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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2010
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-24753
ECB Bancorp, Inc.
(Exact name of registrant as specified in its charter)
North Carolina | 56-2090738 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Post Office Box 337, Engelhard, North Carolina 27824
(Address of principal executive offices) (Zip Code)
(252) 925-9411
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On May 7, 2010, there were 2,849,841 outstanding shares of Registrant’s common stock.
This Form 10-Q has 41 pages.
Table of Contents
Index | Begins on Page | |||
Part 1 – Financial Information | ||||
Item 1. | Financial Statements: | |||
Consolidated Balance Sheets at March 31, 2010 and December 31, 2009 | 3 | |||
Consolidated Income Statements for Three Months Ended March 31, 2010 and 2009 | 4 | |||
5 | ||||
Consolidated Statements of Cash Flows for Three Months Ended March 31, 2010 and 2009 | 6 | |||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||
Item 3. | 34 | |||
Item 4. | 35 | |||
Part II – Other Information | ||||
Item 1. | 35 | |||
Item 1A. | 35 | |||
Item 2. | 35 | |||
Item 3. | 35 | |||
Item 4. | 35 | |||
Item 5. | 35 | |||
Item 6. | 35 | |||
36 | ||||
37 |
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ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
March 31, 2010 and December 31, 2009
(Dollars in thousands, except per share data)
March 31, 2010 | December 31, 2009* | |||||||
Assets | ||||||||
Non-interest bearing deposits and cash | $ | 10,133 | $ | 9,076 | ||||
Interest bearing deposits | 877 | 870 | ||||||
Overnight investments | 59,240 | 7,865 | ||||||
Total cash and cash equivalents | 70,250 | 17,811 | ||||||
Investment securities | ||||||||
Available-for-sale, at market value (cost of $196,068 and $237,594 at March 31, 2010 and December 31, 2009, respectively) | 197,520 | 239,332 | ||||||
Loans held for sale | 627 | — | ||||||
Loans | 577,964 | 577,791 | ||||||
Allowance for loan losses | (11,329 | ) | (9,725 | ) | ||||
Loans, net | 566,635 | 568,066 | ||||||
Real estate and repossessions acquired in settlement of loans, net | 4,974 | 5,443 | ||||||
Federal Home Loan Bank common stock, at cost | 5,116 | 5,116 | ||||||
Bank premises and equipment, net | 25,114 | 25,329 | ||||||
Accrued interest receivable | 4,706 | 4,967 | ||||||
Bank owned life insurance | 8,731 | 8,657 | ||||||
Other assets | 14,081 | 13,999 | ||||||
Total | $ | 897,754 | $ | 888,720 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Deposits | ||||||||
Demand, noninterest bearing | $ | 98,320 | $ | 93,492 | ||||
Demand, interest bearing | 190,720 | 141,956 | ||||||
Savings | 19,669 | 19,595 | ||||||
Time | 464,218 | 499,687 | ||||||
Total deposits | 772,927 | 754,730 | ||||||
Accrued interest payable | 1,042 | 1,121 | ||||||
Short-term borrowings | 20,877 | 22,910 | ||||||
Long-term obligations | 14,500 | 21,000 | ||||||
Other liabilities | 4,116 | 4,584 | ||||||
Total liabilities | 813,462 | 804,345 | ||||||
Shareholders’ equity | ||||||||
Preferred stock, Series A | 17,163 | 17,122 | ||||||
Common stock, par value $3.50 per share | 9,974 | 9,968 | ||||||
Capital surplus | 25,827 | 25,803 | ||||||
Warrants | 878 | 878 | ||||||
Retained earnings | 29,577 | 29,555 | ||||||
Accumulated other comprehensive income | 873 | 1,049 | ||||||
Total shareholders’ equity | 84,292 | 84,375 | ||||||
Total | $ | 897,754 | $ | 888,720 | ||||
Common shares outstanding | 2,849,841 | 2,847,881 | ||||||
Common shares authorized | 10,000,000 | 10,000,000 | ||||||
Preferred shares outstanding | 17,949 | 17,949 | ||||||
Preferred shares authorized | 2,000,000 | 2,000,000 |
* | Derived from audited consolidated financial statements. |
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ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Income Statements
For the three months ended March 31, 2010 and 2009
(Dollars in thousands, except per share data)
Three months ended March 31, | |||||||
2010 | 2009 | ||||||
Interest income: | |||||||
Interest and fees on loans | $ | 7,632 | $ | 7,347 | |||
Interest on investment securities: | |||||||
Interest exempt from federal income taxes | 462 | 319 | |||||
Taxable interest income | 1,897 | 2,530 | |||||
Dividend income | 27 | 30 | |||||
Other interest income | 2 | 3 | |||||
Total interest income | 10,020 | 10,229 | |||||
Interest expense: | |||||||
Deposits: | |||||||
Demand accounts | 317 | 186 | |||||
Savings | 12 | 11 | |||||
Time | 2,489 | 3,595 | |||||
Short-term borrowings | 56 | 196 | |||||
Long-term obligations | 151 | 199 | |||||
Other interest expense | — | 30 | |||||
Total interest expense | 3,025 | 4,217 | |||||
Net interest income | 6,995 | 6,012 | |||||
Provision for loan losses | 3,000 | 750 | |||||
Net interest income after provision for loan losses | 3,995 | 5,262 | |||||
Noninterest income: | |||||||
Service charges on deposit accounts | 823 | 876 | |||||
Other service charges and fees | 265 | 267 | |||||
Mortgage origination brokerage fees | 212 | 291 | |||||
Net gain on sale of securities | 1,289 | 405 | |||||
Income from bank owned life insurance | 74 | 82 | |||||
Other operating income | 5 | 15 | |||||
Total noninterest income | 2,668 | 1,936 | |||||
Noninterest expenses: | |||||||
Salaries | 2,319 | 2,069 | |||||
Retirement and other employee benefits | 730 | 751 | |||||
Occupancy | 457 | 480 | |||||
Equipment | 467 | 388 | |||||
Professional fees | 288 | 297 | |||||
Supplies | 52 | 56 | |||||
Telephone | 183 | 152 | |||||
FDIC insurance | 333 | 255 | |||||
Other outside services | 118 | 143 | |||||
Net cost of foreclosed assets | 334 | 93 | |||||
Other operating expenses | 957 | 761 | |||||
Total noninterest expenses | 6,238 | 5,445 | |||||
Income before income taxes | 425 | 1,753 | |||||
Income tax expense (benefit) | (62 | ) | 500 | ||||
Net income | 487 | 1,253 | |||||
Preferred stock dividends | 224 | 182 | |||||
Accretion of discount | 41 | 25 | |||||
Income available to common shareholders | $ | 222 | $ | 1,046 | |||
Net income per share - basic | $ | 0.08 | $ | 0.37 | |||
Net income per share - diluted | $ | 0.08 | $ | 0.37 | |||
Weighted average shares outstanding - basic | 2,848,839 | 2,842,017 | |||||
Weighted average shares outstanding - diluted | 2,848,969 | 2,843,398 | |||||
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ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
Three months ended March 31, 2010 and 2009
(Dollars in thousands, except per share data)
Preferred stock, Series A |
Common Stock | Common stock warrants | Capital surplus | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total | |||||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||||||||
Balance January 1, 2009 | $ | — | 2,844,489 | $ | 9,956 | — | $ | 25,707 | $ | 31,026 | $ | 1,254 | $ | 67,943 | ||||||||||||||||
Unrealized gain, net of income tax expense of $277 | 442 | $ | 442 | 442 | ||||||||||||||||||||||||||
Net income | 1,253 | 1,253 | 1,253 | |||||||||||||||||||||||||||
Total comprehensive income | $ | 1,695 | ||||||||||||||||||||||||||||
Issuance of preferred stock in connection with Capital Purchase Program, net of discount on preferred stock | 17,067 | 17,067 | ||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with Capital Purchase Program | 882 | 882 | ||||||||||||||||||||||||||||
Costs associated with issuance of preferred stock and common warrant | (95 | ) | (4 | ) | (99 | ) | ||||||||||||||||||||||||
Stock based compensation | 28 | 28 | ||||||||||||||||||||||||||||
Preferred stock accretion | 25 | (25 | ) | — | ||||||||||||||||||||||||||
Cash dividends on preferred stock | (72 | ) | (72 | ) | ||||||||||||||||||||||||||
Cash dividends ($0.1825 per share) | (519 | ) | (519 | ) | ||||||||||||||||||||||||||
Balance March 31, 2009 | $ | 16,997 | 2,844,489 | $ | 9,956 | $ | 878 | $ | 25,735 | $ | 31,663 | $ | 1,696 | $ | 86,925 | |||||||||||||||
Preferred stock, Series A |
Common Stock | Common stock warrants | Capital surplus | Retained earnings | Accumulated other comprehensive income | Comprehensive income | Total | |||||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||||||||
Balance January 1, 2010 | $ | 17,122 | 2,847,881 | $ | 9,968 | $ | 878 | $ | 25,803 | $ | 29,555 | $ | 1,049 | $ | 84,375 | |||||||||||||||
Unrealized loss, net of income tax benefit of $ 110 | (176 | ) | $ | (176 | ) | (176 | ) | |||||||||||||||||||||||
Net income | 487 | 487 | 487 | |||||||||||||||||||||||||||
Total comprehensive income | $ | 311 | ||||||||||||||||||||||||||||
Stock based compensation | — | 11 | 11 | |||||||||||||||||||||||||||
Stock options exercised | 1,960 | 6 | 13 | 19 | ||||||||||||||||||||||||||
Preferred stock accretion | 41 | (41 | ) | — | ||||||||||||||||||||||||||
Cash dividends on preferred stock | (224 | ) | (224 | ) | ||||||||||||||||||||||||||
Cash dividends ($0.07 per share) | (200 | ) | (200 | ) | ||||||||||||||||||||||||||
