-----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, PP161FU3uMbhAWxgxL3NHeSfj6VO8OjgMNUq0YG9xv/jz1JLjPtluRhRKmbJcz3j buXddK9NjM1mVE5TNJGWYQ== 0001021408-01-505387.txt : 20010816 0001021408-01-505387.hdr.sgml : 20010816 ACCESSION NUMBER: 0001021408-01-505387 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24753 FILM NUMBER: 1714124 BUSINESS ADDRESS: STREET 1: P O BOX 337 STREET 2: HWY 264 CITY: ENGELHARD STATE: NC ZIP: 27824 BUSINESS PHONE: 2529259411 10QSB 1 d10qsb.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _____________________ Commission File No. 2017-6 -------------------------- ECB Bancorp, Inc. ----------------- (Exact name of registrant as specified in its charter) North Carolina 56-0215930 -------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Post Office Box 337, Engelhard, North Carolina 27824 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (252) 925-9411 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 10, 2001, 2,067,691 shares of the registrant's common stock, $3.50 par value, were outstanding. This Form 10-QSB has 15 pages. Part I. FINANCIAL INFORMATION Item 1. Financial Statements ECB BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets June 30, 2001 and December 31, 2000 (dollar amounts in thousands)
June 30, December 31, Assets 2001 2000* - ------------------------------------------------------------------------------------ ---------- (unaudited) Non-interest bearing deposits and cash $ 14,885 $ 18,342 Federal funds sold 4,400 1,975 - ------------------------------------------------------------------------------------ ---------- Total cash and cash equivalents 19,285 20,317 - ------------------------------------------------------------------------------------ ---------- Investment securities Available-for-sale, at market value (cost of $61,877 and $64,463 at June 30, 2001 and December 31, 2000, respectively) 62,777 64,777 Loans 187,504 172,965 Allowance for probable loan losses (2,757) (2,800) - ------------------------------------------------------------------------------------ ---------- Loans, net 184,747 170,165 - ------------------------------------------------------------------------------------ ---------- Real estate acquired in settlement of loans, net 37 58 Federal Home Loan Bank stock, at cost 633 633 Bank premises and equipment, net 8,523 7,882 Accrued interest receivable 2,786 2,637 Other assets 2,857 1,920 - ------------------------------------------------------------------------------------ ---------- Total $281,645 $ 268,389 - ------------------------------------------------------------------------------------ ---------- Liabilities and Shareholders' Equity - ------------------------------------------------------------------------------------ ---------- Deposits Demand, noninterest bearing $ 55,090 $ 46,565 Demand interest bearing 62,209 61,759 Savings 13,073 13,457 Time 121,104 114,461 - ------------------------------------------------------------------------------------ ---------- Total deposits 251,476 236,242 - ------------------------------------------------------------------------------------ ---------- Short-term borrowings 2,716 2,678 Long-term obligations - 3,000 Accrued interest payable 1,352 1,160 Other liabilities 1,305 1,366 - ------------------------------------------------------------------------------------ ---------- Total liabilities 256,849 244,446 - ------------------------------------------------------------------------------------ ---------- Shareholders' equity Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,067,691 and 2,073,081 at June 30, 2001 and December 31, 2000, respectively. 7,237 7,256 Capital surplus 5,780 5,822 Retained earnings 11,273 10,682 Deferred compensation - restricted stock (87) (24) Accumulated other comprehensive income 593 207 - ------------------------------------------------------------------------------------ ---------- Total shareholders' equity 24,796 23,943 - ------------------------------------------------------------------------------------ ---------- Commitments - ------------------------------------------------------------------------------------ ---------- Total $281,645 $ 268,389 - ------------------------------------------------------------------------------------ ----------
See accompanying notes to consolidated financial statements. * Derived from audited consolidated financial statements. 2 ECB BANCORP, INC. AND SUBSIDIARY Consolidated Income Statements For the three and six months ended June 30, 2001 and 2000 (unaudited - dollar amounts in thousands, except net income per share)
