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EX-23 - CONSENT OF DIXON HUGHES - SELECT BANCORP, INC.dex23.htm
EX-21 - SUBSIDIARIES - SELECT BANCORP, INC.dex21.htm
EX-32.(I) - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 - SELECT BANCORP, INC.dex32i.htm
EX-31.(II) - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - SELECT BANCORP, INC.dex31ii.htm
EX-32.(II) - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 - SELECT BANCORP, INC.dex32ii.htm
EX-31.(I) - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - SELECT BANCORP, INC.dex31i.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

OR

 

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

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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 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  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   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. $41,700,509 Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date. 6,838,434 shares outstanding as of March 18, 2010.

 

 

Documents Incorporated by Reference.

Definitive Proxy Statement for the 2010 Annual Meeting of Shareholders as filed pursuant to Section 14 of the Securities Exchange Act of 1934, incorporated into Part III of this Form 10-K

 

 

 


FORM 10-K CROSS-REFERENCE INDEX

 

PART I

   FORM
10-K
   PROXY
STATEMENT
   ANNUAL
REPORT

Item 1 – Business

   X      

Item 1A – Risk Factors

   X      

Item 1B – Unresolved Staff Comments

   X      

Item 2 – Properties

   X      

Item 3 – Legal Proceedings

   X      

Item 4 – (RESERVED)

   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

   X      

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(T) – Controls and Procedures

   X      

Item 9B – Other Information

   X      

PART III

        

Item 10 – Directors, Executive Officers and Corporate Governance

   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, and

Director Independence

      X   

Item 14 – Principal Accountant Fees and Services

      X   

PART IV

        

Item 15 – Exhibits and Financial Statement Schedules

   X      

 

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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 institution, New Century Bank (the “Bank”). The Registrant’s headquarters is 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.

The Board of Directors of New Century Bancorp as well as the boards of directors of New Century Bank and New Century Bank South, voted to merge the two banks in early 2008. The merger was completed on March 28, 2008. The merged bank is called New Century Bank and the headquarters and operations center of the merged bank are in Dunn, North Carolina. A 19-member holding company board also serves as the board of directors of the Bank and includes current directors from both banks.

The combined Bank operates for the primary purpose of serving the banking needs of individuals and small to medium-sized businesses in its market area. The Bank 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 southeastern North Carolina. The Registrant’s market area has a population of over 1.1 million with an average household income of over $40,600.

The June 2009 total deposits in the Registrant’s market area exceeded $8.0 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 government and military, followed by services and retail trade. In Sampson County, leading sectors include manufacturing, services, and state and local government. Wayne County’s leading sectors are federal government and military services, retail trade and agriculture. The largest employers in the Registrant’s market area include Goodyear Tire Company, Cape Fear Valley Medical Center, Smithfield Foods 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 markets and higher lending limits than Registrant and are also able to provide more services and make

 

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greater use of media advertising. As of June 30, 2009, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 231 offices of 23 other commercial and savings institutions (30 in Harnett County, 43 in Pitt County, 4 in Hoke County, 69 in Cumberland County, 33 in Robeson County, 17 in Sampson County, and 35 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, 2009, the Registrant employed 133 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 Bank

The Bank is 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 Bank is 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 Bank is required to make regular reports to the Commissioner describing in detail its 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. Insurance of Deposit Accounts. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund of the FDIC. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On January 1, 2014, the SMDIA will return to $100,000 per depositor for all account categories

 

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except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor, unless a new law is enacted before then to extend the increased deposit insurance limits. The FDIC has amended its risk-based assessment system to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I, which contains well-capitalized banks with only a few minor weaknesses. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. During the year ended December 31, 2009, the Bank was assigned to Risk Category I.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. Assessment rates are determined by the FDIC and currently range from 5 to 7 basis points annually of assessable deposits for the healthiest institutions (Risk Category I) to 43 basis points for the riskiest (Risk Category IV). The FDIC may adjust assessment rates from one quarter to the next, except that no single adjustment can exceed 3 basis points. The Bank’s quarterly Deposit Insurance Fund assessments during the year ended December 31, 2009 ranged from 2.052 to 3.830 basis points of assessable deposits.

The Reform Act also provided for a one-time credit for eligible insured institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, one-time credits are used to offset quarterly assessments until exhausted. The Bank did qualify for this credit by virtue of its merger with Progressive State Bank. The Reform Act also provided that the FDIC may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in non-interest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program. The Bank elected to participate in the TAG Program and as a result, does not anticipate a material increase in its deposit insurance premiums. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010. As a Risk Category I bank, for amounts exceeding the existing $250,000 deposit insurance limit in non-interest-bearing transaction accounts the Bank will be assessed an annualized fee of .027 basis points and collected quarterly through June 30, 2010.

On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. The FDIC projected that if no action is taken, its liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010. The prepaid assessment for all insured institutions was collected on December 30, 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessment was based on an institution’s total base assessment rate in effect on September 30, 2009. That rate will be increased by 3 basis points for the 2011 and 2012 prepayments and a quarterly five percent deposit growth rate is also built into the calculation.

 

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On December 30, 2009, the Bank paid a $3.1 million prepaid assessment and it will be accounted for as a prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the Bank will expense its regular quarterly assessment and record an offsetting credit to the prepaid assessment asset until the asset is exhausted. If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned to the Bank.

The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.

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, 2009, the Registrant was classified as well capitalized with Tier 1 and Total Risk-Based Capital of 12.63% and 13.89%, respectively. Also, as of December 31, 2009, the Bank was classified as well capitalized with Tier 1 and Total Risk-Based Capital of 12.31% and 13.57%, 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

 

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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,

 

   

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.

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

The earnings of the Bank 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

 

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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.

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 Bank’s 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 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.

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” and well-managed 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.

 

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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;

 

   

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.

 

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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;

 

   

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 Bank. At present, the Registrant’s only source of income is dividends paid by the Bank 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 Bank. 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 where 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 Bank 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 underlie 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

 

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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 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.

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 Bank, 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 tying 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.

 

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ITEM 1A – RISK FACTORS

Not required for smaller reporting companies.

ITEM 1B – UNRESOLVED STAFF COMMENTS

Not required for smaller reporting companies.

ITEM 2 – PROPERTIES

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

 

Office Location

   Year
Opened
   Approximate
Square Footage
   Owned or Leased

New Century Bank Main Office

700 West Cumberland Street

Dunn, NC 28334

   2001    12,600    Owned

Clinton Office

111 Northeast Boulevard

Clinton, NC 28328

   2002    3,100    Owned

Goldsboro Office

431 North Spence Avenue

Goldsboro, NC 27534

   2005    6,300    Owned

Lillington Office

818 McKinney Parkway

Lillington, NC 27546

   2007    4,500    Owned

Greenville Loan Production Office

323 Clifton Street, Suite #8

Greenville, NC 27858

   2009    500    Leased

Fayetteville Office

2818 Raeford Road

Fayetteville, NC 28303

   2004    10,000    Owned

Ramsey Street Office

6390 Ramsey Street

Fayetteville, NC 28311

   2007    2,500    Owned

Lumberton Office

4400 Fayetteville Road

Lumberton, NC 28358

   2006    3,500    Owned

Pembroke Office

410 East Third Street

Pembroke, NC 28372

   2006    1,600    Owned

Raeford Office

720 Harris Avenue

Raeford, NC 28376

   2006    2,900    Owned

Operations Center

107 East Broad Street

Dunn, NC 28334

   2005    9,000    Leased

Operations Center Annex

106 East Broad Street

Dunn, NC 28334

   2008    3,700    Leased

 

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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 – (RESERVED)

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the NASDAQ Global Market under the trading symbol “NCBC.” FIG Partners, LLC, Howe Barnes Hoefer & Arnett, Morgan Keegan, McKinnon & Company, Sandler O’Neill & Partners, L.P., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2009, there were 6,837,952 shares of common stock outstanding, which were held by 1,429 shareholders of record.

