10-K 1 v336723_10k.htm 10-K

 

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, 2012

 

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 (I.R.S. Employer
Incorporation or Organization) 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).  x Yes ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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 ¨  Smaller reporting company x

(Do not check if a smaller reporting company)

 

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 $31,763,499.

 

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock as of the latest practicable date 6,916,506 shares outstanding as of March 18, 2013.

 

Documents Incorporated by Reference.

Definitive Proxy Statement for the 2013 Annual Meeting of Shareholders as filed pursuant to Section 14 of the Securities Exchange Act of 1934, incorporated into Part III of this Form 10-K

 

 
 

 

FORM 10-K CROSS-REFERENCE INDEX

 

part i form 10-k

Proxy

statement

ANNUAL

REPORT

       
Item 1 – Business 3    
Item 2 – Properties 18    
Item 3 – Legal Proceedings 19    
Item 4 – Mine Safety Disclosures 19    
       
PART II      
       
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19    
Item 6 – Selected Financial Data 20    
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation 21    
Item 7A – Quantitative and Qualitative Disclosures About Market Risk 42    
Item 8 – Financial Statements and Supplementary Data 42    
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 99    
Item 9A – Controls and Procedures 99    
Item 9B – Other Information 100    
       
PART III      
       
Item 10 – Directors, Executive Officers and Corporate Governance 101 X  
Item 11 – Executive Compensation  101 X  
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 102 X  
Item 13 – Certain Relationships and Related Transactions, and Director Independence  103 X  
Item 14 – Principal Accountant Fees and Services  103 X  
       
PART IV      
       
Item 15 – Exhibits and Financial Statement Schedules 104  

   

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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 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 which includes Cumberland, Sampson, Robeson, Wayne and Harnett. The Registrant’s market area has a population of over 767,089 with an average household income of over $45,000.

 

Total deposits in the Registrant’s market area exceeded $6.7 billion at June 30, 2012. The leading economic components of Harnett County are services, manufacturing, and retail trade. 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 early adoption of laws permitting 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 greater use of media advertising. As of June 30, 2012, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 179 offices (27 in Harnett County, 69 in Cumberland County, 33 in Robeson County, 16 in Sampson County, and 34 in Wayne County).

 

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The enactment of legislation authorizing interstate banking caused great increases in the size and financial resources of some of Registrant’s competitors. In addition, as a result of interstate banking and the recent economic recession, 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, 2012, the Registrant employed 111 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 Registrant. Certain of the legal and regulatory requirements are applicable to the Bank and the Registrant. This discussion does not purport to be a complete explanation of all such laws and regulations and is qualified in its entirety by reference to the statutes and regulations involved.

 

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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.

 

North Carolina Banking Law Modernization Act. On October 1, 2012, as a result of the recommendations of the Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws, legislation went into effect that comprehensively modernizes North Carolina’s banking laws for the first time since the Great Depression. As a result of the legislation, Articles 1 through 10, 12, and 13 of Chapter 53 of the North Carolina General Statutes were repealed, and new Chapter 53C, entitled “Regulation of Banks,” became law. Major changes enacted by the law include: a comprehensive list of definitions enhancing the clarity and meaning of the various sections of North Carolina’s banking law, a broader reliance on the North Carolina Business Corporations Act, and incorporation of modern concepts of capital adequacy and regulatory supervision. On March 4, 2013, a bill was filed for consideration by the North Carolina General Assembly to make certain technical corrections and clarifications to Chapter 53C.

 

Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. This law has significantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have significant discretion in drafting rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many years. The Dodd-Frank Act included, 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 FDIC deposit insurance to $250,000 per depository category 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.

 

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The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of Tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). The Federal Reserve released a final rule in early 2011 which requires a “banking entity,” a term that is defined to include bank holding companies like the Registrant, to bring its proprietary trading activities and investments into compliance with the Dodd-Frank Act restrictions no later than two years after the earlier of: (1) July 21, 2012, or (2) 12 months after the date on which interagency final rules are adopted. Pursuant to the compliance date final rule, banking entities are permitted to request an extension of this timeframe from the Federal Reserve. In late 2011, the federal banking agencies released for comment proposed regulations implementing the Volcker Rule. The public comment period closed in early 2012. The proposed rules are highly complex and many aspects of their application remain uncertain. Due to the complexity of the new rules, the challenges of agency coordination, and the volume of public comments received, implementation of the Volcker Rule has been delayed. We do not currently anticipate that the Volcker Rule will have a material effect on our operations. However, until a final rule is adopted, the precise impact of the Volcker Rule on the Registrant cannot be determined.

 

A number of other provisions of the Dodd-Frank Act 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 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 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 went into effect April 1, 2011.

 

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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. 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.

 

On December 30, 2009, the Bank paid a $3.1 million prepaid assessment, creating 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 Registrant 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.

 

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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.

 

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. The MOU represents an informal agreement between the Board of Directors of New Century Bank, the Regional Director of the FDIC’s Atlanta Regional Office and the North Carolina Commissioner of Banks and requires that New Century Bank’s management take certain actions to improve the bank’s lending function. The Memorandum also requires the Bank to maintain minimum Tier 1 Leverage and Total Risk Based Capital Ratios of 8.0% and 11.5%, respectively, during the life of the Memorandum.  The Memorandum also restricts the ability of the Bank to grow its total assets at a rate in excess of 10% per year or to declare cash dividends without the prior approval of the Commissioner and the FDIC. As of December 31, 2012, the Registrant was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.78%, 15.34%, and 16.60%, respectively. Also, as of December 31, 2012, the Bank was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.52%, 14.98%, and 16.24%, respectively.

 

On January 29, 2013, the MOU was resolved and terminated upon agreement of all parties.

 

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

 

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

 

In June 2012, the federal bank regulatory agencies jointly issued three proposed rules that would revise the general risk-based capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). While the regulatory agencies had initially proposed an effective date of January 1, 2013 for the new rules, the agencies have since confirmed that the implementation will be delayed as a result of the many industry participants, including community banks, that expressed concern over the impact of the proposed rules. When and if the proposed rules become effective, they would, among other things: revise the definition of regulatory capital components and related calculations, add a new common equity Tier 1 capital ratio, and increase the minimum Tier 1 Capital Ratio requirement from 4% to 6% percent. If the proposed rules are implemented as written, the amount of capital that the Bank would be required to hold would likely increase.

 

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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, 2012.

 

                   Regulatory
          Adequately     Significantly  Minimum
   Actual   Well Capitalized  Capitalized  Undercapitalized  Undercapitalized  Requirement
Total risk-based capital ratio   16.24%  10.0% or more  8.0% or more  Less than 8.0%  Less than 6.0%  11.50% or more
Tier 1 risk-based capital ratio   14.98%    6.0% or more  4.0% or more  Less than 4.0%  Less than 3.0%  8.00% or more
Leverage ratio   10.52%    5.0% or more  4.0% or more * Less than 4.0% * Less than 3.0%  8.00% or more

 

 

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

 

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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 I 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 the documentation of loans, 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.

 

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.

 

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure of a financial institution to comply with these sanctions could result in legal consequences for the institution.

 

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.

 

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The federal banking agencies have implemented an evaluation system that rates an institution based on its asset size and actual performance in meeting community credit needs. Under these regulations, the institution is first evaluated and rated under two categories: a lending test and a community development test. For each of these 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.

