10QSB 1 0001.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _____________________ Commission File No. 2017-6 -------------------------- ECB Bancorp, Inc. ----------------- (Exact name of registrant as specified in its charter) North Carolina 56-0215930 -------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Post Office Box 337, Engelhard, North Carolina 27824 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) (252) 925-9411 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 10, 2000, 2,093,418 shares of the registrant's common stock, $3.50 par value, were outstanding. This Form 10-QSB has 15 pages. Part I. FINANCIAL INFORMATION Item 1. Financial Statements ECB BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (dollar amounts in thousands)
June 30, December 31, Assets 2000 1999* ------------------------------------------------------------------------------------- ----------- (unaudited) Non-interest bearing deposits and cash $15,876 $11,139 Federal funds sold 3,900 6,650 ------------------------------------------------------------------------------------- ----------- Total cash and cash equivalents 19,776 17,789 ------------------------------------------------------------------------------------- ----------- Investment securities Available-for-sale, at market value (cost of $59,941 and $59,797 at June 30, 2000 and December 31, 1999, respectively) 58,915 58,939 Loans 164,340 147,676 Allowance for probable loan losses (2,721) (2,700) ------------------------------------------------------------------------------------- ----------- Loans, net 161,619 144,976 ------------------------------------------------------------------------------------- ----------- Real estate acquired in settlement of loans, net 83 183 Federal Home Loan Bank stock, at cost 633 633 Bank premises and equipment, net 7,407 6,727 Accrued interest receivable 2,833 2,259 Other assets 2,074 1,607 ------------------------------------------------------------------------------------- ----------- Total $253,340 $233,113 ------------------------------------------------------------------------------------- ----------- Liabilities and Shareholders' Equity ------------------------------------------------------------------------------------- ----------- Deposits Demand, noninterest bearing $53,376 $43,638 Demand interest bearing 64,806 60,623 Savings 13,296 14,823 Time 91,542 84,217 ------------------------------------------------------------------------------------- ----------- Total deposits 223,020 203,301 ------------------------------------------------------------------------------------- ----------- Short-term borrowings 2,598 2,738 Long-term obligations 3,000 3,000 Accrued interest payable 974 817 Other liabilities 1,241 1,195 ------------------------------------------------------------------------------------- ----------- Total liabilities 230,833 211,051 ------------------------------------------------------------------------------------- ----------- Shareholders' equity Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,102,670 and 2,121,529 at June 30, 2000 and December 31, 1999, respectively. 7,359 7,425 Capital surplus 6,096 6,229 Retained earnings 9,757 9,009 Deferred compensation - restricted stock (28) (35) Accumulated other comprehensive loss (677) (566) ------------------------------------------------------------------------------------- ----------- Total shareholders' equity 22,507 22,062 ------------------------------------------------------------------------------------- ----------- Commitments ------------------------------------------------------------------------------------- ----------- Total $253,340 $233,113 ------------------------------------------------------------------------------------- -----------
See accompanying notes to consolidated financial statements. * Derived from audited consolidated financial statements. 2 ECB BANCORP, INC. AND SUBSIDIARY Consolidated Income Statements For the three and six months ended June 30, 2000 and 1999 (unaudited - dollar amounts in thousands, except net income per share)
Three months ended Six months ended June 30 June 30 2000 1999 2000 1999 ---------------------------------------------- ----------- ----------- ------------ ----------- Interest Income: Interest and fees on loans $3,672 $3,112 $7,039 $6,092 Interest on investment securities: Interest exempt from federal income taxes 153 197 324 394 Taxable interest income 741 496 1,490 1,042 Interest on federal funds sold 101 53 166 95 ---------------------------------------------- ----------- ----------- ------------ ----------- Total interest income 4,667 3,858 9,019 7,623 ---------------------------------------------- ----------- ----------- ------------ ----------- Interest expense: Deposits: Demand accounts 345 315 674 554 Savings 55 53 111 109 Time 1,325 995 2,492 2,027 Short-term borrowings 27 - 56 6 Long-term obligations 35 33 71 61 ---------------------------------------------- ----------- ----------- ------------ ----------- Total interest expense 1,787 1,396 3,404 2,757 ---------------------------------------------- ----------- ----------- ------------ ----------- Net interest income 2,880 2,462 5,615 4,866 Provision for probable loan losses 70 60 130 120 ---------------------------------------------- ----------- ----------- ------------ ----------- Net interest