10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

OR

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

For the transition period from              to             .

COMMISSION FILE NUMBER 000-50400

NEW CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	20-0218264
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
700 W. Cumberland Street, Dunn, North Carolina	28334
(Address of Principal Executive Offices)	(Zip Code)

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

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

NONE

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

COMMON STOCK, PAR VALUE $1.00 PER SHARE

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

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

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $ 71,813,475

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date. 4,242,986

Documents Incorporated by Reference.

Proxy Statement for Registrant’s 2006 Annual Meeting of Shareholders.

FORM 10-K CROSS-REFERENCE INDEX

		FORM 10-K	PROXY STATEMENT	ANNUAL REPORT
PART I
Item 1 –	Business	X
Item1A–	Risk Factors	X
Item 1B –	Unresolved Staff Comments	X
Item 2 –	Properties	X
Item 3 –	Legal Proceedings	X
Item 4 –	Submission of Matters to a Vote of Security Holders	X
PART II
Item 5 –	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	X
Item 6 –	Selected Financial Data
Item 7 –	Management’s Discussion and Analysis of Financial Condition and Results of Operation		X
Item 7A –	Quantitative and Qualitative Disclosures About Market Risk	X
Item 8 –	Financial Statements and Supplementary Data		X
Item 9 –	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	X
Item 9A –	Controls and Procedures	X
Item 9B –	Other Information	X
PART III
Item 10 –	Directors and Executive Officers of the Registrant	X	X
Item 11 –	Executive Compensation		X
Item 12 –	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	X	X
Item 13 –	Certain Relationships and Related Transactions		X
Item 14 –	Principal Accounting Fees and Services		X
PART IV
Item 15 –	Exhibits, Financial Statement Schedules	X

- 2 -

PART I

ITEM 1 –BUSINESS

General

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

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

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

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

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

Primary Market Area

The Registrant’s market area consists of Harnett, Cumberland, Johnston, Sampson and Wayne Counties, North Carolina. The Registrant’s market area has a population of over 600,000 with an average household income of over $50,000.

The June 2005 total deposits in the Registrant’s market area exceeded $5.6 billion. The leading economic components of Harnett and Johnston Counties are services, manufacturing, and retail trade. In contrast, Cumberland County’s leading sector is federal military government, followed by services and retail trade. In Sampson County, leading employers include manufacturing, services, and state and local government. Wayne County’s leading sectors are federal military government, services and retail trade and agriculture. The largest employers in the Registrant’s market area include Kelly-Springfield Tires, Black & Decker, Bayer, Morganite, Inc. and the United States military.

Competition

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

- 3 -

markets and higher lending limits than Registrant and are also able to provide more services and make greater use of media advertising. As of June 30, 2005, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 172 offices of 22 different commercial and savings institutions (25 in Harnett County, 36 in Johnston County, 64 in Cumberland County, 15 in Sampson County, and 32 in Wayne County).

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

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

Employees

As of December 31, 2005, the Registrant employed 92 full time equivalent employees. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes relations with its employees to be good.

REGULATION

Regulation of the Banks

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

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

Deposit Insurance. As member institutions of the FDIC, the Banks’ deposits are insured up to a maximum of $100,000 per depositor through the Bank Insurance Fund, administered by the FDIC, and each member institution is required to pay semi-annual deposit insurance premium assessments to the FDIC. The Bank Insurance Fund assessment rates have a range of 0 cents to 27 cents for every $100 in assessable deposits. Banks with no premium are subject to an annual statutory minimum assessment.

- 4 -

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

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2005, the Registrant was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 12.93% and 14.54%, respectively.

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

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

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

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

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

- 5 -

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

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

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

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

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

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

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

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

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

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

- 6 -

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

Regulation of the Registrant

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

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

The merger or consolidation of the Registrant with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.

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

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

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

• making or servicing loans;

• performing certain data processing services;

• providing discount brokerage services;

- 7 -

• acting as fiduciary, investment or financial advisor;

• leasing personal or real property;

• making investments in corporations or projects designed primarily to promote community welfare; and

• acquiring a savings and loan association.

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

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

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

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

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

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

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

- 8 -

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

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

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

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

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

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

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

In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk

- 9 -

model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

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

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

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.

Interstate Branching

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

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

Future Legislation

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

- 10 -

Item 1A – RISK FACTORS

RISK FACTORS

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

Risks Associated with our Merger Agreement with Progressive State Bank

We can give no assurances as to when, or if, our acquisition of Progressive State Bank will be consummated.

We are party to an Agreement and Plan of Merger with Progressive State Bank, Lumberton, North Carolina dated February 2, 2006. Our acquisition of Progressive State Bank is subject to regulatory approval of the North Carolina Banking Commission, the FDIC and also subject to the approval by the shareholders Progressive State Bank. Accordingly, we are unable to predict when, or if, the acquisition will be consummated. If we cannot effect the acquisition of Progressive State Bank and its immediate merger with and into our subsidiary, New Century Bank South, we may be forced to alter our long-range business plans at significant expense.

The merger may have an adverse effect on operating results

Our proposed acquisition of Progressive State Bank and the subsequent merger of Progressive State Bank with and into New Century Bank South involves the combination of two companies that have previously operated independently. A successful combination of the companies’ operations will depend primarily on retaining and expanding the customer base of Progressive State Bank and on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. Difficulties may be encountered in combining the operations of Progressive State Bank and the registrant, including:

• the loss of key employees and customers;

• disruptions to our businesses;

• possible inconsistencies in standards, control procedures and policies;

• unexpected problems with costs, operations, personnel, technology or credit;

• the assimilation of new operations, sites and personnel possibly diverting resources from regular banking operations;

• difficulties assimilating acquired operations and personnel;

• potential disruptions of our ongoing business;

• the diversion of resources and management time;

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

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

- 11 -

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

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

Further, we may be unable to realize fully any of the potential cost savings we expect to achieve in the merger. Any cost savings that are realized may be offset by losses in revenues, increases in expenses or other changes to earnings or required accounting treatments or valuations of the registrant’s assets and liabilities.

Risks Associated with our Continued Operations

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

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

A decrease in interest rates could adversely impact our profitability.

Our results of operations may be significantly affected by the monetary and fiscal policies of the federal government and the regulatory policies of government authorities. A significant component of our earnings is our net interest income. Net interest income is the difference between income from interest-earning assets, such as loans, and the expense of interest-bearing liabilities, such as deposits and our borrowings. Like many financial institutions, we are subject to the risk of fluctuations in interest rates. A significant decrease in interest rates could have a material adverse effect on our net income as we would expect the yields on our earning assets to decrease more quickly than the cost of our interest-bearing deposits and borrowings.

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

Our success depends to a large degree on the general economic conditions in our market areas. The local economic conditions in these areas have a significant impact on the amount of loans that we make to our borrowers, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and performance.

- 12 -

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

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

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

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

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

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

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

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

There is a limited market for our common stock

Our common stock is traded on the Nasdaq Over-the-Counter Bulletin Board and the volume of trading in our common stock has historically been low. Therefore, there can be no assurance that an investor in our common stock who wishes later to sell those shares would be able to do so immediately or at an acceptable price.

Our securities are not FDIC insured.

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

- 13 -

ITEM 1B – UNRESOLVED STAFF COMMENTS

The Registrant is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act. The Registrant received no written comments from the Commission staff regarding its periodic or current reports under the Exchange Act during its fiscal year ended December 31, 2005.

ITEM 2 - PROPERTIES

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

Office Location	Year Opened	Approximate Square Footage	Owned or Leased
Main Office 700 West Cumberland Street Dunn, NC 28110	2001	12,600	Owned
Clinton Office 506 South East Boulevard Clinton, NC 28328	2002	2,200	Leased
Sunset Avenue Office 1519 Sunset Avenue Clinton, NC 28328	2005	2,200	Leased
Goldsboro Office 431 N. Spence Avenue Goldsboro, NC 27534	2005	6,300	Owned
New Century Bank South 2818 Raeford Road Fayetteville, NC 28303	2004	10,000	Owned

ITEM 3 - LEGAL PROCEEDINGS

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

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

Not applicable.

- 14 -

PART II

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

Out common stock is quoted on the NASDAQ Over-the-Counter Bulletin Board under the trading symbol “NCBC.” Howe Barnes Investments, Inc., Chicago, Illinois and Ryan Beck & Company, Florham Park, New Jersey, provide bid and ask quotes for our common stock. At December 31, 2005, there were 4,241,040 shares of common stock outstanding, which were held by 1,468 shareholders.

	Sales Prices(1)
	High		Low
2005
First Quarter	$	16.00	$	12.67
Second Quarter		16.13		13.33
Third Quarter		25.57		14.67
Fourth Quarter		28.50		24.75
2004
First Quarter	$	12.70	$	9.62
Second Quarter		20.17		12.07
Third Quarter		16.67		14.50
Fourth Quarter		17.27		13.33

(1) Adjusted for 3-for-2 stock split effecting in the form of a 50% stock dividend in July 2005 and a 11-for-10 stock split effected in the forms of a 10% stock dividend in June 2004.

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

- 15 -

ITEM 6 – SELECTED FINANCIAL DATA

	At or for the year ended December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands, except per share data)
Operating Data:
Total interest income	$	24,679		$	15,408		$	9,360		$	7,125		$	5,193
Total interest expense		10,089			5,187			3,217			2,760			2,375
Net interest income		14,590			10,221			6,143			4,365			2,818
Provision for loan losses		2,172			1,684			1,042			872			564
Net interest income after provision for loan losses		12,418			8,537			5,101			3,493			2,254
Total non-interest income		2,496			1,692			1,134			731			502
Total non-interest expense		9,129			6,962			4,833			2,870			2,027
Income before income taxes		5,785			3,267			1,402			1,354			729
Provision for income taxes		2,164			1,173			496			496			136
Net income	$	3,621		$	2,094		$	906		$	858		$	593
Per Common Share Data: (1)
Earnings per share - basic	$	.86		$	.50		$	.26		$	.31		$	.29
Earnings per share - diluted		.79			.48			.25			.30			.29
Market Price
High		28.50			20.17			11.02			11.02			6.39
Low		12.67			9.62			8.27			6.01			5.45
Close		24.75			13.67			9.83			9.37			6.07
Book value		7.77			6.98			9.75			8.92			8.25
Selected Year-End Balance Sheet Data:
Loans	$	326,852		$	262,750		$	151,930		$	100,008		$	63,563
Allowance for loan losses		5,298			3,598			2,355			1,546			984
Other interest-earning assets		90,878			51,051			31,059			19,917			16,595
Total assets		436,367			328,311			191,813			126,391			84,375
Deposits		367,003			270,230			151,971			105,482			68,874
Borrowings		34,115			27,057			11,714			2,131			2,009
Shareholders’ equity		32,974			29,444			27,266			17,343			12,671
Selected Average Balances:
Total assets	$	381,494		$	277,432		$	159,360		$	109,956		$	67,126
Loans		297,045			219,257			119,724			81,058			46,289
Total interest-earning assets		362,669			261,217			150,227			104,551			63,287
Deposits		317,648			231,510			131,852			91,459			54,305
Total interest-bearing liabilities		303,889			214,109			118,726			80,338			47,192
Shareholders’ equity		31,583			30,483			21,808			15,868			10,853
Selected Performance Ratios:
Return on average assets		.95	%		.75	%		.57	%		.78	%		.88	%
Return on average equity		11.47	%		6.87	%		4.15	%		5.41	%		5.46	%
Net interest margin		4.02	%		3.91	%		4.09	%		4.17	%		4.45	%
Net interest spread		3.48	%		3.48	%		3.52	%		3.38	%		3.17	%
Non-interest expense to average assets		2.39	%		2.51	%		3.04	%		2.61	%		3.03	%
Asset Quality Ratios:
Nonperforming loans to period-end loans		.47	%		.33	%		.36	%		.27	%		.04	%
Allowance for loan losses to period-end loans		1.62	%		1.37	%		1.55	%		1.55	%		1.55	%
Net loan charge-offs to average loans		.16	%		.20	%		.19	%		.38	%		.16	%
Capital Ratios:
Total risk-based capital		14.54	%		16.76	%		18.61	%		18.24	%		20.56	%
Tier 1 risk-based capital		12.93	%		15.51	%		17.36	%		16.99	%		19.30	%
Leverage ratio		10.56	%		12.52	%		14.64	%		13.99	%		15.49	%
Equity to assets ratio		7.56	%		8.97	%		14.21	%		13.72	%		15.02	%
Other Data:
Number of banking offices		5			4			3			2			1
Number of full time equivalent employees		92			72			55			33			22

⁽¹⁾ Adjusted for the effects of the 3-for-2 stock split in July 2005 and the 11-for-10 stock splits in June 2004, September 2003 and May 2002.

- 16 -

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

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

DESCRIPTION OF BUSINESS

New Century Bancorp, Inc. is a bank holding company whose principal business activity is the ownership of New Century Bank and New Century Bank South (collectively referred to as the “Banks”). New Century Bank opened for business in May 2000 as a North Carolina-chartered banking corporation. Effective September 19, 2003, New Century Bank became a wholly owned subsidiary of the Company. The shareholders of New Century Bank received one share of $1.00 par value common stock of New Century Bancorp, Inc. for each share of $5.00 par value common stock of New Century Bank owned in a share exchange that accomplished the holding company reorganization. All outstanding options to purchase common shares of New Century Bank were converted into options to purchase common shares of New Century Bancorp. In June 2003, New Century Bank opened an office in Fayetteville, which operated as a branch of New Century Bank until January 2, 2004, when the Fayetteville office was sold to New Century Bank South (formerly New Century Bank of Fayetteville), a de novo North Carolina-chartered banking corporation.

The Banks’ lending activities are oriented to the consumer/retail customer as well as to the small-to-medium sized businesses located in Harnett, Cumberland, Johnston, Sampson, and Wayne counties. The Banks offer the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Banks include small business and personal checking, savings accounts and certificates of deposit. The Banks concentrate on customer relationships in building their customer deposit base and compete aggressively in the area of transaction accounts.

- 17 -

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

YEARS ENDED DECEMBER 31, 2005 AND 2004

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In thousands, except share and per share data)
2005
Interest Income	$	5,129	$	5,875	$	6,520	$	7,155
Interest Expense		1,901		2,419		2,740		3,028
Net Interest Income		3,228		3,456		3,780		4,127
Provision for loan losses		500		433		770		469
Net interest income after provision for loan losses		2,728		3,023		3,010		3,658
Non interest income		556		610		579		751
Non interest expense		2,062		2,141		2,368		2,558
Income before taxes		1,222		1,492		1,221		1,851
Income taxes		415		500		409		841
Net income	$	807	$	992	$	812	$	1,010
Net income per share
Basic	$	0.19	$	0.23	$	0.19	$	0.24
Diluted		0.18		0.22		0.18		0.22
Average shares outstanding
Basic		4,217,216		4,219,102		4,224,237		4,234,469
Diluted		4,471,716		4,480,687		4,549,438		4,589,995
2004
Interest Income	$	2,898	$	3,569	$	4,186	$	4,713
Interest Expense		914		1,132		1,462		1,666
Net Interest Income		1,984		2,437		2,724		3,047
Provision for loan losses		603		477		310		295
Net interest income after provision for loan losses		1,381		1,960		2,414		2,752
Non interest income		348		389		410		586
Non interest expense		1,607		1,673		1,785		1,909
Income before taxes		122		676		1,039		1,429
Income taxes		38		241		378		516
Net income	$	84	$	435	$	661	$	913
Net income per share
Basic	$	0.02	$	0.10	$	0.16	$	0.22
Diluted		0.02		0.10		0.15		0.20
Average shares outstanding
Basic		4,193,001		4,193,001		4,193,732		4,210,334
Diluted		4,347,596		4,347,592		4,450,050		4,480,434

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

- 18 -

FINANCIAL CONDITION

DECEMBER 31, 2005 AND 2004

Total assets at December 31, 2005 were $436.4 million, which represents an increase of $108.1 million or 33% from December 31, 2004. Cash, interest-bearing deposits and federal funds sold increased $24.2 million to $56.5 million at December 31, 2005. Investment securities increased to $41.6 million from $24.9 million at December 31, 2004.

Loans receivable increased by $64.1 million to $326.9 million as of December 31, 2005. The growth in loans is due to the maturation and continued growth in our markets. The loan portfolio at December 31, 2005 was comprised of $239.0 million in real estate loans, $72.4 million in commercial and industrial loans, $15.7 million in loans to individuals and $285,000 in deferred loan fees. At December 31, 2005, there were 50 loans with an aggregate principal balance of approximately $2,900,000 that were more than 30 days past due. Fourteen of these loans with a combined balance of approximately $823,000 were in non-accrual status. The allowance for loan losses of $5.3 million represented 1.62% of gross loans outstanding as of December 31, 2005.

The Company’s investment portfolio at December 31, 2005, which consisted of U.S. government agency securities, mortgage-backed securities and bank-qualified municipal securities, aggregated $41.6 million with a weighted average yield of 3.94%. The Company also holds an investment of $1.1 million in the form of Federal Home Loan Bank Stock with a dividend yield of 3.23%. The investment portfolio increased $16.8 million in 2005, the result of $25.5 million in purchases, $8.3 million of maturities and prepayments and a decrease of $515,000 in the market value of securities held available for sale. There were no sales of investment securities during 2005.

At December 31, 2005, the company held $4.2 million in bank owned life insurance on key members of management. Non-earning assets were $19.9 million, an increase of $3.7 million over December 31, 2004. Non-earning assets included $8.5 million in cash and due from banks, $2.1 million in interest receivable, $443,000 in foreclosed real estate, $6.0 million in bank premises and equipment, and $2.9 million in other assets.

Total deposits at December 31, 2005 were $367.0 million, an increase of $96.8 million from $270.2 million at December 31, 2004. In general, the growth in our deposits is attributable to growth in our markets and was supplemented by large deposits associated with the stock offerings of three unaffiliated proposed banks, all of which are due to open in 2006. At December 31, 2005, deposits were comprised of 14% demand deposits, 22% savings, NOW and money market accounts, and 64% time deposits. Time deposits of $100,000 or more totaled $95.1 million or 25.9% of total deposits as of December 31, 2005. Brokered deposits totaled $8.5 million or 2.3% of year-end deposits.

The Company’s short term debt includes securities sold under agreements to repurchase $9.2 million at December, 31, 2005. These were collateralized by U.S. government agency and municipal securities. Also included in short term debt is a $2.5 million advance from the FHLB with an interest rate of 3.95%. This advance was taken in June 2005 and matures in June 2006. FHLB advances are collateralized by a lien on 1-4 family first mortgage loans.

The Company’s long term debt, which is based on contractual maturity, includes $10.0 million in advances from the FHLB. These advances include a $4.0 million advance with an interest rate of 2.65%, a $3.5 million advance with an interest rate of 3.58%, and a $2.5 million advance with an interest rate of 4.03%. These advances mature in February, July, and December 2006, respectively. Also included in long term debt is $12.4 million of junior subordinated debentures. In 2004, these debentures were issued to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million in trust preferred securities. Under the current applicable regulatory guidelines, $10.8 million of these debentures qualify as Tier I capital.

- 19 -

Shareholders’ equity increased $3.5 million during 2005. The increase was due to net income of $3.6 million and $237,000 from the issuance of common stock from the exercise of stock options, partially offset by a decrease of $328,000, net of tax, in the fair value of the Company’s investment securities available for sale.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

Overview. During 2005, New Century Bancorp generated net income of $3.6 million compared with net income of $2.1 million for the year ended December 31, 2004. Net income per share in 2005 was $.86 basic and $.79 diluted compared with net income per share of $.50 basic and $.48 diluted in 2004. This increase is primarily due to the growth in interest-earning assets during 2005 and the resulting increase in net interest income, and also to the strong growth in non-interest income. These increases were partially offset by increases in the provision for loan losses and non-interest expense.

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

Provision for Loan Losses. The Company recorded a provision of approximately $2.2 million for loan losses in 2005, representing an increase of $488,000 over the $1.7 million provision made in 2004. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In both 2005 and 2004, the provision for loan losses was made principally in response to growth in loans, as total loans outstanding increased by $64.1 million in 2005 and by $110.8 million in 2004. In addition, net loan charge-offs increased to $472,000 in 2005 as compared to $441,000 in 2004. At December 31, the allowance for loan losses was $5.3 million for 2005 and $3.6 million for 2004, representing 1.62% and 1.37%, respectively, of loans outstanding. This increase in the percentage of the allowance for loan losses is in response to the maturation and seasoning of the Company’s loan portfolio and lending processes. There were $823,000 and $190,000 of nonaccrual loans at December 31, 2005 and 2004, respectively.

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

Non-Interest Expense. Non-interest expense increased by $2.1 million to $9.1 million for the year ended December 31, 2005, from $7.0 million for the year ended December 31, 2004. Despite this increase, the

- 20 -

Company’s ratio of non-interest expense to average total assets decreased from 2.51% in 2004 to 2.39% in 2005. Salaries and employee benefits increased to $5.5 million from $4.1 million in 2004 due to the increase of Company personnel from 72 to 92 full time equivalent employees. The expansion into a new operations center in downtown Dunn, a new bank building in Goldsboro and another office in Clinton has resulted in an increase of $177,000 in occupancy and equipment expenses to a total of $717,000 for the year ended December 31, 2005. Other non-interest expense increased to $2.9 million in 2005 compared with $2.4 for the year ended December 31, 2004. The following are included in other non-interest expenses:

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

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

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

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

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

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

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

Overview. During 2004, New Century Bancorp generated net income of $2.1 million compared with net income of $906,000 for the year ended December 31, 2003. Net income per share in 2004 was $.50 basic and $.48 diluted compared with net income per share of $.26 basic and $.25 diluted in 2003. This increase is primarily due to the growth in interest-earning assets during 2004 and the resulting increase in net interest income, and also to the strong growth in non-interest income. These increases were partially offset by increases in the provision for loan losses and non-interest expense.

Net Interest Income. Net interest income increased $4.1 million to $10.2 million for the year ended December 31, 2004. The Company’s total interest income benefited from strong growth in interest-earning assets, which was partially offset by lower interest-earning asset yields. Average total interest-earning assets were $261.2 million in 2004 compared with $150.2 million during 2003, while the yield on those assets dropped 34 basis points from 6.23% to 5.89%. The Company’s average interest-bearing liabilities grew by $95.4 million to $214.1 million in 2004, while the cost of those funds dropped from 2.71% to 2.42%, or 29 basis points. For the year ended December 31, 2004, our net interest margin was 3.91% and our net interest spread was 3.48%. For the year ended December 31, 2003, net interest margin was 4.09% and net interest spread was 3.52%. The compression of margin and spread since 2003 is the result of the repricing of interest sensitive assets and the growth in the volume of interest-bearing liabilities during 2004.

Provision for Loan Losses. The Company recorded a provision of approximately $1.7 million for loan losses in 2004, representing an increase of $642,000 over the $1.0 million provision made in 2003. 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.

- 21 -

In both 2004 and 2003, the provision for loan losses was made principally in response to growth in loans, as total loans outstanding increased by $110.8 million in 2004 and by $51.9 million in 2003. In addition, net loan charge-offs increased to $441,000 in 2004 as compared to $233,000 in 2003. At December 31, the allowance for loan losses was $3.6 million for 2004 and $2.4 million for 2003, representing 1.37% and 1.55%, respectively, of loans outstanding. There were $190,000 and $180,000 of nonaccrual loans at December 31, 2004 and 2003, respectively.

Non-Interest Income. Non-interest income for the year ended December 31, 2004 was $1.7 million, an increase of $558,000 over the year ended December 31, 2003. This increase is primarily due to an increase in deposit service fees and charges of $310,000, an increase of $92,000 in commissions from credit life insurance premiums, and income generated by government guaranteed loan programs, which is a new program started in the fourth quarter of 2004, of $100,000. The growth in service fees and charges is directly related to the growth in transaction accounts during 2004 and to the growth in an overdraft protection product tied to qualifying demand deposit accounts.

Non-Interest Expense. Non-interest expense increased by $2.1 million to $6.9 million for the year ended December 31, 2004, from $4.8 million for the year ended December 31, 2003. Despite this increase, the Company’s ratio of non-interest expense to average total assets decreased from 3.04% in 2003 to 2.51% in 2004. Salaries and employee benefits increased to $4.1 million from $2.9 million in 2003 due to the increase of Company personnel from 55 to 72 full time equivalent employees. Also the expansion into two new markets has resulted in an increase of $191,000 in occupancy and equipment expenses to a total of $540,000 for the year ended December 31, 2004. Other non-interest expense increased to $2.4 million in 2004 compared with $1.6 for the year ended December 31, 2003. The following are included in other non-interest expenses:

• Postage, printing and office supplies increased from $131,000 in 2003 to $220,000 in 2004, largely due to the opening of the Goldsboro office and New Century Bank South.

• Advertising and promotion expenses increased from $126,000 in 2003 to $196,000 in 2004, due in part to promotions related to our new office in Goldsboro and deposit related marketing campaigns in all of the Banks’ markets.

• Data processing and other outsourced service expenses increased by $146,000 to $629,000 in 2004. Most of this increase is in core processing and items processing expenses.

• Professional service expenses increased from $250,000 in 2003 to $323,000 in 2004. A large part of this increase is in audit fees and other professional fees.

• Other operating expenses increased $421,000 to approximately $1.0 million in 2004, largely due to additional expenses related to general corporate expenses, the opening of the Goldsboro office and New Century Bank South.

Provision for Income Taxes: The Company’s effective tax rate was 35.9% in 2004 and 35.4% in 2003.

NET INTEREST INCOME

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

- 22 -

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

	For the Years Ended December 31,
	2005							2004							2003
	Average balance			Interest		Average rate		Average balance			Interest		Average rate		Average balance			Interest		Average rate
	(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans	$	297,045		$	22,406	7.54	%	$	219,257		$	14,422	6.58	%	$	119,724		$	8,628	7.21	%
Investment securities		33,006			1,236	3.74	%		17,360			591	3.40	%		13,963			564	4.04	%
Other interest-earning assets		32,618			1,037	3.18	%		24,600			395	1.61	%		16,540			168	1.02	%
Total interest-earning assets		362,669			24,679	6.80	%		261,217			15,408	5.89	%		150,227			9,360	6.23	%
Other assets		18,825							16,215							9,133
Total assets	$	381,494						$	277,432						$	159,360
INTEREST-BEARING LIABILITIES:
Deposits:
Savings, NOW and money market	$	56,378			869	1.54	%	$	55,888			635	1.14	%	$	31,064			440	1.42	%
Time deposits over $100,000		73,238			3,016	4.12	%		39,917			1,279	3.20	%		28,376			946	3.33	%
Other time deposits		143,547			5,021	3.5	%		104,040			2,870	2.76	%		53,958			1,713	3.17	%
Borrowings		30,726			1,183	3.85	%		14,264			403	2.73	%		5,328			118	2.21	%
Total interest-bearing liabilities		303,889			10,089	3.32	%		214,109			5,187	2.41	%		118,726			3,217	2.71	%
Non-interest-bearing deposits		44,485							31,665							18,455
Other liabilities		1,537							1,175							371
Shareholders’ equity		31,583							30,483							21,808
Total liabilities and shareholders’ equity	$	381,494						$	277,432						$	159,360
Net interest income/interest rate spread				$	14,590	3.48	%				$	10,221	3.48	%				$	6,143	3.52	%
Net interest margin						4.02	%						3.91	%						4.09	%
Ratio of interest-earning assets to interest-bearing liabilities		119.34	%						122.00	%						126.53	%

- 23 -

RATE/VOLUME ANALYSIS

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

	Year Ended December 31, 2005 vs. 2004						Year Ended December 31, 2004 vs. 2003							Year Ended December 31, 2003 vs. 2002
	Increase (Decrease) Due to						Increase (Decrease) Due to							Increase (Decrease) Due to
	Volume		Rate		Total		Volume		Rate			Total		Volume		Rate			Total
	(Dollars in thousands)
Interest income:
Loans	$	5,492	$	2,492	$	7,984	$	6,860	$	(1,066	)	$	5,794	$	2,892	$	(696	)	$	2,196
Investment securities		551		58		645		126		(99	)		27		65		(107	)		(42	)
Other interest-earning assets		196		482		642		106		121			227		72		(79	)		(7	)
Total interest income		6,239		3,032		9,271		7,092		(1,044	)		6,048		3,029		(882	)		2,147
Interest expense:
Deposits:
Savings, NOW and money market		7		227		234		317		(122	)		195		156		(156	)		—
Time deposits over $100,000		1,220		517		1,737		377		(44	)		333		377		(223	)		154
Other time deposits		1,236		915		2,151		1,486		(329	)		1,157		570		(346	)		224
Borrowings		549		231		780		225		60			285		70		9			79
Total interest expense		3,012		1,890		4,902		2,405		(435	)		1,970		1,173		(716	)		457
Net interest income increase (decrease)	$	3,227	$	1,142	$	4,369	$	4,687	$	(609	)	$	4,078	$	1,856	$	(166	)	$	1,690

LIQUIDITY

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The Company’s principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 23% and 18% of total assets at December 31, 2005 and 2004.

