-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AFqpEStuYJ3Y9SzsXnzNBETIIbA9VbhdXGJNPkkXZjyrODjh4ZWb9quoFazVxR7T 8XCfDz151duxiMUaU41EPw== 0000950168-98-002773.txt : 19980820 0000950168-98-002773.hdr.sgml : 19980820 ACCESSION NUMBER: 0000950168-98-002773 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19980819 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECB BANCORP INC CENTRAL INDEX KEY: 0001066254 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 562090738 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-61839 FILM NUMBER: 98694404 BUSINESS ADDRESS: STREET 1: P O BOX 337 STREET 2: HWY 264 CITY: ENGELHARD STATE: NC ZIP: 27824 BUSINESS PHONE: 2529259411 SB-2 1 EAST CAROLINA BANK SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998 REGISTRATION NO. 333- * ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- ECB BANCORP, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-2090738 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) HIGHWAY 264, POST OFFICE BOX 337 ENGELHARD, NORTH CAROLINA 27824 (252) 925-9411 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- ARTHUR H. KEENEY, III PRESIDENT AND CHIEF EXECUTIVE OFFICER ECB BANCORP, INC. POST OFFICE BOX 337 ENGELHARD, NORTH CAROLINA 27824 (252) 925-9411 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- COPY TO: WILLIAM R. LATHAN, JR., ESQ. GARY C. IVEY, ESQ. WARD AND SMITH, P.A. PARKER, POE, ADAMS & BERNSTEIN L.L.P. 1001 COLLEGE COURT 2500 CHARLOTTE PLAZA NEW BERN, NORTH CAROLINA 28560 CHARLOTTE, NORTH CAROLINA 28244 (252) 633-1000 (704) 372-9000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] --------------- CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED PROPOSED TITLE OF EACH CLASS MAXIMUM MAXIMUM AMOUNT OF OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION BE REGISTERED REGISTERED(1) SHARE/UNIT(2) OFFERING PRICE(1)(2) FEE(1)(3) - ---------------------------------------------------------------------------------------------------------------------- Common Stock, $3.50 Par Value .. 300,000 shares $ 16.00 $4,800,000 $1,416 ======================================================================================================================
================================================================================ (1) Based on the maximum number of shares of Common Stock being offered for sale. (2) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for the purpose of computing the registration fee. (3) The registration fee is calculated in accordance with Section 6 of the Securities Act of 1933, as amended. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PRELIMINARY PROSPECTUS DATED * , 1998 SUBJECT TO COMPLETION PROSPECTUS COMMON STOCK (ECB logo appears here) ECB BANCORP, INC. MINIMUM SHARES -- 250,000 / MAXIMUM SHARES -- 300,000 ECB Bancorp, Inc. (the "Company") hereby offers for sale a minimum of 250,000 shares and a maximum of 300,000 shares of its common stock, $3.50 par value (the "Common Stock"), at a price of $ * per share. The Common Stock currently is traded on the Nasdaq Over-the-Counter Bulletin Board under the symbol "ECBE," and an application is being made to list the Common Stock on the Nasdaq Small Cap Market. The last reported sale price of the Common Stock as reported on the Nasdaq Bulletin Board on August * , 1998, was $ * . The Company is a North Carolina corporation that was formed on March 4, 1998, to serve as the bank holding company for The East Carolina Bank (the "Bank"). The Company became the Bank's parent company on July 22, 1998. SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DESCRIPTION OF CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. --------------- THESE SECURITIES ARE NOT DEPOSITS, SAVINGS ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- ===============================================================================-
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PUBLIC AND COMMISSION(1) ISSUER(2) - ------------------------------------------------------------------------------- Total minimum(3) ......... $ * $ * $ * - ------------------------------------------------------------------------------- Total maximum(3) ......... $ * $ * $ *
================================================================================ (1) Pursuant to a Sales Agency Agreement between the Company and the Sales Agent, the Company has agreed to pay selling commissions to the Sales Agent equal to 7.0% of the total dollar amount of Common Stock sold in the Offering, and to pay all NASD and "blue sky" filing fees and the Sales Agent's expenses, including reasonable attorneys' fees, related thereto. The Company also has agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Plan of Distribution." (2) Before deducting Offering expenses estimated at $225,000, all of which are payable by the Company. See "Use of Proceeds." (3) Based on the sale of the minimum of 250,000 and maximum of 300,000 shares being offered for sale. The Offering is being made by the Sales Agent on a "reasonable efforts" basis. Unless orders and full payment in collected funds for at least 250,000 shares of Common Stock have been received and accepted by 5:00 p.m., local time, on October 30, 1998 (or a later date agreed upon by the Company and the Sales Agent, which date may be no later than November 30, 1998), the Offering will terminate, all orders will become void, and no Common Stock will be issued. The Company and the Sales Agent have reserved the right to modify the terms of the Offering without notice. See "Plan of Distribution." The shares of Common Stock are offered by the Company and Sales Agent, subject to prior sale, receipt and acceptance by them, and subject to the right of the Company and the Sales Agent to reject any order in whole or in part and certain other conditions. INTERSTATE/JOHNSON LANE CORPORATION The date of this Prospectus is * , 1998. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION. (map appears here with plot points to be provided by customer) REGIONS WESTERN CENTRAL EASTERN - -------- ------- -------- Greenville (3) Engelhard * Avon Columbia Barco Creswell Hatteras Fairfield Manteo Swan Quarter Nags Head Washington Ocracoke So. Shores *CORPORATE HEADQUARTERS CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS OFFERING. IN ADDITION, IN CONNECTION WITH THIS OFFERING, THE SALES AGENT ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." 2 SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE HEREIN. WHENEVER USED IN THIS PROSPECTUS, THE TERM "BANK" SHALL REFER TO THE EAST CAROLINA BANK, AND THE TERM "COMPANY" SHALL REFER TO ECB BANCORP, INC. OR, IF THE CONTEXT SHALL SO REQUIRE, THE COMPANY AND THE BANK ON A CONSOLIDATED BASIS. PROSPECTIVE INVESTORS ALSO SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH HEREIN UNDER "RISK FACTORS." THE COMPANY GENERAL ECB Bancorp, Inc. (the "Company") is a bank holding company headquartered in Engelhard, North Carolina. The Company's wholly-owned subsidiary, The East Carolina Bank (the "Bank"), was founded in 1919 as an eastern North Carolina community bank. The Bank offers commercial and consumer banking services through its 15 full-service offices in six counties. The Bank's primary markets are located in the east central and northeastern portions of North Carolina and along North Carolina's Outer Banks, and are divided into three regions: the Central Region, the Western Region and the Outer Banks Region. As of June 30, 1998, the Company had total consolidated assets of approximately $199.1 million, total consolidated deposits of approximately $180.8 million and total consolidated shareholders' equity of approximately $16.7 million. Following the hiring of its current President and Chief Executive Officer, Arthur H. Keeney, III, in the fall of 1995, the Bank's Board of Directors engaged a consultant to assist the Board and the Bank's senior management team in designing and implementing a five-year strategic plan to enhance shareholder value and expand the Bank's franchise. The plan, adopted in early 1996, focused the efforts of the Board and the management team on increased profitability, the development of new products and services and the addition of select DE NOVO branches in key markets. From December 31, 1995 to June 30, 1998, the Bank's assets, loans and deposits have increased by 20.4%, 38.6% and 20.2%, respectively. During January 1998, in an effort to improve the liquidity and increase the trading volume in the Bank's common stock, the Bank applied for and received listing of the stock on Nasdaq's Over-the-Counter Bulletin Board. In addition, the Bank's Board of Directors approved the formation of the Company to serve as the Bank's holding company (the "Reorganization") and a three-for-one split of the Bank's common stock, each of which was effected on July 22, 1998. Management believes that the Company is taking the appropriate steps to establish a platform for future growth. BUSINESS STRATEGY The Company's business strategy is to expand the Bank's franchise by focusing on community-oriented banking via localized lending, core deposit funding, conservative balance sheet management and stable growth. The primary elements of this strategy are to: o provide community-oriented banking services through the Bank, with a focus on offering a variety of financial services targeted toward small- and medium-sized businesses and individuals within the communities served by the Bank; o increase profitability and maintain appropriate core financial ratios while also maintaining above-average credit quality measurements; o seek opportunities to further penetrate its existing banking markets and expand its current markets through increasing the market share of existing branches, DE NOVO branching, acquisitions of other financial institutions or offices of such other institutions, and acquisitions of non-bank providers of financial services; and o invest in both people and technology as necessary to remain competitive with the larger banking organizations in its markets from a product delivery and customer service standpoint. 3 ADDITIONAL INFORMATION The Company's principal executive offices are the same as those of the Bank and are located on Highway 264 in Engelhard, North Carolina. The Company's mailing address is Post Office Box 337, Engelhard, North Carolina 27824, and its telephone number is (252) 925-9411. For additional information regarding the Company and its financial condition and results of operations, see "Capitalization," "Selected Consolidated Financial Data and Other Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Supervision, Regulation and Other Matters," "Management," "Beneficial Ownership of Common Stock," "Management Compensation," "Certain Relationships and Related Transactions," "Description of Capital Stock," "Available Information," "Incorporation of Certain Documents by Reference," "Index to Consolidated Financial Statements," "ECB Bancorp, Inc. and Subsidiary Supplemental Consolidated Financial Statements" and "The East Carolina Bank and Subsidiaries Consolidated Financial Statements." THE OFFERING Common Stock ................ The Company is offering a minimum of 250,000 and a maximum of 300,000 shares of Common Stock at a price per share of $ *. See "Description of Capital Stock." Market for Common Stock ..... The Common Stock is currently traded on the Nasdaq Over-the-Counter Bulletin Board under the symbol "ECBE," and an application is being made to list the Common Stock on the Nasdaq Small Cap Market. See "Market Price of Common Stock." Common Stock Outstanding after the Offering ......... 2,030,254 shares if the minimum number of shares offered hereby are sold, and 2,080,254 shares if the maximum number of shares are sold. The shares sold in the Offering will be approximately 12.3% or 14.4% of the Company's total outstanding shares if the minimum or maximum number of shares, respectively, are sold. Terms of the Offering ....... Unless orders and full payment in collected funds for at least 250,000 shares of Common Stock have been received and accepted by 5:00 p.m., local time, on October 30, 1998 (or a later date agreed upon by the Company and the Sales Agent, which date may be no later than November 30, 1998), the Offering will terminate, all orders will become void and no Common Stock will be issued. The Company and the Sales Agent have reserved the right to modify the terms of the Offering without notice. See "Plan of Distribution." Orders for Common Stock will be accepted for no fewer than 100 shares and for no more than 5.0% of the total number of shares sold in the Offering. Use of Proceeds ............. Substantially all of the net proceeds received by the Company from the Offering will likely be transferred by the Company to the Bank in the form of contributions of additional capital or loans and will be used by the Bank for general corporate purposes, including without limitation (i) funding for its internal growth of earning assets and deposits, (ii) the financing of possible DE NOVO branches, acquisitions of other financial institutions or their assets and related liabilities (including acquisitions of branch offices of other financial institutions), or of non-bank providers of financial or other services, and (iii) the continued expansion and upgrade of the Bank's products, systems and operations. See "Use of Proceeds." Orders for Common Stock ..... Prospective investors who desire to purchase Common Stock should follow the procedures described in this Prospectus under the caption "Plan of Distribution."
RISK FACTORS An investment in the Common Stock will involve certain risks that should be considered before subscribing for any Common Stock. See "Risk Factors." --------------- INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. SEE "FORWARD LOOKING STATEMENTS." THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD LOOKING STATEMENTS. 4 SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30(1), --------------------------- 1998 1997 ------------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS) INCOME STATEMENT DATA: Net interest income ................... $ 4,492 $ 3,968 Provision for loan losses ............. 120 210 Non-interest income ................... 942 919 Non-interest expense .................. 4,142 3,453 Net income ............................ 902 869 BALANCE SHEET DATA: Assets ................................ $ 199,110 $ 186,777 Loans ................................. 130,964 121,621 Allowance for loan losses ............. 2,691 2,546 Deposits .............................. 180,818 170,117 Shareholders' equity .................. 16,679 15,140 PER COMMON SHARE DATA(2): Net income, basic and diluted(3) ...... $ 0.51 $ 0.49 Cash dividends declared ............... -- -- Book value ............................ 9.37 8.50 OTHER DATA: Branch offices ........................ 15 13 Full-time equivalent employees ........ 138 136 PERFORMANCE RATIOS: Return on average assets .............. 0.96% 1.03% Return on average equity .............. 11.16 11.87 Net interest margin (taxable equivalent) .......................... 5.42 5.04 Dividend payout ....................... -- -- Efficiency(4) ......................... 73.69 69.00 ASSET QUALITY RATIOS: Allowance for loan losses to .......... period end loans ..................... 2.05% 2.09% Allowance for loan losses to period end non-performing loans ............. 252.20 130.63 Net charge-offs to average loans ...... 0.07 0.05 Non-performing assets to period end loans and real estate acquired in settlement of loans .................. 0.81 1.60 CAPITAL AND LIQUIDITY RATIOS: Average equity to average assets ...... 8.64% 8.38% Leverage .............................. 8.73 8.32 Tier 1 risk-based ..................... 12.00 12.11 Total risk-based ...................... 13.26 13.37 Average loans to average deposits ..... 73.46 73.50 AS OF AND FOR THE YEAR ENDED DECEMBER 31(1), --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS) INCOME STATEMENT DATA: Net interest income ................... $ 8,275 $ 7,373 $ 6,588 $ 6,350 $ 5,813 Provision for loan losses ............. 354 497 515 397 549 Non-interest income ................... 1,946 1,718 1,670 1,581 1,474 Non-interest expense .................. 7,544 6,785 6,168 5,787 5,563 Net income ............................ 1,673 1,334 912 1,247 905 BALANCE SHEET DATA: Assets ................................ $ 188,228 $ 167,218 $ 165,408 $ 153,553 $ 153,448 Loans ................................. 121,209 112,656 94,489 85,997 79,737 Allowance for loan losses ............. 2,660 2,400 1,950 1,900 1,600 Deposits .............................. 170,909 151,336 150,411 141,044 141,137 Shareholders' equity .................. 15,713 14,250 13,427 11,904 11,724 PER COMMON SHARE DATA(2): Net income, basic and diluted(3) ...... $ 0.94 $ 0.75 $ 0.51 $ 0.70 $ 0.51 Cash dividends declared ............... 0.23 0.21 0.20 0.19 0.18 Book value ............................ 8.83 8.00 7.54 6.69 6.59 OTHER DATA: Branch offices ........................ 15 13 12 12 12 Full-time equivalent employees ........ 140 130 117 113 115 PERFORMANCE RATIOS: Return on average assets .............. 0.93% 0.80% 0.74% 0.82% 0.61% Return on average equity .............. 11.07 9.55 9.16 10.37 7.80 Net interest margin (taxable equivalent) .......................... 5.19 5.06 4.65 4.80 4.51 Dividend payout ....................... 24.82 28.44 29.85 26.67 34.87 Efficiency(4) ......................... 71.95 72.69 72.57 70.87 74.15 ASSET QUALITY RATIOS: Allowance for loan losses to .......... period end loans ..................... 2.19% 2.13% 2.06% 2.21% 2.01% Allowance for loan losses to period end non-performing loans ............. 134.01 175.57 122.95 121.41 58.14 Net charge-offs to average loans ...... 0.08 0.05 0.50 0.12 0.53 Non-performing assets to period end loans and real estate acquired in settlement of loans .................. 1.91 1.21 1.99 2.13 3.98 CAPITAL AND LIQUIDITY RATIOS: Average equity to average assets ...... 8.37% 8.42% 8.04% 7.93% 7.83% Leverage .............................. 8.53 8.53 8.16 8.33 7.92 Tier 1 risk-based ..................... 12.40 12.49 12.29 12.55 12.43 Total risk-based ...................... 13.66 13.75 13.54 13.80 13.68 Average loans to average deposits ..... 71.90 69.17 63.26 60.10 57.77
- --------- (1) The Company was incorporated on March 4, 1998, and became the parent company of the Bank on July 22, 1998, upon consummation of the Reorganization. The above table reflects the Reorganization that was consummated and became effective on the dates and during the periods indicated. (2) All per share numbers have been restated retroactively to reflect the effect of the three-for-one stock split which became effective on July 22, 1998. (3) For the periods presented, there were no dilutive securities. (4) Computed by dividing non-interest expense by the sum of taxable equivalent net interest income and non-interest income. 5 RISK FACTORS AN INVESTMENT IN SHARES OF COMMON STOCK WILL INVOLVE A SIGNIFICANT DEGREE OF RISK. ACCORDINGLY, EACH PROSPECTIVE INVESTOR, BEFORE PLACING AN ORDER FOR ANY SHARES OF COMMON STOCK, SHOULD CAREFULLY READ THIS PROSPECTUS IN ITS ENTIRETY AND SHOULD CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FEATURES INHERENT IN AND AFFECTING THIS OFFERING AND THE BUSINESS PROPOSED TO BE CARRIED ON BY THE COMPANY, AS WELL AS GENERAL INVESTMENT RISKS. AN INVESTMENT IN COMMON STOCK SHOULD BE UNDERTAKEN ONLY BY PERSONS WHO CAN AFFORD AN INVESTMENT INVOLVING SUCH RISKS. DEPENDENCE ON REGIONAL AND LOCAL ECONOMIES Consistent with the Bank's community banking philosophy, a majority of its depositors are located in and doing business within its banking markets, and the Bank lends a substantial portion of its capital and deposits to individual and commercial borrowers in its banking markets. Accordingly, the local economies of these areas have a direct impact on the ability of the Bank to generate deposits to support loan growth, the demand for loans, the ability of residents who are borrowers from the Bank to repay loans, the value of collateral securing such loans (particularly loans secured by real estate) and the Bank's ability to collect, liquidate and restructure problem loans. Should the economy of any of the Bank's banking markets be adversely affected by a general economic downturn or by other specific events or trends, the resulting economic impact could have a direct adverse effect on the Bank and its operating results. See "Business -- The Bank." Approximately 42% and 50%, respectively, of the Bank's outstanding loan and deposit balances are attributed to its branch offices located along North Carolina's Outer Banks. The economy of this area is seasonal and is based primarily on the tourist industry and construction and sale of resort real estate and vacation homes, each of which is substantially dependent on the general state of the economy. In particular, the tourist industry and the economy of the Outer Banks region can be significantly affected by weather events, including hurricanes and other coastal storms which can reduce revenues derived from tourism, erode shorelines and damage or destroy vacation homes, businesses and infrastructure. Future adverse economic conditions or other developments or events (such as a major hurricane) specifically affecting the Outer Banks region, or affecting North Carolina or the country in general, could have a material adverse impact on these industries and the economy of the Outer Banks and, thereby, have an adverse effect on the Bank's business in that region. Approximately 17% of the Bank's loans at June 30, 1998 were made for a purpose related to crop production (primarily corn, soybeans and vegetables) or other agricultural activities (such as the acquisition of related equipment or farmland). Adverse conditions or events (such as a drought or a general decrease in prices for which specific crops can be sold) could have a material adverse impact on the agricultural industry in the Bank's geographic markets and, thereby, have an adverse effect on the Bank's business in that region. The Bank currently has no loans made for the purpose of tobacco or livestock production, and its loans directly related to commercial fishing are limited. However, the tobacco, livestock, commercial fishing and related seafood industries contribute significantly to the economy of eastern North Carolina, including certain of the eastern North Carolina counties in which the Bank operates. For several decades, tobacco has come under increasing criticism for potential health risks, and the swine industry has come under increasing criticism for the perceived adverse environmental impact of livestock operations. The commercial fishing and related seafood industries are threatened by declining catches and the increasing threat of pollution in North Carolina's coastal waters and the resulting closures of fishing grounds. Adverse events or trends relating to these industries could have a general adverse effect on the economy of the counties in which the Bank operates and, thereby, have an adverse effect on the Bank's business. FLUCTUATIONS IN OPERATING PERFORMANCE The Bank's operating results can fluctuate substantially from period to period as a result of a number of factors, including the volume of loan production, changes in interest rates, credit losses, the seasonality of the economy in the Outer Banks region of North Carolina, and changes in the economy in general, including the local economy in the Bank's market areas. In particular, the Bank's results are strongly influenced by its ability to generate loan production, which is influenced by the interest rate environment and other economic factors. Accordingly, while the Bank's expenses (particularly its overhead expenses) will, to a great extent, be fixed, its revenues may fluctuate substantially from period to period for reasons beyond its control. INTEREST RATE RISK Changes in interest rates can have differing effects on various aspects of the Bank's business, particularly on its net interest income. The Bank's profitability is dependent to a large extent on its net interest income, which is the difference 6 between its income on interest-earning assets and its expense on interest-bearing liabilities. The Bank, like most financial institutions, is affected by changes in general interest rate levels and by other economic factors beyond its control. Interest rate risk arises in part from the mismatch (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing interest-earning assets and interest-bearing liabilities, and is measured in terms of the ratio of the interest rate sensitivity gap to total assets. More interest-earning assets than interest-bearing liabilities repricing or maturing over a given time period is considered asset-sensitive and is reflected as a positive gap, and more liabilities than assets repricing or maturing over a given time period is considered liability-sensitive and is reflected as a negative gap. A liability-sensitive position (i.e., a negative gap) may generally enhance net interest income in a falling interest rate environment and reduce net interest income in a rising interest rate environment, while an asset-sensitive position (i.e., a positive gap) may generally enhance net interest income in a rising interest rate environment and will reduce net interest income in a falling interest rate environment. The Bank's ability to manage its gap position determines to a great extent its ability to operate profitably. However, fluctuations in interest rates are not predictable or controllable, and there is no assurance that management of the Bank will continue to be able to manage the Bank's gap position in a manner that will allow the Bank to remain profitable. CREDIT RISK While management of the Bank employs underwriting procedures and criteria designed to minimize delinquencies and loan losses, the nature of lending is such that there is no assurance all borrowers will repay their loans. Regardless of the underwriting criteria used by the Bank, losses likely will be experienced as a result of various factors beyond the Bank's control, including, among other things, changes in market, economic or personal conditions affecting the value of properties, fluctuations in interest rates and the abilities of borrowers to repay. The Bank establishes an allowance for possible loan losses which is maintained at a level considered adequate by its Board of Directors based on various factors, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which have loan loss potential, delinquency trends, estimated fair value of underlying collateral, current economic conditions, the views of the Bank's regulators (who have the authority to require additional reserves), and geographic and industry loan concentrations. If delinquency levels increase in the future as a result of adverse general economic conditions or other factors, there is no assurance that the Bank's allowance for loan losses will be adequate to cover resulting losses, and any losses that are charged to the allowance will result in the requirement that the Bank set aside additional funds to the allowance which will be charged against its net income. REAL ESTATE LENDING At June 30, 1998, approximately 45% of the Bank's loan portfolio consisted of loans secured by first or junior liens on real estate, approximately 75% of which were made for purposes related to the real estate collateral (including loans made to individuals and businesses for the purchase and improvement of, or investment in, real estate, including construction loans to individuals and builders). While substantially all the Bank's real estate loans are secured primarily by real estate located in its geographic markets which is owner occupied or operated (whether commercial or residential real estate), future events or circumstances that adversely affect real estate values in the Bank's geographic markets could have an adverse effect on the value of the collateral securing the Bank's real estate loans and, in the event of nonpayment, the Bank's ability to collect fully certain loans through foreclosure or the resale of foreclosed real estate. COMPETITION Commercial banking in the Bank's banking markets and in North Carolina as a whole is extremely competitive. North Carolina is the home of three of the largest commercial banks in the Southeast, each of which has branches located in the Bank's Western and Outer Banks Regions, and 14 other commercial banks, thrift institutions and credit unions also are represented in the Bank's market areas. 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 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. 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 financial institutions, but also with out-of-state financial institutions which may acquire North Carolina institutions and are able to conduct certain specific financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, the Bank is one of the smaller commercial banks in North Carolina, and there is no assurance that the Bank will be or continue as an effective competitor in the current financial services environment. See "Business -- Competition." 7 POTENTIAL RISKS ASSOCIATED WITH ACQUISITIONS AND DE NOVO BRANCHING In the future, the Company may expand its business through selective acquisition of other financial institutions, existing branch offices of other financial institutions or other providers of financial services. However, there can be no assurance that the Company will be able to negotiate successfully, finance or consummate, or if consummated, integrate successfully, any such future acquisitions or that the Company will not incur disruption and unexpected expenses in connection with any such transactions. Although the Company currently has no agreements or understandings, either written or oral, with respect to any acquisition, in the future the Company will evaluate opportunities to effect acquisitions that would complement or expand the Company's business. In evaluating acquisition opportunities, the Company will compete with other potential bidders, many of which have greater financial and operational resources. Furthermore, the process of evaluating and negotiating an acquisition transaction, and of integrating an acquired entity or branch office, could divert management time and resources; and, any acquisition may expose the Company to losses resulting from liabilities of the acquired entity. There can be no assurance that any given acquisition that is consummated will not have a material adverse effect on the Company's business, results of operations or financial condition. In pursuing its growth strategy, the Bank may expand its presence into new geographic markets through DE NOVO branching. Due to the personnel and fixed assets costs associated with a DE NOVO branch, any such branch offices established by the Bank in a new banking market likely would operate at a loss for a period of time until a sufficient base of business could be established to operate profitably. Also, when entering new markets, the Bank likely would be faced with competitors having greater knowledge of those new local markets, and the Bank will need to hire or have in place, and would be reliant upon, well trained local managers who have local affiliations and to whom it would be necessary for the Bank to give significant autonomy. There can be no assurance that any DE NOVO branch office established by the Bank would not, for some period of time, operate at a loss and have an adverse affect on the Bank's earnings, that the Bank would be able to hire managers who could successfully operate any such branch offices, or that the Bank would become an effective competitor in any such new banking market. See "Business -- Business Strategy." POSSIBLE NEED FOR ADDITIONAL CAPITAL Management of the Company believes that the sale of the minimum number of shares of Common Stock will provide adequate additional capital to fund anticipated growth and sustain the Company's and the Bank's operations for the foreseeable future. At June 30, 1998, the Bank's regulatory capital ratios were such as to qualify it as a "well capitalized" bank. See "Supervision, Regulation and Other Matters -- Capital Adequacy" and " -- Prompt Corrective Action." However, no assurance can be given that, in the future, the Company will not seek additional capital by offering and selling additional shares of Common Stock in order to fund additional growth in the Bank's operations or to satisfy regulatory requirements. If it becomes necessary to raise additional capital to support the Company's and the Bank's operations, there is no assurance that additional capital will be available to the Company, that additional capital can be obtained on terms favorable to the Company, or that the price at which additional shares of Common Stock may be offered in the future will not be less than the purchase price of shares in this Offering. The effect on existing shareholders of any such future sales of additional shares of Common Stock cannot presently be determined, and such sales could have a dilutive effect on the interests of investors who purchase Common Stock in this Offering. DEPENDENCE ON KEY PERSONNEL The Company and the Bank are highly dependent on the services and performance of their executive officers. Smaller banks located in the more sparsely populated areas of North Carolina have found it more difficult to attract experienced management personnel than is the case with banks located in metropolitan regions. Therefore, the loss of the services of any of the Company's and the Bank's officers who leave the employ of the Company and the Bank or who otherwise unexpectedly become unavailable, or the failure of such officers to perform satisfactorily, could have a material adverse effect on the Company and the Bank and their operating results. See "Management -- Executive Officers." ABSENCE OF TRADING MARKET The Common Stock currently is listed for trading on the Nasdaq Over-the-Counter Bulletin Board, and an application is being made to list the Common Stock on the Nasdaq Small Cap Market. However, there currently is not an active trading market for the Common Stock, there is no assurance that the Company's listing application will be approved, and it is not likely that there will be an active trading market in the near future. A public trading market for the stock of any issuer, including the Company, having the desirable characteristics of depth, liquidity and orderliness, depends upon, among other things, the presence in the marketplace of both willing buyers and willing sellers of that stock at any given time. The presence 8 of buyers and sellers in numbers sufficient to create an active market in the Common Stock in the future will be dependent upon the individual decisions of persons who may wish to buy or sell such stock, which decisions the Company will not be able to control. Therefore, there is no assurance that investors will be able to resell their shares of Common Stock if they need to liquidate their investments to meet unexpected financial needs, and investors should consider the illiquid nature of their investments and be prepared and financially able to hold any shares they purchase for an indefinite period of time. See "Market Price of Common Stock." DEVELOPMENTS IN TECHNOLOGY Banks are heavily dependent on complex computer systems for all phases of their operations. The year 2000 issue common to most corporations concerns the inability of certain software and databases to recognize date-sensitive information beginning on January 1, 2000. If not corrected, this problem could result in a disruption to the operations of financial institutions. Financial services institutions are particularly sensitive to such disruptions. The Bank maintains its own data processing function, but it is dependent on third-party vendors for its software systems and support. As a result, the Bank is dependent on the efforts of those vendors to insure that their data processing systems accommodate year 2000 information. Additionally, the Bank could be adversely affected by year 2000 problems experienced by others (including its customers, vendors, correspondent banks, government agencies, and by the financial services industry in general) over which it has no control. The Bank has retained consultants to assist it in surveying its data processing systems, and it has developed and currently is implementing a program to make modifications necessary to accommodate year 2000 information. The Bank also is attempting to determine the extent to which its vendors and certain of its customers have taken similar steps to modify their own systems and software, and, in conjunction with its loan underwriting and credit review processes and otherwise, it is attempting to educate its customers with respect to potential year 2000 issues. However, no assurances can be given that the Company and the Bank will not be adversely affected by year 2000 problems experienced by these or other third parties. The market for financial services, including banking services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking, debit cards and so-called "smart" cards, and the Bank's ability to compete successfully in its banking markets may depend on the extent to which it is able to offer new services that are dependent on technology, or to integrate such technological changes into its operations. The Bank provides its own data processing function rather than using the services of a service bureau or other third-party provider of those services. The Bank's small size and limited resources may make it impractical or impossible for it to keep pace with its competitors, and the upgrading of data processing and operating systems in response to future advances in technology may require the Bank to incur substantial expenses that would adversely affect its operating results. DIVIDEND POLICY; RELIANCE ON DIVIDENDS FROM THE BANK All of the Company's consolidated operating assets are owned by the Bank, and the Company currently has no separate assets. Further, the Company will rely primarily on dividends from the Bank to meet its separate obligations and for payment of dividends on the Common Stock. The payment of dividends by the Bank to the Company is subject to certain legal and regulatory limitations (including the requirement that the Bank's equity capital be maintained at certain minimum levels), is subject to ongoing review by banking regulators and, under certain circumstances, may require prior approval by banking regulatory authorities. At June 30, 1998, approximately $4.4 million was available for payment of dividends by the Bank to the Company without affecting the Bank's current classification as a "well capitalized" bank under federal bank regulatory capital guidelines and without regulatory approval. However, no assurance can be given that the Bank will have funds available to pay dividends to the Company at any particular time in the future. See "Dividends" and "Supervision, Regulation and Other Matters -- Payment of Dividends." The Bank also is subject to certain restrictions under federal law on extensions of credit to, and certain other transactions with, the Company, and on investments in the stock or other securities thereof. Such restrictions prevent the Company from borrowing from the Bank unless the loans are secured by various types of collateral. Further, such secured loans or other transactions and investments by the Bank are generally limited in amount as to the Company to 10% of the Bank's capital and surplus. The payment of dividends by either the Company or the Bank in the future will be subject to their respective Board of Directors' evaluation of operating results, financial condition, future growth plans, general business conditions, and to tax and other relevant considerations. Management of the Company expects that its board of directors will declare and pay cash dividends on the Common Stock in a manner similar to the practices of the Bank's Board of Directors in effect prior to the Reorganization. However, there is no assurance that, in the future, any dividends will be declared and paid by the Company or, if declared, what the amount of such dividends will be or that any such dividends will be regularly declared and paid. See "Dividends," "Supervision, Regulation and Other Matters" and "Description of Capital Stock -- Dividends." 9 RISK OF CLAIMS; ENVIRONMENTAL MATTERS In the ordinary course of its business, the Bank may become subject to claims made against it by borrowers arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, errors and omissions of employees, officers and agents of the Bank, incomplete or inaccurate loan documentation or disclosure, and failures by the Bank to comply with various laws and regulations applicable to its business. Relying as it does on employee interaction with customers, the Bank may encounter circumstances where employees knowingly or unknowingly violate laws or regulations without the knowledge of management, in which case the Bank may be liable for these acts. While management of the Bank is not aware of any material pending or threatened claims against the Bank relating to such matters, any such claims that are asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Bank's results of operations and financial condition. In the course of its business, through the foreclosure process the Bank from time to time acquires properties securing loans that are in default. Therefore, there is a risk that the Bank could be required to investigate and clean up hazardous or toxic substances or chemical releases at such properties after their acquisition and may be held liable to a governmental entity or to third-parties for property damage, personal injury and investigation and cleanup costs incurred by such parties in connection with the contamination. To date, the Bank has not been required to perform any investigation or cleanup activities of any material nature. No assurance can be given, however, that this will remain the case in the future. SUPERVISION AND REGULATION; GOVERNMENT MONETARY POLICY The Bank operates in a highly regulated environment and is subject to supervision by various governmental agencies, changes in state and federal regulations and governmental policy, and to the monetary and fiscal policies of various regulatory authorities, all of which have a significant effect on the Bank and its operating results. Future changes in governmental economic and monetary policies may affect the ability of the Bank to attract deposits and to make loans. The rates of interest payable on deposits and chargeable on loans are affected by governmental regulation and fiscal policy as well as by national, state and local economic conditions. See "Supervision, Regulation and Other Matters." DETERMINATION OF OFFERING PRICE The $ * offering price was established by the Company's Board of Directors, in consultation with the Sales Agent, based primarily on recent prices at which the Common Stock had been bought and sold in trading on the Nasdaq Over-the-Counter Bulletin Board. However, since there is not an active trading market for the Common Stock, recent trade prices may not be reflective of the intrinsic value of the stock or the price at which it can be resold at a later date. Therefore, there is no assurance that investors will be able to resell their shares of Common Stock at any time in the future for a price per share that is equal to or more than the purchase price in this Offering. PURCHASES AND RESALES OF STOCK BY INSIDERS The Company's officers and directors may purchase shares of the Common Stock in the Offering for their own investment purposes. Such purchases will be counted in determining whether the minimum number of shares has been sold and could permit the Company to complete the Offering without purchases by nonaffiliated persons for the minimum number of shares. The Company's directors and executive officers have agreed with the Sales Agent that, for a period of 90 days following consummation of the Offering, they will not sell any shares of Common Stock owned by them. However, following the end of that period, there will be no significant restrictions on the resale of any of the shares of the Company's Common Stock that will be outstanding following the Offering. Resales of shares of Common Stock following the Offering, including sales by persons affiliated with the Company, could have an adverse affect on the price at which an investor could resell the shares he or she purchases in the Offering. See "Plan of Distribution." 10 USE OF PROCEEDS The net proceeds from the Offering (after deductions for the Sales Agent's commissions and fees and for estimated Offering expenses) are expected to be from a minimum of approximately $ * to a maximum of approximately $ * (based on the sale of the minimum and maximum numbers of shares being offered, respectively). The amount of net proceeds actually received could be more or less than the amounts estimated above, depending on the amounts of expenses actually incurred in the Offering. Substantially all of the net proceeds received by the Company from the Offering will likely be transferred by the Company to the Bank in the form of contributions of additional capital or loans and will be used by the Bank for general corporate purposes, including without limitation (i) funding for its internal growth of earning assets and deposits, (ii) the financing of possible DE NOVO branches, acquisitions of other financial institutions or their assets and related liabilities (including acquisitions of branch offices of other financial institutions), or of non-bank providers of financial or other services, and (iii) the continued expansion and upgrade of the Bank's products, systems and operations. MARKET PRICE OF COMMON STOCK There is not an active public trading market for the Common Stock. However, the Common Stock is listed on the Nasdaq Over-the-Counter Bulletin Board (under the trading symbol "ECBE"), and an application is being made to list the Common Stock on the Nasdaq Small Cap Market. Interstate/Johnson Lane Corporation is currently listed as a "market maker" for the stock. Management of the Company has been informed that, since July 22, 1998 (the date on which the Company's outstanding Common Stock was issued in conjunction with the Reorganization), the Common Stock has traded in isolated transactions on the Over-the-Counter Bulletin Board at prices ranging from $13.67 to $20.00 per share. Prior to February 17, 1998, there was no trading market for the Bank's common stock. However, on that date the Bank's common stock was listed for trading on the Nasdaq Over-the-Counter Bulletin Board, and, between that date and July 22, 1998 (the date on which the Company became the Bank's parent holding company), the Bank's common stock traded in isolated transactions on the Over-the-Counter Bulletin Board at prices ranging from $12.50 to $15.00 (as adjusted for the three-for-one stock split which was effective on July 22, 1998). On July 31, 1998, there were approximately 664 holders of record of the Company's Common Stock. DIVIDENDS Since its organization, the Company has not paid any dividends on the Common Stock. The Company's sole source of funds for the payment of dividends on the Common Stock will be dividends paid to it by the Bank on the shares of the Bank's common stock held by the Company, and the declaration and payment of future dividends by the Bank will continue to depend on the Bank's earnings and financial condition, capital requirements, general economic conditions, compliance with regulatory requirements generally applicable to North Carolina banks, and other factors. The Company's ability to pay dividends also will be subject to its own separate factors, including its earnings and financial condition, capital requirements and regulatory restrictions applicable to bank holding companies. See "Supervision, Regulation and Other Matters -- Payment of Dividends" and "Description of Capital Stock -- Dividends." The Company believes that dividends paid by it will not differ materially from those paid by the Bank. The Bank historically has paid an annual dividend during December of each fiscal year. The following table lists the amounts of cash dividends paid by the Bank on its common stock during each of the fiscal years indicated.
AMOUNT OF CASH DIVIDEND FISCAL YEAR(1) DECLARED PER SHARE(2) - ------------------- ------------------------ 1996 ............ $ .21 1997 ............ $ .23 1998(3) ......... $ --
- --------- (1) Each dividend was paid during December of the indicated year. (2) Amounts of cash dividends per share have been restated to reflect the effect of the three-for-one stock split which was effective on July 22, 1998. (3) Through August 15, 1998. 11 CAPITALIZATION The following table summarizes the capitalization of the Company at June 30, 1998, and the pro forma capitalization of the Company based on the sale of the minimum and maximum numbers of shares of Common Stock being offered. This table should be read in conjunction with the Company's audited and unaudited supplemental consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Available Information," "Incorporation of Certain Documents by Reference," "Index to Consolidated Financial Statements," and "ECB Bancorp, Inc. and Subsidiary Supplemental Consolidated Financial Statements."
