UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission File No. 0-24753
ECB BANCORP, INC.
(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, including Zip Code)
(252) 925-5501
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $3.50 per share | | NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
| Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $24.6 million, based upon the closing price of $11.11 per share as quoted on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter.
On March 19, 2012, there were 2,849,841 outstanding shares of registrant’s common stock.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission in connection with its 2012 annual meeting of shareholders, are incorporated into Part III of this Report.
PART I
When used in this Report, the terms “we,” “us,” “our” and similar terms refer to the registrant, ECB Bancorp, Inc. The term “Bank” refers to our bank subsidiary, The East Carolina Bank.
Item 1. Business.
General
We are a North Carolina corporation organized during 1998 by the Bank and at the direction of its Board of Directors to serve as the Bank’s parent holding company. We operate as a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and our primary business activity is owning the Bank and promoting its banking business. Through the Bank, we engage in a general, community-oriented commercial and consumer banking business.
The Bank is a North Carolina-chartered bank that was founded in 1919. Its deposits are insured under the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum amount permitted by law, and it is subject to supervision and regulation by the FDIC and the North Carolina Commissioner of Banks.
Like other community banks, our net income depends primarily on our net interest income, which is the difference between the interest income we earn on loans, investment assets and other interest-earning assets, and the interest we pay on deposits and other interest-bearing liabilities. To a lesser extent, our net income also is affected by non-interest income we derive principally from fees and charges for our services, as well as the level of our non-interest expenses, such as expenses related to our banking facilities and salaries and employee benefits.
Our operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the general credit needs of small and medium-sized businesses and individuals in our banking markets, competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market interest rates (primarily the rates paid on competing investments), account maturities and the levels of personal income and savings in our banking markets.
Our and the Bank’s headquarters are located at 35050 U.S. Highway 264 East in Engelhard, North Carolina, and our telephone number at that address is (252) 925-9411.
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Business Offices and Banking Markets
The Bank has 25 full-service banking offices located in thirteen North Carolina counties. Our banking markets are located east of the Interstate Highway 95 corridor in portions of the Coastal Plain region of North Carolina which extends from the Virginia border along the coast of North Carolina to the South Carolina border. Within that region, we subdivide our banking markets into two banking regions. The following table lists our branch offices in each banking region.
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Region | | Branches | | County |
Northeast Region | | Currituck | | Currituck |
| | Southern Shores/ Kitty Hawk | | Dare |
| | Nags Head | | Dare |
| | Manteo | | Dare |
| | Avon | | Dare |
| | Hatteras | | Dare |
| | Ocracoke | | Hyde |
| | Engelhard | | Hyde |
| | Swan Quarter | | Hyde |
| | Fairfield | | Hyde |
| | Columbia | | Tyrrell |
| | Creswell | | Washington |
| | Hertford | | Perquimans |
| | |
Southeast Region | | Greenville (three offices) | | Pitt |
| | Wilmington | | New Hanover |
| | Porters Neck | | New Hanover |
| | Ocean Isle Beach | | Brunswick |
| | Leland | | Brunswick |
| | Morehead City | | Carteret |
| | New Bern | | Craven |
| | Washington | | Beaufort |
| | Winterville | | Pitt |
| | Williamston | | Martin |
Competition
Commercial banking in North Carolina is highly competitive, due in large part to our state’s early adoption of statewide branching. Over the years, federal and state legislation (including the elimination of restrictions on interstate banking) has heightened the competitive environment in which all financial institutions conduct their business, and competition among financial institutions of all types has increased significantly.
Banking also is highly competitive in our banking markets, and customers tend to aggressively “shop” the terms of both their loans and deposits. We compete with other commercial banks, savings banks and credit unions, including banks headquartered or controlled by companies headquartered outside of North Carolina but that have offices in our banking markets. According to the most recent market share data published by the FDIC, on June 30, 2011 there were 302 offices of 34 different FDIC-insured depository institutions (including us) in the 13 counties in which we have banking offices. Four of those banks (Wells Fargo, BB&T, Bank of America and First-Citizens Bank) controlled an aggregate of approximately 60% of all deposits in the 13-county area held by those 4 institutions, while we held approximately 7% of total deposits.
We believe community banks can compete successfully by providing personalized service and making timely, local decisions, and that further consolidation in the banking industry is likely to create additional opportunities for community banks to capture deposits from customers of other financial institutions who become dissatisfied as their financial institutions grow larger. Additionally, we believe continued growth in our banking markets provides us with an opportunity to capture new deposits from new residents.
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Almost all our customers are small- and medium-sized businesses and individuals. We try to differentiate ourselves from our larger competitors with our focus on relationship banking, personalized service, direct customer contact, and our ability to make credit and other business decisions locally. We also depend on our reputation as a community bank in our banking markets, our involvement in the communities we serve, the experience of our senior management team, and the quality of our associates. We believe that our focus allows us to be more responsive to our customers’ needs and more flexible in approving loans based on collateral quality and personal knowledge of our customers.
Services
Our banking operations are primarily retail oriented and directed toward small- and medium-sized businesses and individuals located in our banking markets. We derive the majority of our deposits and loans from customers in our banking markets, but we also make loans and have deposit relationships with commercial and consumer customers in areas surrounding our immediate banking markets. We also market certificates of deposit by advertising our deposit rates on an Internet certificate of deposit network, and we accept “brokered” deposits. We provide most traditional commercial and consumer banking services, but our principal activities are taking demand and time deposits and making commercial and consumer loans. Our primary source of revenue is interest income we derive from our lending activities.
We do not believe we have any one customer from whom more than 10% of our revenues are derived. However, we have multiple customers, commercial and retail, that are directly or indirectly affected by, or engaged in businesses related to, the tourism and agribusiness industries and that, in the aggregate, historically have provided greater than 10% of our revenues.
Seasonality and Cycles
Because the local economies of communities in our Northeast Region and Southeast Regions depend, to a large extent, on tourism and agribusiness (including seafood related businesses), historically there has been an element of seasonality in our business in those regions. However, more recently, the extent to which seasonality affects our business has diminished somewhat, largely as a result of a shift away from the seasonal population growth that once characterized many of our coastal communities and toward a more year-round economy resulting from increasing numbers of permanent residents and retirees relocating to these markets. The seasonal patterns that once characterized agribusiness also have been lessened with agricultural product diversification, the year round marketing and sales of agricultural commodities, and agribusiness tax and financial planning.
The current real estate cycle has been trending downward in most of the Bank’s markets. This downward trend has and will continue to have an impact on the real estate lending of the Bank. Continued emphasis will be placed on the customer’s ability to generate sufficient cash flow to support their total credit exposure rather than reliance upon the underlying value of the real estate being held as collateral for those loans.
Lending Activities
General. We make a variety of commercial and consumer loans to small- and medium-sized businesses and individuals for various business and personal purposes, including term and installment loans, business and personal lines of credit, equity lines of credit and overdraft checking credit. For financial reporting purposes, our loan portfolio generally is divided into real estate loans, consumer installment loans, commercial and industrial loans (including agricultural production loans), and credit cards and related plans. We make credit card services available to our customers through a correspondent relationship. Statistical information about our loan portfolio is contained in Item 7 of this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. On December 31, 2011, loans amounting to approximately 82.7% of our loan portfolio were
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classified as real estate loans. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.
Commercial real estate and construction loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.
Construction loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected “as built” appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.
On December 31, 2011, our construction and acquisition and development loans (consumer and commercial) amounted to approximately 13.5% of our loan portfolio, and our other commercial real estate loans amounted to approximately 40.9% of our loan portfolio.
Our real estate loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. A real estate loan with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years.
Our real estate loans also include home equity lines of credit that generally are used for consumer purposes and usually are secured by junior liens on residential real property. Our commitment on each line is for a term of 15 years. During the terms of the lines of credit, borrowers may either pay accrued interest only (calculated at variable interest rates), with their outstanding principal balances becoming due in full at the maturity of the lines, or they may make monthly payments of principal and interest equal to 1.5% of their outstanding balances. On December 31, 2011, our home equity lines of credit amounted to approximately 7.3% of our loan portfolio.
Consumer Installment Loans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. On December 31, 2011, our consumer installment loans made up approximately 1.3% of our loan portfolio, and approximately 24.7% of the aggregate outstanding balances of those loans were unsecured. In addition to loans classified on our books as consumer installment loans, many of our loans included in the real estate loan classification are made for consumer purposes but are classified as real estate loans on our books because they are secured by first or junior liens on real estate. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. However, consumer-purpose loans secured by real estate (and, thus, classified as real estate loans as described above) may be made for terms of up to 15 years but under terms that allow us to call the loan in full, or provide for a “balloon” payment, at the end of a period of no more than five years.
Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.
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Commercial and Industrial Loans and Agricultural Loans. Our commercial and industrial loan classification includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. This classification excludes any loan secured by real estate. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. On December 31, 2011, our commercial and industrial loans made up approximately 13.5% of our loan portfolio, and approximately 18.0% of the aggregate outstanding balances of those loans represented unsecured loans. Those loans included approximately $21.5 million, or approximately 4.3% of our total loans, to borrowers engaged in agriculture, commercial fishing or seafood-related businesses. In addition to loans classified on our books as commercial and industrial loans, many of our loans included in the real estate loan classification are made for commercial or agricultural purposes but are classified as real estate loans on our books because they are secured by first or junior liens on real estate. Commercial and industrial loans may be made at variable or fixed rates of interest. However, any loan that has a maturity or amortization schedule of longer than five years normally will be made at an interest rate that varies with our prime lending rate and will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.
Loan Pricing. We price our loans under policies established as a part of our asset/liability management function. For larger loans, we use a pricing model developed by an outside vendor to reduce our exposure to interest rate risk on fixed and variable rate loans that have maturities of longer than three years. On December 31, 2011, approximately 58.3% of the total dollar amount of our loans accrued interest at variable rates.
Loan Administration and Underwriting. We make loans based, to a great extent, on our assessment of borrowers’ income, cash flow, net worth, sources of repayment and character. The principal risk associated with each of the categories of our loans is the creditworthiness of our borrowers, and our loans may be viewed as involving a higher degree of credit risk than is the case with some other types of loans, such as long-term residential mortgage loans, in which greater emphasis is placed on collateral values. To manage this risk, we have adopted written loan policies and procedures, and our loan portfolio is administered under a defined process. That process includes guidelines and standards for loan underwriting and risk assessment, and procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration, and portfolio reviews to assess loss exposure and to test our compliance with our credit policies and procedures.
The loan underwriting standards we use include an evaluation of various factors, including a loan applicant’s income, cash flow, payment history on other debts, and ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration in the loan approval process, our underwriting process for secured loans also includes analysis of the value of the proposed collateral in relation to the proposed loan amount. We consider the value of collateral, the degree of certainty of that value, the marketability of the collateral in the event of foreclosure or repossession, and the likelihood of depreciation in the collateral value.
Our Board of Directors has approved levels of lending authority for lending and credit personnel based on our aggregate credit exposure to a borrower. A loan that satisfies the Bank’s loan policies and is within a lending officer’s assigned authority may be approved by that officer alone. Loans involving aggregate credit exposures in excess of a lending officer’s authority may be approved by a Credit Policy Officer in our Loan Administration Department up to the amount of that officer’s authority. Above those amounts, a secured or unsecured loan involving an aggregate exposure to a single relationship of up to $2 million may be approved either by our Chief Executive Officer, Chief Revenue Officer or Chief Credit Officer, and a loan involving an aggregate exposure to a single relationship of up to $3 million may be approved by our General Loan Committee which consists of our Chief Executive Officer, Chief Revenue Officer and Chief Credit Officer. A loan that exceeds the approval authority of that Committee, and, notwithstanding the above credit authorities, any single loan in excess of $2 million, must be approved by the Executive Committee of our Board of Directors.
When a loan is made, our lending officer handling that loan assigns it a grade based on various underwriting and other criteria under our risk grading procedures. Any proposed loan that grades below a threshold set by our Board of Directors must be reviewed by a Credit Policy Officer before it can be made, even if the loan amount is within the loan
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officer’s approval authority. The grades assigned to loans we make indicate the level of ongoing review and attention we will give to those loans to protect our position and reduce loss exposure.
After loans are made, they are reviewed by our Loan Administration personnel for adequacy of contract documentation, compliance with regulatory requirements, and documentation of compliance with our loan underwriting criteria. Also, our Credit Policy Officers conduct detailed reviews of selected loans based on various criteria, including loan type, amount, collateral, and borrower identity, and the particular lending officer’s or branch’s lending history. These reviews include at least 10% of the loans made by each lending officer. All loans involving an aggregate exposure of $2 million or more ultimately are reviewed after funding by the Executive Committee of our Board of Directors. Each loan involving an aggregate exposure of more than $350,000 is required to be reviewed at least annually by the lending officer who originated the loan, and those reviews are monitored by a Credit Policy Officer. Loan Administration personnel also periodically review various loans based on various criteria, and we retain the services of an independent credit risk management consultant to annually review our problem loans, a random sampling of performing loans related to our larger aggregate credit exposures, and selected other loans.
During the life of each loan, its grade is reviewed and validated or modified to reflect changes in circumstances and risk. We generally place a loan on a nonaccrual status when it becomes 90 days past due or whenever we believe collection of that loan has become doubtful. We charge off loans when the collection of principal and interest has become doubtful and the loans no longer can be considered sound collectible assets (or, in the case of unsecured loans, when they become 90 days past due).
Our Special Assets Manager, who reports directly to our Chief Credit Officer, monitors the overall performance of our loan portfolio, monitors the collection activities of our lending officers, and directly supervises collection actions that involve legal action or bankruptcies.
Allowance for Loan Losses. Our Board of Directors reviews all impaired loans at least quarterly, and our management reviews asset quality trends monthly. Based on these reviews and our current judgments about the credit quality of our loan portfolio and other relevant internal and external factors, we have established an allowance for loan losses. The adequacy of the allowance is assessed by our management monthly and reviewed by our Board of Directors each quarter. On December 31, 2011, our allowance was $12.1 million and amounted to 2.44% of our total loans and approximately 47% of our nonperforming loans.
