SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 0-24753
ECB BANCORP, INC.
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(Name of small business issuer in its charter)
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NORTH CAROLINA 56-2090738
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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POST OFFICE BOX 337
ENGELHARD, NORTH CAROLINA 27824
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(Address of principal executive offices) (Zip Code)
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(252) 925-9411
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Registrant's telephone number, including area code
Securities registered under Section 12(b) of the Act: NONE
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Securities registered under Section 12(g) of the Act: COMMON STOCK, $3.50 PAR VALUE PER SHARE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Registrant's revenues for its most recent fiscal year were:. $ 17,957,609
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</TABLE>
On March 23, 2000, the aggregate market value of the voting and
non-voting common equity held by nonaffiliates (computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity) was $14,866,560 .
-----------
On March 23, 2000, the number of outstanding shares of Registrant's
common stock was 2,120,854.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the year
ended December 31, 1999, are incorporated herein in Part II.
Portions of Registrant's definitive Proxy Statement dated March 20,
2000, are incorporated herein in Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Registrant is a bank holding company headquartered in
Engelhard, North Carolina. Registrant operates through, and its principal asset
is its investment in, The East Carolina Bank (the "Bank") which operates as
Registrant's wholly-owned subsidiary.
Registrant was organized on March 4, 1998, by the Bank and at the
direction of the Bank's Board of Directors, to serve as the Bank's parent
holding company. Effective July 22, 1998, and to effect the reorganization, (i)
an "interim bank" subsidiary of Registrant (newly formed for the purpose of such
transaction) was merged into the Bank (with the Bank as the surviving
corporation), (ii) the outstanding shares of the Bank's common stock were
converted into an identical number of shares of Registrant's Common Stock with
the result that the then current shareholders of the Bank became shareholders of
Registrant (with the same relative ownership interests that they had in the
Bank) and (iii) Registrant became the Bank's sole shareholder. The Bank
continues to exist under its separate charter and bylaws but as the wholly-owned
subsidiary of Registrant, and continues to conduct its banking business at all
its previous banking offices.
THE BANK. The Bank is an FDIC-insured, North Carolina-chartered bank
which was organized in 1919 and is engaged in a general, community-oriented
commercial and consumer banking business. The Bank currently maintains 15
full-service banking offices in six counties in North Carolina, together with
one mortgage loan production office, and its deposits are insured under the
FDIC's Bank Insurance Fund ("BIF") to the maximum amount permitted by law. The
Bank has two wholly-owned subsidiaries. Carolina Financial Realty, Inc. ("CFR")
holds title to five of the Bank's branch offices which it leases to the Bank.
The second subsidiary, Carolina Financial Courier, Inc., formerly provided
courier services to the Bank but currently contracts with a third-party for such
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.
The Bank's banking markets are located in the east central and
northeastern portions of North Carolina and along North Carolina's Outer Banks.
The Bank makes a variety of types of consumer and commercial loans to
individuals and small- and medium-sized businesses located primarily in its
banking markets for various personal, business and agricultural purposes,
including term and installment loans, equity lines of credit and overdraft
checking credit.
The Bank's deposit services include business and individual checking
accounts, savings accounts, NOW accounts, certificates of deposit and money
market checking accounts. It is the Bank's policy to monitor its competition in
order to keep the rates paid on its deposits at a competitive level. The Bank's
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banking markets include primarily smaller communities where its emphasis on
customer service provides it with a stable source of core funding. The vast
majority of the Bank's deposits are generated from within its banking markets,
and the Bank does not accept brokered deposits but does actively solicit public
funds deposits in its markets.
COMPETITION. The Bank competes for deposits in its banking markets with
other commercial banks, savings banks and other thrift institutions, credit
unions, agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, the Bank competes with all other financial institutions as
well as consumer finance companies, mortgage companies and other lenders.
Commercial banking in the Bank's banking markets and in North Carolina as a
whole is extremely competitive. North Carolina is the home of three of the
largest commercial banks in the Southeast, each of which has branches located in
certain of the Bank's markets, 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 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.
SUPERVISION AND REGULATION. Registrant is a bank holding company
registered with the Federal Reserve Board (the "FRB") under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and, as such, is subject to
supervision and examination by, and the regulations and reporting requirements
of, the FRB under the BHCA. Registrant's activities are limited to those
permitted for bank holding companies under the BHCA, and it is required to
obtain the prior approval of the FRB before it may acquire direct or indirect
control of more than 5% of the outstanding voting stock, or substantially all of
the assets of, any other financial institution or bank holding company.
Additionally, the BHCA prohibits Registrant from acquiring ownership or control
of more than 5% of the outstanding voting stock of any company engaged in an
activity that is not permitted for bank holding companies.
Bank holding companies are required to serve as a source of financial
strength for its depository institution subsidiaries, and, if their depository
institution subsidiaries become undercapitalized, bank holding companies may be
required to guarantee the subsidiaries' compliance with capital restoration
plans filed with their regulators, subject to certain limits.
As an insured, state-chartered bank that is not a member of the Federal
Reserve System, the Bank is subject to supervision and examination by, and the
regulations and reporting requirements of, the Federal Deposit Insurance
Corporation ("FDIC") and the North Carolina Commissioner of Banks (the
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"Commissioner"). Absent approval of the FDIC, it is prohibited from engaging as
principal in activities that are not permitted for national banks, and it is
prohibited from acquiring or retaining any equity investment of a type not
permitted for national banks.
As a subsidiary of Registrant, the Bank subject to restrictions under
Federal law on the amount of, and its ability to enter into, transactions with,
or investments in the securities of, Registrant and other entities considered to
be "affiliates" of the Bank.
Though it is not a member of the Federal Reserve System, the Bank is
subject to the FRB's reserve requirements applicable to all banks, and its
business is significantly influenced by the fiscal policies of the FRB. The
actions and policy directives of the FRB determine to a significant degree the
Bank's cost and the availability of funds and the rates of interest charged on
its loans and paid on its deposits.
The FRB, the FDIC and the Commissioner have broad powers to enforce laws and
regulations applicable to Registrant and the Bank and to require corrective
action of conditions affecting the Bank's safety and soundness. Among others,
these powers include cease and desist orders, the imposition of civil penalties
and the removal of officers and directors.
EMPLOYEES. Registrant does not have any separate employees. As of
December 31, 1999, the Bank employed 143 full-time employees (including its and
Registrant's executive officers) and 16 part-time employees. The Bank and its
employees are not parties to any collective bargaining agreement, and the Bank
considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
Registrant's offices are located in the Bank's corporate offices in
Engelhard, North Carolina, and Registrant does not own or lease any separate
properties. The Bank maintains the following 15 offices, seven of which it owns,
five of which are owned by CFR and leased to the Bank, two 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. All of the Bank's existing banking offices are in good condition and
fully equipped for the Bank's purposes.
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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 branch office (leased)
WESTERN REGION: Greenville Arlington branch office (owned)
Greenville University Medical Center branch office (owned)
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)
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ITEM 3. LEGAL PROCEEDINGS.
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At December 31, 1999, Registrant was not a party to any legal
proceeding that is expected to have a material effect on its financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to page 8 of Registrant's 1999 Annual
Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Incorporated herein by reference to pages 29 through 43 of Registrant's
1999 Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS.
Incorporated herein by reference to pages 11 through 28 of Registrant's
1999 Annual Report to Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated herein by reference from pages 3 through 5 (under the
captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Proposal 1:
Election of Directors" and "Executive Officers") of Registrant's definitive
Proxy Statement dated March 20, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated herein by reference from pages 5 through 7 (under the
caption "Director Compensation," "Executive Compensation" and "Stock Options")
of Registrant's definitive Proxy Statement dated March 20, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to page 2 (under the caption
"Beneficial Ownership of Securities") of Registrant's definitive Proxy Statement
dated March 20, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to page 7 (under the caption
"Transactions with Management") of Registrant's definitive Proxy Statement dated
March 20, 2000.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS. The following exhibits are filed herewith or
incorporated herein by reference as part of this Report.
EXHIBIT
NUMBER DESCRIPTION
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3.1 Registrant's Articles of Incorporation (incorporated
by reference from Exhibit 3.1 Registrant's Registration
Statement on Form SB-2, Reg. No. 333-61839)
3.2 Registrant's Bylaws (incorporated by reference from
Exhibit 3.2 to Registrant's Registration Statement on
Form SB-2, Reg. No. 333-61839)
10.1 Employment Agreement between Arthur H. Keeney, III and
the Bank (incorporated by reference from Exhibit 10.1
to Registrant's Registration Statement on Form SB-2,
Reg. No. 333-61839)
10.2 Omnibus Stock Ownership and Long Term Incentive Plan
(incorporated by reference from Exhibit 10.2 to
Registrant's Registration Statement on Form SB-2, Reg.
No. 333-61839)
10.3 Form of Employee Stock Option Agreement (incorporated
by reference from Exhibit 10.3 to Registrant's
Registration Statement on Form SB-2, Reg. No. 333-61839)
10.4 Form of Restricted Stock Agreement (incorporated by
reference from Exhibit 99.4 to Registrant's Registration
Statement Form S-8, Reg. No. 333-77689)
13.1 Registrant's 1999 Annual Report to Shareholders (filed
herewith)
21 List of subsidiaries of Registrant (incorporated by
reference from Exhibit 21.1 to Registrant's Registration
Statement on Form SB-2, Reg. No. 333-61839)
23 Consent of KPMG LLP (filed herewith)
27 Financial data schedule (filed herewith)
99 Registrant's definitive Proxy Statement dated March 20,
2000, as filed with the Securities and Exchange
Commission (not being refiled)
(B) REPORTS ON FORM 8-K.
None.
6
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ECB BANCORP, INC.
DATE: MARCH 23, 2000 BY: /s/ Arthur H. Keeney, III
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Arthur H. Keeney, III
President and Chief Executive Officer
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
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SIGNATURE TITLE DATE
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/s/ Arthur H. Keeney, III President, Chief Executive March 23, 2000
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Arthur H. Keeney, III Officer and Director
(principal executive officer)
/s/ Gary M. Adams Senior Vice President and March 23, 2000
- --------------------------------- Chief Financial Officer
Gary M. Adams (principal financial and
accounting officer)
/s/ R. S. Spencer, Jr. Chairman March 23, 2000
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R. S. Spencer, Jr.
/s/ George T. Davis, Jr. Director March 23, 2000
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George T. Davis, Jr.
/s/ C. Gilbert Gibbs Director March 23, 2000
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C. Gilbert Gibbs
/s/ Gregory C. Gibbs Director March 23, 2000
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Gregory C. Gibbs
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/s/ John F. Hughes, Jr. Director March 23, 2000
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John F. Hughes, Jr.
/s/ J. Bryant Kittrell, III Director March 23, 2000
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J. Bryant Kittrell, III
Director March 23, 2000
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Joseph T. Lamb, Jr.
/s/ B. Martelle Marshall Director March 23, 2000
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B. Martelle Marshall
/s/ Robert L. Mitchell Director March 23, 2000
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Robert L. Mitchell
/s/ Ray M. Spencer Director March 23, 2000
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Ray M. Spencer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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3.1 Registrant's Articles of Incorporation (incorporated by
reference from Exhibit 3.1 to Registrant's Registration
Statement on Form SB-2, Reg. No. 333-61839)
3.2 Registrant's Bylaws (incorporated by reference from Exhibit
3.2 to Registrant's Registration Statement on Form SB-2, Reg.
No. 333-61839)
10.1 Employment Agreement between Arthur H. Keeney, III and the
Bank (incorporated by reference from Exhibit 10.1 to
Registrant's Registration Statement on Form SB-2, Reg. No.
333-61839)
10.2 Omnibus Stock Ownership and Long Term Incentive Plan
(incorporated by reference from Exhibit 10.2 to Registrant's
Registration Statement on Form SB-2, Reg. No. 333-61839)
10.3 Form of Employee Stock Option Agreement (incorporated by
reference from Exhibit 10.3 to Registrant's Registration
Statement on Form SB-2, Reg. No. 333-61839)
10.4 Form of Restricted Stock Agreement (incorporated by
reference from Exhibit 99.4 to Registrant's Registration
Statement Form S-8, Reg. No. 333-77689)
13.1 Registrant's 1999 Annual Report to Shareholders (filed
herewith)
21 List of subsidiaries of Registrant (incorporated by reference
from Exhibit 21.1 Registrant's Registration Statement on
Form SB-2, Reg. No. 333-61839)
23 Consent of KPMG LLP (filed herewith)
27 Financial data schedule (filed herewith)
99 Registrant's definitive Proxy Statement dated March 20, 2000,
as filed with the Securities and Exchange Commission (not
being refiled)
9
[LOGO] THE EAST CAROLINA BANK EXCELLENCE IN
ECB COMMUNITY BANKING
SINCE 1920
ECB BANCORP, INC.
1999 ANNUAL REPORT
<PAGE>
COMMUNITY BANKING
AS YOU WANT IT TO BE...
[GRAPHIC]
15
Convenient
Branch
Locations
Avon o Barco o Columbia o Creswell o Engelhard o Fairfield
Greenville o Hatteras o Manteo o Nags Head o Ocracoke
Southern Shores o Swan Quarter o Washington
[GRAPHIC]
Automated Teller
Machines
[GRAPHIC]
www.ecbbancorp.com
[GRAPHIC]
XPRESS
PHONE BANKING
[LOGO]EQUAL
HOUSING
LENDER Member FDIC
<PAGE>
(ECB BANCORP, INC. LOGO) TABLE OF CONTENTS
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1999
ANNUAL REPORT
Shareholder Reference ...................................... 3
Letter to Shareholders ..................................... 4-5
Mission Statement .......................................... 7
Financial Highlights ....................................... 8-9
Consolidated Five Year Financial Summary ................... 10
Independent Auditors' Report ............................... 11
Consolidated Balance Sheets ................................ 12
Consolidated Statements of Income .......................... 13
Consolidated Statements of Shareholders' Equity ............ 14
Consolidated Statements of Cash Flows ...................... 15
Notes to Consolidated Financial Statements .................16-28
Management's Discussion and Analysis .......................29-43
Board of Directors and Subsidiary Corporations ............. 44
Bank Senior Management and Corporate Officers .............. 45
Bank Officers and Department Managers ...................... 46
Branch Officers ............................................ 47
Attorneys and Correspondent Banks .......................... 48
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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.
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SHAREHOLDER REFERENCE (ECB BANCORP, INC. LOGO)
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ANNUAL MEETING
The Annual Shareholders' Meeting will be held
Wednesday, April 19, 2000 at 11:00 a.m. at the Lodge at
Lake Mattamuskeet, Hyde County, North Carolina.
