-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdUz7StFJBzgLbW4ozaFBcA2wqWltkv20ZNbnEJ9Cfbhplg4GXMjH6earjInfRgo 96F7/SKdvog796tU8TUI/g== 0000950168-98-002503.txt : 19980807 0000950168-98-002503.hdr.sgml : 19980807 ACCESSION NUMBER: 0000950168-98-002503 CONFORMED SUBMISSION TYPE: 8-K12G3 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980722 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980806 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECB BANCORP INC CENTRAL INDEX KEY: 0001066254 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 562090738 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K12G3 SEC ACT: SEC FILE NUMBER: 000-24753 FILM NUMBER: 98678210 BUSINESS ADDRESS: STREET 1: P O BOX 337 CITY: ENGELHARD STATE: NC ZIP: 27824 BUSINESS PHONE: 2529259411 8-K12G3 1 ECB BANCORP, INC. 8-K12G3 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-KSB PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 22, 1998 ------------- ECB BANCORP, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-2090738 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) HWY. 264 POST OFFICE BOX 337 ENGELHARD, NORTH CAROLINA 27824 - -------------------------------------------------------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (252) 925-9411 -------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. Registrant was incorporated on March 4, 1998, by and at the direction of the Board of Directors of The East Carolina Bank (the "Bank") for the purpose of acquiring the Bank and serving as the Bank's parent bank holding company. Following its incorporation, Registrant conducted no business or operations other than those activities related to its acquisition of the Bank. Effective at 5:01 P.M. on July 22, 1998 (the "Effective Time"), the Bank became the wholly-owned subsidiary of Registrant in a transaction (the "Reorganization") effected in accordance with the terms of an Agreement and Plan of Reorganization and Merger dated March 10, 1998 (the "Agreement"). The Agreement previously had been approved by the Bank's shareholders at a special meeting held on May 13, 1998. Pursuant to the Agreement, at the Effective Time an interim bank subsidiary of Registrant (formed for the sole purpose of facilitating the Reorganization) was merged into the Bank, each of the 1,780,254 outstanding shares of the Bank's $3.50 par value common stock formerly held by its shareholders (as adjusted for a 3-for-1 stock split in the Bank's common stock which became effective immediately prior to the Reorganization) was automatically converted into one newly issued share of Registrant's $3.50 par value common stock, and Registrant became the sole shareholder of the Bank. As a result of the Reorganization, Registrant's current shareholders consist of the former shareholders of the Bank. Following the Effective Time, shareholders will receive certificates evidencing their shares of Registrant's common stock in exchange for and upon the proper surrender of their Bank certificates. The Bank is a North Carolina chartered commercial bank which was incorporated and commenced banking operations during 1919 and which engages in a general commercial and consumer banking business. The Bank's main banking office is located on Hwy. 264 in Engelhard, North Carolina. Its operations are primarily retail oriented and are aimed at individuals and small to medium-sized businesses located in its market area. The Bank's deposits are insured by the Federal Deposit Insurance Corporation and are derived primarily from customers located within its market area. As provided in the Commission's Rule 12g-3(a) under the Securities Exchange Act of 1934 (the "Exchange Act"), Registrant's $3.50 par value common stock is deemed to be registered under Section 12(g) of the Exchange Act. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The following financial statements of The East Carolina Bank are filed herewith: (1) Independent Auditors' Report (2) Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 and 1996 (3) Consolidated Statements of Income for the six month periods ended June 30, 1998 and 1997(unaudited), and for each of the years in the three-year period ended December 31, 1997 (4) Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 1998 (unaudited), and for each of the years in the three-year period ended December 31, 1997 (5) Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 (6) Notes to Consolidated Financial Statements (B) SUPPLEMENTAL FINANCIAL STATEMENTS. The following financial statements of Registrant (which have been restated to give retroactive effect to Registrant's acquisition of The East Carolina Bank) are filed herewith: (1) Independent Auditors' Report (2) Supplemental Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 and 1996 (3) Supplemental Consolidated Statements of Income for the six month periods ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 (4) Supplemental Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 1998 (unaudited), and for each of the years in the three-year period ended December 31, 1997 (5) Supplemental Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 (6) Notes to Supplemental Consolidated Financial Statements (C) EXHIBITS. The exhibits filed herewith are listed on the Exhibit Index appearing immediately following the signature page of this Report, and such listing is incorporated herein by reference INDEPENDENT AUDITORS' REPORT The Board of Directors The East Carolina Bank: We have audited the accompanying consolidated balance sheets of The East Carolina Bank and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These consolidated financial statements are the responsibility of the Bank'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 generally accepted auditing standards. 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 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 The East Carolina Bank and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in note 7 to the consolidated financial statements, on January 1, 1995, the Bank adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. /s/ KPMG Peat Marwick LLP Raleigh, North Carolina February 4, 1998, except note 15 which is as of July 22, 1998 THE EAST CAROLINA BANK AND SUBSIDIARIES Consolidated Balance Sheets
June 30, 1998 December 31, ------------------ Assets (Unaudited) 1997 1996 ------ ----------- ---- ---- Non-interest bearing deposits and cash (note 11) $ 15,525,442 8,280,694 7,861,625 Federal funds sold 1,850,000 4,425,000 6,550,000 ----------- ---------- ---------- Total cash and cash equivalents 17,375,442 12,705,694 14,411,625 ----------- ---------- ---------- Investment securities (note 2): Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638, respectively) 43,855,081 47,119,973 34,588,505 Loans (note 3) 130,963,770 121,208,810 112,655,981 Allowance for possible loan losses (note 4) (2,690,474) (2,660,000) (2,400,000) ----------- ---------- ----------- Loans, net 128,273,296 118,548,810 110,255,981 ----------- ------------ ----------- Real estate acquired in settlement of loans, net - 340,000 - Real estate held for sale, net - 150,000 200,000 Federal Home Loan Bank common stock, at cost 564,800 503,000 - Bank premises and equipment, net (note 5) 6,316,325 6,266,283 5,538,229 Accrued interest receivable 2,106,461 1,922,814 1,519,320 Other assets (note 6) 618,630 671,148 703,934 $ 199,110,035 188,227,722 167,217,594 =========== =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Deposits (note 9): Demand, noninterest bearing 41,488,495 31,897,001 27,211,047 Demand, interest bearing 41,426,399 41,256,397 39,052,101 Savings 14,509,606 14,712,835 15,153,369 Time 83,393,054 83,042,628 69,919,045 ----------- ---------- ---------- Total deposits 180,817,554 170,908,861 151,335,562 ----------- ----------- ----------- Accrued interest payable 771,003 698,997 583,732 Postretirement benefit liability (note 7) 527,640 515,640 473,640 Other liabilities (note 7) 314,413 390,931 575,114 ----------- ----------- --------- Total liabilities 182,430,610 172,514,429 152,968,048 ----------- ----------- ----------- Shareholders' equity (notes 14 and 15): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 1,780,254 shares at June 30, 1998, December 31, 1997 and 1996 6,230,889 6,230,889 6,230,889 Capital surplus 3,200,000 3,200,000 3,200,000 Retained earnings 6,877,531 5,975,624 4,717,766 Unrealized gain on available-for-sale securities, net 371,005 306,780 100,891 --------- --------- --------- Total shareholders' equity 16,679,425 15,713,293 14,249,546 ========== ========== ========== Commitments and contingencies (note 12) $ 199,110,035 188,227,722 167,217,594 =========== =========== ===========
See accompanying notes to consolidated financial statements. THE EAST CAROLINA BANK AND SUBSIDIARIES Consolidated Statements of Income
Six months ended June 30, (Unaudited) Year ended December 31, ----------------------------------------------------------------------- 1998 1997 1997 1996 1995 ---- ---- ---- ---- ---- Interest income: Interest and fees on loans $ 5,819,440 5,336,974 10,887,327 9,521,265 8,754,549 Interest on investment securities: Interest exempt from federal income taxes 361,933 228,337 511,653 472,206 469,306 Taxable interest income 900,724 845,587 1,749,612 1,918,789 2,207,869 Interest on federal funds sold 83,027 187,639 490,623 301,265 371,806 Total interest income 7,165,124 6,598,537 13,639,215 12,213,525 11,803,530 Interest expense: Deposits (note 9): Demand accounts 313,841 347,918 698,635 699,138 804,115 Savings 144,501 151,035 308,012 328,029 407,471 Time 2,206,847 2,130,914 4,357,110 3,804,230 3,995,593 Other 7,637 786 786 9,459 8,746 --------- --------- --------- --------- --------- Total interest expense 2,672,826 2,630,653 5,364,543 4,840,856 5,215,925 Net interest income 4,492,298 3,967,884 8,274,672 7,372,669 6,587,605 Provision for possible loan losses (note 4) 120,000 210,000 353,513 496,914 515,066 --------- --------- --------- --------- ---------- Net interest income after provision for possible loan losses 4,372,298 3,757,884 7,921,159 6,875,755 6,072,539 --------- --------- --------- --------- --------- Other income: Service charges on deposit accounts 659,564 675,668 1,391,136 1,102,866 982,601 Other service charges and fees 262,432 225,506 524,638 419,128 516,890 Net gain (loss) on sale of securities - - - 5,662 (4,663) Net gain on sale of real estate acquired in settlement of loans and real estate held for sale 6,476 - - 110,960 3,400 Other operating income 13,059 18,095 30,293 79,448 171,290 --------- --------- -------- ------- --------- Total other income 941,531 919,269 1,946,067 1,718,064 1,669,518 --------- --------- --------- --------- --------- Other expenses: Salaries 1,566,250 1,442,548 2,938,570 2,770,184 2,624,186 Retirement and other employee benefits (note 7) 482,093 442,191 971,474 939,505 619,020 Occupancy 347,768 294,152 623,134 549,613 478,113 Equipment 417,114 338,450 768,244 563,478 500,123 Deposit insurance premiums 10,158 14,147 24,589 1,500 190,055 Professional fees 178,699 66,219 209,038 198,298 271,588 Supplies 121,522 106,527 221,978 183,942 153,933 Telephone 137,350 96,636 216,821 176,034 193,260 Postage 84,557 74,682 150,311 143,458 133,325 Other operating expenses 796,411 577,322 1,419,816 1,259,044 1,004,271 Total other expenses 4,141,922 3,452,874 7,543,975 6,785,056 6,167,874 --------- --------- --------- --------- --------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits 1,171,907 1,224,279 2,323,251 1,808,763 1,574,183 Income taxes (note 6) 270,000 355,000 650,000 475,000 384,000 --------- --------- -------- ------- --------- Income before cumulative effect of a change in accounting for postretirement benefits 901,907 869,279 1,673,251 1,333,763 1,190,183 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) - - - - (278,555) ---------- ---------- ----------- --------- ---------- Net income $ 901,907 869,279 1,673,251 1,333,763 911,628 ========== ========== ========== ========= ========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits $ 0.51 0.49 0.94 0.75 0.67 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits - - - - (0.16) ---------- ---------- ----------- --------- ---------- Net income $ 0.51 0.49 0.94 0.75 0.51 ========== ========== =========== ========= ==========
See accompanying notes to consolidated financial statements. THE EAST CAROLINA BANK AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 and six months ended June 30, 1998 (Unaudited)
COMMON STOCK --------------------------------------- UNREALIZED NUMBER CAPITAL RETAINED GAINS OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL ----------- ------------- ------------- ------------- -------------- -------------- BALANCE AT DECEMBER 31, 1994 ........... 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174 Common stock issued in 1998 three-for-one stock split (note 15).. 1,186,836 296,709 200,000 (496,709) -- -- --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1994, AS RESTATED ............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174 Change in unrealized gains (losses), net of income tax benefit of $498,100............................. -- -- -- -- 966,893 966,893 Net income ........................... -- -- -- 911,628 -- 911,618 Cash dividends ($.20 per share)....... -- -- -- (356,051) -- (356,051) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1995 ........... 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644 Change in unrealized gains (losses), net of income taxes of $67,500....... -- -- -- -- (131,073) (131,073) Net income ........................... -- -- -- 1,333,763 -- 1,333,763 Cash dividends ($.21 per share)....... -- -- -- (379,788) -- (379,788) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1996 ........... 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546 Change in unrealized gains (losses), net of income taxes of $106,000...... -- -- -- -- 205,889 205,889 Net income ........................... -- -- -- 1,673,251 -- 1,673,251 Cash dividends ($.23 per share)....... -- -- -- (415,393) -- (415,393) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1997 ........... 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293 Change in unrealized gains (losses), net of income taxes of $33,100 (Unaudited) ......................... -- -- -- -- 64,225 64,225 Net income (Unaudited) ............... -- -- -- 901,907 -- 901,907 --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT JUNE 30, 1998 (Unaudited) .......................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425 ========= ========== ========== ========== ========== ===========