On December 31, 2011, our nonperforming loans (consisting of non-accrual loans, loans past due greater than 90 days and still accruing interest, and restructured loans) amounted to approximately $25.6 million, and we had $6.6 million of other real estate owned and repossessed collateral acquired in settlement of loans on our books. We also had $1.4 million in other nonperforming investment assets on our books at December 31, 2011. (See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”)
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. Our deposit services include business and individual checking accounts, NOW accounts, money market checking accounts, savings accounts and certificates of deposit. We monitor our competition in order to keep the rates paid on our deposits at a competitive level. On December 31, 2011, our time deposits of $100,000 or more amounted to approximately $112.4 million, or approximately 14.1% of our total deposits. We derive the majority of our deposits from within our banking market. However, we also accept deposits through deposit brokers and market our certificates of deposit by advertising our deposit rates on an Internet certificate of deposit network, and we generate a significant amount of out-of-market deposits in that manner. Although we accept these deposits primarily for liquidity purposes, we also use them to manage our interest rate risk. On December 31, 2011, our out-of-market deposits amounted to approximately $69.2 million, or approximately 8.7% of our total deposits and approximately 20.6% of our total certificates of deposit.
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Business Banking and Cash Management Services. We also offer a variety of deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include a commercial checking account and checking accounts specifically designed for small businesses. We also offer remote capture products for business customers to meet their online banking needs. Additionally, we offer sweep accounts and money market accounts for businesses. We are seeking to increase our commercial deposits through the offering of these types of cash management products.
Statistical information about our deposit accounts is contained in Item 7 of this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Borrowings. We may utilize advances from the Federal Home Loan Bank of Atlanta to supplement our supply of investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. At December 31, 2011, we had the ability to borrow a total of $184.3 million from the Federal Home Loan Bank of Atlanta, of which $34.5 million was outstanding. All of our borrowings from the Federal Home Loan Bank are secured by a blanket lien on residential real estate or investment securities.
Financial Services. ECB Wealth Management, a department of the Bank, offers customers a range of nondeposit services and products, including investment and retirement planning services, mutual funds, fixed income and equity securities, real estate investment trusts and life insurance services. Wealth management fees totaled $426 thousand during the year ended December 31, 2011.
Investment Portfolio
On December 31, 2011, our investment portfolio totaled approximately $339.5 million and included municipal securities, corporate notes, mortgage-backed securities guaranteed by the Government National Mortgage Association or issued by the Federal National Mortgage Corporation and Federal Home Loan Mortgage Corporation (including collateralized mortgage obligations), and securities issued by U.S. government-sponsored enterprises and agencies. We have classified all of our securities as “available-for-sale,” and we analyze their performance at least quarterly. Our securities have various interest rate features, maturity dates and call options.
Statistical information about our investment portfolio is contained in Item 7 of this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Employees
On December 31, 2011, the Bank employed 244 full-time employees (including our executive officers), and 8 part-time employees. We have no separate employees of our own. The Bank is not party to any collective bargaining agreement with its employees, and we consider the Bank’s relations with its employees to be good.
Supervision and Regulation
As a registered bank holding company, we are subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. In addition, the Bank is subject to extensive regulation by the North Carolina Commissioner of Banks, as its chartering agency, and by the FDIC, as its deposit insurer, and the Bank’s deposits are insured up to applicable limits by the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and, for purposes of the FDIC, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the
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establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the North Carolina legislature, the FDIC or Congress, could have a material adverse impact on our operations. The Bank is a member of the Federal Home Loan Bank of Atlanta.
Certain regulatory requirements applicable to us are referred to below or elsewhere herein. This description of statutes and regulations is intended to be a summary of the material provisions of such statutes and regulations and their effects on us. You are encouraged to reference the actual statutes and regulations for additional information.
Recent Regulatory Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted on July 21, 2010, will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated the Office of Thrift Supervision and required that federal savings associations be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the Federal Reserve Board to supervise and regulate all savings and loan holding companies.
The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months. These new leverage and capital requirements must take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives the state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd Frank Act also broadens the base for FDIC insurance assessments, permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and provides that noninterest-bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Lastly, the Dodd-Frank Act will increase shareholder influence over boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow shareholders to nominate and solicit votes for their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
It is difficult to predict at this time what impact the new legislation and implementing regulations will have on community banks such as the Bank, including the lending and credit practices of such banks. Moreover, many of the provisions of the Dodd-Frank Act are not yet in effect, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations will increase our operating and compliance costs in the future.
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Holding Company Regulation
We are subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. As a result, prior Federal Reserve Board approval would be required for us to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, before any bank acquisition can be completed, prior approval may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired.
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.
We are also subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis), which are substantially similar to those of the FDIC for the Bank.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would have potential applicability if we ever held as a separate subsidiary a depository institution in addition to the Bank.
We are affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on our business or financial condition.
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Our status as a registered bank holding company under the Bank Holding Company Act does not exempt us from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Federal Reserve System
The Federal Reserve Board’s regulations require savings institutions to maintain noninterest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (“NOW”) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $58.8 million; a 10% reserve ratio is applied above $58.8 million. The first $10.7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.
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 calls for 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 a quarterly rate of $0.1825 per share or repurchase our common stock except in limited 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, as amended by the American Recovery and Reinvestment Act of 2009, and the rules and regulations thereunder.
North Carolina Banking Laws and Supervision
General. As a North Carolina commercial bank, the Bank is subject to supervision, regulation and examination by the North Carolina Commissioner of Banks and to various North Carolina statutes and regulations which govern, among other things, investment powers, lending and deposit taking activities, borrowings, maintenance of surplus and reserve accounts, distributions of earnings and payment of dividends. In addition, the Bank is also subject to North Carolina consumer protection and civil rights laws and regulations. The approval of the North Carolina Commissioner of Banks is required for a North Carolina commercial bank to establish or relocate branches, merge with other financial institutions, organize a holding company, issue stock and undertake certain other activities.
Loans to One Borrower Limitations. North Carolina law generally limits a state chartered commercial bank’s direct or indirect extensions of credit to a single borrower to 15% of the unimpaired capital of the bank. An additional 10% of unimpaired capital may be lent if secured by readily marketable collateral having a market value at least equal to the additional loans.
Branching. With appropriate regulatory approvals, North Carolina commercial banks are authorized to establish branches both in North Carolina and in other states. Federal law allows interstate branching through mergers unless the state in which the target is located has opted out of this provision. De novo branching into other states is permitted if the other state has expressly authorized de novo branching into the state by out-of-state banks. A bank that establishes a branch in another state may conduct any activity at that branch office that is permitted by the law of that state to the extent that the activity is permitted either for a state bank chartered by that state or for a branch in the state of an out-of-state national bank.
Restrictions on Payment Dividends. A North Carolina stock commercial bank may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the commercial bank at the time of its conversion to stock form.
In April 2011, the Bank’s Board of Directors adopted a resolution at the request of the FDIC that provides that, among other things, the Bank will not pay any cash dividend to us without seeking the prior approval of the FDIC and
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North Carolina Commissioner of Banks. If the Bank is unable to pay dividends to us, then we may not be able to service our debt, pay our other obligations or pay dividends on our common stock and the Series A Preferred Stock we have sold to Treasury.
Regulatory Enforcement Authority. Any North Carolina commercial bank that does not operate in accordance with the regulations, policies and directives of the North Carolina Commissioner of Banks may be subject to sanctions for noncompliance, including revocation of its articles of incorporation. The North Carolina Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors of a state commercial bank who have violated the law or conducted the bank’s business in a manner which is unsafe or unsound. Upon finding that a state commercial bank has engaged in an unsafe, unsound or discriminatory manner, the North Carolina Commissioner of Banks may issue an order to cease and desist and impose civil monetary penalties on the institution.
Federal Banking Regulations
Capital Requirements. Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as the Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common shareholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.
In addition, FDIC regulations require state non-member banks to maintain certain ratios of regulatory capital to regulatory risk-weighted assets, or “risk-based capital ratios.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0.0% to 100.0%. State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital.
The following table lists our consolidated regulatory capital ratios, and the Bank’s separate regulatory capital ratios, at December 31, 2011. On that date, our capital ratios were at levels to qualify us as “well capitalized.”
| | | | | | | | | | | | | | | | |
| | | Minimum
Required Ratios | | | Required to be
“Well Capitalized” | | | Our Consolidated
Capital Ratios | | | The Bank’s
Capital Ratios | |
Leverage Capital Ratio (Tier 1 Capital to average assets) | | | 3.0 | % | | | 5.0 | % | | | 8.25 | % | | | 8.25 | % |
Risk-based capital ratios: | | | | | | | | | | | | | | | | |
Tier 1 Capital Ratio (Tier 1 Capital to risk-weighted assets) | | | 4.0 | % | | | 6.0 | % | | | 12.59 | % | | | 12.59 | % |
Total Capital Ratio (Total Capital to risk-weighted assets) | | | 8.0 | % | | | 10.0 | % | | | 13.85 | % | | | 13.85 | % |
Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Most recently, the agencies have established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
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Investment Activities. Since the enactment of FDIC Improvement Act, all state- chartered federally insured banks, including commercial banks, have generally been limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The FDIC Improvement Act and the FDIC regulations permit exceptions to these limitations. For example, state chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the Nasdaq Global Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100.0% of Tier 1 Capital, as specified by the FDIC’s regulations, or the maximum amount permitted by North Carolina law, whichever is less. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specifies that a non-member bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
Transactions with Affiliates.�� Transactions between banks and their related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act and Regulation W (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to non-affiliates. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act. The Sarbanes-Oxley Act of 2002 generally prohibits
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loans by a company to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws assuming such loans are also permitted under the law of the institution’s chartering state. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such person’s control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are further limited by specific categories.
Enforcement. The FDIC has extensive enforcement authority over insured state-chartered commercial banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
Insurance of Deposit Accounts. The FDIC insures deposits at FDIC insured financial institutions such as the Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund.
As part of its plan to restore the Deposit Insurance Fund in the wake of the large number of bank failures following the financial crisis, the FDIC imposed a special assessment of 5 basis points for the second quarter of 2009. In addition, the FDIC has required all insured institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. As part of this prepayment, the FDIC assumed a 5% annual growth in the assessment base and applied a 3 basis point increase in assessment rates effective January 1, 2011.
In February 2011, the FDIC published a final rule under the Dodd-Frank Act to reform the deposit insurance assessment system. The rule redefines the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the new rule, assessments will be based on an institution’s average consolidated total assets minus average tangible equity as opposed to total deposits. Since the new base will be much larger than the current base, the FDIC also lowered assessment rates so that the total amount of revenue collected from the industry will not be significantly altered. The new rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the insurance fund to larger institutions, which have greater access to non-deposit sources of funding.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. At December 31, 2011, the Bank complied with this requirement with an investment in Federal Home Loan Bank of Atlanta stock of $3.5 million.
The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements, or general results of operations, could reduce or eliminate the dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, our net interest income would likely also be reduced.
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Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the FDIC, in connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.
The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the FDIC to provide a written evaluation of an association’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system.
The Bank received a “satisfactory” rating as a result of its most recent Community Reinvestment Act assessment.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
| | · | | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
| | · | | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| | · | | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
| | · | | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; |
| | · | | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and |
| | · | | Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of the Bank also are subject to the:
| | · | | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| | · | | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
| | · | | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; |
| | · | | Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expands the responsibilities of financial institutions in preventing the use of the U.S. financial system to fund terrorist activities. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations; and |
| | · | | The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering |
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| | financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. |
Available Information
Copies of reports we file electronically with the Securities and Exchange Commission, including copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports, are available free of charge through our Internet website as soon as reasonably practicable after they are filed. Our website address iswww.myecb.com. These filings also are accessible on the SEC’s website atwww.sec.gov. Information on our website should not be considered a part of this Report.
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Item 1A. Risk Factors
RISK FACTORS
The following paragraphs describe material risks that could affect our business. Other risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. The risks discussed below also include forward-looking statements, and our actual results may differ materially from those discussed in these forward-looking statements.
Risks Relating to Our Business
| · | | We make and hold in our portfolio construction and land development loans, including speculative construction loans, which are considered to have greater credit risk than other types of residential loans. |
We originate construction loans for residential properties and commercial real estate properties, including properties built on speculative, undeveloped property by builders and developers who have not identified a buyer for the completed residential or commercial real estate property at the time of loan origination. At December 31, 2011, $67.1 million, or 13.5%, of our loan portfolio consisted of construction and land development loans.
Construction lending involves additional risks when compared with permanent residential lending because funds are advanced upon the progress of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. While we believe we have established adequate allowances in our financial statements to cover the credit risk of our construction loan portfolio, there can be no assurance that losses will not exceed our allowances, which could adversely impact our future earnings.
Our ability to continue to originate a significant amount of construction loans is dependent on the continued strength of the housing market in our market area. Further, if we lost our relationship with several of our larger borrowers building in this area or there is a decline in the demand for new housing in this area, it is expected that the demand for construction loans would decline and our net income would be adversely affected.
| · | | Our commercial lending exposes us to lending risks. |
At December 31, 2011, $248.7 million, or 50.1%, of our loan portfolio consisted of commercial real estate and commercial business loans and $ 21.5 million, or 4.3% of our loan portfolio consisted of agricultural loans. Commercial loans generally expose a lender to greater risk of nonpayment and loss than residential mortgage loans because repayment of the loans often depends on the successful operation of the business and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. Further, unlike residential mortgage
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loans or commercial real estate loans, commercial business loans may be secured by collateral other than real estate, the value of which may be more difficult to appraise, and may be more susceptible to fluctuation in value. In addition, many of our commercial real estate and commercial business loans are unseasoned, meaning that they were originated recently, with a limited significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of this part of our loan portfolio.
| · | | Our level of nonperforming loans expose us to increased risk of loss. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio. |
At December 31, 2011, our nonperforming loans totaled $25.6 million, representing 5.2% of total loans. If these loans do not perform according to their terms and the value of the collateral is insufficient to pay the remaining loan balance or if the economy and/or the real estate market continues to weaken, we could experience loan losses or be required to record further provisions to our allowance for loan losses, either of which could have a material adverse effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses at a level representing management’s best estimate of inherent losses in the portfolio based upon management’s evaluation of the portfolio’s collectability as of the corresponding balance sheet date. However, our allowance for loan losses may be insufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.
At December 31, 2011, our allowance for loan losses totaled $12.1 million, which represented 2.44% of total loans and 47.3% of nonperforming loans. Our regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our operating results.
| · | | A return of recessionary conditions in our national economy and, in particular, local economy could continue to increase our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings. |
Our business activities and earnings are affected by general business conditions in the United States and, in particular, our local market area as a result of our geographic concentration of lending activities. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally, and in our market area in particular. Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Our primary market area was also negatively impacted by the downturn in the economy and experienced increased unemployment levels and a softening of the local real estate market, including reductions in local property values.