The Company has been a net seller of federal funds, maintaining liquidity sufficient to fund new loan demand. When the need arises, the Company has the ability to sell securities classified as available for sale, sell loan participations to other banks, or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $20.6 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 30% of our assets, subject to our available collateral. A floating lien of $16.4 million on qualifying loans is pledged to FHLB to secure borrowings. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2005, borrowings consisted of securities sold under agreements to repurchase of $9.2 million and FHLB advances totaling $12.5 million.

Total deposits were $367.0 million and $270.2 million at December 31, 2005 and 2004, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be

- 24 -

rate sensitive. Time deposits represented 64% and 66% of total deposits at December 31, 2005 and 2004, respectively. Time deposits of $100,000 or more represented 24% and 21%, respectively, of the total deposits at December 31, 2005 and 2004. At December 31, 2005, the Company had $8.5 million in brokered time deposits. Management believes most other time deposits are relationship-oriented. While the competitive rates will need to be paid to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, management anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that current sources of funds provide adequate liquidity for the Company’s current cash flow needs.

CAPITAL

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier I capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier II 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 I capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines that require a financial institution to maintain capital as a percent of its assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier I capital as a percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II 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 I capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 7.56% at December 31, 2005. As the following table indicates, at December 31, 2005, the Company and its two bank subsidiaries exceeded regulatory capital requirements.

	At December 31, 2005
	Actual Ratio		Minimum Requirement		Well-Capitalized Requirement
New Century Bancorp, Inc.
Total risk-based capital ratio	14.54	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	12.93	%	4.00	%	6.00	%
Leverage ratio	10.56	%	4.00	%	5.00	%
New Century Bank
Total risk-based capital ratio	15.11	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	13.86	%	4.00	%	6.00	%
Leverage ratio	11.19	%	4.00	%	5.00	%
New Century Bank South
Total risk-based capital ratio	12.06	%	8.00	%	10.00	%
Tier 1 risk-based capital ratio	10.80	%	4.00	%	6.00	%
Leverage ratio	9.19	%	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 will provide additional capital for the current and future expansion of New Century Bank. Under the current applicable regulatory guidelines, $10.8 million of these debentures qualify as Tier I capital. Management expects that the Company and both Banks will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, or otherwise.

- 25 -

ASSET/LIABILITY MANAGEMENT

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

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

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

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

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

- 26 -

	Terms to Repricing at December 31, 2005
	1 Year or Less			More Than 1 Year to 3 Years			More Than 3 Years to 5 Years			More Than 5 Years			Total
	(Dollars in thousands)
Interest-earning assets:
Loans:
Adjustable rate	$	194,087		$	—		$	—		$	—		$	194,087
Fixed rate		21,955			55,753			48,320			6,737			132,765
Securities available for sale		10,953			18,671			8,259			3,721			41,604
Interest-earning deposits in other banks		3,284			—			—			—			3,284
Federal funds sold		44,744			—			—			—			44,744
Stock in FHLB of Atlanta		—			—			—			1,094			1,094
Stock in The Bankers Bank		—			—			—			51			51
Total interest-earning assets	$	275,023		$	74,424		$	56,579		$	11,603		$	417,629
Interest-bearing liabilities:
Deposits:
Savings, NOW and money market	$	79,534		$	—		$	—		$	—		$	79,534
Time		31,931			49,738			50,143			7,285			139,097
Time over $100,000		14,458			29,639			44,226			6,735			95,058
Short term debt		11,743			—			—			—			11,743
Long term debt		22,372			—			—			—			22,372
Total interest-bearing liabilities	$	160,038		$	79,377		$	94,369		$	14,020		$	347,804
Interest sensitivity gap per period	$	114,985		$	(4,953	)	$	(37,790	)	$	(2,417	)	$	69,825
Cumulative interest sensitivity gap	$	114,985		$	110,032		$	72,242		$	69,825		$	69,825
Cumulative gap as a percentage of total interest-earning assets		27.53	%		26.35	%		17.30	%		16.72	%		16.72	%
Cumulative interest-earning assets as a percentage of interest-bearing liabilities		171.85	%		145.96	%		121.64	%		120.08	%		120.08	%

Loans maturing or repricing after December 31, 2006 are comprised of $110.8 million of fixed rate loans.

CRITICAL ACCOUNTING POLICY

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

ASSET QUALITY AND THE ALLOWANCE FOR LOAN LOSSES

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

- 27 -

have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The Company’s impaired loans at December 31, 2005 were comprised of $1.4 million non-accrual and substandard loans.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING INFORMATION

Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but

- 28 -

are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principals, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

The following tables set forth additional information regarding the composition of our contractual obligations and commitments, securities portfolio, loan portfolio, contractual loan maturities, allocation of the allowance for loan losses, loan loss and recovery experience and average deposits.

Contractual Obligations and Commitments

($ in thousands)

In the normal course of business there are various outstanding contractual obligations of the Bank that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table reflects contractual obligations of the Bank outstanding as of December 31, 2005

	Payments Due by Period
Contractual Obligations	Total		On Demand or Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Repurchase Agreements	$	9,243	$	9,243	$	—	$	—	$	—
FHLB advances		12,500		2,500		10,000		—		—
Junior Subordinated Debentures		12,000		—		—		—		12,000
Lease Obligations		1,558		162		294		254		848
Deposits		367,003		179,239		79,376		108,388		—
Total contractual cash obligations	$	402,304	$	191,144	$	89,670	$	108,642	$	12,848
The following table reflects other commitments of the Bank outstanding as of December 31, 2005.
	Amount of Commitment Expiration Per Period
Contractual Obligations	Total Amounts Committed		Less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
Undisbursed portion of home equity lines	$	20,685	$	—	$	—	$	—	$	20,685
Other commitments and credit lines		35,871		34,850		645		55		321
Undisbursed portion of constructions loans		18,203		14,346		3,535		322		—
Letters of Credit		3,451		3,451		—		—		—
Total commercial commitments	$	78,210	$	52,647	$	4,180	$	377	$	21,006

- 29 -

Securities Portfolio Composition

($ in thousands)

	Amortized Cost		Fair Value		Weighted Average Yield
U. S. government agency securities
Due within one year	$	11,025	$	10,953	3.14	%
Due after one but within five years		18,569		18,383	4.01	%
Due after five but within ten years		—		—	0.00	%
Due after ten years		—		—	0.00	%
		29,594		29,336	3.69	%
Mortgage-backed securities
Due within one year		—		—	0.00	%
Due after one but within five years		292		288	4.23	%
Due after five but within ten years		7,366		7,170	4.27	%
Due after ten years		1,771		1,738	4.49	%
		9,429		9,196	4.31	%
State and local governments
Due within one year		—		—	0.00	%
Due after one but within five years		—		—	0.00	%
Due after five but within ten years		1,060		1,089	5.43	%
Due after ten years		1,943		1,983	5.19	%
		3,003		3,072	5.28	%
Total securities available for sale
Due within one year		11,025		10,953	3.14	%
Due after one but within five years		18,861		18,671	4.01	%
Due after five but within ten years		8,426		8,259	4.42	%
Due after ten years		3,714		3,721	4.86	%
	$	42,026	$	41,604	3.94	%

- 30 -

Loan Portfolio Composition

($ in thousands)

	At December 31,
	2005					2004					2003					2002					2001
	Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans		Amount			% of Total Loans
Real estate loans:
One-to-four family residential	$	47,531		14.53	%	$	39,417		14.98	%	$	24,805		16.31	%	$	18,219		18.20	%	$	11,576		18.19	%
Multi-family residential and commercial		109,704		33.53	%		83,923		31.90	%		38,228		25.14	%		23,986		23.96	%		16,913		26.58	%
Construction		63,000		19.26	%		43,150		16.41	%		19,403		12.76	%		12,666		12.65	%		9,348		14.69	%
Home equity lines of credit		14,554		4.45	%		12,317		4.68	%		5,161		3.39	%		3,815		3.81	%		2,296		3.61	%
Real estate loans held for sale		4,251		1.30	%		—		0.00	%		2,107		1.39	%		630		0.63	%		850		1.34	%
Total real estate loans		239,040		73.07	%		178,807		67.97	%		89,704		58.99	%		59,316		59.25	%		40,983		64.41	%
Other loans:
Commercial and industrial		71,457		21.85	%		66,071		25.12	%		50,260		33.05	%		31,281		31.24	%		16,093		25.29	%
Loans to individuals		15,709		4.80	%		18,188		6.91	%		11,189		7.36	%		8,836		8.83	%		6,555		10.30	%
Other loans held for sale		931		0.28	%		—		0.00	%		937		0.62	%		685		0.68	%		—		0.00	%
Total other loans		88,097		26.93	%		84,259		32.03	%		62,386		41.03	%		40,802		40.75	%		22,648		35.59	%
Total loans		327,137		100.00	%		263,066		100.00	%		152,090		100.00	%		100,118		100.00	%		63,631		100.00	%
Less:
Deferred loan origination fees, net		(285	)				(316	)				(160	)				(110	)				(68	)
Allowance for loan losses		(5,298	)				(3,598	)				(2,355	)				(1,546	)				(984	)
Total loans, net	$	321,554				$	259,152				$	149,575				$	98,462				$	62,579

- 31 -

Contractual Loan Maturities

($ In thousands)

	At December 31, 2005
	Due within one year		Due after one year but within five years		Due after five years		Total
Fixed rate loans:
One-to-four family residential	$	3,751	$	24,622	$	1,655	$	30,028
Multi-family residential and commercial		6,442		48,783		3,596		58,821
Construction		3,591		5,067		490		9,148
Home equity lines of credit		—		118		—		118
Commercial and industrial		4,900		18,070		766		23,736
Loans to individuals		3,271		7,413		230		10,914
Total at fixed rates		21,955		104,073		6,737		132,765
Variable rate loans:
One-to-four family residential		7,208		12,149		215		19,572
Multi-family residential and commercial		13,473		32,917		4,106		50,496
Construction		51,325		1,705		1,761		54,791
Home equity lines of credit		14,437		—		—		14,437
Commercial and industrial		39,887		3,204		5,029		48,120
Loans to individuals		5,517		331		—		5,848
Total at variable rates		131,847		50,306		11,111		193,264
Subtotal		153,802		154,379		17,848		326,029
Nonaccrual loans		532		291		—		823
Loans, gross	$	154,334	$	154,670	$	17,848	$	326,852

The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.

- 32 -

Allocation of the Allowance for Loan Losses

(In thousands)

	At December 31,
	2005		% of Total Loans		2004		% of Total Loans		2003		% of Total Loans		2002		% of Total Loans		2001		% of Total Loans
One-to-four family residential	$	119	14.53	%	$	99	14.98	%	$	185	16.30	%	$	137	18.20	%	$	88	18.19	%
Multi-family residential and commercial		1,919	33.54	%		1,124	31.88	%		573	25.14	%		360	23.96	%		264	26.58	%
Construction		1,103	19.26	%		647	16.40	%		340	12.76	%		222	12.65	%		164	14.69	%
Home equity lines of credit		36	4.45	%		31	4.68	%		39	3.39	%		29	3.81	%		17	3.61	%
Commercial and industrial		1,429	21.84	%		1,157	25.12	%		880	33.04	%		546	31.24	%		281	25.29	%
Loans to individuals		393	4.80	%		455	6.94	%		280	7.36	%		221	8.83	%		164	10.30	%
Loans held for sale		—	1.58	%		—	0.00	%		—	2.01	%		—	1.31	%		—	1.34	%
			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%
Total allocated		4,999				3,513				2,297				1,515				978
Unallocated		299				85				58				31				6
Total	$	5,298			$	3,598			$	2,355			$	1,546			$	984

- 33 -

Loan Loss and Recovery Experience

($ in thousands)

	At of for the Periods Ended December 31,
	2005			2004			2003			2002			2001
Allowance for loan losses at beginning of year	$	3,598		$	2,355		$	1,546		$	984		$	496
Provision for loan losses		2,172			1,684			1,042			872			564
		5,770			4,039			2,588			1,856			1,060
Loans charged off:
One-to-four family residential		(235	)		(56	)		—			—			—
Multi-family residential and commercial		(61	)		—			—			—			—
Construction		—			—			—			—			—
Home equity lines of credit		—			(25	)		—			—			—
Commercial and industrial		(24	)		(312	)		(97	)		(280	)		(36	)
Loans to individuals		(208	)		(85	)		(136	)		(30	)		(40	)
Total charge-offs		(528	)		(478	)		(233	)		(310	)		(76	)
Recoveries of loans previously charged off:
One-to-four family residential		1			3			—			—			—
Multi-family residential and commercial		—			—			—			—			—
Construction		—			—			—			—			—
Home equity lines of credit		—			—			—			—			—
Commercial and industrial		38			20			—			—			—
Loans to individuals		17			14			—			—			—
Total recoveries		56			37			—			—			—
Net charge-offs		(472	)		(441	)		(233	)		(310	)		(76	)
Allowance for loan losses at end of year	$	5,298		$	3,598		$	2,355		$	1,546		$	984
Ratios:
Net charge-offs as a percent of average loans		0.16	%		0.20	%		0.19	%		0.38	%		0.16	%
Allowance for loan losses as a percent of loans at end of year		1.62	%		1.37	%		1.55	%		1.55	%		1.55	%

- 34 -

Average Deposits

($ in thousands)

	For the Period Ended December 31,
	2005				2004				2003				2002				2001
	Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate
Savings, NOW and money market deposits	$	56,378	1.54	%	$	55,888	1.14	%	$	31,064	1.42	%	$	21,955	2.00	%	$	12,285	3.48	%
Time deposits > $100,000		73,238	4.12	%		39,917	3.21	%		28,376	3.33	%		18,484	4.28	%		11,064	5.80	%
Other time deposits		143,547	3.50	%		104,040	2.76	%		53,958	3.17	%		37,909	3.93	%		22,370	5.61	%
Total interest-bearing deposits		273,163	3.26	%		199,845	2.40	%		113,398	2.73	%		78,348	3.47	%		45,719	5.09	%
Noninterest-bearing deposits		44,485	—			31,665	—			18,455	—			13,111	—			8,586	—
Total deposits	$	317,648	2.80	%	$	231,510	2.07	%	$	131,853	2.35	%	$	91,459	2.98	%	$	54,305	4.28	%

- 35 -

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Expected Maturities of Market Sensitive Instruments Held at December 31, 2005

($ in thousands)

	2006		2007		2008		2009		2010		Beyond 5 Years		Total		Average Interest Rate		Estimated Fair Value
Financial Assets
Interest-earning deposits in other banks	$	3,284	$	—	$	—	$	—	$	—	$	—	$	3,284	4.09	%	$	3,284
Federal funds sold		44,744		—		—		—		—		—		44,744	4.08	%		44,744
Investment securities		10,953		10,842		7,748		81		—		11,980		41,604	3.94	%		41,604
Loans
Fixed rate		22,400		76,824		27,467		—		—		6,737		133,428	6.25	%		127,881
Variable rate		131,934		28,738		12,575		8,199		867		11,111		193,424	8.03	%		193,424
Total loans		154,334		105,562		40,042		8,199		867		17,848		326,852	7.49	%		321,305
Financial Liabilities
Deposits	$	179,237	$	37,206	$	42,171	$	63,778	$	30,591	$	14,020	$	367,003	3.04	%	$	366,272
Repurchase agreements		9,243		—		—		—		—		—		9,243	2.76	%		9,243
FHLB advances		12,500		—		—		—		—		—		12,500	3.42	%		12,113
Junior subordinated debentures		—		—		—		—		—		12,372		12,372	6.65	%		12,372

- 36 -

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors

New Century Bancorp, Inc.

Dunn, North Carolina

We have audited the accompanying consolidated balance sheets of New Century Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Bancorp, Inc. and subsidiaries at December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina

March 17, 2006

- 37 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

	2005			2004
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	8,453		$	6,955
Interest-earning deposits in other banks		3,284			335
Federal funds sold		44,744			25,000
Investment securities available for sale, at fair value (Note C)		41,604			24,879
Loans (Note D)		326,852			262,750
Allowance for loan losses (Note D)		(5,298	)		(3,598	)
NET LOANS		321,554			259,152
Accrued interest receivable		2,072			1,353
Stock in Federal Home Loan Bank of Atlanta, at cost		1,094			788
Stock in The Bankers Bank		51			49
Foreclosed real estate		443			135
Premises and equipment (Note E)		6,018			4,801
Bank owned life insurance		4,186			2,204
Other assets		2,864			2,660
TOTAL ASSETS	$	436,367		$	328,311
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	53,315		$	34,748
Savings		10,253			2,825
Money market and NOW		69,280			53,839
Time (Note F)		234,155			178,818
TOTAL DEPOSITS		367,003			270,230
Short term debt (Note G and I)		11,743			5,685
Long term debt (Note H and I)		22,372			21,372
Accrued interest payable		486			261
Accrued expenses and other liabilities		1,789			1,319
TOTAL LIABILITIES		403,393			298,867
Commitments (Note M)
Shareholder’s Equity (Note L)
Common stock, $1 par value, 10,000,000 shares authorized; 4,241,040 and 2,811,477 shares issued and outstanding at December 31, 2005 and 2004, respectively		4,241			2,811
Additional paid-in capital		21,196			22,389
Retained earnings		7,815			4,194
Accumulated other comprehensive income (loss)		(278	)		50
TOTAL SHAREHOLDERS’ EQUITY		32,974			29,444
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	436,367		$	328,311

See accompanying notes.

- 38 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2005, 2004 and 2003

	2005		2004		2003
	(In thousands, except share and per share data)
INTEREST INCOME
Loans	$	22,406	$	14,422	$	8,628
Investments		1,236		591		564
Federal funds sold and interest-earning deposits		1,037		395		168
TOTAL INTEREST INCOME		24,679		15,408		9,360
INTEREST EXPENSE
Money market, NOW and savings deposits		869		635		440
Time deposits		8,037		4,149		2,659
Short term debt		179		56		27
Long term debt		1,004		347		91
TOTAL INTEREST EXPENSE		10,089		5,187		3,217
NET INTEREST INCOME		14,590		10,221		6,143
PROVISION FOR LOAN LOSSES (Note D)		2,172		1,684		1,042
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		12,418		8,537		5,101
NON-INTEREST INCOME
Service fees and charges		1,002		856		546
Fees from presold mortgages		679		408		440
Commissions from SBA loans		439		100		—
Other		376		328		148
TOTAL NON-INTEREST INCOME		2,496		1,692		1,134
NON-INTEREST EXPENSE
Salaries and employee benefits (Note O)		5,480		4,050		2,911
Occupancy and equipment (Note E)		717		540		349
Other (Note K)		2,932		2,372		1,573
TOTAL NON-INTEREST EXPENSE		9,129		6,962		4,833
INCOME BEFORE INCOME TAXES		5,785		3,267		1,402
INCOME TAXES (Note J)		2,164		1,173		496
NET INCOME	$	3,621	$	2,094	$	906
NET INCOME PER COMMON SHARE
Basic	$	.86	$	.50	$	.26
Diluted	$	.79	$	.48	$	.25
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		4,218,159		4,193,732		3,455,913
Diluted		4,565,548		4,405,356		3,595,496

See accompanying notes.

- 39 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2005, 2004 and 2003

	2005			2004			2003
	(Amounts in thousands)
NET INCOME	$	3,621		$	2,094		$	906
OTHER COMPREHENSIVE LOSS
Unrealized loss on investment securities available for sale arising during the year		(516	)		(139	)		(122	)
Tax effect		188			46			47
TOTAL OTHER COMPREHENSIVE LOSS		(328	)		(93	)		(75	)
COMPREHENSIVE INCOME	$	3,293		$	2,001		$	831

See accompanying notes.

- 40 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003

	Common stock				Additional paid-in capital			Retained earnings		Accumulated other com- prehensive income (loss)			Total shareholders’ equity
	Shares	Amount
	(Amounts in thousands, except share data)
Balance at December 31, 2002	1,607,442	$	8,037		$	7,894		$	1,194	$	218		$	17,343
Net income	—		—			—			906		—			906
Other comprehensive loss	—		—			—			—		(75	)		(75	)
Issuance of common stock	703,346		3,517			5,575			—		—			9,092
Formation of holding company	—		(9,243	)		9,243			—		—			—
Eleven-for-ten stock split	230,867		231			(231	)		—		—			—
Balance at December 31, 2003	2,541,655		2,542			22,481			2,100		143			27,266
Net income	—		—			—			2,094		—			2,094
Other comprehensive loss	—		—			—			—		(93	)		(93	)
Issuance of common stock	16,143		16			161			—		—			177
Eleven-for-ten stock split	253,679		253			(253	)		—		—			—
Balance at December 31, 2004	2,811,477		2,811			22,389			4,194		50			29,444
Net income	—		—			—			3,621		—			3,621
Other comprehensive loss	—		—			—			—		(328	)		(328	)
Issuance of common stock	23,159		23			214			—		—			237
Three-for-two stock split	1,406,404		1,407			(1,407	)		—		—			—
Balance at December 31, 2005	4,241,040	$	4,241		$	21,196		$	7,815	$	(278	)	$	32,974

See accompanying notes.

- 41 -

NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

	2005			2004			2003
	(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,621		$	2,094		$	906
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		392			305			290
Loss on retirement of fixed asset		11			—			—
Provision for loan losses		2,172			1,684			1,042
Origination of loans held for sale		(16,927	)		—			(1,730	)
Proceeds from loans held for sale		11,745			3,044			—
Loss on sale of foreclosed real estate		14			—			—
Gain on sale of real estate held for sale		(39	)		—			—
Increase in cash surrender value of BOLI		(81	)		(86	)		—
Change in assets and liabilities:
Increase in accrued interest receivable		(719	)		(562	)		(80	)
Increase in deferred tax assets		(667	)		(331	)		(241	)
Increase in other assets		(642	)		(278	)		(74	)
Increase (decrease) in accrued expenses and other liabilities		695			718			(535	)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		(425	)		6,588			(422	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities		(25,534	)		(15,640	)		(4,898	)
Maturities and prepayments of investment securities		8,264			3,201			5,651
Net increase in gross loans outstanding		(59,392	)		(114,440	)		(50,643	)
Purchase of bank owned life insurance		(1,901	)		—			(2,118	)
Purchase of Federal Home Loan Bank stock		(306	)		(338	)		(265	)
Purchase of The Bankers Bank stock		(2	)		—			—
Purchase of real estate held for sale		(58	)		(928	)		—
Proceeds from real estate held for sale		1,025			—			—
Proceeds from sale of foreclosed real estate		41			206			—
Purchases of premises and equipment		(1,589	)		(1,763	)		(1,259	)
Investment in trust subsidiary		—			(372	)		—
NET CASH USED BY INVESTING ACTIVITIES		(79,452	)		(130,074	)		(53,532	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		96,773			118,259			46,489
Increase in short term debt		6,058			2,971			583
Increase in long term debt		1,000			12,372			9,000
Net proceeds from issuance of common stock		237			177			9,092
NET CASH PROVIDED BY FINANCING ACTIVITIES		104,068			133,779			65,164
NET INCREASE IN CASH AND CASH EQUIVALENTS		24,191			10,293			11,210
CASH AND CASH EQUIVALENTS, BEGINNING		32,290			21,997			10,787
CASH AND CASH EQUIVALENTS, ENDING	$	56,481		$	32,290		$	21,997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	9,864		$	5,069		$	3,197
Income tax paid		2,520			1,240			1,018
Net unrealized loss on investments available for sale, net of tax		(328	)		(93	)		(75	)
Transfer from loans to foreclosed real estate		363			135			218

See accompanying notes.

- 42 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE A - ORGANIZATION AND OPERATIONS

New Century Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank and New Century Bank South (collectively referred to as the “Banks”). All significant intercompany transactions and balances have been eliminated in consolidation. The Company is subject to the rules and regulations of the Federal Reserve Bank and the North Carolina Commissioner of Banks.

New Century Bank was incorporated on May 15, 2000 and began banking operations on May 24, 2000. New Century Bank South began operations on January 2, 2004. The Banks are engaged in general commercial and retail banking in Harnett, Cumberland, Johnston, Sampson, and Wayne counties and operate under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Banks undergo periodic examinations by those regulatory authorities.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

- 43 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

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

Allowance for Loan Losses

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

Foreclosed Real Estate

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

Premises and Equipment

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

- 44 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals cost and that this investment was not impaired at December 31, 2005.

Income Taxes

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

Comprehensive Income

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

Stock Compensation Plans

Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value at the grant date and, under Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.

- 45 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Compensation Plans (Continued)

	2005			2004			2003
	(Amounts in thousands, except per share data)
Net income:
As reported	$	3,621		$	2,094		$	906
Deduct: Stock-based compensation expense determined under fair value method, net of tax		(56	)		(224	)		(51	)
Pro forma	$	3,565		$	1,870		$	855
Basic net income per share:
As reported	$	.86		$	.50		$	.26
Pro forma		.85			.45			.25
Diluted net income per share:
As reported	$	.79		$	.48		$	.25
Pro forma		.78			.42			.24

Net Income Per Common Share and Common Shares Outstanding

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

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

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

	2005	2004	2003
Weighted average number of common shares used in computing basic net income per share	4,218,159	4,193,732	3,455,913
Effect of dilutive stock options	347,389	211,624	139,583
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	4,565,548	4,405,356	3,595,496

As of December 31, 2005, the Company had no anti-dilutive stock options.

- 46 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP EITF 03-1-b”) to delay the requirement to record impairment losses EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” This FSP is to be applied to reporting periods beginning after December 15, 2005. The Company evaluated the impact of this FSP and determined that it did not have a material impact on the financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(r) (“SFAS No. 123(r)”), “Share-Based Payment”, which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS No. 123(r) requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of the vesting period of the period the employee will be retirement eligible. SFAS No. 123(r) sets accounting requirements for “share-based” compensation to employees, including employee-stock purchase plans (“ESPPs”). Awards to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (“SEC”) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(r) for many registrants. Registrants that do not file as small business users must adopt SFAS No. 123(r) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company adopted SFAS No. 123(r) on January 1, 2006, with no material effect on the consolidated financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which contains guidance on applying the requirements in SFAS No. 123(r). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(r) is adopted. The Company adopted SAB 107 on January 1, 2006, with no material effect on the consolidated financial statements.

- 47 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 “Accounting Changes” and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 with no material effect on the consolidated financial statements.