income after provision for probable loan losses 2,810 2,402 5,485 4,746 ---------------------------------------------- ----------- ----------- ------------ ----------- Non-interest income: Service charges on deposit accounts 357 344 699 666 Other service charges and fees 231 168 336 273 Net loss on sale of securities (2) (3) (2) (3) Other operating income 9 11 26 29 ---------------------------------------------- ----------- ----------- ------------ ----------- Total non-interest income 595 520 1,059 965 ---------------------------------------------- ----------- ----------- ------------ ----------- Non-interest expenses: Salaries 977 877 1,898 1,705 Retirement and other employee benefits 302 266 598 526 Occupancy 193 146 403 327 Equipment 341 226 597 463 Professional fees 82 117 136 182 Supplies 76 74 175 138 Telephone 84 54 180 115 Postage 27 40 76 86 Other operating expenses 486 469 948 879 ---------------------------------------------- ----------- ----------- ------------ ----------- Total non-interest expenses 2,568 2,269 5,011 4,421 ---------------------------------------------- ----------- ----------- ------------ ----------- Income before income taxes 837 653 1,533 1,290 Income taxes 255 160 435 315 ---------------------------------------------- ----------- ----------- ------------ ----------- Net income $582 $493 $1,098 $975 ---------------------------------------------- =========== =========== ============ =========== Net income per share (basic and diluted) $0.28 $0.23 $0.52 $0.46 Weighted average common shares outstanding 2,110,388 2,128,829 2,113,946 2,127,051 ---------------------------------------------- ----------- ----------- ------------ -----------
See accompanying notes to consolidated financial statements. 3 ECB BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity For the six months ended June 30, 2000 and 1999 (unaudited - dollar amounts in thousands)
Deferred Accumulated Compensation Other Common Capital Retained Restricted Comprehensive Comprehensive Stock Surplus Earnings Stock (Loss) Income Total ---------- ---------- ---------- ---------- ------------ ----------- ---------- Balance January 1, 1999 $ 7,438 $ 6,261 $ 7,481 $ 673 $21,853 Unrealized losses, net of income taxes of $376 (730) ($730) (730) Net income 975 975 975 Deferred compensation - restricted stock issuance 12 29 $ (41) Recognition of deferred compensation - restricted stock 2 2 ----------- Total comprehensive income $ 245 =========== Cash dividends ($.145 per share) (309) (309) ---------- ---------- ----------- ----------- ------------ --------- Balance June 30, 1999 $ 7,450 $ 6,290 $ 8,147 $ (39) $ (57) $21,791 ========== ========== =========== =========== ============ ========= Deferred Accumulated Compensation Other Common Capital Retained Restricted Comprehensive Comprehensive Stock Surplus Earnings Stock (Loss) Income Total ---------- ---------- ---------- ---------- ------------ ----------- ---------- Balance January 1, 2000 $ 7,425 $ 6,229 $ 9,009 $ (35) $ (566) $22,062 Unrealized losses, net of income taxes of $57 (111) $ (111) (111) Net income 1,098 1,098 1,098 Recognition of deferred compensation - restricted stock (3) 7 4 ----------- Total comprehensive income $ 987 =========== Repurchase of common stock (66) (130) (196) Cash dividends ($.165 per share) (350) (350) ---------- ---------- ----------- ----------- ------------ ---------- Balance June 30, 2000 $ 7,359 $ 6,096 $ 9,757 $ (28) $ (677) $22,507 ========== ========== =========== =========== ============ ==========
See accompanying notes to consolidated financial statements. 4 ECB BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999 (Unaudited - dollar amounts in thousands)
Six Months Ended June 30 Cash flows from operating activities: 2000 1999 ----------- ----------- Net income $1,098 $975 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 346 334 Amortization of investment securities, net (22) 33 Provision for probable loan losses 130 120 Loss on sale of available-for-sale securities 2 3 Deferred compensation - restricted stock 4 - Increase in accrued interest receivable (574) (69) Gain on sale of real estate acquired in settlement of loans (9) - Increase in other assets (410) (406) Increase (decrease) in accrued interest payable 157 (31) Increase in postretirement benefit liability 34 4 Increase (decrease) in other liabilities, net (9) 5 ---------------------------------------------- ----------- ----------- Net cash provided by operating activities 747 968 ---------------------------------------------- ----------- ----------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale 1,144 1,197 Proceeds from maturities of investment securities classified as available-for-sale 6,815 11,195 Purchases of investment securities classified as available-for-sale (8,083) (6,589) Purchase of Federal Home Loan Bank common stock - (68) Purchases of premises and equipment (1,026) (1,204) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale 109 - Net loan originations (16,773) (10,484) ---------------------------------------------- ----------- ----------- Net cash used by investing activities (17,814) (5,953) ---------------------------------------------- ----------- ----------- Cash flows from financing activities: Net increase in deposits 19,719 9,294 Repayment of short-term borrowings (140) (2,725) Proceeds from long-term obligations - 3,000 Dividends paid (329) (154) Repurchase of common stock (196) - ---------------------------------------------- ----------- ----------- Net cash provided by financing activities 19,054 9,415 ---------------------------------------------- ----------- ----------- Increase in cash and cash equivalents 1,987 4,430 Cash and cash equivalents at beginning of period 17,789 11,787 ----------- ----------- Cash and cash equivalents at end of period $ 19,776 $ 16,217 =========== =========== Cash paid during the period: Interest $ 3,247 $ 2,788 Taxes 300 300 Supplemental disclosures of noncash financing and investing activities: Cash dividends declared but not paid $ 175 $ 155 Unrealized losses on available-for-sale securities, net of deferred taxes (111) (730)
