fwp.htm

Issuer Free Writing Prospectus
Filed Pursuant to Rule 433
Registration No:  333-166225
September 10, 2010















Financial Results
June 30, 2010 and for the three and six
months ended June 30, 2010 (unaudited)
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

INDEX TO FINANCIAL INFORMATION

 
Unaudited Balance Sheets as of June 30, 2010 and December 31, 2009
3
Unaudited Statements of Operations for the three and six months ended June 30, 2010 and 2009
4
Unaudited Statements of Stockholders’ Equity for the six months ended June 30, 2010
5
Unaudited Statements of Cash Flows for the six months ended June 30, 2010 and 2009
6
Notes to Unaudited Financial Statements for the six months ended June 30, 2010 and 2009
7
 
Selected Financial Data
18
Financial Overview
19

 
 
 
- 2 -
 


 

NEW CENTURY BANK D/B/A CUSTOMERS BANK
            
UNAUDITED BALANCE SHEETS
            
             
   
June 30,
    
December 31,
  
   
2010
    
2009
  
   
(dollar amounts in thousands, except per share data)
  
ASSETS
            
             
Cash and due from banks
  
$
5,405
    
$
4,171
  
Interest earning deposits
    
138,708
      
58,978
  
Federal funds sold
    
692
      
5,658
  
                 
Cash and cash equivalents
    
144,805
      
68,807
  
Securities available for sale, at fair value
    
11,989
      
44,588
  
Loans receivable, net of allowance for loan losses
                
2010 $12,236;  2009 $10,032
    
456,344
      
220,266
  
Bank premises and equipment, net
    
3,544
      
2,719
  
Restricted stock, at cost
    
3,029
      
2,026
  
Bank owned life insurance
    
5,056
      
4,955
  
Accrued interest receivable and other assets
    
8,742
      
6,399
  
                 
Total assets
  
$
633,509
    
$
349,760
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Liabilities:
                
Deposits:
                
Demand, non-interest bearing
  
$
43,028
    
$
18,502
  
Interest bearing
    
509,999
      
295,425
  
                 
Total deposits
    
553,027
      
313,927
  
Borrowings
    
11,000
      
11,000
  
Subordinated debt
    
2,000
      
2,000
  
Accrued interest payable and other liabilities
    
1,823
      
1,330
  
                 
Total liabilities
    
567,850
      
328,257
  
                 
Stockholders’ equity:
                
Preferred stock, par value $1,000 per share; 0 shares issued
                
  and outstanding in 2010 and 2009
    
-
      
-
  
Common stock, par value $1.00 per share;
                
40,500,000 shares authorized; shares issued and
                
outstanding 2010 - 20,381,922; 2009 - 5,522,706
    
20,382
      
5,522
  
Surplus
    
63,082
      
29,243
  
Accumulated deficit
    
(17,768
)
    
(13,229
)
Accumulated other comprehensive loss
    
(37
)
    
(33
)
                 
Total stockholders’ equity
    
65,659
      
21,503
  
                 
Total liabilities and stockholders’ equity
  
$
633,509
    
$
349,760
  
 
 
See Notes to Financial Statements.
          
 
 
 
- 3 -
 
 
 
 
 
NEW CENTURY BANK D/B/A CUSTOMERS BANK
  
UNAUDITED STATEMENTS OF OPERATIONS
  
   
   
Three months ended June 30,
    
Six months ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(dollar amounts in thousands, except per share data)
  
Interest income:
                        
Loans receivable, including fees
   $ 5,225     $ 2,952     $ 8,696     $ 5,880  
Securities, taxable
     431       179       818       408  
Securities, non-taxable
     28       42       66       107  
Other
     70       17       94       18  
                                 
Total interest income
     5,754       3,190       9,674       6,413  
                                 
Interest expense:
                                
Deposits
     2,014       1,370       3,545       2,884  
Borrowed funds
     94       138       184       279  
Subordinated debt
     16       39       32       92  
                                 
Total interest expense
     2,124       1,547       3,761       3,255  
                                 
Net interest income
     3,630       1,643       5,913       3,158  
                                 
Provision for loan losses
     1,100       8,000       5,472       8,130  
                                 
Net interest (loss) income after provision for loan losses
     2,530       (6,357 )     441       (4,972 )
                                 
Non-interest income:
                                
Service fees
     78       128       190       281  
Warehouse transaction fees
     547       -       703       -  
Bank owned life insurance
     58       57       116       113  
Gains on sales of securities
     774       -       1,076       168  
Other than temporary impairment charge on investment securities
     -       (15 )     -       (15 )
Other
     55       50       80       72  
Total non-interest income
     1,512       220       2,165       619  
                                 
Non-interest expense:
                                
Salaries and employee benefits
     1,777       781       3,221       1,579  
Occupancy
     325       313       633       630  
Technology, communication and bank operations
     353       225       710       455  
Advertising and promotion
     232       66       328       97  
Professional services
     414       113       889       225  
FDIC assessments, taxes, and regulatory fees
     339       325       615       477  
Other real estate owned
     70       387       452       439  
Other
     102       143       297       267  
                                 
Total non-interest expenses
     3,612       2,353       7,145       4,169  
                                 
Income(loss)  before tax benefit
     430       (8,490 )     (4,539 )     (8,522 )
                                 
Income tax benefit
     -       -       -       -  
                                 
Net income(loss)
   $ 430     $ (8,490 )   $ (4,539 )   $ (8,522 )
                                 
Basic and diluted earnings(loss) per share
   $ 0.02     $ (4.14 )   $ (0.29 )   $ (4.19 )
                                 
See Notes to Financial Statements.
                                