THE EAST CAROLINA BANK AND SUBSIDIARIES Supplemental Consolidated Statements of Cash Flows
Six months ended June 30, (Unaudited) Year ended December 31, ---------------------------------------------------------------- 1998 1997 1997 1996 1995 ---- ---- ---- ---- ---- Cash flows from operating activities: Net income $ 901,907 869,279 1,673,251 1,333,763 911,628 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 327,262 251,587 545,852 445,314 377,844 Amortization of premium on investment securities, net 24,040 26,914 51,838 9,870 2,165 Provision for possible loan losses 120,000 210,000 353,513 496,914 515,066 Provision for loss on real estate held for sale - - 50,000 53,800 23,800 Deferred income taxes - - (33,700) (128,500) (187,000) Loss (gain) on sale of available-for- sale securities - - 25,818 (5,662) 4,663 Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale (6,476) - 95 (110,960) (3,400) Loss (gain) on disposal of premises and equipment - 7,442 7,242 8,384 (122,583) Decrease (increase) in accrued interest receivable (183,647) (303,746) (403,494) (74,499) 4,678 Decrease (increase) in other assets 19,432 (318,594) (914) (8,989) 8,158 Increase (decrease) in accrued interest payable 72,006 206,311 115,265 (72,264) 300,240 Increase in postretirement benefit liability 12,000 21,000 42,000 28,000 445,640 Increase (decrease) in other liabilities (76,518) (340,302) (184,183) 106,518 195,173 --------- -------- --------- --------- --------- Net cash provided by operating activities 1,210,006 629,891 2,242,583 2,081,689 2,476,072 --------- -------- --------- --------- --------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available- for-sale - - 3,015,439 513,924 3,486,953 Proceeds from maturities of investment securities classified as available- for-sale 7,479,588 10,248,033 13,349,710 21,500,092 14,361,272 Proceeds from maturities of investment securities classified as held- to-maturity - - - - 1,301,500 Purchases of investment securities classified as available-for-sale (4,141,425) (12,863,018) (28,662,322) (9,033,608) (5,296,508) Purchases of investment securities classified as held-to-maturity - - - - (9,006,181) Purchase of Federal Home Loan Bank common stock (61,800) (503,000) (503,000) - - Proceeds from disposal of premises and equipment 3,325 23,372 23,665 21,842 217,744 Purchases of premises and equipment (380,629) (565,147) (1,304,813) (592,433) (796,094) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale 496,476 - 50,263 406,653 68,316 Net loan repayments (originations) (9,844,486) (9,029,442) (9,075,362) (18,146,433) (9,046,448) ----------- ----------- ----------- ------------ ----------- Net cash used by investing activities (6,448,951) (12,689,202) (23,106,420) (5,329,963) (4,709,446) ----------- ----------- ----------- ------------ ----------- Cash flows from financing activities: Net increase (decrease) in deposits 9,908,693 18,781,877 19,573,299 924,642 9,391,452 Dividends paid - - (415,393) (379,788) (356,051) ----------- ----------- ----------- ------------ ----------- Net cash provided by financing activities 9,908,693 18,781,877 19,157,906 544,854 9,035,401 ----------- ----------- ----------- ------------ ----------- Increase (decrease) in cash and cash equivalents 4,669,748 6,722,566 (1,705,931) (2,703,420) 6,802,027 Cash and cash equivalents at beginning of year 12,705,694 14,411,625 14,411,625 17,115,045 10,313,018 ----------- ----------- ----------- ------------ ----------- Cash and cash equivalents at end of year $ 17,375,442 21,134,191 12,705,694 14,411,625 17,115,045 ----------- ----------- ----------- ------------ ----------- Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes $ 64,225 21,303 205,889 (131,073) 966,893 ============= ========== ========== =========== ==========
See accompanying notes to consolidated financial statements. THE EAST CAROLINA BANK AND SUBSIDIARIES Notes to Supplemental Consolidated Financial Statements (1) Summary of Significant Accounting and Reporting Policies (a) Consolidation The consolidated financial statements include the accounts of The East Carolina Bank (the "Bank") and its wholly-owned subsidiaries, Carolina Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. All adjustments considered necessary for a fair presentation of the results for interim periods presented have been made (such adjustments are normal and recurring in nature). Operating results for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (b) Basis of Financial Statement Presentation The preparation of financial statements in conformity with generally accepted accounting principles 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 loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. (c) Business 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. (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 Bank 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 Bank has no trading securities. (1) Summary of Significant Accounting and Reporting Policies, Continued (e) Investment Securities, Continued 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. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. (f) Loans Receivable 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 Bank ceases accruing interest on loans (including impaired loans) when, in management's judgement, the collection of interest income 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 Loan Losses The allowance for 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 potential future losses existing 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 Bank's market areas, the fair value and adequacy of underlying collateral, and the growth and risk composition 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 Bank's AFLL. Such agencies may require the Bank 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 in accordance with the standard 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. (1) Summary of Significant Accounting and Reporting Policies, Continued (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 Bank 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 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 with outstanding principal balances totalling $390,358, $-0- and $89,600 were foreclosed on during the years ended December 31, 1997, 1996 and 1995, respectively. (i) Membership/Investment in Federal Home Loan Bank Stock In 1997, the Bank became a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement, provides the Bank with the ability to draw $13 million of advances from the FHLB. No advances were drawn by the Bank in 1997. As a requirement for membership, the Bank 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 Bank. At December 31, 1997, the Bank owned 5,030 shares of the FHLB's $100 par value capital stock. No ready market exists for such stock, which is carried at cost. (j) Bank Premises and Equipment Bank 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) Income Taxes The Bank 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. (1) Summary of Significant Accounting and Reporting Policies, Continued (l) Employee Benefit Plans The Bank has in place a postretirement benefit plan covering certain retirees and a defined contribution 401(k) plan that covers all eligible employees. The Bank had a noncontributory defined benefit retirement plan that covered substantially all employees which was terminated in 1995 with final pay-out of accrued benefits occurring in 1996 (see note 7). (m) Net Income/Dividends Per Share The Bank adopted SFAS No. 128, "Earnings Per Share", in 1997, which requires net income per share to be calculated on both a basic and diluted basis. Net income per share is computed based on the weighted average number of common shares outstanding during the year and represents basic and diluted net income per share for 1997, 1996 and 1995. Because the Bank has no potentially dilutive securities, restatement of 1996 and 1995 net income per share amounts was not necessary. Dividends per share are based on the shares outstanding at the time of dividend declaration. All share and per share amounts have been restated to give effect to the three-for-one stock split on July 22, 1998 (see note 15). (n) Reclassifications Certain 1995 and 1996 amounts have been reclassified in the financial statements to conform with the 1997 presentation. The reclassifications had no effect on previously reported net income or retained earnings. (2) Investment Securities The following is a summary of the securities portfolios by major classification: December 31, 1997 ------------------------------------------------- Gross Gross Approximate Amortized unrealized unrealized market cost gains losses value ---------- ---------- ---------- ----------- Securities available-for-sale: U.S. Treasury obligations $ 25,072,694 156,543 (1,087) 25,228,150 Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667 Obligations of states and political subdivisions 13,761,077 300,592 (4,513) 14,057,156 ---------- ------- ----- ---------- Total $ 46,655,155 472,845 (8,027) 47,119,973 ========== ======= ===== ========== (2) Investment Securities, Continued December 31, 1996 ----------------------------------------------- Gross Gross Approximate Amortized unrealized unrealized market cost gains losses value --------- --------- ----------- ------------- Securities available-for-sale: U.S. Treasury obligations $ 15,983,515 23,180 (12,086) 15,994,609 Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757 Obligations of states and political subdivisions 9,094,282 205,266 (45,409) 9,254,139 ----------- ------- ------ ----------- Total $ 34,435,638 231,876 (79,009) 34,588,505 ========== ======= ====== ========== Gross realized gains and losses on sales of securities for the years ended December 31, 1997, 1996 and 1995 were as follows: 1997 1996 1995 ---- ---- ---- Gross realized gains $ - 5,662 1,500 Gross realized losses (25,818) - (6,163) ------ ------ ----- Net realized gains (losses) $ (25,818) 5,662 (4,663) ====== ===== ===== The aggregate amortized cost and approximate market value of the available-for-sale securities portfolio at December 31, 1997, by remaining contractual maturity are as follows: Approximate Amortized market cost value --------- ----------- U.S. Treasury obligations: Due in one year or less $ 5,995,765 5,997,500 Due in one year through five years 19,076,929 19,230,650 Securities of other U.S. government agencies and corporations: Due in one year or less 3,296,330 3,295,163 Due in one year through five years 3,745,042 3,756,291 Due after ten years 780,012 783,213 Obligations of states and political subdivisions: Due in one year or less 190,035 190,353 Due in one year through five years 5,489,847 5,611,142 Due after five through ten years 3,659,958 3,780,614 Due after ten years 4,421,237 4,475,047 ---------- ----------- Total securities $ 46,655,155 47,119,973 ========== ========== Securities with a principal amount of approximately $18,272,000 at December 31, 1997 are pledged as collateral for deposits. (3)Loans Loans at December 31, 1997 and 1996 classified by type, are as follows: 1997 1996 ---- ---- Commercial, financial and agricultural $ 26,074,410 22,906,424 Real estate loans: Construction 1,490,215 972,127 Mortgage, commercial and residential 64,943,072 67,278,983 Installment 28,845,615 21,670,249 ------------- ----------- 121,353,312 112,827,783 Less deferred fees and costs, net 144,502 171,802 --------------- ------------- $ 121,208,810 112,655,981 =========== =========== Included in the above: Nonaccrual loans $ 1,462,831 1,017,453 ============== ============ Restructured loans $ 522,352 350,024 =============== ============= At December 31, 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis). Included in this amount is $112,000 of impaired loans for which the related AFLL is $112,000 and $685,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1997 was approximately $810,000. For the year ended December 31, 1997, the Bank recognized interest income on those impaired loans of $26,000, all of which was recognized using the cash basis method of income recognition. At December 31, 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis). Included in this amount is $53,000 of impaired loans for which the related AFLL is $53,000 and $866,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $1,016,000. For the year ended December 31, 1996, the Bank recognized interest income on those impaired loans of $18,000, all of which was recognized using the cash basis method of income recognition. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 had they performed in accordance with the original terms throughout each of the periods amounted to approximately $161,000, $119,000 and $62,000, respectively. Actual interest income recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 was $25,000, $23,000 and $41,000, respectively. Interest income on restructured loans included in the results of operations for each of the years amounted to approximately $53,000, $41,000 and $119,000, respectively. Loans at December 31, 1997 and 1996 include loans to officers and directors and their associates totaling approximately $1,103,000 and $1,801,000, respectively. During 1997, $787,000 in loans were disbursed to officers, directors and their associates and principal repayments of $1,485,000 were received on such loans. (3) Loans, Continued The Bank, 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 Bank'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 Bank and such changes could be significant. At December 31, 1997, $66,433,287, or 54.81%, of the Bank's loan portfolio was composed of loans principally collateralized by liens on real estate. Of that amount, approximately $23,963,000, or 19.77%, represents loans collateralized by owner-occupied residential real estate. (4) Allowance for Possible Loan Losses An analysis of the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 follows: 1997 1996 1995 ---- ---- ---- Beginning balance $ 2,400,000 1,950,000 1,900,000 Provision for possible loan losses 353,513 496,914 515,066 Recoveries 100,838 218,843 83,433 Loans charged off (194,351) (265,757) (548,499) --------- ---------- ---------- Ending balance $ 2,660,000 2,400,000 1,950,000 ========= ========= ========= (5) Bank Premises and Equipment An analysis of premises and equipment at December 31, 1997 and 1996 follows: Accumulated Undepreciated Cost depreciation cost ---- ------------ ---- December 31, 1997: Land $ 1,177,138 - 1,177,138 Land improvements 243,541 161,959 81,582 Buildings 5,270,762 1,535,891 3,734,871 Furniture and equipment 4,201,127 2,928,435 1,272,692 ----------- --------- --------- Total $ 10,892,568 4,626,285 6,266,283 ========== ========= ========= December 31, 1996: Land $ 1,177,138 - 1,177,138 Land improvements 220,103 198,869 21,234 Buildings 4,936,591 1,322,548 3,614,043 Furniture and equipment 3,530,902 2,805,088 725,814 ----------- --------- ---------- Total $ 9,864,734 4,326,505 5,538,229 =========== ========= ========= (6) Income Taxes The components of income tax expense (benefit) are as follows: Current Deferred Total ------- -------- ----- Year ended December 31, 1997: Federal $ 660,700 (33,700) 627,000 State 23,000 - 23,000 -------- -------- -------- $ 683,700 (33,700) 650,000 ======= ======= ======= Year ended December 31, 1996: Federal $ 599,500 (128,500) 471,000 State 4,000 - 4,000 ------- -------- ------- $ 603,500 (128,500) 475,000 ======= ======= ======= Year ended December 31, 1995: Federal $ 420,000 (43,000) 377,000 State 7,000 - 7,000 --------- -------- ------- $ 427,000 (43,000) 384,000 ======= ======== ======= 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, ---------------------------------- 1997 1996 1995 ---- ---- ---- Income taxes at statutory rate $ 790,000 615,000 535,000 Increase (decrease) resulting from: Effect of non-taxable interest income (187,000) (179,000) (163,000) Other, net 47,000 39,000 12,000 Applicable income taxes $ 650,000 475,000 384,000 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below: 1997 1996 ---- ---- Deferred tax assets: Allowance for possible loan losses $ 680,000 591,600 Writedown of other real estate 78,000 60,400 Postretirement benefits 175,300 161,000 Other 3,200 43,400 --------- -------- Total gross deferred tax assets 936,500 856,400 ------- ------- (6) Income Taxes, Continued 1997 1996 ---- ---- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation $ 245,400 196,500 Unrealized holding gains on securities available for sale 158,000 52,000 Other 22,000 24,500 -------- -------- Total gross deferred tax liabilities 425,400 273,000 -------- -------- Net deferred tax asset $ 511,100 583,400 ======= ======= The Bank has no valuation allowance at December 31, 1997 or 1996, 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, 1997, 1996 and 1995 were $749,400, $534,100 and $382,300, respectively. (7) Retirement Plans and Other Postretirement Benefits Net periodic pension cost for 1996 and 1995 for the Bank's defined benefit pension plan consists of the following components: 1996 1995 ---- ---- Service cost-benefits earned during the period $ - - Interest cost on projected benefit obligation 69,647 102,175 Actual return on plan assets (19,084) (90,250) Net amortization and deferral 629 63,075 Effect of change in PBGC rate 53,808 - -------- -------- Net periodic pension expense $ 105,000 75,000 ======= ======== (7) Retirement Plans and Other Postretirement Benefits, Continued In 1994, the Plan benefits were frozen in anticipation of a complete plan termination. The Bank approved termination of the Plan in 1995. The Plan termination was approved by the Internal Revenue Service in 1996 and all Plan benefits were paid to participants. On June 1, 1994, the Bank implemented a defined contribution 401(k) plan that covers all eligible employees. The Bank matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $117,355, $100,588 and $100,993 in 1997, 1996 and 1995, respectively. The Bank also has a postretirement benefit plan whereby the Bank pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. The Bank adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1995. The cumulative effect of this change in accounting for the Bank's liability for postretirement benefits of $422,555 was determined as of January 1, 1995, and is reported separately in the 1995 statement of income, net of a deferred income tax benefit of $144,000. Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components: 1997 1996 1995 ---- ---- ---- Service cost $ 6,478 4,832 4,516 Interest cost 35,522 31,966 29,578 ------ ------ ------ Net periodic postretirement benefit cost $ 42,000 36,798 34,094 ====== ====== ====== The following table presents the plan's funded status at December 31, 1997 and 1996:
1997 1996 ---- ---- Accumulated postretirement benefit obligation "APBO"): Retirees $ (304,323) (235,252) Other fully eligible active employees - (70,362) Other active participants (145,172) (158,910) Total accumulated benefit obligation (449,495) (464,524) Unrecognized gain on changes in acturarial assumptions (66,145) (9,116) -------- --------- Plan assets at fair value - - --------- --------- Accrued postretirement benefit cost $ (515,640) (473,640) ======= ======= Weighted average discount rate in determining APBO ......... 7.0% 7.0% Annual health care cost trend rate ......................... 9.0 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 ................................. 16.4% 17.3% APBO ...................................................... 15.0 15.7
(8) Related Party Transactions The Bank has banking transactions in the ordinary course of business with several of its directors and officers, and their associates. 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 (see note 3). (9) Deposits At December 31, 1997 and 1996, certificates of deposit of $100,000 or more amounted to approximately $19,503,067 and $17,835,000, respectively. For the years ended December 31, 1997, 1996 and 1995, interest expense on certificates of deposit of $100,000 or more amounted to approximately $1,057,000, $1,038,000 and $1,236,000, respectively. The Bank made interest payments of $5,249,278, $4,903,660 and $4,906,909 during the years ended December 31, 1997, 1996 and 1995, respectively. Time deposit accounts as of December 31, 1997, mature in the following years and amounts: 1998 - $77,864,727; 1999 - $4,094,535; and 2000 - $1,083,366. (10) Leases The Bank also has several noncancellable operating leases for three branch locations. These leases generally contain renewal options for periods ranging from three to five years and require the Bank to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 1997 and 1996 was $69,758 and $25,000, respectively. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1997 are as follows: Year ending December 31, 1998 $ 65,797 1999 65,797 2000 61,147 2001 35,887 2002 9,879 Thereafter - ------- Total minimum lease payments $ 238,507 ======= (11) Reserve Requirements The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest bearing, were approximately $2,032,000 at December 31, 1997. (12) Commitments and Contingencies The Bank 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 $16,316,000 and standby letters of credit of $223,000, at December 31, 1997. The Bank's exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Bank 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 their funding from normal operations. (13) 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 Bank'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, 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. (13) Fair Value of Financial Instruments, Continued The following table presents the carrying values and estimated fair values of the Bank's financial instruments at December 31, 1997 and 1996: 1997 1996 ---------------------- ----------------------- Carrying Estimated Carrying Estimated value fair value value fair value -------- ---------- -------- ----------- Financial assets: Non-interest bearing deposits and cash $ 8,185,000 8,185,000 7,862,000 7,862,000 Federal funds sold 4,425,000 4,425,000 6,550,000 6,550,000 Investment securities 47,120,000 47,120,000 34,589,000 34,589,000 FHLB common stock 503,000 503,000 - - Net loans 118,549,000 119,094,000 110,256,000 109,408,000 Financial liabilities: Deposits 170,909,000 171,137,000 151,336,000 151,426,000 The estimated fair values of net loans and deposits 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. (14) Regulatory Matters The Bank 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 Bank'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 Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification 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 the Bank. Quantitative measures established by regulation 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). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirments to which it is subject. (14)Regulatory Matters, Continued As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as 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. 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 corrective Actual adequacy purposes action provisions --------------- ---------------- ----------------- Amount Ratio Ratio Ratio ------ ----- ----- ----- As of December 31, 1997: Total Capital (to Risk Weighted Assets) $ 16,973 13.66% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) $ 15,406 12.40% =>4.0% =>6.00% Tier I Capital (to Average Assets) $ 15,406 8.53% =>4.0% =>5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) $ 15,577 13.75% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) $ 14,149 12.49% =>4.0% =>6.0% Tier I Capital (to Average Assets) $ 14,149 8.53% =>4.0% =>5.00%
In May 1995, the Bank Insurance Fund ("BIF") of the FDIC reached its designated ratio of reserves to insured deposits (i.e., 1.25%). For this reason, the FDIC reduced the assessment rate applicable to BIF deposits in two stages, so that, beginning in 1996, the deposit insurance premiums for 92% of all BIF members in the highest capital and supervisory categories were set at $1,500 per year, regardless of deposit size. Beginning in 1997, BIF members were required to begin paying FICO-bond assessments in addition to the $1,500 annual assessment. The FICO bond assessment was $23,089 for the Bank in 1997. (15) Subsequent Events 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 Section 53-88. 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. Additionally, common stock, capital surplus, and retained earnings have been restated for all periods presented as appropriate to reflect the stock split, the increase in par value, and the increase in the capital surplus account. On July 22, 1998, the Bank was acquired by ECB Bancorp, Inc. ("Bancorp"), which was newly-formed by the Bank on March 4, 1998, for the purpose of becoming the Bank's parent holding company. 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. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS EBC BANCORP, INC. We have audited the accompanying supplemental consolidated balance sheets of ECB Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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. The supplemental consolidated financial statements give retroactive effect to the merger of ECB Bancorp, Inc. and The East Carolina Bank on July 22, 1998, which has been accounted for in a manner similar to a pooling-of-interests as described in Note 15 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of ECB Bancorp, Inc. and subsidiary after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in note 7 to the consolidated financial statements, on January 1, 1995, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. /s/ KPMG PEAT MARWICK LLP Raleigh, North Carolina February 4, 1998, except note 15 which is as of July 22, 1998 ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1998 ------------------------------- (Unaudited) 1997 1996 ---------------- --------------- --------------- ASSETS Non-interest bearing deposits and cash (note 11) ....................... $ 15,525,442 $ 8,280,694 $ 7,861,625 Federal funds sold ..................................................... 1,850,000 4,425,000 6,550,000 ------------ ------------ ------------ Total cash and cash equivalents ..................................... 17,375,442 12,705,694 14,411,625 ------------ ------------ ------------ Investment securities (note 2): Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638, respectively) ....................................................... 