XNAS:NCBC New Century Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

or

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

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)

 

North Carolina   20-0218264
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
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

 

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.

 

Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of August 1, 2012, the Registrant had outstanding 6,913,636 shares of Common Stock, $1 par value per share.

 

 
 

 

    Page No.
     
Part I. FINANCIAL INFORMATION  
     
Item 1 - Financial Statements (Unaudited)  
     
  Consolidated Balance Sheets  
  June 30, 2012 and December 31, 2011 3
     
  Consolidated Statements of Operations  
  Three Months and Six Months Ended June 30, 2012 and 2011 4
     
  Consolidated Statements of Comprehensive Income (Loss)  
  Three Months and Six Months Ended June 30, 2012 and 2011 5
     
  Consolidated Statements of Changes in Shareholders’ Equity  
  Six Months Ended June 30, 2012 and 2011 6
     
  Consolidated Statements of Cash Flows  
  Six Months Ended June 30, 2012 and 2011 7
     
  Notes to Consolidated Financial Statements 9
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations  42
 
Item 4 - Controls and Procedures 53
     
Part II. OTHER INFORMATION  
     
Item 4 - Mine Safety Disclosures 54
     
Item 6 - Exhibits 54
     
  Signatures 55
     
  Exhibit Index 56

 

- 2 -
 

 

Part I. Financial Information
Item 1 - Financial Statements
NEW CENTURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

 

   June 30, 2012   December 31, 
   (Unaudited)   2011* 
   (In thousands, except share 
   and per share data) 
ASSETS          
Cash and due from banks  $15,731   $18,478 
Interest-earning deposits in other banks   56,558    55,590 
Federal funds sold   3,028    3,028 
Investment securities available for sale, at fair value   71,808    67,854 
           
Loans   390,403    417,624 
Allowance for loan losses   (8,510)   (10,034)
           
NET LOANS   381,893    407,590 
           
Accrued interest receivable   1,628    2,003 
Stock in Federal Home Loan Bank of Atlanta (“FHLB”), at cost   1,034    1,248 
Other non-marketable securities   1,075    1,080 
Foreclosed real estate   3,859    3,031 
Premises and equipment held for sale   -    1,113 
Premises and equipment, net   11,096    11,243 
Bank Owned Life Insurance (“BOLI”)   8,106    7,981 
Core deposit intangible   356    545 
Other assets   7,510    8,867 
           
TOTAL ASSETS  $563,682   $589,651 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Demand  $72,683   $74,569 
Savings   23,985    24,461 
Money market and NOW   95,374    92,600 
Time   279,142    309,747 
           
TOTAL DEPOSITS   471,184    501,377 
           
Short-term debt   22,953    21,877 
Long-term debt   12,372    14,372 
Accrued interest payable   281    330 
Accrued expenses and other liabilities   3,938    2,149 
           
TOTAL LIABILITIES   510,728    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 June 30, 2012 and December 31, 2011, respectively   6,914    6,860 
Additional paid-in capital   41,985    41,851 
Retained earnings (accumulated deficit)   2,820    (450)
Accumulated other comprehensive income   1,235    1,285 
           
TOTAL SHAREHOLDERS’ EQUITY   52,954    49,546 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $563,682   $589,651 

 

* Derived from audited consolidated financial statements.

 

See accompanying notes.

 

- 3 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
   (In thousands, except share and per share data)
INTEREST INCOME                    
Loans  $5,887   $7,251   $12,042   $14,555 
Federal funds sold and interest-earning deposits in other banks   36    22    72    39 
Investments   402    525    830    1,119 
                     
TOTAL INTEREST INCOME   6,325    7,798    12,944    15,713 
                     
INTEREST EXPENSE                    
Money market, NOW and savings deposits   127    180    228    397 
Time deposits   1,451    1,873    3,007    3,753 
Short-term debt   26    66    60    135 
Long-term debt   80    74    162    148 
                     
TOTAL INTEREST EXPENSE   1,684    2,193    3,457    4,433 
                     
NET INTEREST INCOME   4,641    5,605    9,487    11,280 
                     
PROVISION (RECOVERY) FOR LOAN LOSSES   (649)   2,542    (2,786)   3,706 
                     
NET INTEREST INCOME AFTER                    
PROVISION (RECOVERY) FOR LOAN LOSSES   5,290    3,063    12,273    7,574 
                     
NON-INTEREST INCOME                    
Fees from pre-sold mortgages   75    61    113    87 
Service charges on deposit accounts   291    376    609    758 
Gain on branch sale   557    -    557    - 
Other fees and income   276    455    547    688 
                     
TOTAL NON-INTEREST INCOME   1,199    892    1,826    1,533 
                     
NON-INTEREST EXPENSE                    
Personnel   2,047    2,284    4,008    4,675 
Occupancy and equipment   311    358    670    720 
Deposit insurance   187    235    381    497 
Professional fees   470    503    940    1,133 
Information systems   368    441    735    827 
Foreclosure-related expenses   521    700    545    903 
Other   744    818    1,586    1,662 
TOTAL NON-INTEREST EXPENSE   4,648    5,339    8,865    10,417 
                     
INCOME BEFORE                    
INCOME TAX (BENEFIT)   1,841    (1,384)   5,234    (1,310)
INCOME TAX (BENEFIT)   683    (523)   1,964    (570)
                     
NET INCOME (LOSS)  $1,158   $(861)  $3,270   $(740)
                     
NET INCOME (LOSS) PER COMMON SHARE                    
Basic  $.17   $(.13)  $.47   $(.11)
Diluted  $.17   $(.13)  $.47   $(.11)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                    
                    
Basic   6,913,636    6,913,636    6,886,417    6,913,636 
Diluted   6,913,636    6,913,636    6,886,417    6,913,636 

 

See accompanying notes.

 

- 4 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(Unaudited)

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
  (In thousands) 
                 
Net income (loss)  $1,158   $(861)  $3,270   $(740)
                     
Other comprehensive income (loss):                    
Unrealized gain (loss) on investment                    
securities available for sale   (50)   268    (198)   130 
Tax effect   19    (92)   72    (50)
   (31   176   (126   80  
                     
Reclassification adjustment for gain (loss)                    
included in net income   65    (2)   123    (26)
Tax effect   (25)   1    (47)   15 
   40     (1   76   (11
                     
Total   9    175    (50)   69 
                     
Total comprehensive income (loss)  $1,167   $(686)  $3,220   $(671)

 

See accompanying notes.

 

- 5 -
 

  

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

                   Retained   Accumulated     
           Common   Additional   earnings   other com-   Total 
   Common stock   stock   paid-in   (accumulated   prehensive   shareholders’ 
   Shares   Amount   receivable   capital   Deficit)   income   equity 
   (Amounts in thousands, except share data) 
                             
Balance at December 31, 2010   6,913,636   $6,914   $-   $41,887   $(286)  $1,178   $49,693 
                                    
Net loss   -    -    -    -    (740)   -    (740)
                                    
Common stock receivable   -    -    (242)   -    -    -    (242)
                                    
Other comprehensive income, net   -    -    -    -    -    69    69 
                                    
Stock based compensation   -    -    -    185    -    -    185 
                                    
Balance at June 30, 2011   6,913,636   $6,914   $(242)  $42,072   $(1,026)  $1,247   $48,965 
                                    
Balance at December 31, 2011   6,860,367   $6,860   $-   $41,851   $(450)  $1,285   $49,546 
                                    
Net income   -    -    -    -    3,270    -    3,270 
                                    
Sale of common stock   53,269    54    -    111    -    -    165 
                                    
Other comprehensive loss, net   -    -    -    -    -    (50)   (50)
                                    
Stock based compensation   -    -    -    23    -    -    23 
                                    
Balance at June 30, 2012   6,913,636   $6,914   $-   $41,985   $2,820   $1,235   $52,954 

 

See accompanying notes.

