10KSB 1 0001.txt FORM 10-KSB -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission File No. 0-24753 ---------------- ECB BANCORP, INC. (Name of small business issuer in its charter) 56-2090738 North Carolina (I.R.S. Employer (State or other jurisdiction Identification No.) of incorporation or organization) Post Office Box 337 Engelhard, North Carolina 27824 (Address of principal executive offices, including Zip Code) (252) 925-9411 (Registrant's telephone number, including area code) ---------------- Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common stock, $3.50 par value per share --------------------------------------- (Title of class) ---------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB. [_] Registrant's revenues for its most recent fiscal year were: $21,265,726 On March 5, 2001, the aggregate market value of the voting and non-voting common equity held by nonaffiliates (computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity) was $17,983,260. On March 5, 2001, the number of outstanding shares of Registrant's common stock was 2,067,623. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement dated March 20, 2001, are incorporated herein in Part III. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I Item 1. Description of Business General. Registrant is a bank holding company headquartered in Engelhard, North Carolina. Registrant operates through, and its principal asset is its investment in, The East Carolina Bank (the "Bank") which operates as Registrant's wholly-owned subsidiary. Registrant was organized on March 4, 1998, by the Bank and at the direction of the Bank's Board of Directors, to serve as the Bank's parent holding company. Effective July 22, 1998, and to effect the reorganization, (i) an "interim bank" subsidiary of Registrant (newly formed for the purpose of such transaction) was merged into the Bank (with the Bank as the surviving corporation), (ii) the outstanding shares of the Bank's common stock were converted into an identical number of shares of Registrant's Common Stock with the result that the then current shareholders of the Bank became shareholders of Registrant (with the same relative ownership interests that they had in the Bank) and (iii) Registrant became the Bank's sole shareholder. The Bank continues to exist under its separate charter and bylaws but as the wholly- owned subsidiary of Registrant, and continues to conduct its banking business at all its previous banking offices. The Bank. The Bank is an FDIC-insured, North Carolina-chartered bank which was organized in 1919 and is engaged in a general, community-oriented commercial and consumer banking business. The Bank currently maintains 17 full- service banking offices in six counties in North Carolina, together with one mortgage loan production office, and its deposits are insured under the FDIC's Bank Insurance Fund ("BIF") to the maximum amount permitted by law. The Bank has two wholly-owned subsidiaries. Carolina Financial Realty, Inc. ("CFR") holds title to five of the Bank's branch offices which it leases to the Bank. The second subsidiary, Carolina Financial Courier, Inc., formerly provided courier services to the Bank but currently contracts with a third-party for such services. The Bank's operations are primarily retail oriented and directed toward individuals, small- and medium-sized businesses and local governmental units located in its banking markets, and its deposits and loans are derived primarily from customers in its banking markets. While the Bank provides most traditional commercial and consumer banking services, its principal activities are the taking of demand and time deposits and the making of secured and unsecured loans. The Bank's primary source of revenue is interest income from its lending activities, and it has pursued a strategy of growth through internal expansion by establishing branch offices in communities within its banking markets. The Bank's banking markets are located in the east central and northeastern portions of North Carolina and along North Carolina's Outer Banks. The Bank makes a variety of types of consumer and commercial loans to individuals and small- and medium-sized businesses located primarily in its banking markets for various personal, business and agricultural purposes, including term and installment loans, equity lines of credit and overdraft checking credit. The Bank's deposit services include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. It is the Bank's policy to monitor its competition in order to keep the rates paid on its deposits at a competitive level. The Bank's banking markets include primarily smaller communities where its emphasis on customer service provides it with a stable source of core funding. The vast majority of the Bank's deposits are generated from within its banking markets, and the Bank does not accept brokered deposits but does actively solicit public funds deposits in its markets. Competition. The Bank competes for deposits in its banking markets with other commercial banks, savings banks and other thrift institutions, credit unions, agencies issuing United States government securities and all other organizations and institutions engaged in money market transactions. In its lending activities, the Bank competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders. Commercial banking in the Bank's banking markets and in North Carolina as a whole is 2 extremely competitive. North Carolina is the home of three of the largest commercial banks in the Southeast, each of which has branches located in certain of the Bank's markets, and 15 other commercial banks, thrift institutions and credit unions also are represented in its banking markets. Interest rates, both on loans and deposits, and prices of fee-based services, are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer more sophisticated cash management and other commercial banking services. Many of the Bank's competitors have greater resources, broader geographic markets and higher lending limits than the Bank, and they can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than can the Bank. The Bank depends on its reputation as a community bank in its local markets, its direct customer contact, its ability to make credit and other business decisions locally, and its personalized service, to counter these competitive disadvantages. In recent years, federal and state legislation has heightened the competitive environment in which all financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly. Additionally, with the elimination of restrictions on interstate banking, a North Carolina commercial bank may be required to compete not only with other North Carolina-based financial institutions, but also with out-of-state financial institutions which may acquire North Carolina institutions, establish or acquire branch offices in North Carolina, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, the Bank is one of the smaller commercial banks in North Carolina, and there is no assurance that the Bank will be or continue to be an effective competitor in the current financial services environment. Supervision and Regulation. Registrant is a bank holding company registered with the Federal Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA") and, as such, is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB under the BHCA. Registrant's activities are limited to those permitted for bank holding companies under the BHCA, and it is required to obtain the prior approval of the FRB before it may acquire direct or indirect control of more than 5% of the outstanding voting stock, or substantially all of the assets of, any other financial institution or bank holding company. Additionally, the BHCA prohibits Registrant from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in an activity that is not permitted for bank holding companies. 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 regulators, subject to certain limits. The federal Gramm-Leach-Bliley Act enacted in 1999 (the "GLB Act") dramatically changed various federal laws governing the banking, securities, and insurance industries. The economic effects of the GLB Act on the banking industry, and competitive conditions in the financial services industry generally, may be profound. The GLB Act may expand opportunities for Registrant and the Bank to provide other services and obtain other revenues in the future, and also may present new competitive challenges As an insured, state-chartered bank that is not a member of the Federal Reserve System, the Bank is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Commissioner of Banks (the "Commissioner"). Absent approval of the FDIC, the Bank is prohibited from engaging as principal in activities that are not permitted for national banks, and it is prohibited from acquiring or retaining any equity investment of a type not permitted for national banks. 3 As a subsidiary of Registrant, the Bank is subject to restrictions under Federal law on the amount of, and its ability to enter into, transactions with, or investments in the securities of, Registrant and other entities considered to be "affiliates" of the Bank. Though it is not a member of the Federal Reserve System, the Bank is subject to the FRB's reserve requirements applicable to all banks, and its business is significantly influenced by the fiscal policies of the FRB. The actions and policy directives of the FRB determine to a significant degree the Bank's cost and the availability of funds and the rates of interest charged on its loans and paid on its deposits. The FRB, the FDIC and the Commissioner have broad powers to enforce laws and regulations applicable to Registrant and the Bank and to require corrective action of conditions affecting the Bank's safety and soundness. Among others, these powers include cease and desist orders, the imposition of civil penalties and the removal of officers and directors. Employees. Registrant does not have any separate employees. As of December 31, 2000, the Bank employed 156 full-time employees (including its and Registrant's executive officers) and 9 part-time employees. The Bank and its employees are not parties to any collective bargaining agreement, and the Bank considers its relations with its employees to be good. Item 2. Description of Property. Registrant's offices are located in the Bank's corporate offices in Engelhard, North Carolina, and Registrant does not own or lease any separate properties. The Bank maintains the following 17 offices, eight of which it owns, five of which are owned by CFR and leased to the Bank, three of which are held under leases with unaffiliated third parties, and one of which was constructed by the Bank on property held under a ground lease with an unaffiliated third party. All of the Bank's existing banking offices are in good condition and fully equipped for the Bank's purposes. Central Region: Engelhard main banking and corporate office (owned) Swan Quarter branch office (owned) Fairfield branch office (leased from CFR) Columbia branch office (leased from CFR) Creswell branch office (owned) Washington branch office (leased) Hertford branch office (leased) Western Region: Greenville Arlington branch office (owned) Greenville University Medical Center branch office (owned) New Bern office (owned) Outer Banks Region: Barco branch office (ground lease) Southern Shores/Kitty Hawk branch office (leased from CFR) Nags Head branch office (leased from CFR) Manteo branch office (owned) Avon branch office (leased) Hatteras branch office (leased from CFR) Ocracoke branch office (owned) Item 3. Legal Proceedings. At December 31, 2000, Registrant was not a party to any legal proceeding that is expected to have a material effect on its financial condition or results of operations. 4 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters Bancorp's Common Stock was first issued on July 22, 1998, when it became the Bank's parent holding company. The Common Stock was listed on the Nasdaq Small Cap Market on November 23, 1998, under the trading symbol "ECBE." Previously, it had been traded on the OTC Bulletin Board. On March 5, 2001, there were 695 holders of record of Registrant's Common Stock. The per share cash dividends declared by Bancorp during each quarterly period during 2000 and 1999 and the quarterly high and low prices of Common Stock during those two years are set forth in Table 18 of Item 6 to this report. Bancorp's sole source of funds for the payment of dividends on its Common Stock is dividends paid to it by the Bank on the shares of the Bank's Common Stock held by Bancorp, and the declaration and payment of future dividends by the Bank will continue to depend on its earnings and financial condition, capital requirements, general economic conditions, compliance with regulatory requirements generally applicable to North Carolina banks, and other factors. Bancorp's ability to pay dividends also is subject to its own separate factors, including its earnings and financial condition, capital requirements and regulatory restrictions applicable to bank holding companies. