10KSB 1 d10ksb.txt FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission File No. 0-24753 ----------------- ECB BANCORP, INC. (Name of small business issuer in its charter) ----------------- North Carolina 56-2090738 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) Post Office Box 337 Engelhard, North Carolina 27824 (Address of principal executive offices, including Zip Code) (252) 925-9411 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Act: ______None______ Securities registered under Section 12(g) of the Act:__Common stock, $3.50 par value per share__ (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_] Registrant's revenues for its most recent fiscal year were:__$ 23,189,644. On March 12, 2002, the aggregate market value of the voting and non-voting common equity held by nonaffiliates (computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity) was __$18,808,478. On March 12, 2002, the number of outstanding shares of Registrant's common stock was__2,065,891. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement dated March 18, 2002, are incorporated herein in Part III. Transitional Small Business Disclosure Format: Yes [_] No [X] PART I Item 1. Description of Business General. Registrant is a bank holding company headquartered in Engelhard, North Carolina. Registrant operates through, and its principal asset is its investment in, The East Carolina Bank (the "Bank") which operates as Registrant's wholly-owned subsidiary. Registrant was organized on March 4, 1998, by the Bank and at the direction of the Bank's Board of Directors, to serve as the Bank's parent holding company. Effective July 22, 1998, and to effect the reorganization, (i) an "interim bank" subsidiary of Registrant (newly formed for the purpose of such transaction) was merged into the Bank (with the Bank as the surviving corporation), (ii) the outstanding shares of the Bank's common stock were converted into an identical number of shares of Registrant's Common Stock with the result that the then current shareholders of the Bank became shareholders of Registrant (with the same relative ownership interests that they had in the Bank) and (iii) Registrant became the Bank's sole shareholder. The Bank continues to exist under its separate charter and bylaws but as the wholly-owned subsidiary of Registrant, and continues to conduct its banking business at all its previous banking offices. The Bank. The Bank is an FDIC-insured, North Carolina-chartered bank which was organized in 1919 and is engaged in a general, community-oriented commercial and consumer banking business. The Bank currently maintains 17 full-service banking offices in nine counties in North Carolina, together with one mortgage loan production office, and its deposits are insured under the FDIC's Bank Insurance Fund ("BIF") to the maximum amount permitted by law. The Bank has two wholly-owned subsidiaries. Carolina Financial Realty, Inc. ("CFR") holds title to five of the Bank's branch offices which it leases to the Bank. The second subsidiary, Carolina Financial Services, Inc., formerly provided courier services to the Bank but is currently inactive. The Bank's operations are primarily retail oriented and directed toward individuals, small- and medium-sized businesses and local governmental units located in its banking markets, and its deposits and loans are derived primarily from customers in its banking markets. While the Bank provides most traditional commercial and consumer banking services, its principal activities are the taking of demand and time deposits and the making of secured and unsecured loans. The Bank's primary source of revenue is interest income from its lending activities, and it has pursued a strategy of growth through internal expansion by establishing branch offices in communities within its banking markets. The Bank's banking markets are located in the east central and northeastern portions of North Carolina and along North Carolina's Outer Banks. The Bank makes a variety of types of consumer and commercial loans to individuals and small- and medium-sized businesses located primarily in its banking markets for various personal, business and agricultural purposes, including term and installment loans, equity lines of credit and overdraft checking credit. The Bank's deposit services include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. It is the Bank's policy to monitor its competition in order to keep the rates paid on its deposits at a competitive level. The Bank's banking markets include primarily smaller communities where its emphasis on customer service provides it with a stable source of core funding. The vast majority of the Bank's deposits are generated from within its banking markets, and the Bank does not accept brokered deposits but does actively solicit public funds deposits in its markets. Competition. The Bank competes for deposits in its banking markets with other commercial banks, savings banks and other thrift institutions, credit unions, agencies issuing United States government securities and all other organizations and institutions engaged in money market transactions. In its lending activities, the Bank competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders. Commercial banking in the Bank's banking markets and in North Carolina as a whole is 2 extremely competitive. North Carolina is the home of two of the largest commercial banks in the United States, each of which has branches located in certain of the Bank's markets, and 13 other commercial banks, thrift institutions and credit unions also are represented in its banking markets. Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer more sophisticated cash management and other commercial banking services. Many of the Bank's competitors have greater resources, broader geographic markets and higher lending limits than the Bank, and they can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than can the Bank. The Bank depends on its reputation as a community bank in its local markets, its direct customer contact, its ability to make credit and other business decisions locally, and its personalized service, to counter these competitive disadvantages. In recent years, federal and state legislation has heightened the competitive environment in which all financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly. Additionally, with the elimination of restrictions on interstate banking, a North Carolina commercial bank may be required to compete not only with other North Carolina-based financial institutions, but also with out-of-state financial institutions which may acquire North Carolina institutions, establish or acquire branch offices in North Carolina, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, the Bank is one of the smaller commercial banks in North Carolina, and there is no assurance that the Bank will be or will continue to be an effective competitor in the current financial services environment. Supervision and Regulation. Registrant is a bank holding company registered with the Federal Reserve Board (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA") and, as such, is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB under the BHCA. Registrant has not elected to be a "financial holding company." Its activities are limited to those permitted for bank holding companies under the BHCA, and it is required to obtain the prior approval of the FRB before it may acquire direct or indirect control of more than 5% of the outstanding voting stock, or substantially all of the assets of, any other financial institution or bank holding company. Additionally, the BHCA prohibits Registrant from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in an activity that is not permitted for bank holding companies. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries' compliance with capital restoration plans filed with their regulators, subject to certain limits. The federal Gramm-Leach-Bliley Act enacted in 1999 (the "GLB Act") dramatically changed various federal laws governing the banking, securities, and insurance industries. The economic effects of the GLB Act on the banking industry, and competitive conditions in the financial services industry generally, may be profound. The GLB Act may expand opportunities for Registrant and the Bank to provide other services and obtain other revenues in the future, and also may present new competitive challenges As an insured, state-chartered bank that is not a member of the Federal Reserve System, the Bank is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation ("FDIC") and the North Carolina Commissioner of Banks (the "Commissioner"). Absent approval of the FDIC, the Bank is prohibited from engaging as principal in activities that are not permitted for national banks, and it is prohibited from acquiring or retaining any equity investment of a type not permitted for national banks. 3 As a subsidiary of Registrant, the Bank subject to restrictions under Federal law on the amount of, and its ability to enter into, transactions with, or investments in the securities of, Registrant and other entities considered to be "affiliates" of the Bank. Though it is not a member of the Federal Reserve System, the Bank is subject to the FRB's reserve requirements applicable to all banks, and its business is significantly influenced by the fiscal policies of the FRB. The actions and policy directives of the FRB determine to a significant degree the Bank's cost and the availability of funds and the rates of interest charged on its loans and paid on its deposits. The FRB, the FDIC and the Commissioner have broad powers to enforce laws and regulations applicable to Registrant and the Bank and to require corrective action of conditions affecting the Bank's safety and soundness. Among others, these powers include cease and desist orders, the imposition of civil penalties and the removal of officers and directors. Employees. Registrant does not have any separate employees. As of December 31, 2001, the Bank employed 156 full-time employees (including its and Registrant's executive officers) and 11 part-time employees. The Bank and its employees are not parties to any collective bargaining agreement, and the Bank considers its relations with its employees to be good. Item 2. Description of Property. Registrant's offices are located in the Bank's corporate offices in Engelhard, North Carolina, and Registrant does not own or lease any separate properties. The Bank maintains the following 17 offices, nine of which it owns, five of which are owned by CFR and leased to the Bank, and three of which are held under leases with unaffiliated third parties. All of the Bank's existing banking offices are in good condition and fully equipped for the Bank's purposes. Pamlico Region: Engelhard main banking and corporate office (owned) Swan Quarter branch office (owned) Fairfield branch office (leased from CFR) Washington branch office (leased) Albemarle Region: Columbia office (leased from CFR) Creswell branch office (owned) Hertford branch office (leased) Western Region: Greenville Arlington branch office (owned) Greenville University Medical Center branch office (owned) New Bern office (owned) Outer Banks Region: Currituck office (owned) Southern Shores/Kitty Hawk branch office (leased from CFR) Nags Head branch office (leased from CFR) Manteo branch office (owned) Avon branch office (leased) Hatteras branch office (leased from CFR) Ocracoke branch office (owned)
Item 3. Legal Proceedings. At December 31, 2001, Registrant was not a party to any legal proceeding that is expected to have a material effect on its financial condition or results of operations. 4 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters Registrant's Common Stock was first issued on July 22, 1998, when it became the Bank's parent holding company. The Common Stock was listed on the Nasdaq Small Cap Market on November 23, 1998, under the trading symbol "ECBE." Previously, it had been traded on the OTC Bulletin Board. On March 12, 2002, there were 679 holders of record of Registrant's Common Stock. The per share cash dividends paid by Registrant during each quarterly period during 2001 and 2000 and the quarterly high and low prices of Common Stock during those two years are set forth in Table 18 of Item 6 to this report. Registrant's sole source of funds for the payment of dividends on its Common Stock is dividends paid to it by the Bank on the shares of the Bank's Common Stock held by Registrant, and the declaration and payment of future dividends by the Bank will continue to depend on its earnings and financial condition, capital requirements, general economic conditions, compliance with regulatory requirements generally applicable to North Carolina banks, and other factors. Registrant's ability to pay dividends also is subject to its own separate factors, including its earnings and financial condition, capital requirements and regulatory restrictions applicable to bank holding companies. Item 6. Management's Discussion and Analysis or Plan of Operation. ECB Bancorp, Inc. ("Bancorp") is a bank holding company headquartered in Engelhard, North Carolina. Bancorp's wholly-owned subsidiary, The East Carolina Bank (the "Bank") (Bancorp and the Bank collectively referred to hereafter as the "Company"), is a state-chartered community bank which was founded in 1919. As part of the Bank's growth strategy, management of the Bank perceived that the formation of a holding company likely would result in certain advantages, including additional flexibility in expansion of the Bank's business through the acquisition of other financial institutions or of branch offices of other institutions, in the raising of additional capital through borrowing (if needed) and provide the flexibility to engage in other financial services activities through newly formed subsidiaries or through the acquisition of existing companies. The Bank offers a full range of banking services through 17 branches serving eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Currituck, Avon, Hatteras, Ocracoke, Washington, Greenville (two branches), New Bern and Hertford. Management's discussion and analysis of financial condition and results of operations are presented to assist in understanding the financial condition and results of operations of ECB Bancorp, Inc. and its wholly-owned subsidiary, The East Carolina Bank, for the years 2001, 2000, and 1999. This discussion and the related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes. The operations of the Company and depository institutions in general are significantly influenced by general economic conditions and by related monetary, fiscal and other policies of depository institution regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina State Banking Commission. The net income of the Company is dependent, to a large extent, on the differences between interest earned on loans and investments and interest paid on deposits. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. 5 Liquidity is the Bank's ability to generate cash to fund asset growth, to meet deposit withdrawals, to maintain regulatory reserve requirement and to pay operating expenses. The principal sources of liquidity are the Bank's investment portfolio, interest from loans and investments, loan principal repayments, and increases in deposits. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers, and their associates. All loans included in those transactions during 2001 were made on substantially the same terms, including interest rates, repayment terms, including interest rates, repayment terms and collateral, as those prevailing at the time those loans were made for comparable transactions with other persons, and those loans did not involve more than the normal risk of collectibility or present other unfavorable features. George T. Davis Jr., who is one of our directors, is an attorney. He provided legal services to the Bank during 2001 and is expected to continue to provide those services during 2002. During 2001, the Bank purchased three parcels of land for a total price of $292,500 from R. S. Spencer, Jr., who is one of our directors. Prior to execution of the purchase agreement, the transaction was discussed with the Bank's regulators, and the transaction and purchase price were approved by the Company's Board of Directors after having received two independent appraisals of the property prepared by disinterested third party appraisers. Certain critical accounting policies affect the more significant judgements and estimates used in the preparation of the consolidated financial statements. For example, the Company maintains an allowance for probable loan losses for probable losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional reserves may be required. For further discussion of the estimates used, refer to the section captioned Summary of Loan Loss Experience. Sufficient levels of capital are necessary to sustain growth and absorb losses. To this end, the FDIC has established capital adequacy guidelines. These guidelines relate to the Bank's Leverage Capital, Tier 1 and Total Risk Based Capital ("RBC"). For The East Carolina Bank, Leverage Capital consists of total shareholders' equity excluding unrealized gains or losses, net of income taxes, on securities available-for-sale. As of December 31, 2001, the Bank's Leverage Ratio was 8.43% compared to 9.24% and 9.75%, respectively, at year-end 2000 and 1999. For regulatory purposes, a well-capitalized financial institution must have a Tier 1 Leverage Ratio of at least 5.00%. Within the RBC calculations, The East Carolina Bank's assets, including loan commitments and other off-balance sheet items, are weighted according to Federal regulatory guidelines for risk considered inherent in the assets. The East Carolina Bank's Tier 1 RBC ratio as of December 31, 2001 was 11.33%, which is, along with ratios of 12.49% and 14.22% for 2000 and 1999, respectively, are representative of a well-capitalized institution. The calculation of the Total RBC ratio allows, in The East Carolina Bank's circumstances, the inclusion of the allowance for probable loan losses in capital, but only to the maximum of 1.25% of risk-weighted assets. As of December 31, 2001, The Bank's Total RBC was 12.58%, which is representative of a well-capitalized institution. The Total RBC ratios for 2000 and 1999 were 13.75% and 15.48%, respectively, both of which were representative of a well-capitalized financial institution. As of December 31, 2001, shareholders' equity totaled $25.5 million compared to $23.9 million at December 31, 2000. Shareholders' equity for 2001 included net unrealized securities gains of $101,000 and net unrealized securities gains of $207,000 in 2000. An adequate capital position provides the Company with expansion capabilities. Retention of sufficient earnings to maintain that adequate capital position is an important factor in determining dividends. During 2001, the Company declared $744,200 in dividends, versus $693,424 in 2000 and $615,243 in 1999. As a percentage of 6 net income in 2001, dividends were 28.8%. On a basic and diluted per share basis, dividends declared in 2001 represented an increase of 10.6% and 9.7% over dividends per share declared in 2000, respectively. In 2001, the Company had net income of $2,569,304 or $1.25 basic and $1.24 diluted earnings per share, compared to $2,366,878 or $1.13 basic and diluted earnings per share for the year ended December 31, 2000. Net interest income increased $446,382 as a result of an increase in interest income of $759,494 partially offset by an increase in interest expense of $313,112. This increase in the Company's net interest income is attributable to loans representing a larger portion of the Company's total earning assets as the average volume of loans increased $22.3 million over 2001. The Company's net interest margin, on a tax-equivalent basis, for the year ended December 31, 2001 was 4.81% compared to 5.31% in 2000. The decline of the Company's net interest margin is attributable to the negative effect of a net asset-sensitive interest rate gap position during a falling rate environment and the increase in funding cost as a result of increased balances of certificates of deposit. The yield on average earning assets, on a tax-equivalent basis, for the year ended December 31, 2001 was 7.74% compared to 8.54% in 2000. This decrease in the Company's yield on earning assets is a result of a lower interest rate environment compared to 2000 as the Federal Reserve Board has lowered the federal funds target rate by 475 basis points since late in the fourth quarter of 2000. The Bank is asset sensitive in the initial 90 to 120 day time horizon as interest rates on approximately 43% of the loan portfolio float with the prime rate. Consequently, the net interest margin would be negatively affected by decreases in interest rates during this period. Beyond this initial asset sensitive period the Bank becomes liability sensitive on a cumulative basis due to re-pricing opportunities within the certificate of deposit portfolio. Thus, the Company believes that in the near term (twelve months), net interest income would not likely experience significant downward pressure from rising interest rates. Similarly, management would not expect a significant increase in the near term net interest income from falling rates. Generally, when rates changes, the Company's interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while the Company's interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full amount of the rate change. The net effect is that the twelve month horizon, as rates change, the impact of having a higher level of interest-sensitive liabilities is substantially negated by the later and typically lower proportionate change they experience compared to interest-sensitive assets. The cost of funds for the Company during 2001 was 3.67%, a decrease of 47 basis points when compared to 4.14% for 2000 as a result of a lower interest rate environment. Total interest expense increased $313,000 when compared to 2000, largely as the result of average certificate of deposit balances increasing $31.0 million in 2001. Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the allowance for probable loan losses. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of probable losses inherent in the portfolio and current economic conditions. The Company's watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all loans classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgments about information available to them at the time of their examination. Nonperforming assets, which consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans, were $478,000 and $252,000 at December 31, 2001 and 2000, respectively. The 7 increase in nonperforming assets is primarily due to an increase in foreclosed properties of $113,000 and an increase of loans past due 90 days of $94,000. A beach lot, valued at $75,000 located in Avon, NC was foreclosed during the fourth quarter of 2001. Past due loans increased primarily as the result of a single loan of $55,000 becoming past due 90 days prior to the Bank initiating foreclosure proceedings. At December 31, 2001, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $68,000 compared to $121,000 at December 31, 2000. The provision for probable loan losses charged to operations during 2001 was $439,000, compared to $242,000 for the year ended 2000. Net charge-offs for 2001 totaled $389,000, compared to net charge-offs of $142,000 in 2000. Higher current year net charge-offs are partially the result of a land development credit loss of approximately $100,000. The amount charged for provision for probable loan losses is the result of management's review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience. Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Total noninterest income was $3,428,000 during 2001, an increase of $1,164,000 or 51.41% when compared to 2000. Service charges on deposit accounts increased $353,000 or 24.89%, as the result of increased fees on transaction accounts of $32,000 and non-sufficient-funds (NSF) service charges of $230,000 when compared to 2000. Other service charges and fees increased $341,000 or 43.21% as net fees derived from a new accounts receivable purchase product introduced in the second quarter of 2000 increased $29,000 while the Bank's newly formed Insurance Services generated fees of $80,000. In addition, the Bank's mortgage department increased loan settlement service fees by $155,000 as reductions in mortgage rates spurred homeowners to refinance. Income from merchant services increased $58,000, or 21.32%, the result of an increase in the number of merchant accounts. During 2001, the Bank realized gains on the sale of securities of $438,000 compared to $5,000 in 2000. Noninterest expenses increased by $1,221,000 or 11.75% to $11,615,000 in 2001 compared to $10,394,000 in 2000. This increase is principally due to increases in salary and employee benefits expense of $676,000 or 12.94%. Salary expense was $4,462,000 during 2001 compared to $3,977,000 during 2000, an increase of $485,000 or 12.20%, following a $435,000 or 12.28% increase in 2000 over 1999. The opening of offices in New Bern and Hertford accounted for approximately $157,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $296,000 of personnel expense. During November 2001, the Bank entered into separate agreements with its directors and certain key employees that provide specific individual retirement benefits from the Bank following their retirement from service. This benefit is funded through Bank Owned Life Insurance (BOLI) policies. It is expected the Bank's annual return on the purchased life insurance polices of approximately $280,000 will cover its cost associated with these benefits and the Bank's annual funding cost of approximately $159,000. Income received from the policies is non-taxable to the Bank. Retirement and other employee benefits expense was $1,440,000 during 2001, increasing $191,000 or 15.29% from 2000 as a result of an increase in the Company's employee incentive program of $45,000 and employee health insurance premiums of $52,000. Occupancy expense increased $107,000 or 12.68% to $951,000 compared to $844,000 in 2000. The Company's building taxes and insurance expense increased $54,000 or 43.20% as a result of opening the Hertford and New Bern offices during the third quarter of 2000 and the building of a new facility for the Company's Currituck office in the Spring of 2001. Equipment expense increased $72,000 as equipment depreciation increased $66,000 and maintenance and repairs increased $62,000, partially offset by decreases in miscellaneous equipment expense of $41,000 and technology lease payments of $23,000. Bank supply expense decreased $51,000 during 2001 due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's check image statement during the first quarter of 2000. Other operating expenses increased $377,000 from $2,029,000 in 2000 to $2,406,000 for the year ended December 31, 2001. This increase is partially due to write off of leasehold improvements and other losses 8 associated with the relocation of the Bank's Barco banking office to Currituck of $156,000. In addition, director advisory fees and fiduciary related insurance increased $48,000 and $58,000, respectively, over the prior year period. Income tax expense for the years ended December 31, 2001 and 2000 was $925,000 and $935,000, respectively, resulting in effective tax rates of 26.47% and 28.32%, respectively. Tax-exempt interest income increased $113,000 or 17.10% to $774,000 from the $661,000 recorded in 2000 and had the effect of reducing the Bank's effective tax rate when compared to the prior year period. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income. In 2000, the Company had net income of $2,366,878 or $1.13 basic and diluted earnings per share, compared to $2,143,390 or $1.01 basic and diluted earnings per share for the year ended December 31, 1999. Net interest income increased $1,483,259 as a result of an increase in interest income of $3,107,706 partially offset by an increase in interest expense of $1,624,447. This increase in the Company's net interest margin is attributable to loans representing a larger portion of the Company's total earning assets. Nonperforming assets, which consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans, were $252,000 and $706,000 at December 31, 2000 and 1999, respectively. The decrease in nonperforming assets is primarily due to a pay-off of a large non-accrual status farm credit of approximately $365,000 during the fourth quarter of 2000. At December 31, 2000, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $121,000 compared to $367,000 at December 31, 1999. Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Total noninterest income was $2,264,000 during 2000, an increase of $200,000 or 9.7% when compared to 1999. Service charges on deposit accounts increased $102,000, 7.8%, as the result of increases in personal checking fees of $60,000 and non-sufficient-funds (NSF) service charges of $52,000 when compared to 1999. Other service charges and fees increased $152,000 due primarily to net fees of $74,000 derived from a new accounts receivable purchase product introduced in the second quarter of 2000. The product, known as Business Manager, is an accounts receivable purchasing program that is geared toward small businesses. Through this program, ECB purchases accounts receivable from its business customers at a discount and receives payments directly from the accounts debtors. Income from merchant services increased $49,000, or 22.0%, the result of an increase in the number of merchant accounts. Other noninterest operating income decreased $94,000 from $137,000 in 1999 to $43,000 in 2000. During 1999, the Company recorded a net gain on the sale of fixed assets of $42,000 and generated $57,000 of miscellaneous income compared to $4,000 in year 2000. Noninterest expenses increased by $1,225,000 or 13.36% to $10,394,000 in 2000 compared to $9,169,000 in 1999. This increase is principally due to increases in salary and employee benefits expense of $611,000. Salary expense was $3,977,000 during 2000 compared to $3,542,000 during 1999, an increase of $435,000, or 12.28%, following a $356,000 or 11.17% increase in 1999 over 1998. Increases in each period resulted from growth in the employee base needed to support franchise expansion, merit increases and growth in incentive-based compensation. The Company had 156 full-time employees at December 31, 2000, compared to 143 at December 31, 1999 and 131 at December 31, 1998. The growth in 2000 was primarily due to opening of new offices in New Bern and Hertford and additional staffing within the Company's home office departments. The growth in headcount during 1999 resulted primarily from the opening of new offices in Washington and Barco. Employee benefits expense was $1,249,000 during 2000, an increase of $176,000 or 16.40% from 1999 as a result of an increase in the Company's employee incentive program of $99,000 and employee health insurance of $77,000. Occupancy expense increased $126,000 or 17.55% to $844,000 compared to $718,000 in 1999 as the Company's building rental expense increased $81,000 as a result of expanding the Avon office during the first quarter of 2000, opening the Hertford office during the third quarter of 2000 and the opening of the Washington office in mid-year 1999. Equipment expense increased $274,000 as the Company began paying for its new image check processing system implemented in the first quarter of 2000. Professional fees decreased $143,000 during 2000, a 9 reduction of 42.94% from the $333,000 recorded in 1999 primarily due to a decrease of $80,000 in legal fees and a decrease of $32,000 in consulting fees paid in 1999, which consisted largely of Year 2000 related expense. Bank supply expense increased $87,000 over 1999 primarily due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's image statement. Telephone expense increased $53,000 over 1999 due to continuing voice and data equipment upgrades preparing the Bank for implementation of its wide area network in 2001. Other operating expense increased $217,000, or 13.36%, to $2,029,000 compared to $1,812,000 recorded in 1999. This increase is largely due to an increase in advertising and public relations of $90,000 and increased expense related to the Bank's Best Checking Account products of $85,000. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". This statement improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method--the purchase method. On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations". The FASB has issued SFAS No. 142 "Goodwill and Other Intangible Assets". This statement requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change provides investors with greater transparency regarding the economic value of goodwill and its impact on earnings. The amortization of goodwill ceases upon adoption of the statement, which will be January 1, 2002. Management of the Company anticipates that due to the fact that it does not have goodwill or other intangible assets, the adoption of SFAS No. 142 will not have a material effect on the Company. FORWARD-LOOKING STATEMENTS This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs and future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgment of Bancorp and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of Bancorp's customers, actions of government regulators, the level of market interest rates, and general economic conditions. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE 1. AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
Year Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 ----------------------- ----------------------- ----------------------- Average Yield/ Income/ Average Yield/ Income/ Average Yield/ Income/ Balance Rate Expense Balance Rate Expense Balance Rate Expense -------- ------ ------- -------- ------ ------- -------- ------ ------- (dollars in thousands) Assets Loans--net (1)............. $180,807 8.51% $15,388 $158,622 9.39% $14,900 $138,837 9.01% $12,512 Taxable securities......... 52,467 6.19% 3,247 49,525 6.43% 3,183 39,712 5.84% 2,320 Non-taxable securities (2)........... 18,575 6.31% 1,173 13,608 7.11% 968 15,940 7.22% 1,152 Overnight investments...... 8,621 4.09% 353 4,502 6.22% 280 6,084 4.96% 302 -------- ---- ------- -------- ---- ------- -------- ---- ------- Total interest- earning assets........... 260,470 7.74% $20,161 226,257 8.54% $19,331 200,573 8.12% $16,286 Cash and due from banks.................... 12,052 10,542 10,918 Bank premises and equipment, net........... 8,460 7,274 7,282 Other assets............... 5,875 3,974 2,825 -------- -------- -------- Total assets............... $286,857 $248,047 $221,598 ======== ======== ======== Liabilities and Shareholders' Equity Interest-bearing deposits................. $198,955 3.68% $ 7,313 $170,424 4.11% $ 7,004 $154,668 3.58% $ 5,542 Short-term borrowings...... 4,270 2.32% 99 3,377 5.30% 179 711 4.22% 30 Long-term obligations...... 5,077 4.49% 228 3,000 4.80% 144 2,827 4.63% 131 -------- ---- ------- -------- ---- ------- -------- ---- ------- Total interest- bearing liabilities...... 208,302 3.67% 7,640 176,801 4.14% 7,327 158,206 3.60% 5,703 Non-interest-bearing deposits................. 51,255 47,287 39,941 Other liabilities.......... 2,259 1,231 1,385 Shareholders' equity....... 25,041 22,728 22,066 -------- -------- -------- Total liabilities and shareholders' equity..... $286,857 $248,047 $221,598 ======== ======== ======== Net interest income and net yield on interest-earning assets (FTE) (3)................. 4.81% $12,521 5.31% $12,004 5.28% $10,583 ==== ======= ==== ======= ==== ======= Interest rate spread (FTE) (4)................ 4.07% 4.40% 4.52% ==== ==== ====
-------- (1) Average loans include non-accruing loans. Amortization of deferred loan fees of $367,000, $203,000, and $142,000 for 2001, 2000, and 1999, respectfully, are included in interest income. (2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $399,000, $329,000, and $392,000 for the years 2001, 2000, and 1999, respectively. (3) Net interest margin is computed by dividing net interest income by total earning assets. (4) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate. 11 Changes in interest income and interest expense can result from variances in both volume and rates. Table 2 below analyzes the effect of variances in volume and rate on taxable-equivalent interest income, interest expenses and net interest income. TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
2001 compared to 2000 2000 compared to 1999 ------------------------ -------------------------- Volume (1) Rate (1) Net Volume (1) Rate (1) Net ---------- -------- ---- ---------- -------- ------ (dollars in thousands) Loans..................... $1,986 $(1,498) $488 $1,821 $567 $2,388 Taxable securities........ 186 (122) 64 602 261 863 Non-taxable securities (2) 333 (129) 204 (168) (16) (184) Overnight investments..... 212 (139) 73 (88) 66 (22) ------ ------- ---- ------ ---- ------ Interest income........... 2,717 (1,888) 829 2,167 878 3,045 Interest-bearing deposits. 1,111 (802) 309 606 856 1,462 Short-term borrowings..... 34 (114) (80) 127 22 149 Long-term obligations..... 96 (12) 84 8 5 13 ------ ------- ---- ------ ---- ------ Interest expense.......... 1,241 (928) 313 741 883 1,624 ------ ------- ---- ------ ---- ------ Net interest income....... $1,476 $ (960) $516 $1,426 $ (5) $1,421 ====== ======= ==== ====== ==== ======
-------- (1) The combined rate/volume variance for each category has been allocated equally between rate and volume variances. (2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $399,000, $329,000, and $392,000 for the years 2001, 2000, and 1999, respectively. Interest Sensitivity Rate sensitivity analysis, an important aspect of achieving satisfactory levels of net interest income, is the management of the composition and maturities of rate-sensitive assets and liabilities. The following table sets forth the Company's interest sensitivity analysis at December 31, and describes, at various cumulative maturity intervals, the gap ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that management considers rate sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. The difference between interest-sensitive asset and interest-sensitive liability repricing within time periods is referred to as the interest-rate-sensitivity gap. Gaps are identified as either positive (interest-sensitive assets in excess of interest-sensitive liabilities) or negative (interest-sensitive liabilities in excess of interest-sensitive assets). As of December 31, 2001, the Company had a negative one year cumulative gap of 33.4% of interest-earning assets. The Company has interest-earning assets of $116 million maturing or repricing within one year and interest-bearing liabilities of $209 million repricing or maturing within one year. This is primarily the result of stable core deposits being used to fund longer term interest-earning assets, such as loans and investment securities. A negative gap position implies that interest-bearing liabilities (deposits) will reprice at a faster rate than interest-earning assets (loans and investments). In a falling rate environment, this position will generally have a positive effect on earnings, while in a rising rate environment this will generally have a negative effect on earnings. The Company's savings and core time deposits of $145 million include interest-bearing checking and savings accounts of $77 million. These deposits are considered as repricing in the earliest period because the rate can be changed weekly. However, history has shown that the decreases in the rates paid on these deposits have little, if any, effect on their movement out of the Company. Therefore, in reality, they are not sensitive to changes 12 in market rates and could be considered as non-rate sensitive. If this change were made, the Company's rate sensitive liabilities would be more closely matched at the end of the one year period. TABLE 3. RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 2001
3 Months 4 to 12 Total within Over 12 Or less Months 12 Months Months Total -------- -------- ------------ -------- -------- (dollars in thousands) Earning Assets Loans--gross................................... $ 84,259 $ 11,225 $ 95,484 $ 93,377 $188,861 Investment securities.......................... 6,270 5,416 11,686 69,845 81,531 FHLB stock..................................... 633 -- 633 -- 633 Federal funds sold............................. 7,950 -- 7,950 -- 7,950 -------- -------- -------- -------- -------- Total earning assets........................... $ 99,112 $ 16,641 $115,753 $163,222 $278,975 ======== ======== ======== ======== ======== Percent of total earning assets................ 35.5% 6.0% 41.5% 58.5% 100.0 % Cumulative percentage of total earning assets.. 35.5% 41.5% 41.5% 100.0% Interest-bearing liabilities Time deposits of $100,000 or more.............. $ 38,942 $ 26,287 $ 65,229 $ 1,110 $ 66,339 Savings, NOW and Money Market deposits......... 77,187 -- 77,187 -- 77,187 Other time deposits............................ 27,145 34,176 61,321 6,413 67,734 Short-term borrowings.......................... 5,119 -- 5,119 -- 5,119 Long-term obligations.......................... -- -- -- 10,000 10,000 -------- -------- -------- -------- -------- Total interest-bearing liabilities............. $148,393 $ 60,463 $208,856 $ 17,523 $226,379 ======== ======== ======== ======== ======== Percent of total interest-bearing liabilities.. 65.6% 26.7% 92.3% 7.7% 100.0% Cumulative percent of total interest-bearing liabilities.................................. 65.6% 92.3% 92.3% 100.0% Ratios Ratio of earning assets to interest-bearing liabilities (gap ratio)...................... 66.8% 27.5% 55.4% 931.5% Cumulative ratio of earning assets to interest- bearing liabilities (cumulative gap ratio)... 66.8% 55.4% 55.4% 123.2% Interest sensitivity gap....................... $(49,281) $(43,822) $(93,103) $145,699 $ 52,596 Cumulative interest sensitivity gap............ $(49,281) $(93,103) $(93,103) $ 52,596 $ 52,596 As a percent of total earning assets........... -17.7% -33.4% -33.4% 18.9% 18.9%
In periods of rising interest rates, the Company's rate-sensitive assets cannot be repriced as quickly as its rate-sensitive liabilities. Thus, the Company's net interest income generally will decrease during a period of rising interest rates. In periods of declining interest rates the opposite effect occurs. As of December 31, 2001, approximately 41.5% of the Company's interest-earning assets could be repriced within one year and approximately 75.3% of interest-earning assets could be repriced within five years. Approximately 92.3% of interest-bearing liabilities could be repriced within one year and substantially all interest-bearing liabilities could be repriced within five years. 13 Market Risk The Company's primary market risk is interest rate risk. Interest rate risk the result of differing maturities or repricing intervals of interest earning assets and interest bearing liabilities and the fact that rates on these financial instruments do not change iniformally. These conditions may impact the earnings generated by the Company's interest earning assets or the cost of its interest bearing liabilities, thus directly impacting the Company's overall earnings. The Company's management actively monitors and manages interest rate risk. One way this accomplished is through the development of and adherence to the Company's assets/liability policy. This policy sets forth management's strategy for matching the risk characteristics of the Company's interest bearing assets and liabilities so as to mitigate the effect of changes in the rate environment. TABLE 4. MARKET RISK ANALYSIS
Principal Maturing in Years ended December 31, --------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter -------- ------- ------- ------- ------- ---------- (dollars in thousands) Assets Loans Fixed Rate........................... $ 15,069 $14,168 $23,370 $18,360 $26,732 $10,746 Average rate (%)..................... 8.41% 8.84% 8.36% 8.53% 7.85% 7.75% Variable Rate........................ 35,743 4,404 8,703 5,059 9,485 17,022 Average rate (%)..................... 6.19% 5.26% 5.44% 5.29% 5.25% 5.76% Investment securities Fixed Rate........................... 8,613 3,421 8,633 2,245 679 57,776 Average rate (%)..................... 5.74% 6.36% 4.98% 5.38% 6.56% 5.97% Federal funds sold Variable Rate........................ 7,950 -- -- -- -- -- Average rate (%)..................... 1.34% -- -- -- -- -- Liabilities Savings and interest-bearing checking Variable Rate........................ 77,187 -- -- -- -- -- Average rate (%)..................... 0.68% -- -- -- -- -- Certificates of deposits Fixed Rate........................... 126,287 6,760 761 -- -- -- Average rate (%)..................... 3.52% 5.12% 3.54% -- -- -- Variable Rate........................ 265 -- -- -- -- -- Average rate (%)..................... 2.01% -- -- -- -- -- Short-term borrowings Variable Rate........................ 5,119 -- -- -- -- -- Average rate (%)..................... 0.69% -- -- -- -- -- Long-term obligations Fixed Rate........................... -- -- -- -- 5,000 5,000 Average rate (%)..................... -- -- -- -- 4.40% 5.79%
Fair Total Value -------- -------- Assets Loans Fixed Rate........................... $108,445 $109,982 Average rate (%)..................... 8.27% Variable Rate........................ 80,416 80,416 Average rate (%)..................... 5.80% Investment securities Fixed Rate........................... 81,367 81,531 Average rate (%)..................... 5.85% Federal funds sold Variable Rate........................ 7,950 7,950 Average rate (%)..................... 1.34% Liabilities Savings and interest-bearing checking Variable Rate........................ 77,187 76,386 Average rate (%)..................... 0.68% Certificates of deposits Fixed Rate........................... 133,808 135,288 Average rate (%)..................... 3.60% Variable Rate........................ 265 265 Average rate (%)..................... 2.01% Short-term borrowings Variable Rate........................ 5,119 5,119 Average rate (%)..................... 0.69% Long-term obligations Fixed Rate........................... 10,000 10,059 Average rate (%)..................... 5.10%