 
 
 
- 4 -
 
 

 

NEW CENTURY BANK D/B/A CUSTOMERS BANK
  
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
  
 For the Six Months Ended June 30, 2010
(dollars amounts in thousands)
 
   
Number of
Common Stock Shares
    
Common stock
    
 
Surplus
    
 
Accumulated
deficit
    
Accumulated
other
comprehensive
loss
    
Total
  
Balance, December 31, 2009
     5,522,706     $ 5,522     $ 29,243     $ (13,229 )   $ (33 )   $ 21,503  
                                                 
Comprehensive loss:
                                                
Net loss
                             (4,539 )             (4,539 )
Change in net unrealized
        losses on securities
        available for sale, net of taxes
                                     (4 )     (4 )
Total comprehensive loss
                                             (4,543 )
Common stock shares issued
     14,859,216       14,860       33,747                       48,607  
Stock based compensation
                     92                       92  
             
Balance, June 30, 2010
     20,381,922     $ 20,382     $ 63,082     $ (17,768 )   $ (37 )   $ 65,659  

 
See Notes to Financial Statements.
              

 
 
- 5 -
 

 

NEW CENTURY BANK D/B/A CUSTOMERS BANK
UNAUDITED STATEMENT OF CASH FLOWS

Six months ended June 30,
  
2010
    
2009
  
   
(in thousands)
  
Cash Flows from Operating Activities
            
Net (loss)income
  
$
(4,539
)
  
$
(8,522
)
Adjustments to reconcile net (loss)income to net cash provided by operating activities:
                
Provision for loan losses
    
5,472
      
8,130
  
Provision for depreciation and amortization
    
357
      
346
  
Net amortization of securities premiums and discounts
    
98
      
27
  
(Gain) loss on sale of securities
    
(1,076
)
    
(168
)
Stock based compensation
    
92
      
-
  
Valuation adjustments on OREO
    
342
      
350
  
Earnings on investment in bank owned life insurance
    
(101
)
    
(102
)
Decrease in accrued interest receivable and other assets
    
340
      
321
  
Increase in accrued interest payable and other liabilities
    
443
      
228
  
Net Cash Provided by Operating Activities
    
1,428
      
610
  
                 
Cash Flows from Investing Activities
                
Purchases of securities available for sale
    
(101,634
)
    
(3,430
)
Proceeds from maturities, calls and principal repayments on securities available for sale
    
4,727
      
3,029
  
Proceeds from sales of securities available for sale
    
130,483
      
12,011
  
Purchases of restricted stock
    
(1,003
)
    
(21
)
Net increase in loans
    
(244,888
)
    
(4,166
))
Purchases of bank premises and equipment
    
(1,090
)
    
(129
)
Proceeds from sale of foreclosed real estate
    
268
      
360
  
Net Cash (Used in) Provided by Investing Activities
    
(213,137
)
    
7,654
  
                 
Cash Flows from Financing Activities
                
Net increase (decrease) in deposits
    
239,100
      
(7,935
)
Net decrease in short-term borrowed funds
    
-
      
(4,000
)
Proceeds from issuance of common stock
    
48,607
      
12,629
  
Dividends on preferred stock
    
-
      
(4
)
                 
Net Cash Provided by Financing Activities
    
287,707
      
690
  
                 
Net Increase in Cash and Cash Equivalents
    
75,998
      
8,954
  
                 
Cash and Cash Equivalents - Beginning
    
68,807
      
6,295
  
Cash and Cash Equivalents - Ending
  
$
144,805
    
$
15,249
  
                 
Supplementary Cash Flows Information
                
Interest paid
  
$
3,605
    
$
3,117
  
Income taxes (refund) paid
  
$
-
    
$
(165
)
Other real estate acquired in settlement of loans
  
$
3,296
    
$
2,478
  


See Notes to Financial Statements.
      

 
 
 
- 6 -
 

 
 New Century Bank
 
Notes to Unaudited Financial Statements

June 30, 2010
 

NOTE 1 - BASIS OF PRESENTATION

This quarterly report presents the financial statements of New Century Bank d/b/a Customers Bank (the Bank). The accounting and reporting policies of the Bank conform with accounting principles generally accepted in the United States of America (U.S. GAAP) and predominant practices within the banking industry.

The Bank’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals that are, in the opinion of management, necessary for fair presentation of the results of interim periods presented. The results of operations for the three and six month periods ended June 30, 2010 presented do not necessarily indicate the results that the Bank will achieve for all of 2010. You should read these interim financial statements in conjunction with the financial statements and accompanying notes that are presented in the financial statements for New Century Bank for the year ended December 31, 2009.

