step requires estimation of the Company's fair value. If the fair value exceeds the carrying value, no further testing is required. The step one internal process includes both the income and market approaches to value the Company. The income approach consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the Company. The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and discount rate, which is determined utilizing the Company's cost of capital adjusted for a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management. Under the market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions. After completing this first step, if the carrying value exceeds the fair value, we are required to proceed to step two to determine whether an impairment charge must be recorded and, if so, the amount of such charge. Based on the results provided from the first step, there was no indication that further testing of goodwill was required and the Company was not required to proceed to step two. Therefore, based on the results of the first step, the Company's goodwill was determined not to be impaired as of June 30, 2009 and no impairment of goodwill was recorded. However, based on the analysis performed, an unfavorable variance of 10% or more from the Company's forecasted income projections used in the impairment testing may indicate that impairment exists.

Total deposits at June 30, 2009 were $527.6 million and consisted of $65.9 million in non-interest-bearing demand deposits, $78.8 million in money market and NOW accounts, $27.0 million in savings accounts, and $355.9 million in time deposits. Total deposits grew by $22.5 million from $505.1 million as of December 31, 2008. Brokered deposits totaled $3.8 million or 0.72% of quarter-end deposits.

As of June 30, 2009, the Company had $23.5 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 June 30, 2009 was $62.9 million, an increase of $288,000 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 June 30, 2009. There was $23,000 in stock options exercised for the six months ending June 30, 2009. Other changes in shareholders' equity included $94,000 in stock-based compensation, and net income of $155,000.

Three months ended June 30, 2009 and 2008

General. During the second quarter of 2009, the Company had a net loss of $253,000 as compared with net income of $404,000 for the same quarter in 2008. Net loss per share for the quarter was $(.04) per share, basic and diluted, compared with a net income per share of $.06 per share, basic and diluted, for the second quarter of 2008. Second quarter 2009 results were impacted by a higher provision for loan losses of $1.4 million, compared to $374,000 for the same period in 2008. The Company also experienced a decrease in net interest margin of 13 basis points to 3.16% for the period ending June 30, 2009 as compared to the same period in 2008, as a result of the continuation of historically low interest rates maintained by the Federal Reserve policy in addressing the ongoing decline in economic conditions and concerns over the financial strength of the banking industry. Also in the second quarter of 2009, the Bank accrued $286,000 in additional deposit insurance expense as a result of a special industry wide FDIC assessment.

Net Interest Income. Net interest income increased by $22,000 to $4.6 million for the second 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 $577.8 million in the second quarter of 2009 compared with $552.6 million during the same period in 2008 and the yield on those assets decreased 85 basis points from 6.41% to 5.56%. Total interest income reversed on loans transferred to non-accrual status for the three months ended June 30. 2009 and 2008 was $210,000 and $104,000, respectively, or 15 and 8 basis points on average interest- earning assets for the period mentioned.

The Company's average interest-bearing liabilities grew by $33.7 million to $499.8 million for the quarter ended June 30, 2009 from $466.1 million for the same period one year earlier and the cost of those funds decreased from 3.70% to 2.78% or 92 basis points. During the second quarter of 2009, the Company's net interest margin was 3.16% and net interest spread was 2.78%. For the quarter ended June 30, 2008, net interest margin was 3.29% and net interest spread was 2.71%.

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a

borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. The Company recorded a $1.4 million provision for loan losses in the second quarter of 2009, representing an increase of $1.0 million from the $374,000 provision made in the same period of 2008, primarily as a result of five large loan relationships totaling $4.7 million being reclassified from past due status to non-accrual. In the second quarter of 2009, the Company had a lower level of net charge-offs, $687,000 compared to the same period in 2008, when $3.1 million was charged-off. As mentioned previously, most of the loans that were charged off in the second quarter of 2009 were reserved for at December 31, 2008. Part of 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 June 30, 2009 was $792,000, an increase of $43,000 from the second quarter of 2008. Service charges on deposit accounts remained fairly consistent with prior year levels at $479,000. Mortgage fee income declined $33,000 to $86,000 for the quarter ended June 30, 2009 as compared to the same period in 2008, primarily as a result of changes in the mortgage industry lending and credit requirements. Other non deposit fees and income increased $68,000 to $227,000 for the quarter ended June 30, 2009 as compared to the same period in 2008.

Non-Interest Expenses. Non-interest expenses increased by $136,000 to $4.4 million for the quarter ended June 30, 2009, from $4.3 million for the same period in 2008. The following are highlights of the significant changes in non-interest expenses from the second quarter of 2008 to the second quarter of 2009:

• Personnel expenses decreased to $2.2 million for the quarter ended June 30, 2009 as compared to $2.3 million for the same quarter in 2008.

• A special industry wide FDIC assessment was expensed in the second quarter of 2009. As a result, FDIC insurance expense was $507,000 for the quarter ended June 30, 2009 compared to $129,000 for the same quarter in 2008.

• The net losses on sales and write downs on OREO decreased $95,000 to $44,000 in the second quarter of 2009 compared to the same period in 2008.

• The Bank's investment of $51,000 in Silverton Financial Services, Inc. stock was written off in 2009.