 

     Sales Prices
     High    Low

2009

     

First Quarter

   $ 6.25    $ 4.00

Second Quarter

     7.67      4.31

Third Quarter

     7.00      5.50

Fourth Quarter

     6.24      3.81

2008

     

First Quarter

   $ 9.45    $ 7.30

Second Quarter

     8.10      6.51

Third Quarter

     10.21      5.31

Fourth Quarter

     7.15      4.90

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.

 

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ITEM 6 – SELECTED FINANCIAL DATA

 

     At or for the year ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands, except per share data)  

Operating Data:

          

Total interest income

   $ 33,030      $ 35,237      $ 41,599      $ 35,812      $ 24,679   

Total interest expense

     13,122        17,372        20,653        16,167        10,089   
                                        

Net interest income

     19,908        17,865        20,946        19,645        14,590   

Provision for loan losses

     5,472        4,283        5,974        2,779        2,172   
                                        

Net interest income after provision for loan losses

     14,436        13,582        14,972        16,866        12,418   

Total non-interest income

     3,098        3,124        3,977        3,278        2,496   

Impairment of goodwill

     8,674        —          —          —          —     

Total non-interest expense

     17,375        17,138        16,337        13,816        9,129   
                                        

Income (loss) before income taxes

     (8,515     (432     2,612        6,328        5,785   

Provision for income taxes (benefit)

     (73     (239     953        2,358        2,164   
                                        

Net income (loss)

   $ (8,442   $ (193   $ 1,659      $ 3,970      $ 3,621   
                                        

Per Share Data: (1)

          

Earnings (loss) per share - basic

   $ (1.24   $ (.03   $ .25      $ .69      $ .72   

Earnings (loss) per share - diluted

     (1.24     (.03     .24        .65        .66   

Market Price

          

High

     7.67        10.21        16.33        20.83        23.75   

Low

     3.81        4.90        8.25        15.75        10.56   

Close

     4.75        5.00        8.25        16.99        20.63   

Book value

     7.96        9.17        9.09        8.84        6.48   

Tangible book value

     7.83        7.76        7.63        7.30        6.48   

Selected Year-End Balance Sheet Data:

          

Loans, gross of allowance

   $ 481,176      $ 460,626      $ 442,875      $ 427,948      $ 321,670   

Allowance for loan losses

     10,359        8,860        8,314        7,496        5,298   

Other interest-earning assets

     107,360        99,908        100,292        87,811        96,059   

Goodwill and core deposit intangible

     853        9,680        9,834        9,988        —     

Total assets

     630,419        605,767        591,025        552,965        436,367   

Deposits

     540,262        505,119        498,122        464,117        367,003   

Borrowings

     32,936        35,547        29,339        28,813        34,115   

Shareholders’ equity

     54,409        62,659        61,173        57,439        32,974   

Selected Average Balances:

          

Total assets

   $ 630,521      $ 599,913      $ 583,809      $ 491,849      $ 381,494   

Loans, gross of allowance

     471,059        451,558        449,799        369,110        301,510   

Total interest-earning assets

     578,372        554,798        539,526        458,974        362,669   

Goodwill and core deposit intangible

     9,578        9,756        9,910        4,087        —     

Deposits

     527,844        504,188        493,989        412,077        317,648   

Total interest-bearing liabilities

     498,831        468,044        450,466        381,514        303,889   

Shareholders’ equity

     63,584        62,107        59,888        45,614        31,583   

Selected Performance Ratios:

          

Return on average assets

     (1.34 )%      (.03 )%      .28     .81     .95

Return on average equity

     (13.28 )%      (.31 )%      2.77     8.70     11.47

Net interest margin (5)

     3.49     3.27     3.93     4.33     4.06

Net interest spread (5)

     3.12     2.69     3.18     3.62     3.52

Efficiency ratio (2)

     75.52     81.00     65.40     60.27     53.43

Asset Quality Ratios:

          

Nonperforming loans to period-end loans (3)

     3.34     1.85     1.13     .75     .26

Allowance for loan losses to period-end loans (4)

     2.15     1.92     1.88     1.75     1.65

Net loan charge-offs to average loans

     0.84     0.82     1.15     .27     .16

 

- 14 -


     At or for the year ended December 31,  
     2009     2008     2007     2006     2005  
           (Dollars in thousands, except per share data)        

Capital Ratios:

          

Total risk-based capital

   13.89   14.43   14.77   14.63   14.54

Tier 1 risk-based capital

   12.63   13.18   13.51   13.38   12.93

Leverage ratio

   10.02   10.66   10.77   10.95   10.56

Tangible equity to assets

   8.49   8.75   8.69   8.58   7.56

Equity to assets ratio

   8.63   10.34   10.35   10.39   7.56

Other Data:

          

Number of banking offices

   9      10      10      11      5   

Number of full time equivalent employees

   133      132      144      156      92   

 

(1) Adjusted for all years presented to reflect the effects of a 20% stock dividend in December 2006 and a 50% stock dividend in July 2005.
(2) Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income, excluding goodwill impairment.
(3) Nonperforming loans consist of non-accrual loans and restructured loans.
(4) Allowance for loan losses to period-end loans ratio excludes loans held for sale
(5) Fully taxable equivalent basis

 

- 15 -


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, many of which are beyond our control. 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 consolidated subsidiary, New Century Bank, and its unconsolidated subsidiary, New Century Statutory Trust I, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of the bank subsidiary. However, for ease of reading and because the financial statements are presented on a consolidated basis, New Century Bancorp, Inc and, New Century Bank are collectively referred to herein as the Company unless otherwise noted.

DESCRIPTION OF BUSINESS

The Company is a commercial bank holding company that was incorporated on September 19, 2003 and has only one banking subsidiary, New Century Bank, which became a subsidiary of the Company as part of a holding company reorganization, (referred to as the “Bank”). In September 2004, the Company formed New Century Statutory Trust I, which issued trust preferred securities to provide additional capital for general corporate purposes, including the current and future expansion of New Century Bank. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company’s only business activity is the ownership of the Bank. Accordingly, this discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank’s lending activities are oriented to the consumer/retail customer as well as to the small-to-medium sized businesses located in southeastern North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking, savings accounts and certificates of deposit. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

 

- 16 -


SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

YEARS ENDED DECEMBER 31, 2009 AND 2008

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (dollars are in thousands, except share and per share data)  

2009

        

Interest Income

   $ 8,283      $ 8,045      $ 8,266      $ 8,438   

Interest Expense

     3,673        3,459        3,170        2,821   
                                

Net Interest Income

     4,610        4,586        5,096        5,617   

Provision for loan losses

     685        1,414        2,377        995   
                                

Net interest income after provision for loan losses

     3,925        3,172        2,719        4,622   

Non interest income

     814        756        769        761   

Impairment of goodwill

     —          —          —          8,674   

Non interest expense

     4,080        4,428        4,075        4,796   
                                

Income (loss) before taxes

     659        (500     (587     (8,087

Income taxes (benefit)

     251        (247     (218     141   
                                

Net income (loss)

   $ 408      $ (253   $ (369   $ (8,228
                                

Net income (loss) per share

        

Basic

   $ .06      $ (.04   $ (.05   $ (1.20

Diluted

     .06        (.04     (.05     (1.20

Average shares outstanding

        

Basic

     6,831,149        6,831,973        6,837,292        6,837,863   

Diluted

     6,835,476        6,831,973        6,837,292        6,837,863   

2008

        

Interest Income

   $ 9,382      $ 8,828      $ 8,681      $ 8,348   

Interest Expense

     5,040        4,299        4,043        3,991   
                                

Net Interest Income

     4,342        4,529        4,638        4,357   

Provision for loan losses

     873        374        895        2,142   
                                

Net interest income after provision for loan losses

     3,469        4,155        3,743        2,215   

Non interest income

     487        609        617        690   

Non interest expense

     4,098        4,153        4,108        4,058   
                                

Income (loss) before taxes

     (142     611        252        (1,153

Income taxes (benefit)

     (52     207        93        (487
                                

Net income (loss)

   $ (90   $ 404      $ 159      $ (666
                                

Net income (loss) per share

        

Basic

   $ (.01   $ .06      $ .02      $ (.10

Diluted

     (.01     .06        .02        (.10

Average shares outstanding

        

Basic

     6,764,291        6,816,966        6,826,481        6,829,731   

Diluted

     6,764,291        6,860,016        6,879,919        6,829,731   

 

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

 

- 17 -


FINANCIAL CONDITION

DECEMBER 31, 2009 AND 2008

Overview

Total assets at December 31, 2009 were $630.4 million, which represents an increase of $24.7 million or 4.1% from December 31, 2008. Earning assets at December 31, 2009 totaled $588.5 million and consisted of $470.8 million in net loans, $96.3 million in investment securities, $19.3 million in overnight investments and interest-bearing deposits in other banks and $2.1 million in non-marketable equity securities. Total deposits and shareholders’ equity at December 31, 2009 were $540.3 million and $54.4 million, respectively.