The financial information in this quarterly report has been prepared in accordance with the Bank’s customary accounting practices. Certain information and footnote disclosures required under U.S. GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

The Bank evaluated its June 30, 2010 financial statements for subsequent events through the date the financial statements were issued. The Bank is not aware of any subsequent events which would require recognition or disclosure in the financial statements except the events described in Note 11.


NOTE 2 – EARNINGS PER SHARE
 
Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that could occur if (i) options to issue common stock were exercised and (ii) warrants to issue common stock were exercised.  Potential common shares that may be issued related to outstanding stock options are determined using the treasury stock method.

The weighted average common shares outstanding for the three and six months ended June 30, 2010 were 20,381,922 and 15,588,436, respectively.  The weighted average common shares outstanding for the three and six months ended June 30, 2009 were 2,048,350 and 2,034,880, respectively.  

Stock options to purchase 1,870,140 shares of common stock with an exercise price of $3.25 and warrants to purchase 1,541,783 shares of common stock with exercise prices ranging from $3.76 to $5.50 per share were outstanding and were not included in the computation of diluted earnings per share for the three months ended June 30, 2010 because the option exercise price was greater than the average market price. Stock options outstanding for 1,870,140 shares of common stock with an exercise price of $3.25 and warrants to purchase 1,541,783 shares of common stock with exercise prices ranging from $3.76 to $5.50 for the six month periods ended June 30, 2010 were not dilutive due to losses.  

Stock options outstanding to purchase 45,410 shares of common stock with exercise prices ranging from $10.25 to $11.00 for the three and six month periods ended June 30, 2009 were not dilutive due to losses in 2009. 
 
 

 
 
- 7 -
 

 

NOTE 3 – INVESTMENT SECURITIES
 
The amortized cost and approximate fair value of available for sale investment securities as of June 30, 2010 and December 31, 2009 are summarized as follows:
 
   
June 30, 2010
  
   
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair Value
  
   
(in thousands)
  
Available for Sale:
                        
Mortgage-backed securities
  
$
9,172
    
$
157
    
$
(81
)
  
$
9,248
  
Asset-backed securities
    
775
      
—
      
(2
)
    
773
  
Municipal securities
    
2,097
      
—
      
(129
)
    
1,968
  
   
$
12,044
    
$
157
    
$
(212
)
  
$
11,989
  
       
 
 
   
December 31, 2009
  
   
Amortized Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Fair Value
  
   
(in thousands)
  
Available for Sale:
                        
U.S. Treasury and government agency
  
$
435
    
$
17
    
$
—
    
$
452
  
Mortgage-backed securities
    
39,314
      
317
      
(228
)
    
39,403
  
Asset-backed securities
    
843
      
—
      
(4
)
    
839
  
Municipal securities
    
4,048
      
3
      
(157
)
    
3,894
  
   
$
44,640
    
$
337
    
$
(389
)
  
$
44,588
  
       

The amortized cost and fair value of available for sale securities as of June 30, 2010, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without any penalties.
 
   
Available
for Sale
Amortized
Cost
    
Fair Value
  
   
(in thousands)
  
Due after ten years
  
  $
2,097
    
  $
1,968
  
     
2,097
      
1,968
  
Mortgage-backed securities
    
9,172
      
9,248
  
Asset-backed securities
    
775
      
773
  
   
$
12,044
    
$
11,989
  

The following table shows proceeds from sales of securities, gross gains and gross losses on sales of securities for the periods indicated:
 
   
Six months ended
June 30, 2010
    
Six months ended
June 30, 2009
  
 
(in thousands)
  
Gross gains
   $ 1,079     $ 210  
Gross losses
     (2 )     (42 )

 

 
 
- 8 -
 

 
The Bank’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position, at June 30, 2010 and December 31, 2009 are as follows:
 
   
June 30, 2010
  
   
Less than 12 months
    
12 months or more
    
Total
  
   
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
  
   
(in thousands)
  
Available for Sale:
                                    
Mortgage-backed securities
  
$
238
    
$
(1
)
  
$
1,246
    
$
(80
)
  
$
1,484
    
$
(81
)
Asset-backed securities
    
118
      
(1
)
    
655
      
(1
)
    
773
      
(2
)
Municipal securities
    
-
      
-
      
2,097
      
(129
)
    
2,097
      
(129
)
Total investment securities
                                                
available for sale
  
$
356
    
$
(2
)
    
3,998
    
$
(210
)
  
$
4,354
    
$
(212
)


   
December 31, 2009
  
   
Less than 12 months
    
12 months or more
    
Total
  
   
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
  
   
(in thousands)
  
Available for Sale:
                                    
Mortgage-backed securities
  
$
10,142
    
$
(21
)
  
$
1,934
    
$
(207
)
  
$
12,076
    
$
(228
)
Asset-backed securities
    
122
      
—
      
717
      
(4
)
    
839
      
(4
)
Municipal securities
    
374
      
(1
)
    
1,949
      
(156
)
    