Concerns over the United States’ credit rating (which was downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators, have contributed to increased volatility in the capital markets and diminished expectations for the economy. A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. In particular, unlike larger financial institutions that are more geographically diversified, our profitability depends on the general economic conditions in our primary market area. Most of our loans are secured by real estate or made to businesses in our primary market area and the surrounding communities. As a result of this concentration, a prolonged or more severe downturn in the local economy could result in significant increases in nonperforming loans, which would negatively impact our interest income and result in higher provisions for loan losses, which would reduce our earnings. The economic downturn could also result in reduced demand for credit or fee-based products and services, which would negatively impact our revenues.
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| · | | Our residential mortgage loans and home equity lines of credit exposes us to lending risks. |
At December 31, 2011, $74.2 million, or 14.9%, of our loan portfolio consisted of residential mortgage loans and $36.2 million, or 7.3%, of our loan portfolio consisted of home equity lines of credit. We intend to continue to emphasize and grow these types of lending, in particular residential mortgage lending. Recent declines in the housing market have resulted in declines in real estate values in our market area. Declines in real estate values could cause some of our residential mortgage and home equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
| · | | Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. |
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms which are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as the current disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
Among other sources of funds, we rely heavily on deposits, including out-of-market certificates of deposit, for funds to make loans and provide for our other liquidity needs. Those out-of-market deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those time deposits when they mature, or we may have to pay a higher rate of interest to attract or keep them or to replace them with other deposits or with funds from other sources. Not being able to attract those deposits, or to keep or replace them as they mature, would adversely affect our liquidity. Paying higher deposit rates to attract, keep or replace those deposits could have a negative effect on our interest margin and operating results.
| · | | We may need to raise additional capital in the future in order to continue to grow, but that capital may not be available when it is needed. |
Federal and state banking regulators require us to maintain adequate levels of capital to support our operations. In addition, in the future we may need to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. In that regard, recently a number of financial institutions have sought to raise considerable amounts of additional capital in response to a deterioration in their results of operations and financial condition arising from increases in their non-performing loans and loan losses, deteriorating economic conditions, declines in real estate values and other factors. On December 31, 2011, our three capital ratios were above “well capitalized” levels under bank regulatory guidelines. However, growth in our earning assets resulting from internal expansion and new branch offices, at rates in excess of the rate at which our capital is increased through retained earnings, will reduce our capital ratios unless we continue to increase our capital. Also, future unexpected losses, whether resulting from loan losses or other causes, would reduce our capital.
Should we need, or be required by regulatory authorities, to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock. However, our ability to raise that additional capital will depend on conditions at that time in the capital markets, economic conditions, our financial performance and condition, and other factors, many of which are outside our control. There is no assurance that, if needed, we will be able to raise additional capital on terms favorable to us or at all. Our inability to raise additional capital, if needed, on terms acceptable to us, may have a material adverse effect on our ability to expand our operations, and on our financial condition, results of operations and future prospects.
| · | | If we are unable to redeem our Series A Preferred Stock prior to 2014, the cost of this capital to us will increase substantially. |
If we are unable to redeem the Series A Preferred Stock we have sold to Treasury prior to January 16, 2014, the cost of this capital to us will increase from 5.0% per annum (approximately $897,450 annually) to 9.0% per annum
19
(approximately $1,615,410 annually). Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on our liquidity and on our net income available to holders of our common stock.
| · | | Our profitability is subject to interest rate risk. Changes in interest rates could have an adverse effect on our operating results. |
Our profitability depends, to a large extent, on our net interest income, which is the difference between our income on interest-earning assets and our expense on interest-bearing deposits and other liabilities. In other words, to be profitable, we have to earn more interest on our loans and investments than we pay on our deposits and borrowings. Like most financial institutions, we are affected by changes in general interest rate levels and by other economic factors beyond our control. Interest rate risk arises in part from the mismatch (i.e., the interest sensitivity “gap”) between the dollar amounts of repricing or maturing interest-earning assets and interest-bearing liabilities, and is measured in terms of the ratio of the interest rate sensitivity gap to total assets. When more interest-earning assets than interest-bearing liabilities will reprice or mature over a given time period, a bank is considered asset-sensitive and has a positive gap. When more liabilities than assets will reprice or mature over a given time period, a bank is considered liability-sensitive and has a negative gap. A liability-sensitive position (i.e., a negative gap) may generally enhance net interest income in a falling interest rate environment and reduce net interest income in a rising interest rate environment. An asset-sensitive position (i.e., a positive gap) may generally enhance net interest income in a rising interest rate environment and reduce net interest income in a falling interest rate environment. Our ability to manage our gap position determines to a great extent our ability to operate profitably. However, fluctuations in interest rates are not predictable or controllable, and recent economic and financial market conditions have made it extremely difficult to manage our gap position. Our profitability and results of operations will be adversely affected if we do not successfully manage our interest sensitivity gap.
On December 31, 2011, we had a negative one-year cumulative interest sensitivity gap, which means that, during a one-year period, our interest-bearing liabilities generally would be expected to reprice at a faster rate than our interest-earning assets. A rising rate environment within that one-year period generally would have a negative effect on our earnings, while a falling rate environment generally would have a positive effect on our earnings.
| · | | Our continued success is largely dependent on key management team members. |
We are a customer-focused and relationship-driven organization. Future growth is expected to be driven by a large part in the relationships maintained with customers. While we have assembled an experienced and talented senior management team, maintaining this team, while at the same time developing other managers in order that management succession can be achieved, is not assured. The unexpected loss of key employees could have a material adverse effect on our business and may result in lower revenues or reduced earnings.
| · | | Our inability to successfully implement our strategic plans could adversely impact earnings as well as our overall financial condition. |
We may not be able to successfully implement our strategic plans and manage its growth if we are unable to identify attractive markets, locations or opportunities for expansion in the future. Successful management of increased growth is contingent upon whether we can maintain appropriate levels of capital to support our growth, maintain control over growth in expenses, maintain adequate asset quality, and successfully integrate into the organization, any businesses acquired. In the event that we do open new branches or acquire existing branches or banks, we expect to incur increased personnel, occupancy and other operating expenses. In the case of branch franchise expansion, we must absorb these higher expenses as we begin to generate new deposits. There is a further time lag involved in redeploying the new deposits into attractively priced loans and other higher yielding earning assets. Thus, we may not be able to implement our long-term growth strategy, and our plans to branch could depress earnings in the short run, even if we are able to efficiently execute our branching strategy.
| · | | Our business depends on the condition of the local and regional economies where we operate. |
We currently have offices only in eastern North Carolina. Consistent with our community banking philosophy, a majority of our customers are located in and do business in that region, and we lend a substantial portion of our capital and deposits to commercial and consumer borrowers in our local banking markets. Therefore, our local and regional
20
economy has a direct impact on our ability to generate deposits to support loan growth, the demand for loans, the ability of borrowers to repay loans, the value of collateral securing our loans (particularly loans secured by real estate), and our ability to collect, liquidate and restructure problem loans. The local economies of the coastal communities in our banking markets are heavily dependent on the tourism industry. If our local communities are adversely affected by current conditions in the national economy or by other specific events or trends, including a significant decline in the tourism industry in our coastal communities, there could be a direct adverse effect on our operating results. Adverse economic conditions in our banking markets could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally affect our financial condition and operating results. We are less able than larger institutions to spread risks of unfavorable local economic conditions across a large number of diversified economies.
The economy of North Carolina’s coastal region can be affected by adverse weather events, particularly hurricanes. Our banking markets lie primarily in coastal communities, and we cannot predict whether or to what extent damage caused by future hurricanes will affect our operations, our customers or the economies in our banking markets. However, weather events could cause a decline in loan originations, destruction or decline in the value of properties securing our loans, or an increase in the risks of delinquencies, foreclosures and loan losses.
| · | | New or changes in existing tax, accounting, and regulatory rules and interpretations could have an adverse effect on our strategic initiatives, results of operations, cash flows, and financial condition. |
We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a financial company’s shareholders. These regulations may sometimes impose significant limitations on our operations, and our compliance with regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices.
The significant federal and state banking regulations that affect us are described under “Item 1. Business—Supervision and Regulation.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. The laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. As a result of recent turmoil in the financial services industry, during 2010 Congress enacted the Dodd-Frank Act which implements far-reaching regulatory reform dramatically changed the bank regulatory landscape. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over time, making it difficult to anticipate the overall financial impact on financial institutions and consumers. However, various provisions of the Act likely will reduce the revenues and increase the expenses of all financial institutions, and those provisions could have an adverse affect on our operating results.
| · | | Competition from financial institutions and other financial service providers may adversely affect our profitability. |
Our future growth and success will depend on, among other things, our ability to compete effectively with other financial services providers in our banking markets. To date, we have grown our business by focusing on our lines of business and emphasizing the high level of service and responsiveness desired by our customers. However, commercial banking in our banking markets and in North Carolina as a whole is extremely competitive. We compete against commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other local and community, super-regional, national and international financial institutions that operate offices in our market areas and elsewhere. We compete with these institutions in attracting deposits and in making loans, and we have to attract our customer base from other existing financial institutions and from new residents. Our larger competitors have greater resources, broader geographic markets and name recognition, and higher lending limits than we do, and they can offer more products and services and better afford and more effectively use media advertising, support services and electronic technology than we can. Also, larger competitors may be able to price loans and deposits more aggressively than we do. While we believe we compete effectively with other financial institutions, we may face a competitive disadvantage as a result of our size, lack of geographic diversification and inability to spread marketing costs across a broader market.
21
Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts and greater flexibility and responsiveness in working with local customers, we cannot assure you that we will continue to be an effective competitor in our banking markets.
| · | | We depend on the services of our current management team. |
Our operating results and ability to adequately manage our growth and minimize loan losses are highly dependent on the services, managerial abilities and performance of our executive officers. Smaller banks, like us, sometimes find it more difficult to attract and retain experienced management personnel than larger banks. We currently have an experienced management team that our Board of Directors believes is capable of managing and growing the Bank. However, changes in or losses of key personnel of any company could disrupt that company’s business and could have an adverse effect on its business and operating results.
| · | | Regulatory and contractual restrictions may limit or prevent us from paying dividends on our common stock. |
We are an entity separate and distinct from the Bank and derive substantially all of our revenue in the form of dividends from the Bank. Accordingly, we are and will be dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on our shares of common stock and Series A Preferred Stock. The Bank’s ability to pay dividends is subject to federal and state regulations that limit the amount of dividends that the Bank may pay to us based on the Bank’s ability to earn net income and to meet certain regulatory requirements. In April 2011, the Bank’s Board of Directors adopted a resolution at the request of the FDIC that provides that, among other things, the Bank will not pay any cash dividend to us without seeking the prior approval of the FDIC and North Carolina Commissioner of Banks. If the Bank is unable to pay dividends to us, then we may not be able to service our debt, pay our other obligations or pay dividends on our common stock and the Series A Preferred Stock we have sold to Treasury. Accordingly, our inability to receive dividends from the Bank could also have a material adverse effect on our business, financial condition and results of operations and the value of your investment in our common stock.
In addition, the securities purchase agreement between us and the Treasury that we entered into in connection with the TARP Capital Purchase Program provides that prior to the earlier of (i) January 16, 2012 and (ii) the date on which all of the shares of the Series A Preferred Stock we issued to the Treasury have been redeemed by us or transferred by the Treasury to third parties, we may not, without the consent of the Treasury, (a) increase the cash dividend on our quarterly common stock to more than $0.1825 per share, or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock then outstanding. We also are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the Warrant we issued to the Treasury, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors.
| · | | Financial reform legislation recently enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations. |
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has and will continue to change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months of the date of enactment of the Dodd-Frank Act that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide
22
range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets will be examined by their applicable bank regulators.
In addition, the Dodd-Frank Act increased stockholder influence over boards of directors by requiring certain public companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years. While it is difficult to anticipate the overall impact of the Dodd-Frank Act on us and the financial service industry, it is expected that at a minimum it will increase our operating costs.
| · | | We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. |
We are subject to extensive regulation and supervision by the Federal Reserve Board, and the Bank is subject to extensive government regulation, supervision and examination by the FDIC and the North Carolina Commissioner of Banks. Such regulation, supervision and examination govern the activities in which we may engage and are intended primarily for the protection of the deposit insurance fund and our depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.
Risks Relating to Our Common Stock
| · | | Increases in our capital through sales of common or preferred stock could dilute our existing shareholders. |
In the event that we seek to raise additional capital to support our business and growth, we likely would do that through the issuance of new shares of our common stock or preferred stock. However, our ability to sell additional shares, and the terms (including price) upon which we could sell shares, will depend on conditions in the capital markets, economic conditions, our financial performance and condition, and other factors, many of which are outside our control. Any sales of additional shares of our common stock or preferred stock could dilute the book value and earnings per share of our existing stock and the interests of our existing shareholders.
| · | | The trading volume in our common stock has been low, and the sale of a substantial number of shares in the public market could depress the price of our stock and make it difficult for you to sell your shares. |
Our common stock is listed on the NYSE Amex, but it has a relatively low average daily trading volume relative to many other stocks. Thinly traded stock can be more volatile than stock trading in an active public market, which can lead to significant price swings even when a relatively small number of shares are being traded and limit an investor’s ability to quickly sell blocks of stock. We cannot predict what effect future sales of our common stock in the market, or the availability of shares of our common stock for sale in the market, will have on the market price of our common stock.
| · | | Our outstanding Series A Preferred Stock affects net income available to our common shareholders and earnings per common share, and the warrant we issued to Treasury may be dilutive to holders of our common stock. |
The dividends declared on our Series A Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of our company. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the warrant we issued to Treasury in conjunction with the sale to Treasury of Series A Preferred Stock is exercised. The shares of common stock underlying the warrant represent approximately 4.84% of the shares of our common stock outstanding as of March 16, 2012 (including the shares issuable
23
upon exercise of the warrant). Although Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
Our offices are located in the Bank’s corporate offices in Engelhard, North Carolina, and we do not own or lease any separate properties. The Bank maintains 25 branch offices, 22 of which are owned by the Bank, and three of which are leased from unaffiliated third parties. The following table contains information about our branch offices.
