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EX-21 - SUBSIDIARIES - SELECT BANCORP, INC.dex21.htm
EX-23 - CONSENT OF DIXON HUGHES PLLC - SELECT BANCORP, INC.dex23.htm
EX-32.(I) - SECTION 906 CEO CERTIFICATION - SELECT BANCORP, INC.dex32i.htm
EX-31.(I) - SECTION 302 CEO CERTIFICATION - SELECT BANCORP, INC.dex31i.htm
EX-31.(II) - SECTION 302 CFO CERTIFICATION - SELECT BANCORP, INC.dex31ii.htm
EX-32.(II) - SECTION 906 CFO CERTIFICATION - SELECT BANCORP, INC.dex32ii.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, 2010

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 $39,283,169.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date 6,913,636 shares outstanding as of March 18, 2011.

 

 

Documents Incorporated by Reference.

None

 

 

 


FORM 10-K CROSS-REFERENCE INDEX

 

PART I    FORM 10-K   

PROXY

STATEMENT

    

ANNUAL

REPORT

 

Item 1 – Business

   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 – Controls and Procedures

   X      

Item 9B – Other Information

   X      

PART III

        

Item 10 – Directors, Executive Officers and Corporate Governance

   X      

Item 11 – Executive Compensation

   X      

Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   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 17-member holding company board also serves as the board of directors of the Bank.

The 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 $45,000.

The June 2010 total deposits in the Registrant’s market area exceeded $8.3 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, 2010, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 232 offices of 23 other commercial and savings institutions (27 in Harnett County, 48 in Pitt County, 4 in Hoke County, 68 in Cumberland County, 33 in Robeson County, 16 in Sampson County, and 36 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, 2010, the Registrant employed 135 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

General. The Bank is a North Carolina chartered commercial bank and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”) administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision, examination and regulation by the North Carolina Office of the Commissioner of Banks (“Commissioner”) and the FDIC and to North Carolina and federal statutory and regulatory provisions governing such matters as capital standards, mergers, subsidiary investments and establishment of branch offices. The FDIC also has the authority to conduct special examinations. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition and will be required to obtain regulatory approval prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

As a federally insured depository institution, the Bank is subject to various regulations promulgated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”), including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).

The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank, and is intended primarily for the protection of the FDIC and the depositors of the Bank, rather than shareholders. Changes in the regulatory framework could have a material effect on the Bank that in turn, could have a material effect on the Company. Certain of the legal and regulatory requirements are applicable to the Bank and Company. This discussion does not purport to be a complete

 

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explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.

State Law. The Bank is subject to extensive supervision and regulation by 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.

Dodd–Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

 

   

the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;

 

   

the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

 

   

the establishment of strengthened capital and prudential standards for banks and bank holding companies;

 

   

enhanced regulation of financial markets, including derivatives and securitization markets;

 

   

the elimination of certain trading activities by banks;

 

   

a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

 

   

amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

 

   

new disclosure and other requirements relating to executive compensation and corporate governance.

Although the Dodd-Frank Act has been signed into law, a number of provisions remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact our business. However, we believe that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.

Deposit Insurance. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (“DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of

 

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2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio” or “DRR”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the DRR at 2.0%.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor. 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 July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.

The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation will be effective April 1, 2011.

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. It was subsequently extended again through December 31, 2010. The Bank elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010. This change is expected to lower the Bank’s FDIC insurance expense.

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

 

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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.

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, 2010, the Registrant was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 9.17%, 11.45%, and 12.71%, respectively. Also, as of December 31, 2010, the Bank was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 8.84%, 11.10%, and 12.36%, 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.

 

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

Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy the minimum capital requirements discussed above, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below the “critical capital level” established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods.

Under the implementing regulations, the federal banking regulators, including the FDIC, generally measure an institution’s capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). The following table shows the Bank’s actual capital ratios and the required capital ratios for the various prompt corrective action categories as of December 31, 2010.

 

     Actual    

Well Capitalized

  

Adequately
Capitalized

  

Undercapitalized

  

Significantly
Undercapitalized

Total risk-based capital ratio

     12.36   10.0% or more    8.0% or more    Less than 8.0%    Less than 6.0%

Tier 1 risk-based capital ratio

     11.10   6.0% or more    4.0% or more    Less than 4.0%    Less than 3.0%

Leverage ratio

     8.84   5.0% or more    4.0% or more *    Less than 4.0% *    Less than 3.0%

 

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* 3.0% if institution has the highest regulatory rating and meets certain other criteria.

A “critically undercapitalized” institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. See Note L of the Notes to Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the “CDRI Act”), each federal banking agency was required to establish safety and soundness standards for institutions under its authority. The interagency guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, asset growth, and information security. The guidelines further provide that depository institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the appropriate federal banking agency determines that a depository institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A depository institution must submit an acceptable compliance plan to its primary federal regulator within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Bank substantially meets all the standards adopted in the interagency guidelines.

Community Reinvestment Act. The Bank, like other financial institutions, is subject to the Community Reinvestment Act (“CRA”). The purpose of the CRA is to encourage financial institutions to help meet the credit needs of their entire communities, including the needs of low-and moderate-income neighborhoods.

The federal banking agencies have implemented an evaluation system that rates an institution based on its actual performance in meeting community credit needs. Under these regulations, an institution is first evaluated and rated under three categories: a lending test, an investment test and a service test. For each of these three tests, the institution is given a rating of either “outstanding,” “high satisfactory,” “low satisfactory,” “needs to improve,” or “substantial non-compliance.” A set of criteria for each rating has been developed and is included in the regulation. If an institution disagrees with a particular rating, the institution has the burden of rebutting the presumption by clearly establishing that the quantitative measures do not accurately present its actual performance, or that demographics, competitive conditions or economic or legal limitations peculiar to its service area should be considered. The ratings received under the three tests will be used to determine the overall composite CRA rating. The composite ratings currently given are: “outstanding,” “satisfactory,” “needs to improve” or “substantial non-compliance.”

The Bank’s CRA rating would be a factor to be considered by the FRB and the FDIC in considering applications submitted by the Bank to acquire branches or to acquire or combine with other financial institutions and take other actions and, if such rating was less than “satisfactory,” could result in the denial of such applications. During the Bank’s last compliance examination, the Bank received a satisfactory rating with respect to CRA compliance.

 

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Federal Home Loan Bank System. The FHLB System consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the FHLB of Atlanta. The Bank was in compliance with this requirement with investment in FHLB of Atlanta stock of $1.4 million at December 31, 2010. The FHLB of Atlanta serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It offers advances to members in accordance with policies and procedures established by the FHFA and the Board of Directors of the FHLB of Atlanta. Long-term advances may only be made for the purpose of providing funds for residential housing finance, small businesses, small farms and small agribusinesses.

Reserves. Pursuant to regulations of the FRB, the Bank must maintain average daily reserves equal to 3% on transaction accounts of $10.7 million up to $55.2 million, plus 10% on the remainder. This percentage is subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a noninterest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of December 31, 2010, the Bank met its reserve requirements.

The Bank is also subject to the reserve requirements of North Carolina commercial banks. North Carolina law requires state nonmember banks to maintain, at all times, a reserve fund in an amount set by the Commissioner.

Liquidity Requirements. FDIC policy requires that banks maintain an average daily balance of liquid assets (cash, certain time deposits, mortgage-backed securities, loans available for sale and specified United States government, state, or federal agency obligations) in an amount which it deems adequate to protect the safety and soundness of the bank. The FDIC currently has no specific level which it requires. The Bank maintains its liquidity position under policy guidelines based on liquid assets in relationship to deposits and short-term borrowings. Based on its policy calculation guidelines, the Bank’s calculated liquidity ratio was 18.2% of total deposits and short-term borrowings at December 31, 2010, which management believes is adequate.

Dividend Restrictions. Under FDIC regulations, the Bank is prohibited from making any capital distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. In addition, under North Carolina law, the Bank may declare and pay dividends only out of retained earnings. The FDIC and the Commissioner have the power to further restrict the payment of dividends by the Bank.

Limits on Loans to One Borrower. The Bank generally is subject to both FDIC regulations and North Carolina law regarding loans to any one borrower, including related entities. Under applicable law, with certain limited exceptions, loans and extensions of credit by a state chartered nonmember bank to a person outstanding at one time and not fully secured by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15% of the unimpaired capital of the Bank. Loans and extensions of credit fully secured by readily marketable collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 10% of the unimpaired capital fund of the Bank. Under these limits, the Bank’s loans to one borrower were limited to $10.2 million at December 31, 2010. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit.

Transactions with Related Parties. Transactions between a state nonmember bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a state nonmember bank is any company or entity which controls, is controlled by or is under common control with the state nonmember bank. In a holding company context, the parent holding company of a state nonmember bank

 

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(such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution or state nonmember bank. Generally, Sections 23A and 23B (i) limit the extent to which an institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.

Loans to Directors, Executive Officers and Principal Stockholders. State nonmember banks also are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the applicable regulations there under on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of a state nonmember bank and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and greater than 10% stockholders of a depository institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (or any loans aggregating $500,000 or more). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders generally be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.

State nonmember banks also are subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act on loans to executive officers. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for such extensions of credit and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended (“BHCA”) prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

Restrictions on Certain Activities. State chartered nonmember banks with deposits insured by the FDIC are generally prohibited from engaging in equity investments that are not permissible for a national bank. The foregoing limitation, however, does not prohibit FDIC-insured state banks from acquiring or retaining an equity investment in a subsidiary in which the bank is a majority owner. State chartered banks are also prohibited from engaging as a principal in any type of activity that is not permissible for a national bank and, subject to certain exceptions, subsidiaries of state chartered FDIC-insured banks may not engage as a principal in any type of activity that is not permissible for a subsidiary of a national bank, unless in either case, the FDIC determines that the activity would pose no significant risk to the DIF and the bank is, and continues to be, in compliance with applicable capital standards.

USA Patriot Act. The USA Patriot Act (“Patriot Act”) is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations including standards for verifying client identification at account opening, and rules to

 

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promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

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.

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;

 

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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.

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:

 

   

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

 

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

 

   

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 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

 

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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.

Small Business Lending Fund. In September 2010, the Small Business Lending Fund Program (“SBLF”) was created by the Small Business Jobs Act of 2010. Under the SBLF, the U.S. Treasury may invest in preferred stock and other debt instruments issued by financial institutions. To be eligible, an institution must have total assets of $10 billion or less. An institution between $1 billion and $10 billion may apply for up to 3% of its total risk-weighted assets as long as it is otherwise eligible. An institution with assets of $1 billion or less may apply for up to 5% of its total risk-weighted assets as long as it is otherwise eligible. The U.S. Treasury must consult with the institution’s regulators to determine if the institution should receive the investment. Institutions on the FDIC’s problem bank list as of, or within 90 days prior to, the date of the application, are ineligible to participate in the program.

Treasury’s investment must be repaid within 10 years. While the investment is outstanding, the rate at which dividends are payable varies between 1% and 7%, with an initial rate of 5%, and is wholly dependent upon the amount of increase in the bank’s quarterly small business lending following Treasury’s capital investment. If the amount of small business lending does not increase within 2 years, the dividend rate increases to 7%. If Treasury’s investment is not redeemed on or before 41/2 years following its investment, the dividend rate increases to 9%.

The application for participation in the SBLF along with a business plan for increasing small business lending must be submitted to the Treasury and the institution’s primary federal regulator prior to March 31, 2011. The Company has not yet determined whether it will submit an application for participation in the SBLF. If the Company chooses to submit an application and it is accepted, there is uncertainty as to whether the Bank will be able to increase the level of small business lending in order to qualify for a reduced level of dividend payments. There is also uncertainty as to the capital treatment of any funds received under the SBLF due to conflicts in capital treatment under the Dodd-Frank Act and the proposed Basel III rules. Further, Treasury could change the rules regarding participation in the SBLF at any time.

Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance,

 

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to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

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.

ITEM 1A – RISK FACTORS

Not required for smaller reporting companies.

ITEM 1B – UNRESOLVED STAFF COMMENTS

Not required for smaller reporting companies.

 

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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

   2008    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

861 Tilghman Drive

Dunn, NC 28335

   2010    7,500    Owned

Operations Center - Annex

863 Tilghman Drive

Dunn, NC 28335

   2010    5,000    Owned

 

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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.” Howe Barnes Hoefer & Arnett, Morgan Keegan, McKinnon & Company, Sandler O’Neill & Partners, L.P., Janney, Montgomery, Scott, LLC., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2010, there were 6,913,636 shares of common stock outstanding, which were held by 1,402 shareholders of record.

 

     Sales Prices  
     High      Low  

2010

             

First Quarter

   $ 6.23       $ 4.25   

Second Quarter

     6.44         5.25   

Third Quarter

     6.17         3.19   

Fourth Quarter

     5.00         3.71   

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   

The Registrant did not declare or pay cash dividends during 2010 and 2009 and it is not currently anticipated that cash dividends will be declared and paid to shareholders at any time in the foreseeable future.

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,  
     2010     2009     2008     2007     2006  
     (Dollars in thousands, except per share data)  

Operating Data:

          

Total interest income

   $ 33,610      $ 33,030      $ 35,237      $ 41,599      $ 35,812   

Total interest expense

     9,680        13,122        17,372        20,653        16,167   
                                        

Net interest income

     23,930        19,908        17,865        20,946        19,645   

Provision for loan losses

     15,634        5,472        4,283        5,974        2,779   
                                        

Net interest income after provision for loan losses

     8,296        14,436        13,582        14,972        16,866   

Total non-interest income

     2,678        3,098        3,124        3,977        3,278   

Impairment of goodwill

     —          8,674        —          —          —     

Total non-interest expense

     19,213        17,375        17,138        16,337        13,816   
                                        

Income (loss) before income taxes

     (8,239     (8,515     (432     2,612        6,328   

Provision for income taxes (benefit)

     (3,284     (73     (239     953        2,358   
                                        

Net income (loss)

   $ (4,955   $ (8,442   $ (193   $ 1,659      $ 3,970   
                                        

Per Share Data: (1)

          

Earnings (loss) per share - basic

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

Earnings (loss) per share - diluted

     (.72     (1.24     (.03     .24        .65   

Market Price

          

High

     6.44        7.67        10.21        16.33        20.83   

Low

     3.19        3.81        4.90        8.25        15.75   

Close

     4.98        4.75        5.00        8.25        16.99   

Book value

     7.19        7.96        9.17        9.09        8.84   

Tangible book value

     7.09        7.83        7.76        7.63        7.30   

Selected Year-End Balance Sheet Data:

          

Loans, gross of allowance

   $ 470,484      $ 481,176      $ 460,626      $ 442,875      $ 427,948   

Allowance for loan losses

     10,015        10,359        8,860        8,314        7,496   

Other interest-earning assets

     109,685        107,360        99,908        100,292        87,811   

Goodwill and core deposit intangible

     699        853        9,680        9,834        9,988   

Total assets

     626,896        630,419        605,767        591,025        552,965   

Deposits

     534,599        540,262        505,119        498,122        464,117   

Borrowings

     40,038        32,936        35,547        29,339        28,813   

Shareholders’ equity

     49,692        54,409        62,659        61,173        57,439   

Selected Average Balances:

          

Total assets

   $ 644,904      $ 630,521      $ 599,913      $ 583,809      $ 491,849   

Loans, gross of allowance

     484,647        471,059        451,558        449,799        369,110   

Total interest-earning assets

     599,152        578,372        554,798        539,526        458,974   

Goodwill and core deposit intangible

     775        9,578        9,756        9,910        4,087   

Deposits

     548,768        527,844        504,188        493,989        412,077   

Total interest-bearing liabilities

     511,031        498,831        468,044        450,466        381,514   

Shareholders’ equity

     54,750        63,584        62,107        59,888        45,614   

Selected Performance Ratios:

          

Return on average assets

     (.77 )%      (1.34 )%      (.03 )%      .28     .81

Return on average equity

     (9.05 )%      (13.28 )%      (.31 )%      2.77     8.70

Net interest margin (5)

     4.03     3.49     3.27     3.93     4.33

Net interest spread (5)

     3.75     3.12     2.69     3.18     3.62

Efficiency ratio (2)

     72.71     75.52     81.00     65.40     60.27

Asset Quality Ratios:

          

Nonperforming loans to period-end loans (3)

     2.60     3.34     1.85     1.13     .75

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

     2.13     2.15     1.92     1.88     1.75

Net loan charge-offs to average loans

     3.30     0.84     0.82     1.15     .27

 

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     At or for the year ended December 31,  
     2010     2009     2008     2007     2006  
     (Dollars in thousands, except per share data)  

Capital Ratios:

          

Total risk-based capital

     13.04     13.89     14.43     14.77     14.63

Tier 1 risk-based capital

     11.78     12.63     13.18     13.51     13.38

Leverage ratio

     9.40     10.02     10.66     10.77     10.95

Tangible equity to assets

     7.82     8.49     8.75     8.69     8.58

Equity to assets ratio

     7.93     8.63     10.34     10.35     10.39

Other Data:

          

Number of banking offices

     9        9        10        10        11   

Number of full time equivalent employees

     135        133        132        144        156   

 

(1) Adjusted for all years presented to reflect the effects of a 20% stock dividend in December 2006.
(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

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 one wholly-owned 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.

 

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

YEARS ENDED DECEMBER 31, 2010 AND 2009

 

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

2010

         

Interest Income

   $ 8,333       $ 8,524      $ 8,428      $ 8,327   

Interest Expense

     2,446         2,434        2,439        2,361   
                                 

Net Interest Income

     5,887         6,090        5,989        5,966   

Provision for loan losses

     1,270         639        12,457        1,267   
                                 

Net interest income after provision for loan losses

     4,617         5,451        (6,468     4,699   

Non interest income

     667         670        648        686   

Non interest expense

     4,606         4,497        4,746        5,357   
                                 

Income (loss) before taxes

     678         1,624        (10,566     28   

Income taxes (benefit)

     221         549        (3,955     (97
                                 

Net income (loss)

   $ 457       $ 1,075      $ (6,611   $ 125   
                                 

Net income (loss) per share

         

Basic

   $ .07       $ .16      $ (.96   $ .02   

Diluted

     .07         .16        (.96     .02   

Average shares outstanding

         

Basic

     6,837,952         6,846,437        6,908,466        6,913,636   

Diluted

     6,845,714         6,862,095        6,908,466        6,913,636   

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   

 

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

 

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FINANCIAL CONDITION

DECEMBER 31, 2010 AND 2009

Overview

Total assets at December 31, 2010 were $626.9 million, which represents a decrease of $3.5 million or (0.6)% from December 31, 2009. Earning assets at December 31, 2010 totaled $580.2 million and consisted of $460.5 million in net loans, $89.9 million in investment securities, $27.3 million in overnight investments and interest-bearing deposits in other banks and $2.5 million in non-marketable equity securities. Total deposits and shareholders’ equity at December 31, 2010 were $534.6 million and $49.7 million, respectively.

Investment Securities

Investment securities decreased to $89.9 million from $96.3 million at December 31, 2009. The Company’s investment portfolio at December 31, 2010, which consisted of U.S. government agency securities, mortgage-backed securities and bank-qualified municipal securities, aggregated $89.9 million with a weighted average yield of 2.91%. The Company also holds an investment of $1.4 million in the form of Federal Home Loan Bank Stock with a weighted average yield of 0.33%. The investment portfolio decreased $6.4 million in 2010, the result of $21.8 million in purchases, $26.9 million of maturities and prepayments and a decrease of $1.3 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 2010.