• Other non-interest expenses decreased $53,000 to $661,000 for the quarter ended June 30,2009 from $714,000 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 a (49.4%) benefit and 33.9% expense for the quarters ended June 30, 2009 and 2008, respectively. The effective tax rate in the second quarter of 2009 was impacted by the net loss during the period and a $42,000 tax benefit adjustment for prior periods.

General. During the six months ended June 30, 2009, the Company had net income of approximately $155,000 as compared with net income of approximately $314,000 for the same period in 2008. Net income per share for the first six months of 2009 was $.02 per share, basic and diluted, compared with $.05 per share, basic and diluted, for the same period in 2008. The first six months of 2009 results were impacted by a higher provision for loan losses of $2.1 million compared to $1.2 million for the same period in 2008. The Company also experienced a decrease in net interest margin of 3 basis points to 3.21% for the six months ending June 30, 2009 as compared to the same period in 2008, as a result of the continuation of low interest rates maintained the Federal Reserve policy in addressing the ongoing decline in economic conditions and concerns over the financial strength of the banking industry. Also in the first two quarters of 2009, there was $239,000 in write downs and losses on OREO as compared to $139,000 for the same period 2008. For the six months ending on June 30, 2008, there was a $357,000

loss on the repurchase of participation loans. In addition, during the second quarter of 2009, there was a special industry wide FDIC assessment of which $286,000 was the Company's assessment.

Net Interest Income. Net interest income increased by $260,000 to $9.1 million for the first two quarters 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 $574.0 million in the first six months of 2009 compared with $552.7 million during the same period in 2008 and the yield on those assets decreased 96 basis points from 6.64% to 5.68%. Total interest income reversed on loans transferred to non-accrual status for the six months ended June 30. 2009 and 2008 was $244,000 and $382,000, respectively, or 9 and 14 basis points on average interest-earning assets for the period mentioned.

The Company's average interest-bearing liabilities grew by $26.4 million to $494.1 million for the six month period ended June 30, 2009 from $467.7 million for the same period one year earlier and the cost of those funds decreased from 4.03% to 2.89% or 114 basis points. During the first six months of 2009, the Company's net interest margin was 3.21% and net interest spread was 2.79%. For the six month period ended June 30, 2008, net interest margin was 3.21% and net interest spread was 2.62%.

Provision for Loan Losses. The Company recorded a $2.1 million provision for loan losses in the first six months of 2009, representing an increase of $853,000 from the $1.2 million provision made in the same period of 2008. In the first two quarters of 2009, the Company had a lower level of net charge-offs, $2.4 million as compared to the same period in 2008, when $3.1 million was charged-off. As mentioned previously, most of the loans that were charged off in the first two quarters of 2009 were impaired loans with reserves provided for at December 31, 2008. Part of the increase in the provision for loan losses in 2009 was due to additional reserves provided during the first quarter of 2009 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 six months ended June 30, 2009 was $1.6 million, substantially the same compared to the first six months of 2008. Service charges on deposit accounts remained fairly consistent with prior year levels at $914,000. Mortgage fee income declined $57,000 to $233,000 for the two quarters ended June 30, 2009 as compared to the same period in 2008, primarily as a result of changes in the mortgage industry lending and credit requirements, and slowdowns in processing time of mortgage applications as a result of unprecedented record mortgage refinancing activity. Other non deposit fees and income increased $106,000 to $490,000 for the two quarters ended June 30, 2009 as compared to the same period in 2008.

Non-Interest Expenses. Non-interest expenses decreased by $239,000 to $8.5 million for the two quarters ended June 30, 2009, from $8.7 million for the same period in 2008. The following are highlights of the significant changes in non-interest expenses from the first six months of 2009 compared to the first six months 2008:

• Personnel expenses decreased to $4.3 million for the six month period ending on June 30, 2009 compared to $4.4 million for the same period in 2008.

• Professional service expenses decreased from $587,000 in 2008 to $493,000 in 2009, due to a decrease in outsourced services and other consulting fees that were incurred in 2008.

• Deposit insurance increased to $639,000 for the six months ended June 30, 2009 from $224,000 for the same period in 2008, primarily as a result of the special assessment of $286,000, previously mentioned.

• Information systems expense was $702,000 or $75,000 less than in 2008.

• A loss on the repurchase of a loan participation of $357,000 occurred in 2008. No such loss has been incurred in 2009.

• The net losses on sales and write downs on OREO increased $100,000 to $239,000 in the first six months of 2009 compared to the same period in 2008.

• Other non-interest expenses decreased $187,000 to $1.3 million for the two quarters ended June 30, 2009 from $1.5 million 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 2.5% and 33.0% for the two quarters ended June 30, 2009 and 2008, respectively. The effective tax rate for the six months of 2009 was impacted by a $42,000 tax benefit adjustment for prior periods.

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 19.4% of total assets at June 30, 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, as of June 30, 2009, new credit lines with other financial institutions to purchase up to $34.0 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (FHLB), the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $22.2 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 June 30, 2009, total borrowings consisted of securities sold under agreements to repurchase of $23.5 million and junior subordinated debentures of $12.4 million.

Total deposits were $527.6 million at June 30, 2009. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 67.5% of total deposits at June 30, 2009. Time deposits of $100,000 or more represented 31.7% of the Company's total deposits at June 30, 2009. At quarter end, the Company . . .