2,323
      
(157
)
Total investment securities
available for sale
  
$
10,638
    
$
(22
 
)
  
$
4,600
    
$
(367
 
)
  
$
15,238
    
$
(389
 
)

At June 30, 2010, there were four available for sale investment securities in the less than twelve month category and ten available for sale investment securities in the twelve month or more category. At December 31, 2009, there were nine available for sale investment securities in the less than twelve month category and sixteen available for sale securities in the twelve month or more category.  In management’s opinion, the unrealized losses reflect primarily changes in interest rates, such as but not limited to changes in economic conditions and the liquidity of the market, subsequent to the acquisition of specific securities. The Bank does not intend to sell and it is not more likely than not that the Bank will be required to sell the securities prior to maturity or market price recovery.  

NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 
The composition of net loans receivable at June 30, 2010 and December 31, 2009 is as follows:
 
   
2010
    
2009
  
   
(in thousands)
  
Commercial construction
  
$
13,680
    
$
19,161
  
Commercial real estate
    
143,188
      
133,433
  
Commercial and Industrial
    
32,703
      
25,290
  
Warehouse loans
    
247,185
      
16,435
  
Residential construction
    
2,651
      
2,581
  
Consumer residential
    
25,453
      
27,422
  
Consumer and other
    
3,489
      
5,524
  
Total loans
    
468,349
      
229,846
  
Unearned net loan origination costs and fees
    
231
      
452
  
Allowance for loan losses
    
(12,236
)
    
(10,032
)
Net loans
  
$
456,344
    
$
220,266
  

 
 
 
- 9 -
 

 
The changes in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009 are as follows:

   
Three months ended 
June 30,
    
Six months ended
June 30,
   
2010
    
2009
    
2010
     2009  
 
   
(in thousands)
Balance at beginning of the period
   $ 13,364     $ 2,984     $ 10,032     $ 2,876  
Provision for loan losses
     1,100       8,000       5,472       8,130  
Loans charged off
     (2,178 )     (1,050 )     (3,221 )     (1,072 )
Loan recoveries
     —       —       3       —  
Transfers to reserve for unfunded commitments (a)
     (50 )     -       (50 )     -  
Balance at period end
   $ 12,236     $ 9,934     $ 12,236     $ 9,934  

(a) At June 30, 2010, the Bank has a reserve of $50 thousand for unfunded commitments previously included within the allowance for loan losses.  The reserve for unfunded loan commitments was reclassified to other liabilities during the three months ended June 30, 2010.

Non-performing assets as of June 30, 2010 and December 31, 2009 are as follows:

 
Non-Performing Assets
  
2010
    
2009
  
   
(in thousands)
  
Non-accrual loans
   $ 16,679     $ 10,341  
Loans 90 days past due and still accruing
     1,359       4,119  
Restructured Loans
     3,775       4,690  
Other real estate owned
     3,841       1,155  
Balance, ending
   $ 25,654     $ 20,305  
                 

As of June 30, 2010 and December 31, 2009, the Bank had impaired loans of $37.7 million and $17.5 million, respectively.  The Bank identifies a loan or lease as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the agreements. The allowance for loan and lease losses associated with impaired loans and leases was $8.7 million and $6.8 million, respectively, at June 30, 2010 and December 31, 2009, respectively. At June 30, 2010 and December 31, 2009, the Bank did not have any impaired loans for which there was no related allowance for loan losses recognized.  Interest income recognized on impaired loans was $950 thousand for the six months ended June 30, 2010 and $638 thousand for the year ended December 31, 2009.

On June 30, 2010, the Bank extended a term loan in the principal amount of five million dollars ($5,000,000) to Atlantic Coast Federal Corporation, which is the holding company for Atlantic Coast Bank, a federal savings bank. The Bank’s Chief Executive Officer, Jay Sidhu is the Executive Chairman of the Board of Atlantic Coast Federal Corporation and its subsidiary. This lending transaction was in the ordinary course of the Bank’s business, made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-affiliated customers, and did not involve more than the normal risk of collectability or present other unfavorable features. On July 31, 2010, the Bank participated $2.5 million of the principal balance of this loan to two board members and the remaining $2.5 million to three Bank investors reducing the balance to zero.

NOTE 5 - STOCKHOLDERS’ EQUITY

In February 2010, the Bank sold 10,078,139 total shares, which included 6,529,550 shares of Common Stock and 3,548,589 shares of Class B Non-Voting Common Stock at a price of $4.28 per share and in March 2010, 1,950,798 total shares, which included 761,596 shares of Common Stock and 1,189,202 shares of Class B Non-Voting Common Stock at a price of $3.76 per share (collectively, the 2010 Capital Raises).   The proceeds of the 2010 Capital Raises were $48.9 million, net of offering costs of approximately $1.8 million. As a result of the March 2010 capital raise at a price less than $4.28 per share, 1,417,902 shares of Common Stock and 490,762 shares of Class B Non-Voting Common Stock at a price of $3.76 per share have been issued to the existing investors pursuant to anti-dilution agreements between the Bank and those investors. Taking into account the impact of the anti-dilution agreements issued to investors in the 2010 Capital Raises, the two offerings accumulated to the issuance of 14.9 million shares.   Following the close of these transactions, no investor owns or controls more than 9.9% of the aggregate outstanding shares of the Bank’s Common Stock and Class B Non-Voting Common Stock, including for purposes of this calculation any shares issuable under unexercised warrants.
 