Three months ended Six months ended June 30 June 30 2001 2000 2001 2000 - ---------------------------------------------- ---------- --------- ---------- --------- Interest income: Interest and fees on loans $ 3,943 $ 3,672 $ 7,886 $ 7,039 Interest on investment securities: Interest exempt from federal income taxes 201 153 350 324 Taxable interest income 714 741 1,554 1,490 Interest on federal funds sold 60 101 172 166 - ---------------------------------------------- ---------- ---------- ---------- ---------- Total interest income 4,918 4,667 9,962 9,019 - ---------------------------------------------- ---------- ---------- ---------- ---------- Interest expense: Deposits: Demand accounts 207 345 506 674 Savings 39 55 89 111 Time 1,693 1,325 3,523 2,492 Short-term borrowings 23 27 57 56 Long-term obligations - 35 12 71 - ---------------------------------------------- ---------- ---------- ---------- ---------- Total interest expense 1,962 1,787 4,187 3,404 - ---------------------------------------------- ---------- ---------- ---------- ---------- Net interest income 2,956 2,880 5,775 5,615 Provision for probable loan losses 120 70 200 130 - ---------------------------------------------- ---------- ---------- ---------- ---------- Net interest income after provision for probable loan losses 2,836 2,810 5,575 5,485 - ---------------------------------------------- ---------- ---------- ---------- ---------- Noninterest income: Service charges on deposit accounts 418 357 805 699 Other service charges and fees 314 231 516 336 Net gain (loss) on sale of securities 28 (2) 76 (2) Other operating income 12 9 22 26 - ---------------------------------------------- ---------- ---------- ---------- ---------- Total noninterest income 772 595 1,419 1,059 - ---------------------------------------------- ---------- ---------- ---------- ---------- Noninterest expenses: Salaries 1,092 977 2,180 1,898 Retirement and other employee benefits 356 302 695 598 Occupancy 241 193 489 403 Equipment 328 341 642 597 Professional fees 67 82 135 136 Supplies 82 76 143 175 Telephone 77 84 167 180 Postage 44 27 97 76 Other operating expenses 658 486 1,163 948 - ---------------------------------------------- ---------- ---------- ---------- ---------- Total noninterest expenses 2,945 2,568 5,711 5,011 - ---------------------------------------------- ---------- ---------- ---------- ---------- Income before income taxes 663 837 1,283 1,533 Income taxes 160 255 320 435 - ---------------------------------------------- ---------- ---------- ---------- ---------- Net income $ 503 $ 582 $ 963 $ 1,098 - ---------------------------------------------- ========== ========== ========== ========== Net income per share (basic and diluted) $ 0.24 $ 0.28 $ 0.47 $ 0.52 Weighted average shares outstanding - basic 2,059,599 2,110,388 2,062,599 2,113,946 Weighted average shares outstanding - diluted 2,063,282 2,110,388 2,067,498 2,113,946
See accompanying notes to consolidated financial statements. 3 ECB BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity For six months ended June 30, 2001 and 2000 (unaudited - dollar amounts in thousands)
Deferred Accumulated compensation- other Common Capital Retained restricted comprehensive Comprehensive stock surplus earnings stock loss income Total ---------- ---------- ------------ ----------------- --------------- ---------------- ---------- Balance January 1, 2000 $ 7,425 $ 6,229 $ 9,009 $ (35) $ (566) $ 22,062 Unrealized losses, net of income taxes of $57 (111) $ (111) (111) Net income 1,098 1,098 1,098 ---------- Total comprehensive income $ 987 ========== Recognition of deferred compensation - restricted stock (3) 7 4 Repurchase of common stock (66) (130) (196) Cash dividends ($.165 per share) (350) (350) ---------- ---------- ------------ ----------------- --------------- ---------- Balance June 30, 2000 $ 7,359 $ 6,096 $ 9,757 $ (28) $ (677) $ 22,507 ========== ========== ============ ================= =============== ==========
Deferred Accumulated compensation- other Common Capital Retained restricted comprehensive Comprehensive stock surplus earnings stock loss income Total ---------- ---------- ------------ ----------------- --------------- ---------------- ---------- Balance January 1, 2001 $ 7,256 $ 5,822 $ 10,682 $ (24) $ 207 $ 23,943 Unrealized gains, net of income taxes of $200 386 $ 386 386 Net income 963 963 963 ---------- Total comprehensive income $ 1,349 ========== Deferred compensation - restricted stock issuance 21 54 (75) - Recognition of deferred compensation - restricted stock 12 12 Repurchase of common stock (40) (96) (136) Cash dividends ($.18 per share) (372) (372) ---------- ---------- ------------ ----------------- --------------- ----------- Balance June 30, 2001 $ 7,237 $ 5,780 $ 11,273 $ (87) $ 593 $ 24,796 ========== ========== ============ ================= ============== ===========
See accompanying notes to consolidated financial statements. 4