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. ECB Bancorp, Inc. ("Bancorp") is a bank holding company headquartered in Engelhard, North Carolina. Bancorp's wholly-owned subsidiary, The East Carolina Bank (the "Bank") (Bancorp and the Bank collectively referred to hereafter as the "Company"), is a state-chartered community bank which was founded in 1919. As part of the Bank's growth strategy, management of the Bank perceived that the formation of a holding company likely would result in certain advantages, including additional flexibility in expansion of the Bank's business through the acquisition of other financial institutions or of branch offices of other institutions, in the raising of additional capital through borrowing (if needed) and provide the flexibility to engage in other financial services activities through newly formed subsidiaries or through the acquisition of existing companies. The Bank offers a full range of banking services through 17 branches serving eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Barco, Avon, Hatteras, Ocracoke, Washington, Greenville (two branches), New Bern and Hertford. Management's discussion and analysis of financial condition and results of operations are presented to assist in understanding the financial condition and results of operations of ECB Bancorp, Inc. and its wholly-owned subsidiary, The East Carolina Bank, for the years 2000, 1999, and 1998. This discussion and the related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes. The operations of the Company and depository institutions in general are significantly influenced by general economic conditions and by related monetary, fiscal and other policies of depository institution regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina State Banking Commission. The net income of the Company is dependent, to a large extent, on the differences between interest earned on loans and investments and interest paid on deposits. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. 5 Liquidity is the Bank's ability to generate cash to fund asset growth, to meet deposit withdrawals, to maintain regulatory reserve requirement and to pay operating expenses. The principal sources of liquidity are the Bank's investment portfolio, interest from loans and investments, loan principal repayments, and increases in deposits. Sufficient levels of capital are necessary to sustain growth and absorb losses. To this end, the FDIC has established capital adequacy guidelines. These guidelines relate to the Bank's Leverage Capital, Tier 1 and Total Risk Based Capital ("RBC"). For The East Carolina Bank, Leverage Capital consists of total shareholders' equity less unrealized gains or losses, net of income taxes, on securities available-for-sale. As of December 31, 2000, the Bank's Leverage Ratio was 9.24% compared to 9.75% and 10.45%, respectively, at year-end 1999 and 1998. For regulatory purposes, a well-capitalized financial institution must have a Tier 1 Leverage Ratio of at least 5.00%. Within the RBC calculations, The East Carolina Bank's assets, including loan commitments and other off-balance sheet items, are weighted according to Federal regulatory guidelines for risk considered inherent in the assets. The East Carolina Bank's Tier 1 RBC ratio as of December 31, 2000 was 12.49%, which is, along with ratios of 14.22% and 15.00% for 1999 and 1998, respectively, representative of a well-capitalized institution. The calculation of the Total RBC ratio allows, in The East Carolina Bank's circumstances, the inclusion of the allowance for probable loan losses in capital, but only to the maximum of 1.25% of risk-weighted assets. As of December 31, 2000, The Bank's Total RBC was 13.75%, which is representative of a well-capitalized institution. The Total RBC ratios for 1999 and 1998 were 15.48% and 16.25%, respectively, both of which were representative of a well- capitalized financial institution. As of December 31, 2000, shareholders' equity totaled $23.9 million compared to $22.1 million at December 31, 1999. Shareholders' equity for 2000 included net unrealized securities gains of $207,000 and net unrealized securities losses of $566,000 in 1999. An adequate capital position provides the Company with expansion capabilities. Retention of sufficient earnings to maintain that adequate capital position is an important factor in determining dividends. During 2000, the Company declared $693,424 in dividends, versus $615,243 in 1999 and $453,965 in 1998. As a percentage of net income in 2000, dividends were 29.3%. On a per share basis, dividends declared in 2000 represented an increase of 13.8% over dividends per share declared in 1999. In 2000, the Company had net income of $2,366,878, or $1.13 basic and diluted earnings per share, compared to $2,143,390 or $1.01 basic and diluted earnings per share for the year ended December 31, 1999. Net interest income before the provision for probable loan losses increased $1,483,259 as a result of an increase in interest income of $3,107,706 partially offset by an increase in interest expense of $1,624,447. This increase in the Company's net interest margin is attributable to loans representing a larger portion of the Company's total earning assets. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the allowance for probable loan losses. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of probable losses inherent in the portfolio and current economic conditions. The Company's watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all loans classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgments about information available to them at the time of their examination. 6 Nonperforming assets, which consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans, were $252,000 and $706,000 at December 31, 2000 and 1999, respectively. The decrease in nonperforming assets is primarily due to a pay-off of a large non-accrual status farm credit of approximately $365,000 during the fourth quarter of 2000. At December 31, 2000, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $121,000 compared to $367,000 at December 31, 1999. Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Total noninterest income was $2,264,000 during 2000, an increase of $200,000 or 9.7% when compared to 1999. Service charges on deposit accounts increased $102,000, 7.8%, as the result of increases in personal checking fees of $60,000 and non- sufficient-funds (NSF) service charges of $52,000 when compared to 1999. Other service charges and fees increased $152,000 due primarily to net fees of $74,000 derived from a new accounts receivable purchase product introduced in the second quarter of 2000. The product, known as Business Manager, is an accounts receivable purchasing program that is geared toward small businesses. Through this program, ECB purchases accounts receivable from its business customers at a discount and receives payments directly from the accounts debtors. Income from merchant services increased $49,000, or 22.0%, the result of an increase in the number of merchant accounts. Other noninterest operating income decreased $96,000 from $174,000 in 1999 to $87,000 in 2000. During 1999, the Company recorded a net gain on the sale of fixed assets of $42,000 and generated $57,000 of miscellaneous income compared to $4,000 in year 2000. Noninterest expenses increased by $1,225,000 or 13.36% to $10,394,000 in 2000 compared to $9,169,000 in 1999. This increase is principally due to increases in salary and employee benefits expense of $611,000. Salary expense was $3,977,000 during 2000 compared to $3,542,000 during 1999, an increase of $435,000, or 12.28%, following a $344,000 or 8.05% increase in 1999 over 1998. Increases in each period resulted from growth in the employee base needed to support franchise expansion, merit increases and growth in incentive-based compensation. The Company had 156 full-time employees at December 31, 2000, compared to 143 at December 31, 1999 and 131 at December 31, 1998. The growth in 2000 was primarily due to opening of new offices in New Bern and Hertford and additional staffing within the Company's home office departments. The growth in headcount during 1999 resulted primarily from the opening of new offices in Washington and Barco. Employee benefits expense was $1,249,000 during 2000, an increase of $176,000 or 16.40% from 1999 as a result of an increase in the Company's employee incentive program of $99,000 and employee health insurance of $77,000. Occupancy expense increased $126,000 or 17.55% to $844,000 compared to $718,000 in 1999 as the Company's building rental expense increased $81,000 as a result of expanding the Avon office during the first quarter of 2000, opening the Hertford office during the third quarter of 2000 and the opening of the Washington office in mid-year 1999. Equipment expense increased $274,000 as the Company began paying for its new image check processing system implemented in the first quarter of 2000. Professional fees decreased $143,000 during 2000, a reduction of 42.94% from the $333,000 recorded in 1999 primarily due to a decrease of $80,000 in legal fees and a decrease of $32,000 in consulting fees paid in 1999, which consisted largely of Year 2000 related expense. Bank supply expense increase increased $87,000 over 1999 primarily due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's image statement. Telephone expense increased $53,000 over 1999 due to continuing voice and data equipment upgrades preparing the Bank for implementation of its wide area network in 2001. Other operating expense increased $217,000, or 13.36%, to $2,029,000 compared to $1,812,000 recorded in 1999. This increase is largely due to an increase in advertising and public relations of $90,000 and increased expense related to the Bank's Best Checking Account products of $85,000. In 1999, the Company had net income of $2,143,391, or $1.01 basic and diluted earnings per share, compared to $1,959,040 or $1.08 basic and diluted earnings per share (as restated for three-for-one stock split effected July 22, 1998), for the year ended December 31, 1998. Net interest income before the provision for probable loan losses increased $669,221 as a result of an increase in interest income of $1,012,122 and an increase in interest expense of $342,978. This increase in the Company's net interest margin is attributable to 7 loans representing a larger portion of the Company's total earning assets and a lower cost of funds. During 1998, the Bank collected interest on non-accrual loans in the amount of $245,700. Nonperforming assets were $706,000 and $230,000 at December 31, 1999 and 1998, respectively. The increase in nonperforming assets is primarily due to a large farm credit of approximately $365,000 placed on non-accrual status and foreclosure on two properties that totaled $129,000 during the fourth quarter of 1999. At December 31, 1999, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $367,000 compared to $46,000 at December 31, 1998. Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Noninterest income for 1999 increased $37,000 or 1.8% when compared to 1998. Service charges on deposit accounts increased $23,000 or 4.6%, but were offset by a decrease in NSF service charges of $46,000, resulting in a $19,000 or 1.4% net decrease when compared to 1998. Other service charges and fees increased $10,000 as a result of increased mortgage loan origination fees of $52,000 generated by the Company's new mortgage loan product and payment processing fee income of $38,000. These increases were offset by decreases in net merchant discount fees of $47,000, decreased credit-life loan insurance fees of $19,000 and decreased ATM transaction fees of $15,000. Other noninterest operating income increased $72,000 over the prior period. This increase is principally the result of a net gain on the sale of fixed assets of approximately $42,000. Generally, the Company has been able to increase other income by increasing the prices of its services to partially offset increases in other operating expenses. During 1999, the Company had a net loss on the sale of securities of $27,000 and had no such losses in 1998. Noninterest expenses increased by $466,000 or 5.4% to $9,169,000 in 1999 from $8,703,000 recorded in 1998. This increase is principally due to general increases in salary and employee benefits expense of $344,000. The opening of the Washington office in mid-year 1999 accounted for approximately $112,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $145,000 of personnel expense. Occupancy expense decreased slightly during 1999 as the result of the Company closing the Greenville Wal-Mart office at the end of the first quarter of 1999. The opening of the new Washington office offset this reduction in occupancy expense. Equipment expense increased $117,000 as the Company continued to upgrade its branch platform automation. Professional fees increased $15,000 to $333,000 for 1999. This increase in professional fees is a combination of increased loan-related fees of approximately $65,000 resulting from a home equity loan campaign during the first half of 1999 partially offset by decreases in consultant fees of $30,000 and other non-loan-related fees of approximately $29,000. Telephone expense increased approximately $21,000 during 1999 as the Company continued to implement its technology plan to provide the Company a wide area communications network. 8 Table 1. Average Balances and Net Interest Income Analysis
