ITEM 1 -BUSINESS
General
New Century Bancorp, Inc. (the “Registrant”) was incorporated under the laws of the State of North Carolina on May 14, 2003, at the direction of the Board of Directors of New Century Bank, for the purpose of serving as the bank holding company for New Century Bank and became the holding company for New Century Bank on September 19, 2003. To become New Century Bank’s holding company, the Registrant received the approval of the Federal Reserve Board as well as New Century Bank’s shareholders. Upon receiving such approval, each share of $5.00 par value common stock of New Century Bank was exchanged on a one-for-one basis for one share of $1.00 par value common stock of the Registrant.
The Registrant operates for the primary purpose of serving as the holding company for its subsidiary depository institutions, New Century Bank and New Century Bank of South (collectively, the “Banks”). The Registrant’s headquarters are located at 700 West Cumberland Street, Dunn, North Carolina 28334.
New Century Bank was incorporated on May 19, 2000 as a North Carolina-chartered commercial bank, opened for business on May 24, 2000, and is located at 700 West Cumberland Street, Dunn, North Carolina.
New Century Bank South was incorporated on December 23, 2003 as a North Carolina-chartered commercial bank, opened for business on January 2, 2004, and is located at 2818 Raeford Road, Fayetteville NC 28303, Fayetteville, North Carolina.
The Banks operate for the primary purpose of serving the banking needs of individuals, and small to medium-sized businesses in their respective market areas. The Banks offers a range of banking services including checking and savings accounts, commercial, consumer, mortgage and personal loans, and other associated financial services.
Primary Market Area
The Registrant’s market area consists of Harnett, Cumberland, Johnston, Sampson and Wayne Counties, North Carolina. The Registrant’s market area has a population of over 600,000 with an average household income of over $50,000.
The June 2005 total deposits in the Registrant’s market area exceeded $5.6 billion. The leading economic components of Harnett and Johnston Counties are services, manufacturing, and retail trade. In contrast, Cumberland County’s leading sector is federal military government, followed by services and retail trade. In Sampson County, leading employers include manufacturing, services, and state and local government. Wayne County’s leading sectors are federal military government, services and retail trade and agriculture. The largest employers in the Registrant’s market area include Kelly-Springfield Tires, Black & Decker, Bayer, Morganite, Inc. and the United States military.
Competition
Commercial banking in North Carolina is extremely competitive in large part due to statewide branching. Registrant competes in its market areas with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of Registrant’s competitors have broader geographic
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markets and higher lending limits than Registrant and are also able to provide more services and make greater use of media advertising. As of June 30, 2005, data provided by the FDIC Deposit Market Share Report indicated that, within the Registrant’s market area, there were 172 offices of 22 different commercial and savings institutions (25 in Harnett County, 36 in Johnston County, 64 in Cumberland County, 15 in Sampson County, and 32 in Wayne County).
The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of Registrant’s competitors. In addition, as a result of interstate banking, out-of-state commercial banks have acquired North Carolina banks and heightened the competition among banks in North Carolina.
Despite the competition in its market areas, Registrant believes that it has certain competitive advantages that distinguish it from its competition. Registrant believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. Registrant offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. Registrant offers many personalized services and intends to attract customers by being responsive and sensitive to their individualized needs. Registrant also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional media to attract new customers. To enhance a positive image in the community, Registrant supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.
Employees
As of December 31, 2005, the Registrant employed 92 full time equivalent employees. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes relations with its employees to be good.
REGULATION
Regulation of the Banks
The Banks are extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Registrant and the Banks.
State Law. The Banks are subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Banks are required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.
Deposit Insurance. As member institutions of the FDIC, the Banks’ deposits are insured up to a maximum of $100,000 per depositor through the Bank Insurance Fund, administered by the FDIC, and each member institution is required to pay semi-annual deposit insurance premium assessments to the FDIC. The Bank Insurance Fund assessment rates have a range of 0 cents to 27 cents for every $100 in assessable deposits. Banks with no premium are subject to an annual statutory minimum assessment.
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Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2005, the Registrant was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 12.93% and 14.54%, respectively.
The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of board of director and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDIC Improvement Act”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement Act provides for, among other things:
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publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,
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the establishment of uniform accounting standards by federal banking agencies,
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the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital,
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additional grounds for the appointment of a conservator or receiver, and
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restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.
The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.
A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.
The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA Patriot Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions. The USA Patriot Act of 2001 has not had a material impact on the Registrant’s operations.
Miscellaneous. The dividends that may be paid by the Banks are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid by one of the Banks unless its capital surplus is at least 50% of its paid-in capital.
The earnings of the Banks will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Banks.
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The Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Banks’ operations.
Regulation of the Registrant
Federal Regulation. The Registrant is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.
The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.
The merger or consolidation of the Registrant with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.
The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.
The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:
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making or servicing loans;
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performing certain data processing services;
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providing discount brokerage services;
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acting as fiduciary, investment or financial advisor;
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leasing personal or real property;
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making investments in corporations or projects designed primarily to promote community welfare; and
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acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.
However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.
A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Registrant has not yet elected to become a financial holding company.
Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions. We cannot predict the full sweep of the new legislation.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:
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a leverage capital requirement expressed as a percentage of adjusted total assets;
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a risk-based requirement expressed as a percentage of total risk-weighted assets; and
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a Tier 1 leverage requirement expressed as a percentage of adjusted total assets.
The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.
Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Banks. At present, the Registrant’s only source of income is dividends paid by the Banks and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Banks. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Banks to us will likely be limited to amounts needed to pay any separate expenses of the Registrant and/or to make required payments on our debt obligations, including the debentures which will fund the interest payments on our trust preferred securities.
The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk
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model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable to the Registrant because it maintains two separate subsidiary depository institutions.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Banks, the Registrant, any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.
Interstate Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle Act”), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle Act. These mergers are also subject to similar aging and deposit concentration limits.
North Carolina “opted-in” to the provisions of the Riegle Act. Since July 1, 1995, an out-of-state bank that did not already maintain a branch in North Carolina was permitted to establish and maintain a de novo branch in North Carolina, or acquire a branch in North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank involved in the interstate merger transaction permit interstate merger.
Future Legislation
Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on Registrant’s operations.
