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U.S. Securities and Exchange Commission Washington, D.C. 20549
Form 10-Q
For the quarterly period ended March 31, 2012 or
For the transition period ended from to Commission File Number 000-50400
New Century Bancorp, Inc. (Exact name of Registrant as specified in its charter)
Registrant’s telephone number, including area code (910) 892-7080
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. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x As of May 8, 2012, the Registrant had outstanding 6,913,636 shares of Common Stock, $1 par value per share.
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CONSOLIDATED BALANCE SHEETS
See accompanying notes.
- 3 -
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
See accompanying notes.
- 4 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes.
- 5 -
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
See accompanying notes.
- 6 -
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
See accompanying notes.
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NEW CENTURY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
See accompanying notes.
- 8 -
Notes to Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION New Century Bancorp, Inc. (the “Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank (the “Bank”). The Bank is engaged in general commercial and retail banking and operates under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities. All significant inter-company transactions and balances have been eliminated in consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s 2011 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 28, 2011. This quarterly report should be read in conjunction with the Annual Report. Certain reclassifications have been made to conform prior year financial information to current period presentation. These reclassifications had no material impact on the unaudited consolidated financial statements. NOTE B - PER SHARE RESULTS Basic net income per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the dilutive effect of stock options outstanding during the period. At March 31, 2012 and 2011 there were 395,789 and 428,878 anti-dilutive options for each three month period, respectively.
9
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS The following summarizes recent accounting pronouncements and their expected impact on the Company: Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 became effective for the Company on January 1, 2012 and did not have a significant impact on the Company’s financial statements. ASU 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholders’ equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. ASU 2011-04 became effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements. ASU 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 became effective for annual periods beginning after December 15, 2011. The Company has adopted the standard and the adoption of ASU 2011-05 did not have an impact on the Company’s financial condition, results of operations, or cash flows. Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows. From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
10
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE D – FAIR VALUE MEASUREMENTS ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation. Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, BOLI, deposit accounts and borrowings. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Fair Value Hierarchy The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.
11
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE D – FAIR VALUE MEASUREMENTS (continued)
Investment Securities Available-for-Sale (“AFS”) Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include U.S. government agencies, mortgage-backed securities issued by government sponsored entities, and municipal bonds. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods. The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 (dollars in thousands):
12
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE D – FAIR VALUE MEASUREMENTS (continued)
The following is a description of valuation methodologies used for assets recorded at fair value on a nonrecurring basis. Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, or liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012 and December 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. There were no transfers between levels from the prior reporting periods. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods. Foreclosed Real Estate Foreclosed real estate are properties recorded at the balance of the loan or an estimated fair value less estimated selling costs, whichever is less. Inputs include appraised values on the properties or recent sales activity for similar assets in the property’s market. Therefore, foreclosed real estate is classified within Level 3 of the hierarchy. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior quarters. The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011 (dollars in thousands):
13
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE D – FAIR VALUE MEASUREMENTS (continued)
NOTE E – FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011:
14
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Cash and Due from Banks, Interest-Earning Deposits in Other Banks and Federal Funds Sold The carrying amounts for cash and due from banks, interest-earning deposits in other banks and federal funds sold approximate fair value because of the short maturities of those instruments. Investment Securities Available for Sale Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using prices quoted for similar investments or quoted market prices obtained from independent pricing services. Loans Held for Sale Loans held for sale are carried at fair value which is determined by offers to purchase or expected value of future cash flows. Unrealized losses on loans held for sale are included in losses on sales of loans and leases in the consolidated statement of operations.
15
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. However, the values likely do not represent exit prices due to distressed market conditions. Stock in Federal Home Loan Bank of Atlanta and Other Non Marketable Securities The fair value for FHLB stock approximates carrying value, based on the redemption provisions of the Federal Home Loan Bank. The fair value of stock in other non marketable securities is assumed to approximate carrying value. Bank Owned Life Insurance The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer. Deposits The fair value of demand deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using the rates currently offered for instruments of similar remaining maturities. Short-term Debt The fair values of short term debt (sweep accounts that re-price daily and short term FHLB advances) are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. Long-term Debt The fair values of long term debt are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. Accrued Interest Receivable and Accrued Interest Payable The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments. Financial Instruments with Off-Balance Sheet Risk With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.
