On March 1, 2005, Roy Williams went to Carolina Bank and obtained a loan for $2,000, which he planned to use to purchase a one-of-a-kind basketball at Self’s Sporting Goods Store. Although $2,000 might seem like a lofty price for a basketball, this ball had a special rim-seeking device that ensured that it would always go through the hoop. Roy was very excited about obtaining this new ball and enthusiastically told everyone, including the bank employees, that he could not wait to get the ball home and try it out on the hoop in his driveway. As a part of the loan agreement with Carolina Bank, Roy signed a security agreement granting the bank a security interest in the basketball. Carolina Bank did not file a financing statement covering the ball.

After obtaining the loan, while Roy traveled to Self’s Sporting Goods Store to purchase the ball, Roy remembered that he had not yet purchased the new jerseys that he promised his basketball team. Because his players deserve the best, Roy spent the entire loan amount on basketball gear for the team. After Roy purchased the jerseys, Roy decided that although he had spent the money that he obtained from Carolina Bank on jerseys, he still wanted the new basketball, so he went to Self’s Sporting Goods Store and purchased the ball with his own money.

Later that evening, Roy arrived at basketball practice to dole out the jerseys and try out the new basketball. The basketball proved to be a huge success with the basketball team, so the team used it for the rest of the season, which helped Roy and the team achieve the NCAA National Championship that year. Sadly, after NCAA officials learned of Roy’s use of the prohibited ball, Roy was never allowed to coach basketball again. Due to his unemployment, Roy filed a Chapter 7 bankruptcy petition on June 1, 2005.

Which statement is correct?

(1) Carolina Bank’s security interest was perfected because the basketball was purchase-money collateral.

(2) Carolina Bank’s security interest was not perfected because the basketball was not purchase-money collateral.

(3) Carolina Bank’s security interest was not perfected because Roy did not use the loan proceeds to purchase the basketball.

(4) Both answers (2) and (3) are correct.