 

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 $973,000 at December 31, 2012. 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 $25.0 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, 2012, 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 26.7% of total deposits and short-term borrowings at December 31, 2012, 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%. The FDIC and the Commissioner have the power to further restrict the payment of dividends by the Bank.

 

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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. In addition, the Bank has an internal policy that 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 the internal policy, the Bank’s loans to one borrower were limited to $8.5 million at December 31, 2012.

 

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 (such as the Registrant) 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.

 

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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.

 

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

 

Regulation of the Registrant

 

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

 

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

 

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

 

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

 

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

 

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

 

- making or servicing loans;

- performing certain data processing services;

- providing discount brokerage services;

- acting as fiduciary, investment or financial advisor;

- leasing personal or real property;

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

- acquiring a savings and loan association.

 

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

 

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

 

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

 

Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.

 

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

 

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

 

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

 

-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.

 

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.

 

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In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

 

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.

 

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

 

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

 

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, 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.

 

In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant and the Bank to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.

 

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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
             

Raleigh Loan Production Office

7951 Monument Lane, Suite #101

Raleigh, NC 27615

  2012   1,451   Leased
             

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

 

As of December 31, 2012 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 – mine safety disclosureS

 

None.

 

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.” Raymond James & Associates, Inc., Morgan Keegan & Company, McKinnon & Company, Automated Trading Desk Financial Services, B-Trade Services, Citadel Securities, Domestic Securities, Hill Thompson Magid & Company, Hudson Securities, J. P. Morgan Securities, Knight Capital Americas, L.P., Monroe Securities, UBS Securities, Sandler O’Neill & Partners, L.P., and Scott & Stringfellow provide bid and ask quotes for our common stock. At December 31, 2012, there were 6,913,636 shares of common stock outstanding, which were held by 1,362 shareholders of record.

 

   Sales Prices 
   High   Low 
2012          
First Quarter  $3.34   $1.89 
Second Quarter   4.90    2.94 
Third Quarter   5.75    4.52 
Fourth Quarter   6.14    5.30 
           
2011          
First Quarter  $6.00   $4.35 
Second Quarter   5.75    4.45 
Third Quarter   4.99    3.00 
Fourth Quarter   3.62    1.84 

 

The Registrant did not declare or pay cash dividends during 2012 and 2011 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, 
   2012   2011   2010   2009   2008 
   (dollars in thousands, except per share data) 
Operating Data:                         
Total interest income  $25,132   $30,383   $33,610   $33,030   $35,237 
Total interest expense   6,632    8,425    9,680    13,122    17,372 
Net interest income   18,500    21,958    23,930    19,908    17,865 
Provision for loan losses   (2,597)   6,218    15,634    5,472    4,283 
Net interest income after provision for loan losses   21,097    15,740    8,296    14,436    13,582 
Total non-interest income   3,598    2,817    2,678    3,098    3,124 
Impairment of goodwill   -    -    -    8,674    - 
Total non-interest expense   17,236    19,105    19,213    17,375    17,138 
Income (loss) before income taxes   7,459    (548)   (8,239)   (8,515)   (432)
Provision for income taxes (benefit)   2,822    (385)   (3,284)   (73)   (239)
Net income (loss)  $4,637   $(163)  $(4,955)  $(8,442)  $(193)
                          
Per Share Data:                         
Earnings (loss) per share - basic  $0.67   $(.02)  $(.72)  $(1.24)  $(.03)
Earnings (loss) per share - diluted   0.67    (.02)   (.72)   (1.24)   (.03)
Market Price                         
High   6.14    6.00    6.44    7.67    10.21 
Low   1.89    1.84    3.19    3.81    4.90 
Close   5.60    2.00    4.98    4.75    5.00 
Book value   7.84    7.22    7.19    7.96    9.17 
Tangible book value   7.79    7.14    7.09    7.83    7.76 
                          
Selected Year-End Balance Sheet Data:                         
Loans, gross of allowance  $367,892   $417,624   $470,484   $481,176   $460,626 
Allowance for loan losses   7,897    10,034    10,015    10,359    8,860 
Other interest-earning assets   183,679    128,800    109,685    107,360    99,908 
Goodwill and core deposit intangible   298    545    699    853    9,680 
Total assets   585,453    589,651    626,896    630,419    605,767 
Deposits   498,559    501,377    534,599    540,262    505,119 
Borrowings   30,220    36,249    40,038    32,936    35,547 
Shareholders’ equity   54,179    49,546    49,692    54,409    62,659 
                          
Selected Average Balances:                         
Total assets  $574,616   $624,015   $644,904   $630,521   $599,913 
Loans, gross of allowance   391,648    451,358    484,647    471,059    451,558 
Total interest-earning assets   532,193    565,867    599,152    578,372    554,798 
Goodwill and core deposit intangible   389    621    775    9,578    9,756 
Deposits   481,387    533,000    548,768    527,844    504,188 
Total interest-bearing liabilities   442,554    494,520    511,031    498,831    468,044 
Shareholders’ equity   52,769    50,094    54,750    63,584    62,107 
                          
Selected Performance Ratios:                         
Return on average assets   0.81%   (.03)%   (.77)%   (1.34)%   (.03)%
Return on average equity   8.79%   (.33)%   (9.05)%   (13.28)%   (.31)%
Net interest margin (4)   3.57%   3.91%   4.03%   3.49%   3.27%
Net interest spread (4)   3.34%   3.70%   3.75%   3.12%   2.69%
Efficiency ratio (1)   78.00%   77.10%   72.71%   75.52%   81.00%
                          
Asset Quality Ratios:                         
Nonperforming loans to period-end loans (2)   3.27%   4.70%   2.60%   3.34%   1.85%
Allowance for loan losses to period-end loans (3)   2.15%   2.40%   2.13%   2.15%   1.92%
Net loan charge-offs (recoveries)  to average loans   (0.12)%   1.37%   3.30%   0.84%   0.82%

 

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   At or for the year ended December 31, 
   2012   2011   2010   2009   2008 
   (dollars in thousands, except per share data) 
Capital Ratios:                         
Total risk-based capital   16.60%   13.49%   13.04%   13.89%   14.43%
Tier 1 risk-based capital   15.34%   12.22%   11.78%   12.63%   13.18%
Leverage ratio   10.78%   9.14%   9.40%   10.02%   10.66%
Tangible equity to assets   9.20%   8.31%   7.82%   8.49%   8.75%
Equity to assets ratio   9.25%   8.40%   7.93%   8.63%   10.34%
                          
Other Data:                         
Number of banking offices   7    9    9    9    10 
Number of full time equivalent employees   111    113    135    133    132 

 

(1)Efficiency ratio is calculated as non-interest expenses divided by the sum of net interest income and non-interest income, excluding goodwill impairment.
(2)Nonperforming loans consist of non-accrual loans and restructured loans.
(3)Allowance for loan losses to period-end loans ratio excludes loans held for sale.
(4)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 (referred to as the “Bank”), which became a subsidiary of the Company as part of a holding company reorganization. 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 the 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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FINANCIAL CONDITION

DECEMBER 31, 2012 AND 2011

 

Overview

 

Total assets at December 31, 2012 were $585.5 million, which represents a decrease of $4.2 million or (0.7)% from December 31, 2011. Interest earning assets at December 31, 2012 totaled $549.5 million and consisted of $367.9 million in net loans, $81.5 million in investment securities, $97.1 million in overnight investments and interest-bearing deposits in other banks and $3.0 million in federal funds sold. Total deposits and shareholders’ equity at December 31, 2012 were $498.6 million and $54.2 million, respectively.