ECB BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000 (Unaudited - dollar amounts in thousands) Six Months Ended June 30 Cash flows from operating activities: 2001 2000 ----------- ---------- Net income $ 963 $ 1,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 407 346 Amortization of investment securities, net (5) (22) Provision for probable loan losses 200 130 (Gain) loss on sale of available-for-sale securities (76) 2 Deferred compensation - restricted stock 12 4 Increase in accrued interest receivable (149) (574) Gain on sale of real estate acquired in settlement of loans (2) (9) Increase in other assets (1,137) (410) Increase in accrued interest payable 192 157 Increase in postretirement benefit liability 23 34 Decrease in other liabilities, net (99) (9) - ----------------------------------------------------------- ----------- ---------- Net cash provided by operating activities 329 747 - ----------------------------------------------------------- ----------- ---------- Cash flows from investing activities: Proceeds from sales of investment securities classified as available-for-sale 12,583 1,144 Proceeds from maturities of investment securities classified as available-for-sale 9,765 6,815 Purchases of investment securities classified as available-for-sale (19,681) (8,083) Purchases of premises and equipment (1,048) (1,026) Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale 23 109 Net loan originations (14,782) (16,773) - ----------------------------------------------------------- ----------- ---------- Net cash used by investing activities (13,140) (17,814) - ----------------------------------------------------------- ----------- ---------- Cash flows from financing activities: Net increase in deposits 15,234 19,719 Net increase (decrease) in short-term borrowings 38 (140) Decrease in long-term obligations (3,000) - Dividends paid (357) (329) Repurchase of common stock (136) (196) - ----------------------------------------------------------- ----------- ---------- Net cash provided by financing activities 11,779 19,054 - ----------------------------------------------------------- ----------- ---------- Increase in cash and cash equivalents (1,032) 1,987 Cash and cash equivalents at beginning of period 20,317 17,789 ----------- ---------- Cash and cash equivalents at end of period $ 19,285 $ 19,776 =========== ========== Cash paid during the period: Interest $ 3,995 $ 3,247 Taxes 308 300 Supplemental disclosures of noncash financing and investing activities: Cash dividends declared but not paid $ 186 $ 175 Unrealized gains (losses) on available-for-sale securities, net of deferred taxes 386 (111)
See accompanying notes to consolidated financial statements. 5 ECB BANCORP, INC, AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Basis of Presentation The consolidated financial statements include the accounts of ECB Bancorp, Inc. ("Bancorp") and its wholly-owned subsidiary, The East Carolina Bank (the "Bank") (collectively referred to hereafter as the "Company"). The Bank has two wholly- owned subsidiaries, Carolina Financial Courier, Inc. and Carolina Financial Realty, Inc. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The footnotes in Bancorp's annual report on Form 10- KSB should be referenced when reading these unaudited interim financial statements. Operating results for the six month period ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. (2) Allowance for Probable Loan Losses The following summarizes the activity in the allowance for probable loan losses for the six-month periods ended June 30, 2001 and 2000, respectively. Six months ended June 30, -------------------------- 2001 2000 ---- ---- Balance at the beginning of the period $2,800,000 2,700,000 Provision for probable loan losses 200,000 130,000 Charge-offs (270,000) (140,000) Recoveries 27,000 31,000 ---------- --------- Net charge-offs (243,000) (109,000) ---------- --------- Balance at the end of the period $2,757,000 2,721,000 ========== ========= (3) New Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards (SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This Statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and was adopted by the Company on January 1, 2001 with no impact the Company's financial statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - -------- ECB Bancorp, Inc. ("Bancorp") is a bank holding company headquartered in Engelhard, North Carolina. Bancorp's wholly-owned subsidiary, The East Carolina Bank (the "Bank" or "ECB") (collectively referred to hereafter as the "Company"), is a state-chartered community bank which was founded in 1919. The Bank offers a full range of banking services through 17 branches serving eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Barco, Avon, Hatteras, Ocracoke, Washington, Hertford, New Bern and Greenville (two branches). The operations of the Company and depository institutions in general are significantly influenced by general economic conditions and by related monetary, fiscal and other policies of depository institution regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina State Banking Commission. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. Comparison of the Results of Operations for the Six Month Periods Ended June 30, 2001 and 2000 Summary - -------- For the six months ended June 30, 2001, the Company had net income of $963,000, or $0.47 basic and diluted earnings per share, compared to $1,098,000, or $0.52 basic and diluted earnings per share for the six months ended June 30, 2000. For the six months ended June 30, 2001, net interest income increased 2.87% and noninterest income increased 33.43% when compared to the same period last year. Noninterest expense increased $700,000 or 13.9% for the six months ended June 30, 2001 as compared to the same period in 2000, partly attributable to general increases in salary and employee benefits expense of $379,000. Net interest income - -------------------- Net interest income for the six months ended June 30, 2001 was $5,775,000, an increase of $160,000 or 2.87% when compared to net interest income of $5,615,000 for the six months ended June 30, 2000. The Company's net interest margin, on a tax-equivalent basis, for the six months ended June 30, 2001 was 4.78% compared to 5.22% in 2000. The decline of the Company's net interest margin is attributable to the negative effect of a net asset-sensitive interest rate gap position during a falling rate environment and the increase in funding cost as a result of increased balances of certificates of deposit. Total interest income increased $943,000 for the six months ended June 30, 2001 compared to the six months ended June 30, 2000, principally due to an increase in the average volume of loans of $24.6 million. Yield on average earning assets, on a tax-equivalent basis, for the six months ended June 30, 2001 was 8.15% compared to 8.29% in 2000. This decrease in the Company's yield on earning assets is a result of a lower interest rate environment compared to first half of 2000 as the Federal Reserve Board lowered the federal funds target rate by 250 basis points during the first half of 2001. The Bank is asset sensitive in the initial 90 to 120 day time horizon as interest rates on approximately 35% of the loan portfolio float with the prime rate. Consequently, the net interest margin is negatively affected by decreases in interest rates during this period. Beyond this initial asset sensitive period the Bank becomes liability sensitive on a cumulative basis due to re-pricing opportunities within the certificate of deposit portfolio. The Bank anticipates that its net interest margin will return to historical levels once this re-pricing occurs. 7 Total interest expense increased $783,000 for the six months ended June 30, 2001 compared to the six months ended June 30, 2000, as a result of average certificate of deposit balances increasing $31.5 million. The cost of funds for the Company during the six months ended June 30, 2001 was 4.22%, an increase of 22 basis points when compared to 4.00% for the six months ended June 30, 2000. The Company's increase in cost of funding was a result of increased interest expense associated with an increase of $23.8 million in public funds certificate of deposits late in the fourth quarter of 2000 just prior to the Federal Reserve actions during the first half of 2001. Interest expense increased $591,000 on certificates greater than $100,000 when compared to the first half of 2000. Provision for probable loan losses - ---------------------------------- The provision for probable loan losses charged to operations during the first six months of 2001 was $200,000, compared to $130,000 during the first six months of 2000. Net charge-offs for the six months ended June 30, 2001 totaled $243,000, compared to net charge-offs of $109,000 during the same period of 2000. Higher current year net charge-offs are primarily the result of a land development credit loss of approximately $100,000. The amount charged for provision for probable loan losses is the result of management's review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience. Noninterest income - ------------------ Noninterest income increased $360,000 to $1,419,000 for the six months ended June 30, 2001 from $1,059,000 for the same period in 2000. This is principally due to an increase of $180,000 in other fee income generated from some of the new banking products introduced by the Bank since the first quarter of 2000. A new accounts receivable purchase product introduced in the second quarter of 2000 generated net fees of $30,000 greater than the prior year period while the Bank's newly formed Insurance Services generated fees of $30,000. In addition, the Bank's mortgage department increased loan origination fees by $72,000 as the reduction in mortgage rates spurred homeowners to refinance. Service charges on deposit accounts increased $106,000 to $805,000 compared to $699,000 in 2000. Other operating income decreased $4,000 to $22,000 from the $26,000 recorded during the first half of 2000 due to a gain on the sale of other real estate owned of $9,000 in the first quarter of 2000. During the first half of 2001, the Bank had a gain on the sale of securities of $76,000. Noninterest expense - ------------------- Noninterest