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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      $ 1,436      $ 54,409   
                                           

See accompanying notes.

 

- 42 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2009, 2008 and 2007

 

 

 

     2009     2008     2007  
     (Amounts in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income (loss)

   $ (8,442   $ (193   $ 1,659   

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

      

Depreciation and amortization of premises and equipment

     817        981        506   

Amortization and accretion of investment securities

     529        (215     (16

Amortization of deferred loan fees and costs

     (182     (167     (26

Loss on write down of other assets

     13        —          —     

Loss (gain) on sale of premises and equipment

     26        22        (38

Provision for loan losses

     5,472        4,283        5,974   

Deferred income taxes

     (1,008     (427     (128

Stock based compensation expense

     160        188        238   

Origination of loans held for sale

     —          —          (6,587

Proceeds from the sale of loans held for sale

     —          —          5,001   

Gain on sale of loans held for sale

     —          —          (767

Net loss on sale and write downs of foreclosed real estate

     565        239        108   

Gain on mortgage-backed securities pay-downs

     4        (73     —     

Loss on repurchase of loan participation

     —          357        —     

Increase in cash surrender value of BOLI

     (262     (268     (263

Amortization of core deposit intangible

     153        154        154   

Loss on impairment on non marketable securities

     51        —          —     

Loss on impairment of goodwill

     8,674        —          —     

Change in assets and liabilities:

      

(Increase) decrease in accrued interest receivable

     (71     663        38   

Prepayment of FDIC premiums

     (3,194     —          —     

(Increase) decrease in other assets

     390        (208     (1,950

(Decrease) in accrued expenses and other liabilities

     370        (226     (172
                        

NET CASH PROVIDED BY OPERATING ACTIVITIES

     4,065        5,110        3,731   
                        

CASH FLOWS FROM INVESTING ACTIVITIES

      

Purchase of investment securities available for sale

     (38,664     (30,100     (33,150

Maturities of investment securities available for sale

     12,586        16,861        16,657   

Mortgage-backed securities pay-downs

     12,215        9,403        4,542   

Net decrease (increase) in interest-earning deposits in other banks

     1,123        (13,022     857   

Net decrease (increase) in federal funds sold

     3,285        16,020        (6,869

Purchase of other non-marketable securities

     (75     (500     —     

Net increase in gross loans outstanding

     (22,219     (9,463     (20,082

Repurchase of loan participations

     (4,269     (11,197     —     

Redemption (purchase) of Federal Home Loan Bank stock

     21        (67     340   

Proceeds from sale of foreclosed real estate

     1,852        413        209   

Proceeds from the sale of premises and equipment

     65        18        —     

Purchases of premises and equipment

     (1,064     (564     (2,877
                        

NET CASH USED BY INVESTING ACTIVITIES

     (35,144     (22,198     (40,373
                        

See accompanying notes.

 

- 43 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2009, 2008 and 2007

 

 

 

     2009     2008     2007  
     (Amounts in thousands)  

CASH FLOWS FROM FINANCING ACTIVITIES

      

Increase in deposits

   $ 35,143      $ 6,997      $ 34,005   

Net increase (decrease) in repurchase obligations classified as short term debt

     (2,611     6,208        8,526   

Repayments of FHLB advances classified according to maturity

     —          —          (8,000

Tax benefit from stock option exercises

     3        27        296   

Proceeds from stock options exercises

     32        513        1,174   
                        

NET CASH PROVIDED BY FINANCING ACTIVITIES

     32,567        13,745        36,001   
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,488        (3,343     641   

CASH AND CASH EQUIVALENTS, BEGINNING

     8,124        11,467        12,108   
                        

CASH AND CASH EQUIVALENTS, ENDING

   $ 9,612      $ 8,124      $ 11,467   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      

Interest paid

   $ 12,887      $ 17,632      $ 20,699   

Income tax paid

     624        77        2,100   

Net unrealized gain (loss) on investments available for sale, net of tax

     (3     1,227        232   

Transfer from loans held for sale

     —          3,905        —     

Transfer from loans to foreclosed real estate

     2,147        2,910        695   

See accompanying notes.

 

- 44 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009, 2008 and 2007

 

 

NOTE A – ORGANIZATION AND OPERATIONS

New Century Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank (referred to as the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation. In 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 the Company. New Century Statutory Trust I is not a consolidated subsidiary of the Company. The Company is subject to the rules and regulations of the Federal Reserve Bank and the North Carolina Commissioner of Banks.

New Century Bank was incorporated on May 15, 2000 and began banking operations on May 24, 2000. New Century Bank South began operations on January 2, 2004. The two banks merged on March 28, 2008 and New Century Bank continues as the only banking subsidiary of New Century Bancorp with the headquarters and operations center located in Dunn, NC. The Bank is engaged in general commercial and retail banking in southeastern North Carolina and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Cash and Cash Equivalents

For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “Cash and due from banks.”

Investment Securities Available for Sale

Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method.

 

- 45 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans

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

Allowance for Loan Losses

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

Foreclosed Real Estate

Real estate acquired through, or in lieu of, loan foreclosure is recorded at the lower of cost or net realizable value, less the estimated cost to sell, at the date of foreclosure. After foreclosure, management periodically performs valuations of the property and adjusts the value down when the carrying value of the property exceeds the estimated net realizable value. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.

Premises and Equipment

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

 

- 46 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost at December 31, 2008 and 2009. The FHLB suspended paying cash dividends in the fourth quarter of 2008 as a capital preservation move. The FHLB resumed paying cash dividends for the second quarter of 2009. The Company continually monitors the financial strength of the FHLB and evaluates the investment for potential impairment. There can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the Company’s investment in FHLB stock.

Income Taxes

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

Bank Owned Life Insurance

Bank Owned Life Insurance (“BOLI”) is carried at its cash surrender value on the balance sheet and is classified as a non-interest-earning asset. Death benefit proceeds received in excess of the policy’s cash surrender value are recognized to income. Returns on the BOLI assets are added to the carrying value and included as non-interest income in the consolidated statement of operations. Any receipt of benefit proceeds is recorded as a reduction to the carrying value of the BOLI asset. At December 31, 2009 and 2008, the Company held no policy loans against its BOLI cash surrender values or restrictions on the use of the proceeds.