16
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE F - INVESTMENT SECURITIES The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follow:
As of March 31, 2012, accumulated other comprehensive income included unrealized net gains of $2.0 million, net of deferred income taxes of $776,000.
17
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE F - INVESTMENT SECURITIES (continued)
As of December 31, 2011, accumulated other comprehensive income included unrealized net gains of $2.1 million, net of deferred income taxes of $800,000. The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011.
At March 31, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Five U.S. government agencies and three GSE’s had unrealized losses for less than twelve months totaling $43,000 at March 31, 2012. All unrealized losses are primarily attributable to the general trend of interest rates.
At December 31, 2011, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven GSE’s had unrealized losses for less than twelve months totaling $18,000 at December 31, 2011. All unrealized losses are primarily attributable to the general trend of interest rates.
18
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS Following is a summary of loans at March 31, 2012 and December 31, 2011:
Loans are primarily made in southeastern North Carolina. Real estate loans can be affected by the condition of the local real estate market and by the local economic conditions. At March 31, 2012, the Company had pre-approved but unused lines of credit totaling $54.4 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.
19
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
A description of the various loan products provided by the Bank is presented below. Residential 1-to-4 Family Loans Residential 1-to-4 family loans are mortgage loans that typically convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas. Commercial Real Estate Loans Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts and the repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower’s and guarantor’s global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, market area, and risk grade. Multi-family Residential Loans Multi-family residential loans are typically nonfarm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependant on occupancy rates, rental rates, and property management. Construction Loans Construction loans are non-revolving extensions of credit secured by real property of which the proceeds are used to acquire and develop land and to construct commercial or residential buildings. The primary source of repayment for these types of loans is the sale of the improved property or permanent financing in which case the property is expected to generate the cash flow necessary for repayment on a permanent loan basis. Property cash flow may be supplemented with financial support from the borrowers/guarantors. Proper underwriting of a construction loan consists of the initial process of obtaining, analyzing, and approving various aspects of information pertaining to: the analysis of the permanent financing source, creditworthiness of the borrower and guarantors, ability of contractor to perform under the terms of the contract, and the feasibility, marketability, and valuation of the project. Also much consideration needs to be given to the cost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction loans are traditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, interest rates increasing beyond budget.
20
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
Home Equity Lines of Credit Home equity lines of credit are consumer-purpose revolving extensions of credit which are secured by first or second liens on owner-occupied residential real estate. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established guidelines. The degree of utilization of revolving commitments within this loan segment is reviewed periodically to identify changes in the behavior of this borrowing group. Commercial and Industrial Loans Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and the guarantors. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for repayment can be impacted by the borrower’s ability to collect amounts due from its customers. Loans to Individuals & Overdrafts Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are clearly documented. Several factors are considered in making these decisions such as credit score, adjusted net worth, liquidity, debt ratio, disposable income, credit history, and loan-to-value of the collateral. This process combined with the relatively smaller loan amounts spreads the risk among many individual borrowers. Overdrafts on customer accounts are classified as loans for reporting purposes. The following tables present an age analysis of past due loans, segregated by class of loans as of March 31, 2012 and December 31, 2011, respectively:
There was one loan in 1 to 4 family residential category totaling $81,000 that was over 90 days past due and still accruing interest at March 31, 2012.
21
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
At December 31, 2011 there were three loans totaling $108,000 that were 90 days or more past due and still accruing interest. Impaired Loans The following tables present information on loans that were considered to be impaired as of March 31, 2012 and December 31, 2011:
22
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Impaired Loans (continued)
Loans are placed on non-accrual basis when it has been determined that all contractual principal and interest will not be received. Any payments received on these loans are applied to principal first and then to interest only after all principal has been collected. In the case of an impaired loan that is still on accrual basis, payments are applied to both principal and interest.