| | | | | | |
Office location | | Opening date of
original banking
office | | Owned/Leased | | Date current
facility built
or purchased (1) |
35050 Hwy 264 Engelhard, NC | | January 1920 | | Owned | | 2004 |
| | | |
80 Main and Pearl St. Swan Quarter, NC | | March 1935 | | Owned (2) | | 1975 |
| | | |
204 Scuppernong Dr. Columbia, NC | | December 1936 | | Owned (2) | | 1975 |
| | | |
7th St. & Hwy. 64 Creswell, NC | | January 1963 | | Owned | | 1963 |
| | | |
205 Virginia Dare Rd. Manteo, NC | | June 1969 | | Owned | | 1999 |
| | | |
2721 S Croatan Hwy. Nags Head, NC | | April 1971 | | Owned (2) | | 1974 |
| | | |
State Hwy. 12 Hatteras, NC | | April 1973 | | Owned (2) | | 1980 |
| | | |
6839 N.C. Hwy. 94 Fairfield, NC | | June 1973 | | Owned (2) | | 1973 |
| | | |
Hwy. 12 Ocracoke, NC | | May 1978 | | Owned | | 1978 |
| | | |
Hwy. 158 & Juniper Tr. Kitty Hawk, NC | | May 1984 | | Owned (3) | | 2006 |
| | | |
1001 Red Banks Rd. Greenville, NC | | August 1989 | | Owned | | 1990 |
| | | |
2400 Stantonsburg Rd. Greenville, NC | | June 1995 | | Owned | | 1995 |
| | | |
NC Hwy. 12 Avon, NC | | June 1997 | | Leased (4) | | — |
| | | |
2878 Caratoke Hwy. Currituck, NC | | January 1998 | | Owned | | 2001 |
| | | |
1418 Carolina Ave. Washington, NC | | May 1999 | | Leased (4) | | — |
| | | |
1801 S Glenburnie Rd. New Bern, NC | | August 2000 | | Owned | | 1996 |
| | | |
1103 Harvey Point Road Hertford, NC | | October 2000 | | Owned (5) | | 2006 |
| | | |
403 East Blvd. Williamston, NC | | May 2003 | | Owned | | 2003 |
| | | |
168 Hwy. 24 Morehead City, NC | | January 2004 | | Owned | | 2004 |
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| | | | | | |
Office location | | Opening date of
original banking
office | | Owned/Leased | | Date current
facility built
or purchased (1) |
1724 Eastwood Rd. Wilmington, NC | | June 2004 | | Owned | | 2004 |
| | | |
100 Causeway Drive Unit 4 Ocean Isle Beach, NC | | May 2007 | | Leased (4) | | — |
| | | |
1221 Portertown Rd. Greenville, NC | | July 2007 | | Owned | | 2007 |
| | | |
3810 S. Memorial Dr. Winterville, NC | | July 2007 | | Owned | | 2007 |
| | | |
1101 New Pointe Blvd. Leland, NC | | July 2008 | | Owned | | 2008 |
| | | |
7961 Market Street Wilmington, NC | | December 2010 | | Owned | | 2010 |
| (1) | | Includes only facilities owned by the Bank. |
| (2) | | Leased from the Bank’s subsidiary, ECB Realty, Inc. until February 2, 2007. ECB Realty, Inc. was merged into the Bank on that date and the Bank acquired title to the property. |
| (3) | | Constructed by the Bank and first occupied during February 2006 to replace a facility previously leased from ECB Realty, Inc. |
| (4) | | Leased from a third party. |
| (5) | | Constructed by the Bank and first occupied during January 2006 to replace a facility previously leased from a third party. |
The Bank owns a vacant property in each of Jacksonville, Wilmington, Ocean Isle Beach, New Bern and Grandy, North Carolina, as sites for possible future branch offices.
All the Bank’s existing branch offices are in good condition and fully equipped for the Bank’s purposes. At December 31, 2011, our consolidated investment in premises and banking equipment (cost less accumulated depreciation) was approximately $26.3 million.
Item 3. Legal Proceedings
From time to time we may become involved in legal proceedings in the ordinary course of our business. However, subject to the uncertainties inherent in any litigation, we believe that, at December 31, 2011 there was no pending proceedings that are likely to result in a material adverse change in our financial condition or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
26
PART II
Item 5. Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases of Equity Securities
Effective as of December 30, 2011, our common stock is listed on the NYSE Amex under the trading symbol “ECBE.” Prior to that time, our common stock was listed on the Nasdaq Global Market under the trading symbol “ECBE.” The following table lists the high and low sales prices for our common stock as reported by The Nasdaq Stock Market, and cash dividends declared on our common stock, for the periods indicated.
| | | | | | | | | | | | |
| | | Sales Price Range | | | Cash Dividend
Declared Per Share | |
Quarter | | High | | | Low | | |
2011 Fourth | | $ | 12.15 | | | $ | 9.58 | | | $ | 0.0500 | |
Third | | | 13.85 | | | | 10.12 | | | | 0.0700 | |
Second | | | 12.64 | | | | 10.41 | | | | 0.0000 | |
First | | | 14.50 | | | | 11.09 | | | | 0.0700 | |
2010 Fourth | | $ | 14.50 | | | $ | 12.57 | | | $ | 0.0700 | |
Third | | | 14.55 | | | | 11.25 | | | | 0.0700 | |
Second | | | 16.97 | | | | 11.37 | | | | 0.0700 | |
First | | | 12.77 | | | | 11.00 | | | | 0.0700 | |
On March 16, 2012, there were approximately 629 record holders of our common stock. We believe the number of beneficial owners of our common stock is greater than the number of record holders because a large amount of our common stock is held of record through brokerage firms in “street name.”
We did not repurchase any shares of our common stock during the quarter ended December 31, 2011.
Under North Carolina law, we are authorized to pay dividends as declared by our Board of Directors, provided that no such distribution results in our insolvency on a going concern or balance sheet basis. We have paid cash dividends since we were incorporated during 1998, and, subject to regulatory approval of Bank dividends to us, we intend to continue to pay dividends on a quarterly basis. However, although we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders is dividends we receive from the Bank. For that reason, our ability to pay dividends effectively is subject to the limitations that apply to the Bank.
In general, the Bank may pay dividends only from its undivided profits. However, if its surplus is less than 50% of its paid-in capital stock, the Bank’s directors may not declare any cash dividend until it has transferred to surplus 25% of its undivided profits or any lesser percentage necessary to raise its surplus to an amount equal to 50% of its paid-in capital stock. The Bank’s ability to pay dividends to us is subject to other regulatory restrictions. (See “Supervision and Regulation—Restrictions on Payment of Dividends” under Item 1. Business.)
In April 2011, the Bank’s Board of Directors adopted a resolution at the request of the FDIC that provides that, among other things, the Bank will not pay any cash dividend to us without seeking the prior approval of the FDIC and North Carolina Commissioner of Banks. If the Bank is unable to pay dividends to us, then we may not be able to service our debt, pay our other obligations or pay dividends on our common stock and the Series A Preferred Stock we have sold to Treasury.
Our sale of Series A Preferred Stock to the U.S. Treasury during January 2009 under the TARP Capital Purchase Program resulted in additional restrictions on our ability to pay dividends on our common stock and to repurchase shares of our common stock. Unless all accrued dividends on the Series A Preferred Stock have been paid in full, (1) no dividends may be declared or paid on our common stock, and (2) we may not repurchase any of our outstanding common stock. Additionally, until January 16, 2012, we are required to obtain the consent of the U.S. Treasury in order to declare or pay any dividend or make any distribution on our common stock other than regular quarterly cash dividends of not more than $0.1825 per share, or, subject to certain exceptions, repurchase shares of our common stock unless we have redeemed all of the Series A Preferred Stock or the U.S. Treasury has transferred all of those shares to third parties.
27
In the future, in addition to the restrictions discussed above, our ability to declare and pay cash dividends on our common stock will be subject to evaluation by our Board of Directors of our and the Bank’s operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and other relevant considerations. We cannot assure you that we will continue to pay cash dividends on any particular schedule or that we will not reduce the amount of dividends we pay in the future.
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The following information is being furnished for purposes of Rule 14a-3. It is not deemed to be filed with
the Securities and Exchange Commission or to be incorporated by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent
that we specifically incorporate it by reference into such a filing.
The following graph compares the cumulative total shareholder return (CTSR) on our common stock during the previous five years with the CTSR over the same measurement period of the Nasdaq Composite index and the SNL Bank NASDAQ index. Each trend line assumes that $100 was invested on December 31, 2006, and that dividends were reinvested for additional shares.
Effective as of December 30, 2011, our common stock is listed on the NYSE Amex under the trading symbol “ECBE.” Prior to that time, our common stock was listed on the Nasdaq Global Market under the trading symbol “ECBE.”
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Period Ending | |
Index | | 12/31/06 | | | 12/31/07 | | | 12/31/08 | | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | |
ECB Bancorp, Inc. | | | 100.00 | | | | 80.43 | | | | 51.98 | | | | 37.83 | | | | 46.86 | | | | 37.30 | |
NASDAQ Composite | | | 100.00 | | | | 110.66 | | | | 66.42 | | | | 96.54 | | | | 114.06 | | | | 113.16 | |
SNL Bank NASDAQ Index | | | 100.00 | | | | 78.51 | | | | 57.02 | | | | 46.25 | | | | 54.57 | | | | 48.42 | |
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Item 6. Selected Financial Data
The following table contains summary historical consolidated financial information from our consolidated financial statements. You should read it in conjunction with our audited year end consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | |
| | | At or for the Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands, except per share data) | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | 26,971 | | | $ | 27,919 | | | $ | 26,748 | | | $ | 20,273 | | | $ | 20,357 | |
Provision for loan losses | | | 8,483 | | | | 12,980 | | | | 11,100 | | | | 2,450 | | | | (99 | ) |
Non-interest income | | | 8,800 | | | | 11,995 | | | | 8,649 | | | | 6,809 | | | | 6,377 | |
Non-interest expense | | | 29,856 | | | | 26,840 | | | | 23,152 | | | | 20,633 | | | | 20,344 | |
Provision for income taxes | | | (1,544 | ) | | | (766 | ) | | | (357 | ) | | | 580 | | | | 1,677 | |
Net income (loss) | | | (1,024 | ) | | | 860 | | | | 1,502 | | | | 3,419 | | | | 4,812 | |
Preferred stock dividend & accretion of discount | | | 1,063 | | | | 1,063 | | | | 1,003 | | | | — | | | | — | |
Net income (loss) available to common shareholders | | $ | (2,087 | ) | | $ | (203 | ) | | | 499 | | | | 3,419 | | | | 4,812 | |
Per Share Data and Shares Outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic net income (loss)(1) | | $ | (0.73 | ) | | $ | (0.07 | ) | | $ | 0.18 | | | $ | 1.19 | | | $ | 1.65 | |
Diluted net income (loss)(1) | | | (0.73 | ) | | | (0.07 | ) | | | 0.18 | | | | 1.18 | | | | 1.65 | |
Cash dividends declared | | | 0.19 | | | | 0.28 | | | | 0.73 | | | | 0.73 | | | | 0.70 | |
Dividend payout ratio | | | (26.03 | )% | | | (400.00 | )% | | | 405.56 | % | | | 61.34 | % | | | 42.42 | % |
Book value at period end | | | 22.10 | | | | 22.32 | | | | 23.62 | | | | 23.89 | | | | 22.88 | |
Weighted-average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 2,849,841 | | | | 2,849,594 | | | | 2,844,950 | | | | 2,884,396 | | | | 2,908,371 | |
Diluted | | | 2,849,841 | | | | 2,849,594 | | | | 2,845,966 | | | | 2,889,016 | | | | 2,914,352 | |
Shares outstanding at period end | | | 2,849,841 | | | | 2,849,841 | | | | 2,847,881 | | | | 2,844,489 | | | | 2,920,769 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 921,277 | | | $ | 919,869 | | | $ | 888,720 | | | $ | 841,851 | | | $ | 643,889 | |
Loans receivable | | | 496,542 | | | | 567,631 | | | | 577,791 | | | | 538,836 | | | | 454,198 | |
Allowance for loan losses | | | 12,092 | | | | 13,247 | | | | 9,725 | | | | 5,931 | | | | 4,083 | |
Other interest-earning assets | | | 352,140 | | | | 290,371 | | | | 253,183 | | | | 244,470 | | | | 133,970 | |
Total deposits | | | 797,645 | | | | 785,941 | | | | 754,730 | | | | 629,152 | | | | 526,361 | |
Borrowings | | | 37,179 | | | | 46,009 | | | | 43,910 | | | | 83,716 | | | | 43,174 | |
Shareholders’ equity | | | 80,443 | | | | 80,894 | | | | 84,375 | | | | 67,943 | | | | 66,841 | |
Selected Performance Ratios: | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | (0.11 | )% | | | 0.09 | % | | | 0.17 | % | | | 0.47 | % | | | 0.77 | % |
Return on average shareholders’ equity | | | (1.26 | ) | | | 0.99 | | | | 1.74 | | | | 5.14 | | | | 7.48 | |
Net interest margin(2) | | | 3.20 | | | | 3.40 | | | | 3.41 | | | | 3.12 | | | | 3.72 | |
Efficiency ratio(3) | | | 82.30 | | | | 65.36 | | | | 63.48 | | | | 73.91 | | | | 73.44 | |
Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans to period-end loans | | | 5.15 | % | | | 3.89 | % | | | 2.54 | % | | | 1.85 | % | | | 0.10 | % |
Allowance for loan losses to period-end loans | | | 2.44 | | | | 2.33 | | | | 1.68 | | | | 1.10 | | | | 0.90 | |
Allowance for loan losses to nonperforming loans | | | 47.29 | | | | 59.97 | | | | 66.17 | | | | 59.42 | | | | 876.92 | |
Nonperforming assets to total assets(4) | | | 3.64 | | | | 2.89 | | | | 2.27 | | | | 1.63 | | | | 0.08 | |
Net loan charge-offs to average loans outstanding | | | 1.79 | | | | 1.64 | | | | 1.30 | | | | 0.12 | | | | 0.13 | |
Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
Equity-to-assets ratio(5) | | | 8.73 | % | | | 8.79 | % | | | 9.49 | % | | | 8.07 | % | | | 10.38 | % |
Leverage capital ratio(6) | | | 8.25 | | | | 8.66 | | | | 9.59 | | | | 8.65 | | | | 10.66 | |
Tier 1 capital ratio(6) | | | 12.59 | | | | 12.08 | | | | 12.77 | | | | 10.83 | | | | 12.94 | |
Total capital ratio(6) | | | 13.85 | | | | 13.34 | | | | 14.02 | | | | 11.80 | | | | 13.72 | |
| (1) | | Per share amounts are computed based on the weighted-average number of shares outstanding during each period. |
| (2) | | Net interest margin is net interest income divided by average interest earning assets, net of allowance for loan losses. |
| (3) | | Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income, both as calculated on a fully taxable-equivalent basis. |
| (4) | | Nonperforming assets consist of the aggregate amount of any non-accruing loans, loans past due greater than 90 days and still accruing interest, restructured loans, repossessions and foreclosed assets and other nonperforming assets on each date. |
| (5) | | Equity-to-assets ratios are computed based on total shareholders’ equity and total assets at each period end. |
| (6) | | These ratios are described in Item 1 under the captions “Supervision and Regulation—Capital Requirements” and “—Prompt Corrective Action.” |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section presents management’s discussion and analysis of our financial condition and results of operations. You should read the discussion in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in these forward-looking statements as a result of various factors. This discussion is intended to assist in understanding our financial condition and results of operations.