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

Reclassifications

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

NOTE C - INVESTMENT SECURITIES

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

	December 31, 2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	29,594	$	15	$	273	$	29,336
Mortgage-backed securities		9,429		10		243		9,196
Municipal bonds		3,003		69		—		3,072
	$	42,026	$	94	$	516	$	41,604

- 48 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE C - INVESTMENT SECURITIES (Continued)

	December 31, 2004
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
	(In thousands)
Securities available for sale:
U.S. government securities and obligations of U.S. government agencies	$	12,713	$	10	$	58	$	12,665
Mortgage-backed securities		9,067		77		39		9,105
Municipal bonds		3,005		104		—		3,109
	$	24,785	$	191	$	97	$	24,879

Securities with a carrying value of $16.0 million and $12.6 million at December 31, 2005 and 2004, respectively, were pledged to secure public monies on deposit as required by law and customer repurchase agreements.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, for the 59 investment securities with unrealized losses at December 31, 2005. Of these investment securities, 12 agency securities and 9 mortgage backed securities had continuous unrealized losses for more than twelve months. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

	2005
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(In thousands)
Securities available for sale:
Agency securities	$	17,573	$	141	$	9,245	$	132	$	26,818	$	273
Mortgage-backed securities		5,650		142		3,177		101		8,827		243
Total temporarily impaired securities	$	23,223	$	283	$	12,422	$	233	$	35,645	$	516

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, for the 22 investment securities with unrealized losses at December 31, 2004. Of these investment securities, 4 had continuous unrealized losses for more than twelve months. The unrealized losses relate to the 12 agency securities and the 9 mortgage backed securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased.

- 49 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE C - INVESTMENT SECURITIES (Continued)

Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

	2004
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(In thousands)
Securities available for sale:
Agency securities	$	8,641	$	58	$	—	$	—	$	8,641	$	58
Mortgage-backed securities		3,113		8		1,602		31		4,715		39
Total temporarily impaired securities	$	11,754	$	66	$	1,602	$	31	$	13,356	$	97

The following table sets forth certain information regarding the amortized costs, carrying values, weighted average yields and contractual maturities of the Company’s investment portfolio at December 31, 2005.

	Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
U.S. government agency securities
Due within one year	$	11,025	$	10,953
Due after one but within five years		18,569		18,383
		29,594		29,336
Mortgage-backed securities
Due after one but within five years		292		288
Due after five but within ten years		7,366		7,170
Due after ten years		1,771		1,738
		9,429		9,196
Municipal bonds
Due after five but within ten years		1,060		1,089
Due after ten years		1,943		1,983
		3,003		3,072
Total securities available for sale
Due within one year		11,025		10,953
Due after one but within five years		18,861		18,671
Due after five but within ten years		8,426		8,259
Due after ten years		3,714		3,721
	$	42,026	$	41,604

- 50 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE C - INVESTMENT SECURITIES (Continued)

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

NOTE D - LOANS

Following is a summary of loans at December 31, 2005 and 2004:

	2005					2004
	Amount			Percent of total		Amount			Percent of total
	(Dollars in thousands)
Real estate loans:
One to four family residential	$	47,531		14.53	%	$	39,417		14.98	%
Multi-family residential and commercial		109,704		33.53	%		83,923		31.90	%
Construction		63,000		19.26	%		43,150		16.41	%
Home equity lines of credit		14,554		4.45	%		12,317		4.68	%
Real estate loans held for sale		4,251		1.30	%		—		—	%
Total real estate loans		239,040		73.07	%		178,807		67.97	%
Other loans:
Commercial and industrial		71,457		21.85	%		66,071		25.12	%
Loans to individuals		15,709		4.80	%		18,188		6.91	%
Other loans held for sale		931		0.28	%		—		—	%
Total other loans		88,097		26.93	%		84,259		32.03	%
Total loans		327,137		100.00	%		263,066		100.00	%
Less:
Deferred loan origination fees, net		(285	)				(316	)
Allowance for loan losses		(5,298	)				(3,598	)
Total loans, net	$	321,554				$	259,152

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

- 51 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE D - LOANS (Continued)

Impaired loans at December 31, 2005 and 2004 consisted of loans of approximately $3.9 million and $0 respectively. The average recorded investment in impaired loans was approximately $327,000 and $0 for the years ended December 31, 2005 and 2004, respectively. Impaired loans did not materially affect interest income for the years ended December 31, 2005 and 2004. The provision allocated for impaired loans for 2005 was approximately $514,000.

At December 31, 2005 and 2004, the amount of nonaccrual loans was $823,000 and $190,000, respectively. The average balance of nonaccrual loans was $531,000 and $496,000 at December 31, 2005 and 2004, respectively.

At December 31, 2005, the Company had $5,182,000 in loans held for sale to two unaffiliated proposed banks. These loans were originated by the Company under an agreement with the proposed banks and to be sold to the banks when they open in 2006.

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

	At December 31,
	2005			2004			2003
	(In thousands)
Allowance for loan losses at beginning of period	$	3,598		$	2,355		$	1,546
Provision for loan losses		2,172			1,684			1,042
		5,770			4,039			2,588
Loans charged-off:
Commercial and industrial		(24	)		(312	)		(97	)
Home equity lines of credit		—			(25	)		—
One-to-four family residential		(235	)		(56	)		—
Multi-family residential		(61	)		—			—
Loans to individuals		(208	)		(85	)		(136	)
Total charge-offs		(528	)		(478	)		(233	)
Recoveries of loans previously charged-off:
Commercial and industrial		38			20			—
One-to-four family residential		1			3			—
Loans to individuals		17			14			—
Total charge-offs		56			37			—
Net charge offs		(472	)		(441	)		(233	)
Allowance for loan losses at end of year	$	5,298		$	3,598		$	2,355

At December 31, 2005, the Company had pre-approved but unused lines of credit totaling $78.2 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

- 52 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

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

Balance at January 1, 2005	$	11,346
Borrowings		33,276
Loan repayments		(27,265	)
Balance at December 31, 2005	$	17,357

NOTE E - PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2005 and 2004:

	2005		2004
	(In thousands)
Land	$	1,448	$	1,448
Buildings		3,668		2,391
Furniture and equipment		1,893		1,404
Leasehold improvements		87		19
Construction in progress		11		307
		7,107		5,569
Less accumulated depreciation		1,089		768
Total	$	6,018	$	4,801

Depreciation amounting to $361,622, $246,464 and $218,643 for the years ended December 31, 2005, 2004 and 2003, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.

The Company has operating leases for its corporate offices and branches that expire at various times through 2023. Future minimum lease payments under the leases for years subsequent to December 31, 2005 are as follows:

2006	$	162,000
2007		144,000
2008		150,000
2009		127,000
2010		127,000
Thereafter		848,000
	$	1,558,000

During 2005, 2004, and 2003, payments under operating leases were $127,000, $134,000 and $58,000, respectively.

- 53 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE F - DEPOSITS

At December 31, 2005, the scheduled maturities of time deposits are as follows:

	Less than $100,000		$100,000 or more		Total
	(In thousands)
Three months or less	$	10,509	$	5,653	$	16,162
Over three months through twelve months		21,422		8,805		30,227
Over one year through three years		49,737		29,639		79,376
Over three years		57,429		50,961		108,390
	$	139,097	$	95,058	$	234,155

Included in this total were brokered time deposits of $7.3 million at December 31, 2005.

NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements amounted to $9.2 million and $5.7 million at December 31, 2005 and 2004, respectively, and are collateralized by U. S. Government agency obligations.

NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK

At December 31, 2005, the Company had available lines of credit totaling approximately $20.6 million with various financial institutions for borrowing on a short-term basis. These lines are subject to annual renewals with varying interest rates. Also, as a member of the Federal Home Loan Bank of Atlanta, the Company may obtain advances of up to 30% of assets, subject to available collateral.

Advances from the Federal Home Loan Bank of Atlanta consisted of the following at December 31, 2005 and 2004:

Maturity	Interest Rate		2005		2004
			(In thousands)
June 25, 2005	2.00	%	$	—	$	5,000
February 24, 2006	2.65	%		4,000		4,000
June 29, 2006	3.95	%		2,500		—
July 31, 2006	3.58	%		3,500		—
December 29, 2006	4.03	%		2,500		—
			$	12,500	$	9,000

- 54 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

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

Pursuant to collateral agreements with the Federal Home Loan Bank, at December 31, 2005 advances are secured by loans with a carrying amount of $16.4 million, which approximates market value. Advances are considered either short term debt or long term debt based on contractual maturity. One advance for $2,500, due on June 29, 2006, with a rate of 3.95%, is considered short term debt, as the contractual maturity is one year. The remaining advances are considered long term debt.

NOTE I - JUNIOR SUBORDINATED DEBENTURES

On September 20, 2004, $12.0 million of trust preferred securities were placed through a newly formed, wholly owned trust preferred subsidiary, New Century Statutory Trust I (the “Trust”). The Trust has invested the total proceeds from the sale of the trust-preferred securities in junior subordinated deferrable interest debentures issued by the Company. The terms of the junior subordinated debentures match the terms of the trust-preferred securities. The Trust is considered a variable interest entity as defined in FIN 46. As the Company is not the primary beneficiary of the Trust. The Trust is not consolidated. Accordingly, the Company’s $372,000 equity interest in the Trust is accounted for using the equity method, and the junior subordinated debentures are recorded as long-term debt of the Company. The trust preferred securities pay cumulated cash distributions quarterly at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The trust preferred securities are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The trust preferred securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.

NOTE J - INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2005, 2004 and 2003 are as follows:

	2005			2004			2003
	(In thousands)
Current tax provision:
Federal	$	2,300		$	1,235		$	624
State		531			269			113
Total current tax provision		2,831			1,504			737
Deferred tax provision:
Federal		(548	)		(255	)		(195	)
State		(119	)		(76	)		(46	)
Total deferred tax benefit		(667	)		(331	)		(241	)
Net provision for income taxes	$	2,164		$	1,173		$	496

- 55 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE J - INCOME TAXES (Continued)

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

	2005			2004			2003
	(In thousands)
Expected income tax expense	$	1,967		$	1,111		$	477
Increase (decrease) resulting from:
State income taxes, net of federal tax effect		257			127			44
Tax-exempt interest income		(47	)		(39	)		(44	)
Income from life insurance		(28	)		(29	)		(13	)
Other permanent differences		15			3			32
Provision for income taxes	$	2,164		$	1,173		$	496

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2005 and 2004 are as follows:

	2005			2004
	(In thousands)
Deferred tax assets relating to:
Allowance for loan losses	$	1,754		$	1,121
Pre-opening costs and expenses		37			10
Deferred Compensation		84			66
Unrealized loss on available-for-sale securities		144			—
Other		41			8
Total deferred tax assets		2,060			1,205
Deferred tax liabilities relating to:
Premesis and equipment		(240	)		(235	)
Deferred loan fees		(22	)		—
Unrealized gain on available-for-sale securities		—			(44	)
Other		(17	)		—
Total deferred tax liabilities		(279	)		(279	)
Net recorded deferred tax asset, included in other assets	$	1,781		$	926

- 56 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE K - OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December 31, 2005, 2004 and 2003 are as follows:

	2005		2004		2003
	(In thousands)
Postage, printing and office supplies	$	254	$	220	$	131
Advertising and promotion		274		196		126
Data processing and other outsourced services		817		629		483
Professional services		432		323		250
Other		1,155		1,004		583
Total	$	2,932	$	2,372	$	1,573

NOTE L - REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2005, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in New Century Bank, New Century Bank South and New Century Statutory Trust I.

As of December 31, 2005 and 2004, the most recent notification from the FDIC categorized both Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum amounts and ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Banks’ category.

The Banks may not declare or pay a cash dividend, or repurchase any of its capital stock, if the effect would cause the regulatory net worth of the Banks to fall below the amount required for the liquidation account established in connection with the conversion, or to an amount which is less than the minimum required by the FDIC and the North Carolina Office of the Commissioner of Banks.

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

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	49,523	14.54	%	$	27,251	8.00	%	$	34,064	10.00	%
Tier I Capital (to Risk-Weighted Assets)		44,042	12.93	%		13,626	4.00	%		20,439	6.00	%
Tier I Capital (to Average Assets)		44,042	10.56	%		16,678	4.00	%		20,848	5.00	%
December 31, 2004:
Total Capital (to Risk-Weighted Assets)	$	45,135	16.76	%	$	21,549	8.00	%	$	26,936	10.00	%
Tier I Capital (to Risk-Weighted Assets)		41,765	15.51	%		10,774	4.00	%		16,161	6.00	%
Tier I Capital (to Average Assets)		41,765	12.52	%		13,339	4.00	%		16,674	5.00	%

- 57 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE L - REGULATORY MATTERS (Continued)

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

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	39,006	15.11	%	$	20,649	8.00	%	$	25,811	10.00	%
Tier I Capital (to Risk-Weighted Assets)		35,769	13.86	%		10,325	4.00	%		15,487	6.00	%
Tier I Capital (to Average Assets)		35,769	11.19	%		12,791	4.00	%		15,989	5.00	%
December 31, 2004:
Total Capital (to Risk-Weighted Assets)	$	35,880	16.37	%	$	17,533	8.00	%	$	21,917	10.00	%
Tier I Capital (to Risk-Weighted Assets)		33,139	15.12	%		8,767	4.00	%		13,150	6.00	%
Tier I Capital (to Average Assets)		33,139	12.14	%		10,916	4.00	%		13,646	5.00	%

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

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
December 31, 2005:
Total Capital (to Risk-Weighted Assets)	$	9,901	12.06	%	$	6,569	8.00	%	$	8,212	10.00	%
Tier I Capital (to Risk-Weighted Assets)		8,872	10.80	%		3,285	4.00	%		4,927	6.00	%
Tier I Capital (to Average Assets)		8,872	9.19	%		3,862	4.00	%		4,828	5.00	%
December 31, 2004:
Total Capital (to Risk-Weighted Assets)	$	8,716	17.49	%	$	3,986	8.00	%	$	4,983	10.00	%
Tier I Capital (to Risk-Weighted Assets)		8,092	16.24	%		1,993	4.00	%		2,990	6.00	%
Tier I Capital (to Average Assets)		8,092	13.36	%		2,423	4.00	%		3,029	5.00	%

The average reserve balance required to be maintained under the requirements of the Federal Reserve was approximately $680,000 for the year ended December 31, 2005.

NOTE M - OFF-BALANCE SHEET RISK

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

- 58 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

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

A summary of the contract amount (in thousands) of the Company’s exposure to off-balance sheet credit risk as of December 31, 2005 is as follows:

Financial instruments whose contract amounts represent credit risk:
Undisbursed lines of credit	$	74,759
Letters of credit		3,451

NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

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

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

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

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

Investment Securities Available for Sale

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

- 59 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

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

Loans

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

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

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

Bank Owned Life Insurance

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

Deposits

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

Short Term Debt

The fair values of short term debt, which include securities sold under agreements to repurchase and a one- year advance from the FHLB, are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Long Term Debt

The fair values of long term debt, which includes three advances from the FHLB with contractual maturities of over one year and junior subordinated debentures, are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Financial Instruments with Off-Balance Sheet Risk

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

- 60 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

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

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004.

	2005				2004
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	8,453	$	8,453	$	6,955	$	6,955
Interest-earning deposits in other banks		3,284		3,284		335		335
Federal funds sold		44,744		44,744		25,000		25,000
Investment securities available for sale		41,604		41,604		24,879		24,879
Loans, net		321,554		321,305		259,152		258,878
Stock in the Federal Home Loan Bank		1,094		1,094		788		788
Stock in The Banker’s Bank		51		51		49		49
Bank owned life insurance		4,186		4,186		2,204		2,204
Financial liabilities:
Deposits	$	367,003	$	366,272	$	270,230	$	270,485
Short term debt		11,743		11,743		5,685		5,685
Long term debt		22,372		21,985		21,372		21,372

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) Plan

The Company has a 401(k) Plan whereby substantially all employees participate in the Plan. The Company makes matching contributions equal to 50 percent of the first 6 percent of an employee’s compensation contributed to the Plan. Matching contributions vest to the employee equally over a four-year period. Expenses attributable to the Plan amounted to $83,894, $62,961 and $48,919 for the years ended December 31, 2005, 2004 and 2003, respectively. In December 2005, the Board of Directors approved matching of 100 percent of the first six percent of an employee’s compensation contributed to the plan. This increase was implemented in January of 2006. To help offset the increased cost of the 401(k) match, the Company purchased $1.9 million in Bank owned life insurance on certain key officers to provide funding for the increased 401(k) expense. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age.

Employment Agreements

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

- 61 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Officers Deferred Compensation

The Company implemented a non-qualifying deferred compensation plan for the Chief Executive Officer during 2003. Benefits will accrue and vest during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $89,000, $89,000 and 38,000 were expensed for future benefits to be provided under this plan during 2005, 2004 and 2003, respectively. As part of this plan, the Company has purchased life insurance on certain key officers to provide future funding of benefit payments. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2005 and 2004 was $219,000 and $130,000, respectively.

Stock Option Plans

The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary banks. Options granted to directors typically vest immediately at the time of grant, while options granted to employees typically vest over a three-year period with none vesting at the time of the grant. All unexercised options expire ten years after the date of grant. A summary of the Company’s option plans as of and for the years ended December 31, 2005, 2004 and 2003 is as follows:

			Outstanding Options				Exercisable Options
	Shares Available for Future Grants		Number Outstanding		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
At December 31, 2002	21,487		366,257		$	5.51	304,050		$	5.51
Options granted/vesting	(10,236	)	10,236			7.17	71,114			5.76
At December 31, 2003	11,251		376,493			5.56	375,164			5.56
Options authorized	393,882		—			—	—			—
Options granted/vesting	(265,386	)	265,386			8.49	198,242			5.56
Options exercised	—		(8,774	)		5.51	(8,774	)		8.26
At December 31, 2004	139,747		633,105			6.86	564,632			5.65
Options authorized	—		—			—	—			—
Options granted/vesting	(17,468	)	17,468			13.78	22,825			13.78
Options exercised	—		(21,320	)		5.62	(21,320	)		5.62
At December 31, 2005	122,279		629,253		$	7.01	566,137		$	6.69

- 62 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

The weighted average remaining life of options outstanding and options exercisable as of December 31, 2005 and 2004 is 6.34 and 7.2 years, respectively. The range of exercise prices of options outstanding at December 31, 2005 is from $5.15 to $16.13. The fair value of each option granted in 2005 was $8.92 and was determined using the Black-Scholes option pricing model, assuming a risk-free interest rate of 3.96%, a dividend yield of 0%, volatility of 62.50%, and an expected life of seven years. The fair value of each option granted in 2004 was $2.48, and was determined as of the date of grant using the Black-Scholes option pricing model, assuming a risk-free interest rate of 3%, a dividend yield of 0%, volatility of 12%, and an expected life of six years.

NOTE P - PARENT COMPANY FINANCIAL DATA

Following are the condensed financial statements of New Century Bancorp as of and for the years ended December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 (amounts in thousands):

Condensed Balance Sheet

December 31, 2005 and 2004

	2005			2004
Assets
Cash balances with New Century Bank	$	285		$	178
Due from subsidiaries		311			—
Interest receivable		37			—
Investment in New Century Bank		35,577			33,196
Investment in New Century Bank South		8,786			8,084
Investment in New Century Statutory Trust I		397			376
Total Assets	$	45,393		$	41,834
Liabilities and Shareholders’ Equity
Junior subordinated debentures	$	12,372		$	12,372
Accrued interest payable		47			19
Shareholders’ equity:
Common stock		4,241			4,217
Additional paid-in capital		21,196			20,983
Retained earnings		7,815			4,193
Accumulated other comprehensive income		(278	)		50
Total Liabilities and Shareholders’ Equity	$	45,393		$	41,834

- 63 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE P - PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statement of Operations

Years Ended December 31, 2005 and 2004

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

Condensed Statement of Cash Flows

Years Ended December 31, 2005 and 2004

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,621		$	2,094
Equity in undistributed earnings of subsidiaries		(3,431	)		(2,094	)
Increase in other assets		(348	)		—
Increase in other liabilities		28			—
Net cash used by operating activities		(130	)		—
CASH FLOW FROM INVESTING ACTIVITIES
Payments for investments in and advances to subsidiaries		—			(20,872	)
Net cash used by investing activities		—			(20,872	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from advances from subsidiaries		—			8,500
Proceeds from issuance of junior subordinated debentures		—			12,372
Proceeds from issuance of common stock		237			178
Net cash provided by financing activities		237			21,050
Net increase in cash and cash equivalents		107			178
Cash and cash equivalents at beginning of year		178			—
Cash and cash equivalents, end of year	$	285		$	178

- 64 -

NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

NOTE Q - PENDING BUSINESS COMBINATION

On February 2, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Progressive State Bank (“Progressive”), a North Carolina chartered bank headquartered in Lumberton, NC. Under the terms of the Agreement, Progressive will be merged with and into New Century Bank South. Shareholders of Progressive as of the close of the merger will be entitled to receive cash in the amount of $21.30 per share. As of December 31, 2005, Progressive had total assets of $58.5 million, total loans of $33.4 million and total deposits of $50.9 million (all amounts are unaudited). The merger is expected to be completed during the third quarter of 2006.

- 65 -

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

Not applicable.

ITEM 9A – CONTROLS AND PROCEDURES

The Registrant’s Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the Registrant’s disclosure controls and procedures as of December 31, 2005. Based on their evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms. There have been no changes in the Registrant’s internal control over financial reporting identified in connection with the evaluation described above that occurred during the Registrant’s last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

Not applicable.

PART III

ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from pages 4 through 8 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

The Registrant has adopted a code of ethics that applies, among others to its principal executive offices and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, New Century Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28335.

ITEM 11 - EXECUTIVE COMPENSATION

Incorporated by reference from pages 9 through 13 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

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

Incorporated by reference from pages 2 through 4 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

In 2000, the shareholders of New Century Bank approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders approved amendments to 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 390,778 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under

- 66 -

the 2000 Incentive Plan is 238,476 (adjusted for stock dividends). There are no outstanding options under the 2004 Incentive Plan. Option prices for each of the plans are established at market value at the time of grant.

The following chart contains details of the grants:

Plan Category	Number of securities to be issued upon exercise of outstanding options,	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	629,253	$	7.01	122,279
Equity compensation plans not approved by security holders	None		N/A	None
Total	629,253	$	7.01	122,279

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from pages 5 and 7 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference from page 14 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.

- 67 -

PART IV

ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

3(i)	Articles of Incorporation of Registrant*
3(ii)	Bylaws of Registrant*
4	Form of Stock Certificate*
10(i)	2000 Incentive Stock Option Plan**
10(ii)	2000 Nonqualified Stock Option Plan for Directors**
10(iii)	Employment Agreement of John Q. Shaw*
10(iv)	Employment Agreement of Lisa F. Campbell*
10(v)	Employment Agreement of B. Darrell Fowler*
10(vi)	Salary Continuation Agreement with John Q. Shaw*
10(vii)	2004 Incentive Stock Option Plan**
10(viii)	Agreement and Plan of Merger by and between New Century Bancorp, Inc., New Century Bank South and Progressive State Bank (Filed herewith)
10(ix)	Employment Agreement of William L. Hedgepeth (Filed herewith)
21	Subsidiaries (Filed herewith)
31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
31(ii)	Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
32(ii)	Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
99(i)	Registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholders (Filed with the Securities and Exchange Commission pursuant to Rule 14a-6)

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

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

- 68 -

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	NEW CENTURY BANCORP, INC.
	Registrant
	By:	/s/ John Q. Shaw, Jr.
		John Q. Shaw, Jr.
Date: March 22, 2006		President and Chief Executive Officer

- 69 -

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

/s/ John Q. Shaw, Jr. John Q. Shaw, Jr., President, Chief Executive Officer and Director	March 22, 2006
/s/ Lisa F. Campbell Lisa F. Campbell, Vice President and Chief Financial Officer	March 22, 2006
/s/ J. Gary Ciccone J. Gary Ciccone, Director	March 22, 2006
/s/ John W. McCauley John W. McCauley, Director	March 22, 2006
/s/ Oscar N. Harris Oscar N. Harris, Director	March 22, 2006
/s/ Clarence L. Tart, Jr. Clarence L. Tart, Jr., Director	March 22, 2006
/s/ Gerald W. Hayes, Jr. Gerald W. Hayes, Jr., Director	March 22, 2006
/s/ Thurman C. Godwin, Jr. Thurman C. Godwin, Jr., Director	March 22, 2006
/s/ Carlie C. McLamb Carlie C. McLamb, Director	March 22, 2006
/s/ Anthony Rand Anthony Rand, Director	March 22, 2006

- 70 -

EXHIBIT INDEX

Exhibit Number	Exhibit
3(i)	Articles of Incorporation.	*
3(ii)	Bylaws	*
4	Form of Stock Certificate	*
10(i)	2000 Incentive Stock Option Plan	**
10(ii)	2000 Nonstatutory Stock Option Plan	**
10(iii)	Employment Agreement of John Q. Shaw	*
10(iv)	Employment Agreement of Lisa F. Campbell	*
10(v)	Employment Agreement of B. Darrell Fowler	*
10(vi)	Executive Supplemental Retirement Plan Agreement With John Q. Shaw, Jr.	*
10(vii)	2004 Incentive Stock Option Plan	**
10(viii)	Agreement and Plan of Merger by and between New Century Bancorp, Inc., New Century Bank South and Progressive State Bank	Filed herewith
10(ix)	Employment Agreement of William L. Hedgepeth	Filed herewith
21	Subsidiaries	Filed herewith
31(i)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
31(ii)	Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes Oxley Act	Filed herewith
32(i)	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith
32(ii)	Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes Oxley Act	Filed herewith
99(i)	Registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholders	***

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

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

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

- 71 -

EX-10.VIII

Exhibit 10.VIII

AGREEMENT AND PLAN OF MERGER

by and between

PROGRESSIVE STATE BANK

and

NEW CENTURY BANK SOUTH

and

NEW CENTURY BANCORP, INC.

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of the 2nd day of February, 2006 by and between PROGRESSIVE STATE BANK, a North Carolina banking corporation (“PSB”), NEW CENTURY BANK SOUTH, a North Carolina banking corporation (the “Bank”) and NEW CENTURY BANCORP, INC., a North Carolina corporation and registered bank holding company (“Bancorp”);

W I T N E S S E T H:

WHEREAS, the parties hereto have agreed that it is in their mutual best interests and in the best interests of their respective shareholders for PSB to be merged with and into the Bank pursuant to a plan of merger (the “Plan of Merger”) in the form attached hereto as Schedule A, with the effect that each of the outstanding shares of PSB’s common stock will be converted into cash in the manner set forth herein, and the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the Merger (as hereinafter defined) and transactions contemplated hereby.

NOW, THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions, covenants and promises herein contained, and subject to the terms and conditions hereof, the parties hereto mutually agree as follows:

ARTICLE I. THE MERGER

1.1 Merger. Subject to the provisions of this Agreement and the Plan of Merger, as of the Effective Time (as defined in Section 1.9 hereof), PSB shall be merged with and into the Bank pursuant to Section 53-12 of the North Carolina General Statutes (the “Merger”), the separate corporate existence of PSB shall cease and the corporate existence of the Bank, as the surviving corporation in the Merger, shall continue under the laws of the State of North Carolina. The Bank, as the surviving corporation in the Merger, is hereinafter sometimes referred to as the “Surviving Corporation.”

1.2 Effect of the Merger. At the Effective Time and by reason of the Merger, and in accordance with applicable law, all of the property, assets and rights of every kind and character of PSB including, without limitation, all real, personal or mixed property, all debts due on whatever account, all other choses in action and every other interest of or belonging to or due to PSB, whether tangible or intangible, shall vest in the Surviving Corporation, and the Surviving

Corporation shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature of PSB, all without any conveyance, assignment or further act or deed; and the Surviving Corporation shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description of PSB as of the Effective Time.