AT JUNE 30, 1998(1)(2) ----------------------------------------------- MINIMUM MAXIMUM STOCKHOLDERS' EQUITY ACTUAL PURCHASE(3) PURCHASE(3) - ----------------------------------------------------------------------- ---------------- --------------- -------------- Common stock, $3.50 par value; 10,000,000 shares authorized, 1,780,254 shares outstanding at June 30, 1998; 2,030,254 shares outstanding if minimum number of shares are sold, and 2,080,254 shares outstanding if maximum number of shares are sold .................................... $ 6,230,889 $ 7,105,889 $ 7,280,889 Surplus ............................................................... 3,200,000 * * Undivided profits ..................................................... 6,877,531 6,877,531 6,877,531 Offering expenses(4) .................................................. -- (225,000) (225,000) ------------ ----------- ----------- Total shareholders' equity ........................................... $ 16,679,425 $ * $ * ============ ============ ============ Book value per share .................................................. $ 9.37 $ * $ * ------------ ------------ ------------
- --------- (1) The Company was incorporated on March 4, 1998, and became the parent company of the Bank on July 22, 1998, upon consummation of the Reorganization. The above table assumes that the Reorganization had been consummated and become effective on June 30, 1998. (2) Restated retroactively to reflect the effect of the three-for-one stock split which became effective on July 22, 1998. (3) Reflects pro forma amounts based on the sale of the minimum of 250,000 and maximum of 300,000 shares of Common Stock in the Offering. (4) Reflects estimates by the Company of aggregate Offering expenses. Actual expenses could be more or less than estimated. See "Use of Proceeds." SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION The following table sets forth selected consolidated financial data concerning the Company as of the dates and for the periods indicated. The selected data presented for and as of the end of each of the years in the five-year period ended December 31, 1997, is derived from the supplemental consolidated financial statements of the Company, all of which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The data presented for and as of the end of the six-months periods ended June 30, 1998 and 1997 has not been audited. This selected data is not necessarily indicative of the Company's results for any future period and is qualified in its entirety by, and should be read in conjunction with, the detailed information contained in the Company's supplemental consolidated financial statements as of December 31, 1997 and 1996, and for each of the years in the three-year period ended December 31, 1997, together with the Company's unaudited supplemental consolidated financial statements as of June 30, 1998 and for the six months ended June 30, 1998 and 1997, which are included elsewhere in this Prospectus, as well as all other information included elsewhere or incorporated herein by reference. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Available Information," "Incorporation of Certain Documents by Reference," "Index to Consolidated Financial Statements," "ECB Bancorp, Inc. and Subsidiary Supplemental Consolidated Financial Statements" and "The East Carolina Bank and Subsidiaries Consolidated Financial Statements." 12
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30(1), --------------------------- 1998 1997 ------------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS) INCOME STATEMENT DATA: Interest income ....................... $ 7,165 $ 6,599 Interest expense ...................... 2,673 2,631 Net interest income ................... 4,492 3,968 Provision for loan losses ............. 120 210 Non-interest income ................... 942 919 Non-interest expense .................. 4,142 3,453 Income tax expense .................... 270 355 Cumulative effect of a change in accounting for postretirement benefits, net of taxes ............... -- -- Net income ............................ 902 869 BALANCE SHEET DATA: Assets ................................ $ 199,110 $ 186,777 Loans ................................. 130,964 121,621 Allowance for loan losses ............. 2,691 2,546 Deposits .............................. 180,818 170,117 Shareholders' equity .................. 16,679 15,140 PER COMMON SHARE DATA(2): Net income, basic and diluted(3) ...... $ 0.51 $ 0.49 Cash dividends declared ............... -- -- Book value ............................ 9.37 8.50 OTHER DATA: Branch offices ........................ 15 13 Full-time equivalent employees ........ 138 136 PERFORMANCE RATIOS: Return on average assets .............. 0.96% 1.03% Return on average equity .............. 11.16 11.87 Net interest margin (taxable equivalent) .......................... 5.42 5.04 Dividend payout ....................... -- -- Efficiency(4) ......................... 73.69 69.00 ASSET QUALITY RATIOS: Allowance for loan losses to .......... period end loans ..................... 2.05% 2.09% Allowance for loan losses to period end non-performing loans ............. 252.20 130.63 Net charge-offs to average loans ...... 0.07 0.05 Non-performing assets to period end loans and real estate acquired in settlement of loans ...... 0.81 1.60 CAPITAL AND LIQUIDITY RATIOS: Average equity to average assets ...... 8.64% 8.38% Leverage .............................. 8.73 8.32 Tier 1 risk-based ..................... 12.00 12.11 Total risk-based ...................... 13.26 13.37 Average loans to average deposits ..... 73.46 73.50 AS OF AND FOR THE YEAR ENDED DECEMBER 31(1), -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------ ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS) INCOME STATEMENT DATA: Interest income ....................... $ 13,637 $ 12,214 $ 11,804 $ 9,914 $ 9,481 Interest expense ...................... 5,364 4,841 5,216 3,564 3,668 Net interest income ................... 8,275 7,373 6,588 6,350 5,813 Provision for loan losses ............. 354 497 515 397 549 Non-interest income ................... 1,946 1,718 1,670 1,581 1,474 Non-interest expense .................. 7,544 6,785 6,168 5,787 5,563 Income tax expense .................... 650 475 384 500 270 Cumulative effect of a change in accounting for postretirement benefits, net of taxes ............... -- -- (279) -- -- Net income ............................ 1,673 1,334 912 1,247 905 BALANCE SHEET DATA: Assets ................................ $ 188,228 $ 167,218 $165,408 $ 153,553 $ 153,448 Loans ................................. 121,209 112,656 94,489 85,997 79,737 Allowance for loan losses ............. 2,660 2,400 1,950 1,900 1,600 Deposits .............................. 170,909 151,336 150,411 141,044 141,137 Shareholders' equity .................. 15,713 14,250 13,427 11,904 11,724 PER COMMON SHARE DATA(2): Net income, basic and diluted(3) ...... $ 0.94 $ 0.75 $ 0.51 $ 0.70 $ 0.51 Cash dividends declared ............... 0.23 0.21 0.20 0.19 0.18 Book value ............................ 8.83 8.00 7.54 6.69 6.59 OTHER DATA: Branch offices ........................ 15 13 12 12 12 Full-time equivalent employees ........ 140 130 117 113 115 PERFORMANCE RATIOS: Return on average assets .............. 0.93% 0.80% 0.74% 0.82% 0.61% Return on average equity .............. 11.07 9.55 9.16 10.37 7.80 Net interest margin (taxable equivalent) .......................... 5.19 5.06 4.65 4.80 4.51 Dividend payout ....................... 24.82 28.44 29.85 26.67 34.87 Efficiency(4) ......................... 71.95 72.69 72.57 70.87 74.15 ASSET QUALITY RATIOS: Allowance for loan losses to .......... period end loans ..................... 2.19% 2.13% 2.06% 2.21% 2.01% Allowance for loan losses to period end non-performing loans ............. 134.01 175.57 122.95 121.41 58.14 Net charge-offs to average loans ...... 0.08 0.05 0.50 0.12 0.53 Non-performing assets to period end loans and real estate acquired in settlement of loans ...... 1.91 1.21 1.99 2.13 3.98 CAPITAL AND LIQUIDITY RATIOS: Average equity to average assets ...... 8.37% 8.42% 8.04% 7.93% 7.83% Leverage .............................. 8.53 8.53 8.16 8.33 7.92 Tier 1 risk-based ..................... 12.40 12.49 12.29 12.55 12.43 Total risk-based ...................... 13.66 13.75 13.54 13.80 13.68 Average loans to average deposits ..... 71.90 69.17 63.26 60.10 57.77
- --------- (1) The Company was incorporated on March 4, 1998, and became the parent company of the Bank on July 22, 1998, upon consummation of the Reorganization. The above table reflects the Reorganization that was consummated and became effective on the dates and during the periods indicated. (2) All per share numbers have been restated retroactively to reflect the effect of the three-for-one stock split which became effective on July 22, 1998. (3) For the periods presented, there were no dilutive securities. (4) Computed by dividing non-interest expense by the sum of taxable equivalent net interest income and non-interest income. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 operating subsidiary, The East Carolina Bank, for the years 1997, 1996 and 1995. Whenever used in this discussion, the term "Bank" shall refer to The East Carolina Bank, and the term "Company" shall refer to ECB Bancorp, Inc. or, if the context shall so require, the Company and the Bank on a consolidated basis. This discussion and the related financial data should be read in conjunction with the audited consolidated financial statements and related footnotes thereto included elsewhere in this Prospectus. OVERVIEW During 1997 and the first six months of 1998, the Company expanded its operations by opening two full-service branches in Avon and Barco and a loan production office in Washington, North Carolina. This expansion was in line with the Company's business strategy to expand the Bank's franchise by focusing on community-oriented banking via localized lending, core deposit funding, conservative balance sheet management and stable growth. In 1997 and the first six months of 1998, the Company also focused on improving profitability and credit quality, which also are important elements within its business strategy. The Company's steady improvement in earnings performance continued despite increased expenses associated with the expansion and the upgrade of the Company's technology systems. During the second half of 1998 and in 1999, the Company expects to incur additional costs in these areas, as it seeks to achieve its growth objectives consistent with its business strategy. See "Use of Proceeds" and "Business--Business Strategy." RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997 Total interest income increased $566,000 for the six months ended June 30, 1998 compared to the six months ended June 30, 1997, principally due to an increase in the average volume of loans of $7.7 million. Total interest expense increased $42,000 for the six months ended June 30, 1998 compared to the six months ended June 30, 1997, principally due to an increase in certificate of deposit balances of $4.0 million. Net interest income for the six months ended June 30, 1998 was $4.5 million, an increase of $524,000 or 13.2% when compared to net interest income of $4.0 million for the six months ended June 30, 1997. The net yield on interest-earning assets, on a tax-effected basis, for the six months ended June 30, 1998 was 5.51% compared to 5.12% in 1997. This improvement in the Company's net interest margin is attributable to loans representing a larger portion of the Company's total earning assets. The provision for possible loan losses charged to operations during the first half of 1998 was $120,000, compared to $210,000 during the first half of 1997. Net charge-offs for the six months ended June 30, 1998 totaled $89,000, or 0.07% of average loans (on an annualized basis), compared to net charge-offs of $64,000, or 0.05% of average loans (on an annualized basis), during the same period of 1997. The reduction in provision for possible loan losses is the result of management's review and evaluation of the portfolio under current and projected economic conditions, past due loans, past loan loss experience and significant reduction of nonperforming loans. Nonperforming loans decreased from $2.0 million at December 31, 1997 to $1.1 million at June 30, 1998 due to the pay-off of two large nonperforming relationships during the first six months of the year. Non-interest income increased $23,000 to $942,000 for the six months ended June 30, 1998 from $919,000 for the same period in 1997. This increase is principally due to increased ATM surcharge fees of $35,000 that were effected by the Bank after the first quarter of 1997 and mortgage loan origination fees of $12,000 generated by the Company's new mortgage loan product. These increases were partially offset by a decrease in NSF service charges of $29,000 when compared to the same period in 1997. Non-interest expense increased $689,000 to $4.1 million for the six months ended June 30, 1998 from $3.5 million for the same period in 1997. This increase is principally due to the opening of new full service branches in Avon and Barco, and a loan production office in Washington, North Carolina. Salaries and related personnel expense increased $164,000 over the first half of 1997 due principally to opening of these new offices. When compared to June 30, 1997, net occupancy expense increased $54,000 as a result of opening the aforementioned offices and equipment expense increased $79,000 due to the Company upgrading its host computer system and introduction of branch platform automation. The Company's telephone expense increased $41,000 over the first six months of 1997 as a result of increased usage of the Company's Xpress phone banking service introduced during the second quarter of 1997. Professional fees increased approximately $113,000 in connection with non-recurring legal and accounting fees incurred related to the formation of a holding company. Other operating expenses increased $219,000 from $577,000 for the six months ended June 30, 1997 to $796,000 for the six months ended June 30, 1998. This increase is primarily attributable to increases in marketing expenses, employee related travel expenses, and regulatory agency expenses. Marketing expense increased approximately $144,000 during the first half of the year as the Company 14 launched a broad range of mortgage products and its new Club 7 Visa Card, a program done in conjunction with a local television station. In addition, employee related travel expense increased approximately $30,000 while fees paid to regulatory agencies increased $20,000. Income tax expense for the six months ended June 30, 1998 and 1997 was $270,000 and $355,000, respectively, resulting in effective tax rates of 23.04% and 29.00%, respectively. The decrease in the effective tax rate during the six months ended June 30, 1998 as compared to the same period last year is due to higher tax exempt interest income resulting from the Bank's increased purchases of state and municipal obligations during 1997 and the first half of 1998. For the six months ended June 30, 1998, the Company had net income of $902,000, or $0.51 basic and diluted earnings per share (as restated for the three-for-one stock split effected July 22, 1998), compared to $869,000, or $0.49 basic and diluted earnings per share (as restated for the three-for-one stock split effected July 22, 1998), for the six months ended June 30, 1997. The primary reason for this 3.8% increase in net income was the 13.2% increase in net interest income and the lower effective tax rate, mitigated by the $689,000 increase in non-interest expense, all of which are discussed above. FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996 In 1997, the Company had net income of $1.7 million, an increase of $339,000 compared to 1996 net income. Net interest income after the provision for possible loan losses increased $1.0 million as a result of an increase in interest income of $1.4 million mitigated by an increase in interest expense of $524,000. The provision for possible loan losses for 1997 decreased $143,000 when compared to 1996 provision expense of $497,000. Non-interest income, principally charges for use of the Company's services, is a significant contributor to net income. Non-interest income for 1997 increased $228,000 or 13.3% when compared to 1996. Year-to-date service charges on deposit accounts increased $288,000 as a result of an increased collection rate of NSF fees on transaction accounts. Other service charges and fees increased $106,000 or 25.3% as a result of increased ATM transaction fees of $67,000 and merchant discount income, net of merchant processing expense, of $39,000. The current year other non-interest income decreased $166,000 due principally to gains realized in 1996 on the sale of real estate acquired in settlement of loans totaling $119,000 and other miscellaneous income totaling $22,000 in 1996. Generally, the Company has been able to increase non-interest income by increasing the prices of its services to partially offset increases in non-interest expense. Non-interest expense increased by 11.2% in 1997. A significant component of non-interest expense is salaries and employee benefits. Personnel expense increased $200,000 or 5.4% compared to 1996. This increase was caused in part by the opening of a new branch in Avon and a loan production office in Washington, North Carolina. Net occupancy expense increased $73,000 or 13.3% in 1997 as a result of opening the aforementioned offices as well as an addition to the Company's home office. Equipment expense increased $205,000 or 36.4% when compared to 1996 due in part to the opening of new offices, but principally due to the Company's 1997 initiative to provide deposit and loan platform automation at its branch locations. As part of this initiative, the Company installed approximately 50 personal computers and related equipment, upgraded its IBM A/S 400 host processor and doubled the number of proof machines used in its item processing center. Other non-interest expense increased $281,000 principally due to expenses of $80,000 associated with its "BEST" account product offering, increased telephone and data communication cost of approximately $41,000 and stationery and supplies increases of $38,000. FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995 In 1996, the Company had net income of $1.3 million, an increase of $144,000 compared to 1995 net income of $1.2 million before the cumulative effect of a required change in accounting method for postretirement benefits. Net interest income after the provision for possible loan losses increased $803,000 as a result of an increase in interest income of $410,000 and a decrease in interest expense of $375,000. The provision for possible loan losses decreased $18,000 when compared to 1995 provision expense of $515,000. Non-interest income for 1996 increased $48,000 or 2.9% when compared to 1995. Year-to-date service charges on deposit accounts increased $120,000 for 1996 as a result of increased collection rate of NSF fees on transaction accounts. Other service charges and fees decreased $98,000 or 18.9% as a result of lower origination fees recognized on certain loans. Non-interest expense increased 10.0% in 1996. Personnel expense increased $467,000 or 14.4% compared to 1995. This increase was caused in part by the opening of an in-store branch in Greenville, North Carolina. Personnel expense increased $174,000 in the form of incentive pay awards. Retirement and other employee benefit expense also increased $69,000 between 1995 and 1996 principally as a result of increases in retirement plan expense of $30,000 and personnel related taxes and insurance of $39,000. 15 AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1996 -------------------------------- -------------------------------- AVERAGE YIELD/ INCOME/ AVERAGE YIELD/ INCOME/ BALANCE RATE EXPENSE BALANCE RATE EXPENSE ----------- ---------- --------- ----------- ---------- --------- (DOLLARS IN THOUSANDS) ASSETS Loans, net(1) ..................... $115,487 9.43% $10,887 $101,950 9.34% $ 9,522 Taxable securities ................ 29,705 5.89% 1,750 33,672 5.70% 1,919 Non-taxable securities(2) ......... 10,254 7.57% 512 9,279 7.71% 472 Federal funds sold ................ 9,125 5.38% 491 5,750 5.23% 301 -------- ---- ------- -------- ---- ------- Total interest-earning assets ..... 164,571 8.45% 13,640 150,651 8.27% 12,214 Cash and due from banks ........... 7,715 7,472 Bank premises and equipment, net ................... 5,929 5,617 Other assets ...................... 2,300 2,229 -------- -------- Total assets ...................... $180,515 $165,969 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits ......... $135,789 3.95% $ 5,364 $123,986 3.90% $ 4,831 Borrowed funds .................... -- -- -- 188 5.32% 10 -------- ---- ------- -------- ---- ------- Total interest-bearing liabilities ...................... 135,789 3.95% 5,364 124,174 3.90% 4,841 Non-interest-bearing deposits 28,574 26,788 Other liabilities ................. 1,039 1,035 Shareholders' equity .............. 15,113 13,972 -------- -------- Total liabilities and shareholders' equity ............. $180,515 $165,969 ======== ======== Net interest income and net yield on interest-earning assets (FTE) ..................... 5.19% $ 8,276 5.06% $ 7,373 ==== ======= ==== ======= Interest rate spread (FTE) ........ 4.50% 4.37% YEAR ENDED DECEMBER 31, --------------------------------- 1995 --------------------------------- AVERAGE YIELD/ INCOME/ BALANCE RATE EXPENSE ----------- ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Loans, net(1) ..................... $ 91,511 9.57% $ 8,755 Taxable securities ................ 39,403 5.60% 2,208 Non-taxable securities(2) ......... 9,316 7.63% 469 Federal funds sold ................ 6,555 5.68% 372 -------- ---- ------- Total interest-earning assets ..... 146,785 8.21% 11,804 Cash and due from banks ........... 6,907 Bank premises and equipment, net ................... 5,374 Other assets ...................... 2,495 -------- Total assets ...................... $161,561 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits ......... $123,745 4.21% $ 5,207 Borrowed funds .................... 155 5.81% 9 -------- ---- ------- Total interest-bearing liabilities ...................... 123,900 4.21% 5,216 Non-interest-bearing deposits 24,199 Other liabilities ................. 475 Shareholders' equity .............. 12,987 -------- Total liabilities and shareholders' equity ............. $161,561 ======== Net interest income and net yield on interest-earning assets (FTE) ..................... 4.65% $ 6,588 ==== ======= Interest rate spread (FTE) ........ 4.00%
- --------- (1) Average loans, net of the allowance for possible loan losses and unearned income. These figures include non-accruing loans, the effect of which is to lower the average rates. (2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. Net interest income for 1997 was $8.3 million, up $903,000 from $7.4 million for 1996. This increase was primarily due to a $13.9 million increase in average earning asset volume, which outpaced the $11.6 million increase in interest-bearing liabilities volume. The mix of this growth impacted net interest income positively by $810,000 while the effect of changes in interest rates was less dramatic, increasing net interest income by only $93,000. The net interest margin (net taxable equivalent interest income divided by average interest-earning assets) increased 13 basis points to 5.19% for 1997 compared to 5.06% for 1996. The interest rate spread (the difference between the average earning asset yield and the average rate paid on interest-bearing liabilities) also increased 13 basis points to 4.50% for 1997. The average yield on earning assets was 8.45% in 1997 and 8.27% in 1996, while the rate paid for funding was 3.95% and 3.90% in 1997 and 1996, respectively. The margin was positively impacted by loans growing to represent a greater percentage of earning assets during 1997, principally because loans carry higher yields than investments. 16 Changes in interest income and interest expense can result from variances in both volume and rates. The table below analyzes the effect of variances in volume and rate on taxable-equivalent interest income, interest expenses and net interest income. VOLUME AND RATE VARIANCE ANALYSIS
1997 COMPARED TO 1996 1996 COMPARED TO 1995 --------------------------------- ---------------------------------- VOLUME(1) RATE(1) NET VOLUME(1) RATE(1) NET ----------- ----------- --------- ----------- ------------ --------- (DOLLARS IN THOUSANDS) Loans ............................. $1,270 $ 95 $1,365 $ 987 $(220) $ 767 Taxable securities ................ (230) 61 (169) (324) 35 (289) Non-taxable securities(2) ......... 49 (9) 40 (2) 5 3 Federal funds sold ................ 179 11 190 (44) (27) (71) ------ ----- ------ ------- ----- ------ Interest income ................... 1,268 158 1,426 617 (207) 410 Interest-bearing deposits ......... 463 70 533 10 (386) (376) Borrowed funds .................... (5) (5) (10) 2 (1) 1 -------- ------ ------ ------- -------- ------ Interest expense .................. 458 65 523 12 (387) (375) ------- ----- ------ ------- ------- ------ Net interest income ............... $ 810 $93 $ 903 $ 605 $ 180 $ 785 ======= ===== ====== ======= ======= ======
- --------- (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 using the federal income tax rate of 34%. 17 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, 1997, 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. RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1997
3 MONTHS 4 TO 12 OR LESS MONTHS --------------- --------------- (DOLLARS IN THOUSANDS) EARNING ASSETS Loans, gross ............................................... $ 51,009 $ 15,388 Investment securities ...................................... 6,189 3,397 FHLB stock ................................................. 503 -- Federal funds sold ......................................... 4,425 -- --------- --------- Total earning assets ....................................... $ 62,126 $ 18,785 ========= ========= Percent of total earning assets ............................ 35.9% 10.8% Cumulative % of total earning assets ....................... 35.9% 46.7% INTEREST-BEARING LIABILITIES Time deposits of $100,000 or more .......................... $ 11,736 $ 7,160 Savings, NOW and Money Market deposits ..................... 55,969 -- Other time deposits ........................................ 21,843 37,126 --------- --------- Total interest-bearing liabilities ......................... $ 89,548 $ 44,286 ========= ========= Percent of total interest-bearing liabilities .............. 64.4% 31.9% Cumulative percent of total interest-bearing liabilities 64.4% 96.3% RATIOS Ratio of earning assets to interest-bearing liabilities (gap ratio) ............................................... 69.4% 42.4% Cumulative ratio of earning assets to interest-bearing liabilities (cumulative gap ratio) ........................ 69.4% 60.5% Interest sensitivity gap ................................... $ (27,422) $ (25,501) Cumulative interest sensitivity gap ........................ $ (27,422) $ (52,923) As a percent of total earning assets ....................... (15.8%) (30.5%) TOTAL WITHIN OVER 12 12 MONTHS MONTHS TOTAL -------------- ------------ ------------- (DOLLARS IN THOUSANDS) EARNING ASSETS Loans, gross ............................................... $ 66,397 $ 54,812 $ 121,209 Investment securities ...................................... 9,586 37,534 47,120 FHLB stock ................................................. 503 -- 503 Federal funds sold ......................................... 4,425 -- 4,425 --------- --------- --------- Total earning assets ....................................... $ 80,911 $ 92,346 $ 173,257 ========= ========= ========= Percent of total earning assets ............................ 46.7% 53.3% 100.0% Cumulative % of total earning assets ....................... 46.7% 100.0% INTEREST-BEARING LIABILITIES Time deposits of $100,000 or more .......................... $ 18,896 $ 607 $ 19,503 Savings, NOW and Money Market deposits ..................... 55,969 -- 55,969 Other time deposits ........................................ 58,969 4,571 63,540 --------- --------- --------- Total interest-bearing liabilities ......................... $ 133,834 $ 5,178 $ 139,012 ========= ========= ========= Percent of total interest-bearing liabilities .............. 96.3% 3.7% 100.0% Cumulative percent of total interest-bearing liabilities 96.3% 100.0% RATIOS Ratio of earning assets to interest-bearing liabilities (gap ratio) ............................................... 60.5% 1783.4% Cumulative ratio of earning assets to interest-bearing liabilities (cumulative gap ratio) ........................ 60.5% 124.6% Interest sensitivity gap ................................... $ (52,923) $ 87,168 $ 34,245 Cumulative interest sensitivity gap ........................ $ (52,923) $ 34,245 $ 34,245 As a percent of total earning assets ....................... (30.5%) 19.8% 19.8%
Deregulation of interest rate and short-term, interest bearing deposits, which are more volatile, have created a need for shorter maturities of earning assets. As a result, an increasing percentage of commercial, installment and mortgage loans are being made with variable rates or shorter maturities to increase liquidity and interest rate sensitivity. 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). 18 As of December 31, 1997, the Company had a negative one year cumulative gap of 30.5%. The Company has interest earning assets of $80.9 million maturing or repricing within one year and interest bearing liabilities of $133.8 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 $119.5 million include savings and interest bearing checking accounts of $56.0 million. These deposits are considered as repricing in the earliest period because the rate can be changed weekly. However, history has shown that the decreases in the rates paid on these deposits have little, if any, effect on their movement out of the Company. Therefore, in reality, they are not sensitive to changes in market rates and could be considered in the Non-Rate Sensitive column. If this change were made, the Company's rate sensitive liabilities would be more closely matched at the end of the one year period. MARKET RISK
MATURING IN YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ----------- (DOLLARS IN THOUSANDS) Assets Loans Fixed Rate ................... $ 12,777 $ 12,552 $ 14,868 $ 10,518 $ 7,857 Average rate (%) ............. 9.10% 9.55% 9.08% 9.12% 9.14% Variable Rate ................ 27,346 4,340 4,670 5,266 3,222 Average rate (%) ............. 10.00% 9.33% 9.20% 9.42% 8.92% Investment securities Fixed Rate ..................... 9,585 7,357 9,612 5,527 5,714 Average rate (%) ............... 5.79% 6.08% 6.09% 6.58% 6.40% Liabilities Savings and Interest bearing checking Variable Rate ................ 55,969 -- -- -- -- Average rate (%) ............. 1.77% -- -- -- -- Certificates of deposits Fixed Rate ................... 77,561 4,100 1,083 -- -- Average rate (%) ............. 5.35% 5.54% 5.19% -- -- Variable Rate ................ 296 4 -- -- -- Average rate (%) ............. 3.34% 3.34% -- -- -- THEREAFTER TOTAL FAIR VALUE ------------ ------------ ----------- (DOLLARS IN THOUSANDS) Assets Loans Fixed Rate ................... $ 12,396 $ 70,968 $71,513 Average rate (%) ............. 8.26% 9.02% Variable Rate ................ 5,397 50,241 50,241 Average rate (%) ............. 9.48% 9.68% Investment securities Fixed Rate ..................... 8,860 46,655 47,120 Average rate (%) ............... 7.87% 6.46% Liabilities Savings and Interest bearing checking Variable Rate ................ -- 55,969 55,969 Average rate (%) ............. -- 1.77% Certificates of deposits Fixed Rate ................... -- 82,744 82,913 Average rate (%) ............. -- 5.35% Variable Rate ................ -- 300 300 Average rate (%) ............. -- 3.34%
19 Non-interest income, principally charges for use of the Company's services, is a significant contributor to net income. Non-interest income for 1997 increased $228,000 or 13.3% when compared to 1996. Year-to-date service charges on deposit accounts increased $288,000 as a result of an increased collection rate of NSF fees on transaction accounts. Other service charges and fees increased $106,000 or 25.3% as a result of increased ATM transaction fees of $67,000 and merchant discount income, net of merchant processing expense, of $39,000. For 1997, other non-interest income decreased $166,000 due principally to gains realized in 1996 on the sale of real estate acquired in settlement of loans totaling $119,000 and other miscellaneous income totaling $22,000 in 1996. Generally, the Company has been able to increase non-interest income by increasing the prices of its services to partially offset increases in non-interest expense. NON-INTEREST INCOME
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Service charges on deposit accounts ......... $1,391 $1,103 $ 983 Other service charges and fees .............. 525 419 517 Other ....................................... 30 196 170 ------ ------ ------ Total ....................................... $1,946 $1,718 $1,670 ====== ====== ======
Non-interest expense increased by 11.2% in 1997. A significant component of other non-interest expense is salaries and employee benefits. Personnel expense increased $200,000 or 5.4% compared to 1996. This increase was caused in part by the opening of a new branch in Avon and a loan production office in Washington, North Carolina during 1997. Net occupancy expense increased $73,000 or 13.3% as a result of opening the aforementioned offices as well as an addition to the Company's home office. Equipment expense increased $205,000 or 36.4% when compared to 1996. This increase was due in part to the opening of new offices, but principally to the Company's 1997 initiative to provide deposit and loan platform automation at its branch locations. During the year, the Company installed approximately 50 personal computers and related equipment. In addition, the Company upgraded its IBM AS/400 host processor and doubled the number of proof machines used in its item processing center. Other non-interest expense increased $281,000 principally due to expenses of $80,000 associated with the "BEST" account product offering, increased telephone and data communication cost of approximately $41,000, and stationery and supplies increases of $38,000. NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Salaries and employee benefits .......................... $3,910 $3,710 $3,243 Net occupancy expense ................................... 623 550 478 Equipment rentals, depreciation and maintenance ......... 768 563 500 Other ................................................... 2,243 1,962 1,947 ------ ------ ------ Total ................................................... $7,544 $6,785 $6,168 ====== ====== ======
20 FINANCIAL CONDITION Management believes that 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, 1997 and 1996. DISTRIBUTION OF ASSETS AND LIABILITIES
DECEMBER 31, ---------------------------------------------- 1997 1996 ---------------------- ---------------------- (DOLLARS IN THOUSANDS) ASSETS Loans (net) ..................................... $118,549 63.0% $110,256 65.9% Investment securities ........................... 47,120 25.0% 34,589 20.7% FHLB stock ...................................... 503 0.3% -- -- Federal funds sold .............................. 4,425 2.4% 6,550 3.9% -------- ----- -------- ----- Total earning assets ............................ 170,597 90.7% 151,395 90.5% Cash and due from banks ......................... 8,281 4.4% 7,862 4.7% Bank premises and equipment, net ................ 6,266 3.3% 5,538 3.3% Other assets .................................... 3,084 1.6% 2,423 1.5% -------- ----- -------- ----- Total assets .................................... $188,228 100.0% $167,218 100.0% ======== ===== ======== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits ................................. $ 31,897 16.9% $ 27,211 16.3% Savings, NOW and Money Market deposits .......... 55,969 29.7% 54,206 32.4% Time deposits of $100,000 or more................ 19,503 10.4% 17,835 10.7% Other time deposits ............................. 63,540 33.8% 52,084 31.1% -------- ----- -------- ----- Total deposits .................................. 170,909 90.8% 151,336 90.5% Accrued expense and other liabilities ........... 1,606 0.9% 1,632 1.0% -------- ----- -------- ----- Total liabilities ............................... 172,515 91.7% 152,968 91.5% Shareholders' equity ............................ 15,713 8.3% 14,250 8.5% -------- ----- -------- ----- Total liabilities and shareholders' equity ...... $188,228 100.0% $167,218 100.0% ======== ===== ======== =====
Total assets increased $10.9 million to $199.1 million at June 30, 1998, an increase of 5.8% when compared to $188.2 at December 31, 1997. Asset growth was funded primarily by increased non-interest-bearing demand deposits of $9.6 as the Company entered into its summer tourist season on North Carolina's Outer Banks. Loans receivable increased from $121.2 million at December 31, 1997 to $131.0 million at June 30, 1998. The Company has continued to expand its lending base and the size of its loan portfolio despite increased competitive pressures in its primary lending markets. The Company experiences seasonal loan growth during the first and second quarters of each year as farm production loans and commercial lines of credit are used by the Company's agricultural customer base and tourist related businesses on the Outer Banks. Seasonal lines of credit have increased $7.5 million since December 31, 1997. Stockholders' equity increased from $15.7 million at December 31, 1997 to $16.7 million at June 30, 1998, as the Company generated net income of $902,000 and experienced an increase of net unrealized gains on available-for-sale securities of $64,000. No dividends were paid during the first half of 1998. 21 INVESTMENT PORTFOLIO. The carrying values of investment securities held by the Company at the dates indicated are summarized as follows: INVESTMENT PORTFOLIO COMPOSITION
DECEMBER 31, -------------------------------------------- 1997 1996 --------------------- --------------------- (DOLLARS IN THOUSANDS) SECURITIES AVAILABLE-FOR-SALE: U.S. Treasury ............................ $25,228 53.6% $15,995 46.2% U.S. Government agencies ................. 7,835 16.6% 9,340 27.0% State and political subdivisions ......... 14,057 29.8% 9,254 26.8% ------- ----- ------- ----- Total investments ........................ $47,120 100.0% $34,589 100.0% ======= ===== ======= =====
The following table shows maturities of the carrying values of investment securities held by the Company at December 31, 1997, and the weighted average yields. INVESTMENT PORTFOLIO MATURITY SCHEDULES
AFTER ONE YEAR AFTER FIVE YEARS WITHIN BUT WITHIN BUT WITHIN AFTER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS ------------------- --------------------- ------------------- ------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD -------- ---------- ---------- ---------- -------- ---------- -------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) SECURITIES AVAILABLE- FOR-SALE: U.S. Treasury ........... $5,998 5.55% $19,230 6.07% -- -- -- -- $25,228 5.95% U.S. Government agencies ............... 3,295 5.67% 3,757 6.37% -- -- $ 783 7.01% 7,835 6.14% State and political subdivisions(1) ........ 190 6.90% 5,611 7.82% $3,781 7.61% 4,475 7.25% 14,057 7.57% ------ ---- ------- ---- ------ ---- ------ ---- ------- ---- Total ................... $9,483 5.64% $28,598 6.45% $3,781 7.61% $5,258 7.21% $47,120 6.46% ====== ==== ======= ==== ====== ==== ====== ==== ======= ====
- --------- (1) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis using the federal income tax rate of 34%. 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, 1997 the market value of the investment portfolio was approximately $465,000 above its book value, which is the result of lower market interest rates compared to the interest rates on the investments in the portfolio. LOAN PORTFOLIO. The Company's management believes that the loan portfolio is adequately diversified. The Company has no foreign loans. Real estate loans represent approximately 52.2% 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. 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, 1997, the ten largest loans of the Company accounted for approximately 6.8% of the Company's outstanding loans. As of December 31, 1997, the Company had outstanding loan commitments of approximately $16.3 million. 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. 22 LOAN PORTFOLIO COMPOSITION
DECEMBER 31, -------------------------------------------- 1997 1996 --------------------- --------------------- (DOLLARS IN THOUSANDS) Real estate(1) ......................... $ 63,300 52.2% $ 65,253 57.9% Installment loans ...................... 25,424 21.0% 18,472 16.4% Credit cards and related plans ......... 3,415 2.8% 3,183 2.8% Commercial and all other loans ......... 29,070 24.0% 25,748 22.9% -------- ----- -------- ----- Total .................................. $121,209 100.0% $112,656 100.0% ======== ===== ======== =====
- --------- (1) The majority of these loans are various consumer and commercial loans with approval based on operating cash flows. The majority of the commercial real estate is owner-occupied and operated. The following table sets forth the maturity distribution of the Company's loans as of December 31, 1997. A significant majority of loans maturing after one year are repriced at two and three year intervals. In addition, approximately 38.9% of the Company's loan portfolio is comprised of variable rate loans. 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 ............. $14,555 $ 2,765 $3,415 $19,388 $ 40,123 Due after 1 year through 5 years: Floating interest rates ......... 13,149 3,245 -- 3,835 20,229 Fixed interest rates ............ 26,831 18,719 -- 2,614 48,164 Due after 5 years: Floating interest rates ......... 3,152 175 -- 2,909 6,236 Fixed interest rates ............ 5,613 520 -- 324 6,457 ------- ------- ------ ------- -------- Total ............................. $63,300 $25,424 $3,415 $29,070 $121,209 ======= ======= ====== ======= ========
DEPOSITS. The average amounts of deposits of the Company for the years ended December 31, 1997, and 1996 are summarized below. AVERAGE DEPOSITS
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 ---------------------- ---------------------- AVERAGE AVERAGE BALANCE RATE BALANCE RATE ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Interest-bearing demand deposits ......... $ 40,029 1.75% $ 37,851 1.85% Savings deposits ......................... 14,956 2.06% 15,242 2.15% Time deposits ............................ 80,804 5.39% 70,893 5.37% -------- ---- -------- ---- Total interest-bearing deposits .......... 135,789 3.95% 123,986 3.90% -------- ---- -------- ---- Non-interest-bearing deposits ............ 28,574 -- 26,788 -- -------- ---- -------- ---- Total deposits ........................... $164,363 3.26% $150,774 3.20% ======== ==== ======== ====
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 7.6% of the Company's total deposits at December 31, 1997. All such public funds are collateralized by investment securities. The Company does not purchase brokered deposits. 23 As of December 31, 1997, the Company held approximately $19.5 million in time deposits of $100,000 or more and $63.5 million of time deposits less than $100,000. The following table is a maturity schedule of time deposits as of December 31, 1997. 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 $11,736 $ 3,502 $ 3,658 $ 607 $19,503 Time certificates of deposit less than $100,000 . 21,843 19,484 17,642 4,571 63,540 ------- ------- ------- ------ ------- Total time deposits ............................. $33,579 $22,986 $21,300 $5,178 $83,043 ======= ======= ======= ====== =======
RETURN ON AVERAGE 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 in the period ended December 31, 1997. Calculations for the year ended December 31, 1995 are based on income before a non-recurring charge for the cumulative effect of a change in accounting for postretirement benefits of $279,000, net of income taxes. RETURN ON AVERAGE ASSETS AND EQUITY
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Return on average assets ............................... 0.93% 0.80% 0.74% Return on average equity ............................... 11.07% 9.55% 9.16% Dividend payout ........................................ 24.82% 28.44% 29.85% Average shareholders' equity to average assets ......... 8.37% 8.42% 8.04%
ASSET QUALITY Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current and projected economic conditions in order to evaluate the adequacy of the reserve for 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 possible future loan losses and current economic conditions. The Company's watch committee, which includes three members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all credits classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. Nonperforming assets, which consists of loans not accruing interest, restructured loans and real estate acquired in settlement of loans, totaled $1.1 million and $2.3 million at June 30, 1998 and December 31, 1997, respectively. This decrease in nonperforming assets was due to the pay-off of two large nonperforming lending relationships during the first six months of 1998 and the sale of the remaining balance of real estate acquired in settlement of loans. The Company does not anticipate a loss on any of the remaining non-accrual loans. Through sales, the Company has liquidated all real estate acquired in settlement of loans reducing the balance from $340,000 at December 31, 1997 to $-0- at June 30, 1998. 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 selling costs. Thereafter, a property may be subsequently reduced by additional allowances if the estimated fair value of the property declines below the initial recorded value. 24 The following table summarizes the Company's nonperforming assets and past due loans at the dates indicated. NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31, ------------------- 1997 1996 --------- --------- (DOLLARS IN THOUSANDS) Non-accrual loans .................................. $1,463 $1,017 Loans past due 90 or more days still accruing ...... -- 35 Restructured loans ................................. 522 350 Foreclosed properties .............................. 340 -- ------ ------ Total .............................................. $2,325 $1,402 ====== ======
At December 31, 1997 and 1996, nonperforming assets and loans past due 90 or more days still accruing were approximately 1.92% and 1.24%, respectively, of the loans outstanding at such dates. The allowance for possible 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 possible future 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 allowance for possible loan losses at December 31, 1997 and 1996. ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31, -------------------------------------------------- 1997 1996 ------------------------- ------------------------ PERCENT OF PERCENT OF TOTAL LOANS IN TOTAL LOANS IN AMOUNT EACH CATEGORY AMOUNT EACH CATEGORY -------- ---------------- -------- --------------- (DOLLARS IN THOUSANDS) Real estate ............................ $1,690 52.2% $1,398 57.9% Installment loans ...................... 389 21.0% 218 16.4% Credit cards and related plans ......... 390 2.8% 137 2.8% Commercial and all other loans ......... 149 24.0% 367 22.9% ------ ----- ------ ----- Total allocated ........................ 2,618 100.0% 2,120 100.0% Unallocated ............................ 42 280 ------ ------ Total .................................. $2,660 $2,400 ====== ======
Management considers the allowance for possible loan losses adequate to cover possible loan losses on 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 rests upon various judgments and assumptions about future economic conditions and other factors affecting loans. 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 possible loan losses or future charges to earnings. 25 For 1997, 1996 and 1995, 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. LOAN LOSS AND RECOVERY EXPERIENCE
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 ------------- ------------- ------------ (DOLLARS IN THOUSANDS) Total loans outstanding at end of year ................................... $ 121,209 $ 112,656 $ 94,489 ========= ========= ======== Average loans outstanding ................................................ 118,185 104,297 93,584 ========= ========= ======== Allowance for possible loan losses at beginning of year .................. $ 2,400 $ 1,950 $ 1,900 Loans charged off: Real estate ............................................................. 6 12 89 Installment loans ....................................................... 62 62 72 Credit cards and related plans .......................................... 110 111 49 Commercial and all other loans .......................................... 17 81 338 --------- --------- -------- Total charge-offs ........................................................ 195 266 548 Recoveries of loans previously charged off: Real estate ............................................................. -- 118 -- Installment loans ....................................................... 22 26 31 Credit cards and related plans .......................................... 36 34 19 Commercial and all other loans .......................................... 43 41 33 --------- --------- -------- Total recoveries ......................................................... 101 219 83 Net charge-offs .......................................................... 94 47 465 Additions to the allowance charged to expense ............................ 354 497 515 --------- --------- -------- Allowance for possible loan losses at end of year ........................ $ 2,660 $ 2,400 $ 1,950 ========= ========= ======== RATIOS Net charge-offs during year to average loans outstanding during year ..... 0.08% 0.05% 0.50% Net charge-offs during year to loans at year-end ......................... 0.08% 0.04% 0.49% Allowance for possible loan losses to average loans ...................... 2.25% 2.30% 2.08% Allowance for possible loan losses to loans at year-end .................. 2.19% 2.13% 2.06% Net charge-offs to allowance for possible loan losses .................... 3.53% 1.96% 23.85% Net charge-offs to provision for possible loan losses .................... 26.55% 9.46% 90.29%