Investment Securities

Investment securities increased to $96.3 million from $82.9 million at December 31, 2008. The Company’s investment portfolio at December 31, 2009, which consisted of U.S. government agency securities, mortgage-backed securities and bank-qualified municipal securities, aggregated $96.3 million with a weighted average yield of 3.85%. The Company also holds an investment of $1.1 million in the form of Federal Home Loan Bank Stock with a weighted average yield of 0.31%. This dividend has been recently adjusting downward due to declining interest rates and the current trend of financial institutions to preserve capital during these uncertain economic times. The investment portfolio increased $13.3 million in 2009, the result of $38.7 million in purchases, $24.8 million of maturities and prepayments and a decrease of $0.6 million in the market value of securities held available for sale and net accretion of investment discounts. There were no sales of investment securities during 2009.

The following table summarizes the securities portfolio by major classification:

Securities Portfolio Composition

(dollars are in thousands)

 

     Amortized
Cost
   Fair
Value
   Tax
Equivalent
Yield
 

U. S. government agency securities:

        

Due within one year

   $ 13,832    $ 14,028    2.98

Due after one but within five years

     39,430      39,964    2.04
                
     53,262      53,992    2.27
                

Mortgage-backed securities:

        

Due within one year

     1,456      1,470    3.03

Due after one but within five years

     31,293      32,661    4.72

Due after five but within ten years

     717      753    5.82
                
     33,466      34,884    4.67
                

State and local governments:

        

Due after one but within five years

     1,160      1,202    6.03

Due after five but within ten years

     4,133      4,286    5.18

Due after ten years

     1,898      1,895    6.00
                
     7,191      7,383    5.54
                

Total securities available for sale:

        

Due within one year

     15,288      15,498    2.98

Due after one but within five years

     71,883      73,827    3.29

Due after five but within ten years

     4,850      5,039    5.28

Due after ten years

     1,898      1,895    6.00
                
   $ 93,919    $ 96,259    3.29
                

 

- 18 -


Loans Receivable

Loans receivable increased by $20.6 million, or 4.5%, to $481.2 million as of December 31, 2009. The growth was primarily due to our growth in existing markets and the repurchase of performing participation loans. The loan portfolio at December 31, 2009 was comprised of $397.0 million in real estate loans, $70.7 million in commercial and industrial loans, and $13.8 million in loans to individuals. Also included in loans outstanding is $295,000 in net deferred loan fees.

The following table describes our loan portfolio composition by category:

 

     At December 31,  
     2009     2008     2007     2006     2005  
     Amount     % of
Total
Loans
    Amount     % of
Total
Loans
    Amount     % of
Total
Loans
    Amount     % of
Total
Loans
    Amount     % of
Total
Loans
 
     (dollars in thousands)  

Real estate loans:

                    

One-to-four family residential

   $ 69,995      14.5   $ 67,353      14.6   $ 61,738      13.9   $ 59,867      14.0   $ 47,531      14.8

Commercial

     195,165      40.6     169,856      36.9     132,649      30.0     113,790      26.6     94,051      29.2

Multi-family residential

     22,580      4.7     18,744      4.1     13,379      3.0     13,399      3.1     15,653      4.9

Construction

     70,736      14.7     65,807      14.3     84,795      19.1     79,607      18.6     63,000      19.6

Home equity lines of credit

     38,482      8.0     41,352      9.0     42,016      9.5     42,130      9.8     14,554      4.5
                                                                      

Total real estate loans

     396,958      82.5     363,112      78.9     334,577      75.5     308,793      72.2     234,789      73.0
                                                                      

Other loans:

                    

Commercial and industrial

     70,747      14.7     76,936      16.7     81,832      18.5     88,626      20.7     66,062      20.5

Loans to individuals

     13,766      2.9     20,916      4.5     26,756      6.0     30,827      7.2     21,104      6.6
                                                  

Total other loans

     84,513      17.6     97,852      21.2     108,588      24.5     119,453      27.9     87,166      27.1
                                                                      

Less:

                    

Deferred loan origination (fees) cost, net

     (295   -0.1     (338   -0.1     (290   -0.1     (298   -0.1     (285   -0.1
                                                                      

Total loans

     481,176      100.0     460,626      100.0     442,875      100.0     427,948      100.0     321,670      100.0
                                                                      

Allowance for loan losses

     (10,359       (8,860       (8,314       (7,496       (5,298  
                                                  

Total loans, net

   $ 470,817        $ 451,766        $ 434,561        $ 420,452        $ 316,372     
                                                  

 

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The following table presents as of December 31, 2009 (i) the aggregate maturities of loans in the named categories of our loan portfolio and (ii) the aggregate amounts of such loans, by variable and fixed rates that mature within one year, after one year but within five years, and after five years:

 

     At December 31, 2009  
     Due within
one year
   Due after one
year but within
five years
   Due after
five years
   Total  
     (dollars in thousands)  

Fixed rate loans:

           

One-to-four family residential

   $ 13,828    $ 37,058    $ 1,595    $ 52,481   

Commercial real estate

     15,395      99,987      15,890      131,272   

Multi-family residential

     4,012      14,042      32      18,086   

Construction

     10,276      10,179      489      20,944   

Home equity lines of credit

     58      17      —        75   

Commercial and industrial

     5,693      18,408      116      24,217   

Loans to individuals

     3,300      6,494      205      9,999   
                             

Total at fixed rates

     52,562      186,185      18,327      257,074   
                             

Variable rate loans:

           

One-to-four family residential

     6,057      5,836      2,454      14,347   

Commercial real estate

     23,203      32,967      4,242      60,412   

Multi-family residential

     1,148      3,346      —        4,494   

Construction

     33,323      14,004      —        47,327   

Home equity lines of credit

     530      —        37,596      38,126   

Commercial and industrial

     30,039      5,995      3,753      39,787   

Loans to individuals

     1,216      1,119      1,521      3,856   
                             

Total at variable rates

     95,516      63,267      49,566      208,349   
                             

Subtotal

     148,078      249,452      67,893      465,423   

Non-accrual loans

     8,594      5,018      2,436      16,048   
                             

Gross loans

   $ 156,672    $ 254,470    $ 70,329      481,471   
                       

Deferred loan origination (fees) costs, net

              (295
                 

Total loans

            $ 481,176   
                 

Past Due Loans, Nonperforming Assets, and Asset Quality

Management continues to take necessary actions to identify problem loans and maintain proper internal controls in the lending and credit administration areas. These actions include conducting ongoing loan risk rating reviews; addressing problem loans while enhancing the credit administration process; improving loan documentation, ongoing lender training, enhanced collection efforts, and ongoing updating of policies and procedures.

At December 31, 2009, the Company had nearly $2.0 million in loans that were 30 days or more past due. This represented 0.41% of gross loans outstanding on that date. This is an increase from December 31, 2008 when there was $1.5 million in loans that were past due 30 days or more, or 0.32% of gross loans outstanding. Non-accrual loans increased $7.4 million from December 31, 2008 to $16.0 million at December 31, 2009.

 

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The table below sets forth, for the periods indicated, information about the Company’s non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus restructured loans), and total non-performing assets.