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Item 1A
Item 1A - RISK FACTORS
RISK FACTORS
An investment in the registrant’s common stock involves a number of risks. We urge you to read all of the information contained in this annual report on Form 10-K. In addition, we urge you to consider carefully the following factors before you invest in shares of the registrant’s common stock.
Risks Associated with our Merger Agreement with Progressive State Bank
We can give no assurances as to when, or if, our acquisition of Progressive State Bank will be consummated.
We are party to an Agreement and Plan of Merger with Progressive State Bank, Lumberton, North Carolina dated February 2, 2006. Our acquisition of Progressive State Bank is subject to regulatory approval of the North Carolina Banking Commission, the FDIC and also subject to the approval by the shareholders Progressive State Bank. Accordingly, we are unable to predict when, or if, the acquisition will be consummated. If we cannot effect the acquisition of Progressive State Bank and its immediate merger with and into our subsidiary, New Century Bank South, we may be forced to alter our long-range business plans at significant expense.
The merger may have an adverse effect on operating results
Our proposed acquisition of Progressive State Bank and the subsequent merger of Progressive State Bank with and into New Century Bank South involves the combination of two companies that have previously operated independently. A successful combination of the companies’ operations will depend primarily on retaining and expanding the customer base of Progressive State Bank and on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. Difficulties may be encountered in combining the operations of Progressive State Bank and the registrant, including:
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the loss of key employees and customers;
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disruptions to our businesses;
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possible inconsistencies in standards, control procedures and policies;
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unexpected problems with costs, operations, personnel, technology or credit;
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the assimilation of new operations, sites and personnel possibly diverting resources from regular banking operations;
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difficulties assimilating acquired operations and personnel;
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potential disruptions of our ongoing business;
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the diversion of resources and management time;
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the possibility that uniform standards, controls, procedures and policies may not be maintained;
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the potential impairment of relationships with employees or customers as a result of changes in management;
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difficulties in evaluating the historical or future financial performance of the combined business; and
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brand awareness issues related to the acquired assets or customers.
Further, we may be unable to realize fully any of the potential cost savings we expect to achieve in the merger. Any cost savings that are realized may be offset by losses in revenues, increases in expenses or other changes to earnings or required accounting treatments or valuations of the registrant’s assets and liabilities.
Risks Associated with our Continued Operations
We may not be able to maintain and manage our growth, which may adversely affect our results of operations and financial condition and the value of our common stock.
Our strategy has been to increase the size of our company by opening new offices, acquiring other banks and by pursuing business development opportunities. We have grown rapidly since we commenced operations. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our growth strategy. There can be no assurance that our further expansion will be profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through successful expansion of our markets, or that we will be able to maintain capital sufficient to support our continued growth. If we grow too quickly, however, and are not able to control costs and maintain asset quality, rapid growth also could adversely affect our financial performance.
A decrease in interest rates could adversely impact our profitability.
Our results of operations may be significantly affected by the monetary and fiscal policies of the federal government and the regulatory policies of government authorities. A significant component of our earnings is our net interest income. Net interest income is the difference between income from interest-earning assets, such as loans, and the expense of interest-bearing liabilities, such as deposits and our borrowings. Like many financial institutions, we are subject to the risk of fluctuations in interest rates. A significant decrease in interest rates could have a material adverse effect on our net income as we would expect the yields on our earning assets to decrease more quickly than the cost of our interest-bearing deposits and borrowings.
Our profitability depends significantly on economic conditions in our market area.
Our success depends to a large degree on the general economic conditions in our market areas. The local economic conditions in these areas have a significant impact on the amount of loans that we make to our borrowers, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and performance.
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If we experience greater loan losses than anticipated, it will have an adverse effect on our net income.
While the risk of nonpayment of loans is inherent in banking, if we experience greater nonpayment levels than we anticipate, our earnings and overall financial condition, as well as the value of our common stock, could be adversely affected.
We cannot assure you that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses. In addition, as a result of the rapid growth in our loan portfolio, loan losses may be greater than management’s estimates. Loan losses can cause insolvency and failure of a financial institution and, in such an event, our shareholders could lose their entire investment. In addition, future provisions for loan losses could materially and adversely affect our profitability. Any loan losses will reduce the loan loss allowance. A reduction in the loan loss allowance will be restored by an increase in our provision for loan losses. This would reduce our earnings which could have an adverse effect on our stock price.
In order to be profitable, we must compete successfully with other financial institutions which have greater resources and capabilities than we do.
The banking business in North Carolina in general is extremely competitive. Most of our competitors are larger and have greater resources than we do and have been in existence a longer period of time. We must overcome historical bank-customer relationships to attract customers away from our competition. We compete with the following types of institutions:
- other commercial banks
- securities brokerage firms
- savings banks
- mortgage brokers
- thrifts
- insurance companies
- credit unions
- mutual funds
- consumer finance companies
- trust companies
Some of our competitors are not regulated as extensively as we are and, therefore, may have greater flexibility in competing for business. Some of these competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising-marketing budgets or other factors.
Our legal lending limit is determined by law. The size of the loans which we offer to our customers may be less than the size of the loans that larger competitors are able to offer. This limit may affect to some degree our success in establishing relationships with the larger businesses in our market.
There is a limited market for our common stock
Our common stock is traded on the Nasdaq Over-the-Counter Bulletin Board and the volume of trading in our common stock has historically been low. Therefore, there can be no assurance that an investor in our common stock who wishes later to sell those shares would be able to do so immediately or at an acceptable price.
Our securities are not FDIC insured.
Our common stock is not a savings or deposit account or other obligation of the bank, and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency and is subject to investment risk, including the possible loss of principal.
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ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
The Registrant is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act. The Registrant received no written comments from the Commission staff regarding its periodic or current reports under the Exchange Act during its fiscal year ended December 31, 2005.
ITEM 2
ITEM 2 - PROPERTIES
The following table sets forth the location of the main and branch offices of the Registrant’s subsidiary depository institutions, New Century Bank and New Century Bank South, as well as certain information relating to these offices to date.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant, or any of its subsidiaries, is a party, or of which any of their property is the subject.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5
ITEM 5 - MARKET FOR COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Out common stock is quoted on the NASDAQ Over-the-Counter Bulletin Board under the trading symbol “NCBC.” Howe Barnes Investments, Inc., Chicago, Illinois and Ryan Beck & Company, Florham Park, New Jersey, provide bid and ask quotes for our common stock. At December 31, 2005, there were 4,241,040 shares of common stock outstanding, which were held by 1,468 shareholders.