 
 
- 10 -
 

 
Each investor who participated in the 2010 Capital Raises and owns more than 9% of the common equity of the Bank has been identified by the Bank as a Lead Investor.  The 2010 Capital Raises resulted in seven Lead Investors who received warrants equal to 5% of the shares that they purchased in 2010 and have exercise prices (after taking into account anti-dilution repricing) of $3.76 per share (collectively, the 2010 Warrants).  The 2010 Warrants are for the issuance of 253,885 shares of the Bank’s Common Stock and 204,638 shares of the Bank’s Class B Non-Voting Common Stock.  The Lead Investors also have the right to invest in future capital raises until February 17, 2011 at the issuance price of $3.76 per share.

In conjunction with the 2009 capital raise, investors entered into anti-dilution agreements (the 2009 Agreements) providing them each with price protection until March 31, 2011, such that if the Bank issues any share of common stock at or prior to that date at a price less than $5.50 per share, the Bank will issue sufficient additional shares to the holders of the agreements to maintain the values of their holding of common stock at the new, lower issuance price.  Due to the 2010 Capital Raises being conducted at per share prices less than $5.50 per share, the anti-dilution provisions of the 2009 Agreements become effective.  The Bank issued 921,611 shares of the Bank’s Common Stock during the six months ended June 30, 2010.
 
The Bank agreed to extend and amend the anti-dilution agreements with shareholders who purchased shares in June 2009 or later, to extend anti-dilution protections from June 30, 2010 through March 31, 2011 for any capital raising transactions at a price or value below $3.76 per share, but, after June 30, 2010, only where the capital raising transaction involves share issuances for cash.  

Stock Options
 
During the three months ended June 30, 2010, the Bank granted options to purchase 1,870,140 shares to employees at an exercise price of $3.25 per share. The stock options vest over the next five anniversaries of the date of grant. The estimated fair value of the stock options granted using a Black-Scholes option pricing model using the following assumptions: risk-free interest rate was 3.28%; an expected dividend yield 0%; an expected volatility was 20% and an expected life of seven years. The fair value of the option granted was estimated to be $1.03. The expected compensation expense to be recorded over the vesting period is $2.0 million. Share-based compensation expense was $92,000 for the three and six months ended June 30, 2010. As of June 30, 2010, there was unrecognized compensation cost of $1.9 million related to unvested stock options and the remaining cost is expected to be recognized over approximately 4.8 years.
   
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
 
The components of other comprehensive income (loss) are as follows:
 
   
Six months ended June 30,
  
   
2010
    
2009
  
   
(in thousands)
  
Unrealized holding gains on available for
sale investment securities
  
$
1,072
    
$
273
  
Less:  Reclassification adjustment for gains on sales of
investment securities recognized in the net income(loss)
    
1,076
      
168
  
Net unrealized (loss) income
    
(4
)
    
105
  
Income tax benefit
    
—
      
—
  
Other Comprehensive (Loss) income, net
  
$
(4
)
  
$
105
  
 
 
 
 
- 11 -
 

 

 NOTE 7 - REGULATORY MATTERS
 
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the 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 Bank’s financial statements. Management believes, as of June 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject.  The Bank’s capital amounts and ratios at June 30, 2010 and December 31, 2009 are presented below:
 

   
Actual
  
For Capital Adequacy Purposes
  
To Be Well Capitalized Under Prompt Corrective Action Provisions
   
Amount
    
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
   
(dollars in thousands)
  
As of June 30, 2010:
                                
Total capital (to
risk weighted assets)
  
$
70,794
      
26.1
%
  
$
21,687
  
≥
8.0
%
  
$
27,109
  
≥
10.0
%
Tier 1 capital (to
risk weighted assets)
    
65,696
      
24.2
      
10,844
  
≥
4.0
      
16,266
  
≥
6.0
  
Tier 1 capital (to
average assets)
    
65,696
      
11.0
      
23,782
  
≥
4.0
      
29,727
  
≥
5.0
  
                                             
As of December 31, 2009:
                                            
Total capital (to
risk weighted assets)
  
$
25,958
      
11.8
%
  
$
17,648
  
≥
8.0
%
  
$
22,060
  
≥
10.0
%
Tier 1 capital (to
risk weighted assets)
    
21,537
      
9.8
      
8,824
  
≥
4.0
      
13,236
  
≥
6.0
  
Tier 1 capital (to
average assets)
    
21,537
      
6.7
      
12,906
  
≥
4.0
      
16,132
  
≥
5.0
  

 
NOTE 8 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bank uses fair value measurements to record fair value adjustments to certain assets and to disclose the fair value of its financial instruments.  FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Bank, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair value disclosure purposes, the Bank utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurements and Disclosures, as explained below.  The following methods and assumptions were used to estimate the fair values of the Bank’s financial instruments at June 30, 2010 and December 31, 2009:
 
Cash and cash equivalents:
 
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
 
Investment Securities:
 
The fair value of investment securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
 
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
 
Loans receivable:
 
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
 
 
 
 
- 12 -
 
 

Accrued interest receivable and payable:
 
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
 
Deposit liabilities:
 
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
Borrowings:
 
The carrying amounts of short-term borrowings approximate their fair values.
 