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

   $ 23,783       $ 23,946         1.93

Due after one but within five years

     22,723         23,141         1.72
                    
     46,506         47,087         1.83
                    

Mortgage-backed securities:

        

Due within one year

     2,538         2,581         3.63

Due after one but within five years

     27,614         28,745         4.24

Due after five but within ten years

     4,150         4,186         3.60
                    
     34,302         35,512         4.12
                    

State and local governments:

        

Due within one year

     200         203         7.27

Due after one but within five years

     1,543         1,584         5.23

Due after five but within ten years

     3,608         3,760         5.35

Due after ten years

     1,822         1,753         6.01
                    
     7,173         7,300         5.55
                    

Total securities available for sale:

        

Due within one year

     26,521         26,730         2.13

Due after one but within five years

     51,880         53,470         3.18

Due after five but within ten years

     7,758         7,946         4.41

Due after ten years

     1,822         1,753         6.01
                    
   $ 87,981       $ 89,899         3.03
                    

 

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Loans Receivable

The loan portfolio at December 31, 2010 was comprised of $408.5 million in real estate loans, $49.4 million in commercial and industrial loans, and $13.0 million in loans to individuals. Also included in loans outstanding is $383,000 in net deferred loan fees.

The following table describes the Company’s loan portfolio composition by category:

 

    At December 31,  
    2010     2009     2008     2007     2006  
    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:

                   

1 to 4 Family Residential

  $ 60,385        12.8   $ 69,995        14.5   $ 67,353        14.6   $ 61,738        13.9   $ 59,867        14.0

Commercial

    193,502        41.1     195,165        40.6     169,856        36.9     132,649        30.0     113,790        26.6

Multi-family Residential

    30,088        6.4     22,580        4.7     18,744        4.1     13,379        3.0     13,399        3.1

Construction

    84,550        18.0     70,736        14.7     65,807        14.3     84,795        19.1     79,607        18.6

Home equity lines of credit

    39,938        8.5     38,482        8.0     41,352        9.0     42,016        9.5     42,130        9.8
                                                                               

Total real estate loans

    408,463        86.8     396,958        82.5     363,112        78.9     334,577        75.5     308,793        72.2
                                                                               

Other loans:

                   

Commercial and industrial

    49,437        10.5     70,747        14.7     76,936        16.7     81,832        18.5     88,626        20.7

Loans to individuals & overdrafts

    12,967        2.8     13,766        2.9     20,916        4.5     26,756        6.0     30,827        7.2
                                                 

Total other loans

    62,404        13.3     84,513        17.6     97,852        21.2     108,588        24.5     119,453        27.9
                                                                               

Less:

                   

Deferred loan origination (fees) cost, net

    (383     -0.1     (295     -0.1     (338     -0.1     (290     -0.1     (298     -0.1
                                                                               

Total loans

    470,484        100.0     481,176        100.0     460,626        100.0     442,875        100.0     427,948        100.0
                                                                               

Allowance for loan losses

    (10,015       (10,359       (8,860       (8,314       (7,496  
                                                 

Total loans, net

  $ 460,469        $ 470,817        $ 451,766        $ 434,561        $ 420,452     
                                                 

During 2010, loans receivable decreased by $10.7 million, or 2.2%, to $470.5 million as of December 31, 2010. The decline in loans during the year is attributable to reduced loan demand in the Company’s markets and to net loan charge-offs of nearly $16.0 million. In the third quarter 2010, the Company reported a large charge-off due to alleged borrower fraud in connection with one of its largest loan relationships. Net of recoveries, this charge off totaled $10.1 million and is included in the $16.0 million for 2010.

The majority of the Company’s loan portfolio is comprised of real estate loans. This category, which includes both commercial and consumer loan balances, increased from 82.5% of the portfolio at December 31, 2009 to 86.8% at December 31, 2010. Total real estate loans increased by $11.5 million during the year as result of a $13.8 million increase in construction loans that offset declines on other real estate loan categories. The increase in construction loans in 2010 from 2009 was comprised of a $7.5 million increase in residential construction loans and a $6.3 million increase in other construction loans. The most significant shift in the overall portfolio was in the commercial and industrial category, which declined by $21.3 million due to the losses from the alleged borrower fraud previously mentioned and reduced loan demand from borrowers.

Management 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

 

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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

The Company originates construction loans for the purpose of acquisition, development, and construction of both residential and commercial properties (“ADC” loans).

ADC Loans

As of December 31, 2010

(dollars are in thousands)

 

     Construction     Land and Land
Development
    Total  

Total ADC loans

   $ 60,043      $ 24,507      $ 84,550   

Average Loan Size

   $ 170      $ 345     

Percentage of total loans

     12.76     5.21     17.97

Non-accrual loans

   $ 510      $ 428      $ 938   

At December 31, 2010, total ADC loans represent 17.97% or $84.6 million of the total loan portfolio. Less than $1 million of the ADC portfolio are in non-accrual status. This represents 1.11% 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.

Included in ADC loans and residential real estate loans as of December 31, 2010 were loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $6.9 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $12.7 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 30.7% of total risk based capital as of December 31, 2010, 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   

At December 31, 2009, total ADC loans represented 14.70%, or $70.7 million, of the total loan portfolio. $2.0 million of the ADC portfolio were in non-accrual status as of December 31, 2009, which represented 2.89% of all ADC loans.

Included in ADC loans and residential real estate loans as of December 31, 2009 were loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $10.8 million in non 1-4 residential loans

 

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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.

Business Sector Concentrations

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

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

 

Product Line

   At
December  31,
2010
     % of
Risk Based
Capital
 

1 to 4 Family Rental

   $ 26,992         42

Office Building

   $ 30,265         47

At December 31, 2010 the Company had two product type groups which exceeded this guideline; 1-4 Family Rental and Office Buildings. The 1-4 Family Rental group represented 42% of Risk-Based Capital or $27.0 million and Office Buildings were 47% of Risk-Based Capital or $30.3 million. All other commercial real estate groups were well under the 40% threshold.

 

Product Line

   At
December  31,
2009
     % of
Risk Based
Capital
 

1 to 4 Family Rental

   $ 29,851         44

Office Building

   $ 26,749         39

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.

The Company’s concentration in the 1 –4 Family Rental group decreased from 44% of Risk- Based Capital at December 31, 2009 to 42% of Risk-Based Capital at December 31, 2010. Management does not feel that this level of concentration poses undue risk to the Company.

The Company’s concentration in the Office Building group increased from 39% of Risk-Based Capital at December 31, 2009 to 47% of Risk-Based Capital at December 31, 2010. This increase is almost completely attributed to additional funding to one relationship that management believes was underwritten extensively, with good debt service coverage, good collateral in prime locations, and strong guarantor support. Management does not feel that this increased exposure and this level of concentration poses undue risk to the Company.

 

- 26 -


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 at December 31, 2010.

 

     ADC Loans      Percent     HELOC      Percent  

Harnett County

   $ 6,029         7.1   $ 7,572         19.0

Cumberland County

     26,113         30.9     5,142         12.9

All other locations

     52,408         62.0     27,224         68.1
                                  

Total

   $ 84,550         100.0   $ 39,938         100.0
                                  

Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2009.

 

     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
                                  

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At December 31, 2010, the Company had $107.4 million in loans that had terms permitting interest only payments. This represented 22.8% of the total loan portfolio. At December 31, 2009, the Company had $157.2 million in loans that had terms permitting interest only payments. This represented 32.7% of the total loan portfolio. At December 31, 2010, $10.6 million of the decrease in loans within this risk category from the levels at December 31, 2009 was the result of the third quarter charge-off by the Company due to alleged borrower fraud in connection with one of the Bank’s largest loan relationships. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio are interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit concentrations totaled $52.1 million or 11.1% of total loans at December 31, 2010 compared to $40.6 million or 8.5% of total loans at December 31, 2009. The Company’s ten largest customer loan relationship concentrations totaled $72.1 million, or 15.3% of total loans, at December 31, 2010 compared to $78.2 million, or 16.2% of total loans. at 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 as experienced by the Company with the $10.1 million net charge-off from the alleged fraud involving one of its largest customer relationships.

 

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Maturities and Sensitivities of Loans to Interest Rates

The following table presents the maturity distribution of the Company’s loans at December 31, 2010. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index such as the prime rate:

 

     At December 31, 2010  
     Due within
one year
     Due after one
year but within
five years
     Due after
five years
     Total  
     (dollars in thousands)  

Fixed rate loans:

           

1 to 4 Family Residential

   $ 14,169       $ 31,770       $ 1,169       $ 47,108   

Commercial Real Estate

     22,501         87,933         10,033         120,467   

Multi-family Residential

     7,434         16,276         29         23,739   

Construction

     6,393         10,704         123         17,220   

Home equity lines of credit

     4         83         —           87   

Commercial and Industrial

     5,153         15,855         74         21,082   

Loans to individuals & overdrafts

     2,419         4,726         159         7,304   
                                   

Total at fixed rates

     58,073         167,347         11,587         237,007   
                                   

Variable rate loans:

           

1 to 4 Family Residential

     2,657         6,214         1,284         10,155   

Commercial Real Estate

     27,811         36,213         3,222         67,246   

Multi-family Residential

     3,131         3,218         —           6,349   

Construction

     37,041         29,270         81         66,392   

Home equity lines of credit

     428         1,119         38,207         39,754   

Commercial and Industrial

     19,352         7,445         1,161         27,958   

Loans to individuals & overdrafts

     3,262         1,264         918         5,444   
                                   

Total at variable rates

     93,682         84,743         44,873         223,298   
                                   

Subtotal

     151,755         252,090         56,460         460,305   

Non-accrual loans

     6,664         2,983         915         10,562   
                                   

Gross loans

   $ 158,419       $ 255,073       $ 57,375      
                             

Deferred loan origination (fees) costs, net

              (383
                 

Total loans

            $ 470,484   
                 

The Company may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company’s best interest. In such instances, the Company generally requires payment of accrued interest and may require a principal reduction or modify other terms of the loan at the time of renewal.

Past Due Loans and Nonperforming Assets

At December 31, 2010, the Company had $2.1 million in loans that were 30 days or more past due. This represented 0.46% of gross loans outstanding on that date. This is a slight increase from December 31, 2009 when there were $2.0 million in loans that were past due 30 days or more, or 0.41% of gross loans outstanding. Non-accrual loans decreased by $5.4 million from $16.0 million at December 31, 2009 to $10.6 million at December 31, 2010. As of December 31, 2010, the Company had identified ten loans totaling $3.3 million that were considered to be troubled debt restructured of which two loans totaling

 

- 28 -


$1.7 million were still accruing. At December 31, 2009, the Company had no troubled debt restructured loans. There were no loans that were 90 days or more past due and still in accruing status at either December 31, 2010 or December 31, 2009.

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,  
     2010     2009     2008     2007     2006  
     (dollars in thousands)  

Non-accrual loans

   $ 10,562      $ 16,048      $ 8,630      $ 5,007      $ 2,657   

Restructured loans

     1,688        —          —          —          562   
                                        

Total non-performing loans

     12,250        16,048        8,630        5,007        3,219   
                                        

Foreclosed real estate

     3,655        2,530        2,799        542        164   

Repossessed assets

     —          —          —          34        —     
                                        

Total non-performing assets

   $ 15,905      $ 18,578      $ 11,429      $ 5,583      $ 3,383   
                                        

Accruing loans past due 90 days or more

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

Allowance for loan losses

   $ 10,015      $ 10,359      $ 8,860      $ 8,314      $ 7,496   

Non-performing loans to period end loans

     2.60     3.34     1.87     1.13     0.75

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

     2.60     3.34     1.87     1.13     1.03

Allowance for loans losses to period end loans

     2.13     2.15     1.92     1.88     1.75

Allowance for loan losses to non-performing loans

     82     65     103     166     233

Allowance for loan losses to non-performing assets

     63     56     78     149     222

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

     63     56     78     149     164

Non-performing assets to total assets

     2.54     2.95     1.89     0.94     0.61

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

     2.54     2.95     1.89     0.94     0.83

In addition to the nonperforming assets summarized above, the Company had $5.9 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, 2010, approximately the same as the $16.5 million at December 31, 2009. Impaired loans have been evaluated by management in accordance with Accounting Standards Codification (“ASC”) 310 and $3.3 million has been included in the allowance for loan losses as of December 31, 2010 for these loans. All troubled debt restructured assets are included within impaired loans as of December 31, 2010 and in non-accrual status except two loans totaling $1.7 million which were still accruing.

 

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Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to expense and represents management’s best estimate of probable loans losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur The provision for loan losses reflect loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices. Included in the allowance are specific reserves on loans that are considered to be impaired which are identified and measured in accordance with ASC 310.

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,  
     2010      % of
Total
loans
    2009      % of
Total
loans
    2008      % of
Total
loans
    2007      % of
Total
loans
    2006      % of
Total
loans
 
     (dollars in thousands)  

1 to 4 Family Residential

   $ 2,483         12.83   $ 1,854         14.55   $ 1,437         14.62   $ 682         13.94   $ 133         13.99

Commercial Real Estate

     3,111         41.13     4,281         40.56     2,761         36.88     2,135         29.95     2,078         26.59

Multi- family Residential

     640         6.40     200         4.69     115         4.07     64         3.02     241         3.13

Construction

     349         17.97     629         14.70     1,039         14.29     586         19.15     1,593         18.60

Home equity lines of credit

     850         8.49     1,189         8.00     499         8.97     319         9.49     169         9.84

Commercial and Industrial

     1,052         10.51     1,699         14.70     2,381         16.70     4,270         18.52     2,022         20.71

Loans to individuals & overdrafts

     1,530         2.76     501         2.86     563         4.54     221         6.04     1,254         7.20

Deferred loan originations fees, net

     —           (0.09 )%      —           (0.06 )%      —           (0.07 )%      —           (0.11 )%      —           (0.07 )% 
                                                                                     
        100.00        100.00        100.00        100.00        100.00

Total allocated

     10,015           10,353           8,795           8,277           7,490      

Unallocated

     —             6           65           37           6      
                                                       

Total

   $ 10,015         $ 10,359         $ 8,860         $ 8,314         $ 7,496      
                                                       

The allowance for loan losses decreased by $344,000 during 2010 to 2.13% of gross loans at December 31, 2010 from 2.15% at December 31, 2009. The change in the allowance during 2010 resulted from net charge-offs of nearly $16.0 million, partially offset by provisions for loan losses of $15.6 million. The net charge-offs reduced the specific reserves on impaired loans while increasing our historical loss ratios which increased the general reserves on the performing loan portfolio. General reserves totaled $6.7 million or 1.42% of gross loans outstanding as of December 31, 2010, and increase from year-end 2009 when they totaled $6.2 million or 1.28% of loans outstanding. At December 31, 2010, specific reserves on impaired loans constituted $3.3 million or 0.71% of gross loans outstanding compared to $4.2 million or 0.87% of loans outstanding as of December 31, 2009. Although net charge-offs have increased from 2009 to 2010, the majority of the increase is attributable to the previously mentioned alleged loan fraud which was included in the general reserves until the relationship was charged off when it was discovered in the third quarter.

 

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

 

     As of December 31,  
     2010     2009     2008     2007     2006  
     (dollars are in thousands)  

Allowance for loan losses at beginning of year

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

Provision for loan losses

     15,634        5,472        4,283        5,974        2,779   
                                        
     25,993        14,332        12,597        13,470        8,077   
                                        

Loans charged off:

          

1 to 4 Family Residential

     (2,254     (567     (678     (471     (92

Multi-family Residential and Commercial

     (2,811     —          —          (572     (29

Construction

     (464     (168     (118     (130     —     

Home equity lines of credit

     (496     (404     (448     (127     —     

Commercial and Industrial

     (11,967     (2,932     (2,836     (3,878     (835

Loans to individuals & overdrafts

     (421     (352     (270     (626     (181
                                        

Total charge-offs

     (18,413     (4,423     (4,350     (5,804     (1,137
                                        

Recoveries of loans previously charged off:

          

1 to 4 Family Residential

     15        69        145        119        28   

Multi-family Residential and Commercial

     1,023        —          —          37        —     

Construction

     137        12        33        4        —     

Home equity lines of credit

     44        7        —          —          —     

Commercial and Industrial

     1,121        325        373        325        58   

Loans to individuals & overdrafts

     95        37        62        163        66   
                                        

Total recoveries

     2,435        450        613        648        152   
                                        

Net charge-offs

     (15,978     (3,973     (3,737     (5,156     (985
                                        

Allowance acquired from Progressive State Bank

     —          —          —          —          404   
                                        

Allowance for loan losses at end of year

   $ 10,015      $ 10,359      $ 8,860      $ 8,314      $ 7,496   
                                        

Ratios:

          

Net charge-offs as a percent of average loans

     3.30     0.84     0.83     1.15     0.27

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

     2.13     2.15     1.92     1.88     1.75

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 (“GAAP”), 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 level of the allowance for loan losses as of December 31, 2010 is appropriate in light of the risk inherent within the Company’s loan portfolio.

 

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Other Assets

At December 31, 2010 non-earning assets totaled $46.7 million, an increase of $4.8 million from $41.9 million at December 31, 2009. Non-earning assets at December 31, 2010 consisted of: cash and due from banks of $8.6 million, premises and equipment totaling $12.9 million, foreclosed real estate totaling $3.7 million, accrued interest receivable of $2.5 million, bank owned life insurance of $7.7 million and others totaling $11.3 million which includes a $2.3 million prepayment in FDIC deposit insurance for the years 2011, and 2012 and net deferred taxes and taxes receivable of $6.9 million. The Company’s goodwill was considered impaired and written off in 2009.

The Company has an investment in bank owned life insurance of $7.7 million, which increased $0.3 million from December 31, 2009. 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, 2010 were $534.6 million and consisted of $70.4 million in non-interest-bearing demand deposits, $97.1 million in money market and NOW accounts, $22.5 million in savings accounts, and $344.6 million in time deposits. Total deposits decreased by $5.7 million from $540.3 million as of December 31, 2009. Non-interest-bearing demand deposits decreased by $1.9 million from $72.3 million as of December 31, 2009. During 2010, the Company had a targeted advertising campaign featuring a special MMDA rate. This resulted in the $3.4 million increase in MMDA and NOW accounts. Savings accounts were also affected by this special rate offering and decreased by $3.9 million. Time deposits decreased by $3.3 million during 2010.

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,  
     2010     2009     2008     2007     2006  
     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

   $ 124,974         0.94   $ 108,240         1.22   $ 96,191         1.68   $ 97,370         2.55   $ 87,264         2.56

Time deposits > $100,000

     172,120         2.36     166,641         3.19     153,619         4.38     144,039         5.01     107,855         4.31

Other time deposits

     175,830         2.19     187,687         3.11     187,247         4.30     181,013         5.16     154,864         4.89
                                                       

Total interest-bearing deposits

     472,924         1.92     462,568         2.70     437,057         3.75     422,422         4.51     349,983         4.13

Noninterest-bearing deposits

     75,844         —          65,276         —          67,131         —          71,567         —          62,094         —     
                                                       

Total deposits

   $ 548,768         1.66   $ 527,844         2.36   $ 504,188         3.25   $ 493,989         3.85   $ 412,077         3.51
                                                       

Short Term and Long Term Debt

As of December 31 2010, the Company had $23.7 million in short-term debt, which included $19.7 million in repurchase agreements and $4.0 million in FHLB Advances, and $16.4 million in long-term debt, which included $12.4 million in junior subordinated debentures issued to New Century Statutory Trust I in connection with the Company’s issuance of trust preferred securities in September 2004 and $4.0 million in FHLB Advances.