(1) Adjusted for 3-for-2 stock split effecting in the form of a 50% stock dividend in July 2005 and a 11-for-10 stock split effected in the forms of a 10% stock dividend in June 2004.
See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.
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ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
(1) Adjusted for the effects of the 3-for-2 stock split in July 2005 and the 11-for-10 stock splits in June 2004, September 2003 and May 2002.
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ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of New Century Bancorp, Inc. Because New Century Bancorp, Inc. has no material operations and conducts no business on its own other than owning its subsidiaries, New Century Bank and New Century Bank South, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of these subsidiaries. However, for ease of reading and because the financial statements are presented on a consolidated basis, New Century Bancorp, Inc., New Century Bank and New Century Bank South are collectively referred to herein as the Company unless otherwise noted. All references in this Annual Report to net income per share, price per share, book value per share and weighted average common and common equivalent shares outstanding have been adjusted to reflect three separate eleven-for-ten stock splits effected in the form of 10% stock dividends, one declared in May 2002, another in September 2003 and the third in June 2004, and one three-for-two stock split declared in July 2005.
DESCRIPTION OF BUSINESS
New Century Bancorp, Inc. is a bank holding company whose principal business activity is the ownership of New Century Bank and New Century Bank South (collectively referred to as the “Banks”). New Century Bank opened for business in May 2000 as a North Carolina-chartered banking corporation. Effective September 19, 2003, New Century Bank became a wholly owned subsidiary of the Company. The shareholders of New Century Bank received one share of $1.00 par value common stock of New Century Bancorp, Inc. for each share of $5.00 par value common stock of New Century Bank owned in a share exchange that accomplished the holding company reorganization. All outstanding options to purchase common shares of New Century Bank were converted into options to purchase common shares of New Century Bancorp. In June 2003, New Century Bank opened an office in Fayetteville, which operated as a branch of New Century Bank until January 2, 2004, when the Fayetteville office was sold to New Century Bank South (formerly New Century Bank of Fayetteville), a de novo North Carolina-chartered banking corporation.
The Banks’ lending activities are oriented to the consumer/retail customer as well as to the small-to-medium sized businesses located in Harnett, Cumberland, Johnston, Sampson, and Wayne counties. The Banks offer 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 Banks include small business and personal checking, savings accounts and certificates of deposit. The Banks concentrate on customer relationships in building their customer deposit base and compete aggressively in the area of transaction accounts.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2005 AND 2004
The quarterly financial data may not aggregate to annual amounts due to rounding.
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FINANCIAL CONDITION
DECEMBER 31, 2005 AND 2004
Total assets at December 31, 2005 were $436.4 million, which represents an increase of $108.1 million or 33% from December 31, 2004. Cash, interest-bearing deposits and federal funds sold increased $24.2 million to $56.5 million at December 31, 2005. Investment securities increased to $41.6 million from $24.9 million at December 31, 2004.
Loans receivable increased by $64.1 million to $326.9 million as of December 31, 2005. The growth in loans is due to the maturation and continued growth in our markets. The loan portfolio at December 31, 2005 was comprised of $239.0 million in real estate loans, $72.4 million in commercial and industrial loans, $15.7 million in loans to individuals and $285,000 in deferred loan fees. At December 31, 2005, there were 50 loans with an aggregate principal balance of approximately $2,900,000 that were more than 30 days past due. Fourteen of these loans with a combined balance of approximately $823,000 were in non-accrual status. The allowance for loan losses of $5.3 million represented 1.62% of gross loans outstanding as of December 31, 2005.
The Company’s investment portfolio at December 31, 2005, which consisted of U.S. government agency securities, mortgage-backed securities and bank-qualified municipal securities, aggregated $41.6 million with a weighted average yield of 3.94%. The Company also holds an investment of $1.1 million in the form of Federal Home Loan Bank Stock with a dividend yield of 3.23%. The investment portfolio increased $16.8 million in 2005, the result of $25.5 million in purchases, $8.3 million of maturities and prepayments and a decrease of $515,000 in the market value of securities held available for sale. There were no sales of investment securities during 2005.
At December 31, 2005, the company held $4.2 million in bank owned life insurance on key members of management. Non-earning assets were $19.9 million, an increase of $3.7 million over December 31, 2004. Non-earning assets included $8.5 million in cash and due from banks, $2.1 million in interest receivable, $443,000 in foreclosed real estate, $6.0 million in bank premises and equipment, and $2.9 million in other assets.
Total deposits at December 31, 2005 were $367.0 million, an increase of $96.8 million from $270.2 million at December 31, 2004. In general, the growth in our deposits is attributable to growth in our markets and was supplemented by large deposits associated with the stock offerings of three unaffiliated proposed banks, all of which are due to open in 2006. At December 31, 2005, deposits were comprised of 14% demand deposits, 22% savings, NOW and money market accounts, and 64% time deposits. Time deposits of $100,000 or more totaled $95.1 million or 25.9% of total deposits as of December 31, 2005. Brokered deposits totaled $8.5 million or 2.3% of year-end deposits.
The Company’s short term debt includes securities sold under agreements to repurchase $9.2 million at December, 31, 2005. These were collateralized by U.S. government agency and municipal securities. Also included in short term debt is a $2.5 million advance from the FHLB with an interest rate of 3.95%. This advance was taken in June 2005 and matures in June 2006. FHLB advances are collateralized by a lien on 1-4 family first mortgage loans.
The Company’s long term debt, which is based on contractual maturity, includes $10.0 million in advances from the FHLB. These advances include a $4.0 million advance with an interest rate of 2.65%, a $3.5 million advance with an interest rate of 3.58%, and a $2.5 million advance with an interest rate of 4.03%. These advances mature in February, July, and December 2006, respectively. Also included in long term debt is $12.4 million of junior subordinated debentures. In 2004, these debentures were issued to a newly formed subsidiary, New Century Statutory Trust I, which in turn issued $12.0 million in trust preferred securities. Under the current applicable regulatory guidelines, $10.8 million of these debentures qualify as Tier I capital.