1.3 Articles of Incorporation, Bylaws and Management. The Articles of Incorporation and bylaws of the Bank in effect at the Effective Time shall be the Articles of Incorporation and bylaws of the Surviving Corporation until thereafter amended in accordance with applicable laws. The officers and directors of the Bank at the Effective Time shall continue to hold such offices and positions of the Surviving Corporation until removed as provided by law or until the election or appointment of their respective successors.

1.4 Conversion of Shares and Merger Consideration.

(a) Bancorp and Bank Stock. Each share of common stock of Bancorp, par value $1.00 per share (“Bancorp Stock”), and of the Bank, par value $5.00 per share, issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding and shall not be affected by the Merger.

(b) PSB Stock. Except as otherwise provided herein, at the Effective Time, all rights of PSB’s shareholders with respect to all then outstanding shares of the common stock of PSB, $1.00 par value per share (“PSB Stock”), shall cease to exist, and the holders of shares of PSB Stock shall cease to be and shall have no further rights as shareholders of PSB. At the Effective Time, each such outstanding share of PSB Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by PSB, the Bank or Bancorp, which shall be canceled in the Merger, and for Dissenting Shares (as defined in Section 1.7)) shall be converted, without any action on the part of the holder of such shares, into the right to receive the Per Share Cash Consideration (as defined in Section 1.4(d)) in accordance with this Article I. Following the Effective Time, certificates representing shares of PSB Stock outstanding at the Effective Time shall evidence only the right to receive the Per Share Cash Consideration. No share of PSB Stock, other than Dissenting Shares (as defined in Section 1.7), shall be deemed to be outstanding or have any rights other than those set forth in this Section 1.4 after the Effective Time.

(c) Treatment of PSB Options. At the Effective Time, each unexpired and unexercised outstanding option, whether or not then vested or exercisable in accordance with its terms, to purchase shares of PSB Stock (the “PSB Options”) previously granted by PSB pursuant to a written stock option agreement (each a “PSB Option Agreement”) shall be cancelled and converted, without any action on the part of the holder of such PSB Option, into the right to receive via certified check from Bancorp within 10 days following the Effective Time the Per Share Cash Consideration (as defined in Section 1.4(d)) minus the exercise price per share for each PSB Option held as evidenced in the PSB Option Agreement governing such PSB Option. Following the Effective Time, PSB Option Agreements representing PSB Options shall evidence only the right to receive the Per Share Cash Consideration minus the exercise price per share of the PSB Options. No PSB Option shall be deemed to be outstanding or have any rights other than those set forth in this Section 1.4 after the Effective Time.

2

(d) Per Share Cash Consideration. For purposes of this Agreement, the “Per Share Cash Consideration” shall be $21.30, subject to appropriate adjustment in the event of a stock split, stock dividend, or other change in capitalization effecting PSB Stock.

1.5 Closing Payment. Prior to the Effective Time, Bancorp or the Bank shall deposit, or shall cause to be deposited, with Registrar and Transfer Company, Cranford, New Jersey, transfer agent of Bancorp Stock (the “Exchange Agent”), for the benefit of each holder of PSB Stock for exchange in accordance with this Article I the aggregate amount of cash to be delivered to holders of PSB Stock as cash consideration to be paid pursuant to this Article I for outstanding shares of PSB Stock (such cash referred to as the “Exchange Fund”). Immediately after the Effective Time, the Exchange Agent shall, pursuant to irrevocable instructions in accordance with this Article I, deliver cash contemplated to be paid with respect to PSB Stock out of the Exchange Fund to each shareholder of PSB Stock who has surrendered in accordance with the provisions of Section 1.6 below one or more certificates representing shares of PSB Stock. The Exchange Fund shall not be used for any other purpose. The Exchange Agent shall invest all cash included in the Exchange Fund, as directed by Bancorp, on a daily basis. Any interest and other income resulting from such investments shall be paid to Bancorp.

1.6 Exchange of Shares.

(a) Exchange Procedures. Prior to the Effective Time, Bancorp or the Bank shall cause the Exchange Agent to mail to the shareholders of PSB of record as of the date of such mailing, transmittal materials and other appropriate written instructions (collectively, a “Transmittal Letter”) (which shall specify that delivery shall be effected, and risk of loss and title to the certificate representing shares of PSB Stock prior to such Effective Time shall pass, only upon proper delivery of such certificates to the Exchange Agent and which shall be in such form and have such other provisions as Bancorp may reasonably specify). At the Effective Time and upon the proper surrender of certificate(s) representing shares of PSB Stock to the Exchange Agent, together with a properly completed and duly executed Transmittal Letter, the holder of such certificate(s) shall receive, in exchange therefor, the Per Share Cash Consideration subject to any required withholding of applicable taxes. Notwithstanding anything else herein contained, neither Bancorp, the Bank nor the Exchange Agent shall be obligated to deliver any of such payments in cash unless and until such holder has surrendered the certificate(s) representing such holder’s PSB Stock. The certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may require and shall be held in escrow by the Exchange Agent pending the Effective Time. If there is a transfer of ownership of any shares of PSB Stock not registered in the transfer records of PSB, the appropriate cash consideration shall be paid to the transferee thereof if the certificates representing such PSB Stock are presented to the Exchange Agent, accompanied by all documents required, in the reasonable judgment of Bancorp, the Bank and the Exchange Agent, to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Any portion of the Exchange Fund which remains undistributed to the holders of certificates representing PSB Stock for six months after the Effective Time shall be delivered to Bancorp, upon demand, and any shareholders of PSB who have not previously complied with the provisions of this Article I shall thereafter look only to Bancorp for payment of their claim for cash. Any portion of the Exchange Fund remaining unclaimed by holders of PSB Stock five years after the Effective Time (or such earlier date immediately prior to such time as such portion would otherwise escheat to or become property of any government entity)

3

shall, to the extent permitted by applicable law, become the property of Bancorp free and clear of any claims or interest of any person previously entitled therein. Any other provision of this Agreement notwithstanding, neither Bancorp, the Bank nor the Exchange Agent shall be liable to any holder of shares of PSB Stock for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property law.

(b) Lost Certificates. Any shareholder of PSB whose certificate representing shares of PSB Stock has been lost, destroyed, stolen or otherwise is missing shall be entitled to receive any cash to which he, she or it is entitled in accordance with and upon compliance with conditions reasonably imposed by the Exchange Agent or Bancorp (including, without limitation, a requirement that the shareholder provide a lost instruments indemnity bond in form, substance and amount reasonably satisfactory to the Exchange Agent and Bancorp).

(c) Rights of Former PSB Shareholders. At the Effective Time, the stock transfer books of PSB shall be closed as to holders of PSB Stock immediately prior to the Effective Time and no transfer of PSB Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 1.6(a) of this Agreement, each certificate theretofore representing shares of PSB Stock (other than shares to be canceled pursuant to Section 1.4(b) of this Agreement and Dissenting Shares) shall from and after the Effective Time represent for all purposes only the right to receive the appropriate cash consideration. If, after the Effective Time, certificates representing PSB Stock are presented to PSB, Bancorp, the Bank or the Exchange Agent for any reason, they shall be canceled and exchanged as provided in this Article I.

1.7 Dissenting Shares. Notwithstanding any other provision of this Agreement to the contrary, shares of PSB Stock that are outstanding immediately prior to the Effective Time and that are held by shareholders who shall have not voted in favor of the Merger or consented thereto in writing and who properly shall have demanded appraisal for such shares in accordance with N.C. Gen. Stat. § 55-13-01 et seq. (collectively, the “Dissenting Shares”) shall not be converted into or represent the right to receive the appropriate cash consideration. Such shareholders instead shall be entitled to receive payment of the appraised value of such shares held by them in accordance with the provisions of N.C. Gen. Stat. § 55-13-01 et seq. except that all Dissenting Shares held by shareholders who shall have failed to perfect or who effectively shall have withdrawn or otherwise lost their rights to appraisal of such shares under N.C. Gen. Stat. § 55-13-01 et seq. shall thereupon be deemed to have been converted into and to have become exchangeable, as of the Effective Time, for the right to receive, without any interest thereon, the appropriate cash consideration upon surrender in the manner provided in Section 1.6 of the certificate or certificates that, immediately prior to the Effective Time, evidenced such shares. PSB shall give Bancorp (i) prompt notice of any written demand for appraisal of any shares of PSB Stock, attempted withdrawals of such demands for appraisal or any other instruments served pursuant to N.C. Gen. Stat. § 55-13-01 et seq. and received by PSB relating to shareholders’ rights of appraisal, and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands under N.C. Gen. Stat. § 55-13-01 et seq. consistent with the obligations of PSB thereunder. PSB shall not, except with the prior written consent of Bancorp, (x) make any payment with respect to such demand, (y) offer to settle or settle any demand for appraisal, or (z) waive any failure to timely deliver a written demand for appraisal or timely take any other action to perfect appraisal rights in accordance with N.C. Gen. Stat. § 55-13-01 et seq.

4

1.8 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Bancorp in Dunn, North Carolina, or at such other place as Bancorp shall designate, on a date mutually agreeable to PSB and Bancorp (the “Closing Date”) after the expiration of any and all required waiting periods following the effective date of all required approvals of the Merger by the Federal Deposit Insurance Corporation (“FDIC”), the North Carolina Commissioner of Banks (the “Commissioner”) and any other governmental or regulatory authorities (as soon as practicable, but in no event to be more than 90 days following the expiration of all such required waiting periods). At the Closing, Bancorp and PSB shall take such actions (including, without limitation, the delivery of certain closing documents and the execution of Articles of Merger under North Carolina law) as are required herein and as otherwise shall be required by law to consummate the Merger and cause it to become effective.

1.9 Effective Time. Subject to satisfaction or waiver of all conditions precedent set forth in this Agreement, the Merger shall become effective on the date and at the time (the “Effective Time”) on which Articles of Merger and the other provisions required by, and executed in accordance with applicable North Carolina shall have been accepted for filing by the Secretary of State of the State of North Carolina (or such later time as may be specified in the Articles of Merger); provided, however, that unless otherwise mutually agreed upon by the parties hereto, the Effective Time shall in no event be more than ten days following the Closing Date.

1.10 Further Assurances. If at any time after the Effective Time, Bancorp or the Bank shall consider or be advised that any further deeds, assignments or assurances in law or any other actions are necessary, desirable or proper to vest, perfect or confirm of record or otherwise, in the Surviving Corporation, the title to any property or rights of PSB acquired or to be acquired by reason of, or as a result of, the Merger, PSB, and its officers and directors shall execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary, desirable or proper to vest, perfect or confirm title to such property or rights in Bancorp or the Bank, as applicable and otherwise to carry out the purpose of this Agreement, and that the officers and directors of Bancorp or the Bank, as applicable, are fully authorized and directed in the name of PSB or otherwise to take any and all such actions.

ARTICLE II. REPRESENTATIONS AND WARRANTIES OF PSB

Except as otherwise specifically provided herein or as “Previously Disclosed” to Bancorp, PSB hereby makes the following representations and warranties to Bancorp. (“Previously Disclosed” shall mean, as to PSB, the disclosure of information in a letter delivered by PSB to Bancorp specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the extent that a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.)

5

2.1 Corporate Organization, Capacity and Authority.

(a) Organization. PSB is a banking corporation duly organized and incorporated and validly existing under the laws of the State of North Carolina with its deposits insured up to applicable limits by the FDIC. Other than Progressive Financial Services, Ltd., PSB has no direct or indirect subsidiaries.

(b) Power and Authority. PSB has all requisite power and authority (corporate and other) to own, lease and operate its properties and to carry on its business as it is now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure to so qualify would not have a Material Adverse Effect (as defined herein) on PSB, and, to the best knowledge and belief of the management of PSB, is not transacting business or operating any properties owned or leased by it in violation of any provision of federal, state or local law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on PSB. For purposes of this Article II, “Material Adverse Effect” shall mean any event or change that (i) is material and adverse to the financial position, results of operations or business of PSB, or (ii) would materially impair the ability of PSB to perform its obligations under this Agreement or otherwise materially impede the consummation of the Merger; provided, however, that “Material Adverse Effect” shall not be deemed to include the impact of (A) changes in banking and similar laws of general applicability or interpretations thereof by any applicable governmental authority, (B) changes in generally accepted accounting principles (“GAAP”) or regulatory accounting requirements applicable to banks and their holding companies generally, (C) changes in general economic conditions, including interest rates, affecting banks and their holding companies generally, (D) any modifications or changes to valuation policies and practices, or expenses incurred, in connection with the Merger or restructuring charges taken in connection with the Merger, in each case in accordance with GAAP, and (E) the effects of any action or omission taken with the prior consent of Bancorp or as otherwise contemplated by the Agreement.

(c) Constituent Documents. PSB has previously delivered to Bancorp true, accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of PSB and Progressive Financial Services, Ltd., including all amendments and proposed amendments thereto.

2.2 Capital Stock. The authorized capital stock of PSB consists of 1,600,000 shares of common stock, $1.00 par value per share, of which 767,317 shares are issued and outstanding as of the date hereof. Other than the PSB Stock, PSB has no outstanding class of capital stock. Each outstanding share of PSB Stock has been duly authorized and validly issued, is fully paid and nonassessable except to the extent set forth in N.C. Gen. Stat. § 53-42, has been issued in compliance with applicable federal and state securities laws and has not been issued in violation of the preemptive rights of any shareholder.

2.3 Principal Shareholders. Except as “Previously Disclosed,” there are no persons or entities known to PSB that own beneficially, directly or indirectly, more than 5% of the outstanding shares of PSB Stock.

6

2.4 Convertible Securities, Options, Etc. Except as Previously Disclosed, PSB does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of PSB Stock or any other securities of PSB, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of PSB Stock or any other securities of PSB, or (iii) plan, agreement or other arrangement pursuant to which shares of PSB Stock or any other securities of PSB or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued.

2.5 Authorization and Validity of Agreement. This Agreement has been duly and validly approved by PSB’s board of directors. Subject only to approval of the Plan of Merger by the shareholders of PSB, (i) PSB has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize PSB to enter into this Agreement and to perform its obligations and agreements and to carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of PSB enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors’ rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

2.6 Validity of Transactions; Absence of Required Consents or Waivers. Provided the required approvals of PSB’s shareholders and of governmental or regulatory authorities are obtained, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by PSB with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of PSB, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which PSB is bound or by which it or its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of PSB; (iii) to the best knowledge of management of PSB, violate any applicable federal or state statute, law, rule or regulation, or any judgment, order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of PSB; or (v) interfere with or otherwise adversely affect the ability of PSB to carry on its business as presently conducted, or interfere with or otherwise adversely affect the ability of Bancorp and the Bank to carry on such business after the Effective Time. No consents, approvals or waivers are required to be obtained from any person or entity in connection with PSB’s execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of PSB’s shareholders as described in Section 7.1(a) below and of governmental or regulatory authorities as described in Section 7.1(b) below and approvals previously obtained.

7

2.7 Books and Records. The books of account of PSB have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects PSB’s items of income and expense and all of its assets, liabilities and shareholders’ equity. The minute books of PSB accurately reflect in all material respects the corporate actions which its shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to Bancorp and its representatives.

2.8 Regulatory Reports. Since its date of incorporation, PSB has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the FDIC, (ii) the Commissioner, and (iii) any other governmental or regulatory authorities having jurisdiction over PSB except to the extent that failure to file such reports, registrations and statements would not have a Material Adverse Effect on PSB. All such reports, registrations and statements filed by PSB with the FDIC, the Commissioner or other such regulatory authority are collectively referred to herein as the “PSB Reports.” As of their respective dates and to the best knowledge of management of PSB, the PSB Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and PSB has not been notified that any such PSB Reports were deficient as to form or content. Following the date of this Agreement, PSB shall deliver to Bancorp, simultaneous with the filing thereof, a copy of each report, registration, statement or other regulatory filing made thereafter by PSB, with the FDIC, the Commissioner or any other such regulatory authority.

2.9 Shareholder Communications and FDIC Filings; Financial Statements.

(a) Shareholder Communications and FDIC Filings. PSB has made available to Bancorp true, accurate and complete copies of all communications by PSB to its shareholders generally since December 31, 2002 (collectively, the “PSB Shareholder Reports”). The PSB Shareholder Reports did not as of their respective dates contain any untrue statement of a material fact or omit to state a material fact required to be stated in such PSB Shareholder Reports or necessary in order to make the statements in such PSB Shareholder Reports, in light of the circumstances under which they were made, not misleading.

(b) Financial Statements. PSB has made available to Bancorp the following financial statements (collectively, the “PSB Financial Statements”): (i) its balance sheets as of September 30, 2005 and 2004 and December 31, 2004 and 2003 and its statements of operations for the three and nine month periods ended September 30, 2005 and for the years ended December 31, 2004, 2003 and 2002, together with notes thereto. Following the date of this Agreement, PSB promptly will deliver to Bancorp all other annual or interim financial statements prepared by or for PSB. The PSB Financial Statements (including any related notes and schedules thereto) are in accordance with PSB’s books and records and present fairly PSB’s financial condition, assets and liabilities and results of operations as of the dates indicated and for the periods specified therein subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein, which adjustments will not be material in amount or effect.

8

2.10 Tax Returns and Other Tax Matters. To the best knowledge of management of PSB, (i) PSB has timely filed or caused to be filed, or obtained proper extensions of time for filing, all federal, state and local income tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against PSB, or its respective properties have been fully paid or, if not yet due, a reserve or accrual which is reasonably believed by the management of PSB to be adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes is reflected on the PSB Financial Statements; (iii) tax returns and reports of PSB have not been subject to audit by the Internal Revenue Service (the “IRS”) or the North Carolina Department of Revenue since December 31, 2000 and PSB has not received any indication of the pendency of any audit or examination in connection with any such tax return or report or has any knowledge that any such return or report is subject to adjustment; and (iv) PSB has not executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax.

2.11 Absence of Material Adverse Effects or Certain Other Events.

(a) To the best knowledge of management of PSB, since December 31, 2004, PSB has conducted business only in the ordinary course, and there has been no Material Adverse Effect, and there has occurred no event or development and there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a Material Adverse Effect, on PSB.

(b) To the best knowledge of management of PSB, since December 31, 2004, and other than in the ordinary course of its business, PSB has not incurred any material liability or engaged in any material transaction or entered into any material agreement, suffered any loss, destruction or damage to any of its respective properties or assets, or made a material acquisition or disposition of any assets or entered into any material contract or lease.

(c) PSB has Previously Disclosed to Bancorp any and all “Raises” approved or actually effected since December 31, 2004. For purposes of this Section 2.11(c), “Raises” shall be defined to include (i) any bonus; and (ii) any increase in the salaries, compensation or general benefits payable to employees of PSB.

2.12 Absence of Undisclosed Liabilities. To the best knowledge of management of PSB, PSB has no liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including, without limitation, tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the PSB Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of its business since December 31, 2004 and which are not, individually or in the aggregate, material to PSB. No facts or circumstances exist that could reasonably be expected to serve as the basis for any other liabilities of PSB.

9

2.13 Litigation and Compliance with Law.

(a) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of PSB, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any governmental or regulatory authority, which currently exist or are ongoing, pending or, to the best knowledge and belief of management of PSB, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting PSB, or any of their respective properties, assets or employees which, if determined adversely, could result in liability on the part of PSB for, or subject PSB to, material monetary damages, fines or penalties or an injunction, or which could have a Material Adverse Effect on PSB or on PSB’s ability to consummate the Merger.

(b) Except for such licenses, permits, orders, authorizations or approvals (“Permits”) the absence of which would not have a Material Adverse Effect on PSB, PSB has all Permits of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its respective business or to own, lease and operate its respective properties. Except as would not have a Material Adverse Effect on PSB, all such Permits are in full force and effect and no violations are or have been recorded in respect of any such Permits. No proceeding is pending or, to the best knowledge and belief of management of PSB, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit.

(c) PSB is not subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the Commissioner or the FDIC) relating to its financial condition, directors or officers, employees, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against PSB that in any manner limit, restrict, regulate, enjoin or prohibit any present or past business or practice of PSB; and PSB has not been advised and has no reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award.

(d) PSB is not in violation or default under, and has complied with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including, without limitation, all provisions of North Carolina law relating to usury, consumer protection and all other laws and regulations applicable to extensions of credit) except for any such violation, default or noncompliance as does not or would not have a Material Adverse Effect on PSB, and, to the best knowledge and belief of management of PSB, there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing.

10

2.14 Real Properties. PSB has Previously Disclosed to Bancorp a listing of all real property owned or leased by PSB (the “Real Property”) and all leases pertaining to any such Real Property to which PSB is a party (the “Real Property Leases” and each a “Real Property Lease”). With respect to all Real Property, PSB has good and marketable fee simple title to, or a valid and subsisting leasehold interest in, such Real Property and owns the same free and clear of all mortgages, liens, leases, encumbrances, title defects and exceptions to title other than (i) the lien of current taxes not yet due and payable, and (ii) such imperfections of title and restrictions, covenants and easements (including utility easements) which do not materially affect the value of the Real Property and which do not and will not materially detract from, interfere with or restrict the present or future use of the properties subject thereto or affected thereby. With respect to each Real Property Lease (x) such lease is valid and enforceable in accordance with its terms, (y) there currently exists no circumstance or condition which constitutes an event of default by PSB (as lessor or lessee) or its respective lessor or lessee or which, with the passage of time or the giving of required notices will or could constitute such an event of default, and (z) subject to any required consent of PSB’s lessor, each such Real Property Lease may be assigned to the Bank or Bancorp and the execution and delivery of this Agreement does not constitute an event of default thereunder. To the best knowledge and belief of management of PSB, the Real Property complies with all applicable federal, state and local laws, regulations, ordinances or orders of any governmental authority, including those relating to zoning, building and use permits, except for such noncompliance as does not or would not have a Material Adverse Effect on PSB, and the Real Property may be used under applicable zoning ordinances for commercial banking facilities as a matter of right rather than as a conditional or nonconforming use. All improvements and fixtures included in or on the Real Property are in good condition and repair, ordinary wear and tear excepted, and there does not exist any condition which materially adversely affects the economic value thereof or materially adversely interferes (or will interfere after the Merger) with the contemplated use thereof.

2.15 Loans, Accounts, Notes and Other Receivables.

(a) All loans, accounts, notes and other receivables reflected as assets on the books and records of PSB (i) have resulted from bona fide business transactions in the ordinary course of operations of PSB, (ii) were made in accordance with the standard loan policies and procedures of PSB, and (iii) are owned by PSB free and clear in all material respects of any liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity.

(b) All of the records of PSB regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to such loans the loan documentation of which indicate are secured by any real or personal property or property rights (“Loan Collateral”), such loans are in all material respects secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in the records of such loan. PSB has not engaged in any form of indirect lending and no such indirect loans are outstanding.

(c) To the best knowledge and belief of management of PSB, each loan reflected as an asset on the books of PSB and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty.

11

(d) PSB has previously delivered to Bancorp (i) a written listing of each loan, extension of credit or other asset of PSB which, as of December 31, 2005, is classified by the FDIC or the Commissioner as “Loss,” “Doubtful,” “Substandard” or “Special Mention” (or otherwise by words of similar import), or which it has designated as a special asset or for special handling or placed on any “watch list” because of concerns regarding the ultimate collectibility or deteriorating condition of such asset or any obligor or Loan Collateral therefor, and (ii) a written listing of each loan or extension of credit that, as of December 31, 2005, was past due as to the payment of principal or interest or both, or as to which any obligor thereon (including the borrower or any guarantor) otherwise was in default, is the subject of a proceeding in bankruptcy or otherwise has indicated any inability or intention not to repay such loan or extension of credit. Each such listing is accurate and complete in all material respects as of the date indicated.

(e) As of December 31, 2004 and 2005, PSB’s, reserve for possible loan losses (the “Loan Loss Reserve”) has been established in conformity with GAAP, sound banking practices and all applicable requirements, rules and policies of the FDIC and the Commissioner and, in the best judgment of management of PSB, is reasonable in view of the size and character of its loan portfolio, current economic conditions and other relevant factors, and is adequate to provide for losses relating to or the risk of loss inherent in its loan portfolio.

(f) To the best knowledge and belief of management of PSB, each of the loans carried on PSB’s books and records (with the exception of those loans Previously Disclosed to Bancorp pursuant to subparagraph (d) of this Section 2.15) is collectible in the ordinary course of PSB’s business in an amount which is not less than the amount at which it is carried on PSB’s books and records.

2.16 Securities Portfolio and Investments. Except as Previously Disclosed, all securities owned by PSB (whether owned of record or beneficially) are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of PSB to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which PSB is a party with respect to the voting of any such securities. With respect to all “repurchase agreements” to which PSB has “purchased” securities under agreement to resell, PSB has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed that is secured by such collateral. Except for fluctuations in the market values of its investment securities, since December 31, 2004, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of PSB’s securities portfolio as a whole.

2.17 Personal Property and Other Assets. All tangible personal property of PSB material to the business operations of PSB (including, without limitation, all banking equipment, data processing equipment, vehicles, and all other tangible personal property located in any office of or used by PSB in the operation of its business) is owned or leased by PSB free and

12

clear of all liens, encumbrances, leases, title defects or exceptions to title other than such as are not material in character, amount or extent, and which do not materially detract from the value of, or interfere with the present or future use or ability to convey, the property subject thereto or affected thereby. All of PSB’s tangible personal property material to its business is in good operating condition and repair, ordinary wear and tear excepted.

2.18 Patents and Trademarks. PSB owns, possesses or has the right to use any and all patents, licenses, trademarks, trade names, copyrights, trade secrets and proprietary and other confidential information necessary to conduct its business as now conducted. PSB has not violated, and currently is not in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity. PSB owns, possesses or has the right to use any and all licenses necessary to lawfully use any and all software, applications and code currently installed or otherwise in use on any computer hardware of PSB or otherwise used by PSB in the conduct of its business.

2.19 Environmental Matters.

(a) PSB has Previously Disclosed to Bancorp copies of all written reports, correspondence, notices or other materials, if any, in its possession pertaining to: (i) environmental surveys or assessments of the Real Property or any of its Loan Collateral and any improvements thereon; or (ii) to any violation of “Environmental Laws” (as defined in Section 2.19(f) below) on, affecting or otherwise involving the Real Property or any Loan Collateral.

(b) Except as Previously Disclosed, there has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any “Hazardous Substances” (as defined in Section 2.19(g) below) by any person prior to the date hereof on, from or relating to the Real Property or, to the best knowledge and belief of management of PSB, the Loan Collateral, which constitutes a violation of any Environmental Laws.

(c) PSB has not violated any federal, state or local law, rule, regulation, order, permit or other requirement relating to health, safety or the environment or imposing liability, responsibility or standards of conduct applicable to environmental conditions, and there has been no violation of any Environmental Laws (as defined below) (including, to the best knowledge and belief of management of PSB, any violation with respect to or relating to any Loan Collateral) by any other person or entity for whose liability or obligation with respect to any particular matter or violation PSB is or may be responsible or liable, except to the extent any violations of which, when taken as a whole, would not have a Material Adverse Effect on PSB.

(d) PSB is not subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to the Real Property or, to the best knowledge and belief of management of PSB, any Loan Collateral by any person or entity.