 

- 6 -
 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   Six Months Ended 
   June 30, 
   2012   2011 
   (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income (loss)  $3,270   $(740)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Provision (recovery) for loan losses   (2,785)   3,706 
Depreciation and amortization of premises and equipment   286    336 
Amortization and accretion of investment securities   281    410 
Amortization of deferred loan fees and costs   (96)   (104)
Amortization of core deposit intangible   57    77 
Stock-based compensation   23    185 
Net gain on branch sale   (557)   - 
Increase in cash surrender value of bank owned life insurance   (125)   (127)
Net loss on sale and write-downs of foreclosed real estate   545    903 
Net (gains) loss on sale of investments   123    (26)
Change in assets and liabilities:          
Net change in accrued interest receivable   373    136 
Net change in other assets   1,916    222 
Net change in accrued expenses and other liabilities   1,745    673 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   5,056    5,651 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Redemption of FHLB stock   214    83 
Purchase of investment securities available for sale   (19,372)   (7,256)
Maturities of investment securities available for sale   8,021    14,237 
Mortgage-backed securities pay-downs   6,417    5,274 
Sale of investment securities available for sale   500    500 
Net cash payment on branch sale   (13,001)   - 
Net change in loans outstanding   24,602    6,970 
Proceeds from sale of foreclosed real estate   2,265    1,177 
Purchases of premises and equipment   (109)   (32)
           
NET CASH PROVIDED BY INVESTING ACTIVITIES   9,537    20,953 

 

See accompanying notes.

 

- 7 -
 

 

 

NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

   Six Months Ended 
   June 30, 
   2012   2011 
   (In thousands) 
         
CASH FLOWS FROM FINANCING ACTIVITIES          
Net change in deposits  $(15,613)  $4,213 
Proceeds from short-term debt   3,424    80 
Repayments on short-term debt   (2,348)   - 
Repayments on long-term debt   (2,000)   (2,000)
Proceeds from sale of common stock   165    - 
           
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES   (16,372)   2,293 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (1,779)   28,897 
           
CASH AND CASH EQUIVALENTS, BEGINNING   77,096    35,902 
           
CASH AND CASH EQUIVALENTS, ENDING  $75,317   $64,799 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Cash paid during the period for:          
Interest paid  $3,506   $4,450 
           
Non-cash transactions:          
Unrealized gains (losses) on investment securities available for sale, net of tax   (50)   69 
Transfers from loans to foreclosed real estate   3,638    1,805 
Common stock receivable   -    (242)

 

See accompanying notes.

 

- 8 -
 

 

NEW CENTURY BANCORP, INC.
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 and six month periods ended June 30, 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 and six month periods ended June 30, 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, 2012. This quarterly report should be read in conjunction with the Annual Report.

 

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 June 30, 2012 and 2011 there were 371,883 and 431,274 anti-dilutive options for each three month period and 372,883 and 428,878 anti-dilutive options for each six month period, respectively.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Weighted average shares used for basic net income per share   6,913,636    6,913,636    6,886,417    6,913,636 
                     
Effect of dilutive stock options   -    -    -    - 
                     
Weighted average shares used for diluted net income per share   6,913,636    6,913,636    6,886,417    6,913,636 

 

- 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 IFRS. 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 shareholders’ 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 shareholders’ 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.

 

- 10 -
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. ASU 2011-12 amends Topic 220 to allow the Financial Accounting Standards Board (“FASB”) time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities are required to apply these requirements for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company has adopted the standard and the adoption of ASU 2011-12 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 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.

 

NOTE D – FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification (“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:

 

- 11 -
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

Fair Value Hierarchy

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

 

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

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

 

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

 

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis.

 

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 June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

 

- 12 -
 

 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (dollars in thousands):

 

       Quoted Prices in   Significant     
Investment securities      Active Markets   Other   Significant 
available for sale      for Identical   Observable   Unobservable 
June 30, 2012  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
U.S. government agencies  $32,631   $-   $32,631   $- 
Mortgage-backed securities - Government Sponsored- Enterprises (“GSE’s”)   32,594    -    32,594    - 
Municipal bonds   6,583    -    6,583    - 
Total  $71,808   $-   $71,808   $- 

 

       Quoted Prices in   Significant     
Investment securities      Active Markets   Other   Significant 
available for sale      for Identical   Observable   Unobservable 
December 31, 2011  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
U.S. government agencies  $26,412   $-   $26,412   $- 
Mortgage-backed securities - GSE’s   35,169    -    35,169    - 
Municipal bonds   6,273    -    6,273    - 
Total  $67,854   $-   $67,854   $- 

 

13
 

 

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 non-recurring 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 June 30, 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 non-recurring 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 non-recurring 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 June 30, 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 June 30, 2012. Valuation techniques are consistent with techniques used in prior quarters.

 

Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market value.

 

14
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE D – FAIR VALUE MEASUREMENTS (continued)

 

The following tables summarize quantitative disclosures about the fair value measurement for each category of assets carried at fair value on a non-recurring basis as of June 30, 2012 and
December 31, 2011 (dollars in thousands):

  

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
Asset Category      for Identical   Observable   Unobservable 
June 30, 2012  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
Impaired loans  $11,394   $-   $-   $11,394 
Foreclosed real estate   3,859    -    -    3,859 
                     
Total  $15,253   $-   $-   $15,253 

 

Of the $11.4 million in impaired loans at June 30, 2012 there were $3.1 million in loans with specific reserves of $520,000 along with $8.8 million in loans without specific reserves which had been partially charged-off.

 

       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
Asset Category      for Identical   Observable   Unobservable 
December 31, 2011  Fair value   Assets (Level 1)   Inputs (Level 2)   Inputs (Level 3) 
                 
Impaired loans  $13,353   $-   $-   $13,353 
Foreclosed real estate   3,031    -    -    3,031 
Premises and equipment held for sale   1,113    -    -    1,113 
                     
Total  $17,497   $-   $-   $17,497 

 

Of the $13.4 million in impaired loans at December 31, 2011 there were $9.6 million in loans with specific reserves of $1.5 million along with $5.3 million in loans without specific reserves which had been partially charged-off.

 

15
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

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 June 30, 2012 and December 31, 2011:

 

   June 30, 2012 
   Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial assets:                         
Cash and due from banks  $15,731   $15,731   $15,731   $-   $- 
Interest-earning deposits in other banks   56,558    56,558    56,558    -    - 
Federal funds sold   3,028    3,028    3,028    -    - 
Investment securities available for sale   71,808    71,808    -    71,808    - 
Loans, net   381,220    398,540    -    -    398,540 
Accrued interest receivable   1,628    1,628    -    -    1,628 
Stock in the FHLB   1,034    1,034    -    -    1,034 
Other non-marketable securities   1,075    1,075    -    -    1,075 
                          
Financial liabilities:                         
Deposits  $471,184   $479,845   $-   $479,845   $- 
Short-term debt   22,953    22,953    -    22,953    - 
Long-term debt   12,372    7,661    -    7,661    - 
Accrued interest payable   281    281    -    -    281 

 

16
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

   December 31, 2011 
   Carrying   Estimated             
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (In thousands) 
Financial assets:                         
Cash and due from banks  $18,478   $18,478   $18,478   $-   $- 
Interest-earning deposits in other banks   55,590    55,590    55,590    -    - 
Federal funds sold   3,028    3,028    3,028    -    - 
Investment securities available for sale   67,854    67,854    -    67,854    - 
Loans, net   407,590    424,851    -    -    424,851 
Premises and equipment held for sale   1,113    1,113    -    -    1,113 
Accrued interest receivable   2,003    2,003    -    -    2,003 
Stock in the FHLB   1,248    1,248    -    -    1,248 
Other non-marketable securities   1,080    1,080    -    -    1,080 
                          
Financial liabilities:                         
Deposits  $501,377   $509,454   $-   $509,454   $- 
Short-term debt   21,877    21,877    -    21,877    - 
Long-term debt   14,372    9,661    -    9,661    - 
Accrued interest payable   330    330    -    -    330 

 

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.

 

17
 

 

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.