Balance March 31, 2010 | $ | 17,163 | 2,849,841 | $ | 9,974 | $ | 878 | $ | 25,827 | $ | 29,577 | $ | 873 | $ | 84,292 | |||||||||||||||
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ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three months ended March 31, 2010 and 2009
(Dollar amounts in thousands)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 487 | $ | 1,253 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 317 | 336 | ||||||
Amortization of premium on investment securities, net | 337 | 187 | ||||||
Provision for loan losses | 3,000 | 750 | ||||||
Gain on sale of securities | (1,289 | ) | (405 | ) | ||||
Stock based compensation | 11 | 28 | ||||||
Decrease in accrued interest receivable | 261 | 136 | ||||||
Loss on sale of real estate and repossessions acquired in settlement of loans | 405 | 45 | ||||||
Income from Bank owned life insurance | (74 | ) | (82 | ) | ||||
Originations of mortgage loans held for sale | (627 | ) | — | |||||
Decrease (increase) in other assets | 168 | (540 | ) | |||||
Decrease in accrued interest payable | (79 | ) | (866 | ) | ||||
(Decrease) increase in other liabilities, net | (38 | ) | 189 | |||||
Net cash provided by operating activities | 2,879 | 1,031 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from sales of investment securities classified as available-for-sale | 47,243 | 24,313 | ||||||
Proceeds from maturities of investment securities classified as available-for-sale | 14,599 | 12,370 | ||||||
Purchases of investment securities classified as available-for-sale | (19,614 | ) | (97,125 | ) | ||||
Purchase of Federal Home Loan Bank common stock | — | (1,572 | ) | |||||
Purchases of premises and equipment | (102 | ) | (81 | ) | ||||
Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale | 561 | 29 | ||||||
Net loan originations | (2,066 | ) | (16,482 | ) | ||||
Net cash provided (used) by investing activities | 40,621 | (78,548 | ) | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 18,197 | 58,930 | ||||||
Net decrease in borrowings | (8,533 | ) | (555 | ) | ||||
Dividends paid to common shareholders | (520 | ) | (519 | ) | ||||
Dividends paid on preferred stock | (224 | ) | (72 | ) | ||||
Net proceeds from issuance of common stock | 19 | — | ||||||
Net proceeds from issuance of preferred stock | — | 17,850 | ||||||
Repurchase of common stock | — | — | ||||||
Net cash provided by financing activities | 8,939 | 75,634 | ||||||
Increase (decrease) in cash and cash equivalents | 52,439 | (1,883 | ) | |||||
Cash and cash equivalents at beginning of period | 17,811 | 16,799 | ||||||
Cash and cash equivalents at end of period | $ | 70,250 | $ | 14,916 | ||||
Cash paid during the period: | ||||||||
Interest | $ | 3,104 | $ | 5,083 | ||||
Taxes | — | 1,631 | ||||||
Supplemental disclosures of noncash financing and investing activities: | ||||||||
Cash dividends declared but not paid | $ | 200 | $ | 519 | ||||
Unrealized gains (losses) on available-for-sale securities, net of deferred taxes | (176 | ) | 442 | |||||
Transfer from loans to real estate and repossessions acquired in settlement of loans | 497 | 2,826 | ||||||
Transfer from long-term to short-term borrowings | 6,500 | 5,000 | ||||||
Payable, settlement for securities purchased | — | (53,426 | ) | |||||
Transfer from investments to other assets | 250 | — |
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ECB BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated financial statements include the accounts of ECB Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, The East Carolina Bank (the “Bank”) (Bancorp and the Bank collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities 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 from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as collateral for loans. The Company’s retirement plans and other post-retirement benefit costs are actuarially determined based on assumptions of the discount rate, estimated future return on plan assets and the health care cost trend rate.
All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
Reclassification
Certain reclassifications have been made to the prior period’s financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.
(2) Net Income Per Share
Basic net income per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of basic net income per share, restricted stock is considered “contingently issuable” and is not included in the weighted average number of common shares outstanding.
Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered “proceeds” using the treasury stock method. Restricted stock had no dilutive effect on earnings per share for the three months ended March 31, 2010 and March 31, 2009.
In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate
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diluted net income per share for the Company. Diluted weighted average shares outstanding increased by 130 due to the dilutive impact of options for the three months ended March 31, 2010. For the three months ended March 31, 2009, diluted weighted average shares outstanding increased by 1,381 due to the dilutive impact of options. There were 55,375 and 53,675 options outstanding for the three months ended March 31, 2010 and 2009, respectively, with an exercise price above the average market value of the Company’s stock for that period. As of March 31, 2010 and 2009, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department was not included in the computation of net income per share because its exercise price exceeded the market price of the company’s stock on that date.
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share.
Three months ended March 31, 2010 (Dollars in thousands, except share and per share data) | ||||||||
Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||||
Basic net income per share | $ | 222 | 2,848,839 | $ | 0.08 | |||
Effect of dilutive securities | — | 130 | ||||||
Diluted net income per share | $ | 222 | 2,848,969 | $ | 0.08 | |||
Three months ended March 31, 2009 (Dollars in thousands, except share and per share data) | ||||||||
Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||||
Basic net income per share | $ | 1,046 | 2,842,017 | $ | 0.37 | |||
Effect of dilutive securities | — | 1,381 | ||||||
Diluted net income per share | $ | 1,046 | 2,843,398 | $ | 0.37 | |||
(3) Stock Compensation Plan
During 2008, the Company adopted the 2008 Omnibus Equity Plan (the Plan) which replaced the expired 1998 Omnibus Stock Ownership and Long-Term Incentive Plan. The Plan provides for the issuance of up to an aggregate of 200,000 shares of common stock of the Company in the form of stock options, restricted stock awards and performance share awards.
Stock based compensation is accounted for in accordance with FASB ASC Topic 718. Compensation cost charged to income was approximately $11 thousand and $28 thousand for the three months ended March 31, 2010 and 2009, respectively. No income tax benefit was recognized for stock based compensation, as the Company does not have any outstanding nonqualified stock options.
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Stock Options
Under the Plan, stock options may be issued to employees as incentive stock options which qualify for special tax treatment under the Internal Revenue Code, or as nonqualified stock options. The terms and exercise prices of options, and the dates or schedules on which options vest or become exercisable, are established at the time the options are granted and may be different for each option. However, the term of an option may not exceed ten years, and the exercise price of each option may not be less than the fair market value of a share of common stock on the date the option is granted. It is the Company’s policy to issue new shares of stock to satisfy option exercises.
The weighted-average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average estimated fair values of stock option grants and the assumptions that are used in calculating such fair values are based on estimates at the date of grant. There were no options granted during the three month periods ending March 31, 2010 and March 31, 2009.
A summary of option activity under the Plan as of March 31, 2010, and changes during the three-month period ended March 31, 2010 are presented below:
Options Outstanding | Weighted Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||
(Dollars in thousands, except per share data) | ||||||||||
Outstanding at December 31, 2009 | 57,335 | $ | 28.31 | |||||||
Granted | — | $ | — | |||||||
Forfeited | — | $ | — | |||||||
Exercised | 1,960 | $ | 10.00 | |||||||
Outstanding at March 31, 2010 | 55,375 | $ | 28.96 | 6.11 years | $ | — | ||||
Exercisable at March 31, 2010 | 39,820 | $ | 29.20 | 5.76 years | $ | — | ||||
1,960 options were exercised during the first three months of 2010. Cash received for options exercised in 2010 was $19 thousand with an intrinsic value of $3 thousand. No options were exercised in the first quarter of 2009.