13

(e) No facts, events or conditions relating to the Real Property or, to the best knowledge and belief of management of PSB, any Loan Collateral, or the operations of PSB, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

(f) For purposes of this Agreement, “Environmental Laws” shall include:

(i) all federal, state and local statutes, regulations, ordinances, orders, decrees, and similar provisions having the force or effect of law,

(ii) all contractual agreements, and

(iii) all common law

concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all standards of conduct and bases of obligations relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, discharge, release, threatened release, control, emergency removal, clean-up or remediation of any Hazardous Substances (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, any “Superfund” or “Superlien” law, the Americans with Disabilities Act, and the Occupational Safety and Health Act), as such may now, or at any time prior to the effective time, be defined or in effect.

(g) For purposes of this Agreement, “Hazardous Substances” shall include hazardous, toxic or otherwise regulated materials, substances or wastes; chemical substances or mixtures; pesticides; pollutants; contaminants; toxic chemicals; oil or other petroleum products, byproducts, additives, or constituents (including but not limited to crude oil, diesel oil, fuel oil, gasoline, lubrication oil, oil refuse, oil mixed with other waste, oil sludge, MTBE and all other liquid hydrocarbons regardless of specific gravity); asbestos or asbestos containing material; flammable explosives; polychlorinated biphenyls (“PCBs”) or any material containing PCBs; radioactive materials; biological micro-organisms, viruses, fungi, spores; environmental tobacco smoke; radon or radon gas; formaldehyde or any material containing formaldehyde; fumigants; any material or substance comprising or contributing to conditions known as “sick building syndrome,” “building-related illness” or similar conditions or exposures; and/or any hazardous, toxic, regulated or dangerous waste, substance or material defined as such by the United States Environmental Protection Agency or any other federal, state or local governmental agency or political subdivision thereof, or for the purpose of or by any Environmental Laws, as now or at any time prior to the Effective Time may be defined or in effect.

14

2.20 Brokerage or Finders’ Commissions. All negotiations relative to this Agreement and the transactions described herein have been carried on by PSB or its legal counsel directly with Bancorp or its representatives, and no person or firm has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, PSB or its board of directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein.

2.21 Material Contracts.

(a) Except as Previously Disclosed, PSB is not a party to or bound by any agreement, other than loans made in the ordinary course of business, (i) involving money or other property in an amount or with a value in excess of $25,000, (ii) which calls for the provision of goods or services to PSB and cannot be terminated without material penalty upon written notice to the other party thereto, (iii) which is material to PSB and was not entered into in the ordinary course of business, (iv) which involves hedging, options or any similar trading activity, or interest rate exchanges or swaps, (v) which commits PSB to extend any loan or credit (with the exception of letters of credit, lines of credit and loan commitments extended in the ordinary course of business), (vi) which involves the purchase or sale of any assets of PSB, or the purchase, sale, issuance, redemption or transfer of any capital stock or other securities of PSB, or (vii) with any director, officer or principal shareholder of PSB (including, without limitation, any consulting agreement, but not including any agreement relating to loans or other banking services which were made in the ordinary course of its business and on substantially the same terms and conditions as were prevailing at that time for similar agreements with unrelated persons).

(b) PSB is not in default, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute such a default, under any contract, lease, insurance policy, commitment or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits.

2.22 Employment Matters; Employee Relations.

(a) PSB (i) has paid in full to or accrued on behalf of all its respective directors, officers and employees all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services rendered, including all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services performed by them to the date of this Agreement and all vacation pay, sick pay, severance pay and other amounts promised to the extent required by law or its existing policies or practices, and (ii) to the best knowledge of management of PSB, is in compliance in all material respects with all applicable federal, state and local laws, statutes, rules and regulations with regard to employment and employment practices, terms and conditions, and wages and hours and other compensation matters; and no person has, to the best knowledge and belief of management of PSB, asserted that PSB is liable in any amount for any arrearages in wages or employment taxes or for any penalties for failure to comply with any of the foregoing.

15

(b) There is no action, suit or proceeding by any person pending or, to the best knowledge and belief of management of PSB, threatened against PSB (or its employees), involving employment discrimination, harassment, wrongful discharge or similar claims. PSB is not a party to or bound by any collective bargaining agreement with any of its employees, any labor union or any other collective bargaining unit or organization. There is no pending or, to PSB’s best knowledge, threatened labor dispute, work stoppage or strike involving PSB, or any of its employees, or any pending or, to PSB’s best knowledge, threatened proceeding in which it is asserted that PSB has committed an unfair labor practice; and, PSB is not aware of any activity involving it or any of its employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity.

2.23 Employment Agreements; Employee Benefit Plans.

(a) PSB has Previously Disclosed to Bancorp a true and complete list of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans and agreements; all employment and severance contracts; all medical, dental, health, and life insurance plans; all vacation, sickness and other leave plans, disability and death benefit plans; and all other employee benefit plans, contracts, or arrangements maintained or contributed to by PSB for the benefit of any employees, former employees, directors, former directors or any of their beneficiaries (collectively, the “Plans”). True and complete copies of all Plans, including, but not limited to, any trust instruments or insurance contracts, if any, forming a part thereof, and all amendments thereto, previously have been supplied to Bancorp. PSB does not maintain, sponsor, contribute to or otherwise participate in any “Employee Benefit Plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), any “Multiemployer Plan” within the meaning of Section 3(37) of ERISA, or any “Multiple Employer Welfare Arrangement” within the meaning of Section 3(40) of ERISA. Each Plan that is an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA and which is intended to be qualified under Section 401(a) of the Code, has received or applied for a favorable determination letter from the IRS and PSB is not aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. To the best knowledge of management of PSB, all reports and returns with respect to the Plans (and any Plans previously maintained by PSB) required to be filed with any governmental department, agency, service or other authority, including, without limitation, Internal Revenue Service Form 5500 (Annual Report), have been properly and timely filed.

(b) All “Employee Benefit Plans” maintained by or otherwise covering employees or former employees of PSB currently are, and at all times have been, in compliance with all provisions and requirements of ERISA except those the noncompliance of which, when taken as a whole, would not have a Material Adverse Effect on PSB. There is no pending or, to PSB’s best knowledge, threatened litigation relating to any Plan or any such Plan previously maintained by PSB. PSB has not engaged in a transaction with respect to any Plan that has subjected it, or absent the exemption under which the transaction was effected, would subject it to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA.

(c) PSB has Previously Disclosed to Bancorp a true, correct and complete copy (including copies of all amendments thereto) of each of its retirement plans that is intended to be

16

qualified under Section 401(a) of the Code (collectively, the “Retirement Plans”), together with true, correct and complete copies of the summary plan descriptions relating to the Retirement Plans, the most recent determination letters received from the IRS regarding the Retirement Plans, and the most recent Annual Reports (Form 5500 series) and related schedules, if any, for the Retirement Plans. The Retirement Plans are qualified under the provisions of Section 401(a) of the Code, the trusts under the Retirement Plans are exempt trusts under Section 501(a) of the Code, and determination letters have been issued or applied for with respect to the Retirement Plans to said effect, including determination letters covering the current terms and provisions of the Retirement Plans. There are no issues relating to said qualification or exemption of the Retirement Plans currently pending before the IRS, the United States Department of Labor, the Pension Benefit Guaranty Corporation or any court. The Retirement Plans and the administration thereof meet (and have met since the establishment of the Retirement Plans) the requirements of ERISA, the Code and all other laws, rules and regulations applicable to the Retirement Plans and do not violate (and since the establishment of the Retirement Plans have not violated) any of the provisions of ERISA, the Code and such other laws, rules and regulations, except to the extent such violation, when taken as a whole, would not have a Material Adverse Effect on PSB. Without limiting the generality of the foregoing, all reports and returns with respect to the Retirement Plans required to be filed with any governmental department, agency, service or other authority have been properly and timely filed. There are no disputes or unresolved disagreements with respect to the Retirement Plans or the administration thereof currently existing between PSB, or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of PSB, or beneficiary of any such employee or any other person or entity. No “reportable event” within the meaning of Section 4043(b) of ERISA has occurred at any time with respect to the Retirement Plans, other than those that, when taken as a whole, would not have a Material Adverse Effect on PSB.

(d) No material liability under subtitle C or D of Title IV of ERISA has been or is expected to be incurred by PSB with respect to the Retirement Plans or with respect to any other ongoing, frozen or terminated defined benefit pension plan currently or formerly maintained by PSB. PSB presently does not contribute to a “Multiemployer Plan” or has ever contributed to such a plan. All contributions required to be made pursuant to the terms of each of the Plans (including without limitation the Retirement Plans and any other “pension plan” (as defined in Section 3(2) of ERISA, provided such plan is intended to qualify under the provisions of Section 401(a) of the Code) maintained by PSB have been timely made. Neither the Retirement Plans nor any other “pension plan” maintained by PSB have an “accumulated funding deficiency” (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. PSB has not provided, and is not required to provide, security to any “pension plan” or to any “Single Employer Plan” pursuant to Section 401(a)(29) of the Code. Under the Retirement Plans and any other “pension plan” maintained by PSB as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all “benefit liabilities,” within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan’s most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year.

(e) There are no restrictions on the rights of PSB to amend or terminate any Plan. Except as Previously Disclosed, neither the execution and delivery of this Agreement nor the

17

consummation of the transactions contemplated hereby will (except as otherwise specifically provided for or contemplated by the transactions described in this Agreement) (i) result in any payment to any person (including, without limitation, any severance compensation or payment, unemployment compensation, “golden parachute” or “change in control” payment, or otherwise) becoming due under any plan or agreement to any director, officer, employee or consultant, (ii) increase any benefits otherwise payable under any plan or agreement, or (iii) result in any acceleration of the time of payment or vesting of any such benefit.

2.24 Insurance. PSB has in effect a “financial institutions bond” and such other policies of general liability, casualty, directors and officers liability, employee fidelity, errors and omissions and other property and liability insurance as have been Previously Disclosed to Bancorp (the “Policies”). The Policies provide coverage in such amounts and against such liabilities, casualties, losses or risks as is required by applicable law or regulation; and, in the judgment of management of PSB, the insurance coverage provided under the Policies is reasonable and adequate in all respects for PSB. Each of the Policies is in full force and effect and is valid and enforceable in accordance with its terms, and is underwritten by an insurer of recognized financial responsibility that is qualified to transact business in North Carolina; and PSB has taken all requisite actions (including the giving of required notices) under each such Policy to preserve all rights thereunder with respect to all matters. PSB is not in default under the provisions of, has received notice of cancellation or nonrenewal of, or any premium increase on, or has any knowledge of any failure to pay any premium on or any inaccuracy in any application for any Policy. There are no pending claims under any Policy, and PSB has no knowledge of any facts or of the occurrence of any event that is reasonably likely to result in any such claim.

2.25 Insurance of Deposits. PSB is an “insured institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. The deposits of each depositor in PSB are insured by the FDIC to the maximum amount provided by law, all deposit insurance premiums due from PSB to the FDIC have been paid in full in a timely fashion, and, to the best knowledge and belief of PSB, no proceedings have been commenced or are contemplated by the FDIC or otherwise to terminate such insurance.

2.26 Compensation; Stock Ownership. PSB has Previously Disclosed (i) the name and current salary or wage rate for each present employee of PSB, and (ii) the name of and number of shares of PSB Stock beneficially owned by each of the directors and officers of PSB and by any person or entity known to PSB to own beneficially 5% or more of the issued and outstanding shares of PSB Stock.

2.27 Disclosure. To the best knowledge and belief of management of PSB, no written statement, certificate, schedule, list or other written information furnished by or on behalf of PSB at any time to Bancorp in connection with this Agreement (including without limitation the statements contained herein), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by PSB to Bancorp is or will be a true and complete copy of such document, unmodified except by another document delivered by PSB.

18

ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BANCORP AND BANK

Except as otherwise specifically described herein or as “Previously Disclosed” to PSB, Bancorp hereby makes the following representations and warranties to PSB. (“Previously Disclosed” shall mean, as to Bancorp, the disclosure of information in a letter delivered by Bancorp to PSB specifically referring to this Agreement and arranged in sections corresponding to the sections, subsections and items of this Agreement applicable thereto, and which letter has been delivered prior to the execution of this Agreement. Information shall be deemed Previously Disclosed for the purpose of a given section, subsection or item of this Agreement only to the extent a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.)

3.1 Corporate Organization, Capacity and Authority.

(a) Organization. Bancorp is a corporation duly organized and validly existing under the laws of the State of North Carolina and is registered with the Commissioner as a commercial bank holding company and with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended.

(b) Subsidiaries. Bancorp has two wholly owned bank subsidiaries, the Bank and New Century Bank. Bancorp also owns 100% of the issued and outstanding common securities of New Century Statutory Trust I, a special purpose entity organized as a statutory trust under the laws of the State of Delaware and formed to allow Bancorp to issue trust preferred securities. Other than the Bank, New Century Bank and New Century Statutory Trust I, Bancorp has no subsidiaries, direct or indirect, and does not own, directly or indirectly, any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity, except for equity issues reflected in Bancorp’s investment portfolio and securities held in a fiduciary capacity.

(c) Organization of Subsidiary. The Bank is duly organized and validly existing under the laws of the State of North Carolina. All of the outstanding capital stock of the Bank is owned of record and beneficially, free and clear of all security interests and claims, by Bancorp. All of the outstanding shares of capital stock of the Bank are duly authorized, validly issued, fully paid and nonassessable, except to the extent set forth in N.C. Gen. Stat. § 53-42.

(d) Power and Authority. Each of Bancorp and the Bank has all requisite power and authority (corporate and other) to own, lease and operate its properties and conduct its business as now being conducted, is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect (as defined herein) on Bancorp and the Bank, and is not transacting business, or operating any properties owned or leased by it, in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on Bancorp and the Bank. For purposes of this Article III, “Material Adverse Effect” shall mean: (a) with respect to references to Bancorp, any change in the business of Bancorp that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, investments,

19

properties or operations of Bancorp, or (b) with respect to references to the Bank, any change in the business of the Bank that is or could be materially adverse to the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of Bancorp and the Bank considered as one enterprise. “Material Adverse Effect” shall not be deemed to include the impact of (A) changes in banking and similar laws of general applicability or interpretations thereof by any applicable governmental authority, (B) changes in generally accepted accounting principles (“GAAP”) or regulatory accounting requirements applicable to banks and their holding companies generally, (C) changes in general economic conditions, including interest rates, affecting banks and their holding companies generally, (D) any modifications or changes to valuation policies and practices, or expenses incurred, in connection with the Merger or restructuring charges taken in connection with the Merger, in each case in accordance with GAAP, and (E) the effects of any action or omission taken with the prior consent of Bancorp or as otherwise contemplated by the Agreement.

(e) Constituent Documents. Bancorp has previously delivered to PSB true, accurate and complete copies of the currently effective charter and bylaws or equivalent organizational documents of each of Bancorp and the Bank, including all amendments and proposed amendments thereto.

3.2 Authorization and Validity of Agreement. This Agreement has been duly and validly approved by the respective boards of directors of Bancorp and the Bank. (i) Bancorp and the Bank have the corporate power and authority to execute and deliver this Agreement and to perform their obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to be taken to authorize Bancorp and the Bank to enter into this Agreement and to perform its respective obligations and agreements and to carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of Bancorp and the Bank enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors’ rights generally, (B) legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

3.3 Validity of Transactions; Absence of Required Consents or Waivers. Provided the required approvals of governmental or regulatory authorities are obtained, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by Bancorp or the Bank with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, the Articles of Incorporation or bylaws or the equivalent organizational documents of Bancorp or the Bank, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which Bancorp or the Bank, is bound or by which it, its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of the properties or assets of Bancorp or the Bank; (iii) to the best knowledge of management of Bancorp and the Bank, violate any applicable federal or state statute, law, rule or regulation, or any order, writ, injunction or decree of any court, administrative or regulatory agency or

20

governmental body; (iv) result in the acceleration of any obligation or indebtedness of Bancorp or the Bank; or (v) interfere with or otherwise adversely affect Bancorp’s or the Bank’s ability to carry on its business as presently conducted. No consents, approvals or waivers are required to be obtained from any governmental or regulatory authority in connection with Bancorp’s or the Bank’s execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of governmental or regulatory authorities described in Section 7.1 below and approvals previously obtained.

3.4 Books and Records. The books of account of Bancorp and the Bank have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books of account are complete and reflect accurately in all material respects Bancorp’s and the Bank’s, respectively, items of income and expense and all of its assets, liabilities and shareholders’ equity. The minute books of each of Bancorp and the Bank accurately reflect in all material respects the corporate actions which its respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to PSB and its representatives.

3.5 Obstacles to Regulatory Approval. To the best of the knowledge and belief of the management of Bancorp, no fact or condition relating to Bancorp or the Bank exists that may reasonably be expected to (i) prevent, impede or delay Bancorp, the Bank or PSB from obtaining the regulatory approvals required in order to consummate transactions described herein; and, if any such fact or condition becomes known to the executive officers of Bancorp, Bancorp promptly (and in any event within three days after obtaining such knowledge) shall communicate such fact or condition to the President of PSB.

3.6 Disclosure. To the best of the knowledge and belief of Bancorp, no written statement, certificate, schedule, list or written information furnished by or on behalf of Bancorp at any time to PSB in connection with this Agreement (including, without limitation, the statements contained herein), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by Bancorp to PSB is or will be a true and complete copy of such document, unmodified except by another document delivered by Bancorp.

ARTICLE IV. COVENANTS OF PSB

4.1 Affirmative Covenants of PSB. PSB hereby covenants and agrees as follows with Bancorp:

(a) Conduct of Business Prior to Effective Time. Between the date of this Agreement and the Effective Time, except as otherwise agreed by Bancorp in writing, PSB will carry on its business in and only in the regular and usual course in substantially the same manner as such business heretofore was conducted, and will:

21

(i) make all reasonable efforts to preserve intact its present business organization, keep available its present officers and employees, and preserve its relationships with customers, depositors, creditors, correspondents, suppliers, and others having business relationships with them;

(ii) maintain all of its properties and equipment used in its business in customary repair, order and condition, ordinary wear and tear excepted;

(iii) maintain its books of account and records in the usual, regular and ordinary manner in accordance with sound business practices applied on a consistent basis except to the extent otherwise reasonably required by applicable laws or regulations and on a monthly basis after the date hereof provide the Bank with copies of month-end reconciliations for (a) correspondent bank accounts; and (b) all suspense or clearing accounts;

(iv) comply in all material respects with all laws, rules and regulations applicable to it, its properties, assets or employees and to the conduct of its business;

(v) not change its existing loan underwriting guidelines, policies or procedures except as may be required by law or applicable regulation;

(vi) continue to maintain in force insurance such as is described in Section 2.24 above; not modify any bonds or policies of insurance in effect as of the date hereof unless the same, as modified, provides substantially equivalent coverage; and, not cancel, allow to be terminated or, to the extent available, fail to renew, any such bond or policy of insurance unless the same is replaced with a bond or policy providing substantially equivalent coverage; and

(vii) promptly provide to Bancorp such information about its financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations as Bancorp reasonably shall request.

(b) Loans. PSB will provide Bancorp with two days’ prior notice of each new extension of credit (including the issuance of unfunded commitments, but excluding such new extensions of credit as have been Previously Disclosed,) that it proposes to make within the following categories: (i) loan participations, (ii) loans for acquisition and development purposes, and (iii) non-residential construction loans exceeding $500,000 in principal amount. PSB will not enter into any form of indirect lending. Additionally, PSB will make available and provide to Bancorp the following information with respect to its loans and other extensions of credit (such assets herein referred to as “Loans”) as of December 31, 2005 and as of the end of each month thereafter until the Effective Time, such information for each month, or in the case of (ii) below, quarterly, to be in form and substance as is usual and customary in the conduct of its business and to be furnished within 25 days of the end of each month ending after the date hereof, except as otherwise provided:

(i) a list of Loans past due for 30 days or more as to principal or interest;

22

(ii) an analysis of the Loan Loss Reserve and management’s assessment of the adequacy of the Loan Loss Reserve, which analysis and assessment shall include a list of all classified or “watch list” Loans, along with the outstanding balance and amount specifically allocated to the Loan Loss Reserve for each such classified or “watch list” Loan;

(iii) a list of Loans in nonaccrual status;

(iv) a list of all Loans over $250,000 without principal reduction for a period of longer than one year;

(v) a list of all foreclosed real property or other real estate owned and all repossessed personal property;

(vi) a list of reworked or restructured Loans over $250,000 and still outstanding, including original terms, restructured terms and status (provided however, that for purposes of this Section 4.1(b)(vi), the renewal of a loan under the same or substantially similar terms and conditions shall not constitute a “reworked or restructured” Loan);

(vii) a list of any actual or threatened litigation by or against PSB pertaining to any Loans or credits, together with the pleadings and other filed documents related thereto; and

(viii) a list of new and renewed Loans made during the previous month.

(c) Accruals for Loan Loss Reserve, Expenses and Other Accounting Matters. PSB will make such appropriate accounting entries in its books and records and take such other actions as Bancorp, in consultation with PSB’s independent certified public accounting firm, deems to be required by GAAP, or which Bancorp otherwise reasonably deems to be necessary, appropriate or desirable in anticipation of the Merger and which are not in violation of GAAP or applicable law, including without limitation additional provisions to PSB’s Loan Loss Reserve or accruals or the creation of reserves for employee benefit and Merger-related expenses; provided, however, that notwithstanding any provision of this Agreement to the contrary, and except as otherwise agreed to by PSB and Bancorp, PSB shall not be required to make any such accounting entries until immediately prior to the Closing and only following receipt of written confirmation from Bancorp that it is not aware of any fact or circumstance that would prevent completion of the Merger; and, provided further, however, that no such entry made as a result of such a request by Bancorp shall, itself alone, constitute a breach by PSB of any representation, warranty or covenant made by PSB in this Agreement.

(d) Loan Charge-Offs. PSB will make such appropriate accounting entries in its books and records and take such other actions which are not in violation of GAAP or

23

applicable law as Bancorp, in consultation with PSB’s independent certified public accounting firm, reasonably deems to be necessary, appropriate or desirable to charge-off any Loans on PSB’s books, or any portions thereof, that Bancorp, in its sole discretion, considers to be losses or that Bancorp otherwise believes, in good faith, are required to be charged off pursuant to applicable banking regulations, GAAP or otherwise, or that otherwise would be charged off by Bancorp after the Effective Time in accordance with its Loan administration and charge-off policies and procedures; provided, however, that notwithstanding any provision of this Agreement to the contrary, and except as otherwise agreed to by PSB and Bancorp, PSB shall not be required to make any such accounting entries or take any such actions until immediately prior to the Closing and only following receipt of written confirmation from Bancorp that it is not aware of any fact or circumstance that would prevent completion of the Merger; and, provided further, however, that no such entry made as a result of such a request by Bancorp shall, itself alone, constitute a breach by PSB of any representation, warranty or covenant made by PSB in this Agreement.

(e) Notice of Certain Changes or Events. Following the execution of this Agreement and up to the Effective Time, PSB promptly will notify Bancorp in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or of (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of PSB herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of PSB’s covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.3 below.

(f) Consents to Assignment of Contracts and Leases. PSB will use its best efforts to obtain all required consents to the assignment to Bancorp or the Bank of PSB’s rights and obligations under any contracts or personal or real property leases, each of which consents shall be in such form as shall be specified by Bancorp.

(g) Qualified Plans. PSB shall take all appropriate action as shall be necessary to maintain the Progressive State Bank 401(k) Plan (the “PSB 401(k) Plan”), as a qualified plan for purposes of ERISA. PSB acknowledges that Bancorp intends (i) that the PSB 40l(k) Plan will be merged into the New Century Bancorp, Inc. 401(k) Plan (the “Bancorp 401(k) Plan”) as soon as practicable after the Effective Time. PSB shall take all such actions with respect to such plans as shall be necessary to accomplish such intent and, until the Effective Time, will not take any other extraordinary actions with respect to such plans without the written consent of Bancorp.

(h) Further Action; Instruments of Transfer. PSB shall (i) use its best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to Bancorp all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of PSB in consummating such transactions and (iii) cooperate with Bancorp fully in carrying out, and will pursue diligently the expeditious completion of, such transactions.

24

4.2 Negative Covenants of PSB. Between the date hereof and the Effective Time, PSB will not do any of the following things or take any of the following actions without the prior written consent and authorization of the President of Bancorp:

(a) Amendments to Articles of Incorporation or Bylaws. Amend its Articles of Incorporation or bylaws.

(b) Change in Capital Stock. Make any change in its authorized capital stock, or create any other or additional authorized capital stock or other securities, or issue, sell, purchase, redeem, retire, reclassify, combine or split any shares of its capital stock or other securities (including securities convertible into capital stock), or enter into any agreement or understanding with respect to any such action.

(c) Options, Warrants and Rights. Grant or issue any options, warrants, calls, puts or other rights of any kind relating to the purchase, redemption or conversion of shares of its capital stock or any other securities (including securities convertible into capital stock) or enter into any agreement or understanding with respect to any such action.

(d) Dividends. Declare or pay any dividends on any outstanding shares of its capital stock or make any other distributions on or in respect of any shares of its capital stock or otherwise to its shareholders, provided however, that PSB shall be permitted to declare and pay a one time dividend on or after January 1, 2006 and before the Effective Time in an amount not to exceed $0.40 per share on the issued and outstanding shares of PSB Stock as of the date hereof.

(e) Employment, Benefit or Retirement Agreements or Plans. Except as required by law, contemplated by this Agreement or Previously Disclosed, (i) enter into, become bound by, renew or extend any oral or written contract, agreement or commitment for the employment or compensation of any director, officer, employee or consultant which is not immediately terminable by PSB without cost or other liability on no more than 30 days’ notice; (ii) amend any existing, or adopt, enter into or become bound by any new or additional, profit-sharing, bonus, incentive, change in control or “golden parachute,” stock option, stock purchase, pension, retirement, insurance (hospitalization, life or other), paid leave (sick leave, vacation leave or other) or similar contract, agreement, commitment, understanding, plan or arrangement (whether formal or informal) with respect to or which provides for benefits for any of its current or former directors, officers, employees or consultants; (iii) make contributions to any 401(k) Plan other than basic and matching contributions in accordance with the terms of such 401(k) Plan as Previously Disclosed; or (iv) enter into or become bound by any contract with or commitment to any labor or trade union or association or any collective bargaining group.

(f) Increase in Compensation. With the exception of the anticipated increases in annual salary and annual officer and employee bonuses Previously Disclosed to Bancorp and such other raises as are in the ordinary course of business and in accordance with historical practices, increase the compensation or benefits of, or pay any bonus or other special or additional compensation to, any of its directors, officers, employees or consultants.

25

(g) Accounting Practices. Make any changes in its accounting methods, practices or procedures or in depreciation or amortization policies, schedules or rates heretofore applied (except as required by GAAP or governmental regulations).

(h) Acquisitions; Additional Branch Offices. Directly or indirectly (i) acquire or merge with, or acquire any branch or all or any significant part of the assets of, any other person or entity, (ii) open any new branch office, or (iii) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction or the opening of a new branch office.

(i) Changes in Business Practices. Except as may be required by the FDIC, the Commissioner or any other governmental or other regulatory agency having jurisdiction over PSB or as shall be required by applicable law, regulation or this Agreement, (i) change in any material respect the nature of its business or the manner in which it conducts its business, (ii) discontinue any material portion or line of its business or (iii) change in any material respect its lending, investment, asset-liability management or other material banking or business policies (except to the extent required by Section 4.1 above and Section 6.8 below).

(j) Exclusive Merger Agreement. Directly or indirectly, through any person (i) encourage, solicit or attempt to initiate or procure discussions, negotiations or offers with or from any person or entity (other than Bancorp) relating to a merger or other acquisition of PSB or the purchase or acquisition of any PSB Stock or all or any significant part of PSB’s assets; or, except as required by law or by fiduciary obligations owed to the person assisted, provide assistance to any person in connection with any such offer; (ii) except to the extent required by law, disclose to any person or entity any information not customarily disclosed to the public concerning PSB or its business, or afford to any other person or entity access to its properties, facilities, books or records; (iii) sell or transfer all or any significant part of PSB’s assets to any other person or entity; or (iv) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction.