43,855,081 47,119,973 34,588,505 Loans (note 3) ......................................................... 130,963,770 121,208,810 112,655,981 Allowance for possible loan losses (note 4) ............................ (2,690,474) (2,660,000) (2,400,000) ------------ ------------ ------------ Loans, net .......................................................... 128,273,296 118,548,810 110,255,981 ------------ ------------ ------------ Real estate acquired in settlement of loans, net ....................... -- 340,000 -- Real estate held for sale, net ......................................... -- 150,000 200,000 Federal Home Loan Bank common stock, at cost ........................... 564,800 503,000 -- Bank premises and equipment, net (note 5) .............................. 6,316,325 6,266,283 5,538,229 Accrued interest receivable ............................................ 2,106,461 1,922,814 1,519,320 Other assets (note 6) .................................................. 618,630 671,148 703,934 ------------ ------------ ------------ $199,110,035 $188,227,722 $167,217,594 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (note 9): Demand, noninterest bearing ........................................... 41,488,495 31,897,001 27,211,047 Demand, interest bearing .............................................. 41,426,399 41,256,397 39,052,101 Savings ............................................................... 14,509,606 14,712,835 15,153,369 Time .................................................................. 83,393,054 83,042,628 69,919,045 ------------ ------------ ------------ Total deposits ...................................................... 180,817,554 170,908,861 151,335,562 ------------ ------------ ------------ Accrued interest payable ............................................... 771,003 698,997 583,732 Postretirement benefit liability (note 7) .............................. 527,640 515,640 473,640 Other liabilities (note 7) ............................................. 314,413 390,931 575,114 ------------ ------------ ------------ Total liabilities ................................................... 182,430,610 172,514,429 152,968,048 ------------ ------------ ------------ Shareholders' equity (notes 14 and 15): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 1,780,254 shares at June 30, 1998, December 31, 1997 and 1996 .......................................... 6,230,889 6,230,889 6,230,889 Capital surplus ....................................................... 3,200,000 3,200,000 3,200,000 Retained earnings ..................................................... 6,877,531 5,975,624 4,717,766 Unrealized gain on available-for-sale securities, net ................. 371,005 306,780 100,891 ------------ ------------ ------------ Total shareholders' equity .......................................... 16,679,425 15,713,293 14,249,546 ============ ============ ============ Commitments and contingencies (note 12) $199,110,035 $188,227,722 $167,217,594 ============ ============ ============
See accompanying notes to supplemental consolidated financial statements. ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, (Unaudited) -------------------------------- 1998 1997 ---------------- --------------- Interest income: Interest and fees on loans .................................. $ 5,819,440 $ 5,336,974 Interest on investment securities: Interest exempt from federal income taxes .................. 361,933 228,337 Taxable interest income .................................... 900,724 845,587 Interest on federal funds sold .............................. 83,027 187,639 ------------ ----------- Total interest income ................................... 7,165,124 6,598,537 ------------ ----------- Interest expense: Deposits (note 9): .......................................... Demand accounts ............................................ 313,841 347,918 Savings .................................................... 144,501 151,035 Time ....................................................... 2,206,847 2,130,914 Other ....................................................... 7,637 786 ------------ ----------- Total interest expense .................................. 2,672,826 2,630,653 ------------ ----------- Net interest income ..................................... 4,492,298 3,967,884 Provision for possible loan losses (note 4) .................. 120,000 210,000 ------------ ----------- Net interest income after provision for possible loan losses ............................................ 4,372,298 3,757,884 ------------ ----------- Other income: Service charges on deposit accounts ......................... 659,564 675,668 Other service charges and fees .............................. 262,432 225,506 Net gain (loss) on sale of securities ....................... -- -- Net gain on sale of real estate acquired in settlement of loans and real estate held for sale ........................ 6,476 -- Other operating income ...................................... 13,059 18,095 ------------ ----------- Total other income ...................................... 941,531 919,269 ------------ ----------- Other expenses: Salaries .................................................... 1,566,250 1,442,548 Retirement and other employee benefits (note 7) ............. 482,093 442,191 Occupancy ................................................... 347,768 294,152 Equipment ................................................... 417,114 338,450 Deposit insurance premiums .................................. 10,158 14,147 Professional fees ........................................... 178,699 66,219 Supplies .................................................... 121,522 106,527 Telephone ................................................... 137,350 96,636 Postage ..................................................... 84,557 74,682 Other operating expenses .................................... 796,411 577,322 ------------ ----------- Total other expenses .................................... 4,141,922 3,452,874 ------------ ----------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits ............................................... 1,171,907 1,224,279 Income taxes (note 6) ........................................ 270,000 355,000 ------------ ----------- Income before cumulative effect of a change in accounting for postretirement benefits ................. 901,907 869,279 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) ....................................... -- -- ------------ ----------- Net income .............................................. $ 901,907 $ 869,279 ============ =========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits ................... $ 0.51 $ 0.49 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ....... -- -- ------------ ----------- Net income ................................................. $ 0.51 $ 0.49 ============ =========== YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ---------------- --------------- ------------- Interest income: Interest and fees on loans .................................. $ 10,887,327 $ 9,521,265 $ 8,754,549 Interest on investment securities: Interest exempt from federal income taxes .................. 511,653 472,206 469,306 Taxable interest income .................................... 1,749,612 1,918,789 2,207,869 Interest on federal funds sold .............................. 490,623 301,265 371,806 ------------ ------------ ----------- Total interest income ................................... 13,639,215 12,213,525 11,803,530 ------------ ------------ ----------- Interest expense: Deposits (note 9): .......................................... Demand accounts ............................................ 698,635 699,138 804,115 Savings .................................................... 308,012 328,029 407,471 Time ....................................................... 4,357,110 3,804,230 3,995,593 Other ....................................................... 786 9,459 8,746 ------------ ------------ ----------- Total interest expense .................................. 5,364,543 4,840,856 5,215,925 ------------ ------------ ----------- Net interest income ..................................... 8,274,672 7,372,669 6,587,605 Provision for possible loan losses (note 4) .................. 353,513 496,914 515,066 ------------ ------------ ----------- Net interest income after provision for possible loan losses ............................................ 7,921,159 6,875,755 6,072,539 ------------ ------------ ----------- Other income: Service charges on deposit accounts ......................... 1,391,136 1,102,866 982,601 Other service charges and fees .............................. 524,638 419,128 516,890 Net gain (loss) on sale of securities ....................... -- 5,662 (4,663) Net gain on sale of real estate acquired in settlement of loans and real estate held for sale ........................ -- 110,960 3,400 Other operating income ...................................... 30,293 79,448 171,290 ------------ ------------ ----------- Total other income ...................................... 1,946,067 1,718,064 1,669,518 ------------ ------------ ----------- Other expenses: Salaries .................................................... 2,938,570 2,770,184 2,624,186 Retirement and other employee benefits (note 7) ............. 971,474 939,505 619,020 Occupancy ................................................... 623,134 549,613 478,113 Equipment ................................................... 768,244 563,478 500,123 Deposit insurance premiums .................................. 24,589 1,500 190,055 Professional fees ........................................... 209,038 198,298 271,588 Supplies .................................................... 221,978 183,942 153,933 Telephone ................................................... 216,821 176,034 193,260 Postage ..................................................... 150,311 143,458 133,325 Other operating expenses .................................... 1,419,816 1,259,044 1,004,271 ------------ ------------ ----------- Total other expenses .................................... 7,543,975 6,785,056 6,167,874 ------------ ------------ ----------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits ............................................... 2,323,251 1,808,763 1,574,183 Income taxes (note 6) ........................................ 650,000 475,000 384,000 ------------ ------------ ----------- Income before cumulative effect of a change in accounting for postretirement benefits ................. 1,673,251 1,333,763 1,190,183 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) ....................................... -- -- (278,555) ------------ ------------ ----------- Net income .............................................. $ 1,673,251 $ 1,333,763 $ 911,628 ============ ============ =========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits ................... $ 0.94 $ 0.75 $ 0.67 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ....... -- -- (0.16) ------------ ------------ ----------- Net income ................................................. $ 0.94 $ 0.75 $ 0.51 ============ ============ ===========
See accompanying notes to supplemental consolidated financial statements. ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
COMMON STOCK --------------------------------------- UNREALIZED NUMBER CAPITAL RETAINED GAINS OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL ----------- ------------- ------------- ------------- -------------- -------------- BALANCE AT DECEMBER 31, 1994 ........... 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174 Common stock issued in 1998 three-for-one stock split (note 15).. 1,186,836 296,709 200,000 (496,709) -- -- --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1994, AS RESTATED ............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174 Change in unrealized gains (losses), net of income tax benefit of $498,100............................. -- -- -- -- 966,893 966,893 Net income ........................... -- -- -- 911,628 -- 911,618 Cash dividends ($.20 per share)....... -- -- -- (356,051) -- (356,051) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1995 ........... 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644 Change in unrealized gains (losses), net of income taxes of $67,500....... -- -- -- -- (131,073) (131,073) Net income ........................... -- -- -- 1,333,763 -- 1,333,763 Cash dividends ($.21 per share)....... -- -- -- (379,788) -- (379,788) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1996 ........... 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546 Change in unrealized gains (losses), net of income taxes of $106,000...... -- -- -- -- 205,889 205,889 Net income ........................... -- -- -- 1,673,251 -- 1,673,251 Cash dividends ($.23 per share)....... -- -- -- (415,393) -- (415,393) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1997 ........... 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293 Change in unrealized gains (losses), net of income taxes of $33,100 (Unaudited) ......................... -- -- -- -- 64,225 64,225 Net income (Unaudited) ............... -- -- -- 901,907 -- 901,907 --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT JUNE 30, 1998 (Unaudited) .......................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425 ========= ========== ========== ========== ========== =========== See accompanying notes to supplemental consolidated financial statements.
ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, (Unaudited) -------------------------------- 1998 1997 --------------- ---------------- Cash flows from operating activities: Net income ................................................ $ 901,907 $ 869,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................. 327,262 251,587 Amortization of premium on investment securities, net .................................................... 24,040 26,914 Provision for possible loan losses ....................... 120,000 210,000 Provision for loss on real estate held for sale .......... -- -- Deferred income taxes .................................... -- -- Loss (gain) on sale of available-for-sale securities ..... -- -- Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ...... (6,476) -- Loss (gain) on disposal of premises and equipment -- 7,442 Decrease (increase) in accrued interest receivable ....... (183,647) (303,746) Decrease (increase) in other assets ...................... 19,432 (318,594) Increase (decrease) in accrued interest payable .......... 72,006 206,311 Increase in postretirement benefit liability ............. 12,000 21,000 Increase (decrease) in other liabilities ................. (76,518) (340,302) ------------ -------------- Net cash provided by operating activities .............. 1,210,006 629,891 ------------ -------------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ......................... -- -- Proceeds from maturities of investment securities classified as available-for-sale ......................... 7,479,588 10,248,033 Proceeds from maturities of investment securities classified as held-to-maturity ........................... -- -- Purchases of investment securities classified as available-for-sale ....................................... (4,141,425) (12,863,018) Purchases of investment securities classified as held-to-maturity ......................................... -- -- Purchase of Federal Home Loan Bank common stock (61,800) (503,000) Proceeds from disposal of premises and equipment .......... 3,325 23,372 Purchases of premises and equipment ....................... (380,629) (565,147) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ........ 496,476 -- Net loan repayments (originations) ........................ (9,844,486) (9,029,442) ------------ -------------- Net cash used by investing activities .................. (6,448,951) (12,689,202) ------------ -------------- Cash flows from financing activities: Net increase (decrease) in deposits ....................... 9,908,693 18,781,877 Dividends paid ............................................ -- -- ------------ -------------- Net cash provided by financing activities .............. 9,908,693 18,781,877 ------------ -------------- Increase (decrease) in cash and cash equivalents ........... 4,669,748 6,722,566 Cash and cash equivalents at beginning of year ............. 12,705,694 14,411,625 ------------ -------------- Cash and cash equivalents at end of year ................... $ 17,375,442 $ 21,134,191 ============ ============== Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ........................ $ 64,225 $ 21,303 ============ ============== YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ---------------- ---------------- --------------- Cash flows from operating activities: Net income ................................................ $ 1,673,251 $ 1,333,763 $ 911,628 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................. 545,852 445,314 377,844 Amortization of premium on investment securities, net .................................................... 51,838 9,870 2,165 Provision for possible loan losses ....................... 353,513 496,914 515,066 Provision for loss on real estate held for sale .......... 50,000 53,800 23,800 Deferred income taxes .................................... (33,700) (128,500) (187,000) Loss (gain) on sale of available-for-sale securities ..... 25,818 (5,662) 4,663 Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ...... 95 (110,960) (3,400) Loss (gain) on disposal of premises and equipment 7,242 8,384 (122,583) Decrease (increase) in accrued interest receivable ....... (403,494) (74,499) 4,678 Decrease (increase) in other assets ...................... (914) (8,989) 8,158 Increase (decrease) in accrued interest payable .......... 115,265 (72,264) 300,240 Increase in postretirement benefit liability ............. 42,000 28,000 445,640 Increase (decrease) in other liabilities ................. (184,183) 106,518 195,173 -------------- -------------- ------------ Net cash provided by operating activities .............. 2,242,583 2,081,689 2,476,072 -------------- -------------- ------------ Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ......................... 3,015,439 513,924 3,486,953 Proceeds from maturities of investment securities classified as available-for-sale ......................... 13,349,710 21,500,092 14,361,272 Proceeds from maturities of investment securities classified as held-to-maturity ........................... -- -- 1,301,500 Purchases of investment securities classified as available-for-sale ....................................... (28,662,322) (9,033,608) (5,296,508) Purchases of investment securities classified as held-to-maturity ......................................... -- -- (9,006,181) Purchase of Federal Home Loan Bank common stock (503,000) -- -- Proceeds from disposal of premises and equipment .......... 23,665 21,842 217,744 Purchases of premises and equipment ....................... (1,304,813) (592,433) (796,094) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ........ 50,263 406,653 68,316 Net loan repayments (originations) ........................ (9,075,362) (18,146,433) (9,046,448) -------------- -------------- ------------ Net cash used by investing activities .................. (23,106,420) (5,329,963) (4,709,446) -------------- -------------- ------------ Cash flows from financing activities: Net increase (decrease) in deposits ....................... 19,573,299 924,642 9,391,452 Dividends paid ............................................ (415,393) (379,788) (356,051) -------------- -------------- ------------ Net cash provided by financing activities .............. 19,157,906 544,854 9,035,401 -------------- -------------- ------------ Increase (decrease) in cash and cash equivalents ........... (1,705,931) (2,703,420) 6,802,027 Cash and cash equivalents at beginning of year ............. 14,411,625 17,115,045 10,313,018 -------------- -------------- ------------ Cash and cash equivalents at end of year ................... $ 12,705,694 $ 14,411,625 $ 17,115,045 ============== ============== ============ Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ........................ $ 205,889 $ (131,073) $ 966,893 ============== ============== ============ See accompanying notes to supplemental consolidated financial statements.
ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (A) CONSOLIDATION The consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") (see note 15) 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. All adjustments considered necessary for a fair presentation of the results for interim periods presented have been made (such adjustments are normal and recurring in nature.) Operating results for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (B) BASIS OF FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles 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 loan losses. In connection with the determination of the allowance for 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. (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. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. (F) LOANS RECEIVABLE 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 judgement, the collection of interest income 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 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) 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 LOAN LOSSES The allowance for 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 potential future losses existing 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 risk composition 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 in accordance with the standard 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. (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 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 with outstanding principal balances totalling $390,358, $-0- and $89,600 were foreclosed on during the years ended December 31, 1997, 1996 and 1995, respectively. (I) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK In 1997, the Company became 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. No advances were drawn by the Company in 1997. 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, 1997, the Company owned 5,030 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. ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated. (K) 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. (L) EMPLOYEE BENEFIT PLANS The Company has in place a postretirement benefit plan covering certain retirees and a defined contribution 401(k) plan that covers all eligible employees. The Company had a noncontributory defined benefit retirement plan that covered substantially all employees which was terminated in 1995 with final pay-out of accrued benefits occurring in 1996 (see note 7). (M) NET INCOME/DIVIDENDS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which requires net income per share to be calculated on both a basic and diluted basis. Net income per share is computed based on the weighted average number of common shares outstanding during the year and represents basic and diluted net income per share for 1997, 1996 and 1995. Because the Company has no potentially dilutive securities, restatement of 1996 and 1995 net income per share amounts was not necessary. Dividends per share are based on the shares outstanding at the time of dividend declaration. All share and per share amounts have been restated to give effect to the three-for-one stock split on July 22, 1998 (see note 15). (N) RECLASSIFICATIONS Certain 1995 and 1996 amounts have been reclassified in the financial statements to conform with the 1997 presentation. The reclassifications had no effect on previously reported net income or retained earnings. (2) INVESTMENT SECURITIES The following is a summary of the securities portfolios by major classification:
DECEMBER 31, 1997 ------------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ -------------- Securities available-for-sale: U.S. Treasury obligations .................................... $25,072,694 $156,543 $ (1,087) $25,228,150 Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667 Obligations of states and political subdivisions ............. 13,761,077 300,592 (4,513) 14,057,156 ----------- -------- -------- ----------- Total ...................................................... $46,655,155 $472,845 $ (8,027) $47,119,973 =========== ======== ======== ===========
DECEMBER 31, 1996 ------------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ -------------- Securities available-for-sale: U.S. Treasury obligations .................................... $15,983,515 $ 23,180 $ (12,086) $15,994,609 Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757 Obligations of states and political subdivisions ............. 9,094,282 205,266 (45,409) 9,254,139 ----------- -------- --------- ----------- Total ...................................................... $34,435,638 $231,876 $ (79,009) $34,588,505 =========== ======== ========= ===========
ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) INVESTMENT SECURITIES -- (Continued) Gross realized gains and losses on sales of securities for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ------------ --------- ----------- Gross realized gains .................. $ -- $5,662 $ 1,500 Gross realized losses ................. (25,818) -- (6,163) --------- ------ -------- Net realized gains (losses) .......... $ (25,818) $5,662 $ (4,663) ========= ====== ========
The aggregate amortized cost and approximate market value of the available-for-sale securities portfolio at December 31, 1997, by remaining contractual maturity are as follows:
APPROXIMATE AMORTIZED MARKET COST VALUE -------------- -------------- U.S. Treasury obligations: Due in one year or less ..................................... $ 5,995,765 $ 5,997,500 Due in one year through five years .......................... 19,076,929 19,230,650 Securities of other U.S. government agencies and corporations: Due in one year or less ..................................... 3,296,330 3,295,163 Due in one year through five years .......................... 3,745,042 3,756,291 Due after ten years ......................................... 780,012 783,213 Obligations of states and political subdivisions: Due in one year or less ..................................... 190,035 190,353 Due in one year through five years .......................... 5,489,847 5,611,142 Due after five through ten years ............................ 3,659,958 3,780,614 Due after ten years ......................................... 4,421,237 4,475,047 ----------- ----------- Total securities .......................................... $46,655,155 $47,119,973 =========== ===========
Securities with a principal amount of approximately $18,272,000 at December 31, 1997 are pledged as collateral for deposits. (3) LOANS Loans at December 31, 1997 and 1996 classified by type, are as follows:
1997 1996 -------------- -------------- Commercial, financial and agricultural .......... $ 26,074,410 $ 22,906,424 Real estate loans: Construction ................................... 1,490,215 972,127 Mortgage, commercial and residential ........... 64,943,072 67,278,983 Installment ..................................... 28,845,615 21,670,249 ------------ ------------ 121,353,312 112,827,783 ============ ============ Less deferred fees and costs, net .............. 144,502 171,802 ------------ ------------ $121,208,810 $112,655,981 ============ ============ Included in the above: Nonaccrual loans ............................... $ 1,462,831 $ 1,017,453 ============ ============ Restructured loans ............................. $ 522,352 $ 350,024 ============ ============