HEADQUARTERS
35080 US Highway 264
Post Office Box 337
Engelhard, North Carolina 27824
(252) 925-9411
FORM 10-KSB
Copies of ECB Bancorp, Inc.'s Annual Report on Form 10-KSB to the Securities and
Exchange Commission may be obtained without charge by writing to Gary M. Adams,
Senior VP & Chief Financial Officer, The East Carolina Bank, P.O. Box 337,
Engelhard, North Carolina 27824.
ANNUAL DISCLOSURE STATEMENT
A copy of the Bank's Annual Disclosure Statement may be obtained without charge
by contacting Gary M. Adams, Senior VP & Chief Financial Officer, The East
Carolina Bank, P.O. Box 337, Engelhard, North Carolina 27824.
STOCK TRANSFER AND REGISTRAR
First-Citizens Bank & Trust Company
P.O. Box 29522
Raleigh, North Carolina 27626
SHAREHOLDER ACCOUNT INQUIRIES
Communications regarding transfer requirements and lost certificates should be
directed to:
The East Carolina Bank
35080 US Highway 264
P.O. Box 337
Engelhard, North Carolina 27824
Attention: Corporate Secretary
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP
Suite 1200, 150 Fayetteville Street Mall
P.O. Box 29543
Raleigh, North Carolina 27626-0543
INVESTMENT BANKING ADVISOR
Wachovia/IJL
IJL Financial Center
201 N. Tryon Street
Charlotte, North Carolina 28202
COUNSEL
Davis & Davis
Attorneys at Law
P.O. Box 277
Swan Quarter, North Carolina 27885
BUSINESS PROFILE
ECB Bancorp, Inc. ("Bancorp") is a bank holding company headquartered in
Engelhard, North Carolina, whose wholly-owned subsidiary, The East Carolina Bank
(the "Bank" or "ECB") (collectively referred to hereafter as the "Company"), is
a state-chartered, independent, community bank founded in 1919. At year-end
1999, The East Carolina Bank had 143 full-time employees. ECB is a member of the
Federal Deposit Insurance Corporation, the American Bankers Association, the
North Carolina Bankers Association, and the Independent Bankers Association of
America. The Bank currently operates 15 full-service branches, a mortgage office
and 14 automated teller machines in eastern North Carolina. Nine of these
offices are located in mainland Beaufort, Currituck, Hyde, Pitt, Tyrrell, and
Washington counties, and six are on North Carolina's famed Outer Banks, from
Ocracoke Island in Hyde County to Southern Shores in Dare County.
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Excellence in Community Banking
3
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(ECB BANCORP, INC. LOGO) LETTER TO SHAREHOLDERS
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Dear Shareholder:
Well we made it! As I write this letter early in the year 2000, I am pleased to
report that we came through the Y2K adventure absolutely unscathed. All of our
systems worked flawlessly and we joined the rest of the world in a large,
collective sigh of relief! We learned quite a bit about ourselves and our
organization through the process of creating a thorough contingency plan to deal
with Y2K. We liked what we found, and the knowledge gleaned during this planning
process will help us be a better bank going forward.
The year 2000 also represents our 80th year of delivering quality community bank
services to communities in northeastern North Carolina. We have come a long way
since the doors of the Bank of Engelhard (located in a former barbershop) first
opened on January 20, 1920. It is our intent to have several events during the
year commemorating this anniversary and inviting the general public to
participate.
I am pleased to report that for the year-ended December 31, 1999, ECB Bancorp,
Inc. generated a consolidated net income of $2,143,000 or $1.01 per share, which
is a 9.4% increase over the $1,959,000, or $1.08 per share earned for the period
ended December 31, 1998, (the per share results include the full year's effect
of a 345,000 share stock offering in the 4th quarter of 1998). Consolidated
total assets at year-end 1999 were $233,113,000 or a 10.5% increase over total
assets of $210,902,000 at December 31, 1998. Deposits of $203,301,000 at
December 31, 1999, represented a 10.3% increase over the previous year-end
balance of $184,267,000. Loans grew 11.0% to $147,676,000 at December 31, 1999,
up from $133,024,000 at December 31, 1998. These financial results equate to a
.97% return on average assets and a 9.71% return on average equity and again
reflect the effect of the aforementioned 1998 stock offering.
We are quite satisfied with these results and proud that the organization earned
more than $2 million for the first time in its history. This was achieved in
spite of the fact that significant organizational energy and attention (and
expense) were paid to Y2K and its related issues. That is now behind us and
management and bank employees can again focus their time and energies on the
core strategic initiatives of the company.
I am pleased to report that several of our goals were achieved in 1999. In April
we organized the ECB Mortgage Company under the leadership of Staton Martin who
was formerly with Dare Mortgage Company. Satisfactory progress was made in
growing this business, notwithstanding the increased rate environment in which
we functioned, as we moved through the year. The Bank has decided to accelerate
this progress and, in that regard, has recently hired Edith Corbman primarily to
cover the Washington and Greenville markets.
In addition to the continued growth of our Avon and Currituck branches which
opened in 1998, we opened the Bank's 15th full-service branch in Washington, NC
in June 1999. Steady progress has been achieved in this competitive market and
we are pleased to bring our style of community banking to Beaufort County. In
August 1999, we also completed the move of our Manteo Branch to a more visible
location on Highway 64/264. In early March 2000, the Town of Manteo completed
the renovation of our previous facility and proudly moved into its new municipal
offices. As this letter goes to press, we are also finalizing plans to move our
Currituck branch from its temporary location in Barco to a new permanent
location approximately six miles north in the Town of Currituck. Management
feels this move, which is expected to occur later this year, will only
accelerate our steady market penetration in that corner of North Carolina.
At the same time we were dealing with Y2K issues in 1999, we also were making
substantial progress on ECB's technology strategic plan. As this is being
written, the finishing touches are being put on our wide area network (WAN)
which is comprised of a series of smaller local area networks (LAN's) and will
link all the Bank's facilities. In addition, all departments and branches will
have access to the Internet. We are also close to completion of many major
improvements to our telephone system. The net result of all this will be an
enhanced, state of the art ability to communicate by moving both voice and data
simultaneously and rapidly throughout the system. This has significant
implications for enhanced product delivery, customer satisfaction and efficiency
issues.
In November 1999, we installed a Check Image Processing system. After several
months of testing, we rolled out a redesigned and improved bank statement to our
retail and commercial customers in late February 2000. In our opinion, check
imaging has changed from being a luxury to an absolute necessity in order to
achieve improved efficiency and a higher level of customer service. Switching
from microfilm to digital imaging can be compared to the technological changes
that have been made in the way consumers listen to music - it's the difference
between listening to your favorite songs on cassette or compact disc. With check
imaging (like a CD), the quality is higher and crisper.
- --------------------------------------------------------------------------------
4
<PAGE>
LETTER TO SHAREHOLDERS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
One of the drivers of ECB's future success will be the ability to increase fee
income as we add to our product base. To that end, (and in the very near
future), we will be introducing a leasing product, a new accounts receivable
financing product, various insurance products marketed through ECB Financial
Services, and an array of products designed to appeal to and facilitate the
management of small businesses, under the banner "ECB Best Business Solutions."
In the fall of 1999, we also began the design and construction of a WEB page as
the precursor of taking the East Carolina Bank into the world of Internet
banking. I am pleased to report that this project is almost complete and, by the
time of the annual meeting, our WEB site (www.ecbbancorp.com) should be
functional. We welcome you to visit it and give us your feedback. The next stage
(goal) of this technology initiative is to bring home banking and small business
banking (principally cash management services) via the Internet to our customers
by the end of the third quarter 2000.
The idea of introducing an ECB-style community bank Internet service is to give
customers the choice of banking in person, on the phone, or on the Internet,
thus keeping their loyalty and hopefully broadening their relationship with the
Bank. We anticipate that the ECB branded approach, together with our theme of
"Excellence in Community Banking," will generate high recognition by putting
quality customer service and a friendly face on Internet technology. We think
this is currently lacking in the marketplace. It is our intent to actually
deliver "high tech and high touch."
While the Company ended the past century on a high note, our thoughts and
prayers continue to go out to all individuals and families throughout eastern
North Carolina, but particularly to those in our market area that were heavily
impacted by the floods and tidal surge wrought by Hurricanes Dennis and Floyd.
While contributing along with many others to the Governor's Hurricane Relief
Fund to help all flood victims, ECB spent the majority of its limited resources
on our friends and neighbors from Greenville to the East. Hyde County was
particularly hard hit. The Bank played a key role in gathering public donations
throughout all its branches for the Hyde County Relief Fund and donating the use
of a building in Swan Quarter as the centralized point for food, clothing, and
other essentials for those hardest hit.
I am also saddened to report the passing of Lewis Combs of Creswell, an East
Carolina Bank Director from 1969 to 1996. Mr. Combs was a member of the
Executive Committee when I came to the Bank. Although he elected not to stand
for reelection in 1996, his comments and observations for the months we worked
together were always well reasoned and on target with common sense. His friends
within The East Carolina Bank family will miss him but will also be thankful
that he gave his talents to the governance of the organization for so many
years.
The year 1999 was also highlighted by three increases in interest rates by the
Federal Reserve. It is believed that the year 2000 will see the Feds continue
its bias toward tightening in its effort to cool the economy and contain any
potential signs of inflation. Management believes that the East Carolina Bank
will be minimally impacted in this environment given our current asset/liability
mix.
We are obviously disappointed in the weak performance of our stock during 1999.
For a variety of reasons including the interest rate increases mentioned above,
most bank stocks were under severe pressure this past year and did poorly
regardless of how well the banks themselves were performing. Investors were
simply not focusing on value during the year. We hope to see a reversal of this
trend in 2000.
In closing, I would once again like to thank the directors for their confidence
and contributions and to acknowledge the continued display of teamwork
throughout the organization, particularly among the management team.
Additionally, I will again thank the employees as I try to do all year long for
their support and dedication to the principles upon which the successes of this
Bank are being built. Lastly I want to thank the shareholders for their support
and patience as we put together a top-performing bank which will reward their
investment over time. Watch for our new series of advertisements featuring a
renewed emphasis on our customers and their ECB banking relationship. While we
will continue with the theme of "Excellence in Community Banking (ECB), we will
also be guided by the following: "The East Carolina Bank, community banking as
you want it to be, the excellence of ECB."
Sincerely,
/s/ Arthur H. Keeney, III
Arthur H. Keeney, III
President and CEO
March 20, 2000
- --------------------------------------------------------------------------------
Excellence in Community Banking
5
<PAGE>
(ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
[LOGO]
THE EAST CAROLINA BANK
ECB
SINCE 1920
EXCELLENCE IN COMMUNITY BANKING
- --------------------------------------------------------------------------------
6
<PAGE>
(ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
MISSION STATEMENT
THE EAST CAROLINA BANK WILL BE OPERATED IN A FINANCIALLY SOUND MANNER AND WILL
ACHIEVE ITS GROWTH AND PROFIT OBJECTIVES THROUGH THE DELIVERY OF SELECT, QUALITY
FINANCIAL PRODUCTS AND SERVICES TO INDIVIDUALS, SMALL BUSINESS, AND AGRICULTURAL
CUSTOMERS IN EASTERN NORTH CAROLINA.
WE WILL BE DEDICATED TO EMPLOYEE DEVELOPMENT, STRIVE TO EXCEED THE PUBLIC'S
EXPECTATIONS WITH OUR SERVICE ORIENTATION, AND SEEK TO HAVE OUR CORPORATE VALUES
REFLECT THOSE OF THE COMMUNITY.
THE RESULT SHALL BE A HIGH PERFORMANCE INDEPENDENT BANK PROVIDING CAREER
OPPORTUNITIES FOR OUR EMPLOYEES, SUPERIOR RETURNS FOR OUR SHAREHOLDERS, AND
EXCELLENCE IN COMMUNITY BANKING FOR OUR CUSTOMERS.
- --------------------------------------------------------------------------------
Excellence in Community Banking
7
<PAGE>
(ECB BANCORP, INC. LOGO) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
NET INCOME
(Bar graph appears here with the following plot points.)
1995 1996 1997 1998 1999
$1,190,183 $1,333,763 $1,673,251 $1,959,040 $2,143,390
MARKET PRICE OF COMMON STOCK AND DIVIDENDS
Bancorp's Common Stock was first issued on July 22, 1998, when it became the
Bank's parent holding company. The Common Stock was listed on the Nasdaq Small
Cap Market on November 23, 1998, under the trading symbol "ECBE." Previously, it
had been traded on the Nasdaq Bulletin Board.
The following table sets forth the high and low published prices of the Common
Stock during each calendar quarter since the listing date on the Nasdaq Small
Cap Market, and the amounts of dividends declared on the Common Stock during
each calendar quarter for the past two calendar years.
<TABLE>
<CAPTION>
PRICE(1)
-------------------------------
QUARTER HIGH LOW DIVIDENDS DECLARED
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
First - - -
Second - - -
Third - - -
Fourth(1) $17.125 $14.25 $0.255*
1999
First $16.25 $11.00 $0.0725
Second $15.75 $11.50 $0.0725
Third $12.625 $10.50 $0.0725
Fourth $12.50 $ 9.125 $0.0725
</TABLE>
(1) Beginning November 23, 1998, which was the date the Common Stock was listed
on the Nasdaq Small Cap Market.
Bancorp's sole source of funds for the payment of dividends on its Common Stock
is dividends paid to it by the Bank on the shares of the Bank's Common Stock
held by the Bancorp, and the declaration and payment of future dividends by the
Bank will continue to depend on its earnings and financial condition, capital
requirements, general economic conditions, compliance with regulatory
requirements generally applicable to North Carolina banks, and other factors.
Bancorp's ability to pay dividends also is subject to its own separate factors,
including its earnings and financial condition, capital requirements and
regulatory restrictions applicable to bank holding companies.
*Historically, the Company has paid its dividends on an annual basis. In 1998,
the annual dividend was 25.5 cents per share. On an annualized basis, the 1999
quarterly per share dividend represents a 13.7% increase over the 1998 dividend.
- --------------------------------------------------------------------------------
8
<PAGE>
FINANCIAL HIGHLIGHTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
1999 1998 CHANGE
- ----------------------------------------------------------------------------------------------------------
FOR THE YEAR:
<S> <C> <C> <C>
Operating income $ 17,957,609 $ 16,909,358 6.2%
Operating expense 15,814,219 14,950,318 5.8%
Net income 2,143,390 1,959,040 9.4%
Per share (basic and diluted) 1.01 1.08 (6.4)%
Cash dividends declared 616,119 453,965 35.7%
Per share $ .290 $ .255 13.7%
Average number of common shares outstanding 2,122,354 1,817,117 16.8%
- ----------------------------------------------------------------------------------------------------------
AT YEAR END:
Assets $ 233,113,296 $ 210,901,939 10.5%
Earning assets 213,887,681 191,418,473 11.7%
Loans 147,675,538 133,024,004 11.0%
Investment securities 58,939,340 58,394,469 0.9%
Allowance for probable loan losses 2,700,000 2,750,000 (1.8)%
Deposits 203,301,393 184,266,912 10.3%
Shareholders' equity 22,062,399 21,852,346 1.0%
Book value per share $ 10.40 $ 10.28 1.2%
- ----------------------------------------------------------------------------------------------------------
AVERAGES:
Assets $ 221,598,000 $ 194,618,000 13.9%
Earning assets 203,300,000 179,290,000 13.4%
Loans, gross 141,564,000 127,650,000 10.9%
Deposits 194,609,000 175,857,000 10.7%
Shareholders' equity 22,066,000 17,295,000 27.6%
(Bar graphs appear here with the following plot points.)