Restricted Stock Awards
Restricted stock awards are subject to restrictions and the risk of forfeiture if conditions stated in the award agreement are not satisfied at the end of a restriction period. During the restriction period, restricted stock covered by the award will be held by the Company. If the conditions stated in the award agreement are satisfied at the end of the restriction period, the restricted stock will become unrestricted and the certificate evidencing the stock will be delivered to the employee.
There were no shares of non-vested restricted stock as of March 31, 2010 or December 31, 2009.
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Unrecognized Compensation Cost
Anticipated total unrecognized compensation cost related to outstanding non-vested stock options will be recognized over the following periods:
Stock Options | |||
(Dollars in thousands) | |||
April 1 – December 31, 2010 | $ | 25 | |
2011 | 21 | ||
2012 | 8 | ||
2013 | 2 | ||
Total | $ | 56 | |
(4) Postretirement Benefits
The Company 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. Net periodic postretirement benefit cost for the three months ended March 31, 2010 and 2009 includes the following components.
Components of Net Periodic Benefit Cost | Three months ended March 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Service cost | $ | 1 | $ | 1 | ||||
Interest cost | 10 | 12 | ||||||
Prior service cost | (2 | ) | (2 | ) | ||||
Net periodic postretirement benefit cost | $ | 9 | $ | 11 | ||||
The Company expects to contribute $38 thousand to its postretirement benefit plan in 2010. No contributions were made in the first quarter of 2010.
(5) Investment Securities
The following is a summary of the securities portfolio by major classification (dollars in thousands):
March 31, 2010 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Securities available-for-sale: | |||||||||||||
Government-sponsored enterprises and FFCB bonds | $ | 34,847 | $ | 20 | $ | (296 | ) | $ | 34,571 | ||||
Obligations of states and political subdivisions | 46,720 | 1,339 | (119 | ) | 47,940 | ||||||||
Mortgage-backed securities | 108,967 | 1,118 | (407 | ) | 109,678 |
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March 31, 2010 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Corporate Bonds | 4,534 | 3 | (145 | ) | 4,392 | ||||||||
Equity securities | 1,000 | — | (61 | ) | 939 | ||||||||
$ | 196,068 | $ | 2,480 | $ | (1,028 | ) | $ | 197,520 | |||||
December 31, 2009 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
Securities available-for-sale: | |||||||||||||
Government-sponsored enterprises and FFCB bonds | $ | 36,141 | $ | 69 | $ | (367 | ) | $ | 35,843 | ||||
Obligations of states and political subdivisions | 45,242 | 997 | (217 | ) | 46,022 | ||||||||
Mortgage-backed securities | 149,167 | 2,203 | (569 | ) | 150,801 | ||||||||
Corporate Bonds | 6,044 | — | (184 | ) | 5,860 | ||||||||
Equity securities | 1,000 | — | (194 | ) | 806 | ||||||||
$ | 237,594 | $ | 3,269 | $ | (1,531 | ) | $ | 239,332 | |||||
Gross realized gains and losses on sales of securities for the three months ended March 31, 2010 and March 31, 2009 were as follows (dollars in thousands):
Three months ended March 31, | ||||||
2010 | 2009 | |||||
Gross realized gains | $ | 1,289 | $ | 405 | ||
Gross realized losses | — | — | ||||
Net realized (losses) gains | $ | 1,289 | $ | 405 | ||
Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment
The following tables set forth the amount of unrealized losses at March 31, 2010 and December 31, 2009 (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other-than-temporarily impaired. The tables are segregated into investments that have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer (dollars in thousands).
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March 31, 2010
Less Than 12 Months | 12 Months or longer | Total | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
Government-sponsored enterprises and FFCB bonds | $ | 29,463 | $ | 296 | $ | — | $ | — | $ | 29,463 | $ | 296 | ||||||
Obligations of states and political subdivisions | 5,629 | 31 | 3,106 | 88 | 8,735 | 119 | ||||||||||||
Mortgage-backed securities | 64,326 | 389 | 2,845 | 18 | 67,171 | 407 | ||||||||||||
Corporate bonds | 2,875 | 145 | — | — | 2,875 | 145 | ||||||||||||
Equity securities | — | — | 939 | 61 | 939 | 61 | ||||||||||||
Total | $ | 102,293 | $ | 861 | $ | 6,890 | $ | 167 | $ | 109,183 | $ | 1,028 | ||||||
December 31, 2009
Less Than 12 Months | 12 Months or longer | Total | ||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||
Government-sponsored enterprises and FFCB bonds | $ | 18,431 | $ | 367 | $ | — | $ | — | $ | 18,431 | $ | 367 | ||||||
Obligations of states and political subdivisions | 7,315 | 96 | 3,118 | 121 | 10,433 | 217 | ||||||||||||
Mortgage-backed securities | 56,459 | 568 | 102 | 1 | 56,561 | 569 | ||||||||||||
Corporate bonds | 3,354 | 154 | 2,505 | 30 | 5,859 | 184 | ||||||||||||
Equity securities | — | — | 806 | 194 | 806 | 194 | ||||||||||||
Total | $ | 85,559 | $ | 1,185 | $ | 6,531 | $ | 346 | $ | 92,090 | $ | 1,531 | ||||||
As of March 31, 2010 and December 31, 2009, management concluded that the unrealized losses presented above are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover their cost. The losses above, except for equity securities, are on debt securities that have contractual maturity dates and are primarily related to market interest rates. Municipal losses are also related to lack of liquidity and demand in the general investment market. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not affect the expected cash flows of the underlying collateral or the issuer. The Bank’s mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.
At March 31, 2010 and December 31, 2009, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company was $5.1 million for both periods. On March 31, 2010, FHLB paid a dividend for the fourth quarter of 2009 with an annualized rate of 0.27%. The dividend rate was equal to average three-month LIBOR for the period of October 1, 2009 to December 31, 2009, and was applicable to capital stock held during that period. The FHLB also announced that it would not repurchase activity-based excess capital stock and would continue to evaluate on a quarterly basis whether to repurchase excess capital stock. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2010 or December 31, 2009. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.
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The aggregate amortized cost and fair value of the available-for-sale securities portfolio at March 31, 2010 by remaining contractual maturity are as follows (dollars in thousands):
Amortized Cost | Fair Value | |||||
Government-sponsored enterprises and FFCB bonds: | ||||||
Due in one through five years | $ | 4,980 | $ | 4,979 | ||
Due in five through ten years | 22,408 | 22,213 | ||||
Due after ten years | 7,460 | 7,378 | ||||
Obligations of states and political subdivisions: | ||||||
Due in one year or less | 475 | 477 | ||||
Due in one through five years | 6,899 | 7,244 | ||||
Due in five through ten years | 18,292 | 18,925 | ||||
Due after ten years | 21,054 | 21,294 | ||||
Mortgage-backed securities: | ||||||
Due in five through ten years | 11,839 | 12,139 | ||||
Due after ten years | 97,127 | 97,540 | ||||
Corporate Bonds: | ||||||
Due in five through ten years | 4,534 | 4,392 | ||||
Equity securities: | ||||||
Due after ten years | 1,000 | 939 | ||||
Total securities | $ | 196,068 | $ | 197,520 | ||
Securities with an amortized cost of $155.6 million at March 31, 2010 are pledged as collateral. Of this total, amortized cost of $26.8 million and fair value of $27.2 million are pledged as collateral for FHLB advances.
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2009 by remaining contractual maturity are as follows (dollars in thousands):
Amortized Cost | Fair Value | |||||
Government-sponsored enterprises and FFCB bonds: | ||||||
Due in one through five years | $ | 7,152 | $ | 7,166 | ||
Due in five through ten years | 20,610 | 20,392 | ||||
Due after ten years | 8,379 | 8,285 |
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Amortized Cost | Fair Value | |||||
Obligations of states and political subdivisions: | ||||||
Due in one year or less | 870 | 876 | ||||
Due in one through five years | 7,006 | 7,343 | ||||
Due in five through ten years | 17,997 | 18,448 | ||||
Due after ten years | 19,369 | 19,355 | ||||
Mortgage-backed securities: | ||||||
Due in five through ten years | 14,447 | 14,802 | ||||
Due after ten years | 134,720 | 135,999 | ||||
Corporate Bonds: | ||||||
Due in five through ten years | 6,044 | 5,860 | ||||
Equity securities: | ||||||
Due after ten years | 1,000 | 806 | ||||
Total securities | $ | 237,594 | $ | 239,332 | ||
Securities with an amortized cost of $142.4 million at December 31, 2009 were pledged as collateral. Of this total, amortized cost of $55.6 million and fair value of $56.6 million were pledged as collateral for FHLB advances.