At December 31, 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis). Included in this amount is $112,000 of impaired loans for which the related AFLL is ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LOANS -- (Continued) $112,000 and $685,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1997 was approximately $810,000. For the year ended December 31, 1997, the Company recognized interest income on those impaired loans of $26,000, all of which was recognized using the cash basis method of income recognition. At December 31, 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis). Included in this amount is $53,000 of impaired loans for which the related AFLL is $53,000 and $866,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $1,016,000. For the year ended December 31, 1996, the Company recognized interest income on those impaired loans of $18,000, all of which was recognized using the cash basis method of income recognition. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 had they performed in accordance with the original terms throughout each of the periods amounted to approximately $161,000, $119,000 and $62,000, respectively. Actual interest income recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 was $25,000, $23,000 and $41,000, respectively. Interest income on restructured loans included in the results of operations for each of the years amounted to approximately $53,000, $41,000 and $119,000, respectively. Loans at December 31, 1997 and 1996 include loans to officers and directors and their associates totaling approximately $1,103,000 and $1,801,000, respectively. During 1997, $787,000 in loans were disbursed to officers, directors and their associates and principal repayments of $1,485,000 were received on such loans. 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 Bank and such changes could be significant. At December 31, 1997, $66,433,287, or 54.81%, of the Company's loan portfolio was composed of loans principally collateralized by liens on real estate. Of that amount, approximately $23,963,000, or 19.77%, represents loans collateralized by owner-occupied residential real estate. (4) ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ------------- ------------- ------------- Beginning balance ........................... $2,400,000 $1,950,000 $1,900,000 Provision for possible loan losses .......... 353,513 496,914 515,066 Recoveries .................................. 100,838 218,843 83,433 Loans charged off ........................... (194,351) (265,757) (548,499) ---------- ---------- ---------- Ending balance .............................. $2,660,000 $2,400,000 $1,950,000 ========== ========== ==========
ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) PREMISES AND EQUIPMENT An analysis of premises and equipment at December 31, 1997 and 1996 follows:
ACCUMULATED UNDEPRECIATED COST DEPRECIATION COST -------------- -------------- -------------- December 31, 1997: Land ............................ $ 1,177,138 $ -- $1,177,138 Land improvements ............... 243,541 161,959 81,582 Buildings ....................... 5,270,762 1,535,891 3,734,871 Furniture and equipment ......... 4,201,127 2,928,435 1,272,692 ----------- ---------- ---------- Total ......................... $10,892,568 $4,626,285 $6,266,283 =========== ========== ========== December 31, 1996: Land ............................ $ 1,177,138 $ -- $1,177,138 Land improvements ............... 220,103 198,869 21,234 Buildings ....................... 4,936,591 1,322,548 3,614,043 Furniture and equipment ......... 3,530,902 2,805,088 725,814 ----------- ---------- ---------- Total ......................... $ 9,864,734 $4,326,505 $5,538,229 =========== ========== ==========
(6) INCOME TAXES The components of income tax expense (benefit) are as follows:
CURRENT DEFERRED TOTAL ----------- ------------- ----------- Year ended December 31, 1997: Federal .................... $660,700 $ (33,700) $627,000 State ...................... 23,000 -- 23,000 -------- ---------- -------- $683,700 $ (33,700) $650,000 ======== ========== ======== Year ended December 31, 1996: Federal .................... $599,500 $ (128,500) $471,000 State ...................... 4,000 -- 4,000 -------- ---------- -------- $603,500 $ (128,500) $475,000 ======== ========== ======== Year ended December 31, 1995: Federal .................... $420,000 $ (43,000) $377,000 State ...................... 7,000 -- 7,000 -------- ---------- -------- $427,000 $ (43,000) $384,000 ======== ========== ========
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, ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Income taxes at statutory rate .................. $ 790,000 $ 615,000 $ 535,000 Increase (decrease) resulting from: Effect of non-taxable interest income ......... (187,000) (179,000) (163,000) Other, net .................................... 47,000 39,000 12,000 ---------- ---------- ---------- Applicable income taxes ......................... $ 650,000 $ 475,000 $ 384,000 ========== ========== ==========
ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES -- (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ----------- ----------- Deferred tax assets: Allowance for possible loan losses ......... $680,000 $591,600 Writedown of other real estate ............. 78,000 60,400 Postretirement benefits .................... 175,300 161,000 Other ...................................... 3,200 43,400 -------- -------- Total gross deferred tax assets ........... $936,500 $856,400 ======== ========
1997 1996 ----------- ----------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation $245,400 $196,500 Unrealized holding gains on securities available for sale .................. 158,000 52,000 Other ...................................................................... 22,000 24,500 -------- -------- Total gross deferred tax liabilities ...................................... 425,400 273,000 -------- -------- Net deferred tax asset .................................................... $511,100 $583,400 ======== ========
The Company has no valuation allowance at December 31, 1997 or 1996, 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, 1997, 1996 and 1995 were $749,400, $534,100 and $382,300, respectively. (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS Net periodic pension cost for 1996 and 1995 for the Company's defined benefit pension plan consists of the following components:
1996 1995 ------------ ------------ Service cost-benefits earned during the period .......... $ -- $ -- Interest cost on projected benefit obligation ........... 69,647 102,175 Actual return on plan assets ............................ (19,084) (90,250) Net amortization and deferral ........................... 629 63,075 Effect of change in PBGC rate ........................... 53,808 -- --------- --------- Net periodic pension expense .......................... $ 105,000 $ 75,000 ========= =========
In 1994, the Plan benefits were frozen in anticipation of a complete plan termination. The Company approved termination of the Plan in 1995. The Plan termination was approved by the Internal Revenue Service in 1996 and all Plan benefits were paid to participants. On June 1, 1994, the Company implemented 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 $117,355, $100,588 and $100,993 in 1997, 1996 and 1995, 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 Company adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1995. The cumulative effect of this change in accounting for the Company's liability for postretirement benefits of $422,555 was determined as of January 1, 1995, and is reported separately in the 1995 statement of income, net of a deferred income tax benefit of $144,000. ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (Continued) Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components:
1997 1996 1995 --------- --------- --------- Service cost ...................................... $ 6,478 $ 4,832 $ 4,516 Interest cost ..................................... 35,522 31,966 29,578 ------- ------- ------- Net periodic postretirement benefit cost .......... $42,000 $36,798 $34,094 ======= ======= =======
The following table presents the plan's funded status at December 31, 1997 and 1996:
1997 1996 -------------- -------------- Accumulated postretirement benefit obligation "APBO"): Retirees .................................................. $ (304,323) $ (235,252) Other fully eligible active employees ..................... -- (70,362) Other active participants ................................. (145,172) (158,910) ---------- ---------- Total accumulated benefit obligation .................... (449,495) (464,524) Unrecognized gain on changes in acturarial assumptions ..... (66,145) (9,116) ---------- ---------- Plan assets at fair value .................................. -- -- ---------- ---------- Accrued postretirement benefit cost ........................ $ (515,640) $ (473,640) ========== ========== Weighted average discount rate in determining APBO ......... 7.0% 7.0% Annual health care cost trend rate ......................... 9.0 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 ................................. 16.4% 17.3% APBO ...................................................... 15.0 15.7
(8) RELATED PARTY TRANSACTIONS The Company has banking transactions in the ordinary course of business with several of its directors and officers, and their associates. 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 (see note 3). (9) DEPOSITS At December 31, 1997 and 1996, certificates of deposit of $100,000 or more amounted to approximately $19,503,067 and $17,835,000, respectively. For the years ended December 31, 1997, 1996 and 1995, interest expense on certificates of deposit of $100,000 or more amounted to approximately $1,057,000, $1,038,000 and $1,236,000, respectively. The Company made interest payments of $5,249,278, $4,903,660 and $4,906,909 during the years ended December 31, 1997, 1996 and 1995, respectively. Time deposit accounts as of December 31, 1997, mature in the following years and amounts: 1998 -- $77,864,727; 1999 -- $4,094,535; and 2000 -- $1,083,366. ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) 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 five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 1997 and 1996 was $69,758 and $25,000, respectively. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1997 are as follows: Year ending December 31, 1998 ................................... $ 65,797 1999 ................................... 65,797 2000 ................................... 61,147 2001 ................................... 35,887 2002 ................................... 9,879 Thereafter ............................. -- -------- Total minimum lease payments ......... $238,507 ========
(11) RESERVE REQUIREMENTS The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest bearing, were approximately $2,032,000 at December 31, 1997. (12) 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 $16,316,000 and standby letters of credit of $223,000, at December 31, 1997. 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 their funding from normal operations. (13) 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, 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. ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued) The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996 ----------------------------- ----------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------------- -------------- -------------- -------------- Financial assets: Non-interest bearing deposits and cash $ 8,185,000 $ 8,185,000 $ 7,862,000 $ 7,862,000 Federal funds sold .................... 4,425,000 4,425,000 6,550,000 6,550,000 Investment securities ................. 47,120,000 47,120,000 34,589,000 34,589,000 FHLB common stock ..................... 503,000 503,000 -- -- Net loans ............................. 118,549,000 119,094,000 110,256,000 109,408,000 Financial liabilities: Deposits .............................. 170,909,000 171,137,000 151,336,000 151,426,000
The estimated fair values of net loans and deposits 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. (14) 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 classification 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 the Bank. Quantitative measures established by regulation 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). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirments to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as 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. There are no conditions or events since that notification that management believes have changed the Bank's category. ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) REGULATORY MATTERS -- (Continued) The Bank's actual capital amounts, in thousands, and ratios are presented in the following table:
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------ ------------------- ------------------ AMOUNT RATIO RATIO RATIO ---------- ----------- ------------------- ------------------ As of December 31, 1997: Total Capital (to Risk Weighted Assets) ......... $16,973 13.66% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $15,406 12.40% =>4.0% =>6.00% Tier I Capital (to Average Assets) ............... $15,406 8.53% =>4.0% =>5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) ......... $15,577 13.75% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $14,149 12.49% =>4.0% =>6.0% Tier I Capital (to Average Assets) ............... $14,149 8.53% =>4.0% =>5.00%