26 CAPITAL RESOURCES As a North Carolina-chartered bank, the Bank is subject to the capital requirements of the FDIC and the State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be "well capitalized," the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders' equity calculated in accordance with generally accepted accounting principles less intangible assets, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which is applicable to the Bank is the allowance for possible loan losses. Risk-weighted assets reflect the Bank's on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of June 30, 1998, the Bank was in compliance with all of the aforementioned capital requirements and satisfies the "well-capitalized" definition that is used by the FDIC in its evaluation of banks. Sufficient levels of capital are necessary to sustain growth and absorb losses. To this end, the FDIC, which regulates the Company, has established capital adequacy guidelines. These guidelines relate to the Company's Leverage Capital ratio, Tier 1 Capital ratio and Total Risk Based Capital ratio ("RBC"). For the Company, Tier 1 Capital consists of total shareholders' equity excluding unrealized gains on available-for-sale securities. As of December 31, 1997, the Company's Leverage Capital ratio, which is calculated based on the Company's Tier 1 Capital, was 8.53% compared to 8.53% and 8.16% at December 31, 1996 and 1995, respectively. For regulatory purposes, a 5.00% or greater Leverage Ratio represents a "well-capitalized" financial institution. Within the RBC calculations, the Company's assets, including loan commitments and other off-balance sheet items, are weighted according to regulatory guidelines for risk considered inherent in the assets. The Company's Tier 1 RBC ratio as of December 31, 1997 was 12.40% which is, along with a ratio of 12.49% and 12.29% for 1996 and 1995, respectively, representative of a "well-capitalized" institution. The calculation of the RBC ratio allows, in the Company's circumstances, the inclusion of the allowance for loan losses in capital, but only to the maximum of 1.25% of risk weighted assets. As of December 31, 1997, the Company's RBC ratio was 13.66% which is representative of a "well-capitalized" institution. The Company's RBC ratios for 1996 and 1995 were 13.75% and 13.54%, respectively, both of which were representative of a "well-capitalized" financial institution. As of December 31, 1997, shareholders' equity totaled $15.7 million compared to $14.2 million at December 31, 1996. The shareholders' equity for 1997 and 1996 included, as discussed above, $307,000 and $101,000, respectively, of net unrealized gains on available-for-sale securities. 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 1997, the Company paid $415,000 in dividends, versus $380,000 in 1996 and $356,000 in 1995. As a percentage of net income, dividends were 24.8% and represented an increase of 9.4% over dividends paid in 1996. LIQUIDITY Liquidity is the Company's ability to generate cash to fund asset growth, to meet deposit withdrawals, to maintain regulatory reserve requirements and to pay operating expenses. The principal sources of liquidity are the Company's investment portfolio, interest from loans and investments, loan principal repayments and increases in deposits. The Company relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network has enabled management to fund asset growth and maintain liquidity. These sources have allowed limited dependence on short-term borrowed funds for liquidity or for asset expansion. External sources of funds include the ability to access advances from the Federal Home Loan Bank of Atlanta and Fed Fund lines with correspondent banks. REGULATORY MATTERS Management is not presently aware of any current recommendation to the Company by regulatory authorities which, if they were to be implemented, would have a material effect on the Company's liquidity, capital resources or operations. 27 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and accompanying footnotes have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The assets and liabilities of the Company are primarily monetary in nature and changes in interest rates have a greater impact on the Company's performance than does the effect of inflation. ACCOUNTING AND OTHER MATTERS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes standards of computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings Per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and the denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior-period EPS data presented. The Company adopted SFAS No. 128 in 1997 without any significant impact on its consolidated financial statements. On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. 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. This statement does not change or modify the reporting or display in the income statement. For the six months ended June 30, 1998 and 1997, the Company's total comprehensive income, consisting of net income and changes in unrealized securities gains and losses, net of tax effects, was $966,000 and $890,000, respectively. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments on an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997 and in the initial year of application, comparative information for earlier years is to be restated. The Company plans to adopt SFAS No. 131 at December 31, 1998 and does not anticipate any significant impact on its consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements of pensions and other postretirement benefits. This statement does not change any measurement of recognition provisions, and thus will not materially impact the Company's consolidated financial statements. This statement is effective for fiscal years beginning after December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1998. Earlier application of all of the provisions of this statement is encouraged. The Company plans to adopt this statement on January 1, 2000 and does not anticipate any material effect on its consolidated financial statements. The FASB also issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates. 28 In 1997, the Company developed a plan to deal with the Year 2000 issue and contracted with an industry consultant to assist management in reviewing its overall exposure to the Year 2000 issue. The Year 2000 issue relates to computer programs written using two digits rather than four to define the applicable year. Management has reviewed the results of the consultant's analysis of the Company's data processing Year 2000 exposure and has committed the human resources and the financial resources for the Company to complete its resolution of the Year 2000 issue in 1998. The total cost of the Year 2000 conversion project for the Company is estimated to be $200,000 and is being funded through operating cash flows. The Company is expensing all costs associated with the required systems changes as the costs are incurred. As of June 30, 1998, $23,000 had been expensed. Systems are being remediated, replaced or retired as part of the Company's Year 2000 compliance program. The Company is closely monitoring the progress of the Year 2000 plan and does not expect significant increases in future data processing costs relating to Year 2000 compliance. Management is not aware of any known trends, events, uncertainties, or current recommendations by regulatory authorities that will or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or other operations. 29 BUSINESS GENERAL The Company is a bank holding company headquartered in Engelhard, North Carolina. The Company operates through, and its principal asset is its investment in, the Bank which operates as a wholly-owned subsidiary of the Company. As of June 30, 1998, the Company had total consolidated assets of approximately $199.1 million, total consolidated deposits of approximately $180.8 million and total consolidated shareholders' equity of approximately $16.7 million. Following the hiring of its current President and Chief Executive Officer, Arthur H. Keeney, III, in the fall of 1995, the Bank's Board of Directors engaged a consultant to assist the Board and the Bank's senior management team in designing and implementing a five-year strategic plan to enhance shareholder value and expand the Bank's franchise. The plan, adopted in early 1996, focused the efforts of the Board and the management team on increased profitability, the development of new products and services and the addition of select DE NOVO branches in key markets. From December 31, 1995 to June 30, 1998, the Bank's assets, loans and deposits have increased by 20.4%, 38.6% and 20.2%, respectively. During January 1998, in an effort to improve the liquidity and increase the trading volume in the Bank's common stock, the Bank applied for and received listing of the stock on Nasdaq's Over-the-Counter Bulletin Board. In addition, the Bank's Board of Directors approved the Reorganization and a three-for-one split of the Bank's common stock, each of which was effected on July 22, 1998. Management believes that the Company is taking the appropriate steps to establish a platform for future growth. BUSINESS STRATEGY The Company's business strategy is to expand the Bank's franchise by focusing on community-oriented banking via localized lending, core deposit funding, conservative balance sheet management, and stable growth. The primary elements of this strategy are described below. COMMUNITY FOCUS. The Company will distinguish itself from competitors in its geographic markets by continuing to provide community-oriented banking services through the Bank, with a focus on offering personalized service and a variety of financial services targeted toward small- and medium-sized businesses and individuals within the communities served by the Bank. PROFITABILITY AND CREDIT QUALITY. Within the context of a community-oriented financial institution, the Company will seek to increase its profitability and maintain appropriate core financial ratios, while also maintaining above-average credit quality measurements. GROWTH AND EXPANSION. The Company will seek to increase its asset size through further penetration of its existing banking markets and appropriate expansions of its current markets. The Company will analyze and take advantage of opportunities to establish DE NOVO branches, to acquire other financial institutions or offices of such other institutions, and to acquire non-bank providers of financial services, if the Company believes such actions would be appropriate and would enhance the Bank's franchise and, in the long term, its profitability. Management believes that as its larger competitors continue to focus on larger dollar transactions and less personal forms of customer service, the Bank will have significant opportunities to continue to expand its franchise in its existing markets and in new markets. TECHNOLOGY AND PEOPLE. As banking becomes more and more technology driven, the Company will make the necessary investments in technology to remain competitive with the larger banking organizations in its markets from a product and product delivery standpoint. However, the Company believes that its most valuable resources are its employees who provide the personalized service that separates it as a community-oriented financial institution from the larger institutions in its geographic markets and who provide it with an important basis upon which to compete. Therefore, the Company also will invest in the people who will manage and carry out the Bank's business. BANK HOLDING COMPANY REORGANIZATION As part of the Bank's growth strategy, management of the Bank perceived that the Reorganization likely would result in certain advantages, including, without limitation, additional flexibility in expansion of the Bank's business through the acquisition of other financial institutions, in the raising of additional capital through borrowing (if needed) and with respect to other activities and corporate matters. Additionally, the Reorganization could benefit the Bank's shareholders through increased public awareness and additional liquidity in the trading market for the holding company's outstanding equity securities. As a result, the Company 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 the Company (newly formed for the purpose of such transaction) was merged into the Bank (with the 30 Bank as the surviving corporation), (ii) the outstanding shares of the Bank's common stock were converted into an identical number of shares of the Company's Common Stock with the result that the then current shareholders of the Bank became shareholders of the Company (with the same relative ownership interests that they had in the Bank) and (iii) the Company became the sole shareholder of the Bank. The Bank continues to exist under its separate charter and bylaws but as the wholly-owned subsidiary of the Company, and will continue to conduct its banking business at all its previous banking offices. THE BANK GENERAL. 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 15 full-service banking offices in six counties in North Carolina, together with one loan production office, and its deposits are insured under the FDIC's Bank Insurance Fund ("BIF") to the maximum amount permitted by law. The Bank has two wholly-owned subsidiaries. Carolina Financial Realty, Inc. ("CFR") holds title to five of the Bank's branch offices which it leases to the Bank. The second subsidiary, Carolina Financial Courier, Inc., formerly provided courier services to the Bank but currently contracts with a third-party for such services. SERVICES. The Bank's operations are primarily retail oriented and directed toward individuals, small- and medium-sized businesses and local governmental units located in its banking markets, and its deposits and loans are derived primarily from customers in its banking markets. While the Bank provides most traditional commercial and consumer banking services, its principal activities are the taking of demand and time deposits and the making of secured and unsecured loans. The Bank's primary source of revenue is interest income from its lending activities, and it has pursued a strategy of growth through internal expansion by establishing branch offices in communities within its banking markets. 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, and are divided into the following three regions: CENTRAL REGION: The Central Region is located on the peninsula that divides the Pamlico Sound and the Albermarle Sound on the mainland of North Carolina, and it includes the Bank's three offices located in Hyde County (its Main Office in Engelhard and its branch offices in Swan Quarter and Fairfield), one banking office located in each of Tyrrell County (Columbia) and Washington County (Creswell), and its one loan production office located in Beaufort County (Washington, which is expected to be converted to a full-service branch during 1999). At June 30, 1998, approximately 36% and 37%, respectively, of the Bank's total deposits and total loans were attributed to its Central Region banking offices. The Central Region is mostly rural and had a total population in 1997 of approximately 67,000. The local economy is heavily dependent on agriculture (primarily corn, soybeans, cotton and wheat), forestry products and seafood related industries. Based on its location between the Pamlico and Albemarle Sounds and the location of Lake Mattamuskeet, the region provides many recreational opportunities and benefits from tourism. Major industrial employers in the Central Region include Weyerhauser Company, which operates a large lumber mill in Washington County, and PCS Phosphate and Standyne Automotive Corp., which maintain large mining and manufacturing facilities, respectively, in Beaufort County. Coastal land use restrictions make it difficult to attract industry to this area. However, the prospects for future economic expansion in the Central Region are improving due to active economic development efforts through the region's Northeast Partnership, one of seven regional partnerships of county governments formed in 1993 by the North Carolina Legislature to work in concert with the state's Department of Commerce and other agencies to promote regional growth. For 1997, the average unemployment rate in the region was 6.5% and the average annual per capita income was approximately $20,699. WESTERN REGION: The Western Region is located in the east central section of North Carolina's Coastal Plains, and it currently includes the Bank's three branch offices located in Pitt County (all in Greenville, including the Bank's only in-store branch which is located in a WalMart Supercenter). At June 30, 1998, approximately 13% and 19%, respectively, of the Bank's total deposits and total loans were attributed to its Western Region banking offices. The Western Region is the most urban and economically diversified of the Bank's three regions. Major industries contributing to its economy include manufacturing, retail services, health care and, to a lesser degree, agriculture. Pitt County is the home of East Carolina University, which is the state's third largest public university, and, with its medical 31 school and an affiliated regional hospital, is one of the region's largest employers and has been a significant contributing factor in the region's growth. Other major employers include Catalytica Pharmaceuticals, Rubbermaid and Collins and Aikman. The region's population has grown to approximately 121,000 (with the population of Greenville rising to 59,000), which has resulted in an increase in new home construction. Greenville recently was rated as one of the top 20 cities in the United States in new housing starts. For 1997, the average unemployment rate in the region was 4.6% and the average annual per capita income was approximately $23,090. OUTER BANKS REGION: The Outer Banks Region extends along North Carolina's Outer Banks from Currituck County on the Virginia border, through Dare County, and to Ocracoke Island. The region includes the Bank's one branch office in Currituck County (Barco), five branch offices in Dare County (Southern Shores/Kitty Hawk, Nags Head, Manteo, Avon and Hatteras), and one branch office located on Ocracoke Island, and is the Bank's largest region in terms of a percentage of its business. At June 30, 1998, approximately 50% and 42%, respectively, of the Bank's total deposits and total loans were attributed to its Outer Banks Region banking offices. Currituck and Dare Counties are two of the fastest growing counties (in terms of percentages) in North Carolina, and the total population of the region has grown to approximately 45,000. The entire region is primarily a coastal resort, and its local economy is based primarily on tourism. However, agriculture has a significant influence on the economy of mainland Currituck County, and the seasonality normally associated with agriculture and tourism is being tempered somewhat by an increase in the number of permanent residents (including a large number of retirees) who help to support year-round retail and service establishments. For 1997, the average unemployment rate in the region was 4.0% and the average per capita income was approximately $20,125. On-going highway improvement projects involving U.S. Highway 64 between Raleigh and Manteo, and U.S. Highway 168 between the Tidewater area of Virginia and the Outer Banks, are expected to enhance the economy of the region. LENDING ACTIVITIES. 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 loans are concentrated in four major areas: (i) real estate loans, (ii) commercial and agricultural loans, (iii) installment loans and (iv) credit card loans. At June 30, 1998, approximately 45% of the Bank's loan portfolio consisted of real estate loans. All real estate loans are secured by first or junior liens on real property located almost exclusively in the Bank's geographic markets (and substantially all of which, both commercial and residential, is owner occupied or operated), and management estimates that more than approximately 75% of those loans actually were made for purposes related to the real estate collateral (generally, loans made to individuals and businesses for the purchase and improvement of or investment in real estate, including construction loans to individuals and builders). However, in addition to such real estate purpose loans, the Bank also makes loans secured by first or junior liens on real estate for various other commercial, agricultural and consumer purposes. Such loans generally are reflective of efforts by management to minimize credit risk by taking real estate as primary or additional collateral on loans made for purposes not directly related to the real estate itself. Loans secured by real estate may be made at fixed or variable interest rates and for terms of up to 15 years, or which provide for payments based on an amortization schedule of up to 15 years. However, loans having terms of more than five years, or which are based on an amortization schedule of more than five years, generally will contain contractual provisions which allow the Bank to call the loan in full, or provide for a "balloon" payment in full, at the end of each five-year period. The Bank's commercial and agricultural loans include loans to individuals and small- and medium-sized businesses located in its banking markets for working capital, equipment purchases and various other business and agricultural purposes (other than any such loan secured by real estate) and loans made to finance the production of crops. At June 30, 1998, these loans made up approximately 28% of the Bank's loan portfolio. A majority of the Bank's commercial and agricultural loans are secured by inventory, equipment, crops or similar assets, but these loans also may be made on an unsecured basis. Commercial and agricultural loans may be made at variable or fixed rates of interest; however, it currently is the Bank's policy that those loans which have terms or amortization schedules of longer than five years normally will carry interest rates which vary with the prime lending rate and may be called in full at any time after the first five years. Approximately 17% of the Bank's total loan portfolio consists of loans made for various agricultural purposes, including crop production (primarily corn, soybeans, cotton and wheat) and the purchase of related equipment or farmland. However, approximately 22% of these agricultural loans are secured by first or junior liens on real estate and, thus, are included in 32 the Bank's real estate loans. The Bank currently has no loans made for the purpose of tobacco or livestock production, and the Bank's loans directly related to commercial fishing and related seafood industries are limited. The Bank's installment loan portfolio consists primarily of loans to individuals for various consumer purposes (other than any such loan secured by real estate), but also includes the outstanding balances on consumer revolving credit accounts. The majority of the Bank's installment loans are secured by liens on various personal assets of the borrowers, but these loans may also be made on an unsecured basis. Consumer loans generally are made at fixed interest rates (with the exception of revolving credit accounts which may provide for variable rates) and for terms which generally do not exceed three years. However, the Bank will make consumer loans for terms of up to five years. The Bank is an issuer of MasterCard and Visa credit cards (primarily to customers within its banking markets) and, at June 30, 1998, had outstanding credit card receivables of $2.4 million. Certain statistical information regarding the Bank's loan portfolio at December 31, 1997, and June 30, 1998, is contained this Prospectus under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." MORTGAGE LOANS. During 1998, the Bank began offering long-term, residential mortgage loans that are originated by the Bank but are underwritten and funded by, and closed in the name of, third-party lenders. The Bank retains a portion of the origination fees collected with respect to these loans. This arrangement permits the Bank to offer this product in its markets and enhance its fee-based income, but it avoids the credit and interest rate risk associated with long-term loans since these loans are not in the Bank's loan portfolio. LOAN ADMINISTRATION AND UNDERWRITING. The Bank's loan portfolio is managed under a defined process, which includes guidelines for loan underwriting standards and risk assessment, procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration and portfolio reviews to assess loss exposure and to ascertain compliance with the Bank's credit policies and procedures. The Bank has retained an outside credit risk management consultant which advises the Bank with respect to its credit policies and procedures and provides on-line credit manuals that can be modified quickly and efficiently to reflect periodic changes. The lending and loan administration process includes a centralized credit review and analysis prior to funding of all credit decisions involving an aggregate credit relationship in excess of $200,000, a review of all loans after funding for adequacy of documentation and compliance with regulatory requirements, and a review by credit administration personnel at least annually of any credit relationship exceeding $100,000. Additionally, the Bank's credit risk management consultant currently reviews the Bank's 15 largest lending relationships and other selected loans three times a year (the most recent of which was during May 1998). Reports of the results of these outside reviews are made to the Board of Directors. The Bank's loan approval policies generally provide for various levels of lending authority for lending personnel based on aggregate credit exposure to borrowers. Loans involving an aggregate credit exposure of up to $100,000 may be approved at the branch level. Above that amount, loans involving aggregate exposures of up to $200,000 require the approval of one of the Bank's Regional Managers, loans involving aggregate exposures of up to $750,000 require the approval of the Bank's Chief Credit Officer or President, and loans involving aggregate exposures of up to $1.3 million require the approval of the Bank's General Credit Committee (made up of senior management). All individual loans over $1.0 million require the approval of the Executive Committee of the Board of Directors, and all agricultural loans, without regard to amount, must be approved by one of the Bank's agri-business lending specialists. At the time loans are made, and during periodic reviews, loans are assigned a grade which indicates the level of management attention to be given to that loan to protect the Bank's position and to reduce loss exposure. During the life of each loan, its grade is reviewed and validated or modified to reflect changes in circumstances and risk. Loans are placed in a non-accrual status if they become 90 days past due or otherwise whenever, in the opinion of management, collection becomes doubtful, and they are charged off when the collection of principal and interest is doubtful and the loans can no longer be considered sound collectible assets (or, in the case of unsecured loans, when they become 90 days past due). RESERVE FOR LOAN LOSSES. The General Credit Committee reviews all substandard loans over $10,000 on a quarterly basis, and management of the Bank meets regularly to review asset quality trends and to discuss loan policy issues. Based on these reviews and other factors (including a defined formula that takes into consideration general and specific credit risks in the Bank's loan portfolio), the Bank has established a reserve for loan losses. The adequacy of the reserve is assessed by management of the Bank and reviewed by the Bank's Board of Directors each month and, at June 30, 1998, was 2.05% of the Bank's total loans and 252.20% of its non-performing loans. 33 Certain statistical information regarding the Bank's reserve for loan losses and its nonaccrual, past due and restructured loans at December 31, 1997, and at June 30, 1998, is contained in this Prospectus under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPOSIT ACTIVITIES. The Bank's deposit services include business and individual checking accounts, savings accounts, NOW accounts, certificates of deposit and money market checking accounts. During 1998, the Bank expects to introduce cash management services designed to accommodate the needs of its commercial deposit customers. 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. At June 30, 1998, transaction accounts and non-interest bearing accounts equaled approximately 46% and 23%, respectively, of total deposits. Time deposits of $100,000 and over made up approximately 16% of the Bank's total deposits at June 30, 1998. 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. Certain statistical information regarding the Bank's deposit accounts at December 31, 1997, and at June 30, 1998, is contained in this Prospectus under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." INVESTMENT PORTFOLIO. The Bank's investment portfolio consists almost entirely of U.S. government securities and obligations of states and political subdivisions, approximately 22% of which mature within one year and approximately 54% of which mature within one to five years. Certain statistical information regarding the Bank's investment portfolio at December 31, 1997, and at June 30, 1998, is contained in this Prospectus under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKETING ACTIVITIES. Consistent with its business strategy which includes increasing the Bank's market share in its existing banking markets, during 1997 the Bank hired a marketing director and renewed its focus on marketing the Bank's new and existing products, as well as increasing general market awareness of the Bank as a competitor in its banking markets, through expanded media advertising and promotional activities. OTHER SERVICES. The Bank provides most other traditional commercial and consumer banking services. Discount brokerage services are offered by the Bank through an unaffiliated broker-dealer. 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 extremely competitive. North Carolina is the home of three of the largest commercial banks in the Southeast, each of which has branches located in the Bank's Western and Outer Banks Regions, and 14 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 34 which may acquire North Carolina institutions, establish or acquire branch offices in North Carolina, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, the Bank is one of the smaller commercial banks in North Carolina, and there is no assurance that the Bank will be or continue to be an effective competitor in the current financial services environment. See "Risk Factors -- Competition." EMPLOYEES The Company does not have any separate employees. As of June 30, 1998, the Bank employed 128 full-time employees (including its and the Company's executive officers) and 17 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. LEGAL PROCEEDINGS From time to time the Bank may become involved in legal proceedings occurring in the ordinary course of its business. However, subject to the uncertainties inherent in any litigation, management believes that there currently are no pending or threatened proceedings that are reasonably likely to result in a material adverse change in the Company's financial condition or operations. PROPERTIES The Company's offices are located in the Bank's corporate offices in Engelhard, North Carolina, and the Company does not own or lease any separate properties. The Bank maintains the following 16 offices, seven of which it owns, five of which are owned by CFR and leased to the Bank, three of which are held under leases with unaffiliated third parties, and one of which was constructed by the Bank on property held under a ground lease with an unaffiliated third party. CENTRAL REGION: Engelhard main banking and corporate office (owned) Swan Quarter branch office (owned) Fairfield branch office (leased from CFR) Columbia branch office (leased from CFR) Creswell branch office (owned) Washington loan production office (leased) WESTERN REGION: Greenville Arlington branch office (owned) Greenville University Medical Center branch office (owned) Greenville WalMart Supercenter branch office (leased) OUTER BANKS REGION: Barco branch office (ground lease) Southern Shores/Kitty Hawk branch office (leased from CFR) Nags Head branch office (leased from CFR) Manteo branch office (owned) Avon branch office (leased) Hatteras branch office (leased from CFR) Ocracoke branch office (owned)
All of the Bank's existing banking offices are in good condition and fully equipped for the Bank's purposes. At June 30, 1998, the Bank's investment in premises and banking equipment (cost less accumulated depreciation) was approximately $6.3 million. ADDITIONAL INFORMATION For additional information regarding the Company and its consolidated financial condition and results of operations, see "Capitalization," "Selected Consolidated Financial Data and Other Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Supervision, Regulation and Other Matters," "Management," "Beneficial Ownership of Common Stock," "Management Compensation," "Certain Relationships and Related Transactions," "Description of Capital Stock," "Available Information," "Incorporation of Certain Documents by Reference," "Index to Consolidated Financial Statements," and "ECB Bancorp, Inc. and Subsidiary Supplemental Consolidated Financial Statements" and "The East Carolina Bank and Subsidiaries Consolidated Financial Statements." THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF OR GUARANTEED BY THE BANK OR THE COMPANY AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. 35 SUPERVISION, REGULATION AND OTHER MATTERS THE FOLLOWING IS A SUMMARY OF CERTAIN STATUTES AND REGULATIONS APPLICABLE TO THE COMPANY AND THE BANK BUT IS NOT INTENDED TO BE EXHAUSTIVE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ALL PARTICULAR STATUTORY OR REGULATORY PROVISIONS. The business and operations of the Company and the Bank are subject to extensive federal and state governmental regulation and supervision. REGULATION OF THE COMPANY The Company is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Reserve. Under the BHCA, the activities of the Company are limited to banking, managing or controlling banks or engaging in any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock or substantially all of the assets of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without prior approval of the Federal Reserve. Additionally, the BHCA prohibits the Company from engaging in, or acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company engaged in, a nonbanking activity unless such activity is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. In approving an application by the Company to engage in a nonbanking activity, the Federal Reserve must consider whether that activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. There are a number of obligations and restrictions imposed by law on a bank holding company and its insured depository institution subsidiaries that are designed to minimize potential loss to depositors and federal deposit insurance funds. For example, if a bank holding company's insured depository institution subsidiary becomes "undercapitalized," the bank holding company is required to guarantee (subject to certain limits) the subsidiary's compliance with the terms of any capital restoration plan filed with its appropriate federal banking agency. Also, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so, absent such policy. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of a depository institution subsidiary of the bank holding company. The Company also is registered as a bank holding company under the North Carolina Bank Holding Company Act and is subject to regulations of the North Carolina Commissioner of Banks (the "North Carolina Commissioner") thereunder. REGULATION OF THE BANK As a North Carolina-chartered bank that is not a member of the Federal Reserve System, the Bank's primary federal bank regulator is the FDIC. The Bank's deposits are insured by the FDIC and the Bank is subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the North Carolina Commissioner. As an insured institution, the Bank is prohibited from engaging as a principal in activities that are not permitted for national banks unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards. Insured institutions also are prohibited from directly acquiring or retaining any equity investment of a type or in an amount not permitted for national banks. The Federal Reserve, the FDIC and the North Carolina Commissioner have broad powers to enforce laws and regulations applicable to the Company and the Bank and to require corrective action of conditions affecting the safety and soundness of the Bank. Among others, these powers include cease and desist orders, the imposition of civil penalties and the removal of officers and directors. Even though it is not a member of the Federal Reserve System, the business of the Bank also is influenced by prevailing economic conditions and governmental policies, both foreign and domestic, and by the monetary and fiscal policies of the Federal Reserve. The actions and policy directives of the Federal Reserve determine to a significant degree the cost and the 36 availability of funds obtained from money market sources for lending and investing and also influence, directly and indirectly, the rates of interest paid by commercial banks on their time and savings deposits. The nature and impact on the Bank of future changes in economic conditions and monetary and fiscal policies are not predictable. PAYMENT OF DIVIDENDS The Company is a legal entity separate and distinct from the Bank. The principal sources of cash flow of the Company, including cash flow to pay dividends to its shareholders, are dividends it receives from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to the Company, as well as by the Company to its shareholders. As an insured depository institution, the Bank also is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, it would become "undercapitalized" (as such term is defined in the Federal Deposit Insurance Act). If, in the opinion of the FDIC, an insured depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), it may require, after notice and hearing, that such institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under current federal law, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. See " -- Prompt Corrective Action." Moreover, the federal agencies have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. At June 30, 1998, the Bank had approximately $4.4 million available for payment of dividends to the Company without affecting its classification as a "well-capitalized" bank under federal bank regulatory capital guidelines and without regulatory approval. CAPITAL ADEQUACY The Company and the Bank each is required to comply with the capital adequacy standards established by the Federal Reserve in the case of the Company and the FDIC in the case of the Bank. There are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance. The minimum guideline for the ratio ("Total Capital Ratio") of total capital ("Total Capital") to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital"). At June 30, 1998, the Company's consolidated Total Capital Ratio and its ratio of Tier 1 Capital to risk-weighted assets ("Tier 1 Capital Ratio") were 13.26% and 12.00%, respectively. In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio (the "Leverage Capital Ratio") of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain an additional cushion of 100 to 200 basis points above the stated minimums. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a "Tangible Leverage Ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. At June 30, 1998, the Company's Leverage Capital Ratio was 8.73%. The Bank is subject to risk-based and leverage capital requirements adopted by the FDIC which are substantially similar to those adopted by the Federal Reserve for bank holding companies. At June 30, 1998, the Bank's Total Capital, Tier 1 Capital and Leverage Capital Ratios were 13.26%, 12.00% and 8.73%, respectively, and the Bank was in compliance with all applicable minimum regulatory capital requirements. 37 Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements. See " -- Prompt Corrective Action." The Federal Reserve and the FDIC also consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank's capital adequacy. The bank regulatory agencies' methodology for evaluating interest rate risk requires banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures. PROMPT CORRECTIVE ACTION Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, which became effective in December 1992, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of such actions taken will depend upon the capital category in which an institution is placed. Generally, subject to a narrow exception, current federal law requires the banking regulators to appoint a receiver or conservator for an institution that is critically undercapitalized. Under the final agency rules implementing the prompt corrective action provisions, an institution that (i) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater, and (ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate federal banking agency, is deemed to be well capitalized. An institution with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is considered to be adequately capitalized. A depository institution that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be undercapitalized. A depository institution that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to be significantly undercapitalized, and an institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be critically undercapitalized. For purposes of the regulation, the term "tangible equity" includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. An institution that is categorized as undercapitalized, significantly under-capitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The obligation of a controlling bank holding company to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking agency is given authority with respect to any undercapitalized depository institution to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution as described above if it determines "that those actions are necessary to carry out the purpose" of the law. At June 30, 1998, the Bank had the requisite capital levels to qualify as well capitalized. RESERVE REQUIREMENTS Pursuant to regulations of the Federal Reserve, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $4.7 million of transaction accounts, but reserves equal to 3.0% must be maintained on the aggregate balances of such accounts between $4.7 million and $47.8 million, and reserves equal to 10.0% must be maintained on aggregate balances in excess of $47.8 million. These percentages are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of June 30, 1998, the Bank met its reserve requirements. 38 FDIC INSURANCE ASSESSMENTS The FDIC currently uses a risk-based assessment system that takes into account the risks attributable to different categories and concentrations of assets and liabilities for purposes of calculating deposit insurance assessments to be paid by insured depository institutions. The risk-based assessment system, which went into effect on January 1, 1994, assigns an institution to one of three capital categories: (i) well capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. An institution is also assigned by the FDIC to one of three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's insurance assessment rate is then determined based on the capital category and supervisory category to which it is assigned. Under the final risk-based assessment system, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates (ranging from zero to 31 basis points) are applied. In 1996, the FDIC imposed a special one-time assessment of approximately 65.7 basis points (0.657%) on a depository institution's assessable deposits insured by the Savings Association Insurance Fund ("SAIF ") held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits acquired by banks in certain qualifying transactions), and adopted revisions to the assessment rate schedules that would generally eliminate the disparity between assessment rates applicable to the deposits insured by the Bank Insurance Fund ("BIF ") and the SAIF. The Bank has no SAIF-insured deposits and, therefore, was not required to pay the special assessment. The Bank currently is not assessed any premiums for deposits insured by either the BIF or SAIF. However, the Bank continues to pay premiums based on deposit levels to service debt on Financing Corporation bonds. Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. COMMUNITY REINVESTMENT Under the Community Reinvestment Act ("CRA"), as implemented by regulations of the federal bank regulatory agencies, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the federal bank regulatory agencies, in connection with their examination of insured institutions, to assess the institutions' records of meeting the credit needs of their communities, using the ratings of "outstanding," "satisfactory," "needs to improve," or "substantial noncompliance," and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a "satisfactory" rating in its last CRA examination in May 1998. On May 4, 1995, the federal bank regulatory agencies adopted new uniform CRA regulations that provide guidance to financial institutions on their CRA obligations and the methods by which those obligations will be assessed and enforced. The regulations establish three tests applicable to the Bank: (i) a lending test to evaluate direct lending in low-income areas and indirect lending to groups that specialize in community lending; (ii) a service test to evaluate delivery of services to such areas, and (iii) an investment test to evaluate investment in programs beneficial to such areas. The new CRA regulations became effective on July 1, 1995, but reporting requirements were not effective until January 1, 1997. Evaluation under the regulations was not mandatory until July 1, 1997. The Bank believes its current operations and policies substantially comply with the regulations and therefore no material changes to operations or policies are expected. TRANSACTIONS WITH AFFILIATES The Bank is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Company and other affiliates and on investments in the stock or other securities thereof. These restrictions prevent the Company and other affiliates from borrowing from the Bank unless the loans are secured by specified collateral, and require such transactions to have terms comparable to terms of arms-length transactions with third persons. Further, such 39 secured loans and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10.0% of the Bank's capital and surplus and as to the Company and all other affiliates to an aggregate of 20.0% of the Bank's capital and surplus. These regulations and restrictions may limit the Company's ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. The Bank's ability to extend credit to its and the Company's directors, executive officers, and 10.0% stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve thereunder. INTERSTATE BANKING AND BRANCHING The BHCA, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Law"), permits adequately capitalized and managed bank holding companies to acquire control of the assets of banks in any state. Acquisitions are subject to antitrust provisions that cap at 10.0% the portion of the total deposits of insured depository institutions in the United States that a single bank holding company may control and generally cap at 30.0% the portion of the total deposits of insured depository institutions in a state that a single bank holding company may control. Under certain circumstances, states have the authority to increase or decrease the 30.0% cap, and states may set minimum age requirements of up to five years on target banks within their borders. Beginning June 1, 1997, and subject to certain conditions, the Interstate Banking Law also permitted interstate branching by allowing a bank to merge with a bank located in a different state. A state was allowed to accelerate the effective date for interstate mergers by adopting a law authorizing such transactions prior to June 1, 1997, or it could "opt out" and thereby prohibit interstate branching by enacting legislation to that effect prior to that date. The Interstate Banking Law also permits banks to establish branches in other states by opening new branches or acquiring existing branches of other banks, provided the laws of those other states specifically permit that form of interstate branching. North Carolina has adopted statutes which, subject to conditions contained therein, specifically authorize out-of-state bank holding companies and banks to acquire or merge with North Carolina banks and to establish or acquire branches in North Carolina. 40 MANAGEMENT BOARD OF DIRECTORS The Company's bylaws provide for a Board of Directors composed of not less than nine nor more than 15 members divided into three classes, as nearly equal in number as possible, with the directors in each class being elected to staggered three-year terms. There currently are eleven members of the Board of Directors. Each year the terms of directors in one class expire and the number of persons in that class are elected as directors for new three-year terms. The following table contains information about the Company's current eleven directors. Each director of the Company also serves as a director of the Bank.
YEAR FIRST ELECTED/ POSITION(S) CURRENT TERM PRINCIPAL OCCUPATION AND NAME AND AGE WITH BANK EXPIRES(1) BUSINESS EXPERIENCE - ------------------------- ------------------ -------------- --------------------------------------------------------------- George T. Davis, Jr.(2) Vice Chairman 1979 / 2000 Attorney, Davis & Davis, Swan Quarter, NC (44) C. Gilbert Gibbs(3) Director 1983 / 1999 Owner of C.G. Gibbs Hardware (hardware store) and (75) Darkwood Farms (farming operations), Engelhard, NC Gregory C. Gibbs(3) Director 1994 / 2000 Student, NC State University, Raleigh, NC; previously (38) served as Manager, C.G. Gibbs Hardware (hardware store), Engelhard, NC John F. Hughes, Jr. Director 1996 / 2000 Regional Manager, North Carolina Power (utility company), (53) Manteo, NC Arthur H. Keeney, III President, Chief 1995 / 2001 President and Chief Executive Officer of the Bank since (54) Executive 1995; previously served as Vice President and General Officer and Manager, OMG Co. (manufacturer of electronic and Director telecommunications training devices), Baltimore, MD (1994-1995); as Recruiting Consultant, Don Richards and Associates, Inc. (executive recruiters), Baltimore, MD (1993-1994); as Executive Director, American Foundation for Urologic Disease, Baltimore, MD (1991-1993); and as Executive Vice President, Signet Bank, Richmond, VA (1983-1991) J. Bryant Kittrell, III Director 1990 / 1999 President, Kittrell & Associates, Inc. (real estate (46) development and sales), Greenville, NC Joseph T. Lamb, Jr. Director 1981 / 2001 President, Joe Lamb, Jr. & Associates, Inc. (real estate sales (64) and rentals), Nags Head, NC B. Martelle Marshall Director 1993 / 1999 Owner of Martelle's Barbeque (restaurant), Engelhard, NC; (48) previously conducted farming operations, Engelhard, NC Robert L. Mitchell Director 1981 / 2000 Owner of Mitchell's Barber Shop, Columbia, NC (81) Ray M. Spencer Director 1974 / 2001 Retired farmer, Scranton, NC (75) R. S. Spencer, Jr. Chairman 1963 / 1999 President, R.S. Spencer, Inc. (retail merchant), Engelhard, (57) NC
- --------- (1) The "year first elected" indicates the year in which each individual first was elected a director of the Bank. (2) Mr. Davis provided certain legal services to the Bank during 1997 and continues to do so during 1998. (3) C. Gilbert Gibbs and Gregory C. Gibbs are father and son, respectively. The Company's Bylaws authorize the Board of Directors to set and change the number of directors from time to time (within the minimum and maximum numbers described above). An increase in the number of directors will result in a vacancy on the Board of Directors which may be filled by the Board without shareholder approval. However, any person appointed by the Board to fill a vacancy could serve as a director only until the next meeting of shareholders at which directors are to be elected, and his or her continued service as a director would be subject to reelection by shareholders at that meeting. 41 EXECUTIVE OFFICERS The executive officers of the Company and the Bank are listed below. ARTHUR H. KEENEY, III, age 54, serves as President and Chief Executive Officer of the Company and the Bank. He has been employed by the Bank since 1995. A listing of other positions held by Mr. Keeney during the past five years is contained in his listing above as a director. GARY M. ADAMS, age 45, is a Senior Vice President and serves as Chief Financial Officer of the Company and the Bank. He has been employed by the Bank since 1981. J. DORSON WHITE, JR., age 47, is an Executive Vice President and serves as Branch Administrator for the Bank. He has been employed by the Bank since 1989. WILLIAM F. PLYLER, II, age 54, serves as Senior Vice President and Chief Credit Officer and has been employed by the Bank since 1995. Mr. Plyler has a total of approximately 32 years of experience in lending and loan administration positions with banks. He previously served as Vice President in the Credit Policy Division for Southern National Bank, Winston-Salem, North Carolina, from 1993 to 1995 and held various positions in Lending and Credit Administration with Wachovia Bank of North Carolina, N.A., from 1966 to 1993. SARAH M. STEPHENS, age 40, is a Senior Vice President and serves as the Bank's Director of Human Resources. She has been employed by the Bank since 1988. BENEFICIAL OWNERSHIP OF COMMON STOCK The following table describes the beneficial ownership of the Company's outstanding Common Stock as of July 31, 1998, by its directors and certain executive officers, individually, and by all directors and executive officers as a group. At that date, Mr. C. Gilbert Gibbs (who is included in the table) was the only person known to management of the Company to beneficially own more than 5% of the outstanding shares of Common Stock.