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
 
Subordinated debt:
 
Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.
 
 Off-balance sheet financial instruments:
 
Fair values for the Bank’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
 

The estimated fair values of the Bank’s financial instruments were as follows at June 30, 2010 and December 31, 2009:

  
  
June 30,
    
December 31,
  
   
2010
    
2009
  
   
Carrying Amount
    
Fair Value
    
Carrying Amount
    
Fair Value
  
   
(in thousands)
  
Assets:
                        
Cash and cash equivalents
   $ 144,805     $ 144,805     $ 68,807     $ 68,807  
Securities available for sale
     11,989       11,989       44,588       44,588  
Loans receivable, net
     456,344       455,247       220,266       213,901  
Restricted stock
     3,029       3,029       2,026       2,026  
Accrued interest receivable
     1,371       1,371       2,055       2,055  
Liabilities:
                                
Deposits
     553,027       556,396       313,927       316,377  
Subordinated debt
     2,000       2,000       2,000       2,000  
Borrowings
     11,000       12,765       11,000       11,290  
Accrued interest payable
     731       731       575       575  
Off-balance sheet financial instruments:
                                
Commitments to extend credit and letters of credit
     —       —       —       —  
  Standby letters of credit issued on the Bank's behalf
     —       —       —       —  

In accordance with FASB ASC 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Bank’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
 
 
 
 
- 13 -
 

 

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate.  In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment.  The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
 
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2010 and December 31, 2009 are as follows:
 
   
June 30, 2010
  
   
(Level 1)
Quoted Prices in
Active Markets for Identical Assets
    
(Level 2)
Significant Other
Observable Inputs
    
(Level 3)
Significant
Unobservable Inputs
    
Total Fair
Value
  
   
(in thousands)
  
Mortgage-backed securities
  
$
—
    
$
9,248
    
$
—
    
$
9,248
  
Asset-backed securities
    
—
      
   773
      
—
      
   773
  
Municipal securities
    
—
      
1,968
      
—
      
1,968
  
   
$
—
    
$
11,989
    
$
—
    
$
11,989
  
                                 

   
December 31, 2009
  
   
(Level 1)
Quoted Prices in
Active Markets for
Identical Assets
    
(Level 2)
Significant Other
Observable Inputs
    
(Level 3)
Significant
Unobservable Inputs
    
Total Fair
Value
  
   
(in thousands)
  
U.S. Treasury and government agency
  
$
452
    
$
—
    
$
—
    
$
452
  
Mortgage-backed securities
    
1,207
      
38,196
      
—
      
39,403
  
Asset-backed securities
    
—
      
839
      
—
      
839
  
Municipal securities
    
—
      
3,894
      
—
      
3,894
  
   
$
1,659
    
$
42,929
    
$
—
    
$
44,588
  

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of June 30, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
   
June 30, 2010
  
   
(Level 1)
Quoted Prices in
Active Markets for
Identical Assets
    
(Level 2)
Significant Other
Observable Inputs
    
(Level 3)
Significant
Unobservable Inputs
    
Total Fair
Value
  
   
(in thousands)
  
Impaired Loans, net of specific reserves of $8.7 million
  
$
—
    
$
—
    
$
29,028
    
$
29,028
  
Other Real Estate Owned
    
—
      
—
      
3,841
      
3,841
  
   
$
—
    
$
—
    
$
32,869
    
$
32,869
  
 
 
 
- 14 -
 
 
 
 
  
  
December 31, 2009
  
   
(Level 1)
Quoted Prices in
Active Markets for
Identical Assets
    
(Level 2)
Significant Other
Observable Inputs
    
(Level 3)
Significant
Unobservable Inputs
    
Total Fair
Value
  
   
(in thousands)
  
Impaired Loans, net of specific reserves of $6.8 million
  
$
—
    
$
—
    
$
10,780
    
$
10,780
  
Other Real Estate Owned
    
—
      
—
      
1,155
      
1,155
  
   
$
—
    
$
—
    
$
11,935
    
$
11,935
  

Fair value methodologies for financial assets valued on a nonrecurring basis are as follows:

Impaired loans:
 
Impaired loans are those that are accounted for under FASB ASC 450, Contingencies, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
 
Other real estate owned:

OREO is measured at fair value based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data


This information should not be interpreted as an estimate of the fair value of the entire Bank since a fair value calculation is only provided for a limited portion of the Bank’s assets.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Bank’s disclosures and those of other companies may not be meaningful.  