See accompanying notes to consolidated financial statements. 5 ECB BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Basis of Presentation The consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") 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 Courier, Inc. and Carolina Financial Realty, Inc. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The footnotes in Bancorp's annual report on Form 10-KSB should be referenced when reading these unaudited interim financial statements. Operating results for the six month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. (2) Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks (with original maturities of ninety days or less) and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (3) Allowance for Probable Loan Losses The following summarizes the activity in the allowance for probable loan losses for the six months ended June 30, 2000 and 1999, respectively. Six months ended June 30, ------------------------- 2000 1999 ---- ---- Balance at the beginning of the period $ 2,700,000 2,750,000 Provision for probable loan losses 130,000 120,000 Charge-offs (140,000) (220,000) Recoveries 31,000 50,000 ----------- ----------- Net charge-offs (109,000) (170,000) ----------- ----------- Balance at the end of the period $ 2,721,000 2,700,000 =========== =========== (4) Net income 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. The stock options granted in 1998 had no dilutive effect on net income per share for the six months ended June 30, 2000 and 1999. 6 (5) Reclassifications Certain items in the prior period consolidated financial statements have been reclassified to conform with the current presentation. Such reclassifications had no impact on net income or shareholders' equity as previously reported. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General ECB Bancorp, Inc. ("Bancshares") is a bank holding company headquartered in Engelhard, North Carolina. Bancshares' wholly-owned subsidiary, The East Carolina Bank (the "Bank") (collectively referred to hereafter as the "Company"), is a state-chartered community bank which was founded in 1919. The Bank offers a full range of banking services through 15 branches serving eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Barco, Avon, Hatteras, Ocracoke, Washington and Greenville (two branches). The operations of the Company and depository institutions in general are significantly influenced by general economic conditions and by related monetary, fiscal and other policies of depository institution regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina State Banking Commission. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. Comparison of the Results of Operations for the Six Month Periods Ended June 30, 2000 and 1999 Summary For the six months ended June 30, 2000, the Company had net income of $1,098,000, or $0.52 basic and diluted earnings per share, compared to $975,000, or $0.46 basic and diluted earnings per share for the six months ended June 30, 1999. For the six months ended June 30, 2000, net interest income increased 15.39% and non-interest income increased 9.74% when compared to the same period last year. Non-interest expense increased $590,000 or 13.35% for the six months ended June 30, 2000 as compared to the same period in 1999, partly attributable to general increases in salary and employee benefits expense of $265,000. Net interest income Total interest income increased $1,396,000 for the six months ended June 30, 2000 compared to the six months ended June 30, 1999, principally due to an increase in the average volume of loans of $17.1 million. Yield on average earning assets, on a tax-equivalent basis, for the six months ended June 30, 2000 was 8.29% compared to 8.08% in 1999. Total interest expense increased $647,000 for the six months ended June 30, 2000 compared to the six months ended June 30, 1999, as a result of average balances of interest-bearing demand deposits increasing by $8.0 million and increased average balances of jumbo certificates of deposit of $8.7 million. The cost of funds for the Company during the first six months of 2000 increased 36 basis points when compared to the six months ended June 30, 1999. The Company's increase in the cost of funds was partially offset by increased non-interest-bearing demand deposits of $8.1 million over the first half of 1999. Net interest income for the six months ended June 30, 2000 was $5,615,000, an increase of $749,000 or 15.39% when compared to net interest income of $4,866,000 for the six months ended June 30, 1999. The Company's net interest margin, on a tax-equivalent basis, for the six months ended June 30, 2000 was 5.22% compared to 5.24% in 1999. The stability of the Company's net interest margin is attributable to its closely matched rate sensitive-asset and rate-sensitive liability gap position. 