Shareholders’ Equity

Total shareholders’ equity at December 31, 2010 was $49.7 million, a decrease of $4.7 million from $54.4 million as of December 31, 2009. Changes in shareholders’ equity included a $5.0 million net loss

 

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primarily as a result of a $10.8 million charge-off pertaining to an alleged fraud net of tax benefit, an increase of $332,000 from stock options exercised, an increase of $148,000 from stock based compensation, a $16,000 tax benefit due to the exercise of stock options and a $258,000 other comprehensive loss.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

Overview

During 2010, New Century Bancorp incurred a net loss of $5.0 million compared to a net loss of $8.4 million for 2009. Both basic and diluted loss per share for the year ended December 31, 2010 were $0.72, compared with basic and diluted loss per share of $1.24 for 2009. The decrease in net loss is primarily due to a $10.8 million charge-off pertaining to an alleged fraud net of tax benefit in 2010 compared to a goodwill impairment charge of $8.7 million with no tax benefit in 2009. These negative factors are partially offset by increase in net interest income of $4.0 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 $4.0 million to $23.9 million for the year ended December 31, 2010. The Company’s total interest income benefited from growth in interest earning assets that were offset by a low interest rate environment in 2010 that began in 2008 when the Federal Reserve lowered interest rates by more than 400 basis points. Average total interest-earnings assets were $599.2 million in 2010 compared with $578.4 million in 2009. The yield on those assets decreased by 8 basis points from 5.73% in 2009 to 5.65% in 2010. 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 $313,000 in 2010 and $423,000 in 2009. Meanwhile, average interest-bearing liabilities increased by $12.2 million from $498.8 million for the year ended December 31, 2009 to $511.0 million for the year ended December 31, 2010. Cost of funds decreased by 74 basis points in 2010 to 1.89% from 2.63% in 2009. In 2010, the Company’s net interest margin was 4.03% and net interest spread was 3.75%. In 2009, net interest margin was 3.49% and net interest spread was 3.12%.

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 $15.6 million provision for loan losses in 2010, an increase of $10.1 million from the $5.5 million provision that was recorded in 2009. The 2010 provision for loan losses was impacted by the $10.1 million net charge-off pertaining to the previously mentioned alleged fraud. For more information

 

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on changes in the allowance for loan losses, refer to Note D of the financial statements in the section titled Allowance for Loan Losses.

Non-Interest Income

Non-interest income for the year ended December 31, 2010 was $2.7 million down $400,000 from 2009. When compared to last year, the Company had a decrease in deposit service fees and charges of $359,000, or 18%. Fees from pre-sold mortgages decreased to $226,000 in 2010, a decline of $102,000 or 31% as compared to 2009, primarily as a result of continued softness in the real estate market. Other non-interest income remained approximately the same at nearly $800,000 in both 2010 and 2009.

Non-Interest Expenses

Non-interest expenses decreased by $6.8 million or 26% to $19.2 million for the year ended December 31, 2010, from $26.0 million for the same period in 2009, primarily as the result of the goodwill impairment write-off of $8.7 million in 2009. Salaries and employee benefits increased $700,000 to $9.4 million for the year ended December 31, 2010 as compared to the same period in 2009. Occupancy and equipment expenses were approximately the same at $1.6 million for both the years ended December 31, 2010 and 2009. The following highlight other changes in non-interest expenses from 2009 to 2010:

 

   

Data processing and other outsourced service expenses increased $100,000 to $1.6 million for the year ended December 31, 2010 from $1.5 million for the same period in 2009, primarily as a result of the core system conversion.

 

   

Losses on the write down of foreclosed real estate increased to $656,000 in 2010 from $565,000 in 2009, a $91,000 or 16% increase.

 

   

FDIC assessments decreased by approximately $350,000 or 27% in 2010 to $1.0 million as compared to the same period in 2009, primarily as the result of the one-time special assessment in 2009.

 

   

Other operating expense increased from $3.7 million in 2009 to $5.0 million in 2010 primarily as a result of a $1.0 million increase in professional service expenses from $1.1 million in 2009 to $2.1 million in 2010, as a result of a $460,000 increase in legal lending services and a $600,000 increase in other professional fees primarily to develop and implement an earnings enhancement and cost containment program.

Provision for Income Taxes

The Company’s effective tax rate in 2010 was a tax benefit of 39.9%. This is the result of a net operating loss in addition to non taxable income in 2010, as compared to a 0.9% benefit offset by non taxable income and an adverse permanent difference resulting from the goodwill impairment write-off in 2009. For further discussion pertaining to the Company’s deferred tax analysis see the section titled Deferred Tax Asset under Critical Accounting Policies.

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.

 

- 34 -


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

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.

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 the prior 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.

 

- 35 -


   

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.

 

- 36 -


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. Non-accrual loans have been included in determining average loans.

 

     For the Years Ended December 31,  
     2010     2009     2008  
     (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

   $ 474,849      $ 30,908         6.51   $ 462,247      $ 29,709         6.39   $ 444,094      $ 30,900         6.96

Investment securities

     87,261        2,870         3.29     91,709        3,533         3.85     80,278        3,986         4.97

Other interest-earning assets

     37,042        66         .18     24,416        43         0.18     30,426        617         2.03
                                                                           

Total interest-earning assets

     599,152        33,844         5.65     578,372        33,286         5.73     554,798        35,503         6.40
                                                                           

Other assets

     48,704             51,915             45,115        
                                       

Total assets

   $ 647,856           $ 630,287           $ 599,913        
                                       

INTEREST-BEARING LIABILITIES:

                     

Deposits:

                     

Savings, NOW and money market

   $ 124,974        1,180         .94   $ 108,240        1,317         1.22   $ 96,191        1,618         1.68

Time deposits over $100,000

     172,120        4,068         2.36     166,641        5,312         3.19     153,620        6,661         4.34

Other time deposits

     175,830        3,853         2.19     187,687        5,843         3.11     187,247        8,129         4.34

Borrowings

     38,107        579         1.52     36,263        650         1.79     30,987        964         3.11
                                                                           

Total interest-bearing liabilities

     511,031        9,680         1.89     498,831        13,122         2.63     468,045        17,372         3.71
                                                                           

Non-interest-bearing deposits

     75,843             65,276             67,131        

Other liabilities

     6,232             2,597             2,630        

Shareholders’ equity

     54,750             63,584             62,107        
                                       

Total liabilities and shareholders’ equity

   $ 647,856           $ 630,287           $ 599,913        
                                       

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

     $ 24,164         3.75     $ 20,164         3.12     $ 18,131         2.69
                                                         

Net interest margin (taxable-equivalent basis)

          4.03          3.49          3.27
                                       

Ratio of interest-earning assets to interest-bearing liabilities

     117.24          115.95          118.54     
                                       

Reported net interest income

                     

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

     $ 24,164         4.03     $ 20,164         3.49     $ 18,131         3.27

Less:

                     

taxable-equivalent adjustment

       234             256             266      
                                       

Net Interest Income

     $ 23,930           $ 19,908           $ 17,865      
                                       

 

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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     Year Ended     Year Ended  
     December 31, 2010 vs. 2009     December 31, 2009 vs. 2008     December 31, 2008 vs. 2007  
     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

   $ 815      $ 384      $ 1,199      $ 1,215      $ (2,409   $ (1,194   $ 160      $ (6,095   $ (5,935

Investment securities

     (159     (505     (664     504        (957     (453     1,073        (239     834   

Other interest-earning assets

     23        —          23        (66     (508     (574     (353     (911     (1,264
                                                                        

Total interest income (taxable-equivalent basis)

     679        (121     558        1,653        (3,874     (2,221     880        (7,245     (6,365
                                                                        

Interest expense:

                  

Deposits:

                  

Savings, NOW and money market

     181        (318     (137     175        (476     (301     (30     (836     (866

Time deposits over $100,000

     152        (1,396     (1,244     490        (1,838     (1,348     480        (1,030     (550

Other time deposits

     (314     (1,676     (1,990     16        (2,302     (2,286     322        (1,542     (1,220

Borrowings

     31        (102     (71     129        (443     (314     169        (814     (645
                                                                        

Total interest expense

     50        (3,492     (3,442     810        (5,059     (4,249     941        (4,222     (3,281
                                                                        

Net interest income
Increase/(decrease) (taxable-equivalent basis)

   $ 629      $ 3,371        4,000      $ 843      $ 1,185        2,028      $ (61   $ (3,023     (3,084
                                                                        

Less:

                  

Taxable-equivalent adjustment

         —              —              1   
                                    

Net interest income
Increase/(decrease)

       $ 4,000          $ 2,028          $ (3,083
                                    

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 20.1% and 19.9% of total assets at December 31, 2010 and 2009 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 $44.0 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

 

- 38 -


assets, subject to our available collateral. A floating lien of $41.1 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 $2.0 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 $19.7 million and FHLB advances of $8.0 million.

At December 31, 2010, the Company’s outstanding commitments to extend credit consisted of loan commitments of $33.2 million, undisbursed lines of credit of $49.7 million, and letters of credit of $1.2 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 $534.6 million and $540.3 million at December 31, 2010 and 2009, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 64.5% and 64.4% of total deposits at December 31, 2010 and 2009, respectively. Time deposits of $100,000 or more represented 31.8% and 31.2%, respectively, of the total deposits at December 31, 2010 and 2009. 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. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for New Century Bancorp’s current cash flow needs. Chapter 53, Article 7 of the North Carolina General Statutes prohibits banks from declaring and paying dividends at any time during the period that a bank has an accumulated deficit. At December 31, 2010 the Bank has an accumulated deficit of $1.2 million.

 

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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 7.93% at December 31, 2010. As the following table indicates, at December 31, 2010, the Company and its bank subsidiary exceeded regulatory capital requirements.

 

     At December 31, 2010  
     Actual
Ratio
    Minimum
Requirement
    Well-Capitalized
Requirement
 

New Century Bancorp, Inc.

      

Total risk-based capital ratio

     12.71     8.00     N/A   

Tier 1 risk-based capital ratio

     11.45     4.00     N/A   

Leverage ratio

     9.17     4.00     N/A   

New Century Bank

      

Total risk-based capital ratio

     12.36     8.00     10.00

Tier 1 risk-based capital ratio

     11.10     4.00     6.00

Leverage ratio

     8.84     4.00     5.00

During 2004, the Company issued $12.4 million of junior subordinated debentures to a special purpose subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds provided additional capital for the 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.

 

- 40 -


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, 2010, 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.

 

- 41 -


     Terms to Re-pricing at December 31, 2010  
     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

   $ 293,696      $ 132,981      $ 29,676      $ 14,131      $ 470,484   

Securities, available for sale

     37,168        33,324        6,944        12,463        89,899   

Interest-earning deposits in other banks

     20,089        —          —          —          20,089   

Federal funds sold

     7,183        —          —          —          7,183   

Stock in FHLB of Atlanta

     1,448        —          —          —          1,448   

Other non marketable securities

     1,082        —          —          —          1,082   
                                        

Total interest-earning assets

   $ 360,666      $ 166,305      $ 36,620      $ 26,594      $ 590,185   
                                        

Interest-bearing liabilities:

          

Deposits:

          

Savings, NOW and money market

   $ 72,708      $ 46,929      $ —        $ —        $ 119,637   

Time

     111,238        35,483        27,998        —          174,719   

Time over $100,000

     99,531        35,876        34,473        —          169,880   

Short term debt

     23,666        —          —          —          23,666   

Long term debt

     12,372        4,000        —          —          16,372   
                                        

Total interest-bearing liabilities

   $ 319,515      $ 122,288      $ 62,471      $ —        $ 504,274   
                                        

Interest sensitivity gap per period

   $ 41,151      $ 44,017      $ (25,851   $ 26,594      $ 85,911   

Cumulative interest sensitivity gap

   $ 41,151      $ 85,168      $ 59,317      $ 85,911      $ 85,911   

Cumulative gap as a percentage of total interest-earning assets

     11.41     16.16     10.52     14.56     14.56

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

     112.88     119.28     111.76     117.04     117.04

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 deferred tax asset.

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.

 

- 42 -


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.

Deferred Tax Asset

The Company’s net deferred tax asset was $5.6 million at December 31, 2010 and $2.3 million at December 31, 2009, respectively. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of December 31 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset and need for valuation allowance. Significant negative trends in credit quality, losses from operations, etc. could impact the realization of the deferred tax asset in the future.

The Company has a history of earnings and no history of expiration of loss carry-forwards. We believe our forecasted earnings provide positive evidence to support a conclusion that a valuation allowance is not needed. Management closely monitors the previous twelve quarters of income (loss) before income taxes in evaluating the need for a deferred tax asset valuation allowance which is called the cumulative loss test. This test excludes the net charge-off relating to the alleged fraud in 2010 and the goodwill impairment in 2009, as both are losses of infrequent nature and are aberrations rather than continuing conditions. As of December 31, 2010, the Company passed the cumulative loss test by $2.3 million excluding the previously mentioned one-time non-recurring charge-off pertaining to the alleged fraud by a large relationship borrower and the previously discussed goodwill impaired charge. The Company also passed the cumulative loss test by $159,000 as of December 31, 2009 due to exclusion of Goodwill Impairment. The Company feels confident that deferred tax assets are more likely than not to be realized. Although the Company had positive earnings in the first and second quarters of 2010, a net loss was recorded for the third quarter returning to positive earnings in the fourth quarter. If the recent yearly trends in losses continue and negative evidence grows, a valuation allowance may be necessary going forward.

 

- 43 -


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, 2010.

 

     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

   $ 23,666       $ 23,666       $ —         $ —         $ —     

Long term debt

     16,372         —           4,000         —           12,372   

Lease obligations

     1,737         121         199         218         1,199   

Deposits

     534,599         394,813         73,440         66,346         —     
                                            

Total contractual cash obligations

   $ 576,374       $ 418,600       $ 77,639       $ 66,564       $ 13,571   
                                            

 

 

- 44 -


The following table reflects other commitments outstanding as of December 31, 2010.

 

     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

   $ 24,333       $ 551       $ 15       $ 69       $ 23,698   

Other commitments and credit lines

     25,335         21,016         454         617         3,248   

Un-disbursed portion of constructions loans

     33,229         19,563         13,578         88         —     

Letters of credit

     1,245         868         312         —           65   
                                            

Total commercial commitments

   $ 84,142       $ 41,998       $ 14,359       $ 774       $ 27,011   
                                            

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.

The Company does not undertake a duty to update any forward-looking statements in this report.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

- 45 -


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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes PLLC

Raleigh, North Carolina

March 31, 2011

 

- 46 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

 

 

     2010     2009  
     (In thousands, except share
and per share data)
 

ASSETS

    

Cash and due from banks

   $ 8,630      $ 9,612   

Interest-earning deposits in other banks

     20,089        12,647   

Federal funds sold

     7,183        6,676   

Investment securities available for sale, at fair value

     89,899        96,259   

Loans

     470,484        481,176   

Allowance for loan losses

     (10,015     (10,359
                

NET LOANS

     460,469        470,817   

Accrued interest receivable

     2,488        2,590   

Stock in Federal Home Loan Bank of Atlanta, at cost

     1,448        1,133   

Other non marketable securities

     1,082        1,004   

Foreclosed real estate

     3,655        2,530   

Premises and equipment

     12,930        12,191   

Bank owned life insurance

     7,727        7,465   

Core deposit intangible

     699        853   

Other assets

     10,597        6,642   
                

TOTAL ASSETS

   $ 626,896      $ 630,419   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits:

    

Demand

   $ 70,363      $ 72,294   

Savings

     22,541        26,407   

Money market and NOW

     97,096        93,677   

Time

     344,599        347,884   
                

TOTAL DEPOSITS

     534,599        540,262   

Short term debt

     23,666        20,564   

Long term debt

     16,372        12,372   

Accrued interest payable

     395        349   

Accrued expenses and other liabilities

     2,172        2,463   
                

TOTAL LIABILITIES

     577,204        576,010   
                

Shareholders’ Equity

    

Common stock, $1 par value, 10,000,000 shares authorized; 6,913,636 and 6,837,952 shares issued and outstanding at December 31, 2010 and 2009, respectively

     6,914        6,838   

Additional paid-in capital

     41,887        41,467   

Retained earnings (deficit)

     (287     4,668   

Accumulated other comprehensive income

     1,178        1,436   
                

TOTAL SHAREHOLDERS’ EQUITY

     49,692        54,409   
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 626,896      $ 630,419   
                

See accompanying notes.

 

- 47 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2010, 2009 and 2008

 

 

     2010     2009     2008  
     (In thousands, except share and per share data)  

INTEREST INCOME

      

Loans

   $ 30,896      $ 29,694      $ 30,887   

Investments

     2,646        3,293        3,733   

Federal funds sold and interest-earning deposits

     68        43        617   
                        

TOTAL INTEREST INCOME

     33,610        33,030        35,237   
                        

INTEREST EXPENSE

      

Money market, NOW and savings deposits

     1,180        1,317        1,618   

Time deposits

     7,921        11,155        14,790   

Short term debt

     276        280        304   

Long term debt

     303        370        660   
                        

TOTAL INTEREST EXPENSE

     9,680        13,122        17,372   
                        

NET INTEREST INCOME

     23,930        19,908        17,865   

PROVISION FOR LOAN LOSSES

     15,634        5,472        4,283   
                        

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     8,296        14,436        13,582   
                        

NON-INTEREST INCOME

      

Service fees and charges

     1,641        2,000        1,846   

Fees from presold mortgages

     226        328        514   

Other

     811        770        764   
                        

TOTAL NON-INTEREST INCOME

     2,678        3,098        3,124   
                        

NON-INTEREST EXPENSE

      

Salaries and employee benefits

     9,370        8,706        8,705   

Occupancy and equipment

     1,557        1,560        1,526   

Data processing and other outsourced services

     1,625        1,484        1,540   

Loss on repurchase of loan participation

     —          —          357   

Loss on write down of foreclosed real estate

     656        565        239   

Refund of SBA premiums

     —          —          125   

FDIC deposit insurance assessment

     956        1,307        525   

Goodwill impairment

     —          8,674        —     

Other

     5,049        3,753        4,121   
                        

TOTAL NON-INTEREST EXPENSE

     19,213        26,049        17,138   
                        

LOSS BEFORE INCOME TAX BENEFIT

     (8,239     (8,515     (432

INCOME TAX BENEFIT

     (3,284     (73     (239
                        

NET LOSS

   $ (4,955   $ (8,442   $ (193
                        

NET LOSS PER COMMON SHARE

      

Basic

   $ (.72   $ (1.24   $ (.03
                        

Diluted

   $ (.72   $ (1.24   $ (.03
                        

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

      

Basic

     6,875,845        6,834,595        6,809,437   
                        

Diluted

     6,875,845        6,834,595        6,809,437   
                        

See accompanying notes.

 

- 48 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2010, 2009 and 2008

 

 

     2010     2009     2008  
     (Amounts are in thousands)  

NET LOSS

   $ (4,955   $ (8,442   $ (193
                        

OTHER COMPREHENSIVE INCOME (LOSS)

      

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

     (385     (4     1,996   

Tax effect

     127        1        (769
                        

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

     (258     (3     1,227   
                        

COMPREHENSIVE INCOME (LOSS)

   $ (5,213   $ (8,445   $ 1,034   
                        

See accompanying notes.

 

- 49 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2010, 2009 and 2008

 

 

     Common stock      Additional
paid-in
capital
     Retained
earnings
(deficit)
    Accumulated
other comprehensive
income (loss)
    Total
shareholders’
equity
 
     Shares      Amount            
     (Amounts in thousands, except share data)  

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   

Net loss

     —           —           —           (4,955     —          (4,955

Other comprehensive loss

     —           —           —           —          (258     (258

Stock options exercises

     75,684         76         256         —          —          332   

Compensation expense recognized

     —           —           148         —          —          148   

Tax benefit from option exercises

     —           —           16         —          —          16   
                                                   

Balance at December 31, 2010

     6,913,636       $ 6,914       $ 41,887       $ (287   $ 1,178      $ 49,692   
                                                   

See accompanying notes.