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Shareholders’ equity increased $3.5 million during 2005. The increase was due to net income of $3.6 million and $237,000 from the issuance of common stock from the exercise of stock options, partially offset by a decrease of $328,000, net of tax, in the fair value of the Company’s investment securities available for sale.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Overview. During 2005, New Century Bancorp generated net income of $3.6 million compared with net income of $2.1 million for the year ended December 31, 2004. Net income per share in 2005 was $.86 basic and $.79 diluted compared with net income per share of $.50 basic and $.48 diluted in 2004. This increase is primarily due to the growth in interest-earning assets during 2005 and the resulting increase in net interest income, and also to the strong growth in non-interest income. These increases were partially offset by increases in the provision for loan losses and non-interest expense.
Net Interest Income. Net interest income increased $4.4 million to $14.6 million for the year ended December 31, 2005. The Company’s total interest income benefited from strong growth in interest-earning assets, and higher interest-earning asset yields. Average total interest-earning assets were $362.7 million in 2005 compared with $261.2 million during 2004, while the yield on those assets increased 91 basis points from 5.89% to 6.80%. The Company’s average interest-bearing liabilities grew by $89.8 million to $303.9 million in 2005, while the cost of those funds increased from 2.42% to 3.32%, or 90 basis points. For the year ended December 31, 2005, our net interest margin was 4.02% and our net interest spread was 3.48%. For the year ended December 31, 2004, net interest margin was 3.91% and net interest spread was 3.48%.
Provision for Loan Losses. The Company recorded a provision of approximately $2.2 million for loan losses in 2005, representing an increase of $488,000 over the $1.7 million provision made in 2004. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In both 2005 and 2004, the provision for loan losses was made principally in response to growth in loans, as total loans outstanding increased by $64.1 million in 2005 and by $110.8 million in 2004. In addition, net loan charge-offs increased to $472,000 in 2005 as compared to $441,000 in 2004. At December 31, the allowance for loan losses was $5.3 million for 2005 and $3.6 million for 2004, representing 1.62% and 1.37%, respectively, of loans outstanding. This increase in the percentage of the allowance for loan losses is in response to the maturation and seasoning of the Company’s loan portfolio and lending processes. There were $823,000 and $190,000 of nonaccrual loans at December 31, 2005 and 2004, respectively.
Non-Interest Income. Non-interest income for the year ended December 31, 2005 was $2.5 million, an increase of $804,000 over the year ended December 31, 2004. This increase is primarily due to an increase in deposit service fees and charges of $146,000 and an increase of $271,000 in mortgage program commissions. Additionally, there was an increase of $328,000 in commissions from the sales of SBA loans, which is a program that the Company started in the fourth quarter of 2004. The growth in service fees and charges is directly related to the growth in transaction accounts during 2005 and to the growth in an overdraft protection product tied to qualifying demand deposit accounts.
Non-Interest Expense. Non-interest expense increased by $2.1 million to $9.1 million for the year ended December 31, 2005, from $7.0 million for the year ended December 31, 2004. Despite this increase, the
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Company’s ratio of non-interest expense to average total assets decreased from 2.51% in 2004 to 2.39% in 2005. Salaries and employee benefits increased to $5.5 million from $4.1 million in 2004 due to the increase of Company personnel from 72 to 92 full time equivalent employees. The expansion into a new operations center in downtown Dunn, a new bank building in Goldsboro and another office in Clinton has resulted in an increase of $177,000 in occupancy and equipment expenses to a total of $717,000 for the year ended December 31, 2005. Other non-interest expense increased to $2.9 million in 2005 compared with $2.4 for the year ended December 31, 2004. The following are included in other non-interest expenses:
•
Postage, printing and office supplies increased from $220,000 in 2004 to $254,000 in 2005, largely due to the increasing growth in all areas of the Company.
•
Advertising and promotion expenses increased from $196,000 in 2004 to $274,000 in 2005, due in part to promotions and deposit related marketing campaigns in all of the Banks’ markets.
•
Data processing and other outsourced service expenses increased by $188,000 to $817,000 in 2005. Most of this increase is in core processing, networking and items processing expenses.
•
Professional service expenses increased from $323,000 in 2004 to $432,000 in 2005. A large part of this increase is in legal fees and other professional fees.
•
Other operating expenses increased $151,000 to approximately $1.2 million in 2005, largely due to additional expenses related to general corporate expenses, the opening of new offices and the general growth of the Company.
Provision for Income Taxes. The Company’s effective tax rate was 37.4% in 2005 and 35.9% in 2004.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Overview. During 2004, New Century Bancorp generated net income of $2.1 million compared with net income of $906,000 for the year ended December 31, 2003. Net income per share in 2004 was $.50 basic and $.48 diluted compared with net income per share of $.26 basic and $.25 diluted in 2003. This increase is primarily due to the growth in interest-earning assets during 2004 and the resulting increase in net interest income, and also to the strong growth in non-interest income. These increases were partially offset by increases in the provision for loan losses and non-interest expense.
Net Interest Income. Net interest income increased $4.1 million to $10.2 million for the year ended December 31, 2004. The Company’s total interest income benefited from strong growth in interest-earning assets, which was partially offset by lower interest-earning asset yields. Average total interest-earning assets were $261.2 million in 2004 compared with $150.2 million during 2003, while the yield on those assets dropped 34 basis points from 6.23% to 5.89%. The Company’s average interest-bearing liabilities grew by $95.4 million to $214.1 million in 2004, while the cost of those funds dropped from 2.71% to 2.42%, or 29 basis points. For the year ended December 31, 2004, our net interest margin was 3.91% and our net interest spread was 3.48%. For the year ended December 31, 2003, net interest margin was 4.09% and net interest spread was 3.52%. The compression of margin and spread since 2003 is the result of the repricing of interest sensitive assets and the growth in the volume of interest-bearing liabilities during 2004.
Provision for Loan Losses. The Company recorded a provision of approximately $1.7 million for loan losses in 2004, representing an increase of $642,000 over the $1.0 million provision made in 2003. 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.
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In both 2004 and 2003, the provision for loan losses was made principally in response to growth in loans, as total loans outstanding increased by $110.8 million in 2004 and by $51.9 million in 2003. In addition, net loan charge-offs increased to $441,000 in 2004 as compared to $233,000 in 2003. At December 31, the allowance for loan losses was $3.6 million for 2004 and $2.4 million for 2003, representing 1.37% and 1.55%, respectively, of loans outstanding. There were $190,000 and $180,000 of nonaccrual loans at December 31, 2004 and 2003, respectively.