Goodwill and Intangible Assets

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. Goodwill impairment testing is performed annually on June 30, or more frequently if events and circumstances indicate possible impairment. Management completed the annual goodwill impairment test as of June 30, 2009 and also as of December 31, 2009. The December 31, 2009 test indicated that the Company recorded goodwill was fully impaired, and therefore the recorded goodwill of $8.7 million was written off as of that date. Intangible assets with finite lives include core deposits and other intangibles. Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company’s core deposit intangible is amortized using the straight-line method over nine years. The gross amount of the core deposit intangible is $1.4 million with $0.5 million being amortized as of December 31, 2009, leaving a remaining net balance of $0.9 million as of that date.

 

- 47 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

The Company has certain stock-based employee compensation plans, described more fully in Note O. Effective January 1, 2006, the Company adopted ASC 718, (“Compensation – Stock Compensation”) ASC 718 using the modified prospective application method and accordingly did not restate prior period amounts. ASC 718 requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period). ASC 718 also requires the compensation cost for all awards granted after the date of adoption and any unvested awards that remained outstanding as of the date of adoption to be measured based on the fair value of the award on the grant date.

Comprehensive Income

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

Segment Information

The Company follows the provisions of ASC 280, “Segment Reporting”, which specifies guidelines for determining an entity’s operating segments and the type and level of financial information to be disclosed. Based on these guidelines, management has determined that the Bank operates as one business segment, the providing of general commercial and retail financial services to customers located in the Company’s market areas. The various products, as well as the methods used to distribute them, are those generally offered by community banks.

Net Income per Common Share and Common Shares Outstanding

Basic earnings per share, represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:

 

- 48 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Income per Common Share and Common Shares Outstanding (Continued)

 

     2009    2008    2007

Weighted average number of common shares used in computing basic net income per share

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

Effect of dilutive stock options

   —      —      240,795
              

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share

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

The Company had no anti-dilutive stock options as of December 31, 2009 and 2008, and 114,301 anti-dilutive stock options as of December 31, 2007. All options in 2008 and 2009 were anti-dilutive due to losses.

Recent Accounting Pronouncements

The following summarizes recent accounting pronouncements and their expected impact on the Company:

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, “Accounting Standards Codification”, requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of ASC 825 were effective for the Company’s interim period ending on June 30, 2009. The Company adopted ASC 825 as of June 30, 2009. As ASC 825 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of ASC 825 did not have a material impact on the consolidated financial statements.

ASC 320, “Investments – Debt and Equity Securities”, amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. ASC 320 does not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. ASC 320 replaces the assertion of intent and ability to hold an impaired debt security until fair value recovers with assertions that the holder does not intend to sell the security prior to recovery and that it is more likely than not the holder will not be required to sell the impaired security prior to recovery. The full impairment loss is recognized in earnings if the holder is unable to make these assertions. Otherwise, the credit loss portion of the impairment is recognized in earnings and the remaining impairment is recognized in other comprehensive income. Both the full impairment and credit loss portion are presented on the face of the statement of operations. ASC 320 also requires additional disclosure in interim periods. ASC 320 is effective for interim and annual periods ending after June 15, 2009. The Company adopted ASC 320 as of June 30, 2009. The adoption of ASC 320 did not have a material impact on the consolidated financial statements.

ASC 820, “Fair Value Measurements and Disclosures”, provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have decreased significantly. ASC 820 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of ASC 820 were effective for the Company’s interim period ending on June 30, 2009. The Company adopted ASC 820 as of June 30, 2009. The adoption of ASC 820 did not have a material impact on the consolidated financial statements.

 

- 49 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

ASC 855, “Subsequent Events”, sets forth the circumstances under which an entity should recognize events occurring after the balance sheet date and the disclosures that should be made. Also, ASC 855 requires disclosure of the date through which the entity has evaluated subsequent events (for public companies, and other companies that expect to widely distribute their financial statements, this date is the date of financial statement issuance, and for nonpublic companies, the date the financial statements are available to be issued). The effective date is for interim and annual periods ending after June 15, 2009. The Company adopted ASC 855 during the second quarter of 2009, and the adoption did not have a material effect on its consolidated financial statements.

ASC 860, “Transfers and Servicing”, eliminates the concept of a qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures, including information about continuing exposure to risks related to transferred financial assets. ASC 860 is effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009. The disclosure requirements must be applied to transfers that occurred before and after the effective date. The Company is in the process of evaluating the impact, if any, of ASC 860.

ASC 810, “Consolidation”, contains new criteria for determining the primary beneficiary, eliminates the exception to consolidating QSPE’s, requires continual reconsideration of conclusions reached in determining the primary beneficiary, and requires additional disclosures. ASC 810 is effective as of the beginning of fiscal years beginning after November 15, 2009 and is applied using a cumulative effect adjustment to retained earnings for any carrying amount adjustments (e.g., for newly- consolidated VIE’s). The Company has not evaluated the effect of the adoption of ASC 810 on its consolidated financial statements.

ASC 105, “Generally Accepted Accounting Principles”, will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities and will supersede all non-SEC accounting and reporting standards. This statement is effective for financial statements issued for interim and annual financial statements ending after September 15, 2009.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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

Reclassifications

Certain amounts in the 2007 and 2008 consolidated financial statements have been reclassified to conform to the presentation adopted for 2009. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

- 50 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE C – INVESTMENT SECURITIES

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

 

     December 31, 2009
     Amortized
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
    Fair
value
          (In thousands)      

Securities available for sale:

       

U.S. government agencies

   $ 53,262    $ 800    $ (70   $ 53,992

Mortgage-backed securities – GSE’s

     33,466      1,418      —          34,884

(“Government Sponsored Entities”)

          

Municipal bonds

     7,191      210      (18     7,383
                            
   $ 93,919    $ 2,428    $ (88   $ 96,259
                            
     December 31, 2008
     Amortized
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
    Fair
value
          (In thousands)      

Securities available for sale:

       

U.S. government agencies

   $ 36,321    $ 1,082    $ —        $ 37,403

Mortgage-backed securities – GSE’s

     37,618      1,260      15        38,863

Municipal bonds

     6,649      108      91        6,666
                            
   $ 80,588    $ 2,450    $ 106      $ 82,932
                            

Securities with a carrying value of $42.1 million and $38.7 million at December 31, 2009 and 2008, respectively, were pledged to secure public monies on deposit as required by law, customer repurchase agreements, and access to the Federal Reserve Discount Window.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2009 and 2008. For the investment securities with unrealized losses at December 31, 2009, no securities had continuous unrealized losses for more than twelve months. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the liquidity of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold these securities to recovery, no other than temporary impairments were identified for these investments having unrealized losses for the periods ended December 31, 2009 and December 31, 2008.