 

Investment Securities

 

Investment securities increased to $81.5 million from $67.9 million at December 31, 2012. The Company’s investment portfolio at December 31, 2012, which consisted of U.S. government agency securities, U.S. government sponsored entities agency securities (GSE’s), mortgage-backed securities and bank-qualified municipal securities, aggregated $81.5 million with a weighted average taxable equivalent yield of 2.25%. The Company also holds an investment of $973,000 in Federal Home Loan Bank Stock with a weighted average yield of 1.66%. The investment portfolio increased $13.6 million in 2012, the result of $42.1 million in purchases, $26.9 million of maturities and prepayments and a decrease of $1.1 million in the market value of securities held available for sale and net accretion of investment discounts. There was a sale of $500,000 to fund a Community Reinvestment Act (“CRA”) investment.

 

The following table summarizes the securities portfolio by major classification:

 

Securities Portfolio Composition

(dollars in thousands)

           Tax 
   Amortized   Fair   Equivalent 
   Cost   Value   Yield 
             
U. S. government agency securities - GSE’s:               
Due within one year   9,385    9,460    1.27%
Due after one but within five years   16,947    17,047    0.68%
Due after five but within ten years   6,003    5,958    2.02%
Due after ten years   4,616    4,689    2.19%
    36,951    37,154    1.24%
Mortgage-backed securities:               
Due within one year   1,085    1,152    4.85%
Due after one but within five years   27,188    28,290    3.00%
Due after five but within ten years   4,505    4,500    1.77%
Due after ten years   2,016    2,012    2.16%
    34,794    35,954    2.85%
State and local governments:               
Due within one year   350    351    4.10%
Due after one but within five years   2,354    2,541    4.80%
Due after five but within ten years   3,665    3,787    3.35%
Due after ten years   1,601    1,704    6.03%
    7,970    8,383    4.35%
Total securities available for sale:               
Due within one year   10,820    10,963    1.72%
Due after one but within five years   46,489    47,878    2.25%
Due after five but within ten years   14,173    14,245    2.28%
Due after ten years   8,233    8,405    2.93%
                
   $79,715   $81,491    2.25%

 

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Loans Receivable

 

The loan portfolio at December 31, 2012 totaled $367.9 million and was comprised of $330.3 million in real estate loans, $29.3 million in commercial and industrial loans, and $8.7 million in loans to individuals. Also included in loans outstanding is $452,000 in net deferred loan fees.

 

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

 

   At December 31, 
   2012   2011   2010   2009   2008 
       % of       % of       % of       % of       % of 
       Total       Total       Total       Total       Total 
   Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans 
               (dollars in thousands)             
Real estate loans:                                                  
1 to 4 family residential  $41,017    11.1%  $52,182    12.5%  $60,385    12.8%  $69,995    14.5%  $67,353    14.6%
Commercial real estate   186,949    50.8%   192,047    46.0%   193,502    41.1%   195,165    40.6%   169,856    36.9%
Multi-family residential   19,524    5.3%   23,377    5.6%   30,088    6.4%   22,580    4.7%   18,744    4.1%
Construction   48,220    13.1%   70,846    16.9%   84,550    18.0%   70,736    14.7%   65,807    14.3%
Home equity lines of credit   34,603    9.4%   38,702    9.3%   39,938    8.5%   38,482    8.0%   41,352    9.0%
Total real estate loans   330,313    89.7%   377,154    90.3%   408,463    86.8%   396,958    82.5%   363,112    78.9%
Other loans:                                                  
Commercial and industrial   29,297    8.0%   33,146    8.0%   49,437    10.5%   70,747    14.7%   76,936    16.7%
Loans to individuals & overdrafts   8,734    2.4%   7,671    1.8%   12,967    2.8%   13,766    2.9%   20,916    4.5%
Total other loans   38,031    10.4%   40,817    9.8%   62,404    13.3%   84,513    17.6%   97,852    21.2%
Less:                                                  
Deferred loan origination (fees) cost, net   (452)   (0.1)%   (347)   (.1)%   (383)   (.1)%   (295)   (0.1)%   (338)   (0.1)%
Total loans   367,892    100%   417,624    100%   470,484    100.0%   481,176    100.0%   460,626    100.0%
Allowance for loan losses   (7,897)        (10,034)        (10,015)        (10,359)        (8,860)     
Total loans,  net  $359,995        $407,590        $460,469        $470,817        $451,766      

 

During 2012, loans receivable decreased by $47.6 million, or 11.7%, to $360.0 million as of December 31, 2012. The decline in loans during the year is attributable to reduced loan demand in the Company’s markets.

 

The majority of the Company’s loan portfolio is comprised of real estate loans. This category, which includes both commercial and consumer loan balances, decreased from 90.3% of the portfolio at December 31, 2011 to 89.7% at December 31, 2012. The real estate loan category decreased by $46.8 million during the year as result of a $22.6 million decrease in construction loans, an $11.1 million decrease in 1 to 4 family residential loans, a $5.1 decrease in commercial real estate loans, a $4.1 million decrease in HELOC loans and a $3.9 million decrease in multi-family residential loans. The most significant shift in the overall portfolio was that of the construction loan category which was primarily the result of loan repayments that exceeded the 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 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.

 

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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).

 

Acquisition, Development and Construction Loans

As of December 31, 2012

(dollars in thousands)

 

   Construction   Land and Land
Development
   Total 
Total ADC loans  $29,892   $18,328   $48,220 
                
Average Loan Size  $100   $333      
                
Percentage of total loans   8.13%   4.98%   13.11%
                
Non-accrual loans  $733   $1,565   $2,298 

 

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, 2012 were certain loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $8.3 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $8.6 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 25.7% of total risk-based capital as of December 31, 2012, 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.

 

Acquisition, Development and Construction Loans

As of December 31, 2011

(dollars in thousands)

 

   Construction   Land and Land
Development
   Total 
Total ADC loans  $49,958   $20,888   $70,846 
                
Average Loan Size  $174   $307      
                
Percentage of total loans   11.96%   5.00%   16.96%
                
Non-accrual loans  $596   $3,172   $3,768 

 

Included in ADC loans and residential real estate loans as of December 31, 2011 were loans that exceeded regulatory loan to value (“LTV”) guidelines. The Company had $13.3 million in non 1-4 residential loans that exceeded the regulatory LTV limits and $12.5 million of 1-4 residential loans that exceeded the regulatory LTV limits. The total amount of these loans represented 43.8% of total risk-based capital as of December 31, 2011, 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.

 

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At December 31, 2012 and 2011 the Company exceeded the 40% guideline in one product line. The Office Building product type group represented 40% of Risk-Based Capital or $26.7 million at December 31, 2012. This total for this product line at December 31, 2011 was $27.4 million or 46% of Risk-Based Capital. All other commercial real estate groups were under the 40% threshold at both dates.

 

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, 2012.