(6) 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. The components of comprehensive income for the periods presented are as follows (dollars in thousands):
Three months ended March 31 | ||||||||
2010 | 2009 | |||||||
Net income | $ | 487 | $ | 1,253 | ||||
Other comprehensive income (loss): | ||||||||
Unrealized gains arising during the period | 1,003 | 1,124 | ||||||
Tax expense | (386 | ) | (433 | ) | ||||
Reclassification to realized (gains) losses | (1,289 | ) | (405 | ) | ||||
Tax expense | 496 | 156 | ||||||
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2010 | 2009 | ||||||
Other comprehensive income (loss) | (176 | ) | 442 | ||||
Total comprehensive income | $ | 311 | $ | 1,695 | |||
(7) Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.
In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliation. The disclosures effective for the Company for the current quarter have been reflected in the Fair Value footnote.
Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated. The amendments were effective upon issuance and had no significant impact on the Company’s financial statements.
In March 2010, guidance related to derivatives and hedging was amended to clarify the exemption of certain embedded credit derivative features related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting. The amendments will be effective for the Company on July 1, 2010 although early adoption is permitted. The Company does not expect these amendments to have any impact on the financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
(8) 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
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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.
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2010 and December 31, 2009 (dollars in thousands):
March 31, 2010 | December 31, 2009 | |||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||
Financial assets: | ||||||||||||
Cash and cash equivalents | $ | 70,250 | $ | 70,250 | $ | 17,811 | $ | 17,811 | ||||
Investment securities | 197,520 | 197,520 | 239,332 | 239,332 | ||||||||
FHLB stock | 5,116 | 5,116 | 5,116 | 5,116 | ||||||||
Accrued interest receivable | 4,706 | 4,706 | 4,967 | 4,967 | ||||||||
Net loans | 566,635 | 562,215 | 568,066 | 565,178 | ||||||||
Loans held for sale | 627 | 627 | — | — | ||||||||
Financial liabilities: | ||||||||||||
Deposits | $ | 772,927 | $ | 776,496 | $ | 754,730 | $ | 759,647 | ||||
Short-term borrowings | 20,877 | 20,877 | 22,910 | 22,910 | ||||||||
Accrued interest payable | 1,042 | 1,042 | 1,121 | 1,121 | ||||||||
Long-term obligations | 14,500 | 15,267 | 21,000 | 21,210 |
The estimated fair values of net loans, deposits and long-term obligations are based on estimated cash flows discounted at market interest rates. The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 | Valuation is based upon quoted prices for identical instruments traded in active markets. |
Level 2 | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
Level 3 | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and |
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similar techniques. |
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
There were no changes to the techniques used to measure fair value during the period.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Loans Held for Sale
Loans held-for-sale are carried at the lower of cost or market value. The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to non-recurring fair value adjustments as Level 2.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2010, the majority of impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Real Estate and Repossessions Acquired in Settlement of Loans
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is
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further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
Assets recorded at fair value on a recurring basis
March 31, 2010 (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Investment Securities Available-for-Sale | ||||||||||||
Government-sponsored enterprises and FFCB bonds | $ | 34,571 | $ | 1,000 | $ | 33,571 | $ | — | ||||
Obligations of states and political subdivisions | 47,940 | — | 47,940 | — | ||||||||
Mortgage-backed securities | 109,678 | 23,802 | 85,876 | — | ||||||||
Corporate bonds | 4,392 | — | 2,526 | 1,866 | ||||||||
Equity securities | 939 | 939 | — | — | ||||||||
Total Securities | $ | 197,520 | $ | 25,741 | $ | 169,913 | $ | 1,866 | ||||
Total assets at fair value | $ | 197,520 | $ | 25,741 | $ | 169,913 | $ | 1,866 | ||||
December 31, 2009 (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Investment Securities Available-for-Sale | ||||||||||||
Government-sponsored enterprises and FFCB bonds | 35,843 | 8,626 | 24,737 | 2,480 | ||||||||
Obligations of states and political subdivisions | 46,022 | 4,506 | 41,516 | |||||||||
Mortgage-backed securities | 150,801 | 35,724 | 115,077 | |||||||||
Corporate bonds | 5,860 | 3,989 | 1,871 | |||||||||
Equity securities | 806 | 806 | ||||||||||
Total Securities | $ | 239,332 | $ | 49,662 | $ | 185,319 | $ | 4,351 | ||||
Total assets at fair value | $ | 239,332 | $ | 49,662 | $ | 185,319 | $ | 4,351 |
Assets recorded at fair value on a nonrecurring basis
March 31, 2010 (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Loans held for sale | $ | 627 | $ | — | $ | 627 | $ | — | ||||
Impaired Loans | ||||||||||||
Real estate—construction and land development | 10,740 | — | 9,453 | 1,287 | ||||||||
Real estate—commercial, residential and other(1) | 3,113 | — | 2,606 | 507 | ||||||||
Commercial and all other loans | 1,780 | — | — | 1,780 | ||||||||
Total impaired loans | $ | 15,633 | $ | — | $ | 12,059 | $ | 3,574 |
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March 31, 2010 (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Real estate and repossessions acquired in settlement of loans | ||||||||||||
Total real estate and repossessions acquired in settlement of loans | $ | 4,974 | $ | — | $ | 2,149 | $ | 2,825 | ||||
Total assets at fair value | $ | 21,234 | $ | — | $ | 14,835 | $ | 6,399 | ||||
December 31, 2009 (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||
Loans held for sale | $ | — | $ | — | $ | — | $ | — | ||||
Impaired Loans | ||||||||||||
Real estate—construction and land development | 6,882 | — | 5,510 | 1,372 | ||||||||
Real estate—commercial, residential and other(1) | 3,389 | — | 2,205 | 1,184 | ||||||||
Commercial and all other loans | 2,304 | — | — | 2,304 | ||||||||
Total impaired loans | $ | 12,575 | $ | — | $ | 7,715 | $ | 4,860 | ||||
Real estate and repossessions acquired in settlement of loans | ||||||||||||
Real estate and repossessions acquired in settlement of loans | $ | 5,438 | $ | 606 | $ | 1,657 | $ | 3,175 | ||||
Total assets at fair value | $ | 18,013 | $ | 606 | $ | 9,372 | $ | 8,035 |
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A transfer of $20.7 million of investment securities available for sale were transferred from Level 1 to Level 2 during the first quarter of 2010. The transfer occurred because the December 31, 2009 pricing was based on the Company’s actual trades for the securities at initial purchase while the March 31, 2010 pricing was through a pricing system. The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2010 and 2009.
(Dollars in thousands) | Government- sponsored enterprises and FFCB bonds | Corporate Bonds | Available-for Sale Debt Securities | |||||||||
Balance, December 31, 2009 | $ | 2,480 | $ | 1,871 | $ | 4,351 | ||||||
Total gains or losses (realized/unrealized): | ||||||||||||
Included in earnings | — | — | — | |||||||||
Included in other comprehensive income | — | (5 | ) | (5 | ) | |||||||
Purchases, issuances, and settlements | — | |||||||||||
Transfers in to/out of Level 3 | (2,480 | ) | (2,480 | ) | ||||||||
Balance, March 31, 2010 | $ | — | $ | 1,866 | $ | 1,866 |
(Dollars in thousands) | Obligations of states and political subdivisions | Mortgage- backed securities | Corporate Bonds | Available-for Sale Debt Securities | |||||||||||
Balance, December 31, 2008 | $ | 698 | $ | 8,374 | $ | 2,000 | $ | 11,072 | |||||||
Total gains or losses (realized/unrealized): | |||||||||||||||
Included in earnings | — | — | — | — | |||||||||||
Included in other comprehensive income | (78 | ) | — | — | (78 | ) | |||||||||
Purchases, issuances, and settlements | — | ||||||||||||||
Transfers in to/out of Level 3 | — | (8,374 | ) | (8,374 | ) | ||||||||||
Balance, March 31, 2009 | $ | 620 | $ | — | $ | 2,000 | $ | 2,620 |
(9) U.S. Treasury’s Troubled Asset Relief Program (TARP) Capital Purchase Program
On January 16, 2009, we issued Series A Preferred Stock in the amount of $17,949,000 and a warrant to purchase 144,984 shares of our common stock to the U.S. Treasury as a participant in the TARP Capital Purchase Program. The Series A Preferred Stock qualifies as Tier 1 capital for purposes of regulatory capital requirements and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Prior to January 16, 2012, unless we have redeemed all of this preferred stock or the U.S. Treasury has transferred all of this preferred stock to a third party, the consent of the U.S. Treasury will be required for us to, among other things, increase our common stock dividend above $0.1825 per share or repurchase our common stock except in limited
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circumstances. In addition, until the U.S. Treasury ceases to own our securities sold under the TARP Capital Purchase Program, the compensation arrangements for our senior executive officers must comply in all respects with the U.S. Emergency Economic Stabilization Act of 2008 and the rules and regulations thereunder.