 

     As December 31,  
     2009     2008     2007     2006     2005  
     (dollars in thousands)  

Non-accrual loans

   $ 16,048      $ 8,630      $ 5,007      $ 2,657      $ 823   

Restructured loans

     —          —          —          562        —     
                                        

Total non-performing loans

     16,048        8,630        5,007        3,219        823   
                                        

Foreclosed real estate

     2,530        2,799        542        164        443   

Repossessed assets

     —          —          34        —          5   
                                        

Total non-performing assets

   $ 18,578      $ 11,429      $ 5,583      $ 3,383      $ 1,271   
                                        

Accruing loans past due 90 days or more

   $ —        $ —        $ 1      $ 1,197      $ 189   

Allowance for loan losses

   $ 10,359      $ 8,860      $ 8,314      $ 7,496      $ 5,298   

Non-performing loans to period end loans

     3.34     1.87     1.13     0.75     0.26

Non-performing loans and accruing loans past due 90 days or more to period end loans

     3.34     1.87     1.13     1.03     0.31

Allowance for loans losses to period end loans

     2.15     1.92     1.88     1.75     1.65

Allowance for loan losses to non-performing loans

     65     103     166     233     644

Allowance for loan losses to non-performing assets

     56     78     149     222     417

Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more

     56     78     149     164     363

Non-performing assets to total assets

     2.95     1.89     0.94     0.61     0.29

Non-performing assets and accruing loans past due 90 days or more to total assets

     2.95     1.89     0.94     0.83     0.33

In addition to the nonperforming assets summarized above, the Company had $0.5 million in loans that were considered to be impaired for reasons other than their past due status. In total, there were $16.5 million of loans that were considered to be impaired at December 31, 2009, an increase of $7.4 million from the $9.1 million at December 31, 2008. Impaired loans have been evaluated by management in accordance with ASC (“Accounting Standards Codification”) 310 and $4.2 million has been included in the allowance for loan losses as of December 31, 2009 for these loans.

 

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

Acquisition, Development, and Construction Loans (“ADC”)

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

Included in ADC loans and residential real estate loans were loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $10.8 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $17.2 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 40.7% of total risk based capital as of December 31, 2009, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to soften for both market activity and collateral valuations.

ADC Loans

As of December 31, 2009

(dollars are in thousands)

 

     Construction     Land and Land
Development
    Total  

Total ADC loans

   $ 46,296      $ 24,440      $ 70,736   

Average Loan Size

   $ 183      $ 298     

Percentage of total loans

     9.62     5.08     14.70

Non-accrual loans

   $ 1,370      $ 677      $ 2,047   

The ADC portfolio consists of $46.3 million in construction loans and $24.4 million in land and land development loans. The average loan size is less than $200,000 for construction loans and $300,000 for land and land development loans. Total ADC loans represent 14.70% or $70.7 million of the total loan portfolio. $2.0 million of the ADC portfolio are in non-accrual status. This represents 2.89% of all ADC loans. Management closely monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company’s market area.

Other Lending Risk Factors

Interest Only Payments - Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At December 31, 2009, the Company had $157.2 million in loans that had terms requiring interest only payments. This represented 32.7% of the total loan portfolio.

Large Dollar Concentrations - Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit concentrations totaled $40.6 million or 8.5% of total loans at of December 31, 2009. The Company’s ten largest customer loan relationship concentrations totaled $78.2 million or 16.2% of total loans at of December 31, 2009. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the capital position of the Company.

 

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Business Sector Concentrations - Loan concentrations in certain business sectors impacted by lower than normal retail sales, higher unemployment, and lower charitable contribution levels may also pose additional risk to the Company’s capital position. Federal Regulators have established a Commercial Real Estate benchmark of 40% of Risk-Based Capital for any single product line and at December 31. 2009 the Company had one product type group which exceeded this guideline; 1-4 Family Rental. The 1-4 Family Rental group represented 44% of Risk-Based Capital or $29.9 million. Office Buildings were just below the benchmark at 39% of Risk-Based Capital or $26.7 million. All other Commercial Real Estate groups were well under the 40% threshold.

Geographic Concentrations - Certain risks exist arising from geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and home equity lines of credit (“HELOC”) loans.

 

     ADC Loans    Percent     HELOC    Percent  

Harnett County

   $ 7,942    11.2   $ 7,947    20.7

Cumberland County

     27,162    38.3     6,303    17.1

All other locations

     35,632    50.5     24,232    62.2
                          

Total

   $ 70,736    100.0   $ 38,482    100.0
                          

Allowance for Loan Losses

The allowance for loan losses increased 23 basis points to 2.15% of gross loans at December 31, 2009 from 1.92% at December 31, 2008. The increase resulted from increases allocable to the downgrading of loans, resulting from both internal and external loan reviews, an increase in the level of non-performing loans and the impact on the actual loss experience resulting from net charge-offs of $4.0 million in 2009. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loss experience, current delinquency levels, trends in past dues, adverse situations that may affect a borrower’s ability to repay, estimated value of underlying collateral, prevailing economic conditions and other relevant factors derived from the Company’s history of operations. During 2009, management continued to make enhancements to the Company’s process for determining the allowance for loan losses. Other steps taken include regular management meetings and past due conference calls to review and monitor problem assets, centralized loan documentation and improved processes for identification and measurement of impaired loans in accordance with ASC 310.

While the Company believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making determinations regarding the allowance. While the Company believes that the allowance for loan losses has been established in conformity with generally accepted accounting principles, there can be no assurance that banking regulators, in reviewing the loan portfolio, will not require adjustments to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increased provisions to the allowance will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations and the value of the Company’s common stock.

Management believes the allowance for loan losses as of December 31, 2009 is appropriate in light of the risk inherent within the Company’s loan portfolio.

 

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The following table presents the Company’s allowance for loan losses as a percentage of loans at December 31 for the years indicated.

 

     At December 31,  
     2009    % of
Total
loans
    2008    % of
Total
loans
    2007    % of
Total
loans
    2006    % of
Total
loans
    2005    % of
Total
loans
 
     (dollars in thousands)  

One-to-four family residential

   $ 1,854    14.55   $ 1,437    14.62   $ 682    13.94   $ 133    13.99   $ 209    14.78

Commercial real estate

     4,281    40.56     2,761    36.88     2,135    29.95     2,078    26.59     1,786    29.24

Multi- family residential

     200    4.69     115    4.07     64    3.02     241    3.13     196    4.87

Construction

     629    14.70     1,039    14.29     586    19.15     1,593    18.60     1,235    19.59

Home equity lines of credit

     1,189    8.00     499    8.97     319    9.49     169    9.84     35    4.52

Commercial and industrial

     1,699    14.70     2,381    16.70     4,270    18.52     2,022    20.71     893    20.54

Loans to individuals

     501    2.86     563    4.54     221    6.04     1,254    7.20     789    6.56

Deferred loan originations fees, net

     —      (.06 )%      —      (0.07 )%      —      (0.11 )%      —      (0.07 )%      —      (0.09 )% 
                                                                 
      100.00      100.00      100.00      100.00      100.00

Total allocated

     10,353        8,795        8,277        7,490        5,143   

Unallocated

     6        65        37        6        155   
                                             

Total

   $ 10,359      $ 8,860      $ 8,314      $ 7,496      $ 5,298   
                                             

The following table presents information regarding changes in the allowance for loan losses for the years indicated:

 

     As of December 31,  
     2009     2008     2007     2006     2005  
           (dollars are in thousands)        

Allowance for loan losses at beginning of year

   $ 8,860      $ 8,314      $ 7,496      $ 5,298      $ 3,598   

Provision for loan losses

     5,472        4,283        5,974        2,779        2,172   
                                        
     14,332        12,597        13,470        8,077        5,770   
                                        

Loans charged off:

          

One-to-four family residential

     (567     (678     (471     (92     (235

Multi-family residential and commercial

     —          —          (572     (29     (61

Construction

     (168     (118     (130     —          —     

Home equity lines of credit

     (404     (448     (127     —          —     

Commercial and industrial

     (2,932     (2,836     (3,878     (835     (24

Loans to individuals

     (352     (270     (626     (181     (208
                                        

Total charge-offs

     (4,423     (4,350     (5,804     (1,137     (528
                                        

Recoveries of loans previously charged off:

          