NAME OF AMOUNT AND NATURE OF PERCENT BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS - -------------------------------------------------------- ------------------------- --------- George T. Davis, Jr. ........................... 20,514 1.15% C. Gilbert Gibbs (2) ...........................480,666 (3) 27.00% Gregory C. Gibbs ............................... 5,628 (3) .32% John F. Hughes, Jr. ............................ 1,200 .07% Arthur H. Keeney, III .......................... 750 .04% J. Bryant Kittrell, III ........................ 4,350 .24% Joseph T. Lamb, Jr. ............................ 13,983 .79% B. Martelle Marshall ........................... 1,932 .11% Robert L. Mitchell ............................. 2,226 .13% R. S. Spencer, Jr. ............................. 72,963 4.10% Ray M. Spencer ................................. 10,008 .56% All current directors and executive officers as a group (15 persons) .......................615,423 (2) 34.57%
- --------- (1) Except as otherwise noted, to the best knowledge of management of the Company, the individuals named and included in the group exercise sole voting and investment power with respect to all shares shown as beneficially owned other than the following shares as to which such powers are shared: Mr. Davis -- 6,993 shares; Mr. C.G. Gibbs -- 74,835 shares; Mr. G.C. Gibbs -- 828 shares; Mr. Kittrell -- 450 shares; Mr. Lamb -- 2,265 shares; Mr. Marshall -- 1,041 shares; Mr. Mitchell -- 891 shares; Mr. R.S. Spencer -- 29,457 shares; all current directors and executive officers as a group -- 116,760 shares. (2) Mr. Gibbs' address is Post Office Box 39, Engelhard, North Carolina 27824. (3) Includes 828 shares listed as beneficially owned by both Mr. G.C. Gibbs and Mr. C.G. Gibbs which are counted only once in the total shares beneficially owned by individuals included in the group. 42 MANAGEMENT COMPENSATION EXECUTIVE COMPENSATION The following table shows, for 1997, 1996 and 1995, the cash and certain other compensation paid to, or received or deferred by, the Bank's Chief Executive Officer. The Company was organized on March 4, 1998, and commenced operations as the Bank's parent holding company on July 22, 1998, upon consummation of the Reorganization. The Company's officers and directors are compensated by the Bank for their services as officers and directors of the Bank and do not receive any separate compensation from the Company. All compensation reflected in the table below was paid by the Bank. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------------------------------- OTHER ANNUAL ALL OTHER NAME AND SALARY COMPENSATION COMPENSATION PRINCIPAL POSITION YEAR ($)(1) BONUS($)(2) ($)(3) ($)(4) - ----------------------------- ------ ----------- ------------- -------------- ------------- Arthur H. Keeney, III(5), 1997 $103,599 $26,880 $780 $14,939 President and Chief 1996 95,646 33,000 780 19,402 Executive Officer 1995 29,842 -0- -0- 1,400
- --------- (1) Includes amounts deferred at Mr. Keeney's election pursuant to the Bank's Section 401(k) salary deferral plan. (2) The Bank maintains an annual incentive bonus plan (the "Incentive Plan") under which cash bonus awards may be paid each year to executive officers and other officers and employees of the Bank based on the extent to which the Bank and the participant achieve specific performance goals. The Bank's Chief Executive Officer each year approves a list of eligible employees to participate in the Incentive Plan, and participants are assigned to one of seven tiers based upon job titles and responsibilities. Each tier is assigned performance goals and bonuses are awarded based upon the extent to which such goals are achieved. Performance goals under the Incentive Plan are stated each year as various levels of return on average assets, return on average equity, operating expenses as a percentage of average assets, branch performance criteria and department operating criteria. (3) In addition to compensation paid in cash, Mr. Keeney received certain personal benefits, including the use of a vehicle owned by the Bank. The amount of such non-cash benefits received by Mr. Keeney during each year did not exceed 10% of his cash compensation for that year. (4) The amounts reported for 1997 consist of $6,878 attributable to premiums paid by the Bank on an insurance policy used to fund a supplemental retirement plan established by the Bank, $5,373 in contributions by the Bank to the Section 401(k) salary deferral plan for Mr. Keeney's account, and an aggregate of $2,688 in moving and storage expenses which the Bank agreed to pay when Mr. Keeney was hired. (5) Mr. Keeney's employment with the Bank commenced during 1995. He currently serves as President and Chief Executive Officer of the Bank pursuant to an employment agreement which provides for a term of three years (commencing during January 1998). At the end of each year, the term automatically will be extended for one additional year, subject to the Bank's option that the agreement not be so extended. The agreement may be terminated by the Bank for conduct constituting "cause" (as such term is defined in the agreement) or, upon 90 days' prior written notice, without cause, and may be terminated by Mr. Keeney upon 90 days' prior written notice. Mr. Keeney's annual base salary for 1998 under the agreement is $112,000, he is entitled to discretionary salary increases and bonuses as may be determined by the Board of Directors from time to time, and he has agreed not to compete with the Bank in the areas in which it does business following the termination of his employment. In the event that, within three months following a "change in control" of the Bank, Mr. Keeney's employment is terminated without cause, or his duties are substantially reduced relative to his position prior to such transaction, or he is required to change his workplace to a location more than 75 miles from Engelhard, North Carolina, then he will be entitled to receive payment of an amount equal to 2.99 times the average of his salary, cash bonus and incentive payments during the preceding three years. DIRECTOR COMPENSATION The Bank pays its directors (other than directors who are employees) a fee of $350 for each Board meeting attended. In addition, members of committees of the Board receive a fee for each committee meeting attended ($350 for the Executive Committee and $200 for each other committee), and directors are reimbursed for travel expenses incurred in attending Board and committee meetings. No separate fees are paid to directors for their services as directors of the Company. E. Royden Clarke, whose service to the Bank totaled 42 years, retired from his position as a director during December 1997. He previously had served as Chairman of the Board of Directors until December 1996, and, until his retirement from 43 active employment during 1995, he served as the Bank's President and Chief Executive Officer. In connection with his retirement, the Bank paid Mr. Clarke a supplemental retirement benefit of $100,000 and transferred to him title to an automobile valued at $11,875. STOCK OPTIONS During January 1998, the Bank's Board of Directors adopted an Omnibus Stock Ownership and Long Term Incentive Plan (the "Omnibus Plan," which was approved by the Bank's shareholders at the May 13, 1998 annual meeting) and awarded to certain officers of the Bank options to purchase an aggregate of 9,516 shares of the Bank's common stock at a price equal to the then current market value of $12.50 per share (as such number of shares and purchase price have been adjusted in accordance with the terms of the Omnibus Plan to reflect the three-for-one stock split which was effective July 22, 1998). Upon consummation of the Reorganization, the Company assumed the Bank's obligations under the Omnibus Plan, and each of the then outstanding options under the Plan were converted, in accordance with its terms, into options to purchase shares of the Company's Common Stock. The following table contains certain information regarding Options granted to and currently held by the Company's Chief Executive Officer under the Omnibus Plan. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ----------------------------------------------------------------------------------------- ---------------------- % OF TOTAL NO. OF SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OR OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE)(1) DATE 5% ($) 10% ($) - --------------------------- ------------------- -------------- -------------- ----------- ---------- ----------- Arthur H. Keeney, III .. 4,422 46.5% $ 12.50 01/21/08 $39,264 $102,431
- --------- (1) All options become exercisable as to one-third of the covered shares on January 21 each year, beginning January 21, 2001, and expire ten years following the date of grant. The number of shares granted and exercise price have been adjusted in accordance with the terms of the Omnibus Plan to reflect the effect of the three-for-one stock split in the Bank's common stock which was effective on July 22, 1998. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with certain of its directors, executive officers and their associates. All loans included in such transactions were made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time such loans were made for comparable transactions with other persons, and such loans do not involve more than the normal risk of collectibility or present other unfavorable features. DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL. The Company's authorized capital stock consists of 10,000,000 shares of Common Stock, $3.50 par value per share, of which 1,780,254 shares were issued and outstanding at July 31, 1998. OPTIONS. There currently are outstanding options under the Omnibus Plan to purchase an aggregate of 9,516 shares (as adjusted for the three-for-one split in the Bank's common stock which was effective July 22, 1998) of Common Stock at a price of $12.50 per share (as adjusted for the stock split). VOTING RIGHTS. Except as otherwise provided below, the holders of Common Stock are entitled to one vote per share held of record on all matters submitted to a vote of shareholders, and are not entitled to vote cumulatively in the election of directors. Pursuant to the North Carolina Control Share Acquisition Act, shares of Common Stock acquired in a "control share acquisition" ("Control Shares") will have no voting rights unless such rights are granted by resolution adopted by the holders of at least a majority of the outstanding shares of the Company's stock entitled to vote in the election of directors, excluding shares held by the person who has acquired or proposes to acquire the Control Shares and excluding shares held by any officer or director who is also an employee of the Company. "Control Shares" are defined as shares of the Company acquired by any person which, when added to the shares already owned by such person, would entitle that person (except for the 44 application of the Act) to voting power in the election of directors equal to or greater than (i) one-fifth of all voting power, (ii) one-third of all voting power, or (iii) a majority of all voting power. "Control share acquisition" means, with certain exceptions, the acquisition by any person of beneficial ownership of Control Shares, including an acquisition pursuant to certain agreements of merger or consolidation to which the Company is a party, and purchases of shares directly from the Company. CHARTER AMENDMENTS. With certain exceptions, an amendment to the Company's charter, including a provision to increase the authorized capital stock of the Company, may be effected if the amendment is recommended to the Company's shareholders by the Board of Directors and if the votes cast by shareholders in favor of the amendment exceed the votes cast opposing the amendment. MERGER, SHARE EXCHANGE, SALE OF ASSETS AND DISSOLUTION. In general, North Carolina law requires that any merger, share exchange, voluntary liquidation or transfer of substantially all the assets (other than in the ordinary course of business) of the Company be recommended to the Company's shareholders by its board of directors and be approved by the affirmative vote of at least a majority of all outstanding shares of the Company's voting stock. The North Carolina Shareholder Protection Act requires the affirmative vote of the holders of 95% of the outstanding shares of Common Stock (excluding shares owned by an "interested shareholder") to approve certain business combinations between the Company and an entity which owns more than 10% of the Company's voting shares. DIVIDENDS. Holders of Common Stock are entitled to dividends when and if declared by the Company's Board of Directors from funds legally available, whether in cash or in stock. Under North Carolina law, the declaration and payment of cash dividends is at the discretion of the Company's Board of Directors; provided, however, that no cash dividend may be paid if, after such payment, the Company would not be able to pay its debts as they become due in the usual course of its business or the Company's total assets would be less than its total liabilities (plus the amount, if any, necessary to satisfy certain preferential rights of shareholders). See "Dividends" and "Supervision, Regulation and Certain Other Matters -- Payment of Dividends." MISCELLANEOUS. In accordance with North Carolina law, holders of Common Stock are entitled, upon dissolution or liquidation, to participate ratably in the distribution of assets legally available for distribution to shareholders after payment of debts. The Company's shareholders do not have preemptive rights to acquire other or additional shares which might be issued by the Company, or any redemption, sinking fund or conversion rights. First-Citizens Bank & Trust Company currently acts as registrar and transfer agent for Common Stock. PLAN OF DISTRIBUTION A minimum of 250,000 shares and a maximum of 300,000 shares of Common Stock are being offered by the Company at a price of $ * per share. The Company and the Sales Agent have entered into a Sales Agency Agreement pursuant to which the Sales Agent will act as the Company's agent on a "reasonable efforts" basis and solicit orders for the Common Stock. The Sales Agent may form a selling group of one or more other selected broker-dealers who also will solicit orders for the Common Stock. While the Sales Agent will serve as the Company's non-exclusive agent, it will be entitled to approve the Company's engagement of any other selling agents and may require that any such other selling agents conduct their sales efforts in a manner consistent with the procedures described in this Prospectus. The Sales Agent will direct its selling efforts in the Company's primary geographic market in particular and in eastern North Carolina in general. However, the Sales Agent likely will sell shares of the Common Stock to investors elsewhere in North Carolina and in other states where the Common Stock can lawfully be offered and sold. Unless extended as provided below, the Offering will terminate on the earlier of October 30, 1998, or the date on which the maximum number of shares have been sold, and may be terminated at any time on or after the date on which the minimum number of shares have been sold. If orders and full payment in collected funds for the minimum of 250,000 shares have not been placed with the Sales Agent and any other selected broker-dealers as described below by October 30, 1998, the Offering will terminate and no shares will be sold; provided, however, that such termination date and the Offering period may be extended by the Company and the Sales Agent until no later than November 30, 1998, without notice. Also, the Company and the Sales Agent reserve the right to otherwise terminate or withdraw the Offering at any time without notice. If the Offering is terminated or withdrawn, all orders will be canceled and no shares of Common Stock will be issued. 45 Each order for the purchase of Common Stock will be held until it is accepted, rejected, or accepted in part and rejected in part. Assuming orders for at least the minimum number of shares have been received, after completion of the Offering a closing will be held whereby the Sales Agent and any other selected broker-dealers will debit the accounts of prospective investors that have placed orders with them for the purchase price of Common Stock (as described below), and certificates for shares sold will be delivered promptly thereafter to the purchasers of those shares. The Company's existing shareholders do not have preemptive rights to acquire additional shares of Common Stock issued by the Company. However, if orders are received for an aggregate of more than the maximum number of shares being offered, then orders received prior to termination of the Offering from persons who are shareholders of record as of commencement of the Offering will be given priority. In order to purchase Common Stock, each prospective investor must be a customer of or otherwise have an account with the Sales Agent or any other selected broker-dealer and must place his or her order and make payment for Common Stock through the Sales Agent or such other selected broker-dealer in accordance with the following procedures: o Prospective investors should contact the Bank at (252) 925-9411 for information regarding establishing an account with the Sales Agent. o The Sales Agent and other selected broker-dealers will obtain "indications of interest" from prospective investors who desire to purchase Common Stock, together with authorizations to debit those investors' customer securities accounts held by the Sales Agent or other selected broker-dealers, and each such investor will be instructed to deposit funds in the investor's securities brokerage account equal to the purchase price of shares being ordered. o Once the Sales Agent has determined that the total of the "indications of interest" received by it and any other selected broker-dealers exceeds the minimum number of shares, that funds are available in each prospective investor's securities brokerage accounts equal to the purchase price of shares ordered, and that the closing of the Offering is imminent, the Sales Agent will so notify any other selected broker-dealers and the Sales Agent and each such other selected broker-dealer will send confirmations to its customers who have given "indications of interest" to purchase Common Stock which have not been withdrawn (with the date such confirmations are sent being the "Order Date"). o Not later than the next business day after the Order Date, the Sales Agent and each other selected broker-dealer will notify the Company that the Sales Agent and the other selected broker-dealers have received orders for shares of Common Stock in excess of the minimum number of shares to be sold in the Offering. o On the date three business days after the Order Date (the "Settlement Date"), the Sales Agent and each other selected broker-dealer will debit the accounts of each prospective investor for the purchase price of Common Stock for which they have received orders. Investors whose brokerage accounts are to be debited in this manner must have funds in their accounts on the Settlement Date for the purchase price of Common Stock to be purchased. o On the Settlement Date, the Sales Agent and each other selected broker-dealer will transmit all such debited funds, less the amount of the Sales Agent's commission, to the Company. The terms of the Offering have been set by the Company and the Sales Agent as a matter of general policy only and may be modified by them at any time without notice. Any order for the purchase of Common Stock may be accepted or rejected or may be accepted for a lesser amount than ordered, and, if the Offering is oversubscribed, the Company and the Sales Agent reserve the right to allocate shares among prospective purchasers in such manner as they, in their sole discretion, shall consider appropriate. The Sales Agent has agreed that it will not sell more than five percent of the aggregate number of shares of Common Stock sold in the Offering (12,500 shares if the minimum number of shares is sold, and 15,000 if the maximum number of shares is sold) to any person or to any group of persons acting in concert without the prior written consent of the Company, and the Company reserves the right to otherwise restrict the number of shares of Common Stock that may be purchased by any such person or group. The minimum order for Common Stock that will be accepted is 100 shares. For its services, the Company has agreed to pay the Sales Agent commissions calculated at 7.0% of the aggregate total dollar amount of Common Stock sold in the Offering. If the Sales Agent forms a selling group of selected broker-dealers, it will reallow or pay to those broker-dealers a portion (up to 60%) of its 7.0% commissions for Common Stock sold by them. Certain officers, directors and employees of the Company also may participate in the offering, but such persons will not be compensated, directly or indirectly, for their participation. 46 Whether or not any Common Stock is sold, the Company will pay all filing fees and expenses associated with required filings with the National Association of Securities Dealers, Inc. and various state securities regulators, including the reasonable fees of the Sales Agent's legal counsel related thereto, and, if the Offering is terminated with no shares of Common Stock being sold, the Company will reimburse the Sales Agent for its actual, accountable out-of-pocket expenses related to the Offering. The Company also will pay its own expenses incurred in connection with the Offering, including legal, accounting, printing and mailing expenses. It is expected that all such expenses will amount to approximately $ * and will be paid by the Company from the sales proceeds. If the Offering is terminated or withdrawn or no shares of the Common Stock are sold, Offering expenses will be charged against the Company's earnings. The Company's directors and executive officers have agreed with the Sales Agent that, for a period of 90 days following consummation of the Offering, they will not sell any shares of Common Stock owned by them. The Company has agreed to indemnify the Sales Agent against certain liabilities and expenses (including legal fees) incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the Offering materials for the Common Stock. During and after the Offering, the Sales Agent may purchase and sell Common Stock in the open market. These transactions may include stablizing transactions, "passive" market making (see below) and purchases to cover syndicate short positions created in connection with the Offering. The Sales Agent also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such securities are repurchased by the syndicate in stablizing or covering transactions. These activities may stablize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. These transactions may be effected on the Nasdaq Small Cap Market or otherwise, and these activities, if commenced, may be discontinued at any time. As permitted by Rule 103 of Regulation M under the Exchange Act, the Sales Agent or selected broker-dealers that are market makers in the Common Stock may make bids for or purchases of Common Stock in the Nasdaq Small Cap Market until such time, if any, when a stablizing bid for such securities has been made. INDEMNIFICATION North Carolina law and the Company's Bylaws generally provide for the indemnification of the Company's officers and directors in the manner described below. PERMISSIBLE INDEMNIFICATION. The North Carolina Business Corporation Act (the "NCBCA") allows a corporation, by charter, bylaw, contract or resolution, to indemnify or agree to indemnify its officers, directors, employees and agents and any person who is or was serving at the corporation's request as a director, officer, employee or agent of another entity or enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses, including reasonable attorneys' fees, in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities as summarized herein. Any provision in a corporation's charter or bylaws or in a contract or resolution may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys' fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing such rights. The corporation may indemnify such person against liability expenses incurred only where such person conducted himself or herself in good faith and reasonably believed (i) in the case of conduct in his or her official corporate capacity, that his or her conduct was in the corporation's best interests, and (ii) in all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and, in the case of a criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful; provided, however, that a corporation may not indemnify such person either in connection with a proceeding by or in the right of the corporation in which such person was adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to such person (whether or not involving action in an official capacity) in which such person was adjudged liable on the basis that personal benefit was improperly received. MANDATORY INDEMNIFICATION. Unless limited by the corporation's charter, the NCBCA requires a corporation to indemnify a director or officer of the corporation who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which such person was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding. 47 ADVANCE FOR EXPENSES. Expenses incurred by a director, officer, employee or agent of the corporation in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors in the specific case, or as authorized by the charter or bylaws or by any applicable resolution or contract, upon receipt of an undertaking by or on behalf of such person to repay amounts advanced unless it ultimately is determined that such person is entitled to be indemnified by the corporation against such expenses. COURT-ORDERED INDEMNIFICATION. Unless otherwise provided in the corporation's charter, a director or officer of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court deems necessary, may order indemnification if it determines either (I) that the director or officer is entitled to mandatory indemnification as described above, in which case the court also will order the corporation to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (II) that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not such person met the requisite standard of conduct or was adjudged liable to the corporation in connection with a proceeding by or in the right of the corporation or on the basis that personal benefit was improperly received in connection with any other proceeding so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred). PARTIES ENTITLED TO INDEMNIFICATION. The NCBCA defines "director" to include ex-directors and the estate or personal representative of a director. Unless its charter provides otherwise, a corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director and also may indemnify and advance expenses to an officer, employee or agent who is not a director to the extent, consistent with public policy, as may be provided in its charter or bylaws, by general or specific action of its board of directors, or by contract. INDEMNIFICATION BY REGISTRANT. The Company's Bylaws provide for indemnification of its directors and officers to the fullest extent permitted by North Carolina law, and require its Boards of Directors to take all actions necessary and appropriate to authorize such indemnification. Under North Carolina law, a corporation also may purchase insurance on behalf of any person who is or was a director or officer against any liability arising out of his status as such. The Company currently maintains a directors' and officers' liability insurance policy. LEGAL MATTERS The validity of the shares of Common Stock offered hereby has been passed upon for the Company by Ward and Smith, P.A., Raleigh, North Carolina. Certain legal matters related to this offering will be passed upon for the Sales Agent by Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina. EXPERTS The supplemental consolidated balance sheets of ECB Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the aforementioned supplemental consolidated financial statements states that the supplemental consolidated financial statements give retroactive effect to the merger of ECB Bancorp, Inc. and The East Carolina Bank on July 22, 1998, which has been accounted for in a manner similar to a pooling-of-interest as described in note 15 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. However, they will become the historical consolidated financial statements of ECB Bancorp, Inc. and subsidiary after financial statements covering the date of consummation of the business combination are issued. Additionally, the report of KPMG Peat Marwick LLP contains an explanatory paragraph that states that the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The consolidated balance sheets of The East Carolina Bank and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the aforementioned 48 consolidated financial statements refers to the Bank's adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. AVAILABLE INFORMATION The Company is subject to the informational requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Commission. Any reports, proxy and information statements and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices in Chicago, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and in New York, Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained by mail from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants who file electronically with the Commission, including Registrant. This Prospectus constitutes a part of a Registration Statement on Form SB-2 (together with all exhibits thereto, the "Registration Statement") filed by the Company with the Commission under the Securities Act. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and reference is hereby made to the Registration Statement for further information with respect to the Company and the Common Stock. Any statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. This Prospectus may contain or incorporate by reference statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Prospective investors are cautioned that any such forward-looking statements are not guarantees for future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment and tax laws, significant underperformance in the Company's portfolio of outstanding loans, and competition in the Company's markets. The Company does not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following document, which has been filed by the Company with the Commission pursuant to the Exchange Act, is incorporated by reference in this Prospectus: the Company's Current Report on Form 8-K dated July 22, 1998. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of any offering of securities hereunder shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for all purposes of the Registration Statement and this Prospectus to the extent that a statement contained herein or in any subsequently filed document that is also incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. As used herein, the terms "Prospectus" and "herein" mean this Prospectus, including the documents incorporated or deemed to be incorporated herein by reference, as the same may be amended, supplemented or otherwise modified from time to time. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein do not purport to be complete, and where reference is made to the particular provisions of such contract or other document, such provisions are qualified in all respects by reference to all of the provisions of such contract or other document. 49 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- ECB BANCORP, INC. AND SUBSIDIARY: Independent Auditors' Report ............................................................. F-2 Supplemental Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 and 1996 ............................................................... F-3 Supplemental Consolidated Statements of Income for the six months ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 ....................................................................... F-4 Supplemental Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 and for the six months ended June 30, 1998 (unaudited) ............................................................... F-5 Supplemental Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 ....................................................................... F-6 Notes to Supplemental Consolidated Financial Statements .................................. F-7 THE EAST CAROLINA BANK AND SUBSIDIARIES: Independent Auditors' Report ............................................................. F-18 Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 and 1996 ............................................................................... F-19 Consolidated Statements of Income for the six months ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 ....................................................................... F-20 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 and for the six months ended June 30, 1998 (unaudited) ............................................................................. F-21 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited), and for each of the years in the three-year period ended December 31, 1997 ....................................................................... F-22 Notes to Consolidated Financial Statements ............................................... F-23
F-1 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS ECB BANCORP, INC.: We have audited the accompanying supplemental consolidated balance sheets of ECB Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of ECB Bancorp, Inc. and The East Carolina Bank on July 22, 1998, which has been accounted for in a manner similar to a pooling-of-interests as described in note 15 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of ECB Bancorp, Inc. and subsidiary after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of ECB Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in note 7 to the supplemental consolidated financial statements, on January 1, 1995, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. /s/ KPMG PEAT MARWICK LLP Raleigh, North Carolina February 4, 1998, except note 15 which is as of July 22, 1998 F-2 ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1998 ------------------------------- (UNAUDITED) 1997 1996 ---------------- --------------- --------------- ASSETS Non-interest bearing deposits and cash (note 11) ..................... $ 15,525,442 $ 8,280,694 $ 7,861,625 Federal funds sold ................................................... 1,850,000 4,425,000 6,550,000 ------------ ------------ ------------ Total cash and cash equivalents ................................... 17,375,442 12,705,694 14,411,625 ------------ ------------ ------------ Investment securities (note 2): Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638, respectively) ..................................................... 43,855,081 47,119,973 34,588,505 Loans (note 3) ....................................................... 130,963,770 121,208,810 112,655,981 Allowance for possible loan losses (note 4) .......................... (2,690,474) (2,660,000) (2,400,000) ------------ ------------ ------------ Loans, net ........................................................ 128,273,296 118,548,810 110,255,981 ------------ ------------ ------------ Real estate acquired in settlement of loans, net ..................... -- 340,000 -- Real estate held for sale, net ....................................... -- 150,000 200,000 Federal Home Loan Bank common stock, at cost ......................... 564,800 503,000 -- Bank premises and equipment, net (note 5) ............................ 6,316,325 6,266,283 5,538,229 Accrued interest receivable .......................................... 2,106,461 1,922,814 1,519,320 Other assets (note 6) ................................................ 618,630 671,148 703,934 ------------ ------------ ------------ $199,110,035 $188,227,722 $167,217,594 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (note 9): Demand, noninterest bearing ......................................... 41,488,495 31,897,001 27,211,047 Demand, interest bearing ............................................ 41,426,399 41,256,397 39,052,101 Savings ............................................................. 14,509,606 14,712,835 15,153,369 Time ................................................................ 83,393,054 83,042,628 69,919,045 ------------ ------------ ------------ Total deposits .................................................... 180,817,554 170,908,861 151,335,562 ------------ ------------ ------------ Accrued interest payable ............................................. 771,003 698,997 583,732 Postretirement benefit liability (note 7) ............................ 527,640 515,640 473,640 Other liabilities (note 7) ........................................... 314,413 390,931 575,114 ------------ ------------ ------------ Total liabilities ................................................. 182,430,610 172,514,429 152,968,048 ------------ ------------ ------------ Shareholders' equity (notes 14 and 15): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 1,780,254 shares at June 30, 1998, December 31, 1997 and 1996 ........................................ 6,230,889 6,230,889 6,230,889 Capital surplus ..................................................... 3,200,000 3,200,000 3,200,000 Retained earnings ................................................... 6,877,531 5,975,624 4,717,766 Unrealized gain on available-for-sale securities, net ............... 371,005 306,780 100,891 ------------ ------------ ------------ Total shareholders' equity ........................................ 16,679,425 15,713,293 14,249,546 ============ ============ ============ Commitments and contingencies (note 12) $199,110,035 $188,227,722 $167,217,594 ============ ============ ============
See accompanying notes to supplemental consolidated financial statements. F-3 ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, (UNAUDITED) -------------------------------- 1998 1997 ---------------- --------------- Interest income: Interest and fees on loans .................................. $ 5,819,440 $ 5,336,974 Interest on investment securities: Interest exempt from federal income taxes .................. 361,933 228,337 Taxable interest income .................................... 900,724 845,587 Interest on federal funds sold .............................. 83,027 187,639 ------------ ----------- Total interest income ................................... 7,165,124 6,598,537 ------------ ----------- Interest expense: ............................................ Deposits (note 9): .......................................... Demand accounts ............................................ 313,841 347,918 Savings .................................................... 144,501 151,035 Time ....................................................... 2,206,847 2,130,914 Other ....................................................... 7,637 786 ------------ ----------- Total interest expense .................................. 2,672,826 2,630,653 ------------ ----------- Net interest income ..................................... 4,492,298 3,967,884 Provision for possible loan losses (note 4) .................. 120,000 210,000 ------------ ----------- Net interest income after provision for possible loan losses ............................................ 4,372,298 3,757,884 ------------ ----------- Non-interest income: ......................................... Service charges on deposit accounts ......................... 659,564 675,668 Other service charges and fees .............................. 262,432 225,506 Net gain (loss) on sale of securities ....................... -- -- Net gain on sale of real estate acquired in settlement of loans and real estate held for sale ........................ 6,476 -- Other ....................................................... 13,059 18,095 ------------ ----------- Total non-interest income ............................... 941,531 919,269 ------------ ----------- Non-interest expense: Salaries .................................................... 1,566,250 1,442,548 Retirement and other employee benefits (note 7) ............. 482,093 442,191 Occupancy ................................................... 347,768 294,152 Equipment ................................................... 417,114 338,450 Deposit insurance premiums .................................. 10,158 14,147 Professional fees ........................................... 178,699 66,219 Supplies .................................................... 121,522 106,527 Telephone ................................................... 137,350 96,636 Postage ..................................................... 84,557 74,682 Other ....................................................... 796,411 577,322 ------------ ----------- Total non-interest expense .............................. 4,141,922 3,452,874 ------------ ----------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits ............................................... 1,171,907 1,224,279 Income taxes (note 6) ........................................ 270,000 355,000 ------------ ----------- Income before cumulative effect of a change in accounting for postretirement benefits ................. 901,907 869,279 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) ....................................... -- -- ------------ ----------- Net income .............................................. $ 901,907 $ 869,279 ============ =========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits ................... $ 0.51 $ 0.49 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ....... -- -- ------------ ----------- Net income ................................................. $ 0.51 $ 0.49 ============ =========== YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ---------------- --------------- ------------- Interest income: Interest and fees on loans .................................. $ 10,887,327 $ 9,521,265 $ 8,754,549 Interest on investment securities: Interest exempt from federal income taxes .................. 511,653 472,206 469,306 Taxable interest income .................................... 1,749,612 1,918,789 2,207,869 Interest on federal funds sold .............................. 490,623 301,265 371,806 ------------ ------------ ----------- Total interest income ................................... 13,639,215 12,213,525 11,803,530 ------------ ------------ ----------- Interest expense: ............................................ Deposits (note 9): .......................................... Demand accounts ............................................ 698,635 699,138 804,115 Savings .................................................... 308,012 328,029 407,471 Time ....................................................... 4,357,110 3,804,230 3,995,593 Other ....................................................... 786 9,459 8,746 ------------ ------------ ----------- Total interest expense .................................. 5,364,543 4,840,856 5,215,925 ------------ ------------ ----------- Net interest income ..................................... 8,274,672 7,372,669 6,587,605 Provision for possible loan losses (note 4) .................. 353,513 496,914 515,066 ------------ ------------ ----------- Net interest income after provision for possible loan losses ............................................ 7,921,159 6,875,755 6,072,539 ------------ ------------ ----------- Non-interest income: ......................................... Service charges on deposit accounts ......................... 1,391,136 1,102,866 982,601 Other service charges and fees .............................. 524,638 419,128 516,890 Net gain (loss) on sale of securities ....................... -- 5,662 (4,663) Net gain on sale of real estate acquired in settlement of loans and real estate held for sale ........................ -- 110,960 3,400 Other ....................................................... 30,293 79,448 171,290 ------------ ------------ ----------- Total non-interest income ............................... 1,946,067 1,718,064 1,669,518 ------------ ------------ ----------- Non-interest expense: Salaries .................................................... 2,938,570 2,770,184 2,624,186 Retirement and other employee benefits (note 7) ............. 971,474 939,505 619,020 Occupancy ................................................... 623,134 549,613 478,113 Equipment ................................................... 768,244 563,478 500,123 Deposit insurance premiums .................................. 24,589 1,500 190,055 Professional fees ........................................... 209,038 198,298 271,588 Supplies .................................................... 221,978 183,942 153,933 Telephone ................................................... 216,821 176,034 193,260 Postage ..................................................... 150,311 143,458 133,325 Other ....................................................... 1,419,816 1,259,044 1,004,271 ------------ ------------ ----------- Total non-interest expense .............................. 7,543,975 6,785,056 6,167,874 ------------ ------------ ----------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits ............................................... 2,323,251 1,808,763 1,574,183 Income taxes (note 6) ........................................ 650,000 475,000 384,000 ------------ ------------ ----------- Income before cumulative effect of a change in accounting for postretirement benefits ................. 1,673,251 1,333,763 1,190,183 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) ....................................... -- -- (278,555) ------------ ------------ ----------- Net income .............................................. $ 1,673,251 $ 1,333,763 $ 911,628 ============ ============ =========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits ................... $ 0.94 $ 0.75 $ 0.67 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ....... -- -- (0.16) ------------ ------------ ----------- Net income ................................................. $ 0.94 $ 0.75 $ 0.51 ============ ============ ===========
See accompanying notes to supplemental consolidated financial statements. F-4 ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
COMMON STOCK --------------------------------------- UNREALIZED NUMBER CAPITAL RETAINED GAINS OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL ----------- ------------- ------------- ------------- -------------- -------------- BALANCE AT DECEMBER 31, 1994 ........... 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174 Common stock issued in 1998 three-for-one stock split (note 15).. 1,186,836 296,709 200,000 (496,709) -- -- --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1994, AS RESTATED ............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174 Change in unrealized gains (losses), net of income tax benefit of $498,100............................. -- -- -- -- 966,893 966,893 Net income ........................... -- -- -- 911,628 -- 911,628 Cash dividends ($.20 per share)....... -- -- -- (356,051) -- (356,051) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1995 ........... 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644 Change in unrealized gains (losses), net of income taxes of $67,500....... -- -- -- -- (131,073) (131,073) Net income ........................... -- -- -- 1,333,763 -- 1,333,763 Cash dividends ($.21 per share)....... -- -- -- (379,788) -- (379,788) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1996 ........... 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546 Change in unrealized gains (losses), net of income taxes of $106,000...... -- -- -- -- 205,889 205,889 Net income ........................... -- -- -- 1,673,251 -- 1,673,251 Cash dividends ($.23 per share)....... -- -- -- (415,393) -- (415,393) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1997 ........... 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293 Change in unrealized gains (losses), net of income taxes of $33,100 (Unaudited) ......................... -- -- -- -- 64,225 64,225 Net income (Unaudited) ............... -- -- -- 901,907 -- 901,907 --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT JUNE 30, 1998 (Unaudited) .......................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425 ========= ========== ========== ========== ========== ===========
See accompanying notes to supplemental consolidated financial statements. F-5 ECB BANCORP, INC. AND SUBSIDIARY SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, (UNAUDITED) -------------------------------- 1998 1997 --------------- ---------------- Cash flows from operating activities: Net income ................................................ $ 901,907 $ 869,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................. 327,262 251,587 Amortization of premium on investment securities, net .................................................... 24,040 26,914 Provision for possible loan losses ....................... 120,000 210,000 Provision for loss on real estate held for sale .......... -- -- Deferred income taxes .................................... -- -- Loss (gain) on sale of available-for-sale securities ..... -- -- Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ...... (6,476) -- Loss (gain) on disposal of premises and equipment -- 7,442 Decrease (increase) in accrued interest receivable ....... (183,647) (303,746) Decrease (increase) in other assets ...................... 19,432 (318,594) Increase (decrease) in accrued interest payable .......... 72,006 206,311 Increase in postretirement benefit liability ............. 12,000 21,000 Increase (decrease) in other liabilities ................. (76,518) (340,302) ------------ -------------- Net cash provided by operating activities .............. 1,210,006 629,891 ------------ -------------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ......................... -- -- Proceeds from maturities of investment securities classified as available-for-sale ......................... 7,479,588 10,248,033 Proceeds from maturities of investment securities classified as held-to-maturity ........................... -- -- Purchases of investment securities classified as available-for-sale ....................................... (4,141,425) (12,863,018) Purchases of investment securities classified as held-to-maturity ......................................... -- -- Purchase of Federal Home Loan Bank common stock (61,800) (503,000) Proceeds from disposal of premises and equipment .......... 3,325 23,372 Purchases of premises and equipment ....................... (380,629) (565,147) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ........ 496,476 -- Net loan repayments (originations) ........................ (9,844,486) (9,029,442) ------------ -------------- Net cash used by investing activities .................. (6,448,951) (12,689,202) ------------ -------------- Cash flows from financing activities: Net increase (decrease) in deposits ....................... 9,908,693 18,781,877 Dividends paid ............................................ -- -- ------------ -------------- Net cash provided by financing activities .............. 9,908,693 18,781,877 ------------ -------------- Increase (decrease) in cash and cash equivalents ........... 4,669,748 6,722,566 Cash and cash equivalents at beginning of year ............. 12,705,694 14,411,625 ------------ -------------- Cash and cash equivalents at end of year ................... $ 17,375,442 $ 21,134,191 ============ ============== Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ........................ $ 64,225 $ 21,303 ============ ============== YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ---------------- ---------------- --------------- Cash flows from operating activities: Net income ................................................ $ 1,673,251 $ 1,333,763 $ 911,628 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................. 545,852 445,314 377,844 Amortization of premium on investment securities, net .................................................... 51,838 9,870 2,165 Provision for possible loan losses ....................... 353,513 496,914 515,066 Provision for loss on real estate held for sale .......... 50,000 53,800 23,800 Deferred income taxes .................................... (33,700) (128,500) (187,000) Loss (gain) on sale of available-for-sale securities ..... 25,818 (5,662) 4,663 Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ...... 95 (110,960) (3,400) Loss (gain) on disposal of premises and equipment 7,242 8,384 (122,583) Decrease (increase) in accrued interest receivable ....... (403,494) (74,499) 4,678 Decrease (increase) in other assets ...................... (914) (8,989) 8,158 Increase (decrease) in accrued interest payable .......... 115,265 (72,264) 300,240 Increase in postretirement benefit liability ............. 42,000 28,000 445,640 Increase (decrease) in other liabilities ................. (184,183) 106,518 195,173 -------------- -------------- ------------ Net cash provided by operating activities .............. 2,242,583 2,081,689 2,476,072 -------------- -------------- ------------ Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ......................... 3,015,439 513,924 3,486,953 Proceeds from maturities of investment securities classified as available-for-sale ......................... 13,349,710 21,500,092 14,361,272 Proceeds from maturities of investment securities classified as held-to-maturity ........................... -- -- 1,301,500 Purchases of investment securities classified as available-for-sale ....................................... (28,662,322) (9,033,608) (5,296,508) Purchases of investment securities classified as held-to-maturity ......................................... -- -- (9,006,181) Purchase of Federal Home Loan Bank common stock (503,000) -- -- Proceeds from disposal of premises and equipment .......... 23,665 21,842 217,744 Purchases of premises and equipment ....................... (1,304,813) (592,433) (796,094) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ........ 50,263 406,653 68,316 Net loan repayments (originations) ........................ (9,075,362) (18,146,433) (9,046,448) -------------- -------------- ------------ Net cash used by investing activities .................. (23,106,420) (5,329,963) (4,709,446) -------------- -------------- ------------ Cash flows from financing activities: Net increase (decrease) in deposits ....................... 19,573,299 924,642 9,391,452 Dividends paid ............................................ (415,393) (379,788) (356,051) -------------- -------------- ------------ Net cash provided by financing activities .............. 19,157,906 544,854 9,035,401 -------------- -------------- ------------ Increase (decrease) in cash and cash equivalents ........... (1,705,931) (2,703,420) 6,802,027 Cash and cash equivalents at beginning of year ............. 14,411,625 17,115,045 10,313,018 -------------- -------------- ------------ Cash and cash equivalents at end of year ................... $ 12,705,694 $ 14,411,625 $ 17,115,045 ============== ============== ============ Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ........................ $ 205,889 $ (131,073) $ 966,893 ============== ============== ============
See accompanying notes to supplemental consolidated financial statements. F-6 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (A) CONSOLIDATION The supplemental consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") (see note 15) and its wholly-owned subsidiary, The East Carolina Bank (the "Bank") (collectively referred to hereafter as the "Company"). The Bank has two wholly-owned subsidiaries, Carolina Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. All adjustments considered necessary for a fair presentation of the results for interim periods presented have been made (such adjustments are normal and recurring in nature). Operating results for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (B) BASIS OF FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. (C) BUSINESS Bancorp is a bank holding company incorporated in North Carolina. The principal activity of Bancorp is ownership of the Bank. The Bank provides financial services through its branch network located in eastern North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. (D) CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (E) INVESTMENT SECURITIES Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation at each reporting date. Securities are classified as held-to-maturity ("HTM") when the Company has both the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as available-for-sale ("AFS"). AFS securities are stated at fair value as determined by reference to published sources, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders' equity. The Company has no trading securities. The amortized cost of securities classified as HTM or AFS is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. (F) LOANS RECEIVABLE Loans are generally stated at their outstanding unpaid principal balances net of any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method. F-7 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management's judgement, the collection of interest income appears doubtful or the loan is past due 90 days or more. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. (G) ALLOWANCE FOR LOAN LOSSES The allowance for loan losses ("AFLL") is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management's estimate of the amount necessary to absorb potential future losses existing in the loan portfolio. Management believes that the AFLL is adequate. Management's periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company's market areas, the fair value and adequacy of underlying collateral, and the growth and risk composition of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Thus, future additions to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's AFLL. Such agencies may require the Company to recognize additions to the AFLL based on their judgments about information available to them at the time of their examination. Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" (collectively referred to hereafter as "SFAS No. 114"), the AFLL related to loans that are identified for evaluation in accordance with the standard is based on discounted cash flows using the loan's initial effective interest rate, the loan's observable market price, or the fair value of the collateral for collateral dependent loans. (H) REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with SFAS No. 114, a loan is classified as in-substance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate acquired in settlement of loans is recorded initially at the lower of the loan balance plus unpaid accrued interest or estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings, if the estimated fair value of the property declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Loans with outstanding principal balances totalling $390,358, $-0- and $89,600 were foreclosed on during the years ended December 31, 1997, 1996 and 1995, respectively. (I) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK In 1997, the Company became a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement, provides the Company with the ability to draw $13 million of advances from the FHLB. No advances were drawn by the Company in 1997. As a requirement for membership, the Company invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Company. At December 31, 1997, the Company owned 5,030 shares of the FHLB's $100 par value capital stock. No ready market exists for such stock, which is carried at cost. F-8 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) (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) INCOME TAXES The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled. (L) EMPLOYEE BENEFIT PLANS The Company has in place a postretirement benefit plan covering certain retirees and a defined contribution 401(k) plan that covers all eligible employees. The Company had a noncontributory defined benefit retirement plan that covered substantially all employees which was terminated in 1995 with final pay-out of accrued benefits occurring in 1996 (see note 7). (M) NET INCOME/DIVIDENDS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which requires net income per share to be calculated on both a basic and diluted basis. Net income per share is computed based on the weighted averatge number of common shares outstanding during the year and represents basic and diluted net income per share for 1997, 1996 and 1995. Because the Company has no potentially dilutive securities, restatement of 1996 and 1995 net income per share amounts was not necessary. Dividends per share are based on the shares outstanding at the time of dividend declaration. All shares and per share amounts have been restated to give effect to the three-for-one stock split on July 22, 1998 (see note 15). (N) RECLASSIFICATIONS Certain 1995 and 1996 amounts have been reclassified in the financial statements to conform with the 1997 presentation. The reclassifications had no effect on previously reported net income or retained earnings. (2) INVESTMENT SECURITIES The following is a summary of the securities portfolios by major classification:
DECEMBER 31, 1997 ------------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ -------------- Securities available-for-sale: U.S. Treasury obligations .................................... $25,072,694 $156,543 $ (1,087) $25,228,150 Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667 Obligations of states and political subdivisions ............. 13,761,077 300,592 (4,513) 14,057,156 ----------- -------- -------- ----------- Total ...................................................... $46,655,155 $472,845 $ (8,027) $47,119,973 =========== ======== ======== ===========
F-9 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) INVESTMENT SECURITIES -- (Continued)
DECEMBER 31, 1996 ------------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ -------------- Securities available-for-sale: U.S. Treasury obligations .................................... $15,983,515 $ 23,180 $ (12,086) $15,994,609 Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757 Obligations of states and political subdivisions ............. 9,094,282 205,266 (45,409) 9,254,139 ----------- -------- --------- ----------- Total ...................................................... $34,435,638 $231,876 $ (79,009) $34,588,505 =========== ======== ========= ===========
Gross realized gains and losses on sales of securities for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ------------ --------- ----------- Gross realized gains .................. $ -- $5,662 $ 1,500 Gross realized losses ................. (25,818) -- (6,163) --------- ------ -------- Net realized gains (losses) .......... $ (25,818) $5,662 $ (4,663) ========= ====== ========
The aggregate amortized cost and approximate market value of the available-for-sale securities portfolio at December 31, 1997, by remaining contractual maturity are as follows:
APPROXIMATE AMORTIZED MARKET COST VALUE -------------- -------------- U.S. Treasury obligations: Due in one year or less ..................................... $ 5,995,765 $ 5,997,500 Due in one year through five years .......................... 19,076,929 19,230,650 Securities of other U.S. government agencies and corporations: Due in one year or less ..................................... 3,296,330 3,295,163 Due in one year through five years .......................... 3,745,042 3,756,291 Due after ten years ......................................... 780,012 783,213 Obligations of states and political subdivisions: Due in one year or less ..................................... 190,035 190,353 Due in one year through five years .......................... 5,489,847 5,611,142 Due after five through ten years ............................ 3,659,958 3,780,614 Due after ten years ......................................... 4,421,237 4,475,047 ----------- ----------- Total securities .......................................... $46,655,155 $47,119,973 =========== ===========
Securities with a principal amount of approximately $18,272,000 at December 31, 1997 are pledged as collateral for deposits. F-10 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LOANS Loans at December 31, 1997 and 1996 classified by type, are as follows:
1997 1996 -------------- -------------- Commercial, financial and agricultural .......... $ 26,074,410 $ 22,906,424 Real estate loans: Construction ................................... 1,490,215 972,127 Mortgage, commercial and residential ........... 64,943,072 67,278,983 Installment ..................................... 28,845,615 21,670,249 ------------ ------------ 121,353,312 112,827,783 ============ ============ Less deferred fees and costs, net .............. 144,502 171,802 ------------ ------------ $121,208,810 $112,655,981 ============ ============ Included in the above: Nonaccrual loans ............................... $ 1,462,831 $ 1,017,453 ============ ============ Restructured loans ............................. $ 522,352 $ 350,024 ============ ============
At December 31, 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis). Included in this amount is $112,000 of impaired loans for which the related AFLL is $112,000 and $685,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1997 was approximately $810,000. For the year ended December 31, 1997, the Company recognized interest income on those impaired loans of $26,000, all of which was recognized using the cash basis method of income recognition. At December 31, 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis). Included in this amount is $53,000 of impaired loans for which the related AFLL is $53,000 and $866,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $1,016,000. For the year ended December 31, 1996, the Company recognized interest income on those impaired loans of $18,000, all of which was recognized using the cash basis method of income recognition. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 had they performed in accordance with the original terms throughout each of the periods amounted to approximately $161,000, $119,000 and $62,000, respectively. Actual interest income recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 was $25,000, $23,000 and $41,000, respectively. Interest income on restructured loans included in the results of operations for each of the years amounted to approximately $53,000, $41,000 and $119,000, respectively. Loans at December 31, 1997 and 1996 include loans to officers and directors and their associates totaling approximately $1,103,000 and $1,801,000, respectively. During 1997, $787,000 in loans were disbursed to officers, directors and their associates and principal repayments of $1,485,000 were received on such loans. The Company, through its normal lending activity, originates and maintains loans receivable which are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company's policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Bank and such changes could be significant. At December 31, 1997, $66,433,287, or 54.81%, of the Company's loan portfolio was composed of loans principally collateralized by liens on real estate. Of that amount, approximately $23,963,000, or 19.77%, represents loans collateralized by owner-occupied residential real estate. F-11 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ------------- ------------- ------------- Beginning balance ........................... $2,400,000 $1,950,000 $1,900,000 Provision for possible loan losses .......... 353,513 496,914 515,066 Recoveries .................................. 100,838 218,843 83,433 Loans charged off ........................... (194,351) (265,757) (548,499) ---------- ---------- ---------- Ending balance .............................. $2,660,000 $2,400,000 $1,950,000 ========== ========== ==========
(5) PREMISES AND EQUIPMENT An analysis of premises and equipment at December 31, 1997 and 1996 follows:
ACCUMULATED UNDEPRECIATED COST DEPRECIATION COST -------------- -------------- -------------- December 31, 1997: Land ............................ $ 1,177,138 $ -- $1,177,138 Land improvements ............... 243,541 161,959 81,582 Buildings ....................... 5,270,762 1,535,891 3,734,871 Furniture and equipment ......... 4,201,127 2,928,435 1,272,692 ----------- ---------- ---------- Total ......................... $10,892,568 $4,626,285 $6,266,283 =========== ========== ========== December 31, 1996: Land ............................ $ 1,177,138 $ -- $1,177,138 Land improvements ............... 220,103 198,869 21,234 Buildings ....................... 4,936,591 1,322,548 3,614,043 Furniture and equipment ......... 3,530,902 2,805,088 725,814 ----------- ---------- ---------- Total ......................... $ 9,864,734 $4,326,505 $5,538,229 =========== ========== ==========
(6) INCOME TAXES The components of income tax expense (benefit) are as follows:
CURRENT DEFERRED TOTAL ----------- ------------- ----------- Year ended December 31, 1997: Federal .................... $660,700 $ (33,700) $627,000 State ...................... 23,000 -- 23,000 -------- ---------- -------- $683,700 $ (33,700) $650,000 ======== ========== ======== Year ended December 31, 1996: Federal .................... $599,500 $ (128,500) $471,000 State ...................... 4,000 -- 4,000 -------- ---------- -------- $603,500 $ (128,500) $475,000 ======== ========== ======== Year ended December 31, 1995: Federal .................... $420,000 $ (43,000) $377,000 State ...................... 7,000 -- 7,000 -------- ---------- -------- $427,000 $ (43,000) $384,000 ======== ========== ========
