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NCBC > SEC Filings for NCBC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for NEW CENTURY BANCORP INC

Form 10-Q for NEW CENTURY BANCORP INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of New Century Bancorp, Inc. (the "Company"). This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "could," "project," "predict," "expect," "estimate," "continue," and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance or achievements may differ materially from the results expressed or implied by our forward-looking statements. Factors that could influence actual results, performance or achievements include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.

Overview

The Company is a commercial bank holding company and has one banking subsidiary, New Century Bank (referred to as the "Bank") and one unconsolidated subsidiary, New Century Statutory Trust I, which issued trust preferred securities in 2004 to provide additional capital for general corporate purposes. The Company's only business activity is the ownership of the Bank and New Century Statutory Trust I. This discussion focuses primarily on the financial condition and operating results of the Bank.

The Bank's lending activities are oriented to the consumer/retail customer as well as to the small-to medium-sized businesses located in Harnett, Cumberland, Johnston, Pitt, Robeson, Sampson, Wake and Wayne counties in North Carolina. During the third quarter of 2012, the Bank opened a loan production office in Raleigh, North Carolina. The Bank offers the standard complement of commercial, consumer, and mortgage lending products, as well as the ability to structure products to fit specialized needs. The deposit services offered by the Bank include small business and personal checking accounts, savings accounts and certificates of deposit. Deposit services are not offered in Pitt or Wake Counties. The Bank concentrates on customer relationships in building its customer deposit base and competes aggressively in the area of transaction accounts.

Comparison of Financial Condition at

September 30, 2012 and December 31, 2011

During the first nine months of 2012, total assets decreased by $11.8 million to $577.8 million as of September 30, 2012. Earning assets at September 30, 2012 totaled $525.9 million and consisted of $377.5 million in net loans, $67.3 million in investment securities, $79.0 million in overnight investments and interest-bearing deposits in other banks and $2.1 million in non-marketable equity securities. Total deposits and shareholders' equity at the end of the third quarter of 2012 were $481.3 million and $53.7 million, respectively. The decline in assets is attributable to the April 2012 sale of two branches which resulted in decreases of $14.6 million in deposits, $338,000 in loans, and $1.1 million in real property and equipment, and a net decrease in cash of $13.0 million.

Since the end of 2011, gross loans have decreased by $31.5 million to $386.1 million as of September 30, 2012 due to continued soft loan demand and efforts to reduce concentration levels within certain loan categories. Gross loans consisted of $33.2 million in commercial and industrial loans, $189.6 million in commercial real estate loans, $21.3 million in multi-family residential loans, $8.9 million in consumer loans, $47.1 million in residential real estate, $35.0 million in HELOC, and $51.4 million in construction loans. Deferred loan fees, net of costs, on these loans were $426,000.

At September 30, 2012 and December 31, 2011, the Company held $3.0 million in federal funds sold. Interest-earning deposits in other banks were $76.0 million at September 30, 2012, a $20.4 million increase from December 31, 2011. The Company's investment securities at September 30, 2012 were $67.3 million, a decrease of $0.5 million from December 31, 2011. The investment portfolio as of September 30, 2012 consisted of $29.4 million in government agency debt securities, $27.8 million in mortgage-backed securities and $8.0 million in municipal securities. The net unrealized gain on these securities was $2.1 million.

At September 30, 2012, the Company also held an investment of $973,000 in the form of Federal Home Loan Bank ("FHLB") stock a decrease of $275,000 from December 31, 2011 due to redemptions during the second and third quarters of 2012. Also, the Company had $1.1 million in other non-marketable securities, which was approximately the same at December 31, 2011.