 

Premises and Equipment Held for Sale

 

Premises and equipment held for sale are stated at book value which approximates fair market value.

 

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.

 

18
 

 

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:

 

   June 30, 2012 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (In thousands) 
Securities available for sale:                    
U.S. government agencies                    
Within 1 year  $12,021   $59   $-   $12,080 
After 1 year but within 5 years   20,391    169    (9)   20,551 
                     
Mortgage-backed securities-GSE’s                    
Within 1 year   1,196    46    -    1,242 
After 1 year but within 5 years   24,747    1,183    -    25,930 
After 5 years but within 10 years   5,281    141    -    5,422 
                     
Municipal bonds                    
Within 1 year   352    4    -    356 
After 1 year but within 5 years   2,358    209    -    2,567 
After 5 years but within 10 years   1,846    127    (12)   1,961 
After 10 years   1,601    98    -    1,699 
                     
   $69,793   $2,036   $(21)  $71,808 

 

As of June 30, 2012, accumulated other comprehensive income included unrealized net gains of $2.0 million, net of deferred income taxes of $780,000.

 

For the second quarter 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $3,000 and $5,000, respectively, and realized losses of $49,000 and $20,000, respectively for each period. These investment sales generated $3.5 million and $2.6 million in proceeds during these respective periods. For the six months ended June 30, 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $6,000 and $12,000, respectively, and realized losses of $129,000 and $38,000, respectively, for each period. These investment sales generated $6.9 million and $5.8 million in proceeds during these respective periods.

 

19
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F- INVESTMENT SECURITIES (continued)

 

   December 31, 2011 
       Gross   Gross     
   Amortized   unrealized   unrealized   Fair 
   cost   gains   losses   value 
   (In thousands) 
Securities available for sale:                    
U.S. government agencies                    
Within 1 year  $13,508   $106   $-   $13,614 
After 1 year but within 5 years   12,577    221    -    12,798 
                     
Mortgage-backed securities-GSE’s                    
Within 1 year   1,858    56    -    1,914 
After 1 year but within 5 years   29,584    1,243    (11)   30,816 
After 5 years but within 10 years   2,429    17    (7)   2,439 
                     
Municipal bonds                    
Within 1 year   -    -    -    - 
After 1 year but within 5 years   1,369    70    -    1,439 
After 5 years but within 10 years   2,691    287    -    2,978 
After 10 years   1,747    109    -    1,856 
                     
   $65,763   $2,109   $(18)  $67,854 

 

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.

 

20
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE F- INVESTMENT SECURITIES (continued)

 

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 June 30, 2012 and December 31, 2011.

 

   June 30, 2012 
   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   value   losses   value   losses   value   losses 
   (In thousands) 
Securities available for sale:                              
U.S. government agencies  $8,357   $9   $-   $-   $8,357   $9 
Municipal bonds   669    12    -    -    669    12 
                               
Total temporarily impaired securities  $9,026   $21   $-   $-   $9,026   $21 

 

At June 30, 2012, the Company had no AFS securities with an unrealized loss for twelve or more consecutive months. Seven U.S. government agencies and one municipal bond had unrealized losses for less than twelve months totaling $21,000 at June 30, 2012. All unrealized losses are attributable to the general trend of interest rates.

 

   December 31, 2011 
   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   value   losses   value   losses   value   losses 
   (In thousands) 
Securities available for sale:                              
Mortgage-backed securities- GSE’s  $7,207   $18   $-   $-   $7,207   $18 
Total temporarily impaired securities  7,207    $18   $-   $-   $7,207   18 

 

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 attributable to the general trend of interest rates.

 

21
 

  

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS

 

Following is a summary of loans at June 30, 2012 and December 31, 2011:

 

   2012   2011 
       Percent       Percent 
   Amount   of total   Amount   of total 
   (In thousands) 
Real estate loans:                    
1-to-4 family residential  $48,487    12.42%  $52,182    12.49%
Commercial real estate   193,221    49.48%   192,047    45.98%
Multi-family residential   19,501    5.00%   23,377    5.60%
Construction   54,716    14.02%   70,846    16.96%
Home equity lines of credit (“HELOC”)   36,771    9.42%   38,702    9.27%
                     
Total real estate loans   352,696    90.34%   377,154    90.30%
                     
Other loans:                    
Commercial and industrial   31,044    7.95%   33,146    7.94%
Loans to individuals & overdrafts   7,070    1.81%   7,671    1.84%
Total other loans   38,114    9.76%   40,817    9.78%
                     
Gross loans   390,810         417,971      
                     
Less deferred loan origination fees, net   (407)   (.10)%   (347)   (.08)%
                     
Total loans   390,403    100.00%   417,624    100.00%
                     
Allowance for loan losses   (8,510)        (10,034)     
                     
Total loans, net  $381,893        $407,590      

 

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 June 30, 2012, the Company had pre-approved but unused lines of credit for customers totaling $60.0 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.

 

22
 

 

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.

 

1-to-4 Family Residential 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 a 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 non-farm 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 often 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.

 

23
 

 

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 June 30, 2012 and December 31, 2011, respectively:

 

   June 30, 2012 
   30+   Non-   Total         
   Days   Accrual   Past       Total 
   Past Due   Loans   Due   Current   Loans 
   (In thousands) 
                     
Commercial and industrial  $1,923   $259   $2,182   $28,862   $31,044 
Construction   366    2,649    3,015    51,701    54,716 
Multi-family residential   43    1,508    1,551    17,950    19,501 
Commercial real estate   63    7,685    7,748    185,473    193,221 
Loans to individuals & overdrafts   18    124    142    6,928    7,070 
1-to-4 family residential   472    1,627    2,099    46,388    48,487 
HELOC   113    824    937    35,834    36,771 
Deferred loan (fees) cost, net                       (407)
   $2,998   $14,676   $17,674   $373,136   $390,403 

 

At June 30, 2012 there were no loans that were more than 90 days past due and still accruing interest.

 

24
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

   December 31, 2011 
   30+   Non-   Total         
   Days   Accrual   Past       Total 
   Past Due   Loans   Due   Current   Loans 
   (In thousands) 
                     
Commercial and industrial  $48   $171   $219   $32,927   $33,146 
Construction   568    4,072    4,640    66,206    70,846 
Multi-family residential   1,540    -    1,540    21,837    23,377 
Commercial real estate   1,013    10,425    11,438    180,609    192,047 
Loans to individuals & overdrafts   10    176    186    7,485    7,671 
1-to-4 family residential   735    1,875    2,610    49,572    52,182 
HELOC   333    904    1,237    37,465    38,702 
Deferred loan (fees) cost, net                       (347)
   $4,247   $17,623   $21,870   $396,101   $417,624 

 

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 June 30, 2012 and December 31, 2011:

 

               Three months ended   Six months ended 
               June 30, 2012   June 30, 2012 
       Contractual           Interest Income       Interest Income 
       Unpaid       Average   Recognized on   Average   Recognized on 
   Recorded   Principal   Related   Recorded   Impaired   Recorded   Impaired 
   Investment   Balance   Allowance   Investment   Loans   Investment   Loans 
   (In thousands) 
With no related allowance recorded:                                   
Commercial and  industrial  $512   $777   $-   $480   $6   $480   $13 
Construction   2,312    2,915    -    2,134    6    1,760    6 
Commercial real  estate   13,683    15,187    -    12,810    196    11,605    284 
Loans to individuals & overdrafts   121    138    -    149    1    171    1 
Multi-family residential   1,508    1,508    -    1,524    -    1,529    - 
1 to 4 family residential   1,683    1,932    -    1,776    9    1,884    13 
HELOC   1,336    1,556    -    1,193    7    1,039    15 
Subtotal:   21,155    24,013    -    20,066    225    18,468    332 
With an allowance recorded:                                   
Commercial and  industrial   7    7    2    64    -    43    - 
Construction   1,192    1,192    167    1,443    11    2,083    12 
Commercial real  estate   852    1,114    75    1,744    13    2,842    13 
Loans to individuals  & overdrafts   15    16    7    35    -    29    - 
Multi-family residential   43    43    10    21    1    14    1 
1 to 4 family residential   810    1,133    162    792    14    774    24 
HELOC   181    181    97    258    5    308    5 
Subtotal:   3,100    3,686    520    4,357    44    6,093    55 
Totals:                                   
Commercial   20,109    22,743    254    20,220    233    20,356    329 
Consumer   136    154    7    184    1    200    1 
Residential   4,010    4,802    259    4,019    35    4,005    57 
Grand Total:  $24,255   $27,699   $520   $24,423   $269   $24,561   $387 