14 Noninterest income, principally charges for the use of the Company's services, is a significant contributor to net earnings. Total noninterest income was $3,428,000 during 2001, an increase of $1,164,000 or 51.41% when compared to 2000. Service charges on deposit accounts increased $353,000 or 24.89%, as the result of increased fees on transaction accounts of $32,000 and non-sufficient-funds (NSF) service charges of $230,000 when compared to 2000. Other service charges and fees increased $341,000 or 43.21% as net fees derived from a new accounts receivable purchase product introduced in the second quarter of 2000 increased $29,000 while the Bank's newly formed Insurance Services generated fees of $80,000. In addition, the Bank's mortgage department increased loan settlement service fees by $155,000 as reductions in mortgage rates spurred homeowners to refinance. Income from merchant services increased $58,000, or 21.32%, the result of an increase in the number of merchant accounts. During 2001, the Bank realized gains on the sale of securities of $438,000 compared to $5,000 in 2000. During November 2001, the Bank entered into separate agreements with its directors and certain key employees that provide specific individual retirement benefits from the Bank following their retirement from service. This benefit is funded through Bank Owned Life Insurance (BOLI) policies. It is expected the Bank's annual return of approximately $280,000 on the purchased life insurance policies will cover the annual cost associated with these benefits and the Bank's annual funding cost of approximately $159,000. Income received from the policies is non-taxable to the Bank. TABLE 5. NONINTEREST INCOME
Year Ended December 31, ---------------------- 2001 2000 1999 ------ ------ ------ (dollars in thousands) Service charges on deposit accounts..................................................... $1,771 $1,418 $1,316 Other service charges and fees.......................................................... 1,130 789 637 Net gain (loss) on sale of securities................................................... 438 5 (27) Net gain on sale of real estate acquired in settlement of loans and real estate held for sale.................................................................................. -- 9 -- Other................................................................................... 89 43 137 ------ ------ ------ Total................................................................................... $3,428 $2,264 $2,063 ====== ====== ======
Noninterest expenses increased by $1,221,000 or 11.75% to $11,615,000 in 2001 compared to $10,394,000 in 2000. This increase is principally due to increases in salary and employee benefits expense of $676,000 or 12.94%. Salary expense was $4,462,000 during 2001 compared to $3,977,000 during 2000, an increase of $485,000 or 12.20%, following a $435,000 or 12.28% increase in 2000 over 1999. The opening of offices in New Bern and Hertford accounted for approximately $157,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $296,000 of personnel expense. Employee benefits expense was $1,440,000 during 2001, an increase of $191,000 or 15.29% from 2000 as a result of an increase in the Company's employee incentive program of $45,000 and employee health insurance premiums of $52,000. Occupancy expense increased $107,000 or 12.68% to $951,000 compared to $844,000 in 2000. The Company's building taxes and insurance expense increased $54,000 or 43.20% as a result of opening the Hertford and New Bern offices during the third quarter of 2000 and the building of a new facility for the Company's Currituck office in the Spring of 2001. Equipment expense increased $72,000 as equipment depreciation increased $66,000 and maintenance and repairs increased $62,000, partially offset by decreases in miscellaneous equipment expense of $41,000 and technology lease payments of $23,000. Bank supply expense decreased $51,000 during 2001 due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's check image statement during the first quarter of 2000. Other operating expenses increased $377,000 from $2,029,000 in 2000 to $2,406,000 for the year ended December 31, 2001. This increase is partially due to write off of leasehold improvements and other losses associated with the relocation of the Bank's Barco banking office to Currituck of $156,000. In addition, director advisory fees and fiduciary related insurance increased $48,000 and $58,000, respectively over the prior year period. 15 TABLE 6. NONINTEREST EXPENSES
Year Ended December 31, ----------------------- 2001 2000 1999 ------- ------- ------ (dollars in thousands) Salaries.............................. $ 4,462 $ 3,977 $3,542 Retirement and other employee benefits 1,440 1,249 1,073 Occupancy............................. 951 844 718 Equipment............................. 1,338 1,266 992 Professional fees..................... 225 190 333 Supplies.............................. 276 327 240 Telephone............................. 319 339 286 Postage............................... 198 173 173 Other................................. 2,406 2,029 1,812 ------- ------- ------ Total................................. $11,615 $10,394 $9,169 ======= ======= ======
ANALYSIS OF FINANCIAL CONDITION Management believes the Company's financial condition is sound. The following discussion focuses on the factors considered by management to be important in assessing the Company's financial condition. The following table sets forth the percentage of significant components of the Company's balance sheets at December 31, 2001, 2000 and 1999. TABLE 7. DISTRIBUTION OF ASSETS AND LIABILITIES
December 31, ---------------------------------------------- 2001 2000 1999 -------------- -------------- -------------- (dollars in thousands) Assets Loans, net................................ $186,011 59.7% $170,166 63.4% $144,976 62.3% Investment securities..................... 81,531 26.2% 64,777 24.1% 58,939 25.3% FHLB stock................................ 633 0.2% 633 0.3% 633 0.3% Federal funds sold........................ 7,950 2.6% 1,975 0.7% 6,650 2.9% -------- ----- -------- ----- -------- ----- Total earning assets...................... 276,125 88.6% 237,551 88.5% 211,198 90.8% Cash and due from banks................... 17,473 5.7% 18,342 6.8% 11,139 4.7% Bank premises and equipment, net.......... 8,208 2.6% 7,882 2.9% 6,727 2.9% Other assets.............................. 9,690 3.1% 4,613 1.7% 4,049 1.6% -------- ----- -------- ----- -------- ----- Total assets.............................. $311,496 100.0% $268,388 100.0% $233,113 100.0% ======== ===== ======== ===== ======== ===== Liabilities and shareholders' equity Demand deposits........................... $ 57,207 18.4% $ 46,564 17.3% $ 43,637 18.7% Savings, NOW and Money Market deposits.... 77,187 24.8% 75,216 28.0% 75,447 32.4% Time deposits of $100,000 or more......... 66,339 21.3% 52,215 19.5% 32,588 14.0% Other time deposits....................... 67,734 21.7% 62,246 23.2% 51,629 22.1% -------- ----- -------- ----- -------- ----- Total deposits............................ 268,467 86.2% 236,241 88.0% 203,301 87.2% Short-term borrowings..................... 5,119 1.6% 2,678 1.0% 2,738 1.2% Long-term obligations..................... 10,000 3.2% 3,000 1.1% 3,000 1.3% Accrued expense and other liabilities..... 2,384 0.8% 2,526 0.9% 2,012 0.9% -------- ----- -------- ----- -------- ----- Total liabilities......................... 285,970 91.8% 244,445 91.1% 211,051 90.5% Shareholders' equity...................... 25,526 8.2% 23,943 8.9% 22,062 9.5% -------- ----- -------- ----- -------- ----- Total liabilities and shareholders' equity $311,496 100.0% $268,388 100.0% $233,113 100.0% ======== ===== ======== ===== ======== =====
16 INVESTMENT PORTFOLIO The carrying values of investment securities held by the Company at the dates indicated are summarized as follows: TABLE 8. INVESTMENT PORTFOLIO COMPOSITION.
December 31, --------------------------------------------------------- 2001 Percentage 2000 Percentage 1999 Percentage ------- ---------- --------- ---------- ------- ---------- Securities available-for-sale U.S. Treasury.................... $ 2,011 2.4% $9,043.00 14.0% $15,958 27.1% U.S. Government agencies......... 17,778 21.8% 24,457 37.8% 25,922 44.0% Collaterized mortgage obligations 21,665 26.6% 12,406 19.2% -- -- Mortgage-backed securities....... 18,069 22.2% 4,326 6.7% 2,559 4.3% Tax-exempt municipals............ 16,306 20.0% 13,531 20.9% 14,500 24.6% Preferred stock.................. 5,702 7.0% 1,015 1.5% -- -- ------- ----- --------- ----- ------- ----- Total investments................ $81,531 100.0% $ 64,778 100.0% $58,939 100.0% ======= ===== ========= ===== ======= =====
The following table shows maturities of the carrying values of investment securities held by the Company at December 31, 2001, and the weighted average yields. TABLE 9. INVESTMENT PORTFOLIO MATURITY SCHEDULES.
3 Months or Over 3 Months Over 1 Year Over 5 Years But Less Through 1 Year Through 5 Years Within 10 Years Over 10 Years ------------ -------------- --------------- ---------------- ------------- Security Type Available-for-sale Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield Total/Yield -------------------------------- ------------ -------------- --------------- ---------------- ------------- ----------- U.S. Treasury.............. $2,011 $ -- $ -- $ -- $ -- $ 2,011 5.97% 5.97% U.S. Government agencies................. 1,003 5,088 11,687 -- -- 17,778 6.13% 5.35% 4.90% 5.10% Collaterized mortgage obligations.............. -- -- 9,199 12,466 -- 21,665 6.76% 5.88% 6.25% Mortgage-backed securities............... -- -- 6,772 11,297 -- 18,069 5.87% 6.14% 6.04% Tax-exempt municipals...... 292 328 7,757 6,791 1,138 16,306 7.54% 7.52% 6.23% 6.26% 6.77% 6.33% Preferred stock............ 2,964 -- -- -- 2,738 5,702 4.47% 4.52% 4.49% ------ ------ ------- ------- ------ ------- Total investments.......... $6,270 $5,416 $35,415 $30,554 $3,876 $81,531 ====== ====== ======= ======= ====== ======= 5.35% 5.48% 5.86% 6.06% 5.18% 5.84% ====== ====== ======= ======= ====== =======
-------- (1) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $399,000, $329,000, and $392,000 for the years 2001, 2000, and 1999, respectively. The weighted average yields shown are calculated on the basis of cost and effective yields for the scheduled maturity of each security. At December 31, 2001 the market value of the investment portfolio was approximately $165,000 above its book value, which is primarily the result of lower market interest rates compared to the interest rates on the investments in the portfolio. 17 LOAN PORTFOLIO The Company's management believes the loan portfolio is adequately diversified and contains no foreign loans. Real estate loans represent approximately 55.2% of the Company's loan portfolio. Real estate loans are primarily loans secured by real estate, mortgage, and construction loans. The Company does not have a large portfolio of home mortgage loans. See note (1) below. Commercial loans are spread throughout a variety of industries, with no particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. At December 31, 2001, the ten largest loans of the Company accounted for approximately 9.3% of the Company's outstanding loans. As of December 31, 2001, the Company had outstanding loan commitments of approximately $35,596,000. The amounts of loans outstanding and the percentage that such loans represented of total loans at the indicated dates are shown in the following table according to loan type. TABLE 10. LOAN PORTFOLIO COMPOSITION
December 31, -------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands) Real estate (1)................... $104,309 $ 99,625 $ 83,116 $ 64,538 $ 63,300 Installment loans................. 12,012 12,449 11,622 11,339 25,424 Credit cards and related plans.... 3,884 3,960 3,817 3,694 3,415 Commercial and all other loans (2) 68,656 56,932 49,121 53,453 29,070 -------- -------- -------- -------- -------- Total............................. $188,861 $172,966 $147,676 $133,024 $121,209 ======== ======== ======== ======== ========
(1) The majority of these loans are various consumer and commercial loans with approval based on cash flow and not the real estate. (2) The majority of the commercial real estate is owner-occupied and operated. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table sets forth the maturity distribution of the Company's loans as of December 31, 2001. A significant majority of loans maturing after one year are repriced at two and three year intervals. In addition, approximately 42.6% of the Company's loan portfolio is comprised of variable rate loans. TABLE 11. LOAN MATURITIES
Credit cards Commercial Real and related and all estate Installment plans other loans Total -------- ----------- ------------ ----------- -------- (dollars in thousands) Due in 1 year or less............ $ 2,235 $ 3,040 $3,740 $23,595 $ 32,610 Due after 1 year through 5 years: Floating interest rates....... 22,587 257 91 11,450 34,385 Fixed interest rates.......... 33,540 8,477 -- 28,409 70,426 Due after 5 years: Floating interest rates....... 18,890 -- 53 2,846 21,789 Fixed interest rates.......... 27,057 238 -- 2,356 29,651 -------- ------- ------ ------- -------- Total............................ $104,309 $12,012 $3,884 $68,656 $188,861 ======== ======= ====== ======= ========
18 NONPERFORMING ASSETS AND PAST DUE LOANS A loan is placed on non-accrual status when, in management's judgment, the collection of interest income appears doubtful or the loan is past due 90 days or more. Interest receivable that has been accrued and is subsequently determined to have doubtful collectibility is charged to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original terms. Foreclosed properties are included in other assets and represent other real estate that has been acquired through loan foreclosures or deeds in lieu of foreclosure. Such properties are initially recorded at the lower of cost or fair value less estimated costs to sell. Thereafter the properties are maintained at the lower of cost or fair value. The following table summarizes the Company's nonperforming assets and past due loans at the dates indicated. TABLE 12. NONPERFORMING ASSETS AND PAST DUE LOANS
December, 31 -------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ------ (dollars in thousands) Non-accrual loans............................ $146 $121 $408 $ 88 $1,463 Loans past due 90 or more days still accruing 94 -- 34 -- -- Restructured loans........................... 67 73 81 92 49 Foreclosed properties........................ 171 58 183 50 340 ---- ---- ---- ---- ------ Total........................................ $478 $252 $706 $230 $1,852 ==== ==== ==== ==== ======
At December 31, 2001 and 2000, nonperforming assets and past due loans were approximately 0.17% and 0.15%, respectively, of the loans outstanding at such dates. SUMMARY OF LOAN LOSS EXPERIENCE The allowance for probable loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management's opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of estimated probable loan losses and current economic conditions. The Company's loan watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all credits classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. The following table sets forth the allocation of allowance for probable loan losses and percent of total loans in each loan category for each of the years presented. TABLE 13. ALLOCATION OF ALLOWANCE FOR PROBABLE LOAN LOSSES