At September 30, 2012, non-earning assets were $51.7 million, which reflects a decrease of $1.6 million from the $53.3 million as of December 31, 2011. Non-earning assets as of September 30, 2012 included $18.8 million in cash and due from banks, bank premises and equipment of $11.0 million, core deposit intangible of $327,000, accrued interest receivable of $1.9 million, foreclosed real estate of $2.8 million, and other assets which consisted of $8.2 million in Bank Owned Life Insurance ("BOLI"), $5.1 million in deferred tax assets, and $3.6 million in all other assets. Since the income on BOLI is included in non-interest income, this asset is not included in the Company's calculation of earning assets.

Total deposits at September 30, 2012 were $481.3 million and consisted of $76.8 million in non-interest-bearing demand deposits, $108.9 million in money market and NOW accounts, $23.4 million in savings accounts, and $272.2 million in time deposits. Total deposits decreased by $20.1 million from $501.4 million as of December 31, 2011. Of this decrease, $14.6 million is related to the previously disclosed branch sale. The Bank had $498,000 in brokered demand deposits and no brokered time deposits as of September 30, 2012.

As of September 30, 2012, the Company had $26.2 million in short-term debt and $12.4 million in long-term debt. Short-term debt consisted of $24.2 million of repurchase agreements with local customers and $2.0 million of FHLB advances. Long-term debt consisted of $12.4 million of junior subordinated debentures that were issued in September 2004.

Total shareholders' equity at September 30, 2012 was $53.7 million, an increase of $4.2 million from $49.5 million as of December 31, 2011. Accumulated other comprehensive income relating to available for sale securities increased $27,000 for the nine months ended September 30, 2012. Other changes in shareholders' equity included increases of $31,000 in stock-based compensation, net income of $3.9 million for the nine months ending September 30, 2012, and $165,000 from the proceeds of the sale of common stock.

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

At September 30, 2012, the Company had $1.8 million in loans that were 30 to 89 days past due and $15,000 in loans that were 90 days or more past due and still accruing. This represented 0.47% of gross loans outstanding on that date. This is a decrease from December 31, 2011 when there were $4.2 million in loans that were 30-89 days past due and $108,000 in loans that were 90 days or more past due and still accruing. This represented 1.01% of gross loans outstanding as of December 31, 2011. Non-accrual loans decreased from $17.6 million at December 31, 2011 to $15.0 million at September 30, 2012.

The percentage of non-performing loans (non-accrual loans and accruing troubled debt restructurings) to total loans increased 12 basis points from 4.70% at December 31, 2011 to 4.82% at September 30, 2012.

The Company had eighteen loans totaling $3.6 million that were considered troubled debt restructurings ("TDRs") that were still in accruing status at September 30, 2012 with the remaining TDRs included in non-accrual loans. All TDRs are considered non-performing loans regardless of accrual status.

The table below sets forth, for the periods indicated, information about the Company's non-accrual loans, loans past due 90 days or more and still accruing interest, total non-performing loans (non-accrual loans plus accruing TDRs), and total non-performing assets.

                                                                   For Periods Ended
                                                            September 30,       December 31,
                                                                2012                2011
                                                                 (Dollars in thousands)

Non-accrual loans                                          $        14,988     $       17,623
Accruing TDRs                                                        3,625              2,013
Total non-performing loans                                          18,613             19,636
Foreclosed real estate                                               2,849              3,031
Repossessed assets                                                       -                  -
Total non-performing assets                                $        21,462     $       22,667

Accruing loans past due 90 days or more                    $            15     $          109
Allowance for loan losses                                  $         8,588     $       10,034

Non-performing loans to period end loans                              4.82 %             4.70 %
Non-performing loans and accruing loans past due 90 days
or more to period end loans                                           4.82 %             4.73 %
Allowance for loans losses to period end loans                        2.22 %             2.40 %
Allowance for loan losses to non-performing loans                    46.14 %            51.10 %
Allowance for loan losses to non-performing assets                   40.01 %            44.27 %
Allowance for loan losses to non-performing assets and
accruing loans past due 90 days or more                              39.99 %            44.06 %
Non-performing assets to total assets                                 3.71 %             3.84 %
Non-performing assets and accruing loans past due 90
days or more to total assets                                          3.72 %             3.86 %

The total non-performing assets (non-accrual loans, accruing TDRs, and foreclosed real estate), at September 30, 2012 and December 31, 2011 were $21.5 million and $22.7 million. The allowance for loan losses at September 30, 2012 represented 44.01% of non-performing assets compared to 44.27% at December 31, 2011.