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in Item 1A under the heading “Rick Factors” in the Company’s Annual Report on Form 10-K and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company’s management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to: (a) pressures on the earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and equity markets and the banking industry in general, (b) the financial success or changing strategies of the Company’s customers, (c) actions of government regulators, (d) the level of market interest rates, (e) weather and similar conditions, particularly the effect of hurricanes on the Company’s banking and operations facilities and on the Company’s customers and the communities in which it does business, (f) changes in general economic conditions and the real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral), (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against larger financial institutions in our banking market. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligations, and does not intend to update these forward-looking statements.
Executive Summary
ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the “Bank”) is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, “we,” “us” and “our” refers to the Bank and the bank holding company as a single, consolidated entity unless the context otherwise indicates.
As of March 31, 2010, we had consolidated assets of approximately $897.8 million, total loans of approximately $578.0 million, total deposits of approximately $772.9 million and shareholders’ equity of approximately $84.3 million. For the three months ended March 31, 2010, we had income available to common shareholders of $0.2 million or $0.08 basic and diluted earnings per share, compared to income available to common shareholders of $1.0 million, or $0.37 basic and diluted earnings per share for the three months ended March 31, 2009.
Critical Accounting Policies
The Company’s significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2009. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies
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and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company’s assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Asset Quality”.
We also consider our determination of retirement plans and other postretirement benefit cost to be a critical accounting estimate as it requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Our retirement plans and other post-retirement benefit costs are actuarially determined based on assumptions on the discount rate, estimated future return on plan assets and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs could have a material impact to our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year. For additional discussion concerning our retirement plans and other postretirement benefits refer to Note 8 to the Consolidated Financial Statements contained in our Form 10-K Annual Report for the fiscal year ended December 31, 2009.
Comparison of the Results of Operations for the Three Month Periods Ended March 31, 2010 and 2009
Results of Operations
The following table summarizes components of income and expense and the changes in those components for the three-month period ended March 31, 2010 as compared to the same period in 2009.
Condensed Consolidated Statements of Income
For the Three months ended March 31, 2010 | For the Three months ended March 31, 2009 | Changes from the Prior Year | ||||||||||||
Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||
Gross interest income | $ | 10,020 | $ | 10,229 | $ | (209 | ) | (2.0 | ) | |||||
Gross interest expense | 3,025 | 4,217 | (1,192 | ) | (28.3 | ) | ||||||||
Net interest income | 6,995 | 6,012 | 983 | 16.4 | ||||||||||
Provision for loan losses | 3,000 | 750 | 2,250 | 300.0 | ||||||||||
Net interest income after provision for loan losses | 3,995 | 5,262 | (1,267 | ) | (24.1 | ) | ||||||||
Noninterest income | 2,668 | 1,936 | 732 | 37.8 | ||||||||||
Noninterest expense | 6,238 | 5,445 | 793 | 14.6 | ||||||||||
Income before income taxes | 425 | 1,753 | (1,328 | ) | (75.8 | ) | ||||||||
Income tax provision | (62 | ) | 500 | (562 | ) | (112.4 | ) | |||||||
Net income | $ | 487 | $ | 1,253 | (766 | ) | (61.1 | ) | ||||||
Preferred stock dividend and accretion of discount | 265 | 207 | 58 | (28.0 | ) | |||||||||
Net income available to common shareholders | $ | 222 | $ | 1,046 | $ | (824 | ) | (78.8 | ) | |||||
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Net Interest Income
Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended March 31, 2010 was $7.0 million compared to $6.0 million for the three months ended March 31, 2009.
The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as non-interest-bearing deposits.
Interest income decreased $209 thousand or 2.0% for the three months ended March 31, 2010 compared to the same three months of 2009. The decrease for the three months ended March 31, 2010 is due to the decrease in the rates paid on our average earning assets which was partially offset by increase in the volume of these earning assets. Average earning assets increased $23.7 million as compared to the same period in 2009. We funded the increases in interest-earning assets primarily with interest-bearing deposits. The tax equivalent yield on average earning assets decreased 22 basis points for the quarter ended March 31, 2010 to 5.03% from 5.25% for the same period in 2009. Management attributes the decrease in the yield on our earning assets to the continued low level of short-term market interest rates. Approximately $348.5 million or 60.3% of our loan portfolio consists of variable rate loans that adjust with the movement of the prime rate. As a result of low rates for an extended period of time, these loans’ yields have remained relatively flat while other loans have repriced at lower rates; therefore composite yield on our loans decreased approximately 10 basis points for the first quarter of 2010 compared to the first quarter of 2009. Also, yields on our taxable securities decreased approximately 74 basis points for the first quarter of 2010 as compared to the same period last year as securities sold, called or matured have been replaced with lower yielding securities.
Our average cost of funds during the first quarter of 2010 was 1.73%, a decrease of 79 basis points when compared to 2.52% for the first quarter of 2009. Average rates paid on bank certificates of deposit decreased 109 basis points from 3.18% for the quarter ended March 31, 2009 to 2.09% for the quarter ended March 31, 2010, while our average cost of borrowed funds increased 44 basis points during the first quarter of 2010 compared to the same period in 2009. The increase in average cost of borrowed funds occurred because there was a larger percentage of long-term obligations to total borrowing during the first quarter of 2010 as compared to the same period in 2009. Total interest expense decreased $1.2 million or 28.3% during the first quarter of 2010 compared to the same period in 2009, primarily the result of decreased market rates paid on certificates of deposit.
The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest-bearing deposits and TARP proceeds in earning assets.
Our annualized net interest margin, on a tax-equivalent basis, for the three months ended March 31, 2010 was 3.55% compared to 3.12% in the first quarter of 2009 while our net interest spread increased 57 basis points to 3.30% for the three months ended March 31, 2010 compared to 2.73% during that same period in 2009. The increase in our net interest margin is mainly the result of decreased rates paid on our interest bearing liabilities. Average interest-bearing liabilities, as a percentage of interest-earning assets for the quarters ended March 31, 2010 and 2009 was 85.8% and 84.4%, respectively.
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Average Consolidated Balance Sheets and Net Interest Analysis Fully on Tax Equivalent Basis
For the three months ended March 31, 2010 and 2009
Average Balance | 2010 Yield/ Rate | Income/ Expense | Average Balance | 2009 Yield/ Rate | Income/ Expense | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Assets | ||||||||||||||||||
Loans – net (1) | $ | 566,921 | 5.46 | % | $ | 7,632 | $ | 536,005 | 5.56 | % | $ | 7,347 | ||||||
Taxable securities | 200,750 | 3.89 | % | 1,927 | 224,207 | 4.63 | % | 2,560 | ||||||||||
Non-taxable securities (2) | 46,107 | 6.16 | % | 700 | 34,052 | 5.76 | % | 483 | ||||||||||
Other investments | 12,785 | 0.06 | % | 2 | 8,621 | 0.14 | % | 3 | ||||||||||
Total interest- earning assets | 826,563 | 5.03 | % | $ | 10,261 | 802,885 | 5.25 | % | $ | 10,393 | ||||||||
Cash and due from banks | 10,295 | 9,268 | ||||||||||||||||
Bank premises and equipment, net | 25,257 | 25,690 | ||||||||||||||||
Other assets | 26,896 | 22,549 | ||||||||||||||||
Total assets | $ | 889,011 | $ | 860,392 | ||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | $ | 670,409 | 1.70 | % | $ | 2,818 | $ | 577,922 | 2.66 | % | $ | 3,792 | ||||||
Short-term borrowings | 19,034 | 1.19 | % | 56 | 74,060 | 1.07 | % | 196 | ||||||||||
Long-term obligations | 19,917 | 3.07 | % | 151 | 25,944 | 3.58 | % | 229 | ||||||||||
Total interest- bearing liabilities | 709,360 | 1.73 | % | 3,025 | 677,926 | 2.52 | % | 4,217 | ||||||||||
Non-interest-bearing deposits | 94,069 | 82,553 | ||||||||||||||||
Other liabilities | 282 | 16,057 | ||||||||||||||||
Shareholders’ equity | 85,300 | 83,856 | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 889,011 | $ | 860,392 | ||||||||||||||
Net interest income and net yield on interest-earning assets (FTE) (3) | 3.55 | % | $ | 7,236 | 3.12 | % | $ | 6,176 | ||||||||||
Interest rate spread (FTE) (4) | 3.30 | % | 2.73 | % | ||||||||||||||
(1) | Average loans include non-accruing loans, net of allowance for loan losses. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $238 thousand and $164 thousand for periods ended March 31, 2010 and 2009, respectively. |
(3) | Net interest margin is computed by dividing net interest income by total earning assets. |
(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate. |
The following table presents the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.