December 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (dollars in thousands) Real estate............. $1,587 55.2% $1,660 56.2% $1,647 56.2% $1,619 48.5% $1,690 52.2% Installment loans....... 192 6.4% 154 7.9% 237 7.9% 166 8.5% 389 21.0% Credit cards and related plans................. 142 2.1% 170 2.6% 166 2.6% 160 2.8% 390 2.8% Commercial and all other loans........... 809 36.3% 686 33.3% 646 33.3% 624 40.2% 149 24.0% ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allocated......... 2,730 100.0% 2,670 100.0% 2,696 100.0% 2,569 100.0% 2,618 100.0% Unallocated............. 120 130 4 181 42 ------ ------ ------ ------ ------ Total................... $2,850 $2,800 $2,700 $2,750 $2,660 ====== ====== ====== ====== ======
19 Management considers the allowance for probable loan losses adequate to cover estimated probable loan losses relating to the loans outstanding as of each reporting period. It must be emphasized, however, that the determination of the allowance using the Company's procedures and methods rest upon various judgements and assumptions about economic conditions and other factors affecting loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgements about the information available to them at the time of their examinations. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for probable loan losses or future charges to earnings. The following table summarizes the Company's balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category, and additions to the allowance that have been charged to expense. TABLE 14. LOAN LOSS AND RECOVERY EXPERIENCE
Year ended December 31, ------------------------------------------------ 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands) Total loans outstanding at end of year............... $188,861 $172,966 $147,676 $133,024 $121,209 ======== ======== ======== ======== ======== Average loans outstanding............................ 183,612 161,356 141,564 127,650 118,185 ======== ======== ======== ======== ======== Allowance for probable loan losses at beginning of year............................................... $ 2,800 $ 2,700 $ 2,750 $ 2,660 $ 2,400 Loans charged off: Real estate.......................................... 136 6 69 21 6 Installment loans.................................... 83 45 80 89 62 Credit cards and related plans....................... 124 72 72 119 110 Commercial and all other loans....................... 103 114 145 2 17 -------- -------- -------- -------- -------- Total charge-offs.................................... 446 237 366 231 195 Recoveries of loans previously charged off: Real estate.......................................... 25 2 6 -- -- Installment loans.................................... 14 23 25 22 22 Credit cards and related plans....................... 15 31 27 23 36 Commercial and all other loans....................... 3 39 16 34 43 -------- -------- -------- -------- -------- Total recoveries..................................... 57 95 74 79 101 Net charge offs...................................... 389 142 292 152 94 Provision for probable loan losses................... 439 242 242 242 354 -------- -------- -------- -------- -------- Allowance for probable loan losses at end of year.... $ 2,850 $ 2,800 $ 2,700 $ 2,750 $ 2,660 ======== ======== ======== ======== ======== RATIOS Net charge offs during year to average loans outstanding........................................ 0.21% 0.09% 0.21% 0.12% 0.08% Net charge offs during year to loans at year-end..... 0.21% 0.08% 0.20% 0.11% 0.08% Allowance for probable loan losses to average loans.. 1.55% 1.74% 1.91% 2.15% 2.25% Allowance for probable loan losses to loans at year- end................................................ 1.51% 1.62% 1.83% 2.07% 2.19% Net charge offs to allowance for probable loan losses 13.65% 5.07% 10.81% 5.53% 3.53% Net charge offs to provision for probable loan losses 88.61% 58.68% 120.66% 62.81% 26.55%
20 DEPOSITS The average amounts of deposits and interest rates thereon of the Company for the years ended December 31, 2001, 2000, and 1999 are summarized below. TABLE 15. AVERAGE DEPOSITS
Year ended December 31, ------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- Average Average Average Balance Rate Balance Rate Balance Rate -------- ---- -------- ---- -------- ---- (dollars in thousands) Interest-bearing demand deposits $ 62,751 1.29% $ 62,904 2.18% $ 59,105 2.12% Savings deposits................ 13,556 1.18% 13,930 1.58% 14,115 1.58% Time deposits................... 122,648 5.17% 93,590 5.79% 81,448 4.99% -------- ---- -------- ---- -------- ---- Total interest-bearing deposits. 198,955 3.68% 170,424 4.11% 154,668 3.58% Noninterest-bearing deposits.... 51,255 47,287 39,941 -------- ---- -------- ---- -------- ---- Total deposits.................. $250,210 2.92% $217,711 3.22% $194,609 2.85% ======== ==== ======== ==== ======== ====
The Company has a large, stable base of time deposits with little dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposits and individual retirement accounts obtained from individual customers. Deposits of certain local governments and municipal entities represented approximately 17.6% of the Company's total deposits at December 31, 2001. All such public funds are collateralized by investment securities. The Company does not purchase brokered deposits. As of December 31, 2001, the Company held approximately $66,339,000 in time deposits of $100,000 or more and time deposits less than $100,000 of $67,734,000. The following table is a maturity schedule of time deposits as of December 31, 2001. TABLE 16. TIME DEPOSIT MATURITY SCHEDULE
3 Months 4 to 6 7 to 12 Over 12 Or Less Months Months Months Total -------- ------- ------- ------- -------- (dollars in thousands) Time certificates of deposit of $100,000 or more $38,942 $16,608 $ 9,679 $1,110 $ 66,339 Time certificates of deposit less than $100,000. 27,145 20,997 13,179 6,413 67,734 ------- ------- ------- ------ -------- Total time deposits............................. $66,087 $37,605 $22,858 $7,523 $134,073 ======= ======= ======= ====== ========
RETURN ON ASSETS AND EQUITY The following table shows return on assets (net income divided by average assets), return on equity (net income divided by average shareholders' equity), dividend payout ratio (dividends declared per share divided by net income per share) and shareholders' equity to assets ratio (average shareholders' equity divided by average total assets) for each of the years presented. TABLE 17. RETURN ON ASSETS AND EQUITY
Year ended December 31, ------------------- (Averages) 2001 2000 1999 ---------- ----- ----- ----- Return on assets.............. 0.90% 0.95% 0.97% Return on equity.............. 10.26% 10.41% 9.71% Dividend payout............... 28.80% 29.26% 28.69% Shareholders' equity to assets 8.73% 9.96% 9.96%
21 TABLE 18. MARKET PRICE OF COMMON STOCK AND DIVIDENDS The following table sets forth the high and low published prices of the Company's common stock during each quarterly period during 2001 and 2000 and the quarterly per share cash dividend declared by Bancorp.
Dividends Quarter High Low Declared ------- ------ ------ --------- 2001 First.. $12.50 $10.00 $0.0900 Second. 12.50 12.50 0.0900 Third.. 13.50 11.01 0.0900 Fourth. 13.50 13.00 0.0900 2000 First.. 11.06 9.50 0.0825 Second. 12.25 9.94 0.0825 Third.. 13.50 12.13 0.0825 Fourth. 12.50 11.00 0.0825
The following table sets forth the Company's contractual payment obligations as of December 31, 2001. TABLE 19. CONTRACTUAL OBLIGATIONS
Payments Due --------------------------------------- 1 year 2-3 4-5 After 5 Contractual Obligations or less years years years Total ----------------------- -------- ------ ------ ------- -------- (dollars in thousands) Long-term obligations........ $ -- $ -- $5,000 $5,000 $ 10,000 Short-term borrowings........ 5,119 -- -- -- 5,119 Operating leases............. 272 421 213 1,333 2,239 Deposits..................... 260,944 7,523 -- -- 268,467 -------- ------ ------ ------ -------- Total contractual obligations $266,335 $7,944 $5,213 $6,333 $285,825 ======== ====== ====== ====== ========
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 include commitments to extend credit and standby letters of credit. The dollar amount of commitments as of December 31, 2001, are set forth in the following table. TABLE 20. COMMERCIAL COMMITMENTS
Amount of Commitment Expiration per Period ------------------------------------------ 1 year 2-3 4-5 After 5 Commercial Commitments or less years years years Total ---------------------- ------- ------ ----- ------- ------- (dollars in thousands) Loan commitments and lines of credit $23,285 $8,659 $847 $9,138 $41,929 Standby letters of credit........... 937 -- -- -- 937 ------- ------ ---- ------ ------- Total commercial commitments........ $24,222 $8,659 $847 $9,138 $42,866 ======= ====== ==== ====== =======
22 Item 7. Financial Statements. INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS ECB BANCORP, INC.: We have audited the accompanying consolidated balance sheets of ECB Bancorp, Inc. and subsidiary (the "Company") as of December 31, 2001 and 2000, 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, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ECB Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. [LOGO] KPMG Raleigh, North Carolina February 1, 2002 23 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ------------------------- 2001 2000 ------------ ----------- ASSETS Cash and non-interest bearing deposits (note 11)............ $ 17,473,420 18,342,044 Federal funds sold.......................................... 7,950,000 1,975,000 ------------ ----------- Total cash and cash equivalents...................... 25,423,420 20,317,044 ------------ ----------- Investment securities available-for-sale (cost: $81,366,622 and $64,462,906, respectively) (note 2)................... 81,531,173 64,776,683 Loans (note 3).............................................. 188,861,167 172,965,645 Allowance for probable loan losses (note 4)................. (2,850,000) (2,800,000) ------------ ----------- Loans, net........................................... 186,011,167 170,165,645 ------------ ----------- Real estate acquired in settlement of loans, net............ 170,626 58,000 Federal Home Loan Bank stock, at cost....................... 632,800 632,800 Bank premises and equipment, net (note 5)................... 8,208,109 7,881,550 Accrued interest receivable................................. 2,386,936 2,636,698 Other assets (note 6)....................................... 7,132,258 1,919,933 ------------ ----------- $311,496,489 268,388,353 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (note 9): Demand, noninterest-bearing.............................. $ 57,207,001 46,564,512 Demand, interest-bearing................................. 63,254,778 61,758,754 Savings.................................................. 13,931,905 13,456,959 Time..................................................... 134,072,937 114,461,272 ------------ ----------- Total deposits....................................... 268,466,621 236,241,497 Accrued interest payable.................................... 976,002 1,160,090 Short-term borrowings....................................... 5,119,212 2,678,040 Long-term obligations....................................... 10,000,000 3,000,000 Other liabilities (note 7).................................. 1,408,729 1,365,724 ------------ ----------- Total liabilities.................................... 285,970,564 244,445,351 ------------ ----------- Shareholders' equity (note 14): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,065,891 and 2,073,081 shares at December 31, 2001 and 2000, respectively........................................... 7,230,619 7,255,784 Capital surplus.......................................... 5,762,477 5,821,523 Retained earnings........................................ 12,507,403 10,682,300 Deferred compensation--restricted stock.................. (75,896) (23,698) Accumulated other comprehensive income................... 101,322 207,093 ------------ ----------- Total shareholders' equity........................... 25,525,925 23,943,002 ------------ ----------- $311,496,489 268,388,353 ============ ===========
See accompanying notes to consolidated financial statements. 24 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, --------------------------------- 2001 2000 1999 ----------- ---------- ---------- Interest income: Interest and fees on loans.......................................... $15,387,869 14,900,352 12,512,479 Interest on investment securities: Interest exempt from federal income taxes....................... 616,041 638,759 760,243 Taxable interest income......................................... 3,134,427 3,101,574 2,274,319 Dividend income................................................. 225,293 32,125 -- Interest on federal funds sold...................................... 352,670 279,976 302,071 FHLB stock dividends................................................ 45,055 49,075 45,043 ----------- ---------- ---------- Total interest income........................................ 19,761,355 19,001,861 15,894,155 ----------- ---------- ---------- Interest expense: Deposits (note 9): Demand accounts................................................. 806,539 1,368,180 1,253,138 Savings......................................................... 159,586 220,379 223,373 Time............................................................ 6,346,851 5,415,007 4,065,536 Short-term borrowings............................................... 99,434 179,448 30,201 Long-term obligations............................................... 228,006 144,290 130,609 ----------- ---------- ---------- Total interest expense....................................... 7,640,416 7,327,304 5,702,857 ----------- ---------- ---------- Net interest income.......................................... 12,120,939 11,674,557 10,191,298 Provision for probable loan losses (note 4)............................ 439,116 242,112 242,319 ----------- ---------- ---------- Net interest income after provision for probable loan losses..................................................... 11,681,823 11,432,445 9,948,979 ----------- ---------- ---------- Noninterest income: Service charges on deposit accounts................................. 1,771,382 1,418,009 1,316,222 Other service charges and fees...................................... 1,130,312 788,937 637,202 Net gain (loss) on sale of securities (note 2)...................... 437,918 5,246 (27,122) Other............................................................... 88,677 51,673 137,152 ----------- ---------- ---------- Total noninterest income..................................... 3,428,289 2,263,865 2,063,454 ----------- ---------- ---------- Noninterest expense: Salaries............................................................ 4,461,632 3,976,592 3,541,511 Retirement and other employee benefits (note 7)..................... 1,440,014 1,249,407 1,073,039 Occupancy........................................................... 950,790 844,111 718,356 Equipment........................................................... 1,338,474 1,266,069 992,213 Professional fees................................................... 225,364 190,063 333,159 Supplies............................................................ 276,290 326,500 239,925 Telephone........................................................... 319,126 339,375 285,828 Postage............................................................. 198,335 173,005 172,759 Other............................................................... 2,405,784 2,029,310 1,812,253 ----------- ---------- ---------- Total noninterest expense.................................... 11,615,809 10,394,432 9,169,043 ----------- ---------- ---------- Income before income taxes................................... 3,494,303 3,301,878 2,843,390 Income taxes (note 6).................................................. 925,000 935,000 700,000 ----------- ---------- ---------- Net income................................................... $ 2,569,303 2,366,878 2,143,390 =========== ========== ========== Net income per share (basic)........................................... $ 1.25 1.13 1.01 =========== ========== ========== Net income per share (diluted)......................................... $ 1.24 1.13 1.01 =========== ========== ========== Weighted average shares outstanding--basic............................. 2,059,999 2,098,490 2,122,354 =========== ========== ========== Weighted average shares outstanding--diluted........................... 2,064,690 2,101,488 2,123,081 =========== ========== ==========
