Hi Randy,
From your description of the NC state flag, it sounds a bit odd. For one, NC state issused flags were almost entirely made of wool bunting or silk, not cotton. I have studied a lot of period NC flags in the museums and I have never seen where the NC letters were ever on are the red bar with the star. Usually, the white star was much larger than what you see today and there was no room for any letters beside it, and two dates were above and below the large white star. They didn't add the NC letters to the flag until after the War and Reconstruction when they redesigned the flag in 1885 by swaping the red and blue bars and puting the letters and a little star on the blue bar next to the hoist. When you said the battles honors were stenciled, red flags went up too. Recently, a lot of fake CW flags have been using that method and passing them off as "reunion" flags but unfortunately they are poor reproductions and worthless. Again, most if not all NC reunion flags that have survived have been patterned after the ANV battle flag not the state flag. The best way to tell is a photo would help to identify if your flag is genuine. Photobucket is a site you can use to upload and post the URL on this site.