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.
Our consolidated assets increased 0.2% to $921.3 million on December 31, 2011, from $919.9 million at year-end 2010. Our loan portfolio decreased 12.5% to $496.5 million at December 31, 2011, from $567.6 million at year-end 2010 while deposits increased 1.5% to $797.6 million at year-end 2011 from $785.9 million at year-end 2010. Total shareholders’ equity was approximately $80.4 million at year-end 2011.
In 2011, we had a loss attributable to common shareholders of $2.1 million or $(0.73) basic and diluted loss per share, compared to a loss attributable to common shareholders of $203 thousand or $(0.07) basic and diluted loss per share for the year ended December 31, 2010. The 2011 loss attributable to common shareholders represents a higher loss than was reported in 2010 mainly due to a decrease in net gains on sales of securities, fees incurred in connection with the terminated private placement offering and increased data processing fees.
Critical Accounting Policies
The Company’s accounting policies are in accordance with accounting principles generally accepted in the United States and with general practices within the banking industry. Our significant accounting policies are set forth in Note 1 to our audited consolidated financial statements included in Item 8 of this report. Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuations, postretirement and benefit plan accounting and income taxes.
We consider our policy regarding the allowance for loan losses to be our 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. We have developed policies 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 our loan portfolio. Our 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 currently known to management. For additional discussion concerning our allowance for loan losses and related matters, see “—Allowance for Loan Losses” and “—Nonperforming Assets and Past Due Loans.” Other real estate acquired through the settlement of loans is carried at fair value less cost to sell. Management relies on outside appraisals and estimates of costs of disposal in determining this value. The actual disposal value could vary from this fair value estimate.
The determination of retirement plans and other postretirement benefit plans 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. Our retirement plans and other postretirement benefit plans are actuarially determined based on assumptions on the discount rate 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 of our consolidated financial statements.
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Management seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy. For additional discussion concerning income taxes refer to Note 6 of our consolidated financial statements.
Results of Operations for the Years Ended December 31, 2011, 2010 and 2009
In 2011, our loss attributable to common shareholders was $2.1 million or $(0.73) basic and diluted loss per share, compared to loss attributable to common shareholders of $203 thousand or $(0.07) basic and diluted loss per share for the year ended December 31, 2010. The decrease in earnings is primarily due to a decrease in net gains on sales of securities.
The following table shows return on assets (net income before preferred dividends and accretion of discount divided by average assets), return on equity (net income before preferred dividends and accretion of discount divided by average shareholders’ equity), dividend payout ratio (dividends declared per share divided by net income available to common shareholders per share) and shareholders’ equity to assets ratio (average shareholders’ equity divided by average total assets) for each of the years presented.
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
Return on assets | | | (0.11 | )% | | | 0.09 | % | | | 0.17 | % |
Return on equity | | | (1.26 | ) | | | 0.99 | | | | 1.74 | |
Dividend payout | | | (26.0 | ) | | | (400.00 | ) | | | 405.56 | |
Shareholders’ equity to assets | | | 8.79 | | | | 9.53 | | | | 9.98 | |
Our core strategies continue to be to: (1) grow the loan portfolio while maintaining high asset quality; (2) grow core deposits; (3) increase non-interest income; (4) control expenses; and (5) make strategic investments in new and existing communities that will result in increased shareholder value.
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. The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and our interest-bearing liabilities and the various rate spreads between our interest-earning assets and 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, and the availability of particular sources of funds, such as non-interest-bearing deposits.
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 interest earning assets and takes into account the positive effects of investing non-interest-bearing deposits in earning assets.
Our net interest income for the year ended December 31, 2011 was $27.0 million, a decrease of $948 thousand or 3.40% when compared to net interest income of $27.9 million for the year ended December 31, 2010. Our net interest margin, on a tax-equivalent basis, for 2011 was 3.20% compared to 3.40% for 2010. Our net interest rate spread, on a tax-equivalent basis, for 2011 was 2.99% compared to 3.16% for 2010. The spread decreased by seventeen basis points as the decrease in the rates paid on interest-bearing liabilities was twenty-five basis points while the decrease on yields earned on interest-earning assets was forty-two basis points for the year.
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Total interest income decreased $2.7 million or 6.8% to $37.1 million in 2011 compared to $39.8 million in interest income in 2010. Although our average interest earning assets increased $5.5 million in 2011 when compared to 2010 this still resulted in a $1.8 million decrease in interest income from 2010 to 2011 as the increase in volume of lower yielding taxable securities was more than offset by the decline in volume of higher yielding loans and tax-exempt securities. Our interest income declined $1.5 million in 2011 as compared to 2010 from a decline in yields. We funded the increases in interest-earning assets primarily with long-term borrowings.
The effect of variances in volume and rate on interest income and interest expense is illustrated in the table titled “Change in Interest Income and Expense on Tax Equivalent Basis.” Management attributes the decrease in the yield on our interest earning assets to the continued low level of market interest rates. Yields on our taxable securities decreased approximately 60 basis points for 2011 as compared to 2010 as the volume of securities has increased with lower yielding securities and previously held securities sold, called or matured have been replaced with lower yielding securities.
Our average cost of funds for 2011 was 1.40%, a decrease of 25 basis points when compared to 1.65% for 2010. The average cost on Bank certificates of deposit decreased 24 basis points from 2.06% paid in 2010 to 1.82% paid in 2011, while our average cost of borrowed funds decreased 15 basis points during 2011 compared to 2010.
Total interest expense decreased $1.8 million or 15.1% to $10.1 million in 2011 from $11.9 million in 2010, primarily as a result of decreased market rates paid on Bank certificates of deposit. The volume of average interest-bearing liabilities increased approximately $3.3 million when comparing 2011 with that of 2010. The decrease to interest expense resulting from decreased rates on all interest-bearing liabilities was $1.9 million and the increase attributable to higher volumes of interest-bearing liabilities was $96 thousand.
Our net interest income for the year ended December 31, 2010 was $27.9 million, an increase of $1.2 million or 4.49% when compared to net interest income of $26.7 million for the year ended December 31, 2009. Our net interest margin, on a tax-equivalent basis, for 2010 was 3.40% compared to 3.41% for 2009. Our net interest rate spread, on a tax-equivalent basis, for 2010 was 3.16% compared to 3.09% for 2009. The spread increased by seven basis points as the decrease in the rates paid on interest-bearing liabilities was forty-two basis points while the decrease on yields earned on interest-earning assets was thirty-five basis points for the year.
Total interest income decreased $1.1 million or 2.7% to $39.8 million in 2010 compared to $40.9 million in interest income in 2009. Increases in our average earning assets of $38.7 million in 2010 when compared to 2009 resulted in a $1.6 million increase in interest income from 2009 to 2010 but this was more than offset by a decrease in interest income of $2.7 million from a decline in yields. We funded the increases in interest-earning assets primarily with interest-bearing demand accounts.
Our average cost of funds for 2010 was 1.65%, a decrease of 42 basis points when compared to 2.07% for 2009. The average cost on Bank certificates of deposit decreased 48 basis points from 2.54% paid in 2009 to 2.06% paid in 2010, while our average cost of borrowed funds increased 64 basis points during 2010 compared to 2009. The increase in the average cost of borrowed funds for 2010 compared to 2009 was the result of a decrease in the volume of lower cost short-term borrowings.
Total interest expense decreased $2.3 million or 16.2% to $11.9 million in 2010 from $14.2 million in 2009, primarily as a result of decreased market rates paid on Bank certificates of deposit. The volume of average interest-bearing liabilities increased approximately $37.6 million when comparing 2010 with that of 2009. The decrease to interest expense resulting from decreased rates on all interest-bearing liabilities was $3.2 million and the increase attributable to higher volumes of interest-bearing liabilities was $0.9 million.
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The following table presents an analysis of average interest-earning assets and interest-bearing liabilities, the interest income or expense applicable to each asset or liability category and the resulting yield or rate paid.
Average Consolidated Balances and Net Interest Income Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Average
Balance | | | Yield/
Rate | | | Income/
Expense | | | Average
Balance | | | Yield/
Rate | | | Income/
Expense | | | Average
Balances | | | Yield/
Rate | | | Income/
Expense | |
| | | (Dollars in thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans—net(1) | | $ | 525,244 | | | | 5.45 | % | | $ | 28,652 | | | $ | 566,007 | | | | 5.43 | % | | $ | 30,745 | | | $ | 556,017 | | | | 5.50 | % | | $ | 30,595 | |
Taxable securities | | | 292,982 | | | | 2.70 | | | | 7,896 | | | | 227,505 | | | | 3.30 | | | | 7,508 | | | | 201,676 | | | | 4.41 | | | | 8,901 | |
Nontaxable securities(2) | | | 12,814 | | | | 5.73 | | | | 735 | | | | 38,351 | | | | 6.09 | | | | 2,335 | | | | 36,743 | | | | 5.80 | | | | 2,130 | |
Other investments(3) | | | 19,290 | | | | 0.23 | | | | 44 | | | | 12,981 | | | | 0.10 | | | | 13 | | | | 11,705 | | | | 0.03 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 850,330 | | | | 4.39 | | | | 37,327 | | | | 844,844 | | | | 4.81 | | | | 40,601 | | | | 806,141 | | | | 5.16 | | | | 41,629 | |
Cash and due from banks | | | 13,092 | | | | | | | | | | | | 11,645 | | | | | | | | | | | | 10,999 | | | | | | | | | |
Bank premises and equipment, net | | | 26,515 | | | | | | | | | | | | 25,577 | | | | | | | | | | | | 25,506 | | | | | | | | | |
Other assets | | | 35,938 | | | | | | | | | | | | 27,277 | | | | | | | | | | | | 23,745 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 925,875 | | | | | | | | | | | $ | 909,343 | | | | | | | | | | | $ | 866,391 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 680,576 | | | | 1.35 | % | | $ | 9,208 | | | $ | 680,920 | | | | 1.62 | % | | $ | 11,010 | | | $ | 607,880 | | | | 2.13 | % | | $ | 12,958 | |
Short-term borrowings | | | 14,547 | | | | 1.95 | | | | 284 | | | | 15,842 | | | | 1.52 | | | | 241 | | | | 52,293 | | | | 0.94 | | | | 492 | |
Long-term obligations | | | 28,174 | | | | 2.18 | | | | 614 | | | | 23,195 | | | | 2.75 | | | | 637 | | | | 22,219 | | | | 3.18 | | | | 707 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 723,297 | | | | 1.40 | | | | 10,106 | | | | 719,957 | | | | 1.65 | | | | 11,888 | | | | 682,392 | | | | 2.07 | | | | 14,157 | |
Non-interest-bearing deposits | | | 115,847 | | | | | | | | | | | | 102,039 | | | | | | | | | | | | 90,732 | | | | | | | | | |
Other liabilities | | | 5,379 | | | | | | | | | | | | 705 | | | | | | | | | | | | 6,783 | | | | | | | | | |
Shareholders’ equity | | | 81,352 | | | | | | | | | | | | 86,642 | | | | | | | | | | | | 86,484 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 925,875 | | | | | | | | | | | $ | 909,343 | | | | | | | | | | | $ | 866,391 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income and net interest margin (FTE)(4) | | | | | | | 3.20 | % | | $ | 27,221 | | | | | | | | 3.40 | % | | $ | 28,713 | | | | | | | | 3.41 | % | | $ | 27,472 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread (FTE)(5) | | | | | | | 2.99 | % | | | | | | | | | | | 3.16 | % | | | | | | | | | | | 3.09 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | Average loans include non-accruing loans, net of allowance for loan losses, and loans held for sale. |
| (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 $250 thousand, $794 thousand, and $724 thousand for the years ended December 31, 2011, 2010, and 2009, respectively. |
| (3) | | Other investments include federal funds sold and interest-bearing deposits with banks and other institutions. |
| (4) | | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (5) | | Net interest rate spread equals the average yield on total earning assets minus the average rate paid on total interest-bearing liabilities. |
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The following table presents the relative impact on net interest income of the 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.
Change in Interest Income and Expense on Tax Equivalent Basis
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 Compared to 2010 | | | 2010 Compared to 2009 | |
| | | Volume(1) | | | Rate(1) | | | Net | | | Volume(1) | | | Rate(1) | | | Net | |
| | | (Dollars in thousands) | |
Loans(2) | | $ | (2,219 | ) | | $ | 126 | | | $ | (2,093 | ) | | $ | 546 | | | $ | (396 | ) | | $ | 150 | |
Taxable securities | | | 1,963 | | | | (1,575 | ) | | | 388 | | | | 996 | | | | (2,389 | ) | | | (1,393 | ) |
Nontaxable securities(3) | | | (1,510 | ) | | | (90 | ) | | | (1,600 | ) | | | 96 | | | | 109 | | | | 205 | |
Other investments | | | 10 | | | | 21 | | | | 31 | | | | 1 | | | | 9 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | (1,756 | ) | | | (1,518 | ) | | | (3,274 | ) | | | 1,639 | | | | (2,667 | ) | | | (1,028 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | (5 | ) | | | (1,797 | ) | | | (1,802 | ) | | | 1,369 | | | | (3,318 | ) | | | (1,949 | ) |
Short-term borrowings | | | (22 | ) | | | 65 | | | | 43 | | | | (449 | ) | | | 198 | | | | (251 | ) |
Long-term obligations | | | 123 | | | | (146 | ) | | | (23 | ) | | | 29 | | | | (99 | ) | | | (70 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 96 | | | | (1,878 | ) | | | (1,782 | ) | | | 949 | | | | (3,219 | ) | | | (2,270 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | (1,852 | ) | | $ | 360 | | | $ | (1,492 | ) | | $ | 690 | | | $ | 552 | | | $ | 1,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | The combined rate/volume variance for each category has been allocated equally between rate and volume variances. |
| (2) | | Income on non-accrual loans is included only to the extent that it represents interest payments received. |
| (3) | | 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 $250 thousand, $794 thousand, and $724 thousand for the years ended December 31, 2011, 2010, and 2009, respectively. |
Rate Sensitivity Management
Rate sensitivity management, an important aspect of achieving satisfactory levels of net interest income, is the management of the composition and maturities of rate-sensitive assets and liabilities. The following table sets forth our interest sensitivity analysis at December 31, 2011 and describes, at various cumulative maturity intervals, the gap-ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that we consider to be rate sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Variable rate loans are considered to be highly sensitive to rate changes and are assumed to reprice within 12 months.