RETURN ON ASSETS RETURN ON EQUITY
1995 1996 1997 1998 1999 1995 1996 1997 1998 1999
.74% .80% .93% 1.01% *.97% 9.16% 9.55% 11.07% 11.33% *9.71%
</TABLE>
*Results include the full year's effect of a 345,000 share stock offering in the
4th quarter of 1998.
- --------------------------------------------------------------------------------
Excellence in Community Banking
9
<PAGE>
(ECB BANCORP, INC. LOGO) CONSOLIDATED FIVE YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS AND LIABILITIES 1999 1998 1997 1996 1995
- ----------------------------------------------------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Deposits $ 203,301,393 $ 184,266,912 $ 170,908,861 $ 151,335,562 $ 150,435,845
Demand 104,261,971 86,375,845 73,153,398 66,263,148 61,617,488
Savings and time 99,039,422 97,891,067 97,755,463 85,072,414 88,818,357
Loans 147,675,538 133,024,004 121,208,810 112,655,981 94,488,919
Securities: 58,939,340 58,394,469 47,119,973 34,588,505 47,771,754
Taxable 44,438,517 40,969,145 33,062,817 25,334,366 38,259,514
Tax exempt 14,500,823 17,425,324 14,057,156 9,254,139 9,512,240
Allowance for probable loan losses 2,700,000 2,750,000 2,660,000 2,400,000 1,950,000
Shareholders' equity 22,062,399 21,852,346 15,713,293 14,249,546 13,426,644
Assets $ 233,113,296 $ 210,901,939 $ 188,227,722 $ 167,217,594 $ 165,407,814
=========================================================== ============== ============== =============== ============
OPERATING SUMMARY
Interest income:
Interest and fees on loans $ 12,512,479 $ 12,104,838 $ 10,887,327 $ 9,521,265 $ 8,754,549
Interest on securities 3,079,605 2,625,600 2,261,265 2,390,995 2,677,175
Interest on federal funds sold 302,071 241,595 490,623 301,265 371,806
- ----------------------------------------------------------- -------------- -------------- --------------- -------------
Total interest income 15,894,155 14,882,033 13,639,215 12,213,525 11,803,530
Interest expense:
Interest on deposits 5,542,047 5,351,026 5,363,757 4,831,397 5,207,179
Interest on short-term borrowings 30,201 8,853 786 9,459 8,746
Interest on long-term obligations 130,609 - - - -
- ----------------------------------------------------------- -------------- -------------- --------------- ------------
Total interest expense 5,702,857 5,359,879 5,364,543 4,840,856 5,215,925
- ----------------------------------------------------------- -------------- -------------- --------------- -------------
Net interest income 10,191,298 9,522,154 8,274,672 7,372,669 6,587,605
Provision for probable loan losses 242,319 242,396 353,513 496,914 515,066
Non-interest income 2,063,454 2,027,325 1,920,249 1,718,064 1,669,518
Non-interest expenses 9,169,043 8,703,043 7,518,157 6,785,056 6,167,874
- ----------------------------------------------------------- -------------- -------------- --------------- ------------
Income before taxes and cumulative
effect of a change in accounting for
postretirement benefits 2,843,390 2,604,040 2,323,251 1,808,763 1,574,183
Income taxes 700,000 645,000 650,000 475,000 384,000
- ----------------------------------------------------------- -------------- -------------- --------------- -------------
Income before cumulative effect of
a change in accounting for
postretirement benefits 2,143,390 1,959,040 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 tax - - - - (278,555)
- ----------------------------------------------------------- -------------- -------------- --------------- ------------
Net income $ 2,143,390 $ 1,959,040 $ 1,673,251 $ 1,333,763 $ 911,628
=========================================================== ============== ============== =============== ============
Weighted average outstanding
shares of common stock 2,122,354 1,817,117 1,780,254 1,780,254 1,780,254
Per share amounts:
Income before cumulative effect of
a change in accounting for
postretirement benefits $ 1.01 $ 1.08 $ 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 per common share
(basic and diluted) $ 1.01 $ 1.08 $ .94 $ .75 $ .51
=========================================================== ============== ============== =============== ============
</TABLE>
10
<PAGE>
INDEPENDENT AUDITORS' REPORT (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
ECB BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of ECB Bancorp,
Inc. and subsidiary (the "Company") as of December 31, 1999 and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 ECB Bancorp, Inc.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Raleigh, North Carolina
February 4, 2000
KPMG LLP
- --------------------------------------------------------------------------------
Excellence in Community Banking
11
<PAGE>
(ECB BANCORP, INC. LOGO) CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 AND 1998
<S> <C> <C>
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------- -----------------
Non-interest bearing deposits and cash (note 13) $ 11,138,810 $ 11,965,108
Federal funds sold 6,650,000 -
- ------------------------------------------------------------------------------------------------------- -----------------
Total cash and cash equivalents 17,788,810 11,965,108
- ------------------------------------------------------------------------------------------------------- -----------------
INVESTMENT SECURITIES (NOTE 2)
Available-for-sale (cost: $59,797,382 and
$57,374,975, respectively) 58,939,340 58,394,469
LOANS (NOTE 3) 147,675,538 133,024,004
Allowance for probable loan losses (note 4) (2,700,000) (2,750,000)
- ------------------------------------------------------------------------------------------------------- ----------------
Loans, net 144,975,538 130,274,004
- ------------------------------------------------------------------------------------------------------- ----------------
Real estate acquired in settlement of loans, net 182,672 50,000
Federal Home Loan Bank stock, at cost 632,800 564,800
Bank premises and equipment, net (note 5) 6,727,460 7,006,508
Accrued interest receivable 2,259,371 2,096,424
Other assets (note 6) 1,607,305 550,626
- ------------------------------------------------------------------------------------------------------- ----------------
Total $ 233,113,296 $ 210,901,939
======================================================================================================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------- ----------------
DEPOSITS (NOTE 10):
Demand, noninterest bearing $ 43,638,449 $ 38,264,627
Demand, interest bearing 60,623,522 48,111,218
Savings 14,822,699 14,561,072
Time 84,216,723 83,329,995
- ------------------------------------------------------------------------------------------------------- ----------------
Total deposits 203,301,393 184,266,912
- ------------------------------------------------------------------------------------------------------- ----------------
Short-term borrowings 2,737,649 2,725,000
Accrued interest payable 816,980 829,104
Long-term obligations 3,000,000 -
Other liabilities (note 7) 1,194,875 1,228,577
- ------------------------------------------------------------------------------------------------------- ----------------
Total liabilities 211,050,897 189,049,593
- ------------------------------------------------------------------------------------------------------- ----------------
SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 16):
Common stock, par value $3.50 per share; authorized
10,000,000 shares; issued and outstanding 2,121,529 and
2,125,254 shares at December 31, 1999 and 1998, respectively 7,425,352 7,438,389
Capital surplus 6,229,452 6,260,392
Retained earnings 9,008,846 7,480,699
Deferred compensation - restricted stock (34,945) -
Accumulated other comprehensive (loss) income (566,306) 672,866
- ------------------------------------------------------------------------------------------------------- ----------------
Total shareholders' equity 22,062,399 21,852,346
======================================================================================================= ================
COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 14)
Total $ 233,113,296 $ 210,901,939
- ------------------------------------------------------------------------------------------------------- -----------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<S> <C> <C> <C>
1999 1998 1997
- ---------------------------------------------------------------------------------- ---------------- --------------
INTEREST INCOME:
Interest and fees on loans $ 12,512,479 $ 12,014,838 $ 10,887,327
Interest on investment securities:
Interest exempt from federal income taxes 760,243 751,990 511,653
Taxable interest income 2,319,362 1,873,610 1,749,612
Interest on federal funds sold 302,071 241,595 490,623
- ---------------------------------------------------------------------------------- ---------------- --------------
Total interest income 15,894,155 14,882,033 13,639,215
- ---------------------------------------------------------------------------------- ---------------- --------------
INTEREST EXPENSE:
Deposits (note 10):
Demand accounts 1,253,138 686,085 698,635
Savings 223,373 284,094 308,012
Time 4,065,536 4,380,847 4,357,110
Short-term borrowings 30,201 8,853 786
Long-term obligations 130,609 - -
- ---------------------------------------------------------------------------------- ---------------- --------------
Total interest expense 5,702,857 5,359,879 5,364,543
- ---------------------------------------------------------------------------------- ---------------- --------------
NET INTEREST INCOME 10,191,298 9,522,154 8,274,672
Provision for probable loan losses (note 4) 242,319 242,396 353,513
- ---------------------------------------------------------------------------------- ---------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR PROBABLE LOAN LOSSES 9,948,979 9,279,758 7,921,159
- ---------------------------------------------------------------------------------- ---------------- --------------
NON-INTEREST INCOME:
Service charges on deposit accounts 1,316,222 1,334,958 1,391,136
Other service charges and fees 600,623 590,832 524,638
Net loss on sale of securities (27,122) - (25,818)
Other 173,731 101,535 30,293
- ---------------------------------------------------------------------------------- ---------------- --------------
Total non-interest income 2,063,454 2,027,325 1,920,249
- ---------------------------------------------------------------------------------- ---------------- --------------
NON-INTEREST EXPENSE:
Salaries 3,541,511 3,186,103 2,938,570
Retirement and other employee benefits (note 7) 1,073,039 1,083,843 971,474
Occupancy 718,356 720,257 623,134
Equipment 992,213 875,232 768,244
Professional fees 333,159 318,336 209,038
Supplies 239,925 251,076 221,978
Telephone 285,828 265,386 216,821
Postage 172,759 171,747 150,311
Other 1,812,253 1,831,063 1,418,587
- ---------------------------------------------------------------------------------- ---------------- --------------
Total non-interest expense 9,169,043 8,703,043 7,518,157
- ---------------------------------------------------------------------------------- ---------------- --------------
INCOME BEFORE INCOME TAXES 2,843,390 2,604,040 2,323,251
INCOME TAXES (NOTE 6) 700,000 645,000 650,000
- ---------------------------------------------------------------------------------- ---------------- --------------
NET INCOME $ 2,143,390 $ 1,959,040 $ 1,673,251
================================================================================== ================ ==============
NET INCOME PER SHARE (BASIC AND DILUTED) $ 1.01 $ 1.08 $ 0.94
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,122,354 1,817,117 1,780,254
================================================================================== ================ ==============
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
13
<PAGE>
(ECB BANCORP, INC. LOGO) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED
DEFERRED OTHER
COMMON STOCK COMPENSATION- COMPREHENSIVE
NUMBER CAPITAL RETAINED RESTRICTED (LOSS) COMPREHENSIVE
OF SHARES AMOUNT SURPLUS EARNINGS STOCK INCOME INCOME TOTAL
- --------------------------------------------- --------- ---------- ---------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 1,780,254 $6,230,889 $3,200,000 $4,717,766 - $100,891 - $14,249,546
Unrealized gain, net of
income taxes of $106,000 - - - - - 205,889 205,889 205,889
Net income - - - 1,673,251 - - 1,673,251 1,673,251
Total comprehensive income $ 1,879,140
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
Unrealized gain, net of
income taxes of $188,590 - - - - - 366,086 366,086 366,086
Net income - - - 1,959,040 - - 1,959,040 1,959,040
Total comprehensive income $ 2,325,126
Common stock issued (note 11) 345,000 1,207,500 3,060,392 - - - ========= 4,267,892
Cash dividends ($.255 per share) - - - (453,965) - - (453,965)
- --------------------------------------------- --------- ---------- ---------- ------------ --------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 2,125,254 7,438,389 6,260,392 7,480,699 672,866 21,852,346
Unrealized losses, net of
income taxes of $638,364 - - - - - (1,239,172) (1,239,172) (1,239,172)
Net income - - - 2,143,390 - - 2,143,390 2,143,390
Total comprehensive income $ 904,218
Deferred compensation - ==========
restricted stock issuance 3,575 12,513 28,599 - (41,112) - -
Recognition of deferred stock
compensation - restricted stock - - - - 6,167 - 6,167
Repurchase of common stock (7,300) (25,550) (59,539) - - - (85,089)
Cash dividends ($.29 per share) - - - (615,243) - - (615,243)
- --------------------------------------------- --------- ---------- ---------- ------------ --------- ----------
BALANCE AT DECEMBER 31, 1999 2,121,529 $7,425,352 $6,229,452 $9,008,846 $(34,945) $(566,306) $22,062,399
============================================= ========= ========== ========== ============ ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<S> <C> <C> <C>
1999 1998 1997
- -------------------------------------------------------------------------------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,143,390 $ 1,959,040 $ 1,673,251
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 660,762 668,383 545,852
Amortization of premium on investment securities, net 41,651 54,862 51,838
Provision for probable loan losses 242,319 242,396 353,513
Provision for loss on real estate held for sale - - 50,000
Deferred income taxes 61,500 72,000 (33,700)
Loss on sale of available-for-sale securities 27,122 - 25,818
Loss on disposal of premises and equipment 47,486 6,285 7,242
Deferred compensation - restricted stock 6,167 - -
Increase in accrued interest receivable (162,947) (173,610) (403,494)
Decrease (increase) in other assets (612,487) 93,092 (819)
Increase (decrease) in accrued interest payable (12,124) 130,107 115,265
Increase in postretirement benefit liability 12,739 20,747 42,000
Increase (decrease) in other liabilities (200,289) (34,833) (184,183)
- -------------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided by operating activities 2,255,289 3,038,469 2,242,583
- -------------------------------------------------------------------------------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities classified
as available-for-sale 3,346,458 - 3,015,439
Proceeds from maturities of investment securities
classified as available-for-sale 18,818,876 9,913,543 13,349,710
Purchases of investment securities classified as
available-for-sale (24,656,514) (20,688,225) (28,662,322)
Purchases of Federal Home Loan Bank stock (68,000) (61,800) (503,000)
Proceeds from disposal of premises and equipment 2,286,397 12,063 23,665
Purchases of premises and equipment (2,715,597) (1,426,956) (1,304,813)
Proceeds from disposal of real estate acquired in
settlement of loans and real estate held for sale - 446,476 50,263
Net loan originations (14,943,853) (11,967,590) (9,075,362)
- -------------------------------------------------------------------------------------- ---------------- -----------------
Net cash used by investing activities (17,932,233) (23,772,489) (23,106,420)
- -------------------------------------------------------------------------------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,034,481 13,454,507 19,573,299
Net increase in short-term borrowings 12,649 2,725,000 -
Proceeds from long-term borrowings 3,000,000 - -
Dividends paid (461,395) (453,965) (415,393)
Proceeds from issuance of common stock - 4,267,892 -
Repurchase of common stock (85,089) - -
- -------------------------------------------------------------------------------------- ---------------- ----------------
Net cash provided by financing activities 21,500,646 19,993,434 19,157,906
- -------------------------------------------------------------------------------------- ---------------- -----------------
Increase (decrease) in cash and cash equivalents 5,823,702 (740,586) (1,705,931)
Cash and cash equivalents at beginning of year 11,965,108 12,705,694 14,411,625
- -------------------------------------------------------------------------------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,788,810 $ 11,965,108 $ 12,705,694
====================================================================================== ================ ================
Supplemental disclosure of noncash financing and investing activities:
Unrealized gains (losses) on available-for-sale securities,
net of deferred taxes $ (1,239,172) $ 366,086 $ 205,889
====================================================================================== ================ ================
Dividends declared but not paid $ 153,848 - -
====================================================================================== ================ ================
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
15
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
--------------------------------------------------------
(a) CONSOLIDATION
-------------
The consolidated financial statements include the accounts of ECB Bancorp,
Inc. ("Bancorp") (see note 11) and its wholly-owned subsidiary, The East
Carolina Bank (the "Bank") (collectively referred to hereafter as the
"Company"). The Bank has two wholly-owned subsidiaries, Carolina Financial
Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
------------------------------------------
The preparation of financial statements in conformity with 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 probable
loan losses. In connection with the determination of the allowance for
probable 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. The Company has no foreign operations, and
the Company's customers are principally located in eastern North Carolina.