 

   ADC Loans   Percent   HELOC   Percent 
   (dollars in thousands) 
                 
Harnett County  $4,404    9.13%  $6,839    19.76%
Cumberland County   17,909    37.14%   7,258    20.99%
Johnston County   543    1.13%   648    1.87%
Pitt County   4,642    9.63%   5    .01%
Robeson County   1,602    3.32%   3,775    10.91%
Sampson County   614    1.27%   1,686    4.87%
Wake County   5,707    11.84%   960    2.77%
Wayne County   3,079    6.39%   5,521    15.96%
Hoke County   4,443    9.21%   172    .50%
All other locations   5,277    10.94%   7,739    22.36%
                     
Total  $48,220    100.00%  $34,603    100.0%

 

Below is a table showing geographic concentrations for ADC and HELOC loans at December 31, 2011.

 

   ADC Loans   Percent   HELOC   Percent 
   (dollars in thousands) 
                 
Harnett County  $5,637    7.95%  $7,432    19.20%
Cumberland County   18,424    26.01%   6,652    17.18%
Johnston County   1,410    1.99%   622    1.61%
Pitt County   4,631    6.54%   -    - 
Robeson County   2,021    2.85%   3,377    8.72%
Sampson County   730    1.03%   1,645    4.25%
Wake County   12,696    17.92%   1,322    3.42%
Wayne County   4,474    6.32%   5,769    14.91%
Hoke County   2,626    3.71%   111    .29%
All other locations   18,197    25.68%   11,772    30.42%
                     
Total  $70,846    100.0%  $38,702    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, 2012, the Company had $84.4 million in loans that had terms permitting interest only payments. This represented 22.9% of the total loan portfolio. At December 31, 2011, the Company had $125.8 million in loans that had terms permitting interest only payments. This represented 30.1% of the total loan portfolio. 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.

 

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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 $43.2 million or 11.7% of total loans at December 31, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company’s ten largest customer loan relationship concentrations totaled $61.0 million, or 16.6% of total loans, at December 31, 2012 compared to $68.3 million, or 16.4% of total loans at December 31, 2011. 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.

 

Maturities and Sensitivities of Loans to Interest Rates

 

The following table presents the maturity distribution of the Company’s loans at December 31, 2012. 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, 2012 
       Due after one         
   Due within   year but within   Due after     
   one year   five years   five years   Total 
   (dollars in thousands) 
Fixed rate loans:                    
1 to 4 family residential  $16,802   $14,580   $1,999   $33,381 
Commercial real estate   34,091    64,752    41,501    140,344 
Multi-family residential   6,532    4,052    39    10,623 
Construction   4,167    7,099    182    11,448 
Home equity lines of credit   29    -    208    237 
Commercial and industrial   2,231    9,480    3,117    14,828 
Loans to individuals & overdrafts   3,198    2,387    97    5,682 
Total at fixed rates   67,050    102,350    47,143    216,543 
                     
Variable rate loans:                    
1 to 4 family residential   1,891    3,984    700    6,575 
Commercial real estate   10,164    27,483    4,585    42,232 
Multi-family residential   1,271    6,148    -    7,419 
Construction   26,566    7,379    529    34,474 
Home equity lines of credit   5    110    33,669    33,784 
Commercial and industrial   10,268    2,361    1,522    14,151 
Loans to individuals & overdrafts   1,678    681    681    3,040 
Total at variable rates   51,843    48,146    41,686    141,675 
                     
Subtotal   118,893    150,496    88,829    358,218 
                     
Non-accrual loans   6,170    3,319    637    10,126 
                     
Gross loans  $125,063   $153,815   $89,466    368,344 
                     
Deferred loan origination (fees) costs, net                  (452)
                     
Total loans                 $367,892 

 

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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, 2012, the Company had $1.2 million in loans that were 30 days or more past due. This represented 0.32% of gross loans outstanding on that date. This is a decrease from December 31, 2011 when there were $4.1 million in loans that were past due 30 days or more, or 1.02% of gross loans outstanding. Non-accrual loans decreased by $7.5 million to $10.1 million at December 31, 2012. As of December 31, 2012, the Company had thirty-three loans totaling $6.6 million that were considered to be troubled debt restructurings, of which fourteen loans totaling $1.9 million were still accruing interest. At December 31, 2011, the Company had twenty-one loans totaling $9.1 million that were considered to be troubled debt restructurings, of which eight loans totaling $2.0 million were still accruing. There were no loans that were over 90 days past due and still accruing interest at December 31, 2012. There were three loans totaling $108,000 that were 90 days or more past due and still in accruing at December 31, 2011.

 

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, 
   2012   2011   2010   2009   2008 
   (dollars in thousands) 
                     
Non-accrual loans  $10,126   $17,623   $10,562   $16,048   $8,630 
Restructured loans   1,904    2,013    1,688    -    - 
Total non-performing loans   12,030    19,636    12,250    16,048    8,630 
Foreclosed real estate   2,833    3,031    3,655    2,530    2,799 
Repossessed assets   -    -    -    -    - 
Total non-performing assets  $14,863   $22,667   $15,905   $18,578   $11,429 
                          
Accruing loans past due 90 days  or more  $-   $108   $-   $-   $- 
Allowance for loan losses  $7,897   $0,034   $10,015   $10,359   $8,860 
                          
Non-performing loans to period  end loans   3.27%   4.70%   2.60%   3.34%   1.87%
Non-performing loans and accruing  loans past due 90 days or more to  period end loans   3.27%   4.73%   2.60%   3.34%   1.87%
Allowance for loan losses to period  end loans   2.15%   2.40%   2.13%   2.15%   1.92%
Allowance for loan losses to  non-performing loans   66%   51%   82%   65%   103%
Allowance for loan losses to  non-performing assets   53%   44%   63%   56%   78%
Allowance for loan losses to  non-performing assets and accruing   loans past due 90 days or more   53%   44%   63%   56%   78%
Non-performing assets to total assets   2.53%   3.84%   2.54%   2.95%   1.89%
Non-performing assets and accruing                         
loans past due 90 days or more to                         
total assets   2.53%   3.86%   2.54%   2.95%   1.89%

 

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In addition to the above, the Company had $7.7 million in loans that were considered to be impaired for reasons other than their past due, accrual or restructured status. In total, there were $19.7 million of loans that were considered to be impaired at December 31, 2012 which is a $5.0 million decrease from the $24.8 million that was impaired at December 31, 2011. Impaired loans have been evaluated by management in accordance with Accounting Standards Codification (“ASC”) 310 and $909,000 has been included in the allowance for loan losses as of December 31, 2012 for these loans. All troubled debt restructurings and other non-performing loans are included within impaired loans as of December 31, 2012.