See accompanying notes to consolidated financial statements. 25 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Common Stock --------------------- Deferred Accumulated compensation other Number Capital Retained - restricted comprehensive Comprehensive of shares Amount surplus earnings stock income (loss) income Total --------- ---------- --------- ---------- ------------ ------------- ------------- ---------- BALANCE AT DECEMBER 31, 1998.......... 2,125,254 $7,438,389 6,260,392 7,480,699 -- 672,866 21,852,346 Unrealized losses, net of income taxes of $638,364.................. -- -- -- -- -- (1,239,172) (1,239,172) (1,239,172) Net income................. -- -- -- 2,143,390 -- -- 2,143,390 2,143,390 ---------- ---------- Total comprehensive income.................... 904,218 ========== Deferred compensation- restricted stock issuance. 3,575 12,513 28,599 -- (41,112) -- -- Recognition of deferred stock compensation- restricted stock.......... -- -- -- -- 6,167 -- 6,167 Repurchase of common stock..................... (7,300) (25,550) (59,539) -- -- -- (85,089) Cash dividends ($.29 per share).................... -- -- -- (615,243) -- -- (615,243) --------- ---------- --------- ---------- ------- ---------- ---------- BALANCE AT DECEMBER 31, 1999.......... 2,121,529 7,425,352 6,229,452 9,008,846 (34,945) (566,306) 22,062,399 Unrealized gains, net of income taxes of $398,420.................. -- -- -- -- -- 773,399 773,399 773,399 Net income................. -- -- -- 2,366,878 -- -- 2,366,878 2,366,878 ---------- Total comprehensive income.................... 3,140,277 ========== Recognition of deferred stock compensation- restricted stock.......... (275) (962) (2,063) -- 11,247 -- 8,222 Repurchase of common stock..................... (48,173) (168,606) (405,866) -- -- -- (574,472) Cash dividends ($.33 per share).................... -- -- -- (693,424) -- -- (693,424) --------- ---------- --------- ---------- ------- ---------- ---------- BALANCE AT DECEMBER 31, 2000.......... 2,073,081 7,255,784 5,821,523 10,682,300 (23,698) 207,093 23,943,002 Unrealized losses, net of income taxes of $43,455... -- -- -- -- -- (105,771) (105,771) (105,771) Net income................. -- -- -- 2,569,303 -- -- 2,569,303 2,569,303 ---------- Total comprehensive income.................... 2,463,532 ========== Deferred compensation restricted stock issuance. 6,042 21,147 54,378 -- (75,525) -- -- Recognition of deferred compensation -restricted stock..................... -- -- -- -- 23,327 -- 23,327 Repurchase of common stock..................... (13,232) (46,312) (113,424) -- -- -- (159,736) Cash dividends ($.36 per share).................... -- -- -- (744,200) -- -- (744,200) --------- ---------- --------- ---------- ------- ---------- ---------- BALANCE AT DECEMBER 31, 2001.......... 2,065,891 $7,230,619 5,762,477 12,507,403 (75,896) 101,322 25,525,925 ========= ========== ========= ========== ======= ========== ==========
See accompanying notes to consolidated financial statements. 26 ECB BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, -------------------------------------- 2001 2000 1999 ------------ ----------- ----------- Cash flows from operating activities: Net income $ 2,569,303 2,366,878 2,143,390 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................................... 825,395 729,728 660,762 Amortization of premium (accretion of discount) on investment securities, net.................................................. (430,536) (57,536) 41,651 Provision for probable loan losses................................. 439,116 242,112 242,319 Deferred income taxes.............................................. (180,000) 67,900 34,800 Loss (gain) on sale of securities.................................. (437,918) (5,246) 27,122 Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale.................................... 2,000 (9,363) -- Loss on disposal of premises and equipment......................... 156,483 261 47,486 Deferred compensation--restricted stock............................ 23,327 8,222 6,167 Decrease (increase) in accrued interest receivable................. 249,762 (377,327) (162,947) Decrease (increase) in other assets................................ 71,522 (705,202) (659,533) Increase (decrease) in accrued interest payable.................... (184,088) 343,110 (12,124) Increase in postretirement benefit liability....................... 7,696 11,774 12,739 Increase (decrease) in other liabilities........................... 20,773 141,529 (200,289) ------------ ----------- ----------- Net cash provided by operating activities...................... 3,132,835 2,756,840 2,181,543 ------------ ----------- ----------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale................................................. 25,659,026 6,706,542 3,346,458 Proceeds from maturities of investment securities classified as available-for-sale................................................. 21,403,887 12,680,251 18,818,876 Purchases of investment securities classified as available-for-sale.. (63,098,175) (23,989,535) (24,656,514) Purchases of Federal Home Loan Bank stock............................ -- -- (68,000) Proceeds from disposal of premises and equipment..................... 64,409 8,601 2,286,397 Purchases of premises and equipment.................................. (1,372,846) (1,892,680) (2,715,597) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale................................ 27,000 134,035 -- Net loan originations................................................ (16,426,264) (25,432,219) (14,943,853) Purchases of life insurance.......................................... (5,060,392) -- -- ------------ ----------- ----------- Net cash used by investing activities.......................... (38,803,355) (31,785,005) (17,932,233) ------------ ----------- ----------- Cash flows from financing activities: Net increase in deposits............................................. 32,225,124 32,940,104 19,034,481 Net (decrease) increase in short-term borrowings..................... 2,441,172 (59,609) 12,649 Repayments of long-term obligations.................................. (3,000,000) -- -- Origination of long-term obligations................................. 10,000,000 -- 3,000,000 Dividends paid....................................................... (729,664) (675,878) (461,395) Repurchase of common stock........................................... (159,736) (574,472) (85,089) ------------ ----------- ----------- Net cash provided by financing activities...................... 40,776,896 31,630,145 21,500,646 ------------ ----------- ----------- Increase in cash and cash equivalents................................. 5,106,376 2,601,980 5,749,956 Cash and cash equivalents at beginning of year........................ 20,317,044 17,715,064 11,965,108 ------------ ----------- ----------- Cash and cash equivalents at end of year.............................. $ 25,423,420 20,317,044 17,715,064 ============ =========== =========== Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes................................................... $ (105,771) 773,399 (1,239,172) ============ =========== =========== Dividends declared but not paid.................................... $ 185,930 171,394 153,848 ============ =========== ===========
See accompanying notes to consolidated financial statements. 27 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Consolidation The consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") and its wholly-owned subsidiary, The East Carolina Bank (the "Bank") (collectively referred to hereafter as the "Company"). The Bank has two wholly-owned subsidiaries, Carolina Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. (B) Basis of Financial Statement Presentation The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates. (C) Business Bancorp is a bank holding company incorporated in North Carolina on March 4, 1998. The principal activity of Bancorp is ownership of the Bank. The Bank provides financial services through its branch network located in eastern North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Company's customers are principally located in eastern North Carolina. (D) Cash and Cash Equivalents Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (E) Investment Securities Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation at each reporting date. Securities are classified as held-to-maturity ("HTM") when the Company has both the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as available-for-sale ("AFS"). AFS securities are stated at fair value as determined by reference to published sources, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders' equity. The Company may sell its securities AFS in response to liquidity needs changes in regulatory capital and investment requirements, or significant unforeseen changes in market conditions, including interest rates and market values of securities held in the portfolio. The Company has no trading securities. The amortized cost of securities classified as HTM or AFS is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income from investments. The cost of securities sold is based on the specific identification method. 28 (F) Loans Loans are generally stated at their outstanding unpaid principal balances net of any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method. Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management's judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. (G) Allowance for Probable Loan Losses The allowance for probable loan losses ("AFLL") is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management's estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company's market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Thus, future additions to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's AFLL. Such agencies may require the Company to recognize additions to the AFLL based on their judgments about information available to them at the time of their examination. Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" (collectively referred to hereafter as "SFAS No. 114"), the AFLL related to loans that are identified for evaluation and deemed impaired is based on discounted cash flows using the loan's initial effective interest rate, the loan's observable market price, or the fair value of the collateral for collateral dependent loans. Loans evaluated for impairment and not considered impaired are assessed under SFAS No. 5, "Accounting for Contingencies". (H) Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings, if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Loans with outstanding principal balances totaling $141,626 and $29,000 were foreclosed on during the years ended December 31, 2001 and 2000, respectively. There were no such foreclosures in 1998. (I) Membership/Investment in Federal Home Loan Bank Stock The Company is a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement, provides the Company with the ability to draw $13 million of advances from the FHLB. At December 31, 2001 and 2000, the Company had advances totaling $10 million and $3 million, respectively, from the FHLB. These advances, which are classified as long-term obligations, consist 29 of a $5 million advance with a 10 year term (with a 2 year call) at 4.44% maturing on July 6, 2011, and a $5 million advance with a five year term at 5.79% maturing on July 6, 2006. 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, 2001, the Company owned 6,328 shares of the FHLB's $100 par value capital stock. No ready market exists for such stock, which is carried at cost. (J) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 25 to 50 years for bank premises and 3 to 10 years for furniture and equipment. Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated. (K) Short-term Borrowings Short-term borrowings are composed primarily of securities sold under agreements to repurchase, generally on an overnight basis. (L) Income Taxes The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled. (M) Stock Option Plan During 1998, the Company adopted an Omnibus Stock Ownership and Long-Term Incentive Plan ("the Omnibus Plan") which provides for the issuance of up to an aggregate of 159,000 shares of common stock of the Company pursuant to stock options and other awards granted or issued under its terms. Stock options vest one-third each year beginning three years after the grant date and expire after 10 years. Restricted stock vests over 4 years. The Company accounts for awards pursuant to the Omnibus Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on the date of grant only if the market price of the underlying stock on the date of grant exceeds the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of ABP Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note 8). (N) Net Income Per Share Basic Net Income Per Share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. For purposes of Basic Net Income Per Share, restricted stock is considered "contingently issuable" and is not included in the weighted average number of common shares outstanding. 30 Diluted Net Income Per Share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of Diluted Net Income Per Share. The amount of compensation cost attributed to future services and not yet recognized is considered "proceeds" using the treasury stock method. Diluted weighted average shares outstanding increased by 3,167 and 1,106 shares for 2001 and 2000, respectively, due to the dilutive impact of restricted stock. In computing Diluted Net Income Per Share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate Diluted Net Income Per Share for the Company. During 2001 and 2000 diluted weighted average shares outstanding increased by 1,524 and 1,892, respectively, due to the dilutive impact of options. There were no dilutive stock options outstanding during 1999 as the exercise price exceeded the average market price. (O) Comprehensive Income Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. As of and for the periods presented, the sole component of other comprehensive income for the Company has consisted of unrealized gains and losses, net of taxes, of the Company's available-for-sale securities portfolio.