23
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
Troubled Debt Restructurings The following table presents loans that were modified as troubled debt restructurings (“TDRs”) for which there was a payment default together with a breakdown of the types of concessions made by loan class during the three months ended March 31, 2012 and within the previous twelve months:
24
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Troubled Debt Restructurings (continued)
The following table presents loans that were modified as TDRs with a breakdown of the types of concessions made by loan class during the three months ended March 31, 2012 and within the previous twelve months:
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Troubled Debt Restructurings (continued)
The following table presents the successes and failures of the types of modifications within the previous three months as of March 31, 2012:
At March 31, 2012, the Company had 25 loans with a balance of $7.2 million that were considered to be troubled debt restructured. Of those TDRs, 11 loans with a balance totaling $1.7 million were still accruing as of March 31, 2012. The remaining 14 TDRs with a balance totaling $5.5 million as of March 31, 2012 were in nonaccrual status. Credit Quality Indicators As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. All non-consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of these nine different risk grades is as follows:
26
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Credit Quality Indicators (continued)
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Credit Quality Indicators (continued)
Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:
28
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Credit Quality Indicators (continued)
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of March 31, 2012 and December 31, 2011, respectively:
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
Nonperforming assets at March 31, 2012 and December 31, 2011 consist of the following:
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued)
Allowance for Loan Losses The allowance for loan losses is a reserve established through provisions for loan losses charged to income 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. Individual reserves are calculated according to ASC Section 310-10-35 against loans evaluated individually and deemed to most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible at the discretion of the Chief Credit Officer, based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off.
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Allowance for Loan Losses (Continued)
The following tables present a roll forward of the Company’s allowance for loan losses by loan class for the three month periods ended March 31, 2012 and March 31, 2011, respectively:
During the three months ended March 31, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $2.7 million. These recoveries were primarily a result of a $2.4 million recovery on commercial and industrial loans. These recoveries combined with the decrease in total loans outstanding at March 31, 2012 resulted in a $2.1 million reversal in the provision.
33
NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE G - LOANS (continued) Allowance for Loan Losses (continued)
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NEW CENTURY BANCORP, INC. Notes to Consolidated Financial Statements (Unaudited)
NOTE H –BRANCH SALE On April 6, 2012, the Bank sold all deposits and selected assets associated with two branch offices located in Pembroke and Raeford, North Carolina, respectively. The transaction was consummated pursuant to a definitive purchase and assumption agreement with Lumbee Guaranty Bank, Pembroke, North Carolina, which was entered into on December 20, 2011. The purchase price under the terms of the purchase and assumption agreement was $1.8 million which included $1.1 million for all real property and equipment and $691,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $134,000 on these deposits resulting in a net gain of $557,000 for the Company from this transaction. Lumbee Guarantee Bank assumed $14.6 million in deposits from the Bank and took assignment of all real property and equipment associated with the two branch offices, which totaled $1.1 million at April 6, 2012. The Bank retained all loans associated with the two branches except for approximately $340,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. Separate payment for these loans was not included in the $1.8 million purchase price.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of New Century Bancorp, Inc. (the “Company”). This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment. Overview The Company is a commercial bank holding company and has one banking subsidiary, New Century Bank (referred to as the “Bank”) and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company’s only business activity is the ownership of the Bank and New Century Statutory Trust I. 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 Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, and Wayne counties in 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 accounts, savings accounts and certificates of deposit. Deposit services are not offered in Pitt County. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts. Comparison of Financial Condition at March 31, 2012 and December 31, 2011 During the first three months of 2012, total assets decreased by $8.7 million to $581.0 million as of March 31, 2012. Earning assets at March 31, 2012 totaled $534.1 million and consisted of $390.2 million in net loans, $1.6 million in loans held for sale, $72.9 million in investment securities, $67.0 million in overnight investments and interest-bearing deposits in other banks and $2.4 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the first quarter of 2012 were $490.0 million and $51.8 million, respectively. Since the end of 2011, gross loans have decreased by $17.9 million to $399.8 million as of March 31, 2012 due to continued soft loan demand and efforts to reduce concentration levels of construction and commercial real estate loans. Gross loans consisted of $31.6 million in commercial and industrial loans, $184.5 million in commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||