 

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, 
       % of       % of       % of       % of       % of 
       Total       Total       Total       Total       Total 
   2012   loans   2011   loans   2010   loans   2009   loans   2008   loans 
   (dollars in thousands) 
                                         
1 to 4 family residential  $1,070    11.10%  $1,597    12.49%  $2,483    12.83%  $1,854    14.55%  $1,437    14.62%
Commercial real estate   4,946    50.80%   4,771    45.98%   3,111    41.13%   4,281    40.56%   2,761    36.88%
Multi- family residential   106    5.30%   127    5.60%   640    6.40%   200    4.69%   115    4.07%
Construction   798    13.10%   1,540    16.96%   349    17.97%   629    14.70%   1,039    14.29%
Home equity lines of credit   627    9.40%   1,186    9.27%   850    8.49%   1,189    8.00%   499    8.97%
Commercial and industrial   278    8.00%   719    7.94%   1,052    10.51%   1,699    14.70%   2,381    16.70%
Loans to individuals & overdrafts   72    2.40%   94    1.84%   1,530    2.76%   501    2.86%   563    4.54%
Deferred loan origination (fees) cost, net   -    (0.1)%   -    (0.08)%   -    (0.09)%   -    (0.06)%   -    (0.07)%
         100.00%        100.00%        100.00%        100.00%        100.00%
Total allocated   7,897         10,034         10,015         10,353         8,795      
Unallocated   -         -         -         6         65      
Total  $7,897        $10,034        $10,015        $10,359        $8,860      

 

The allowance for loan losses as a percentage of gross loans outstanding decreased by 0.25% during 2012 to 2.15% of gross loans at December 31, 2012. The change in the allowance during 2012 resulted from net recoveries of $460,000, largely due to a $2.6 million recovery on the previously reported loan fraud by a large relationship borrower. General reserves totaled $7.0 million or 1.90% of gross loans outstanding as of December 31, 2012, a decrease from year-end 2011 when they totaled $8.5 million or 2.04% of loans outstanding. At December 31, 2012, specific reserves on impaired loans constituted $909,000 or 0.25% of gross loans outstanding compared to $1.5 million or 0.36% of loans outstanding as of December 31, 2011.

 

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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, 
   2012   2011   2010   2009   2008 
   (dollars in thousands) 
Allowance for loan losses at  beginning of year  $10,034   $10,015   $10,359   $8,860   $8,314 
Provision for loan losses   (2,597)   6,218    15,634    5,472    4,283 
    7,437    16,233    25,993    14,332    12,597 
Loans charged off:                         
Commercial and industrial   (193)   (4,116)   (11,967)   (2,932)   (2,836)
Construction   (720)   (993)   (464)   (168)   (118)
Commercial real estate   (1,580)   (2,970)   (2,811)   -    - 
Multi-family residential   -    -    -    -    - 
Home equity lines of credit   (459)   (661)   (496)   (404)   (448)
1 to 4 family residential   (232)   (1,512)   (2,254)   (567)   (678)
Loans to individuals & overdrafts   (70)   (170)   (421)   (352)   (270)
Total charge-offs   (3,254)   (10,422)   (18,413)   (4,423)   (4,350)
                          
Recoveries of loans previously charged off:                         
Commercial and industrial   2,714    3,765    1,121    325    373 
Construction   317    12    137    12    33 
Multi-family residential   -    -    -    -    - 
Commercial real estate   287    60    1,023    -    - 
Home equity lines of credit   74    52    44    7    - 
1 to 4 family residential   232    247    15    69    145 
Loans to individuals & overdrafts   90    87    95    37    62 
Total recoveries   3,714    4,223    2,435    450    613 
                          
Net recoveries (charge-offs)   460    (6,199)   (15,978)   (3,973)   (3,737)
                          
Allowance for loan losses at  end of year  $7,897   $10,034   $10,015   $10,359   $8,860 
                          
Ratios:                         
Net charge-offs (recoveries) as a percent of  average loans   (0.12)%   1.37%   3.30%   0.84%   0.83%
Allowance for loan losses as a percent of loans at end of year   2.15%   2.40%   2.13%   2.15%   1.92%

 

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.

 

Management believes the level of the allowance for loan losses as of December 31, 2012 is appropriate in light of the risk inherent within the Company’s loan portfolio.

 

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Other Assets

 

At December 31, 2012, non-earning assets totaled $41.1 million, a decrease of $12.1 million from $53.2 million at December 31, 2011. Non-earning assets at December 31, 2012 consisted of: cash and due from banks of $13.5 million, premises and equipment totaling $10.9 million, foreclosed real estate totaling $2.8 million, accrued interest receivable of $1.6 million, bank owned life insurance of $8.2 million and other assets totaling $4.4 million, which includes a $723,000 net prepayment in FDIC deposit insurance for the year 2012 and net deferred taxes of $2.5 million.

 

The Company has an investment in bank owned life insurance of $8.2 million, which increased $0.2 million from December 31, 2011 due to 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, 2012 were $498.6 million and consisted of $92.3 million in non-interest-bearing demand deposits, $122.7 million in money market and NOW accounts, $22.2 million in savings accounts, and $261.4 million in time deposits. Total deposits decreased by $2.8 million from $501.4 million as of December 31, 2011. Non-interest-bearing demand deposits increased by $17.7 million from $74.6 million as of December 31, 2011. MMDA and NOW accounts increased by $30.1 million from $92.6 million as of December 31, 2011. Savings accounts decreased by $2.3 million from $24.5 million as of December 31, 2011. Time deposits decreased by $48.3 million during 2012.

 

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, 
   2012   2011   2010   2009   2008 
   Average   Average   Average   Average   Average   Average   Average   Average   Average   Average 
   Amount   Rate   Amount   Rate   Amount   Rate   Amount   Rate   Amount   Rate 
   (dollars in thousands) 
Savings, NOW and money market deposits  $124,583    0.42%  $120,363    0.53%  $124,974    0.94%  $108,240    1.22%  $96,191    1.68%
Time deposits > $100,000   144,029    2.24%   167,689    2.32%   172,120    2.36%   166,641    3.19%   153,619    4.38%
Other time deposits   137,566    1.78%   168,172    2.00%   175,830    2.19%   187,687    3.11%   187,247    4.30%
Total interest-bearing  deposits   406,178    1.53%   456,224    1.73%   472,924    1.92%   462,568    2.70%   437,057    3.75%
                                                   
Noninterest-bearing  deposits   75,659    -    76,776    -    75,844    -    65,276    -    67,131    - 
                                                   
Total deposits  $481,837    1.29%  $533,000    1.48%  $548,768    1.66%  $527,844    2.36%  $504,188    3.25%

 

Short Term and Long Term Debt

 

As of December 31 2012, the Company had $17.8 million in short-term debt, which included $15.8 million in repurchase agreements and $2.0 million in FHLB Advances, and $12.4 million in long-term debt, which was $12.4 million in junior subordinated debentures issued to New Century Statutory Trust I in connection with the Company’s trust preferred securities.

 

Shareholders’ Equity

 

Total shareholders’ equity at December 31, 2012 was $54.2 million, an increase of $4.6 million from $49.6 million as of December 31, 2011. Changes in shareholders’ equity included $4.6 million in net income, $38,000 in stock based compensation, proceeds from the sale of $165,000 in common stock, and a $207,000 decrease in accumulated other comprehensive income.

 

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RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

Overview

 

During 2012, New Century Bancorp had net income of $4.6 million compared to a net loss of $163,000 for 2011. Both basic and diluted net income per share for the year ended December 31, 2012 were $0.67, compared with a basic and diluted net loss per share of $0.02 for 2011.

 

Net Interest Income

 

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

 

Net interest income decreased by $3.5 million to $18.5 million for the year ended December 31, 2012. The Company’s total interest income was impacted by a decrease in interest earning assets and a low interest rate environment in 2012. Average total interest-earnings assets were $523.0 million in 2012 compared with $565.9 million in 2011. The yield on those assets decreased by 56 basis points from 5.40% in 2011 to 4.84% in 2012. 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 $120,000 in 2012 and $240,000 in 2011. Meanwhile, average interest-bearing liabilities decreased by $51.9 million from $494.5 million for the year ended December 31, 2011 to $442.6 million for the year ended December 31, 2012. Cost of funds decreased by 20 basis points in 2012 to 1.50% from 1.70% in 2011. In 2012, the Company’s net interest margin was 3.57% and net interest spread was 3.34%. In 2011, net interest margin was 3.91% and net interest spread was 3.70%.