 

- 51 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE C – INVESTMENT SECURITIES (Continued)

 

     2009
     Less Than 12 Months    12 Months or More    Total
     Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
               (In thousands)          

Securities available for sale:

                 

U.S. government agencies

   $ 10,884    $ 70    $ —      $ —      $ 10,884    $ 70

Mortgage-backed securities - GSE’s

     —        —        —        —        —        —  

Municipal bonds

     1,630      18      —        —        1,630      18
                                         

Total temporarily impaired securities

   $ 12,514    $ 88    $ —      $ —      $ 12,514    $ 88
                                         

At December 31, 2009, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Fourteen U.S. government agencies and five municipal bonds had unrealized losses for less than twelve months totaling $88,000 at December 31, 2009. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.

 

     2008
     Less Than 12 Months    12 Months or More    Total
     Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
   Fair
value
   Unrealized
losses
               (In thousands)          

Securities available for sale:

                 

U.S government agencies

   $ —      $ —      $ —      $ —      $ —      $ —  

Mortgage-backed securities - GSE’s

     907      15      —        —        907      15

Municipal bonds

     1,149      55      454      36      1,603      91
                                         

Total temporarily impaired securities

   $ 2,056    $ 70    $ 454    $ 36    $ 2,510    $ 106
                                         

At December 31, 2008, the Company had one AFS security with an unrealized loss for twelve or more consecutive months of $36,000. One U.S. government agency and five municipal bonds had unrealized losses for less than twelve months totaling $70,000 at December 31, 2008. All unrealized losses are attributable to the general trend of interest rates and the abnormal spreads of all debt instruments to U.S. Treasury securities.

 

- 52 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE C – INVESTMENT SECURITIES (Continued)

The following table sets forth certain information regarding the amortized costs, carrying values, and contractual maturities of the Company’s investment portfolio at December 31, 2009.

 

     Amortized
Cost
   Fair
Value
     (In thousands)

Securities available for sale:

     

U.S. government agencies

     

Due within one year

   $ 13,832    $ 14,028

Due after one but within five years

     39,430      39,964
             
     53,262      53,992
             

Mortgage-backed securities – GSE’s

     

Due within one year

     1,456      1,470

Due after one but within five years

     31,293      32,661

Due after five but within ten years

     717      753
             
     33,466      34,884
             

Municipal bonds

     

Due after one but within five years

     1,160      1,202

Due after five but within ten years

     4,133      4,286

Due after ten years

     1,898      1,895
             
     7,191      7,383
             

Total securities available for sale

     

Due within one year

     15,288      15,498

Due after one but within five years

     71,883      73,827

Due after five but within ten years

     4,850      5,039

Due after ten years

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

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

 

- 53 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE D – LOANS

Following is a summary of loans at December 31, 2009 and 2008:

 

     2009     2008  
     Amount     Percent
of total
    Amount     Percent
of total
 
     (Dollars in thousands)  

Real estate loans:

        

One to four family residential

   $ 69,995      14.55   $ 67,353      14.62

Commercial

     195,165      40.56     169,856      36.88

Multi-family residential

     22,580      4.69     18,744      4.07

Construction

     70,736      14.70     65,807      14.29

Home equity lines of credit

     38,482      8.00     41,352      8.97
                            

Total real estate loans

     396,958      82.50     363,112      78.83
                            

Other loans:

        

Commercial and industrial

     70,747      14.70     76,936      16.70

Loans to individuals

     13,673      2.84     20,639      4.48

Overdrafts

     93      0.02     277      0.06
                            

Total other loans

     84,513      17.56     97,852      21.24
                            

Gross loans

     481,471          460,964     

Less deferred loan origination fees, net

     (295   (.06 )%      (338   (.07 )% 
                            

Total loans

     481,176      100.00     460,626      100.00
                

Allowance for loan losses

     (10,359       (8,860  
                    

Total loans, net

   $ 470,817        $ 451,766     
                    

Loans are primarily made in southeastern North Carolina. Real estate loans can be affected by the condition of the local real estate market and can be affected by the local economic conditions.

Impaired loans at December 31, 2009 and 2008 consisted of loans of approximately $16.5 million and $9.1 million respectively. Impaired loans at December 31, 2009 were comprised of $16.0 million in non-accrual loans, and $0.5 million in other loans that management has classified as impaired for other reasons. There were no restructured loans or loans that were 90 days or more past due and still accruing as of December 31, 2009. Impaired loans at December 31, 2008 consisted of $8.6 million in non-accrual loans, and $0.5 million in other loans that management has classified as impaired for other reasons.

 

- 54 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE D – LOANS (Continued)

Nonperforming assets at December 31, 2009 and 2008 consist of the following:

 

     As December 31,
     2009    2008
     (dollars in thousands)

Non-accrual loans

   $ 16,048    $ 8,630

Restructured loans

     —        —  
             

Total non-performing loans

     16,048      8,630
             

Foreclosed real estate

     2,530      2,799

Repossessed assets

     —        —  
             

Total non-performing assets

   $ 18,578    $ 11,429
             

The average recorded investment in impaired loans was approximately $11.5 million and $10.6 million for the years ended December 31, 2009 and 2008, respectively. Approximately, $9.7 million of the $16.5 million in impaired loans at December 31, 2009 had specific allowances provided while the remaining balance had no allowances recorded. Approximately, $4.2 million of the $9.1 million in impaired loans at December 31, 2008 had specific allowances provided while the remaining balance had no allowances recorded. The allowance allocated for impaired loans for 2009 and 2008 was approximately $4.2 million and $3.4 million, respectively.

At December 31, 2009 and 2008, the Company had no troubled debt restructures.

The average balance of non-accrual loans was $11.5 million and $8.9 million for the years ended December 31, 2009 and 2008, respectively. In 2009, 2008 and 2007, interest forgone on non-accrual loans was approximately $423,000, $560,000 and $365,000. Non-accrual loans totaled $16.0 million, $8.6 million, and $5.0 million at December 31, 2009, 2008, and 2007.