Year Ended December 31, ----------------------------------------------------------------------- 2000 1999 1998 ----------------------- ----------------------- ----------------------- Average Yield/ Income/ Average Yield/ Income/ Average Yield/ Income/ Balance Rate Expense Balance Rate Expense Balance Rate Expense -------- ------ ------- -------- ------ ------- -------- ------ ------- (dollars in thousands) ASSETS Loans--net (1).......... $158,622 9.39% $14,900 $138,837 9.01% $12,512 $124,794 9.63% $12,015 Taxable securities...... 49,525 6.43 3,183 39,712 5.84 2,320 31,721 5.91 1,874 Non-taxable securities (2).................... 13,608 7.11 968 15,940 7.22 1,152 15,318 7.44 1,139 Overnight investments... 4,502 6.22 280 6,084 4.96 302 4,601 5.26 242 -------- ---- ------- -------- ---- ------- -------- ---- ------- Total interest-earning assets................. 226,257 8.54 $19,331 200,573 8.12 $16,286 176,434 8.66 $15,270 Cash and due from banks.................. 10,542 10,918 9,122 Bank premises and equipment, net......... 7,274 7,282 6,542 Other assets............ 3,974 2,825 2,520 -------- -------- -------- Total assets........... $248,047 $221,598 $194,618 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits............... $170,424 4.11 $ 7,004 $154,668 3.58 $ 5,542 $140,585 3.81 $ 5,351 Short-term borrowings... 3,377 5.30 179 711 4.22 30 152 5.92 9 Long-term obligations... 3,000 4.80 144 2,827 4.63 131 -- -- -- -------- ---- ------- -------- ---- ------- -------- ---- ------- Total interest-bearing liabilities............ 176,801 4.14 7,327 158,206 3.60 5,703 140,737 3.81 5,360 Non-interest-bearing deposits............... 47,287 39,941 35,272 Other liabilities....... 1,231 1,385 1,314 Shareholders' equity.... 22,728 22,066 17,295 -------- -------- -------- Total liabilities and shareholders' equity.. $248,047 $221,598 $194,618 ======== ======== ======== Net interest income and net yield on interest- earning assets (FTE) (3).................... 5.31% $12,004 5.28% $10,583 5.62% $ 9,910 ==== ======= ==== ======= ==== ======= Interest rate spread (FTE) (4).............. 4.40% 4.52% 4.85% ==== ==== ====
-------- (1) Average loans, net of the allowance for probable loan losses and unearned income. These figures include non-accruing loans, the effect of which is to lower the average rates. Loan fees of $203,000, $142,000, and $156,000 for 2000, 1999, and 1998, respectfully, are included in interest income. (2) Yields on tax-exempt investments have been adjusted to a fully taxable- equivalent basis (FTE) using the federal income tax rate of 34% and applicable state tax rates in 2000, 1999 and 1998. The taxable equivalent adjustment was $329,000, $392,000, and $387,000 for the years 2000, 1999, and 1998, respectively. (3) Net interest margin is computed by dividing net interest income by total earning assets. (4) Interest rate spread equals the earning asset yield minus the interest- bearing liability rate. 9 Changes in interest income and interest expense can result from variances in both volume and rates. Table 2 below analyzes the effect of variances in volume and rate on taxable-equivalent interest income, interest expenses and net interest income. Table 2. Volume and Rate Variance Analysis
2000 compared to 1999 1999 compared to 1998 ------------------------ ------------------------ Volume(1) Rate(1) Net Volume(1) Rate(1) Net --------- ------- ------ --------- ------- ------ (dollars in thousands) Loans...................... $1,821 $567 $2,388 $1,309 $(812) $ 497 Taxable securities......... 602 261 863 469 (23) 446 Non-taxable securities (2)....................... (168) (16) (184) 46 (32) 13 Overnight investments...... (88) 66 (22) 76 (16) 60 ------ ---- ------ ------ ----- ------ Interest income.......... 2,167 878 3,045 1,900 (884) 1,016 Interest-bearing deposits.. 606 856 1,462 520 (329) 191 Short-term borrowings...... 127 22 149 28 (7) 21 Long-term obligations...... 8 5 13 66 65 131 ------ ---- ------ ------ ----- ------ Interest expense......... 741 883 1,624 614 (271) 343 ------ ---- ------ ------ ----- ------ Net interest income...... $1,426 $ (5) $1,421 $1,286 $(613) $ 673 ====== ==== ====== ====== ===== ======
-------- (1) The combined rate/volume variance for each category has been allocated equally between rate and volume variances. (2) Yields on tax-exempt investments have been adjusted to a taxable- equivalent basis using the federal income tax rate of 34% and applicable state rates in 2000, 1999 and 1998. 10 Rate sensitivity analysis, an important aspect of achieving satisfactory levels of net interest income, is the management of the composition and maturities of rate-sensitive assets and liabilities. The following table sets forth the Company's interest sensitivity analysis at December 31, and describes, at various cumulative maturity intervals, the gap ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that management considers rate sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Table 3. Rate Sensitivity Analysis as of December 31, 2000
3 Months 4 to 12 Total within Over 12 Or less Months 12 Months Months Total -------- -------- ------------ -------- -------- (dollars in thousands) Earning assets Loans--gross............ $ 68,378 $ 8,410 $ 76,788 $ 96,178 $172,966 Investment securities... 3,341 8,982 12,323 52,454 64,777 FHLB stock.............. 633 -- 633 -- 633 Federal funds sold...... 1,975 -- 1,975 -- 1,975 -------- -------- -------- -------- -------- Total earning assets.. $ 74,327 $ 17,392 $ 91,719 $148,632 $240,351 ======== ======== ======== ======== ======== Percent of total earning assets................. 30.9 % 7.2 % 38.2 % 61.8% 100.0% Cumulative % of total earning assets......... 30.9 % 38.2 % 38.2 % 100.0% Interest-bearing liabilities Time deposits of $100,000 or more....... $ 26,083 $ 22,726 $ 48,809 $ 3,406 $ 52,215 Savings, NOW and Money Market deposits........ 75,216 -- 75,216 -- 75,216 Other time deposits..... 20,511 33,482 53,993 8,253 62,246 Short-term borrowings... 2,678 -- 2,678 -- 2,678 Long-term obligations... -- -- -- 3,000 3,000 -------- -------- -------- -------- -------- Total interest-bearing liabilities.......... $124,488 $ 56,208 $180,696 $ 14,659 $195,355 ======== ======== ======== ======== ======== Percent of total interest-bearing liabilities............ 63.7 % 28.8 % 92.5 % 7.5% 100.0% Cumulative percent of total interest-bearing liabilities............ 63.7 % 92.5 % 92.5 % 100.0% Ratios Ratio of earning assets to interest-bearing liabilities (gap ratio)................. 59.7 % 30.9 % 50.8 % 1013.9% Cumulative ratio of earning assets to interest-bearing liabilities (cumulative gap ratio)............. 59.7 % 50.8 % 50.8 % 123.0% Interest sensitivity gap.................... $(50,161) $(38,816) $(88,977) $133,973 $ 44,996 Cumulative interest sensitivity gap........ $(50,161) $(88,977) $(88,977) $ 44,996 $ 44,996 As a percent of total earning assets......... (20.9)% (37.0)% (37.0)% 18.7% 18.7%
In periods of rising interest rates, the Company's rate-sensitive assets cannot be repriced as quickly as its rate-sensitive liabilities. Thus, the Company's net interest income generally will decrease during a period of rising interest rates. In periods of declining interest rates the opposite effect occurs. As of December 31, 2000, approximately 38.2% of the Company's interest- earning assets could be repriced within one year and approximately 81.5% of interest-earning assets could be repriced within five years. Approximately 92.5% of interest-bearing liabilities could be repriced within one year and substantially all interest-bearing liabilities could be repriced within five years. 11 Interest Sensitivity A principal objective of Bancorps' asset/liability function is to manage interest rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. The difference between interest-sensitive asset and interest-sensitive liability repricing within time periods is referred to as the interest-rate- sensitivity gap. Gaps are identified as either positive (interest-sensitive assets in excess of interest-sensitive liabilities) or negative (interest- sensitive liabilities in excess of interest-sensitive assets). As of December 31, 2000, the Company had a negative one year cumulative gap of 37.0% of interest-earning assets. The Company has interest-earning assets of $92 million maturing or repricing within one year and interest-bearing liabilities of $181 million repricing or maturing within one year. This is primarily the result of stable core deposits being used to fund longer term interest-earning assets, such as loans and investment securities. A negative gap position implies that interest-bearing liabilities (deposits) will reprice at a faster rate than interest-earning assets (loans and investments). In a falling rate environment, this position will generally have a positive effect on earnings, while in a rising rate environment this will generally have a negative effect on earnings. The Company's savings and core time deposits of $137 million include interest-bearing checking and savings accounts of $75 million. These deposits are considered as repricing in the earliest period because the rate can be changed weekly. However, history has shown that the decreases in the rates paid on these deposits have little, if any, effect on their movement out of the Company. Therefore, in reality, they are not sensitive to changes in market rates and could be considered in the Non-Rate Sensitive column. If this change were made, the Company's rate sensitive liabilities would be more closely matched at the end of the one year period. Table 4. Market Risk Analysis
Principal Maturing in Years ended December 31, --------------------------------------------------------------------------- Fair 2001 2002 2003 2004 2005 Thereafter Total Value -------- ------- ------- ------- ------- ---------- -------- -------- (dollars in thousands) ASSETS Loans Fixed rate............. $ 13,584 $11,551 $20,899 $27,512 $18,571 $17,646 $109,763 $109,099 Average rate (%)....... 9.07% 9.18% 8.82% 8.58% 9.06% 7.97% 8.74% Variable rate.......... $ 28,775 $ 4,061 $ 4,456 $ 8,650 $ 5,397 $11,864 $ 63,203 $ 63,203 Average rate (%)....... 10.23% 9.97% 10.01% 9.74% 9.72% 9.42% 9.93% Investment securities Fixed rate............. $ 12,323 $13,510 $ 6,391 $ 1,979 $ 3,389 $26,871 $ 64,463 $ 64,777 Average rate (%)....... 6.27% 6.09% 6.02% 7.13% 6.88% 7.04% 6.59% LIABILITIES Savings and interest- bearing checking Variable rate.......... $ 75,216 -- -- -- -- -- $ 75,216 $ 70,618 Average rate (%)....... 2.07% -- -- -- -- -- 2.07% Certificates of deposits Fixed rate............. $102,408 $ 9,992 $ 1,669 -- -- -- $114,069 $114,601 Average rate (%)....... 6.19% 6.32% 6.26% -- -- -- 6.20% Variable rate.......... $ 392 -- -- -- -- -- $ 392 $ 392 Average rate (%)....... 4.93% -- -- -- -- -- 4.93% Short-term borrowings Variable rate.......... $ 2,678 -- -- -- -- -- $ 2,678 $ 2,678 Average rate (%)....... 5.30% -- -- -- -- -- 5.30% Long-term obligations Fixed rate............. -- -- -- -- $ 3,000 -- $ 3,000 $ 4,211 Average rate (%)....... -- -- -- -- 4.80% -- 4.80%
12 Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Total noninterest income was $2,264,000 during 2000, an increase of $200,000 or 9.7% when compared to 1999. Service charges on deposit accounts increased $102,000 or 7.8% as the result of increases in personal checking fees of $60,000 and NSF service charges of $52,000 compared to the same period in 1999. Other service charges and fees increased $152,000 due primarily to net fees of $74,000 derived from a new accounts receivable purchase product introduced in the second quarter of 2000. The product, known as Business Manager, is an accounts receivable purchasing program that is geared toward small businesses. Through this program, ECB purchases accounts receivable from its business customers at a discount and receives payments directly from the accounts debtors. Income from merchant services increased $49,000 or 22.0%, the result of an increase in the number of merchant accounts. Other noninterest income decreased $96,000 from $174,000 in 1999 to $87,000 in 2000. During 1999, the Company recorded a net gain on the sale of fixed assets of approximately $42,000 and generated $57,000 of miscellaneous income compared to $4,000 in 2000. Table 5. Noninterest Income
Year Ended December 31, ------------------------ 2000 1999 1998 ------- ------- ------- (dollars in thousands) Service charges on deposit accounts.................. $ 1,418 $ 1,316 $ 1,335 Other service charges and fees....................... 753 601 591 Net gain (loss) on sale of securities................ 5 (27) -- Net gain on sale of real estate acquired in settlement of loans and real estate held for sale... 9 -- 6 Other................................................ 79 174 95 ------- ------- ------- Total.............................................. $ 2,264 $ 2,064 $ 2,027 ======= ======= =======
