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 (referred to as the "Bank") and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company's only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank's lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, and Wayne counties in North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts and certificates of deposit. Deposit services are not offered in Pitt County. 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 2012, total assets decreased by $8.7 million to $581.0 million as of March 31, 2012. Earning assets at March 31, 2012 totaled $534.1 million and consisted of $390.2 million in net loans, $1.6 million in loans held for sale, $72.9 million in investment securities, $67.0 million in overnight investments and interest-bearing deposits in other banks and $2.4 million in non-marketable equity securities. Total deposits and shareholders' equity at the end of the first quarter of 2012 were $490.0 million and $51.8 million, respectively.

Since the end of 2011, gross loans have decreased by $17.9 million to $399.8 million as of March 31, 2012 due to continued soft loan demand and efforts to reduce concentration levels of construction and commercial real estate loans. Gross loans consisted of $31.6 million in commercial and industrial loans, $184.5 million in commercial real estate loans, $19.3 million in multi-family residential loans, $8.3 million in consumer loans, $51.5 million in residential real estate, $37.3 million in HELOC, and $67.6 million in construction loans. The deferred loan fees and costs on these loans were ($346,000). During the first quarter of 2012 there was one loan within the commercial real estate loan group totaling approximately $1.6 million that was moved to loans held for sale and reported at fair market value as of March 31, 2012.

At March 31, 2012, the Company also held an investment of $1.2 million in the form of Federal Home Loan Bank ("FHLB") stock and $1.1 million in other non marketable securities, each of which was approximately the same at December 31, 2011.

At March 31, 2012, non-earning assets were $46.9 million, which reflects a decrease of $6.4 million from the $53.3 million as of December 31, 2011. Non-earning assets as of March 31, 2012 included $14.4 million in cash and due from banks, bank premises and equipment of $11.2 million, $1.1 million in bank premises and equipment available for sale, core deposit intangible of $516,000, accrued interest receivable of $1.8 million, foreclosed real estate of $2.4 million, and other assets which consisted of $8.0 million in bank owned life insurance ("BOLI"), $5.2 million in deferred tax assets, $1.5 million in prepaid expenses, and $800,000 in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company's calculation of earning assets.

Total deposits at March 31, 2012 were $490.0 million and consisted of $77.2 million in non-interest-bearing demand deposits, $94.1 million in money market and NOW accounts, $25.5 million in savings accounts, and $293.2 million in time deposits. Total deposits decreased by $11.4 million from $501.4 million as of December 31, 2011. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of March 31, 2012.

As of March 31, 2012, the Company had $23.3 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of $21.3 million of repurchase agreements with local customers and $2.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004.

Total shareholders' equity at March 31, 2012 was $51.8 million, an increase of $2.2 million from $49.6 million as of December 31, 2011. Accumulated other comprehensive income relating to available for sale securities decreased $59,000 for the three months ended March 31, 2012. Other changes in shareholders' equity included increases of $13,000 in stock-based compensation, and a net income of $2.1 million for the three months ending March 31, 2012, and $165,000 from the proceeds of the sale of common stock.

Past Due Loans, Nonperforming Assets, and Asset Quality

At March 31, 2012, the Company had $933,000 in loans that were past due with $852,000 being 30-89 days past due and $81,000 being 90 or more days past due and still accruing. This represented 0.23% of gross loans outstanding on that date. This is an decrease from December 31, 2011 when there were $4.1 million in loans that were 30-89 days past due and $109,000 in loans that were 90 days or more past due and still accruing. This represented 1.02% of gross loans outstanding. Non-accrual loans remained approximately the same at $17.6 million for the periods ended March 31, 2012 and December 31, 2012.

The percentage of non-performing loans (non-accrual loans and restructured loans) to total loans increased 12 basis points from 4.70% at December 31, 2011 to 4.82% at March 31, 2012.

The Company had eleven loans totaling $1.7 million that were considered troubled debt restructurings ("TDRs") that were not included in nonaccrual loans at March 31, 2012.

                                                                For Periods Ended
                                                        March 31,            December 31,
                                                          2012                   2011
                                                                 (In thousands)

Non-accrual loans                                      $    17,551          $       17,623
Restructured loans                                           1,719                   2,013

Total non-performing loans                                  19,270                  19,636

Foreclosed real estate                                       2,391                   3,031
Repossessed assets                                              -                       -

Total non-performing assets                            $    21,661          $       22,667


Accruing loans past due 90 days or more                $        81          $          109
Allowance for loan losses                              $     9,568          $       10,034

Non-performing loans to period end loans                      4.82 %                  4.70 %
Non-performing loans and accruing loans past due
90 days or more to period end loans                           4.84 %                  4.73 %
Allowance for loans losses to period end loans                2.39 %                  2.40 %
Allowance for loan losses to non-performing
loans                                                        49.65 %                 51.10 %
Allowance for loan losses to non-performing
assets                                                       44.17 %                 44.27 %
Allowance for loan losses to non-performing
assets and accruing loans past due 90 days or
more                                                         44.01 %                 44.06 %
Non-performing assets to total assets                         3.73 %                  3.84 %
Non-performing assets and accruing loans past
due 90 days or more to total assets                           3.74 %                  3.86 %

The total non-performing assets (non-accrual loans, restructured loans, and foreclosed real estate), at March 31, 2012 and December 31, 2011 were $21.7 million and $22.7 million. The allowance for loan losses at March 31, 2012 represented 44.17% of non-performing assets compared to 44.27% at December 31, 2011.