(d) CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents include demand and time deposits (with original
maturities of ninety days or less) at other financial institutions and
federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
(e) INVESTMENT SECURITIES
---------------------
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation at
each reporting date. Securities are classified as held-to-maturity ("HTM")
when the Company has both the positive intent and ability to hold the
securities to maturity. HTM securities are stated at amortized cost.
Securities not classified at 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.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(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 judgment, 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 PROBABLE LOAN LOSSES
----------------------------------
The allowance for probable loan losses ("AFLL") is established through
provisions for losses charged against income. Loan amounts deemed to be
uncollectible are charged against the AFLL, and subsequent recoveries, if
any, are credited to the allowance. The AFLL represents management's
estimate of the amount necessary to absorb estimated probable losses in
the loan portfolio. Management 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 these standards 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 less estimated selling costs declines below the
initial recorded value. Costs related to the improvement of the property
are capitalized, whereas those related to holding the property are
expensed. Such properties are held for sale and, accordingly, no
depreciation or amortization expense is recognized. Loans with outstanding
principal balances totalling $132,672 and $390,358 were foreclosed on
during the years ended December 1999 and 1997, respectively. There were no
such foreclosures in 1998.
(i) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
-----------------------------------------------------
The Company is a member of the Federal Home Loan Bank of Atlanta ("FHLB").
Membership, along with a signed blanket collateral agreement, provides the
Company with the ability to draw $13 million of advances from the FHLB. At
December 31, 1999, the Company had advances totaling $3 million from the
FHLB. These advances, which are classified as long-term borrowings, mature
in January 2004 and carry an interest rate of 4.7 percent at December 31,
1999. No advances were drawn by the Company in 1998.
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
- --------------------------------------------------------------------------------
Excellence in Community Banking
17
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued)
collateral for any FHLB advances drawn by the Company. At December 31,
1999, the Company owned 6,328 shares of the FHLB's $100 par value capital
stock. No ready market exists for such stock, which is carried at cost.
(j) PREMISES AND EQUIPMENT
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method and is charged to
operations over the estimated useful lives of the assets which range from
25 to 50 years for bank premises and 3 to 10 years for furniture and
equipment.
Maintenance, repairs, renewals and minor improvements are charged to
expense as incurred. Major improvements are capitalized and depreciated.
(k) 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.
(m) STOCK OPTION PLAN
-----------------
As discussed in note 8, the Company adopted a stock option plan in 1998.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No.
25), "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the date of
grant only if the market price of the underlying stock on the date of
grant exceeds the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), requires entities to recognize
as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to apply
the provision of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(n) NET INCOME/DIVIDENDS PER SHARE
------------------------------
Basic Earnings Per Share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted Earnings Per Share is computed by assuming the issuance of common
shares for all dilutive potential common shares outstanding during the
reporting period. Currently, the Company's only dilutive potential common
stock issuances relate to options that have been issued under the
Company's stock option plan. In computing Diluted Earnings Per Share, it
is assumed that all such dilutive stock options are exercised during the
reporting period at their respective exercise prices, with the proceeds
from the exercises used by the Company to buy back stock in the open
market at the average market price in effect during the reporting period.
The difference between the number of shares assumed to be exercised and
the number of shares bought back is added to the number of weighted
average common shares outstanding during the period. The sum is used as
the denominator to calculate Diluted Earnings Per Share for the Company.
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
11).
- --------------------------------------------------------------------------------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (continued)
(o) COMPREHENSIVE INCOME
--------------------
Comprehensive income is defined as the change in equity during a period
for non-owner transactions and is divided into net income and other
comprehensive income. Other comprehensive income includes revenues,
expenses, gains, and losses that are excluded from earnings under current
accounting standards. As of and for the periods presented, the sole
component of other comprehensive income for the Company has consisted of
unrealized gains and losses, net of taxes, of the Company's
available-for-sale securities portfolio.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- --------------------------------------------------------------------------------- ---------------- -----------------
Unrealized (losses) gains arising during the period $ (1,904,655) $ 554,676 $ 286,071
Tax benefit (expense) 647,582 (188,590) (97,222)
Reclassification to realized losses 27,119 - 25,818
Tax benefit (9,218) - (8,778)
- --------------------------------------------------------------------------------- ---------------- -----------------
Other comprehensive (loss) income $ (1,239,172) $ 366,086 $ 205,889
================================================================================= ================ =================
(p) RECLASSIFICATIONS
---------------------
Certain prior year amounts have been reclassified in the financial
statements to conform with the current year presentation. The
reclassifications had no effect on previously reported net income or
retained earnings.
(2) INVESTMENT SECURITIES
---------------------
The following is a summary of the securities portfolios by major
classification:
<CAPTION>
DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
<S> <C> <C> <C> <C>
U.S. Treasury obligations $16,005,692 $ 21,821 $ (70,011) $ 15,957,502
Securities of other U.S. government
agencies and corporations 26,279,605 - (356,839) 25,922,766
Obligations of states and political subdivisions 14,875,182 67,157 (441,516) 14,500,823
Mortgage-backed securities 2,636,903 - (78,654) 2,558,249
- ---------------------------------------------------------------------- ------------- -------------- -------------------
Total $ 59,797,382 $ 88,978 $ (947,020) $ 58,939,340
====================================================================== ============= ============== ===================
<CAPTION>
DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 19,045,593 $ 406,297 $ - $ 19,451,890
Securities of other U.S. government
agencies and corporations 20,913,647 70,740 (21,802) 20,962,585
Obligations of states and political subdivisions 16,867,122 563,438 (5,236) 17,425,324
Mortgage-backed securities 548,613 6,057 - 554,670
- ---------------------------------------------------------------------- ------------- --------------- -----------------
Total $ 57,374,975 $ 1,046,532 $ (27,038) $ 58,394,469
====================================================================== ============= =============== =================
Gross realized gains and losses on sales of securities for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- ----------------------------------------------------------------------------------------- ------------ --------------
Gross realized gains $ - $ - $ -
Gross realized losses (27,122) - (25,818)
- ----------------------------------------------------------------------------------------- ------------ --------------
Net realized gains (losses) $ (27,122) $ - $ (25,818)
========================================================================================= ============ ==============
- -----------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
19
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(2) INVESTMENT SECURITIES (continued)
The aggregate amortized cost and fair value of the available-for-sale
securities portfolio at December 31, 1999, by remaining contractual
maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
- -------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C>
U.S. Treasury obligations:
Due in one year or less $ 5,997,194 $ 6,006,889
Due in one year through five years 10,008,498 9,956,812
Securities of other U.S. government agencies and corporations:
Due in one year or less 3,998,759 3,976,560
Due in one year through five years 22,280,846 21,946,206
Obligations of states and political subdivisions:
Due in one year or less 1,815,500 1,819,314
Due in one year through five years 3,392,103 3,418,137
Due after five through ten years 6,619,071 6,360,426
Due after ten years 3,048,508 2,902,947
Mortgage-backed securities 2,636,903 2,558,249
- ------------------------------------------------------------------------------------------------- ------------------
Total securities $ 59,797,382 $ 58,939,340
================================================================================================= ==================
Securities with an amortized cost of approximately $25,531,000 at December
31, 1999 are pledged as collateral for deposits.
(3) LOANS
-----
Loans at December 31, 1999 and 1998 classified by type, are as follows:
<CAPTION>
<S> <C> <C>
1999 1998
- ------------------------------------------------------------------------------------------------------ -----------------
Commercial, financial and agricultural $ 56,343,257 $ 48,893,329
Real estate loans:
Construction 1,865,625 4,560,418
Mortgage, commercial and residential 74,248,848 64,687,018
Installment 15,379,233 15,033,205
- ------------------------------------------------------------------------------------------------------ -----------------
147,836,963 133,173,970
Less deferred fees and costs, net 161,425 149,966
- ------------------------------------------------------------------------------------------------------ -----------------
$ 147,675,538 $ 133,024,004
====================================================================================================== =================
Included in the above:
Nonaccrual loans $ 407,649 $ 88,170
Restructured loans $ 127,774 $ 92,000
====================================================================================================== =================
</TABLE>
At December 31, 1999, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $366,631 (all on a non-accrual
basis), which had a related allowance for probable loan losses of
approximately $55,000. The average recorded investment in impaired loans
during the year ended December 31, 1999 was approximately $192,220. For
the year ended December 31, 1999, the Company recognized interest income
on those impaired loans of $30,510, all of which was recognized using the
cash basis method of income recognition.
At December 31, 1998, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $46,000 (all on a non-accural
basis), the entire balance of which has been reserved in the AFLL. The
average recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $354,000. For the year ended December
31, 1998, the Company recognized interest on those impaired loans of
$234,683, all of which was recognized using the cash basis method of
income recognition.
- --------------------------------------------------------------------------------
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(3) LOANS (continued)
Loans at December 31, 1999 and 1998 include loans to officers and
directors and their associates totaling approximately $656,000 and
$800,000, respectively. During 1999, $783,163 in loans were disbursed to
officers, directors and their associates and principal repayments of
$927,004 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 Company
and such changes could be significant.
At December 31, 1999, and 1998, included in mortgage, commercial, and
residential loans were loans collateralized by owner-occupied residential
real estate of approximately $21,877,000 and $21,152,000, respectively.
(4) ALLOWANCE FOR PROBABLE LOAN LOSSES
----------------------------------
An analysis of the allowance for probable loan losses for the years ended
December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------- ---------------- ----------------
Beginning balance $ 2,750,000 $ 2,660,000 $ 2,400,000
Provision for probable loan losses 242,319 242,396 353,513
Recoveries 74,046 78,538 100,838
Loans charged off (366,365) (230,934) (194,351)
- ----------------------------------------------------------------------------------- ----------------- ----------------
Ending balance $ 2,700,000 $ 2,750,000 $ 2,660,000
=================================================================================== ================= ================
(5) PREMISES AND EQUIPMENT
----------------------
An analysis of premises and equipment at December 31, 1999 and 1998
follows:
<CAPTION>
ACCUMULATED UNDEPRECIATED
COST DEPRECIATION COST
- --------------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C> <C>
DECEMBER 31, 1999:
Land $ 1,431,212 $ - $ 1,431,212
Land improvements 191,842 106,242 85,600
Buildings 5,453,747 1,546,467 3,907,280
Furniture and equipment 4,737,681 3,434,313 1,303,368
- --------------------------------------------------------------------------------- ------------------ ------------------
Total $ 11,814,482 $ 5,087,022 $ 6,727,460
================================================================================= ================== =================
DECEMBER 31, 1998:
Land $ 1,787,138 $ - $ 1,787,138
Land improvements 242,744 179,286 63,458
Buildings 5,599,256 1,739,986 3,859,270
Furniture and equipment 4,594,566 3,297,924 1,296,642
- --------------------------------------------------------------------------------- ----------------- -----------------
Total $ 12,223,704 $ 5,217,196 $ 7,006,508
================================================================================= ================= =================
- -----------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
21
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(6) INCOME TAXES
------------
The components of income tax expense (benefit) are as follows:
CURRENT DEFERRED TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999:
<S> <C> <C> <C>
Federal $ 638,500 $ 61,500 $ 700,000
State - - -
- ----------------------------------------------------------------------------------- ---------------- ----------------
$ 638,500 $ 61,500 $ 700,000
=================================================================================== ================ ================
Year ended December 31, 1998:
Federal $ 556,700 $ 72,000 $ 628,700
State 16,300 - 16,300
- ----------------------------------------------------------------------------------- ---------------- ---------------
$ 573,000 $ 72,000 $ 645,000
=================================================================================== ================ ===============
Year ended December 31, 1997:
Federal $ 660,700 $ (33,700) $ 627,000
State 23,000 - 23,000
- ----------------------------------------------------------------------------------- ---------------- ---------------
$ 683,700 $ (33,700) $ 650,000
=================================================================================== ================ ===============
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:
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------- ------------- --------------
<S> <C> <C> <C>
Income taxes at statutory rate $ 967,000 $ 885,000 $ 790,000
Increase (decrease) resulting from:
Effect of non-taxable interest income (256,000) (268,000) (187,000)
Other, net (11,000) 28,000 47,000
- ---------------------------------------------------------------------------------- ------------- --------------
APPLICABLE INCOME TAXES $ 700,000 $ 645,000 $ 650,000
================================================================================== ============= ==============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<CAPTION>
<S> <C> <C>
1999 1998
- ------------------------------------------------------------------------------------------------------ --------------
Deferred tax assets:
Allowance for probable loan losses $ 693,600 $ 710,600
Unrealized losses on securities available for sale 295,000 -
Postretirement benefits 186,200 183,500
Other 13,400 3,700
- ------------------------------------------------------------------------------------------------------ --------------
Total gross deferred tax assets $ 1,188,200 $ 897,800
====================================================================================================== ==============
Deferred tax liabilities:
Bank premises and equipment, principally due to differences
in depreciation $ 325,700 $ 280,800
Unrealized gains on securities available for sale - 347,000
Other 36,000 30,900
- ------------------------------------------------------------------------------------------------------ --------------
Total gross deferred tax liabilities 361,700 658,700
- ------------------------------------------------------------------------------------------------------ --------------
Net deferred tax asset included in other assets $ 826,500 $ 239,100
====================================================================================================== ==============
</TABLE>
The Company has no valuation allowance at December 31, 1999 or 1998,
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, 1999,
1998 and 1997 were $654,500, $555,700 and $749,400, respectively.