One-to-four family residential

     69        145        119        28        —     

Multi-family residential and commercial

     —          —          37        —          —     

Construction

     12        33        4        —          —     

Home equity lines of credit

     7        —          —          —          —     

Commercial and industrial

     325        373        325        58        38   

Loans to individuals

     37        62        163        66        17   
                                        

Total recoveries

     450        613        648        152        56   
                                        

Net charge-offs

     (3,973     (3,737     (5,156     (985     (472
                                        

Allowance acquired from Progressive State Bank

     —          —          —          404        —     
                                        

Allowance for loan losses at end of year

   $ 10,359      $ 8,860      $ 8,314      $ 7,496      $ 5,298   
                                        

Ratios:

          

Net charge-offs as a percent of average loans

     0.84     0.83     1.15     0.27     0.16

Allowance for loan losses as a percent of loans at end of year

     2.15     1.92     1.88     1.75     1.65

 

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Other Assets

At December 31, 2009 non-earning assets totaled $41.9 million, a decrease of $3.4 million from $45.3 million at December 31, 2008. Non-earning assets at December 31, 2009 consisted of: cash and due from banks of $9.6 million, premises and equipment totaling $12.2 million, foreclosed real estate totaling $2.5 million, accrued interest receivable of $2.6 million, bank owned life insurance of $7.5 million and others totaling $7.5 million which includes a $3.2 million prepayment in FDIC deposit insurance for the years 2010, 2011, and 2012. The Company’s goodwill was considered impaired and written off in 2009.

The Company has an investment in bank owned life insurance of $7.5 million, which increased $0.3 million from December 31, 2008. The change reflects an increase in cash surrender value. Since the income on this investment is included in non-interest income, the asset is not included in the Company’s calculation of earning assets.

Deposits

Total deposits at December 31, 2009 were $540.3 million and consisted of $72.3 million in non-interest-bearing demand deposits, $93.7 million in money market and NOW accounts, $26.4 million in savings accounts, and $347.9 million in time deposits. Total deposits grew by $35.1 million from $505.1 million as of December 31, 2008. Non-interest-bearing demand deposits increased by $9.4 million from $62.9 million as of December 31, 2008. During 2009, the Company had a targeted advertising campaign featuring a special MMDA rate. This resulted in the $19.5 million increase in MMDA and NOW accounts. Savings accounts were also affected by this special and decreased by $0.8 million. Time deposits increased by $7.0 million during 2009.

The following table shows historical information regarding the average balances outstanding and average interest rates for each major category of deposits:

 

     For the Period Ended December 31,  
     2009     2008     2007     2006     2005  
     Average
Amount
   Average
Rate
    Average
Amount
   Average
Rate
    Average
Amount
   Average
Rate
    Average
Amount
   Average
Rate
    Average
Amount
   Average
Rate
 
     (dollars in thousands)  

Savings, NOW and money market deposits

   $ 108,240    1.22   $ 96,191    1.68   $ 97,370    2.55   $ 87,264    2.56   $ 56,378    1.54

Time deposits > $100,000

     166,641    3.19     153,619    4.38     144,039    5.01     107,855    4.31     73,238    4.12

Other time deposits

     187,687    3.11     187,247    4.30     181,013    5.16     154,864    4.89     143,547    3.50
                                             

Total interest-bearing deposits

     462,568    2.70     437,057    3.75     422,422    4.51     349,983    4.13     273,163    3.26

Noninterest-bearing deposits

     65,276    —          67,131    —          71,567    —          62,094    —          44,485    —     
                                             

Total deposits

   $ 527,844    2.36   $ 504,188    3.25   $ 493,989    3.85   $ 412,077    3.51   $ 317,648    2.80
                                             

Short Term and Long Term Debt

As of December 31 2009, the Company had $20.6 million in short-term debt, all of which were repurchase agreements, and $12.4 million in long-term debt, all of which were junior subordinated debentures issued to New Century Statutory Trust I in connection with the Company’s issuance of trust preferred securities in September 2004.

Shareholders’ Equity

Total shareholders’ equity at December 31, 2009 was $54.4 million, a decrease of $8.2 million from $62.7 million as of December 31, 2008. Changes in shareholders’ equity included an $8.4 million net loss primarily as a result of an $8.7 million impairment write-off of goodwill, an increase of $32,000 from stock options exercised, an increase of $160,000 from stock based compensation, a $3,000 tax benefit due to the exercise of stock options and a $3,000 other comprehensive loss.

 

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RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

Overview

During 2009, New Century Bancorp incurred a net loss of $8.4 million compared to a net loss of $193,000 for 2008. Both basic and diluted loss per share for the year ended December 31, 2009 were $1.24, compared with basic and diluted loss per share of $0.03 for 2008. The increase in net loss is primarily due to a goodwill impairment charge of $8.7 million and an increase of $1.2 million in the provision for loan losses. These negative factors are partially offset by increase in net interest income of $2.0 million.

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 loans 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 the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.

Net interest income increased by $2.0 million to $19.9 million for the year ended December 31, 2009. The Company’s total interest income benefited from growth in interest earning assets that were offset by a low interest rate environment in 2009 that began in 2008 when the Federal Reserve lowered interest rates by more than 400 basis points. Average total interest-earnings assets were $578.4 million in 2009 compared with $554.8 million in 2008. The yield on those assets decreased by 67 basis points from 6.40% in 2008 to 5.73% in 2009. Earning asset yields in both years were adversely impacted by income reversed when loans were placed into non-accrual status. These income reversals were approximately $423,000 in 2009 and $560,000 in 2008. Meanwhile, average interest-bearing liabilities increased by $30.8 million from $468.0 million for the year ended December 31, 2008 to $498.8 million for the year ended December 31, 2009. Cost of funds decreased by 108 basis points in 2009 to 2.63% from 3.71% in 2008. In 2009, the Company’s net interest margin was 3.49% and net interest spread was 3.12%. In 2008, net interest margin was 3.27% and net interest spread was 2.69%.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management in light of the risk inherent in the loan portfolio. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan losses, current delinquency and impairment levels, adverse situations that may affect a borrower’s ability to repay, estimated value of underlying collateral, prevailing economic conditions and other relevant factors.

The Company recorded a $5.5 million provision for loan losses in 2009, an increase of $1.2 million from the $4.3 million provision that was recorded in 2008. The 2009 provision for loan losses was impacted by the downgrading of loans, resulting from both internal and external loan reviews, an increase in the level of non-performing loans resulting in changes in the specific reserves provided on these loans, and net charge-offs of $4.0 million. While the Company continues to identify and resolve credit issues prior to enhancing current credit standards, the downturn in the economy has begun to impact the entire loan portfolio.

 

- 26 -


Non-Interest Income

Non-interest income for the year ended December 31, 2009 was $3.1 million, the same as for the year ended December 31, 2008. When compared to last year, the Company had an increase in deposit service fees and charges of $154,000, or 8%. Fees from pre-sold mortgages decreased to $328,000 in 2009, a decline of $186,000 or 36% as compared to 2008, primarily as a result of the Company’s third party provider, for the funding of mortgage loans, going out of business. Other non-interest income remained approximately the same at nearly $800,000 in both 2009 and 2008.

Non-Interest Expenses

Non-interest expenses increased by $8.9 million or 52% to $26.0 million for the year ended December 31, 2009, from $17.1 million for the same period in 2008, primarily from the goodwill impairment write-off of $8.7 million in 2009. Salaries and employee benefits remained constant at $8.7 million for both 2009 and 2008. Occupancy and equipment expenses increased by $34,000 to $1.6 million for the year ended December 31, 2009 from the same period in 2008. The following highlight other changes in non-interest expenses from 2008 to 2009:

 

   

Data processing and other outsourced service expenses remained constant at $1.5 million for both 2009 and 2008.

 

   

There were no refunds of SBA premiums in 2009 as compared to $125,000 for 2008.

 

   

The Company experienced no losses on the repurchase of loan participations in 2009 as compared to $357,000 for 2008.

 

   

Losses on the write down of foreclosed real estate increased to $565,000 in 2009 from $239,000 in 2008, a $326,000 or 136% increase.

 

   

FDIC assessments increased by approximately $800,000 or 149% in 2009 to $1.3 million as compared to the same period in 2008.