13 Noninterest expense increased $1,225,000 or 13.36% to $10,394,000 compared $9,169,000 in 1999. This increase is principally due to increases in salary and employee benefits expense of $611,000. Salary expense was $3,977,000 during 2000, compared to $3,542,000 during 1999, an increase of $435,000 or 12.28%, following a $344,000 or 8.05% increase in 1999 over 1998. Increases in each period resulted from growth in the employee base needed to support franchise expansion, merit increases and growth in incentive-based compensation. The Company had 156 full-time equivalent employees at December 31, 2000, compared to 143 at December 31, 1999 and 131 at Decemeber 31, 1998. The growth in 2000 was primarily due to the opening of new offices in New Bern and Hertford and additional staffing within the Company's home office departments. The growth in headcount during 1999 resulted primarily from the opening of new offices in Washington and Barco. Employee benefits expense was $1,249,000 during 2000, an increase of $176,000 or 16.40% from 1999 as a result of an increase in the Company's employee incentive program of $99,000 and employee health insurance of $77,000. Occupancy expense increased $126,000 or 17.55% to $844,000, compared to $718,000 in 1999 as the Company's building rental expense increased $81,000 as a result of expanding the Avon office during the first quarter of 2000, opening the Hertford office in the third quarter of 2000 and the opening of the Washingaton office in mid-year 1999. Equipment expense increased $274,000 as the Company began paying for its new image check processing system implemented in the first quarter of 2000. Professional fees decreased $143,000 during 2000, a reduction of 42.94% from the $333,000 recorded in 1999 primarily due to a decrease of $80,000 in legal fees. Bank supply expense increased $87,000 over 1999 primarily due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's image statement. Telephone expense increased $53,000 over 1999 due to voice and data equipment upgrades preparing the Bank for implementation of its wide area network in 2001. Other operating expense increased $217,000 or 13.36% to $2,029,000 compared to $1,812,000 recorded in 1999. This increase is primarily due to an increases in advertising and public relations of $90,000 and increased expense related to the Bank's Best Checking Account products of approximately $85,000. Table 6. Noninterest Expenses
Year Ended December 31, ------------------------ 2000 1999 1998 -------- ------- ------- (dollars in thousands) Salaries.............................................. $ 3,977 $ 3,542 $ 3,186 Retirement and other employee benefits................ 1,249 1,073 1,084 Occupancy............................................. 844 718 720 Equipment............................................. 1,266 992 875 Professional fees..................................... 190 333 318 Supplies.............................................. 327 240 251 Telephone............................................. 339 286 265 Postage............................................... 173 173 172 Other................................................. 2,029 1,812 1,832 -------- ------- ------- Total............................................... $ 10,394 $ 9,169 $ 8,703 ======== ======= =======
14 ANALYSIS OF FINANCIAL CONDITION Management believes the Company's financial condition is sound. The following discussion focuses on the factors considered by management to be important in assessing the Company's financial condition. The following table sets forth the percentage of significant components of the Company's balance sheets at December 31, 2000, 1999 and 1998. Table 7. Distribution of Assets and Liabilities
December 31, ---------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- (dollars in thousands) ASSETS Loans (net).................... $170,166 63.4% $144,976 68.7% $130,274 61.9% Investment securities.......... 64,777 24.1 58,939 27.9 58,394 27.7 FHLB stock..................... 633 0.3 633 0.3 565 0.3 Federal funds sold............. 1,975 0.7 6,650 3.1 -- -- -------- ----- -------- ----- -------- ----- Total earning assets......... 237,551 88.5 211,198 100.1 189,233 89.9 Cash and due from banks........ 18,342 6.9 11,139 5.2 11,965 5.6 Bank premises and equipment, net........................... 7,882 2.9 6,727 3.2 7,007 3.3 Other assets................... 4,613 1.7 4,049 2.0 2,697 1.2 -------- ----- -------- ----- -------- ----- Total assets................. $268,388 100.0% $233,113 110.5% $210,902 100.0% ======== ===== ======== ===== ======== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits................ $ 46,564 17.3% $ 43,637 20.7% $ 38,265 18.1% Savings, NOW and Money Market deposits...................... 75,216 28.0 75,447 35.8 62,672 29.7 Time deposits of $100,000 or more.......................... 52,215 19.5 32,588 15.5 26,855 12.7 Other time deposits............ 62,246 23.2 51,629 24.5 56,475 26.8 -------- ----- -------- ----- -------- ----- Total deposits............... 236,241 88.0 203,301 96.4 184,267 87.4 Short-term borrowings.......... 2,678 1.0 2,738 1.3 2,725 1.3 Long-term obligations.......... 3,000 1.1 3,000 1.4 2,058 1.0 Accrued expense and other liabilities................... 2,526 0.9 2,012 0.9 -- -- -------- ----- -------- ----- -------- ----- Total liabilities............ 244,445 91.1 211,051 100.1 189,050 89.6 Shareholders' equity........... 23,943 8.9 22,062 10.5 21,852 10.4 -------- ----- -------- ----- -------- ----- Total liabilities and shareholders' equity........ $268,388 100.0% $233,113 110.5% $210,902 100.0% ======== ===== ======== ===== ======== =====
15 INVESTMENT PORTFOLIO The carrying values of investment securities held by the Company at the dates indicated are summarized as follows: Table 8. Investment Portfolio Composition
December 31, ------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- (dollars in thousands) Securities available-for- sale U.S. Treasury............. $ 9,043 14.0% $15,958 27.1% $19,452 33.3% U.S. Government agencies.. 24,457 37.8 25,922 44.0 20,962 35.9 Mortgage-backed securities............... 16,731 25.8 2,559 4.3 555 1.0 State and political subdivisions............. 13,531 20.9 14,500 24.6 17,425 29.8 Preferred stock........... 1,015 1.5 -- -- -- -- ------- ----- ------- ----- ------- ----- Total investments....... $64,777 100.0% $58,939 100.0% $58,394 100.0% ======= ===== ======= ===== ======= =====
The following table shows maturities of the carrying values of investment securities held by the Company at December 31, 2000, and the weighted average yields. Table 9. Investment Portfolio Maturity Schedules
After One Year After Five Years Within But Within But Within After One Year Five Years Ten Years Ten Years ------------- ------------- ----------------- ------------- Amount Yield Amount Yield Amount Yield Amount Yield Total Yield ------- ----- ------- ----- --------- ------- ------- ----- ------- ----- (dollars in thousands) Available-for-sale U.S. Treasury........... $ 4,005 6.31% $ 5,038 5.79% -- -- -- -- $ 9,043 6.02% U.S. Government agencies............... 7,525 6.04 16,932 6.18 -- -- -- -- 24,457 6.14 Mortgage-backed securities............. -- -- -- -- $ 523 7.10% $16,208 7.44% 16,731 7.43 State and political subdivisions (1)....... 793 8.22 4,685 7.18 5,853 6.35 2,200 6.63 13,531 6.76 Preferred stock......... 1,015 6.34 1,015 6.34 ------- ---- ------- ---- --------- ------- ------- ---- ------- ---- Total investments....... $12,323 6.13% $26,655 6.23% $ 6,376 6.34% $19,423 6.89% $64,777 6.59% ======= ==== ======= ==== ========= ======= ======= ==== ======= ====
-------- (1) Yields on tax-exempt investments have been adjusted to a fully taxable- equivalent basis using the federal income tax rate of 34% and applicable state rates for 2000, 1999 and 1998. The weighted average yields shown are calculated on the basis of cost and effective yields for the scheduled maturity of each security. At December 31, 2000 the market value of the investment portfolio was approximately $314,000 above its book value, which is primarily the result of lower market interest rates compared to the interest rates on the investments in the portfolio. 16 LOAN PORTFOLIO The Company's management believes the loan portfolio is adequately diversified and contains no foreign loans. Real estate loans represent approximately 57.4% of the Company's loan portfolio. Real estate loans are primarily loans secured by real estate, mortgage, and construction loans. The Company does not have a large portfolio of home mortgage loans. See note (1) below. Commercial loans are spread throughout a variety of industries, with no particular industry or group of related industries accounting for a significant portion of the commerical loan portfolio. At December 31, 2000, the ten largest loans of the Company accounted for approximately 8.2% of the Company's outstanding loans. As of December 31, 2000, the Company had outstanding loan commitments of approximately $36,168,000. The amounts of loans outstanding and the percentage that such loans represented of total loans at the indicated dates are shown in the following table according to loan type. Table 10. Loan Portfolio Composition
December 31, -------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (dollars in thousands) Real estate (1)................... $ 99,625 $ 83,116 $ 64,538 $ 63,300 $ 65,253 Installment loans................. 12,449 11,622 11,339 25,424 18,472 Credit cards and related plans.... 3,960 3,817 3,694 3,415 3,183 Commercial and all other loans.... 56,932 49,121 53,453 29,070 25,748 -------- -------- -------- -------- -------- Total........................... $172,966 $147,676 $133,024 $121,209 $112,656 ======== ======== ======== ======== ========
-------- (1) The majority of these loans are various consumer and commercial loans with approval based on cash flow and not the real estate. The majority of the commercial real estate is owner-occupied and operated. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table sets forth the maturity distribution of the Company's loans as of December 31, 2000. A significant majority of loans maturing after one year are repriced at two and three year intervals. In addition, approximately 36.5% of the Company's loan portfolio is comprised of variable rate loans. Table 11. Loan Maturities
Credit cards Commercial Real and related and all estate Installment plans other loans Total ------- ----------- ------------ ----------- -------- (dollars in thousands) Due in 1 year or less... $ 9,046 $ 1,155 $3,771 $28,387 $ 42,359 Due after 1 year through 5 years: Floating interest rates................. 15,441 541 118 6,463 22,563 Fixed interest rates... 53,364 9,941 -- 15,772 79,077 Due after 5 years: Floating interest rates................. 8,571 155 71 3,069 11,866 Fixed interest rates... 13,203 657 -- 3,241 17,101 ------- ------- ------ ------- -------- Total................. $99,625 $12,449 $3,960 $56,932 $172,966 ======= ======= ====== ======= ========
NONPERFORMING ASSETS AND PAST DUE LOANS A loan is placed on non-accrual status when, in management's judgment, the collection of interest income appears doubtful or the loan is past due 90 days or more. Interest receivable that has been accrued and is subsequently determined to have doubtful collectibility is charged to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from 17 the original terms. Foreclosed properties are included in other assets and represent other real estate that has been acquired through loan foreclosures or deeds in lieu of foreclosure. Such properties are initially recorded at the lower of cost or fair value less estimated costs to sell. Thereafter the properties are maintained at the lower of cost or fair value. The following table summarizes the Company's nonperforming assets and past due loans at the dates indicated. Table 12. Nonperforming Assets and Past Due Loans
December 31, ---------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ------ ------ (dollars in thousands) Non-accrual loans................................. $121 $408 $ 88 $1,463 $1,017 Loans past due 90 or more days still accruing..... -- 34 -- -- 35 Restructured loans................................ 73 81 92 49 57 Foreclosed properties............................. 58 183 50 340 -- ---- ---- ---- ------ ------ Total........................................... $252 $706 $230 $1,852 $1,109 ==== ==== ==== ====== ======
At December 31, 2000 and 1999, nonperforming assets and past due loans were approximately 0.15% and .48%, respectively, of the loans outstanding at such dates. SUMMARY OF LOAN LOSS EXPERIENCE The allowance for probable loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of estimated probable loan losses and current economic conditions. The Company's loan watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all credits classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. The following table sets forth the allocation of allowance for probable loan losses and percent of total loans in each loan category for each of the years presented. Table 13. Allocation of Allowance for Probable Loan Losses
December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------- -------------- -------------- -------------- -------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (dollars in thousands) Real estate............. $1,660 57.6% $1,647 56.2% $1,619 48.5% $1,690 52.2% $1,388 57.9% Installment loans....... 154 7.2 237 7.9 166 8.5 389 21.0 337 16.4 Credit cards and related plans.................. 170 2.3 166 2.6 160 2.8 390 2.8 167 2.8 Commercial and all other loans.................. 686 32.9 646 33.3 624 40.2 149 24.0 445 22.9 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allocated......... 2,670 100.0% 2,696 100.0% 2,569 100.0% 2,618 100.0% 2,337 100.0% Unallocated............. 130 4 181 42 63 ------ ------ ------ ------ ------ Total................... $2,800 $2,700 $2,750 $2,660 $2,400 ====== ====== ====== ====== ======
Management considers the allowance for probable loan losses adequate to cover estimated probable loan losses relating to the loans outstanding as of each reporting period. It must be emphasized, however, that the 18 determination of the allowance using the Company's procedures and methods rest upon various judgements and assumptions about economic conditions and other factors affecting loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgments about the information available to them at the time of their examinations. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for probable loan losses or future charges to earnings. The following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category, and additions to the allowance that have been charged to expense. Table 14. Loan Loss and Recovery Experience