(k) Acquisition or Disposition of Assets.

(i) Except in the ordinary course of business consistent with its past practices, sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any real estate; or sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any equipment or any other fixed or capital asset (other than real estate) having a book value or a fair market value, whichever is greater, of more than $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets.

(ii) Except in the ordinary course of business consistent with past practices, purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any real property; or purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment

26

relating to the purchase, lease (as lessee) or other acquisition of any equipment or any other fixed assets (other than real estate) having a purchase price, or involving aggregate lease payments, in excess of $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets;

(iii) Enter into any purchase commitment for supplies or services which calls for prices of goods or fees for services materially higher than current market prices or fees or which obligates PSB for a period longer than six months;

(iv) Except in the ordinary course of its business consistent with its past practices, sell, purchase or repurchase, or enter into or become bound by any contract, agreement, option or commitment to sell, purchase or repurchase, any loan or other receivable or any participation in any loan or other receivable; or

(v) Sell or dispose of, or enter into or become bound by any contract, agreement, option or commitment relating to the sale or other disposition of, any other asset (whether tangible or intangible, and including without limitation any trade name, trademark, copyright, service mark or intellectual property right or license) other than assets that are obsolete or no longer used in PSB’s business; or assign its right to or otherwise give any other person its permission or consent to use or do business under the corporate name of PSB or any name similar thereto; or release, transfer or waive any license or right granted to it by any other person to use any trademark, trade name, copyright, service mark or intellectual property right.

(l) Debt; Liabilities. Except in the ordinary course of its business consistent with its past practices, (i) enter into or become bound by any promissory note, loan agreement or other agreement or arrangement pertaining to its borrowing of money, (ii) assume, guarantee, endorse or otherwise become responsible or liable for any obligation of any other person or entity, or (iii) incur any other liability or obligation (absolute or contingent).

(m) Liens; Encumbrances. Mortgage, pledge or subject any of its assets to, or permit any of its assets to become or (with the exception of those liens and encumbrances Previously Disclosed to Bancorp with specificity) remain subject to, any lien or any other encumbrance (other than in the ordinary course of business consistent with its past practices in connection with borrowings from the Federal Home Loan Bank of Atlanta, securing of public funds deposits, repurchase agreements or other similar operating matters).

(n) Waiver of Rights. Waive, release or compromise any material rights in its favor (except in the ordinary course of business) except in good faith for fair value in money or money’s worth, nor waive, release or compromise any rights against or with respect to any of its officers, directors or shareholders or members of families of officers, directors or shareholders.

(o) Other Contracts. Except as Previously Disclosed, enter into or become bound by any contracts, agreements, commitments or understandings (other than those described elsewhere in this Section 4.2) (i) for or with respect to any charitable contribution in excess of $2,000; (ii) with any governmental or regulatory agency or authority; (iii) pursuant to which PSB

27

would assume, guarantee, endorse or otherwise become liable for the debt, liability or obligation of any other person or entity; (iv) which is entered into other than in the ordinary course of its business; or (v) which, in the case of any one contract, agreement, commitment or understanding and whether or not in the ordinary course of its business, would obligate or commit PSB to make expenditures of more than $25,000 (other than contracts, agreements, commitments or understandings entered into in the ordinary course of PSB’s lending operations).

(p) Deposit Liabilities. Following the date of this Agreement and up to the Effective Time, PSB will make pricing decisions with respect to its deposit accounts in a manner consistent with its past practices based on competition and prevailing market rates in its banking markets.

4.3 Shareholder Approval.

(a) Meeting of Shareholders. PSB shall cause a meeting of its shareholders to be duly called and held as soon as practicable for the purpose of voting on the approval and adoption of the Plan of Merger. In connection with the call and conduct of and all other matters relating to its shareholders’ meeting or other shareholder approval, PSB shall fully comply with all provisions of applicable federal and state law and regulations and with its Articles of Incorporation and bylaws.

(b) Recommendation of Board of Directors. Subject to its fiduciary obligations, the board of directors of PSB shall recommend to the shareholders of PSB that they vote their shares at the shareholders’ meeting contemplated by Section 4.3(a) above to approve the Plan of Merger.

ARTICLE V. COVENANTS OF BANCORP AND BANK

Bancorp hereby covenants and agrees as follows with PSB:

5.1 Employment.

(a) Contracts. At the Effective Time, the Bank will enter into an Employment Agreement with Roland T. Orr substantially in the form attached hereto as Exhibit A.

(b) Other Employees. After the Effective Time, Bancorp will use its best efforts to retain other employees of PSB. Any such person so retained shall be employed on an “at-will” basis, and nothing in this Agreement shall be deemed to constitute an employment agreement with any such person or to obligate Bancorp or any affiliate of Bancorp to employ any such person for any specific period of time or in any specific position or location or to restrict Bancorp’s right to change the rate of compensation or terminate the employment of any such person at any time and for any reason.

28

5.2 Employee Benefits.

(a) Generally. Except as otherwise provided herein, or as Previously Disclosed to Bancorp, and to the extent permitted by contribution and deduction limitations of ERISA and the Code with respect to Bancorp’s qualified plans, any employee of PSB who continues employment with Bancorp or the Bank at the Effective Time (a “New Employee”) shall become entitled to receive all employee benefits and to participate in all benefit plans provided by Bancorp or the Bank, as applicable, on the same basis and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of Bancorp or the Bank. However, each New Employee shall be given credit for his or her full years of service with PSB for purposes of (i) entitlement to vacation and sick leave and for participation in all Bancorp welfare, insurance and other fringe benefit plans, and (ii) eligibility for participation and vesting in the Bancorp 401(k) Plan. Notwithstanding any provision herein to the contrary, neither the Bank nor Bancorp will be required to take any action that could adversely affect the continuing qualification of the Bancorp 401(k) Plan. The Bank will grant to each New Employee a pro rata amount of sick leave and vacation leave, in accordance with the Bank’s standard leave policies, for the period between the Effective Time and the end of the calendar year during which the Effective Time occurs. Each New Employee will be permitted to carry over accrued and unused sick leave and vacation leave earned at PSB but shall thereafter be subject to the Bank’s leave policies.

(b) Health Insurance. Each New Employee shall be entitled to participate in the Bank’s group health insurance plan at a cost equal to the cost, if any, for any Bank employee and such participation shall be without regard to pre-existing condition requirements under the Bank’s group health insurance plan, to the extent any such condition at the Effective Time would have been covered under the health insurance plans of PSB.

(c) Retirement Benefits. Subject to the agreement of the Bank’s group health insurance plan carrier, each employee of PSB who has retired with ten (10) years of service after attaining age 55, but before attaining age 65 or who has retired with at least ten (10) years of service at PSB after attaining age 65 and any employee of PSB after the Effective Time who retires after meeting the aforesaid age and service qualifications will be permitted, at such employee’s own cost and expense, to elect to retain medical, dental care and life insurance as if they were active New Employees. After the Effective Time, Bancorp and the Bank shall, subject to approval of their group health insurance plan carrier, seek to have the foregoing coverage applicable to all New Employees as well as all employees of Bancorp, the Bank and any of its direct or indirect subsidiaries.

5.3 PSB Directors.

(a) Representation on Bank Board. The Bank shall appoint one person mutually agreeable to Bancorp and PSB to serve as a director of the Bank until the next annual meeting of its shareholder, Bancorp, at which directors of the Bank are elected and shall take such actions as shall be required, if any, to increase the number of members of its board of directors as may be necessary to permit such nominee to serve as director. The Bank’s board shall nominate for election and Bancorp shall elect such person at the annual meeting of the Bank’s shareholder such that the nominee of PSB will be able to serve as a director of the Bank for a term of no less than one year after the Effective Time.

29

(b) Advisory Board. Each member of the board of directors of PSB not also serving as an officer, independent contractor or employee of PSB at the Effective Time shall be appointed to serve on an advisory board of the Bank for Lumberton, North Carolina. Such members shall be compensated $500 per month for a period of two (2) years and shall attend such advisory board meetings as shall be called by the President of the Bank from time to time .

5.4 Indemnification of Directors and Officers.

(a) After the Effective Time, without releasing any insurance carrier and after exhaustion of all applicable director and liability insurance coverage for PSB and its directors and officers, Bancorp shall indemnify, hold harmless and defend the directors and officers of PSB in office at the Effective Time, to the same extent as it indemnifies its own directors and officers, from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature including, without limitation, reasonable attorneys’ fees and legal costs and expenses therewith whether known or unknown and whether now existing or hereafter arising which may be threatened against, incurred, undertaken, received or paid by such persons in connection with or which arise out of or result from or are based upon any action or failure to act by such person in the ordinary scope of his duties as a director or officer of PSB (including service as a fiduciary of any of the PSB Plans (as defined in Section 2.23(a)) through the Effective Time; provided, however, that Bancorp shall not be obligated to indemnify such person for (i) any act not available for statutory or permissible indemnification under North Carolina law, (ii) any penalty, decree, order, finding or other action imposed or taken by any banking regulatory authority, (iii) any violation or alleged violation of federal or state securities laws to the extent that indemnification is prohibited by law, or (iv) any claim of sexual or other unlawful harassment, or any form of employment discrimination prohibited by federal or state law; further, provided, however, that (A) Bancorp or the Bank shall have the right to assume the defense thereof and upon such assumption Bancorp or the Bank shall not be liable to any director or officer of PSB for any legal expenses of other counsel or any other expenses subsequently incurred by such director or officer in connection with the defense thereof, except that if Bancorp or the Bank elects not to assume such defense for such director or officer or reasonably advises such director or officer that there are issues which raise conflicts of interest between Bancorp or the Bank and such director or officer, such director or officer may retain counsel reasonably satisfactory to him, and Bancorp or the Bank shall pay the reasonable fees and expenses of such counsel, (B) neither Bancorp nor the Bank shall be liable for any settlement effected without its prior written consent, and (C) neither Bancorp nor the Bank shall have any obligation hereunder to any director or officer of PSB when and if a court of competent jurisdiction shall determine that indemnification of such director or officer in the manner contemplated hereby is prohibited by applicable law. The indemnification provided herein shall be in addition to any indemnification rights an indemnitee may have by law, pursuant to the charter or bylaws of PSB or pursuant to any PSB Plan for which the indemnitee serves as a fiduciary.

(b) From and after the Effective Time, Bancorp will directly or indirectly cause the persons who served as directors or officers of PSB at the Effective Time to be covered by PSB’s existing directors’ and officers’ liability insurance policy (provided that Bancorp may substitute therefor policies of at least the same coverage in amounts contained and terms and conditions which are not less advantageous than such policy). Such insurance coverage shall commence at the Effective Time and will be provided for a period of no less than three years after the Effective Time.

30

(c) The indemnification provided by this Section 5.4 is the sole indemnification provided by Bancorp to the directors and officers of PSB for service in such positions up to and through the Effective Time. This Section 5.4 is intended to create personal rights in the directors and officers of PSB, who shall be deemed to be third-party beneficiaries hereof. Notwithstanding any other provision of this Agreement, at the Effective Time, the indemnification rights provided herein shall not be extinguished but shall instead survive for a period of three years after the Effective Time.

5.5 Notice of Certain Changes or Events. Following the execution of this Agreement and up to the Effective Time, Bancorp promptly will notify PSB in writing of and provide to it such information as it shall request regarding (i) any material adverse change in Bancorp’s consolidated financial condition, consolidated results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of Bancorp herein to be or become inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the breach or violation of any of Bancorp’s covenants or agreements contained herein or in the failure of any of the conditions described in Sections 7.1 or 7.2 below.

5.6 Further Action; Instruments of Transfer. Bancorp shall (i) use its best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the expeditious consummation of the transactions described herein, (ii) perform all acts and execute and deliver to PSB all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested of Bancorp in consummating such transactions and (iii) cooperate with PSB fully in carrying out, and will pursue diligently the expeditious completion of, such transactions.

ARTICLE VI. MUTUAL AGREEMENTS

6.1 Shareholder Approval.

(a) Preparation and Distribution of Notice of Meeting of Shareholders and Proxy Statement. Bancorp and PSB jointly shall prepare a notice of meeting of shareholders and a statement soliciting proxies for distribution to the shareholders of PSB for the purpose of approving the Plan of Merger (together, the “Proxy Statement”). Such Proxy Statement shall be in such form and shall contain or be accompanied by such information regarding the shareholders’ meeting, this Agreement, the parties hereto, the Merger and other transactions described herein as is required by applicable law and regulations and otherwise as shall be agreed upon by Bancorp and PSB. PSB shall mail of the Proxy Statement to its shareholders prior to the scheduled date of its shareholders’ meeting in accordance with its bylaws and North Carolina law.

31

(b) Information for Regulatory Applications. Each of Bancorp and PSB shall promptly respond, and use its best efforts to cause its directors, officers, accountants and affiliates to promptly respond, to requests by the other party and its counsel for information for inclusion in the various applications for regulatory approvals. Each of Bancorp and PSB hereby covenants with the other that none of such information provided will contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading; and, at all times up to and including the Effective Time, none of such information as it may be amended or supplemented, will contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading.

6.2 Regulatory Approvals. Within 75 days after the date of this Agreement, each of Bancorp, the Bank and PSB shall prepare and file, or cause to be prepared and filed, all applications for regulatory approvals and actions as may be required of it, by applicable law and regulations with respect to the transactions described herein (including applications to the FDIC, the Commissioner and to any other applicable federal or state banking, securities or other regulatory authority). Each party shall use its best efforts in good faith to obtain all necessary regulatory approvals required for consummation of the transactions described herein. Each party shall cooperate with the other party in the preparation of all applications to regulatory authorities and, upon request, promptly shall furnish all documents, information, financial statements or other material that may be required by any other party to complete any such application; and, before the filing therefor, each party to this Agreement shall have the right to review and comment on the form and content of any such application to be filed by any other party. Should the appearance of any of the officers, directors, employees or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance.

6.3 Access. Following the date of this Agreement and to and including the Effective Time, PSB and Bancorp shall each provide the other party and such other party’s employees, accountants, counsel or other representatives, access to all its books, records, files and other information (whether maintained electronically or otherwise), to all its properties and facilities, and to all its employees, accountants, counsel and consultants as PSB and Bancorp, as the case may be, shall, in its sole discretion, consider to be necessary or appropriate; provided, however, that any investigation or reviews conducted by Bancorp or PSB shall be performed in such a manner as will not interfere unreasonably with the other party’s normal operations or with relationships with its customers or employees, and shall be conducted in accordance with procedures established by the parties having due regard for the foregoing.

6.4 Costs. Subject to the provisions of Section 8.2(b)(iv) below, and whether or not this Agreement shall be terminated or the Merger shall be consummated, each of Bancorp and PSB shall pay its own legal, accounting and financial advisory fees and all its other costs and expenses incurred or to be incurred in connection with the execution and performance of its obligations under this Agreement, or otherwise in connection with this Agreement and the transactions described herein (including, without limitation, all accounting fees, legal fees, filing fees, printing costs, mailing costs, travel expenses, and investment banking fees).

32

6.5 Announcements. No person other than the parties to this Agreement is authorized to make any public announcements or statements about this Agreement or any of the transactions described herein, and, without the prior review and consent of the others (which consent shall not unreasonably be denied or delayed), no party hereto may make any public announcement, statement or disclosure as to the terms and conditions of this Agreement or the transactions described herein, except for such disclosures as may be required incidental to obtaining the prior approval of any regulatory agency or official for the consummation of the transactions described herein. However, notwithstanding anything contained herein to the contrary, prior review and consent shall not be required if in the good faith opinion of counsel to Bancorp, the Bank or PSB any such disclosure by Bancorp, the Bank or PSB, as the case may be, is required by law or otherwise is prudent.

6.6 Confidentiality. Bancorp, the Bank and PSB each shall treat as confidential and not disclose to any unauthorized person any documents or other information obtained from or learned about any other party during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (including any information obtained during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party; and that it will not use any such documents or other information for any purpose except for the purposes for which such documents and information were provided to it and in furtherance of the transactions described herein. However, the above obligations of confidentiality shall not prohibit the disclosure of any such document or information by any party to this Agreement to the extent (i) such document or information is then available generally to the public or is already known to the person or entity to whom disclosure is proposed to be made (other than through the previous actions of such party in violation of this Section 6.6), (ii) such document or information was available to the disclosing party on a nonconfidential basis prior to the same being obtained pursuant to this Agreement, (iii) disclosure is required by subpoena or order of a court or regulatory authority of competent jurisdiction, or by the SEC or other regulatory authorities in connection with the transactions described herein, or (iv) to the extent that, in the reasonable opinion of legal counsel to such party, disclosure otherwise is required by law. In the event this Agreement is terminated for any reason, then each of the parties hereto immediately shall return to the other party all copies of any and all documents or other written materials or information (including computer generated and stored data) of or relating to such other party which were obtained during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (whether during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other party. The parties’ obligations of confidentiality under this Section 6.6 shall survive and remain in effect following any termination of this Agreement.

6.7 Environmental Studies. At its option, Bancorp may cause to be conducted, at its expense, Phase I and/or Phase II environmental assessments of the Real Property, the real estate subject to any Real Property Lease, or the Loan Collateral, or any portion thereof, together with

33

such other studies, testing and intrusive sampling and analyses as Bancorp shall deem necessary or desirable (collectively, the “Environmental Survey”); provided, however, that the Environmental Survey, to the extent possible, shall be performed in such a manner as will not interfere unreasonably with PSB’s normal operations, and provided further, however, that PSB shall use its best efforts to obtain any required consents of third parties to permit any Environmental Survey of any Loan Collateral. Bancorp shall attempt in good faith to complete all such Phase I and/or Phase II environmental assessments within 60 days following the date of this Agreement and thereafter to conduct and complete any such additional studies, testing, sampling and analyses as promptly as practicable. Subject to the provisions of Section 8.2(b)(iv) below, the costs of the Environmental Survey shall be paid by Bancorp. If (i) the final results of any Environmental Survey (or any related analytical data) reflect that there likely has been any discharge, disposal, release or emission by any person of any Hazardous Substance on, from or relating to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral at any time prior to the Effective Time, or that any action has been taken or not taken, or a condition or event likely has occurred or exists, with respect to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral which constitutes or would constitute a violation of any Environmental Laws, and if, (ii) based on the advice of its legal counsel or other consultants, Bancorp believes that PSB or, following the Merger, Bancorp or the Bank, could become responsible for the remediation of such discharge, disposal, release or emission or for other corrective action with respect to any such violation, or that PSB or, following the Merger, Bancorp or the Bank, could become liable for monetary damages (including without limitation any civil or criminal penalties or assessments) resulting therefrom (or that, in the case of any of the Loan Collateral, PSB or, following the Merger, Bancorp or the Bank, could incur any such liability if it acquired title to such Loan Collateral), and if, (iii) based on the advice of their legal counsel or other consultants, Bancorp reasonably believes the amount of expenses or liability which either of them could incur or for which either of them could become responsible or liable on account of any and all such remediation, corrective action or monetary damages at any time during the next twenty years could equal or exceed an aggregate of $200,000, then Bancorp shall give PSB prompt written notice thereof (together with all information in its possession relating thereto) and, at Bancorp’s sole option and discretion, at any time thereafter and up to the Effective Time, it may terminate this Agreement without further obligation or liability to PSB or its shareholders.

6.8 Certain Modifications. Bancorp and PSB shall consult with each other with respect to PSB’s loan, litigation and real estate valuation policies and practices (including loan classifications and levels of reserves) and PSB shall make such modifications or changes to its policies and practices, if any, prior to the Effective Time, as may be mutually agreed upon. Bancorp and PSB also shall consult with each other with respect to the character, amount and timing of restructuring and Merger-related expense charges to be taken by each of them in connection with the transactions contemplated by this Agreement and shall take such charges in accordance with GAAP as may be mutually agreed upon by them. The representations, warranties and covenants of each of Bancorp and PSB contained in this Agreement shall not be deemed to be inaccurate or breached in any respect as a consequence of any modifications or charges undertaken by reason of this Section 6.8.

6.9 Transition Team. Bancorp and PSB shall create a transition team comprised of staff and representatives of PSB and staff and representatives of Bancorp and the Bank (the

34

“Transition Team”). The purpose of the Transition Team shall be to provide detailed guidance to Bancorp in fulfilling and consummating the Merger, to maintain open lines of communication between PSB and Bancorp, and to handle customer inquiries regarding the Merger. The Transition Team shall meet as necessary until the Effective Time. Members of the Transition Team shall receive no separate compensation for such service.

ARTICLE VII. CONDITIONS PRECEDENT TO MERGER

7.1 Conditions to all Parties’ Obligations. Notwithstanding any other provision of this Agreement to the contrary, the obligations of each of the parties to this Agreement to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Corporate Action. All corporate action necessary to authorize the execution, delivery and performance of this Agreement and the Plan of Merger in consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken, including, without limitation, the approval of the shareholders of PSB of the Plan of Merger.

(b) Regulatory Approvals. (i) The Merger and other transactions described herein shall have been approved, to the extent required by law, by the FDIC, the Commissioner and by all other governmental or regulatory agencies or authorities having jurisdiction over such transactions, (ii) no governmental or regulatory agency or authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by Bancorp or PSB to be materially disadvantageous or burdensome or to so adversely affect the economic or business benefits of this Agreement to Bancorp or PSB’s shareholders as to render it inadvisable for it to consummate the Merger; (iii) all applicable waiting periods following regulatory approvals shall have expired without objection to the Merger by the FDIC or other applicable regulatory authorities; and (iv) all other consents, approvals and permissions, and the satisfaction of all of the requirements prescribed by law or regulation, necessary to the carrying out of the transactions contemplated herein shall have been procured.

(c) Adverse Proceedings, Injunction, Etc. There shall not be (i) any order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or any of the other transactions described herein or any of the parties hereto from consummating any such transaction, (ii) any pending or threatened investigation of the Merger or any of such other transactions by the FDIC, or any actual or threatened litigation under federal antitrust laws relating to the Merger or any other such transaction, (iii) any suit, action or proceeding by any person (including any governmental, administrative or regulatory agency), pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit PSB, Bancorp or the Bank from consummating the Merger or carrying out any of the terms or provisions of this Agreement, or (iv) any other suit, claim, action or proceeding pending or threatened against PSB, Bancorp or the Bank or any of their respective officers or directors which shall reasonably be considered by PSB or Bancorp to be materially burdensome in relation to the proposed Merger or materially adverse in relation to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of either such corporation, and which has not been dismissed, terminated or resolved to the satisfaction of all parties hereto within 90 days of the institution or threat thereof.

35

7.2 Additional Conditions to PSB’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, PSB’s separate obligation to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Compliance with Laws. Bancorp and the Bank shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein, except where the violation of or failure to comply with any such law or regulation would not result in a material adverse change to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Bancorp and the Bank considered as one enterprise.

(b) Bancorp’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by PSB as provided in Section 10.3 below, (i) each of the representations and warranties of Bancorp and the Bank contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct on and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the consolidated financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Bancorp and the Bank considered as one enterprise, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement; and (ii) Bancorp shall have performed in all material respects all of its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. PSB shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of Bancorp to the foregoing effect and as to such other matters as may be reasonably requested by PSB.

(c) Legal Opinion of Bancorp’s Counsel. PSB shall have received from Gaeta & Eveson, P.A., Raleigh, North Carolina, counsel for Bancorp, a written opinion dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to PSB and its counsel.

(d) Other Documents and Information from Bancorp. Bancorp shall have provided to PSB correct and complete copies of its Articles of Incorporation, bylaws and board of directors resolutions approving this Agreement and the Merger (all certified by its Secretary or any Assistant Secretary), together with certificates of the incumbency of its officers and such other closing documents and information as may be reasonably requested by PSB or its counsel.

7.3 Additional Conditions to Bancorp’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, Bancorp’s obligations to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

36

(a) Material Adverse Change. There shall not have occurred any material adverse change in the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of PSB and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change.

(b) Compliance with Laws. PSB shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein, except where the violation of or failure to comply with any such law or regulation would not have a Material Adverse Effect on the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of PSB.

(c) PSB’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by Bancorp as provided in Section 10.3 below, (i) each of the representations and warranties of PSB contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct at and as of the Effective Time with the same force and effect as though made on and as of such date, except (A) for changes which are not, in the aggregate, material and adverse to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of PSB, and (B) for the effect of any activities or transactions that may have taken place after the date of this Agreement and are expressly contemplated by this Agreement, and (ii) PSB shall have performed in all material respects all its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date. Bancorp shall have received a certificate dated as of the Closing Date and executed by the chief executive officer and chief financial officer of PSB to the foregoing effect and as to such other matters as may be reasonably requested by Bancorp.

(d) Legal Opinion of PSB’s Counsel. Bancorp shall have received from McCoy Weaver Wiggins Cleveland Rose Ray PLLC, Fayetteville, North Carolina, counsel to PSB, a written opinion, dated as of the Closing Date in form and substance customary for transactions of this nature and otherwise reasonably satisfactory to Bancorp and its counsel.

(e) Other Documents and Information from PSB. PSB shall have provided to Bancorp correct and complete copies of PSB’s Articles of Incorporation, bylaws and Board and shareholder resolutions (all certified by PSB’s Secretary or any Assistant Secretary), together with certificates of the incumbency of PSB’s officers and such other closing documents and information as may be reasonably requested by Bancorp or its counsel.

(f) Property. PSB shall have obtained all required consents to the assignment to Bancorp or the Bank of its rights and obligations under any personal property lease and any Real Property Lease material to the business of PSB, and such consents shall be in such form and substance as shall be satisfactory to Bancorp; and each of the lessors of PSB shall have confirmed in writing that PSB is not in default under the terms and conditions of any personal property lease or any Real Property Lease.

37

(g) Employment Agreement. Mr. Roland T. Orr shall have entered into the Employment Agreement described in Section 5.1(a) hereof.

ARTICLE VIII. TERMINATION; BREACH; REMEDIES

8.1 Mutual Termination. At any time prior to the Effective Time (and whether before or after approval hereof by the shareholders of PSB), this Agreement may be terminated by the mutual agreement of Bancorp and PSB. Upon any such mutual termination, all obligations of PSB and Bancorp hereunder shall terminate and each party shall pay costs and expenses as provided in Section 6.4 above.

8.2 Unilateral Termination. This Agreement may be terminated by either Bancorp or PSB (whether before or after approval hereof by PSB’s shareholders) upon written notice to the other parties and under the circumstances described below.

(a) Termination by Bancorp. This Agreement may be terminated by Bancorp by action of its board of directors:

(i) if any of the conditions to the obligations of Bancorp (as set forth in Section 7.1 and 7.3 above) shall not have been satisfied or effectively waived in writing by Bancorp by September 15, 2006 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of Bancorp to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if PSB shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article IV or Article VI herein in any material respect;

(iii) if Bancorp determines at any time that any of PSB’s representations or warranties contained in Article II above or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;

(iv) if PSB’s shareholders do not approve the Plan of Merger;

(v) if the Merger shall not have become effective on or before September 15, 2006 unless such date is extended as evidenced by the written mutual agreement of the parties hereto; provided, however, that in the event there is a delay of not more than 30 days caused by circumstances beyond the control of the parties hereto, the dates set forth in this Section 8.2(a) shall be extended by mutual agreement for up to an additional 60 days; and

38

(vi) under the circumstances described in Section 6.7 above;

However, before Bancorp may terminate this Agreement for any of the reasons specified above in (i), (ii) or (iii) of this Section 8.2(a), it shall give written notice to PSB as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by Bancorp shall not become effective if, within 30 days following the giving of such notice, PSB shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Bancorp. In the event PSB cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Bancorp within such 30-day period, Bancorp shall have 30 days to notify PSB of its intention to terminate this Agreement. A failure to so notify PSB will be deemed to be a waiver by Bancorp of the breach, default or violation pursuant to Section 10.3 below.