 

25
 

  

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Impaired Loans (continued)

 

               December 31, 2011 
       Contractual       Year to Date 
       Unpaid       Average   Interest Income 
   Recorded   Principal   Related   Recorded   Recognized on 
   Investment   Balance   Allowance   Investment   Impaired Loans 
   (In thousands) 
With no related allowance recorded:                         
Commercial and industrial  $478   $808   $-   $290   $25 
Construction   1,011    1,166    -    1,539    23 
Commercial real estate   9,195    10,085    -    7,889    158 
Loans to individuals & overdrafts   217    234    -    175    4 
Multi-family residential   1,540    1,540    -    1,041    102 
1-to-4 family residential   2,100    2,930    -    1,746    33 
HELOC   730    823    -    406    - 
Subtotal:   15,271    17,586    -    13,086    345 
With an allowance recorded:                         
Commercial and industrial   -    -    -    272    - 
Construction   3,365    4,085    674    1,269    4 
Commercial real estate   5,039    5.929    498    4,043    71 
Loans to individuals & overdrafts   16    16    15    102    1 
Multi-family residential   -    -    -    -    - 
1-to-4 family residential   736    774    170    1,999    35 
HELOC   408    435    158    321    10 
Subtotal:   9,564    11,239    1,515    8,006    121 
Totals:                         
Commercial   20,628    23,613    1,172    16,343    383 
Consumer   233    250    15    277    5 
Residential   3,974    4,962    328    4,472    78 
                          
Grand Total:  $24,835   $28,825   $1,515   $21,092   $466 

 

Loans are placed on non-accrual status 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.

 

26
 

 

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 previous twelve months:

 

   Twelve months ended June 30, 2012 
       Pre-   Post- 
       Modification   Modification 
       Outstanding   Outstanding 
   Number   Recorded   Recorded 
   of loans   Investment   Investment 
   (Dollars in thousands) 
             
Below market interest rate:               
Commercial and industrial   -   $-   $- 
Construction   -    -    - 
Commercial real estate   -    -    - 
Loans to individuals & overdrafts   -    -    - 
1-to-4 family residential   -    -    - 
HELOC   -    -    - 
Total   -    -    - 
                
Extended payment terms:               
Commercial and industrial   2    327    325 
Construction   2    2,057    2,036 
Commercial real estate   5    3,111    2,974 
Loans to individuals & overdrafts   -    -    - 
1-to-4 family residential   2    151    143 
HELOC   -    -    - 
Total   11    5,646    5,478 
                
Forgiveness of principal:               
Commercial and industrial   -    -    - 
Construction   -    -    - 
Commercial real estate   -    -    - 
Loans to individuals & overdrafts   -    -    - 
1- to-4 family residential   -    -    - 
HELOC   -    -    - 
Total   -    -    - 
                
Total   11   $5,646   $5,478 

 

27
 

 

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 and six months ended June 30, 2012:

 

   Three months ended   Six months ended 
   June 30, 2012   June 30, 2012 
   Number   Recorded   Number   Recorded 
   of loans   investment   of loans   investment 
   (Dollars in thousands) 
Below market interest rate:                    
Commercial and industrial   -   $-    -   $- 
Construction   -    -    -    - 
Commercial real estate   -    -    -    - 
Loans to individuals & overdrafts   -    -    -    - 
1-to-4 family residential   -    -    -    - 
HELOC   -    -    -    - 
Total   -    -    -    - 
                     
Extended payment terms:                    
Commercial and industrial   -    -    1    114 
Construction   -    -    2    290 
Commercial real estate   -    -    4    1,144 
Loans to individuals & overdrafts   -    -    -    - 
1-to-4 family residential   -    -    -    - 
HELOC   -    -    -    - 
Total   -    -    7    1,548 
                     
Forgiveness of principal:                    
Commercial and industrial   -    -    -    - 
Construction   -    -    -    - 
Commercial real estate   -    -    -    - 
Loans to individuals and overdrafts   -    -    -    - 
1-to-4 family residential   -    -    -    - 
HELOC   -    -    -    - 
Total   -    -    -    - 
                     
Other:                    
Commercial and industrial   -    -    -    - 
Construction   -    -    -    - 
Commercial real estate   2    849    2    849 
Loans to individuals and overdrafts   -    -    -    - 
1-to-4 family residential   4    165    4    165 
HELOC   -    -    -    - 
Total   6    1,014    6    1,014 
                     
Total   6   $1,014    13   $2,562 

 

28
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Troubled Debt Restructurings (continued)

 

All loans extended to borrowers that are considered TDRs and have characteristics that are not within the normal lending guidelines and practices when extending credit are included in the Other category.

 

The following table presents the successes and failures of the types of modifications within the previous six months as of June 30, 2012:

 

   Paid in full   Paying as restructured   Converted to non-accrual   Foreclosure/Default 
   Number   Recorded   Number   Recorded   Number   Recorded   Number   Recorded 
   of loans   Investment   of loans   Investment   of loans   Investment   of loans   Investment 
   (In thousands) 
                                 
Below market interest rate   -   $-    -   $-    -   $-    -   $- 
Extended payment terms   -    -    2    290    4    975    1    283 
Forgiveness of principal   -    -    -    -    -    -    -    - 
Other   -    -    6    1,014    -    -    -    - 
                                         
Total   -   $-    8   $1,304    4   $975    1   $283 

 

At June 30, 2012, the Company had 31 loans with a balance of $9.0 million that were considered to be troubled debt restructurings. Of those TDRs, 14 loans with a balance totaling $1.9 million were still accruing as of June 30, 2012. The remaining 17 TDRs with a balance totaling $7.1 million as of June 30, 2012 were in non-accrual 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:

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

 

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

 

·Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

 

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

 

29
 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Credit Quality Indicators (continued)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:
30
 

  

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Credit Quality Indicators (continued)

 

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

 

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

 

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

 

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

 

·Risk Grade 8 (Doubtful) - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.
   
·Risk Grade 9 (Loss) - Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

 

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:

 

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

 

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

 

oLoans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.
   
31
 

  

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Credit Quality Indicators (continued)

 

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

 

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

 

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

 

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

 

·Risk Grade 9 (Loss) - Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.
32
 

 

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 June 30, 2012 and December 31, 2011, respectively:

 

June 30, 2012
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
(In thousands) 
                 
Superior  $764   $55   $-   $- 
Very good   32    4    307    - 
Good   3,067    655    14,303    1,687 
Acceptable   9,870    5,049    63,276    5,793 
Acceptable with care   15,441    40,670    74,336    10,470 
Special mention   1,339    4,629    23,338    - 
Substandard   531    3,654    17,661    1,551 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $31,044   $54,716   $193,221   $19,501 

 

Consumer Credit        
Exposure By        
Internally  1-to-4 family     
Assigned Grade  residential   HELOC 
         
Pass  $41,324   $33,746 
Special mention   3,528    1,200 
Substandard   3,635    1,825 
   $48,487   $36,771 

 

Consumer Credit    
Exposure Based  Loans to 
On Payment  individuals & 
Activity  overdrafts 
     
Pass  $6,888 
Non –pass   182 
   $7,070 

 

 

33
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

December 31, 2011
Commercial                
Credit                
Exposure By  Commercial       Commercial     
Internally  and       real   Multi-family 
Assigned Grade  industrial   Construction   estate   residential 
(In thousands) 
                 