- --------------------------------------------------------------------------------
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------
The Company has a defined contribution 401(k) plan that covers all
eligible employees. The Company matches employee contributions up to
certain amounts as defined in the plan. Total expense related to this plan
was $136,242, $98,089 and $117,355 in 1999, 1998 and 1997, repectively.
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 following tables provide information relating to the Company's
postretirement benefit plan:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
- ---------------------------------------------------------------------------------------------------------- ----------------
RECONCILIATION OF BENEFIT OBLIGATION
Net benefit obligation, January 1 $ 427,776 $ 449,495
Service Cost 4,815 5,662
Interest cost 29,944 31,465
Actuarial gain 2,341 (42,601)
Benefits paid (18,165) (16,245)
- ---------------------------------------------------------------------------------------------------------- ----------------
Net benefit obligation, December 31 446,711 427,776
========================================================================================================== ================
FAIR VALUE OF PLAN ASSETS - -
FUNDED STATUS
Funded status, December 31 446,711 427,776
Unrecognized actuarial gain 82,836 89,032
- --------------------------------------------------------------------------------------------------------- ----------------
Net amount recognized, included in other liabilities $ 529,547 $ 516,808
========================================================================================================= =================
Net periodic postretirement benefit cost for 1999, 1998 and 1997 includes
the following components:
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- ------------------------------------------------------------------------------------ ---------------- ----------------
Service cost $ 4,815 $ 5,662 $ 6,478
Interest cost 29,944 31,465 32,517
- ------------------------------------------------------------------------------------ ---------------- ----------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 34,759 $ 37,127 $ 38,995
==================================================================================== ================ ================
The following table presents assumptions relating to the plan at December
31, 1999 and 1998:
<CAPTION>
<S> <C> <C>
1999 1998
- ---------------------------------------------------------------------------------------------------------- ---------------
Weighted average discount rate in determining benefit obligation 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 15.8% 16.2%
Benefit obligation 14.3 14.6
Effect of 1% decrease in assumed health care cost on:
Service and interest cost (12.9) (13.3)
Benefit obligation (11.8) (12.0)
</TABLE>
- --------------------------------------------------------------------------------
Excellence in Community Banking
23
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(8) STOCK OPTION PLAN
-----------------
During 1998, the Company adopted an Omnibus Stock Ownership and Long-Term
Incentive Plan ("the Omnibus Plan") which was approved by the Company's
shareholders at the May 13, 1998 annual meeting and which provides for the
issuance of up to an aggregate of 159,000 shares of common stock of the
Company pursuant to stock options and other awards granted or issued under
its terms. At that time, the Board of Directors also awarded to certain
officers of the Bank options to purchase an aggregate of 9,516 shares of
the Company's common stock pursuant to the terms of the Omnibus Plan at a
price equal to the then current market value of $12.50 per share. These
options expire on May 13, 2008, and are all currently outstanding as of
December 31, 1999. Beginning January 2001, one-third of the options become
exercisable each year.
If the Company had elected to recognize compensation cost for its
stock-based compensation plans in accordance with the fair value based
accounting method of SFAS No. 123, net income and earnings per share would
have been as follows:
1999
- --------------------------------------------------------------------------------
PRO FORMA AS REPORTED
- --------------------------------------------------------------------------------
Net Income $ 2,135,492 $ 2,143,390
Basic and diluted EPS 1.01 1.01
(9) 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).
(10) DEPOSITS
--------
At December 31, 1999 and 1998, certificates of deposit of $100,000 or more
amounted to approximately $32,588,000 and $26,855,000, respectively.
Time deposit accounts as of December 31, 1999, mature in the following
years and amounts: 2000 - $78,202,969; 2001 - $4,559,352; and 2002 -
$1,454,402.
For the years ended December 31, 1999, 1998 and 1997, interest expense on
certificates of deposit of $100,000 or more amounted to approximately
$1,460,000, $1,254,000 and $1,057,000, respectively.
The Company made interest payments of $5,714,981, $5,229,772 and
$5,249,278 during the years ended December 31, 1999, 1998 and 1997,
respectively.
(11) STOCKHOLDERS' EQUITY AND FORMATION OF HOLDING COMPANY
-----------------------------------------------------
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.
- --------------------------------------------------------------------------------
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(11) STOCKHOLDERS' EQUITY AND FORMATION OF HOLDING COMPANY (continued)
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.
On November 23, 1998 the Company issued 345,000 shares of common stock to
the public at a price of $14.25 per share. The net proceeds of the
offering were approximately $4,268,000.
(12) LEASES
------
The Company also has several noncancellable operating leases for three
branch locations. These leases generally contain renewal options for
periods ranging from three to twenty years and require the Company to pay
all executory costs such as maintenance and insurance. Rental expense for
operating leases during 1999, 1998, and 1997 was $94,107, $65,795 and
$69,758, respectively.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31,
1999 are as follows:
Year ending December 31,
2000 $ 172,417
2001 149,017
2002 116,499
2003 106,620
2004 106,620
Thereafter 1,545,990
- --------------------------------------------------------------------------------
Total minimum lease payments $ 2,197,163
================================================================================
(13) RESERVE REQUIREMENTS
--------------------
The aggregate net reserve balances maintained under the requirements of
the Federal Reserve, which are noninterest bearing, were approximately
$3,498,000 at December 31, 1999.
(14) 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 $23,346,000 and
standby letters of credit of $264,000, at December 31, 1999.
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.
The Company is not involved in any legal proceedings which, in
management's opinion, could have a material effect on the consolidated
financial position of the Company.
- --------------------------------------------------------------------------------
Excellence in Community Banking
25
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the
market. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of
a particular financial instrument nor are potential taxes and other
expenses that would be incurred in an actual sale considered. Fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
and/or the methodology used could significantly affect the estimates
disclosed. Similarly, the fair values disclosed could vary significantly
from amounts realized in actual transactions.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments.
The following table presents the carrying values and estimated fair values
of the Company's financial instruments at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------
Financial assets:
Non-interest bearing deposits and cash $ 11,030,000 $ 11,030,000 $ 11,787,000 $ 11,787,000
Federal funds sold 6,650,000 6,650,000 - -
Investment securities 58,939,000 58,939,000 58,394,000 58,394,000
FHLB common stock 632,800 632,800 564,800 564,800
Accrued interest receivable 2,259,000 2,259,000 2,096,000 2,096,000
Net loans 144,975,000 151,708,000 130,274,000 130,770,000
Financial liabilities:
Deposits $ 203,211,000 $ 205,542,000 $ 184,088,000 $ 175,722,000
Short-term borrowings 2,738,000 2,741,000 2,725,000 2,725,000
Accrued interest payable 816,980 816,980 829,104 829,104
Long-term borrowings 3,000,000 2,796,000 2,725,000 2,725,000
</TABLE>
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.
(16) 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.
- --------------------------------------------------------------------------------
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
(16) REGULATORY MATTERS (continued)
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, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
Based on the most recent notification from the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual capital amounts, in thousands, and ratios are presented
in the following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO RATIO RATIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $24,626 15.48% > 8.0% >10.00%
Tier I Capital - -
(to Risk Weighted Assets) 22,628 14.22% > 4.0% >6.00%
Tier I Capital _ -
(to Average Assets) 22,268 9.75% > 4.0% >5.00%
- -
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $22,957 16.25% >8.0% >10.00%
Tier I Capital - -
(to Risk Weighted Assets) 21,179 15.00% >4.0% >6.00%
Tier I Capital - -
(to Average Assets) 21,179 10.45% >4.0% >5.00%
- -
- -----------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
27
<PAGE>
(ECB BANCORP, INC. LOGO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(17) ECB BANCORP, INC. (PARENT COMPANY)
ECB Bancorp, Inc.'s principal asset is its investment in the Bank, and its
principal source of income is dividends from the Bank. The Parent Company
condensed balance sheet as of December 31, 1999 and 1998, and the related
condensed statements of income and cash flows from the year ended December
31, 1999 and for the period July 22, 1998 (see note 11) to December 31,
1998 are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
<S> <C> <C>
1999 1998
- ------------------------------------------------------------------------------------------------------ ------------------
ASSETS
Receivable from subsidiary $ 153,848 $ -
Investment in subsidiary 22,062,399 21,852,346
- ------------------------------------------------------------------------------------------------------ ------------------
Total assets $ 22,216,247 $ 21,852,346
====================================================================================================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ 153,848 $ -
Total shareholders' equity 22,062,399 21,852,346
- ------------------------------------------------------------------------------------------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,216,247 $ 21,852,346
====================================================================================================== ==================
<CAPTION>
CONDENSED STATEMENTS OF INCOME
<S> <C> <C>
Dividends from bank subsidiary $ 540,317 $ 453,965
Equity in undistributed net income of subsidiary 1,603,073 603,168
- ------------------------------------------------------------------------------------------------------ ------------------
Net income $ 2,143,390 $ 1,057,133
====================================================================================================== ==================
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
1999 1998
- ------------------------------------------------------------------------------------------------------ ------------------
Operating activities:
Net income $ 2,143,390 $ 1,057,133
Undistributed net income of subsidiary (1,603,073) (603,168)
Deferred compensation - restricted stock 6,167 -
- ------------------------------------------------------------------------------------------------------ ------------------
Net cash provided by operating activities 546,484 453,965
- ------------------------------------------------------------------------------------------------------ ------------------
Investing activities:
Investment in subsidiary - (4,267,892)
- ------------------------------------------------------------------------------------------------------ ------------------
Net cash used by investing activities - (4,267,892)
====================================================================================================== ==================
Financing activities:
Proceeds from issuance of common stock - 4,267,892
Repurchase of common stock (85,089) -
Cash dividends paid (461,395) (453,965)
- ------------------------------------------------------------------------------------------------------ ------------------
Net cash (used) provided by financing activities (546,484) 3,813,927
====================================================================================================== ==================
Net change in cash $ - $ -
====================================================================================================== ==================
</TABLE>
As discussed in note 11, on July 22, 1998 the Parent Company exchanged its
common stock for that of the Bank, resulting in an increase in
shareholders' equity at the Parent Company of $16,679,425.
- --------------------------------------------------------------------------------
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
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") (collectively referred to hereafter as the "Company"), is a
state-chartered community bank which was founded in 1919. As part of the Bank's
growth strategy, management of the Bank perceived that the formation of a
holding company likely would result in certain advantages, including additional
flexibility in expansion of the Bank's business through the acquisition of other
financial institutions or of branch offices of other institutions, in the
raising of additional capital through borrowing (if needed) and provide the
flexibility to engage in other financial services activities through newly
formed subsidiaries or through the acquisition of existing companies.
The Bank offers a full range of banking services through 15 branches serving
eastern North Carolina, including the communities of Engelhard, Swan Quarter,
Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Barco, Avon,
Hatteras, Ocracoke, Washington and Greenville (two branches).
Management's discussion and analysis of financial condition and results of
operations are presented to assist in understanding the financial condition and
results of operations of ECB Bancorp, Inc. and its wholly-owned subsidiary, The
East Carolina Bank, for the years 1999, 1998, and 1997. This discussion and the
related financial data should be read in conjunction with the audited
consolidated financial statements and related footnotes.
The operations of the Company and depository institutions in general are
significantly influenced by general economic conditions and by related monetary,
fiscal and other policies of depository institution regulatory agencies,
including the Federal Reserve Board, the Federal Deposit Insurance Corporation
(the "FDIC") and the North Carolina State Banking Commission. The net income of
the Company is dependent, to a large extent, on the differences between interest
earned on loans and investments and interest paid on deposits. Deposit flows and
costs of funds are influenced by interest rates on competing investments and
general market rates of interest. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and other
factors affecting local demand and availability of funds.
Liquidity is the Bank'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 Bank's investment
portfolio, interest from loans and investments, loan principal repayments, and
increases in deposits.
Sufficient levels of capital are necessary to sustain growth and absorb losses.
To this end, the FDIC has established capital adequacy guidelines. These
guidelines relate to the Bank's Leverage Capital, Tier 1 and Total Risk Based
Capital ("RBC").
For The East Carolina Bank, Leverage Capital consists of total shareholders'
equity less unrealized gains or losses, net of income taxes, on securities
available-for-sale. As of December 31, 1999, the Bank's Leverage Ratio was 9.75%
compared to 10.45% and 8.53%, respectively, at year-end 1998 and 1997. For
regulatory purposes, a well-capitalized financial institution must have a Tier 1
Leverage Ratio of at least 5.00%.
Within the RBC calculations, The East Carolina Bank's assets, including loan
commitments and other off-balance sheet items, are weighted according to Federal
regulatory guidelines for risk considered inherent in the assets. The East
Carolina Bank's Tier 1 RBC ratio as of December 31, 1999 was 14.22% which is,
along with a ratio of 15.00% and 12.40% for 1998 and 1997, respectively,
representative of a well-capitalized institution. The calculation of the Total
RBC ratio allows, in The East Carolina Bank's circumstances, the inclusion of
the allowance for loan losses in capital, but only to the maximum of 1.25% of
risk-weighted assets. As of December 31, 1999, The Bank's Total RBC was 15.48%
which is representative of a well-capitalized institution. The Total RBC ratios
for 1998 and 1997 were 16.25% and 13.66%, respectively, both of which were
representative of a well-capitalized financial institution.
As of December 31, 1999, shareholders' equity totaled $22.1 million compared to
$21.9 million at December 31, 1998. On November 23, 1998 the Company issued
345,000 shares of common stock to the public at a price $14.25 per share. The
net proceeds of the offering were approximately $4,268,000. Shareholders' equity
included net unrealized securities losses of $566,306 in 1999 and $672,866 of
net unrealized securities gains in 1998.
- --------------------------------------------------------------------------------
Excellence in Community Banking
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 1999, the Company declared
$615,243 in dividends, versus $453,965 in 1998 and $415,393 in 1997. As a
percentage of net income in 1999, dividends were 28.7%. On a per share basis,
dividends declared in 1999 represented an increase of 13.7% over dividends per
share paid in 1998.