 

   

Other operating expense decreased from $4.1 million in 2008 to $3.7 million in 2009 due to cost containment measures employed by management which included a reduction in professional service expenses from $1.2 million in 2008 to $1.1 million in 2009, as a result of leveling of the expenses related to audit, legal, other outsourced services.

Provision for Income Taxes

The Company’s effective tax rate in 2009 was a tax benefit of 0.9%. This is the result of a net operating loss offset by non taxable income and an adverse permanent difference resulting from the goodwill impairment write-off, as compared to a 55.3% benefit resulting from the net operating loss in addition to non taxable income in 2008.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

Overview

During 2008, New Century Bancorp incurred a net loss of $0.2 million compared to net income of $1.7 million for 2007, a decrease of 112%. Both, basic and diluted, loss per share, for the year ended December 31, 2008, were $0.03, as compared with basic earnings per share of $0.25 and diluted earnings per share of $0.24 for 2007. The decrease in net income is primarily due to a decrease in net interest income of $3.1 million together with a decrease in non-interest income of $853,000 for 2008 as compared to 2007 offset by a decrease in the provision for loan losses of $1.7 million.

 

- 27 -


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 loans 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 the average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by the levels on non-interest bearing liabilities and capital.

Net interest income decreased by $3.1 million to $17.9 million for the year ended December 31, 2008. The Company’s total interest income benefited from continued growth in interest earning assets that was offset by a gradual declining interest rate environment. Average total interest-earnings assets were $554.8 million in 2008 compared with $539.5 million in 2007. The yield on those assets decreased by 136 basis points from 7.76% in 2007 to 6.40% for the same period in 2008. Earning asset yields were adversely impacted by income reversed when loans were placed into non-accrual status. Meanwhile, average interest-bearing liabilities increased by $17.5 million from $450.5 million for the year ended December 31, 2007 to $468.0 million for the year ended December 31, 2008. The cost of funds decreased by 87 basis points to 3.71% in 2008 from 4.58% as compared to the same period in 2007. In 2008, the Company’s net interest margin was 3.27% and net interest spread was 2.69%. In 2007, net interest margin was 3.93% and net interest spread was 3.18%.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management in light of the risk inherent in the loan portfolio. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan losses, current delinquency and impairment levels, adverse situations that may affect a borrower’s ability to repay, estimated value of underlying collateral, prevailing economic conditions and other relevant factors.

The Company recorded a $4.3 million provision for loan losses in 2008, a decrease of $1.7 million from the $6.0 million provision that was recorded in 2007. The 2008 provision for loan losses was significantly impacted by the downgrading of loans, resulting from both internal and external loan reviews, an increase in the level of non-performing loans resulting in changes in the specific reserves provided on these loans, and net charge-offs of $3.7 million.

Non-Interest Income

Non-interest income for the year ended December 31, 2008 was $3.1 million, a decrease of $0.9 million over the year ended December 31, 2007. When compared to last year, the Company had an increase in deposit service fees and charges of $47,000, or 3%. Fees from pre-sold mortgages decreased to $514,000 in 2008, a decline of $253,000 or 33% as compared to 2007. Also, the Company realized no gains from the sale of loans held for sale in 2008, as compared to $460,000 in such gains in 2007.

Non-Interest Expenses

Non-interest expenses increased by $0.8 million or 5% to $17.1 million for the year ended December 31, 2008, from $16.3 million for the same period in 2007. Salaries and employee benefits decreased to $8.7 million in 2008 from $9.0 million in 2007. Occupancy and equipment expenses increased by $100,000 to $1.5 million for the year ended December 31, 2008. The following highlight other changes in non-interest expenses from 2007 to 2008:

 

   

Data processing and other outsourced service expenses increased from $1.4 million in 2007 to $1.5 million in 2008 due to growth in the Company.

 

- 28 -


   

FDIC assessments increased to $525,000 in 2008 from $250,000 in 2007, a change of $275,000 or 110%.

 

   

In addition for 2008, the Company experienced a $357,000 loss on the repurchase of a loan participation which did not occur in 2007.

 

   

In 2008, $239,000 in losses was recognized on the write down of OREO as compared to $108,000 for the same period in 2007.

 

   

Also in 2008, $125,000 in refunds of SBA premiums was expensed. No refunds of SBA premiums occurred in 2007.

 

   

Other operating expense remained constant at $4.1 million for both 2008 and 2007.

Provision for Income Taxes

The Company’s effective tax rate in 2008 was a 55.3% benefit resulting from the net operating loss in addition to non taxable income as compared to a 36.5% expense on net operating income in 2007.

 

- 29 -


NET INTEREST INCOME

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,  
     2009     2008     2007  
     (dollars are in thousands)  
     Average
balance
    Interest    Average
rate
    Average
balance
    Interest    Average
rate
    Average
balance
    Interest    Average
rate
 

INTEREST-EARNING ASSETS:

                     

Loans, net of allowance

   $ 462,247      $ 29,709    6.39   $ 444,094      $ 30,900    6.96   $ 442,171      $ 36,835    8.33

Investment securities

     91,709        3,533    3.85     80,278        3,986    4.97     59,889        3,152    5.26

Other interest-earning assets

     24,416        43    0.18     30,426        617    2.03     37,466        1,881    5.02
                                                               

Total interest-earning assets

     578,372        33,286    5.73     554,798        35,503    6.40     539,526        41,868    7.76
                                                               

Other assets

     51,915             45,115             44,283        
                                       

Total assets

   $ 630,287           $ 599,913           $ 583,809        
                                       

INTEREST-BEARING LIABILITIES:

                     

Deposits:

                     

Savings, NOW and money market

   $ 108,240        1,317    1.22   $ 96,191        1,618    1.68   $ 97,370        2,484    2.55

Time deposits over $100,000

     166,641        5,312    3.19     153,620        6,661    4.34     144,039        7,211    5.01

Other time deposits

     187,687        5,843    3.11     187,247        8,129    4.34     181,013        9,349    5.16

Borrowings

     36,263        650    1.79     30,987        964    3.11     28,044        1,609    5.74
                                                               

Total interest-bearing liabilities

     498,831        13,122    2.63     468,045        17,372    3.71     450,466        20,653    4.58
                                                               

Non-interest-bearing deposits

     65,276             67,131             71,567        

Other liabilities

     2,597             2,630             1,888        

Shareholders' equity

     63,584             62,107             59,888        
                                       

Total liabilities and shareholders’ equity

   $ 630,287           $ 599,913           $ 583,809        
                                       

Net interest income/interest rate spread (taxable-equivalent basis)

     $ 20,164    3.12     $ 18,131    2.69     $ 21,215    3.18
                                             

Net interest margin (taxable-equivalent basis)

        3.49        3.27        3.93
                                 

Ratio of interest-earning assets to interest-bearing liabilities

     115.95          118.54          119.77     
                                       

Reported net interest income

                     

Net interest income/net interest margin (taxable-equivalent basis)

     $ 20,164    3.49     $ 18,131    3.27     $ 21,215    3.93

Less:

                     

taxable-equivalent adjustment

       256          266          269   
                                 

Net Interest Income

     $ 19,908        $ 17,865        $ 20,946   
                                 

 

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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, 2009 vs. 2008
    Year Ended
December 31, 2008 vs. 2007
    Year Ended
December 31, 2007 vs. 2006
 
     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

   $ 1,215      $ (2,409   $ (1,194   $ 160      $ (6,095   $ (5,935   $ 6,808      $ (1,284   $ 5,524   

Investment securities

     504        (957     (453     1,073        (239     834        293        167        460   

Other interest-earning assets

     (66     (508     (574     (353     (911     (1,264     (211     46        (165
                                                                        

Total interest income (taxable-equivalent basis)

     1,653        (3,874     (2,221     880        (7,245     (6,365     6,890        (1,071     5,819   
                                                                        

Interest expense:

                  

Deposits:

                  

Savings, NOW and money market

     175        (476     (301     (30     (836     (866     259        (10     249   

Time deposits over $100,000

     490        (1,838     (1,348     480        (1,030     (550     1,561        997        2,558   

Other time deposits

     16        (2,302     (2,286     322        (1,542     (1,220     1,278        505        1,783   

Borrowings

     129        (443     (314     169        (814     (645     (189     85        (104
                                                                        

Total interest expense

     810        (5,059     (4,249     941        (4,222     (3,281     2,908        1,578        4,486   
                                                                        

Net interest income

                  

Increase/(decrease) (taxable-equivalent basis)

   $ 843      $ 1,185        2,028      $ (61   $ (3,023     (3,084   $ 3,981      $ (2,648     1,333   
                                                                        

Less:

                  

Taxable-equivalent adjustment

         —              1            (33
                                    

Net interest income Increase/(decrease)

       $ 2,028          $ (3,083       $ 1,300   
                                    

LIQUIDITY

Market and public confidence in the Company’s financial strength and in the strength of financial institutions in general will largely determine the Company’s access to appropriate levels of liquidity. This confidence is significantly dependent on the Company’s ability to maintain sound asset quality and appropriate levels of capital resources. The term “liquidity” refers to the Company’s ability to generate adequate amounts of cash to meet our needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures the Company’s liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.