F-12 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES -- (Continued) Total income tax expense was less than the amount computed by applying the federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Income taxes at statutory rate .................. $ 790,000 $ 615,000 $ 535,000 Increase (decrease) resulting from: Effect of non-taxable interest income ......... (187,000) (179,000) (163,000) Other, net .................................... 47,000 39,000 12,000 ---------- ---------- ---------- Applicable income taxes ......................... $ 650,000 $ 475,000 $ 384,000 ========== ========== ==========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ----------- ----------- Deferred tax assets: Allowance for possible loan losses ......... $680,000 $591,600 Writedown of other real estate ............. 78,000 60,400 Postretirement benefits .................... 175,300 161,000 Other ...................................... 3,200 43,400 -------- -------- Total gross deferred tax assets ........... $936,500 $856,400 ======== ========
1997 1996 ----------- ----------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation $245,400 $196,500 Unrealized holding gains on securities available for sale .................. 158,000 52,000 Other ...................................................................... 22,000 24,500 -------- -------- Total gross deferred tax liabilities ...................................... 425,400 273,000 -------- -------- Net deferred tax asset .................................................... $511,100 $583,400 ======== ========
The Company has no valuation allowance at December 31, 1997 or 1996, because management has determined that it has sufficient taxable income in the carryback period to support the realizability of the net deferred tax asset. Income taxes paid during each of the three years ended December 31, 1997, 1996 and 1995 were $749,400, $534,100 and $382,300, respectively. (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS Net periodic pension cost for 1996 and 1995 for the Company's defined benefit pension plan consists of the following components:
1996 1995 ------------ ------------ Service cost-benefits earned during the period .......... $ -- $ -- Interest cost on projected benefit obligation ........... 69,647 102,175 Actual return on plan assets ............................ (19,084) (90,250) Net amortization and deferral ........................... 629 63,075 Effect of change in PBGC rate ........................... 53,808 -- --------- --------- Net periodic pension expense .......................... $ 105,000 $ 75,000 ========= =========
F-13 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (Continued) In 1994, the Plan benefits were frozen in anticipation of a complete plan termination. The Company approved termination of the Plan in 1995. The Plan termination was approved by the Internal Revenue Service in 1996 and all Plan benefits were paid to participants. On June 1, 1994, the Company implemented a defined contribution 401(k) plan that covers all eligible employees. The Company matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $117,355, $100,588 and $100,993 in 1997, 1996 and 1995, respectively. The Company also has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. The Company adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1995. The cumulative effect of this change in accounting for the Company's liability for postretirement benefits of $422,555 was determined as of January 1, 1995, and is reported separately in the 1995 statement of income, net of a deferred income tax benefit of $144,000. Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components:
1997 1996 1995 --------- --------- --------- Service cost ...................................... $ 6,478 $ 4,832 $ 4,516 Interest cost ..................................... 35,522 31,966 29,578 ------- ------- ------- Net periodic postretirement benefit cost .......... $42,000 $36,798 $34,094 ======= ======= =======
The following table presents the plan's funded status at December 31, 1997 and 1996:
1997 1996 -------------- -------------- Accumulated postretirement benefit obligation ("APBO"): Retirees .................................................. $ (304,323) $ (235,252) Other fully eligible active employees ..................... -- (70,362) Other active participants ................................. (145,172) (158,910) ---------- ---------- Total accumulated benefit obligation .................... (449,495) (464,524) Unrecognized gain on changes in acturarial assumptions ..... (66,145) (9,116) ---------- ---------- Plan assets at fair value .................................. -- -- ---------- ---------- Accrued postretirement benefit cost ........................ $ (515,640) $ (473,640) ========== ========== Weighted average discount rate in determining APBO ......... 7.0% 7.0% Annual health care cost trend rate ......................... 9.0 9.0 Ultimate medical trend rate ................................ 8.0 8.0 Medical trend rate period (in years) ....................... 5 5 Effect of 1% increase in assumed health care cost on: Service and interest cost ................................. 16.4% 17.3% APBO ...................................................... 15.0 15.7
(8) RELATED PARTY TRANSACTIONS The Company has banking transactions in the ordinary course of business with several of its directors and officers, and their associates. Such transactions are on the same terms as those prevailing at the time for comparable transactions with others. In the opinion of management, loans made to directors, officers and their associates do not involve more than the normal risk of collectibility or present any other unfavorable features (see note 3). (9) DEPOSITS At December 31, 1997 and 1996, certificates of deposit of $100,000 or more amounted to approximately $19,503,067 and $17,835,000, respectively. F-14 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) DEPOSITS -- (Continued) For the years ended December 31, 1997, 1996 and 1995, interest expense on certificates of deposit of $100,000 or more amounted to approximately $1,057,000, $1,038,000 and $1,236,000, respectively. The Company made interest payments of $5,249,278, $4,903,660 and $4,906,909 during the years ended December 31, 1997, 1996 and 1995, respectively. Time deposit accounts as of December 31, 1997, mature in the following years and amounts: 1998 -- $77,864,727; 1999 -- $4,094,535; and 2000 -- $1,083,366. (10) LEASES The Company also has several noncancellable operating leases for three branch locations. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 1997 and 1996 was $69,758 and $25,000, respectively. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1997 are as follows: Year ending December 31, 1998 ................................... $ 65,797 1999 ................................... 65,797 2000 ................................... 61,147 2001 ................................... 35,887 2002 ................................... 9,879 Thereafter ............................. -- -------- Total minimum lease payments ......... $238,507 ========
(11) RESERVE REQUIREMENTS The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest bearing, were approximately $2,032,000 at December 31, 1997. (12) COMMITMENTS AND CONTINGENCIES The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of $16,316,000 and standby letters of credit of $223,000, at December 31, 1997. The Company's exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer's creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments and anticipates their funding from normal operations. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future F-15 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued) expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following table presents the carrying values and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996 ----------------------------- ----------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------------- -------------- -------------- -------------- Financial assets: Non-interest bearing deposits and cash $ 8,185,000 $ 8,185,000 $ 7,862,000 $ 7,862,000 Federal funds sold .................... 4,425,000 4,425,000 6,550,000 6,550,000 Investment securities ................. 47,120,000 47,120,000 34,589,000 34,589,000 FHLB common stock ..................... 503,000 503,000 -- -- Net loans ............................. 118,549,000 119,094,000 110,256,000 109,408,000 Financial liabilities: Deposits .............................. 170,909,000 171,137,000 151,336,000 151,426,000
The estimated fair values of net loans and deposits at December 31 are based on cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. (14) REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank, as a North Carolina chartered bank, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the Bank. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirments to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. F-16 ECB BANCORP, INC. AND SUBSIDIARY NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) REGULATORY MATTERS -- (Continued) The Bank's actual capital amounts, in thousands, and ratios are presented in the following table:
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------ ------------------- ------------------ AMOUNT RATIO RATIO RATIO ---------- ----------- ------------------- ------------------ As of December 31, 1997: Total Capital (to Risk Weighted Assets) ......... $16,973 13.66% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $15,406 12.40% =>4.0% =>6.00% Tier I Capital (to Average Assets) ............... $15,406 8.53% =>4.0% =>5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) ......... $15,577 13.75% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $14,149 12.49% =>4.0% =>6.0% Tier I Capital (to Average Assets) ............... $14,149 8.53% =>4.0% =>5.00%
In May 1995, the Bank Insurance Fund ("BIF") of the FDIC reached its designated ratio of reserves to insured deposits (i.e., 1.25%). For this reason, the FDIC reduced the assessment rate applicable to BIF deposits in two stages, so that, beginning in 1996, the deposit insurance premiums for 92% of all BIF members in the highest capital and supervisory categories were set at $1,500 per year, regardless of deposit size. Beginning in 1997, BIF members were required to begin paying FICO-bond assessments in addition to the $1,500 annual assessment. The FICO bond assessment was $23,089 for the Company in 1997. (15) SUBSEQUENT EVENTS On July 22, 1998, and pursuant to a charter amendment, the Bank effected a three-for-one stock split of the Bank's common stock increasing the number of shares of common stock from 593,418 to 1,780,254. Additionally, by way of the same charter amendment, the Bank increased the post-split par value of the common stock from $3.33 per share to $3.50 per share. In connection with the stock split and increase in par value, the Bank increased the capital surplus account in accordance with North Carolina General Statutes Section 53-88. All references to the number of common shares and per share amounts in the financial statements have been restated as appropriate to reflect the effect of the split, for all periods presented. Additionally, common stock, capital surplus, and retained earnings have been restated for all periods presented as appropriate to reflect the stock split, the increase in par value, and the increase in the capital surplus account. On July 22, 1998, the Bank was acquired by Bancorp which was newly-formed on March 4, 1998, for purposes of such transaction. Each outstanding share of the Bank's common stock was exchanged for one share of Bancorp's common stock with the Bank becoming a wholly-owned subsidiary of Bancorp. Bancorp's primary purpose is to serve as the parent of the Bank. This transaction was accounted for in a manner similar to a pooling-of-interests whereby the historical book values of the Bank's accounts were combined with Bancorp's accounts on the date of the merger. F-17 INDEPENDENT AUDITORS' REPORT The Board of Directors The East Carolina Bank: We have audited the accompanying consolidated balance sheets of The East Carolina Bank and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The East Carolina Bank and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in note 7 to the consolidated financial statements, on January 1, 1995, the Bank adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENIFITS OTHER THAN PENSIONS. /s/ KPMG PEAT MARWICK LLP Raleigh, North Carolina February 4, 1998, except note 15 which is as of July 22, 1998 F-18 THE EAST CAROLINA BANK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1998 ----------------------------- (UNAUDITED) 1997 1996 ---------------- -------------- -------------- ASSETS Non-interest bearing deposits and cash (note 11) .......................... $ 15,525,442 8,280,694 7,861,625 Federal funds sold ........................................................ 1,850,000 4,425,000 6,550,000 ------------ --------- --------- Total cash and cash equivalents ........................................ 17,375,442 12,705,694 14,411,625 ------------ ---------- ---------- Investment securities (note 2): Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638, respectively) .......................................................... 43,855,081 47,119,973 34,588,505 Loans (note 3) ............................................................ 130,963,770 121,208,810 112,655,981 Allowance for possible loan losses (note 4) ............................... (2,690,474) (2,660,000) (2,400,000) ------------ ----------- ----------- Loans, net ............................................................. 128,273,296 118,548,810 110,255,981 ------------ ----------- ----------- Real estate acquired in settlement of loans, net .......................... -- 340,000 -- Real estate held for sale, net ............................................ -- 150,000 200,000 Federal Home Loan Bank common stock, at cost .............................. 564,800 503,000 -- Bank premises and equipment, net (note 5) ................................. 6,316,325 6,266,283 5,538,229 Accrued interest receivable ............................................... 2,106,461 1,922,814 1,519,320 Other assets (note 6) ..................................................... 618,630 671,148 703,934 $199,110,035 188,227,722 167,217,594 ============ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (note 9): Demand, noninterest bearing .............................................. 41,488,495 31,897,001 27,211,047 Demand, interest bearing ................................................. 41,426,399 41,256,397 39,052,101 Savings .................................................................. 14,509,606 14,712,835 15,153,369 Time ..................................................................... 83,393,054 83,042,628 69,919,045 ------------ ----------- ----------- Total deposits ......................................................... 180,817,554 170,908,861 151,335,562 ------------ ----------- ----------- Accrued interest payable .................................................. 771,003 698,997 583,732 Postretirement benefit liability (note 7) ................................. 527,640 515,640 473,640 Other liabilities (note 7) ................................................ 314,413 390,931 575,114 ------------ ----------- ----------- Total liabilities ...................................................... 182,430,610 172,514,429 152,968,048 ------------ ----------- ----------- Shareholders' equity (notes 14 and 15): Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 1,780,254 shares at June 30, 1998, December 31, 1997 and 1996 ............................................. 6,230,889 6,230,889 6,230,889 Capital surplus .......................................................... 3,200,000 3,200,000 3,200,000 Retained earnings ........................................................ 6,877,531 5,975,624 4,717,766 Unrealized gain on available-for-sale securities, net .................... 371,005 306,780 100,891 ------------ ----------- ----------- Total shareholders' equity ............................................. 16,679,425 15,713,293 14,249,546 ============ =========== =========== Commitments and contingencies (note 12) $199,110,035 188,227,722 167,217,594 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-19 THE EAST CAROLINA BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, (UNAUDITED) ------------------------------ 1998 1997 --------------- -------------- Interest income: Interest and fees on loans ........................................ $ 5,819,440 5,336,974 Interest on investment securities: Interest exempt from federal income taxes ........................ 361,933 228,337 Taxable interest income .......................................... 900,724 845,587 Interest on federal funds sold .................................... 83,027 187,639 Total interest income .......................................... 7,165,124 6,598,537 Interest expense: Deposits (note 9): Demand accounts .................................................. 313,841 347,918 Savings .......................................................... 144,501 151,035 Time ............................................................. 2,206,847 2,130,914 Other ............................................................. 7,637 786 ----------- --------- Total interest expense ......................................... 2,672,826 2,630,653 Net interest income ............................................ 4,492,298 3,967,884 Provision for possible loan losses (note 4) ........................ 120,000 210,000 ----------- --------- Net interest income after provision for possible loan losses ................................................... 4,372,298 3,757,884 ----------- --------- Non-interest income: Service charges on deposit accounts ............................... 659,564 675,668 Other service charges and fees .................................... 262,432 225,506 Net gain (loss) on sale of securities ............................. -- -- Net gain on sale of real estate acquired in settlement of loans and real estate held for sale .................................... 6,476 -- Other ............................................................. 13,059 18,095 ----------- --------- Total non-interest income ...................................... 941,531 919,269 ----------- --------- Non-interest expense: Salaries .......................................................... 1,566,250 1,442,548 Retirement and other employee benefits (note 7) ................... 482,093 442,191 Occupancy ......................................................... 347,768 294,152 Equipment ......................................................... 417,114 338,450 Deposit insurance premiums ........................................ 10,158 14,147 Professional fees ................................................. 178,699 66,219 Supplies .......................................................... 121,522 106,527 Telephone ......................................................... 137,350 96,636 Postage ........................................................... 84,557 74,682 Other ............................................................. 796,411 577,322 Total non-interest expense ..................................... 4,141,922 3,452,874 ----------- --------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits .............. 1,171,907 1,224,279 Income taxes (note 6) .............................................. 270,000 355,000 ----------- --------- Income before cumulative effect of a change in accounting for postretirement benefits ................................... 901,907 869,279 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) .......................................................... -- -- ----------- --------- Net income ..................................................... $ 901,907 869,279 =========== ========= Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits .......................................... $ 0.51 0.49 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ................. -- -- ----------- ---------- Net income ........................................................ $ 0.51 0.49 =========== ========== YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1996 1995 --------------- --------------- -------------- Interest income: Interest and fees on loans ........................................ 10,887,327 9,521,265 8,754,549 Interest on investment securities: Interest exempt from federal income taxes ........................ 511,653 472,206 469,306 Taxable interest income .......................................... 1,749,612 1,918,789 2,207,869 Interest on federal funds sold .................................... 490,623 301,265 371,806 Total interest income .......................................... 13,639,215 12,213,525 11,803,530 Interest expense: Deposits (note 9): Demand accounts .................................................. 698,635 699,138 804,115 Savings .......................................................... 308,012 328,029 407,471 Time ............................................................. 4,357,110 3,804,230 3,995,593 Other ............................................................. 786 9,459 8,746 ---------- ---------- ---------- Total interest expense ......................................... 5,364,543 4,840,856 5,215,925 Net interest income ............................................ 8,274,672 7,372,669 6,587,605 Provision for possible loan losses (note 4) ........................ 353,513 496,914 515,066 ---------- ---------- ---------- Net interest income after provision for possible loan losses ................................................... 7,921,159 6,875,755 6,072,539 ---------- ---------- ---------- Non-interest income: Service charges on deposit accounts ............................... 1,391,136 1,102,866 982,601 Other service charges and fees .................................... 524,638 419,128 516,890 Net gain (loss) on sale of securities ............................. -- 5,662 (4,663) Net gain on sale of real estate acquired in settlement of loans and real estate held for sale .................................... -- 110,960 3,400 Other ............................................................. 30,293 79,448 171,290 ---------- ---------- ---------- Total non-interest income ...................................... 1,946,067 1,718,064 1,669,518 ---------- ---------- ---------- Non-interest expense: Salaries .......................................................... 2,938,570 2,770,184 2,624,186 Retirement and other employee benefits (note 7) ................... 971,474 939,505 619,020 Occupancy ......................................................... 623,134 549,613 478,113 Equipment ......................................................... 768,244 563,478 500,123 Deposit insurance premiums ........................................ 24,589 1,500 190,055 Professional fees ................................................. 209,038 198,298 271,588 Supplies .......................................................... 221,978 183,942 153,933 Telephone ......................................................... 216,821 176,034 193,260 Postage ........................................................... 150,311 143,458 133,325 Other ............................................................. 1,419,816 1,259,044 1,004,271 Total non-interest expense ..................................... 7,543,975 6,785,056 6,167,874 ---------- ---------- ---------- Income before income taxes and cumulative effect of a change in accounting for postretirement benefits .............. 2,323,251 1,808,763 1,574,183 Income taxes (note 6) .............................................. 650,000 475,000 384,000 ---------- ---------- ---------- Income before cumulative effect of a change in accounting for postretirement benefits ................................... 1,673,251 1,333,763 1,190,183 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits, net of income taxes (note 7) .......................................................... -- -- (278,555) ---------- ---------- ---------- Net income ..................................................... 1,673,251 1,333,763 911,628 ========== ========== ========== Net income per share (basic and diluted): Income before cumulative effect of a change in accounting for postretirement benefits .......................................... 0.94 0.75 0.67 Cumulative effect for years prior to January 1, 1995 of a change in accounting for postretirement benefits ................. -- -- (0.16) ----------- ----------- ----------- Net income ........................................................ 0.94 0.75 0.51 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-20 THE EAST CAROLINA BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
COMMON STOCK --------------------------------------- UNREALIZED NUMBER CAPITAL RETAINED GAINS OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL ----------- ------------- ------------- ------------- -------------- -------------- BALANCE AT DECEMBER 31, 1994 ............ 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174 Common stock issued in 1998 three-for-one stock split (note 15) .. 1,186,836 296,709 200,000 (496,709) -- -- --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1994, AS RESTATED .............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174 Change in unrealized gains (losses), net of income tax benefit of $498,100 ............................. -- -- -- -- 966,893 966,893 Net income ............................ -- -- -- 911,628 -- 911,628 Cash dividends ($.20 per share) ....... -- -- -- (356,051) -- (356,051) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1995 ............ 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644 Change in unrealized gains (losses), net of income taxes of $67,500 ....... -- -- -- -- (131,073) (131,073) Net income ............................ -- -- -- 1,333,763 -- 1,333,763 Cash dividends ($.21 per share) ....... -- -- -- (379,788) -- (379,788) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1996 ............ 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546 Change in unrealized gains (losses), net of income taxes of $106,000 ...... -- -- -- -- 205,889 205,889 Net income ............................ -- -- -- 1,673,251 -- 1,673,251 Cash dividends ($.23 per share) ....... -- -- -- (415,393) -- (415,393) --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT DECEMBER 31, 1997 ............ 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293 Change in unrealized gains (losses), net of income taxes of $33,100 (Unaudited) .......................... -- -- -- -- 64,225 64,225 Net income (Unaudited) ................ -- -- -- 901,907 -- 901,907 --------- ---------- ---------- ---------- ---------- ----------- BALANCE AT JUNE 30, 1998 (Unaudited) ........................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425 ========= ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements. F-21 THE EAST CAROLINA BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, (UNAUDITED) -------------------------------- 1998 1997 --------------- ---------------- Cash flows from operating activities: Net income .................................................... $ 901,907 869,279 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................. 327,262 251,587 Amortization of premium on investment securities, net ........ 24,040 26,914 Provision for possible loan losses ........................... 120,000 210,000 Provision for loss on real estate held for sale .............. -- -- Deferred income taxes ........................................ -- -- Loss (gain) on sale of available-for- sale securities ........ -- -- Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ..................... (6,476) -- Loss (gain) on disposal of premises and equipment ............ -- 7,442 Decrease (increase) in accrued interest receivable ........... (183,647) (303,746) Decrease (increase) in other assets .......................... 19,432 (318,594) Increase (decrease) in accrued interest payable .............. 72,006 206,311 Increase in postretirement benefit liability ................. 12,000 21,000 Increase (decrease) in other liabilities ..................... (76,518) (340,302) ------------ -------- Net cash provided by operating activities .................. 1,210,006 629,891 ------------ -------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ........................................... -- -- Proceeds from maturities of investment securities classified as available-for-sale ........................................ 7,479,588 10,248,033 Proceeds from maturities of investment securities classified as held-to-maturity .......................................... -- -- Purchases of investment securities classified as available-for-sale ........................................... (4,141,425) (12,863,018) Purchases of investment securities classified as held-to-maturity ............................................. -- -- Purchase of Federal Home Loan Bank common stock ............... (61,800) (503,000) Proceeds from disposal of premises and equipment .............. 3,325 23,372 Purchases of premises and equipment ........................... (380,629) (565,147) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ............ 496,476 -- Net loan repayments (originations) ............................ (9,844,486) (9,029,442) ------------ ----------- Net cash used by investing activities ...................... (6,448,951) (12,689,202) ------------ ----------- Cash flows from financing activities: Net increase (decrease) in deposits ........................... 9,908,693 18,781,877 Dividends paid ................................................ -- -- ------------ ----------- Net cash provided by financing activities .................. 9,908,693 18,781,877 ------------ ----------- Increase (decrease) in cash and cash equivalents .............. 4,669,748 6,722,566 Cash and cash equivalents at beginning of year ................ 12,705,694 14,411,625 ------------ ----------- Cash and cash equivalents at end of year ...................... $ 17,375,442 21,134,191 ------------ ----------- Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ...................................... $ 64,225 21,303 ============ =========== YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ---------------- ---------------- --------------- Cash flows from operating activities: Net income .................................................... 1,673,251 1,333,763 911,628 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................. 545,852 445,314 377,844 Amortization of premium on investment securities, net ........ 51,838 9,870 2,165 Provision for possible loan losses ........................... 353,513 496,914 515,066 Provision for loss on real estate held for sale .............. 50,000 53,800 23,800 Deferred income taxes ........................................ (33,700) (128,500) (187,000) Loss (gain) on sale of available-for- sale securities ........ 25,818 (5,662) 4,663 Loss (gain) on sale of real estate acquired in settlement of loans and real estate held for sale ..................... 95 (110,960) (3,400) Loss (gain) on disposal of premises and equipment ............ 7,242 8,384 (122,583) Decrease (increase) in accrued interest receivable ........... (403,494) (74,499) 4,678 Decrease (increase) in other assets .......................... (914) (8,989) 8,158 Increase (decrease) in accrued interest payable .............. 115,265 (72,264) 300,240 Increase in postretirement benefit liability ................. 42,000 28,000 445,640 Increase (decrease) in other liabilities ..................... (184,183) 106,518 195,173 --------- --------- -------- Net cash provided by operating activities .................. 2,242,583 2,081,689 2,476,072 --------- --------- --------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale ........................................... 3,015,439 513,924 3,486,953 Proceeds from maturities of investment securities classified as available-for-sale ........................................ 13,349,710 21,500,092 14,361,272 Proceeds from maturities of investment securities classified as held-to-maturity .......................................... -- -- 1,301,500 Purchases of investment securities classified as available-for-sale ........................................... (28,662,322) (9,033,608) (5,296,508) Purchases of investment securities classified as held-to-maturity ............................................. -- -- (9,006,181) Purchase of Federal Home Loan Bank common stock ............... (503,000) -- -- Proceeds from disposal of premises and equipment .............. 23,665 21,842 217,744 Purchases of premises and equipment ........................... (1,304,813) (592,433) (796,094) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale ............ 50,263 406,653 68,316 Net loan repayments (originations) ............................ (9,075,362) (18,146,433) (9,046,448) ----------- ----------- ---------- Net cash used by investing activities ...................... (23,106,420) (5,329,963) (4,709,446) ----------- ----------- ---------- Cash flows from financing activities: Net increase (decrease) in deposits ........................... 19,573,299 924,642 9,391,452 Dividends paid ................................................ (415,393) (379,788) (356,051) ----------- ----------- ---------- Net cash provided by financing activities .................. 19,157,906 544,854 9,035,401 ----------- ----------- ---------- Increase (decrease) in cash and cash equivalents .............. (1,705,931) (2,703,420) 6,802,027 Cash and cash equivalents at beginning of year ................ 14,411,625 17,115,045 10,313,018 ----------- ----------- ---------- Cash and cash equivalents at end of year ...................... 12,705,694 14,411,625 17,115,045 ----------- ----------- ---------- Supplemental disclosure of noncash financing and investing activities: Unrealized gains (losses) on available-for-sale securities, net of deferred taxes ...................................... 205,889 (131,073) 966,893 =========== =========== ==========
See accompanying notes to consolidated financial statements. F-22 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (A) CONSOLIDATION The consolidated financial statements include the accounts of The East Carolina Bank (the "Bank") and its wholly-owned subsidiaries, Carolina Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. All adjustments considered necessary for a fair presentation of the results for interim periods presented have been made (such adjustments are normal and recurring in nature). Operating results for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (B) BASIS OF FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. (C) BUSINESS The Bank provides financial services through its branch network located in eastern North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. (D) CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (E) INVESTMENT SECURITIES Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation at each reporting date. Securities are classified as held-to-maturity ("HTM") when the Bank has both the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities not classified as HTM are classified as available-for-sale ("AFS"). AFS securities are stated at fair value as determined by reference to published sources, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders' equity. The Bank has no trading securities. The amortized cost of securities classified as HTM or AFS is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. (F) LOANS RECEIVABLE Loans are generally stated at their outstanding unpaid principal balances net of any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method. Interest on loans is recorded based on the principal amount outstanding. The Bank ceases accruing interest on loans (including impaired loans) when, in management's judgement, the collection of interest income appears doubtful or the loan is past due 90 days or more. Management may return a loan classified as nonaccrual to accrual status when the obligation F-23 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. (G) ALLOWANCE FOR LOAN LOSSES The allowance for loan losses ("AFLL") is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management's estimate of the amount necessary to absorb potential future losses existing in the loan portfolio. Management believes that the AFLL is adequate. Management's periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Bank's market areas, the fair value and adequacy of underlying collateral, and the growth and risk composition of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Thus, future additions to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's AFLL. Such agencies may require the Bank to recognize additions to the AFLL based on their judgments about information available to them at the time of their examination. Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" (collectively referred to hereafter as "SFAS No. 114"), the AFLL related to loans that are identified for evaluation in accordance with the standard is based on discounted cash flows using the loan's initial effective interest rate, the loan's observable market price, or the fair value of the collateral for collateral dependent loans. (H) REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure. In accordance with SFAS No. 114, a loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate acquired in settlement of loans is recorded initially at the lower of the loan balance plus unpaid accrued interest or estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings, if the estimated fair value of the property declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Loans with outstanding principal balances totalling $390,358, $-0- and $89,600 were foreclosed on during the years ended December 31, 1997, 1996 and 1995, respectively. (I) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK In 1997, the Bank became a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement, provides the Bank with the ability to draw $13 million of advances from the FHLB. No advances were drawn by the Bank in 1997. As a requirement for membership, the Bank invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Bank. At December 31, 1997, the Bank owned 5,030 shares of the FHLB's $100 par value capital stock. No ready market exists for such stock, which is carried at cost. (J) BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 25 to 50 years for bank premises and 3 to 10 years for furniture and equipment. Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated. F-24 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued) (K) INCOME TAXES The Bank records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled. (L) EMPLOYEE BENEFIT PLANS The Bank has in place a postretirement benefit plan covering certain retirees and a defined contribution 401(k) plan that covers all eligible employees. The Bank had a noncontributory defined benefit retirement plan that covered substantially all employees which was terminated in 1995 with final pay-out of accrued benefits occurring in 1996 (see note 7). (M) NET INCOME/DIVIDENDS PER SHARE The Bank adopted SFAS No. 128, "Earnings Per Share", in 1997, which requires net income per share to be calculated on both a basic and diluted basis. Net income per share is computed based on the weighted average number of common shares outstanding during the year and represents basic and diluted net income per share for 1997, 1996 and 1995. Because the Bank has no potentially dilutive securities, restatement of 1996 and 1995 net income per share amounts was not necessary. Dividends per share are based on the shares outstanding at the time of dividend declaration. All share and per share amounts have been restated to give effect to the three-for-one stock split on July 22, 1998 (see note 15). (N) RECLASSIFICATIONS Certain 1995 and 1996 amounts have been reclassified in the financial statements to conform with the 1997 presentation. The reclassifications had no effect on previously reported net income or retained earnings. (2) INVESTMENT SECURITIES The following is a summary of the securities portfolios by major classification:
DECEMBER 31, 1997 ----------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ ------------ Securities available-for-sale: U.S. Treasury obligations .................................... $25,072,694 156,543 (1,087) 25,228,150 Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667 Obligations of states and political subdivisions ............. 13,761,077 300,592 (4,513) 14,057,156 ----------- ------- ------ ---------- Total ...................................................... $46,655,155 472,845 (8,027) 47,119,973 =========== ======= ====== ==========
DECEMBER 31, 1996 ----------------------------------------------------- GROSS GROSS APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE -------------- ------------ ------------ ------------ Securities available-for-sale: U.S. Treasury obligations .................................... $15,983,515 23,180 (12,086) 15,994,609 Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757 Obligations of states and political subdivisions ............. 9,094,282 205,266 (45,409) 9,254,139 ----------- ------- ------- ---------- Total ...................................................... $34,435,638 231,876 (79,009) 34,588,505 =========== ======= ======= ==========
F-25 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) INVESTMENT SECURITIES -- (Continued) Gross realized gains and losses on sales of securities for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ------------ ------- ----------- Gross realized gains .................. $ -- 5,662 1,500 Gross realized losses ................. (25,818) -- (6,163) --------- ----- ------ Net realized gains (losses) .......... $ (25,818) 5,662 (4,663) ========= ===== ======
The aggregate amortized cost and approximate market value of the available-for-sale securities portfolio at December 31, 1997, by remaining contractual maturity are as follows:
APPROXIMATE AMORTIZED MARKET COST VALUE ------------- ------------ U.S. Treasury obligations: Due in one year or less ..................................... $ 5,995,765 5,997,500 Due in one year through five years .......................... 19,076,929 19,230,650 Securities of other U.S. government agencies and corporations: Due in one year or less ..................................... 3,296,330 3,295,163 Due in one year through five years .......................... 3,745,042 3,756,291 Due after ten years ......................................... 780,012 783,213 Obligations of states and political subdivisions: Due in one year or less ..................................... 190,035 190,353 Due in one year through five years .......................... 5,489,847 5,611,142 Due after five through ten years ............................ 3,659,958 3,780,614 Due after ten years ......................................... 4,421,237 4,475,047 ----------- ---------- Total securities .......................................... $46,655,155 47,119,973 =========== ==========
Securities with a principal amount of approximately $18,272,000 at December 31, 1997 are pledged as collateral for deposits. (3) LOANS Loans at December 31, 1997 and 1996 classified by type, are as follows:
1997 1996 -------------- ------------- Commercial, financial and agricultural .......... $ 26,074,410 22,906,424 Real estate loans: Construction ................................... 1,490,215 972,127 Mortgage, commercial and residential ........... 64,943,072 67,278,983 Installment ..................................... 28,845,615 21,670,249 ------------ ---------- 121,353,312 112,827,783 Less deferred fees and costs, net .............. 144,502 171,802 ------------ ----------- $121,208,810 112,655,981 ============ =========== Included in the above: Nonaccrual loans ............................... $ 1,462,831 1,017,453 ============ =========== Restructured loans ............................. $ 522,352 350,024 ============ ===========
At December 31, 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis). Included in this amount is $112,000 of impaired loans for which the related AFLL is F-26 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LOANS -- (Continued) $112,000 and $685,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1997 was approximately $810,000. For the year ended December 31, 1997, the Bank recognized interest income on those impaired loans of $26,000, all of which was recognized using the cash basis method of income recognition. At December 31, 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis). Included in this amount is $53,000 of impaired loans for which the related AFLL is $53,000 and $866,000 of impaired loans that as a result of write-downs and collateral values do not have an AFLL. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $1,016,000. For the year ended December 31, 1996, the Bank recognized interest income on those impaired loans of $18,000, all of which was recognized using the cash basis method of income recognition. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 had they performed in accordance with the original terms throughout each of the periods amounted to approximately $161,000, $119,000 and $62,000, respectively. Actual interest income recorded on nonaccrual loans for the years ended December 31, 1997, 1996 and 1995 was $25,000, $23,000 and $41,000, respectively. Interest income on restructured loans included in the results of operations for each of the years amounted to approximately $53,000, $41,000 and $119,000, respectively. Loans at December 31, 1997 and 1996 include loans to officers and directors and their associates totaling approximately $1,103,000 and $1,801,000, respectively. During 1997, $787,000 in loans were disbursed to officers, directors and their associates and principal repayments of $1,485,000 were received on such loans. The Bank, through its normal lending activity, originates and maintains loans receivable which are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Bank's policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Bank and such changes could be significant. At December 31, 1997, $66,433,287, or 54.81%, of the Bank's loan portfolio was composed of loans principally collateralized by liens on real estate. Of that amount, approximately $23,963,000, or 19.77%, represents loans collateralized by owner-occupied residential real estate. (4) ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 ------------- ------------- ------------- Beginning balance ........................... $2,400,000 1,950,000 1,900,000 Provision for possible loan losses .......... 353,513 496,914 515,066 Recoveries .................................. 100,838 218,843 83,433 Loans charged off ........................... (194,351) (265,757) (548,499) ---------- --------- --------- Ending balance .............................. $2,660,000 2,400,000 1,950,000 ========== ========= =========
F-27 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) BANK PREMISES AND EQUIPMENT An analysis of premises and equipment at December 31, 1997 and 1996 follows:
ACCUMULATED UNDEPRECIATED COST DEPRECIATION COST ------------- -------------- -------------- December 31, 1997: Land ............................ $ 1,177,138 -- 1,177,138 Land improvements ............... 243,541 161,959 81,582 Buildings ....................... 5,270,762 1,535,891 3,734,871 Furniture and equipment ......... 4,201,127 2,928,435 1,272,692 ----------- --------- --------- Total ......................... $10,892,568 4,626,285 6,266,283 =========== ========= ========= December 31, 1996: Land ............................ $ 1,177,138 -- 1,177,138 Land improvements ............... 220,103 198,869 21,234 Buildings ....................... 4,936,591 1,322,548 3,614,043 Furniture and equipment ......... 3,530,902 2,805,088 725,814 ----------- --------- --------- Total ......................... $ 9,864,734 4,326,505 5,538,229 =========== ========= =========
(6) INCOME TAXES The components of income tax expense (benefit) are as follows:
CURRENT DEFERRED TOTAL ----------- ------------ ---------- Year ended December 31, 1997: Federal .................... $660,700 (33,700) 627,000 State ...................... 23,000 -- 23,000 -------- ------- ------- $683,700 (33,700) 650,000 ======== ======= ======= Year ended December 31, 1996: Federal .................... $599,500 (128,500) 471,000 State ...................... 4,000 -- 4,000 -------- -------- ------- $603,500 (128,500) 475,000 ======== ======== ======= Year ended December 31, 1995: Federal .................... $420,000 (43,000) 377,000 State ...................... 7,000 -- 7,000 -------- -------- ------- $427,000 (43,000) 384,000 ======== ======== =======
Total income tax expense was less than the amount computed by applying the federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Income taxes at statutory rate .................. $ 790,000 615,000 535,000 Increase (decrease) resulting from: Effect of non-taxable interest income ......... (187,000) (179,000) (163,000) Other, net .................................... 47,000 39,000 12,000 Applicable income taxes ......................... $ 650,000 475,000 384,000 ========== ======== ========
F-28 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES -- (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 ----------- ---------- Deferred tax assets: Allowance for possible loan losses ......................................... $680,000 591,600 Writedown of other real estate ............................................. 78,000 60,400 Postretirement benefits .................................................... 175,300 161,000 Other ...................................................................... 3,200 43,400 -------- ------- Total gross deferred tax assets .......................................... 936,500 856,400 -------- ------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation $245,400 196,500 Unrealized holding gains on securities available for sale .................. 158,000 52,000 Other ...................................................................... 22,000 24,500 -------- ------- Total gross deferred tax liabilities ..................................... 425,400 273,000 -------- ------- Net deferred tax asset ................................................... $511,100 583,400 ======== =======
The Bank has no valuation allowance at December 31, 1997 or 1996, because management has determined that it has sufficient taxable income in the carryback period to support the realizability of the net deferred tax asset. Income taxes paid during each of the three years ended December 31, 1997, 1996 and 1995 were $749,400, $534,100 and $382,300, respectively. (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS Net periodic pension cost for 1996 and 1995 for the Bank's defined benefit pension plan consists of the following components:
1996 1995 ------------ ------------ Service cost-benefits earned during the period .......... $ -- -- Interest cost on projected benefit obligation ........... 69,647 102,175 Actual return on plan assets ............................ (19,084) (90,250) Net amortization and deferral ........................... 629 63,075 Effect of change in PBGC rate ........................... 53,808 -- --------- ------- Net periodic pension expense ........................... $ 105,000 75,000 ========= =======
In 1994, the Plan benefits were frozen in anticipation of a complete plan termination. The Bank approved termination of the Plan in 1995. The Plan termination was approved by the Internal Revenue Service in 1996 and all Plan benefits were paid to participants. On June 1, 1994, the Bank implemented a defined contribution 401(k) plan that covers all eligible employees. The Bank matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $117,355, $100,588 and $100,993 in 1997, 1996 and 1995, respectively. The Bank also has a postretirement benefit plan whereby the Bank pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. The Bank adopted SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions", as of January 1, 1995. The cumulative effect of this change in accounting for the Bank's liability for postretirement benefits of $422,555 was determined as of January 1, 1995, and is reported separately in the 1995 statement of income, net of a deferred income tax benefit of $144,000. F-29 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (Continued) Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components:
1997 1996 1995 --------- -------- -------- Service cost ...................................... $ 6,478 4,832 4,516 Interest cost ..................................... 35,522 31,966 29,578 ------- ------ ------ Net periodic postretirement benefit cost .......... $42,000 36,798 34,094 ======= ====== ======
The following table presents the plan's funded status at December 31, 1997 and 1996:
1997 1996 -------------- ------------- Accumulated postretirement benefit obligation ("APBO"): Retirees ................................................. $ (304,323) (235,252) Other fully eligible active employees .................... -- (70,362) Other active participants ................................ (145,172) (158,910) Total accumulated benefit obligation .................... (449,495) (464,524) Unrecognized gain on changes in acturarial assumptions ..... (66,145) (9,116) ---------- -------- Plan assets at fair value .................................. -- -- ---------- -------- Accrued postretirement benefit cost ........................ $ (515,640) (473,640) ========== ======== Weighted average discount rate in determining APBO ......... 7.0% 7.0% Annual health care cost trend rate ......................... 9.0 9.0 Ultimate medical trend rate ................................ 8.0 8.0 Medical trend rate period (in years) ....................... 5 5 Effect of 1% increase in assumed health care cost on: Service and interest cost ................................ 16.4% 17.3% APBO ..................................................... 15.0 15.7
(8) RELATED PARTY TRANSACTIONS The Bank has banking transactions in the ordinary course of business with several of its directors and officers, and their associates. Such transactions are on the same terms as those prevailing at the time for comparable transactions with others. In the opinion of management, loans made to directors, officers and their associates do not involve more than the normal risk of collectibility or present any other unfavorable features (see note 3). (9) DEPOSITS At December 31, 1997 and 1996, certificates of deposit of $100,000 or more amounted to approximately $19,503,067 and $17,835,000, respectively. For the years ended December 31, 1997, 1996 and 1995, interest expense on certificates of deposit of $100,000 or more amounted to approximately $1,057,000, $1,038,000 and $1,236,000, respectively. The Bank made interest payments of $5,249,278, $4,903,660 and $4,906,909 during the years ended December 31, 1997, 1996 and 1995, respectively. Time deposit accounts as of December 31, 1997, mature in the following years and amounts: 1998 -- $77,864,727; 1999 -- $4,094,535; and 2000 -- $1,083,366. (10) LEASES The Bank also has several noncancellable operating leases for three branch locations. These leases generally contain renewal options for periods ranging from three to five years and require the Bank to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 1997 and 1996 was $69,758 and $25,000, respectively. F-30 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) LEASES -- (Continued) Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1997 are as follows: Year ending December 31, 1998 .................................. $ 65,797 1999 .................................. 65,797 2000 .................................. 61,147 2001 .................................. 35,887 2002 .................................. 9,879 Thereafter ............................ -- -------- Total minimum lease payments ......... $238,507 ========
(11) RESERVE REQUIREMENTS The aggregate net reserve balances maintained under the requirements of the Federal Reserve, which are noninterest bearing, were approximately $2,032,000 at December 31, 1997. (12) COMMITMENTS AND CONTINGENCIES The Bank has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of $16,316,000 and standby letters of credit of $223,000, at December 31, 1997. The Bank's exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Bank uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer's creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments and anticipates their funding from normal operations. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. F-31 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued) The following table presents the carrying values and estimated fair values of the Bank's financial instruments at December 31, 1997 and 1996:
1997 1996 ----------------------------- ---------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------------- -------------- -------------- ------------- Financial assets: Non-interest bearing deposits and cash $ 8,185,000 8,185,000 7,862,000 7,862,000 Federal funds sold .................... 4,425,000 4,425,000 6,550,000 6,550,000 Investment securities ................. 47,120,000 47,120,000 34,589,000 34,589,000 FHLB common stock ..................... 503,000 503,000 -- -- Net loans ............................. 118,549,000 119,094,000 110,256,000 109,408,000 Financial liabilities: Deposits .............................. 170,909,000 171,137,000 151,336,000 151,426,000
The estimated fair values of net loans and deposits at December 31 are based on cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. (14) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank, as a North Carolina chartered bank, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the Bank. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirments to which it is subject. As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. F-32 THE EAST CAROLINA BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) REGULATORY MATTERS -- (Continued) The Bank's actual capital amounts, in thousands, and ratios are presented in the following table:
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------------- ------------------- ------------------ AMOUNT RATIO RATIO RATIO ---------- ----------- ------------------- ------------------ As of December 31, 1997: Total Capital (to Risk Weighted Assets) ......... $ 16,973 13.66% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $ 15,406 12.40% =>4.0% =>6.00% Tier I Capital (to Average Assets) ............... $ 15,406 8.53% =>4.0% =>5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) ......... $ 15,577 13.75% =>8.0% =>10.00% Tier I Capital (to Risk Weighted Assets) ......... $ 14,149 12.49% =>4.0% =>6.0% Tier I Capital (to Average Assets) ............... $ 14,149 8.53% =>4.0% =>5.00%
In May 1995, the Bank Insurance Fund ("BIF") of the FDIC reached its designated ratio of reserves to insured deposits (i.e., 1.25%). For this reason, the FDIC reduced the assessment rate applicable to BIF deposits in two stages, so that, beginning in 1996, the deposit insurance premiums for 92% of all BIF members in the highest capital and supervisory categories were set at $1,500 per year, regardless of deposit size. Beginning in 1997, BIF members were required to begin paying FICO-bond assessments in addition to the $1,500 annual assessment. The FICO bond assessment was $23,089 for the Bank in 1997. (15) SUBSEQUENT EVENTS On July 22, 1998, and pursuant to a charter amendment, the Bank effected a three-for-one stock split of the Bank's common stock increasing the number of shares of common stock from 593,418 to 1,780,254. Additionally, by way of the same charter amendment, the Bank increased the post-split par value of the common stock from $3.33 per share to $3.50 per share. In connection with the stock split and increase in par value, the Bank increased the capital surplus account in accordance with North Carolina General Statutes Section 53-88. All references to the number of common shares and per share amounts in the financial statements have been restated as appropriate to reflect the effect of the split, for all periods presented. Additionally, common stock, capital surplus, and retained earnings have been restated for all periods presented as appropriate to reflect the stock split, the increase in par value, and the increase in the capital surplus account. On July 22, 1998, the Bank was acquired by ECB Bancorp, Inc. ("Bancorp"), which was newly-formed by the Bank on March 4, 1998, for the purpose of becoming the Bank's parent holding company. Each outstanding share of the Bank's common stock was exchanged for one share of Bancorp's common stock with the Bank becoming a wholly-owned subsidiary of Bancorp. Bancorp's primary purpose is to serve as the parent of the Bank. F-33 ================================================================================ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF BANCORP SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. UNTIL * , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. -------------------------------- TABLE OF CONTENTS
PAGE ---------- Summary ................................................... 3 Risk Factors .............................................. 6 Use of Proceeds ........................................... 11 Market Price of Common Stock .............................. 11 Dividends ................................................. 11 Capitalization ............................................ 12 Selected Consolidated Financial Data and Other Information ............................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 14 Business .................................................. 30 Supervision, Regulation and Other Matters ................. 36 Management ................................................ 41 Beneficial Ownership of Common Stock ...................... 42 Management Compensation ................................... 43 Certain Relationships and Related Transactions ............ 44 Description of Capital Stock .............................. 44 Plan of Distribution ...................................... 45 Indemnification ........................................... 47 Legal Matters ............................................. 48 Experts ................................................... 48 Available Information ..................................... 49 Incorporation of Certain Documents by Reference .............................................. 49 Index to Consolidated Financial Statements ................ F-1 ECB Bancorp, Inc. and Subsidiary Supplemental Consolidated Financial Statements ...................... F-7 The East Carolina Bank and Subsidiaries Consolidated Financial Statements ...................... F-23
================================================================================ ================================================================================ $ * (ECB logo appears here) ECB BANCORP, INC. COMMON STOCK --------------------------------------- PROSPECTUS --------------------------------------- [GRAPHIC OMITTED] CORPORATION * , 1998 ================================================================================ PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. PERMISSIBLE INDEMNIFICATION. The North Carolina Business Corporation Act (the "NCBCA") allows a corporation, by charter, bylaw, contract or resolution, to indemnify or agree to indemnify its officers, directors, employees and agents and any person who is or was serving at the corporation's request as a director, officer, employee or agent of another entity or enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses, including reasonable attorneys' fees, in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities as summarized herein. Any provision in a corporation's charter or bylaws or in a contract or resolution may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys' fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing such rights. The corporation may indemnify such person against liability expenses incurred only where such person conducted himself or herself in good faith and reasonably believed (I) in the case of conduct in his or her official corporate capacity, that his or her conduct was in the corporation's best interests, and (II) in all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and, in the case of a criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful; provided, however, that a corporation may not indemnify such person either in connection with a proceeding by or in the right of the corporation in which such person was adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to such person (whether or not involving action in an official capacity) in which such person was adjudged liable on the basis that personal benefit was improperly received. MANDATORY INDEMNIFICATION. Unless limited by the corporation's charter, the NCBCA requires a corporation to indemnify a director or officer of the corporation who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which such person was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding. ADVANCE FOR EXPENSES. Expenses incurred by a director, officer, employee or agent of the corporation in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors in the specific case, or as authorized by the charter or bylaws or by any applicable resolution or contract, upon receipt of an undertaking by or on behalf of such person to repay amounts advanced unless it ultimately is determined that such person is entitled to be indemnified by the corporation against such expenses. COURT-ORDERED INDEMNIFICATION. Unless otherwise provided in the corporation's charter, a director or officer of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court deems necessary, may order indemnification if it determines either (I) that the director or officer is entitled to mandatory indemnification as described above, in which case the court also will order the corporation to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (II) that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not such person met the requisite standard of conduct or was adjudged liable to the corporation in connection with a proceeding by or in the right of the corporation or on the basis that personal benefit was improperly received in connection with any other proceeding so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred). PARTIES ENTITLED TO INDEMNIFICATION. The NCBCA defines "director" to include ex-directors and the estate or personal representative of a director. Unless its charter provides otherwise, a corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director and also may indemnify and advance expenses to an officer, employee or agent who is not a director to the extent, consistent with public policy, as may be provided in its charter or bylaws, by general or specific action of its board of directors, or by contract. INDEMNIFICATION BY REGISTRANT. Registrant's Bylaws provide for indemnification of its directors and officers to the fullest extent permitted by North Carolina law, and require its Board of Directors to take all actions necessary and appropriate to authorize such indemnification. Under North Carolina law, a corporation also may purchase insurance on behalf of any person who is or was a director or officer against any liability arising out of his status as such. Registrant currently maintains a directors' and officers' liability insurance policy. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the securities covered by this Registration Statement, other than underwriting discounts and commissions, are as follows: Printing fees and expenses ........... $ 25,000 Legal fees and expenses .............. 75,000 Accounting fees and expenses ......... 90,000 Blue Sky fees and expenses ........... 15,000 Other(1) ............................. 20,000 -------- Total .............................. $225,000 --------
- --------- (1) Includes Securities and Exchange Commission registration fee of $1,416 and NASD filing fee of $980. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Effective July 22, 1998, and in connection with the reorganization of Registrant's current wholly-owned subsidiary, The East Carolina Bank (the "Bank"), into a bank holding company form of ownership, Registrant (which was newly formed by and at the direction of the Bank's board of directors for purposes of such transaction) issued an aggregate of 1,780,254 shares of its Common Stock, $3.50 par value, in exchange for a like number of outstanding shares of the Bank's common stock, $3.50 par value. As a result of that transaction, the Bank's shareholders became shareholders of Registrant (holding the same proportional share interests in Registrant as they previously held in the Bank) and the Bank became Registrant's wholly-owned subsidiary. In issuing its common stock, Registrant relied upon the exemption from registration provided by Section 3(a)(12) of the Securities Act of 1933, as amended (the "Securities Act"). ITEM 27. EXHIBITS. An index of exhibits appears at page II-6 of this Registration Statement and is incorporated herein by reference. ITEM 28. UNDERTAKINGS. (A) The undersigned Registrant hereby undertakes: 1. to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. 2. that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof; 3. to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of this offering. (B) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the undersigned Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Engelhard, State of North Carolina, on August 19, 1998. ECB BANCORP, INC. By: /s/ ARTHUR H. KEENEY, III ------------------------------------- ARTHUR H. KEENEY, III PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form SB-2 has been signed by the following persons in the capacity and on the dates indicated. Each of the undersigned directors and officers of Registrant, by his execution hereof, hereby constitutes and appoints ARTHUR H. KEENEY, III and GARY M. ADAMS, and each of them, as his true and lawful attorneys-in-fact and agents, for him or her, and in his or her name, place and stead, to execute and sign any and all pre-effective and post-effective amendments to such Registration Statement, and file the same, together with all exhibits and schedules thereto and all other documents in connection therewith, with the Commission and with such state securities authorities as may be appropriate, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might or could do in person, and hereby ratifying and confirming all the acts of said attorneys-in-fact and agents , or any of them, which they may lawfully do in the premises or cause to be done by virtue hereof.