Year ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (dollars in thousands) Total loans outstanding at end of year................ $172,966 $147,676 $133,024 $121,209 $112,656 ======== ======== ======== ======== ======== Average loans outstanding... 161,356 141,564 127,650 118,185 104,297 ======== ======== ======== ======== ======== Allowance for probable loan losses at beginning of year....................... $ 2,700 $ 2,750 $ 2,660 $ 2,400 $ 1,950 Loans charged off: Real estate................. 6 69 21 6 12 Installment loans........... 45 80 89 62 62 Credit cards and related plans...................... 72 72 119 110 111 Commercial and all other loans...................... 114 145 2 17 81 -------- -------- -------- -------- -------- Total charge-offs......... 237 366 231 195 266 Recoveries of loans previously charged off: Real estate................. 2 6 -- -- 118 Installment loans........... 23 25 22 22 26 Credit cards and related plans...................... 31 27 23 36 34 Commercial and all other loans...................... 39 16 34 43 41 -------- -------- -------- -------- -------- Total recoveries.......... 95 74 79 101 219 Net charge offs............. 142 292 152 94 47 Additions to the allowance charged to expense......... 242 242 242 354 497 -------- -------- -------- -------- -------- Allowance for probable loan losses at end of year...... $ 2,800 $ 2,700 $ 2,750 $ 2,660 $ 2,400 ======== ======== ======== ======== ======== RATIOS Net charge offs during year to average loans outstanding................ 0.09% 0.21% 0.12% 0.08% 0.05% Net charge offs during year to loans at year-end....... 0.08% 0.20% 0.11% 0.08% 0.04% Allowance for probable loan losses to average loans.... 1.74% 1.91% 2.15% 2.25% 2.30% Allowance for probable loan losses to loans at year- end........................ 1.62% 1.83% 2.07% 2.19% 2.13% Net charge offs to allowance for probable loan losses... 5.07% 10.81% 5.53% 3.53% 1.96% Net charge offs to provision for probable loan losses... 58.68% 120.66% 62.81% 26.55% 9.46%
19 DEPOSITS The average amounts of deposits and interest rates thereon of the Company for the years ended December 31, 2000, 1999, and 1998 are summarized below. Table 15. Average Deposits
Year ended December 31, ------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Average Average Average Balance Rate Balance Rate Balance Rate -------- ---- -------- ---- -------- ---- (dollars in thousands) Interest-bearing demand deposits................. $ 62,904 2.18% $ 59,105 2.12% $ 42,807 1.60% Savings deposits.......... 13,930 1.58 14,115 1.58 14,648 1.94 Time deposits............. 93,590 5.79 81,448 4.99 83,130 5.27 -------- ---- -------- ---- -------- ---- Total interest-bearing deposits................. 170,424 4.11 154,668 3.58 140,585 3.81 ==== ==== ==== Noninterest-bearing deposits................. 47,287 39,941 35,272 -------- -------- -------- Total deposits.......... $217,711 3.22% $194,609 2.85% $175,857 3.04% ======== ==== ======== ==== ======== ====
The Company has a large, stable base of time deposits with little dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposits and individual retirement accounts obtained from individual customers. Deposits of certain local governments and municipal entities represented approximately 13.8% of the Company's total deposits at December 31, 2000. All such public funds are collateralized by investment securities. The Company does not purchase brokered deposits. As of December 31, 2000, the Company held approximately $52,215,000 in time deposits of $100,000 or more and time deposits less than $100,000 of $62,246,000. The following table is a maturity schedule of time deposits as of December 31, 2000. Table 16. Time Deposit Maturity Schedule
3 Months 4 to 6 7 to 12 Over 12 Or Less Months Months Months Total ------- ------- ------- ------- -------- (dollars in thousands) Time certificates of deposit of $100,000 or more.................... $26,083 $10,419 $12,307 $ 3,406 $ 52,215 Time certificates of deposit less than $100,000....................... 20,511 16,300 17,182 8,253 62,246 ------- ------- ------- ------- -------- Total time deposits................ $46,594 $26,719 $29,489 $11,659 $114,461 ======= ======= ======= ======= ========
20 RETURN ON ASSETS AND EQUITY The following table shows return on assets (net income divided by average assets), return on equity (net income divided by average shareholders' equity), dividend payout ratio (dividends declared per share divided by net income per share) and shareholders' equity to assets ratio (average shareholders' equity divided by average total assets) for each of the years presented. Table 17. Return on Assets and Equity
Year ended December 31, ------------------- 2000 1999 1998 ----- ----- ----- (Averages) Return on assets........................................... 0.95% 0.97% 1.01% Return on equity........................................... 10.41 9.71 11.33 Dividend payout............................................ 29.26 28.69 23.64 Shareholders' equity to assets............................. 9.16 9.96 8.89
Table 18. Market Price of Common Stock and Dividends The following table sets forth the high and low published prices of the Common Stock during each quarterly period during 2000 and 1999 and the quarterly per share cash dividend declared by Bancorp.
Dividends Quarter High Low Declared ------- ------ ------ --------- 1999 First................................................. $16.25 $11.00 $0.0725 Second................................................ 15.75 11.50 0.0725 Third................................................. 12.63 10.50 0.0725 Fourth................................................ 12.50 9.13 0.0725 2000 First................................................. 11.06 9.50 0.0825 Second................................................ 12.25 9.94 0.0825 Third................................................. 13.50 12.13 0.0825 Fourth................................................ 12.50 11.00 0.0825
21 Item 7. Financial Statements. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS ECB BANCORP, INC.: We have audited the accompanying consolidated balance sheets of ECB Bancorp, Inc. and subsidiary (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company'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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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 ECB Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. [Logo KPMG LLP] Raleigh, North Carolina February 2, 2001 22 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 2000 1999 ------------ ------------ ASSETS Non-interest bearing deposits and cash (note 12)... $ 18,342,044 $ 11,065,064 Federal funds sold................................. 1,975,000 6,650,000 ------------ ------------ Total cash and cash equivalents................ 20,317,044 17,715,064 ------------ ------------ Investment securities available-for-sale (cost: $64,462,906 and $59,797,382, respectively) (note 2)................................................ 64,776,683 58,939,340 Loans (note 3)..................................... 172,965,645 147,675,538 Allowance for probable loan losses (note 4)........ (2,800,000) (2,700,000) ------------ ------------ Loans, net..................................... 170,165,645 144,975,538 ------------ ------------ Real estate acquired in settlement of loans, net... 58,000 182,672 Federal Home Loan Bank stock, at cost.............. 632,800 632,800 Bank premises and equipment, net (note 5).......... 7,881,550 6,727,460 Accrued interest receivable........................ 2,636,698 2,259,371 Other assets (note 6).............................. 1,919,933 1,681,051 ------------ ------------ $268,388,353 $233,113,296 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (note 9): Demand, noninterest-bearing...................... $ 46,564,512 $ 43,638,449 Demand, interest-bearing......................... 61,758,754 60,623,522 Savings.......................................... 13,456,959 14,822,699 Time............................................. 114,461,272 84,216,723 ------------ ------------ Total deposits................................. 236,241,497 203,301,393 Short-term borrowings............................ 2,678,040 2,737,649 Accrued interest payable......................... 1,160,090 816,980 Long-term obligations............................ 3,000,000 3,000,000 Other liabilities (note 7)....................... 1,365,724 1,194,875 ------------ ------------ Total liabilities.............................. 244,445,351 211,050,897 ------------ ------------ Shareholders' equity (notes 10 and 15): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,073,081 and 2,121,529 shares at December 31, 2000 and 1999, respectively........ 7,255,784 7,425,352 Capital surplus.................................. 5,821,523 6,229,452 Retained earnings................................ 10,682,300 9,008,846 Deferred compensation--restricted stock.......... (23,698) (34,945) Accumulated other comprehensive income (loss).... 207,093 (566,306) ------------ ------------ Total shareholders' equity..................... 23,943,002 22,062,399 ------------ ------------ Commitments and contingencies (notes 11 and 13).... $268,388,353 $233,113,296 ============ ============
See accompanying notes to consolidated financial statements. 23 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ------------------------------------ 2000 1999 1998 ----------- ----------- ----------- Interest income: Interest and fees on loans.............. $14,900,352 $12,512,479 $12,014,838 Interest on investment securities: Interest exempt from federal income taxes................................ 638,759 760,243 751,990 Taxable interest income............... 3,101,574 2,274,319 1,832,081 Dividend income....................... 32,125 -- -- Interest on federal funds sold.......... 279,976 302,071 241,595 FHLB stock dividends.................... 49,075 45,043 41,529 ----------- ----------- ----------- Total interest income............... 19,001,861 15,894,155 14,882,033 ----------- ----------- ----------- Interest expense: Deposits (note 9): Demand accounts....................... 1,368,180 1,253,138 686,085 Savings............................... 220,379 223,373 284,094 Time.................................. 5,415,007 4,065,536 4,380,847 Short-term borrowings................... 179,448 30,201 8,853 Long-term obligations................... 144,290 130,609 -- ----------- ----------- ----------- Total interest expense.............. 7,327,304 5,702,857 5,359,879 ----------- ----------- ----------- Net interest income................. 11,674,557 10,191,298 9,522,154 Provision for probable loan losses (note 4)....................................... 242,112 242,319 242,396 ----------- ----------- ----------- Net interest income after provision for probable loan losses........... 11,432,445 9,948,979 9,279,758 ----------- ----------- ----------- Noninterest income: Service charges on deposit accounts..... 1,418,009 1,316,222 1,334,958 Other service charges and fees.......... 753,128 600,623 590,832 Net gain (loss) on sale of securities (note 2)............................... 5,246 (27,122) -- Other................................... 87,482 173,731 101,535 ----------- ----------- ----------- Total noninterest income............ 2,263,865 2,063,454 2,027,325 ----------- ----------- ----------- Noninterest expense: Salaries................................ 3,976,592 3,541,511 3,186,103 Retirement and other employee benefits (note 7)............................... 1,249,407 1,073,039 1,083,843 Occupancy............................... 844,111 718,356 720,257 Equipment............................... 1,266,069 992,213 875,232 Professional fees....................... 190,063 333,159 318,336 Supplies................................ 326,500 239,925 251,076 Telephone............................... 339,375 285,828 265,386 Postage................................. 173,005 172,759 171,747 Other................................... 2,029,310 1,812,253 1,831,063 ----------- ----------- ----------- Total noninterest expense........... 10,394,432 9,169,043 8,703,043 ----------- ----------- ----------- Income before income taxes.......... 3,301,878 2,843,390 2,604,040 Income taxes (note 6)..................... 935,000 700,000 645,000 ----------- ----------- ----------- Net income.......................... $ 2,366,878 $ 2,143,390 $ 1,959,040 =========== =========== =========== Net income per share (basic and diluted).. $ 1.13 $ 1.01 $ 1.08 =========== =========== =========== Weighted average shares outstanding-- basic.................................... 2,098,490 2,122,354 1,817,117 =========== =========== =========== Weighted average shares outstanding-- diluted.................................. 2,101,488 2,123,081 1,818,112 =========== =========== ===========