 

- 50 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2010, 2009 and 2008

 

 

     2010     2009     2008  
     (Amounts in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net loss

   $ (4,955   $ (8,442   $ (193

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

      

Depreciation and amortization of premises and equipment

     751        817        981   

Amortization and accretion of investment securities

     836        529        (215

Amortization of deferred loan fees and costs

     (176     (182     (167

Loss on write down of other assets

     —          13        —     

Loss on sale of premises and equipment

     11        26        22   

Provision for loan losses

     15,634        5,472        4,283   

Deferred income taxes

     (2,405     (1,008     (427

Stock based compensation expense

     148        160        188   

Net loss on sale and write downs of foreclosed real estate

     656        565        239   

Loss (gain) on mortgage-backed securities pay-downs

     37        4        (73

Loss on repurchase of loan participation

     —          —          357   

Increase in cash surrender value of BOLI

     (262     (262     (268

Amortization of core deposit intangible

     154        153        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

     102        (71     663   

(Increase) decrease in other assets

     (1,444     (2,804     (208

(Decrease) in accrued expenses and other liabilities

     (242     370        (226
                        

NET CASH PROVIDED BY OPERATING ACTIVITIES

     8,845        4,065        5,110   
                        

CASH FLOWS FROM INVESTING ACTIVITIES

      

Purchase of investment securities available for sale

     (21,836     (38,664     (30,100

Maturities of investment securities available for sale

     15,796        12,586        16,861   

Mortgage-backed securities pay-downs

     11,104        12,215        9,403   

Purchase of other non-marketable securities

     (100     (75     (500

Net increase in gross loans outstanding

     (11,223     (22,219     (9,463

Repurchase of loan participations

     —          (4,269     (11,197

Redemption (purchase) of FHLB stock

     (315     21        (67

Proceeds from sale of loans

     2,618        —          —     

Proceeds from sale of foreclosed real estate

     1,712        1,852        413   

Proceeds from the sale of premises and equipment

     5        65        18   

Purchases of premises and equipment

     (1,426     (1,064     (564
                        

NET CASH USED BY INVESTING ACTIVITIES

     (3,665     (39,552     (25,196
                        

See accompanying notes.

 

- 51 -


NEW CENTURY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31, 2010, 2009 and 2008

 

 

     2010     2009     2008  
     (Amounts in thousands)  

CASH FLOWS FROM FINANCING ACTIVITIES

      

Increase (decrease) in deposits

   $ (5,663   $ 35,143      $ 6,997   

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

     1,102        (2,611     6,208   

Net increase (decrease) in FHLB advances classified as long term debt

     (2,000     —          —     

Proceeds from short term FHLB advances

     2,000        —          —     

Proceeds from long term FHLB advances

     6,000        —          —     

Tax benefit from stock option exercises

     16        3        27   

Proceeds from stock options exercises

     332        32        513   
                        

NET CASH PROVIDED BY FINANCING ACTIVITIES

     1,787        32,567        13,745   
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     6,967        (2,920     (6,341

CASH AND CASH EQUIVALENTS, BEGINNING

     28,935        31,855        38,196   
                        

CASH AND CASH EQUIVALENTS, ENDING

   $ 35,902      $ 28,935      $ 31,855   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      

Interest paid

   $ 9,634      $ 12,887      $ 17,632   

Income tax paid

     939        624        77   

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

     (258     (3     1,227   

Transfer from loans held for sale

     —          —          3,905   

Transfer from loans to foreclosed real estate

     3,495        2,147        2,910   

Transfer from foreclosed real estate to premises and equipment

     960        —          —     

See accompanying notes.

 

- 52 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

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 19, 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 captions “Cash and due from banks,” “Interest-earning deposits in other banks,” and “Federal funds sold.”

Investment Securities Available for Sale

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

 

- 53 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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 payment obligations 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 in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonable assured. 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. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case, interest is recognized on a cash basis. Impaired loans, or portions there of, are charged off when deemed uncollectible. 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

 

- 54 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

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, 2010 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, 2010 and 2009, 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. 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 $0.7 million being amortized as of December 31, 2010, leaving a remaining net balance of $0.7 million as of that date.

 

- 55 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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. Generally accepted accounting principles (“GAAP”) 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). GAAP 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 accounting standards codification (“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:

 

     2010      2009      2008  

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

     6,875,845         6,834,595         6,809,437   

Effect of dilutive stock options

     —           —           —     
                          

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

     6,875,845         6,834,595         6,809,437   
                          

All options in 2010, 2009, and 2008 were anti-dilutive due to losses.

 

- 56 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20 entitled Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses which amends accounting standards codification (“ASC”) No. 820-10. The update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for the periods beginning on or after December 15, 2010. The adoption of this standard did not have a material impact on our financial position or results of operation.

In October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. This Update amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The amendments in this update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. The adoption of this standard did not have a material impact on our financial position or results of operation.

In January 2010, the FASB issued an ASU entitled Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements (“ASU 820”) which amends ASC 820-10. This ASU requires new disclosures: (i) of significant transfers in and out of Levels 1 and 2 with reasons for the transfers; and (ii) activity in Level 3 fair value measurements, including purchases, sales, issuances, and settlements on a gross basis. In addition, the reporting entity should provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about inputs and valuation techniques used to measure fair value of both recurring and nonrecurring fair value measurements. The ASU includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets (ASC 715-20). These amendments change the terminology from major categories of assets to classes of assets and provide a cross reference to ASC 820-10 on how to determine appropriate class to present fair value disclosures. This ASU is effective for interim and annual periods beginning after December 15, 2009, except disclosures about purchases, sales, issuances, and settlements in the roll forward of Level 3 non-recurring fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. The adoption of ASU 820 did not have a material impact on the consolidated financial statements.

The Company has adopted ASC Topic 810, Amendments to FASB Interpretation No. 46(R). The Company has not invested and does not anticipate investing in any Variable Interest Entities. This pronouncement was effective after the beginning of fiscal years beginning after November 15, 2009. The adoption of ASC Topic 810 did not have a material impact on the consolidated financial statements.

 

- 57 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

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 2008 and 2009 consolidated financial statements have been reclassified to conform to the presentation adopted for 2010. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

NOTE C - INVESTMENT SECURITIES

The amortized cost and fair value of available for sale (“AFS”), with gross unrealized gains and losses, follow:

 

     December 31, 2010  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair
value
 
     (In thousands)  

Securities available for sale:

          

U.S. government agencies

   $ 46,506       $ 592       $ (11   $ 47,087   

Mortgage-backed securities – GSE’s

     34,302         1,285         (75     35,512   

(“Government Sponsored Entities”) Municipal bonds

     7,173         196         (69     7,300   
                                  
   $ 87,981       $ 2,073       $ (155   $ 89,899   
                                  
     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   
                                  

 

- 58 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE C - INVESTMENT SECURITIES (Continued)

 

Securities with a carrying value of $38.4 million and $42.1 million at December 31, 2010 and 2009, 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, 2010 and 2009. For the investment securities with unrealized losses at December 31, 2010, 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, 2010 and December 31, 2009.

 

     2010  
     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

   $ 6,177       $ 11       $ —         $ —         $ 6,177       $ 11   

Mortgage-backed securities GSE’s

     8,395         75         —           —           8,395         75   

Municipal bonds

     1,678         69         —           —           1,678         69   
                                                     

Total temporarily impaired securities

   $ 16,250       $ 155       $ —         $ —         $ 16,250       $ 155   
                                                     

At December 31, 2010, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies, seven GSE’s and five municipal bonds had unrealized losses for less than twelve months totaling $155,000 at December 31, 2010. 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.

 

     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   

Municipal bonds

     1,630         18         —           —           1,630         18   
                                                     

Total temporarily impaired securities

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

 

- 59 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE C - INVESTMENT SECURITIES (Continued)

 

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.

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, 2010.

 

     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Securities available for sale:

     

U.S. government agencies

     

Due within one year

   $ 23,783       $ 23,946   

Due after one but within five years

     22,723         23,141   
                 
     46,506         47,087   
                 

Mortgage-backed securities – GSE’s

     

Due within one year

     2,538         2,581   

Due after one but within five years

     27,614         28,745   

Due after five but within ten years

     4,150         4,186   
                 
     34,302         35,512   
                 

Municipal bonds

     

Due within one year

     200         203   

Due after one but within five years

     1,543         1,584   

Due after five but within ten years

     3,608         3,760   

Due after ten years

     1,822         1,753   
                 
     7,173         7,300   
                 

Total securities available for sale

     

Due within one year

     26,521         26,730   

Due after one but within five years

     51,880         53,470   

Due after five but within ten years

     7,758         7,946   

Due after ten years

     1,822         1,753   
                 
   $ 87,981       $ 89,899   
                 

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.

 

- 60 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS

Following is a summary of loans at December 31, 2010 and 2009:

 

     2010     2009  
     Amount     Percent
of total
    Amount     Percent
of total
 
     (Dollars in thousands)  

Real estate loans:

        

One to four family residential

   $ 60,385        12.83   $ 69,995        14.55

Commercial

     193,502        41.13     195,165        40.56

Multi-family residential

     30,088        6.40     22,580        4.69

Construction

     84,550        17.97     70,736        14.70

Home equity lines of credit

     39,938        8.49     38,482        8.00
                                

Total real estate loans

     408,463        86.82     396,958        82.50
                                

Other loans:

        

Commercial and industrial

     49,437        10.51     70,747        14.70

Loans to individuals

     12,860        2.73     13,673        2.84

Overdrafts

     107        0.02     93        0.02
                                

Total other loans

     62,404        13.26     84,513        17.56
                                

Gross loans

     470,867          481,471     

Less deferred loan origination fees, net

     (383     (.08 )%      (295     (.06 )% 
                                

Total loans

     470,484        100.00     481,176        100.00
                    

Allowance for loan losses

     (10,015       (10,359  
                    

Total loans, net

   $ 460,469        $ 470,817     
                    

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.

At December 31, 2010, the Company had pre-approved but unused lines of credit totaling $84.1 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.

 

- 61 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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, 2010. A summary of related party loan transactions, in thousands, is as follows:

 

Balance at January 1, 2010

   $ 29,283   

Exposure of directors added on board in 2010

     2,882   

Borrowings

     16,521   

Directors Removed from board in 2010

     (13,717

Loan repayments

     (18,878
        

Balance at December 31, 2010

   $ 16,091   
        

At December 31, 2010, there was $6.5 million of unused lines of credit outstanding to directors and executive officers of the Company and its subsidiaries. Included in loans on Directors removed from the Board in 2010 were $10.8 million in charged off loans.

Non-Accrual and Past Due Loans

Non-accrual loans totaled $10.6 million, $16.0 million, and $8.6 million at December 31, 2010, 2009, and 2008.

The table below details non-accrual loans, segregated by class of loans, as of December 31, 2010.

 

     2010  

One to Four Family Residential

   $ 3,122   

Commercial Real Estate

     5,789   

Multi-family Residential

     —     

Construction

     938   

Home Equity Lines of Credit (“HELOC”)

     98   

Commercial and Industrial

     435   

Loans to individuals & overdrafts

     180   
        

Total

   $ 10,562   
        

The average balance of non-accrual loans was $14.5 million and $11.5 million for the years ended December 31, 2010 and 2009, respectively. Had non-accrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of $313,000 in 2010, $423,000 in 2009 and $560,000 in 2008.

 

- 62 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

The following table presents as of December 31, 2010 an age analysis of past due loans, segregated by class of loans:

 

     30-89
Days
Past Due
     Non-
Performing
Loans
     Total
Past
Due
     Current     Total
Loans
 

Commercial and Industrial

   $ 1,227       $ 435       $ 1,662       $ 47,775      $ 49,437   

Construction

     103         938         1,041         83,509        84,550   

Multi-family Residential

     —           —           —           30,088        30,088   

Commercial Real Estate

     46         5,789         5,835         187,667        193,502   

Loans to individuals & overdrafts

     135         180         315         12,652        12,967   

1 to 4 family residential and HELOC

     633         3,220         3,853         96,470        100,323   

Deferred loan (fees) cost, net

     —           —           —           (383     (383
                                           
   $ 2,144       $ 10,562       $ 12,706       $ 457,778      $ 470,484   
                                           

At December 31, 2010 there were no loans 90 days past due and still accruing.

Impaired Loans

The following table presents information on loans that were considered to be impaired as of December 31, 2010:

 

     Recorded
Investment
     Contractual
Unpaid
Principal
Balance
     Related
Allowance
     YTD
Average
Recorded
Investment
     Interest Income
Recognized on
Impaired Loans
 

With no related allowance recorded:

              

Commercial and Industrial

   $ —           88       $ —         $ 297       $ —     

Construction

     562         570         —           1,143         11   

Commercial Real Estate

     3,557         4,830         —           3,375         149   

Loans to individuals & overdrafts

     152         204            113         —     

1 to 4 Family and HELOC’s

     1,449         2,062         —           1,519         —     
                                            

Subtotal:

     5,720         7,754         —           6,447         160   
                                            

With an allowance recorded:

              

Commercial and Industrial

     396         429         132         567         —     

Construction

     662         1,048         159         529         —     

Commercial real estate

     5,346         5,746         1,317         4,068         32   

Loans to individuals & overdrafts

     67         67         13         96         —     

1 to 4 Family and HELOC’s

     4,324         4,779         1,697         3,056         12   
                                            

Subtotal:

     10,795         12,069         3,318         8,316         44   
                                            

Totals:

              

Commercial

     10,523         12,711         1,608         9,979         192   

Consumer

     219         271         13         209         —     

Residential

     5,773         6,841         1,697         4,575         12   
                                            

Grand Total:

   $ 16,515       $ 19,823       $ 3,318       $ 14,763       $ 204   
                                            

Impaired loans at December 31, 2009 were approximately $16.5 million and were comprised of $16.0 million in non-accrual loans and $0.5 million in loans still in accruing status. The amount of interest income recognized on impaired loans during the portion of the year they were considered impaired for 2010, 2009 and 2008 was approximately less than $1,000, $3,000, and less than $1,000.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. Commercial loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

 

- 63 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

   

Risk Grade 1 (Superior) - Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

 

   

Risk Grade 2 (Very Good) - This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

 

   

Risk Grade 3 (Good) - This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

 

   

Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

 

   

Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

 

   

Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

 

   

Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

 

   

General conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.

 

   

Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

 

   

Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor

 

   

Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics:

 

- 64 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

   

Additional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.

 

   

Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.

 

   

Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

 

   

Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:

 

   

Loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.

 

   

Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

 

   

Loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

 

   

Risk Grade 7 (Substandard) - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action.

 

   

Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

 

   

Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

 

- 65 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

 

   

Risk Grades 1 – 5 (Pass) – The loans in this category range from loans secured by cash with no risk of principal deterioration (Risk Grade 1) to loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss (Risk Grade 5).

 

   

Risk Grade 6 (Watch List or Special Mention) - Watch list or Special Mention loans include the following characteristics:

 

   

Loans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.

 

   

Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

 

   

Loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

 

   

Risk Grade 7 (Substandard) - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

   

Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt

 

   

Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

 

- 66 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

The following table presents information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of December 31, 2010:

 

Commercial Credit Exposure by Internally Assigned Grade

   Commercial and
Industrial
     Construction      Commercial Real
Estate
     Multi-Family
Residential
 

Superior

   $ 1,298       $ 67       $ —         $ —     

Very Good

     177         130         1,605         —     

Good

     7,744         5,159         20,444         2,959   

Acceptable

     17,707         15,467         67,322         13,432   

Acceptable with care

     18,232         58,056         71,854         9,750   

Special mention

     2,505         1,506         20,139         2,377   

Substandard

     1,765         4,165         11,756         1,570   

Doubtful

     9         —           382         —     

Loss

     —           —           —           —     
                                   
   $ 49,437       $ 84,550       $ 193,502       $ 30,088   
                                   

 

Consumer Credit Exposure by Internally Assigned Grade

   1 to 4 Family
Residential and
HELOCs
 

Pass

   $ 86,262   

Special mention

     6,389   

Substandard

     7,672   
        
   $ 100,323   
        

Consumer Credit Exposure based on Payment Activity

   Loans to
individuals and
overdrafts
 

Performing

   $ 12,581   

Non Performing

     386   
        
   $ 12,967   
        

 

- 67 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

Nonperforming assets at December 31, 2010 and 2009 consist of the following:

 

     As December 31,  
     2010      2009  
     (dollars in thousands)  

Non-accrual loans

   $ 10,562       $ 16,048   

Restructured loans

     1,688         —     
                 

Total non-performing loans

     12,250         16,048   
                 

Foreclosed real estate

     3,655         2,530   

Repossessed assets

     —           —     
                 

Total non-performing assets

   $ 15,905       $ 18,578   
                 

The average recorded investment in impaired loans was approximately $14.7 million and $11.5 million for the years ended December 31, 2010 and 2009, respectively. Approximately, $10.8 million of the $16.5 million in impaired loans at December 31, 2010 had specific allowances provided while the remaining balance had no allowances recorded. 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. The allowance allocated for impaired loans for 2010 and 2009 was approximately $3.3 million and $4.2 million, respectively.

 

- 68 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to expense and represents management’s best estimate of probable loans losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur The provision for loan losses reflect loan quality trends, including the levels of and trends related to past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.

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

 

     At December 31,  
     2010     2009     2008  
     (In thousands)  

Allowance for loan losses at beginning of year

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

Provision for loan losses

     15,634        5,472        4,283   
                        
     25,993        14,332        12,597   
                        

Loans charged-off:

      

Commercial and Industrial

     (11,967     (2,932     (2,836

Construction

     (464     (168     (118

Home equity lines of credit

     (496     (404     (448

1 to 4 Family Residential

     (2,254     (567     (678

Multi-family Residential

     (2,811     —          —     

Loans to individuals & overdrafts

     (421     (352     (270
                        

Total charge-offs

     (18,413     (4,423     (4,350
                        

Recoveries of loans previously charged-off:

      

Commercial and Industrial

     1,121        325        373   

Construction

     137        12        33   

Home equity lines of credit

     44        7        —     

1 to 4 Family Residential

     15        69        145   

Multi-family Residential

     1,023        —          —     

Loans to individuals & overdrafts

     95        37        62   
                        

Total recoveries

     2,435        450        613   
                        

Net charge-offs

     (15,978     (3,973     (3,737
                        

Allowance for loan losses at end of year

   $ 10,015      $ 10,359      $ 8,860   
                        

 

- 69 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE D - LOANS (Continued)

 

The following table presents a roll forward of the Company’s allowance for loan losses by loan category:

 

Allowance for loan losses

   Commercial
And
Industrial
    Construction     Commercial
Real Estate
    1 to 4
Family
Residential
& HELOC
    Loans to
Individuals &
Overdrafts
    Multi-
family
Residential
    Total  

Balance, beginning of period 01/01/2010

   $ 1,699      $ 629      $ 4,281      $ 3,043      $ 507      $ 200      $ 10,359   

Provision for loan losses

     10,199        47        (1,170     2,981        1,349        2,228        15,634   

Loans charged-off

     (11,967     (464     —          (2,750     (421     (2,811     (18,413

Recoveries

     1,121        137        —          59        95        1,023        2,435   
                                                        

Balance, end of period 12/31/2010

   $ 1,052      $ 349      $ 3,111      $ 3,333      $ 1,530      $ 640      $ 10,015   
                                                        

Ending Balance: individually evaluated for impairment

   $ 132      $ 159      $ 1,317      $ 1,697      $ 13      $ —        $ 3,318   
                                                        

Ending Balance: collectively evaluated for impairment

   $ 920      $ 190      $ 1,794      $ 1,636      $ 1,517      $ 640      $ 6,697   
                                                        

Loans:

              

Ending Balance

   $ 49,437      $ 84,550      $ 193,502      $ 100,323      $ 12,967      $ 30,088      $ 470,867   
                                                        

Ending Balance: individually evaluated for impairment

   $ 396      $ 1,224      $ 8,903      $ 5,773      $ 219      $ —        $ 16,515   
                                                        

Ending Balance: collectively evaluated for impairment

   $ 49,041      $ 83,326      $ 184,599      $ 94,550      $ 12,748      $ 30,088      $ 454,352   
                                                        

NOTE E - PREMISES AND EQUIPMENT

Following is a summary of premises and equipment at December 31, 2010 and 2009:

 

     2010      2009  
     (In thousands)  

Land

   $ 3,470       $ 3,278   

Buildings

     10,021         9,099   

Furniture and equipment

     3,473         3,226   

Leasehold improvements

     29         113   

Construction in progress

     19         19   
                 
     17,012         15,735   

Less accumulated depreciation

     4,082         3,544   
                 

Total

   $ 12,930       $ 12,191   
                 

Depreciation amounting to approximately $751,000, $817,000, and $981,000 for the years ended December 31, 2010, 2009 and 2008, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.