NAME TITLE DATE - ------------------------------------ --------------------------------------- ---------------- /s/ ARTHUR H. KEENEY, III President, Chief Executive Officer August 19, 1998 ------------------------------- ARTHUR H. KEENEY, III Director (principal executive officer) /s/ GARY M. ADAMS Vice President and Chief August 19, 1998 ------------------------------- GARY M. ADAMS Financial Officer (principal financial and accounting officer) /s/ R.S. SPENCER, JR. Chairman August 19, 1998 ------------------------------- R.S. SPENCER, JR. /s/ GEORGE T. DAVIS, JR. Vice Chairman August 19, 1998 ------------------------------- GEORGE T. DAVIS, JR. /s/ C. GILBERT GIBBS Director August 19, 1998 ------------------------------- C. GILBERT GIBBS /s/ GREGORY C. GIBBS Director August 19, 1998 ------------------------------- GREGORY C. GIBBS /s/ JOHN F. HUGHES, JR. Director August 19, 1998 ------------------------------- JOHN F. HUGHES, JR. /s/ J. BRYANT KITTRELL, III Director August 19, 1998 ------------------------------- J. BRYANT KITTRELL, III
II-3
NAME TITLE DATE - ---------------------------------- ---------- ---------------- /s/ JOSEPH T. LAMB, JR. Director August 19, 1998 ------------------------------- JOSEPH T. LAMB, JR. /s/ B. MARTELLE MARSHALL Director August 19, 1998 ------------------------------- B. MARTELLE MARSHALL /s/ ROBERT L. MITCHELL Director August 19, 1998 ------------------------------- ROBERT L. MITCHELL /s/ RAY M. SPENCER Director August 19, 1998 ------------------------------- RAY M. SPENCER
II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. - ------------- ------------------------------------------------------------------ --------- 1.1 * Sales Agency Agreement 3.1 Registrant's Articles of Incorporation 3.2 Registrant's Bylaws 5.1 Opinion of Ward and Smith, P.A., as to legality 10.1 Employment Agreement between Arthur H. Keeney, III and the Bank 10.2 Omnibus Stock Ownership and Long Term Incentive Plan 10.3 Form of Employee Stock Option Agreement 21.1 List of subsidiaries 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Ward and Smith, P.A. (included in Exhibit 5.1 hereto) 24.1 Powers of Attorney (included on signature page of Registration Statement) 27.1 Financial data schedule--ECB Bancorp, Inc. 27.2 Financial data schedule--The East Carolina Bank
- --------- * To be filed by amendment. II-5 EX-3 2 EXHIBIT 3.1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF ECB BANCORP, INC. The undersigned entity hereby makes and acknowledges these Articles of Incorporation for the purpose of forming a business corporation under and by virtue of the laws of the State of North Carolina as contained in Chapter 55 of the General Statutes of North Carolina and the several amendments thereto, and to that end hereby does set forth that: 1. The name of the corporation is ECB BANCORP, INC. 2. The corporation shall have authority to issue 10,000,000 shares of stock, all of one class and having a par value of $3.50 per share. 3. The street and mailing address of the initial registered office of the corporation is Highway 264, Post Office Box 337, Engelhard, North Carolina 27824, and the name of the initial registered agent at such address is Arthur H. Keeney, III. 4. To the fullest extent permitted by the North Carolina Business Corporation Act as it exists or may hereafter be amended, no person who is serving or who has served as a director of the corporation shall be personally liable to the corporation or any of its shareholders or otherwise for monetary damages for breach of any duty as a director. No amendment or repeal of this article, nor the adoption of any provision to these Articles of Incorporation inconsistent with this article, shall eliminate or reduce the protection granted herein with respect to any matter that occurred prior to such amendment, repeal, or adoption. 5. The name of the incorporator is The East Carolina Bank and the address of the incorporator is Post Office Box 337, Engelhard, North Carolina 27824. IN TESTIMONY WHEREOF, the undersigned has caused this instrument properly to be executed in its name, this the 30th day of January, 1998. THE EAST CAROLINA BANK By:/s/ Arthur H. Keeney, III -------------------------- Arthur H. Keeney, III President EX-3 3 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF ECB BANCORP, INC. INDEX ARTICLE I OFFICES SECTION 1. Principal Office SECTION 2. Registered Office SECTION 3. Other Offices ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. Place of Meetings SECTION 2. Annual Meetings SECTION 3. Substitute Annual Meeting SECTION 4. Special Meetings SECTION 5. Notice of Meetings SECTION 6. Waiver of Notice SECTION 7. Voting Lists SECTION 8. Voting Group SECTION 9. Quorum SECTION 10. Proxies SECTION 11. Voting of Shares SECTION 12. Informal Action By Shareholders ARTICLE III DIRECTORS SECTION 1. General Powers SECTION 2. Number and Qualifications SECTION 3. Classification of Directors SECTION 4. Election of Directors SECTION 5. Nominations SECTION 6. Terms of Directors SECTION 7. Removal SECTION 8. Vacancies SECTION 9. Chairman of the Board SECTION 10. Compensation ARTICLE IV MEETINGS OF DIRECTORS SECTION 1. Regular Meetings SECTION 2. Special Meetings SECTION 3. Notice of Meetings SECTION 4. Waiver of Notice SECTION 5. Quorum SECTION 6. Manner of Acting SECTION 7. Presumption of Assent SECTION 8. Informal Action by Directors ARTICLE V COMMITTEES OF THE BOARD SECTION 1. General SECTION 2. Executive Committee SECTION 3. Audit Committee ARTICLE VI OFFICERS SECTION 1. Number SECTION 2. Election and Term SECTION 3. Removal and Resignation SECTION 4. Compensation SECTION 5. President SECTION 6. Vice Presidents SECTION 7. Secretary SECTION 8. Assistant Secretaries SECTION 9. Treasurer SECTION 10. Assistant Treasurers ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts SECTION 2. Loans SECTION 3. Checks and Drafts SECTION 4. Deposits ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares SECTION 2. Transfer of Shares SECTION 3. Fixing Record Date SECTION 4. Lost Certificates SECTION 5. Holder of Record SECTION 6. Reacquired Shares SECTION 7. Shares held by Nominees ARTICLE IX GENERAL PROVISIONS SECTION 1. Distributions SECTION 2. Seal SECTION 3. Fiscal Year SECTION 4. Amendments SECTION 5. Definitions SECTION 6. Indemnification BYLAWS OF ECB BANCORP, INC. ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office of the corporation shall be located at such place as the Board of Directors may fix from time to time. SECTION 2. REGISTERED OFFICE. The registered office of the corporation required by law to be maintained in the State of North Carolina may be, but need not be, identical with the principal office. SECTION 3. OTHER OFFICES. The corporation may have offices at such other places, either within or without the State of North Carolina, as the Board of Directors from time to time may determine, or as the affairs of the corporation from time to time may require. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of shareholders shall be held at the principal office of the corporation or at such other place, either within or without the State of North Carolina, as shall, in each case, be (I) fixed by the President or the Board of Directors and designated in the notice of the meeting, or (II) agreed upon by a majority of the shareholders entitled to vote at the meeting. SECTION 2. ANNUAL MEETINGS. The annual meeting of shareholders shall be held during the first six months following the corporation's immediately preceding fiscal year end and on a date and at a time determined by the corporation's Board of Directors for the purpose of electing directors of the corporation and for the transaction of such other business as properly may be brought before the meeting. SECTION 3. SUBSTITUTE ANNUAL MEETING. If the annual meeting shall not be held on the day designated by these Bylaws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. SECTION 4. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time (I) by or at the direction of the Chairman of the Board or the Chief Executive Officer, or (II) by resolution duly adopted by the Board of Directors of the corporation. SECTION 5. NOTICE OF MEETINGS. Written or printed notice stating the time, place and date of the meeting shall be delivered not less than ten (10) nor more than sixty (60) days before the date of any shareholders' meeting, either by personal delivery, by mail or private carrier, by facsimile transmission or by telegraph, teletype or other form or wire or wireless communication, by or at the direction of the Board of Directors, the President, the Chairman or the Secretary or other person calling the meeting, to each shareholder entitled to vote at such meeting; provided, that such notice shall be given to all shareholders where required by applicable law. If mailed, such notice shall be deemed to be effective when deposited in the United States mail, correctly addressed to the shareholder at the shareholder's address as it appears on the current record of shareholders of the corporation, with postage thereon prepaid. In the case of a special meeting, the notice of meeting shall include a description of the purpose of purposes for which the meeting is called. In the case of an annual or substitute annual meeting, the notice of meeting need not include a description of the purpose or purposes for which the meeting is called or the business to be transacted at such meeting unless such a description expressly is required by the provisions of applicable law. If any meeting of shareholders is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment and if a new record date is not fixed for the adjourned meeting. If a new record date for the adjourned meeting is fixed for the adjourned meeting (which must be done if the new date is more than 120 days after the date of the original meeting), notice of the adjourned meeting must be given as provided in this Section to persons who are shareholders as of the new record date. SECTION 6. WAIVER OF NOTICE. Any shareholder may waive notice of any meeting before or after the meeting. The waiver must be in writing, signed by the shareholder, and delivered to the corporation for inclusion in the minutes or filing with the corporate records. A shareholder's attendance, in person or by proxy, at a meeting (i) waives objection to lack of notice or defective notice of the meeting, unless the shareholder or the shareholder's proxy at the beginning of the meeting objects to holding the meeting or transacting business at the meeting, and (II) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder or the shareholder's proxy objects to considering the matter before it is voted upon. SECTION 7. VOTING LISTS. Before each meeting of shareholders, the Secretary of the corporation shall prepare an alphabetical list of the shareholders entitled to notice of such meeting. The list shall be arranged by voting group (and within each voting group by class 2 or series of shares) and show the address of and the number of shares held by each shareholder. The list shall be kept on file at the principal office of the corporation for the period beginning two business days after notice of the meeting is given and continuing through the meeting, and shall be available for inspection by any shareholder or shareholder's agent or attorney at any time prior to the meeting during regular business hours and at any time during the meeting or any adjournment thereof. SECTION 8. VOTING GROUP. All shares of one or more classes or series that under the corporation's articles of incorporation or North Carolina law are entitled to vote and be counted together collectively on a matter at a meeting of shareholders constitute a voting group. All shares entitled by the corporation's articles of incorporation or North Carolina law to vote generally on a matter are for that purpose a single voting group. Classes or series of shares shall not be entitled to vote separately by voting group unless expressly authorized by the corporation's articles of incorporation or specifically required by law. SECTION 9. QUORUM. Shares entitled to vote as a separate voting group may take action on a matter at a meeting of shareholders only if a quorum of those shares is present at the meeting. A majority of the votes entitled to be cast on the matter by the voting group shall constitute a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the votes cast on the motion to adjourn; and, subject to the provisions of Section 5 of this Article II, at any adjourned meeting any business may be transacted which might have been transacted at the original meeting if a quorum exists with respect to the matter proposed. SECTION 10. PROXIES. Shares may be voted either in person or by one or more proxies authorized by a written appointment of proxy signed by the shareholder or by the shareholder's duly authorized attorney-in-fact. An appointment of proxy is valid for eleven months from the date of its execution, unless a different period is expressly provided in the appointment form. SECTION 11. VOTING OF SHARES. Subject to the provisions of the corporation's articles of incorporation, each outstanding share shall be entitled to one vote on each matter voted on at a meeting of shareholders. Except in the election of directors as provided in Section 4 of Article III, if a quorum exists, action on a matter by a voting group at a meeting of shareholders is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the 3 action, unless a greater vote is required by law or by the corporation's articles of incorporation or these Bylaws. Absent special circumstances, shares of the corporation are not entitled to vote if they are owned, directly or indirectly, by another corporation in which the corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation; provided that this provision does not limit the power of the corporation to vote its own shares held by it in a fiduciary capacity. SECTION 12. INFORMAL ACTION BY SHAREHOLDERS. Any action that is required or permitted to be taken at a meeting of shareholders may be taken without a meeting if one or more written consents, describing the action so taken, shall be signed by all of the shareholders who would be entitled to vote upon such action at a meeting, and delivered to the Secretary of the corporation for inclusion in the minutes or filing with the corporate records. If the corporation is required by law to give notice to nonvoting shareholders of action to be taken by unanimous written consent of the voting shareholders, then the corporation shall give the nonvoting shareholders, if any, written notice of the proposed action at least ten days before the action is taken. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the corporation shall be directed by the Board of Directors or, to the extent provided herein and permitted by applicable law, by such Executive Committee or other committees as the Board of Directors may establish pursuant to these Bylaws. SECTION 2. NUMBER AND QUALIFICATIONS. The number of directors constituting the Board of Directors of the corporation shall be not less than nine (9) nor more than fifteen (15) as may be fixed or changed from time to time, within the above minimum and maximum numbers, by the Board of Directors. SECTION 3. CLASSIFICATION OF DIRECTORS. The directors shall be divided into three classes, as nearly equal in number as may be. At the first election of directors following the adoption of this Section 3 by the corporation's shareholders, directors in all three classes shall be elected, with the members of such classes to serve for terms of one, two and three years, respectively. Thereafter, as the terms of directors in each class expire, their successors shall be elected for terms of three years. In the event of any increase or decrease in the number of directors, the additional or eliminated directorships shall be so classified or chosen that all classes of directors shall remain or become as nearly equal in number as may be. 4 SECTION 4. ELECTION OF DIRECTORS. Except as provided herein or in Section 8 of this Article III, the directors shall be elected at the annual meeting of shareholders. Those persons who receive the highest number of votes at a meeting at which a quorum is present shall be deemed to have been elected. Directors need not be residents of the State of North Carolina, but must satisfy all qualifications required by applicable law for directors of North Carolina corporations and of bank holding companies. SECTION 5. NOMINATIONS. Only persons who are nominated in accordance with the provisions of these bylaws shall be eligible to be elected as directors at an annual or special meeting of shareholders. Nominations for election to the Board of Directors shall be made by the Board of Directors at any meeting of shareholders at which directors are to be elected. Nomination for election of any person to the Board of Directors also may be made at any meeting of shareholders at which directors are to be elected by a shareholder of record entitled to vote at that meeting if written notice of such person's nomination shall have been delivered to the Secretary of the corporation at its principal office not later than the close of business on the fifth business day following the date on which notice is first given to shareholders of the meeting at which such election is to be held. Each such notice shall set forth: (I) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (II) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (III) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (IV) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission if the nominee had been nominated by the Board of Directors; and (V) the written consent of each nominee to serve as a director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. SECTION 6. TERMS OF DIRECTORS. The term of each director shall be for the number of years for which he is elected as set forth in Section 3 of this Article III, or until such director's death, resignation, retirement, removal or disqualification. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which directors are elected, at which time such director or any other person may be nominated for election for a term (a "Special Term") equal to the remainder, if any, of the unexpired term which such director was initially elected to fill. A decrease in the number of directors does not shorten an incumbent director's term. Despite the expiration of a director's term, such director shall continue to serve until a successor shall be elected and qualifies or until there is a decrease in the number of directors. 5 SECTION 7. REMOVAL. Any director may be removed from office at any time with or without cause by a vote of shareholders whenever the number of votes cast in favor of removal of the director exceeds the number of votes cast against such removal. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove such director. A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director. If any directors are so removed, new directors may be elected at the same meeting. SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors, including without limitation a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, may be filled by the shareholders or by the Board of Directors, whichever group shall act first. If the directors remaining in office do not constitute a quorum of the Board of Directors, the directors may fill the vacancy by the affirmative vote of a majority of the remaining directors, or by the sole remaining director, as the case may be. If the vacant directorship was held by a director elected by a voting group, only the remaining directors or director elected by that voting group or the holders of shares of that voting group are entitled to fill the vacancy. SECTION 9. CHAIRMAN OF THE BOARD. There may be a Chairman of the Board of Directors elected by the directors from their number at any meeting of the Board. The Chairman shall serve in such position at the pleasure of the Board of Directors and shall preside at all meetings of the Board of Directors and perform such other duties as may be directed by the Board. In like fashion, the directors may elect from their number a Vice Chairman of the Board of Directors who shall preside at meetings of the directors in the absence of the Chairman and shall perform such other duties as may from time to time be directed by the Board. In the absence of the Chairman and any Vice Chairman, the Chief Executive Officer shall preside at meetings of directors. SECTION 10. COMPENSATION. The Board of Directors may provide for the compensation of directors for their services as such and for the payment or reimbursement of any and all expenses incurred by directors in attending meetings of the Board or otherwise in connection with such services. 6 ARTICLE IV MEETINGS OF DIRECTORS SECTION 1. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held immediately after, and at the same place as, the annual meeting of shareholders. In addition, the Board of Directors may provide, by resolution or otherwise, the time and place, either within or without the State of North Carolina, for the holding of additional regular meetings. SECTION 2. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the direction of the Chairman of the Board, the Chief Executive Officer, or any two directors. Such meetings may be held either within or without the State of North Carolina. SECTION 3. NOTICE OF MEETINGS. Regular meetings of the Board of Directors may be held without notice. The person or persons calling a special meeting of the Board of Directors, at least two days before the meeting, shall give notice thereof by any usual means of communication. Such notice need not specify the purpose for which the meeting is called. Any duly convened regular or special meeting may be adjourned by the directors to a later time without further notice. SECTION 4. WAIVER OF NOTICE. Any director may waive notice of any meeting before or after the meeting. The waiver must be in writing, signed by the director entitled to the notice, and delivered to the corporation for inclusion in the minutes or filing with the corporate records. The attendance by a director at, or the participation of a director in, a meeting shall constitute a waiver of any required notice of such meeting, unless the director, at the beginning of the meeting (or promptly upon the director's arrival thereat), objects to holding the meeting or to transacting any business at the meeting and does not thereafter vote for or assent to action taken at the meeting. SECTION 5. QUORUM. Unless the corporation's articles of incorporation provide otherwise, a majority of the number of directors fixed by or pursuant to these Bylaws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. SECTION 6. MANNER OF ACTING. Except as otherwise provided in the corporation's articles of incorporation or these Bylaws or by applicable law, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 7. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors or at a meeting of any committee of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented 7 to the action taken unless (I) such director objects at the beginning of the meeting (or promptly upon the director's arrival thereat) to holding the meeting or to transacting any business at the meeting, or (II) such director's contrary vote is recorded or such director's dissent or abstention from the action taken otherwise is entered in the minutes of the meeting, or (III) such director files written notice of dissent or abstention to such action with the person presiding at the meeting before the adjournment thereof or forwards such notice by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right of dissent or abstention is not available to a director who voted in favor of the action taken. SECTION 8. INFORMAL ACTION BY DIRECTORS. Action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board and evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and delivered to the Secretary of the corporation for inclusion in the minutes or filing with the corporate records. ARTICLE V COMMITTEES OF THE BOARD SECTION 1. GENERAL. The Board of Directors may create such committees of the Board, and appoint members to serve on such committees, as from time to time it shall consider appropriate. The creation of a committee of the Board and appointment of its members must be approved by the greater of (I) a majority of the number of directors in office when the action is taken or (II) the number of directors required to take action pursuant to Section 6 of Article IV. Each committee of the Board must have two or more members and, to the extent authorized by law, shall have such duties and authority as may be described in these Bylaws or otherwise specified by the Board of Directors. Each committee member shall serve at the pleasure of the Board of Directors. The provisions in these Bylaws governing meetings, actions without meetings, notice and waiver of notice, and quorum and voting requirements of the Board of Directors shall also apply to any committees of the Board established pursuant to these Bylaws. SECTION 2. EXECUTIVE COMMITTEE. There may be a standing committee of the Board of Directors to be known as the Executive Committee and consisting of the Chairman of the Board, the Chief Executive Officer, and not fewer than two other directors. The Chief Executive Officer shall act as chairman of the Executive Committee. Except as limited by this Article V or otherwise limited by law, the Executive Committee is empowered to act for and on behalf of the Board of Directors in any and all matters in the interim between meetings of the Board. Without limiting its powers herein conferred, the Executive Committee may act as a nominating committee by recommending to the Board of Directors nominees for election as directors by shareholders at meetings of shareholders or for election as directors by the Board of Directors to fill vacancies on the Board. Within the powers 8 conferred upon it, action by the Executive Committee shall be as binding upon the corporation as if performed by the full Board. Such actions shall be reported to the Board for review at its next meeting following such action. The committee shall meet as often as it considers necessary or advisable. SECTION 3. AUDIT COMMITTEE. There may be a standing committee of the Board of Directors to be known as the Audit Committee and consisting of not fewer than three directors. The Audit Committee shall superintend examinations of the assets and the liabilities and the internal audit program of the corporation and its subsidiaries, cause outside audits to be performed on the financial statements of the corporation, and shall make periodic reports to the Board. ARTICLE VI OFFICERS SECTION 1. NUMBER. The officers of the corporation shall consist of a President, one or more Vice Presidents (any of whom may be designated by the Board of Directors as a Vice President, Senior Vice President or Executive Vice President), a Secretary, and such Assistant Secretaries, Treasurers and other officers as the Board of Directors from time to time may elect. Any two (2) or more offices may be held by the same person, except that no officer may act in more than one capacity where action of two (2) or more officers is required. SECTION 2. ELECTION AND TERM. The officers of the corporation shall be elected by the Board of Directors. Such elections may be held at any regular or special meeting of the Board. Each officer shall hold office until such officer's death, resignation, retirement, removal or disqualification, or until the election and qualification of such officer's successor. SECTION 3. REMOVAL AND RESIGNATION. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. An officer may resign at any time by notifying the corporation, orally or in writing, of such resignation. A resignation shall be effective upon receipt by the corporation unless it specifies in writing a later effective date. In the event a resignation so specifies a later effective date, the Board of Directors may fill the pending vacancy prior to such date; however, the successor to the resigning officer may not take office until the effective date. An officer's resignation does not affect the corporation's contract rights, if any, with such officer. 9 SECTION 4. COMPENSATION. The compensation of all officers of the corporation shall be fixed by the Board of Directors. The election of an officer does not of itself create any contract rights. SECTION 5. PRESIDENT. The President shall be and may be designated as the Chief Executive Officer of the corporation and, subject to the control of the Board of Directors, shall supervise and control the management of the corporation in accordance with these Bylaws. The President, when present, shall preside at all meetings of shareholders. The President, with any other proper officer, may sign certificates for shares of the corporation and any deeds, leases, mortgages, bonds, contracts or other instruments which lawfully may be executed on behalf of the corporation, except where required or permitted by law otherwise to be signed and executed and except where the signing and execution thereof shall be delegated by the Board of Directors to some other officer or agent. In general, the President shall perform all duties incident to the office of President and such other duties as from time to time may be assigned by the Board of Directors. SECTION 6. VICE PRESIDENTS. In the absence of the President or in the event of the President's death, inability or refusal to act, the Vice Presidents in the order of their length of service as Vice Presidents, unless otherwise determined by the Board of Directors, shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President, with any other proper officer, may sign certificates for shares of the corporation and shall perform such other duties as from time to time may be assigned by the President or by the Board of Directors. SECTION 7. SECRETARY. The Secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and directors. The Secretary shall give all notices required by law and by these Bylaws. The Secretary shall have general charge of the corporate books and records and of the corporate seal, and shall affix the corporate seal to any lawfully executed instrument requiring it. The Secretary shall keep all records required by law at the principal office of the corporation. The Secretary shall have general charge of the stock transfer books of the corporation and shall keep, at the registered or principal office of the corporation, a record of shareholders showing the name and address of each shareholder and the number and class of the shares held by each. The Secretary, with any other proper officer, may sign certificates for shares of the corporation and shall sign such instruments as may require the Secretary's signature. In general, the Secretary shall perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President or by the Board of Directors. SECTION 8. ASSISTANT SECRETARIES. In the absence of the Secretary or in the event of the Secretary's death, inability or refusal to act, the Assistant Secretaries in the order of their length of service as Assistant Secretaries, unless otherwise determined by the Board of 10 Directors, shall perform the duties of the Secretary, and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary. They shall perform such other duties as from time to time may be assigned by the Secretary, by the President, or by the Board of Directors. Any Assistant Secretary, with any other proper officer, may sign certificates for shares of the corporation. SECTION 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have custody of all funds and securities belonging to the corporation and shall receive, deposit or disburse the same under the direction of the Board of Directors. The Chief Financial Officer shall maintain appropriate accounting records as required by law and shall prepare, or cause to be prepared, annual financial statements of the corporation that include a balance sheet as of the end of the fiscal year and an income and cash flow statement for that year. The Chief Financial Officer, with any other proper officer, may sign certificates for shares of the corporation and, in general, shall perform all duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned by the President or by the Board of Directors. ARTICLE VII CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or officers, or any agent or agents, to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the corporation (as borrower) and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or specific in nature and scope. SECTION 3. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money issued in the name of the corporation shall be signed by such officer or officers, or such agent or agents, of the corporation and in such manner as from time to time shall be determined by the Board of Directors. SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed from time to time shall be deposited to the credit of the corporation in such depositories as may be selected by or under the authority of the Board of Directors. 11 ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. The Board of Directors may authorize the issuance of some or all of the shares of the corporation's classes or series without issuing certificates to represent such shares. If shares are represented by certificates, the corporation shall issue and deliver to each shareholder to whom such shares have been issued or transferred certificates representing the shares owned by him. The certificates shall be in such form as required by law and as determined by the Board of Directors. Certificates shall be signed, either manually or by facsimile, by the President or a Vice President and by the Secretary, the Chief Financial Officer or an Assistant Secretary. All certificates for shares shall be numbered consecutively or otherwise identified and shall be entered on the stock transfer books of the corporation with the name and address of the persons to whom they are issued, the number of shares and the date of issue. If shares are not represented by certificates, then within a reasonable time after issuance or transfer of such shares, the corporation shall send to the shareholder to whom such shares have been issued or transferred a written statement of the information required by law to be on certificates. SECTION 2. TRANSFER OF SHARES. The corporation shall keep or cause to be kept a book or set of books, to be known as the stock transfer books of the corporation, containing the name of each shareholder of record, together with such shareholder's address and the number and class or series of shares held by him. Transfers of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative (who shall furnish proper evidence of authority to transfer) or by his attorney authorized to effect such transfer by power of attorney duly executed and filed with the Secretary, and, if the shares are represented by certificates, only upon surrender for cancellation of the certificates for the shares sought to be transferred. Certificates surrendered for transfer shall be canceled before new certificates for the transferred shares shall be issued. SECTION 3. FIXING RECORD DATE. The Board of Directors of the corporation may fix a future date as the record date for one or more voting groups in order to determine the shareholders entitled (I) to notice of a shareholders' meeting, (II) to demand a special meeting, (III) to vote, or (IV) to take any other action. A record date fixed under this Section may not be more than seventy days before the meeting or action requiring a determination of shareholders. 12 A determination of shareholders entitled to notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to notice of or to vote at a shareholders' meeting, the close of business on the day before the first notice of the meeting is delivered to shareholders shall be the record date for such determination of shareholders. The Board of Directors may fix a date as the record date for determining shareholders entitled to a distribution or share dividend. If no record date is fixed by the Board of Directors for such determination, it is the date the Board of Directors authorized the distribution or share dividend. SECTION 4. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the certificate to have been lost or destroyed. When authorizing such issuance of a new certificate, the Board shall require the owner of such lost or destroyed certificate, or his legal representative, to give the corporation a bond in such sum and with such surety or other security as the Board may direct as indemnity against any claim that may be made against the corporation with respect to the certificate claimed to have been lost or destroyed, except where the Board by resolution finds that in the judgment of the directors the circumstances justify omission of a bond. SECTION 5. HOLDER OF RECORD. Except as otherwise required by law, the corporation may treat the person in whose name shares stand of record on its books as the absolute owner of those shares and the person exclusively entitled to receive notification and distributions, to vote, and otherwise to exercise the rights, powers and privileges of ownership of such shares. SECTION 6. REACQUIRED SHARES. Shares of the corporation that have been issued and thereafter reacquired by the corporation shall constitute authorized but unissued shares. SECTION 7. SHARES HELD BY NOMINEES. The corporation shall recognize the beneficial owner of shares registered in the name of a nominee as the owner and shareholder of such shares for certain purposes if the nominee in whose name such shares are registered files with the Secretary a written certificate in a form prescribed by the corporation, signed by the nominee, indicating the following: (I) the name, address, and taxpayer identification number of the nominee; (II) the name, address and taxpayer identification number of the beneficial owner; (III) the number and class or series of shares registered in the name of the nominee as to which the beneficial owner shall be recognized as the shareholder; and (IV) the purposes for which the beneficial owner shall be recognized as the shareholder. 13 The purposes for which the corporation shall recognize the beneficial owner as the shareholder may include the following: (I) receiving notice of, voting at, and otherwise participating in shareholders' meetings; (II) executing consents with respect to the shares; (III) exercising dissenters' rights under Article 13 of the North Carolina Business Corporation Act; (IV) receiving distributions and share dividends with respect to the shares; (V) exercising inspection rights; (VI) receiving reports, financial statements, proxy statements, and other communications from the corporation; (VII) exercising any other rights or receiving any other benefits of a shareholder with respect to the shares. The certificate shall be effective ten business days after its receipt by the corporation and until it is changed by the nominee, unless the certificate specifies a later effective time or an earlier termination date. If the certificate affects less than all of the shares registered in the name of the nominee, the corporation may require the shares affected by the certificate to be registered separately on the books of the corporation and be represented by a share certificate that bears a conspicuous legend stating that there is a nominee certificate in effect with respect to the shares represented by that share certificate. ARTICLE IX GENERAL PROVISIONS SECTION 1. DISTRIBUTIONS. The Board of Directors from time to time may authorize, and the corporation may grant, distributions and share dividends to the corporation's shareholders subject to and upon the terms and conditions provided by applicable law and the corporation's articles of incorporation. SECTION 2. SEAL. The corporate seal of the corporation shall consist of two concentric circles between which is the name of the corporation and in the center of which is inscribed SEAL; and such seal, in the form approved and adopted by the Board of Directors, shall be the corporate seal of the corporation. SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be fixed by the Board of Directors. SECTION 4. AMENDMENTS. Except to the extent otherwise provided in the corporation's articles of incorporation or by law, these Bylaws may be amended or repealed and new bylaws may be adopted by the Board of Directors. No bylaw adopted, amended or repealed by the shareholders shall be readopted, amended or repealed by the Board of Directors unless the corporation's articles of incorporation or a bylaw adopted by the shareholders authorizes the Board of Directors to adopt, amend or repeal that particular bylaw or the Bylaws generally. 14 SECTION 5. DEFINITIONS. Unless the context otherwise requires, terms used in these Bylaws shall have the meanings assigned to them in the North Carolina Business Corporation Act to the extent defined therein. SECTION 6. INDEMNIFICATION. The corporation shall indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (and any appeal therein), whether civil, criminal, administrative, arbitrative or investigative and whether or not brought by or on behalf of the corporation, by reason of the fact that such party is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, or arising out of such party's activities in any of the foregoing capacities, against all liability and litigation expense, including reasonable attorneys' fees; PROVIDED, however, that the corporation shall not indemnify any such person against liability or expense incurred on account of such person's activities which were at the time taken known or believed by such person to be clearly in conflict with the best interests of the corporation. The corporation likewise shall indemnify any such person for all reasonable costs and expenses (including attorneys' fees) incurred by such person in connection with the enforcement of such person's right to indemnification granted herein. The corporation shall pay all expenses incurred by any director, officer, employee or agent in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director, officer, employee or agent to repay such amount unless it ultimately shall be determined that such party is entitled to be indemnified by the corporation against such expenses. The Board of Directors of the corporation shall take all such action as may be necessary and appropriate to authorize the corporation to pay the indemnification required by this bylaw, including without limitation a determination by a majority vote of disinterested directors that the activities giving rise to the liability or expense for which indemnification is requested were not, at the time taken, known or believed by the person requesting indemnification to be clearly in conflict with the best interests of the corporation. Any person who at any time after the adoption of this bylaw serves or has served in any of the aforesaid capacities for or on behalf of the corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of, but shall be in addition to, any rights to which such person may be entitled apart from the provision of this bylaw. 15 EX-5 4 EXHIBIT 5.1 EXHIBIT 5.1 WARD AND SMITH, P.A. ATTORNEYS AT LAW 1001 COLLEGE COURT POST OFFICE BOX 867 NEW BERN, N.C. 28563-0867 TELEPHONE (252) 633-1000 FACSIMILE (252) 636-2121 SUITE 2400 TWO HANNOVER SQUARE 120 WEST FIRE UNIVERSITY CORPORATE FAYETTEVILLE STREET MALL TOWER ROAD CENTER POST OFFICE BOX 2091 POST OFFICE BOX 127 RACINE DRIVE RALEIGH, N.C. 27602-2091 8088 POST OFFICE BOX 7068 GREENVILLE, N.C. WILMINGTON, N.C. 27835-8088 28406-7068 TELEPHONE (919) 836-1800 TELEPHONE (910) FACSIMILE (919) 836-1507 TELEPHONE (252) 392-5100 355-3030 FACSIMILE (910) FACSIMILE (252) 392-2333 WEB SITE www.wardandsmith.com 756-3689 August 18, 1998 ECB Bancorp, Inc. Post Office Box 337 Engelhard, North Carolina 27824 RE: Our File 78-0376(AK) Gentlemen: We have acted as counsel to ECB Bancorp, Inc. ("Bancorp") in connection with its proposed offer and sale, through Interstate/Johnson Lane Corporation acting as Bancorp's "sales agent" on a "reasonable efforts" basis pursuant to a Sales Agency Agreement (the "Offering"), of a minimum of 250,000 and a maximum of 300,000 shares of Bancorp's $3.50 par value common stock (the "Common Stock"). In connection with the Offering, Registrant is filing with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 (the "Registration Statement") for purposes of registering under the Securities Act of 1933, as amended (the "Act") its offer and sale of the Common Stock. The Offering will be made pursuant to the final form of Prospectus contained in the Registration Statement at the time it is declared effective by the Commission. In connection with rendering the opinions set forth in this letter, we have examined or relied upon copies of the Registration Statement as it is initially being filed with the Commission, including the form of Prospectus contained therein, Bancorp's Articles of Incorporation and bylaws, minutes of proceedings of Bancorp's Board of Directors, and such other records, certificates and instruments as we have deemed necessary. For purposes of the opinions expressed herein, we have assumed (i) the authenticity of all documents submitted to us as originals and the conformity to the original or certified copies of all documents submitted to us as conformed or reproduction copies, (ii) that the minutes of proceedings of Bancorp's Board of Directors are accurate and complete and contain minutes of all actions pertaining to the Offering, and (iii) that the Offering will be conducted and the Common Stock will be issued and sold on the terms and in the manner described in the Registration Statement and Prospectus. Based upon and subject to the foregoing, as well as the qualifications set forth in subsequent portions of this letter, we WARD AND SMITH, P.A. ECB Bancorp, Inc. August 18, 1998 Page 2 are of the opinion as of this date that, when the Registration Statement has become effective and the Common Stock is issued and sold in the manner described therein, and the purchase price thereof has been received by Bancorp, and upon compliance with the pertinent provisions of the Act and the securities or "blue sky" laws of various jurisdictions in which the Common Stock will be offered or sold, then the shares of Common Stock will be legally issued, fully paid and non-assessable. In rendering the opinions set forth above, we have assumed, without independent verification, that a. No event will take place subsequent to the date hereof that would cause any action taken in connection with the Offering to fail to comply with any law, rule, regulation, order, judgment, decree or duty, or that would permit any party to cancel, rescind, or otherwise avoid any act; and b. All certificates of public officials have been properly given and are accurate and complete; In addition, all opinions and statements set forth in this letter are expressly limited and qualified as follows: a. The opinions expressed herein are limited to matters of North Carolina law and the federal laws of the United States of America; b. Our opinions are limited to the matters expressly stated herein, and no opinion may be inferred or implied beyond the matters expressly stated; and, c. Except as otherwise expressly specified herein, the opinions herein are limited to matters in existence as of the date hereof, and we undertake no responsibility to revise or supplement this letter or the opinions herein to reflect any change in the law or facts. We consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to Ward and Smith, P.A. under the caption "Legal Matters" in the Registration Statement. Yours truly, /s/ Ward and Smith, P.A. ------------------------------------ WARD AND SMITH, P.A. EX-10 5 EXHIBIT 10.1 EXHIBIT 10.1 STATE OF NORTH CAROLINA COUNTY OF HYDE THIS AGREEMENT, made as of the 1st day of January, 1998, by and between The East Carolina Bank, a North Carolina corporation ("ECB") and Arthur H. Keeney, III, a resident of Hyde County, North Carolina (the "Officer"), W I T N E S S E T H: WHEREAS, the Officer and ECB have previously agreed that the Officer shall be an employee of ECB under the terms of an agreement which became effective on September 11, 1995; and, WHEREAS, the parties have agreed to certain modifications thereof and have agreed to restate their agreement as modified; and, WHEREAS, the document fully supercedes the said September 1, 1995, agreement between the parties; and, WHEREAS, the Board of Directors of ECB, acting through its executive committee, exclusive of the Officer, has determined that the continued retention of the services of the Officer on a long term basis as described herein is in the best interest of ECB in that (a) such action promotes the stability of the management of ECB, (b ) such action enables ECB to retain the services of a well-qualified employee with extensive contacts in the financial services community, and (c) it secures the continued services of the Officer notwithstanding any change of control of ECB; and, WHEREAS, the services of the Officer, his experience and knowledge of the affairs of ECB, and his reputation and contacts in ECB's industry are extremely valuable to ECB; and, WHEREAS, ECB considers the establishment and maintenance of a sound and vital management to be a part of its overall corporate strategy and to be essential to protecting and enhancing the best interests of ECB and its stockholders; and, WHEREAS, the parties desire to enter into this Agreement in order to clearly set fourth the terms and conditions of the Officer's employment relationship with ECB; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows: 1. ECB hereby engages the employment of the Officer and the Officer hereby accepts such engagement of employment upon the terms and conditions stated herein. The Officer shall render such administrative and management services to ECB as are customarily performed by persons situated in a similar capacity and as directed by the Board of Directors. The Officer shall promote the business of ECB and perform such other duties as shall from time to time be reasonably prescribed by the Board of Directors. 