The difference between interest-sensitive asset and interest-sensitive liability repricing within time periods is referred to as the interest-rate-sensitivity gap. Gaps are identified as either positive (interest-sensitive assets in excess of interest-sensitive liabilities) or negative (interest-sensitive liabilities in excess of interest-sensitive assets).
As of December 31, 2011, we had a negative one-year cumulative gap of 12.5% and had interest-earning assets of $440.7 million maturing or repricing within one year and interest-bearing liabilities of $546.7 million repricing or maturing within one year. This is primarily the result of short-term interest sensitive liabilities being used to fund longer term interest-earning assets, such as loans and investment securities. A negative gap position implies that interest-bearing liabilities (deposits and other borrowings) will reprice at a faster rate than interest-earning assets (loans and investments). In a falling rate environment, a negative gap position will generally have a positive effect on earnings, while in a rising rate environment this will generally have a negative effect on earnings.
On December 31, 2011, our savings, NOW and Money Market accounts had aggregate balances totaling $325.6 million. In our rate sensitivity analysis, these deposits are considered as repricing in the earliest period (3 months or less) because the rate we pay on these interest-bearing deposits can be changed weekly. However, our historical experience has shown that changes in market interest rates have little, if any, effect on those deposits within a given time period and, for that reason, those liabilities could be considered non-rate sensitive. If those deposits were excluded from rate sensitive liabilities, our rate sensitive assets and liabilities would be more closely matched at the end of the one-year period.
35
Rate Sensitivity Analysis as of December 31, 2011
| | | | | | | | | | | | | | | | | | | | |
| | | 3 Months
Or Less | | | 4-12
Months | | | Total
Within 12
Months | | | Over 12
Months | | | Total | |
| | | (Dollars in thousands) | |
| | | | | |
Earning assets: | | | | | | | | | | | | | | | | | | | | |
Loans—gross | | $ | 310,502 | | | $ | 29,297 | | | $ | 339,799 | | | $ | 156,743 | | | $ | 496,542 | |
Loans held for sale | | | 2,866 | | | | — | | | | 2,866 | | | | — | | | | 2,866 | |
Investment securities | | | 69,976 | | | | 18,173 | | | | 88,149 | | | | 251,301 | | | | 339,450 | |
Interest bearing deposits | | | 63 | | | | — | | | | 63 | | | | — | | | | 63 | |
Federal funds sold | | | 6,305 | | | | — | | | | 6,305 | | | | — | | | | 6,305 | |
FHLB stock | | | 3,456 | | | | — | | | | 3,456 | | | | — | | | | 3,456 | |
| | | | | | | | | | | | | | | | | | | | |
Total earning assets | | | 393,168 | | | | 47,470 | | | | 440,638 | | | | 408,044 | | | | 848,682 | |
| | | | | | | | | | | | | | | | | | | | |
Percent of total earnings assets | | | 46.3 | % | | | 5.6 | % | | | 51.9 | % | | | 48.1 | % | | | 100.0 | % |
Cumulative percentage of total earning assets | | | 46.3 | | | | 51.9 | | | | 51.9 | | | | 100.0 | | | | | |
| | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
Savings, NOW and Money Market deposits | | | 325,636 | | | | — | | | | 325,636 | | | | — | | | | 325,636 | |
Time deposits of $100,000 or more | | | 24,249 | | | | 53,467 | | | | 77,716 | | | | 34,661 | | | | 112,377 | |
Other time deposits | | | 64,958 | | | | 66,671 | | | | 131,629 | | | | 92,271 | | | | 223,900 | |
Short-term borrowings | | | 11,679 | | | | — | | | | 11,679 | | | | — | | | | 11,679 | |
Long-term obligations | | | — | | | | — | | | | — | | | | 25,500 | | | | 25,500 | |
| | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | $ | 426,522 | | | $ | 120,138 | | | $ | 546,660 | | | $ | 152,432 | | | $ | 699,092 | |
| | | | | | | | | | | | | | | | | | | | |
Percent of total interest-bearing liabilities | | | 61.0 | % | | | 17.2 | % | | | 78.2 | % | | | 21.8 | % | | | 100.0 | % |
Cumulative percent of total interest-bearing
liabilities | | | 61.0 | | | | 78.2 | | | | 78.2 | | | | 100.0 | | | | | |
| | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | |
Ratio of earning assets to interest-bearing liabilities
(gap ratio) | | | 92.2 | % | | | 39.5 | % | | | 80.6 | % | | | 267.7 | % | | | 121.4 | % |
Cumulative ratio of earning assets to interest-bearing liabilities (cumulative gap ratio) | | | 92.2 | % | | | 80.6 | % | | | 80.6 | % | | | 121.4 | % | | | | |
Interest sensitivity gap | | $ | (33,354 | ) | | $ | (72,668 | ) | | $ | (106,022 | ) | | $ | 255,612 | | | $ | 149,590 | |
Cumulative interest sensitivity gap | | | (33,354 | ) | | | (106,022 | ) | | | (106,022 | ) | | | 149,590 | | | | 149,590 | |
As a percent of total earnings assets | | | (3.9 | )% | | | (12.5 | )% | | | (12.5 | )% | | | 17.6 | % | | | 17.6 | % |
As of December 31, 2011, approximately 51.9% of our interest-earning assets could be repriced within one year and approximately 68.0% of our interest-earning assets could be repriced within five years. Approximately 78.2% of interest-bearing liabilities could be repriced within one year and 100.0% could be repriced within five years.
Market Risk
Our primary market risk is interest rate risk. Interest rate risk results from differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by our interest-earning assets or the cost of our interest-bearing liabilities, thus directly impacting our overall earnings.
We actively monitor and manage interest rate risk. One way this is accomplished is through the development of and adherence to our asset/liability policy. This policy sets forth our strategy for matching the risk characteristics of interest-earning assets and interest-bearing liabilities so as to mitigate the effect of changes in the rate environment.
36
Market Risk Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Principal Maturing in Years Ended December 31, | |
| | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | | | Total | | | Fair
Value | |
| | | (Dollars in thousands) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans, gross: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 49,880 | | | $ | 41,837 | | | $ | 27,743 | | | $ | 19,850 | | | $ | 34,851 | | | $ | 32,683 | | | $ | 206,844 | | | $ | 205,245 | |
Average rate (%) | | | 5.53 | % | | | 6.12 | % | | | 6.09 | % | | | 5.99 | % | | | 5.72 | % | | | 5.35 | % | | | 5.77 | % | | | | |
Variable rate | | | 84,460 | | | | 46,805 | | | | 55,045 | | | | 37,492 | | | | 21,152 | | | | 44,744 | | | | 289,698 | | | | 289,698 | |
Average rate (%) | | | 4.93 | | | | 4.78 | | | | 4.95 | | | | 4.82 | | | | 5.13 | | | | 3.73 | | | | 4.72 | | | | | |
| | | | | | | | |
Loans held for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 2,866 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,866 | | | | 2,866 | |
Average rate (%) | | | 3.85 | | | | | | | | | | | | | | | | | | | | | | | | 3.85 | | | | | |
| | | | | | | | |
Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 250 | | | | — | | | | — | | | | 5,200 | | | | 5,102 | | | | 234,752 | | | | 245,304 | | | | 246,591 | |
Average rate (%) | | | 7.35 | | | | — | | | | — | | | | 3.27 | | | | 3.32 | | | | 3.00 | | | | 3.01 | | | | | |
Variable rate | | | — | | | | — | | | | — | | | | 2,500 | | | | 1,500 | | | | 89,381 | | | | 93,381 | | | | 92,859 | |
Average rate (%) | | | — | | | | — | | | | — | | | | 5.00 | | | | 2.85 | | | | 1.96 | | | | 2.05 | | | | 63 | |
| | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variable rate | | | 63 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63 | | | | 63 | |
Average rate (%) | | | 0.01 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.01 | | | | | |
| | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings and interest-bearing checking: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variable rate | | | 325,636 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 325,636 | | | | 325,636 | |
Average rate (%) | | | 0.70 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.70 | | | | | |
| | | | | | | | |
Certificate of deposit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 208,096 | | | | 40,351 | | | | 16,584 | | | | 43,993 | | | | 26,003 | | | | — | | | | 335,027 | | | | 342,124 | |
Average rate (%) | | | 1.21 | | | | 1.93 | | | | 2.31 | | | | 2.77 | | | | 2.24 | | | | — | | | | 1.64 | | | | | |
Variable rate | | | 1,250 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,250 | | | | 1,250 | |
Average rate (%) | | | 0.25 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 0.25 | | | | | |
| | | | | | | | |
Short-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 9,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,000 | | | | 9,000 | |
Average rate (%) | | | 2.64 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.64 | | | | | |
Variable rate | | | 2,679 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,679 | | | | 2,679 | |
Average rate (%) | | | 1.00 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1.00 | | | | | |
| | | | | | | | |
Long-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | — | | | | 9,500 | | | | 6,000 | | | | 7,500 | | | | 2,500 | | | | — | | | | 25,500 | | | | 26,296 | |
Average rate (%) | | | — | | | | 3.02 | | | | 1.49 | | | | 1.84 | | | | 2.21 | | | | — | | | | 2.23 | | | | | |
37
Non-interest Income
Non-interest 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 non-interest income for 2011, 2010 and 2009.
Non-interest Income
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Service charges on deposit accounts | | $ | 3,262 | | | $ | 3,418 | | | $ | 3,652 | |
Other service charges and fees | | | 1,225 | | | | 1,419 | | | | 1,160 | |
Mortgage origination fees | | | 1,300 | | | | 1,283 | | | | 950 | |
Net gain (loss) on sale of securities | | | 2,631 | | | | 5,508 | | | | 2,565 | |
Income from bank owned life insurance | | | 324 | | | | 297 | | | | 310 | |
Other operating income | | | 58 | | | | 70 | | | | 12 | |
| | | | | | | | | | | | |
Total non-interest income | | $ | 8,800 | | | $ | 11,995 | | | $ | 8,649 | |
| | | | | | | | | | | | |
Non-interest income decreased $3.2 million or 26.7% to $8.8 million in 2011 compared to $12.0 million for 2010. The decrease in non-interest income for the year ending December 31, 2011 is primarily the result of a decrease of $2.9 million in gains on the sale of securities compared to 2010. Service charges on deposit accounts decreased $156 thousand or 4.6% as we saw a decline in our overdraft protection fees. Other service charges and fees decreased $194 thousand or 13.7% in 2011 compared to the prior year mainly due to a decrease in gain on mortgage commitments. Mortgage origination fees increased $17 thousand or 1.3% over 2010. Other operating income decreased $12 thousand in 2011 compared to the prior year due to an impairment charge on investments.
Non-interest income increased $3.3 million or 38.7% to $12.0 million in 2010 compared to $8.6 million for 2009. The increase in non-interest income for the year ending December 31, 2010 is primarily the result of an increase of $2.9 million in gains on the sale of securities compared to 2009. Service charges on deposit accounts decreased $234 thousand or 6.4% as we saw a decline in our overdraft protection fees. Other service charges and fees increased $259 thousand or 22.3% in 2010 compared to the prior year mainly due to increased investment brokerage fees of $295 thousand. Mortgage origination fees increased $333 thousand or 35.1% over 2009.
38
Non-interest Expense
Non-interest expense increased $3.1 million or 11.6% to $29.9 million in 2011 compared to $26.8 million in 2010. Non-interest expense increased $3.7 million or 15.9% in 2010 compared to $23.2 million in 2009. The following table presents the components of non-interest expense for 2011, 2010 and 2009.
Non-interest Expense
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Salaries | | $ | 10,869 | | | $ | 9,832 | | | $ | 8,287 | |
Retirement and other employee benefits | | | 2,814 | | | | 2,924 | | | | 2,488 | |
Occupancy | | | 2,041 | | | | 1,876 | | | | 1,832 | |
Equipment | | | 2,173 | | | | 2,160 | | | | 1,763 | |
Professional fees | | | 1,386 | | | | 936 | | | | 832 | |
Supplies | | | 238 | | | | 221 | | | | 216 | |
Communications/Data lines | | | 710 | | | | 663 | | | | 642 | |
FDIC Insurance | | | 941 | | | | 1,445 | | | | 1,689 | |
Other outside services | | | 602 | | | | 528 | | | | 470 | |
Net cost of real estate and repossessions acquired in settlement of loans | | | 1,438 | | | | 1,104 | | | | 1,345 | |
Data processing and related expenses | | | 1,062 | | | | 295 | | | | 304 | |
Securities Purchase Agreement termination fees | | | 1,686 | | | | — | | | | — | |
Contract early termination fees | | | — | | | | 1,141 | | | | — | |
Other | | | 3,896 | | | | 3,715 | | | | 3,284 | |
| | | | | | | | | | | | |
Total | | $ | 29,856 | | | $ | 26,840 | | | $ | 23,152 | |
| | | | | | | | | | | | |
Salary expense increased $1.0 million or 10.5% in 2011 compared to 2010. During 2011, we continued to expand the Bank’s infrastructure to support asset growth as outlined in our five-year strategic plan and implemented several initiatives to improve our customer service delivery. A portion of the increase in salary expense can be attributed to the successful implementation of a fully staffed and functioning Customer Care Center that manages various communication channels and contact points for the customer. This allows customers to utilize phone, email, website and online banking to receive immediate responses to questions they have regarding their Bank accounts or other services offered by the Bank. The Customer Care Center is part of the Bank’s continued development of its Customer Experience strategy designed to focus on improving the experience customers have, whether it be interacting with a branch or the many “banking channels” offered to maintain their banking relationship with ECB. We also made staff additions to our Agriculture Lending business unit during 2011 as we continue to expand our presence and expertise to capture attractive lending opportunities within our eastern North Carolina footprint. Expansion of our Bank support infrastructure came in several forms during 2011, the Bank added additional staff in the areas of Information Technology, Risk Management, Asset Review, Human Resources, Training, Marketing and Special Assets. The Bank’s salary expense also increased during 2011 as the result of a full year of salary expense incurred at our newest office in Porter’s Neck opened in December of 2010.