 

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 evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.

 

In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent eight consecutive quarters. In determining the appropriate level of the allowance for loan losses at December 31, 2012, the loss history was expanded to ten consecutive quarters of net charge-offs. Since the most recent quarters contain a declining amount of charge offs coupled with a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a $564,000 increase to our loan loss reserves as compared to the methodology previously used. Loan loss provisions in 2012 have also been affected by the decline in overall loan balances during the year.

 

The Company recorded a $2.6 million negative provision for loan losses in 2012, a decrease of $8.8 million from the $6.2 million provision that was recorded in 2011. For more information on changes in the allowance for loan losses, refer to Note D of the financial statements in the section titled Allowance for Loan Losses.

 

- 31 -
 

 

Non-Interest Income

 

Non-interest income for the year ended December 31, 2012 was $3.6 million, up $781,000 from 2011. This increase is due to a one-time gain of $557,000 related to the sale of two branches in 2012 and increases in fees from pre-sold mortgages of $113,000 and other non-interest income of $386,000. These increases were partially offset by a decrease in deposit service fees and charges of $275,000

 

Non-Interest Expenses

 

Non-interest expenses decreased by $1.9 million or 9.8% to $17.2 million for the year ended December 31, 2012, from $19.1 million for the same period in 2011. The following are highlights of the significant changes in non-interest expenses from 2011 to 2012. Many of these changes were due to the sale of two branches in April 2012.

 

·Personnel expenses decreased $0.5 million to $8.3 million due to reductions in staffing.
·Occupancy and equipment expenses decreased $72,000 to $1.3 million
·Foreclosure-related expenses decreased to $1.2 million in 2012 from $1.8 million in 2011, a $700,000 or 36.7% decrease.
·Deposit insurance expense decreased by approximately $147,000 or 16.2% in 2012 due to a lower deposit base and assessment rates.
·Other operating expense increased slightly by $73,000 or 2.3%.

 

Provision for Income Taxes

 

The Company’s effective tax rate in 2012 was 37.8%, compared to a 70.3% tax benefit in 2011. This change resulted from net operating income in 2012 versus a net operating loss in 2011. For further discussion pertaining to the Company’s tax position, see the section titled Deferred Tax Asset under Critical Accounting Policies.

 

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

 

Overview

 

During 2011, New Century Bancorp incurred a net loss of $163,000 compared to a net loss of $5.0 million for 2010. Both basic and diluted loss per share for the year ended December 31, 2011 were $0.02, compared with basic and diluted loss per share of $0.72 for 2010. The decrease in net loss is primarily due to a reduction in provision for loan loss from 2010 when the Company reported a $10.8 million charge-off from the loan fraud previously reported in 2010.

 

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.

 

- 32 -
 

 

Net interest income decreased by $2.0 million to $22.0 million for the year ended December 31, 2011. The Company’s total interest income was impacted by a decrease in interest earning assets and a low interest rate environment in 2011. Average total interest-earnings assets were $565.9 million in 2011 compared with $599.2 million in 2010. The yield on those assets decreased by 25 basis points from 5.65% in 2010 to 5.40% in 2011. 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 $240,000 in 2011 and $313,000 in 2010. Meanwhile, average interest-bearing liabilities decreased by $16.5 million from $511.0 million for the year ended December 31, 2010 to $494.5 million for the year ended December 31, 2011. Cost of funds decreased by 19 basis points in 2011 to 1.70% from 1.89% in 2010. In 2011, the Company’s net interest margin was 3.91% and net interest spread was 3.70%. In 2010, net interest margin was 4.03% and net interest spread was 3.75%.

 

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 $6.2 million provision for loan losses in 2011, a decrease of $9.4 million from the $15.6 million provision that was recorded in 2010. For more information 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, 2011 was $2.8 million an increase of $139,000 from 2010. When compared to last year, the Company had a decrease in deposit service fees and charges of $166,000, or 10.1%. Fees from pre-sold mortgages decreased to $183,000 in 2011, a decline of $43,000 or 19.0% as compared to 2010, primarily as a result of continued softness in the real estate market. Other non-interest income increased approximately $348,000 during 2011 primarily as a result of a one time gain of $242,000 related to common stock received as collateral on loan default.

 

Non-Interest Expenses

 

Non-interest expenses decreased by $108,000 or 0.6% to $19.1 million for the year ended December 31, 2011, from $19.2 million for the same period in 2010. Salaries and employee benefits decreased $0.5 million to $8.8 million for the year ended December 31, 2011 as compared to the same period in 2010 primarily as a result of staff reductions. Occupancy and equipment expenses decreased $139,000 to $1.4 million for the year ended December 31, 2011. The following highlights other changes in non-interest expenses from 2010 to 2011:

 

·Foreclosure-related expenses increased to $1.8 million in 2011 from $1.0 million in 2010, an $800,000 or 86.9% increase.
·FDIC assessments decreased by approximately $46,000 or 4.8% in 2011 to $910,000 as compared to the same period in 2010.
·Other operating expense remained approximately the same at $2.6 million for the years 2011 and 2010.

 

Provision for Income Taxes

 

The Company’s effective tax rate in 2011 was a tax benefit of 70.3%. This is the result of a net operating loss in addition to non taxable income in 2011, as compared to a 39.9% benefit offset by non taxable income. For further discussion pertaining to the Company’s deferred tax analysis see the section titled Deferred Tax Asset under Critical Accounting Policies.

 

- 33 -
 

 

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, 
   2012   2011   2010 
   (dollars in thousands) 
   Average       Average   Average      Average   Average       Average 
   balance   Interest   rate   balance   Interest   rate   balance   Interest   rate 
Interest-earning assets:                                             
Loans, net of allowance  $382,431   $23,420    6.12%  $441,207   $28,183    6.39%  $474,849   $30,908    6.51%
Investment securities   69,491    1,715    2.47%   77,038    2,284    2.96%   87,261    2,870    3.29%
Other interest-earning assets   71,054    164    0.23%   47,622    109    0.23%   37,042    66    .18%
Total interest-earning assets   522,976    25,299    4.84%   565,867    30,576    5.40%   599,152    33,844    5.65%
                                              
Other assets   51,648              58,148              48,704           
                                              
Total assets  $574,624             $624,015             $647,856           
                                              
Interest-bearing liabilities:                                             
Deposits:                                             
Savings, NOW and money  market  $124,583    522    0.42%  $120,363    643    0.53%  $124,974    1,180    .94%
Time deposits over $100,000   144,029    3,232    2.24%   167,694    3,885    2.32%   172,120    4,068    2.36%
Other time deposits   137,566    2,446    1.78%   168,168    3,370    2.00%   175,830    3,853    2.19%
Borrowings   36,375    432    1.19%   38,296    527    1.38%   38,107    579    1.52%
                                              
Total interest-bearing  liabilities   442,553    6,632    1.50%   494,521    8,425    1.70%   511,031    9,680    1.89%
                                              
Non-interest-bearing deposits   75,659              76,775              75,843           
Other liabilities   3,643              2,625              6,232           
Shareholders' equity   52,769              50,094              54,750           
                                              
Total liabilities and shareholders' equity  $574,624             $624,015             $647,856           
                                              
Net interest income/interest rate spread(taxable-equivalent basis)       $18,667    3.34%       $22,151    3.70%       $24,164    3.75%
                                              