Total impaired loans at September 30, 2012 were $23.2 million. This includes $15.0 million in loans that were classified as impaired because they were in non-accrual and $8.2 million in loans that were determined to be impaired for other reasons. Of these loans, $6.9 million required a specific reserve of $1.1 million at September 30, 2012. Total impaired loans at December 31, 2011 were $24.8 million. This includes $17.6 million in loans that were considered to be impaired due to being in non-accrual status and $7.2 million in loans that were deemed to be impaired for other reasons. Of these loans, $9.6 million required a specific reserve of $1.5 million at December 31, 2011.

The allowance for loan losses was $8.6 million at September 30, 2012 or 2.22% of gross loans outstanding. This is a decrease of 18 basis points from the 2.40% of gross loans at December 31, 2011. The allowance for loan losses at September 30, 2012 represented 37.03% of impaired loans compared to 40.40% at December 31, 2011. This decrease in the allowance for the first nine months of 2012 resulted primarily from net recoveries of $1.2 million, management's concerted effort to charge off impairments on collateral dependant impaired loans, and an overall decrease in loan balances. It is management's assessment that the allowance for loan losses as of September 30, 2012 is appropriate in light of the risk inherent within the Company's loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

Other Lending Risk Factors

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

Regulatory Loan to Value

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

At September 30, 2012 and December 31, 2011 the Company had $7.1 million and $13.3 million in non 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. At September 30, 2012 and December 31, 2011 the Company had $9.8 million and $12.5 million of 1-to-4 family residential loans that exceeded the regulatory LTV limits, respectively. The total amount of these loans represented 26.9% and 43.8% of total risk based capital as of September 30, 2012 and December 31, 2011, which is less than the 100% maximum allowed. These loans may provide more than ordinary risk to the Company if the real estate market continues to weaken in terms of both market activity and collateral valuations.

Business Sector Concentrations

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

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

                                             At
                                        September 30,         % of
                                            2012           Risk Based
                                       (In thousands)        Capital
                1-to-4 Family Rental   $        18,994              30 %
                Office Building        $        27,399              44 %

At September 30, 2012 the Company exceeded this guideline in the Office Buildings product type. The Office Buildings category equaled 44% of risk-based capital or $27.4 million. All other commercial real estate groups were under the 40% threshold. The reduced concentration within these categories from December 31, 2011 to September 30, 2012 resulted from the increase in capital combined with reduced loan balances.

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

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

Acquisition, Development, and Construction Loans ("ADC")

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

                                         ADC Loans
                                 As of September 30, 2012
                                  (Dollars in thousands)

                                                       Land and Land
                                    Construction        Development        Total

       Total ADC loans             $       33,751     $        17,692     $ 51,443

       Average Loan Size           $          124     $           322

       Percentage of total loans             8.74 %              4.58 %      13.32 %

       Non-accrual loans           $        1,038     $         1,676     $  2,714

At September 30, 2012, total ADC loans represented 13.32%, or $51.4 million, of the total loan portfolio. Included in this balance is$2.7 million loans in non-accrual status which represents 5.3% of all ADC loans. Management monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company's market area.