 

- 70 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE E - PREMISES AND EQUIPMENT (Continued)

 

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, 2010 are as follows:

 

2011

   $ 121   

2012

     97   

2013

     102   

2014

     109   

2015

     109   

Years thereafter

     1,199   
        
   $ 1,737   
        

During 2010, 2009, and 2008, payments under operating leases were approximately $213,000, $297,000, and $270,000 respectively. Lease expense was accounted for on a straight line basis.

NOTE F - DEPOSITS

At December 31, 2010, the scheduled maturities of time deposits are as follows:

 

     Total Time Deposits  
     (In thousands)  

Three months or less

   $ 74,660   

Over three months through twelve months

     110,517   

Over one year through two years

     72,591   

Over two years through three years

     19,951   

Over three years through four years

     20,133   

Over four years through five years

     45,676   

Over five years

     1,071   
        
   $ 344,599   
        

Time deposits with balances of $100,000 or more at December 31, 2010 were $169.9 million.

 

- 71 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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:

 

     2010     2009  
     ($ in thousands)  

Balance at December 31

   $ 19,666      $ 20,564   

Weighted average interest rate at December 31

     1.03     1.00

Maximum amount outstanding at any month-end during the year

   $ 20,926      $ 27,408   

Average daily balance outstanding during the year

   $ 19,146      $ 23,891   

Average annual interest rate paid during the year

     1.06     1.17

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

At December 31, 2010, the Company had available lines of credit totaling approximately $44.0 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 $2.0 million in securities to the Federal Reserve Bank for access to the discount window.

At December 31, 2010 and 2009 the Company had $8.0 million and $0 in advances from the Federal Home Loan Bank of Atlanta or borrowings from the Federal Reserve Bank discount window. The $8.0 million in FHLB advances at December 31, 2010 were comprised of $4.0 million in short-term borrowings and $4.0 million in long-term borrowings. The following table sets forth the maturity and interest rate information pertaining to FHLB advances as of December 31, 2010: ($ in Thousands)

 

Maturity

   Rate     Total  

March 8, 2011

     0.62   $ 2,000   

September 8, 2011

     0.86     2,000   

March 8, 2012

     1.17     2,000   

March 8, 2013

     1.82     2,000   
          
     $ 8,000   
          

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.

 

- 72 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE I - JUNIOR SUBORDINATED DEBENTURES (Continued)

 

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, 2010.

NOTE J - INCOME TAXES

The significant components of the provision for income taxes for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010     2009     2008  
     (In thousands)  

Current tax provision:

      

Federal

   $ (879   $ 825      $ 183   

State

     —          110        5   
                        

Total current tax provision

     (879     935        188   
                        

Deferred tax provision:

      

Federal

     (1,876     (832     (356

State

     (529     (175     (71
                        

Total deferred tax benefit

     (2,405     (1,008     (427
                        

Net provision for income taxes

   $ (3,284   $ (73   $ (239
                        

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:

 

     2010     2009     2008  
     (In thousands)  

Income tax at federal statutory rate

   $ (2,801   $ (2,895   $ (147

Increase (decrease) resulting from:

      

State income taxes, net of federal tax effect

     (349     —          (43

Goodwill impairment

     —          2,949        —     

Tax-exempt interest income

     (89     (86     (88

Income from life insurance

     (89     (89     (91

Incentive stock option expense

     50        55        64   

Other permanent differences

     (6     (6     66   
                        

Provision for income taxes

   $ (3,284   $ (73   $ (239
                        

 

- 73 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE J - INCOME TAXES (Continued)

 

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, 2010 and 2009 are as follows:

 

     2010     2009  
     (In thousands)  

Deferred tax assets relating to:

    

Allowance for loan losses

   $ 3,861      $ 3,767   

Deferred compensation

     388        362   

Supplemental executive retirement plan

     61        61   

Net operating loss/net economic loss

     1,951        —     

Write-downs on foreclosed real estate

     348        121   

Other

     96        82   
                

Total deferred tax assets

     6,705        4,393   

Deferred tax liabilities relating to:

    

Premises and equipment

     (750     (764

Deferred loan fees/costs

     (19     (16

Unrealized gain on available-for-sale securities

     —          (904

Core deposit intangible

     (269     (329

Other

     (79     (102
                

Total deferred tax liabilities

     (1,117     (2,115
                

Net recorded deferred tax asset, included in other assets

   $ 5,588      $ 2,279   
                

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 2007. As of December 31, 2010 the Company has no uncertain tax provisions.

Deferred Tax Asset

The Company’s net deferred tax asset was $5.6 million at December 31, 2010 and $2.3 million at December 31, 2009, respectively. In evaluating whether we will realize the full benefit of our net deferred tax asset, we consider both positive and negative evidence, including among other things recent earnings trends and projected earnings, and asset quality, etc. As of December 31 2010, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset and need for valuation allowance. Significant negative trends in credit quality, losses from operations, etc. could impact the realization of the deferred tax asset in the future.

The Company has a history of earnings and no history of expiration of loss carry-forwards. We believe our forecasted earnings provide positive evidence to support a conclusion that a valuation allowance is not needed. Management closely monitors the previous twelve quarters of income (loss) before income taxes in evaluating the need for a deferred tax asset valuation allowance which is called the cumulative loss test. Excluding the net charge-off relating to the alleged fraud in 2010 and the goodwill impairment in 2009, as both are losses of infrequent nature and are aberrations rather than continuing conditions. The Company passed the cumulative loss test by $159,000 as of December 31, 2009 due to exclusion of Goodwill Impairment.

 

- 74 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE J - INCOME TAXES (Continued)

 

As of December 31, 2010, the Company passed the cumulative loss test by $2.3 million excluding the previously mentioned one-time non-recurring charge-off pertaining to the alleged fraud by a large relationship borrower and the previously discussed goodwill impaired charge. The Company feels confident that deferred tax assets are more likely than not to be realized. Although the Company had positive earnings in the first and second quarters of 2010, a net loss was recorded for the third quarter returning to positive earnings in the fourth quarter. If the recent yearly trends in losses continue and negative evidence grows, a valuation allowance may be necessary going forward.

NOTE K - OTHER NON-INTEREST EXPENSE

The major components of other non-interest expense for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010      2009      2008  
     (In thousands)  

Postage, printing and office supplies

   $ 435       $ 377       $ 406   

Advertising and promotion

     387         339         417   

Professional services

     2,141         1,069         1,213   

Other

     2,086         1,968         2,085   
                          

Total

   $ 5,049       $ 3,753       $ 4,121   
                          

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, 2010, 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, however, Chapter 53, Article 7 of the North Carolina General Statutes prohibits banks from declaring and paying dividends during the period in which the bank has an accumulated deficit. At December 31, 2010 the Bank has an accumulated deficit of $1.2 million.

 

- 75 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE L - REGULATORY MATTERS (Continued)

 

The Company’s actual capital amounts and ratios are presented in the table below as of December 31, 2010 and 2009:

 

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

December 31, 2010:

          

Total Capital (to Risk-Weighted Assets)

   $ 64,628         12.71   $ 40,624         8.00

Tier 1 Capital (to Risk-Weighted Assets)

     58,227         11.45     20,312         4.00

Tier 1 Capital (to Average Assets)

     58,227         9.17     25,451         4.00

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

New Century Bank’s actual capital amounts and ratios are presented in the table below as of December 31, 2010 and 2009:

 

     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, 2010:

  

Total Capital (to Risk-Weighted Assets)

   $ 62,504         12.36   $ 40,465         8.00   $ 50,582         10.00

Tier 1 Capital (to Risk-Weighted Assets)

     56,136         11.10     20,233         4.00     30,349         6.00

Tier 1 Capital (to Average Assets)

     56,136         8.84     25,451         4.00     31,813         5.00

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

As of December 31, 2010 and 2009, 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.

 

- 76 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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, 2010 is as follows:

 

     (In thousands)  

Financial instruments whose contract amounts represent credit risk:

  

Undisbursed commitments

   $ 82,897   

Letters of credit

     1,245   

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:

 

- 77 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

 

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.

 

   

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.

 

- 78 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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 recurring basis as of December 31, 2010 and December 31, 2009 (dollars in thousands):

 

Investment securities

available for sale

December 31, 2010

   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

   $ 47,087       $ —         $ 47,087       $ —     

Mortgage-backed securities - GSE’s

     35,512         —           35,512         —     

Municipal bonds

     7,300         —           7,300         —     
                                   

Total

   $ 89,899       $ —         $ 89,899       $ —     
                                   

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       $ —     
                                   

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, 2010, 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.

 

- 79 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

 

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, 2010 total assets classified as foreclosed real estate totaled $3.7 million.

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 December 31, 2010 and December 31, 2009 (dollars in thousands):

 

Asset Category

December 31, 2010

   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

   $ 9,393       $ —         $ —         $ 9,393   

Foreclosed real estate

     3,655         —           —           3,655   
                                   

Total

   $ 13,048       $ —         $ —         $ 13,048   
                                   

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

   $ 7,546       $ —         $ —         $ 7,546   

Foreclosed real estate

     2,530         —           —           2,530   
                                   

Total

   $ 10,076       $ —         $ —         $ 10,076   
                                   

As of December 31, 2010, the Bank identified $16.5 million in impaired loans, of which $10.8 million required a specific allowance of $3.3 million. 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.

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.

 

- 80 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

 

Loans

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions. Therefore, incremental market risks and liquidity discounts were subtracted to reflect illiquid and distressed conditions at December 31, 2010 and December 31, 2009. The liquidity discount for both December 31, 2010 and December 31, 2009 was 0.5% based on local economic conditions impacting employment, rising energy costs, and extended periods of time to sell or liquidate assets.

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.

 

- 81 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

 

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.

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2010 and 2009.

 

     2010      2009  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
     (In thousands)  

Financial assets:

           

Cash and due from banks

   $ 8,630       $ 8,630       $ 9,612       $ 9,612   

Interest-earning deposits in other banks

     20,089         20,089         12,647         12,647   

Federal funds sold

     7,183         7,183         6,676         6,676   

Investment securities available for sale

     89,899         89,899         96,259         96,259   

Loans, net

     460,469         458,167         470,817         468,668   

Accrued interest receivable

     2,488         2,488         2,590         2,590   

Stock in the Federal Home Loan Bank

     1,448         1,448         1,133         1,133   

Other non marketable securities

     1,082         1,082         1,004         1,004   

Bank owned life insurance

     7,727         7,727         7,465         7,465   

Financial liabilities:

           

Deposits

   $ 534,599       $ 541,394       $ 540,262       $ 545,985   

Short term debt

     23,666         23,666         20,564         20,564   

Long term debt

     16,372         12,453         12,372         7,820   

Accrued interest payable

     395         395         349         349   

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 $319,000, $302,000 and $295,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

Employment Agreements

The Company has entered into employment agreements with its five executive officers and two of its senior officers to promote a stable and competent management base. The agreements provide for benefits as specified 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 generally be bound to the terms of those contracts.

 

- 82 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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 $26,000, $29,000 and $47,000 were expensed for future benefits to be provided under this plan during 2010, 2009 and 2008, 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, 2010 and 2009 was $411,000 and $440,000, 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 $21,000, $20,000 and $21,000 and were expensed in 2010, 2009 and 2008, resulting in a total liability of $351,000 and $330,000 as of December 31, 2010 and 2009. 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, 2010, 2009 and 2008 were $245,000, $250,000, and $190,000, 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 employees under the 2000 Incentive Stock Option Plan were subject to a three-year vesting schedule and options granted to directors under the 2000 Nonstatutory Stock Option Plan were vested immediately at the time of grant. No new stock options may be granted under the 2000 Incentive Stock Option Plan of the 2000 Nonstatutory Stock Option Plan. In 2010, the Company granted 10,000 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.

On May 11, 2010, the shareholders of the Company approved the implementation of the New Century Bancorp, Inc. 2010 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights. Officers and other full-time employees of the Company and the Bank, including executive officers and directors, are eligible to receive awards under the Omnibus Plan. However, no projections have been made as to specific award terms or recipients.

 

- 83 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

 

On July 27, 2010, the board of directors of the Company formally adopted the Omnibus Plan, which had previously been approved by the Company’s shareholders at the annual meeting of shareholders held on May 11, 2010.

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:

 

     2010     2009     2008  

Estimated fair value of options granted

   $ 3.07      $ 3.67      $ 3.13   

Assumptions in estimating average option values:

      

Risk-free interest rate

     3.49     3.15     3.01

Dividend yield

     0     0     0

Volatility

     50.29     50.23     39.07

Expected life (in years)

     8.00        4.49        5.45   

A summary of the Company’s option plans as of and for the year ended December 31, 2010 is as follows:

 

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

At December 31, 2009

     17,987        516,378      $ 8.26         450,947      $ 7.90   

Options authorized

     250,000        —          —           —          —     

Options granted

     (10,000     10,000        5.16         23,516        5.40   

Options exercised

     —          (75,684     4.59         (75,684     4.59   

Options forfeited

     50,999        (50,999     7.05         (48,507     7.05   
                                         

At December 31, 2010

     308,986        399,695      $ 9.03         350,272      $ 9.00   
                                         

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2010 were both zero. At December 31, 2009, the aggregate intrinsic value of options outstanding and options exercisable were $15,000 each. The unrecognized compensation expense for outstanding options at December 31, 2010, 2009, and 2008 was $237,000, $279,000, and $462,000.

 

- 84 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)

 

The weighted average remaining life of options outstanding and options exercisable as of December 31, 2010 was 4.52 years and 4.12 years, respectively. Information regarding the stock options outstanding at December 31, 2010 is summarized below:

 

Range of Exercise Prices

   Number
of options
outstanding
     Number
of options
exercisable
 

$4.59 - $7.07

     274,554         252,265   

$7.08 - $10.69

     37,091         24,957   

$10.70 - $16.22

     88,050         73,050   
                 

Outstanding at end of year

     399,695         350,272   
                 

A summary of the status of the Company’s non-vested shares as of December 31, 2010 and changes during the year ended December 31, 2010, is presented below:

 

Non-vested Shares

   Shares     Weighted-Average
Grant Date

Fair Value
 

Non-vested at January 1, 2010

     65,430      $ 4.96   

Granted

     10,000        3.07   

Vested

     24,992        2.22   

Forfeited

     (50,999     1.04   
          

Non-vested at December 31, 2010

     49,423        4.41   
          

For the years ended December 31, 2010, 2009 and 2008, the intrinsic value of options exercised was $96,000, $8,000, and $293,000, respectively, and the grant-date fair value of options vested was $148,000, $160,000, and $188,000, respectively. Cash received from stock option exercises for the year ended December 31, 2010 was approximately $332,000. The actual tax benefit in shareholders’ equity realized for the tax deductions from option exercises was approximately $16,000.

As of December 31, 2010, there was approximately $237,000 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 1.24 years.

 

- 85 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

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, 2010 and 2009 and the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2010 (amounts in thousands):

Condensed Balance Sheets

December 31, 2010 and 2009

 

     2010     2009  

Assets

    

Cash balances with New Century Bank

   $ 507      $ 342   

Investment in New Century Bank

     59,601        64,624   

Investment in New Century Statutory Trust I

     493        485   

Other assets

     1,589        1,448   
                

Total Assets

   $ 62,190      $ 66,899   
                

Liabilities and Shareholders’ Equity

    

Junior subordinated debentures

   $ 12,372      $ 12,372   

Accrued interest payable

     126        118   

Shareholders’ equity:

    

Common stock

     6,914        6,838   

Additional paid-in capital

     41,887        41,467   

Retained earnings (deficit)

     (287     4,668   

Accumulated other comprehensive income

     1,178        1,436   
                

Total Shareholders’ Equity

     49,692        54,409   
                

Total Liabilities and Shareholders’ Equity

   $ 62,190      $ 66,899   
                

Condensed Statements of Operations

Years Ended December 31, 2010, 2009 and 2008

 

     2010     2009     2008  

Dividends

   $ 233      $ 373      $ 676   

Equity in earnings (losses) of subsidiaries

     (4,904     (8,535     (341

Operating expense

     (425     (485     (790

Income tax benefit

     141        205        262   
                        

Net loss

   $ (4,955   $ (8,442   $ (193
                        

 

- 86 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE P - PARENT COMPANY FINANCIAL DATA (Continued)

 

Condensed Statements of Cash Flows

Years Ended December 31, 2010, 2009 and 2008

 

     2010     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net loss

   $ (4,955   $ (8,442   $ (193

Equity in undistributed losses of subsidiaries

     4,904        8,535        341   

(Increase) decrease in other assets

     (124     (251     (259

Increase in other liabilities

     (8     6        (22
                        

Net cash used by operating activities

     (183     (152     (133
                        

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

     332        32        513   

Tax benefit from stock option exercises

     16        3        27   
                        

Net cash provided by financing activities

     348        35        540   
                        

Net increase (decrease) in cash and cash equivalents

     165        (117     (4,593

Cash and cash equivalents at beginning of year

     342        459        5,052   
                        

Cash and cash equivalents, end of year

   $ 507      $ 342      $ 459   
                        

NOTE Q - RELATED PARTY TRANSACTIONS

During 2010, the Company purchased various insurance policies from a company owned by one of the former directors of New Century Bancorp. Premiums paid totaled approximately $30,000 for these policies, which include one-year policies for directors and officers liability coverage. All such policies were purchased on terms at least as favorable to the Company as could be obtained from an unaffiliated third party.

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 a one-year policy 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.

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. This lease was terminated in October 2010.

All related party transactions are “arms length” transactions.

 

- 87 -


NEW CENTURY BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

 

 

NOTE R - ALLEGED BORROWER LOAN FRAUD

During the third quarter of 2010, the Bank discovered an alleged borrower fraud in connection with one of the Bank’s largest loan relationships. The apparent fraud included multiple loans to the same borrower and related entities and was committed over a period of years.

In September 2010, $10.8 million in loans were charged-off pertaining to this alleged fraud. The Bank is committed to employing every legal remedy available to recover losses arising from this alleged fraud. Through the end of December 2010, $777,000 of losses were recovered on these loans. Additionally, $211,000 in legal and investigative fees have been incurred through December 2010 to determine the extent of the fraud, the potential for any additional losses or recoveries. Any additional future losses, recoveries or expenses related to resolving this alleged fraud are not able to be currently estimated.

 

- 88 -


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

None.

ITEM 9A – 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, 2010. 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, 2010 was effective based on those criteria.

 

- 89 -


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 rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

 

Date: March 31, 2011  

/s/ William L. Hedgepeth II.

  William L. Hedgepeth II.
  President and Chief Executive Officer
Date: March 31, 2011  

/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.

 

- 90 -


PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The Board has set the number of directors of the Corporation at 17. Certain information regarding the Company’s directors is set forth in the following table.