8 Provision for probable loan losses The provision for probable loan losses charged to operations during the first six months of 2000 was $130,000, compared to $120,000 during the first six months of 1999. Net charge-offs for the six months ended June 30, 2000 totaled $109,000, compared to net charge-offs of $170,000 during the same period of 1999. Higher prior year net charge-offs are primarily the result of farm related credit loss of approximately $75,000. The amount charged for provision for probable loan losses is the result of management's review and evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience. Non-interest income Non-interest income increased $94,000 to $1,059,000 for the six months ended June 30, 2000 from $965,000 for the same period in 1999. This increase is due to increased service charge fees on personal checking accounts of $29,000, mortgage loan origination fees of $26,000 generated by the Company's mortgage loan product and net fees of $25,000 derived from a new accounts receivable purchase product introduced in the second quarter of this year. The product known as Business Manager, is an accounts receivable purchasing program that is geared toward small businesses. Through this program, ECB purchases accounts receivables from its business customers at a discount and receives payments directly from the accounts debtors. Non-interest expense Non-interest expense increased $590,000 or 13.35% to $5,011,000 for the six months ended June 30, 2000 from the same period in 1999. This increase is principally due to general increases in salary and employee benefits expense of $265,000 of which $110,000 is related to the new Washington office. Occupancy expense increased $76,000 over the prior year period as the Bank's building rental expense increased $70,000 as a result of expanding the Avon office during the first quarter of 2000 and opening of the Washington office in June of 1999. Bank supply expense increased during the first six months of 2000 due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's check image statement. Telephone and communications expense increased $65,000 over the prior year period due to voice and data equipment upgrades. Equipment expense increased $134,000 as the Company began paying for its newly implemented image check processing system. Other operating expenses increased $69,000 from $879,000 for the six months ended June 30, 1999 to $948,000 for the six months ended June 30, 2000. This increase is primarily due to increased expense related to the Bank's Best Checking Account products of approximately $54,000 and increased advertising expense of $26,000 compared to the first half of 1999. These increases were partially offset by the reduction of Club 7 credit card program expense of $47,000 as the Bank completed its two-year co-branding obligation with a local television station. Income taxes Income tax expense for the six months ended June 30, 2000 and 1999 was $435,000 and $315,000, respectively, and effective tax rates were 28.38% and 24.42%, respectively. The increase in the effective tax rate during for the six months ended June 30, 2000 as compared to the same period last year is due to lower tax exempt interest income resulting from the sale of approximately $3.2 million of certain municipal obligations during the third quarter of 1999. Comparison of the Results of Operations for the Three Month Periods Ended June 30, 2000 and 1999 Summary For the three months ended June 30, 2000, the Company had net income of $582,000, or $0.28 basic and diluted earnings per share, compared to $493,000, or $0.23 basic and diluted earnings per share for the three months ended June 30, 1999. Net interest income increased 16.98% to $2,880,000 in the second 9 quarter of 2000 from $2,462,000 in the second quarter of 1999, and non-interest income increased $75,000 or 14.42% when compared to the same period last year. Non-interest expense increased $299,000 or 13.18% for the three month period ended June 30, 2000 as compared to the same period in 1999 partly attributable to the opening of the new Washington office and the addition of personnel at the Company's corporate office. Salary and employee benefits expense increased $136,000 to $1,279,000 compared to $1,143,000 during the second quarter of 1999. Net interest income Net interest income for the three months ended June 30, 2000 was $2,880,000, an increase of $418,000 or 16.99% when compared to net interest income of $2,462,000 for the three months ended June 30, 1999. The net interest margin, on a tax-equivalent basis, for the three months ended June 30, 2000 was 5.19% compared to 5.21% in 1999. Total interest income increased $809,000 for the three months ended June 30, 2000 compared to the three months ended June 30, 1999, principally due to an increase in the average volume of loans of $18.2 million. Yield on average earning assets, on a tax-equivalent basis, for the three months ended June 30, 2000 was 8.33% compared to 8.04% in 