                                         ADC Loans
                                  As of December 31, 2011
                                  (Dollars in thousands)

                                                       Land and Land
                                    Construction        Development        Total

       Total ADC loans             $       49,958     $        20,888     $ 70,846

       Average Loan Size           $          174     $           307

       Percentage of total loans            11.96 %              5.00 %      16.96 %

       Non-accrual loans           $          596     $         3,172     $  3,768

At December 31, 2011, total ADC loans represented 16.96%, or $70.8 million, of the total loan portfolio, of which $3.8 million of the ADC portfolio is in non-accrual status. This represents 5.3% of all ADC loans. Management monitors the ADC portfolio as to collateral value, funding based on project completeness, and the performance of similar loans in the Company's market area.

Geographic Concentrations



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



                       ADC Loans      Percent       HELOC       Percent
                                    (Dollars in thousands)

Harnett County        $     5,024          9.8 %   $  7,317         20.9 %
Cumberland County          16,648         32.4 %      9,128         26.1 %
Johnston County               750          1.4 %        613          1.8 %
Pitt County                 4,697          9.1 %        100          0.3 %
Robeson County              1,743          3.4 %      3,546         10.1 %
Sampson County                836          1.6 %      1,517          4.3 %
Wayne County                2,934          5.7 %      5,514         15.8 %
Hoke County                 4,156          8.1 %        189          0.5 %
All other locations        14,655         28.5 %      7,064         20.2 %

Total                 $    51,443        100.0 %   $ 34,988        100.0 %

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

                       ADC Loans      Percent       HELOC       Percent
                                    (Dollars in thousands)

Harnett County        $     5,637          8.0 %   $  7,432         19.2 %
Cumberland County          18,424         26.0 %      6,652         17.2 %
Johnston County             1,410          2.0 %        622          1.6 %
Pitt County                 4,631          6.5 %          -          0.0 %
Robeson County              2,021          2.9 %      3,377          8.7 %
Sampson County                730          1.0 %      1,645          4.3 %
Wayne County                4,474          6.3 %      5,769         14.9 %
Hoke County                 2,626          3.7 %        111          0.3 %
All other locations        30,893         43.6 %     13,094         33.8 %

Total                 $    70,846        100.0 %   $ 38,702        100.0 %

Interest Only Payments

Another risk factor that exists in the total loan portfolio pertains to loans with interest only payment terms. At September 30, 2012, the Company had $95.7 million in loans that had terms permitting interest only payments. This represented 24.8% of the total loan portfolio. At December 31, 2011, the Company had $125.8 million in loans that had terms permitting interest only payments. This represented 30.1% of the total loan portfolio. Recognizing the risk inherent with interest only loans, it is customary and general industry practice that loans in the ADC portfolio permit interest only payments during the acquisition, development, and construction phases of such projects.

Large Dollar Concentrations

Concentrations of high dollar loans or large customer relationships may pose additional risk in the total loan portfolio. The Company's ten largest loans or lines of credit totaled $47.3 million or 12.3% of total loans at September 30, 2012 compared to $48.6 million or 11.6% of total loans at December 31, 2011. The Company's ten largest customer relationships totaled $68.1 million or 17.6% of total loans at September 30, 2012 compared to $68.3 million or 16.4% of total loans at December 31, 2011. Deterioration or loss in any one or more of these high dollar loan or customer concentrations could have an immediate, significant adverse impact on the Company's capital position.

Comparison of Results of Operations for the

Three months ended September 30, 2012 and 2011

General. During the third quarter of 2012, the Company had net income of $632,000 as compared with net loss of ($22,000) for the same quarter in 2011. Net income per share for the third quarter of 2012 was $0.09, basic and diluted, compared with net loss per share of ($0.00), basic and diluted, for the third quarter of 2011. Results of operations for the third quarter of 2012 were primarily impacted by a reduction in the provision for loan losses of $2.0 million due to a reduction in loan balances and lower loan charge-offs. The Company also experienced a decrease in net interest margin of 28 basis points to 3.54% in the third quarter of 2012 from the same period in 2011.