Superior  $722   $59   $-   $- 
Very good   154    6    429    - 
Good   5,184    2,369    16,510    1,064 
Acceptable   8,224    6,685    67,922    12,828 
Acceptable with care   15,048    54,087    60,604    7,820 
Special mention   3,062    2,671    27,177    125 
Substandard   752    4,969    19,405    1,540 
Doubtful   -    -    -    - 
Loss   -    -    -    - 
   $33,146   $70,846   $192,047   $23,377 

 

Consumer Credit        
Exposure By        
Internally  1-to-4 family     
Assigned Grade  residential   HELOC 
         
Pass  $43,647   $35,127 
Special mention   2,925    1,391 
Substandard   5,610    2,184 
   $52,182   $38,702 

 

Consumer Credit    
Exposure Based  Loans to 
On Payment  individuals & 
Activity  overdrafts 
     
Pass  $7,447 
Non-pass   224 
   $7,671 

  

Non-performing assets at June 30, 2012 and December 31, 2011 consist of the following:

 

   June 30, 2012   December 31, 2011 
   (In thousands) 
         
Non-accrual loans  $14,676   $17,623 
Accruing TDRs   1,903    2,013 
Total non-performing loans   16,579    19,636 
Foreclosed real estate   3,859    3,031 
Total non-performing assets  $20,438   $22,667 
34
 

 

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.

 

35
 

 

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 and six month periods ended June 30, 2012 and June 30, 2011, respectively:

 

   Three months ended 
   June 30, 2012 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (In thousands) 
                                 
Balance, beginning of period 3/31/2012  $555   $1,311   $4,804   $1,585   $1,101   $105   $107   $9,568 
Provision (recovery) for loan losses   (409)   (967)   1,024    (275)   (41)   3    16    (649)
Loans charged-off   (4)   -    (670)   (54)   (168)   (45)   -    (940)
Recoveries   244    138    70    58    5    17    -    532 
                                         
Balance, end of period 6/30/2012  $386   $482   $5,228   $1,314   $897   $80   $123   $8,510 
                                         
Ending balance: individually evaluated for impairment  $2   $167   $75   $162   $97   $7   $10   $520 
Ending balance: collectively evaluated for impairment  $384   $315   $5,153   $1,152   $800   $73   $113   $7,990 
                                         
Loans:                                        
Ending balance  $31,044   $54,716   $193,221   $48,487   $36,771   $7,070   $19,501   $390,810 
Ending balance: individually evaluated for impairment  $519   $3,504   $14,535   $2,493   $1,517   $136   $1,551   $24,255 
Ending balance: collectively evaluated for impairment  $30,525   $51,212   $178,686   $45,994   $35,254   $6,934   $17,950   $366,555 

 

36
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (Continued)

 

   Six months ended 
   June 30, 2012 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (In thousands) 
                                 
Balance, beginning of period 1/1/2012  $719   $1,540   $4,771   $1,661   $1,122   $94   $127   $10,034 
Provision (recovery) for loan losses   (2,956)   (911)   1,357    (369)   134    (37)   (4)   (2,786)
Loans charged-off   (51)   (458)   (981)   (99)   (376)   (54)   -    (2,019)
Recoveries   2,674    311    81    121    17    77    -    3,281 
                                         
Balance, end of period 6/30/2012  $386   $482   $5,228   $1,314   $897   $80   $123   $8,510 
                                         
Ending balance: individually evaluated for impairment  $2   $167   $75   $162   $97   $7   $10   $520 
Ending balance: collectively evaluated for impairment  $384   $315   $5,153   $1,152   $800   $73   $113   $7,990 
                                         
Loans:                                        
Ending balance  $31,044   $54,716   $193,221   $48,487   $36,771   $7,070   $19,501   $390,810 
Ending balance: individually evaluated for impairment  $519   $3,504   $14,535   $2,493   $1,517   $136   $1,551   $24,255 
Ending balance: collectively evaluated for impairment  $30,525   $51,212   $178,686   $45,994   $35,254   $6,934   $17,950   $366,555 

 

During the six months ended June 30, 2012 the Company recorded recoveries on loans previously charged-off in the amount of $3.3 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 June 30, 2012 resulted in a $2.8 million recovery in the provision for loan losses.

37
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (continued)

   December 31, 2011 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (In thousands) 
Loans:                                        
Ending Balance  $33,146   $70,846   $192,047   $52,182   $38,702   $7,671   $23,377   $417,971 
Ending Balance: individually evaluated for impairment  $478   $4,376   $14,234   $2,836   $1,138   $233   $1,540   $24,835 
Ending Balance: collectively evaluated for impairment  $32,668   $66,470   $177,813   $49,346   $37,564   $7,438   $21,837   $393,136 

 

38
 

  

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (continued)

 

   Three months ended 
   June 30, 2011 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (In thousands) 
                                 
Balance, beginning of period 3/31/2011  $1,081   $1,271   $3,609   $2,451   $1,140   $383   $183   $10,118 
Provision (recovery) for loan losses   203    570    1,864    (230)   376    (232)   (9)   2,542 
Other   -    -    (53)   -    -    -    -    (53)
Loans charged-off   (3,880)   (669)   (926)   (410)   (69)   (65)   -    (6,019)
Recoveries   3,648    -    8    81    3    50    -    3,790 
                                         
Balance, end of period 6/30/2011  $1,052   $1,172   $4,502   $1,892   $1,450   $136   $174   $10,378 
                                         
Ending balance: individually evaluated for impairment  $191   $106   $761   $701   $268   $46   $-   $2,073 
Ending balance: collectively evaluated for impairment  $861   $1,066   $3,741   $1,191   $1,182   $90   $174   $8,305 
                                         
Loans:                                        
Ending balance  $40,646   $77,211   $204,412   $59,504   $40,532   $8,409   $28,168   $458,882 
Ending balance: individually evaluated for impairment  $538   $2,329   $13,647   $3,408   $442   $213   $-   $20,577 
Ending balance: collectively evaluated for impairment  $40,108   $74,882   $190,765   $56,096   $40,090   $8,196   $28,168   $438,305 

 

39
 

 

NEW CENTURY BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 

NOTE G - LOANS (continued)

 

Allowance for Loan Losses (continued)

 

   Six months ended 
   June 30, 2011 
   Commercial           1-to-4       Loans to   Multi-     
   and       Commercial   family       individuals &   family     
Allowance for loan losses  industrial   Construction   real estate   residential   HELOC   overdrafts   residential   Total 
   (In thousands) 
                                 
Balance, beginning of period 1/1/2011  $1,052   $349   $3,111   $1,985   $1,348   $1,530   $640   $10,015 
Provision (recovery) for loan losses   160    1,714    3,133    296    231    (1,362)   (466)   3,706 
Other   -    -    (53)   -    -    -    -    (53)
Loans charged-off   (3,880)   (891)   (1,699)   (600)   (134)   (87)   -    (7,291)
Recoveries   3,720    -    10    211    5    55    -    4,001 
                                         
Balance, end of period 6/30/2011  $1,052   $1,172   $4,502   $1,892   $1,450   $136   $174   $10,378 
                                         
Ending balance: individually evaluated for impairment  $191   $106   $761   $701   $268   $46   $-   $2,073 
Ending balance: collectively evaluated for impairment  $861   $1,066   $3,741   $1,191   $1,182   $90   $174   $8,305 
                                         
Loans:                                        
Ending balance  $40,646   $77,211   $204,412   $59,504   $40,532   $8,409   $28,168   $458,882 
Ending balance: individually evaluated for impairment  $538   $2,329   $13,647   $3,408   $442   $213   $-   $20,577 
Ending balance: collectively evaluated for impairment  $40,108   $74,882   $190,765   $56,096   $40,090   $8,196   $28,168   $438,305 

  

40
 

 

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. 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 $688,000 for a deposit premium. The deposit premium was offset by the write-off of a core deposit intangible of $131,000 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 plus accrued interest of $5,000 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 $338,000 plus accrued interest of $2,000 in loans associated with deposit accounts which included overdraft protection loans and time deposit loans. There was a separate payment for the loans purchased that was not included in the $1.8 million purchase price.