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”)

Construction loans are comprised of loans originated 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.

 

- 55 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE D – LOANS (Continued)

ADC Loans

As of December 31, 2009

(Dollars 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   

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. 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. 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.

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%.

 

- 56 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE D – LOANS (Continued)

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
                          

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

 

     At December 31,  
     2009     2008     2007  
           (In thousands)        

Allowance for loan losses at beginning of year

   $ 8,860      $ 8,314      $ 7,496   

Provision for loan losses

     5,472        4,283        5,974   
                        
     14,332        12,597        13,470   
                        

Loans charged-off:

      

Commercial and industrial

     (2,932     (2,836     (3,878

Construction

     (168     (118     (130

Home equity lines of credit

     (404     (448     (127

One-to-four family residential

     (567     (678     (471

Multi-family residential

     —          —          (572

Loans to individuals

     (352     (270     (626
                        

Total charge-offs

     (4,423     (4,350     (5,804
                        

Recoveries of loans previously charged-off:

      

Commercial and industrial

     325        373        325   

Construction

     12        33        4   

Home equity lines of credit

     7        —          —     

One-to-four family residential

     69        145        119   

Multi-family residential

     —          —          37   

Loans to individuals

     37        62        163   
                        

Total recoveries

     450        613        648   
                        

Net charge-offs

     (3,973     (3,737     (5,156
                        

Allowance for loan losses at end of year

   $ 10,359      $ 8,860      $ 8,314   
                        

At December 31, 2009, the Company had pre-approved but unused lines of credit totaling $62.4 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

 

- 57 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE D – LOANS (Continued)

The Bank has had loan transactions with its directors and executive officers. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectability or present other unfavorable features. The following table represents loan transactions for directors and executive officers who held that position as of December 31, 2009. A summary of related party loan transactions, in thousands, is as follows:

 

Balance at January 1, 2009

   $ 22,023   

Exposure of directors added on board in May 2009

     943   

Borrowings

     10,331   

Loan repayments

     (4,014
        

Balance at December 31, 2009

   $ 29,283   
        

At December 31, 2009, there was $3.1 million of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries.

NOTE E – PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2009 and 2008:

 

     2009    2008
     (In thousands)

Land

   $ 3,278    $ 3,343

Buildings

     9,099      8,370

Furniture and equipment

     3,226      2,969

Leasehold improvements

     113      110

Construction in progress

     19      46
             
     15,735      14,838

Less accumulated depreciation

     3,544      2,963
             

Total

   $ 12,191    $ 11,875
             

Depreciation amounting to $754,000, $702,000 and $732,000 for the years ended December 31, 2009, 2008 and 2007, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.

The Company has operating leases for its corporate offices and branches that expire at various times through 2027. Future minimum lease payments under the leases for years subsequent to December 31, 2009 are as follows:

 

2010

   $ 180,272

2011

     115,000

2012

     96,700

2013

     101,890

2014

     109,480

Thereafter

     1,308,816
      
   $ 1,912,158
      

 

- 58 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE E – PREMISES AND EQUIPMENT (Continued)

During 2009, 2008, and 2007, payments under operating leases were approximately $297,000, $270,000 and $250,000, respectively. Lease expense was accounted for on a straight line basis.

NOTE F – DEPOSITS

At December 31, 2009, the scheduled maturities of time deposits are as follows:

 

     Less than
$100,000
   $100,000
or more
   Total
     (In thousands)

Three months or less

   $ 47,847    $ 41,032    $ 88,879

Over three months through twelve months

     94,362      82,623      176,985

Over one year through two years

     6,367      3,007      9,374

Over two years through three years

     13,869      16,487      30,356

Over three years through four years

     3,560      6,138      9,698

Over four years through five years

     13,503      18,162      31,665

Over five years

     24      903      927
                    
   $ 179,532    $ 168,352    $ 347,884
                    

NOTE G – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase generally mature within one to four days from the transaction date and are classified as short term debt. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements are collateralized by U. S. Government agency obligations and all are floating rate. The following table presents certain information for securities sold under agreements to repurchase:

 

     2009     2008  
     ($ in thousands)  

Balance at December 31

   $ 20,564      $ 23,175   

Weighted average interest rate at December 31

     1.00     1.12

Maximum amount outstanding at any month-end during the year

   $ 27,408      $ 23,534   

Average daily balance outstanding during the year

   $ 23,891      $ 18,600   

Average annual interest rate paid during the year

     1.17     1.63

 

- 59 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE H – ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER CREDIT FACILITIES

At December 31, 2009, the Company had available lines of credit totaling approximately $34.0 million with various financial institutions for borrowing on a short-term basis. These lines are subject to annual renewals with varying interest rates. Also, as a member of the Federal Home Loan Bank of Atlanta, the Company may obtain advances of up to 10% of assets, subject to available collateral. Additionally, the Company had pledged $3.0 million in securities to the Federal Reserve Bank for access to the discount window.

At December 31, 2009 and 2008 the Company had no advances from the Federal Home Loan Bank of Atlanta or borrowings from the Federal Reserve Bank discount window.

NOTE I – JUNIOR SUBORDINATED DEBENTURES

On September 20, 2004, $12.4 million of junior subordinated debentures were issued to New Century Statutory Trust I (“the Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. All of the Trust’s common equity is owned by the Company. The junior subordinated debentures are included in long term debt and the Company’s equity interest in the Trust is included in other assets.

The Company pays interest on the junior subordinated debentures at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The debentures are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities qualify as Tier 1 capital for regulatory capital purposes subject to certain limitations, none of which were applicable at December 31, 2009.