Net Interest Income. Net interest income decreased by $920,000 to $4.6 million for the third quarter of 2012. The Company's total interest income was affected by a reduction in the yield on interest-earning assets combined with a decrease in those assets. Average total interest-earning assets were $518.8 million in the third quarter of 2012 compared with $574.9 million during the same period in 2011 and the yield on those assets decreased 47 basis points from 5.26% to 4.79%. Total interest income reversed on loans transferred to non-accrual status for the three months ended September 30, 2012 and 2011 was $17,000 and $53,000, respectively, or approximately 1 basis point on average interest-earning assets for both periods mentioned.

The Company's average interest-bearing liabilities decreased by $58.4 million to $437.2 million for the quarter ended September 30, 2012 from $495.6 million for the same period one year earlier and the cost of those funds decreased from 1.67% to 1.48%, or 19 basis points. During the third quarter of 2012, the Company's net interest margin was 3.54% and net interest spread was 3.31%. For the quarter ended September 30, 2011, net interest margin was 3.82% and net interest spread was 3.59%

Provision for Loan Losses. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In determining the loss history to be applied to its ASC 450 loan pools within the allowance for loan losses, the Company has previously used net charge-off history for most recent eight consecutive quarters. In determining the appropriate level of the allowance for loan losses at September 30, 2012, the loss history was expanded to nine consecutive quarters of net charge-offs. Since the most recent quarters have contained a large number of recoveries and thus have a lower loss history than quarters from 2010 and 2011, management determined that the expansion of loss history better reflects the inherent losses in the current loan portfolio. The impact of this adjustment to the allowance for loan losses resulted in a $1.2 million increase to our loan loss reserves as compared to the methodology previously used. During the third quarter, the Company recorded a provision for loan losses of $189,000 which is a decrease of $2.0 million from the provision that was recorded in the third quarter of 2011. The reduction in provision is directly related to a decrease in net charge-offs from $2.3 million in the third quarter of 2011 to $400,000 in the third quarter of 2012. Loan loss provisions in 2012 have also been affected by the decline in overall loan balances during the year.

Non-Interest Income. Non-interest income for the quarter ended September 30, 2012 was $757,000, an increase of $114,000 from the third quarter of 2011. This increase was primarily due to an increase in various loan servicing fees. Service charges on deposit accounts decreased $57,000 to $306,000 for the quarter ended September 30, 2012 as compared to $363,000 for the same period in 2011. Mortgage fee income increased $6,000 to $53,000 for the quarter ended September 30, 2012 compared to the same period in 2011. Other non-deposit fees and income increased $165,000 in the third quarter of 2012 to $398,000 due largely to the previously mentioned increase in loan servicing fees.

Non-Interest Expenses. Non-interest expenses increased by $56,000 to $4.2 million for the quarter ended September 30, 2012, from $4.1 million for the same period in 2011. The following are highlights of the significant categories of non-interest expenses during the third quarter of 2012 versus the third quarter of 2011:

Personnel expenses remained approximately the same at $2.0 million in the third quarter of 2012 as compared to the same quarter in 2011.

Deposit insurance expense was $191,000 for the quarter ended September 30, 2012 down from $209,000.

Professional fees decreased $26,000 to $303,000 for the quarter ended September 30, 2012 from $329,000 for the quarter ended September 30, 2011.

Foreclosure-related expenses increased by $44,000 to $355,000 for the quarter ending September 30, 2012 compared to the same period for 2011.

Provision for Income Taxes. The Company's effective tax rate was 35.0% for the quarter ended September 30, 2012 and (87.1%) for the quarter ended September 30, 2011 as a result of permanent tax differences that were in excess of taxable income resulting in lower effective tax rates.

As of September 30, 2012, the Company had a recorded net deferred tax asset in the amount of $5.1 million, compared to $4.7 million at September 30, 2011. In evaluating whether the Company will realize the full benefit of the net deferred tax asset, management considered both positive and negative evidence, including among other things recent earnings trends, projected earnings, and asset quality. As of September 30, 2012 and September 30, 2011, management concluded . . .

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