 NOTE 9 - LEASE COMMITMENTS
  
During the six months ended June 30, 2010, the Bank entered into four additional leases with initial terms through 2015.  The following chart shows the minimum commitments, under all noncancellable leases with remaining terms of more than one year (in thousands):
 
2010
  
$
543
  
2011
    
1,311
  
2012
    
1,305
  
2013
    
1,291
  
2014
    
1,076
  
2015
    
670
  
Thereafter
    
3,203
  
   
$
9,399
  
 
NOTE 10 – NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued accounting guidance to enhance fair value measurement disclosures by requiring the reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reason for the transfers. Furthermore, activity in Level 3 fair value measurements should separately provide information about purchases, sales, issues and settlements rather than providing that information as one net number. These new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the enhanced Level 3 disclosures, which are effective for interim and annual reporting periods beginning after December 15, 2010. The Bank applied this guidance in the first quarter of 2010 and application did not have a material impact on the Bank’s financial statements.

In July 2010, the FASB issued accounting guidance to enhance the disclosures for the Credit Quality of Financing Receivables and the Allowance for Credit Losses to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  The existing disclosure guidance is amended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for loan losses and to disclose credit quality indicators, past due information, and modifications of its financing receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. Management is currently evaluating the impact that this accounting standard update may have on the financial statements.
 
 
 
 
- 15 -
 
 

 
NOTE 11 – SUBSEQUENT EVENTS

Common Stock Issuance

In July 2010, the Bank sold 305,000 total shares, which included 25,000 shares of Common Stock and 280,000 shares of Class B Non-Voting Common Stock at a price of $3.50 per share with gross proceeds of $1.1 million. As a result of the July 2010 capital raise at a price less than $3.76 per share, 1,009,996 shares of Common Stock and 327,323 shares of Class B Non-Voting Common Stock at a price of $3.50 per share have been issued to the existing investors pursuant to anti-dilution agreements between the Bank and those investors. 

Business Combination

On August 24, 2010, the Bank entered into a definitive agreement to acquire Berkshire Bancorp and its subsidiary Berkshire Bank (collectively, Berkshire) upon the formation of its Holding Company.  Berkshire is a $150 million bank holding company with 5 offices.   The Bank will issue shares of its common stock valued at the tangible book value at the monthend prior to closing for Berkshire and the Bank.  In addition, the Bank will provide Berkshire approximately $3.0 million to repurchase the preferred shares held by the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program. The merger is expected to close in the first quarter of 2011 and will require both regulatory and each Bank’s shareholder approval.

FDIC assisted Acquisition

 
On July 9, 2010, the Bank acquired certain assets and assumed certain liabilities of USA Bank from the Federal Deposit Insurance Corporation (the FDIC) in a FDIC-assisted transaction. USA Bank was a full-service bank headquartered in Port Chester, New York that operated one branch location. The Bank made this acquisition to enter into the New York region and to allow the Bank to expand its geographic footprint. The loans and other real estate owned acquired as part of the Purchase and Assumption Agreement are covered by two loss share agreements between the FDIC and the Bank (one for single family residential mortgage loans and the other for all other loans and other real estate owned), which affords the Bank significant loss protection. Under the terms of the loss share agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss share agreement for single family residential mortgage loans is in effect for 10 years from July 9, 2010 (the acquisition date) and the loss share agreement for all other loans and other real estate owned is in effect for 5 years from the acquisition date.

Under the terms of the Purchase and Assumption Agreement, the Bank has the option (through October 9, 2010) to notify the FDIC of its intent to assume the leases and to acquire the furniture and equipment of USA Bank from the FDIC at their fair market values as of the acquisition date. The Bank and the FDIC are continuing to evaluate appraisals related to USA Bank premises and equipment. Prior to the expiration of this option, the Bank will notify the FDIC of its intention to assume the leases and to purchase certain equipment. Substantially all of the USA Bank’s premises and equipment subject to the option described above has been leased from the FDIC on a month-to-month basis during the term of the option.
 
 
 
 
- 16 -
 

 

The statement of assets acquired and liabilities assumed (at their purchased book values) from the USA Bank acquisition are as follows:
 
       
   
July 9, 2010
  
   
(in thousands)
  
Assets Acquired
      
Cash and cash equivalents, including federal funds sold
   $ 28,539  
Investment securities available for sale
     2,226  
Loans Receivable
     153,621  
Other real estate owned
     7,112  
Accrued interest receivable
     611  
Other assets
     430  
Total assets acquired
   $ 192,539  
Liabilities Assumed
        
Deposits
   $ 179,526  
Other liabilities
     307  
Total liabilities assumed
   $ 179,833  
         
Net Assets Acquired
   $ 12,706  
 
The purchased assets and assumed liabilities will be recorded at their respective acquisition date fair values and identifiable intangible assets, if any, will be recorded at fair value.   Management has commenced the fair value analysis of all acquired assets and assumed liabilities and anticipates the finalization of these fair value measurements in the fourth quarter 2010, subject to availability of relevant information.  The Bank anticipates a pre-tax gain of approximately $20 to $23 million on the acquisition of USA Bank representing the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the Bank’s bid, the FDIC made an initial cash payment to the Bank of $25.6 million, which is subject to finalization throughout the Agreement settlement period.