NOTE J – INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2009, 2008 and 2007 are as follows:

 

     2009     2008     2007  
     (In thousands)  

Current tax provision:

      

Federal

   $ 825      $ 183      $ 810   

State

     110        5        271   
                        

Total current tax provision

     935        188        1,081   
                        

Deferred tax provision:

      

Federal

     (832     (356     (110

State

     (175     (71     (18
                        

Total deferred tax benefit

     (1,008     (427     (128
                        

Net provision for income taxes

   $ (73   $ (239   $ 953   
                        

 

- 60 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE J – INCOME TAXES (Continued)

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

 

     2009     2008     2007  
     (In thousands)  

Income tax at federal statutory rate

   $ (2,895   $ (147   $ 888   

Increase (decrease) resulting from:

      

State income taxes, net of federal tax effect

     —          (43     167   

Goodwill impairment

     2,949        —          —     

Tax-exempt interest income

     (86     (88     (81

Income from life insurance

     (89     (91     (89

Incentive stock option expense

     55        64        81   

Other permanent differences

     (6     66        (13
                        

Provision for income taxes

   $ (73   $ (239   $ 953   
                        

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2009 and 2008 are as follows:

 

      2009     2008  
     (In thousands)  

Deferred tax assets relating to:

    

Allowance for loan losses

   $ 3,767      $ 3,018   

Deferred Compensation

     362        366   

Supplemental executive retirement plan

     61        61   

Write-downs on foreclosed real estate

     121        —     

Other

     82        165   
                

Total deferred tax assets

     4,393        3,610   

Deferred tax liabilities relating to:

    

Premises and equipment

     (764     (798

Deferred loan fees

     (16     (157

Unrealized gain on available-for-sale securities

     (904     (904

Core deposit intangible

     (329     (388

Other

     (102     (92
                

Total deferred tax liabilities

     (2,115     (2,339
                

Net recorded deferred tax asset, included in other assets

   $ 2,279      $ 1,271   
                

 

- 61 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE J – INCOME TAXES (Continued)

Effective January 1, 2007, the Company adopted ASC 740, “Income Taxes”. This Interpretation provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As a result of the initial adoption of this Interpretation, retained earnings were increased by $135,000 and accrued expenses were reduced by the same amount. As of January 1, 2009, there were no uncertain tax positions. The amount of uncertain tax positions may increase or decrease in the future for various reasons including adding amounts for current tax positions, expiration of open tax returns due to statutes of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. The Company’s policy is to report interest and penalties, if any, related to uncertain tax positions in income tax expense in the Consolidated Statements of Operations. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

NOTE K – OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December 31, 2009, 2008 and 2007 are as follows:

 

     2009    2008    2007
     (In thousands)

Postage, printing and office supplies

   $ 377    $ 406    $ 413

Advertising and promotion

     339      417      385

Professional services

     1,069      1,213      1,306

Other

     1,968      2,085      2,040
                    

Total

   $ 3,753    $ 4,121    $ 4,144
                    

NOTE L – REGULATORY MATTERS

The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2009, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in New Century Bank and New Century Statutory Trust I.

The Bank may not declare or pay a cash dividend, or repurchase any of its capital stock, unless its capital surplus is equal to at least 50% of its paid-in capital. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The North Carolina Commissioner of Banks and the FDIC are also authorized to prohibit the payment of dividends under certain other circumstances. The Bank has sufficient liquidity and is well capitalized which permits the payment of cash dividends to the parent Company.

 

- 62 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE L – REGULATORY MATTERS (Continued)

The Company’s actual capital amounts and ratios are presented in the table below as of December 31, 2009 and 2008:

 

     Actual     Minimum for capital
adequacy purposes
 
     Amount    Ratio     Amount    Ratio  
                (Dollars in thousands)  

December 31, 2009:

       

Total Capital (to Risk-Weighted Assets)

   $ 70,517    13.89   $ 40,622    8.00

Tier 1 Capital (to Risk-Weighted Assets)

     64,120    12.63     20,310    4.00

Tier 1 Capital (to Average Assets)

     64,120    10.02     25,604    4.00

December 31, 2008:

          

Total Capital (to Risk-Weighted Assets)

   $ 69,602    14.43   $ 38,575    8.00

Tier 1 Capital (to Risk-Weighted Assets)

     63,540    13.18     19,288    4.00

Tier 1 Capital (to Average Assets)

     63,540    10.66     23,849    4.00

New Century Bank’s actual capital amounts and ratios are presented in the table below as of December 31, 2009 and 2008:

 

     Actual     Minimum for capital
adequacy purposes
    Minimum to be well
capitalized under prompt
corrective action provisions
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  
     (Dollars in thousands)  

December 31, 2009:

  

Total Capital (to Risk-Weighted Assets)

   $ 68,715    13.57   $ 40,516    8.00   $ 50,646    10.00

Tier 1 Capital (to Risk-Weighted Assets)

     62,335    12.31     20,258    4.00     30,388    6.00

Tier 1 Capital (to Average Assets)

     62,335    9.75     25,587    4.00     31,980    5.00

December 31, 2008:

               

Total Capital (to Risk-Weighted Assets)

   $ 67,932    14.14   $ 38,447    8.00   $ 48,059    10.00

Tier 1 Capital (to Risk-Weighted Assets)

     61,890    12.88     19,224    4.00     28,835    6.00

Tier 1 Capital (to Average Assets)

     61,890    10.38     23,849    4.00     29,813    5.00

As of December 31, 2009 and 2008, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum amounts and ratios, as set forth in the tables above. There are no conditions or events since that notification that management believes have changed the Bank’s category.

NOTE M – OFF-BALANCE SHEET RISK

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

 

- 63 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE M – OFF-BALANCE SHEET RISK (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of December 31, 2009 is as follows:

 

      (In thousands)

Financial instruments whose contract amounts represent credit risk:

  

Undisbursed commitments

   $ 60,788

Letters of credit

     1,634

NOTE N – FAIR VALUE MEASUREMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

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

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

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

   

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

- 64 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE N – FAIR VALUE MEASUREMENTS (Continued)

 

   

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

   

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of December 31, 2009 and December 31, 2008 (dollars in thousands):

 

Investment securities

available for sale

December 31, 2009

   Fair value    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)

U.S. government agencies

   $ 53,992    $ —      $ 53,992    $ —  

Mortgage-backed securities - GSE’s

     34,884      —        34,884      —  

Municipal bonds

     7,383      —        7,383      —  
                           

Total

   $ 96,259    $ —      $ 96,259    $ —  
                           

 

- 65 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE N – FAIR VALUE MEASUREMENTS (Continued)

 

Investment securities

available for sale

December 31, 2008

   Fair value    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)

U.S. government agencies

   $ 37,403    $ —      $ 37,403    $ —  

Mortgage-backed securities – GSE’s

     38,863      —        38,863      —  

Municipal bonds

     6,666      —        6,666      —  
                           

Total

   $ 82,932    $ —      $ 82,932    $ —  
                           

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Real Estate

Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less, at the date acquired. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. At December 31, 2009 total assets classified as foreclosed real estate totaled $2.5 million.