Total impaired loans at March 31, 2012 were $24.6 million, this includes $17.6 million in loans that were classified as impaired because they were in non-accrual and $7.0 million in loans that were determined to be impaired for other reasons. Of these loans, $5.6 million required a specific reserve of $1.4 million at March 31, 2012. Total impaired loans at December 31, 2011 were $24.8 million. This includes $17.6 million in loans that were considered to be impaired due to being in non-accrual status and $7.2 million in loans that were deemed to be impaired for other reasons. Of these loans, $9.6 million required a specific reserve of $1.5 million at December 31, 2011.

The allowance for loan losses was $9.6 million at March 31, 2012 or 2.39% of gross loans outstanding. This is a decrease of 1 basis point from the 2.40% of gross loans at December 31, 2011. The allowance for loan losses at March 31, 2012 represented 38.91% of impaired loans compared to 40.40% at December 31, 2011. This decrease in the allowance for the three months of 2012 resulted primarily from net recoveries of $1.7 million. It is management's assessment that the allowance for loan losses as of March 31, 2012 is appropriate in light of the risk inherent within the Company's loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

Besides monitoring nonperforming loans and past due loans, Management also monitors trends in the loan portfolio that may indicate more than normal risk. A discussion of other risk factors follows. Some loans or groups of loans may contain one or more of these individual loan risk factors. Therefore, an accumulation of the amounts or percentages of the individual loan risk factors may not necessarily be an indication of the cumulative risk in the total loan portfolio.

Regulatory Loan to Value

The Company monitors its exposure to loans that exceed the guidelines established by regulators for loan to value ("LTV") ratios.

At March 31, 2012 and December 31, 2011 the Company had $13.2 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At March 31, 2012 and December 31, 2011 the Company had $11.3 million and $12.5 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 40.5% and 43.8% of total risk based capital as of March 31, 2012 and December 31, 2011, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to weaken in terms of both market activity and collateral valuations.

Business Sector Concentrations

Loan concentrations in certain business sectors impacted by lower than normal retail sales, higher unemployment, higher vacancy rates, and weakened real estate market values may also pose additional risk to the Company's capital position. The Company has established an internal commercial real estate guideline of 40% of Risk-Based Capital for any single product line.

The tables below set forth, for the periods indicated, information about the Company's business sector concentrations.

                                            At
                                         March 31,            % of
                                           2012            Risk Based
                                      (In thousands)        Capital
               1-to-4 Family Rental   $        21,086               35 %
               Office Building        $        27,440               45 %

At March 31, 2012 the Company exceeded this guideline in the Office Buildings product type. The Office Buildings were 45% of Risk-Based Capital or $27.4 million. All other commercial real estate groups were under the 40% threshold. The reduced concentration within these categories from December 31, 2011 to March 31, 2012 resulted from the increase in capital combined with reduced loan balances.

                                            At
                                       December  31,          % of
                                           2011            Risk Based
                                      (In thousands)        Capital
               1-to-4 Family Rental   $        26,992               42 %
               Office Building        $        30,265               47 %

At December 31, 2011 the Company had two product type groups which exceeded this guideline; 1-to-4 Family Rental and Office Buildings. The 1-to-4 Family Rental group represented 42% of Risk-Based Capital or $27.0 million and Office Buildings were 47% of Risk-Based Capital or $30.3 million. All other commercial real estate groups were under the 40% threshold.

The table below sets forth construction loans the Company originates for the purpose of acquisition, development, and construction of both residential and commercial properties.

                                   ADC Loans

                              As of March 31, 2012

                             (Dollars in thousands)



                                                       Land and Land
                                   Construction         Development         Total

      Total ADC loans             $       49,741      $        17,801      $ 67,542

      Average Loan Size           $          174      $           307

      Percentage of total loans            12.43 %               4.46 %       16.89 %

      Nonaccrual loans            $          825      $         2,131      $  2,956

At March 31, 2012, total ADC loans represented 16.89% or $67.5 million of the total loan portfolio, of which $3.0 million of the ADC loan portfolio is in nonaccrual status. This represents 4.4% of all ADC loans. Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company's market area.

                                   ADC Loans

                            As of December 31, 2011

                             (Dollars in thousands)



                                                       Land and Land
                                   Construction         Development         Total

      Total ADC loans             $       49,958      $        20,888      $ 70,846

      Average Loan Size           $          174      $           307

      Percentage of total loans            11.96 %               5.00 %       16.96 %

      Nonaccrual loans            $          596      $         3,172      $  3,768

At December 31, 2011, total ADC loans represented 16.96% or $70.8 million of the total loan portfolio, of which $3.8 million of the ADC portfolio is in nonaccrual status. This represents 5.3% of all ADC loans. Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company's market area.