Employee benefit expense decreased $110 thousand or 3.8% in 2011 over the prior year principally due to the reduction in the Bank’s supplemental executive retirement plan benefit expense. As of December 31, 2011, we had 251 full time equivalent employees compared to 239 full time equivalent employees at December 21, 2010. We operated 25 full service banking offices and a mortgage loan origination office in both 2011 and 2010.
Occupancy expense increased $165 thousand or 8.8% in 2011 mainly due to building repairs and maintenance expense increasing $94 thousand. Equipment expense remained relatively flat only increasing $13 thousand or less than 1%.
Professional fees, which include audit, legal and consulting fees, increased $450 thousand or 48.1% to $1.4 million for 2011 compared to $936 thousand in 2010. Legal fees increased $282 thousand year over year as loan collection legal fees increased $67 thousand and other legal fees increased $215 thousand which was partially related to legal expense associated with our previously announced proposed private placement offering and efforts to acquire several branches from another financial institution. Consulting fees increased $129 thousand in 2011 as compared to 2010, partially due to
39
fees associated with the above mentioned branch acquisition efforts. Accounting and audit fees increased $39 thousand in 2011 as compared to 2010, primarily due to expanded quarterly review of our Allowance for Loan Loss (ALLL) model by our external auditors.
FDIC insurance decreased $504 thousand in 2011 compared to 2010. The decrease was mainly due to a change made by the FDIC in its assessment calculations.
Other outside services increased $74 thousand in 2011 compared to 2010. During 2011, we updated our branch operations manual at a cost of approximately $38 thousand. We also incurred expense of $31 thousand for professional services relating to our previously announced proposed private placement offering potential equity raise, and we incurred $29 thousand of expense for marketing research associated with our proposed branch acquisition efforts.
Net cost of real estate and repossessions acquired in settlement of loans expense increased $334 thousand or 30.3% in 2011 compared to 2010.
Data processing services expense, which primarily consist of check and deposit item processing, nightly update of loan, deposit and general ledger balances, ATM/ EFT network management and On-line Banking, for the period ended December 31, 2011 was $1.1 million compared to $0.3 million for the period ended December 31, 2010. In May of 2011, the Bank outsourced all of its core bank data processing under agreement with InfoTech Alliance Bank Services (“ITA”) using the FIS integrated HORIZON banking system. Prior to the core system conversion in May, the Bank only outsourced its item processing through ITA while maintaining an in-house core processing system, ATM/EFT network and On-line Banking package. During 2010, expense related to our On-line Banking totaled approximately $311 thousand and was included in Other Outside Services. Our 2010 expense for our ATM/EFT network management totaled approximately $228 thousand and was included in Other Operating Expense. The year-over-year data processing expense increase also includes a one-time charge of $175 thousand paid to ITA for pre-conversion services related to our terminated 2011 branch acquisition effort. In addition, the Bank implemented a number of ancillary systems including an advanced data reporting interface, customer relationship management system, fraud monitoring system, teller system, and real-time online banking among others. These additional systems also added to the increase in data processing services expense in 2011 when compared to 2010.
On February 8, 2012, we and six institutional investors mutually agreed to terminate a previously reported Securities Purchase Agreement under which the Company would issue $79.7 million in Company common stock in a private placement offering. Pursuant to the terms of the agreement, we had also agreed to reimburse the lead investors for certain out-of-pocket expenses such as legal fees, asset review fees and travel expense incurred during their due diligence process during 2011 of approximately $300 thousand dollars. In addition, pursuant to our engagement letter dated July 19, 2010 with our investment banking group, we agreed to reimburse out-of-pocket expenses such as legal fees, asset review fees and travel expense incurred on behalf of ECB Bancorp in connection with the private placement that totaled approximately $425 thousand dollars. These reimbursable expenses are included in other liabilities on the balance sheet at December 31, 2011. The Bank incurred additional expense of approximately $965 thousand dollars related to the equity raise during 2011. As a result of the agreement termination, we recorded a Securities Purchase Agreement termination expense of $1.7 million at December 31, 2011.
Salary expense increased $1.5 million or 18.6% in 2010 compared to 2009. The increase was primarily the result of additions made to senior management and other management positions during 2010 and general cost of living and merit increases. Employee benefits increased $436 thousand or 17.5% in 2010 over the prior year principally due to the additional positions mentioned above and an increase in supplemental employee retirement plan expense. As of December 31, 2010, we had 239 full time equivalent employees and operated 25 full service banking offices and a mortgage loan origination office. At December 31, 2009 we had 219 full time equivalent employees and operated 24 full service banking offices, a loan production office and a mortgage loan origination office.
Equipment expense increased $397 thousand or 22.5% in 2010 mainly due to maintenance expense increasing $239 thousand and furniture and equipment rental expense increasing $68 thousand.
Professional fees, which include audit, legal and consulting fees, increased $104 thousand or 12.5% to $936 thousand for 2010 compared to $832 thousand in 2009. Legal fees increased $138 thousand year over year but were offset by consulting fees decreasing $1 thousand and audit fees decreasing $32 thousand during 2010 as compared to 2009.
40
FDIC insurance decreased $244 thousand in 2010 compared to 2009. The decrease is related to the special assessment that was levied on all banks by the FDIC in 2009.
Net cost of real estate and repossessions acquired in settlement of loans expense decreased $241 thousand to $1.1 million in 2010 compared to $1.3 million in 2009.
During 2010 we accrued an expense for contract early termination fees in the amount of $1.1 million. The Bank announced on August 12, 2010, that it had signed an agreement with InfoTech Alliance Bank Services to implement the FIS integrated HORIZON banking system. As a result of this decision, it was determined that several existing multiyear support and maintenance agreements with current vendors would be terminated early resulting in the accrual of the expenses in 2010.
Other operating expense increased $431 thousand in 2010 compared to 2009. The increase is related to increased director fees of $138 thousand due to an accrual of retirement benefits and an increase in franchise taxes of $122 thousand in 2010 as compared to 2009.
Income Taxes
For the year ended December 31, 2011, we recorded an income tax benefit of $1.5 million, compared to a benefit of $766 thousand and $357 thousand for the years ended December 31, 2010 and 2009, respectively. Our effective tax rate for the years ended December 31, 2011, 2010 and 2009 was 60.1%, (814.9%) and (31.2%), respectively. The effective tax rate in 2011, 2010 and 2009 differs from the federal statutory rate of 34.0% primarily due to tax-exempt interest income we earned on tax-exempt securities in our investment portfolio. For more information see disclosure on income taxes in note 6.
The valuation allowance for deferred tax assets was $7 thousand for December 31, 2011 and $43 thousand for December 31, 2010 and December 31, 2009. The valuation allowance was primarily for certain capital losses related to equity securities and perpetual preferred stock issued by FNMA and FHLMC in 2004. These losses are capital in character and we may not have current capital gain capacity to offset these losses.
Financial Condition at December 31, 2011, 2010 and 2009
Our total assets were $921.3 million at December 31, 2011, $919.9 million at December 31, 2010 and $888.7 million at December 31, 2009. Asset growth during 2011 was funded primarily by an increase in non-interest-bearing demand accounts of $30.8 million. For the year ended December 31, 2011 our loans declined $71.1 million which can be attributed to continued weak economic conditions. For the year ended December 31, 2010, our loans declined $10.2 million, which was also, due primarily to weak economic conditions. For the years ended December 31, 2011 and 2010, we grew our deposits $11.7 million and $31.2 million, respectively. The deposit growth was mainly through non-interest-bearing demand deposits in 2011 and mainly through interest-bearing demand deposits in 2010, the proceeds of which were invested in interest-earning assets.
We believe our financial condition is sound. The following discussion focuses on the factors considered by us to be important in assessing our financial condition.
41
The following table sets forth the relative composition of our balance sheets at December 31, 2011, 2010 and 2009.
Distribution of Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
| | | Amount | | | % | | | Amount | | | % | | | Amount | | | % | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Loan, gross | | $ | 496,542 | | | | 53.9 | % | | $ | 567,631 | | | | 61.7 | % | | $ | 577,791 | | | | 65.0 | % |
Loans held for sale | | | 2,866 | | | | 0.3 | | | | 4,136 | | | | 0.4 | | | | — | | | | 0.0 | |
Investment securities | | | 339,450 | | | | 36.8 | | | | 273,229 | | | | 29.7 | | | | 239,332 | | | | 26.9 | |
Interest-bearing deposits | | | 63 | | | | 0.0 | | | | 20 | | | | 0.0 | | | | 870 | | | | 0.1 | |
FHLB stock | | | 3,456 | | | | 0.4 | | | | 4,571 | | | | 0.5 | | | | 5,116 | | | | 0.6 | |
Federal funds sold | | | 6,305 | | | | 0.7 | | | | 8,415 | | | | 0.9 | | | | 7,865 | | | | 0.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total earning assets | | | 848,682 | | | | 92.1 | | | | 858,002 | | | | 93.2 | | | | 830,974 | | | | 93.5 | |
Allowance for loan losses | | | (12,092 | ) | | | (1.3 | ) | | | (13,247 | ) | | | (1.4 | ) | | | (9,725 | ) | | | (1.1 | ) |
Non-interest-bearing deposits and cash | | | 18,363 | | | | 2.0 | | | | 11,731 | | | | 1.3 | | | | 9,076 | | | | 1.0 | |
Bank premises and equipment, net | | | 26,289 | | | | 2.9 | | | | 26,636 | | | | 2.9 | | | | 25,329 | | | | 2.9 | |
Other assets | | | 40,035 | | | | 4.3 | | | | 36,747 | | | | 4.0 | | | | 33,066 | | | | 3.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 921,277 | | | | 100.0 | % | | $ | 919,869 | | | | 100.0 | % | | $ | 888,720 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 135,732 | | | | 14.7 | % | | $ | 104,932 | | | | 11.4 | % | | $ | 93,492 | | | | 10.5 | % |
Savings, NOW and Money Market deposits | | | 325,636 | | | | 35.3 | | | | 292,915 | | | | 31.8 | | | | 161,551 | | | | 18.2 | |
Time deposits of $100,000 or more | | | 112,377 | | | | 12.2 | | | | 92,889 | | | | 10.1 | | | | 198,388 | | | | 22.3 | |
Other time deposits | | | 223,900 | | | | 24.3 | | | | 295,205 | | | | 32.1 | | | | 301,299 | | | | 33.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total deposits | | | 797,645 | | | | 86.5 | | | | 785,941 | | | | 85.4 | | | | 754,730 | | | | 84.9 | |
Short-term borrowings | | | 11,679 | | | | 1.3 | | | | 11,509 | | | | 1.3 | | | | 22,910 | | | | 2.6 | |
Long-term obligations | | | 25,500 | | | | 2.8 | | | | 34,500 | | | | 3.7 | | | | 21,000 | | | | 2.4 | |
Accrued interest and other liabilities | | | 6,010 | | | | 0.7 | | | | 7,025 | | | | 0.8 | | | | 5,705 | | | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 840,834 | | | | 91.3 | | | | 838,975 | | | | 91.2 | | | | 804,345 | | | | 90.5 | |
Shareholders’ equity | | | 80,443 | | | | 8.7 | | | | 80,894 | | | | 8.8 | | | | 84,375 | | | | 9.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and share-holders’ equity | | $ | 921,277 | | | | 100.0 | % | | $ | 919,869 | | | | 100.0 | % | | $ | 888,720 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loans
As of December 31, 2011, total loans decreased to $496.5 million, down 12.5% from total loans of $567.6 million at December 31, 2010. Construction and land development loans decreased from $90.1 million in 2010 to $67.1 million in 2011. The decrease in construction and development loans was a result of the continuing decline of the housing market. Commercial and residential real estate loans decreased from $364.6 million in 2010 to $343.3 million in 2011.
As of December 31, 2010, total loans decreased to $567.6 million, down 1.8% from total loans of $577.8 million at December 31, 2009. Construction and land development loans decreased from $125.9 million in 2009 to $90.1 million in 2010. The decrease in construction and development loans was a function of the decline of economic conditions. Commercial and residential real estate loans increased from $335.0 million in 2009 to $364.6 million in 2010. The growth in residential and commercial real estate loans was due to a continued focus on growth by the bank in owner-occupied small business lending during the year.
At December 31, 2011, our loan portfolio contained no foreign loans, and we believe the portfolio is adequately diversified. Real estate loans represented approximately 82.7% of our loan portfolio at December 31, 2011. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). Real estate loans are primarily loans
42
secured by real estate, including mortgage and construction loans. Residential mortgage loans accounted for approximately $110.4 million or 26.9% of our real estate loans at December 31, 2011. Commercial loans are spread throughout a variety of industries, with no particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. At December 31, 2011, our ten largest loans accounted for approximately 7.57% of our loans outstanding. As of December 31, 2011, we had outstanding loan commitments of approximately $93.8 million. The amounts of loans outstanding at the indicated dates are shown in the following table according to loan type.
Loan Portfolio Composition
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Real estate—construction and land development | | $ | 67,127 | | | $ | 90,145 | | | $ | 125,856 | | | $ | 132,525 | | | $ | 104,339 | |
Real estate—commercial, residential and other(1) | | | 343,327 | | | | 364,648 | | | | 335,004 | | | | 298,959 | | | | 234,812 | |
Installment loans | | | 6,620 | | | | 4,209 | | | | 4,351 | | | | 5,115 | | | | 5,808 | |
Credit card and related plans | | | 1,661 | | | | 2,261 | | | | 2,451 | | | | 2,214 | | | | 2,002 | |
Commercial and all other loans | | | 77,807 | | | | 106,368 | | | | 110,129 | | | | 100,023 | | | | 107,237 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 496,542 | | | $ | 567,631 | | | $ | 577,791 | | | $ | 538,836 | | | $ | 454,198 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | | The majority of the commercial real estate is owner-occupied and operated. |
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table sets forth the maturity distribution of our loans as of December 31, 2011. A significant majority of our loans maturing after one year reprice at two and three year intervals. In addition, approximately 58.3% of our loan portfolio is comprised of variable rate loans.