 

- 66 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE N – FAIR VALUE MEASUREMENTS (Continued)

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of September 30, 2009 and December 31, 2008 (dollars in thousands):

 

Asset Category

December 31, 2009

   Fair value    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)

Impaired loans

   $ 5,573    $ —      $ —      $ 5,573

Foreclosed real estate

     874      —        —        874
                           

Total

   $ 6,447    $ —      $ —      $ 6,447
                           

Asset Category

December 31, 2008

   Fair value    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)

Impaired loans

   $ 846    $ —      $ —      $ 846

Foreclosed real estate

     2,799      —        —        2,799
                           

Total

   $ 3,645    $ —      $ —      $ 3,645
                           

As of December 31, 2009, the Bank identified $16.5 million in impaired loans, of which $9.7 million required a specific allowance of $4.2 million. As of December 31, 2008, the Bank identified $9.1 million in impaired loans, of which $4.2 million required a specific allowance of $3.4 million.

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

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

Investment Securities Available for Sale

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

Loans

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

 

- 67 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE N – FAIR VALUE MEASUREMENTS (Continued)

Stock in Federal Home Loan Bank of Atlanta and Other Non Marketable Securities

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

Bank Owned Life Insurance

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

Deposits

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

Short Term Debt

The fair values of short term debt (sweep accounts that re-price weekly) are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Long Term Debt

The fair values of long term debt are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.

Financial Instruments with Off-Balance Sheet Risk

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

 

- 68 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE N – FAIR VALUE MEASUREMENTS (Continued)

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2009 and 2008.

 

     2009    2008
     Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
          (In thousands)     

Financial assets:

           

Cash and due from banks

   $ 9,612    $ 9,612    $ 8,124    $ 8,124

Interest-earning deposits in other banks

     12,647      12,647      13,770      13,770

Federal funds sold

     6,676      6,676      9,961      9,961

Loans held for sale

     —        —        —        —  

Investment securities available for sale

     96,259      96,259      82,932      82,932

Loans, net

     470,817      468,668      451,766      449,740

Accrued interest receivable

     2,590      2,590      2,519      2,519

Stock in the Federal Home Loan Bank

     1,133      1,133      1,154      1,154

Other non marketable securities

     1,004      1,004      929      929

Bank owned life insurance

     7,465      7,465      7,203      7,203

Financial liabilities:

           

Deposits

   $ 540,262    $ 545,985    $ 505,119    $ 514,338

Short term debt

     20,564      20,564      23,175      23,175

Long term debt

     12,372      7,820      12,372      12,372

Accrued interest payable

     349      349      584      584

NOTE O – EMPLOYEE AND DIRECTOR BENEFIT PLANS

401(k) Plan

The Company has a 401(k) Plan and substantially all employees participate in the Plan. The Company matches 100% of the first 6% of an employee’s compensation contributed to the plan. Expenses attributable to the Plan amounted to $302,000, $295,000 and $296,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Employment Agreements

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

 

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NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE O – EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Supplemental Executive Retirement Plans

The Company implemented a supplemental executive retirement plan for the former Chief Executive Officer during 2003. Benefits will accrue and vest during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $29,000, $47,000 and $116,000 were expensed for future benefits to be provided under this plan during 2009, 2008 and 2007, respectively. In conjunction with the implementation of this plan, the Company has purchased life insurance on certain key officers to provide future funding of benefit payments. The life insurance policies provide the payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2009 and 2008 was $440,000 and $464,000, respectively.

As part of the acquisition of Progressive State Bank, the Company assumed a liability for the supplemental early retirement plan for Progressive’s Chief Executive Officer. Provisions of $20,000, $21,000 and $16,000 and were expensed in 2009, 2008 and 2007, resulting in a total liability of $330,000 and $310,000 as of December 31, 2009 and 2008. Corresponding to this liability, Progressive had purchased a life insurance policy on certain key officers to provide future funding of benefit payments. This policy was acquired by the Company upon its acquisition of Progressive.

Directors Deferred Compensation

The Company has instituted a Directors’ Deferral Plan whereby individual directors may elect annually to defer receipt of all or a designated portion of their fees for the coming year. Amounts so deferred are used to purchase shares of the Company’s common stock on the open market by the administrator of the Deferral Plan or to issue shares from the Company’s authorized but unissued shares, with such deferred compensation disbursed in the future as specified by the director at the time of his or her deferral election. Compensation and other expenses attributable to this plan for the years ended December 31, 2009, 2008 and 2007 were $250,000, $190,000, and $186,000, respectively.

Stock Option Plans

The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary banks. Options granted to directors under the 2000 Nonqualified Plan typically vest immediately at the time of grant. During the year ended December 31, 2009, the Company granted 1,000 options to employees under the 2000 Incentive Plan. These options will vest over a three-year period with none vested at the time of grant. Also in 2009, the Company granted 1,000 options to employees under the 2004 Incentive Stock Option Plan, which vest over a five-year period with none vested at the time of grant.

 

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NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE O – EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

The estimated fair market value of each option awarded, using the Black-Scholes option pricing model, together with the assumptions used in estimating those fair values, are displayed below:

 

     2009     2008     2007  

Estimated fair value of options granted

   $ 3.67      $ 3.13      $ 6.55   

Assumptions in estimating average option values:

      

Risk-free interest rate

     3.15     3.01     4.58

Dividend yield

     0     0     0

Volatility

     50.23     39.07     30.69

Expected life (in years)

     4.49        5.45        7.45   

A summary of the Company’s option plans as of and for the year ended December 31, 2009 is as follows:

 

     Shares
Available
for Future
Grants
    Outstanding Options    Exercisable Options
       Number
Outstanding
    Weighted
Average
Exercise
Price
   Number
Outstanding
    Weighted
Average
Exercise
Price

At December 31, 2008

   15,487      525,680      $ 8.25    425,567      $ 7.47

Options authorized

   —        —          —      —          —  

Options granted/vesting

   (2,000   2,000        6.49    33,683        13.10

Options exercised

   —        (6,803     4.63    (6,803     4.63

Options forfeited

   4,500      (4,500     11.33    (1,500     5.75
                               

At December 31, 2009

   17,987      516,377      $ 8.26    450,947      $ 7.90
                               

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2009, 2008, and 2007 was $15,000, $42,000, and $1.0 million each. The unrecognized compensation for outstanding options at December 31, 2009, 2008, and 2007 was $279,000, $462,000, and $521,000.