Non-Interest Income. Non-interest income for the year ended December 31, 2004 was $1.7 million, an increase of $558,000 over the year ended December 31, 2003. This increase is primarily due to an increase in deposit service fees and charges of $310,000, an increase of $92,000 in commissions from credit life insurance premiums, and income generated by government guaranteed loan programs, which is a new program started in the fourth quarter of 2004, of $100,000. The growth in service fees and charges is directly related to the growth in transaction accounts during 2004 and to the growth in an overdraft protection product tied to qualifying demand deposit accounts.
Non-Interest Expense. Non-interest expense increased by $2.1 million to $6.9 million for the year ended December 31, 2004, from $4.8 million for the year ended December 31, 2003. Despite this increase, the Company’s ratio of non-interest expense to average total assets decreased from 3.04% in 2003 to 2.51% in 2004. Salaries and employee benefits increased to $4.1 million from $2.9 million in 2003 due to the increase of Company personnel from 55 to 72 full time equivalent employees. Also the expansion into two new markets has resulted in an increase of $191,000 in occupancy and equipment expenses to a total of $540,000 for the year ended December 31, 2004. Other non-interest expense increased to $2.4 million in 2004 compared with $1.6 for the year ended December 31, 2003. The following are included in other non-interest expenses:
•
Postage, printing and office supplies increased from $131,000 in 2003 to $220,000 in 2004, largely due to the opening of the Goldsboro office and New Century Bank South.
•
Advertising and promotion expenses increased from $126,000 in 2003 to $196,000 in 2004, due in part to promotions related to our new office in Goldsboro and deposit related marketing campaigns in all of the Banks’ markets.
•
Data processing and other outsourced service expenses increased by $146,000 to $629,000 in 2004. Most of this increase is in core processing and items processing expenses.
•
Professional service expenses increased from $250,000 in 2003 to $323,000 in 2004. A large part of this increase is in audit fees and other professional fees.
•
Other operating expenses increased $421,000 to approximately $1.0 million in 2004, largely due to additional expenses related to general corporate expenses, the opening of the Goldsboro office and New Century Bank South.
Provision for Income Taxes: The Company’s effective tax rate was 35.9% in 2004 and 35.4% in 2003.
NET INTEREST INCOME
Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest-bearing liabilities.
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The following table sets forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Nonaccrual loans have been included in determining average loans.
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RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.
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 Company’s 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 23% and 18% of total assets at December 31, 2005 and 2004.
The Company has been a net seller of federal funds, maintaining liquidity sufficient to fund new loan demand. When the need arises, the Company has the ability to sell securities classified as available for sale, sell loan participations to other banks, or to borrow funds as necessary. The Company has established credit lines with other financial institutions to purchase up to $20.6 million in federal funds. Also, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Company may obtain advances of up to 30% of our assets, subject to our available collateral. A floating lien of $16.4 million on qualifying loans is pledged to FHLB to secure borrowings. As another source of short-term borrowings, the Company also utilizes securities sold under agreements to repurchase. At December 31, 2005, borrowings consisted of securities sold under agreements to repurchase of $9.2 million and FHLB advances totaling $12.5 million.
Total deposits were $367.0 million and $270.2 million at December 31, 2005 and 2004, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be
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rate sensitive. Time deposits represented 64% and 66% of total deposits at December 31, 2005 and 2004, respectively. Time deposits of $100,000 or more represented 24% and 21%, respectively, of the total deposits at December 31, 2005 and 2004. At December 31, 2005, the Company had $8.5 million in brokered time deposits. Management believes most other time deposits are relationship-oriented. While the competitive rates will need to be paid to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, management anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.
Management believes that current sources of funds provide adequate liquidity for the Company’s current cash flow needs.
CAPITAL
A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier I capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier II 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 I capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines that require a financial institution to maintain capital as a percent of its assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A financial institution is required to maintain, at a minimum, Tier I capital as a percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, federal regulations require that we maintain a minimum leverage ratio (Tier I capital as a percentage of tangible assets) of 4.0%. The Company’s equity to assets ratio was 7.56% at December 31, 2005. As the following table indicates, at December 31, 2005, the Company and its two bank subsidiaries exceeded regulatory capital requirements.
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 will provide additional capital for the current and future expansion of New Century Bank. Under the current applicable regulatory guidelines, $10.8 million of these debentures qualify as Tier I capital. Management expects that the Company and both Banks will remain “well-capitalized” for regulatory purposes, although there can be no assurance that additional capital will not be required in the near future due to greater-than-expected growth, or otherwise.
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ASSET/LIABILITY MANAGEMENT
The Company’s results of operations depend substantially on its net interest income. Like most financial institutions, the Company’s interest income and cost of funds are affected by general economic conditions and by competition in the market place.
The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company’s earnings from undue interest rate risk, which arises from volatile interest rates and changes in the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. The Company maintains, and has complied with, a Board approved asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analysis: liquidity, equity, volatile liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Company’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.
When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies, mortgage-backed securities and municipal obligations. The securities portfolio contributes to the Company’s profits and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.
In reviewing the needs of the Company with regard to proper management of its asset/liability program, the Company’s management estimates its future needs, taking into consideration historical periods of high loan demand and low deposit balances, estimated loan and deposit increases (due to increased demand through marketing), and forecasted interest rate changes.
The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.
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Loans maturing or repricing after December 31, 2006 are comprised of $110.8 million of fixed rate loans.
CRITICAL ACCOUNTING POLICY
The Company’s most significant critical accounting policy is the determination of its allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of the Company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain.
ASSET QUALITY AND THE ALLOWANCE FOR LOAN LOSSES
The Financial Statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when there are serious doubts about the collectibility of principal or interest. Amounts received on non-accrual loans generally are applied first to principal and then to interest only after all principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal,
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have been granted due to the borrower’s weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The Company’s impaired loans at December 31, 2005 were comprised of $1.4 million non-accrual and substandard loans.
The allowance for loan losses is maintained at a level considered adequate by management to provide for anticipated loan losses based on management’s assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Additional information regarding the Company’s allowance for loan losses and loan loss experience are presented in Note D to the accompanying financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
Information about the Company’s off-balance sheet risk exposure is presented in Note M to the accompanying financial statements. During 2004 the Company formed an unconsolidated subsidiary trust to which the Company has issued $12.4 million of junior subordinated debentures (see Note I to the consolidated financial statements). Otherwise, as part of its ongoing business, the Company has not participated in, nor does it anticipate participating in, transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which generally are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note B to the financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability make-up that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of a commercial bank’s assets are monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.