expense increased $700,000 or 13.9% to $5,711,000 for the six months ended June 30, 2001 from the same period in 2000. This increase is principally due to increases in salary and employee benefits expense of $379,000. The opening of offices in New Bern and Hertford accounted for approximately $117,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $139,000 of personnel expense. The Company experienced increases in employee group insurance premiums during the first half of 2001 of $30,000 compared to the prior year. Occupancy expense increased $86,000 over the prior year period as a result of increased utilities of $20,000, building depreciation expense of $17,000 and increases in property insurance and outside janitorial services of $25,000 and $13,000, respectively. Equipment expense increased $45,000 as equipment depreciation and rental expense increased $40,000 and $13,000, respectively. Bank supply expense decreased during the first half of 2001 due to approximately $35,000 of nonrecurring expenses related to the implementation of the Bank's check image statement during the first quarter of 2000. Other operating expenses increased $215,000 from $948,000 for the six months ended June 30, 2000 to $1,163,000 for the six months ended June 30, 2001. This increase is primarily due to write offs of leasehold improvements associated with the relocation of the Bank's Barco banking office to Currituck of $91,000. Advertising and public relations increased $58,000 over the prior year period. 8 Income taxes - ------------- Income tax expense for the six months ended June 30, 2001 and 2000 was $320,000 and $435,000, respectively, resulting in effective tax rates of 24.94% and 28.38%, respectively. Tax-exempt interest income increased $26,000 or 8.02% to $350,000 from the $324,000 recorded in the first half of 2000 and had the effect of reducing the Bank's effective tax rate when compared to the prior year period. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income. Comparison of the Results of Operations for the Three Month Periods Ended June 30, 2001 and 2000 Summary - -------- For the three months ended June 30, 2001, the Company had net income of $503,000, or $0.24 basic and diluted earnings per share, compared to $582,000, or $0.28 basic and diluted earnings per share for the three months ended June 30, 2000. Net interest income increased 2.67% to $2,956,000 in the second quarter of 2001 from $2,880,000 in the second quarter of 2000, and noninterest income increased $177,000 or 29.75% when compared to the same period last year. Noninterest expense increased $377,000 or 14.68% for the three month period ended June 30, 2001 as compared to the same period in 2000, partly attributable to the opening of offices in New Bern and Hertford and the addition of personnel at the Company's corporate office. Salary and employee benefits expense increased $169,000 to $1,448,000 compared to $1,279,000 during the second quarter of 2000. Net interest income - ------------------- Net interest income for the three months ended June 30, 2001 was $2,956,000, an increase of $76,000 or 2.67% when compared to net interest income of $2,880,000 for the three months ended June 30, 2000. The net interest margin, on a tax- equivalent basis, for the three months ended June 30, 2001 was 4.84% compared to 5.19% in 2000. Total interest income increased $251,000 for the three months ended June 30, 2001 compared to the three months ended June 30, 2000, principally due to an increase in the average volume of loans of $24.2 million. Yield on average earning assets, on a tax-equivalent basis, for the three months ended June 30, 2001 was 7.94% compared to 8.33% in 2000. Total interest expense increased $175,000 for the three months ended June 30, 2001 compared to the three months ended June 30, 2000, as a result of average certificate of deposit balances increasing $28.9 million. The cost of funds for the Company during the three months ended June 30, 2001 decreased 17 basis points when compared to the three months ended June 30, 2000. The Company's decrease in cost of funding was a result of decreased rates paid on interest-bearing deposits since the second quarter of 2000 and increased noninterest-bearing demand deposits of $2.4 million over the second quarter of 2000. Provision for probable loan losses - ---------------------------------- The provision for probable loan losses charged to operations during the three months ended June 30, 2001 was $120,000, compared to $70,000 during the three months ended June 30, 2000. Net charge-offs for the quarter ended June 30, 2001 totaled $190,000, compared to net charge-offs of $47,000 during the same period of 2000. Higher current year net charge-offs are primarily the result of a land development credit loss of approximately $100,000 and credit card losses of $60,000. The amount charged for provision for probable loan losses is the result of management's