See accompanying notes to consolidated financial statements. 24 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Common Stock --------------------- Deferred Accumulated compensation other Number of Capital Retained - restricted comprehensive Comprehensive shares Amount surplus earnings stock income (loss) income Total --------- ---------- ---------- ----------- ------------ ------------- ------------- ----------- BALANCE AT DECEMBER 31, 1997................... 1,780,254 $6,230,889 $3,200,000 $ 5,975,624 $ -- $ 306,780 $15,713,293 Unrealized gains, net of income taxes of $188,590.............. -- -- -- -- -- 366,086 $ 366,086 366,086 Net income............. -- -- -- 1,959,040 -- -- 1,959,040 1,959,040 ----------- Total comprehensive income................ $ 2,325,126 =========== Common stock issued (note 10)............. 345,000 1,207,500 3,060,392 -- -- -- 4,267,892 Cash dividends ($.255 per share)............ -- -- -- (453,965) -- (453,965) --------- ---------- ---------- ----------- -------- ----------- ----------- BALANCE AT DECEMBER 31, 1998................... 2,125,254 7,438,389 6,260,392 7,480,699 -- 672,866 21,852,346 Unrealized losses, net of income taxes of $638,364.............. -- -- -- -- -- (1,239,172) $(1,239,172) (1,239,172) Net income............. -- -- -- 2,143,390 -- -- 2,143,390 2,143,390 ----------- Total comprehensive income................ $ 904,218 =========== Deferred compensation- restricted stock issuance.............. 3,575 12,513 28,599 -- (41,112) -- -- Recognition of deferred stock compensation- restricted stock...... -- -- -- -- 6,167 -- 6,167 Repurchase of common stock................. (7,300) (25,550) (59,539) -- -- -- (85,089) Cash dividends ($.29 per share)............ -- -- -- (615,243) -- -- (615,243) --------- ---------- ---------- ----------- -------- ----------- ----------- BALANCE AT DECEMBER 31, 1999................... 2,121,529 7,425,352 6,229,452 9,008,846 (34,945) (566,306) 22,062,399 Unrealized gains, net of income taxes of $398,420.............. -- -- -- -- -- 773,399 $ 773,399 773,399 Net income............. -- -- -- 2,366,878 -- -- 2,366,878 2,366,878 ----------- Total comprehensive income................ $ 3,140,277 =========== Recognition of deferred stock compensation- restricted stock...... (275) (962) (2,063) -- 11,247 -- 8,222 Repurchase of common stock................. (48,173) (168,606) (405,866) -- -- -- (574,472) Cash dividends ($.33 per share)............ -- -- -- (693,424) -- -- (693,424) --------- ---------- ---------- ----------- -------- ----------- ----------- BALANCE AT DECEMBER 31, 2000................... 2,073,081 $7,255,784 $5,821,523 $10,682,300 $(23,698) $ 207,093 $23,943,002 ========= ========== ========== =========== ======== =========== ===========
See accompanying notes to consolidated financial statements. 25 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income.......................... $ 2,366,878 $ 2,143,390 $ 1,959,040 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................... 729,728 660,762 668,383 Amortization of premium (accretion of discount) on investment securities, net................... (57,536) 41,651 54,862 Provision for probable loan losses............................ 242,112 242,319 242,396 Deferred income taxes.............. 67,900 34,800 72,000 Loss (gain) on sale of securities.. (5,246) 27,122 -- Gain on sale of real estate acquired in settlement of loans and real estate held for sale..... (9,363) -- (6,476) Loss on disposal of premises and equipment......................... 261 47,486 6,285 Deferred compensation--restricted stock............................. 8,222 6,167 -- Increase in accrued interest receivable........................ (377,327) (162,947) (173,610) Decrease (increase) in other assets............................ (705,202) (659,533) 99,568 Increase (decrease) in accrued interest payable.................. 343,110 (12,124) 130,107 Increase in postretirement benefit liability......................... 11,774 12,739 20,747 Increase (decrease) in other liabilities....................... 141,529 (200,289) (34,833) ------------ ------------ ------------ Net cash provided by operating activities...................... 2,756,840 2,181,543 3,038,469 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of investment securities classified as available- for-sale........................... 6,706,542 3,346,458 -- Proceeds from maturities of investment securities classified as available-for-sale................. 12,680,251 18,818,876 9,913,543 Purchases of investment securities classified as available-for-sale... (23,989,535) (24,656,514) (20,688,225) Purchases of Federal Home Loan Bank stock.............................. -- (68,000) (61,800) Proceeds from disposal of premises and equipment...................... 8,601 2,286,397 12,063 Purchases of premises and equipment.......................... (1,892,680) (2,715,597) (1,426,956) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale............................... 134,035 -- 446,476 Net loan originations............... (25,432,219) (14,943,853) (11,967,590) ------------ ------------ ------------ Net cash used by investing activities...................... (31,785,005) (17,932,233) (23,772,489) ------------ ------------ ------------ Cash flows from financing activities: Net increase in deposits............ 32,940,104 19,034,481 13,454,507 Net (decrease) increase in short- term borrowings.................... (59,609) 12,649 2,725,000 Origination of long-term obligations........................ -- 3,000,000 -- Dividends paid...................... (675,878) (461,395) (453,965) Proceeds from issuance of common stock.............................. -- -- 4,267,892 Repurchase of common stock.......... (574,472) (85,089) -- ------------ ------------ ------------ Net cash provided by financing activities...................... 31,630,145 21,500,646 19,993,434 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents......................... 2,601,980 5,749,956 (740,586) Cash and cash equivalents at beginning of year................... 17,715,064 11,965,108 12,705,694 ------------ ------------ ------------ Cash and cash equivalents at end of year................................ $ 20,317,044 $ 17,715,064 $ 11,965,108 ============ ============ ============ Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes................. $ 773,399 $ (1,239,172) $ 366,086 ============ ============ ============ Dividends declared but not paid.... $ 171,394 $ 153,848 $ -- ============ ============ ============
See accompanying notes to consolidated financial statements. 26 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Consolidation The consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") (see note 10) and its wholly-owned subsidiary, The East Carolina Bank (the "Bank") (collectively referred to hereafter as the "Company"). The Bank has two wholly-owned subsidiaries, Carolina Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. (B) Basis of Financial Statement Presentation 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 disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for probable loan losses. In connection with the determination of the allowance for probable loan losses, management obtains independent appraisals for significant properties held as collateral for loans. (C) Business Bancorp is a bank holding company incorporated in North Carolina. The principal activity of Bancorp is ownership of the Bank. The Bank provides financial services through its branch network located in eastern North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Company's customers are principally located in eastern North Carolina. (D) Cash and Cash Equivalents Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (E) Investment Securities Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation at each reporting date. Securities are classified as held-to-maturity ("HTM") when the Company has both the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as available-for-sale ("AFS"). AFS securities are stated at fair value as determined by reference to published sources, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders' equity. The Company has no trading securities. The amortized cost of securities classified as HTM or AFS is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income from investments. The cost of securities sold is based on the specific identification method. 27 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (F) Loans Loans are generally stated at their outstanding unpaid principal balances net of any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method. Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management's judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. (G) Allowance for Probable Loan Losses The allowance for probable loan losses ("AFLL") is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management's estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management believes that the AFLL is adequate. Management's periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company's market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Thus, future additions to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's AFLL. Such agencies may require the Company to recognize additions to the AFLL based on their judgments about information available to them at the time of their examination. Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" (collectively referred to hereafter as "SFAS No. 114"), the AFLL related to loans that are identified for evaluation and deemed impaired is based on discounted cash flows using the loan's initial effective interest rate, the loan's observable market price, or the fair value of the collateral for collateral dependent loans. Loans evaluated for impairment and not considered impaired are assessed under SFAS No. 5, "Accounting for Contingencies". (H) Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with SFAS No. 114, a loan is classified as in-substance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate acquired in settlement of loans is recorded initially at the lower of the loan balance plus unpaid accrued interest or estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings, if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Loans 28 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) with outstanding principal balances totalling $29,000 and $132,672 were foreclosed on during the years ended December 31, 2000 and 1999, respectively. There were no such foreclosures in 1998. (I) Membership/Investment in Federal Home Loan Bank Stock The Company is a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement, provides the Company with the ability to draw $13 million of advances from the FHLB. At December 31, 2000 and 1999, the Company had advances totaling $3 million from the FHLB. These advances, which are classified as long-term obligations, mature in January 2004 and carry an interest rate of 4.7 percent at December 31, 2000. As a requirement for membership, the Company invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Company. At December 31, 2000, the Company owned 6,328 shares of the FHLB's $100 par value capital stock. No ready market exists for such stock, which is carried at cost. (J) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 25 to 50 years for bank premises and 3 to 10 years for furniture and equipment. Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated. (K) Short-term Borrowings Short-term borrowings are composed primarily of securities sold under agreements to repurchase, generally on an overnight basis. (L) Income Taxes The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled. (M) Stock Option Plan As discussed in note 8, the Company adopted a stock option plan in 1998. The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on the date of grant only if the market price of the underlying stock on the date of grant exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of ABP Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note 8). 29 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (N) Net Income/Dividends Per Share Basic Net Income Per Share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. For purposes of Basic Net Income Per Share, restricted stock is considered "contingently issuable" and is not included in the weighted average number of common shares outstanding. Diluted Net Income Per Share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of Diluted Net Income Per Share. The amount of compensation cost attributed to future services and not yet recognized is considered "proceeds" using the treasury stock method. Diluted weighted average shares outstanding increased by 1,106 and 727 shares for 2000 and 1999, respectively, due to the dilutive impact of restricted stock. In computing Diluted Net Income Per Share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate Diluted Net Income Per Share for the Company. There were no dilutive stock options outstanding during 1999 as the exercise price exceeded the average market price. During 2000 and 1998 diluted weighted average shares outstanding increased by 1,892 and 995 shares, respectively, due to the dilutive impact of options. Dividends per share are based on the shares outstanding at the time of dividend declaration. All shares and per share amounts have been restated to give effect to the three-for-one stock split on July 22, 1998 (see note 10). (O) Comprehensive Income Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. As of and for the periods presented, the sole component of other comprehensive income for the Company has consisted of unrealized gains and losses, net of taxes, of the Company's available-for-sale securities portfolio.