FORWARD-LOOKING INFORMATION
Statements contained in this annual report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but
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are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principals, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.
The following tables set forth additional information regarding the composition of our contractual obligations and commitments, securities portfolio, loan portfolio, contractual loan maturities, allocation of the allowance for loan losses, loan loss and recovery experience and average deposits.
Contractual Obligations and Commitments
($ in thousands)
In the normal course of business there are various outstanding contractual obligations of the Bank that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. The following table reflects contractual obligations of the Bank outstanding as of December 31,
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Securities Portfolio Composition
($ in thousands)
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Loan Portfolio Composition
($ in thousands)
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Contractual Loan Maturities
($ In thousands)
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
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Allocation of the Allowance for Loan Losses
(In thousands)
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Loan Loss and Recovery Experience
($ in thousands)
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Average Deposits
($ in thousands)
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ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in the diminished current market values and/or reduced potential net interest income in future periods. The Company’s market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account, nor is it subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Banks’ asset/liability management functions. The following table presents information about the contractual maturities, average interest rates and estimated fair values of the Company’s financial instruments that are considered market risk sensitive.
Expected Maturities of Market Sensitive Instruments Held at December 31, 2005
($ in thousands)
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ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
New Century Bancorp, Inc.
Dunn, North Carolina
We have audited the accompanying consolidated balance sheets of New Century Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Century Bancorp, Inc. and subsidiaries at December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
Raleigh, North Carolina
March 17, 2006
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NEW CENTURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
See accompanying notes.
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NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
See accompanying notes.
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NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2005, 2004 and 2003
See accompanying notes.
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NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2005, 2004 and 2003
See accompanying notes.
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NEW CENTURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
See accompanying notes.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE A - ORGANIZATION AND OPERATIONS
New Century Bancorp, Inc. (“Company”) is a bank holding company whose principal business activity consists of ownership of New Century Bank and New Century Bank South (collectively referred to as the “Banks”). All significant intercompany transactions and balances have been eliminated in consolidation. The Company is subject to the rules and regulations of the Federal Reserve Bank and the North Carolina Commissioner of Banks.
New Century Bank was incorporated on May 15, 2000 and began banking operations on May 24, 2000. New Century Bank South began operations on January 2, 2004. The Banks are engaged in general commercial and retail banking in Harnett, Cumberland, Johnston, Sampson, and Wayne counties and operate 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 Banks undergo periodic examinations by those regulatory authorities.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.
Cash and Cash Equivalents
For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “Cash and due from banks,” “Interest-earning deposits in other banks,” and “Federal funds sold.”
Investment Securities Available for Sale
Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific-identification method. Declines in the fair value of held to maturity securities and available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. Such write-downs would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loans held for sale are held at the lower of cost or fair market value until sold.
Allowance for Loan Losses
The provision for loan losses is based upon management’s estimate of the amount needed to maintain the allowance for loan losses at an adequate level. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, delinquency information and management’s internal review of the loan portfolio. Loans are considered impaired when it is probable that all amounts due under the contractual terms of the loan will not be collected. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, or upon the fair value of the collateral if readily determinable. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, management periodically performs valuations of the property and the real estate is carried at the lower of cost or fair value minus estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other non-interest expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 40 years for buildings, 5 to 10 years for furniture, fixtures and equipment and 3 years for computers and related equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are charged to operations as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current operations.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock in Federal Home Loan Bank of Atlanta
As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemption provisions of the FHLB, the Company estimated that fair value equals cost and that this investment was not impaired at December 31, 2005.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.
Comprehensive Income
The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses on investment securities available for sale.
Stock Compensation Plans
Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value at the grant date and, under Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation Plans (Continued)
Net Income Per Common Share and Common Shares Outstanding
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options.
All references in these financial statements to net income per share, weighted average common and common equivalent shares outstanding, outstanding stock options and option exercise prices have been adjusted to reflect three eleven-for-ten stock splits effected in the form of a 10% stock dividend in May 2002, September 2003, and June 2004, and the three-for-two stock split in July 2005.
Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
As of December 31, 2005, the Company had no anti-dilutive stock options.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP EITF 03-1-b”) to delay the requirement to record impairment losses EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” This FSP is to be applied to reporting periods beginning after December 15, 2005. The Company evaluated the impact of this FSP and determined that it did not have a material impact on the financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(r) (“SFAS No. 123(r)”), “Share-Based Payment”, which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS No. 123(r) requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of the vesting period of the period the employee will be retirement eligible. SFAS No. 123(r) sets accounting requirements for “share-based” compensation to employees, including employee-stock purchase plans (“ESPPs”). Awards to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (“SEC”) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(r) for many registrants. Registrants that do not file as small business users must adopt SFAS No. 123(r) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company adopted SFAS No. 123(r) on January 1, 2006, with no material effect on the consolidated financial statements.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which contains guidance on applying the requirements in SFAS No. 123(r). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(r) is adopted. The Company adopted SAB 107 on January 1, 2006, with no material effect on the consolidated financial statements.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS No. 154”), “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20 “Accounting Changes” and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 with no material effect on the consolidated financial statements.
From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
Reclassifications
Certain amounts in the 2004 consolidated financial statements have been reclassified to conform to the presentation adopted for 2005. These reclassifications had no effect on net income or shareholders’ equity as previously reported.
NOTE C - INVESTMENT SECURITIES
The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follow:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE C - INVESTMENT SECURITIES (Continued)
Securities with a carrying value of $16.0 million and $12.6 million at December 31, 2005 and 2004, respectively, were pledged to secure public monies on deposit as required by law and customer repurchase agreements.