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Change in Interest Income and Expense on Tax Equivalent Basis
For the three months ended March 31, 2010 and 2009
Increase (Decrease) in interest income and expense due to changes in:
2010 compared to 2009 | ||||||||||||
Volume (1) | Rate (1) | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Loans | $ | 420 | $ | (135 | ) | $ | 285 | |||||
Taxable securities | (246 | ) | (387 | ) | (633 | ) | ||||||
Non-taxable securities (2) | 177 | 40 | 217 | |||||||||
Other investments | 1 | (2 | ) | (1 | ) | |||||||
Interest income | 352 | (484 | ) | (132 | ) | |||||||
Interest-bearing deposits | 498 | (1,472 | ) | (974 | ) | |||||||
Short-term borrowings | (154 | ) | 14 | (140 | ) | |||||||
Long-term obligations | (49 | ) | (29 | ) | (78 | ) | ||||||
Interest expense | 295 | (1,487 | ) | (1,192 | ) | |||||||
Net interest income | $ | 57 | $ | 1,003 | $ | 1,060 | ||||||
(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $238 thousand and $164 thousand for periods ended March 31, 2010 and 2009, respectively. |
Provision for loan losses
The provision for loan losses charged to operations during the three months ended March 31, 2010 and 2009 was $3.0 million and $750 thousand, respectively. The increase reflects higher historical loss rates, additional impaired loans and management’s response to the current economic environment. The Bank had net charge-offs of $1.4 million for the quarter ended March 31, 2010 compared to net charge-offs of $1.9 million during the first quarter of 2009. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary.
Noninterest income
Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the three months ended March 31, 2010 and 2009.
Three months ended March 31, | |||||||||
2010 | 2009 | Percent Change | |||||||
(Dollars in thousands) | |||||||||
Service charges on deposit accounts | $ | 823 | $ | 876 | (6.1 | )% | |||
Other service charges and fees | 265 | 267 | (0.7 | ) | |||||
Mortgage origination brokerage fees | 212 | 291 | (27.1 | ) | |||||
Net gain on sale of securities | 1,289 | 405 | 218.3 | ||||||
Income from bank owned life insurance | 74 | 82 | (9.8 | ) | |||||
Other operating income | 5 | 15 | (66.7 | ) | |||||
Total noninterest income | $ | 2,668 | $ | 1,936 | 37.8 | % | |||
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Noninterest income increased $732 thousand or 37.8% to $2.7 million for the three months ended March 31, 2010 compared to $1.9 million for the same period in 2009. The increase is due to net gains on sale of securities in the first quarter of 2010 of $1.3 million, an increase of $884 thousand over realized net gains of $405 thousand for the same period in 2009. Certain bonds subject to high price volatility to rising interest rates were sold in the first quarter resulting in the net gain. Management anticipates replacing the bonds with less price sensitive bonds in the second quarter of 2010. Service charges on deposit accounts decreased $53 thousand or 6.1% in the first quarter of 2010 relative to the same period in 2009 due to a decrease in overdraft fees. Mortgage origination brokerage fees decreased $79 thousand or 27.1% in the first quarter 2010 compared to the same period in 2009.
Noninterest expense
Noninterest expense increased $793 thousand or 14.6% to $6.2 million for the three months ended March 31, 2010 from $5.4 million incurred in the same period in 2009. This increase is principally due to general increases in salary expense and in net cost of real estate and repossessions acquired in settlement of loans. The following table presents the components of noninterest expense for the three months ended March 31, 2010 and 2009.
Three months ended March 31, | |||||||||
2010 | 2009 | Percent Change | |||||||
(Dollars in thousands) | |||||||||
Salaries | $ | 2,319 | $ | 2,069 | 12.1 | % | |||
Retirement and other employee benefits | 730 | 751 | (2.8 | ) | |||||
Occupancy | 457 | 480 | (4.8 | ) | |||||
Equipment | 467 | 388 | 20.4 | ||||||
Professional fees | 288 | 297 | (3.0 | ) | |||||
Supplies | 52 | 56 | (7.1 | ) | |||||
Telephone | 183 | 152 | 20.4 | ||||||
FDIC Insurance | 333 | 255 | 30.6 | ||||||
Other outside services | 118 | 143 | (17.5 | ) | |||||
Net cost of real estate and repossessions acquired in settlement of loans | 334 | 93 | 259.6 | ||||||
Other operating expenses | 957 | 761 | 25.8 | ||||||
Total noninterest expenses | $ | 6,238 | $ | 5,445 | 14.6 | % | |||
Salary and employee benefits expense increased $229 thousand in the first quarter of 2010 over the prior year period as we experienced an increase in salaries of $250 thousand and a decrease in retirement and other employee benefits of $21 thousand. Salary expense increased due to additions to our senior management team and due to general pay increases. Retirement and other employee benefits decreased mainly because of a decrease in accrued incentive expense of $75 thousand in the first quarter of 2010 compared to the same period in 2009. As of March 31, 2010, we had 222 full time equivalent employees and operated 24 full service banking offices and one mortgage loan origination office.
Occupancy expense decreased $23 thousand or 4.82% to $457 thousand in the first three months of 2010 compared to $480 thousand in the prior year period. The largest components of the decrease in the first quarter of 2010 relative to the same period of 2009 were building repair and maintenance expense, which decreased $6 thousand and other occupancy expense which decreased $8 thousand.
Equipment expense increased during the first three months of 2010 by $79 thousand or 20.4% compared to the first quarter of 2009. The largest component of the increase was equipment rental expense, which increased $68 thousand.
Professional fees, which include audit, legal and consulting fees, decreased $9 thousand or 3.0% to $288 thousand for the three months ended March 31, 2010 from $297 thousand in the prior year period. The decrease is the result of a decline in audit and consulting fees which was offset by an increase in legal fees. Audit fees decreased approximately $16 thousand and consulting fees decreased approximately $7 thousand, while legal fees increased approximately $14 thousand during the first quarter of 2010 compared to the same period in 2009.
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Expenses related to FDIC insurance increased $78 thousand during the first quarter of 2010 compared to the same period in 2009. The increase is the result of the FDIC increase in assessment rates charged to banks while part of the increase is the result of increased deposit balances in the first quarter of 2010 compared to the same period in 2009.
Net cost of real estate and repossessions acquired in settlement of loans expense increased $241 thousand to $324 thousand in the first quarter of 2010 compared to $93 thousand in the same period in 2009. The increase is attributable to larger losses recognized on disposition of the assets.
Other operating expenses increased $196 thousand or 25.8% from $761 thousand for the three months ended March 31, 2009 to $957 thousand for the three months ended March 31, 2010. The largest component of the increase was an expense related to a charge-down on a receivable which increased $179 thousand during the first quarter of 2010 compared to the year ago period.
Income taxes
Income tax (benefit) expense for the three months ended March 31, 2010 and 2009 was $(62) thousand and $500 thousand, respectively, resulting in effective tax rates of (14.6%) and 28.5%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.
Financial Condition
Balance Sheet
Our total assets were $897.8 million at March 31, 2010, $888.7 million at December 31, 2009 and $865.4 million at March 31, 2009. Our year-over-year asset growth was primarily funded by deposit growth. For the twelve months ended March 31, 2010, we grew our loans $27.3 million while our deposits grew by approximately $84.8 million. Year-over-year, our earning assets grew mainly through loan originations. Our investment portfolio decreased by approximately $50.1 million as we sold approximately $45.9 million in securities during the first quarter of 2010. For the three months ended March 31, 2010, we experienced loan growth that was basically flat and an increase in deposits of 2.4%.