2. ECB shall pay to the Officer during the term of this Agreement as compensation for all services rendered by him to ECB a base salary in such amounts and at such intervals as shall be commensurate with his duties and responsibilities hereunder and as determined by the Board of Directors. The Officer's initial base salary under this agreement is $112,000.00 per annum. The Officer's base salary may be modified from time to time to reflect the duties required of the Officer. In reviewing the Officer's base salary the Board of Directors of ECB shall consider the overall performance of the Officer and the service of the Officer rendered to ECB and its subsidiaries, as well as increases in the cost of living and may also provide for performance or merit increases. The Officer's performance shall be reviewed annually. Participation in ECB's cash incentive, deferred compensation, stock option, stock purchase, discretionary bonus, pension, life insurance, and other employee benefit plans and participation in any fringe benefits shall not cause a reduction in the base salary payable to the Officer; provided however, that the enumeration of the programs herein described are no representation that ECB has or will have any of such programs. The Officer will be entitled to such customary fringe benefits, vacation and sick leave as are consistent with the normal practices and established policies of ECB. 3. During the term of this Agreement, the Officer shall be entitled, in an equitable manner based on the terms of any bonus and incentive plans that have been approved, or may from time to time be approved, by the Board of Directors, with all other key management personnel of ECB, to such incentives and discretionary bonuses as may be authorized, declared and paid by the Board of Directors to ECB's key management employee's. No other compensation provided for in this Agreement shall be deemed a substitute for the Officer's right to such incentives and discretionary bonuses when, if, and as declared by the Board of Director's. Provided that ECB shall have the right to terminate any existing bonus or incentive plans now existing or hereafter initiated so long as such termination is of general applicability and not specifically limited to the Officer. 4. The Officer shall be entitled to participate in any plan relating to incentive and deferred compensation, stock options, stock purchase, pension, thrift, profit sharing, group life insurance, medical coverage, disability coverage, education, or other retirement or employee benefits that ECB has adopted, or may from time to time adopt, for the benefit of its executive employees and for employees generally, subject to the eligibility rules of such plans. Provided that ECB shall have the right to terminate any existing or future benefits so long as such termination is of general applicability and not specifically limited to the Officer. The Officer shall also be entitled to participate in any other fringe benefits which are now or may be or may become applicable to ECB's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations, and any other benefits which are commensurate with the duties and responsibilities to be performed by the Officer under this Agreement. Additionally, the Officer shall be entitled to such vacation and sick leave as shall be established under uniform employee policies promulgated by the Board of Directors. ECB shall reimburse the Officer for all out-of-pocket reasonable and necessary business expenses which the Officer may incur in connection with his service on behalf of ECB, subject to the reimbursement policy of ECB as adopted and modified by the Board of Directors from time to time. Also, the Officer shall be entitled to undertake and be reimbursed for the reasonable cost of a complete physical examination each year. 2 5. (a) The initial term of employment under this Agreement commenced on January 1, 1998 (the Commencement Date) and shall continue until the third (3rd) anniversary of the Commencement Date. The initial term of employment under this Agreement shall terminate at the close of the business day on December 31, 2000 (the Initial Termination Date.) On January 1 of each year, beginning on January 1, 1999, this Agreement will be extended for an additional year, unless either party to the Agreement notifies the other in writing within 90 (ninety) days prior to an Anniversary Date of a desire to seek a final termination or amendment of the Agreement. Following such duly executed notice, this Agreement will cease to be extended automatically, and shall end automatically at the then expiration date which shall be no less than two years and 90 (ninety) days from the said notice. (b) The Officer's employment under this Agreement shall be terminated upon the death of the Officer prior to the Termination Date, in which event the Officer's estate shall be entitled to receive the compensation due the Officer through the last day of the calendar month in which the Officer's death shall have occurred. The Officer's employment under this Agreement shall be terminated upon the total permanent disability of the Officer during the term of this Agreement in which event the Officer shall receive all compensation, including incentives and bonuses, through the date of determination of such disability and for a period of 90 days thereafter. For purposes of this Section, the Officer shall be deemed to have suffered total permanent disability upon the determination of such status by the United States Social Security Administration, or upon such certification as may be required by any insurance policy carried by ECB insuring against such disability (or in the absence of such a policy, a certificate to such effect by the Officer's regular physician). (c) The Officer's employment under this Agreement may be terminated at any time prior to the Termination Date by the Officer upon ninety (90) days prior written notice to ECB. Upon such termination, the Officer shall be entitled to receive the compensation and benefits payable to the Officer under this Agreement through the effective date of such termination. (d) The Board may terminate the Officer's employment at any time prior to the Termination Date for "cause", in which event the Officer shall have no right to receive compensation or other benefits hereunder for any period after such termination for "cause". Termination for "cause" shall mean termination of employment because of the Officer's personal dishonesty, incompetence, willful material misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful material violation of any law, rule, or regulation (other than minor traffic infractions or other similar misdemeanor offenses) or final cease-and-desist order, or a material breach of any provision of this Agreement. (e) Notwithstanding the foregoing provisions of this Section 5, ECB may terminate the employment of the Officer hereunder without cause at any time during the term of this agreement upon ninety (90) days prior written notice to the Officer provided, however, that in the event of involuntary termination of the Officer's employment without cause under this Agreement the Officer shall be entitled to receive the remaining monthly sums due throughout the remaining life of the contract and ECB shall carry the Officer's medical and disability insurance for a like period. 3 (f) In the event of involuntary termination of the Officer's employment in connection with or within 3 months after any change in control of ECB, or, in the event of a voluntary termination of the Officer's employment in connection with or within 3 months of any change of control of ECB under which the Officer shall have incurred a reduction of compensation or a reduction of responsibilities (irrespective of title) or shall have been required to change his workplace to a location greater than 75 miles from Engelhard, North Carolina, then, the Officer shall be entitled to receive the greater of (i) the severance payment offered by the Corporation in such notice of termination, or, (ii) the following sums: A. A lump sum equal to 2.99 times the average annual salary paid to the Officer over the three prior 12 month periods, plus B. A lump sum equal to 2.99 times the average annual cash bonuses and incentives paid to the Officer over the three prior 12 month periods, plus C. The Officer shall be carried on the medical and disability programs of the Corporation for the remaining period of the contract from the date of termination. 6. (a) The Officer shall devote his full efforts and entire business time to the performance of the Officer's duties and responsibilities under this Agreement. (b) In consideration of employment of the Officer by ECB hereunder during the term of this Agreement, the Officer agrees that in the event of an involuntary termination of his employment, he will not, for a period equal to the time compensation will be paid to the Officer under the provisions of this or any termination agreement, within the borders of any county contiguous to or in any county in which ECB, any financial institution subsidiary of ECB, or any subsidiary of any such financial institution subsidiary maintain offices, or directly or indirectly own, manage, operate, join, control, or participate in the management, operation, or control of or be employed by or connected in any manner with, any business which competes with ECB or any of the other subsidiaries of ECB, without the prior written consent of ECB. By example, direct competition does not include employment by a North Carolina financial institution not headquartered in the counties in which ECB is located but which may operate branches there, provided that the Officer shall not live or work in the area above delineated and shall not have managerial input or control of activities in that area. Notwithstanding the foregoing, the Officer shall be free, without such consent, to purchase or hold as an investment or otherwise up to five percent (5%) of the outstanding stock or other securities of any corporation which has its securities publicly traded on the New York Stock Exchange, the American Stock Exchange, or through the NASDAQ exchange. (c) In consideration of employment of the Officer by ECB hereunder during the term of this Agreement, the Officer agrees that in the event of an voluntary termination of his employment, he will not, for a period of three (3) years, within the borders of any county contiguous to or in any county in which ECB, any financial institution subsidiary of ECB, or any subsidiary of any such financial institution subsidiary maintain offices, or directly or indirectly own, manage, operate, join, control, or participate in the management, operation, or control of or be 4 employed by or connected in any manner with, any business which competes with ECB or any of the other subsidiaries of ECB, without the prior written consent of ECB. By example, direct competition does not include employment by a North Carolina financial institution not headquartered in the counties in which ECB is located but which may operate branches there, provided that the Officer shall not live or work in the area above delineated and shall not have managerial input or control of activities in that area. Notwithstanding the foregoing, the Officer shall be free, without such consent, to purchase or hold as an investment or otherwise up to five percent (5%) of the outstanding stock or other securities of any corporation which has its securities publicly traded on the New York Stock Exchange, the American Stock Exchange, or through the NASDAQ exchange. (d) The Officer will hold in strict confidence, during the term of this Agreement and at all times thereafter, all knowledge or information of a confidential nature with respect to the business of ECB and all subsidiaries of ECB received by the Officer during the term of this Agreement and will not disclose or make use of such information without the prior written consent of the ECB. The Officer acknowledges that it would be difficult or impossible to ascertain the amount of monetary damages in the event of a breach by the Officer under the provisions of this Section 6. The Officer agrees that, in the event of a breach of this Section, injunctive relief enforcing the terms of this Section is an appropriate remedy. 7. (a) The Officer shall perform his duties and responsibilities under this Agreement in accordance with such reasonable standards expected of employees with comparable positions in comparable organizations and the Bank's policies and procedures, and as may be established from time to time by the Board of Directors of ECB. (b) The Officer represents that he has acquired and at all times during the term of this agreement, including all extensions and renewals hereof, will hold unencumbered stock of ECB in such amount as may be required by N. C. G. S. Sec. 53-80, as amended from time to time. 8. (a) This Agreement shall inure to the benefit of, and be binding upon, any corporate or other successor of ECB which shall acquire, directly or indirectly by merger, share exchange, consolidation, purchase or otherwise, all or substantially all of the assets of ECB. (b) Because ECB is contracting for the unique and personal skills of the Officer, the officer shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of ECB. 9. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge agreed to in writing, signed by the Officer and on behalf of the ECB by such Officer as may be specifically designated by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing 5 and signed by both parties, except as herein otherwise provided. All prior negotiations, discussions, and agreements between the parties are merged herein. 10. This agreement shall be governed in all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of North Carolina and any action relating to or arising from this agreement shall be litigated only in the North Carolina General Court of Justice. 11. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. IN TESTIMONY WHEREOF the parties hereto have executed this Agreement in duplicate originals, one of which is to be retained by each of the parties, to be effective as of the day and year first hereinabove written. THE EAST CAROLINA BANK By: /s/ R. S. Spencer, Jr. _________________________________ Chairman of the Board of Directors of The East Carolina Bank /s/ Arthur H. Keeney, III _____________________________________(SEAL) Arthur H. Keeney, III 6 EX-10 6 EXHIBIT 10.2 EXHIBIT 10.2 THE EAST CAROLINA BANK OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN THIS IS THE OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN ("Plan") of THE EAST CAROLINA BANK (the "Corporation"), a North Carolina banking corporation with its principal office in Englehard, Hyde County, North Carolina, under which Incentive Stock Options and Non-Qualified Options to acquire shares of the Stock, Restricted Stock, Performance Units and/or Stock Appreciation Rights may be granted from time to time to Eligible Employees of the Bank and of any of its Subsidiaries (the "Subsidiaries"), subject to the following provisions: ARTICLE I DEFINITIONS The following terms shall have the meanings set forth below. Additional terms defined in this Plan shall have the meanings ascribed to them when first used herein. BOARD. The Board of Directors of the Corporation. CHANGE IN CONTROL TRANSACTION. The dissolution or liquidation of the Corporation; a reorganization, merger or consolidation of the Corporation as a result of which the outstanding securities of the class then subject to Rights hereunder are changed into or exchanged for cash or property or securities not of the Corporation's issue; or a sale of all or substantially all of the assets of the Corporation to, or the acquisition of stock representing more than twenty-five percent (25%) of the voting power of the capital stock of the Corporation then outstanding by another corporation or person. CODE. The Internal Revenue Code of 1986, as amended. COMMITTEE. The Incentive Committee of the Board, which shall be composed of no less than three outside directors which shall include the Chairman and Vice Chairman of the Board, none of which may be employees of the Corporation. COMMON STOCK. The Common Stock, $10 par value per share, of the Corporation. DEATH. The date and time of death of an Eligible Employee, who has received Rights as an Optionee, a Holder, and/or a Unit Recipient, as established by the relevant death certificate. DISABILITY. The date on which an Eligible Employee who has received Rights becomes totally and permanently disabled as determined (i) by the Corporation's disability insurance carrier (if the Eligible Employee is covered by a Corporation-owned disability policy) or by his or her disability insurance carrier (if the eligible Employee is not covered by a Corporation-owned disability policy), or (ii) under federal Social Security laws and regulations, or (iii) by a physician acceptable to the Corporation. EFFECTIVE DATE. The date as of which this Plan is effective (subject to approval by the Corporation's shareholders) shall be January 21, 1998, which is the date it has been adopted by the Board. ELIGIBLE EMPLOYEES. Those individuals who meet the following eligibility requirements: (i) Such individual must be a full time employee of the Corporation or a Subsidiary. For this purpose, an individual shall be considered to be an "employee" only if there exists between the Corporation or a Subsidiary and the individual the legal and bona fide relationship of employer and employee. In determining whether such relationship exists, the regulations of the United States Treasury Department relating to the determination of such relationship for the purpose of collection of income tax at the source on wages shall be applied. (ii) Such individual falls within such job grade classifications as may be specified by the Board, at its option, from time to time by the Board, and which job grade classifications so specified may be amended, expanded, restricted or otherwise modified by the Committee, subject to ratification of such action by the Board. (iii) If the Registration shall not have occurred, such individual must have such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the investment involved in the receipt and/or exercise of a Right. (iv) Such individual, being otherwise an Eligible Employee under the foregoing items, shall have been selected by the Committee as a person to whom a Right or Rights shall be granted under the Plan. FAIR MARKET VALUE. With respect to the Corporation's Common Stock, the market price per share of such Common Stock determined by the Committee, consistent with the requirements of Section 422 of the Code and to the extent consistent therewith, as follows, as of the date specified in the context within which such term is used: (i) if the Common Stock was traded on a stock exchange on the date in question, then the Fair Market Value will be equal to the closing price reported by the applicable composite-transactions report for such date; (ii) if the Common Stock was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value will be equal to the last transaction price quoted by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), National Market System ("NMS"); (iii) if the Common Stock was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value will be equal to the average of the last reported representative bid and asked prices quoted by the NASDAQ for such date; and (iv) if none of the foregoing provisions is applicable, then the Fair Market Value will be determined by the Committee in good faith on such basis as it deems appropriate. The Committee shall maintain a written record of its method of determining Fair Market Value. ISO. An "incentive stock option" as defined in Section 422 of the Code. JUST CAUSE TERMINATION. A termination by the Corporation or a Subsidiary of an Eligible Employee's employment by the Corporation or the Subsidiary in connection with the good faith determination of the Board or the Board of Directors of the Subsidiary, as applicable, that the Eligible Employee (I) has failed or neglected in any material respect to perform or discharge his duties or responsibilities of employment, (II) has engaged in any acts or conduct involving wilful misconduct, dishonesty, breach of trust or moral turpitude, that materially and adversely affect the business, affairs or reputation of the Corporation or the Subsidiary, or that disqualifies the Eligible Employee under applicable 2 law from serving as an employee of the Corporation, or (III) has become excluded from coverage under the Corporation's then current "blanket bond" or other fidelity bond by the carrier or underwriter thereof. NON-QUALIFIED OPTION. Any Option granted under Article III whether designated by the Committee as a Non-Qualified Option or otherwise, other than an Option designated by the Committee as an ISO, or any Option so designated but which, for any reason, fails to qualify as an ISO pursuant to Section 422 of the Code and the rules and regulations thereunder. OPTION AGREEMENT. The agreement between the Corporation and an Optionee with respect to Options granted to such Optionee, including such terms and provisions as are necessary or appropriate under Article III. OPTIONS. ISOs and Non-Qualified Options are collectively referred to herein as "Options;" provided, however, whenever reference is specifically made only to ISOs or Non-Qualified Options, such reference shall be deemed to be made to the exclusion of the other. PLAN POOL. A total of 53,000 shares of authorized, but unissued, Common Stock, as adjusted pursuant to Section 2.3(b), which shall be available as Stock under this Plan. In no event may the Plan Pool exceed 10% of the authorized but unissued shares of Common Stock of the Corporation. REGISTRATION. The registration by the Corporation under the 1933 Act and applicable state "Blue Sky" and securities laws of this Plan, the offering of Rights under this Plan, the offering of Stock under this Plan, and/or the Stock acquirable under this Plan. RESTRICTED STOCK. The Stock which a Holder shall be awarded with restrictions when, as, in the amounts and with the restrictions described in Article IV. RESTRICTED STOCK PURCHASE AGREEMENT. The agreement between the Corporation and a Holder with respect to Rights to Restricted Stock, including such terms and provisions as are necessary or appropriate under Article IV. RETIREMENT. "Retirement" shall mean: (i) the termination of an Eligible Employee's employment under conditions which would constitute "normal retirement" or "early retirement" under any tax qualified retirement plan maintained by the Corporation or a Subsidiary, or (ii) termination of employment after attaining age 65. RIGHTS. The rights to exercise, purchase or receive the Options, Restricted Stock, Performance Units and SARs described herein. RIGHTS AGREEMENT. An Option Agreement, a Restricted Stock Grant Agreement, a Unit Agreement or an SAR Agreement. SAR. The Right of an SAR Recipient to receive cash when, as and in the amounts described in VI. SAR AGREEMENT. The agreement between the Corporation and an SAR Recipient with respect to the SAR awarded to the SAR Recipient, including such terms and conditions as are necessary or appropriate under VI. 3 SEC. The Securities and Exchange Commission. STOCK. The shares of Common Stock in the Plan Pool available for issuance pursuant to the valid exercise of a Right or on which the cash value of a Right is to be based. TAX WITHHOLDING LIABILITY. All federal and state income taxes, social security tax, and any other taxes applicable to the compensation income arising from the transaction required by applicable law to be withheld by the Corporation. TRANSFER. The sale, assignment, transfer, conveyance, pledge, hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for the benefit of creditors, by operation of law (by will or descent and distribution), transfer by a qualified domestic relations order, a property settlement or maintenance agreement, transfer by result of the bankruptcy laws or otherwise of a share of Stock or of a Right. UNITS. The Right of a Unit Recipient to receive a combination of cash and Stock when, as and in the amounts described in Article V. UNIT AGREEMENT. The agreement between the Corporation and Unit Recipient with respect to the award of Units to the Unit Recipient, including such terms and conditions as are necessary or appropriate under Article V. 1933 ACT. The Securities Act of 1933, as amended. 1934 ACT. The Securities Exchange Act of 1934, as amended. ARTICLE II GENERAL SECTION 2.1. PURPOSE. The purposes of this Plan are to encourage and motivate employees within specified job grade classifications to contribute to the successful performance of the Corporation and its Subsidiaries and the growth of the market value of the Corporation's Common Stock; to achieve a unity of purpose between such employees and shareholders by providing ownership opportunities, and, when viewed in conjunction with benefit plans for members of the Board and the Boards of Directors of certain Subsidiaries, to achieve a unity of purpose between such employees and directors in the achievement of the Corporation's primary long term performance objectives; and to retain such employees by rewarding them with potentially tax-advantageous future compensation. These objectives will be promoted through the granting of Rights to designated Eligible Employees pursuant to the terms of this Plan. SECTION 2.2. ADMINISTRATION. (a) The Plan shall be administered by the Committee. The Committee may designate any officers or employees of the Corporation or any Subsidiary to assist in the administration of the Plan, to execute documents on behalf of the Committee and to perform such other ministerial duties as may be delegated to them by the Committee. (b) Subject to the provisions of the Plan, the determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive upon persons affected thereby. By way of illustration and not of limitation, the Committee shall have the discretion: 4 (i) to construe and interpret the Plan and all Rights granted hereunder and to determine the terms and provisions (and amendments thereof) of the Rights granted under the Plan (which need not be identical); (ii) to define the terms used in the Plan and in the Rights granted hereunder; (iii) to prescribe, amend and rescind the rules and regulations relating to the Plan; (iv) to determine the Eligible Employees to whom and the time or times at which such Rights shall be granted, the number of shares of Stock, as and when applicable, to be subject to each Right, but in no event shall the total of all rights granted to any individual exceed 40% of outstanding Common Stock of the Corporation; (v) to determine the exercise price or, other relevant purchase price or value pertaining to a Right; (vi) to determine any leaves of absence which may be granted to Eligible Employees without constituting a termination of their employment for the purposes of the Plan; and (vii) to make all other determinations and interpretations necessary or advisable for the administration of the Plan. (c) Notwithstanding the foregoing, or any other provision of this Plan, the Committee will have no authority to grant Rights to any of its members, whether or not approved by the Board. (d) It shall be in the discretion of the Committee to grant Options to purchase shares of Stock which qualify as ISOs under the Code or which will be given tax treatment as Non-Qualified Options. Any Options granted which fail to satisfy the requirements for ISOs shall become Non-Qualified Options. (e) The intent of the Corporation is to effect the Registration. In such event, the Corporation shall make available to Eligible Employees receiving Rights and/or shares of Stock in connection therewith all disclosure documents required under such federal and state laws. If such Registration shall not occur, the Committee shall be responsible for supplying the recipient of a Right and/or shares of Stock in connection therewith with such information about the Corporation as is contemplated by the federal and state securities laws in connection with exemptions from the registration requirements of such laws, as well as providing the recipient of a Right with the opportunity to ask questions and receive answers concerning the Corporation and the terms and conditions of the Rights granted under this Plan. In addition, if such Registration shall not occur, the Committee shall be responsible for determining the maximum number of Eligible Employees and the suitability of particular persons to be Eligible Employees in order to comply with applicable federal and state securities statutes and regulations governing such exemptions. (f) In determining the Eligible Employees to whom Rights may be granted and the number of shares of Stock to be covered by each Right, the Committee shall take into account the nature of the services rendered by such Eligible Employees, their present and potential contributions to the success of the Corporation and/or a Subsidiary and such other factors as the Committee shall deem relevant. An Eligible Employee who has been granted a Right under this Plan may be granted an additional Right or Rights under this Plan if the Committee shall so determine. If, pursuant to the terms of this Plan, or otherwise in connection with this Plan, it is necessary that the percentage of stock ownership of an Eligible Employee be determined, the ownership attribution provisions set forth in Section 424(d) of the Code shall be controlling. 5 (g) The granting of Rights pursuant to this Plan is in the exclusive discretion of the Committee, and until the Committee acts, no individual shall have any rights under this Plan. The terms of this Plan shall be interpreted in accordance with this intent. SECTION 2.3. STOCK AVAILABLE FOR RIGHTS. (a) Shares of the Stock shall be subject to, or underlying, grants of Options, Restricted Stock, Stock Appreciation Rights and Performance Units under this Plan. The total number of shares of Stock for which, or with respect to which, Rights may be granted (including the number of shares of Stock in respect of which Performance Units may be granted) under this Plan shall be those designated in the Plan Pool, but in no event shall the Rights to shares granted under the Plan exceed 10% of the outstanding Common Stock of the Corporation. In the event that a Right granted under this Plan to any Eligible Employee expires or is terminated unexercised as to any shares of Stock covered thereby, such shares thereafter shall be deemed available in the Plan Pool for the granting of Rights under this Plan; provided, however, if the expiration or termination date of a Right is beyond the term of existence of this Plan as described in Section 6.3, then any shares of Stock covered by unexercised or terminated Rights shall not reactivate the existence of this Plan and therefore shall not be available for additional grants of Rights under this Plan. (b) In the event the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend, recapitalization, merger, share exchange acquisition, combination or reclassification, appropriate proportionate adjustments will be made in: (i) the aggregate number and/or kind of shares of Stock in the Plan Pool that may be issued pursuant to the exercise of, or that are underlying, Rights granted hereunder; (ii) the exercise or other purchase price or value pertaining to, and the number and/or kind of shares of Stock called for with respect to, or underlying, each outstanding Right granted hereunder; and (iii) other rights and matters determined on a per share basis under this Plan or any Rights Agreement. Any such adjustments will be made only by the Committee, subject to ratification by the Board, and when so made will be effective, conclusive and binding for all purposes with respect to this Plan and all Rights then outstanding. No such adjustments will be required by reason of (1) the issuance or sale by the Corporation for cash of additional shares of its Common Stock or securities convertible into or exchangeable for shares of its Common Stock, or (2) the issuance of shares of Common Stock in exchange for shares of the capital stock of any corporation, financial institution or other organization acquired by the Corporation or any Subsidiary in connection therewith. (c) The grant of a Right pursuant to this Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassification, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. (d) No fractional shares of Stock shall be issued under this Plan for any adjustment under Section 2.3(b). SECTION 2.4. SEVERABLE PROVISIONS. The Corporation intends that the provisions of each of Articles III, IV, V and VI, in each case together with Articles I, II and VII, shall each be deemed to be effective on an independent basis, and that if one or more of such Articles, or the operative provisions thereof, shall be deemed invalid, void or voidable, the remainder of such Articles shall continue in full force and effect. 6 ARTICLE III OPTIONS SECTION 3.1. GRANT OF OPTIONS. (a) The Corporation may grant Options to Eligible Employees as provided in this Article III. Options will be deemed granted pursuant to this Article III only upon authorization by the Committee, effective on even date thereon, and shall require the immediate execution and delivery of an Option Agreement by the Eligible Employee Optionee ("the "Optionee") and a duly authorized officer of the Corporation. Options will not be deemed granted hereunder merely upon authorization of such grant by the Committee. The aggregate number of shares of Stock potentially acquirable under all Options granted shall not exceed the total number of shares of Stock in the Plan Pool, less all shares of Stock potentially acquired under, or underlying, all other Rights outstanding under this Plan. (b) The Committee shall designate Options at the time a grant is authorized as either ISOs or Non-Qualified Options. The aggregate Fair Market Value (determined as of the date an ISO is granted) of the shares of Stock as to which an ISO may first become exercisable by an Optionee in a particular calendar year (pursuant to Article III and all other plans of the Company and/or its Subsidiaries) may not exceed $100,000 (the "$100,000 Limitation"). If an Optionee is granted Options in excess of the $100,000 Limitation, or if such Options otherwise become exercisable with respect to the number of shares of Stock which would exceed the $100,000 limitation, such excess Options shall be Non-Qualified Options. SECTION 3.2 EXERCISE PRICE. (a) The initial exercise price of each Option granted under this Plan (the "Exercise Price") shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of grant of the Option. In the case of ISOs granted to a shareholder who owns capital stock of the Corporation possessing more than ten percent (10%) of the total combined voting power of all classes of the capital stock of the Corporation (a "10% Shareholder"), the Exercise Price of each Option granted under the Plan to such 10% Shareholder shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant of the Option. (b) In its discretion and subject to the provisions of Section 3.2(a) (as to the establishment of the Exercise Price of an Option on the date of grant), the Committee may establish that the Exercise Price of an Option shall be adjusted upward or downward, on a quarterly basis, based upon the market value performance of the Common Stock in comparison with the aggregate market value performance of one or more indices composed of publicly-traded financial institutions and financial institution holding companies deemed by the Committee to be similar (in terms of asset size, capitalization, trading volumes and other factors deemed relevant by the Committee) to the Company (an "Index" and the "Indices"); provided, however, that the Exercise Price of an ISO shall not be adjustable if, under the Code, such adjustable Exercise Price would disqualify the ISO as an ISO. The Committee may utilize Indices published by third parties and/or may construct one or more Indices meeting the characteristics described above. The Indices utilized will be recalculated quarterly, including in such quarterly recalculation such adjustments for stock splits, reverse stock splits and stock dividends of the companies in the indices and of the Company as are appropriate. Each such Index shall include no fewer than fifteen (15) publicly-traded financial institutions and financial institution holding companies. If more than one Index is utilized by the Committee, it may give such weighting to each Index utilized as the Committee may determine in its sole discretion, consistent with the provisions of this Article III. 7 SECTION 3.3. TERMS AND CONDITIONS OF OPTIONS. (a) All Options must be granted within ten (10) years of the Effective Date. (b) The Committee may grant ISOs and Non-Qualified Options, either separately or jointly, to an Eligible Employee. (c) Each grant of Options shall be evidenced by an Option Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article III. (d) At the discretion of the Committee, an Optionee, as a condition to the granting of an Option, must execute and deliver to the Company a confidential information agreement approved by the Committee. (e) Nothing contained in Article III, any Option Agreement or in any other agreement executed in connection with the granting of an Option under this Article III will confer upon any Optionee any right with respect to the continuation of his or her status as an employee of, consultant or independent contractor to, or director of the Company or any of its Subsidiaries. (f) Except as otherwise provided herein, each Option Agreement may specify the period or periods of time within which each Option or portion thereof will first become exercisable (the "Vesting Period") with respect to the total number of shares of Stock acquirable thereunder. Such Vesting Periods will be fixed by the Committee in its discretion, and may be accelerated or shortened by the Committee in its discretion; provided, however, that the Vesting Period For each ISO shall be at least two years (2) from the date such Option was granted. (g) Not less than one hundred (100) shares of Stock may be purchased at any one time through the exercise of an Option unless the number purchased is the total number at that time purchasable under all Options granted to the Optionee. (h) An Optionee shall have no rights as a shareholder of the Company with respect to any shares of Stock covered by Options granted to the Optionee until payment in full of the Exercise Price by such Optionee for the shares being purchased. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Sections 2.3(b) and 3.2(b). (i) All shares of Stock obtained pursuant to an Option which qualifies as an ISO shall be held in escrow for a period which ends on the later of (i) two (2) years from the date of the granting of the ISO or (ii) one (1) year after the issuance of such shares pursuant to the exercise of the ISO. Such shares of Stock shall be held by the Corporation or its designee. The Optionee who has exercised the ISO shall have all rights of a shareholder, including, but not limited to, the rights to vote, receive dividends and sell such shares. The sole purpose of the escrow is to inform the Corporation of a disqualifying disposition of the shares of Stock acquired within the meaning of Section 422 of the Code, and it shall be administered solely for this purpose. (j) Additionally, and notwithstanding any other provisions of this Article III, no shares of Stock obtained pursuant to an Option may be Transferred until at least six (6) months and one (1) day shall have elapsed since the date such Option was granted. 8 SECTION 3.4. EXERCISE OF OPTIONS. (a) An Optionee must be an Eligible Employee at all times from the date of grant until the exercise of the Options granted, except as provided in Section 3.5(b). (b) An Option may be exercised to the extent exercisable (i) by giving written notice of exercise to the Corporation, specifying the number of full shares of Stock to be purchased and, if applicable, accompanied by full payment of the Exercise Price thereof and the amount of the Tax Withholding Liability pursuant to Section 3.4(c) below; and (ii) by giving assurances satisfactory to the Corporation that the shares of Stock to be purchased upon such exercise are being purchased for investment and not with a view to resale in connection with any distribution of such shares in violation of the 1933 Act; provided, however, that in the event the prior occurrence of the Registration or in the event resale of such Stock without such Registration would otherwise be permissible, this second condition will be inoperative if, in the opinion of counsel for the Corporation, such condition is not required under the 1933 Act or any other applicable law, regulation or rule of any governmental agency. (c) As a condition to the issuance of the shares of Stock upon full or partial exercise of a Non-Qualified Option, the Optionee will pay to the Corporation in cash, or in such other form as the Committee may determine in its discretion, the amount of the Corporation's Tax Withholding Liability required in connection with such exercise. (d) The Exercise Price of an Option shall be payable to the Corporation either (i) in United States dollars, in cash or by check, corporation draft or money order payable to the order of the Corporation, or (ii) at the discretion of the Committee, through the delivery of outstanding shares of the Common Stock owned by the Optionee with a Fair Market Value as of the date of delivery equal to the Exercise Price, or (iii) at the discretion of the Committee, by a combination of (i) and (ii) above. No shares of Stock shall be delivered until full payment has been made. Except as provided in Section 2.3(b), the Committee may not approve a reduction of the Exercise Price of any such Option, or the cancellation of any such Option and the regranting thereof to the same Optionee at a lower Exercise Price, at a time when the Fair Market Value of the Common Stock is lower than it was when such Option was granted. SECTION 3.5. TERM AND TERMINATION OF OPTION. (a) The Committee shall determine, and each Option Agreement shall state, the expiration date or dates of each Option, but such expiration date shall be not later than ten (10) years after the date such Option was granted (the "Option Period"). In the event an ISO is granted to a 10% Shareholder, the expiration date or dates of each Option Period shall be not later than five (5) years after the date such Option is granted. The Committee, in its discretion, may extend the expiration date or dates of an Option Period after such date was originally set; provided, however such expiration date may not exceed the maximum expiration date described in this Section 3.5(a). (b) To the extent not previously exercised, each Option will terminate upon the expiration of the Option Period specified in the Option Agreement; provided, however, that, subject to the provisions of Section 3.5(a), each such Option will terminate upon the earlier of: (i) ninety (90) days after the date that the Optionee ceases to be an Eligible Employee for any reason, other than by reason of Death, Disability, Retirement or a Just Cause Termination; (ii) twelve (12) months after the date that the Optionee ceases to be an Eligible Employee by reason of Death, Disability or Retirement; or (iii) immediately as of the date that the Optionee ceases to be an Eligible Participant by reason of a Just Cause Termination. Any portions of Options not exercised within the foregoing periods shall terminate. The Committee may, in its discretion, specify other events that will result in the termination of an ISO (including, without limitation, termination of employment by reason of Death). In the case of Non-Qualified Options, the Committee shall 9 have full discretion to specify what, if any, events will terminate the Option prior to the expiration of the Option Period. SECTION 3.6. CHANGE IN CONTROL TRANSACTION. At any time prior to the date or consummation of a Change in Control Transaction, the Committee may, in its absolute discretion, determine that all or any part of the Options theretofore granted under this Article III shall become immediately exercisable in full and may thereafter be exercised at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of exercisability would result in an "excess parachute payment" within the meaning of Section 280G of the Code). Any Option that has not been fully exercised before the date of consummation of the Change in Control Transaction shall terminate on such date, unless a provision has been made in writing in connection with such transaction for the assumption of all Options theretofore granted, or the substitution for such Options of options to acquire the voting stock of a successor employer corporation, or a parent or a subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices, in which event the Options theretofore granted shall continue in the manner and under the terms so provided. SECTION 3.7. RESTRICTIONS ON TRANSFER. An Option granted under Article III may not be Transferred except by will or the laws of descent and distribution and, during the lifetime of the Optionee to whom it was granted, may be exercised only by such Optionee. SECTION 3.8. STOCK CERTIFICATES. Certificates representing the Stock issued pursuant to the exercise of Options will bear all legends required by law and necessary to effectuate the provisions hereof. The Corporation may place a "stop transfer" order against such shares of Stock until all restrictions and conditions set forth in this Article III, the applicable Option Agreement, and in the legends referred to in this Section have been complied with. SECTION 3.9. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or discontinue the provisions of this Article III at any time or from time to time; provided that no action of the Board will cause ISOs granted under this Plan not to comply with Section 422 of the Code unless the Board specifically declares such action to be made for that purpose; and, provided, further, that no such action may, without the approval of the shareholders of the Corporation, materially increase (other than by reason of an adjustment pursuant to Section 2.3(b) hereof) the maximum aggregate number of shares of Stock in the Plan Pool, materially increase the benefits accruing to Eligible Employees under this Article III, or materially modify eligibility requirements for participation under this Article III. Moreover, no such action may alter or impair any Option previously granted under this Article III without the consent of the applicable Optionee. SECTION 3.10. COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section 16 of the 1934 Act, transactions under this Article III are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of this Article III or action by the Board or the Committee fails so to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. ARTICLE IV RESTRICTED STOCK GRANTS SECTION 4.1 GRANTS OF RESTRICTED STOCK. (a) The Corporation may issue Restricted Stock to Eligible Employees as provided in this Article IV. Restricted Stock will be deemed issued only upon (i) authorization by the Committee and (ii) the execution and delivery of a Restricted Stock Grant Agreement by the Eligible Employee to whom such 10 Restricted Stock is to be issued (the "Holder") and a duly authorized officer of the Corporation. Restricted Stock will not be deemed to have been issued merely upon authorization by the Committee. (b) Each issuance of Restricted Stock pursuant to this Article IV will be evidenced by a Restricted Stock Grant Agreement between the Corporation and the Holder in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article IV. Each Restricted Stock Grant Agreement will specify the purchase price per share, if any, paid by the Holder for the Restricted Stock, such amount to be fixed by the Committee in its discretion. (c) Without limiting the foregoing, each Restricted Stock Grant Agreement shall set forth the terms and conditions of any forfeiture provisions regarding the Restricted Stock, (including any provisions for accelerated vesting in the event of a change in Control Transaction) as determined by the Committee in its discretion. (d) At the discretion of the Committee, the Holder, as a condition to such issuance, may be required (i) to execute and deliver to the Corporation a confidential information agreement approved by the Committee, and/or (ii) to pay to the Corporation in cash, or in such other form as the Committee may determine in its discretion, the amount of the Corporation's Tax Withholding Liability required in connection with such issuance. (e) Nothing contained in this Article IV, any Restricted Stock Grant Agreement or in any other agreement executed in connection with the issuance of Restricted Stock under this Article IV will confer upon any holder any right with respect to the continuation of his or her status as an employee of the Corporation or any of its Subsidiaries. SECTION 4.2. RESTRICTIONS ON TRANSFER OF RESTRICTED STOCK. (a) Shares of restricted Stock acquired by a Holder may be transferred only in accordance with the specific limitations on the transfer of restricted Stock imposed by applicable state or federal securities laws or set forth below, and subject to certain undertakings of the transferee set forth in Section 4.2(c). All Transfers of Restricted Stock not meeting the conditions set forth in this Section 4.2(a) are expressly prohibited. Except as otherwise set forth in this Article IV, as of the date of a grant of Restricted Stock (the "Grant Date), all of the shares of Restricted Stock to be issued pursuant to the Restricted Stock Grant Agreement (the "Total Award Shares") will be deemed not available for transfer or sale by the Holder and will become available for transfer or sale by the Holder) according to the schedule set forth in the appropriate Restricted Stock Grant Agreement. (b) Any prohibited Transfer of Restricted Stock is void and of no effect. Should such a Transfer purport to occur, the Corporation may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertaking or right under this Section 4.2(b), and/or exercise any other legal or equitable remedy. (c) Any Transfer of Restricted Stock that would otherwise be permitted under the terms of this Plan is prohibited unless the transferee executes such documents as the Corporation may reasonably require to ensure the Company's rights under a Restricted Stock Grant Agreement and this Article IV are adequately protected with respect to the Restricted Stock so Transferred. Such documents may include, without limitation, an agreement by the transferee to be bound by all of the terms of this Plan applicable to Restricted Stock and of the applicable Restricted Stock Grant Agreement, as if the transferee were the original Holder of such Restricted Stock. 