The following table shows 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, for the 59 investment securities with unrealized losses at December 31, 2005. Of these investment securities, 12 agency securities and 9 mortgage backed securities had continuous unrealized losses for more than twelve months. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
The following table shows 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, for the 22 investment securities with unrealized losses at December 31, 2004. Of these investment securities, 4 had continuous unrealized losses for more than twelve months. The unrealized losses relate to the 12 agency securities and the 9 mortgage backed securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE C - INVESTMENT SECURITIES (Continued)
Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
The following table sets forth certain information regarding the amortized costs, carrying values, weighted average yields and contractual maturities of the Company’s investment portfolio at December 31, 2005.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE C - INVESTMENT SECURITIES (Continued)
For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
NOTE D - LOANS
Following is a summary of loans at December 31, 2005 and 2004:
Loans are primarily made in Harnett, Sampson, Johnston, Wayne, and Cumberland Counties, North Carolina. Real estate loans can be affected by the condition of the local real estate market. Commercial and installment loans can be affected by the local economic conditions.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE D - LOANS (Continued)
Impaired loans at December 31, 2005 and 2004 consisted of loans of approximately $3.9 million and $0 respectively. The average recorded investment in impaired loans was approximately $327,000 and $0 for the years ended December 31, 2005 and 2004, respectively. Impaired loans did not materially affect interest income for the years ended December 31, 2005 and 2004. The provision allocated for impaired loans for 2005 was approximately $514,000.
At December 31, 2005 and 2004, the amount of nonaccrual loans was $823,000 and $190,000, respectively. The average balance of nonaccrual loans was $531,000 and $496,000 at December 31, 2005 and 2004, respectively.
At December 31, 2005, the Company had $5,182,000 in loans held for sale to two unaffiliated proposed banks. These loans were originated by the Company under an agreement with the proposed banks and to be sold to the banks when they open in 2006.
Following is a summary of activity in the allowance for loan losses for the years indicated:
At December 31, 2005, the Company had pre-approved but unused lines of credit totaling $78.2 million. In management’s opinion, these commitments, and undisbursed proceeds on construction loans in process reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
The Company has had loan transactions with its directors and executive officers. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectibility or present other unfavorable features. A summary of related party loan transactions, in thousands, is as follows:
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31, 2005 and 2004:
Depreciation amounting to $361,622, $246,464 and $218,643 for the years ended December 31, 2005, 2004 and 2003, respectively, is included in occupancy and equipment expense, data processing and other outsourced services expense and other expenses.
The Company has operating leases for its corporate offices and branches that expire at various times through 2023. Future minimum lease payments under the leases for years subsequent to December 31, 2005 are as follows:
During 2005, 2004, and 2003, payments under operating leases were $127,000, $134,000 and $58,000, respectively.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE F - DEPOSITS
At December 31, 2005, the scheduled maturities of time deposits are as follows:
Included in this total were brokered time deposits of $7.3 million at December 31, 2005.
NOTE G - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. These repurchase agreements amounted to $9.2 million and $5.7 million at December 31, 2005 and 2004, respectively, and are collateralized by U. S. Government agency obligations.
NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2005, the Company had available lines of credit totaling approximately $20.6 million with various financial institutions for borrowing on a short-term basis. These lines are subject to annual renewals with varying interest rates. Also, as a member of the Federal Home Loan Bank of Atlanta, the Company may obtain advances of up to 30% of assets, subject to available collateral.
Advances from the Federal Home Loan Bank of Atlanta consisted of the following at December 31, 2005 and 2004:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
Pursuant to collateral agreements with the Federal Home Loan Bank, at December 31, 2005 advances are secured by loans with a carrying amount of $16.4 million, which approximates market value. Advances are considered either short term debt or long term debt based on contractual maturity. One advance for $2,500, due on June 29, 2006, with a rate of 3.95%, is considered short term debt, as the contractual maturity is one year. The remaining advances are considered long term debt.
NOTE I - JUNIOR SUBORDINATED DEBENTURES
On September 20, 2004, $12.0 million of trust preferred securities were placed through a newly formed, wholly owned trust preferred subsidiary, New Century Statutory Trust I (the “Trust”). The Trust has invested the total proceeds from the sale of the trust-preferred securities in junior subordinated deferrable interest debentures issued by the Company. The terms of the junior subordinated debentures match the terms of the trust-preferred securities. The Trust is considered a variable interest entity as defined in FIN 46. As the Company is not the primary beneficiary of the Trust. The Trust is not consolidated. Accordingly, the Company’s $372,000 equity interest in the Trust is accounted for using the equity method, and the junior subordinated debentures are recorded as long-term debt of the Company. The trust preferred securities pay cumulated cash distributions quarterly at an annual rate, reset quarterly, equal to 3 month LIBOR plus 2.15%. The trust preferred securities are redeemable on September 20, 2009 or afterwards in whole or in part, on any March 20, June 20, September 20 or December 20. Redemption is mandatory at September 20, 2034. The Company has fully and unconditionally guaranteed repayment of the trust-preferred securities. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The trust preferred securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.
NOTE J - INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31, 2005, 2004 and 2003 are as follows:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE J - INCOME TAXES (Continued)
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred taxes at December 31, 2005 and 2004 are as follows:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE K - OTHER NON-INTEREST EXPENSE
The major components of other non-interest expense for the years ended December 31, 2005, 2004 and 2003 are as follows:
NOTE L - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2005, that the Company meets all capital adequacy requirements to which it is subject. The Company’s significant assets are its investments in New Century Bank, New Century Bank South and New Century Statutory Trust I.
As of December 31, 2005 and 2004, the most recent notification from the FDIC categorized both Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Banks must maintain minimum amounts and ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Banks’ category.
The Banks may not declare or pay a cash dividend, or repurchase any of its capital stock, if the effect would cause the regulatory net worth of the Banks to fall below the amount required for the liquidation account established in connection with the conversion, or to an amount which is less than the minimum required by the FDIC and the North Carolina Office of the Commissioner of Banks.
The Company’s actual capital amounts and ratios are presented in the table below as of December 31:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE L - REGULATORY MATTERS (Continued)
New Century Bank’s actual capital amounts and ratios are presented in the table below as of December 31:
New Century Bank South’s actual capital amounts and ratios are presented in the table below as of December 31:
The average reserve balance required to be maintained under the requirements of the Federal Reserve was approximately $680,000 for the year ended December 31, 2005.
NOTE M - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount (in thousands) of the Company’s exposure to off-balance sheet credit risk as of December 31, 2005 is as follows:
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments include cash and due from banks, interest-earning deposits with banks, investments, loans, deposit accounts and borrowings. Fair value estimates are made at a specific moment in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Due from Banks, Interest-Earning Deposits with Banks and Federal Funds Sold
The carrying amounts for cash and due from banks, interest-earning deposits with banks and federal funds sold approximate fair value because of the short maturities of those instruments.