 

Name and Age

  

Position(s)

Held

   Term
Expires
  

Principal Occupation and

Business Experience During the Past Five Years

J. Gary Ciccone

(64)

  

Chairman

of the

Board

   2013    Real estate developer; Owner, Nimocks, Ciccone & Townsend, Inc. (commercial real estate brokerage).

Watson G. Caviness

(45)

   Director    2013    President, Caviness & Cates Building and Development Company; President, Caviness Land Development, Inc. and Owner, Caviness & Cates Communities, LLC

T. Dixon Dickens

(51)

   Director    2011    President, Mercedes-Benz of Fayetteville.

T. C. Godwin, Jr.

(70)

   Director    2011    President, T-Mart Food Stores, Inc., 1970-Present (convenience stores).

Oscar N. Harris

(71)

   Director    2012    Senior Partner-President, Oscar N. Harris & Assoc. P.A., (CPA’s) 1979-Present; former North Carolina State Senator; Mayor – City of Dunn.

Gerald W. Hayes

(67)

   Director    2011    Attorney and President, Hayes, Williams, Turner & Daughtry, P.A., 1969-Present (law firm).

William L. Hedgepeth, II

(49)

   Director, President, and CEO    2011    President and CEO, New Century Bancorp and New Century Bank.

D. Ralph Huff, III

(61)

   Director    2013    President, H&H Constructors.

Tracy L. Johnson

(49)

   Director    2011    President, Ace Services, Inc.; Vice President Contech, Inc., Dunn, NC

John W. McCauley

(43)

   Director    2012    Chief Executive Officer, Highland Paving Co, LLC; General Manager, McCauley-McDonald Investments, Inc.; General Manager, AOM Investments, LLC.

Carlie C. McLamb, Jr.

(46)

   Director    2011    President – Carlie C’s IGA

Michael S. McLamb

(60)

   Director    2012    Certified Public Accountant; Retired Treasurer, K&M Maintenance Services, Inc.

Anthony E. Rand

(71)

   Director    2011    Chairman, State of North Carolina Post Release Supervision and Parole Commission; former Majority Leader, North Carolina State Senate; President, Rand & Gregory, P.A. (law firm).

Sharon Raynor

(53)

   Director    2012    President, Life, Inc., Goldsboro, NC

 

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Name and Age

  

Position(s)

Held

   Term
Expires
  

Principal Occupation and

Business Experience During the Past Five Years

C. L. Tart, Jr.

(76)

   Director    2013    President, Chief Executive Officer and Chairman, Tart & Tart, Inc., 1969-Present (holding company).

Ann H. Thornton

(70)

   Director    2013    President, Thornton Ventures, Clinton, NC

W. Lyndo Tippett

(71)

   Director    2012    Former Secretary, State of North Carolina Department of Transportation; Partner, Tippett, Padrick, Bryan & Merritt (CPA’s).

Qualifications of Directors

A description of the specific experience, qualifications, attributes, or skills that led to the conclusion that each of the directors listed above should serve as a director of the Corporation is presented below.

Watson G. Caviness. Mr. Caviness was a founding director of New Century Bank South. He is President of Caviness & Cates Building and Development Company, President of Caviness Land Development, Inc. and owner of Caviness & Cates Communities, LLC, named one of the top 100 builders in the United States in 2008 by Builder Magazine. Mr. Caviness holds a Bachelor of Arts from the University of North Carolina at Wilmington.

J. Gary Ciccone. Mr. Ciccone has served as Chairman of the Board of Directors since April 2008 and was a founding director of New Century Bank South, serving as Chairman of the Board of that institution from inception until its merger with New Century Bank. Mr. Ciccone has completed the North Carolina Bank Directors’ College and Advanced Bank Directors’ College programs. As a partner with Nimocks, Ciccone & Townsend in Fayetteville, he has extensive experience in real estate development and commercial real estate brokerage. In addition, he holds a Bachelor of Science in Business Administration from the University of North Carolina at Chapel Hill and a law degree from the University of North Carolina School of Law, Chapel Hill, NC. Mr. Ciccone has prior experience as a bank director, serving on the board of directors and as secretary of New East Bank of Fayetteville, Fayetteville, NC. Mr. Ciccone also currently serves on the North Carolina Board of Transportation.

T. Dixon Dickens. Mr. Dickens was a founding member of New Century Bank South and has served as a member of the Corporation’s Board of Directors since 2008. He has completed North Carolina Bank Directors’ College. Mr. Dickens is President of Mercedes-Benz of Fayetteville. In addition, he holds a Bachelor of Arts in Economics from Wake Forest University, Winston-Salem, NC.

T.C. Godwin, Jr. Mr. Godwin was a founding director of New Century Bank and has served as a member of the Corporation’s Board of Directors since inception. Mr. Godwin also chairs the Compensation Committee. He has extensive business experience, serving as President of T-Mart Food Stores, Inc., Dunn, NC. He has completed North Carolina Bank Directors’ College. Mr. Godwin is also involved in various community activities, including service as Chairman of the Board for the Betsy Johnson Regional Hospital Foundation.

Oscar N. Harris. Mr. Harris was a founding director of New Century Bank and has served as a member of the Corporation’s Board of Directors since inception. He has completed North Carolina Bank Directors’ College and the Advanced Bank Directors’ College program. Mr. Harris is a Certified Public Accountant and is Senior Partner and President of Oscar Harris & Associates, P.A., Dunn, NC. His background provides valuable financial and accounting expertise to the Board of Directors and the Audit Committee, which Mr. Harris chairs. In addition to his accounting background, Mr. Harris is also involved in numerous real estate businesses and in state and local matters. He served as a North Carolina State Senator from 1999 to 2002 and currently serves a Mayor of the City of Dunn. He is a graduate of

 

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Edwards Military Academy, Salemburg, NC and holds a Bachelor of Science degree in Business Administration from Campbell University, Buies Creek, NC, where he currently serves on the Presidential Board of Advisors. Mr. Harris has extensive prior bank director experience, formerly serving on the Board of Directors of First Federal Savings Bank from 1987 to 1988 and as a director of Standard Bank & Trust from 1988 to 1996. Mr. Harris was awarded the Man of the Year in Dunn, NC in 1986 and again in 2006 and received the Boy Scouts of America Distinguished Service Award in 1997.

Gerald W. Hayes. Mr. Hayes was a founding director of New Century Bank and has served as a member of the Corporation’s Board of Directors since inception. He has completed North Carolina Bank Directors’ College. Mr. Hayes is a member of Hayes, Williams, Turner & Daughtry, P.A. and has practiced law in Harnett County for over 40 years, providing the board with excellent perspective on legal issues and the Harnett County market area in general. He holds a Bachelor of Arts degree from the University of North Carolina at Chapel Hill and a law degree from Wake Forest University Law School, Winston-Salem, NC.

William L. Hedgepeth II. Mr. Hedgepeth is the President and Chief Executive Officer of the Corporation and of New Century Bank. He previously served as Executive Vice President and Chief Operating Officer of the Corporation, New Century Bank and New Century Bank South. Mr. Hedgepeth has 27 years of experience in banking, previously serving as Senior Vice President and Fayetteville Area Executive for another well established North Carolina community bank. He has completed the North Carolina Bank Directors’ College and Advanced Bank Directors’ College programs. He holds a Bachelor of Arts degree from the University of North Carolina at Chapel Hill. Mr. Hedgepeth is a member of the Dunn Rotary Club and serves on the Boards of Directors of the North Carolina Bankers Association and the March of Dimes.

D. Ralph Huff, III. Mr. Huff was a founding director of New Century Bank South and has served as a director of the Corporation since 2008. Mr. Huff, who is Chief Executive Officer and Owner of H&H Homes and Co-Owner of Coldwell Banker, Huff & Pennink, Advantage Real Estate Company, Fayetteville, has extensive experience in the real estate and construction industries. He currently chairs the Building Committee. He has completed North Carolina Bank Directors’ College and holds a Bachelor of Arts degree in Business Administration from the University of North Carolina at Chapel Hill.

Tracy L. Johnson. Mr. Johnson was a founding director of New Century Bank. He has extensive experience in business management, serving as President of Ace Services, Inc., Dunn, NC, Vice President of Contech Services, and President of Universal Management Group. Mr. Johnson holds a Bachelor of Science in Biological & Agricultural Engineering from North Carolina State University.

John W McCauley. Mr. McCauley was a founding member of New Century Bank South and has served as a member of the Corporation’s Board of Directors since 2004. He currently chairs the Loan Committee. Mr. McCauley is Chief Executive Officer of Highland Paving Co., LLC and General Manager of McCauley-McDonald Investments and AOM Investments, LLC, Fayetteville, NC. He has completed North Carolina Bank Directors’ College and holds a Bachelor of Science in Economics from Davidson College, Davidson, NC and a law degree from the University of North Carolina School of Law, Chapel Hill, NC.

Carlie C. McLamb, Jr. Mr. McLamb was a founding Director of Computer World Inc. and has served as a Director and a former Chairman of the Board. He currently serves as a member of the Loan Committee for New Century Bank. Mr. McLamb is the President of Carlie C’s IGA which is a retail grocery store chain with 15 stores. Mr. McLamb is also a current Director of East Coast Ethanol, LLC. and a former Elder and Deacon of Beulah Baptist Church.

Michael S. McLamb. Mr. McLamb was a founding director of New Century Bank and has served as a member of the Corporation’s Board of Directors since 2008. He currently chairs the Asset/Liability Management Committee. Mr. McLamb has completed North Carolina Bank Directors’ College. He is

 

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also a Certified Public Accountant and is the retired Treasurer of K&M Maintenance Services, Inc., a service contracting company based in Dunn, NC. Mr. McLamb has a Bachelors degree in Business Administration from Campbell University, Buies Creek, NC and currently serves on the Campbell University Presidential Board of Advisors and on various steering committees at Campbell University.

Anthony E. Rand. Mr. Rand was a founding director of New Century Bank South and has served as a member of the Corporation’s Board of Directors since 2004. Mr. Rand served in the North Carolina Senate for 22 years and was the Senate Majority Leader in 1987-88 and from 2001-2009. He currently serves as Chairman of the North Carolina Post Release Supervision and Parole Commission. He has completed North Carolina Bank Directors’ College. Mr. Rand holds a Bachelor of Arts in Political Science from the University of North Carolina at Chapel Hill and a law degree from the University of North Carolina School of Law, Chapel Hill, NC. Mr. Rand is President of the law firm of Rand & Gregory, P.A., Fayetteville, NC and also serves on numerous boards and commissions including the Board of Directors and Treasurer, General Alumni Association of the University of North Carolina. Mr. Rand has prior experience as a bank director, formerly serving on the board of State Bank, Fayetteville, NC and on the local advisory board for First-Citizens Bank.

Sharon L. Raynor. Ms. Raynor has served as a director of New Century Bank since 2005 and as a member of the Corporation’s Board of Directors since 2009. She is President of LIFE, Inc., a provider of intermediate care facilities for the mentally handicapped and contract services to area mental health agencies throughout eastern North Carolina. Ms. Raynor is very involved in the Bank’s local community, serving as a member of the Betsy Johnson Foundation & Friends of the Foundation Fighting Cancer Fundraising committee, the Lucknow Garden Club, the Dunn schools advisory board and the advisory board for Harnett County schools. She worked in the public schools for seven years as a special education teacher. She is a member of the American Association on Intellectual and Developmental Disabilities, having been appointed by former Governor James B. Hunt. Ms. Raynor holds a Bachelor of Science in Special Education from East Carolina University, Greenville, NC.

C.L. (Bozie) Tart. Mr. Tart was a founding director of New Century Bank and served as Chairman of the Corporation’s Board of Directors from 2000 to 2007. He currently serves as Vice Chairman of the Board. Mr. Tart has completed North Carolina Bank Directors’ College. As President and Chief Executive Officer of Tart & Tart, Inc., Dunn, NC, Mr. Tart has deep experience in various local real estate and business matters. In addition, he holds a Bachelor of Arts degree in Industrial Relations with a Minor in Business from the University of North Carolina at Chapel Hill. Mr. Tart has extensive prior experience as a financial institution director, previously serving as a director of United Carolina Bank, Whiteville, NC and as a member of the United Carolina Bank/BB&T local advisory board of directors.

Ann H. Thornton. Ms. Thornton has served as a director of New Century Bank since 2002 and as a member of the Corporation’s Board of Directors since 2009. She is President of Thornton Ventures, Clinton, NC and the owner of Brightleaf Warehouse, Clinton, NC. Ms. Thornton is very involved in her local community, formerly serving as President of the Clinton-Sampson Chamber of Commerce and President of the Clinton-Sampson leadership development committee. She also serves as President of the Clinton Committee of 100, President of the Clinton Rotary Club and formerly served as President of the Sampson Community College Foundation Board. In addition, she serves on the Sampson County Agri-Exposition advisory board, the Sampson Regional Hospital foundation board, the North Carolina Museum of History Board of Directors, Raleigh, NC and the Coharie Country Club board of directors, Clinton, NC. She is a former schoolteacher. Ms. Thornton has completed North Carolina Bank Directors’ College. She holds a Bachelor of Arts from Wake Forest University, Winston-Salem, NC and is a Trustee of Methodist University, Fayetteville, NC.

W. Lyndo Tippett. Mr. Tippet was a founding director of New Century Bank South and has served as a member of the Corporation’s Board of Directors since 2008. He has been a partner in the accounting firm of Tippett Padrick Bryan and Merritt, CPAs, Fayetteville, NC since 1976 and is a member of the AICPA

 

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and the NCACPA. He served as Secretary of Transportation for the State of North Carolina from 2001 through 2009, and served as a member of the North Carolina Board of Transportation for eight years prior to becoming Secretary. He currently serves as a Director of the North Carolina State Health Plan of Teachers and State Employees. He was Chief Executive Officer of Bybon, Inc., a manufacturing, retail and real estate concern, from 1970 through 1976. He previously served as a staff accountant with Ernst & Young. Mr. Tippett holds a Bachelor of Science in Accounting from Barton College. He also has prior experience as a bank director, serving on the board of State Bank, Fayetteville, NC and on the local advisory board for First-Citizens Bank.

Director Independence

With the exception of Mr. Hedgepeth, each member of the Corporation’s Board of Directors is “independent” as defined by NASDAQ listing standards and the regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). In making this determination the Board considered certain insider transactions with directors for the provision of goods or services to the Corporation and its subsidiary bank. All such transactions were conducted at arm’s length upon terms no less favorable than those that would be available from an independent third party. Specific transactions considered by the Board of Directors included certain legal services rendered to New Century Bank by Hayes, Williams, Turner & Daughtry, P.A., Attorneys at Law, a related interest of Gerald W. Hayes.

Director Relationships

With the exception of Messrs. Rand and Tippett, who are directors of Law Enforcement Associates Corporation, and Mr. Harris, who is a director of East Coast Ethanol, LLC, no director of the Corporation is a director of any other company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940.

There are no family relationships among directors, nominees or executive officers of the Corporation.

Section 16(a) Beneficial Ownership Reporting Compliance

Directors and executive officers of the Corporation are required by federal law to file reports with the Securities and Exchange Commission (the “SEC”) regarding the amount of, and changes in, their beneficial ownership of the Corporation’s common stock. Based upon a review of copies of reports received by the Corporation, all required reports of directors and executive officers of the Corporation during 2009 were filed on a timely basis, with the exception of a Form 4 filed by Mr. Harris.

 

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Executive Officers

The following table sets forth certain information regarding the Corporation’s executive officers.

 

NAME

   AGE   

POSITION

  

BUSINESS EXPERIENCE

William L. Hedgepeth, II

   49   

President and Chief

Executive Officer of the

Corporation and

New Century Bank

   President and Chief Executive Officer, New Century Bancorp, Inc. and New Century Bank, 2008-Present; Executive Vice President and Chief Operating Officer, New Century Bancorp, Inc. and New Century Bank; President and Chief Executive Officer, New Century Bank South, 2004-2008; Senior Vice President and Area Executive for First South Bank, Fayetteville, NC, 2001-2004.

Lisa F. Campbell

   43   

Executive Vice

President, Chief

Operating Officer, and

Chief Financial Officer

of the Corporation and

New Century Bank

   Executive Vice President and Chief Financial Officer, New Century Bancorp, Inc., New Century Bank, 2000-Present; Senior Vice President and Controller, Triangle Bancorp, Inc., Raleigh, NC, 1997-2000; Assurance Senior Manager, KPMG LLP, Raleigh, NC, 1993-1997.

Kevin S. Bunn

   49   

Executive Vice

President and Chief

Banking Officer of the

Corporation and New

Century Bank

   Executive Vice President and Chief Banking Officer, New Century Bancorp, Inc. and New Century Bank, 2008-Present; Chief Lending Officer, New Century Bank South, 2003–2007; Senior Vice President, Wachovia Bank, N.A., 1985-2003.

J. Daniel Fisher

   61   

Executive Vice

President and Chief

Credit Officer of the

Corporation and New

Century Bank

   Senior Executive Vice President and Chief Credit Officer, Gateway Bank & Trust Co., 2004-2007; Special Loans Group Manager, RBC Centura; Regional Credit Administrator, Centura Bank, 1994-1998; Executive Vice President, Mid-South Bank; 1990-1994.

Joan I. Patterson

   64   

Executive Vice

President and Chief

Deposit Operations

Officer of the

Corporation and New

Century Bank

   Executive Vice President and Chief Deposit Operations Officer, New Century Bancorp, Inc. and New Century Bank, 2000-Present; Branch Manager, BB&T (previously UCB), Dunn, NC, 1973-2000.

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.

 

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Meetings and Committees of the Board of Directors

The Company’s Board of Directors held 14 meetings during 2010. Each director attended 75% or more of all board meetings and the meetings of any committee(s) of which he was a member. It is the policy of the Company that directors attend each annual meeting of shareholders. All members of the Corporation’s Board of Directors attended the 2010 Annual Meeting of Shareholders. The Company’s Board has several standing committees including an Audit/Compliance Committee, a Nominating Committee and a Compensation Committee.

Audit/Compliance Committee. The members of the Audit/Compliance Committee during 2010 were J. Gary Ciccone, T. C. Godwin, Oscar N. Harris, John McCauley, Sharon L. Raynor, D. Ralph Huff, III, W. Lyndo Tippett and C. L. Tart, Jr. The members of the committee are “independent” as defined by NASDAQ listing standards and the regulations promulgated under the Securities Exchange Act of 1934. The Audit/Compliance Committee met 6 times during 2010. The Board of Directors has adopted a written Audit Committee Charter, which is available under the Corporate Governance link in the Investor Relations section of the Company’s website, www.newcenturybanknc.com. The report of the Audit/Compliance Committee is included under Item 14 of this Annual Report.

Each of the Audit/Compliance Committee members is “independent” and “financially literate” as defined by NASDAQ listing standards and applicable SEC rules and regulations. The Board of Directors has determined that Oscar N. Harris, a member of the Audit/Compliance Committee, meets the requirements adopted by the SEC for qualification as an “audit committee financial expert.” An audit committee financial expert is defined as a person who has the following attributes: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of GAAP in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that are of the same level of complexity that can be expected in the registrant’s financial statements, or experience supervising people engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions.

Nominating Committee. The duties of the Nominating Committee are: (i) to assist the Board of Directors, on an annual basis, by identifying individuals qualified to become board members, and to recommend to the board the director nominees for the next meeting of shareholders at which directors are to be elected; and (ii) to assist the Board of Directors by identifying individuals qualified to become board members, in the event a vacancy on the board exists and that such vacancy should be filled.