2001 2000 1999 --------- --------- ---------- Unrealized (losses) gains arising during the period $ 288,692 1,177,065 (1,904,658) Tax benefit (expense).............................. (125,380) (400,204) 647,582 Reclassification to realized (gains) losses........ (437,918) (5,246) 27,122 Tax expense (benefit).............................. 168,835 1,784 (9,218) --------- --------- ---------- Other comprehensive income (loss)............... $(105,771) 773,399 (1,239,172) ========= ========= ==========
(P) Reclassifications Certain prior year amounts have been reclassified in the financial statements to conform with the current year presentation. The reclassifications had no effect on previously reported net income or shareholders' equity. (Q) New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This Statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and was adopted by the Company on January 1, 2001 with no material impact to the Company's financial statements. The FASB has also issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after 31 March 31, 2001. This statement is effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company adopted this statement during 2001 with no material impact to the Company. On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations". This statement improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method--the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The FASB has issued SFAS No. 142 "Goodwill and Other Intangible Assets". This statement requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change provides investors with greater transparency regarding the economic value of goodwill and its impact on earnings. The amortization of goodwill ceases upon adoption of the statement, which will be January 1, 2002. Management of the Company anticipates that due to the fact that it does not have goodwill or other intangible assets, the adoption of SFAS No. 142 will not have a material effect on the Company. (2) INVESTMENT SECURITIES The following is a summary of the securities portfolio by major classification:
December 31, 2001 -------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ---------- ---------- ---------- Securities available-for-sale: U.S. Treasury obligations........................ $ 2,000,345 10,249 -- 2,010,594 Securities of other U.S. government agencies and corporations................................... 17,479,843 338,786 (41,157) 17,777,472 Obligations of states and political subdivisions. 16,307,266 156,076 (156,950) 16,306,392 Mortgage-backed securities....................... 39,814,382 278,188 (358,305) 39,734,265 Preferred stock.................................. 5,764,786 -- (62,336) 5,702,450 ----------- ------- -------- ---------- $81,366,622 783,299 (618,748) 81,531,173 =========== ======= ======== ==========
December 31, 2000 -------------------------------------------- Gross Gross Amortized unrealized unrealized cost gains losses Fair value ----------- ---------- ---------- ---------- Securities available-for-sale: U.S. Treasury obligations........................ $ 8,997,123 45,377 -- 9,042,500 Securities of other U.S. government agencies and corporations................................... 24,361,236 138,799 (42,600) 24,457,435 Obligations of states and political subdivisions. 13,537,396 82,419 (89,437) 13,530,378 Mortgage-backed securities....................... 16,552,151 203,651 (24,432) 16,731,370 Preferred stock.................................. 1,015,000 -- -- 1,015,000 ----------- ------- -------- ---------- $64,462,906 470,246 (156,469) 64,776,683 =========== ======= ======== ==========
Gross realized gains and losses on sales of securities for the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 --------- ------ ------- Gross realized gains....................................... $ 635,212 10,808 -- Gross realized losses...................................... (197,294) (5,562) (27,122) --------- ------ ------- Net realized gains (losses)................................ $ 437,918 5,246 (27,122) ========= ====== =======
32 The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2001, by remaining contractual maturity are as follows:
Amortized cost Fair value ----------- ---------- U.S. Treasury obligations: Due in one year or less.................................... $ 2,000,345 2,010,594 Securities of other U.S. government agencies and corporations: Due in one year or less.................................... 5,996,705 6,090,970 Due in one year through five years......................... 11,483,138 11,686,502 Obligations of states and political subdivisions: Due in one year or less.................................... 615,643 620,320 Due in one year through five years......................... 7,752,798 7,757,397 Due after five through ten years........................... 6,792,870 6,790,593 Due after ten years........................................ 1,145,955 1,138,081 Mortgage-backed securities: Due in one year through five years......................... 15,807,714 15,971,171 Due after five through ten years........................... 24,006,668 23,763,095 Preferred stock................................................ 5,764,786 5,702,450 ----------- ---------- Total securities........................................ $81,366,622 81,531,173 =========== ==========
Securities with an amortized cost of approximately $64,566,000 at December 31, 2001 are pledged as collateral for deposits. Of this total, $11,000,000 are pledged as collateral for FHLB advances. (3) LOANS Loans at December 31, 2001 and 2000 classified by type, are as follows:
2001 2000 ------------ ----------- Real estate loans: Construction...................................... $ 12,880,587 10,019,371 Secured by farmland............................... 14,320,854 11,137,661 Secured by residential properties................. 27,080,648 22,759,935 Secured by nonfarm, nonresidential properties..... 50,026,201 40,830,466 Consumer installment.................................. 12,012,321 11,435,743 Credit cards and related plans........................ 3,884,239 3,989,494 Commercial and all other loans: Commercial and industrial......................... 51,113,569 54,765,776 Loans to finance agricultural production.......... 13,402,120 14,854,751 All other loans................................... 4,370,691 3,387,815 ------------ ----------- 189,091,230 173,181,012 Less deferred fees and costs, net................. 230,063 215,367 ------------ ----------- $188,861,167 172,965,645 ============ =========== Included in the above: Nonaccrual loans.................................. 146,000 121,014 Restructured loans................................ 66,892 72,511
At December 31, 2001, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $68,000. The average recorded investment in impaired loans during the year ended December 31, 2001 was approximately $73,000. For the year ended December 31, 2001, the Company recognized no interest income on impaired loans. 33 At December 31, 2000, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $121,014 (all on a non-accrual basis). The average recorded investment in impaired loans during the year ended December 31, 2000 was approximately $334,000. For the year ended December 31, 2000, the Company recognized interest income on those impaired loans of $49,035, all of which was recognized using the cash basis method of income recognition. At December 31, 1999, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $366,631 (all on a non-accrual basis) which had a related allowance for probable loan losses of approximately $55,000. The average recorded investment in impaired loans during the year ended December 31, 1999 was approximately $192,220. For the year ended December 31, 1999, the Company recognized interest income on those impaired loans of $234,683, all of which was recognized using the cash basis method of income recognition. The Company, through its normal lending activity, originates and maintains loans receivable which are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company's policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant. At December 31, 2001, qualifying first mortgage loans were pledged as collateral for the Company's Federal Home Loan Bank (FHLB) borrowings under a blanket lien arrangement. (4) ALLOWANCE FOR PROBABLE LOAN LOSSES An analysis of the allowance for probable loan losses for the years ended December 31, 2001, 2000 and 1999 follows:
December 31, -------------------------------- 2001 2000 1999 ---------- --------- --------- Beginning balance................. $2,800,000 2,700,000 2,750,000 Provision for probable loan losses 439,116 242,112 242,319 Recoveries........................ 56,931 94,845 74,046 Loans charged off................. (446,047) (236,957) (366,365) ---------- --------- --------- Ending balance.................... $2,850,000 2,800,000 2,700,000 ========== ========= =========
(5) PREMISES AND EQUIPMENT An analysis of premises and equipment at December 31, 2001 and 2000 follows:
Accumulated Undepreciated Cost depreciation cost ----------- ------------ ------------- December 31, 2001: Land.................... $ 1,962,822 -- 1,962,822 Land improvements....... 193,322 142,075 51,247 Buildings............... 6,642,684 1,890,342 4,752,342 Furniture and equipment. 5,761,685 4,319,987 1,441,698 ----------- --------- --------- Total............... $14,560,513 6,352,404 8,208,109 =========== ========= ========= December 31, 2000: Land.................... $ 1,731,212 -- 1,731,212 Land improvements....... 193,322 124,617 68,705 Buildings............... 6,332,970 1,741,414 4,591,556 Furniture and equipment. 5,305,869 3,815,792 1,490,077 ----------- --------- --------- Total............... $13,563,373 5,681,823 7,881,550 =========== ========= =========
34 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) (6) INCOME TAXES The components of income tax expense are as follows:
Current Deferred Total ---------- -------- ------- Year ended December 31, 2001: Federal................... $ 994,000 (53,000) 941,000 State..................... 111,000 (127,000) (16,000) ---------- -------- ------- $1,105,000 (180,000) 925,000 ========== ======== ======= Year ended December 31, 2000: Federal................... $ 856,100 67,900 924,000 State..................... 11,000 -- 11,000 ---------- -------- ------- $ 867,100 67,900 935,000 ========== ======== ======= Year ended December 31, 1999: Federal................... $ 665,200 34,800 700,000 State..................... -- -- -- ---------- -------- ------- $ 665,200 34,800 700,000 ========== ======== =======
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, ------------------------------- 2001 2000 1999 ---------- --------- -------- Income taxes at statutory rate....................... $1,188,000 1,123,000 967,000 Increase (decrease) resulting from: Effect of non-taxable interest income............. (196,000) (208,000) (256,000) State taxes, net of federal benefit............... (11,000) 7,000 -- Other, net........................................ (56,000) 13,000 (11,000) ---------- --------- -------- Applicable income taxes.............................. $ 925,000 935,000 700,000 ========== ========= ========
35 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(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, 2001 and 2000 are presented below:
2001 2000 ---------- --------- Deferred tax assets: Allowance for probable loan losses............................. $ 844,300 825,100 Postretirement benefits........................................ 226,600 208,600 State economic loss carryforwards.............................. 3,800 5,600 Other.......................................................... 29,300 13,900 ---------- --------- Total gross deferred tax assets............................ 1,104,000 1,053,200 State valuation allowance......................................... (600) (73,200) ---------- --------- Total net deferred tax assets.............................. 1,103,400 980,000 ---------- --------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation................................................. 387,000 403,300 Unrealized gains on securities available for sale.............. 63,500 107,000 Other.......................................................... 31,400 71,700 ---------- --------- Total gross deferred tax liabilities....................... 481,900 582,000 ---------- --------- Net deferred tax asset included in other assets............ $ 621,500 398,000 ========== =========
The valuation allowance at December 31, 2001 or 2000 is the amount necessary to reduce the Company's gross state deferred tax asset to the amount which is more likely than not to be realized. Income taxes paid during each of the three years ended December 31, 2001, 2000 and 1999 were $800,700, $870,000 and $654,500, respectively. (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has a defined contribution 401(k) plan that covers all eligible employees. The Company matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $161,444, $138,204 and $136,242 in 2001, 2000 and 1999, 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. During 2001, the Company modified the benefit options available to participants. 36 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) The following tables provide information relating to the Company's postretirement benefit plan:
2001 2000 -------- ------- Reconciliation of benefit obligation Net benefit obligation, January 1................... $541,321 529,547 Service cost........................................ 7,604 5,217 Interest cost....................................... 39,092 31,270 Plan amendment...................................... (67,688) -- Actuarial loss...................................... 21,688 13,660 Benefits paid....................................... (21,336) (21,243) -------- ------- Net benefit obligation, December 31................. 520,681 558,451 -------- ------- Fair value of plan assets........................... -- -- Funded status Funded status, December 31.......................... 520,681 558,451 Unrecognized prior service cost..................... 67,688 -- Unrecognized actuarial loss......................... (21,688) (17,130) -------- ------- Net amount recognized, included in other liabilities $566,681 541,321 ======== =======
Net periodic postretirement benefit cost for 2001, 2000 and 1999 includes the following components:
2001 2000 1999 ------- ------ ------ Service cost......................................... $ 7,604 5,217 4,815 Interest cost........................................ 39,092 31,270 29,944 Amortization of gain................................. -- (3,470) (3,855) ------- ------ ------ Net periodic postretirement benefit cost............. $46,696 33,017 30,904 ======= ====== ======
37 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) The following table presents assumptions relating to the plan at December 31, 2001 and 2000:
2001 2000 ----- ----- Weighted average discount rate in determining benefit obligation. 7.0% 7.0% Annual health care cost trend rate............................... 8.0 8.0 Ultimate medical trend rate...................................... 8.0 8.0 Medical trend rate period (in years)............................. 4 5 Effect of 1% increase in assumed health care cost on:............ Service and interest cost.................................... 15.2% 16.2% Benefit obligation........................................... 13.8 14.7 Effect of 1% decrease in assumed health care cost on: Service and interest cost.................................... (12.4) (13.1)% Benefit obligation........................................... (11.4) (12.1)