11 (d) To facilitate the enforcement of the restrictions on Transfer set forth in this Article IV, the Committee may, at its discretion, require the Holder of shares of Restricted Stock to deliver the certificate(s) for such shares with a stock power executed in blank by the Holder and the Holder's spouse, to the Secretary of the Corporation or his or her designee, and the Company may hold said certificate(s) and stock power(s) in escrow and take all such actions as are necessary to insure that all Transfers and/or releases are made in accordance with the terms of this Plan. The certificates may be held in escrow so long as the shares of Restricted Stock whose ownership they evidence are subject to any restriction on Transfer under this Article IV or under a Restricted Stock Grant Agreement. Each Holder acknowledges that the Secretary of the Corporation (or his or her designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to the issuance of shares of Restricted Stock under this Article IV, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow holder will not be liable to any party to a Restricted Stock Grant Agreement (or to any other party) for any actions or omissions unless the escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine. SECTION 4.3. COMPLIANCE WITH LAW. Notwithstanding any other provision of this Article IV, Restricted Stock may be issued pursuant to this Article IV only after there has been compliance with all applicable federal and state securities laws, and such issuance will be subject to this overriding condition. The Company may include shares of Restricted Stock in a Registration, but will not be required to register or qualify Restricted Stock with the SEC or any state agency, except that the Corporation will register with, or as required by local law, file for and secure an exemption from such registration requirements from, the applicable securities administrator and other officials of each jurisdiction in which an Eligible Employee would be issued Restricted Stock hereunder prior to such issuance. SECTION 4.4. STOCK CERTIFICATES. Certificates representing the Restricted Stock issued pursuant to this Article IV will bear all legends required by law and necessary to effectuate the provisions hereof. The Corporation may place a "stop transfer" order against shares of Restricted Stock until all restrictions and conditions set forth in this Article IV have been complied with. SECTION 4.5. MARKET STANDOFF. To the extent requested by the Corporation and any underwriter of securities of the Corporation in connection with a firm commitment underwriting, no Holder of any shares of Restricted Stock will Transfer any such shares not included in such underwriting, or not previously registered in a Registration, during the one hundred twenty (120) day period following the effective date of the registration statement filed with the SEC under the 1933 Act in connection with such offering. SECTION 4.6. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or discontinue this Article IV at any time or from time to time; provided, that no such action of the Board shall alter or impair any rights previously granted to Holders under this Article IV without the consent of such affected Holders; and provided, further, that no such action may, without the approval of the Corporation's shareholders, materially increase (other than by reason of an adjustment pursuant to Section 2.3(b) hereof) the maximum aggregate number of shares of Stock in the Plan Pool, materially increase the benefits accruing to Eligible Employees under this Article IV, or materially modify the requirements as to eligibility for participation under this Article IV. Moreover, no such action may alter or impair any Restricted Stock previously granted under this Article IV without the consent of the applicable Holder. SECTION 4.7. COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section 16 of the 1934 Act, transactions are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of this Article IV or action by the Board or the Committee fails so to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 12 ARTICLE V LONG-TERM INCENTIVE COMPENSATION UNITS SECTION 5.1. AWARDS OF UNITS. (a) The Committee may grant awards of Units to Eligible Employees as provided in this Article V. Units will be deemed granted only upon authorization by the Committee, effective on even date thereon and requiring the immediate execution and delivery of a Unit Agreement by the Eligible Employee to whom Units are to be granted (a "Unit Recipient") and an authorized officer of the Corporation. Units will not be deemed granted merely upon authorization by the Committee. Units may be granted in each of the years 1998 through 2005 in such amounts and to such Unit Recipients as the Committee may determine in its sole discretion subject to the limitation in Section 5.2 below. (b) Each grant of Units pursuant to this Article V will be evidenced by a Unit Award Agreement between the Corporation and the Unit Recipient in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article V. (c) Except as otherwise provided herein, Units will be distributed only after the end of a performance period of two or more years ("Performance Period") beginning with the year in which such Units were awarded. The Performance Period shall be set by the Committee for each year's awards. (d) The percentage of the Units awarded under this Section 5.1 or credited pursuant to Section 5.5 that will be distributed to Unit Recipients shall depend on the levels of financial performance and other performance objectives achieved during each year of the Performance Period; provided, however, that the Committee may adopt one or more performance categories or eliminate all performance categories other than financial performance. Financial performance shall be based on the consolidated results of the Corporation and its Subsidiaries prepared on the same basis as the financial statements published for financial reporting purposes and determined in accordance with Section 5.1(e) below. Other performance categories adopted by the Committee shall be based on measurements of performance as the Committee shall deem appropriate. (e) Distributions of Units awarded will be based on the Corporations financial performance with results from other performance categories applied as a factor, not exceeding one (1), against financial results. The annual financial and other performance results will be averaged over the Performance Period and translated into percentage factors according to graduated criteria established by the Committee for the entire Performance Period. The resulting percentage factors shall determine the percentage of Units to be distributed. No distributions of Units, based on financial performance and other performance, shall be made if a minimum average percentage of the applicable measurement of performance, to be established by the Committee, is not achieved for the Performance Period. The performance levels achieved for each Performance Period and percentage of Units to be distributed shall be conclusively determined by the Committee. (f) The percentage of Units awarded the receipt of which Unit Recipients become entitled based on the levels of performance (including those Units credited under Section 55) will be determined as soon as practicable after each Performance Period and are called "Retained Units." (g) As soon as practical after determination of the number of Retained Units, such Retained Units shall be distributed in the form of a combination of shares of Stock and cash, as determined under Section 5.1(e). The percentage of Retained Units to be distributed in the form of a combination of shares and cash in the relative percentages as between the two as determined by the Committee in its sole discretion, however in no event shall the value of the total distributions pursuant to this Section 5.1(g) exceed 13 the total Retained Units determined under Section 5.1(e). The Units awarded but which Unit Recipients do not become entitled to receive, shall be canceled. (h) Notwithstanding any other provision in this Article V, the Committee, if it determines in its sole discretion that it is necessary or advisable under the circumstances, may adopt rules pursuant to which Eligible Employees by virtue of hire, or promotion or upgrade to a higher job grade classification, or special individual circumstances, may be granted the total award of Units or any portion thereof, with respect to one or more Performance Periods that began in prior years and at the time of the awards have not yet been completed. SECTION 5.2. LIMITATIONS. The aggregate number of shares of Stock potentially distributable under all Units granted, including those Units credited pursuant to Section 5.5, shall not exceed the total number of shares of Stock in the Plan Pool, less all shares of Stock potentially acquirable under, or underlying, all other Rights outstanding under this Plan. SECTION 5.3. TERMS AND CONDITIONS. (a) All grants of Units must be made within ten (10) years of the Effective Date. (b) The grant of Units shall be evidenced by a Unit Award Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article V. (c) At the discretion of the Committee, a Unit Recipient, as a condition to the award of Units, may be required to execute and deliver to the Corporation a confidential information agreement approved by the Committee. (d) Nothing contained in this Article V, any Unit Award Agreement or in any other agreement executed in connection with the grant of Units under this Article V will confer upon any Unit Recipient any right with respect to the continuation of his or her status as an employee of, consultant or independent contractor to, or director of, the Corporation or any of its Subsidiaries. (e) A Unit Recipient shall have no rights as a shareholder of the Corporation with respect to any Units until the distribution of shares of Stock in connection therewith. No adjustment shall be made in the number of Units for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Sections 2.3(b) and 5.6(a). SECTION 5.4. SPECIAL DISTRIBUTION RULES. (a) Except as otherwise provided in this Section 5.4., a Unit Recipient must be an Eligible Employee from the date a Unit is granted him or her continuously through and including the date of distribution of such Unit. (b) In case of the Death or Disability of a Unit Recipient prior to the end of any Performance Period, whether before or after any event set forth in Section 5.4.(b) below, the number of Units awarded to the Unit Recipient for such Performance Period shall be reduced pro rata based on the number of months remaining in the Performance Period after the month of Death or Disability. The remaining Units, reduced in the discretion of the Committee to the percentage indicated by the levels of performance achieved prior to the date of Death or Disability, if any, shall be distributed within a reasonable time after Death or Disability. All other Units awarded to the Unit Recipient for such Performance Period shall be canceled. 14 (c) If a Unit Recipient enters into Retirement prior to the end of any Performance Period, the Units awarded to such Unit Recipient under this Article V, and not yet distributed, shall be prorated to the end of the year in which such Retirement occurs and distributed at the end of the Performance Period based upon the Corporation's performance for such period. (d) In case of the termination of the Unit Recipient's status as an Eligible Employee prior to the end of any Performance Period for any reason other than Death, Disability or Retirement, all Units awarded to the Unit Recipient with respect to any such Performance Period shall be immediately forfeited and canceled. (e) Upon a Unit Recipient's promotion to a higher job grade classification, the Committee may award to the Unit Recipient the total Units, or any portion thereof, which are associated with the higher job grade classification for the current Performance Period. (f) Notwithstanding any other provision of the Plan, the Committee may reduce or eliminate awards to a Unit Recipient who has been demoted to a lower job grade classification, and where circumstances warrant, may permit continued participation, proration or early distribution, or a combination thereof, of awards which would otherwise be canceled. SECTION 5.5. DIVIDEND EQUIVALENT UNITS. On each record date for dividends on the Common Stock, an amount equal to the dividend payable on one share of Common Stock will be determined and credited (the "Dividend Equivalent Credit") on the payment date to each Unit Recipient's account for each Unit which has been awarded to the Unit Recipient and not distributed or canceled. Such amount will be converted within the account to an additional number of Units equal to the number of shares of Common Stock that could be purchased at Fair Market Value on such dividend payment date. These Units will be treated for purposes of this Article V in the same manner as those Units granted pursuant to Section 5.1. SECTION 5.6. ADJUSTMENTS. (a) In addition to the provisions of Section 2.3.(b), if an extraordinary charge occurs during a Performance Period which significantly alters the basis upon which the performance levels were established under Section 5.1. for that Performance Period, to avoid distortion in the operation of this Article V, but subject to Section 5.2., the Committee may make adjustments in such performance levels to preserve the incentive features of this Article V, whether before or after the end of the Performance Period, to the extent it deems appropriate in its sole discretion, which adjustments shall be conclusive and binding upon all parties concerned. Such changes may include, without limitation, adoption of, or changes in, accounting practices, tax laws and regulatory or other laws or regulations; economic changes not in the ordinary course of business cycles; or compliance with judicial decrees or other legal authorities. (b) At any time prior to the date of consummation of a Change in Control Transaction, the Committee may, in its absolute discretion, determine that all or any part of the Units theretofore awarded under this Article V shall become immediately distributable (reduced pro rata based on the number of months remaining in the Performance Period after the consummation of the Change in Control Transaction) and may thereafter be distributed at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of distribution would result in an "excess parachute payment" within the meaning of Section 280G of the Code). Any Units that have not been distributed before the date of consummation of the Change in Control Transaction shall terminate on such date, unless a provision has been made in writing in connection with such transaction for the assumption of all awards of Units theretofore made, or the substitution for such units of awards of compensation units having comparable characteristics under a long term incentive award plan of 15 a successor employer corporation or a parent or a subsidiary thereof, with appropriate adjustments, in which event the awards of Units theretofore made shall continue in the manner and under the terms so provided. SECTION 5.7. OTHER CONDITIONS. (a) No person shall have any claim to be granted an award of Units under this Article V and there is no obligation for uniformity of treatment of Eligible Employees or Unit Recipients under this Article V. (b) The Corporation shall have the right to deduct from any distribution or payment in cash under this Article V, and the Unit Recipient or other person receiving shares of Stock under this Article V shall be required to pay to the Corporation, any Tax Withholding Liability. The number of shares of Stock to be distributed to any individual Unit Recipient may be reduced by the number of shares of Stock, the Fair Market Value of which on the Distribution Date (as defined in Section 5.7(d) below) is equivalent to the cash necessary to pay any Tax Withholding Liability, where the cash to be distributed is not sufficient to pay such Tax Withholding Liability, or the Unit Recipient may deliver to the Corporation cash sufficient to pay such Tax Withholding Liability. (c) Any distribution of shares of Stock under this Article V may be delayed until the requirements of any applicable laws or regulations, and any stock exchange or NASDAQ-NMS requirements, are satisfied. The shares of Stock distributed under this Article V shall be subject to such restrictions and conditions on disposition as counsel for the Corporation shall determine to be desirable or necessary under applicable law. (d) For the purpose of distribution of Units in cash, the value of a Unit shall be : either a fixed unit value or the Fair Market Value of the Common Stock on the Distribution Date. Further , the number of units awarded may be based upon performance. Except as otherwise determined by the Committee, the "Distribution Date" shall be March 15th (or the first business day thereafter) in the year of distribution, except that in the case of special distributions the Distribution Date shall be the first business day of the month in which the Committee determines the amount and form of the distribution. (e) Notwithstanding any other provision of this Article V, no Dividend Equivalent Credits shall be made and no distributions of Units shall be made if at the time a Dividend Equivalent Credit or distribution would otherwise have been made: (i) The regular quarterly dividend on the Common Stock has been omitted and not subsequently paid or there exists any default in payment of dividends on any such outstanding shares of capital stock of the Corporation; (ii) The rate of dividends on the Common Stock is lower than at the time the Units to which the Dividend Equivalent Credit relates were awarded, adjusted for any change of the type referred to in Section 2.3.(b); (iii) Estimated consolidated net income of the Corporation for the twelve month period preceding the month the Dividend Equivalent Credit or distribution would otherwise have been made is less than the sum of the amount of the Dividend Equivalent Credits and Units eligible for distribution under this Article V in that month plus all dividends applicable to such period on an accrual basis, either paid, declared or accrued at the most recently paid rate, on all outstanding shares of Common Stock; or (iv) The Dividend Equivalent Credit or distribution would result in a default in any agreement by which the Corporation is bound. 16 (f) In the event net income available under Section 5.7(e) above for Dividend Equivalent Credits and awards eligible for distribution under this Article V is sufficient to cover part but not all of such amounts, the following order shall be applied in making payments: (i) Dividend Equivalent Credits, (ii) Units eligible for distribution under this Article V. SECTION 5.8. DESIGNATION OF BENEFICIARIES. A Unit Recipient may designate a beneficiary or beneficiaries to receive all or part of the Stock and/or cash to be distributed to the Unit Recipient under this Article V in case of Death. A designation of beneficiary may be replaced by a new designation or may be revoked by the Unit Recipient at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the Unit Recipient and delivered to the Corporation prior to the Unit Recipient's Death. In case of the Unit Recipient's Death, the amounts to be distributed to the Unit Recipient under this Article V with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article V to the designated beneficiary or beneficiaries. The amount distributable to a Unit Recipient upon Death and not subject to such a designation shall be distributed to the Unit Recipient's estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article V, the amount in question may be paid to the estate of the Unit Recipient, in which event the Corporation shall have no further liability to anyone with respect to such amount. SECTION 5.9. RESTRICTIONS ON TRANSFER. Units granted under Article V may not be Transferred, except as provided in Section 5.8, and, during the lifetime of the Unit Recipient to whom it was awarded, cash and stock receivable with respect to Units may be received only by such Unit Recipient. SECTION 5.10. AMENDMENT AND DISCONTINUANCE. No award of Units may be granted under this Article V after January 21, 2008. The Board may amend, suspend or discontinue the provisions of this Article V at any time or from time to time, provided, that no such action may, without the approval of the shareholders of the Corporation, materially increase (other than by reason of an adjustment pursuant to Section 2.3.(b) hereof) the maximum number of shares of Stock in the Plan Pool, materially increase the benefits accruing to Eligible Employees under this Article V, or materially modify the eligibility requirements for participation under this Article V. Moreover, no such action may alter or impair any Units previously granted under this Article V without the consent of the applicable Holder. SECTION 5.11. COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section 16 of the 1934 Act, transactions under this Article V are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of this Article V or action by the Board or the Committee fails so to comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. ARTICLE VI STOCK APPRECIATION RIGHTS SECTION 6.1. GRANTS OF SARS. (a) The Corporation may grant SARs under this Article VI. SARs will be deemed granted only upon (i) authorization by the Committee and (ii) the execution and delivery of a SAR Agreement by the Eligible Employee to whom the SARs are to be granted (the "SAR Recipient") and a duly authorized officer of the Corporation. SARs will not be deemed granted merely upon authorization by the Committee. The aggregate number of shares of Stock which shall underlie SARs granted hereunder shall not exceed the total number of shares of Stock remaining in the Plan Pool, less all shares of Stock potentially acquirable under or underlying all other Rights outstanding under this Plan. 17 (b) Each grant of SARs pursuant to this Article VI shall be evidenced by a SAR Agreement between the Corporation and the SAR Recipient, in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article VI. SECTION 6.2. TERMS AND CONDITIONS OF SARS. (a) All SARs must be granted within ten (10) years of the Effective Date. (b) Each SAR issued pursuant to this Article VI shall have an initial base value (the "Base Value") equal to the Fair Market Value of a share of Common Stock on the date of issuance of the SAR. (c) In its discretion and subject to the provisions of Section 6.2(b) (as to the establishment of the initial Base Value of a SAR), the Committee may establish that the Base Value of a SAR shall be adjusted, upward or downward, on a quarterly basis, based upon the market value performance of the Common Stock in comparison with the aggregate market value performance of the Index or Indices utilized under Section 3.2(b). (d) At the discretion of the Committee, a SAR Recipient, as a condition to the granting of a SAR, must execute and deliver to the Corporation a confidential information agreement approved by the Committee. (e) Nothing contained in this Article VI, any SAR Agreement or in any other agreement executed in connection with the granting of a SAR under this Article VI will confer upon any SAR Recipient any right with respect to the continuation of his or her status as an employee of the Corporation or any of its Subsidiaries. (f) Except as otherwise provided herein, each SAR Agreement may specify the period or periods of time within which each SAR or portion thereof will first become exercisable (the "SAR Vesting Period"). Such SAR Vesting Periods will be fixed by the Committee in its discretion, and may be accelerated or shortened by the Committee in its discretion. (g) SARs relating to no less than one hundred (100) shares of Stock may be exercised at any one time unless the number exercised is the total number at that time exercisable under all SARs granted to the SAR Recipient. (h) A SAR Recipient shall have no rights as a shareholder of the Corporation with respect to any shares of Stock underlying such SAR. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Stock is fully paid for, except as provided in Sections 2.3(b) and 6.2(c). SECTION 6.3. RESTRICTIONS ON TRANSFER OF SARS. SARs granted under this Article VI may not be Transferred, except as provided in Section 6.7, and during the lifetime of the SAR Recipient to whom it was granted, may be exercised only by such SAR Recipient. SECTION 6.4. EXERCISE OF SARS. (a) A SAR Recipient (or his or her executors or administrators, or heirs or legatees) shall exercise a SAR by giving written notice of such exercise to the Corporation. SARs may be exercised only upon the completion of the SAR Vesting Period, if any, applicable to such SAR (the date such notice is received by the Corporation being referred to herein as the "SAR Exercise Date"). 18 (b) Within ten (10) business days of the SAR Exercise Date applicable to a SAR exercised in accordance with Section 6.4(a), the SAR Recipient shall be paid in cash the difference between the Base Value of such SAR (as adjusted, if applicable under Section 6.2(c), as of the most recently preceding quarterly period) and the Fair Market Value of the Common Stock as of the SAR Exercise Date, as such difference is reduced by the Corporation's Tax Withholding Liability arising from such exercise. SECTION 6.5. TERMINATION OF SARS. The Committee shall determine in its discretion, and each SAR Agreement shall state, the expiration date or dates of each SAR, but such expiration date shall be not later than ten (10) years after the date such SAR is granted (the "SAR Period"). The Committee, in its discretion, may extend the expiration date or dates of a SAR Period after such date was originally set; provided, however, such expiration date may not exceed the maximum expiration date described in this Section 6.5(a). SECTION 6.6. CHANGE IN CONTROL TRANSACTION. At any time prior to the date or consummation of a Change in Control Transaction, the Committee may, in its absolute discretion, determine that all or any part of the SARs theretofore granted under this Article VI shall become immediately exercisable in full and may thereafter be exercised at any time before the date of consummation of the Change in Control Transaction (except as otherwise provided in Article II hereof, and except to the extent that such acceleration of exercisability would result in an excess parachute payment within the meaning of Section 280G of the Code). Any SAR that has not been fully exercised before the date of consummation of the Change in Control Transaction shall terminate on such date, unless a provision has been made in writing in connection with such transaction for the assumption of all SARs theretofore granted, or the substitution for such SARs of grants of stock appreciation rights having comparable characteristics under a stock appreciation rights plan of a successor employer corporation or corporation, or a parent or a subsidiary thereof, with appropriate adjustments, in which event the SARs theretofore granted shall continue in the manner and under the terms so provided. SECTION 6.7. DESIGNATION OF BENEFICIARIES. A SAR Recipient may designate a beneficiary or beneficiaries to receive all or part of the cash to be paid to the SAR Recipient under this Article VI in case of Death. A designation of beneficiary may be replaced by a new designation or may be revoked by the SAR Recipient at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the SAR Recipient and delivered to the Corporation prior to the SAR Recipient's Death. In case of the SAR Recipient's Death, the amounts to be distributed to the SAR Recipient under this Article VI with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article VI to the designated beneficiary or beneficiaries. The amount distributable to a SAR Recipient upon Death and not subject to such a designation shall be distributed to the SAR Recipient's estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article VI, the amount in question may be paid to the estate of the SAR Recipient in which event the Corporation shall have no further liability to anyone with respect to such amount. SECTION 6.8. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or discontinue the provisions of this Article VI at any time or from time to time provided that no action of the Board may, without the approval of the shareholders of the Corporation materially increase (other than by reason of an adjustment pursuant to Section 2.3(b) hereof) the maximum aggregate number of shares of Stock in the Plan Pool, materially increase the benefits accruing to Eligible Employees under this Article VI, or materially modify eligibility requirements for participation under this Article VI. Moreover, no such action may alter or impair any SAR previously granted under this Article VI without the consent of the applicable SAR Recipient. SECTION 6.9. COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section 16 of the 1934 Act, transactions under this Article VI are intended to comply with all applicable conditions of Rule 19 16b-3 or its successors under the 1934 Act. To the extent any provision of this Article VI or action by the Board or the Committee fails so to comply, it shall be deemed null and void, is the extent permitted by law and deemed advisable by the Committee. ARTICLE VII MISCELLANEOUS SECTION 7.1. APPLICATION OF FUNDS. The proceeds received by the Corporation from the sale of Stock pursuant to the exercise of Rights will be used for general corporate purposes. SECTION 7.2. NO OBLIGATION TO EXERCISE RIGHT. The granting of a Right shall impose no obligation upon the recipient to exercise such Right. SECTION 7.3. TERM OF PLAN. Except as otherwise specifically provide herein, Rights may be granted pursuant to this Plan from time to time within ten (10) years from the Effective Date. SECTION 7.4. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part of, and shall not serve as a basis for, interpretation or construction of this Plan. As used herein, the masculine gender shall include the feminine and neuter, and the singular number shall include the plural, and vice versa, whenever such meanings are appropriate. SECTION 7.5 EXPENSES OF ADMINISTRATION OF PLAN. All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Corporation or by one or more Subsidiaries. The Corporation shall also indemnify, defend and hold each member of the Committee harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Committee's powers and the discharge of the Committee's duties hereunder. SECTION 7.6 GOVERNING LAW. Without regard to the principles of conflicts of laws the laws of the State of North Carolina shall govern and control the validity, interpretation, performance and enforcement of this Plan. SECTION 7.7 INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto, shall be maintained by the Secretary of the Corporation and shall be shown to any proper person making inquiry about it. 20 EX-10 7 EXHIBIT 10.3 EXHIBIT 10.3 STATE OF NORTH CAROLINA COUNTY OF HYDE EMPLOYEE STOCK OPTION AGREEMENT THIS EMPLOYEE STOCK OPTION AGREEMENT (the "Agreement") is made as of this _____ day of ____________, 19____ (the "Date of Grant"), by and between THE EAST CAROLINA BANK, a North Carolina banking corporation (the "Bank"), and ____________________, a resident of ____________________________ County, North Carolina (the "Optionee"). WHEREAS, on January 21, 1998, the Bank's Board of Directors adopted the OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN (the "Omnibus Plan"), subject to the approval of the Bank's shareholders; and WHEREAS, the Plan provides that the Incentive Committee (the "Committee") of the Bank's Board of Directors from time to time may grant to officers and employees of the Bank and its subsidiaries the right or option to purchase shares of the Bank's $10.00 par value common stock ("Common Stock") on the terms and conditions set forth in the Omnibus Plan; and WHEREAS, the Optionee currently is a full-time employee of the Bank and the Committee has selected the Optionee as an employee to whom it will grant an option to purchase Common Stock under the Omnibus Plan; NOW, THEREFORE, in consideration of the premises and the agreements of the parties set forth herein, the Bank and the Optionee hereby agree as follow: 1. GRANT OF OPTION. Pursuant to and subject to the terms and conditions contained in this Agreement and Articles I, II and III of the Omnibus Plan, the Bank hereby grants to the Optionee the right and option (the "Option") to purchase from the Bank all or any number of an aggregate of ________________________________________________ (_____________________________) shares of Common Stock (the "Option Stock") which may be authorized but unissued shares or shares acquired by the Bank on the open market or in private transactions. The Option is intended to be (check one): [ ] an Incentive Stock Option (an "ISO") [ ] a Non-qualified Stock Option as those terms are defined in the Omnibus Plan. The Option is granted under and pursuant to the Omnibus Plan in the form in which it has been approved by the Board of Directors (a copy of which will be provided to the Optionee upon his or her request), and the terms and conditions of Articles I, II and III of the Omnibus Plan are incorporated herein by reference. Capitalized terms used in this Agreement which are defined in the Omnibus Plan shall have the same meanings herein as are assigned to them in the Omnibus Plan. In the event any provision of this Agreement conflicts or is inconsistent with a term or condition of the Omnibus Plan, then the Omnibus Plan provision shall be controlling and shall supersede the provision of this Agreement. 2. APPROVAL BY SHAREHOLDERS. This Agreement and the Option described herein are expressly made subject to approval of the Omnibus Plan by the Bank's shareholders at the Bank's 1998 annual meeting of shareholders. Notwithstanding anything contained herein to the contrary, the Option may not be exercised prior to receipt of such approval. In the event such approval is not obtained, then this Agreement and the Option shall, without any action by the Bank or the Optionee, become void and unenforceable and of no further force or effect. 3. DATE OF GRANT OF OPTION. For purposes of the Omnibus Plan and this Agreement, the effective date of the grant of the Option (the "Date of Grant") shall be the date of this Agreement. 4. EXERCISE PRICE. The Exercise Price to be paid by the Optionee for the purchase for the Option Stock upon exercise of the Option shall be: _________________________________________ Dollars ($_______________) per share. 5. EXERCISE SCHEDULE. Subject to any further restrictions contained in the Plan or this Agreement, the Optionee's right to exercise the Option, either in whole or in part, shall be conditioned upon the Optionee's completion of (check one): [ ] two years [ ] Other: _________________ of service in the employment of the Bank following the Date of Grant (the "Vesting Period") and, following expiration of the Vesting Period, if any, the Option will become exercisable on the following dates as to the indicated numbers of the shares of the Option Stock: DATE OPTION STOCK AVAILABLE FOR EXERCISE - --------------- ------------------------------------ _______________ ................ ____________ SHARES _______________ ................ ____________ SHARES _______________ ................ ____________ SHARES Notwithstanding anything contained herein to the contrary, the Option may not be exercised at any time as to a fractional share and, in the event adjustments in the number of Option Shares as provided in the terms of the Omnibus Plan results in a fractional shares, the number of shares as to which the Option may be exercised at any particular time shall be rounded down to the next lower whole share. 6. METHOD OF EXERCISE. To exercise the Option in whole or in part, the Optionee must deliver written notice of such exercise (a "Notice of Exercise") to the President or Secretary of the Bank. Such written notice shall be substantially in the form attached hereto as Exhibit A, shall specify the number of shares of Option Stock to be purchased, and shall be accompanied by payment in full (in the form described below) of the Exercise Price of shares to be purchased, together with payment of the Optionee's Tax Withholding Liability (if any). A Notice of Exercise shall not be effective (and the Bank shall have no obligation to sell any Option Stock to the Optionee pursuant to such Notice) unless it satisfies the terms and conditions contained in the Omnibus Plan and this Agreement, is accompanied by such payments or other information as is required by the Omnibus Plan or this Agreement, and actually is received by the Bank prior to the Expiration Date or any earlier termination of the Option. Notwithstanding anything contained herein to the contrary, the Optionee may not exercise the Option to purchase less than one hundred (100) shares at any one time, unless the Committee otherwise approves or unless the partial exercise is for all remaining shares of Option Stock available under the Option. Following receipt from the Optionee of a valid and effective Notice of Exercise and full payment of the Exercise Price relating to a number the shares of Option Stock being purchased, a stock certificate representing that number of shares shall be issued and delivered by the Bank to the Optionee as soon as 2 practicable; provided however that, if the Option is an ISO, then all shares of Option Stock purchased upon the exercise of the Option shall be held by the Bank in escrow for a period ending on the later of (I) two years from the Date of Grant of the Option, or (II) one year after issuance of the stock upon exercise of the Option, for the sole purpose of informing the Bank of a disqualifying disposition within the meaning of Section 422 of the Internal Revenue Code of 1986. During any such escrow period, the Optionee shall have all rights of a shareholder with respect to the Option Stock purchased, including but not limited to the right to vote, receive dividends on and to sell such stock. Additionally, notwithstanding anything contained herein to the contrary, no shares of Option Stock purchased upon the exercise of the Option may be sold or otherwise transferred by the Optionee until at least six months and one day have elapsed since the Date of Grant. 7. PAYMENT. The Exercise Price of Option Stock being purchased upon an exercise of the Option (in part or in whole) shall be paid by the Optionee in full at the time of such exercise. Such payment shall be made in the manner described in the Omnibus Plan and shall accompany the Notice of Exercise. The Option shall not be considered to have been properly exercised as to any Option Stock, and no Option Stock shall be issued or delivered, until full payment of the Exercise Price therefor has been made. 8. EXPIRATION OR TERMINATION. (A) EXPIRATION DATE. Notwithstanding anything contained herein to the contrary, to the extent the Option shall not previously have been exercised in the manner required by or otherwise terminated as provided in the Omnibus Plan or this Agreement, it shall expire and terminate at 5:00 P.M. on the "Expiration Date" which, for purposes of this Agreement, shall be (check one): [ ] __________, 20_____, which is the date 10 years following the Date of Grant [ ] Other: ___________________________________________________________________ (B) OTHER TERMINATION. The Option otherwise shall terminate prior to the Expiration Date in the events and upon the occurrences described in the Option Plan. (C) EFFECT OF TERMINATION OR EXPIRATION OF OPTION. Upon the expiration or termination of all or any portion of the Option, it shall, without any further act by the Bank or the Optionee, no longer be exercisable or of any force or effect and shall no longer confer any rights to any person to purchase shares of Common Stock under the Omnibus Plan or this Agreement. 9. EFFECT ON EMPLOYMENT STATUS OF OPTIONEE. Neither the Omnibus Plan, this Agreement nor the grant of the Option, is intended or shall be deemed or interpreted to constitute an employment agreement or to confer upon the Optionee any right of employment with the Bank, including without limitation any right to continue in the employ of or to provide any other services to the Bank, or to interfere with, restrict or otherwise limit in any way the right of the Bank to discharge or terminate the employment of the Optionee at any time for any reason whatsoever, with or without cause. 10. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any other person shall have any rights as a stockholder with respect to any shares of Option Stock until the Option has been validly exercised in the manner described in the Omnibus Plan and this Agreement, full payment of the Exercise Price has been made for such shares, and a stock certificate representing the Option Stock purchased upon such exercise has been registered on the Bank's stock records in the name of and delivered to the Optionee or other person entitled thereto. Except to the extent of adjustments made as described in the Omnibus Plan, no adjustment on behalf of the Optionee shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date for determining the shareholders entitled to receive the same is prior to the date of registration and delivery of the stock certificate(s) representing the Option Stock. 3 11. PAYMENT OF TAXES. The Optionee shall be responsible for all federal, state, local or other taxes of any nature as shall be imposed pursuant to any law or governmental regulation or ruling on the Option or the exercise thereof or on any income which the Optionee is deemed to recognize in connection with the Option. If the Bank shall determine to its reasonable satisfaction that the Bank is required to pay or withhold the whole or any part of any estate, inheritance, income, or other tax with respect to or in connection with the Option or the exercise thereof, then the Bank shall have the full power and authority to withhold and pay such tax out of any shares of Option Stock being purchased by the Optionee or from the Optionee's salary or any other funds otherwise payable to the Optionee, or, prior to and as a condition of exercising such Option, the Bank may require that the Optionee pay to it in cash the amount of any such tax which it, in good faith, deems itself required to withhold. 12. LIMITS ON GRANT OF ISOS. Notwithstanding anything contained in this Agreement to the contrary (including the number of shares of Option Stock provided for herein), if the Option is intended to be an ISO, then the aggregate Fair Market Value (determined as of the Date of Grant) of the Option Stock for which the Option may be exercised for the first time in any calendar year (including ISOs granted under all option plans of the Bank) shall not exceed $100,000; and, if this Agreement covers a number of shares of Option Stock, or if such Option becomes exercisable in a manner, such as would result in the Option exceeding that limitation, then the Option shall constitute a Non-qualified Stock Option as to all such excess shares of Option Stock. 13. NONTRANSFERABILITY. The Option shall not be assignable or transferable except by will or by the laws of descent and distribution, and, during the lifetime of the Optionee, may be exercised only by him or her. More particularly, but without limiting the generality of the foregoing, the Option may not be sold, assigned, transferred (except as noted herein), pledged or hypothecated in any way and shall not be subject to execution, attachment or similar process. 14. NOTICES. Except as otherwise provided herein, any notice which the Bank or the Optionee may be required or permitted to give to the other under the Omnibus Plan or this Agreement shall be in writing and shall be deemed duly given when delivered personally or deposited in the United States mail, first class postage prepaid, and properly addressed. Notice, if to the Bank, shall be sent to its President at the address of the Bank's then current corporate office. Any notice sent by mail by the Bank to the Optionee shall be sent to the most current address of the Optionee as reflected on the records of the Bank or its Subsidiaries as of the time said notice is required. If the Optionee has died, any such notice shall be given to the Optionee's personal representative if such representative has delivered to the Bank evidence satisfactory to the Bank of such representative's status as such and has informed the Bank of the address of such representative by notice pursuant to this Paragraph 14. Notwithstanding anything contained herein to the contrary, a Notice of Exercise shall be effective only upon actual receipt thereof by the Bank as provided in Paragraph 6 above. 15. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be valid and enforceable under applicable law, but, in the event that any provision hereof shall be held to be invalid or unenforceable, the remaining provisions shall continue to be in full force and effect and this Agreement shall continue to be binding on the parties hereto as if such invalid or unenforceable provision or part hereof had not been included herein. 16. MODIFICATION OF AGREEMENT; WAIVER. Except as otherwise provided herein, this Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by written instrument signed by each of the parties hereto. No waiver hereunder shall constitute a waiver with respect to any subsequent occurrence or other transaction hereunder or of any other provision hereof. 4 17. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Agreement. As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate. 18. GOVERNING LAW; VENUE AND JURISDICTION. The validity, interpretation and administration of this Agreement, and the rights of any and all persons having or claiming to have any interest hereunder, shall be determined exclusively in accordance with the laws of the State of North Carolina. Without limiting the generality of the foregoing, the period within which any action in connection with this Agreement must be commenced shall be governed by the laws of the State of North Carolina, without regard to the place where the act or omission complained of took place, the residence of any party to such action, or the place where the action may be brought or maintained. The parties hereto agree that any suit or action relating to this Agreement shall be instituted and prosecuted in the courts of Hyde County, North Carolina, and each party hereby does waive any right or defense relating to such jurisdiction and venue. 19. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the Bank, its successors and assigns, and shall be binding upon and inure to the benefit of the Optionee, his heirs, legatees, personal representatives, executors, and administrators. 20. ENTIRE AGREEMENT. This Agreement (which incorporates the terms and conditions of Articles I, II and III of the Omnibus Plan) constitutes and embodies the entire understanding and agreement of the parties hereto and, except as otherwise provided hereunder, there are no other agreements or understandings, written or oral, in effect between the parties hereto relating to the matters addressed herein. 21. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Bank, has caused this instrument to be executed in its corporate name by its President, or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereto affixed, all by authority of its Board of Directors first duly given, and the Optionee has hereunto set his or her hand and adopted as his or her seal the typewritten word "SEAL" appearing beside his or her name, all done this the day and year first above written. THE EAST CAROLINA BANK [CORPORATE SEAL] ATTEST: By: _________________________________ _____________________________ _________________________________ Secretary ___________________________ , Optionee 5 EXHIBIT A NOTICE OF EXERCISE OF EMPLOYEE STOCK OPTION TO: The Incentive Committee of the Board of Directors of The East Carolina Bank The undersigned hereby elects to purchase shares of Common Stock of The East Carolina Bank (the "Bank") pursuant to the Option granted to the undersigned pursuant to the Omnibus Stock Ownership and Long Term Incentive Plan (the "Omnibus Plan") and that certain Stock Option Agreement between the Bank and the undersigned dated ________________________, _________________. The undersigned elects to purchase _____________________ whole shares of Common Stock having an aggregate Exercise Price of $______________________________ which is tendered herewith. This the _____________ day _________________ of, _________________________,____ ___________________________ Optionee EX-21 8 EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES The East Carolina Bank, a North Carolina state-chartered bank. EX-23 9 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors The East Carolina Bank: We consent to the use of our reports on the consolidated financial statements of The East Carolina Bank and subsidiaries included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated February 4, 1998, except note 15 which is as of July 22, 1998, contains an explanatory paragraph that states that the Company adopted the provisions of Financial Accounting Standards Board's Statement of the Financial Accounting Standards No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions. /s/ KPMG Peat Marwick LLP Raleigh, North Carolina August 19, 1998 EX-23 10 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors ECB Bancorp, Inc.: We consent to the use of our reports on the supplemental consolidated financial statements of ECB Bancorp, Inc. and subsidiary included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated February 4, 1998, except note 15 which is as of July 22, 1998, contains an explanatory paragraph that states that the supplemental consolidated financial statements give retroactive effect to the merger of ECB Bancorp, Inc. and The East Carolina Bank on July 22, 1998, which has been accounted for in a manner similar to a pooling-of-interests as described in note 15 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consumation. These consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of ECB Bancorp, Inc. and subsidiary after financial statements covering the date of consummation of the business combination are issued. Additionally, our report contains an explanatory paragraph that states that the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions. /s/ KPMG Peat Marwick LLP Raleigh, North Carolina August 19, 1998 EX-27.1 11 FDS -- ECB BANCORP, INC. WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 0001066254 ECB BANCORP, INC. 6-MOS DEC-31-1998 JUN-30-1998 15,525,442 0 1,850,000 0 43,855,081 0 0 130,963,770 2,690,474 199,110,035 180,817,554 0 1,613,056 0 0 0 6,230,889 10,448,536 199,110,035 5,819,440 1,262,657 83,027 7,165,124 2,665,189 2,672,826 4,492,298 120,000 0 4,141,922 1,171,907 901,907 0 0 901,907 0.51 0.51 5.29 558,524 140,451 507,730 1,206,705 2,660,000 129,795 40,269 2,690,474 2,690,474 0 0
EX-27.2 12 FDS -- EAST CAROLINA BANK
9 6-MOS DEC-31-1998 JUN-30-1998 15,525,442 0 1,850,000 0 43,855,081 0 0 130,963,770 2,690,474 199,110,035 180,817,554 0 1,613,056 0 0 0 6,230,889 10,448,536 199,110,035 5,819,440 1,262,657 83,027 7,165,124 2,665,189 2,672,826 4,492,298 120,000 0 4,141,922 1,171,907 901,907 0 0 901,907 0.51 0.51 5.29 558,524 140,451 507,730 1,206,705 2,660,000 129,795 40,269 2,690,474 2,690,474 0 0
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