 

- 71 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE O – EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

Stock Option Plans (Continued)

The weighted average remaining life of options outstanding and options exercisable as of December 31, 2009 and 2008 is 4.49 years and 5.45 years, respectively. Information regarding the stock options outstanding at December 31, 2009 is summarized below:

 

Range of Exercise Prices

   Number
of options
outstanding
   Number
of options
exercisable

$4.59 - $7.07

   384,876    366,413

$7.08 - $10.69

   38,351    19,284

$10.70 - $16.22

   93,150    65,250
         

Outstanding at end of year

   516,377    450,947
         

A summary of the status of the Company’s nonvested shares as of December 31, 2009 and changes during the year ended December 31, 2009, is presented below:

 

Nonvested Shares

   Shares     Weighted-Average
Grant Date

Fair Value

Nonvested at January 1, 2009

   100,113      $ 5.29

Granted

   2,000        3.67

Vested

   (32,183     1.54

Forfeited

   (4,500     5.42
        

Nonvested at December 31, 2008

   65,430        4.96
        

For the years ended December 31, 2009, 2008 and 2007, the intrinsic value of options exercised was $8,000, $293,000, and $1.2 million, respectively, and the grant-date fair value of options vested was $200,000, $188,000, and $238,000, respectively. Cash received from stock option exercises for the year ended December 31, 2009 was approximately $32,000. The actual tax benefit in shareholders’ equity realized for the tax deductions from option exercises was approximately $3,000.

As of December 31, 2009, there was approximately $279,000 of total unrecognized compensation expense related to the Company’s stock based compensation plans. This cost is expected to be recognized over a weighted average period of 1.48 years.

 

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NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE P – PARENT COMPANY FINANCIAL DATA

Following are the condensed balance sheets of New Century Bancorp as of and for the years ended December 31, 2009 and 2008 and the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2009 (amounts in thousands):

Condensed Balance Sheets

December 31, 2009 and 2008

 

     2009    2008

Assets

     

Cash balances with New Century Bank

   $ 342    $ 459

Investment in New Century Bank

     64,624      73,011

Investment in New Century Statutory Trust I

     485      473

Other assets

     1,448      1,197
             

Total Assets

   $ 66,899    $ 75,140
             

Liabilities and Shareholders’ Equity

     

Junior subordinated debentures

   $ 12,372    $ 12,372

Accrued interest payable

     118      109

Shareholders’ equity:

     

Common stock

     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

   $ 66,899    $ 75,140
             

Condensed Statements of Operations

Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007  

Dividends

   $ 373      $ 676      $ 1,156   

Equity in earnings of subsidiaries

     (8,535     (341     1,233   

Operating expense

     (485     (790     (1,060

Income tax benefit

     205        262        330   
                        

Net income (loss)

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

 

- 73 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE P – PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statements of Cash Flows

Years Ended December 31, 2009, 2008 and 2007

 

     2009     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net income (loss)

   $ (8,442   $ (193   $ 1,659   

Equity in undistributed earnings of subsidiaries

     8,535        341        (1,233

(Increase) decrease in other assets

     (251     (259     (329

Increase in other liabilities

     9        5        26   
                        

Net cash provided (used) by operating activities

     (149     (106     123   
                        

CASH FLOW FROM INVESTING ACTIVITIES

      

Payments for investments in and advances to subsidiaries

     —          (5,000     —     
                        

CASH FLOW FROM FINANCING ACTIVITIES

      

Proceeds from other issuance of common stock

     32        513        1,174   
                        

Net cash provided by financing activities

     32        513        1,174   
                        

Net increase (decrease) in cash and cash equivalents

     (117     (4,593     1,297   

Cash and cash equivalents at beginning of year

     459        5,052        3,755   
                        

Cash and cash equivalents, end of year

   $ 342      $ 459      $ 5,052   
                        

NOTE Q – RELATED PARTY TRANSACTIONS

During 2009, the Company purchased various insurance policies from a company owned by one of the directors of New Century Bancorp. Premiums paid totaled approximately $91,000 for these policies, which include one-year policies for directors and officers liability coverage as well as commercial property and other insurance policies. All such policies were purchased on terms at least as favorable to the Company as could be obtained from an unaffiliated third party.

During 2008, the Company purchased various insurance policies from a company owned by one of the directors of New Century Bancorp. Premiums paid totaled approximately $50,200 for these policies, which include a one-year policy for commercial property and other insurance policies. All such policies were purchased on terms at least as favorable to the Company as could be obtained from an unaffiliated third party.

Beginning in July 2008, the Company began leasing a building owned by one of the directors of New Century Bancorp for a portion of its operations center. The two year lease will total approximately $57,000 paid to the director, through 2009 and part of 2010.

 

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NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2009, 2008 and 2007

 

 

 

NOTE Q – RELATED PARTY TRANSACTIONS (Continued)

In October 2007, New Century Bank South purchased a portion of the building that houses its Raeford Road branch from one of its directors for $1.4 million. This additional office space will be used by lending and administrative staff. New Century Bank South obtained an appraisal of the property’s value from an independent third party appraiser and the transaction was subject to prior approval by a committee of disinterested directors.

All related party transactions are “arms length” transactions.

 

- 75 -


Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T) – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for preparing the Company’s annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even these systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has made a comprehensive review, evaluation and assessment of the Company’s internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control–Integrated Framework.

Based on this assessment, Management has concluded that that the Company’s internal control over financial reporting as of December 31, 2009 was effective based on those criteria.

 

- 76 -


This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Date: March 26, 2010     /S/    WILLIAM L. HEDGEPETH II        
   

William L. Hedgepeth II.

President and Chief Executive Officer

Date: March 26, 2010     /S/    LISA F. CAMPBELL        
   

Lisa F. Campbell

Executive Vice President, Chief Operating Officer

and Chief Financial Officer

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) and 15d–15(f) of the Exchange Act) during the fourth quarter of 2009. Management has concluded that there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s fourth quarter of 2009 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

None.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Incorporated by reference to the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

The Registrant has adopted a code of ethics that applies, among others to its principal executive officer and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, New Century Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28334.