Net interest margin (taxable-equivalent basis)             3.57%             3.91%             4.03%
                                              
Ratio of interest-earning assets to interest-bearing liabilities   118.17%             114.43%             117.24%          
                                              
Reported net interest income                                             
Net interest income/net interest margin(taxable-equivalent basis) Less:       $18,667    3.57%       $22,151    3.91%       $24,164    4.03%
taxable-equivalent adjustment        167              193              234      
                                              
Net Interest Income       $18,500             $21,958             $23,930      

 

- 34 -
 

 

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, 2012 vs. 2011   December 31, 2011 vs. 2010   December 31, 2010 vs. 2009 
   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  $(3,677)  $(1,087)  $(4,764)  $(2,169)  $(554)  $(2,723)  $815   $384   $1,199 
Investment securities   (205)   (363)   (568)   (320)   (267)   (587)   (159)   (505)   (664)
Other interest-earning assets   54    1    55    22    19    41    23    -    23 
                                              
Total interest income (taxable-equivalent basis)   (3,828)   (1,449)   (5,277)   (2,467)   (802)   (3,269)   679    (121)   558 
                                              
Interest expense:                                             
Deposits:                                             
Savings, NOW and  money market   20    (141)   (121)   (34)   (503)   (537)   181    (318)   (137)
Time deposits over $100,000   (540)   (113)   (653)   (104)   (79)   (183)   152    (1,396)   (1,244)
Other time deposits   (578)   (346)   (924)   (161)   (322)   (483)   (314)   (1,676)   (1,990)
Borrowings   (25)   (70)   (95)   3    (55)   (52)   31    (102)   (71)
                                              
Total interest expense   (1,123)   (670)   (1,793)   (296)   (959)   (1,255)   50    (3,492)   (3,442)
                                              
Net interest income                                             
Increase/(decrease)                                             
(taxable-equivalent basis)  $(2,705)  $(779)   (3,484)  $(2,171)  $157    (2,014)  $629   $3,371    4,000 
                                              
Less:                                             
Taxable-equivalent adjustment             26              42              22 
Net interest income                                             
Increase/(decrease)            $(3,458)            $(1,972)            $4,022 

  

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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 depends significantly 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 current 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 33.3% and 24.6% of total assets at December 31, 2012 and 2011, 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 assets, subject to our available collateral. A floating lien of $24.0 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 $1.0 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, 2012, borrowings consisted of securities sold under agreements to repurchase of $15.8 million and FHLB advances of $2.0 million.

 

At December 31, 2012, the Company’s outstanding commitments to extend credit totaled $55.2 million and consisted of loan commitments and undisbursed lines of credit of $53.8 million, and letters of credit of $1.4 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 $498.6 million and $501.4 million at December 31, 2012 and 2011, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 52.4% and 61.8% of total deposits at December 31, 2012 and 2011, respectively. Time deposits of $100,000 or more represented 25.4% and 31.2%, respectively, of the total deposits at December 31, 2012 and 2011. 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 Bank’s 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.

 

- 36 -
 

 

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 9.25% at December 31, 2012. As the following table indicates, at December 31, 2012, the Company and its bank subsidiary exceeded regulatory capital requirements.

 

Effective June 10, 2011, the Board of Directors of New Century Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks. The MOU represents an informal agreement between the Board of Directors of New Century Bank, the Regional Director of the FDIC’s Atlanta Regional Office and the North Carolina Commissioner of Banks and requires that New Century Bank’s management take certain actions to improve the bank’s lending function. The Memorandum also requires the Bank to maintain minimum Tier 1 Leverage and Total Risk-Based Capital Ratios of 8.0% and 11.5%, respectively, during the life of the Memorandum.  The Memorandum also restricts the ability of the Bank to grow its total assets at a rate in excess of 10% per year or to declare cash dividends without the prior approval of the Commissioner and the FDIC. As of December 31, 2012, the Registrant was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.78%, 15.34%, and 16.60%, respectively. Also, as of December 31, 2012, the Bank was classified as well capitalized with Leverage Ratio, Tier 1, and Total Risk-Based Capital of 10.52%, 14.98%, and 16.24%, respectively.

 

On January 29, 2013, the MOU was resolved and terminated upon agreement of all parties.

 

   At December 31, 2012 
   Actual   Minimum   Regulatory Minimum 
   Ratio   Requirement   Requirement 
New Century Bancorp, Inc.               
                
Total risk-based capital ratio   16.60%   8.00%   N/A 
Tier 1 risk-based capital ratio   15.34%   4.00%   N/A 
Leverage ratio   10.78%   4.00%   N/A 
                
New Century Bank               
                
Total risk-based capital ratio   16.24%   8.00%   11.50%
Tier 1 risk-based capital ratio   14.98%   4.00%   8.00%
Leverage ratio   10.52%   4.00%   8.00%

 

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 future.

 

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ASSET/LIABILITY MANAGEMENT

 

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

 

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

 

When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies, mortgage-backed securities and municipal obligations. The securities portfolio contributes to the Company’s income 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, 2012, 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.

 

- 38 -
 

 

   Terms to Re-pricing at December 31, 2012 
       More Than   More Than         
   1 Year   1 Year to   3 Years to   More Than     
   or Less   3 Years   5 Years   5 Years   Total 
   (dollars in thousands) 
Interest-earning assets:                         
Loans  $226,222   $87,214   $30,411   $24,045   $367,892 
Securities, available for sale   28,396    31,224    11,230    10,943    81,793 
Interest-earning deposits in other banks   97,081    -    -    -    97,081 
Federal funds sold   3,029    -    -    -    3,029 
Stock in the Federal Home Loan Bank of Atlanta   973    -    -    -    973 
Other non marketable securities   1,105    -    -    -    1,105 
                          
Total interest-earning assets  $356,806   $118,438   $41,641   $34,988   $551,873 
                          
Interest-bearing liabilities:                         
Deposits:                         
Savings, NOW and money market  $81,014   $63,852   $-   $-   $144,866 
Time   50,275    34,296    41,724    -    126,295 
Time over $100,000   41,829    44,837    48,467    -    135,133 
Short term debt   17,848    -    -    -    17,848 
Long term debt   12,372    -    -    -    12,372 
                          
Total interest-bearing liabilities  $203,338   $142,985   $90,191   $-   $436,514 
                          
Interest sensitivity gap per period  $153,468   $(24,547)  $(48,550)  $34,988   $115,539 
                          
Cumulative interest sensitivity gap  $153,468   $128,921   $80,371   $115,359   $115,359 
                          
Cumulative gap as a percentage of total interest-earning assets   43.00%   27.14%   15.55%   20.90%   20.90%
                          
Cumulative interest-earning assets as a percentage of interest-bearing liabilities   175.47%   137.22%   118.41%   126.43%   126.43%

 

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.

 

- 39 -
 

 

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 $2.5 million at December 31, 2012 and $5.1 million at December 31, 2011, 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. As of December 31 2012, management concluded that the Company’s 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 or whether there is any need for a valuation allowance. Significant negative trends in credit quality, losses from operations, or other factors could impact the realization of the deferred tax asset in the future.