2000 1999 1998 ---------- ---------- -------- Unrealized (losses) gains arising during the period............................. $1,177,065 (1,904,658) 554,676 Tax benefit (expense)................... (400,204) 647,582 (188,590) Reclassification to realized (gains) losses................................. (5,246) 27,122 -- Tax expense (benefit)................... 1,784 (9,218) -- ---------- ---------- -------- Other comprehensive income (loss)..... $ 773,399 (1,239,172) 366,086 ========== ========== ========
(P) Reclassifications Certain prior year amounts have been reclassified in the financial statements to conform with the current year presentation. The reclassifications had no effect on previously reported net income or shareholders' equity. 30 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Q) New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This Statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and was adopted by the Company on January 1, 2001 with no impact to the Company's financial statements. The FASB has also issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement is not expected to materially impact the Company. (2) INVESTMENT SECURITIES The following is a summary of the securities portfolio by major classification:
December 31, 2000 -------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ---------- ---------- ---------- Securities available-for-sale: U.S. Treasury obligations....... $ 8,997,123 45,377 -- 9,042,500 Securities of other U.S. government agencies and corporations................... 24,361,236 138,799 (42,600) 24,457,435 Obligations of states and political subdivisions......... 13,537,396 82,419 (89,437) 13,530,378 Mortgage-backed securities...... 16,552,151 203,651 (24,432) 16,731,370 Preferred stock................. 1,015,000 -- -- 1,015,000 ----------- ------- -------- ---------- $64,462,906 470,246 (156,469) 64,776,683 =========== ======= ======== ==========
December 31, 1999 -------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ---------- ---------- ---------- Securities available-for-sale: U.S. Treasury obligations....... $16,005,692 21,821 (70,011) 15,957,502 Securities of other U.S. government agencies and corporations................... 26,279,605 -- (356,839) 25,922,766 Obligations of states and political subdivisions......... 14,875,182 67,157 (441,516) 14,500,823 Mortgage-backed securities...... 2,636,903 -- (78,654) 2,558,249 ----------- ------ -------- ---------- $59,797,382 88,978 (947,020) 58,939,340 =========== ====== ======== ==========
31 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Gross realized gains and losses on sales of securities for the years ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998 ------- ------- ---- Gross realized gains.................................. $10,808 -- -- Gross realized losses................................. (5,562) (27,122) -- ------- ------- --- Net realized gains (losses)........................... $ 5,246 (27,122) -- ======= ======= ===
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2000, by remaining contractual maturity are as follows:
Amortized cost Fair value ----------- ---------- U.S. Treasury obligations: Due in one year or less........................... $ 3,999,559 4,005,000 Due in one year through five years................ 4,997,564 5,037,500 Securities of other U.S. government agencies and corporations: Due in one year or less........................... 7,519,550 7,524,536 Due in one year through five years................ 16,841,686 16,932,900 Obligations of states and political subdivisions: Due in one year or less........................... 790,412 793,364 Due in one year through five years................ 4,668,453 4,684,874 Due after five through ten years.................. 5,893,829 5,852,441 Due after ten years............................... 2,184,702 2,199,700 Mortgage-backed securities: Due in one year through five years................ 12,270,127 12,405,785 Due after five through ten years.................. 4,282,024 4,325,583 Preferred stock..................................... 1,015,000 1,015,000 ----------- ---------- Total securities................................ $64,462,906 64,776,683 =========== ==========
Securities with an amortized cost of approximately $39,240,000 at December 31, 2000 are pledged as collateral for deposits. Of this total, $3,000,000 are pledged as collateral for FHLB advances. 32 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (3) LOANS Loans at December 31, 2000 and 1999 classified by type, are as follows:
2000 1999 ------------ ----------- Commercial, financial and agricultural.............. $ 65,575,183 56,343,257 Real estate loans: Construction...................................... 7,803,324 1,865,625 Mortgage, commercial and residential.............. 83,356,598 74,248,848 Installment......................................... 16,445,907 15,379,233 ------------ ----------- 173,181,012 147,836,963 ------------ ----------- Less deferred fees and costs, net................. 215,363 161,425 ------------ ----------- $172,965,645 147,675,538 ============ =========== Included in the above: Nonaccrual loans.................................. $ 121,014 407,649 ============ =========== Restructured loans................................ $ 72,511 80,537 ============ ===========
At December 31, 2000, the recorded investment in loans that were considered to be impaired under SFAS No. 114 was $121,014, all on a non-accrual basis. The average recorded investment in impaired loans during the year ended December 31, 2000 was approximately $334,000. For the year ended December 31, 2000, the Company recognized interest income on impaired loans of $49,035, all of which was recognized using the cash basis method of income recognition. At December 31, 1999, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $366,631 (all on a non-accrual basis) which had a related allowance for probable loan losses of approximately $55,000. The average recorded investment in impaired loans during the year ended December 31, 1999 was approximately $192,220. For the year ended December 31, 1999, the Company recognized interest income on those impaired loans of $234,683, all of which was recognized using the cash basis method of income recognition. Loans at December 31, 2000 and 1999 include loans to officers and directors and their associates totaling approximately $1,617,000 and $656,000, respectively. During 2000, $1,367,000 in loans were disbursed to officers, directors and their associates and principal repayments of $406,000 were received on such loans. Such transactions are on the same terms as those prevailing at the time for comparable transactions with others. In the opinion of management, loans made to directors, officers and their associates do not involve more than the normal risk of collectibility or present any other unfavorable features. The Company, through its normal lending activity, originates and maintains loans receivable which are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company's policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant. At December 31, 2000, and 1999, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $22,760,000 and $21,877,000, respectively. 33 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) ALLOWANCE FOR PROBABLE LOAN LOSSES An analysis of the allowance for probable loan losses for the years ended December 31, 2000, 1999 and 1998 follows:
December 31, -------------------------------- 2000 1999 1998 ---------- --------- --------- Beginning balance.......................... $2,700,000 2,750,000 2,660,000 Provision for probable loan losses......... 242,112 242,319 242,396 Recoveries................................. 94,845 74,046 78,538 Loans charged off.......................... (236,957) (366,365) (230,934) ---------- --------- --------- Ending balance............................. $2,800,000 2,700,000 2,750,000 ========== ========= =========
(5) PREMISES AND EQUIPMENT An analysis of premises and equipment at December 31, 2000 and 1999 follows:
Accumulated Undepreciated Cost depreciation cost ----------- ------------ ------------- December 31, 2000: Land................................ $ 1,731,212 -- 1,731,212 Land improvements................... 193,322 124,617 68,705 Buildings........................... 6,332,970 1,741,414 4,591,556 Furniture and equipment............. 5,305,869 3,815,792 1,490,077 ----------- --------- --------- Total............................. $13,563,373 5,681,823 7,881,550 =========== ========= ========= December 31, 1999: Land................................ $ 1,431,212 -- 1,431,212 Land improvements................... 191,842 106,242 85,600 Buildings........................... 5,453,747 1,546,467 3,907,280 Furniture and equipment............. 4,737,681 3,434,313 1,303,368 ----------- --------- --------- Total............................. $11,814,482 5,087,022 6,727,460 =========== ========= =========
34 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (6) INCOME TAXES The components of income tax expense are as follows:
Current Deferred Total ---------- -------- -------- Year ended December 31, 2000: Federal.................................... $ 856,100 67,900 924,000 State...................................... 11,000 -- 11,000 ---------- -------- -------- $ 867,100 67,900 935,000 ========== ======== ======== Year ended December 31, 1999: Federal.................................... $ 665,200 34,800 700,000 State...................................... -- -- -- ---------- -------- -------- $ 665,200 34,800 700,000 ========== ======== ======== Year ended December 31, 1998: Federal.................................... $ 556,700 72,000 628,700 State...................................... 16,300 -- 16,300 ---------- -------- -------- $ 573,000 72,000 645,000 ========== ======== ======== Total income tax expense was less than the amount computed by applying the federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows: Years ended December 31, ------------------------------ 2000 1999 1998 ---------- -------- -------- Income taxes at statutory rate............... $1,123,000 967,000 885,000 Increase (decrease) resulting from: Effect of non-taxable interest income...... (208,000) (256,000) (268,000) Other, net................................. 20,000 (11,000) 28,000 ---------- -------- -------- Applicable income taxes...................... $ 935,000 700,000 645,000 ========== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below:
2000 1999 -------- --------- Deferred tax assets: Allowance for probable loan losses.................... $727,600 693,600 Unrealized losses on securities available for sale.... -- 295,000 Postretirement benefits............................... 183,900 186,200 Other................................................. 12,500 40,100 -------- --------- Total gross deferred tax assets..................... 924,000 1,214,900 -------- --------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation.......................... 370,500 325,700 Unrealized gains on securities available for sale..... 104,000 -- Other................................................. 66,200 36,000 -------- --------- Total gross deferred tax liabilities................ 540,700 361,700 -------- --------- Net deferred tax asset included in other assets..... $383,300 853,200 ======== =========
35 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has no valuation allowance at December 31, 2000 or 1999, because management has determined that it has sufficient taxable income in the carryback period to support the realizability of the net deferred tax asset. Income taxes paid during each of the three years ended December 31, 2000, 1999 and 1998 were $870,000, $654,500 and $555,700, respectively. (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has a defined contribution 401(k) plan that covers all eligible employees. The Company matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $138,204, $136,242 and $98,089 in 2000, 1999 and 1998, respectively. The Company also has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. The following tables provide information relating to the Company's postretirement benefit plan:
2000 1999 -------- ------- Reconciliation of benefit obligation Net benefit obligation, January 1......................... $529,547 427,776 Service cost.............................................. 5,217 4,815 Interest cost............................................. 31,270 29,944 Actuarial gain............................................ 13,660 2,341 Benefits paid............................................. (21,243) (18,165) -------- ------- Net benefit obligation, December 31....................... 558,451 446,711 -------- ------- Fair value of plan assets................................. -- -- -------- ------- Funded status Funded status, December 31................................ 558,451 446,711 Unrecognized actuarial (loss) gain........................ (17,130) 82,836 -------- ------- Net amount recognized, included in other liabilities...... $541,321 529,547 ======== =======
Net periodic postretirement benefit cost for 2000, 1999 and 1998 includes the following components:
2000 1999 1998 ------- ------ ------ Service cost........................................ $ 5,217 4,815 5,662 Interest cost....................................... 31,270 29,944 31,465 Amortization of gain................................ (3,470) (3,855) (135) ------- ------ ------ Net periodic postretirement benefit cost............ $33,017 30,904 36,992 ======= ====== ======
36 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents assumptions relating to the plan at December 31, 2000 and 1999:
2000 1999 ----- ----- Weighted average discount rate in determining benefit obligation............................................... 7.0% 7.0% Annual health care cost trend rate........................ 8.0 9.0 Ultimate medical trend rate............................... 8.0 8.0 Medical trend rate period (in years)...................... 5 5 Effect of 1% increase in assumed health care cost on: Service and interest cost............................... 16.2% 15.8% Benefit obligation...................................... 14.7 14.3 Effect of 1% decrease in assumed health care cost on: Service and interest cost............................... (13.1)% (12.9)% Benefit obligation...................................... (12.1) (11.8)
(8) STOCK OPTION PLAN During 1998, the Company adopted an Omnibus Stock Ownership and Long-Term Incentive Plan ("the Omnibus Plan") which was approved by the Company's shareholders at the May 13, 1998 annual meeting and which provides for the issuance of up to an aggregate of 159,000 shares of common stock of the Company pursuant to stock options and other awards granted or issued under its terms. Stock options vest one-third each year beginning three years after the grant date and expire after 10 years. A summary of the status of stock options as of December 31, 2000, 1999 and 1998, and changes during the years then ended is presented below:
2000 1999 1998 --------------- --------------- --------------- Weighted Weighted Weighted average average average option option option Number price Number price Number price ------ -------- ------ -------- ------ -------- Options outstanding, beginning of year...................... 8,844 $12.50 9,516 $12.50 -- $ -- Granted....................... 8,358 10.00 -- -- 9,516 12.50 Exercised..................... -- -- -- -- -- -- Forfeited..................... -- -- 672 12.50 -- -- ------ ------ ----- ------ ----- ------ Options outstanding, end of year......................... 17,202 $11.29 8,844 $12.50 9,516 $12.50 ====== ====== ===== ====== ===== ======