1999. Total interest expense increased $391,000 for the three months ended June 30, 2000 compared to the three months ended June 30, 1999, as a result of certificates of deposit balances increasing $13.1 million and an increase of interest-bearing demand deposits of $5.0 million. The cost of funds for the Company during the three months ended June 30, 2000 increased 49 basis points when compared to the three months ended June 30, 1999. The Company's increase in cost of funding was a result of increased rates paid on interest bearing deposits since the second quarter of 1999. The Company's increase in cost of funding was partially offset by increased non-interest-bearing demand deposits of $9.7 million over the second quarter of 1999. Provision for probable loan losses The provision for probable loan losses charged to operations during the three months ended June 30, 2000 was $70,000, compared to $60,000 during the three months ended June 30, 1999. Net charge-offs for the quarter ended June 30, 2000 totaled $47,000, compared to net charge-offs of $159,000 during the same period of 1999. Higher prior year net charge-offs are primarily the result of farm related credit loss of approximately $75,000. The amount charged for provision for probable loan losses is the result of management's review and evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience. Non-interest income Non-interest income increased $75,000 to $595,000 for the three months ended June 30, 2000 compared to the same period in 1999. This is principally due to net fees of $25,000 derived from a new accounts receivable purchase product introduced in the second quarter of this year, increased net merchant discount income of $18,000 and increased service charge fees on personal checking accounts of approximately $13,000. Non-interest expense Non-interest expense increased $299,000 or 13.18% to $2,568,000 for the three months ended June 30, 2000 from the same period in 1999. This increase is principally due to general increases in salary and employee benefits expense of $136,000. The opening of the Washington office accounted for approximately $18,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $31,000 of personnel expense. The Company experienced increases in employee group insurance premiums during the second quarter of 2000 of $17,000 compared to the prior year. Occupancy expense increased $47,000 over the prior year period as the Bank's building rental expense increased $35,000 as a result of expanding the Avon office during the first quarter of 2000 and opening of the Washington office in June of 1999. Equipment expense increased $115,000 as the Company began paying for its newly implemented image check processing system. Telephone and communications expense increased $30,000 over the prior year period due to voice and data equipment 10 upgrades associated with the Company's new communications network. Other operating expenses increased $17,000 from $469,000 for the three months ended June 30, 1999 to $486,000 for the three months ended June 30, 2000. This increase is primarily due to increased expense related to the Bank's Best Checking Account products of approximately $17,000 and general increases in operating expense. These increases were partially offset by the reduction of Club 7 credit card program expense of $23,000 as the Bank completed its two-year co-branding obligation with a local television station. Income taxes Income tax expense for the three months ended June 30, 2000 and 1999 was $255,000 and $160,000, respectively, resulting in effective tax rates of 30.47% and 24.50%, respectively. The increase in the effective tax rate during for the three months ended June 30, 2000 as compared to the same period last year is due to lower tax exempt interest income resulting from the sale of approximately $3.2 million of certain municipal obligations during the third quarter of 1999. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income. Comparison of Financial Condition at June 30, 2000 and December 31, 1999 Total assets increased $20.2 million to $253.3 million, an increase of 8.68% when compared to $233.1 million at December 31, 1999. Asset growth was funded by increased non interest-bearing demand deposits of $9.7 million and increases in certificates of deposits of $7.3 million. Loans receivable increased from $147.7 million at December 31, 1999 to $164.3 million at June 30, 2000. The Company experiences seasonal loan growth during the first and second quarters of each year as farm production loans and commercial lines of credit are used by the Company's agricultural base and tourist related businesses on the "Outer Banks". Shareholders' equity increased by $445,000 from December 31, 1999 to June 30, 2000, as the Company generated net income of $1,098,000 and experienced an increase of net unrealized losses on available-for-sale securities of $111,000. The Company declared cash dividends of $350,000 or 16.50 cents per share, during the first half of 2000 compared to 14.50 cents per share in the prior year period. The Company repurchased $196,000 of common stock during the first two quarters of 2000. Asset Quality Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current conditions in order to evaluate the adequacy of the allowance for probable loan losses. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of probable losses inherent in the portfolio and current economic conditions. The Company's watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all credits classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgments about information available to them at the time of their examination. Nonperforming assets, which consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans, were $653,000 and $672,000 at June 30, 2000 and December 31, 1999, respectively. The decrease in nonperforming assets is the result of a reduction in foreclosed properties of $100,000 partially offset by an increase of non-accrual loans of $87,000 during the first half of this year. At June 30, 2000, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $658,192 compared to $367,000 at December 31, 1999. These loans are on a non-accrual basis and had related allowance for probable loan losses of approximately $121,000 and $55,000, respectively. 11 Regulatory Matters Management is not presently aware of any current recommendation to the Company by regulatory authorities which, if they were to be implemented, would have a material effect on the Company's liquidity, capital resources or operations. Liquidity The Company relies on the investment portfolio, as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. These sources have allowed limited dependence on short-term borrowed funds for liquidity or for asset expansion. External sources of funds include the ability to access advances from the Federal Home Loan Bank of Atlanta and Fed Fund lines with correspondent banks. Capital Resources Bancorp and the Bank are subject to the capital requirements of the Federal Reserve, the FDIC and the State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be "well capitalized," the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders' equity calculated in accordance with generally accepted accounting principles excluding unrealized gains or losses, net of income taxes, on securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which is applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the Banks' on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of June 30, 2000, the Bank was in compliance with all of the aforementioned capital requirements and meets the "well-capitalized" definition that is used by the FDIC in its evaluation of member banks. Additionally, at June 30, 2000, Bancorp was also in compliance with the applicable capital requirements set forth by the Federal Reserve. Current Accounting Issues In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards (SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier application of all of the provisions of this statement is encouraged. The Company plans to adopt this statement at January 1, 2001 and does not anticipate any material effect on its consolidated financial statements. The FASB also issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates. Management awareness Management is not aware of any known trends, events, uncertainties, or current recommendations by regulatory authorities that will or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or other operations. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's Annual Meeting of Shareholders was held on April 19, 2000. (b) At the Annual Meeting, the following four Directors were elected for terms of three years or until their respective successors are duly elected and qualified: George T. Davis, Jr.; Gregory C. Gibbs; John F. Hughes; and Robert L. Mitchell. Registrant's incumbent directors whose terms of office continued after the meeting are: C. Gilbert Gibbs, Arthur H. Keeney III, Bryant Kittrell III, Joseph T. Lamb, Jr., B. Martelle Marshall, Ray M. Spencer, and R. S. Spencer, Jr. Voting for Directors was as follows: For Withheld Broker Non-vote ---------------------------------------------- George T. Davis, Jr. 1,806,995 5,531 1,525 Gregory C. Gibbs 1,806,995 5,531 1,525 John F. Hughes 1,806,995 5,531 1,525 Robert L. Mitchell 1,801,065 11,461 1,525 In addition to the election of Directors, the following proposal was voted on and approved at the Annual Meeting: 1. Proposal to ratify the selection of KPMG LLP as independent auditors for the Registrant as described under the caption "Ratification of Selection of Independent Auditor" in the Registrant's Proxy Statement dated March 20, 2000 (approved by an affirmative vote of 1,796,174 shares or 99.10% of the shares that voted, 1,269 negative votes and 15,083 shares abstained). Item 5. Other Information Not applicable. 13 Item 6. Exhibits and Reports on Form 8-KSB (a) Exhibits: Exhibit Number Description ------ ----------- 3.1 Registrant's Articles of Incorporation (incorporated by reference from Exhibit 3.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 3.2 Registrant's Bylaws (incorporated by reference from Exhibit 3.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 27 Financial Data Schedule. (b) Reports on Form 8-KSB None. 14 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECB BANCORP, INC. ----------------- (Registrant) Date: 8/11/2000 By: /s/ Arthur H. Keeney, III --------------- ------------------------- Arthur H. Keeney, III (President & CEO) Date: 8/11/2000 By: /s/ Gary M. Adams --------------- ----------------- Gary M. Adams (Senior Vice President & CFO) 15