 

The Company has no history of expiration of loss carry forwards. Management believes the Company’s forecasted earnings 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. This is referred to as the cumulative loss test. This test excludes the net charge-off relating to the previously reported fraud in 2010, as the loss is of infrequent nature stemming from aberrations rather than continuing conditions. As of December 31, 2012, the Company passed the cumulative loss test by $6.4 million excluding the previously mentioned one-time non-recurring charge-off pertaining to the previously reported loan fraud by a large relationship borrower. The Company also passed the cumulative loss test by $2.2 million as of December 31, 2011, due to the exclusion of goodwill impairment and the previously mentioned one-time non-recurring charge-off pertaining to the previously reported loan fraud. The Company feels confident that deferred tax assets are more likely than not to be realized.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Information about the Company’s off-balance sheet risk exposure is presented in Note J 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 G 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.

 

- 40 -
 

 

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, 2012.

 

   Payments Due by Period 
   (dollars in thousands) 
       On Demand             
       Or Within           After 
Contractual Obligations  Total   1 Year   1-3 Years   4-5 Years   5 Years 
   (dollars are in thousands) 
                     
Short term debt  $17,848   $17,848   $-   $-   $- 
Long term debt   12,372    -    -    -    12,372 
Lease obligations   1,651    122    221    218    1,090 
Deposits   498,559    265,384    142,984    90,191    - 
                          
Total contractual cash obligations  $530,430   $283,354   $143,205   $90,409   $13,462 

 

The following table reflects other commitments outstanding as of December 31, 2012.

 

   Amount of Commitment Expiration Per Period 
   (dollars in thousands) 
   Total                 
   Amounts   Less than           After 
Other Commitments  Committed   1 Year   1-3 Years   4-5 Years   5 Years 
                     
Undisbursed home equity credit lines  $23,276   $145   $41   $656   $22,434 
Other commitments and credit lines   13,099    9,844    240    143    2,872 
Un-disbursed portion of constructions loans   17,500    16,494    265    741    - 
Letters of credit   1,366    1,274    27    -    65 
                          
Total loan commitments  $55,241   $27,757   $573   $1,540   $25,371 

 

- 41 -
 

 

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

 

- 42 -
 

 

 

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 (the “Company”) as of December 31, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Dixon Hughes Goodman LLP

Raleigh, North Carolina

March 28, 2013

 

 

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NEW CENTURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011

 

   2012   2011 
   (In thousands, except share 
   and per share data) 
ASSETS          
           
Cash and due from banks  $13,498   $18,478 
Interest-earning deposits in other banks   97,081    55,590 
Federal funds sold   3,029    3,028 
Investment securities available for sale, at fair value   81,491    67,854 
           
Loans   367,892    417,624 
Allowance for loan losses   (7,897)   (10,034)
           
NET LOANS   359,995    407,590 
           
Accrued interest receivable   1,636    2,003 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost   973    1,248 
Other non marketable securities   1,105    1,080 
Foreclosed real estate   2,833    3,031 
Premises and equipment held for sale   -    1,113 
Premises and equipment, net   10,939    11,243 
Bank owned life insurance   8,228    7,981 
Core deposit intangible   298    545 
Other assets   4,347    8,867 
           
TOTAL ASSETS  $585,453   $589,651 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits:          
Demand  $92,265   $74,569 
Savings   22,139    24,461 
Money market and NOW   122,727    92,600 
Time   261,428    309,747 
           
TOTAL DEPOSITS   498,559    501,377 
           
Short term debt   17,848    21,877 
Long term debt   12,372    14,372 
Accrued interest payable   281    330 
Accrued expenses and other liabilities   2,214    2,149 
           
TOTAL LIABILITIES   531,274    540,105 
           
Shareholders’ Equity          
Common stock, $1 par value, 25,000,000 shares authorized; 6,913,636 and 6,860,367 shares issued and outstanding at December 31, 2012 and 2011, respectively   6,914    6,860 
Preferred stock, no par value, 10,000,000 shares authorized, none outstanding   -    - 
Additional paid-in capital   42,000    41,851 
Retained earnings (accumulated deficit)   4,187    (450)
Accumulated other comprehensive income   1,078    1,285 
           
TOTAL SHAREHOLDERS’ EQUITY   54,179    49,546 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $585,453   $589,651 

 

See accompanying notes.

 

- 44 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2012, 2011 and 2010

 

   2012   2011   2010 
   (In thousands, except share and per share data) 
INTEREST INCOME               
Loans  $23,405   $28,172   $30,896 
Federal funds sold and interest-earning deposits in other banks   164    109    68 
Investments   1,563    2,102    2,646 
                
TOTAL INTEREST INCOME   25,132    30,383    33,610 
                
INTEREST EXPENSE               
Money market, NOW and savings deposits   522    643    1,180 
Time deposits   5,678    7,255    7,921 
Short term debt   113    228    276 
Long term debt   319    299    303 
TOTAL INTEREST EXPENSE   6,632    8,425    9,680 
NET INTEREST INCOME   18,500    21,958    23,930 
                
PROVISION FOR LOAN LOSSES   (2,597)   6,218    15,634 
                
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   21,097    15,740    8,296 
                
NON-INTEREST INCOME               
Fees from pre-sold mortgages   296    183    226 
Service charges on deposit accounts   1,200    1,475    1,641 
Gain on branch sale   557    -    - 
Other fees and income   1,545    1,159    811 
                
TOTAL NON-INTEREST INCOME   3,598    2,817    2,678 
                
NON-INTEREST EXPENSE               
Personnel   8,318    8,842    9,370 
Occupancy and equipment   1,346    1,418    1,557 
Deposit insurance   763    910    956 
Professional fees   1,495    1,861    2,141 
Information systems   1,429    1,586    1,625 
Foreclosure related expenses   1,165    1,841    985 
Other   2,720    2,647    2,579 
                
TOTAL NON-INTEREST EXPENSE   17,236    19,105    19,213 
                
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)   7,459    (548)   (8,239)
                
INCOME TAX (BENEFIT)   2,822    (385)   (3,284)
                
NET INCOME (LOSS)  $4,637   $(163)  $(4,955)
                
NET INCOME (LOSS) PER COMMON SHARE               
Basic  $0.67   $(.02)  $(.72)
Diluted  $0.67   $(.02)  $(.72)
                
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING               
Basic   6,898,147    6,887,168    6,875,845 
Diluted   6,898,377    6,887,168    6,875,845 

 

See accompanying notes.

 

- 45 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2012, 2011 and 2010

 

   2012   2011   2010 
   (Amounts in thousands) 
             
Net income (loss)  $4,637   $(163)  $(4,955)
                
Other comprehensive income (loss):               
Unrealized gains (losses) on investment securities- available for sale   (91)   286    (348)
Tax effect   31    (104)   116 
    (60)   182    (232)
                
Reclassification adjustment for losses included in net income (loss)   (223)   (113)   (37)
Tax effect   76    38    11 
    (147)   (75)   (26)
                
Total   (207)   107    (258)
                
Total comprehensive income (loss)  $4,430   $(56)  $(5,213)

 

See accompanying notes.

 

- 46 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2012, 2011 and 2010

 

               Retained   Accumulated     
           Additional   earnings   other   Total 
   Common stock   paid-in   (accumulated)   comprehensive   shareholders’ 
   Shares   Amount   capital   (deficit)   income   equity 
   (Amounts in thousands, except share and per data share) 
                         
Balance at December 31, 2009   6,837,952   $6,838   $41,467   $4,668   $1,436   $54,409 
                               
Net loss   -    -    -    (4,955)   -    (4,955)