(b) Termination by PSB. This Agreement may be terminated by PSB by action of its board of directors:

(i) if any of the conditions of the obligations of Bancorp (as set forth in Section 7.1 and 7.2 above) shall not have been satisfied or effectively waived in writing by PSB by September 15, 2006 (except to the extent that the failure of such condition to be satisfied has been caused by the failure of PSB to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if Bancorp shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article V or Article VI herein in any material respect;

(iii) if PSB determines that any of Bancorp’ representations and warranties contained in Article III herein or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;

(iv) if, prior to the Effective Time, a corporation, partnership, person, or other entity or group shall have made a bona fide proposal to acquire all or substantially all of the capital stock of PSB or to merge with PSB (an “Acquisition Transaction”) that the PSB board of directors determines, in its good faith judgment and in the exercise of its fiduciary duties, with respect to legal matters on the written opinion of legal counsel, is more favorable to the PSB shareholders and that the failure to terminate this Agreement and accept such alternative Acquisition Transaction would be inconsistent with the proper exercise of such fiduciary duties; provided, however, that in the event this Agreement is terminated by PSB pursuant to this Section 8.2(b)(iv), PSB shall reimburse Bancorp for its reasonable out-of-pocket expenses relating to the Merger in an amount not to exceed $150,000.

39

However, before PSB may terminate this Agreement for any of the reasons specified above in clause (i), (ii) or (iii) of this Section 8.2(b), it shall give written notice to Bancorp as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by PSB shall not become effective if, within 30 days following the giving of such notice, Bancorp shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of PSB. In the event Bancorp cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of PSB within such 30-day period, PSB shall have 30 days to notify Bancorp of its intention to terminate this Agreement. A failure to so notify Bancorp will be deemed to be a waiver by PSB of the breach, default or violation pursuant to Section 10.3 below.

8.3 Effect of Termination.

(a) In the event that this Agreement is terminated by PSB pursuant to Section 8.2(b)(iv) and within twelve (12) months of such termination, PSB enters into a definitive agreement regarding an Acquisition Transaction or actually consummates an Acquisition Transaction, PSB shall, immediately upon the consummation of such Acquisition Transaction, make a cash payment to Bancorp in the amount of $500,000.

(b) Except as set forth in subsection (a) of this Section 8.3 and Section 8.2(b)(iv), in the event of the termination of this Agreement, this Agreement shall become void and have no effect except that the provisions of Section 10.2 and Section 6.6 of this Agreement shall survive such termination, and neither party hereto shall have any liability to the other party in connection with such termination.

ARTICLE IX. INDEMNIFICATION

9.1 Agreement to Indemnify. In the event this Agreement is terminated for any reason and the Merger is not consummated, then PSB and Bancorp will indemnify each other as provided below.

(a) By PSB. PSB shall indemnify, hold harmless and defend Bancorp from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by Bancorp:

(i) in connection with or which arise out of or result from or are based upon (A) PSB’s operations or business transactions or its relationship with any of its employees, or (B) PSB’s intentional or grossly negligent failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;

40

(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes an intentional or grossly negligent breach by PSB of, or any intentional or grossly negligent inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of PSB to perform any of its covenants, agreements or obligations under or in connection with this Agreement;

(iii) in connection with or which arise out of or result from or are based upon any information provided by PSB which is included in the Proxy Statement and which information causes the Proxy Statement at the time of its mailing to PSB’s shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading; and

(iv) in connection with or which arise out of or result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation on, from or relating to the Real Property by PSB or any other person of any Hazardous Substances, or any action taken or any event or condition occurring or existing with respect to the Real Property which constitutes a violation of any Environmental Laws by PSB or any other person.

(b) By Bancorp. Bancorp shall indemnify, hold harmless and defend PSB from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature that arise from or are related to claims by third parties, including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by PSB:

(i) in connection with or which arise out of or result from or are based upon (A) Bancorp’s operations or business transactions or its relationship with any of its employees, or (B) Bancorp’s intentional or grossly negligent failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;

(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes an intentional or grossly negligent breach by Bancorp of, or any intentional or grossly negligent inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of Bancorp to perform any of its covenants, agreements or obligations under or in connection with this Agreement; and,

41

(iii) in connection with or which arise out of or result from or are based upon any information provided by Bancorp which is included in the Proxy Statement and which information causes the Proxy Statement at the time of its mailing to PSB’s shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

9.2 Procedure for Claiming Indemnification.

(a) By Bancorp. If any matter subject to indemnification hereunder arises in the form of a claim against Bancorp or its successors and assigns (herein referred to as a “Third Party Claim”), Bancorp promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to PSB. Within 15 days of such notice, PSB either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify Bancorp that PSB disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by PSB and the cost of such defense shall be borne by PSB except that Bancorp shall have the right to participate in such defense at its own expense and provided that PSB shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon Bancorp or its successors or assigns. Bancorp agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to PSB without charge therefor except for out-of-pocket expenses. If PSB fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, Bancorp shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. Bancorp also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by PSB.

(b) By PSB. If any matter subject to indemnification hereunder arises in the form of a claim against PSB or its successors and assigns (herein referred to as a “Third Party Claim”), PSB promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to Bancorp. Within 15 days of such notice, Bancorp either (i) shall pay the Third Party Claim either in full or upon agreed compromise or (ii) shall notify PSB that Bancorp disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by Bancorp and the cost of such defense shall be borne by Bancorp except that PSB shall have the right to participate in such defense at its own expense and provided that Bancorp shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind upon PSB or its successors and assigns. PSB agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to Bancorp without charge therefor except for out-of-pocket expenses. If Bancorp fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, PSB shall have the right to

42

pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. PSB also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by Bancorp.

ARTICLE X. MISCELLANEOUS PROVISIONS

10.1 Reservation of Right to Revise Structure. Notwithstanding any provision herein to the contrary, Bancorp shall have the unilateral right to revise the structure of the Merger for any reason Bancorp may deem advisable; provided, however, that no such change will (i) alter or change the amount or kind of consideration to be received by the shareholders of PSB in the Merger or (ii) adversely affect the tax treatment to the shareholders of PSB as a result of receiving such consideration. In the event of such election by Bancorp, the parties hereto shall execute one or more appropriate amendments to this Agreement.

10.2 Survival of Representations, Warranties, Indemnification and Other Agreements.

(a) Representations, Warranties and Other Agreements. None of the representations, warranties or agreements herein shall survive the effectiveness of the Merger, and no party shall have any right after the Effective Time to recover damages or any other relief from any other party to this Agreement by reason of any breach of representation or warranty, any nonfulfillment or nonperformance of any agreement contained herein, or otherwise; provided, however, that the parties’ agreements contained in Section 6.6 above, and Bancorp’s covenants contained in Sections 5.1 through 5.4 above shall survive the effectiveness of the Merger.

(b) Indemnification. The parties’ indemnification agreements and obligations pursuant to Section 9.1 above shall become effective only in the event this Agreement is terminated, and neither of the parties shall have any obligations under Section 9.1 in the event of or following consummation of the Merger.

10.3 Waiver. Any term or condition of this Agreement may be waived (except as to matters of regulatory approvals and approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof, provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its board of directors) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party or as provided in Sections 8.2(a) and 8.2(b) above, or be construed to be a waiver of any succeeding breach of the same term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand full and complete compliance with such terms.

10.4 Amendment. This Agreement may be amended, modified or supplemented at any time or from time to time prior to the Effective Time, and either before or after its approval

43

by the shareholders of PSB, by an agreement in writing approved by a majority of the Boards of Directors of Bancorp and PSB executed in the same manner as this Agreement; provided however, that the provisions of this Agreement relating to the manner or basis in which shares of PSB Stock are converted into cash shall not be amended after the approval of this Agreement and Plan of Merger by the shareholders of PSB without the requisite approval of such shareholders of such amendment.

10.5 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by courier, or mailed by certified mail, return receipt requested, postage prepaid, and addressed as follows:

(a) If to PSB, to:

Attn: Mr. Roland T. Orr

Progressive State Bank

308 North Chestnut Street

Lumberton, North Carolina 28358

With copy to:

Alfred E. Cleveland, Esq.

McCoy Weaver Wiggins Cleveland Rose Ray PLLC

202 Fairway Drive

Fayetteville, NC 28305

(b) If to Bancorp, to:

Attention: Mr. John Q. Shaw, Jr.

New Century Bancorp, Inc.

700 W. Cumberland St.

Dunn, North Carolina 28334

With copy to:

Anthony Gaeta, Jr., Esq.

Gaeta & Eveson, P.A.

8305 Falls of Neuse Road, Suite 203

Raleigh, North Carolina 27615

10.6 Further Assurance. PSB and Bancorp shall each furnish to the other such further assurances with respect to the matters contemplated herein and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other party may reasonably request.

10.7 Headings and Captions. Headings and captions of the sections and Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof.

44

10.8 Entire Agreement. This Agreement (including all schedules and exhibits attached hereto and all documents incorporated herein by reference) contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to, or any agreements between, any of the parties hereto other than those contained herein in writing.

10.9 Severability of Provisions. The invalidity or unenforceability of any term, phrase, clause, Section, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof.

10.10 Assignment. This Agreement may not be assigned by either party hereto except with the prior written consent of the other party hereto.

10.11 Counterparts. Any number of counterparts of this Agreement may be signed and delivered, each of which shall be considered an original and all of which together shall constitute one agreement.

10.12 Governing Law. This Agreement is made in and shall be construed and enforced in accordance with the laws of North Carolina.

10.13 Inspection. Any right of Bancorp or PSB hereunder to investigate or inspect the assets, books, records, files and other information of the other in no way shall establish any presumption that Bancorp or PSB should have conducted any investigation or that such right has been exercised by Bancorp or PSB or their agents, representatives or others. Any investigations or inspections that have been made by Bancorp or PSB or their agents, representatives or others prior to the Closing Date shall not be deemed in any way in derogation or limitation of the covenants, representations and warranties made by or on behalf of PSB or Bancorp in this Agreement.

45

IN WITNESS WHEREOF, PSB and Bancorp each has caused this Agreement to be executed in its name by its duly authorized officers and its corporate seal to be affixed hereto as of the date first above written.

	PROGRESSIVE STATE BANK
	By	/s/ Roland T. Orr
		Roland T. Orr
		President and Chief Executive Officer
ATTEST:
/s/ Thomas A. Jernigan
Assistant Secretary
	NEW CENTURY BANCORP, INC.
	By	/s/ John Q. Shaw, Jr.
		John Q. Shaw, Jr.
		President and Chief Executive Officer
ATTEST:
/s/ Brenda B. Bonner
Secretary
	NEW CENTURY BANK SOUTH
	By	/s/ William L. Hedgepeth
		William L. Hedgepeth
		President and Chief Executive Officer
ATTEST:
/s/ Donna M. Warren
Secretary

46

SCHEDULES AND EXHIBITS TO

AGREEMENT AND PLAN OF MERGER

SCHEDULE	DESCRIPTION
A	Plan of Merger
EXHIBIT	DESCRIPTION
A	Employment Agreement with Roland T. Orr

47

SCHEDULE A

PLAN OF MERGER

By and Between

NEW CENTURY BANK SOUTH

and

PROGRESSIVE STATE BANK

1.01. Names of the Merging Corporations. The names of the banking corporations proposed to be merged are New Century Bank South (“New Century”) and Progressive State Bank (“PSB”).

1.02. Nature of Transaction; Plan of Merger. Subject to the provisions of this Plan of Merger, at the “Effective Time” specified in the Articles of Merger filed with the North Carolina Secretary of State, PSB will be merged into and with New Century pursuant to Section 53-12 of the North Carolina General Statutes (the “Merger”).

1.03. Effect of Merger. At the Effective Time, and by reason of the Merger, the separate corporate existence of PSB shall cease while the corporate existence of New Century, as the surviving corporation in the Merger, shall continue with all of its purposes, objects, rights, privileges, powers and franchises, all of which shall be unaffected and unimpaired by the Merger.

1.04 Surviving Corporation. Following the Merger, New Century shall continue to operate as a North Carolina banking corporation and will conduct its business at the then legally established branch and main offices of New Century and PSB. The duration of the corporate existence of New Century, as the surviving corporation in the Merger, shall be perpetual and unlimited.

1.05. Terms and Conditions of the Merger. The Merger shall be effected pursuant to the terms and conditions of this Plan of Merger and of the Agreement and Plan of Merger, dated as of February     , 2006, by and among PSB, New Century and New Century’s sole shareholder, New Century Bancorp, Inc. (the “Agreement”).

1.06 Assets and Liabilities of PSB. At the Effective Time, and by reason of the Merger, and in accordance with applicable law, all property, assets and rights of every kind and character of PSB (including without limitation all real, personal or mixed property, all debts due on whatever account, all other choses in action and every other interest of or belonging to or due to PSB, whether tangible or intangible) shall be transferred to and vest in New Century, and New Century shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature of PSB (including all trust and other fiduciary properties, powers and rights), all without any conveyance, assignment or further act or deed; and, New Century shall become responsible for all other liabilities, duties and obligations of every kind, nature and description of PSB (including duties as trustee or fiduciary) as of the Effective Time.

1.07. Articles of Incorporation, Bylaws and Management. The Articles of Incorporation and Bylaws of New Century in effect at the Effective Time shall be the Articles of Incorporation and Bylaws of New Century as the surviving corporation in the Merger.

48

1.08. Conversion of Shares and Merger Consideration.

(a) New Century Stock. Each share of common stock of New Century, par value $5.00 per share, issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding and shall not be affected by the Merger.

(b) PSB Stock. Except as otherwise provided herein, at the Effective Time, all rights of PSB’s shareholders with respect to all then outstanding shares of the common stock of PSB, $1.00 par value per share (“PSB Stock”), shall cease to exist, and the holders of shares of PSB Stock shall cease to be and shall have no further rights as shareholders of PSB. At the Effective Time, each such outstanding share of PSB Stock (except for shares held, other than in a fiduciary capacity or as a result of debts previously contracted, by PSB, New Century or New Century Bancorp, Inc., which shall be canceled in the Merger, and for Dissenting Shares (as defined in Section 1.7 of the Agreement) shall be converted, without any action on the part of the holder of such shares, into the right to receive the Per Share Cash Consideration (as defined in Article 1.08(d) below) in accordance with this Article 1.08. Following the Effective Time, certificates representing shares of PSB Stock outstanding at the Effective Time shall evidence only the right to receive the Per Share Cash Consideration. No share of PSB Stock, other than Dissenting Shares (as defined in Section 1.7 of the Agreement), shall be deemed to be outstanding or have any rights other than those set forth in this Article 1.08 after the Effective Time.

(c) PSB Options. At the Effective Time, each unexpired and unexercised outstanding option, whether or not then vested or exercisable in accordance with its terms, to purchase shares of PSB Stock (the “PSB Options”) previously granted by PSB pursuant to stock option agreements (the “PSB Option Agreements”) shall be cancelled and converted, without any action on the part of the holder of such PSB Option, into the right to receive via certified check from Bancorp within 10 days following the Effective Time the Per Share Cash Consideration (as defined in Article 1.08(d) below) minus the exercise price per share for each PSB Option held as evidenced in the PSB Option Agreement governing such PSB Option. Following the Effective Time, PSB Option Agreements representing PSB Options shall evidence only the right to receive the Per Share Cash Consideration minus the exercise price per share of the PSB Options. No PSB Option shall be deemed to be outstanding or have any rights other than those set forth in this Article 1.08 after the Effective Time.

(d) Per Share Cash Consideration. For purposes of this Plan of Merger, the “Per Share Cash Consideration” shall be $21.30.

1.09 Closing; Effective Time. The closing of the Merger and other transactions contemplated by the agreement between New Century Bancorp, Inc., New Century and PSB shall take place at the offices of New Century Bancorp, Inc. in Dunn, North Carolina, or at such other place as New Century shall designate, on a date mutually agreeable to New Century and PSB (the “Closing Date”) after the expiration of any and all required waiting periods following the effective date of required approvals of the Merger by governmental or regulatory authorities (but in no event more that sixty (90) days following the expiration of all such required waiting periods).

49

EXHIBIT A

STATE OF NORTH CAROLINA

COUNTY OF CUMBERLAND

EMPLOYMENT AGREEMENT

THIS AGREEMENT entered into as of             , 2006 by and between NEW CENTURY BANK SOUTH (hereinafter referred to as the “Bank”) and ROLAND T. ORR (hereinafter referred to as “Orr”).

W I T N E S S E T H:

WHEREAS, the expertise and experience of Orr and his relationships and reputation in the financial institutions industry are extremely valuable to the Bank; and

WHEREAS, it is in the best interests of the Bank to maintain an experienced and sound executive management team to manage the Bank and to further the Bank’s overall strategies to protect and enhance the value of the investments of the shareholders of its parent company, New Century Bancorp, Inc.; and

WHEREAS, the Bank and Orr desire to enter into this Agreement to establish the scope, terms and conditions of Orr’s employment by the Bank.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants and conditions hereinafter set forth, and other good and valuable considerations, the receipt and sufficiency of which hereby are acknowledged, the Bank and Orr hereby agree as follows:

1. Employment. The Bank hereby agrees to employ Orr, and Orr hereby agrees to serve as an officer of the Bank, all upon the terms and conditions stated herein. As an officer of the Bank, Orr will (i) serve as Executive Vice President of the Bank, and (ii) have such other duties and responsibilities, and render to the Bank such other management services, as are customary for persons in Orr’s position with the Bank or as shall otherwise be reasonably assigned to him from time to time by the Bank. Orr shall faithfully and diligently discharge his duties and responsibilities under this Agreement and shall use his best efforts to implement the policies established by the Bank. Orr hereby agrees to devote such number of hours of his working time and endeavors to the employment granted hereunder as Orr and the Bank shall deem to be necessary to discharge his duties hereunder, and, for so long as employment hereunder shall exist, Orr shall not engage in any other occupation which requires a significant

amount of Orr’s personal attention during the Bank’s regular business hours or which otherwise interferes with Orr’s attention to or performance of his duties and responsibilities as an officer of the Bank hereunder except with the prior written consent of the Bank. However, nothing herein contained shall restrict or prevent Orr from personally, and for Orr’s own account, trading in stocks, bonds, securities, real estate or other forms of investment for Orr’s own benefit so long as said activities do not interfere with Orr’s attention to or performance of his duties and responsibilities as an officer of the Bank hereunder.

During the term of this Agreement, Orr shall be allowed, in his sole discretion, to maintain his primary work location in either Lumberton or Fayetteville, North Carolina.

2. Compensation. For all services rendered by Orr to the Bank under this Agreement, the Bank shall pay Orr a base salary at a rate of $150,000.00 per annum. Salary paid under this Agreement shall be payable in cash not less frequently than monthly. All compensation hereunder shall be subject to customary withholding taxes and such other employment taxes as are required by law.

3. Participation in Retirement and Employee Benefit Plans; Fringe Benefits. Subject to the terms and conditions of this Agreement, Orr shall be entitled to participate in any and all employee benefit programs and compensation plans from time to time maintained by the Bank and available to all employees of the Bank, all in accordance with the terms and conditions (including eligibility requirements) of such programs and plans of the Bank, resolutions of the Bank’s Board of Directors establishing such programs and plans, and the Bank’s normal practices and established policies regarding such programs and plans.

In addition to the other compensation and benefits described in this Agreement, the Bank shall:

(i) Assume payment of Orr’s dues for the Pine Crest Country Club provided that Orr shall be responsible for all personal expenses for use of such club;

(ii) Reimburse Orr for all reasonable expenses incurred by him in the performance of his duties under this Agreement and documented to the reasonable satisfaction of the Bank pursuant to established policies;

(iii) Provide to Orr an automobile mutually acceptable to the Bank and Orr for his use while performing the Bank’s business. The Bank shall pay all taxes and insurance for said vehicle and shall pay all operating expenses for the use of same during use for and about the Bank’s business. Orr shall pay operating costs for said vehicle while same is being used for personal and family purposes;

2

(iv) Permit Orr to participate in all savings, pension and retirement plans (including supplemental retirement plans), practices, policies and programs applicable generally to all employees of the Bank. Without limiting the foregoing, such plans shall include the Bank’s 401(k) Savings Plan;

4. Term. Unless sooner terminated as provided in this Agreement and subject to the right of either Orr or the Bank to terminate Orr’s employment at any time as provided herein, the term of this Agreement and Orr’s employment with the Bank hereunder shall be for a period commencing on the date hereof and continuing for a period of six (6) months.

5. Confidentiality. Orr hereby acknowledges and agrees that (i) in the course of his service as an officer of the Bank, he will gain substantial knowledge of and familiarity with the Bank’s customers and its dealings with them, and other information concerning the Bank’s business, all of which constitutes valuable assets and privileged information that is particularly sensitive due to the fiduciary responsibilities inherent in the banking business. In consideration of the Bank’s agreements contained herein, Orr covenants and agrees that any and all data, figures, projections, estimates, lists, files, records, documents, manuals or other such materials or information (financial or otherwise) relating to the Bank and its banking business, regulatory examinations, financial results and condition, lending and deposit operations, customers (including lists of the Bank’s customers and information regarding their accounts and business dealings with the Bank), policies and procedures, computer systems and software, shareholders, employees, officers and directors (herein referred to as “Confidential Information”) are proprietary to the Bank and are valuable, special and unique assets of the Bank’s business to which Orr will have access during his employment with the Bank. Orr agrees that (i) all such Confidential Information shall be considered and kept as the confidential, private and privileged records and information of the Bank, and (ii) at all times during the term of his employment with the Bank and except as shall be required in the course of the performance by Orr of his duties on behalf of the Bank or otherwise pursuant to the direct, written authorization of the Bank, Orr will not: divulge any such Confidential Information to any other Person or Financial Institution; remove any such Confidential Information in written or other recorded

3

form from the Bank’s premises; or make any use of any Confidential Information for his own purposes or for the benefit of any Person or Financial Institution other than the Bank. However, following the termination of Orr’s employment with the Bank, this paragraph shall not apply to any Confidential Information which then is in the public domain (provided that Orr was not responsible, directly or indirectly, for permitting such Confidential Information to enter the public domain without the Bank’s consent), or which is obtained by Orr from a third party which or who is not obligated under an agreement of confidentiality with respect to such information.

(a) Remedies for Breach. Orr understands and agrees that a breach or violation by him of the covenants contained in Paragraph 5 of this Agreement will be deemed a material breach of this Agreement and will cause irreparable injury to the Bank, and that it would be difficult to ascertain the amount of monetary damages that would result from any such violation. In the event of Orr’s actual or threatened breach or violation of the covenants contained in Paragraph 5, the Bank shall be entitled to bring a civil action seeking an injunction restraining Orr from violating or continuing to violate those covenants or from any threatened violation thereof, or for any other legal or equitable relief relating to the breach or violation of such covenant. Orr agrees that, if the Bank institutes any action or proceeding against Orr seeking to enforce any of such covenants or to recover other relief relating to an actual or threatened breach or violation of any of such covenants, Orr shall be deemed to have waived the claim or defense that the Bank has an adequate remedy at law and shall not urge in any such action or proceeding the claim or defense that such a remedy at law exists. However, the exercise by the Bank of any such right, remedy, power or privilege shall not preclude the Bank or its successors or assigns from pursuing any other remedy or exercising any other right, power or privilege available to it for any such breach or violation, whether at law or in equity, including the recovery of damages, all of which shall be cumulative and in addition to all other rights, remedies, powers or privileges of the Bank.

Notwithstanding anything contained herein to the contrary, Orr agrees that the provisions of this Paragraph 5 and the remedies provided herein for a breach by Orr shall be in addition to, and shall not be deemed to supersede or to otherwise restrict, limit or impair the rights of the Bank under the Trade Secrets Protection Act contained in Article 24, Chapter 66 of the North Carolina General Statutes, or any other state or federal law or regulation dealing with or providing a remedy for the wrongful disclosure, misuse or misappropriation of trade secrets or other proprietary or confidential information.

4

(b) Survival of Covenants. Orr’s covenants and agreements and the Bank’s rights and remedies provided for in this Paragraph 5 shall survive any termination of this Agreement or Orr’s employment with the Bank.

6. Termination and Termination Pay.

(a) Orr’s employment under this Agreement may be terminated at any time by Orr upon sixty (60) days written notice to the Bank. Upon such termination, Orr shall be entitled to receive compensation through the effective date of such termination; provided, however, that the Bank, in its sole discretion, may elect for Orr not to serve out part or all of said notice period.

(b) Orr’s employment under this Agreement shall be terminated upon the death of Orr during the term of this Agreement. Upon any such termination, Orr estate shall be entitled to receive any compensation due to Orr computed through the last day of the calendar month in which his death shall have occurred but which remains unpaid.

(c) In the event Orr becomes disabled during the term of his employment hereunder and it is determined by the Bank that Orr is permanently unable to perform his duties under this Agreement, the Bank shall continue to compensate Orr at the level of compensation described in Paragraph 2 above, and shall continue to provide Orr each of the other benefits set forth or described in this Agreement, for the remaining term of this Agreement, less any other payments provided under any disability income plan of the Bank which is applicable to Orr. In the event of any disagreement between Orr and the Bank as to whether Orr is physically or mentally incapacitated such as will result in the termination of Orr’s employment pursuant to this Paragraph 6(c), the question of such incapacity shall be submitted to an impartial and reputable physician for determination, selected by mutual agreement of Orr and the Bank or, failing such agreement, by two (2) physicians (one (1) of whom shall be selected by the Bank and the other by Orr), and such determination of the question of such incapacity by such physician or physicians shall be final and binding on Orr and the Bank. The Bank shall pay the reasonable fees and expenses of such physician or physicians in making any determination required under this Paragraph 6 (c).

5

(d) The Bank may terminate Orr’s employment at any time for any reason with or without “Cause” (as defined below), but any termination by the Bank other than termination for “Cause”, (as defined below) shall not prejudice Orr’s right to compensation or other benefits under this Agreement for its remaining term. Following any termination of Orr’s employment by the Bank for “Cause”, Orr shall have no further rights under this Agreement (including any right to receive compensation or other benefits for any period after such termination).

For purposes of this Paragraph 6 (d), the Bank shall have “Cause” to terminate Orr’s employment upon:

(i) A determination by the Bank, in good faith, that Orr (A) has breached in any material respect any of the terms or conditions of this Agreement, or (B) is engaging or has engaged in willful misconduct or conduct which is detrimental to the business prospects of the Bank or which has had or likely will have a material adverse effect on the Bank’s business or reputation. Prior to any termination by the Bank of Orr’s employment for a breach, failure to perform or conduct described in this subparagraph (i), the Bank shall give Orr written notice which describes such breach, failure to perform or conduct and if during a period of five business (5) days following such notice Orr cures or corrects the same to the reasonable satisfaction of the Bank, then this Agreement shall remain in full force and effect. However, notwithstanding the above, if the Bank has given written notice to Orr on a previous occasion of the same or a substantially similar breach, failure to perform or conduct, or of a breach, failure to perform or conduct which the Bank determines in good faith to be of substantially similar import, or if the Bank determines in good faith that the then current breach, failure to perform or conduct is not reasonably curable, then termination under this subparagraph (i) shall be effective immediately and Orr shall have no right to cure such breach, failure to perform or conduct.