 

41
 

 

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

June 30, 2012 and December 31, 2011

 

During the first six months of 2012, total assets decreased by $26.0 million to $563.7 million as of June 30, 2012. Earning assets at June 30, 2012 totaled $515.4 million and consisted of $381.9 million in net loans, $71.8 million in investment securities, $59.6 million in overnight investments and interest-bearing deposits in other banks and $2.1 million in non-marketable equity securities. Total deposits and shareholders’ equity at the end of the second quarter of 2012 were $471.2 million and $53.0 million, respectively. In the second quarter of 2012 the Company completed the sale of two branches which resulted in decreases of $14.6 million in deposits, $338,000 in loans, and $1.1 million in real property and equipment which resulted in a net decrease in cash of $13.0 million.

 

Since the end of 2011, gross loans have decreased by $27.2 million to $390.4 million as of June 30, 2012 due to continued soft loan demand and efforts to reduce concentration levels within certain loan categories.. Gross loans consisted of $31.0 million in commercial and industrial loans, $193.2 million in commercial real estate loans, $19.5 million in multi-family residential loans, $7.1 million in consumer loans, $48.5 million in residential real estate, $36.8 million in HELOC, and $54.7 million in construction loans. Deferred loan fees, net of costs, on these loans were $407,000.

 

42
 

  

At June 30, 2012 and December 31, 2011, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $56.6 million at June 30, 2012, a $1.0 million increase from December 31, 2011. The Company’s investment securities at June 30, 2012 were $71.8 million, an increase of $3.9 million from December 31, 2011. The investment portfolio as of June 30, 2012 consisted of $32.6 million in government agency debt securities, $32.6 million in mortgage-backed securities and $6.6 million in municipal securities. The net unrealized gain on these securities was $2.0 million.

 

At June 30, 2012, the Company also held an investment of $1.0 million in the form of Federal Home Loan Bank (“FHLB”) stock a decrease of $214,000 from December 31, 2011 due to redemptions during the second quarter of 2012. Also, the Company had $1.1 million in other non-marketable securities, which was approximately the same at December 31, 2011.

 

At June 30, 2012, non-earning assets were $48.3 million, which reflects a decrease of $5.0 million from the $53.3 million as of December 31, 2011. Non-earning assets as of June 30, 2012 included $15.7 million in cash and due from banks, bank premises and equipment of $11.1 million, core deposit intangible of $356,000, accrued interest receivable of $1.6 million, foreclosed real estate of $3.9 million, and other assets which consisted of $8.1 million in Bank Owned Life Insurance (“BOLI”), $5.2 million in deferred tax assets, and $2.3 million in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company’s calculation of earning assets. During the second quarter of 2012 the Company experienced a decrease in cash and cash equivalents of $6.1 million due to the previously mentioned branch sale.

 

Total deposits at June 30, 2012 were $471.2 million and consisted of $72.7 million in non-interest-bearing demand deposits, $95.4 million in money market and NOW accounts, $24.0 million in savings accounts, and $279.1 million in time deposits. Total deposits decreased by $30.2 million from $501.4 million as of December 31, 2011. Of this decrease, $14.6 million is related to the previously mentioned branch sale. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of June 30, 2012.

 

As of June 30, 2012, the Company had $23.0 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of $21.0 million of repurchase agreements with local customers and $2.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004.

 

Total shareholders’ equity at June 30, 2012 was $53.0 million, an increase of $3.5 million from $49.5 million as of December 31, 2011. Accumulated other comprehensive income relating to available for sale securities decreased $50,000 for the six months ended June 30, 2012. Other changes in shareholders’ equity included increases of $23,000 in stock-based compensation, net income of $3.3 million for the six months ending June 30, 2012, and $165,000 from the proceeds of the sale of common stock.

 

Past Due Loans, Non-performing Assets, and Asset Quality

 

At June 30, 2012, the Company had $3.0 million in loans that were 30 to 89 days past due. This represented 0.77% of gross loans outstanding on that date. This is a decrease from December 31, 2011 when there were $4.2 million in loans that were 30-89 days past due and $108,000 in loans that were 90 days or more past due and still accruing. This represented 1.01% of gross loans outstanding. Non-accrual loans decreased from $17.6 million at December 31, 2011 to $14.7 million for the period ended June 30, 2012.

 

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans decreased 45 basis points from 4.70% at December 31, 2011 to 4.25% at June 30, 2012.

 

The Company had fourteen loans totaling $1.9 million that were considered troubled debt restructurings (“TDRs”) that were still in accruing status at June 30, 2012 with the remaining TDRs included in non-accrual loans. All TDRs are considered non-performing loans regardless of accrual status.

 

43
 

 

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 accruing TDRs), and total non-performing assets.

 

   For Periods Ended 
   June 30,   December 31, 
   2012   2011 
   (Dollars in thousands) 
         
Non-accrual loans  $14,676   $17,623 
Accruing TDRs   1,903    2,013 
Total non-performing loans   16,579    19,636 
Foreclosed real estate   3,859    3,031 
Repossessed assets   -    - 
Total non-performing assets  $20,438   $22,667 
           
Accruing loans past due 90 days or more  $-   $109 
Allowance for loan losses  $8,510   $10,034 
           
Non-performing loans to period end loans   4.25%   4.70%
Non-performing loans and accruing loans past due 90 days  or more to period end loans   4.25%   4.73%
Allowance for loans losses to period end  loans   2.18%   2.40%
Allowance for loan losses to non-performing loans   51.33%   51.10%
Allowance for loan losses to non-performing assets   41.64%   44.27%
Allowance for loan losses to non-performing assets and accruing loans past due 90 days or more   41.64%   44.06%
Non-performing assets to total assets   3.63%   3.84%
Non-performing assets and accruing loans past due 90 days  or more to total assets   3.63%   3.86%

 

The total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate), at June 30, 2012 and December 31, 2011 were $20.4 million and $22.7 million. The allowance for loan losses at June 30, 2012 represented 41.64% of non-performing assets compared to 44.27% at December 31, 2011.

 

Total impaired loans at June 30, 2012 were $24.3 million, this includes $14.7 million in loans that were classified as impaired because they were in non-accrual and $9.6 million in loans that were determined to be impaired for other reasons. Of these loans, $3.1 million required a specific reserve of $520,000 at June 30, 2012. Total impaired loans at December 31, 2011 were $24.8 million. This includes $17.6 million in loans that were considered to be impaired due to being in non-accrual status and $7.2 million in loans that were deemed to be impaired for other reasons. Of these loans, $9.6 million required a specific reserve of $1.5 million at December 31, 2011.

 

The allowance for loan losses was $8.5 million at June 30, 2012 or 2.18% of gross loans outstanding. This is a decrease of 22 basis points from the 2.40% of gross loans at December 31, 2011. The allowance for loan losses at June 30, 2012 represented 35.09% of impaired loans compared to 40.40% at December 31, 2011. This decrease in the allowance for the six months of 2012 resulted primarily from net recoveries of $1.3 million which included a $2.4 million recovery on commercial and industrial loans during the first quarter of 2012, management’s concerted effort to charge off impairments on collateral dependant impaired loans, and an overall decrease in loan balances. It is management’s assessment that the allowance for loan losses as of June 30, 2012 is appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

 

44
 

 

Other Lending Risk Factors

 

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

 

Regulatory Loan to Value

 

The Company monitors its exposure to loans that exceed the guidelines established by regulators for loan to value (“LTV”) ratios.

 

At June 30, 2012 and December 31, 2011 the Company had $10.1 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At June 30, 2012 and December 31, 2011 the Company had $10.3 million and $12.5 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 32.6% and 43.8% of total risk based capital as of June 30, 2012 and December 31, 2011, 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 weaken in terms of both market activity and collateral valuations.