In May 1995, the Bank Insurance Fund ("BIF") of the FDIC reached its designated ratio of reserves to insured deposits (i.e., 1.25%). For this reason, the FDIC reduced the assessment rate applicable to BIF deposits in two stages, so that, beginning in 1996, the deposit insurance premiums for 92% of all BIF members in the highest capital and supervisory categories were set at $1,500 per year, regardless of deposit size. Beginning in 1997, BIF members were required to begin paying FICO-bond assessments in addition to the $1,500 annual assessment. The FICO bond assessment was $23,089 for the Company in 1997. (15) SUBSEQUENT EVENTS 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 Section 53-88. 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. Additionally, common stock, capital surplus, and retained earnings have been restated for all periods presented as appropriate to reflect the stock split, the increase in par value, and the increase in the capital surplus account. On July 22, 1998, the Bank was acquired by Bancorp which was newly-formed by the Bank on March 4, 1998, for the purpose of becoming the Bank's parent holding company. 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECB BANCORP, INC. (Registrant) Date: August 5, 1998 By: /s/ Arthur H. Keeney, III ----------------------------- Arthur H. Keeney, III President and Chief Executive Officer EXHIBIT INDEX PAGE NO. IN SEQUENTIAL EXHIBIT NO. EXHIBIT DESCRIPTION NUMBERING SYSTEM - ----------- ------------------- ------------------ 2 Agreement and Plan or Reorganization and Merger dated March 10, 1998 EX-2 2 EXHIBIT 2 EXHIBIT 2 AGREEMENT AND PLAN OF REORGANIZATION AND MERGER BY AND AMONG THE EAST CAROLINA BANK AND ECB INTERIM BANK AND ECB BANCORP, INC. THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (hereinafter called "Agreement") entered into as of the 10th day of March , 1998, by and among THE EAST CAROLINA BANK (the "Bank") and ECB BANCORP, INC. ("Bancorp"); WHEREAS, the Bank is a North Carolina banking corporation with its principal office and place of business located in Engelhard, North Carolina; and, WHEREAS, Bancorp is a North Carolina business corporation with its principal office and place of business located in Engelhard, North Carolina, which has been organized by the Bank at the direction of its Board of Directors for the purpose of acquiring all of the outstanding shares of Bank Stock and thereby becoming the Bank's parent bank holding company. Bancorp is authorized by its Articles of Incorporation to issue 10,000,000 shares of common stock, each of $3.50 par value (the "Bancorp Stock"), of which there are 100 shares issued and outstanding (all of which are owned by the Bank); and, WHEREAS, ECB Interim Bank ("Interim Bank") is a proposed interim North Carolina banking corporation to be organized as the wholly-owned subsidiary of Bancorp for the purpose of merger with the Bank as described in this Agreement, with its initial registered office to be located in Engelhard, North Carolina. Upon its organization, Interim Bank will be authorized by its Articles of Incorporation to issue 1,000 shares of common stock, each of $3.50 par value (the "Interim Bank Stock"), of which all shares to be issued and outstanding will be owned by Bancorp; and, upon such organization, Interim Bank shall execute and become a party to this Agreement; and, WHEREAS, the Board of Directors of the Bank has approved this Agreement and will recommend to the Bank's shareholders approval of the plan and transactions described herein, including, among other items, a merger to be effected between the Bank and Interim Bank in the manner and upon the terms and conditions hereinafter set forth; and, WHEREAS, the Board of Directors of Bancorp has approved this Agreement and such merger and the other transactions described herein, including the issuance of shares of Bancorp Stock to the Bank's shareholders to effectuate said transactions, all as hereinafter set forth. NOW, THEREFORE, the Bank, Interim Bank and Bancorp, for and in consideration of the premises and their mutual promises, and subject to the terms and conditions hereinafter contained, hereby adopt and make this Agreement and mutually agree as follows: ARTICLE I. PLAN OF MERGER 1.1 NAMES OF MERGING CORPORATIONS. The names of the banking corporations proposed to be merged are THE EAST CAROLINA BANK (the "Bank") and ECB INTERIM BANK ("Interim Bank"). 1.2 NATURE OF TRANSACTIONS. At the "Effective Time" (as defined in Paragraph 1.8 below), Interim Bank shall be merged into and with the Bank (the "Merger"), at which time the separate corporate existence of Interim Bank shall cease while the corporate existence of the Bank, with all of its purposes, objects, rights, privileges, powers and franchises, shall continue unaffected and unimpaired by the Merger. 1.3 SURVIVING CORPORATION. Upon consummation of the Merger, the Bank shall be the surviving corporation and shall become and operate under the name "The East Carolina Bank" as the wholly-owned banking subsidiary of Bancorp, and will continue to conduct the business of a North Carolina banking corporation at the then legally established branch and main offices of the Bank. The duration of the corporate existence of the Bank, as the surviving corporation, shall be perpetual and unlimited. 1.4 ASSETS AND LIABILITIES OF THE BANK. At the Effective Time and by reason of the Merger and in accordance with N.C. GEN. STAT. ss.ss. 53-13 and 53-17, the Bank shall acquire all of the assets of every kind and character of Interim Bank (including, but not limited to, all real, personal or mixed property, all debts due in whatever account, all other choses in action and all and every other interest of or belonging to or due to Interim Bank), and shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature (including all trust and fiduciary properties, powers and rights) of Interim Bank, all of which shall pass or be transferred to and vest in the Bank without any conveyance, assignment or further act or deed; and, the Bank shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description (including duties as trustee or fiduciary) of Interim Bank as of the Effective Time. 1.5 CONVERSION AND EXCHANGE OF STOCK. a. CONVERSION OF BANK STOCK. At the Effective Time, all rights of the shareholders of the Bank with respect to the outstanding shares of the Bank's common stock ("Bank Stock") shall cease to exist, and, as consideration for and to effectuate the Merger, each such outstanding share of Bank Stock shall be converted, without any action on the part of the Bank, Bancorp or the holder thereof, into one (1) share of Bancorp Stock. Certificates representing shares of Bank Stock outstanding at the Effective Time (herein sometimes referred to as "Old Certificates") shall thereafter, and without any action by the Bank, Bancorp or any holder thereof, evidence only the right of the registered holder thereof to receive, and following the Effective Time may be exchanged for, either (I) certificates for the number of whole shares of Bancorp Stock to which such holders shall have become entitled on the basis set forth above, plus cash for any fractional share interests as provided herein, or (II) in the case of shareholders perfecting dissenters' rights, cash as provided in Article 13 of Chapter 55 of the North Carolina General Statutes. b. ISSUANCE OF SHARES BY BANCORP AND THE BANK. At the Effective Time, Bancorp shall issue and deliver to the transfer agent of Bancorp Stock (the "Transfer Agent"), one certificate representing the aggregate number of whole shares of Bancorp Stock into which the outstanding shares of Bank Stock have been converted as provided above; and, the Bank shall issue and deliver to Bancorp one certificate representing the number of shares of Bank Stock as were outstanding immediately prior to the Effective Time and which, at such time, were converted into shares of Bancorp Stock. The Transfer Agent shall divide the certificate delivered to it by Bancorp into certificates evidencing such numbers of shares of Bancorp Stock as the respective shareholders of the Bank shall have become entitled, and shall register such shares in the names of such shareholders and deliver said certificates to the individual shareholders entitled thereto upon and in exchange for the delivery to the Transfer Agent by said individual shareholders of their Old Certificates. c. ANTIDILUTIVE ADJUSTMENTS. If, prior to the Effective Time, Bancorp shall declare any dividend payable in shares of Bancorp Stock or shall subdivide, split, reclassify or combine the presently outstanding shares of Bancorp Stock, an appropriate and proportionate adjustment shall be made in the number of shares of Bancorp Stock to be issued in exchange for each of the shares of Bank Stock. d. TREATMENT OF FRACTIONAL SHARES. No scrip or certificates representing fractional shares of Bancorp Stock will be issued and no right to vote or to receive any dividend or other distribution shall attach to any fraction of a share of Bancorp Stock resulting from the above exchange. In the event the exchange of shares results in the creation of fractional shares, the Transfer Agent shall sell the aggregate of such fractional shares at public auction or by private sale (including a sale to Bancorp), or through a dealer or by any other reasonable method, at its election, for the best available price, and remit the net proceeds of such sale(s) to the Bank's shareholders in accordance with their respective interests therein. e. SURRENDER OF CERTIFICATES. Subject to subparagraph 1.5.g. below, no certificate for any shares of Bancorp Stock or cash for any fractional share shall be delivered to any shareholder of the Bank unless and until such shareholder shall have surrendered to the Transfer Agent the Old Certificate(s) formerly representing his or her shares of Bank Stock. Further, until such Old Certificate(s) are so surrendered, no dividend or other distribution payable to holders of record of Bancorp Stock as of any date subsequent to the Effective Time shall be delivered to the holder of such Old Certificate(s); provided, that, upon surrender of such Old Certificate(s), the holder hereof shall be entitled to receive the amount of any such dividends or distributions which have accrued but remain unpaid with respect to the shares of Bancorp Stock represented by such certificate(s). f. DISSENTERS. Any shareholder of the Bank perfecting dissenters' rights with respect to the Merger in the manner required by the North Carolina General Statutes shall be entitled to receive payment of the fair value of his shares of Bank Stock in the manner and pursuant to the procedures provided therein. Any shares of Bancorp Stock authorized to be issued pursuant to this Agreement but not exchanged for shares of Bank Stock because of the dissent or objection of a shareholder of the Bank and the receipt by him of cash in lieu of shares, may be sold by the Transfer Agent at public auction or by private sale (including a sale to Bancorp), or through a dealer or by any other reasonable method, at its election, for the best available price, and the net proceeds of any such sale shall be retained by Bancorp. g. LOST CERTIFICATES. Shareholders of the Bank whose certificates evidencing shares of Bank Stock have been lost, destroyed, stolen or are otherwise missing shall be entitled to receive certificates representing the shares of Bancorp Stock to which they are entitled in accordance with and upon compliance with conditions imposed by the Transfer Agent or Bancorp pursuant to the provisions of N.C. GEN. STAT. ss.ss. 25-8-405 and 25-8-104. h. OUTSTANDING BANCORP AND INTERIM BANK STOCK. Following the Effective Time, each of the shares of Bancorp Stock which are issued and outstanding immediately prior to the Effective Time shall be repurchased by Bancorp from the Bank for the amount paid for such shares upon their original issuance. At the Effective Time, each of the shares of Interim Bank Stock which are issued and outstanding immediately prior to the Effective Time shall, without any action on the part of the Bank, Interim Bank or Bancorp, be converted into and exchanged for a like number of shares of Bank Stock as the surviving corporation, and, thereafter, the certificates formerly representing such shares of Interim Bank Stock shall be canceled. Following the Effective Time, the Bank may purchase and redeem such shares of Bank Stock from Bancorp for the amount paid by Bancorp for the original shares of Interim Bank Stock upon their issuance. i. OUTSTANDING STOCK OPTIONS. At the Effective Time, each then currently outstanding option to purchase shares of Bank Stock shall be converted into an option to purchase the same number of shares of Bancorp Stock on the same terms and subject to the same conditions and restrictions as are provided for in the Bank's Omnibus Stock Ownership and Long Term Incentive Plan and the individual option agreement evidencing such option, and Bancorp shall be deemed to have assumed the Bank's obligations under each such option agreement and such Plan. 1.6. ARTICLES, BY-LAWS AND MANAGEMENT. The Articles of Incorporation and By-Laws of the Bank in effect at the Effective Time shall be the Articles of Incorporation and By-Laws of the Bank as the surviving corporation. The officers and directors of the Bank in office at the Effective Time of the Merger shall continue to hold such offices until removed as provided by law or until the election or appointment of their respective successors. 1.7. OFFICES OF THE BANK. Subject to the approval of appropriate regulatory authorities and following the Effective Time, the Bank shall continue the operation of the present offices of the Bank. 1.8. EFFECTIVE TIME. The Merger shall be effective on the date and at the time (the "Effective Time") so specified in Articles of Merger which shall include the Plan of Merger contained herein and which shall be duly executed by the Bank as the surviving entity and, with the approval of the North Carolina Commissioner of Banks, shall be presented to and filed by the North Carolina Secretary of State in accordance with law. ARTICLE II. ADDITIONAL AGREEMENTS 2.1. ORGANIZATION OF INTERIM BANK. Following the date hereof, Bancorp shall use its best efforts to cause Interim Bank to be organized as its wholly-owned North Carolina "interim" bank subsidiary for the purpose of merger with the Bank. Upon the completed organization of Interim Bank, Bancorp shall take such action as Interim Bank's sole shareholder as is necessary to cause this Agreement to be executed on behalf of Interim Bank, whereupon this Agreement shall become enforceable as to Interim Bank. Prior to such execution by Interim Bank, this Agreement shall be enforceable by and between the Bank and Bancorp without regard to the lack of execution hereof by Interim Bank. 2.2. "BLUE SKY" APPROVALS. As soon as practicable following the execution of this Agreement, Bancorp shall take all such actions under applicable state securities laws as reasonably shall be necessary to cause the Bancorp Stock to be issued upon consummation of the Merger, at the time of the issuance thereof, to be duly qualified or registered (unless exempt), to cause all conditions to any exemptions from qualification or registration under applicable state securities laws to have been satisfied, and to obtain any and all required approvals or consents to the issuance thereof. 