In 1999, the Company had net income of $2,143,390, or $1.01 basic and diluted
earnings per share, compared to $1,959,040 or $1.08 basic and diluted earnings
per share (as restated for three-for-one stock split effected July 22, 1998),
for the year ended December 31, 1998. Net interest income after the provision
for probable loan losses increased $669,221 as a result of an increase in
interest income of $1,012,122 and an increase in interest expense of $342,978.
This increase in the Company's net interest margin is attributable to loans
representing a larger portion of the Company's total earning assets and a lower
cost of funds. During 1998, the Bank collected interest on non-accrual loans in
the amount of $245,700.
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 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.
Following hurricanes Dennis and Floyd, management reviewed and assessed its
larger credits to determine to what extent the storms may have had on certain
borrower's ability to repay. No significant adverse effects are expected on the
portfolio. 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
loans and real estate acquired in settlement of loans, were $706,000 and
$230,000 at December 31, 1999 and 1998, respectively. The increase in
nonperforming assets is primarily due to a large farm credit of approximately
$365,000 placed on non-accrual status and foreclosure on two properties that
totaled $129,000 during the fourth quarter of 1999. At December 31, 1999, the
recorded investment in loans that are considered to be impaired under SFAS No.
114 was $366,631 compared to $46,000 at December 31, 1998.
Non-interest income, principally charges for the use of the Company's services,
is a significant contributor to net earnings. Non-interest income for 1999
increased $37,000 or 1.8% when compared to 1998. Service charges on deposit
accounts increased $23,000 or 4.6%, but were offset by a decrease in
Non-Sufficient Funds (NSF) service charges of $46,000, resulting in a $19,000 or
1.4% net decrease when compared to 1998. Other service charges and fees
increased $10,000 as a result of increased mortgage loan origination fees of
$52,000 generated by the Company's new mortgage loan product and payment
processing fee income of $38,000. These increases were offset by decreases in
net merchant discount fees of $47,000, decreased credit-life loan insurance fees
of $19,000 and decreased ATM transaction fees of $15,000. Other non-interest
operating income increased $72,000 over the prior period. This increase is
principally the result of a net gain on the sale of fixed assets of
approximately $42,000. Generally, the Company has been able to increase other
income by increasing the prices of its services to partially offset increases in
other operating expenses. During 1999, the Company had a net loss on the sale of
securities of $27,000 and had no such losses in 1998.
Non-interest expenses increased by $466,000 or 5.4% to $9,169,000 in 1999. This
increase is principally due to general increases in salary and employee benefits
expense of $344,000. The opening of the Washington office in mid-year 1999
accounted for approximately $112,000 of the personnel expense increase while
additional staffing within the Company's home offices accounted for an
additional $145,000 of personnel expense. Occupancy expense decreased slightly
during 1999 as the result of the Company closing the Greenville Wal-Mart office
at the end of the first quarter of 1999. The opening of the new Washington
office offset this reduction in occupancy expense. Equipment expense increased
$117,000 as the Company continues to upgrade its branch platform automation.
Professional fees increased $15,000 to $333,000 for 1999. This increase in
professional fees is a combination of increased loan-related legal fees of
approximately $65,000 resulting from a home equity loan campaign during the
first half of 1999 partially offset by decreases in consultant fees of $30,000
and other non-loan-related fees of approximately $29,000. Telephone expense
increased approximately $21,000 during 1999 as the Company continues to
implement its technology plan to provide the Company a wide area communications
network.
- --------------------------------------------------------------------------------
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
In 1998, the Company had net income of $1,959,040, or $1.08 basic and diluted
earnings per share, compared to $1,673,251 or $0.94 basic and diluted earnings
per share (as restated for three-for-one stock split effected July 22, 1998),
for the year ended December 31, 1997. Net interest income after the provision
for probable loan losses increased $1,358,599 as a result of an increase in
interest income of $1,242,818 and a decrease in interest expense of $4,664. This
increase in the Company's net interest margin is attributable to loans
representing a larger portion of the Company's total earning assets and, in
part, to interest recoveries on certain non-accrual loans and a lower cost of
funds. During 1998, the Bank had interest recoveries on non-accrual loans in the
amount of $245,700. The provision for probable loan losses decreased $111,117
when compared to 1997 provision expense of $353,513 due primarily to lower
levels of nonperforming assets.
Nonperforming assets, which consist of loans not accruing interest, restructured
debt and real estate acquired in settlement of loans, were $230,000 and
$2,325,000 at December 31, 1998 and 1997, respectively. The decrease in
nonperforming assets was primarily due to the pay-off of two large nonperforming
lending relationships during the year and the sale of a significant portion of
real estate acquired in settlement of loans. Through sales, the Company
liquidated all other real estate owned reducing the balance to $50,000 at
December 31, 1998 from $490,000 at December 31, 1997.
Non-interest income, principally charges for the use of the Company's services,
is a significant contributor to net earnings. Non-interest income for 1998
increased $107,000 or 5.6% when compared to 1997. Service charges on deposit
accounts increased $31,000 or 6.2%, but were offset by a decrease in
Non-Sufficient Funds (NSF) service charges of $87,000, resulting in a $56,000 or
4.0% net decrease when compared to 1997. Other service charges and fees
increased $66,000 or 12.6% as a result of increased ATM transaction fees of
$55,000 that were effected by the Company after the first quarter of 1997. Other
non-interest operating income increased $71,000 principally due to mortgage loan
origination fees of $54,000 generated by the Company's new mortgage loan
product. Generally, the Company has been able to increase other income by
increasing the prices of its services to partially offset increases in other
operating expenses.
Non-interest expenses increased by $1,185,000 or 15.8% in 1998 and by 11.2% in
1997. This increase was caused in part by the opening of new full service
branches in Avon and Barco, and a loan production office in Washington, North
Carolina. A significant component of non-interest expense is salaries and
employee benefits. Salary expense increased $247,000 over 1997 partially as a
result of opening the aforementioned offices, and employee benefits increased
approximately $112,000 as the Company increased cash awards paid to employees
participating in the Company's performance based incentive program. When
compared to 1997, net occupancy expense increased $97,000 or 15.6% as a result
of opening the aforementioned offices, and equipment expense increased $107,000
due to the Company upgrading its host processor and continued introduction of
branch automation. The Company's telephone expense increased $48,000 over last
year as a result of increased usage of the Company's Xpress phone banking system
introduced during the second quarter of 1997. Professional fees increased
$109,000 in connection with non-recurring legal and accounting fees incurred
related to the formation of Bancorp in 1998. Other non-interest expenses
increased $412,000 from $1,419,000 in 1997 to $1,831,000 in 1998. This increase
is principally attributable to increases in marketing expense and non-recurring
expenses related to the planned closing of the Company's Wal-Mart Supercenter
office in March of 1999. Marketing expense increased approximately $182,000 over
1997 as the Company launched a broad range of mortgage products and its new Club
7 Visa Card, a program done in conjunction with a local television station.
During December of 1998, the Company expensed approximately $157,000 relating to
the closing of the Wal-Mart Supercenter office. These expenses consisted
primarily of obligated lease payments of $50,000 and write-off of leasehold
improvements of approximately $87,000.
- --------------------------------------------------------------------------------
Excellence in Community Banking
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
TABLE 1. AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ INCOME/ AVERAGE YIELD/ INCOME/ AVERAGE YIELD/ INCOME/
BALANCE RATE EXPENSE BALANCE RATE EXPENSE BALANCE RATE EXPENSE
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans - net (1) $138,837 9.01% $12,512 $124,794 9.63% $12,015 $115,487 9.43% $10,887
Taxable securities 39,712 5.84% 2,320 31,721 5.91% 1,874 29,705 5.89% 1,750
Non-taxable
securities (2) 15,940 7.22% 1,152 15,318 7.44% 1,139 10,254 7.57% 776
Federal funds sold 6,084 4.96% 302 4,601 5.26% 242 9,125 5.38% 491
- ----------------------- ----------- ------- --------- --------- -------- -------- -------- ------- ---------
Total interest-
earning assets 200,573 8.12% 16,286 176,434 8.66% 15,270 164,571 8.45% 13,904
Cash and due from
banks 10,918 9,122 7,715
Bank premises and
equipment, net 7,282 6,542 5,929
Other assets 2,825 2,520 2,300
- ----------------------- ----------- --------- --------
TOTAL ASSETS $221,598 $194,618 $180,515
======================== =========== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
- -------------------------
Interest-bearing
deposits $154,668 3.58% $ 5,542 $140,585 3.81% $ 5,351 $135,789 3.95% $ 5,364
Short-term borrowings 711 4.22% 30 152 5.92% 9 - - -
Long-term obligations 2,827 4.63% 131 - - - - - -
- ----------------------- ----------- ------- --------- --------- -------- -------- -------- ------- ---------
Total interest-
bearing liabilities 158,206 3.60% 5,703 140,737 3.81% 5,360 135,789 3.95% 5,364
Non-interest-bearing
deposits 39,941 35,272 28,574
Other liabilities 1,385 1,314 1,039
Shareholders' equity 22,066 17,295 15,113
- ----------------------- ----------- --------- --------
Total liabilities and
SHAREHOLDERS' EQUITY $221,598 $194,618 $180,515
======================== =========== ========= =========
Net interest income
and net yield on
interest-earning
assets (FTE) 5.28% $10,583 5.62% $ 9,910 5.19% $ 8,540
======================== ====== ======= ===== ======= ===== =======
Interest rate spread
(FTE) 4.52% 4.85% 4.50%
</TABLE>
(1) Average loans, net of the allowance for probable 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%.
- --------------------------------------------------------------------------------
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
Changes in interest income and interest expense can result from variances in
both volume and rates. Table 2 below analyzes the effect of variances in volume
and rate on taxable-equivalent interest income, interest expenses and net
interest income.
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
VOLUME (1) RATE (1) NET VOLUME (1) RATE (1) NET
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans $ 1,309 $ (812) $ 497 $ 887 $ 241 $ 1,128
Taxable securities 469 (23) 446 119 5 124
Non-taxable securities (2) 46 (33) 13 380 (17) 363
Federal funds sold 76 (16) 60 (241) (8) (249)
- --------------------------------------------------------------- ------- ---------- ---------- -------- -------
Interest income 1,900 (884) 1,016 1,145 221 1,366
Interest-bearing deposits 520 (329) 191 186 (199) (13)
Short-term borrowings 28 (7) 21 5 4 9
Long-term obligations 66 65 131 - - -
- --------------------------------------------------------------- ------- ---------- ---------- -------- -------
Interest expense 614 (271) 343 191 (195) (4)
- --------------------------------------------------------------- ------- ---------- ---------- -------- -------
Net interest income $ 1,286 $ (613) $ 673 $ 954 $ 416 $ 1,370
=============================================================== ======= ========== ========== ======== ========
</TABLE>
(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 taxable-equivalent
basis using the federal income tax rate of 34%.
- --------------------------------------------------------------------------------
Excellence in Community Banking
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Rate sensitivity analysis, an important aspect of achieving satisfactory levels
of net interest income, is the management of the composition and maturities of
rate-sensitive assets and liabilities. The following table sets forth the
Company's interest sensitivity analysis at December 31, and describes, at
various cumulative maturity intervals, the gap ratios (ratios of rate-sensitive
assets to rate-sensitive liabilities) for assets and liabilities that management
considers rate sensitive.
TABLE 3. RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
3 MONTHS 4 TO 12 TOTAL WITHIN OVER 12
OR LESS MONTHS 12 MONTHS MONTHS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
EARNING ASSETS
<S> <C> <C> <C> <C> <C>
Loans-gross $ 58,650 $ 8,096 $ 66,746 $ 80,930 $ 147,676
Investment securities 5,087 6,715 11,802 47,127 58,929
FHLB stock 633 - 633 - 633
Federal funds sold 6,650 - 6,650 - 6,650
- ----------------------------------------------------------------- ----------- ---------- ---------- ------------
Total earning assets $ 71,020 $ 14,811 $ 85,831 $ 128,057 $ 213,888
================================================================= =========== ========== ========== ============
Percent of total earning assets 33.2% 6.9% 40.1% 59.9% 100.0%
Cumulative % of total earnings assets 33.2% 40.1% 40.1% 100.0%
INTEREST-BEARING LIABILITIES
Time deposits of $100,000 or more $ 14,139 $ 17,936 $ 32,075 $ 513 $ 32,588
Savings, NOW and Money Market deposits 75,447 - 75,447 - 75,447
Other time deposits 18,149 27,954 46,103 5,526 51,629
Short-term borrowings 2,738 - 2,738 - 2,738
Long-term obligations - - - 3,000 3,000
- ----------------------------------------------------------------- ----------- ---------- ---------- ------------
Total interest-bearing liabilities $ 110,473 $ 45,890 $ 156,363 $ 9,039 $ 165,402
================================================================= =========== ========== ========== ============
Percent of total interest-bearing liabilities 66.8% 27.7% 94.5% 5.5% 100.0%
Cumulative percent of total interest-bearing
liabilities 66.8% 94.5% 94.5% 100.0%
RATIOS
Ratio of earning assets to interest-bearing
liabilities (gap ratio) 64.3% 32.3% 54.9% 1416.8%
Cumulative ratio or earning assets to
interest-bearing liabilities (cumulative
gap ratio) 64.3% 54.9% 54.9% 129.3%
Interest sensitivity gap $ (39,453) $ (31,079) $ (70,532) $ 119,028 $ 48,496
Cumulative interest sensitivity gap $ (39,453) $ (70,532) $ (70,532) $ 48,496 $ 48,496
As a percent of total earning assets (18.4)% (33.0)% (33.0)% 22.7% 22.7%
</TABLE>
In periods of rising interest rates, the Company's rate-sensitive assets cannot
be repriced as quickly as its rate-sensitive liabilities. Thus, the Company's
net interest income generally will decrease during a period of rising interest
rates. In periods of declining interest rates the opposite effect occurs.
As of December 31, 1999, approximately 40.1% of the Company's interest-earning
assets could be repriced within one year and approximately 87.2% of
interest-earning assets could be repriced with in five years. Approximately
94.5% of interest-bearing liabilities could be repriced within one year and
substantially all interest-bearing liabilities could be repriced within five
years.
- --------------------------------------------------------------------------------
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
INTEREST SENSITIVITY
Deregulation of interest rates 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).
As of December 31, 1999 the Company had a negative one year cumulative gap of
33.0%. The Company has interest earning assets of $86 million maturing or
repricing within one year and interest bearing liabilities of $156 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 $127 million include interest
bearing checking and savings accounts of $75 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.