 

Business Sector Concentrations

 

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

 

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

 

   At     
   June 30,   % of 
   2012   Risk Based 
   (In thousands)   Capital 
1-to-4 Family Rental  $19,554    31%
Office Building  $29,565    47%

 

At June 30, 2012 the Company exceeded this guideline in the Office Buildings product type. The Office Buildings were 47% of risk-based capital or $29.6 million. All other commercial real estate groups were under the 40% threshold. The reduced concentration within these categories from December 31, 2011 to June 30, 2012 resulted from the increase in capital combined with reduced loan balances.

 

    At     
   December 31,   % of 
   2011   Risk Based 
   (In thousands)   Capital 
1-to-4 Family Rental  $26,992    42%
Office Building  $30,265    47%

 

At December 31, 2011 the Company had two product type groups which exceeded this guideline; 1-to-4 Family Rental and Office Buildings. The 1-to-4 Family Rental group represented 42% of risk-based capital, or $27.0 million, and Office Buildings were 47% of risk-based capital or $30.3 million. All other commercial real estate groups were under the 40% threshold.

 

45
 

 

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

 

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

 

ADC Loans

As of June 30, 2012

(Dollars in thousands)

 

       Land and Land     
   Construction   Development   Total 
             
Total ADC loans  $37,272   $17,444   $54,716 
                
Average Loan Size  $138   $311      
                
Percentage of total loans   9.55%   4.47%   14.02%
                
Non-accrual loans  $210   $2,189   $2,399 

 

At June 30, 2012, total ADC loans represented 14.02%, or $54.7 million, of the total loan portfolio, of which $2.4 million of the ADC loan portfolio is in non-accrual status. This represents 4.4% of all ADC loans. Management 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.

 

ADC Loans

As of December 31, 2011

(Dollars in thousands)

 

       Land and Land     
   Construction   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 

 

At December 31, 2011, total ADC loans represented 16.96%, or $70.8 million, of the total loan portfolio, of which $3.8 million of the ADC portfolio is in non-accrual status. This represents 5.3% of all ADC loans. Management 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.

 

46
 

 

Geographic Concentrations

 

Certain risks exist arising from the geographic location of specific types of higher than normal risk real estate loans. Below is a table showing geographic concentrations for ADC and HELOC loans at June 30, 2012.

 

   ADC Loans   Percent   HELOC   Percent 
   (Dollars in thousands) 
     
Harnett County  $6,224    11.4%  $7,301    19.8%
Cumberland County   16,452    30.1%   7,768    21.1%
Johnston County   749    1.4%   584    1.6%
Pitt County   3,784    6.9%   25    0.1%
Robeson County   1,755    3.2%   3,458    9.4%
Sampson County   733    1.3%   1,464    4.0%
Wayne County   3,045    5.6%   5,586    15.2%
Hoke County   2,907    5.3%   250    0.7%
All other locations   19,067    34.8%   10,335    28.1%
                     
Total  $54,716    100.0%  $36,771    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    8.0%  $7,432    19.2%
Cumberland County   18,424    26.0%   6,652    17.2%
Johnston County   1,410    2.0%   622    1.6%
Pitt County   4,631    6.5%   -    0.0%
Robeson County   2,021    2.9%   3,377    8.7%
Sampson County   730    1.0%   1,645    4.3%
Wayne County   4,474    6.3%   5,769    14.9%
Hoke County   2,626    3.7%   111    0.3%
All other locations   30,893    43.6%   13,094    33.8%
                     
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 June 30, 2012, the Company had $97.6 million in loans that had terms permitting interest only payments. This represented 25.0% 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 permit interest only payments during the acquisition, development, and construction phases of such projects.

 

Large Dollar Concentrations

 

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company’s ten largest loans or lines of credit totaled $51.2 million or 13.1% of total loans at June 30, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company’s ten largest customer relationships totaled $75.2 million or 19.3% of total loans at June 30, 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 Company’s capital position.

 

47
 

 

Comparison of Results of Operations for the

Three months ended June 30, 2012 and 2011

 

General. During the second quarter of 2012, the Company had net income of $1.2 million as compared with net loss of ($861,000) for the same quarter in 2011. Net income per share for the second quarter of 2012 was $0.17, basic and diluted, compared with net loss per share of ($0.13), basic and diluted, for the second quarter of 2011. Results of operations for the second quarter of 2012 were primarily impacted by a recovery in the provision for loan losses of $649,000 due to a reduction in loan balances and lower loan charge-offs. The Company experienced a decrease in net interest margin of 21 basis points to 3.68% in the second quarter of 2012from the same period in 2011.

 

Net Interest Income. Net interest income decreased by $964,000 to $4.6 million for the second quarter of 2012. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets combined with a decrease in those assets. Average total interest-earning assets were $511.9 million in the second quarter of 2012 compared with $582.2 million during the same period in 2011 and the yield on those assets decreased 40 basis points from 5.40% to 5.00%. Total interest income reversed on loans transferred to non-accrual status for the three months ended June 30, 2012 and 2011 was $20,000 and $58,000, respectively, or approximately 1 basis point on average interest-earning assets for both periods mentioned.

 

The Company’s average interest-bearing liabilities decreased by $66.3 million to $435.0 million for the quarter ended June 30, 2012 from $501.3 million for the same period one year earlier and the cost of those funds decreased from 1.75% to 1.56%, or 19 basis points. During the second quarter of 2012, the Company’s net interest margin was 3.68% and net interest spread was 3.44%. For the quarter ended June 30, 2011, net interest margin was 3.89% and net interest spread was 3.65%

 

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. During the second quarter, the Company recorded a recovery for loan losses of $649,000 which is a decrease of $3.2 million from the provision that was recorded in the second quarter of 2011. This decrease in the allowance for the three months ended June 30, 2012 resulted primarily from an overall decrease in loan balances and net charge-offs of $408,000.

 

Non-Interest Income. Non-interest income for the quarter ended June 30, 2012 was $1.2 million, an increase of $287,000 from the second quarter of 2011. This increase was primarily due to a $557,000 gain on the sale of two branches during the second quarter of 2012. Service charges on deposit accounts decreased $85,000 to $291,000 for the quarter ended June 30, 2012 as compared to $376,000 for the same period in 2011. Mortgage fee income increased $14,000 to $75,000 for the quarter ended June 30, 2012 compared to the same period in 2011. Other non-deposit fees and income decreased $199,000 to $256,000 as compared to the same period in 2011.

 

Non-Interest Expenses. Non-interest expenses decreased by $710,000 to $4.6 million for the quarter ended June 30, 2012, from $5.3 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the second quarter of 2012 versus the second quarter of 2011:

·Personnel expenses decreased $237,000 to $2.0 million in the second quarter of 2012 due to a decrease in staff size to 111 at June 30, 2012 from 125 at June 30, 2011.
·Deposit insurance expense was $187,000 for the quarter ended June 30, 2012 down from $235,000.
·Professional fees decreased $33,000 to $470,000 for the quarter ended June 30, 2012 from to $503,000 for the quarter ended June 30, 2011.
·Foreclosure-related expenses decreased by $179,000 to $521,000 for the quarter ending June 30, 2012 compared to the same period for 2011.

 

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Provision for Income Taxes. The Company’s effective tax rate was 37.1% for the quarter ended June 30, 2012 and (37.8%) for the quarter ended June 30, 2011 as a result of permanent tax differences that were in excess of taxable income resulting in lower effective tax rates.

 

As of June 30, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million, compared to $4.9 million at June 30, 2011. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of June 30, 2012 and June 30, 2011, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

 

Comparison of Results of Operations for the

Six months ended June 30, 2012 and 2011

 

General. During the first six months of 2012, the Company had net income of $3.3 million compared with net loss of ($740,000) for the same period in 2011. Net income per share for the first two quarters of 2012 was $0.47 per share, basic and diluted, compared with net loss per share of ($0.11), basic and diluted, for the same period in 2011. Results of operations for the first six months of 2012 were primarily impacted by a recovery in the provision for loan losses of $2.8 million, which was a $6.5 million decrease from the same period in 2011. The Company experienced a decrease in net interest margin of 26 basis points to 3.68% for the first six months of 2012 from 3.94% for the same period in 2011.