ITEM 11 – EXECUTIVE COMPENSATION

Incorporated by reference to the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

 

- 77 -


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

Incorporated by reference to the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

In 2000, the shareholders of New Century Bank approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders approved amendments to 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 478,627 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Incentive Plan is 278,102 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon exercise of outstanding options granted under the 2004 Incentive Plan is 75,600. Option prices for each of the plans are established at market value at the time of grant.

The following chart contains details of the grants:

 

Plan Category

   Number of securities
to be issued upon
exercise of
outstanding options,
   Weighted-average
exercise price of
outstanding
options, warrants
and rights
   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
     (a)    (b)    (c)

Equity compensation plans approved by security holders

   516,377    $ 8.26    18,887

Equity compensation plans not approved by security holders

   none      n/a    none

Total

   516,377    $ 8.26    18.887

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference to the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference to the Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders.

 

- 78 -


PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) The following documents are filed as part of this report:

 

  1. Financial statements required to be filed by Item 8 of this Form:

Report of independent registered public accounting firm

Consolidated Balance Sheets as of December 31, 2009 and 2008

Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007

Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 2008 and 2007

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

Notes to Consolidated Financial Statements.

 

  2. Financial statement schedules required to be filed by Item 8 of this Form:

None

 

  3. Exhibits

 

- 79 -


RIDER A

Exhibits

 

  3(i)

Articles of Incorporation of Registrant(1)

 

  3(ii)

Bylaws of Registrant(1)

 

  4

Form of Stock Certificate(1)

 

  10(i)

2000 Incentive Stock Option Plan, a compensatory plan(2)

 

  10(ii)

2000 Nonqualified Stock Option Plan for Directors, a compensatory plan(2)

 

  10(iii)

Employment Agreement of John Q. Shaw, a management contract(1)

 

  10(iv)

Employment Agreement of Lisa F. Campbell, a management contract(1)

 

  10(v)

Salary Continuation Agreement with John Q. Shaw, a compensatory plan(1)

 

  10(vi)

2004 Incentive Stock Option Plan, a compensatory plan(2)

 

  10(vii)

Employment Agreement of William L. Hedgepeth II, a management contract(3)

 

  10(viii)

Employment Agreement of J. Daniel Fisher, a management contract(3)

 

  21 Subsidiaries (Filed herewith)

 

  23 Consent of Dixon Hughes PLLC (Filed herewith)

 

  31(i) Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)

 

  31(ii) Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)

 

  32(i) Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)

 

  32(ii) Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)

 

  99(i)

Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders(4)

 

1. Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.
2. Incorporated by reference from Registrant’s Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.
3. Incorporated by reference from Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2008.
4. To be filed with the Securities and Exchange Commission pursuant to Rule 14a-6.

 

- 80 -


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NEW CENTURY BANCORP, INC.
    Registrant
    By:   /S/    WILLIAM L. HEDGEPETH, II        
Date: March 26, 2010      

William L. Hedgepeth, II

President and Chief Executive Officer

 

- 81 -


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

 

/S/    WILLIAM L. HEDGEPETH, II        

William L. Hedgepeth, II., President,

Chief Executive Officer and Director

     

March 26, 2010

/S/    LISA F. CAMPBELL        

Lisa F. Campbell, Executive Vice President,

Chief Operating Officer and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

     

March 26, 2010

/S/    J. GARY CICCONE        

J. Gary Ciccone, Director

     

March 26, 2010

/S/    T. DIXON DICKENS        

T. Dixon Dickens, Director

     

March 26, 2010

/S/    JOHN W. MCCAULEY        

John W. McCauley, Director

     

March 26, 2010

/S/    OSCAR N. HARRIS        

Oscar N. Harris, Director

     

March 26, 2010

/S/    CLARENCE L. TART, JR.        

Clarence L. Tart, Jr., Director

     

March 26, 2010

/S/    GERALD W. HAYES, JR.        

Gerald W. Hayes, Jr., Director

     

March 26, 2010

/S/    D. RALPH HUFF III        

D. Ralph Huff III, Director

     

March 26, 2010

/S/    THURMAN C. GODWIN, JR.        

Thurman C. Godwin, Jr., Director

     

March 26, 2010

/S/    TRACY L. JOHNSON        

Tracy L. Johnson, Director

     

March 26, 2010

/S/    CARLIE C. MCLAMB        

Carlie C. McLamb, Director

     

March 26, 2010

/S/    MICHAEL S. MCLAMB        

Michael S. McLamb, Director

      March 26, 2010

 

- 82 -


/S/    RAYMOND L. MULKEY JR.        

Raymond L. Mulkey Jr., Director

     

March 26, 2010

/S/    ANTHONY RAND        

Anthony Rand, Director

     

March 26, 2010

/S/    SHARON L. RAYNOR        

Sharon L. Raynor, Director

     

March 26, 2010

/S/    JAMES H. SMITH        

James H. Smith, Director

     

March 26, 2010

/S/    W. LYNDO TIPPETT        

W. Lyndo Tippett, Director

     

March 26, 2010

/S/    ANN H. THORNTON        

Ann H. Thornton, Director

     

March 26, 2010

 

- 83 -


RIDER B

EXHIBIT INDEX

 

Exhibit Number

 

Exhibit

     
3(i)   Articles of Incorporation.    *
3(ii)   Bylaws    *
4   Form of Stock Certificate    *
10(i)   2000 Incentive Stock Option Plan    *
10(ii)   2000 Nonstatutory Stock Option Plan    *
10(iv)   Employment Agreement of Lisa F. Campbell    *
10(v)   Executive Supplemental Retirement Plan Agreement With John Q. Shaw, Jr.    *
10(vi)   2004 Incentive Stock Option Plan    *
10(vii)   Employment Agreement of William L. Hedgepeth    *
10(viii)   Employment Agreement of J. Daniel Fisher    *
21   Subsidiaries    Filed herewith
23   Consent of Dixon Hughes PLLC    Filed herewith
31(i)   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act    Filed herewith
31(ii)   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act    Filed herewith
32(i)   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act    Filed herewith
32(ii)   Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act    Filed herewith
99(i)   Registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders    *

 

* Incorporated by reference

 

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