Liquid assets (consisting of cash and due from banks, interest-earning deposits with other banks, federal funds sold and investment securities classified as available for sale) comprised 19.9% and 18.9% of total assets at December 31, 2009 and 2008 respectively.

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 $34.0 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 10% of

 

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assets, subject to our available collateral. A floating lien of $25.5 million on qualifying loans is pledged to FHLB to secure such borrowings. In addition, the Company may borrow at the Federal Reserve discount window and has pledged $3.0 million in securities for that purpose. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2009, borrowings consisted of securities sold under agreements to repurchase of $20.6 million.

At December 31, 2009, the Company’s outstanding commitments to extend credit consisted of loan commitments of $16.3 million, undisbursed lines of credit of $44.5 million, and letters of credit of $1.6 million. The Company believes that its combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Total deposits were $540.2 million and $505.1 million at December 31, 2009 and 2008, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 64.4% and 67.5% of total deposits at December 31, 2009 and 2008, respectively. Time deposits of $100,000 or more represented 31.2% and 30.4%, respectively, of the total deposits at December 31, 2009 and 2008. Management believes most other time deposits are relationship-oriented. While 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 Bank’s current cash flow needs. The parent company (“New Century Bancorp”) maintains minimal cash balances with liquidity provided through cash dividends from the Bank.

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 1 capital, which includes common shareholders’ equity and qualifying preferred equity (including trust preferred securities), and (2) Tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines 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 1 capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier 1 capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 8.63% at December 31, 2009. As the following table indicates, at December 31, 2009, the Company and its bank subsidiary exceeded regulatory capital requirements.

 

     At December 31, 2009  
     Actual
Ratio
    Minimum
Requirement
    Well-Capitalized
Requirement
 

New Century Bancorp, Inc.

      

Total risk-based capital ratio

   13.89   8.00   N/A   

Tier 1 risk-based capital ratio

   12.63   4.00   N/A   

Leverage ratio

   10.02   4.00   N/A   

New Century Bank

      

Total risk-based capital ratio

   13.57   8.00   10.00

Tier 1 risk-based capital ratio

   12.31   4.00   6.00

Leverage ratio

   9.75   4.00   5.00

 

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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 provided additional capital for the current and future expansion of the Bank. Under the current applicable regulatory guidelines, all of the debentures qualify as Tier 1 capital. Management expects that the Company and the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, or otherwise.

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 marketplace.

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 analyses: 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 re-pricing 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, 2009, of which are projected to re-price or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which re-price 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 re-pricing 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.

 

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     Terms to Re-pricing at December 31, 2009  
     1 Year
or Less
    More Than
1 Year to
3 Years
    More Than
3 Years to
5 Years
    More Than
5 Years
    Total  
           (dollars are in thousands)        

Interest-earning assets:

          

Loans

   $ 315,299      $ 129,484      $ 30,149      $ 6,244      $ 481,176   

Securities, available for sale

     27,604        49,033        7,739        11,883        96,259   

Interest-earning deposits in other banks

     12,647        —          —          —          12,647   

Federal funds sold

     6,676        —          —          —          6,676   

Stock in FHLB of Atlanta

     1,134        —          —          —          1,134   

Other non marketable securities

     1,004        —          —          —          1,004   
                                        

Total interest-earning assets

   $ 364,364      $ 178,517      $ 37,888      $ 18,127      $ 598,896   
                                        

Interest-bearing liabilities:

          

Deposits:

          

Savings, NOW and money market

   $ 55,826      $ 64,258      $ —        $ —        $ 120,084   

Time

     142,741        20,204        16,587        —          179,532   

Time over $100,000

     125,951        19,129        23,272        —          168,352   

Short term debt

     20,564        —          —          —          20,564   

Long term debt

     12,372        —          —          —          12,372   
                                        

Total interest-bearing liabilities

   $ 357,454      $ 103,591      $ 39,859      $ —        $ 500,904   
                                        

Interest sensitivity gap per period

   $ 6,910      $ 74,926      $ (1,971   $ 18,127      $ 97,992   

Cumulative interest sensitivity gap

   $ 6,910      $ 81,832      $ 79,861      $ 97,988      $ 97,992   

Cumulative gap as a percentage of total interest-earning assets

     1.15     13.66     13.33     16.36     16.36

Cumulative interest-earning assets as a percentage of interest-bearing liabilities

     101.93     117.75     115.94     119.56     119.56

CRITICAL ACCOUNTING POLICIES

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. The following is a summary of the Company’s most complex and judgmental accounting policies: the allowance for loan losses and accounting for goodwill impairment.

 

- 34 -


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 the loan portfolio, unless a loan is placed on a non-accrual basis. Loans are placed on a non-accrual basis when there are serious doubts about the collectability 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 which the deferral of interest or principal 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. See the previous section titled “Past Due Loans and Nonperforming Assets” for a discussion on past due loans, non-performing assets and other impaired loans.

The allowance for loan losses is maintained at a level considered appropriate in light of the risk inherent within the Company’s loan portfolio, 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. Additional information regarding the Company’s allowance for loan losses and loan loss experience are presented above in the discussion of the allowance for loan losses and in Note D to the accompanying financial statements.

Goodwill and Other Intangibles

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased intangible assets that can be separately distinguished from goodwill.

Management has developed procedures to test goodwill for impairment on an annual basis, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. The first step (“Step 1”) in the evaluation of goodwill for impairment uses both the income and market approaches to value the Company. The income approach consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the Company. The significant inputs to the income approach include the long-term target tangible equity to tangible assets ratio and the discount rate, which is determined utilizing the Company’s cost of capital adjusted for a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management. Under the market approach, a value is calculated from an analysis of comparable acquisition transactions based on earnings, book value, assets and deposit premium multiples from the sale of similar financial institutions.

Our goodwill testing (“Step 1”) for 2009 was updated as of December 31, 2009. Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of this Step 1 process indicated that the Company’s estimated fair value was less than book value, thus requiring a second step (“Step 2”) of the goodwill impairment test. Based on the Step 2 analysis, it was determined that the Company’s fair value did not support the goodwill recorded at the time of the acquisition of Progressive State Bank; therefore, the Company recorded an $8.7 million goodwill impairment charge to write-off the entire amount of goodwill as of December 31, 2009. This non-cash goodwill impairment charge to earnings was recorded as a component of non-interest expense on the consolidated statement of operations.

 

- 35 -


Intangible assets with finite lives include core deposits and other intangibles. Intangible assets other than goodwill are subject to impairment testing at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Core deposit intangibles are amortized on the straight-line method over a period not to exceed 10 years. Note B to the Company’s audited financial statements contains additional information regarding goodwill and other intangible assets.

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 (“SPE”), 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 Company’s audited 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.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

In the normal course of business there are various outstanding contractual obligations of the Company 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 Company outstanding as of December 31, 2009.