 

Net Interest Income. Net interest income decreased by $1.8 million to $9.5 million for the six month period ended June 30, 2012. The Company’s total interest income was affected by a reduction in the yield on interest-earning assets combined with a decrease in those assets. Average total interest-earning assets were $522.4 million in the first six months of 2012 compared with $582.5 million during the same period in 2011 and the yield on those assets decreased 46 basis points from 5.47% to 5.01%. Total interest income reversed on loans transferred to non-accrual status for the six months ended June 30, 2012 and 2011 was $98,000 and $130,000, respectively, or approximately 1 basis point on average interest-earning assets for both periods mentioned.

 

The Company’s average interest-bearing liabilities decreased by $56.7 million to $446.0 million for the two quarters ended June 30, 2012 from $502.7 million for the same period one year earlier and the cost of those funds decreased from 1.78% to 1.56%, or 22 basis points. During the first six months of 2012, the Company’s net interest margin was 3.68% and net interest spread was 3.45%. For the same period in 2011, net interest margin was 3.94% 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 including net recoveries. The decrease in the allowance for loan losses for the six months ended June 30, 2012 of $1.5 million resulted primarily from net recoveries of $1.3 million which included a $2.4 million recovery on commercial and industrial loans during the first quarter of 2012, management’s concerted effort to charge off impairments on collateral dependant impaired loans, and an overall decrease in loan balances.

 

49
 

 

Non-Interest Income. Non-interest income for the six months ended June 30, 2012 was $1.8 million, an increase of $273,000 from the same period in 2011. This increase was primarily due to a $557,000 gain on the sale of two branches during the second quarter of 2012. Service charges on deposit accounts decreased $149,000 to $609,000 for the two quarters ended June 30, 2012 from $758,000 for the two quarters ended June 30, 2011. Mortgage fee income increased $26,000 to $113,000 for the two quarters ended June 30, 2012 compared to the same period in 2011. Other non-deposit fees and income decreased $161,000 to $527,000 for the two quarters ended June 30, 2012 compared to the same period in 2011.

 

Non-Interest Expenses. Non-interest expenses decreased by $1.6 million to $8.8 million for the six months ended June 30, 2012, from $10.4 million for the same period in 2011. The following are highlights of the significant differences in non-interest expenses during the first six months of 2012 versus the same period in 2011:

·Personnel expenses decreased $667,000 to $4.0 million for the two quarters ended June 30, 2012 due to a decrease in staff size to 111 at June 30, 2012 from 125 at June 30, 2011.
·Deposit insurance expense was $381,000 for the two quarters ended June 30, 2012 down from $497,000 for the same period in 2011.
·Professional fees decreased $193,000 to $940,000 for the two quarters ended June 30, 2012 from $1.1 million.
·Foreclosure-related expenses decreased by $358,000 to $545,000 for the six months ended June 30, 2012 compared to the same period for 2011.

 

Provision for Income Taxes. The Company’s effective tax rate was 37.5% for the two quarters ended June 30, 2012 as a result of permanent tax differences that were in excess of taxable income and (43.5%) for the same period in 2011.

 

As of June 30, 2012, the Company had a recorded net deferred tax asset in the amount of $5.2 million. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of June 30, 2012, management concluded that the net deferred tax assets were fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether the full benefit of the net deferred tax asset will require a valuation allowance. Significant negative trends in credit quality or losses from operations, among other trends, could impact the realization of the deferred tax asset in the future.

 

50
 

 

Liquidity

 

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid deposits, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. 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 26.10% of total assets at June 30, 2012.

 

The Company has been a net seller of federal funds since its inception and strives to maintain a position of liquidity sufficient to fund future loan demand and to satisfy fluctuations in deposit levels. Should the need arise the Company would have the capability to sell securities classified as available for sale or to borrow funds as necessary. As of June 30, 2012 the Company had existing credit lines with other financial institutions to purchase up to $44.0 million in federal funds. Also, as a member of the FHLB of Atlanta, the Company may obtain advances of up to 10% of total assets, subject to available collateral. A floating lien of $30.4 million of qualifying loans is pledged to the FHLB to secure borrowings. At June 30, 2012, the Company had $2.0 million outstanding in FHLB advances. Another source of short-term borrowings is securities sold under agreements to repurchase. At June 30, 2012, total borrowings consisted of securities sold under agreements to repurchase of $23.0 million and junior subordinated debentures of $12.4 million.

 

Total deposits were $471.2 million at June 30, 2012. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 59.24% of total deposits at June 30, 2012. Time deposits of $100,000 or more represented 30.49% of the Company’s total deposits at June 30, 2012. At quarter-end, the Company had no brokered time deposits and $498,000 in brokered demand deposits. Management believes most other time deposits are relationship-oriented. While the Bank will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company 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. New Century Bancorp maintains minimal cash balances at the parent holding company level. Management believes that the current cash balances plus taxes receivable will provide adequate liquidity for the Company’s current cash flow needs.

 

51
 

 

Capital Resources

 

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, 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, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). The Company’s equity to assets ratio was 9.39% at June 30, 2012.

 

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.

 

The Bank intends to comply fully with all terms of the MOU.

 

As the following table indicates, at June 30, 2012, the Company and related Bank subsidiary both exceeded minimum regulatory capital requirements as specified in the tables below.

 

   Actual   Minimum 
New Century Bancorp, Inc.  Ratio   Requirement 
         
Total risk-based capital ratio   14.95%   8.00%
Tier 1 risk-based capital ratio   13.69%   4.00%
Leverage ratio   10.42%   4.00%

 

       Regulatory     
   Actual   Minimum   Well-Capitalized 
New Century Bank  Ratio   Requirement   Requirement 
             
Total risk-based capital ratio   14.57%   11.50%   10.00%
Tier 1 risk-based capital ratio   13.31%   8.00%   6.00%
Leverage ratio   10.13%   8.00%   5.00%

 

During 2004, the Company issued $12.4 million of junior subordinated debentures to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million of trust preferred securities. The proceeds from the sale of the trust preferred securities provided additional capital for the growth and expansion of the Bank. Under the current applicable regulatory guidelines, all of the proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital as of June 30, 2012. The Company is currently required to obtain prior regulatory approval before making interest payments on its outstanding junior subordinated debentures.

 

Management expects that the Company and the Bank will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future.

 

52
 

 

Legal Proceedings

 

The Company is not currently engaged in, nor are any of its properties subject to, any material legal proceedings.  From time to time, the Bank is a party to legal proceedings in the ordinary course of business wherein it attempts to collect loans, enforce its security interest in loans, or other matters of similar nature.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.

 

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

 

Changes in internal control over financial reporting. Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the second quarter of 2012. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the second quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

53
 

 

Part II.     OTHER INFORMATION

 

Item 4.    Mine Safety Disclosures

 

None.

 

Item 6.    Exhibits

 

Exhibit  
Number Description of Exhibit
   
   
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
   
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act (Filed herewith)
   
32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)
   
32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act (Filed herewith)  

 

 

54
 

 

SIGNATURES

 

Under the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  NEW CENTURY BANCORP, INC.
   
Date: August 10, 2012 By: /s/ William L. Hedgepeth II
    William L. Hedgepeth II
    President and Chief Executive Officer
   
Date: August 10, 2012 By: /s/ Lisa F. Campbell
    Lisa F. Campbell
    Executive Vice President and Chief Financial Officer and Chief Operating Officer

 

55
 

  

Exhibit Index

 

Exhibit
Number
  Description of Exhibit
     
     
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
     
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
     
32.1   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
     
32.2   Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)
     

 

56

 

 

XNAS:NCBC New Century Bancorp Inc Quarterly Report 10-Q Filling

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