<TABLE>
<CAPTION>
TABLE 4. MARKET RISK
Principal Maturing in Years ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Assets
Loans
Fixed rate $12,304 $10,942 $11,116 $18,684 $23,633 $16,555 $93,234 $99,966
Average rate (%) 8.89% 9.39% 8.98% 8.58% 8.40% 7.74% 8.57%
Variable rate 26,548 4,421 3,343 4,823 8,656 6,651 54,442 54,442
Average rate (%) 9.33% 8.43% 8.69% 8.42% 8.60% 8.59% 9.12%
Investment securities
Fixed rate 11,811 12,267 14,524 6,369 1,980 12,846 59,797 58,939
Average rate (%) 6.13% 6.27% 6.08% 6.02% 7.13% 6.54% 6.25%
Liabilities
Savings and interest
bearing checking
Variable rate 75,447 - - - - - 75,447 75,447
Average rate (%) 2.01% - - - - - 2.01%
Certificates of deposits
Fixed rate 77,874 4,580 1,459 - - - 83,913 86,243
Average rate (%) 5.15% 5.12% 5.63% - - - 5.16%
Variable rate 304 - - - - - 304 304
Average rate (%) 3.92% - - - - 3.92%
Short-term borrowings
Variable rate 2,738 - - - - - 2,738 2,741
Average rate (%) 4.24% - - - - - 4.24%
Long-term obligations
Fixed rate - - - - 3,000 - 3,000 2,796
Average rate (%) - - - - 4.70% - 4.70%
- -------------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Non-interest income, principally charges for the use of the Company's services,
is a significant contributor to net earnings. Non-interest income for 1999
increased $37,000 or 1.8% when compared to 1998. Service charges on deposit
accounts increased $23,000 or 4.6% but was offset by a decrease in NSF service
charges of $46,000, resulting in a $19,000 or 1.4% net decrease when compared to
the same period in 1998. Other service charges and fees increased $10,000 as a
result of increased mortgage loan origination fees of $52,000 generated by the
Company's new mortgage loan product and payment processing fee income of
$38,000. These increases were offset by decreases in net merchant discount fees
of $47,000, decreased credit-life loan insurance fees of $19,000 and decreased
ATM fees of $15,000. Other operating income increased $72,000 over the prior
year period. This increase is primarily the result of a net gain on the sale of
fixed assets of approximately $42,000.
TABLE 5. NON-INTEREST INCOME
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts $1,316 $1,335 $1,391
Other service charges and fees 601 591 525
Net loss on sale of securities (27) - (26)
Other 174 101 30
- ------------------------------------------------------- --------- ---------
Total $2,064 $2,027 $1,920
======================================================= ========= =========
Non-interest expense increased by $466,000 or 5.4% to $9,169,000 in 1999. This
increase is principally due to general increases in salary and employee benefits
expense of $344,000. The opening of the Washington office in mid-year 1999
accounted for approximately $112,000 of the personnel expense increase while
additional staffing within the Company's home offices accounted for an
additional $145,000 of personnel expense. Occupancy expense decreased slightly
during 1999 as the result of the Company closing the Greenville Wal-Mart office
at the end of the first quarter of 1999. This reduction in occupancy expense
offset the opening on the new Washington office. Equipment expense increased
$117,000 as the Company continues to upgrade its branch platform automation.
Professional fees increased $15,000 to $333,000 for 1999. This increase in
professional fees is a combination of increased loan-related legal fees of
approximately $65,000 resulting from a home equity loan campaign during the
first half of 1999 partially offset by decreases in consultant fees of $30,000
and other non-loan-related legal fees of approximately $29,000. Telephone
expense increased approximately $21,000 during 1999 as the Company continues to
implement its technology plan to provide the Company a wide area communications
network.
TABLE 6. NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Salaries $3,542 $3,186 $2,939
Retirement and other employee benefits 1,073 1,084 971
Occupancy 718 720 623
Equipment 992 875 768
Professional fees 333 318 209
Supplies 240 251 222
Telephone 286 265 217
Postage 173 172 150
Other 1,812 1,832 1,419
- ----------------------------------------------------- -------- ---------
Total $9,169 $8,703 $7,518
===================================================== ======== =========
- --------------------------------------------------------------------------------
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Management believes the Company's financial condition is sound. The following
discussion focuses on the factors considered by management to be important in
assessing the Company's financial condition.
The following table sets forth the percentage of significant components of the
Company's balance sheets at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
TABLE 7. DISTRIBUTION OF ASSETS AND LIABILITIES
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Loans (net) $144,976 62.2% $130,274 61.9% $118,549 63.0%
Investment securities 58,939 25.3% 58,394 27.7% 47,120 25.0%
FHLB stock 633 0.3% 565 0.3% 503 0.3%
Federal funds sold 6,650 2.8% - - 4,425 2.4%
- ------------------------------------------------------- -------- ---------- -------- ---------- ----------
Total earning assets 211,198 90.6% 189,233 89.9% 170,597 90.7%
Cash and due from banks 11,139 4.7% 11,965 5.6% 8,281 4.4%
Bank premises and equipment, net 6,727 2.9% 7,007 3.3% 6,266 3.3%
Other assets 4,049 1.8% 2,697 1.2% 3,084 1.6%
- ------------------------------------------------------- -------- ---------- -------- ---------- ----------
Total assets $233,113 100.0% $210,902 100.0% $188,228 100.0%
======================================================= ======== ========== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 43,637 18.7% $ 38,265 18.1% $ 31,897 16.9%
Savings, NOW and Money market deposits 75,447 32.4% 62,672 29.7% 55,969 29.7%
Time deposits of $100,000 or more 32,588 14.0% 26,855 12.7% 19,503 10.4%
Other time deposits 51,629 22.1% 56,475 26.8% 63,540 33.8%
- ------------------------------------------------------- -------- ---------- -------- ---------- ----------
Total deposits 203,301 87.2% 184,267 87.3% 170,909 90.8%
Short-term borrowings 2,738 1.2% 2,725 1.3% - -
Accrued expense and other liabilities 2,012 0.8% 2,058 1.0% 1,606 0.9%
Long-term obligations 3,000 1.3% - - - -
- ------------------------------------------------------- -------- ---------- -------- ---------- ----------
Total liabilities 211,051 90.5% 189,050 89.6% 172,515 91.7%
Shareholders' equity 22,062 9.5% 21,852 10.4% 15,713 8.3%
- ------------------------------------------------------- -------- ---------- -------- ---------- ----------
Total liabilities and shareholders' equity $233,113 100.0% $210,902 100.0% $188,228 100.0%
======================================================= ======== ========== ======== ========== ==========
</TABLE>
(Bar graphs appear here with the following plot points.)
In Thousands TOTAL ASSETS
1995 1996 1997 1998 1999
$165,408 $167,218 $188,228 $210,902 $233,113
In Thousands TOTAL DEPOSITS
1995 1996 1997 1998 1999
$150,436 $151,336 $170,909 $184,267 $203,301
- --------------------------------------------------------------------------------
Excellence in Community Banking
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
The carrying values of investment securities held by the Company at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
TABLE 8. INVESTMENT PORTFOLIO COMPOSITION
DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE
U.S. Treasury $15,958 27.1% $19,452 33.3% $25,228 53.6%
U.S. Government agencies 25,922 44.0% 20,962 35.9% 7,052 14.9%
Mortgage-backed securities 2,559 4.3% 555 1.0% 783 1.7%
State and political subdivisions 14,500 24.6% 17,425 29.8% 14,057 29.8%
- ---------------------------------- -------- -------- --------- --------- -------- -------
Total investments $58,939 100.0% $58,394 100.0% $47,120 100.0%
- ---------------------------------- -------- -------- --------- --------- -------- -------
The following table shows maturities of the carrying values of investment
securities held by the Company at December 31, 1999, and the weighted average
yields.
<CAPTION>
TABLE 9. 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)
AVAILABLE-FOR-SALE:
U.S. Treasury $ 6,007 6.21% $ 9,951 6.01% - - - - $15,958 6.09%
U.S. Government
agencies 3,976 5.35% 21,946 6.05% - - - - 25,922 5.95%
Mortgage-backed
securities - - 1,581 7.07% $ 978 6.99% - - 2,559 7.04%
State and political
subdivisions (1) 1,819 7.57% 3,418 7.64% 6,360 6.24% 2,903 6.89% 14,500 6.86%
- ------------------------------- ------- -------- ------- -------- ------- ------- ------ ------- ------
TOTAL $11,802 6.13% $36,896 6.23% $7,338 6.34% $2,903 6.89% $58,939 6.25%
=============================== ======= ======== ======= ======== ======= ======= ====== ======== ======
</TABLE>
(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, 1999 the market
value of the investment portfolio was approximately $858,000 below its book
value, which is the result of higher market interest rates compared to the
interest rates on the investments in the portfolio.
- --------------------------------------------------------------------------------
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
The Company's management believes the loan portfolio is adequately diversified
and contains no foreign loans. Real estate loans represent approximately 57.4%
of the Company's loan portfolio. Real estate loans are primarily loans secured
by real estate, mortgage, and construction loans. The Company does not have a
large portfolio of home mortgage loans. See note (1) below. Commercial loans are
spread throughout a variety of industries, with no particular industry or group
of related industries accounting for a significant portion of the commercial
loan portfolio. At December 31, 1999, the ten largest loans of the Company
accounted for approximately 6.4% of the Company's outstanding loans. As of
December 31, 1999, the Company had outstanding loan commitments of approximately
$23,346,000. The amounts of loans outstanding at the indicated dates are shown
in the following table according to loan type.
<TABLE>
<CAPTION>
TABLE 10. LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate (1) $ 83,116 $ 64,538 $ 63,300 $ 65,253 $ 58,095
Installment loans 11,622 11,339 25,424 18,472 13,353
Credit cards and related plans 3,817 3,694 3,415 3,183 3,017
Commercial and all other loans 49,121 53,453 29,070 25,748 20,024
- --------------------------------------------------------------------- ---------- ---------- ---------- ---------
Total $147,676 $133,024 $121,209 $112,656 $ 94,489
===================================================================== ========== ========== ========== =========
(1) The majority of these loans are various consumer and commercial loans with
approval based on cash flow and not the real estate. The majority of the
commercial real estate is owner-occupied and operated.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution of the Company's loans
as of December 31, 1999. A significant majority of loans maturing after one year
are repriced at two and three year intervals. In addition, approximately 36.9%
of the Company's loan portfolio is comprised of variable rate loans.
TABLE 11. LOAN MATURITIES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT CARDS COMMERCIAL
REAL AND RELATED AND ALL
ESTATE INSTALLMENT PLANS OTHER LOANS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Due in 1 year or less $10,012 $ 1,313 $3,595 $23,933 $ 38,853
Due after 1 year through 5 years:
Floating interest 14,352 394 156 8,188 23,090
Fixed interest rates 45,725 9,692 - 13,192 68,609
Due after 5 years:
Floating interest rates 3,135 9 66 1,594 4,804
Fixed interest rates 9,892 214 - 2,214 12,320
- ------------------------------------------------------------- ----------- ---------- ----------- ----------
Total $83,116 $11,622 $3,817 $49,121 $147,676
============================================================= =========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
Excellence in Community Banking
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
A loan is placed on non-accrual status when, in management's judgment, the
collection of interest income appears doubtful or the loan is past due 90 days
or more. Interest receivable that has been accrued and is subsequently
determined to have doubtful collectibility is charged to the appropriate
interest income account. Interest on loans that are classified as non-accrual is
recognized when received. In some cases, where borrowers are experiencing
financial difficulties, loans may be restructured to provide terms significantly
different from the original terms. Foreclosed properties are included in other
assets and represent other real estate that has been acquired through loan
foreclosures or deeds in lieu of foreclosure. Such properties are initially
recorded at the lower of cost or fair value less estimated costs to sell.
Thereafter the properties are maintained at the lower of cost or fair value.
The following table summarizes the Company's nonperforming assets and past due
loans at the dates indicated.
TABLE 12. NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Non-accrual loans $408 $ 88 $1,463 $1,017 $531
Loans past due 90 or more days still accruing 34 - - 35 -
Restructured loans 81 92 49 57 65
Foreclosed properties 183 50 340 - 296
- --------------------------------------------------------------------------- -------- ------- -------- -------
Total $706 $230 $1,852 $1,109 $892
=========================================================================== ======== ======= ======== =======
As of December 31, 1999 and 1998, nonperforming assets and past due loans were
approximately 0.48% and 0.17%, respectively, of the loans outstanding at such
dates.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for probable loan losses is created by direct charges to
operations. Losses on loans are charged against the allowance in the period in
which such loans, in management's opinion, become uncollectible. Recoveries
during the period are credited to this allowance. The factors that influence
management's judgment in determining the amount charged to operating expense
include past loan loss experience, composition of the loan portfolio, evaluation
of estimated probable loan losses and current economic conditions. The Company's
loan watch committee, which includes three members of senior management as well
as regional managers and other credit administration personnel, conducts a
quarterly review of all credits classified as substandard. This review follows a
re-evaluation by the account officer who has primary responsibility for the
relationship.
The following table sets forth the allocation of allowance for probable loan
losses and percent of total loans in each loan for each of the years presented.
TABLE 13. ALLOCATION OF ALLOWANCE FOR PROBABLE LOAN LOSSES
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Real estate $1,647 56.2% $1,619 48.5% $1,690 52.2% $1,388 57.9% $1,192 61.5%
Installment loans 237 7.9% 166 8.5% 389 21.0% 337 16.4% 165 14.1%
Credit cards and related plans 166 2.6% 160 2.8% 390 2.8% 167 2.8% 143 3.2%
Commercial and all other items 646 33.3% 624 40.2% 149 24.0% 445 22.9% 337 21.2%
- ------------------------------------------ ------- ------ ------- ------- ------- ------- ------- ------- -----------
Total allocated 2,696 100.0% 2,569 100.0% 2,618 100.0% 2,337 100.0% 1,837 100.0%
Unallocated 4 181 42 63 113
- ------------------------------------------ --------- -------- --------- -------
Total $2,700 $2,750 $2,660 $2,400 $1,950
========================================== ========= ======== ========= =======
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
Management considers the allowance for probable loan losses adequate to cover
estimated probable 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 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
probable loan losses or future charges to earnings.
The following table summarizes the Company's balances of loans outstanding,
average loans outstanding, changes in the allowance arising from charge-offs and
recoveries by category, and additions to the allowance that have been charged to
expense.