(ii) The violation by Orr of any applicable federal or state law, or any applicable rule, regulation, order or statement of policy promulgated by any governmental agency or authority having jurisdiction over the Bank or any of its affiliates or subsidiaries (a “Regulatory Authority”, including without limitation the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks or any other banking regulator having legal jurisdiction over the Bank), which results from Orr’s gross negligence, willful misconduct or intentional disregard of such law, rule, regulation, order or policy statement and results in any substantial damage, monetary or otherwise, to the Bank or any of its affiliates or subsidiaries or to the Bank’s reputation;

6

(iii) The commission in the course of Orr’s employment with the Bank of an act of fraud, embezzlement, theft or proven personal dishonesty (whether or not resulting in criminal prosecution or conviction);

(iv) The conviction of Orr of any felony or any criminal offense involving dishonesty or breach of trust, or the occurrence of any event described in Section 19 of the Federal Deposit Insurance Act or any other event or circumstance which disqualifies Orr from serving as an employee or executive officer of, or a party affiliated with, the Bank or its bank holding company;

(v) Orr becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Bank’s affairs (or if proceedings for that purpose are commenced) by any Regulatory Authority; and,

(vi) The occurrence of any event believed by the Bank, in good faith, to have resulted in Orr being excluded from coverage, or having coverage limited as to Orr as compared to other covered officers or employees, under the Bank’s then current “blanket bond” or other fidelity bond or insurance policy covering its directors, officers or employees.

7. Additional Regulatory Requirements. Notwithstanding anything contained in this Agreement to the contrary, it is understood and agreed that the Bank (or its successors in interest) shall not be required to make any payment or take any action under this Agreement if (a) the Bank is declared by any Regulatory Authority to be insolvent, in default or operating in an unsafe or unsound manner, or if (b) in the opinion of counsel to the Bank such payment or action (i) would be prohibited by or would violate any provision of state or federal law applicable to the Bank, including without limitation the Federal Deposit Insurance Act and Chapter 53 of the North Carolina General Statutes as now in effect or hereafter amended, (ii) would be prohibited by or would violate any applicable rules, regulations, orders or statements of policy, whether now existing or hereafter promulgated, of any Regulatory Authority, or (iii) otherwise would be prohibited by any Regulatory Authority.

7

8. Successors and Assigns.

(a) This Agreement shall inure to the benefit of and he binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Bank.

(b) The Bank is contracting for the unique and personal skills of Orr. Therefore, Orr shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank.

9. Modification; Waiver; Amendments. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties hereto. No waiver by either party hereto, at any time, of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.

10. Applicable Law. This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

11. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

12. Previous Agreements. Orr and the Bank acknowledge and agree that Orr was a party to a certain employment agreement by and between Orr and Progressive State Bank, Lumberton, North Carolina (“Progressive”) dated February 15, 2005 (the “Progressive Agreement”) and that as of the date of this Agreement Progressive has been merged with and into the Bank with the Bank as the surviving financial institution. Orr and the Bank further acknowledge that pursuant to the provisions of Paragraph 2 of the Progressive Agreement, upon the payment to Orr of the sum of 2.95 times Orr’s annual salary as of the date hereof under the Progressive Agreement,

8

the Progressive Agreement is terminated, null, void and of no further effect; provided, however, that both Orr and the Bank acknowledge and agree that such termination and nullification of the Progressive Agreement shall not affect Orr’s right to receive the benefits of the Bank Owned Life Insurance and rights under the Supplemental Employment Retirement Plan created by Progressive in favor of Orr.

IN WITNESS WHEREOF, the parties have executed this Agreement under seal and in such form as to be binding as of the day and year first hereinabove written.

	NEW CENTURY BANK SOUTH
	By:
		William L. Hedgepeth, President and CEO
ATTEST:
, Secretary
		Roland T. Orr

9

EX-10.IX

Exhibit 10.IX

STATE OF NORTH CAROLINA

COUNTY OF CUMBERLAND

EMPLOYMENT AGREEMENT

THIS AGREEMENT entered into as of March 1, 2004 by and between NEW CENTURY BANK of FAYETTEVILLE (hereinafter referred to as the “Bank”) and William L. Hedgepeth, II (hereinafter referred to as “Employee”).

W I T N E S S E T H:

WHEREAS, the expertise and experience of Employee and his/her relationships and reputation in the financial institutions industry are extremely valuable to the Bank; and

WHEREAS, it is in the best interests of the Bank and its shareholders to maintain an experienced and sound management team to manage the Bank and to further the Bank’s overall strategies to protect and enhance the value of its shareholders’ investments; and

WHEREAS, the Bank and Employee desire to enter into this Agreement to establish the scope, terms and conditions of Employee’s employment by the Bank; and

WHEREAS, the Bank and Employee desire to enter into this Agreement also to provide Employee with security in the event of a change in control in the Bank and to insure the continued loyalty of Employee during any such change in control in order to maximize shareholder value as well as the continued safe and sound operation of the Bank.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants and conditions hereinafter set forth, and other good and valuable considerations, the receipt and sufficiency of which hereby are acknowledged, the Bank and Employee hereby agree as follows:

1. Employment. The Bank hereby agrees to employ Employee, and Employee hereby agrees to serve as an officer of the Bank, all upon the terms and conditions stated herein. As an officer of the Bank, Employee will (i) serve as Chief Executive Officer of the Bank, and (ii) have such other duties and responsibilities, and render to the Bank such other management services, as are customary for persons in Employee’s position with the Bank or as shall otherwise be reasonably assigned to him from time to time by the Bank. Employee shall faithfully and diligently discharge his duties and responsibilities under this Agreement and shall use his best efforts to implement the policies established by the Bank. Employee hereby agrees

to devote such number of hours of his working time and endeavors to the employment granted hereunder as Employee and the Bank shall deem to be necessary to discharge his duties hereunder, and, for so long as employment hereunder shall exist, Employee shall not engage in any other occupation which requires a significant amount of Employee’s personal attention during the Bank’s regular business hours or which otherwise interferes with Employee’s attention to or performance of his duties and responsibilities as an officer of the Bank hereunder except with the prior written consent of the Bank. However, nothing herein contained shall restrict or prevent Employee from personally, and for Employee’s own account, trading in stocks, bonds, securities, real estate or other forms of investment for Employee’s own benefit so long as said activities do not interfere with Employee’s attention to or performance of his duties and responsibilities as an officer of the Bank hereunder.

During the term of this Agreement, Employee shall be allowed, in his sole discretion, to maintain his primary work location in Fayetteville, North Carolina.

2. Compensation. For all services rendered by Employee to the Bank under this Agreement, the Bank shall pay Employee a minimum base salary at a rate of one hundred fifteen thousand and 00/100 dollars ($115,000.00) per annum for the first year and shall increase this amount by a minimum of five percent (5%) at the beginning of each of the second and third years of the contract term. Salary paid under this Agreement shall be payable in cash not less frequently than monthly. All compensation hereunder shall be subject to customary withholding taxes and such other employment taxes as are required by law. In the event of a Change in Control (as defined in Paragraph 8), Employee’s base salary shall be increased not less than six percent (6%) annually during the term of this Agreement.

In addition to the foregoing, Employee shall be entitled to receive cash bonuses and stock options and grants on an annual basis during the term of this Agreement as may be determined by the Board of Directors of the Bank or its Compensation Committee.

3. Participation in Retirement and Employee Benefit Plans; Fringe Benefits. Subject to the terms and conditions of this Agreement, Employee shall be entitled to participate in any and all employee benefit programs and compensation plans from time to time maintained by the Bank and available to all employees of the Bank including incentive and other stock options and grants, all in accordance with the terms and conditions (including eligibility

2

requirements) of such programs and plans of the Bank, resolutions of the Bank’s Board of Directors establishing such programs and plans, and the Bank’s normal practices and established policies regarding such programs and plans.

In addition to the other compensation and benefits described in this Agreement, the Bank shall :

(i) Provide Employee with four (4) weeks of paid vacation leave notwithstanding the policy for the Bank for all other employees.

(ii) Assume payment of dues to Highland Country Club provided that Employee shall be responsible for all personal expenses for use of such club.

(iii) Provide Employee with a car allowance in the amount of $550.00 per month. The Employee shall be responsible for taxes, insurance and maintenance and fuel expenses incurred with regard to the automobile.

(iv) Pay, when due, the two thousand five hundred ($2,500.00) dollar remaining balance due on Employee’s fifteen thousand ($15,000.00) dollar membership fee to Highland Country Club.

(v) Pay Employee a lump sum signing bonus in the amount of twelve thousand ($12,000.00) dollars; provided, however, that the signing bonus shall be considered to be earned over the first twelve months of employment with the Bank.

(vi) Issue to Employee, upon approval by stockholders, options for 15,000 shares of New Century Bancorp stock on a three year vesting program.

4. Term. Unless sooner terminated as provided in this Agreement and subject to the right of either Employee or the Bank to terminate Employee’s employment at any time as provided herein, the term of this Agreement and Employee’s employment with the Bank hereunder shall be for a period commencing on March 1, 2004 and continuing for a period of three (3) years. At the end of the term of this Agreement, the term shall automatically be extended for an additional three year period unless written notice from the Bank is given thirty (30) days prior to such date notifying the other party that this Agreement shall not be further extended.

3

5. Confidentiality; Noncompetition. Employee hereby acknowledges and agrees that (i) in the course of his service as an officer of the Bank, he will gain substantial knowledge of and familiarity with the Bank’s customers and its dealings with them, and other information concerning the Bank’s business, all of which constitutes valuable assets and privileged information that is particularly sensitive due to the fiduciary responsibilities inherent in the banking business; and, (ii) in order to protect the Bank’s interest in and to assure it the benefit of its business, it is reasonable and necessary to place certain restrictions on Employee’s ability to compete against the Bank and on his disclosure of information about the Bank’s business and customers. For that purpose, and in consideration of the Bank’s agreements contained herein, Employee covenants and agrees as provided below.

(a) Covenant Not to Compete. Employee will not “Compete” (as defined below), directly or indirectly, with the Bank within a twenty-five (25) mile radius of any full service office of the Bank (the “Relevant Market”) as follows:

(i) if this Agreement is terminated by the Bank without “cause” (as defined in paragraph 6(d) hereof) Employee shall not “Compete” for a period of time Employee is receiving compensation pursuant to the terms of this Agreement; or

(ii) if this Agreement is terminated by Employee for any reason, Employee shall not “Compete” for a period of twelve (12) months from the date of termination of this Agreement by Employee.

For the purposes of this Paragraph 5, the following terms shall have the meanings set forth below:

Compete. The term “Compete” means: (i) soliciting or securing deposits from any Person residing in the Relevant Market for any Financial Institution; (ii) soliciting any Person residing in the Relevant Market to become a borrower from any Financial Institution, with which such Person has no prior relationship, or assisting (other than through the performance of ministerial or clerical duties) any Financial Institution with which such Person has no prior relationship in making loans to any such Person; (iii) including or attempting to induce any Person who was a Customer of the Bank on the date of termination of Employee’s employment with the Bank, to change such Customer’s depository, loan and/or other banking relationship from the Bank to another Financial Institution with which Customer has no prior

4

relationship; (iv) acting as a consultant, officer, director, independent contractor, or employee of any Financial Institution that has its main or principal office in the Relevant Market, or, in acting in any such capacity with any other Financial Institution, to maintain an office or be employed at or assigned to or to have any direct involvement in the management, business or operation of any office of such Financial Institution located in the Relevant Market; or (v) communicating to any Financial Institution the names or addresses or any financial information concerning any Person who was a Customer of the Bank at the date of Employee’s termination of this Agreement.

Customer. The term “Customer” means any Person with whom, as of the effective date of termination of this Agreement or during Employee’s employment with the Bank, the Bank has or has had a depository, loan and/or other banking relationship.

Financial Institution. The term “Financial Institution” means any federal or state chartered bank, savings bank, savings and loan association or credit union, any subsidiary thereof, or any holding company for or corporation that owns or controls any such entity, or any other Person engaged in the business of making loans of any type or receiving deposits, other than the Bank.

Person. The term “Person” means any natural person or any corporation, partnership, proprietorship, joint venture, limited liability company, trust, estate, governmental agency or instrumentality, fiduciary, unincorporated association or other entity.

(b) Confidentiality Covenant. Employee covenants and agrees that any and all data, figures, projections, estimates, lists, files, records, documents, manuals or other such materials or information (financial or otherwise) relating to the Bank and its banking business, regulatory examinations, financial results and condition, lending and deposit operations, customers (including lists of the Bank’s customers and information regarding their accounts and business dealings with the Bank), policies and procedures, computer systems and software, shareholders and employees (herein referred to as “Confidential Information”) are proprietary to the Bank and are valuable, special and unique assets of the Bank’s business to which Employee will have access during his employment with the Bank. Employee agrees that (i) all such Confidential Information shall be considered and kept as the confidential, private and privileged records and information of the Bank, and (ii) at all times during the term of his employment with the Bank and following the termination of this Agreement or his employment

5

for any reason, and except as shall be required in the course of the performance by Employee of his duties on behalf of the Bank or otherwise pursuant to the direct, written authorization of the Bank, Employee will not: divulge any such Confidential Information to any other Person or Financial Institution; remove any such Confidential Information in written or other recorded form from the Bank’s premises; or make any use of any Confidential Information for his own purposes or for the benefit of any Person or Financial Institution other than the Bank. However, following the termination of Employee’s employment with the Bank, this subparagraph (b) shall not apply to any Confidential Information which then is in the public domain (provided that Employee was not responsible, directly or indirectly, for permitting such Confidential Information to enter the public domain without the Bank’s consent), or which is obtained by Employee from a third party which or who is not obligated under an agreement of confidentiality with respect to such information.

(c) Remedies for Breach. Employee understands and agrees that a breach or violation by him of the covenants contained in Paragraph 5(a) and 5(b) of this Agreement will be deemed a material breach of this Agreement and will cause irreparable injury to the Bank, and that it would be difficult to ascertain the amount of monetary damages that would result from any such violation. In the event of Employee’s actual or threatened breach or violation of the covenants contained in Paragraph 5(a) or 5(b) , the Bank shall be entitled to bring a civil action seeking an injunction restraining Employee from violating or continuing to violate those covenants or from any threatened violation thereof, or for any other legal or equitable relief relating to the breach or violation of such covenant. Employee agrees that, if the Bank institutes any action or proceeding against Employee seeking to enforce any of such covenants or to recover other relief relating to an actual or threatened breach or violation of any of such covenants, Employee shall be deemed to have waived the claim or defense that the Bank has an adequate remedy at law and shall not urge in any such action or proceeding the claim or defense that such a remedy at law exists. However, the exercise by the Bank of any such right, remedy, power or privilege shall not preclude the Bank or its successors or assigns from pursuing any other remedy or exercising any other right, power or privilege available to it for any such breach or violation, whether at law or in equity, including the recovery of damages, all of which shall be cumulative and in addition to all other rights, remedies, powers or privileges of the Bank.

6

Notwithstanding anything contained herein to the contrary, Employee agrees that the provisions of Paragraph 5(a) and 5(b) above and the remedies provided in this Paragraph 5(c) for a breach by Employee shall be in addition to, and shall not be deemed to supersede or to otherwise restrict, limit or impair the rights of the Bank under the Trade Secrets Protection Act contained in Article 24, Chapter 66 of the North Carolina General Statutes, or any other state or federal law or regulation dealing with or providing a remedy for the wrongful disclosure, misuse or misappropriation of trade secrets or other proprietary or confidential information.

(d) Survival of Covenants. Employee’s covenants and agreements and the Bank’s rights and remedies provided for in this Paragraph 5 shall survive any termination of this Agreement or Employee’s employment with the Bank.

6. Termination and Termination Pay.

(a) Employee’s employment under this Agreement may be terminated at any time by Employee upon ninety (90) days written notice to the Bank. Upon such termination, Employee shall be entitled to receive compensation through the effective date of such termination; provided, however, that the Bank, in its sole discretion, may elect for Employee not to serve out part or all of said notice period.

(b) Employee’s employment under this Agreement shall be terminated upon the death of Employee during the term of this Agreement. Upon any such termination, Employee’s estate shall be entitled to receive any compensation due to Employee computed through the last day of the calendar month in which his death shall have occurred but which remains unpaid.

(c) In the event Employee becomes disabled during the term of his employment hereunder and it is determined by the Bank that Employee is permanently unable to perform his duties under this Agreement, the Bank shall continue to compensate Employee at the level of compensation described in Paragraph 2 above, and shall continue to provide Employee each of the other benefits set forth or described in this Agreement, for the remaining term of this Agreement, less any other payments provided under any disability income plan of the Bank which is applicable to Employee. In the event of any disagreement between Employee and the Bank as to whether Employee is physically or mentally incapacitated such as will result in the

7

termination of Employee’s employment pursuant to this Paragraph 6(c), the question of such incapacity shall be submitted to an impartial and reputable physician for determination, selected by mutual agreement of Employee and the Bank or, failing such agreement, by two (2) physicians (one (1) of whom shall be selected by the Bank and the other by Employee), and such determination of the question of such incapacity by such physician or physicians shall be final and binding on Employee and the Bank. The Bank shall pay the reasonable fees and expenses of such physician or physicians in making any determination required under this Paragraph 6(c).

(d) The Bank may terminate Employee’s employment at any time for any reason with or without “Cause” (as defined below), but any termination by the Bank other than termination for “Cause”, (as defined below) shall not prejudice Employee’s right to compensation or other benefits under this Agreement for a period of time equal to the balance of the term of this Agreement. Following any termination of Employee’s employment by the Bank for “Cause”, Employee shall have no further rights under this Agreement (including any right to receive compensation or other benefits for any period after such termination).

For purposes of this Paragraph 6(d), the Bank shall have “Cause” to terminate Employee’s employment upon:

(i) A determination by the Bank, in good faith, that Employee (A) has breached in any material respect any of the terms or conditions of this Agreement, or (B) is engaging or has engaged in willful misconduct or conduct which is detrimental to the business prospects of the Bank or which has had or likely will have a material adverse effect on the Bank’s business or reputation. Prior to any termination by the Bank of Employee’s employment for a breach, failure to perform or conduct described in this subparagraph (i), the Bank shall give Employee written notice which describes such breach, failure to perform or conduct and if during a period of five (5) business days following such notice Employee cures or corrects the same to the reasonable satisfaction of the Bank, then this Agreement shall remain in full force and effect. However, notwithstanding the above, if the Bank has given written notice to Employee on a previous occasion of the same or a substantially similar breach, failure to perform or conduct, or of a breach, failure to perform or conduct which the Bank determines in good faith to be of substantially similar import, or if the Bank determines in good faith that the then current breach, failure to perform or conduct is not reasonably curable, then termination under this subparagraph (i) shall be effective immediately and Employee shall have no right to cure such breach, failure to perform or conduct.

8

(ii) The violation by Employee of any applicable federal or state law, or any applicable rule, regulation, order or statement of policy promulgated by any governmental agency or authority having jurisdiction over the Bank or any of its affiliates or subsidiaries (a “Regulatory Authority”, including without limitation the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks or any other banking regulator having legal jurisdiction over the Bank), which results from Employee’s gross negligence, willful misconduct or intentional disregard of such law, rule, regulation, order or policy statement and results in any substantial damage, monetary or otherwise, to the Bank or any of its affiliates or subsidiaries or to the Bank’s reputation;

(iii) The commission in the course of Employee’s employment with the Bank of an act of fraud, embezzlement, theft or proven personal dishonesty (whether or not resulting in criminal prosecution or conviction);

(iv) The conviction of Employee of any felony or misdemeanor involving dishonesty or breach of trust, or the occurrence of any event described in Section 19 of the Federal Deposit Insurance Act or any other event or circumstance which disqualifies Employee from serving as an employee or officer of, or a party affiliated with, the Bank or any of its affiliates or subsidiaries;

(v) Employee becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Bank’s affairs (or if proceedings for that purpose are commenced) by any Regulatory Authority; and,

(vi) The occurrence of any event believed by the Bank, in good faith, to have resulted in Employee being excluded from coverage, or having coverage limited as to Employee as compared to other covered officers or employees, under the Bank’s then current “blanket bond” or other fidelity bond or insurance policy covering its directors, officers or employees.

7. Additional Regulatory Requirements. Notwithstanding anything contained in this Agreement to the contrary, it is understood and agreed that the Bank (or its successors in interest) shall not be required to make any payment or take any action under this

9

Agreement if (a) the Bank is declared by any Regulatory Authority to be insolvent, in default or operating in an unsafe or unsound manner, or if (b) in the opinion of counsel to the Bank such payment or action (i) would be prohibited by or would violate any provision of state or federal law applicable to the Bank, including without limitation the Federal Deposit Insurance Act and Chapter 53 of the North Carolina General Statutes as now in effect or hereafter amended, (ii) would be prohibited by or would violate any applicable rules, regulations, orders or statements of policy, whether now existing or hereafter promulgated, of any Regulatory Authority, or (iii) otherwise would be prohibited by any Regulatory Authority.

8. Change in Control

(a) In the event of a “Change in Control” (as defined in Subparagraph (d) below), of the Bank, Employee shall be entitled to terminate this Agreement upon the occurrence within six (6) months following a change in control of any Termination Event as defined in Subparagraph (b) below.

(b) A Termination Event shall mean the occurrence of any of the following events:

(i) Employee is assigned any duties and/or responsibilities that are inconsistent with his position, duties, responsibilities, or status at the time of the Change in Control or with his reporting responsibilities or titles with the Bank in effect at such time;

(ii) Employee’s annual base salary is reduced below the amount in effect as of the effective date of a Change in Control or as the same shall have been increased from time to time following such effective date;

(iii) Employee’s life insurance, major medical insurance, disability insurance, dental insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Bank to Employee as of the effective date of the Change in Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Bank who participated in such benefits prior to such Change in Control; or

10

(iv) Employee is transferred or required to report on a daily basis to a location outside of Fayetteville, North Carolina, without Employee’s express written consent.

A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect.

(c) In the event that Employee terminates this Agreement or the Bank terminates this Agreement pursuant to this Paragraph 8, the Bank will be obligated to pay or cause to be paid to Employee an amount equal to two hundred percent (200%) of Employee’s “base amount” as defined in Section 28OG(b) (3) (A) of the Internal Revenue Code of 1986, as amended (the “Code”) .

(d) For the purposes of this Agreement, the term “Change in Control” shall mean any of the following events:

(i) After the effective date of this Agreement, any “person” (as such term is defined in Section 7 (j) (8) (A) of the Change in Bank Control Act of 1978), directly or indirectly, acquires beneficial ownership of voting stock, or acquires irrevocable proxies or any combination of voting stock and irrevocable proxies, representing twenty-five percent (25%) or more of any class of voting securities of the Bank, or acquires control of in any manner the election of a majority of the directors of the Bank;

(ii) The Bank consolidates or merges with or into another corporation, association, or entity, or is otherwise reorganized, where the Bank is not the surviving corporation in such transaction; or

(iii) All or substantially all of the assets of the Bank are sold or otherwise transferred to or are acquired by any other corporation, association, or other person, entity, or group.

Notwithstanding the other provisions of this Paragraph 8, a transaction or event shall not be considered a Change in Control (i) if, prior to the consummation or occurrence of such transaction or event, Employee and the Bank agree in writing that the same shall not be treated as a Change in Control for purposes of this Agreement or (ii) if the Bank reorganizes

11

itself into the bank holding company form of organization where the shareholders of the Bank are given an opportunity to exchange their shares of common stock in the Bank for shares of common stock in the holding company.

(e) Amounts payable pursuant to this Paragraph 8 shall be paid, at the option of Employee either in one lump sum or in equal monthly payments over the remaining term of this Agreement.

(f) Following a Termination Event which gives rise to Employee’s rights hereunder, Employee shall have six (6) months from the date of occurrence of the Termination Event to terminate this Agreement pursuant to this Paragraph 8. Any such termination shall be deemed to have occurred only upon delivery to the Bank or any successor thereto, of written notice of termination which describes the Change in Control and Termination Event. If Employee does not so terminate this Agreement within such six month period, Employee shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights, if any, hereunder with respect to any other Termination Event as to which such period has not expired.

(g) It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by the Bank for federal income tax purposes and not result in the imposition of an excise tax on Employee. Notwithstanding anything contained in this Agreement to the contrary, any payments to be made to or for the benefit of Employee which are deemed to be “parachute payments” as that term is defined in Section 28OG(b) (2) of the Code, shall be modified or reduced to the extent deemed to be necessary by the Bank’s Board of Directors to avoid the imposition of an excise tax on Employee under Section 4999 of the Code or the disallowance of a deduction to the Bank under Section 28OG(a) of the Code.

(h) In the event any dispute shall arise between Employee and the Bank as to the terms or interpretation of this Agreement, including this Paragraph 8, whether instituted by formal legal proceedings or otherwise, including any action taken by Employee to enforce the terms of this Paragraph 8 or in defending against any action taken by the Bank, the Bank shall reimburse Employee for all costs and expenses, proceedings or actions, in the event Employee prevails in any such action.

12

9. Successors and Assigns.

(a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by conversion, merger, share exchange, purchase or otherwise, all or substantially all of the assets of the Bank.

(b) The Bank is contracting for the unique and personal skills of Employee. Therefore, Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank.

10. Modification; Waiver; Amendments. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties hereto. No waiver by either party hereto, at any time, of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.

11. Applicable Law. This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

12. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

13. Entire Agreement. This Agreement contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreements heretofore made, and there are no representations or inducements by or to, or any agreements between, any of the parties hereto other than those contained herein in writing.

13

IN WITNESS WHEREOF, the parties have executed this Agreement under seal and in such form as to be binding as of the day and year first hereinabove written.

NEW CENTURY BANK of FAYETTEVILLE
By:	/s/ J. Gary Ciccone	/s/ William L. Hedgepeth, II
	J. Gary Ciccone	William L. Hedgepeth, II
	Chairman of the Board

14

EX-21

Exhibit 21

Subsidiaries of New Century Bancorp, Inc.

New Century Bank, Dunn, North Carolina

(a North Carolina chartered banking corporation)

New Century Bank South, Fayetteville, North Carolina*

(a North Carolina chartered banking corporation)

New Century Statutory Trust I

(a Delaware statutory trust)

* Formerly, New Century Bank of Fayetteville

EX-31.I

Exhibit 31(i)

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John Q. Shaw, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of New Century Bancorp, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that all material information relating to the registrant, is made known to us by others within those entities, particularly during the period which this report is being prepared;

b. [Reserved]

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, and of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based upon our most recent evaluation of internal control over financial reporting, to the registrant’s auditor and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 22, 2006	By:	/s/ John Q. Shaw, Jr.
		John Q. Shaw, Jr.
		President and Chief Executive Officer

EX-31.II

Exhibit 31(ii)

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lisa F. Campbell, certify that:

1. I have reviewed this annual report on Form 10-K of New Century Bancorp, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designated such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that all material information relating to the registrant, is made known to us by others within those entities, particularly during the period which this report is being prepared;

b. [Reserved]

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, and of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based upon our most recent evaluation of internal control over financial reporting, to the registrant’s auditor and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 22, 2006	By:	/s/ Lisa F. Campbell
		Lisa F. Campbell
		Vice President (Principal Financial Officer)

EX-32.I

Exhibit 32(i)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that, to his knowledge, (i) the Form 10-K filed by New Century Bancorp, Inc. (the “Issuer”) for the year ended December 31, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: March 22, 2006	/s/ John Q. Shaw, Jr.
	John Q. Shaw, Jr.
	Principal Executive Officer

EX-32.II

Exhibit 32(ii)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that, to his knowledge, (i) the Form 10-K filed by New Century Bancorp, Inc. (the “Issuer”) for the year ended December 31, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

Date: March 22, 2006	/s/ Lisa F. Campbell
	Lisa F. Campbell
	Principal Financial Officer