Loans
As of March 31, 2010, total loans were basically flat at $578.0 million, from total loans of $577.8 million at December 31, 2009 and up 5.0% from total loans of $550.6 million at March 31, 2009. Loan growth year over year can be attributed to our branching efforts, the efforts of our lending team and the overall decline in interest rates for loans.
Asset Quality
At March 31, 2010, our allowance for loan losses as a percentage of loans was 1.96%, up from 0.88% at March 31, 2009. The increase in part reflects the increase in our historical loss rate as our charge-offs have increased during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.
Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.
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Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight - possible risk ratings. The risk ratings are established based on perceived probability of loss. All loans risk rated “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.
A portion of the Bank’s allowance for loan losses is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. The Bank has identified an acceptable range for this unallocated portion to be 5%—15% of the total reserve. While we believe that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.
Loans are charged-off against the Bank’s allowance for loan losses as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount. Generally, if the loan is unsecured the loan must be charged-off in full while if it is secured the loan is charged down to the net liquidation value of the collateral.
Net charge-offs for the first quarter of 2010 totaled $1.4 million compared to net charge-offs of $1.9 million during the first quarter of 2009. The provision for loan losses charged to operations for the three months ended March 31, 2010 and 2009 was $3.0 million and $750 thousand, respectively. The following table presents an analysis of the changes in the allowance for loan losses for the three months ended March 31, 2010 and 2009.
Analysis of Changes in Allowance for Loan Losses
For the three months Ended March 31, | ||||||
2010 | 2009 | |||||
(Dollars in thousands) | ||||||
Total loans outstanding at end of period-gross | $ | 577,964 | $ | 550,639 | ||
Average loans outstanding-gross | $ | 576,524 | $ | 541,285 | ||
Allowance for loan losses at beginning of period | $ | 9,725 | $ | 5,931 | ||
Loans charged-off: | ||||||
Real estate | 1,227 | 1,810 |
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Installment loans | 16 | 9 | ||||||
Credit cards and related plans | ||||||||
Commercial and all other loans | 142 | 18 | ||||||
Demand deposit overdraft program | 58 | 69 | ||||||
Total charge-offs | (1,443 | ) | (1,906 | ) | ||||
Recoveries of loans previously charged-off: | ||||||||
Real estate | 14 | — | ||||||
Installment loans | 2 | 2 | ||||||
Credit cards and related plans | — | — | ||||||
Commercial and all other loans | — | 8 | ||||||
Demand deposit overdraft program | 31 | 43 | ||||||
Total recoveries | 47 | 53 | ||||||
Net charge-offs | (1,396 | ) | (1,853 | ) | ||||
Provision for loan losses | 3,000 | 750 | ||||||
Allowance for loan losses at end of period | $ | 11,329 | $ | 4,828 | ||||
Ratios | ||||||||
Annualized net charge-offs to average loans during the period | 0.97 | % | 1.37 | % | ||||
Allowance for loan losses to loans at period end | 1.96 | % | 0.88 | % | ||||
Allowance for loan losses to nonperforming loans at period end | 61 | % | 61 | % |
The ratio of annualized net charge-offs to average loans decreased to 0.97% at March 31, 2010 from 1.37% at March 31, 2009 mainly due to a decrease in real estate related charge-offs. Declining economic conditions, particularly in our southern coastal markets, resulted in an increased number of impaired collateral dependant loans which resulted in a portion of these loans being charged-off. The increase in the allowance for loan losses to loans to 1.96% at March 31, 2010 from 0.88% at March 31, 2009 reflects the increase in our historical loss rate as our charge-offs have increased during the past year. Also, the increase reflects the recognition of additional loans identified as being impaired. The ratio of our allowance for loan losses to nonperforming loans remained flat at 61% as of March 31, 2010 and March 31, 2009.
Construction, land and development (“CLD”) loans make up 19.4% of the Bank’s loan portfolio. This sector of the economy has been particularly impacted by declines in housing activity, and has had a disproportionate impact on the credit quality of the Bank. The table below shows trends of CLD loans, along with ratios relating to their relative credit quality.
CLD Loans | All Other Loans | Total Loans | ||||||||||||||||
Dollars in thousands | Balance | % of Total | Balance | % of Total | ||||||||||||||
Balances at March 31, 2010 | $ | 112,357 | 19.4 | % | $ | 465,607 | 80.6 | % | $ | 577,964 | ||||||||
Impaired loans | 16,276 | 51.1 | % | 15,580 | 48.9 | % | 31,856 | |||||||||||
Allocated Reserves | 5,937 | 58.2 | % | 4,268 | 41.8 | % | 10,205 | |||||||||||
YTD Net Charge-offs | 515 | 36.9 | % | 881 | 63.1 | % | 1,396 | |||||||||||
Nonperforming loans (NPL) | 10,152 | 55.0 | % | 8,298 | 45.0 | % | 18,450 | |||||||||||
NPL as % of loans | 9.0 | % | 1.8 | % | 3.2 | % |
While balances of CLD loans make up 19.4% of the Bank’s loan portfolio, they represent 51.1% and 36.9% of the Bank’s impaired loans and YTD net charge-offs, respectively. CLD loans represent 55.0% of the Bank’s nonperforming loans and 58.2% of the Bank’s allocated reserves are allocated to CLD loans.
Nonperforming Assets
The following table summarizes our nonperforming assets and past due loans at the dates indicated.
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March 31, 2010 | December 31, 2009 | |||||
Non-accrual loans | $ | 15,118 | $ | 13,343 | ||
Loans past due 90 days or more days still accruing | 214 | — | ||||
Restructured loans | 3,118 | 1,353 | ||||
Other real estate owned & repossessions | 4,974 | 5,443 | ||||
Total | $ | 23,424 | $ | 20,139 | ||
Nonperforming assets consist of loans not accruing interest, loans past due ninety days and still accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on non-accrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. Nonperforming assets were $23.4 million and $20.1 million, or 4.05% and 3.49% of loans outstanding at March 31, 2010 and December 31, 2009, respectively. On March 31, 2010, our nonperforming loans (consisting of nonaccruing, loans, loans past due ninety days and still accruing interest and restructured loans) amounted to approximately $18.4 million compared to $14.7 million as of December 31, 2009. We had $5.0 million in other real estate owned and repossessions at March 31, 2010 compared to $5.4 million at December 31, 2009.
Loans Considered Impaired
We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At March 31, 2010, we had loans totaling $31.8 million (which includes $17.9 million in nonperforming loans) which were considered to be impaired compared to $23.9 million at December 31, 2009. As discussed in Asset Quality, loans are considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is probable on a non-collateral dependent impaired loan, a portion of our reserve is allocated to that probable loss. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal.
The following table sets forth the number and volume of loans net of previous charge-offs considered impaired and their associated reserve allocation, if any, at March 31, 2010.
Number of Loans | Loan Balances Outstanding | Allocated Reserves | ||||||
(Dollars in millions) | ||||||||
Non-accrual loans | 44 | $ | 14.8 | $ | 1.2 | |||
Restructured loans | 5 | 3.1 | 0.8 | |||||
Total nonperforming loans | 49 | $ | 17.9 | $ | 2.0 | |||
Other impaired loans with allocated reserves | 11 | 5.2 | 1.5 |
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Impaired loans without allocated reserves | 18 | 8.7 | — | |||||
Total impaired loans | 78 | $ | 31.8 | $ | 3.5 | |||
Investment Securities and Other Assets
The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: “held-to-maturity” and “available-for-sale.” Currently, none of our investments are classified as held-to-maturity. While we have no plans to liquidate a significant amount of our securities, the securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our best interest.
Our investment securities totaled $197.5 million at March 31, 2010, $239.3 million at December 31, 2009 and $239.7 million at March 31, 2009. The decrease in investment securities of $42.2 million or 17.6% when compared to March 31, 2009 is principally due to the decision to sell certain bonds that had high price volatility to rising interest rates with the anticipation of replacing these bonds with less price sensitive bonds in the second quarter of 2010. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.
At March 31, 2010, the securities portfolio had unrealized net gains of approximately $0.9 million, which are reported in accumulated other comprehensive income on the consolidated statement of changes in shareholders’ equity, net of tax. Our securities portfolio at March 31, 2010 consisted of U.S. government sponsored agencies, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), corporate bonds, equity securities and tax-exempt municipal securities.