review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience. Noninterest income - ------------------ Noninterest income increased $177,000 or 29.75% to $772,000 for the three months ended June 30, 2001 compared to $595,000 for the same period in 2000. This is principally due to an increase of $61,000 in other fee income generated from some of the new banking products introduced by the Bank since the first 9 quarter of 2000. A new accounts receivable purchase product introduced in the second quarter of 2000 increased net fees by $14,000 for the quarter while the Bank's newly formed Insurance Services generated fees of $14,000. In addition, the Bank's mortgage department increased loan origination fees by $33,000 as the reduction in mortgage rates spurred homeowners to refinance. Service charges on deposit accounts increased $61,000 to $418,000 compared to $357,000 in 2000. During the second quarter of 2001, the Bank had gains on the sale of securities of $28,000. Noninterest expense - ------------------- Noninterest expense increased $377,000 or 14.68% to $2,945,000 for the three months ended June 30, 2001 from the same period in 2000. This increase is principally due to general increases in salary and employee benefits expense of $169,000. The opening of offices in New Bern and Hertford accounted for approximately $54,000 of the personnel expense increase while additional staffing within the Company's home offices accounted for an additional $61,000 of personnel expense. Occupancy expense increased $48,000 over the prior year period as a result of building depreciation expense of $11,000 and increases in property insurance and outside janitorial services of $15,000 and $8,000, respectively. Equipment expense decreased $13,000 as increased equipment depreciation expense of $21,000 was offset by a decrease in equipment lease payments of $30,000 for the quarter. Other operating expenses increased $172,000 from $486,000 for the three months ended June 30, 2000 to $658,000 for the three months ended June 30, 2001. This increase is primarily due to write offs of leasehold improvements associated with the relocation of the Bank's Barco banking office to Currituck of $91,000. Advertising and public relations increased $40,000 over the prior year period. Income taxes - ------------- Income tax expense for the three months ended June 30, 2001 and 2000 was $160,000 and $255,000, respectively, resulting in effective tax rates of 24.13% and 30.47%, respectively. Tax-exempt interest income increased $48,000 or 31.37% to $201,000 from the $153,000 recorded in the second quarter of 2000 and had the effect of reducing the Bank's effective tax rate when compared to the prior year period. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income. Comparison of Financial Condition at June 30, 2001 and December 31, 2000 Total assets increased $13.3 million to $281.6 million, an increase of 4.94% when compared to $268.4 million at December 31, 2000. Asset growth was funded by increased demand deposits of $8.5 million and certificates of deposit of $6.6 million but was partially offset by a call option on a $3.0 million advance that was exercised by the Federal Home Loan Bank of Atlanta during the first quarter of 2001. Loans receivable have increased $14.5 million from $173.0 million at December 31, 2000 to $187.5 million at June 30, 2001. The Company has experienced steady loan demand from all of its markets throughout the year. Shareholders' equity increased by $853,000 from December 31, 2000 to June 30, 2001, as the Company generated net income of $963,000 and experienced an increase of net unrealized gains on available-for-sale securities of $386,000. The Company declared cash dividends of $372,000 or 18.00 cents per share, during the first half of 2001 compared to 16.50 cents per share in the prior year period. The Company repurchased $136,000 of common stock during the first two quarters of 2001. Asset Quality - ------------- Management continuously analyzes the growth and risk characteristics of the total loan portfolio under current economic conditions in order to evaluate the adequacy of the allowance for probable loan losses. The factors that influence management's judgment in determining the amount charged to operating expense include past loan loss experience, composition of the loan portfolio, evaluation of probable losses inherent in the portfolio and current economic conditions. The Company's watch committee, which includes three 10 members of senior management as well as regional managers and other credit administration personnel, conducts a quarterly review of all credits classified as substandard. This review follows a re-evaluation by the account officer who has primary responsibility for the relationship. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for probable loan losses. Such agencies may require the Company to recognize additions to the allowance for probable loan losses based on their judgments about information available to them at the time of their examination. Nonperforming assets, which consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans, were $373,000 and $252,000 at June 30, 2001 and December 31, 2000, respectively. At June 30, 2001, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $266,000 compared to $121,000 at December 31, 2000, all of which are on non-accrual. Regulatory Matters - ------------------ Management is not presently aware of any current recommendation to the Company by regulatory authorities which, if they were to be implemented, would have a material effect on the Company's liquidity, capital resources or operations. Liquidity - --------- The Company relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. These sources have allowed limited dependence on short-term borrowed funds for liquidity or for asset expansion. External sources of funds include the ability to access advances from the Federal Home Loan Bank of Atlanta and Fed Fund lines with correspondent banks. Capital Resources - ----------------- Bancorp and the Bank are subject to the capital requirements of the Federal Reserve, the FDIC and the State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be "well capitalized," the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders' equity calculated in accordance with generally accepted accounting principles excluding unrealized gains or losses, net of income taxes, on securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which is applicable to the Bank is the allowance for probable loan losses. Risk- weighted assets reflect the Banks' on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of June 30, 2001, the Bank was in compliance with all of the aforementioned capital requirements and meets the "well- capitalized" definition that is used by the FDIC in its evaluation of member banks. Additionally, at June 30, 2001, Bancorp was also in compliance with the applicable capital requirements set forth by the Federal Reserve. Current Accounting Issues - ------------------------- The Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards (SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This Statement did not materially impact the Company. 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 11 proposed statements on the consolidated financial statements of the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates. Management awareness Management is not aware of any known trends, events, uncertainties, or current recommendations by regulatory authorities that will or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or other operations. Forward-Looking Statements This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgment of Bancorp and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of Bancorp's customers, actions of government regulators, the level of market interest rates, and general economic conditions. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a) The Registrant's Annual Meeting of Shareholders was held on April 18, 2001. (b) At the Annual Meeting, the following three Directors were elected for terms of three years or until their respective successors are duly elected and qualified: Registrant's incumbent directors whose terms of office continued after the meeting are: George T. Davis, Jr.; Gregory C. Gibbs; John F. Hughes; Robert L. Mitchell, Bryant Kittrell III, B. Martelle Marshall, and R. S. Spencer, Jr. Voting for Directors was as follows: For Withheld Broker Non-vote -------------------------------------- Arthur H. Keeney III 1,688,284 33,558 none Joseph T. Lamb, Jr., 1,687,084 33,758 none Ray M. Spencer 1,688,284 33,558 none In addition to the election of Directors, the following proposal was voted on and approved at the Annual Meeting: 1. Proposal to ratify the selection of KPMG LLP as independent auditors for the Registrant as described under the caption "Ratification of Selection of Independent Auditor" in the Registrant's Proxy Statement dated March 20, 2001 (approved by an affirmative vote of 1,710,364 shares or 99.33% of the shares that voted, 11,199 negative votes and 279 shares abstained). Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-KSB (a) Exhibits: Exhibit Number Description ------ ----------- 3.1 Registrant's Articles of Incorporation (incorporated by reference from Exhibit 3.1 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) 13 3.2 Registrant's Bylaws (incorporated by reference from Exhibit 3.2 to Registrant's Registration Statement on Form SB-2, Reg. No. 333-61839) (b) Reports on Form 8-KSB None. 14 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECB BANCORP, INC. ---------------- (Registrant) Date: 8/10/2001 By: /s/ Arthur H. Keeney, III - --------------- ------------------------- Arthur H. Keeney, III (President & CEO) Date: 8/10/2001 By: /s/ Gary M. Adams - --------------- ----------------- Gary M. Adams (Senior Vice President & CFO) 15 -----END PRIVACY-ENHANCED MESSAGE-----