2.3. APPROVAL OF SHAREHOLDERS. This Agreement shall be submitted for approval, ratification and confirmation to the shareholders of the Bank at the Bank's next annual meeting of shareholders to be duly called and held in accordance with the Bank's By-Laws and all applicable provisions of law following the date hereof. In accordance with the Securities Exchange Act of 1934 (the "Act") and applicable regulations promulgated thereunder by the Federal Deposit Insurance Corporation ("FDIC"), the Bank will prepare and file with the FDIC and, thereafter, will mail to its shareholders as soon as practicable and in accordance with law a proxy statement (the "Proxy Statement") for purposes of the solicitation of appointments of proxy for use at the meeting. The Proxy Statement will contain such information as may be required by the Act and applicable regulations thereunder and North Carolina law. The Proxy Statement will indicate that the Board of Directors of the Bank considers the Merger to be advisable and to the advantage of the Bank and its shareholders and, accordingly, that it recommends ratification and approval of this Agreement and the transactions contemplated hereby. 2.4. REGULATORY APPROVALS. Promptly following the date of this Agreement, the Bank and Bancorp each shall prepare, submit and file, or cause to be prepared, submitted and filed, all applications for regulatory approvals and actions as may be required of them, respectively, by applicable law and regulations with respect to the transactions contemplated by this Agreement (including applications to the North Carolina Commissioner of Banks, the FDIC, the Board of Governors of the Federal Reserve System (the "Federal Reserve") and to state securities regulatory agencies). Each such party shall cooperate with the others in the preparation of all of the foregoing applications and shall promptly furnish upon request all documents, information, financial statements or other material that may be required to complete such applications. Should the appearance of any of the officers, directors, employees or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance. 2.5. CLOSING. A closing and consummation of the Merger (the "Closing") shall be held on such date (the "Closing Date") and at such reasonable time following the satisfaction of all conditions to the Merger and at such location as shall be specified by Bancorp, but in no event later than thirty (30) business days after all conditions of the Merger have been satisfied or effectively waived. 2.6. FURTHER ACTION. The Bank, Interim Bank and Bancorp each represents and warrants to and covenants with each other such party that it or they will use its or their best efforts in good faith to take or cause to be taken all action required of it or them hereunder as promptly as practicable so as to permit the consummation of the transactions contemplated herein at the earliest possible date, and shall cooperate fully with each other such party in delivering all documents or instruments reasonably necessary or useful to any party hereto in carrying out such transactions. 2.7. "AFFILIATES" OF THE BANK. The Bank shall, if requested by Bancorp following the execution and delivery of this Agreement, promptly deliver to Bancorp a list of persons deemed by it and its counsel to be "affiliates" of the Bank as that term is defined in Rule 405 promulgated under the Securities Act of 1933 (which such list shall be subject to the review and concurrence of Bancorp and its counsel), and, thereafter, the Bank agrees that, if requested by Bancorp, each such affiliate (as well as such additional persons as shall be deemed by Bancorp or its counsel to be affiliates of the Bank, including certain persons, trusts, estates, corporations or other entitles related to persons deemed to be affiliates of the Bank) shall execute and deliver to Bancorp a written agreement ("Affiliates' Agreement") in form and content satisfactory to Bancorp relating to restrictions on shares of Bancorp Stock to be received by such affiliates pursuant to this Agreement. In such event, certificates for the shares of Bancorp Stock issued to affiliates of the Bank shall bear a restrictive legend (substantially in the form as shall be set forth in the Affiliates' Agreement) with respect to the restricted nature of such shares. ARTICLE III. CONDITIONS PRECEDENT TO MERGER The obligations of the parties to this Agreement to consummate the transactions contemplated herein shall be conditioned upon the satisfaction of the following conditions precedent on or prior to the Closing Date. 3.1. MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change in the financial condition, business, properties, assets, or operation of the Bank or Bancorp, nor shall any event have occurred, which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change. 3.2. ADVERSE PROCEEDINGS, INJUNCTION, ETC. There shall not be any order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits any of the transactions described herein or any of the parties hereto from consummating any such transaction, nor any pending or threatened investigation of such transactions by the United States Department of Justice, or any suit, action or proceeding instituted by any governmental, administrative or regulatory agency, pending or threatened before any court or governmental agency, seeking to restrain or prohibit the Bank, Interim Bank or Bancorp from carrying out any of the terms or provisions of this Agreement. 3.3. APPROVAL BY GOVERNMENTAL OR REGULATORY AUTHORITIES; NO DISADVANTAGEOUS CONDITIONS. (I) The transactions contemplated hereunder shall have been approved, to the extent required by law, by the Federal Reserve, Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks and the State Banking Commission, and by all other governmental or regulatory agencies or authorities having jurisdiction over such transactions; (II) no governmental or regulatory agency or authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by Bancorp or the Bank to be disadvantageous or burdensome; (III) the fifteen-day waiting period required following necessary approvals by the Federal Reserve and FDIC for review of the transactions contemplated herein by the United States Department of Justice shall have expired; and (IV) all other consents, approvals, and permissions and the satisfaction of all of the requirements prescribed by law necessary to the carrying out of the transactions contemplated herein shall have been procured (including without limitation any required approval of the Commissioner of Banks or the FDIC for the payment of cash to shareholders of the Bank, if any, who perfect dissenters' rights as provided in Article 13, Chapter 55 of the North Carolina General Statutes). 3.4. APPROVAL BY BOARDS OF DIRECTORS AND SHAREHOLDERS. The Boards of Directors of the Bank, Interim Bank and Bancorp shall have duly approved and adopted this Agreement by appropriate resolutions, and the shareholders of the Bank and of Interim Bank shall have duly approved, ratified and confirmed this Agreement to the extent required by and in accordance with this Agreement and North Carolina law. 3.5. COMPLIANCE WITH AGREEMENTS. Unless waived by the other parties hereto in accordance with Paragraph 5.1. below, the Bank and Bancorp each shall have performed in all material respects their respective obligations, covenants and agreements hereunder to be performed before or at Closing. Each of the parties hereto, by and through their respective Presidents or Chief Executive Officers, shall have executed and delivered to the other parties a certificate, dated as of the Closing Date, with regard to the foregoing and such other matters as may be reasonably requested. 3.6. COMPLIANCE WITH "BLUE SKY" REQUIREMENTS. The Bancorp Stock to be issued upon consummation of the Merger shall have been duly qualified or registered (unless exempt) by Bancorp under applicable state securities laws, all conditions to any exemptions from qualification or registration shall have been satisfied, and any and all required approvals or consents to the issuance of such Bancorp Stock shall have been obtained. 3.7. FAVORABLE FEDERAL TAX ASPECTS OF MERGER. The parties hereto shall have received favorable assurances which are satisfactory to the Bank and Bancorp, either in the form of a favorable opinion of independent certified public accountants or of legal counsel, to the effect that the Merger will be treated for tax purposes under the Internal Revenue Code of 1986, as amended, as a tax-free reorganization, and that such related matters as are customarily covered by such opinions shall be favorably treated for tax purposes. 3.8. AGREEMENTS FROM AFFILIATES OF THE BANK. If requested by Bancorp, Bancorp shall have received the written Affiliates' Agreements in form and content satisfactory to Bancorp signed by all persons who are deemed by Bancorp or its counsel to be "affiliates" of the Bank as provided in Paragraph 2.7. above. 3.9. NO TERMINATION OR ABANDONMENT. This Agreement shall not have been terminated by any party hereto. 3.10 ARTICLES OF MERGER; OTHER ACTIONS. Articles of Merger in the form described in Paragraph 1.8. above shall have been duly executed by the Bank as provided in that Paragraph. ARTICLE IV. TERMINATION At any time prior to the Effective Time, and whether before or after approval hereof by the shareholders of the Bank, this Agreement may be terminated by the mutual consent of a majority of the members of each of the Boards of Directors of the Bank and Bancorp; or, otherwise, by the majority vote of the Board of Directors of either Bancorp or the Bank in the event that: (i) There shall have been any materially adverse change in the business, operations, properties, assets or financial condition of the other corporation since the date hereof; or, the other corporation shall have violated any of its obligations, covenants or agreements contained herein in any material respect; (ii) Any suit, action or proceeding shall have been instituted or threatened in which it is sought to restrain or prohibit the consummation of the transactions contemplated herein, or there shall be any other suit, action or proceeding instituted or threatened or any liability or claim shall have been asserted against the Bank, Interim Bank or Bancorp or any of their officers or directors which shall reasonably be considered by either such corporation to be materially burdensome in relation to the proposed Merger or materially adverse in relation to the financial condition of either such corporation, and the same has not been dismissed, terminated or resolved to the satisfaction of all parties hereto within ninety (90) days of the institution or threat thereof; (iii) This Agreement and the transactions described herein are not approved, ratified and affirmed by the shareholders of the Bank in the manner required by law at the meeting held for that purpose as herein provided; (iv) The Merger shall not have become effective on or before July 31, 1998, unless such date is extended as evidenced by the written mutual agreement of the parties hereto; or (v) Such Board of Directors shall determine that consummation of the Merger for any reason is not in the best interests of the Bank or its shareholders. ARTICLE V. MISCELLANEOUS PROVISIONS 5.1. WAIVER. Any term or condition of this Agreement may be waived (except as to matters of regulatory approvals and approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof; provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its Board of Directors) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party, or be construed to be a waiver of any succeeding breach of the same term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand a full and complete compliance with such terms. 5.2. AMENDMENT. This Agreement may be amended, modified or supplemented at any time or from time to time prior to the Effective Time, and either before or after its approval by the shareholders of the Bank and Interim Bank, by an agreement in writing approved by a majority of the Board of Directors of Bancorp and executed in the same manner as this Agreement; provided, however, that except as authorized herein, no change in the exchange ratio specified herein may be made following shareholder ratification except with such shareholder approval of that change. 5.3. FURTHER ASSURANCE. The Bank, Interim Bank and Bancorp each agree to furnish to the others such further assurances with respect to the matters contemplated herein and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other party may reasonably request. 5.4. HEADINGS AND CAPTIONS. Headings and captions of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof. 5.5. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the Bank, Interim Bank and Bancorp with respect to the transactions contemplated herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to any party hereto or other provisions other than those contained herein. 5.6. SEVERABILITY OF PROVISIONS. The invalidity or unenforceability of any term, phrase, clause, paragraph, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof. 5.7. COUNTERPARTS. Any number of counterparts of this Agreement may be signed and delivered, each of which shall be considered an original and which together shall constitute one agreement. 5.8. GOVERNING LAW. This Agreement is made in and shall be construed and enforced in accordance with the laws of North Carolina. IN WITNESS WHEREOF, the Bank, Interim Bank and Bancorp each has caused this Agreement to be executed in its name by its duly authorized officers as of the date first above written. THE EAST CAROLINA BANK By: /s/ Arthur H. Keeney, III ------------------------- Arthur H. Keeney, III President ATTEST: /s/ Jo Ellen Cutrell - -------------------- Jo Ellen Cutrell Secretary ECB BANCORP, INC. By: /s/ Arthur H. Keeney, III ------------------------- Arthur H. Keeney, III President ATTEST: /s/ Jo Ellen Cutrell - -------------------- Jo Ellen Cutrell Secretary IN WITNESS WHEREOF, ECB Interim Bank has caused this Agreement to be executed in its name by its duly authorized officers for the purpose of joining as a party hereto and, by such execution, it hereby adopts and agrees to each of the terms and conditions herein as its own, all as of the date first above written. ECB INTERIM BANK By: /s/ Arthur H. Keeney, III ------------------------- Arthur H. Keeney, III President ATTEST: /s/ Jo Ellen Cutrell - -------------------- Jo Ellen Cutrell Secretary -----END PRIVACY-ENHANCED MESSAGE-----