We currently have the ability to hold our available-for-sale investment securities to maturity except for equity securities. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of March 31, 2010, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our common shareholders’ equity. As of March 31, 2010 the amortized cost and market value of the securities from such issuers were as follows:
Amortized Cost | Market Value | |||||
(Dollars in thousands) | ||||||
Federal National Mortgage Corporation | $ | 44,353 | $ | 44,727 | ||
Federal Home Loan Mortgage Corporation | 18,536 | 18,635 | ||||
Federal Farm Credit Banks | 13,117 | 13,007 | ||||
Government National Mortgage Association | 23,357 | 23,421 | ||||
Small Business Administration | 29,819 | 29,976 | ||||
Federal Home Loan Banks | 14,633 | 14,484 |
At March 31, 2010 and December 31, 2009, we held $8.7 million in bank owned life insurance, compared to $8.4 million at March 31, 2009.
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Deposits and Other Borrowings
Deposits
Deposits totaled $772.9 million as of March 31, 2010 compared to deposits of $754.7 million at December 31, 2009 and up 12.3% compared to deposits of $688.1 million at March 31, 2009. We attribute our deposit growth during the twelve months ended March 31, 2010 to an increase in public funds in money market accounts and an increase in noninterest bearing demand accounts. We believe that we can improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us. We anticipate that our deposits will continue to increase during 2010.
Other Borrowings
Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) having maturities of one year or less, Federal Funds purchased, repurchase agreements and other borrowings to be repaid this year. Our short-term borrowings totaled $20.9 million at March 31, 2010, compared to $22.9 million on December 31, 2009, a decrease of $2.0 million.
The following table details the maturities and rates of our borrowings from the FHLB, as of March 31, 2010.
Borrow Date | Type | Principal | Term | Rate | Maturity | |||||||
(Dollars in thousands) | ||||||||||||
March 12, 2010 | Fixed rate | 10,000 | 30 days | 0.35 | April 12, 2010 | |||||||
March 12, 2008 | Fixed rate | 6,500 | 3 years | 2.89 | March 14, 2011 | |||||||
February 29, 2008 | Fixed rate | 5,000 | 4 years | 3.18 | February 29, 2012 | |||||||
March 12, 2008 | Fixed rate | 2,000 | 4 years | 3.25 | March 12, 2012 | |||||||
March 12, 2008 | Fixed rate | 7,500 | 5 years | 3.54 | March 12, 2013 | |||||||
Total Borrowings: $ | 31,000 | Composite rate: 2.30 | % |
Long-Term Obligations
Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowing from the FHLB totaled $14.5 million on March 31, 2010, compared to $21.0 million FHLB advances on both December 31, 2009 and March 31, 2009. The decrease of $6.5 million in long-term FHLB advances as of March 31, 2010, is the result of an FHLB advance being reclassed to short-term borrowing because the current time to maturity is less than a year.
Liquidity
Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) lines for the purchase of federal funds from other banks; (d) lines of credit established at the FHLB, less existing advances; and (e) our investment securities portfolio. All our debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.
Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using local core deposits, retail repurchase agreements and the Bank’s capital position. To date, these core funds, supplemented by FHLB advances, institutional deposits obtained through the internet and brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and institutional deposits obtained through the Internet.
We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $179.6 million and $177.7 million of advances from the FHLB at March 31, 2010 and
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December 31, 2009, respectively. At March 31, 2010 we had outstanding FHLB advances totaling $31.0 million compared to $41.0 million and $73.0 million at December 31, 2009 and March 31, 2009, respectively.
As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At March 31, 2010, we owned 51,160 shares of the FHLB’s $100 par value capital stock, compared to 51,160 and 54,310 shares at December 31, 2009 and March 31, 2009, respectively. No ready market exists for such stock, which is carried at cost.
We also had unsecured federal funds lines in the aggregate amount of $41.0 million available to us at March 31, 2010 under which we can borrow funds to meet short-term liquidity needs. At March 31, 2010, we had no borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.
Net cash provided by operations during the three months ended March 31, 2010 totaled $2.9 million, compared to net cash provided by operations of $1.0 million for the same period in 2009. Net cash provided in investing activities increased to $40.6 million for the three months ended March 31, 2010, as compared to net cash used in investing activities of $78.5 million for the same period in 2009 primarily due to the proceeds from the sale of investment securities during the first quarter of 2010. Net cash provided by financing activities was $8.9 million for the first three months of 2010, compared to net cash provided of $75.6 million for the same period in 2009 due primarily to a smaller increase in deposits during the first quarter of 2010 as compared to the same period in 2009. Cash and cash equivalents at March 31, 2010 was $70.3 million compared to $14.9 million at March 31, 2009.
Capital Resources
Shareholders’ Equity
As of March 31, 2010, our total shareholders’ equity was $84.3 million (consisting of common shareholders’ equity of $67.1 million and preferred stock of $17.2 million) compared with total shareholders’ equity of $84.4 million as of December 31, 2009 (consisting of common shareholders’ equity of $67.3 million and preferred stock of $17.1 million). Common shareholders’ equity decreased by approximately $0.2 million to $67.1 million at March 31, 2010 from $67.3 million at December 31, 2009. We generated net income of $0.5 million, experienced a decrease in net unrealized gains on available-for-sale securities of $0.2 million and recognized stock based compensation of $11 thousand on incentive stock awards. We declared cash dividends of $200 thousand on our common shares or $0.07 per share during the first quarter of 2010 and dividends and accretion of discount of $265 thousand on preferred shares.
We are subject to various regulatory capital requirements administered by our federal banking regulators. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by these regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines involving quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of March 31, 2010, we and the Bank met all capital adequacy requirements to which we are subject.
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As of March 31, 2010, we experienced a decrease in our capital ratios when compared to the March 31, 2009. This decrease is primarily due to an increase in risk weighted assets. Ratios were relatively flat when compared to December 31, 2009.
Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
Our and the Bank’s actual capital ratios are presented in the following table:
To be well capitalized under prompt corrective action provisions Ratio | Minimum required for capital adequacy purposes Ratio | Our Ratio | Bank’s Ratio | |||||||||
As of March 31, 2010: | ||||||||||||
Tier 1 Capital (to Average Assets) | ³ 5.00 | % | ³ 3.00 | % | 9.26 | % | 7.25 | % | ||||
Tier 1 Capital (to Risk Weighted Assets) | ³ 6.00 | % | ³ 4.00 | % | 12.69 | 9.91 | ||||||
Total Capital (to Risk Weighted Assets) | ³ 10.00 | % | ³ 8.00 | % | 13.95 | 11.17 | ||||||
As of December 31, 2009: | ||||||||||||
Tier 1 Capital (to Average Assets) | ³ 5.00 | % | ³ 3.00 | % | 9.59 | % | 7.53 | % | ||||
Tier 1 Capital (to Risk Weighted Assets) | ³ 6.00 | % | ³ 4.00 | % | 12.77 | 10.03 | ||||||
Total Capital (to Risk Weighted Assets) | ³ 10.00 | % | ³ 8.00 | % | 14.02 | 11.28 | ||||||
As of March 31, 2009: | ||||||||||||
Tier 1 Capital (to Average Assets) | ³ 5.00 | % | ³ 3.00 | % | 9.87 | % | 7.80 | % | ||||
Tier 1 Capital (to Risk Weighted Assets) | ³ 6.00 | % | ³ 4.00 | % | 13.54 | 10.69 | ||||||
Total Capital (to Risk Weighted Assets) | ³ 10.00 | % | ³ 8.00 | % | 14.31 | 11.46 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.
The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Company’s asset/liability management function.
Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2009.
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Item 4. | Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.
We review our disclosure controls and procedures, including our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the quarterly period ended March 31, 2010, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults upon Senior Securities |
None.
Item 4. | Removed and Reserved |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
An Exhibit Index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ECB BANCORP, INC. | ||||||
(Registrant) | ||||||
Date: May 12, 2010 | By: | /s/ A. Dwight Utz | ||||
A. Dwight Utz | ||||||
(President & CEO) | ||||||
Date: May 12, 2010 | By: | /s/ Thomas M. Crowder | ||||
Thomas M. Crowder | ||||||
(Executive Vice President & CFO) |
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Exhibit | Description | |
10.1 | Severance and Change in Control Agreement between Thomas M. Crowder and the Bank (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated March 29, 2010) | |
31.01 | Certification of Chief Executive Officer required by Rule 13a-14(a) (furnished herewith) | |
31.02 | Certification of Chief Financial Officer required by Rule 13a-14(a) (furnished herewith) | |
32.01 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) | |
320.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) |
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