 

     Payments Due by Period

Contractual Obligations

   Total    On Demand
Or Within
1 Year
   1-3 Years    4-5 Years    After
5 Years
          (dollars are in thousands)     

Short term debt

   $ 20,564    $ 20,564    $ —      $ —      $ —  

Long term debt

     12,372      —        —        —        12,372

Lease obligations

     1,912      180      212      211      1,309

Deposits

     540,262      389,735      108,237      42,290      —  
                                  

Total contractual cash obligations

   $ 575,110    $ 410,479    $ 108,449    $ 42,501    $ 13,681
                                  

 

- 36 -


The following table reflects other commitments outstanding as of December 31, 2009.

 

     Amount of Commitment Expiration Per Period
          (dollars are in thousands)     

Other Commitments

   Total
Amounts
Committed
   Less than
1 Year
   1-3 Years    4-5 Years    After
5 Years

Undisbursed home equity credit lines

   $ 23,982    $ 22    $ —      $ —      $ 23,960

Other commitments and credit lines

     26,344      22,464      326      93      3,461

Un-disbursed portion of constructions loans

     10,462      7,806      2,275      381      —  

Letters of credit

     1,634      1,569      —        —        65
                                  

Total commercial commitments

   $ 62,422    $ 31,861    $ 2,601    $ 474    $ 27,486
                                  

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; as well as the Company’s results of operations in future periods; 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 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 principles, 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.

REGULATORY MATTERS

The items contained in the Bank’s outstanding Memorandum of Understanding with the FDIC and the Office of the North Carolina Commissioner of Banks have been satisfactorily addressed and the Memorandum of Understanding was terminated on February 12, 2010.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

- 37 -


LOGO

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 subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’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 subsidiary at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

LOGO

Raleigh, North Carolina

March 26, 2010

 

- 38 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

 

 

 

     2009     2008  
    

(In thousands, except share

and per share data)

 

ASSETS

  

Cash and due from banks

   $ 9,612      $ 8,124   

Interest-earning deposits in other banks

     12,647        13,770   

Federal funds sold

     6,676        9,961   

Investment securities available for sale, at fair value

     96,259        82,932   

Loans

     481,176        460,626   

Allowance for loan losses

     (10,359     (8,860
                

NET LOANS

     470,817        451,766   

Accrued interest receivable

     2,590        2,519   

Stock in Federal Home Loan Bank of Atlanta, at cost

     1,133        1,154   

Other non marketable securities

     1,004        929   

Foreclosed real estate

     2,530        2,799   

Premises and equipment

     12,191        11,875   

Bank owned life insurance

     7,465        7,203   

Goodwill

     —          8,674   

Core deposit intangible

     853        1,006   

Other assets

     6,642        3,055   
                

TOTAL ASSETS

   $ 630,419      $ 605,767   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits:

    

Demand

   $ 72,294      $ 62,856   

Savings

     26,407        27,223   

Money market and NOW

     93,677        74,138   

Time

     347,884        340,902   
                

TOTAL DEPOSITS

     540,262        505,119   

Short term debt

     20,564        23,175   

Long term debt

     12,372        12,372   

Accrued interest payable

     349        584   

Accrued expenses and other liabilities

     2,463        1,858   
                

TOTAL LIABILITIES

     576,010        543,108   
                

Shareholders’ Equity

    

Common stock, $1 par value, 10,000,000 shares authorized; 6,837,952 and 6,831,149 shares issued and outstanding at December 31, 2009 and 2008, respectively

     6,838        6,831   

Additional paid-in capital

     41,467        41,279   

Retained earnings

     4,668        13,110   

Accumulated other comprehensive income

     1,436        1,439   
                

TOTAL SHAREHOLDERS’ EQUITY

     54,409        62,659   
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 630,419      $ 605,767   
                

See accompanying notes.

 

- 39 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2009, 2008 and 2007

 

 

 

     2009     2008     2007
     (In thousands, except share and per share data)

INTEREST INCOME

      

Loans

   $ 29,694      $ 30,887      $ 36,819

Investments

     3,293        3,733        2,977

Federal funds sold and interest-earning deposits

     43        617        1,803
                      

TOTAL INTEREST INCOME

     33,030        35,237        41,599
                      

INTEREST EXPENSE

      

Money market, NOW and savings deposits

     1,317        1,618        2,484

Time deposits

     11,155        14,790        16,560

Short term debt

     280        304        690

Long term debt

     370        660        919
                      

TOTAL INTEREST EXPENSE

     13,122        17,372        20,653
                      

NET INTEREST INCOME

     19,908        17,865        20,946

PROVISION FOR LOAN LOSSES

     5,472        4,283        5,974
                      

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     14,436        13,582        14,972
                      

NON-INTEREST INCOME

      

Service fees and charges

     2,000        1,846        1,799

Gain on sale of loans held for sale

     —          —          767

Fees from presold mortgages

     328        514        460

Other

     770        764        951
                      

TOTAL NON-INTEREST INCOME

     3,098        3,124        3,977
                      

NON-INTEREST EXPENSE

      

Salaries and employee benefits

     8,706        8,705        9,011

Occupancy and equipment

     1,560        1,526        1,433

Data processing and other outsourced services

     1,484        1,540        1,391

Loss on repurchase of loan participation

     —          357        —  

Loss on write down of foreclosed real estate

     565        239        108

Refund of SBA premiums

     —          125        —  

FDIC deposit insurance assessment

     1,307        525        250

Goodwill impairment

     8,674        —          —  

Other

     3,753        4,121        4,144
                      

TOTAL NON-INTEREST EXPENSE

     26,049        17,138        16,337
                      

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)

     (8,515     (432     2,612

INCOME TAXES (BENEFIT)

     (73     (239     953
                      

NET INCOME (LOSS)

   $ (8,442   $ (193   $ 1,659
                      

NET INCOME (LOSS) PER COMMON SHARE

      

Basic

   $ (1.24   $ (.03   $ .25
                      

Diluted

   $ (1.24   $ (.03   $ .24
                      

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

      

Basic

     6,834,595        6,809,437        6,603,631
                      

Diluted

     6,834,595        6,809,437        6,844,426
                      

See accompanying notes.

 

- 40 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2009, 2008 and 2007

 

 

 

     2009     2008     2007  
     (Amounts are in thousands)  

NET INCOME (LOSS)

   $ (8,442   $ (193   $ 1,659   
                        

OTHER COMPREHENSIVE INCOME

      

Unrealized gains on investment securities available for sale arising during the year

     (4     1,996        376   

Tax effect

     1        (769     (144
                        

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

     (3     1,227        232   
                        

COMPREHENSIVE INCOME (LOSS)

   $ (8,445   $ 1,034      $ 1,891   
                        

See accompanying notes.

 

- 41 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2009, 2008 and 2007

 

 

 

     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, 2006

   6,497,022    $ 6,497    $ 39,177    $ 11,785      $ (20   $ 57,439   

Net income

   —        —        —        1,659        —          1,659   

Other comprehensive income

   —        —        —        —          232        232   

Stock options exercises

   233,852      234      940      —          —          1,174   

Compensation expense recognized

   —        —        238      —          —          238   

Tax benefit from option exercises

   —        —        296      —          —          296   

Adjustment related to the adoption of ASC 740

   —        —        —        135        —          135   
                                           

Balance at December 31, 2007

   6,730,874      6,731      40,651      13,579        212        61,173   

Net loss

   —        —        —        (193     —          (193

Other comprehensive income

   —        —        —        —          1,227        1,227   

Stock options exercises

   100,275      100      413      —          —          513   

Compensation expense recognized

   —        —        188      —          —          188   

Tax benefit from option exercises

   —        —        27      —          —          27   

Adjustment related to the adoption of ASC 715

   —        —        —        (276     —          (276
                                           

Balance at December 31, 2008

   6,831,149      6,831      41,279      13,110        1,439        62,659   

Net loss

   —        —        —        (8,442     —          (8,442

Other comprehensive loss

   —        —        —        —          (3     (3

Stock options exercises

   6,803      7      25      —          —          32   

Compensation expense recognized

   —        —        160      —          —          160   

Tax benefit from option exercises

   —        —        3      —          —          3   
                                           

Balance at December 31, 2009

   6,837,952    $ 6,838    $ 41,467    $ 4,668<