(8) OMNIBUS PLAN A summary of the status of stock options as of December 31, 2001, 2000 and 1999, and changes during the years then ended is presented below:
2001 2000 1999 --------------- --------------- --------------- Weighted Weighted Weighted average Average average option option option Number price Number price Number price ------ -------- ------ -------- ------ -------- Options outstanding, beginning of year 17,202 $11.29 8,844 $12.50 9,516 $12.50 Granted............................... -- -- 8,358 10.00 -- -- Exercised............................. -- -- -- -- -- -- Forfeited............................. -- -- -- -- 672 12.50 ------ ------ ------ ------ ----- ------ Options outstanding, end of year...... 17,202 $11.29 17,202 $11.29 8,844 $12.50 ====== ====== ====== ====== ===== ======
The following table summarizes information about the stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------ ----------------------------- Number Weighted- Number outstanding average remaining outstanding Weighted- December 31, contractual December 31, average exercise Exercise Price 2001 life (years) 2001 price -------------- ------------ ----------------- ------------ ---------------- $10.00................. 8,358 8.1 -- -- $12.50................. 8,844 6.4 2,948 12.50
38 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) There were no options granted in 2001 or 1999. The per share weighted-average fair value of options granted during 2000 was $3.42, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected dividend yield.............................. 2.8% Risk-free interest rate.............................. 6.0% Expected life........................................ 6 years Expected volatility.................................. 20.0%
Restricted stock of 6,042 shares and 3,575 shares was awarded in 2001 and 1999, respectively, resulting in an increase to deferred compensation--restricted stock of $75,525 in 2001 and $41,112 in 1999. If the Company had elected to recognize compensation cost for its stock-based compensation plans in accordance with the fair value based accounting method of SFAS No. 123, net income and earnings per share ("EPS") would have been as follows:
2001 2000 1999 -------------------- ------------------- ------------------- As As As Pro Forma Reported Pro Forma Reported Pro Forma Reported ---------- --------- --------- --------- --------- --------- Net income............. $2,562,930 2,569,303 2,360,504 2,366,878 2,138,390 2,143,390 Basic.................. 1.24 1.25 1.12 1.13 1.01 1.01 Diluted EPS............ 1.24 1.24 1.12 1.13 1.01 1.01
(9) DEPOSITS At December 31, 2001 and 2000, certificates of deposit of $100,000 or more amounted to approximately $66,339,000 and $52,215,000, respectively. Time deposit accounts as of December 31, 2001, mature in the following years and amounts: 2002--$126,550,000; 2003--$6,762,000; and 2004--$761,000. For the years ended December 31, 2001, 2000 and 1999, interest expense on certificates of deposit of $100,000 or more amounted to approximately $2,899,000, $2,308,000 and $1,460,000, respectively. The Company made interest payments of $7,824,504, $6,984,194 and $5,714,981 during the years ended December 31, 2001, 2000 and 1999, respectively. (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 twenty years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 2001, 2000 and 1999 was $167,019 and $147,417, and $94,107, respectively. 39 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2001 are as follows:
Year ending December 31, ------------------------ 2002................................................. $ 271,549 2003................................................. 215,363 2004................................................. 206,301 2005................................................. 106,620 2006................................................. 106,620 Thereafter........................................... 1,332,750 ---------- Total minimum lease payments......................... $2,239,203 ==========
(11) RESERVE REQUIREMENTS The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest-bearing, were approximately $4,891,000 at December 31, 2001. (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 $41,929,000 and standby letters of credit of $937,000 at December 31, 2001. The Company's exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer's creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments and anticipates funding them from normal operations. The Company is not involved in any legal proceedings which, in management's opinion, could have a material effect on the consolidated financial position of the Company. (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. 40 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000:
2001 2000 ----------------------------- ----------------------------- Estimated fair Estimated fair Carrying value value Carrying value value -------------- -------------- -------------- -------------- Financial assets: Cash and non-interest bearing bank deposits................... $ 17,473,000 $ 17,473,000 $ 18,342,000 $ 18,342,000 Federal funds sold................ 7,950,000 7,950,000 1,975,000 1,975,000 Investment securities............. 81,531,000 81,531,000 64,777,000 64,777,000 FHLB stock........................ 632,800 632,800 632,800 632,800 Accrued interest receivable....... 2,387,000 2,387,000 2,637,000 2,637,000 Net loans......................... 186,011,000 187,548,000 170,166,000 169,502,000 Financial liabilities:................ Deposits.......................... 268,467,000 260,832,000 236,241,000 220,670,000 Short-term borrowings............. 5,119,000 5,119,000 2,678,000 2,678,000 Accrued interest payable.......... 976,000 976,000 1,160,000 1,160,000 Long-term obligations............. 10,000,000 10,059,000 3,000,000 2,984,000
The estimated fair values of net loans, deposits and long-term obligations at December 31 are based on cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. Refer to note 1(E) for investment securities fair value information. (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 classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by the Federal Deposit Insurance Corporation ("FDIC") to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). The Company, as a bank holding company, is also subject, on a consolidated basis, to the capital adequacy guidelines of the Board of Governors of the Federal Reserve (the "Federal Reserve Board"). The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. Management believes, as of December 31, 2001, that the Bank and the Company meet all capital adequacy requirements to which they are subject. 41 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts, in thousands, and ratios are presented in the following table:
To be well capitalized For capital under prompt adequacy corrective action Actual purposes provisions ------------- ------------------ ------------------- Amount Ratio Ratio Ratio ------- ----- ------------------ ------------------- As of December 31, 2001: Total Capital (to Risk Weighted Assets)........... $28,161 12.58% (greater or =)8.00% (greater or =)10.00% Tier I Capital (to Risk Weighted Assets).......... $25,361 11.33% (greater or =)4.00% (greater or =)6.00% Tier I Capital (to Average Assets)................ $25,361 8.43% (greater or =)4.00% (greater or =)5.00% As of December 31, 2000: Total Capital (to Risk Weighted Assets)........... $26,100 13.75% (greater or =)8.00% (greater or =)10.00% Tier I Capital (to Risk Weighted Assets).......... $23,722 12.49% (greater or =)4.00% (greater or =)6.00% Tier I Capital (to Average Assets)................ $23,722 9.24% (greater or =)4.00% (greater or =)5.00%
The Bank, as a North Carolina chartered bank, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of such banks. 42 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) (15) ECB BANCORP, INC. (PARENT COMPANY) ECB Bancorp, Inc.'s principal asset is its investment in the Bank, and its principal source of income is dividends from the Bank. The Parent Company condensed balance sheets as of December 31, 2001 and 2000, and the related condensed statements of income and cash flows for the years ended December 31, 2001, 2000 and 1999 and are as follows: CONDENSED BALANCE SHEETS
2001 2000 ----------- ---------- ASSETS Receivable from subsidiary........................... $ 185,930 171,394 Investment in subsidiary............................. 25,525,925 23,943,002 ----------- ---------- Total assets...................................... $25,711,855 24,114,396 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable.................................... $ 185,930 171,394 Total shareholders' equity........................... 25,525,925 23,943,002 ----------- ---------- Total liabilities and shareholders' equity........ $25,711,855 24,114,396 =========== ==========
CONDENSED STATEMENTS OF INCOME
2001 2000 1999 ---------- --------- --------- Dividends from bank subsidiary....................... $ 866,073 1,242,128 540,317 Equity in undistributed net income of subsidiary..... 1,703,230 1,124,750 1,603,073 ---------- --------- --------- Net income........................................ $2,569,303 2,366,878 2,143,390 ========== ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
2001 2000 1999 ----------- ---------- ---------- Operating activities: Net income........................................ $ 2,569,303 2,366,878 2,143,390 Equity in undistributed net income of subsidiary.. (1,703,230) (1,124,750) (1,603,073) Deferred compensation--restricted stock........... 23,327 8,222 6,167 ----------- ---------- ---------- Net cash provided by operating activities..... 889,400 1,250,350 546,484 ----------- ---------- ---------- Financing activities: Repurchase of common stock........................ (159,736) (574,472) (85,089) Cash dividends paid............................... (729,664) (675,878) (461,395) ----------- ---------- ---------- Net cash used in financing activities......... (889,400) (1,250,350) (546,484) ----------- ---------- ---------- Net change in cash................................... $ -- -- -- =========== ========== ==========
43 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO FINANCIAL CONSOLIDATED STATEMENT--(Continued) (16) RELATED PARTY TRANSACTIONS Bancorp and the Bank have had, and expect to have in the future, banking transactions in the ordinary course of business with several directors, officers and their associates ("Related Parties") on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Those transactions neither involve more than normal risk of collectibility nor present any unfavorable features. Loans at December 31, 2001 and 2000 include loans to officers and directors and their associates totaling approximately $1,494,000 and $1,617,000, respectively. During 2001, $303,000 in loans were disbursed to officers, directors and their associates and principal repayments of $426,000 were received on such loans. During 2001, the Bank purchased three parcels of land from a Related Party for a total price of $292,500. One parcel is located adjacent to the Bank's main branch while the other two parcels are located across the street from the Bank's main branch. Prior to the execution of the agreement, the transaction was discussed with the Bank's regulators, and the transaction and purchase price were approved by Bancorp's Board of Directors after having received two independent appraisals of the property. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Incorporated herein by reference from pages 3,4 and 6 (under the captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Proposal 1: Election of Directors" and "Executive Officers") of Registrant's definitive Proxy Statement dated March 18, 2002. Item 10. Executive Compensation. Incorporated herein by reference from pages 4 and 6 through 8 (under the captions "Director Compensation" and "Executive Compensation") of Registrant's definitive Proxy Statement dated March 18, 2002. Item 11. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference from pages 2 and 3 (under the caption "Beneficial Ownership of Securities") of Registrant's definitive Proxy Statement dated March 18, 2002. Item 12. Certain Relationships and Related Transactions. Incorporated herein by reference from page 8 (under the caption "Transactions with Management") of Registrant's definitive Proxy Statement dated March 18, 2002. 44 Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are filed herewith or incorporated herein by reference as part of this Report.
Exhibit No. Description ------- ----------- 3.1 Registrant's Articles of Incorporation (incorporated by reference from Exhibit 3.1 Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 3.2 Registrant's Bylaws (incorporated by reference from Exhibit 3.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.1 Employment Agreement between Arthur H. Keeney, III and the Bank (incorporated by reference from Exhibit 10.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.2 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibit 10.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.3 Form of Employee Stock Option Agreement (incorporated by reference from Exhibit 10.3 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 10.4 Form of Restricted Stock Agreement (incorporated by reference from Exhibit 99.4 to Registrant's Registration Statement Form S-8, Reg. No. 333-77689) 10.5 Agreement between J. Dorson White, Jr. and the Bank (filed herewith) 21 List of subsidiaries of Registrant (incorporated by reference from Exhibit 21.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 23 Consent of KPMG LLP (filed herewith) 99 Registrant's definitive Proxy Statement dated March 18, 2002, as filed with the Securities and Exchange Commission (not being refiled)
(b) Reports on Form 8-K. None. 45 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 18, 2002 ECB BANCORP, INC. By: /s/ ARTHUR H. KEENEY, III ----------------------------- Arthur H. Keeney, III President and Chief Executive Officer In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ----- /S/ ARTHUR H. KEENEY, III President, Chief March 18, 2002 ----------------------------- Executive Officer Arthur H. Keeney, III and Director (principal executive officer) /S/ GARY M. ADAMS Senior Vice President March 18, 2002 ----------------------------- and Chief Financial Gary M. Adams Officer (principal financial and accounting officer) /S/ R. S. SPENCER, JR. Chairman March 18, 2002 ----------------------------- R. S. Spencer, Jr. /S/ GEORGE T. DAVIS, JR. Director March 18, 2002 ----------------------------- George T. Davis, Jr. /S/ GREGORY C. GIBBS Director March 18, 2002 ----------------------------- Gregory C. Gibbs /S/ JOHN F. HUGHES, JR. Director March 18, 2002 ----------------------------- John F. Hughes, Jr. /S/ J. BRYANT KITTRELL, III Director March 18, 2002 ----------------------------- J. Bryant Kittrell, III /S/ JOSEPH T. LAMB, JR. Director March 18, 2002 ----------------------------- Joseph T. Lamb, Jr. /S/ B. MARTELLE MARSHALL Director March 18, 2002 ----------------------------- B. Martelle Marshall /S/ ROBERT L. MITCHELL Director March 18, 2002 ----------------------------- Robert L. Mitchell /S/ RAY M. SPENCER Director March 18, 2002 ----------------------------- Ray M. Spencer 46