The members of the Nominating Committee during 2010 were J. Gary Ciccone, Gerald W. Hayes, and Anthony Rand. each of whom is “independent” as defined by NASDAQ listing standards and applicable SEC rules and regulations. The nominating committee met one time in 2010. The Bylaws of the Company state that candidates may be nominated for election to the Board of Directors by the Nominating Committee or by any shareholder of the Company’s common stock. It is the policy of the Nominating Committee to consider all shareholder nominations. Shareholder nominations must be submitted to the Nominating Committee in writing on or before September 30th of the year preceding the annual meeting at which the nominee would stand for election to the Board of Directors and must be accompanied by each nominee’s written consent to serve as a director of the Company if elected. The Bylaws of the Company require that all nominees for director, including shareholder nominees, have business, economic or residential ties to the Company’s market area. In evaluating nominees for director, the Nominating Committee values community involvement and experience in finance or banking including prior service as an officer or director of an entity engaged in the financial services business, although such experience is not a prerequisite for nomination. Although there is not currently a formal policy requiring that the Nominating Committee consider diversity in its identification of nominees to the Board of Directors, the committee values diversity, including diversity of background, experience and expertise. The Nominating Committee has adopted a formal written charter which is reviewed annually

 

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for adequacy and which is available under the Corporate Governance link in the Investor Relations section of the Company’s website, www.newcenturybanknc.com.

Compensation Committee. The members of the Compensation Committee are J. Gary Ciccone, Michael McLamb, Anthony E. Rand, Gerald Hayes, Ann H. Thornton, and W. Lyndo Tippett. The Compensation Committee meets on an as needed basis to review the salaries and compensation programs required to attract and retain the Company’s executive officers. The Compensation Committee met 3 times in 2010. The Committee approves the compensation of the President and Chief Executive Officer. The compensation of “reporting officers” to the President including the Chief Financial Officer, Chief Banking Officer, Chief Credit Officer, and Chief Deposit Operations Officer is determined by the President and Chief Executive Officer based on such officer’s experience, managerial effectiveness, contribution to the Company’s overall profitability, maintenance of regulatory compliance standards and professional leadership. The Committee compares the compensation of the Company’s executive officers with compensation paid to executives of similarly situated bank holding companies, other businesses in the Company’s market area and appropriate state and national salary data. The Committee is not bound by recommendations made by the President and Chief Executive Officer. Furthermore, the President and Chief Executive Officer does not have any input into his own compensation. The Compensation Committee engages third party compensation consultants on occasion to assist in determining executive pay or additional benefits, but does not delegate its duties. The Board of Directors has adopted a written Compensation Committee Charter, which is available under the Corporate Governance link in the Investor Relations section of the Company’s website, www.newcenturybanknc.com.

Indebtedness of and Transactions with Management

The Bank, has had, and expects to have in the future, banking and other transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers and associates. All such transactions are made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing for comparable transactions with unaffiliated persons, and will not involve more than the normal risk of collection or present other unfavorable features. Loans made by the Bank to directors and executive officers are subject to the requirements of Regulation O of the Board of Governors of the Federal Reserve System. Regulation O requires, among other things, prior approval of the Board of Directors with any “interested director” not participating, dollar limitations on amounts of certain loans and prohibits any favorable treatment being extended to any director or executive officer in any of the Bank’s lending matters. To the best knowledge of the management of the Company and the Bank, Regulation O has been complied with in its entirety.

ITEM 11 – EXECUTIVE COMPENSATION

The following Summary Compensation Table shows all cash and non-cash compensation paid to or received or deferred by William L Hedgepeth, II, Lisa F. Campbell, Kevin S. Bunn, J. Daniel Fisher and Joan I. Patterson (the “Named Executive Officers”) for services rendered in all capacities during the fiscal years ended December 31, 2010 and 2009. Compensation paid to the Named Executive Officers consisted of cash salary, non-equity incentive plan compensation paid in cash, equity compensation in the form of incentive stock option awards, 401(k) matching contributions, insurance premiums paid on behalf of each of the Named Executive Officers and certain perquisites. The following table summarizes the dollar amounts of each element of compensation and for incentive stock options, the grant date fair value computed in accordance with FASB ASC Topic 718.

 

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SUMMARY COMPENSATION TABLE

 

Name and

Principal Position

   Year      Salary      Bonus(1)      Option
Awards(2)
     Non-Equity
Incentive Plan
Compensation
     Change in
Pension
Value  and
Non-Qualified
Deferred
Compensation
Earnings
     All Other
Compensation(3)
    Total  

William L. Hedgepeth, II
President and Chief Executive Officer

    

 

2010

2009

  

  

   $

 

277,200

231,000

  

  

   $

 

—  

500

  

  

   $

 

7,838

57,838

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

   $

 

48,516

53,683

  

(4) 

  $

 

333,554

285,183

  

  

Lisa F. Campbell
Executive Vice President, Chief Financial Officer, and Chief Operating Officer

    

 

2010

2009

  

  

   $

 

203,280

169,400

  

  

   $

 

1,000

500

  

  

   $

 

4,703

—  

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

   $

 

31,318

32,204

  

  

  $

 

240,301

202,104

  

  

Kevin S. Bunn
Executive Vice President and Chief Banking Officer

    

 

2010

2009

  

  

   $

 

160,069

145,517

  

  

   $

 

1,000

500

  

  

   $

 

3,135

—  

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

   $

 

23,685

20,104

  

  

  $

 

187,889

166,121

  

  

J. Daniel Fisher
Executive Vice President and Chief Credit Officer

    

 

2010

2009

  

  

   $

 

212,750

185,000

  

  

   $

 

1,000

500

  

  

   $

 

3,135

—  

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

   $

 

29,174

27,339

  

  

  $

 

246,059

212,839

  

  

Joan I. Patterson
Executive Vice President and Chief Deposit Operations Officer

    

 

2010

2009

  

  

   $

 

133,403

121,275

  

  

   $

 

1,000

500

  

  

   $

 

3,135

—  

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

   $

 

18,527

17,189

  

  

  $

 

156,065

138,964

  

  

 

(1) Consists of Christmas bonuses.
(2) Calculated in accordance with FASB ASC Topic 718 and represents the fair value of stock options awarded based on the market price of the Company’s common stock on the date of grant of such award; the values do not represent actual cash compensation earned. The assumptions used in estimating the fair value of stock options are set forth in Note O to the Company’s audited consolidated financial statements at December 31, 2010.
(3) Includes 401(k) matching contributions and the dollar value of insurance premiums paid on behalf of the named officers for group term life, health, dental and disability insurance. Also includes an automobile allowance and country club dues paid to, or on behalf of, the named executives.
(4) Includes fees earned in connection with Mr. Hedgepeth’s service as a member of the Company’s Board of Directors

2000 Incentive Stock Option Plan. At the 2000 Annual Meeting, the shareholders approved the adoption of the New Century Bank 2000 Incentive Stock Option Plan.

The 2000 Incentive Stock Option Plan was adopted by the Board of Directors of the Company in connection with the reorganization of New Century Bank into the holding company form of organization. Upon adoption of the 2000 Incentive Stock Option Plan by the Company, all outstanding options to purchase shares of New Century Bank were converted into options to purchase shares of the Company’s common stock. At the 2004 Annual Meeting, the shareholders approved an amendment to the 2000 Incentive Stock Option Plan that increased the number of shares of the Company’s common stock available for issuance under the Plan. The 2000 Incentive Stock Option Plan expired in June 2010. No further stock options may be granted under the 2000 Incentive Stock Option Plan.

 

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2004 Incentive Stock Option Plan. At the 2004 Annual Meeting, the shareholders approved the adoption of the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The 2004 Incentive Stock Option Plan currently provides for the issuance of up to 357,000 shares of the Company’s common stock to officers and employees of the Company and its subsidiaries upon the exercise of stock options.

2010 Omnibus Stock Ownership and Long Term Incentive Plan. The Omnibus Stock Ownership and Long-Term Incentive Plan was approved at the 2010 annual meeting of shareholders. The 2010 Omnibus Plan provides for issuance of up to 250,000 shares of the Company’s common stock. The awards may be issued in the form of incentive stock option grants, non-qualified stock option grants, restricted stock grants, long-term incentive compensation units, or stock appreciation rights. There were no awards granted under this plan in 2010.

The following table sets forth information regarding vested and unvested incentive stock options outstanding as of December 31, 2010. All of the Company’s outstanding stock options have been granted at 100% of fair market value on the date of grant. The number of shares underlying the stock options, and the exercise prices associated with each option grant, have been adjusted for a 20% stock dividend in December 2006, a 50% stock dividend in July 2005 and three separate 10% stock dividends in June 2004, September 2003 and May 2002, respectively.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Name

  No. of
Securities
Underlying
Unexercised
Options
Exercisable
    No. of Securities
Underlying
Unexercised
Options
Unexerciseable
    Equity
Incentive
Plan
Awards; No.
of  Securities
Underlying
Unexercised
Unearned
Options
    Option
Exercise
Price
   

Option
Expiration

Date

  No. of
Shares
or Units
of Stock
That
Have
Not
Vested
    Market
Value
of
Shares
or Units
of  Stock
That
Have
Not
Vested
    Equity
Incentive
Plan
Awards;
No. of
Unearned
Shares,
Units or
Other
Rights
That Have

Not Vested
    Equity
Incentive
Plan
Awards;
Market or
Payout
Value  of
Unearned
Shares,
Units or
Other
Rights
That Have

Not Vested
 

William L. Hedgepeth, II

   

 

 

 

 

 

30

3,333

4,000

13,200

5,400

29,520

  

  

  

  

  

  

   

 

 

 

 

 

120

6,667

6,000

-0-

-0-

-0-

  

  

  

  

  

  

   

 

 

 

 

 

—  

—  

—  

—  

—  

—  

  

  

  

  

  

  

  $

 

 

 

 

 

5.75

7.73

14.15

16.22

10.69

7.07

  

  

  

  

  

  

 

Oct. 22, 2018

May 22, 2018

June 7, 2017

Aug. 3, 2016

Jan. 19, 2015

June 9, 2014

   

 

 

 

 

 

—  

—  

—  

—  

—  

—  

  

  

  

  

  

  

   

 

 

 

 

 

—  

—  

—  

—  

—  

—  

  

  

  

  

  

  

   

 

 

 

 

 

—  

—  

—  

—  

—  

—  

  

  

  

  

  

  

   

 

 

 

 

 

—  

—  

—  

—  

—  

—  

  

  

  

  

  

  

Lisa F. Campbell

   

 

 

 

 

30

600

2,000

3,600

11,979

  

  

  

  

  

   

 

 

 

 

120

2,400

3,000

2,400

-0-

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

5.75

7.94

15.81

16.22

4.59

  

  

  

  

  

 

Oct. 22, 2018

June 18, 2018

Feb. 6, 2017

Aug. 3, 2016

July 25, 2010

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

Kevin S. Bunn

   

 

 

 

 

30

300

4,800

1,350

19,800

  

  

  

  

  

   

 

 

 

 

120

1,200

-0-

-0-

-0-

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

5.75

7.94

16.22

13.44

7.07

  

  

  

  

  

 

Oct. 22, 2018

June 18, 2018

Aug. 3, 2016

July 13, 2015

June 9, 2014

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

   

 

 

 

 

—  

—  

—  

—  

—  

  

  

  

  

  

J. Daniel Fisher

   

 

 

30

2,000

2,800

  

  

  

   

 

 

120

1,000

4,200

  

  

  

   

 

 

—  

—  

—  

  

  

  

   

 

 

5.75

8.39

8.39

  

  

  

 

Oct. 22, 2018

Jan. 16, 2018

Jan. 16, 2018

   

 

—  

—  

  

  

   

 

—  

—  

  

  

   

 

—  

—  

  

  

   

 

—  

—  

  

  

Joan I. Patterson

   

 

 

 

30

300

3,600

7,174

  

  

  

  

   

 

 

 

120

1,200

2,400

-0-

  

  

  

  

   

 

 

 

—  

—  

—  

—  

  

  

  

  

   

 

 

 

5.75

7.94

16.22

4.59

  

  

  

  

 

Oct. 22, 2018

June 18, 2018

Aug. 3, 2016

July 25, 2010

   

 

 

 

—  

—  

—  

—  

  

  

  

  

   

 

 

 

—  

—  

—  

—  

  

  

  

  

   

 

 

 

—  

—  

—  

—  

  

  

  

  

   

 

 

 

—  

—  

—  

—  

  

  

  

  

 

- 100 -


The following chart contains details regarding the Company’s outstanding stock option 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

     399,695       $ 9.03         308,986   

Equity compensation plans not approved by security holders

     none         n/a         none   

Total

     399,695       $ 9.03         308,986   

The Company and New Century Bank have entered into employment agreements with each of William L. Hedgepeth, II, Lisa F. Campbell, Kevin S. Bunn, J. Daniel Fisher, and Joan I. Patterson. The agreements establish the scope, terms, and conditions of each employee’s employment by the Company and New Century Bank. The following discussion summarizes the employment agreements and is qualified in its entirety by reference to the employment agreements.

Employment Agreement with William L. Hedgepeth, II

The Company has entered into an employment agreement with William L. Hedgepeth, II as its President and Chief Executive Officer. The employment agreement establishes Mr. Hedgepeth’s duties and compensation and provides for his continued employment with the Company.

Term. Mr. Hedgepeth’s employment agreement provides for an initial term of three (3) years with renewal on each anniversary thereafter for an additional one-year term unless there is an affirmative decision not to renew the contract by the Board of Directors or by Mr. Hedgepeth.

Base Salary and Benefits. The agreement provides Mr. Hedgepeth with an annual salary of $231,000, with guaranteed salary increases of 5% on the first and second anniversaries of the agreement’s original effective date. Mr. Hedgepeth is also entitled to receive cash bonuses on an annual basis as determined by the Board of Directors or the Compensation Committee. The agreement also provides for Mr. Hedgepeth’s participation in any and all retirement and employee benefit plans maintained by the Company on behalf of its employees, as well as fringe benefits normally associated with Mr. Hedgepeth’s position with the Company or made available to all other employees.

Change in Control Benefits. The employment agreement provides that if an “adverse change” occurs within 12 months of a “change in control” of the Company and either (1) the Company terminates Mr. Hedgepeth’s employment other than for “cause,” disability, or death, or (2) Mr. Hedgepeth terminates his employment with the Company, he will be entitled to receive a payment equal to 299% of his “base amount,” as that term is defined in the Internal Revenue Code of 1986, as amended.

An “adverse change” will be deemed to have occurred if (i) Mr. Hedgepeth is assigned duties and/or responsibilities that are inconsistent with his position, duties, or status at the time of the change in control or with his reporting responsibilities or titles with the Company in effect at the time of the change in

 

- 101 -


control; (ii) Mr. Hedgepeth’s annual base salary is reduced below the amount in effect as of the change in control; (iii) Mr. Hedgepeth’s life insurance, major medical insurance, disability insurance, dental insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Company to the executive as of the effective date of the change in control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Company who participated in such benefits prior to such change in control; or (iv) Mr. Hedgepeth is transferred to a location more than twenty (20) miles from Dunn, North Carolina, or Fayetteville, North Carolina, without his express written consent.

For purposes of Mr. Hedgepeth’s employment agreement, a “change in control” will be deemed to have occurred upon (1) any person directly or indirectly acquiring beneficial ownership of voting stock, or acquiring irrevocable proxies or any combination of voting stock and irrevocable proxies representing 25% or more of any class of voting securities of the Company, or acquiring control of the election of a majority of the directors of the Company in any manner; (2) the consolidation or merger of the Company with or into another corporation, association, or entity, or any other reorganization, in which the Company is not the surviving corporation, or (3) the sale, transfer, or acquisition of all or substantially all of the assets of the Company by any other corporation, association, or other person, entity, or group.

Lisa F. Campbell and Kevin S. Bunn

New Century Bank has also entered into employment agreements with Lisa F. Campbell and Kevin S. Bunn.

Term. The initial term of Ms. Campbell’s employment agreement is three years. The term of Ms. Campbell’s employment agreement automatically extends for an additional year on each anniversary of the effective date, unless written notice of termination is received prior to renewal. The initial term of Mr. Bunn’s employment agreement is two years. The term of Mr. Bunn’s employment agreement automatically extends for an additional two years on the anniversary of the effective date, unless written notice of termination is given prior to renewal.

Benefits. Each of the officers’ employment agreements also entitles them to certain fringe benefits normally associated with individuals serving in their capacities with a community bank.

Change in Control Benefits. Each officer’s employment agreement provides that if a “termination event” occurs within a certain period of time following a “change in control,” such officer will be entitled to terminate the employment agreement and receive a lump sum payment equal to 150% of such officer’s “base amount” of compensation. The termination event must occur within six months of the change in control in the case of Mr. Bunn’s employment agreement, and within twelve months of the change in control in the case of Ms. Campbell’s employment agreement.

A “termination event” will be deemed to have occurred if (i) the executive is assigned duties and/or responsibilities that are inconsistent with his or her position, duties, or status at the time of the change in control or with his reporting responsibilities or titles with the Company in effect at the time of the change in control; (ii) the executive’s annual base salary is reduced below the amount in effect as of the change in control; (iii) the executive’s life insurance, major medical insurance, disability insurance, dental insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Company to the executive as of the effective date of the change in control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Company who participated in such benefits prior to such change in control; or (iv) the executive is transferred to a location outside Fayetteville, North Carolina, in the case of Mr. Bunn and Dunn, North Carolina in the case of Ms. Campbell; without the executive’s express written consent.

 

- 102 -


J. Daniel Fisher

As of January 14, 2008, the Company and New Century Bank entered into an employment agreement with J. Daniel Fisher, Executive Vice President and Chief Credit Officer of the Company and New Century Bank.

Base Salary. The agreement provides for a base salary of $185,000 per year, to be reviewed at least annually by the board of directors of New Century Bank. Mr. Fisher’s base salary may only be decreased if he is demoted for “cause” or if he voluntarily accepts a position with New Century Bank that involves a material reduction in his duties or responsibilities. If a “change in control” of New Century Bank occurs, then Mr. Fisher’s base salary must be increased by at least 6% per year during the term of the employment agreement. The agreement also entitled Mr. Fisher to receive a one-time bonus payment of $25,000 payable on or before January 31, 2008.

Benefits. Mr. Fisher is entitled to participate in any and all employee benefit programs and compensation plans that are available to all employees of the Bank. In addition, the Bank has agreed to provide Mr. Fisher with the following benefits:

 

   

Five weeks of paid vacation leave per year and ten days of paid sick leave per year (in addition to federal banking holidays, which are paid holidays)

 

   

Reimbursement for relocation expenses

 

   

Reimbursement for reasonable expenses incurred in the performance of his duties under the employment agreement

 

   

Payment of expenses associated with membership in one country club, including initiation fees and monthly dues not to exceed $7,500 per year

 

   

Major medical insurance

 

   

Life insurance coverage in an amount equal to at least twice Mr. Fisher’s annual base salary

 

   

Stock options

 

   

Participation in incentive and bonus compensation plans

 

   

Participation in all savings, pension and retirement plans (including the Bank’s 401(k) savings plan)

 

   

A car allowance of $1,000 per month

Term. The initial term of Mr. Fisher’s employment agreement is three years. The term is automatically extended for an additional year on each anniversary of the execution of the agreement unless written notice is received by Mr. Fisher or the Bank ninety days prior to the anniversary of the execution of the Agreement.

Change in Control Benefits. Mr. Fisher is also entitled to certain benefits in the event of a change in control of the Bank. A change in control means any of the following events:

 

   

The acquisition by any “person” (as such term is defined in section 7(j)(8)(A) of the Change in Bank Control Act of 1978), directly or indirectly, of beneficial ownership of voting stock representing 25% or more of any class of voting securities of the Bank, or the acquisition of control of the election of a majority of the directors of the Bank

 

   

The consolidation or merger of the Bank with or into another entity where the Bank is not the surviving corporation

 

   

The sale or transfer of all or substantially all of the assets of the Bank to another entity

 

- 103 -


If the Bank terminates Mr. Fisher’s employment other than for cause or disability or Mr. Fisher terminates his employment following a “termination event,” in either case within one year after a change in control, then Mr. Fisher will be entitled to receive a lump sum cash payment equal to 299% of Mr. Fisher’s “base amount,” as that term is defined in the Internal Revenue Code.