Purchase of Manufactured Housing Loans

On August 6, 2010, the Bank purchased $105.8 million of manufactured housing loans for a purchase price of $95.2 million, net of the holdback purchase price.  The Agreement of Sale of Loans (the Agreement) includes a hold-back for 10% of the purchase price for the fulfillment of the provisions of the Agreement, including the payment of past due amounts for principal and interest of the purchased loans during the holdback period and servicing and indemnification obligations.  The loans purchased were originated on or before 2008 and are current with their payments as of August 6, 2010.
 
 
 
 
 - 17 -
 
 
NEW CENTURY BANK - SELECTED FINANCIAL DATA
 
The following selected financial data is derived from the Bank’s audited financial statements as of and for the five years ended December 31, 2009 and the unaudited interim financial statements as of and for the three and six months ended June 30, 2010 and 2009.  The following financial data should be read in conjunction with the Financial Overview of New Century Bank’s Financial Condition and Results of Operations (included) and the Consolidated Financial Statements and related notes.
 
   
Six months ended
June 30,
    
Twelve months ended December 31,
  
   
2010
    
2009
    
2009
    
2008
    
2007
    
2006
    
2005
  
   
(Dollar amounts in thousands except per share data)
  
For the Period
                                          
Interest income
   $ 9,674     $ 6,413     $ 13,486     $ 15,502     $ 17,659     $ 13,917     $ 9,471  
Interest expense
     3,761       3,255       6,336       8,138       10,593       7,461       3,980  
Net interest income
     5,913       3,158       7,150       7,364       7,066       6,456       5,491  
Provision for loan losses
     5,472       8,130       11,778       611       444       416       282  
Total non-interest
     income (loss)
     2,165       619       1,043       (350 )     356       479       385  
Total non-interest expense
     7,145       4,169       9,650       7,654       6,908       5,588       4,649  
(Loss) income before taxes
     (4,539 )     (8,522 )     (13,235 )     (1,251 )     70       931       945  
Income tax
     expense
     (benefit)
     —       —       —       (426 )     (160 )     275       33  
Net (loss) income
   $ (4,539 )   $ (8,522 )   $ (13,235 )   $ (825 )   $ 230     $ 656     $ 912  
Basic (loss) earnings
     per share
   $ (0.29 )   $ (4.19 )   $ (3.66 )   $ (0.41 )   $ 0.11     $ 0.33     $ 0.57  
Diluted (loss) earnings
     per share
   $ (0.29 )   $ (4.19 )   $ (3.66 )   $ (0.41 )   $ 0.11     $ 0.32     $ 0.57  
At Period End
                                                        
Total assets
   $ 633,509     $ 266,540     $ 349,760     $ 274,038     $ 272,004     $ 234,407     $ 182,623  
Net loans
     456,344       214,329       220,266       220,876       212,109       176,147       138,100  
Allowance for loan losses
     12,236       9,934       10,032       2,876       2,460       2,029       1,615  
Deposits
     553,027       229,907       313,927       237,842       220,345       182,433       144,601  
Stockholders’ equity
     65,659       21,058       21,503       16,849       16,830       16,239       15,503  
Tangible common
     equity(2)
     65,659       21,058       21,503       15,869       16,830       16,239       15,503  
Selected Ratios & Share
     Data
      
Return on average
     assets(1)
     (1.84 )%     (6.45 )%     (4.69 )%     (0.30 )%     0.09 %     0.31 %     0.56 %
Return on average
     equity(1)
     (17.03 )%     (101.14 )%     (65.35 )%     (4.98 )%     1.40 %     4.17 %     7.67 %
Book value per share
   $ 3.22     $ 4.66     $ 3.89     $ 8.34     $ 8.33     $ 8.18     $ 7.81  
Tangible book value
     per common share(2)
   $ 3.22     $ 4.66     $ 3.89     $ 7.85     $ 8.33     $ 8.18     $ 7.81  
Common shares
     outstanding
     20,381,922       4,519,251       5,522,706       2,021,078       2,021,078       1,984,370       1,984,370  
                                                         
Net interest margin
     2.72 %     2.56 %     2.62 %     2.82 %     2.83 %     2.85 %     3.42 %
Equity to assets
     10.36 %     7.90 %     6.14 %     6.15 %     6.19 %     6.93 %     8.49 %
Non-performing loans
   $ 21,813     $ 9,943     $ 19,150     $ 7,175     $ 2,069     $ 742     $ 1,158  
Non-performing loans
     to total loans
     4.66 %     4.15 %     8.32 %     3.21 %     1.63 %     0.42 %     0.83 %
Non-performing assets
   $ 25,654     $ 13,231     $ 20,305     $ 8,694     $ 2,069     $ 742     $ 1,694  
Non-performing assets to
     total assets
     3.44 %     3.73 %     5.81 %     3.17 %     1.28 %     0.32 %     0.46 %
Allowance for loan losses
     to total loans
     2.61 %     4.14 %     4.36 %     1.29