The following table summarizes information about the stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ------------------------ ---------------------- Weighted- average Number remaining Number Weighted- outstanding contractual outstanding average December 31, life December 31, exercise Exercise Price 2000 (years) 2000 price -------------- ------------ ----------- ------------ --------- $10.00....................... 8,358 7.375 -- $ -- $12.50....................... 8,844 9.125 2,786 12.50 ------ ----- ----- ------ 17,202 8.225 2,786 $12.50 ====== ===== ===== ======
37 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The per share weighted-average fair value of options granted during 2000 and 1998 was $3.42 and $3.32, respectively, on the date(s) of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1998 ------- ------- Expected dividend yield...................................... 2.8% 2.0% Risk-free interest rate...................................... 6.0% 5.5% Expected life................................................ 6 years 6 years Expected volatility.......................................... 20.0% 20.0%
If the Company had elected to recognize compensation cost for its stock- based compensation plans in accordance with the fair value based accounting method of SFAS No. 123, net income and earnings per share ("EPS") would have been as follows:
2000 1999 1998 -------------------- ------------------- ------------------- As As As Pro Forma Reported Pro Forma Reported Pro Forma Reported ---------- --------- --------- --------- --------- --------- Net income.............. $2,360,504 2,366,878 2,138,390 2,143,390 1,954,040 1,959,040 Basic and diluted EPS... 1.12 1.13 1.01 1.01 1.07 1.08
(9) DEPOSITS At December 31, 2000 and 1999, certificates of deposit of $100,000 or more amounted to approximately $52,215,000 and $32,588,000, respectively. Time deposit accounts as of December 31, 2000, mature in the following years and amounts: 2001--$102,802,000; 2002--$9,992,000; and 2003--$1,667,000. For the years ended December 31, 2000, 1999 and 1998, interest expense on certificates of deposit of $100,000 or more amounted to approximately $2,308,000, $1,460,000 and $1,254,000, respectively. The Company made interest payments of $6,974,194, $5,714,981 and $5,229,772 during the years ended December 31, 2000, 1999 and 1998, respectively. (10) SHAREHOLDERS' EQUITY AND FORMATION OF HOLDING COMPANY On July 22, 1998, and pursuant to a charter amendment, the Bank effected a three-for-one stock split of the Bank's common stock, increasing the number of shares of common stock from 593,418 to 1,780,254. Additionally, by way of the same charter amendment, the Bank increased the post-split par value of the common stock from $3.33 per share to $3.50 per share. In connection with the stock split and increase in par value, the Bank increased the capital surplus account in accordance with North Carolina General Statutes. All references to the number of common shares and per share amounts in the financial statements have been restated as appropriate to reflect the effect of the split, for all periods presented. On July 22, 1998, the Bank was acquired by Bancorp, which was newly-formed on March 4, 1998, for purposes of such transaction. Each outstanding share of the Bank's common stock was exchanged for one share of Bancorp's common stock with the Bank becoming a wholly-owned subsidiary of Bancorp. Bancorp's primary purpose is to serve as the parent of the Bank. This transaction was accounted for in a manner similar to a pooling-of-interests whereby the historical book values of the Bank's accounts were combined with Bancorp's accounts on the date of the merger. On November 23, 1998 the Company issued 345,000 shares of common stock to the public at a price of $14.25 per share. The net proceeds of the offering were approximately $4,268,000. 38 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) LEASES The Company also has several noncancellable operating leases for three branch locations. These leases generally contain renewal options for periods ranging from three to twenty years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 2000, 1999 and 1998 was $147,417, $94,107 and $65,795, respectively. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2000 are as follows:
Year ending December 31, ------------------------ 2001.......................................................... $ 308,277 2002.......................................................... 271,549 2003.......................................................... 215,363 2004.......................................................... 206,301 2005.......................................................... 106,620 Thereafter.................................................... 1,439,370 ---------- Total minimum lease payments................................ $2,547,480 ==========
(12) RESERVE REQUIREMENTS The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest-bearing, were approximately $3,997,000 at December 31, 2000. (13) COMMITMENTS AND CONTINGENCIES The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of $35,776,000 and standby letters of credit of $392,000 at December 31, 2000. The Company's exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer's creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments and anticipates funding them from normal operations. The Company is not involved in any legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. 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 nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, 39 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999:
2000 1999 ------------------------ ----------------------- Carrying Estimated Carrying Estimated value fair value value fair value ------------ ----------- ----------- ----------- Financial assets: Non-interest bearing deposits and cash...... $ 18,342,000 18,342,000 11,065,000 11,065,000 Federal funds sold...... 1,975,000 1,975,000 6,650,000 6,650,000 Investment securities... 64,777,000 64,777,000 58,939,000 58,939,000 FHLB stock.............. 632,800 632,800 632,800 632,800 Accrued interest receivable............. 2,637,000 2,637,000 2,259,000 2,259,000 Net loans............... 170,166,000 169,502,000 144,975,000 151,708,000 Financial liabilities: Deposits................ 236,241,000 220,670,000 203,301,000 205,542,000 Short-term borrowings... 2,678,000 2,678,000 2,738,000 2,741,000 Accrued interest payable................ 1,160,000 1,160,000 816,980 816,980 Long-term obligations... 3,000,000 2,984,000 3,000,000 2,796,000
The estimated fair values of net loans, deposits and long-term obligations at December 31 are based on cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. (15) REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank, as a North Carolina chartered bank, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of such banks. 40 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Quantitative measures established by the Federal Deposit Insurance Corporation ("FDIC") to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). The Company, as a bank holding company, is also subject, on a consolidated basis, to the capital adequacy guidelines of the Board of Governors of the Federal Reserve (the "Federal Reserve Board"). The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. Management believes, as of December 31, 2000, that the Bank and the Company meet all capital adequacy requirements to which they are subject. Based on the most recent notification from the FDIC, the Bank is well- capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk- based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts, in thousands, and ratios are presented in the following table:
To be well capitalized under prompt For capital adequacy corrective action Actual purposes provisions ------------- ----------------------- ------------------------ Amount Ratio Ratio Ratio ------- ----- ----------------------- ------------------------ As of December 31, 2000: Total Capital (to Risk Weighted Assets)..... $26,100 13.75% (greater than or =)8.00% (greater than or =)10.00% Tier I Capital (to Risk Weighted Assets).............. $23,722 12.49% (greater than or =)4.00% (greater than or =)6.00% Tier I Capital (to Average Assets)...... $23,722 9.24% (greater than or =)4.00% (greater than or =)5.00% As of December 31, 1999: Total Capital (to Risk Weighted Assets)..... $24,626 15.48% (greater than or =)8.00% (greater than or =)10.00% Tier I Capital (to Risk Weighted Assets).............. $22,628 14.22% (greater than or =)4.00% (greater than or =)6.00% Tier I Capital (to Average Assets)...... $22,628 9.75% (greater than or =)4.00% (greater than or =)5.00%
(16) ECB BANCORP, INC. (PARENT COMPANY) ECB Bancorp, Inc.'s principal asset is its investment in the Bank, and its principal source of income is dividends from the Bank. The Parent Company condensed balance sheets as of December 31, 2000 and 1999, and the related condensed statements of income and cash flows for the years ended December 31, 2000 and 1999 and for the period July 22, 1998 (see note 10) to December 31, 1998 are as follows: CONDENSED BALANCE SHEETS
2000 1999 ----------- ---------- ASSETS Receivable from subsidiary............................... $ 171,394 153,848 Investment in subsidiary................................. 23,943,002 22,062,399 ----------- ---------- Total assets........................................... $24,114,396 22,216,247 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable........................................ $ 171,394 153,848 Total shareholders' equity............................... 23,943,002 22,062,399 ----------- ---------- Total liabilities and shareholders' equity............. $24,114,396 22,216,247 =========== ==========
41 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF INCOME
2000 1999 1998 ---------- --------- --------- Dividends from bank subsidiary................. $1,242,128 540,317 453,965 Equity in undistributed net income of subsidiary.................................... 1,124,750 1,603,073 603,168 ---------- --------- --------- Net income................................... $2,366,878 2,143,390 1,057,133 ========== ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
2000 1999 1998 ----------- ---------- ---------- Operating activities: Net income.............................. $ 2,366,878 2,143,390 1,057,133 Undistributed net income of subsidiary.. (1,124,750) (1,603,073) (603,168) Deferred compensation--restricted stock.................................. 8,222 6,167 -- ----------- ---------- ---------- Net cash provided by operating activities........................... 1,250,350 546,484 453,965 ----------- ---------- ---------- Investing activities: Investment in subsidiary................ -- -- (4,267,892) ----------- ---------- ---------- Net cash used by investing activities........................... -- -- (4,267,892) ----------- ---------- ---------- Financing activities: Proceeds from issuance of common stock.. -- -- 4,267,892 Repurchase of common stock.............. (574,472) (85,089) -- Cash dividends paid..................... (675,878) (461,395) (453,965) ----------- ---------- ---------- Net cash (used) provided by financing activities........................... (1,250,350) (546,484) 3,813,927 ----------- ---------- ---------- Net change in cash........................ $ -- -- -- =========== ========== ==========
As discussed in note 10, on July 22, 1998 the Parent Company exchanged its common stock for that of the Bank, resulting in an increase in shareholders' equity at the Parent Company of $16,679,425. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Incorporated herein by reference from pages 3, 4, 5 and 6 (under the captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Proposal 1: Election of Directors" and "Executive Officers") of Registrant's definitive Proxy Statement dated March 20, 2001. Item 10. Executive Compensation. Incorporated herein by reference from pages 5 through 7 (under the captions "Director Compensation" and "Executive Compensation") of Registrant's definitive Proxy Statement dated March 20, 2001. 42 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Item 11. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference to pages 2 and 3 (under the caption "Beneficial Ownership of Securities") of Registrant's definitive Proxy Statement dated March 20, 2001. Item 12. Certain Relationships and Related Transactions. Incorporated herein by reference to pages 7 and 8 (under the caption "Transactions with Management") of Registrant's definitive Proxy Statement dated March 20, 2001. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed herewith or incorporated herein by reference as part of this Report.
Exhibit Number Description ------- ----------- 3.1 Registrant's Articles of Incorporation (incorporated by reference from Exhibit 3.1 to Registrant's Registration Statement on Form SB- 2, Reg. No. 333-61839) 3.2 Registrant's Bylaws (incorporated by reference from Exhibit 3.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.1 Employment Agreement between Arthur H. Keeney, III and the Bank (incorporated by reference from Exhibit 10.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.2 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibit 10.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.3 Form of Employee Stock Option Agreement (incorporated by reference from Exhibit 10.3 to Registrant's Registration Statement on Form SB- 2, Reg. No. 333-61839) 10.4 Form of Restricted Stock Agreement (incorporated by reference from Exhibit 99.4 to Registrant's Registration Statement Form S-8, Reg. No. 333-77689) 21 List of subsidiaries of Registrant (incorporated by reference from Exhibit 21.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 23 Consent of KPMG LLP (filed herewith) 99 Registrant's definitive Proxy Statement dated March 20, 2001, as filed with the Securities and Exchange Commission (not being refiled)
(b) Reports on Form 8-K. None. 43 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ECB Bancorp, Inc. /s/ Arthur H. Keeney, III Date: March 20, 2001 By: _________________________________ Arthur H. Keeney, III President and Chief Executive Officer In accordance with Section 13 or 15(d) of 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.
Signature Title Date --------- ----- ---- /s/ Arthur H. Keeney, III President, Chief Executive March 20, 2001 ______________________________________ Officer and Director Arthur H. Keeney, III (principal executive officer) /s/ Gary M. Adams Senior Vice President and March 20, 2001 ______________________________________ Chief Financial Officer Gary M. Adams (principal financial and accounting officer) /s/ R. S. Spencer, Jr. Chairman March 20, 2001 ______________________________________ R. S. Spencer, Jr. /s/ George T. Davis, Jr. Director March 20, 2001 ______________________________________ George T. Davis, Jr. /s/ Gregory C. Gibbs Director March 20, 2001 ______________________________________ Gregory C. Gibbs /s/ John F. Hughes, Jr. Director March 20, 2001 ______________________________________ John F. Hughes, Jr. /s/ J. Bryant Kittrell, III Director March 20, 2001 ______________________________________ J. Bryant Kittrell, III /s/ Joseph T. Lamb, Jr. Director March 20, 2001 ______________________________________ Joseph T. Lamb, Jr.
44
Signature Title Date --------- ----- ---- /s/ B. Martelle Marshall Director March 20, 2001 ______________________________________ B. Martelle Marshall /s/ Robert L. Mitchell Director March 20, 2001 ______________________________________ Robert L. Mitchell /s/ Ray M. Spencer Director March 20, 2001 ______________________________________ Ray M. Spencer
45