A “termination event” includes any of the following events:

 

   

If Mr. Fisher is assigned duties and/or responsibilities that are inconsistent with his position, duties, responsibilities, or status at the time of the change in control

 

   

If Mr. Fisher’s annual base salary is reduced below the amount in effect as of the effective date of the change in control

 

   

If Mr. Fisher’s insurance or other plans and benefits are reduced or eliminated (unless such reduction or elimination applies proportionately to all salaried employees)

 

   

If Mr. Fisher is transferred to a location outside of Cumberland County, North Carolina, and Harnett County, North Carolina, without his express written consent.

Joan I. Patterson

As of May 24, 2001, the Bank entered into an employment agreement with Joan I. Patterson, executive vice president and chief deposit operations officer of the Company and New Century Bank.

Base Salary. The agreement provides for a base salary of $121,275 per year, to be reviewed at least annually by the board of directors. If a “change in control” occurs, then Ms. Patterson’s base salary must be increased by at least 6% per year during the term of the employment agreement.

Benefits. Ms. Patterson is entitled to participate in any and all employee benefit programs and compensation plans that are available to all employees of the Bank. In addition, the Bank has agreed to provide Ms. Patterson with the following benefits:

 

   

Five weeks of paid vacation leave

 

   

Payment of certain club dues

 

   

Stock options

The initial term of Ms. Patterson’s employment agreement is three years. The term is automatically extended for an additional year at the end of each year of the agreement unless written notice is received by Ms. Patterson or the Bank thirty days prior to such date.

Change in Control Benefits. Ms. Patterson is also entitled to certain benefits in the event of a change in control of the Bank. A change in control means any of the following events:

 

   

The acquisition by any “person” (as such term is defined in section 7(j)(8)(A) of the Change in Bank Control Act of 1978), directly or indirectly, of beneficial ownership of voting stock representing 25% or more of any class of voting securities of the Bank, or the acquisition of control of the election of a majority of the directors of the Bank

 

   

The consolidation or merger of the Bank with or into another entity where the Bank is not the surviving corporation

 

   

The sale or transfer of all or substantially all of the assets of the Bank to another entity

In the event of a change in control, Ms. Patterson is entitled to terminate her employment agreement if a “termination event” occurs within one year of the change in control. In that case, Ms. Patterson would be

 

- 104 -


entitled to receive all amounts due and owing to the end of the term of the agreement as well as an amount equal to 150% of her “base amount,” as that term is defined in the Internal Revenue Code.

A “termination event” includes any of the following events:

 

   

If Ms. Patterson is assigned duties and/or responsibilities that are inconsistent with her position, duties, responsibilities, or status at the time of the change in control

 

   

If Ms. Patterson’s annual base salary is reduced below the amount in effect as of the effective date of the change in control

 

   

If Ms. Patterson’s insurance or other plans and benefits are reduced or eliminated (unless such reduction or elimination applies proportionately to all salaried employees)

 

   

If Ms. Patterson is transferred to a location outside of Harnett County, North Carolina, without her express written consent.

401(k) Plan. The Company has adopted a tax-qualified savings plan for employees. The 401(k) Plan covers all employees beginning the first day of their first full month of service. Employees may contribute up to 15% of their compensation, subject to the maximum allowed by law. The Company matches up to 100% of up to 6% of compensation contributed by participants beginning on January 1, 2006. Matching contributions vest at a rate of 25% per year following the participant’s first year of service.

Director Compensation

Board Fees. Each director receives a fee of $500 for each meeting of the Company’s Board of Directors attended, with the exception of the chairman, who receives $700 for each meeting of the Company’s Board of Directors attended. Members of all other committees of the Board of Directors receive $300 for each committee meeting attended, with the exception of committee chairmen, who receive $400 per committee meeting attended. In addition, all members of the Board of Directors receive a monthly retainer of $333, with the exception of Mr. Hedgepeth.

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. Directors’ fees deferred under the plan are used to purchase shares of the Company’s common stock by the administrator of the Deferral Plan, with such deferred compensation disbursed in the future as specified by the director at the time of his or her deferral election.

2000 Nonstatutory Stock Option Plan. The shareholders of New Century Bank ratified the 2000 Nonstatutory Stock Option Plan at the 2000 Annual Meeting. In connection with the reorganization of New Century Bank into the holding company form of organization, which resulted in the creation of the Company in 2003, the 2000 Nonstatutory Option Plan was adopted by the Company and options under that plan were converted into options to purchase shares of the Company’s common stock. At the 2004 Annual Meeting, the shareholders of the Company approved an amendment to the 2000 Nonstatutory Stock Option Plan that increased the number of shares of the Company’s common stock available for issuance under the Plan. Under the terms of the Plan, options on a total of 478,668 shares (as adjusted for stock dividends) of the Company’s common stock are currently available for issuance to members of the Company’s Board of Directors and the board of any subsidiary of the Company.

The 2000 Nonstatutory Stock Option Plan expired in June 2010. No further stock options may be granted under the 2000 Nonstatutory Stock Option Plan.

The following table presents a summary of all compensation paid by the Company to its directors for their service as such during the year ended December 31, 2010.

 

- 105 -


DIRECTOR COMPENSATION TABLE

 

Name

   Fees Earned
or

Paid in  Cash
     Stock
Awards
     Option
Awards
     All Other
Compensation
     Total  

Watson Caviness

   $ 6,166         —           —           —         $ 6,166   

J. Gary Ciccone

     22,700         —           —           —           22,700   

T. Dixon Dickens

     12,000         —           —           —           12,000   

T.C. Godwin, Jr.

     9,800         —           —           —           9,800   

Oscar N. Harris

     13,200         —           —           —           13,200   

Gerald W. Hayes

     10,800         —           —           —           10,800   

William L. Hedgepeth II

     6,500         —           —           —           6,500   

D. Ralph Huff, III

     11,200         —           —           —           11,200   

Tracy L. Johnson

     15,900         —           —           —           15,900   

John W. McCauley

     18,000         —           —           —           18,000   

Carlie C. McLamb

     6,000         —           —           —           6,000   

Carlie C. McLamb Jr.

     6,500         —           —           —           6,500   

Michael S. McLamb

     13,700         —           —           —           13,700   

Raymond L. Mulkey, Jr.

     9,933         —           —           —           9,933   

Anthony E. Rand

     10,700         —           —           —           10,700   

Sharon Raynor

     12,300         —           —           —           12,300   

James H. Smith

     12,266         —           —           —           12,266   

C. L. Tart, Jr.

     15,900         —           —           —           15,900   

Sidney E. Thompson

     0         —           —           —           0   

Ann H. Thornton

     11,500         —           —           —           11,500   

W. Lyndo Tippett

     13,800         —           —           —           13,800   

 

- 106 -


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

As of March 18, 2011, no shareholder known to management owned more than 5% of the Company’s common stock. As of March 18, 2011, the beneficial ownership of the Company’s common stock, by directors and named executive officers individually, and by directors and named executive officers as a group, was as follows:

 

NAME AND ADDRESS OF

BENEFICIAL OWNER

   AMOUNT AND
NATURE  OF
BENEFICIAL
OWNERSHIP  (1)(2)
     PERCENT
OF CLASS (3)
 

Kevin S. Bunn

Fayetteville, NC

     30,988         0.45   

Lisa F. Campbell(4)

Lillington, NC

     14,376         0.21   

Watson G. Caviness

Fayetteville, NC

     45,665         0.67   

J. Gary Ciccone(5)

Fayetteville, NC

     125,432         1.83   

T. Dixon Dickens(6)

Fayetteville, NC

     45,210         0.66   

J. Daniel Fisher

Dunn, NC

     14,868         0.22   

T. C. Godwin, Jr.(7)

Dunn, NC

     53,953         0.79   

Oscar N. Harris(8)

Dunn, NC

     306,030         4.48   

Gerald W. Hayes

Dunn, NC

     104,690         1.53   

William L. Hedgepeth, II

Fayetteville, NC

     92,134         1.35   

D. Ralph Huff, III(9)

Fayetteville, NC

     58,054         0.85   

Tracy L. Johnson(10)

Dunn, NC

     68,965         1.01   

John W. McCauley

Fayetteville, NC

     44,964         0.66   

Carlie C. McLamb, Jr.(11)

Dunn, NC

     30,321         0.44   

Michael S. McLamb(12)

Dunn, NC

     51,882         0.76   

Joan I. Patterson

Coats, NC

     20,991         0.31   

Anthony E. Rand(13)

Fayetteville, NC

     82,863         1.21   

Sharon L. Raynor(14)

Dunn, NC

     254,429         3.72   

 

- 107 -


NAME AND ADDRESS OF

BENEFICIAL OWNER

   AMOUNT AND
NATURE  OF
BENEFICIAL
OWNERSHIP  (1)(2)
     PERCENT
OF CLASS (3)
 

C. L. Tart, Jr.(15)

Dunn, NC

     147,157         2.15   

W. Lyndo Tippett

Fayetteville, NC

     32,528         0.48   

Ann H. Thornton

Clinton, NC

     38,483         0.56   

All Directors and Executive Officers as a group (21 persons)

     1,663,983         24.33   

 

(1) Except as otherwise noted, to the best knowledge of the Company’s management, the above individuals and group exercise sole voting and investment power with respect to all shares shown as beneficially owned other than the following shares as to which such powers are shared: Mr. Fisher – 5,114 shares; Mr. Harris –89,299 shares; Mr. Hedgepeth – 930 shares; Ms. Patterson – 957 shares; Ms. Raynor – 72,958; Mr. C.L. Tart – 18,783 shares; and Mr. Tippett – 16,985 shares.
(2) Included in the beneficial ownership tabulations are the following options to purchase shares of common stock of the Company: Mr. Bunn – 26,810 shares; Ms. Campbell – 10,360 shares; Mr. Caviness – 11,070 shares; Mr. Ciccone – 14,485 shares; Mr. Dickens – 8,746 shares; Mr. Fisher – 7,460 shares; Mr. Godwin – 2,653 shares; Mr. Hedgepeth – 61,346 shares; Mr. Huff – 12,482 shares; Mr. Johnson – 4,653 shares; Mr. McCauley – 2,839 shares; Ms. Patterson – 5,660 shares; Mr. Rand – 13,992 shares; Mr. Tart – 1,153 shares; Ms. Thornton – 9,499 shares; and Mr. Tippett – 6,116 shares and for all directors and executive officers as a group – 199,324 shares.
(3) The calculation of the percentage of class beneficially owned by each individual and the group is based on the sum of (i) a total of 6,913,636 shares of common stock outstanding as of March 18, 2011, and (ii) options to purchase shares of common stock which are exercisable within 60 days of March 18, 2011.
(4) Includes 325 shares held in the IRA of Ms. Campbell’s spouse.
(5) Includes 720 shares owned by Mr. Ciccone’s spouse and 4,301 shares held in the IRA of Mr. Ciccone’s spouse.
(6) Includes 3,264 shares held by Mr. Dickens as custodian for minor children, 3,932 shares held in the IRA of Mr. Dickens’ spouse and 2,303 shares owned by Mr. Dickens’ business.
(7) Includes 1,196 shares owned by Mr. Godwin’s spouse.
(8) Includes 2,395 shares owned by Mr. Harris’ spouse.
(9) Includes 14,700 shares owned by Mr. Huff’s business and 3,632 shares owned by Mr. Huff’s spouse.
(10) Includes 1,194 shares held by Mr. Johnson as custodian for minor children.
(11) Includes 25,369 shares held in the IRA of Mr. C. McLamb’s spouse.
(12) Includes 3,159 shares owned by Mr. M. McLamb’s spouse.
(13) Includes 9,298 shares held by Mr. Rand’s IRA spouse and 600 shares owned by Mr. Rand’s spouse.
(14) Includes 180,062 shares owned by Ms. Raynor’s husband and 2,395 shares held as custodian for minor children.
(15) Includes 85,971 shares owned by Mr. Tart’s business, 4,633 shares owned by Mr. Tart’s spouse, and 3,415 shares held in the IRA of Mr. Tart’s spouse.

 

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

Indebtedness of and Transactions with Management

The Company’s bank subsidiary, New Century Bank, has had, and expects to have in the future, banking and other transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers and associates. All such transactions are made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing for comparable transactions with unaffiliated persons, and will not involve more than the normal risk of collection or present other unfavorable features. Loans made by New Century Bank to directors and executive officers are subject to the requirements of Regulation O of the Board of Governors of the Federal Reserve System. Regulation O requires, among other things, prior approval of the Board of Directors with any “interested director” not participating, dollar limitations on amounts of certain loans and prohibits any favorable treatment being extended to any director or executive officer in any of the Bank’s lending matters. To the best knowledge of the management of the Company and the Bank, Regulation O has been complied with in its entirety.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Company has paid Dixon Hughes PLLC fees in connection with its assistance in the Company’s annual audit and review of the Company’s financial statements. From time to time, the Company engages Dixon Hughes PLLC to assist in other areas of financial planning.

The following table sets forth the fees billed by Dixon Hughes PLLC in various categories during 2010 and 2009.

AUDIT FEES

 

Category

   2010      2009  

Audit Fees(1)

   $ 119,935       $ 116,244   

Audit-Related Fees(2)

     4,516         3,640   

Tax Fees(3)

     12,425         13,775   

All Other Fees

     —           —     
                 

Total Fees Paid

     136,876       $ 133,659   
                 

 

(1) Includes fees paid or expected to be paid for audits of annual consolidated financial statements, reviews of consolidated financial statements included in quarterly reports on Form 10-Q, report production assistance relating to said financial statements and related documents.
(2) Includes fees paid for accounting consultations.
(3) Includes fees paid for services relating to tax planning, preparation and compliance.

All services rendered by Dixon Hughes PLLC during 2010 were subject to pre-approval by the Audit/Compliance Committee. The Audit/Compliance Committee has considered whether Dixon Hughes PLLC’s provision of other non-audit services to the Company is compatible with maintaining independence of Dixon Hughes PLLC. The Audit/Compliance Committee has determined that it is compatible with maintaining the independence of Dixon Hughes PLLC.

 

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Report of the Audit/Compliance Committee

The Audit/Compliance Committee of the Company is responsible for receiving and reviewing the annual audit report of the Company’s independent auditors and reports of examinations by bank regulatory agencies, and helps formulate, implement, and review the Company’s internal audit program. The Audit/Compliance Committee assesses the performance and independence of the Company’s independent auditors and recommends their appointment and retention. The Audit/Compliance Committee has in place pre-approval policies and procedures that involve an assessment of the performance and independence of the Company’s independent auditors, an evaluation of any conflicts of interest that may impair the independence of the independent auditors and pre-approval of an engagement letter that outlines all services to be rendered by the independent auditors.

During the course of its examination of the Company’s audit process in 2010, the Audit/Compliance Committee reviewed and discussed the audited financial statements with management. The Audit/Compliance Committee also discussed with the independent auditors, Dixon Hughes PLLC, all matters that are required to be discussed by the Statement of Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. Furthermore, the Audit/Compliance Committee received from Dixon Hughes PLLC disclosures regarding their independence required by the Public Company Accounting Oversight Board Rule 3526, as amended and discussed with Dixon Hughes PLLC their independence.

Based on the review and discussions above, the Audit/Compliance Committee (i) recommended to the Board that the audited financial statements be included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 for filing with the SEC and (ii) has recommended that shareholders ratify the appointment of Dixon Hughes PLLC as independent auditors for 2011.

This report is submitted by the Audit/Compliance Committee:

J. Gary Ciccone

Oscar N. Harris

John McCauley

Sharon L. Raynor

W. Lyndo Tippett

D. Ralph Huff, III

 

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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, 2010 and 2009

  

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008

  

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008

  

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

  

Notes to Consolidated Financial Statements.

  

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

  

None

  

3.      Exhibits

 

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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 Nonstatutory Stock Option Plan, a compensatory plan(2)
10(iii)   Employment Agreement of William L. Hedgepeth II, a management contract(3)
10(iv)   Employment Agreement of Lisa F. Campbell, a management contract(1)
10(v)   2004 Incentive Stock Option Plan, a compensatory plan(2)
10(vi)   Directors’ Deferral Plan, as amended(4)
10(vii)   Employment Agreement of Kevin S. Bunn, a management contract(3)
10(viii)   Employment Agreement of J. Daniel Fisher, a management contract(3)
10(ix)   Employment Agreement of Joan I. Patterson, a management contract(3)
10(x)   2010 Omnibus Stock Ownership and Long Term Incentive Plan(5)
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)

 

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. Incorporated by reference from Registrant’s Registration Statement on Form S-8 (Registration No. 333-117816), filed with the Securities and Exchange Commission on July 30, 2004.
5. Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 2, 2010.

 

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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

      William L. Hedgepeth, II
Date: March 31, 2011       President and Chief Executive Office

 

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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.

    March 31, 2011

William L. Hedgepeth, II., President,

Chief Executive Officer and Director

   

/s/ Lisa F. Campbell

    March 31, 2011

Lisa F. Campbell, Executive Vice President,

Chief Operating Officer and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

   

/s/ J. Gary Ciccone

    March 31, 2011
J. Gary Ciccone, Director    

/s/ T. Dixon Dickens

    March 31, 2011
T. Dixon Dickens, Director    

/s/ John W. McCauley

John W. McCauley, Director

    March 31, 2011

/s/ Oscar N. Harris

Oscar N. Harris, Director

    March 31, 2011

/s/ Clarence L. Tart, Jr.

Clarence L. Tart, Jr., Director

    March 31, 2011

/s/ Gerald W. Hayes, Jr.

Gerald W. Hayes, Jr., Director

    March 31, 2011

/s/ D. Ralph Huff, III

D. Ralph Huff III, Director

    March 31, 2011

/s/ Thurman C. Godwin, Jr.

Thurman C. Godwin, Jr., Director

    March 31, 2011

/s/ Tracy L. Johnson

Tracy L. Johnson, Director

    March 31, 2011

/s/ Carlie C. McLamb Jr.

Carlie C. McLamb Jr., Director

    March 31, 2011

/s/ Michael S. McLamb

Michael S. McLamb, Director

    March 31, 2011

 

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/s/ Anthony Rand

Anthony Rand, Director

    March 31, 2011

/s/ Sharon L. Raynor

Sharon L. Raynor, Director

    March 31, 2011

/s/ W. Lyndo Tippett

W. Lyndo Tippett, Director

    March 31, 2011

/s/ Ann H. Thornton

Ann H. Thornton, Director

    March 31, 2011

/s/ Watson G. Caviness

Watson G. Caviness, Director

    March 31, 2011

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Exhibit

    
3(i)   Articles of Incorporation.    *
3(ii)   Bylaws    *
4   Form of Stock Certificate    *
10(i)   2000 Incentive Stock Option Plan    *
10(ii)   2000 Nonstatutory Stock Option Plan    *
10(iii)   Employment Agreement with William L. Hedgepeth II    *
10(iv)   Employment Agreement of Lisa F. Campbell    *
10(v)   2004 Incentive Stock Option Plan    *
10(vi)   Directors’ Deferral Plan    *
10(vii)   Employment Agreement of Kevin S. Bunn    *
10(viii)   Employment Agreement of J. Daniel Fisher    *
10(ix)   Employment Agreement of Joan I. Patterson    *
10(x)   2010 Omnibus Stock Ownership and Long Term Incentive Plan    *
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

 

* Incorporated by reference

 

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