Investment Securities Available for Sale
Fair value for investment securities available for sale equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Loans
For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Stock in Federal Home Loan Bank of Atlanta and The Bankers Bank
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 The Bankers Bank is assumed to approximate carrying value.
Bank Owned Life Insurance
The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.
Deposits
The fair value of demand deposits is the amount payable on demand at the reporting date. The fair value of time deposits and borrowings is estimated using the rates currently offered for instruments of similar remaining maturities.
Short Term Debt
The fair values of short term debt, which include securities sold under agreements to repurchase and a one- year advance from the FHLB, 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, which includes three advances from the FHLB with contractual maturities of over one year and junior subordinated debentures, are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk discussed in Note M, it is not practicable to estimate the fair value of future financing commitments.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2005 and 2004.
NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS
401(k) Plan
The Company has a 401(k) Plan whereby substantially all employees participate in the Plan. The Company makes matching contributions equal to 50 percent of the first 6 percent of an employee’s compensation contributed to the Plan. Matching contributions vest to the employee equally over a four-year period. Expenses attributable to the Plan amounted to $83,894, $62,961 and $48,919 for the years ended December 31, 2005, 2004 and 2003, respectively. In December 2005, the Board of Directors approved matching of 100 percent of the first six percent of an employee’s compensation contributed to the plan. This increase was implemented in January of 2006. To help offset the increased cost of the 401(k) match, the Company purchased $1.9 million in Bank owned life insurance on certain key officers to provide funding for the increased 401(k) expense. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age.
Employment Agreements
The Company has entered into employment agreements with its four executive officers and two of its senior officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officers’ right to receive certain vested rights, including compensation. In the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound to the terms of those contracts.
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Officers Deferred Compensation
The Company implemented a non-qualifying deferred compensation plan for the Chief Executive Officer during 2003. Benefits will accrue and vest during the period of employment, and will be paid in monthly benefit payments over the officer’s life after retirement. Provisions of $89,000, $89,000 and 38,000 were expensed for future benefits to be provided under this plan during 2005, 2004 and 2003, respectively. As part of this plan, the Company has purchased life insurance on certain key officers to provide future funding of benefit payments. The plan also provides for payment of a death benefit in the event an insured officer dies prior to attainment of retirement age. The total liability under this plan at December 31, 2005 and 2004 was $219,000 and $130,000, respectively.
Stock Option Plans
The Company has shareholder approved stock option plans under which options are granted to directors and employees of the Company and its subsidiary banks. Options granted to directors typically vest immediately at the time of grant, while options granted to employees typically vest over a three-year period with none vesting at the time of the grant. All unexercised options expire ten years after the date of grant. A summary of the Company’s option plans as of and for the years ended December 31, 2005, 2004 and 2003 is as follows:
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
Stock Option Plans (Continued)
The weighted average remaining life of options outstanding and options exercisable as of December 31, 2005 and 2004 is 6.34 and 7.2 years, respectively. The range of exercise prices of options outstanding at December 31, 2005 is from $5.15 to $16.13. The fair value of each option granted in 2005 was $8.92 and was determined using the Black-Scholes option pricing model, assuming a risk-free interest rate of 3.96%, a dividend yield of 0%, volatility of 62.50%, and an expected life of seven years. The fair value of each option granted in 2004 was $2.48, and was determined as of the date of grant using the Black-Scholes option pricing model, assuming a risk-free interest rate of 3%, a dividend yield of 0%, volatility of 12%, and an expected life of six years.
NOTE P - PARENT COMPANY FINANCIAL DATA
Following are the condensed financial statements of New Century Bancorp as of and for the years ended December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 (amounts in thousands):
Condensed Balance Sheet
December 31, 2005 and 2004
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE P - PARENT COMPANY FINANCIAL DATA (Continued)
Condensed Statement of Operations
Years Ended December 31, 2005 and 2004
Condensed Statement of Cash Flows
Years Ended December 31, 2005 and 2004
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NEW CENTURY BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
NOTE Q - PENDING BUSINESS COMBINATION
On February 2, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Progressive State Bank (“Progressive”), a North Carolina chartered bank headquartered in Lumberton, NC. Under the terms of the Agreement, Progressive will be merged with and into New Century Bank South. Shareholders of Progressive as of the close of the merger will be entitled to receive cash in the amount of $21.30 per share. As of December 31, 2005, Progressive had total assets of $58.5 million, total loans of $33.4 million and total deposits of $50.9 million (all amounts are unaudited). The merger is expected to be completed during the third quarter of 2006.
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ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
The Registrant’s Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the Registrant’s disclosure controls and procedures as of December 31, 2005. Based on their evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms. There have been no changes in the Registrant’s internal control over financial reporting identified in connection with the evaluation described above that occurred during the Registrant’s last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
Not applicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from pages 4 through 8 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.
The Registrant has adopted a code of ethics that applies, among others to its principal executive offices and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Ms. Brenda Bonner, New Century Bancorp, Inc., 700 W. Cumberland Street, Dunn, NC 28335.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated by reference from pages 9 through 13 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from pages 2 through 4 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.
In 2000, the shareholders of New Century Bank approved the New Century Bank 2000 Nonqualified Stock Option Plan for Directors (the “2000 Nonqualified Plan”) and the New Century Bank 2000 Incentive Stock Option Plan (the “2000 Incentive Plan”). Both plans were adopted by the Registrant upon its organization as the holding company for New Century Bank on September 19, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders approved amendments to 2000 Nonqualified Plan and the 2000 Incentive Plan and also approved the New Century Bancorp, Inc. 2004 Incentive Stock Option Plan. The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under the 2000 Nonqualified Plan is 390,778 (adjusted for stock dividends). The maximum number of shares reserved for issuance upon the exercise of outstanding options granted under
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the 2000 Incentive Plan is 238,476 (adjusted for stock dividends). There are no outstanding options under the 2004 Incentive Plan. Option prices for each of the plans are established at market value at the time of grant.
The following chart contains details of the grants:
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from pages 5 and 7 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from page 14 of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders.
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PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
* Incorporated by reference from the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.
** Incorporated by reference from Registrant’s Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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EXHIBIT INDEX
* Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 30, 2004.
** Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-117476), filed with the Securities and Exchange Commission on July 19, 2004.
*** Filed with the Securities and Exchange Commission pursuant to Rule 14a-6.
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