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at March 31, 2012.

                                 ADC
                                Loans         Percent           HELOC       Percent
                                              (Dollars in thousands)

         Harnett County        $  5,088             7.5 %      $  7,584         20.3 %
         Cumberland County       20,727            30.7 %         6,225         16.7 %
         All other locations     41,727            61.8 %        23,519         63.0 %


         Total                 $ 67,542           100.0 %      $ 37,328        100.0 %

Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2011.

                                 ADC
                                Loans         Percent           HELOC       Percent
                                              (Dollars in thousands)

         Harnett County        $  5,637             8.0 %      $  7,432         19.2 %
         Cumberland County       18,424            26.0 %         6,652         17.2 %
         All other locations     46,785            66.0 %        24,618         63.6 %


         Total                 $ 70,846           100.0 %      $ 38,702        100.0 %

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At March 31, 2012, the Company had $102.9 million in loans that had terms permitting interest only payments. This represented 25.7% of the total loan portfolio. At December 31, 2011, the Company had $125.8 million in loans that had terms permitting interest only payments. This represented 30.1% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio require interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company's ten largest loans or lines of credit totaled $48.4 million or 14.2% of total loans at March 31, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company's ten largest customer relationships totaled $69.3 million or 20.4% of total loans at March 31, 2012 compared to $68.3 million or 16.4% of total loans at December 31, 2011. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company's capital position.

Three months ended March 31, 2012 and 2011

General. During the first quarter of 2012, the Company had net income of $2.1 million as compared with net income of $121,000 for the same quarter in 2011. Net income per share for the first quarter of 2012 was $0.31 per share, basic and diluted, compared with net income per share of $0.02 per share, basic and diluted, for the first quarter of 2011. First quarter 2012 results were impacted by a reversal in the

Net Interest Income. Net interest income decreased by $828,000 to $4.8 million for the first quarter of 2012. The Company's total interest income was affected by a reduction in the yield on interest-earning assets combined with a decrease in those assets. Average total interest-earning assets were $531.4 million in the first quarter of 2012 compared with $581.1 million during the same period in 2011 and the yield on those assets decreased 51 basis points from 5.52% to 5.01%. Total interest income reversed on loans transferred to non-accrual status for the three months ended March 31, 2012 and 2011 was comparable at $77,000 and $72,000, respectively, or 1 basis point on average interest-earning assets for both periods mentioned.

The Company's average interest-bearing liabilities decreased by $47.1 million to $457.1 million for the quarter ended March 31, 2012 from $504.2 million for the same period one year earlier and the cost of those funds decreased from 1.80% to 1.54%, or 26 basis points. During the first quarter of 2012, the Company's net interest margin was 3.65% and net interest spread was 3.47%. For the quarter ended March 31, 2011, net interest margin was 3.96% and net interest spread was 3.72%

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. During the three months ended March 31, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $2.7 million. These recoveries were primarily a result of a $2.4 million recovery in commercial and industrial loans. This recovery combined with a reduction in loan balances at March 31, 2012 compared to March 31, 2011 resulted in a $2.1 million reversal in the provision for loan losses for the three months ended March 31, 2012. This reversal represented a decrease of $3.3 million from the $1.2 million provision made in the same period of 2011.

Non-Interest Income. Non-interest income for the quarter ended March 31, 2012 was $626,000, a decrease of $15,000 from the first quarter of 2011. Service charges on deposit accounts decreased $64,000 to $318,000 for the quarter ended March 31, 2012 as compared to $382,000 for the same period in 2011. Mortgage fee income increased $13,000 to $39,000 for the quarter ended March 31, 2012 compared to the same period in 2012. Other non-deposit fees and income increased $36,000 to $269,000 for the quarter ended March 31, 2012 compared to the same period in 2011.

Non-Interest Expenses. Non-interest expenses decreased by $863,000 to $4.2 million for the quarter ended March 31, 2012, from $5.1 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the first quarter of 2011 versus the first quarter of 2012:

• Personnel expenses decreased $430,000 to $2.0 million in the first quarter of 2012 as compared to the same period of 2011 primarily as the result of a decrease in staff size to 117 at March 31, 2012 from 125 at March 31, 2011.

• FDIC insurance expense was $195,000 for the quarter ended March 31, 2012 down from $263,000 for the same quarter in 2011.

• Professional fees decreased $161,000 to $469,000 for the quarter ended March 31, 2012 from to $630,000 for the quarter ended March 31, 2011.

• Foreclosure-related expenses decreased by $168,000 to $131,000 for the quarter ending March 31, 2012 compared to the same period for 2011.

As of March 31, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million, compared to $4.9 million at March 31, 2011. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of March 31, 2012 and March 31, 2011, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

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, . . .