<TABLE>
<CAPTION>
TABLE 14. LOAN LOSS AND RECOVERY EXPERIENCE
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Total loans outstanding at end of year $147,676 $133,024 $121,209 $112,656 $94,489
========================================================================== =========== ========== =========== ==========
Average loans outstanding during year 141,564 127,650 118,185 104,297 93,584
========================================================================== =========== ========== =========== ==========
Allowance for probable loan losses at beginning of year $2,750 $2,660 $2,400 $1,950 $1,900
Loans charged off:
Real estate 69 21 6 12 89
Installment loans 80 89 62 62 72
Credit cards and related plans 72 119 110 111 49
Commercial and all other loans 145 2 17 81 338
- -------------------------------------------------------------------------- ----------- ---------- ----------- ----------
Total charge-offs 366 231 195 266 548
Recoveries of loans previously charged off:
Real estate 6 - - 118 -
Installment loans 25 22 22 26 31
Credit cards and related plans 27 23 36 34 19
Commercial and all other loans 16 34 43 41 33
- -------------------------------------------------------------------------- ----------- ---------- ----------- ----------
Total recoveries 74 79 101 219 83
Net charge-offs 292 152 94 47 465
Additions to the allowance charged to expense 242 242 354 497 515
- -------------------------------------------------------------------------- ----------- ---------- ----------- ----------
Allowance for probable loan losses at end of year $2,700 $2,750 $2,660 $2,400 $1,950
========================================================================== =========== ========== =========== ==========
RATIOS
Net charge-offs during year to average loans outstanding 0.21% 0.12% 0.08% 0.05% 0.50%
Net charge-offs during year to loans at year-end 0.20% 0.11% 0.08% 0.04% 0.49%
Allowance for probable loan losses to average loans 1.91% 2.15% 2.25% 2.30% 2.08%
Allowance for probable loan losses to loans at year-end 1.83% 2.07% 2.19% 2.13% 2.06%
Net charge-offs to allowance for probable loan losses 10.81% 5.53% 3.53% 1.96% 23.85%
Net charge-offs to provision for probable loan losses 120.66% 62.81% 26.55% 9.46% 90.29%
- ---------------------------------------------------------------------------------------------------------------------------
Excellence in Community Banking
</TABLE>
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
(ECB BANCORP, INC. LOGO) FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
DEPOSITS
The average amounts of deposits of the Company for the years ended December 31,
1999 and 1998 are summarized below:
TABLE 15. AVERAGE DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
- ----------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits $ 59,105 2.12% $ 42,807 1.60% $ 40,029 1.75%
Savings deposits 14,115 1.58% 14,648 1.94% 14,956 2.06%
Time deposits 81,448 4.99% 83,130 5.27% 80,804 5.39%
- ------------------------------------------------------ --------- ---------- --------- ----------- ---------
Total interest-bearing deposits 154,668 3.58% 140,585 3.81% 135,789 3.95%
- ------------------------------------------------------ --------- ---------- --------- ----------- ---------
Non-interest-bearing deposits 39,941 - 35,272 - 28,574 -
- ------------------------------------------------------ --------- ---------- --------- ----------- ---------
Total deposits $194,609 2.85% $175,857 3.04% $164,363 3.26%
====================================================== ========= ========== ========= =========== =========
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 9.3% of the Company's total deposits at
December 31, 1999. All such public funds are collateralized by investment
securities. The Company does not purchase brokered deposits.
As of December 31, 1999, the Company held approximately $32,588,000 in time
deposits of $100,000 or more and time deposits less than $100,000 of
$51,629,000. The following table is a maturity schedule of time deposits as of
December 31, 1999.
TABLE 16. TIME DEPOSIT MATURITY SCHEDULE
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
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 $14,139 $ 9,307 $ 8,629 $ 513 $32,588
Time certificates of deposit less
than $100,000 18,149 13,959 13,995 5,526 51,629
- ------------------------------------------------------------------------ ---------- --------- --------- ------------
Total time deposits $32,288 $23,266 $22,624 $6,039 $84,217
======================================================================== ========== ========= ========= ============
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
RETURN ON ASSETS AND EQUITY
The following table shows return on assets (net income divided by average
assets), return on equity (net income divided by average shareholders' equity),
dividend payout ratio (dividends declared per share divided by net income per
share) and shareholders' equity to assets ratio (average shareholders' equity
divided by average total assets) for each of the years presented.
TABLE 17. RETURN ON ASSETS AND EQUITY
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Return on assets 0.97% 1.01% 0.93%
Return on equity 9.71% 11.33% 11.07%
Dividend payout 28.69% 23.64% 24.82%
Shareholders' equity to assets 9.96% 8.89% 8.37%
ACCOUNTING AND OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, 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, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Earlier application of all of the provisions of this statement is encouraged.
The Company plans to adopt this statement at January 1, 2001 and does not
anticipate any material effect on its consolidated financial statements.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of the Company and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
YEAR 2000 PREPARATIONS
Bancorp has not experienced any significant impact on the operations due to Year
2000 problems. The date change has resulted in no major interruptions in
service. Although Bancorp has not been informed of any material risks associated
with the Year 2000 problem from third parties, there can be no assurance that
Bancorp will not be impacted in the future. Bancorp will continue to reevaluate
its Year 2000 operations and monitor its progress. Management does not expect
Year 2000 issues to have a material adverse effect on operations or financial
results during 2000. During 1999 the Company expensed approximately $119,000 and
life-to-date expensed approximately $166,000 relating to Y2K compliance.
- --------------------------------------------------------------------------------
Excellence in Community Banking
43
<PAGE>
(ECB BANCORP, INC. LOGO) BOARD OF DIRECTORS AND SUBSIDIARY CORPORATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
GEORGE THOMAS DAVIS, JR. ARTHUR H. KEENEY, III ROBERT L. MITCHELL
Vice Chairman of the Board President and CEO Barber and Retired Magistrate
Attorney at Law The East Carolina Bank Mitchell's Barber Shop
Davis & Davis Attorneys Engelhard, North Carolina Columbia, North Carolina
Swan Quarter, North Carolina
J. BRYANT KITTRELL, III R.S. SPENCER, JR.
C. GILBERT GIBBS President and Owner Chairman of the Board
Farmer and Merchant Kittrell & Associates, Inc. President, R.S. Spencer, Inc.
C.G. Gibbs Hardware Greenville, North Carolina Merchant
Engelhard, North Carolina Engelhard, North Carolina
JOSEPH T. LAMB, JR.
GREGORY C. GIBBS President RAY MITCHELL SPENCER
Financial Planner Joe Lamb, Jr. & Associates, Inc. Retired Farmer
Piedmont Carolinas Group, LLC Real Estate Sales and Rentals Swan Quarter, North Carolina
Raleigh, North Carolina Nags Head, North Carolina
JOHN F. HUGHES, JR. B. MARTELLE MARSHALL JO ELLEN G. CUTRELL
Resident Manager Co-owner and Operator Corporate Secretary
North Carolina Power Martelle's Restaurant & Catering
Manteo, North Carolina Engelhard, North Carolina
<CAPTION>
THE EAST CAROLINA BANK SUBSIDIARY CORPORATIONS
- -----------------------------------------------------------------------------------------------------
CAROLINA FINANCIAL REALTY, INC. CAROLINA FINANCIAL COURIER, INC.
- ------------------------------- --------------------------------
GREGORY C. GIBBS GREGORY C. GIBBS
President President
B. MARTELLE MARSHALL B. MARTELLE MARSHALL
Vice President Vice President
ARTHUR H. KEENEY, III ARTHUR H. KEENEY, III
Corporate Secretary and Treasurer Corporate Secretary and Treasurer
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
BANK SENIOR MANAGEMENT and CORPORATE OFFICERS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
BANK SENIOR MANAGEMENT
* ARTHUR H. KEENEY, III * GARY M. ADAMS JO ELLEN G. CUTRELL
President and Senior Vice President Corporate Secretary
Chief Executive Officer Chief Financial Officer
* J. DORSON WHITE, JR. * WILLIAM F. PLYLER, II
Executive Vice President Senior Vice President
Branch Administration Chief Credit Officer
* Denotes Policy-making Officers of the Bank
- --------------------------------------------------------------------------------
CORPORATE OFFICERS
ARTHUR H. KEENEY, III GARY M. ADAMS JO ELLEN G. CUTRELL
President and Senior Vice President Corporate Secretary
Chief Executive Officer Chief Financial Officer
- --------------------------------------------------------------------------------
Excellence in Community Banking
45
<PAGE>
(ECB BANCORP, INC. LOGO) BANK OFFICERS AND DEPARTMENT MANAGERS
- --------------------------------------------------------------------------------
BANK OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
ACCOUNTING BANK CARD SERVICES MANAGEMENT INFORMATION SYSTEMS
JUDITH C. TOMLINSON T. ANN WILLIAMS EDWARD H. HEFLIN
Vice President Vice President Vice President
AGRI-BUSINESS BANK OPERATIONS CANDIS GEORGE
ARTHUR R. "BUCK" SPRUILL, III EDNA H. SUKEFORTH Assistant Vice President
Vice President Vice President
Agri-Business Officer MARKETING
CREDIT ADMINISTRATION MIMI W. VAN NORTWICK
WALTER T. "TOM" FELTON MARLA C. GIBBS Assistant Vice President
Banking Officer Vice President
Agri-Business Officer ELIZABETH C. STANLEY
MATTHEW J. BYRNE Assistant Vice President
AUDIT/COMPLIANCE Vice President
THOMAS B. HEGGIE, III MORTGAGE
Vice President MURRAY T. BALLANCE J. STATON MARTIN
Banking Officer Vice President
</TABLE>
- --------------------------------------------------------------------------------
BANK DEPARTMENT MANAGERS
CENTRAL PURCHASING DATA PROCESSING GENERAL ACCOUNTING
DENISE L. GIBBS C. TODD MASON TINA L. DUNBAR
DATA ENTRY FACILITIES MAINTENANCE ITEM PROCESSING
JEAN M. RACZENSKI-CLARKE JERRY W. GIBBS DEVONDA HOWARD
- --------------------------------------------------------------------------------
46
<PAGE>
BRANCH OFFICERS (ECB BANCORP, INC. LOGO)
- --------------------------------------------------------------------------------
CENTRAL REGION CRESWELL FAIRFIELD
BETTY B. CABARRUS FAYE C. SADLER
COLUMBIA Vice President Vice President
DAVID W. NOELL Branch Manager Branch Manager
Banking Officer
Branch Manager ELOISE F. HASSELL SWAN QUARTER
Branch Operations Manager FAYE C. SADLER
Vice President
DAWN L. HARRELL ENGELHARD Branch Manager
Branch Operation Manager BEVERLY B. MEEKINS
Banking Officer WASHINGTON
Branch Manager JOHN E. WOJCIK
Vice President
LORI G. CAHOON Branch Manager
Branch Operations Manager
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
<S> <C> <C>
EASTERN REGION HATTERAS NAGS HEAD
R. DREW PULLEN RICHARD N. "SKIPPER" HINES, III
T. OLIN DAVIS Vice President Vice President
Vice President Branch Manager Branch Manager
Eastern Region Manager
CORA A. SIMMONS LINDA H. ALGOOD
RICHARD N. "SKIPPER" HINES, III Assistant Vice President Assistant Vice President
Vice President Loan Officer Loan Officer
Business Development Officer
MANTEO OCRACOKE
T. OLIN DAVIS R. DREW PULLEN
AVON Vice President Vice President
K. NORMAN CAMPBELL Branch Manager Branch Manager
Branch Manager
SUSAN H. BERRY AGNES G. GARRISH
BARCO/CURRITUCK Vice President Banking Officer
LEWIS G. BARNETT Loan Officer
Assistant Vice President
Branch Manager ROY O. "CHIP" PHILLIPS JUDITH G. GARRISH
Banking Officer Banking Officer
Loan Officer Branch Operations Manager
SOUTHERN SHORES
THOMAS J. KERN
Vice President
Branch Manager
<CAPTION>
- --------------------------------------------------------------------------------------------
<S> <C> <C>
WESTERN REGION GREENVILLE UNIVERSITY MEDICAL CENTER
MARY M. LAWRENCE
EDWIN J. "JERRY" BRETT RED BANKS ROAD Banking Officer
Vice President BARRY G. ALLEN Branch Manager
Western Region Manager Assistant Vice President
Branch Manager
THOMAS W. PAULING
Vice President
Business Development Officer
</TABLE>
- --------------------------------------------------------------------------------
Excellence in Community Banking
47
<PAGE>
(ECB BANCORP, INC. LOGO) ATTORNEYS AND CORRESPONDENT BANKS
- --------------------------------------------------------------------------------
ATTORNEYS
DAVIS & DAVIS
Attorneys at Law
Swan Quarter, North Carolina
WARD AND SMITH, P.A.
Attorneys at Law
New Bern, North Carolina
CHARLES W. OGLETREE
Attorney at Law
Columbia, North Carolina
CORRESPONDENT BANKS
CENTURA BANK
Rocky Mount, North Carolina
FEDERAL HOME LOAN BANK OF ATLANTA
Atlanta, Georgia
FEDERAL RESERVE BANK OF RICHMOND
Charlotte Branch
Charlotte, North Carolina
FEDERAL RESERVE BANK OF RICHMOND
Richmond, Virginia
FIRST-CITIZENS BANK & TRUST COMPANY
Raleigh, North Carolina
BANK OF AMERICA
Charlotte, North Carolina
SUNTRUST BANK
Atlanta, Georgia
WACHOVIA BANK & TRUST COMPANY
Winston-Salem, North Carolina
- --------------------------------------------------------------------------------
48
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
ECB Bancorp, Inc.
We consent to incorporation by reference in the Registration Statement of ECB
Bancorp, Inc. on Form S-8 relating to the ECB Bancorp, Inc. Omnibus Stock
Ownership and Long-Term Incentive Plan, of our report dated February 4, 2000,
relating to the consolidated balance sheets of ECB Bancorp, Inc. and Subsidiary
as of December 31, 1999 and 1998, 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, 1999, which report appears in the December
31, 1999 Annual Report on Form 10-KSB of ECB Bancorp, Inc.
KPMG LLP
Raleigh, North Carolina
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,139
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,939
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 147,676
<ALLOWANCE> 2,700
<TOTAL-ASSETS> 233,113
<DEPOSITS> 203,301
<SHORT-TERM> 2,738
<LIABILITIES-OTHER> 2,012
<LONG-TERM> 3,000
0
0
<COMMON> 7,425
<OTHER-SE> 14,637
<TOTAL-LIABILITIES-AND-EQUITY> 233,113
<INTEREST-LOAN> 12,512
<INTEREST-INVEST> 3,080
<INTEREST-OTHER> 302
<INTEREST-TOTAL> 15,894
<INTEREST-DEPOSIT> 5,542
<INTEREST-EXPENSE> 5,703
<INTEREST-INCOME-NET> 10,191
<LOAN-LOSSES> 242
<SECURITIES-GAINS> (27)
<EXPENSE-OTHER> 9,169
<INCOME-PRETAX> 2,843
<INCOME-PRE-EXTRAORDINARY> 2,843
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,143
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 5.28
<LOANS-NON> 408
<LOANS-PAST> 34
<LOANS-TROUBLED> 81
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,750
<CHARGE-OFFS> 366
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 2,700
<ALLOWANCE-DOMESTIC> 2,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4
</TABLE>