Loan Maturities at December 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 1 year or
less | | | Due after 1 year
through 5 years | | | Due after 5 years | | | Total | |
| | | Floating | | | Fixed | | | Floating | | | Fixed | | |
| | | (Dollars in thousands) | |
Real estate—construction and land development | | $ | 36,203 | | | $ | 16,102 | | | $ | 12,246 | | | $ | 1,589 | | | $ | 987 | | | $ | 67,127 | |
Real estate—commercial, residential and other | | | 57,325 | | | | 128,825 | | | | 97,701 | | | | 40,248 | | | | 19,228 | | | | 343,327 | |
Installment loans | | | 1,528 | | | | 374 | | | | 4,189 | | | | 30 | | | | 499 | | | | 6,620 | |
Credit card and related plans | | | 716 | | | | 224 | | | | 22 | | | | 25 | | | | 674 | | | | 1,661 | |
Commercial and all other loans | | | 38,568 | | | | 14,970 | | | | 10,122 | | | | 2,852 | | | | 11,295 | | | | 77,807 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 134,340 | | | $ | 160,495 | | | $ | 124,280 | | | $ | 44,744 | | | $ | 32,683 | | | $ | 496,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses
We consider the allowance for loan losses (AFLL) adequate to cover estimated probable loan losses relating to the loans outstanding as of each reporting period. However, the procedures and methods used in the determination of the allowance necessarily rely upon various judgments and assumptions about economic conditions and other factors affecting our loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Those agencies may require us to recognize adjustments to the allowance for loan losses based on their judgments about the information available to them at the time of their examinations. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.
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The following table summarizes the balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category and additions to the allowance that have been charged to expense.
Analysis of the Allowance for Loan Losses
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Total loans outstanding at end of year—gross | | $ | 496,542 | | | $ | 567,631 | | | $ | 577,791 | | | $ | 538,836 | | | $ | 454,198 | |
| | | | | | | | | | | | | | | | | | | | |
Average loans outstanding—gross | | $ | 537,524 | | | $ | 575,374 | | | $ | 562,095 | | | $ | 504,426 | | | $ | 431,579 | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses at beginning of year | | $ | 13,247 | | | $ | 9,725 | | | $ | 5,931 | | | $ | 4,083 | | | $ | 4,725 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Loans charged off: | | | | | | | | | | | | | | | | | | | | |
Real estate | | | 9,022 | | | | 8,211 | | | | 7,032 | | | | 381 | | | | 433 | |
Installment loans | | | 20 | | | | 21 | | | | 18 | | | | 64 | | | | 43 | |
Credit cards and related plans | | | 294 | | | | 44 | | | | 19 | | | | — | | | | — | |
Commercial and all other loans | | | 622 | | | | 1,469 | | | | 497 | | | | 253 | | | | 161 | |
| | | | | | | | | | | | | | | | | | | | |
Total charge-offs | | | 9,958 | | | | 9,745 | | | | 7,566 | | | | 698 | | | | 637 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
Real estate | | | 65 | | | | 130 | | | | 72 | | | | 1 | | | | — | |
Installment loans | | | 5 | | | | 7 | | | | 3 | | | | 4 | | | | 18 | |
Credit cards and related plans | | | 3 | | | | 1 | | | | 4 | | | | 9 | | | | — | |
Commercial and all other loans | | | 247 | | | | 149 | | | | 181 | | | | 82 | | | | 76 | |
| | | | | | | | | | | | | | | | | | | | |
Total recoveries | | | 320 | | | | 287 | | | | 260 | | | | 96 | | | | 94 | |
| | | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | 9,638 | | | | 9,458 | | | | 7,306 | | | | 602 | | | | 543 | |
Provision for loan losses | | | 8,483 | | | | 12,980 | | | | 11,100 | | | | 2,450 | | | | (99 | ) |
| | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses at end of year | | $ | 12,092 | | | $ | 13,247 | | | $ | 9,725 | | | $ | 5,931 | | | $ | 4,083 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Ratios: | | | | | | | | | | | | | | | | | | | | |
Net charge-offs during year to average loans outstanding | | | 1.79 | % | | | 1.64 | % | | | 1.30 | % | | | 0.12 | % | | | 0.13 | % |
Allowance for loan losses to loans at year end | | | 2.44 | | | | 2.33 | | | | 1.68 | | | | 1.10 | | | | 0.90 | |
Allowance for loan losses to nonperforming loans | | | 47 | | | | 60 | | | | 66 | | | | 59 | | | | 877 | |
At December 31, 2011, our AFLLas a percentage of loans was 2.44%, up from 2.33% at December 31, 2010. The increase was mainly due to increases in the portion of the allowance determined through general qualitative and quantitative internal and external factors. Also, the increase reflects the recognition of additional loans identified as being impaired. For additional discussion on the AFLL refer to Note 4 of our consolidated financial statements.
In evaluating the AFLL, the Company prepares an analysis of its 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.
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
44
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. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not 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 AFLL 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 portion determined through general qualitative and quantitative internal and external factors, the general portion 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. While the Company believes that our management uses the best information available to determine the AFLL, unforeseen market conditions could result in adjustments to the AFLL, 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.
Unsecured loans are charged-off in full against the Company’s AFLL 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.
Net charge-offs totalled $9.6 million for 2011 representing an increase of $180 thousand and $2.3 million when compared to 2010 and 2009, respectively. Net charge-offs from real estate secured loans were $9.0 million, $8.1 million and $7.0 million for 2011, 2010 and 2009, respectively. Asset quality remains a top priority of the Bank. For the year ending December 31, 2011, net loan charge-offs were 1.79% of average loans compared to 1.64% for the year ending December 31, 2010. The increase in the AFLL to loans to 2.44% at December 31, 2011 from 2.33% at December 31, 2010 was mainly due to increases in the portion of the allowance determined through general qualitative and quantitative internal and external factors.
Construction, land and development (“CLD”) loans make up 13.5% of the Bank’s loan portfolio. The local construction industry has been particularly impacted by declines in housing activity, and has had a disproportionate impact on the credit quality of the Company. The table below shows trends of CLD loans, along with ratios relating to their relative credit quality.
| | | | | | | | | | | | | | | | | | | | |
| | | CLD Loans | | | All Other Loans | | | Total
Loans | |
| | | Balance | | | % of Total | | | Balance | | | % of Total | | |
| | | Dollars in thousands | |
Balances at December 31, 2011 | | $ | 67,127 | | | | 13.5 | % | | $ | 429,415 | | | | 86.5 | % | | $ | 496,542 | |
Impaired loans | | | 10,074 | | | | 32.2 | % | | | 21,215 | | | | 67.8 | % | | | 31,289 | |
Allocated Reserves | | | 3,655 | | | | 42.6 | % | | | 4,933 | | | | 57.4 | % | | | 8,588 | |
YTD Net Charge-offs | | | 5,140 | | | | 53.3 | % | | | 4,498 | | | | 46.7 | % | | | 9,638 | |
Nonperforming loans (NPL) | | | 8,757 | | | | 34.2 | % | | | 16,813 | | | | 65.8 | % | | | 25,570 | |
NPL as % of loans | | | 13.0 | % | | | | | | | 3.9 | % | | | | | | | 5.1 | % |
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While balances of CLD loans make up 13.5% of the Bank’s loan portfolio, they represent 32.2% and 53.3% of the Bank’s impaired loans and YTD net charge-offs, respectively. CLD loans represent 34.2% of the Bank’s nonperforming loans and 42.6% of the Bank’s allocated allowance for loan loss is reserved for CLD loans.
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of allowance for loan losses and percent of our total loans represented by the loans in each loan category for each of the years presented.
Allocation of the Allowance for Loan Losses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | (Dollars in thousands) | |
Real estate | | $ | 7,828 | | | | 82.7 | % | | $ | 10,653 | | | | 80.1 | % | | $ | 7,572 | | | | 79.8 | % | | $ | 4,762 | | | | 80.1 | % | | $ | 2,642 | | | | 74.7 | % |
Installment loans | | | 46 | | | | 1.3 | | | | 12 | | | | 0.7 | | | | 23 | | | | 0.8 | | | | 25 | | | | 0.9 | | | | 73 | | | | 1.3 | |
Credit cards and related plans | | | 18 | | | | 0.3 | | | | 21 | | | | 0.4 | | | | 13 | | | | 0.4 | | | | 16 | | | | 0.4 | | | | 38 | | | | 0.4 | |
Commercial and all other loans | | | 696 | | | | 15.7 | | | | 1,039 | | | | 18.8 | | | | 708 | | | | 19.0 | | | | 507 | | | | 18.6 | | | | 773 | | | | 23.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total allocated | | | 8,588 | | | | 100.0 | % | | | 11,725 | | | | 100.0 | % | | | 8,316 | | | | 100.0 | % | | | 5,310 | | | | 100.0 | % | | | 3,526 | | | | 100.0 | % |
Unallocated1 | | | 3,504 | | | | | | | | 1,522 | | | | | | | | 1,409 | | | | | | | | 621 | | | | | | | | 557 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 12,092 | | | | | | | $ | 13,247 | | | | | | | $ | 9,725 | | | | | | | $ | 5,931 | | | | | | | $ | 4,083 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1. | | Beginning in 2009 unallocated reserve was reflected in our homogenous pool estimates based on general qualitative and quantitative internal and external factors. |
Loans Considered Impaired
We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At December 31, 2011, we had loans totaling $31.3 million (which includes $24.7 million in nonperforming loans) which were considered to be impaired compared to $26.3 million at December 31, 2010. 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 may 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.
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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 December 31, 2011. Twenty-four non-accrual loans with a total balance of $745 thousand and three restructured loans with a balance of $114 thousand were not removed from their homogeneous group and individually analyzed for impairment because their individual loan balances were less than $100 thousand.
| | | | | | | | | | | | |
| | | Number
of Loans | | | Loan
Balances
Outstanding | | | Allocated
Reserves | |
| | | (Dollars in millions) | |
Non-accrual loans | | | 39 | | | $ | 15.2 | | | $ | 0.3 | |
Restructured loans(1) | | | 17 | | | | 9.5 | | | | 1.5 | |
| | | | | | | | | | | | |
Total nonperforming loans | | | 56 | | | $ | 24.7 | | | $ | 1.8 | |
| | | | | | | | | | | | |
Other impaired loans with allocated reserves | | | 11 | | | | 4.9 | | | | 0.7 | |
Impaired loans without allocated reserves | | | 6 | | | | 1.7 | | | | — | |
| | | | | | | | | | | | |
Total impaired loans | | | 73 | | | $ | 31.3 | | | $ | 2.5 | |
| | | | | | | | | | | | |
| (1) | | Restructured loans include loans restructured and still accruing. |
Nonperforming Assets and Past Due Loans
The following table summarizes our nonperforming assets and past due loans at the dates indicated.
Nonperforming Assets and Past Due Loans
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Non-accrual loans | | $ | 15,973 | | | $ | 15,896 | | | $ | 13,343 | | | $ | 9,957 | | | $ | 393 | |
Loans past due 90 days or more days still accruing | | | — | | | | — | | | | — | | | | — | | | | — | |
Restructured loans | | | 9,596 | | | | 6,193 | | | | 1,353 | | | | 24 | | | | 73 | |
Other real estate owned & repossessions | | | 6,573 | | | | 4,536 | | | | 5,443 | | | | 3,724 | | | | 66 | |
Other nonperforming assets(1) | | | 1,427 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 33,569 | | | $ | 26,625 | | | $ | 20,139 | | | $ | 13,705 | | | $ | 532 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | | The other nonperforming asset of $1.4 million represents the movement of a foreclosed participation loan into a separate LLC for liability purposes. It is a single purpose LLC set up specifically by the lending group to handle the disposition of the property. Proper approvals for this arrangement had to be obtained in advance from the NC Commissioner of Banks. |
A loan is placed on non-accrual status when, in our judgment, the collection of interest income appears doubtful or the loan is past due 90 days or more. Interest receivable that has been accrued and is subsequently determined to have doubtful collectability is charged to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original terms.
At December 31, 2011 and 2010, nonperforming assets were approximately 3.64% and 2.89%, respectively, of total assets outstanding at such dates. The general downturn in the overall economy has contributed to the overall increase in nonperforming assets reflected at year end. The impact of our impaired loans at December 31, 2011 on our interest income was approximately $0.9 million, as we would have accrued $1.6 million in interest income versus the $0.7 million recognized.
Any loans that are classified for regulatory purposes as loss, doubtful, substandard or special mention, and that are not included as nonperforming loans, do not (i) represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results; or (ii) represent material credits about which management has any information which causes management to have serious doubts as to the ability of such borrower to comply with the loan repayment terms.
47
Off-Balance Sheet Arrangements and Contractual Obligations
We have various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. We also have contractual cash obligations and commitments, including certificates of deposit, other borrowings, operating leases and loan commitments. The following tables set forth our commercial commitments and contractual payment obligations as of December 31, 2011.
| | | 000000 | | | | 000000 | | | | 000000 | | | | 000000 | | | | 000000 | |
| | | Amount of Commitment Expiration per Period | |
Commercial Commitments | | Total | | | Less than
1 year | | | 1-3
years | | | 4-5
years | | | More than
5 years | |
| | | (Dollars in thousands) | |
Loan commitments and lines of credit | | $ | 92,336 | | | $ | 53,990 | | | $ | 8,148 | | | $ | 5,552 | | | $ | 24,646 | |
Standby letters of credit | | | 1,534 | | | | 1,500 | | | | 34 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total commercial commitments | | $ | 93,870 | | | $ | 55,490 | | | $ | 8,182 | | | $ | 5,552 | | | $ | 24,646 | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | | Amount of Payments Due per Period | |
Contractual Obligations | | Total | | | Less than
1 year | | | 1-3
years | | | 4-5
years | | | More than
5 years | |
| | | (Dollars in thousands) | |
Short-term borrowings | | $ | 11,679 | | | $ | 11,679 | | | $ | — | | | $ | — | | | $ | — | |
Long-term borrowings | | | 25,500 | | | | — | | | | 15,500 | | | | 10,000 | | | | — | |
Operating leases | | | 1,916 | | | | 531 | | | | 864 | | | | 402 | | | | 119 | |
Deposits | | | 797,645 | | | | 670,714 | | | | 56,935 | | | | 69,996 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 836,740 | | | $ | 682,924 | | | $ | 73,299 | | | $ | 80,398 | | | $ | 119 | |
| | | | | | | | | | | | | | | | | | | | |
Investment Portfolio
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 $339.5 million at December 31, 2011, $273.2 million at December 31, 2010, and $239.3 million at December 31, 2009. The investment portfolio increased $66.3 million or 24.2% from December 31, 2010 to December 31, 2011. The investment portfolio increased $33.9 million or 14.1% from December 31, 2009 when compared to December 31, 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.
48
The carrying values of investment securities held by us at the dates indicated are summarized as follows:
Investment Portfolio Composition
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2011 | | | Percentage | | | 2010 | | | Percentage | | | 2009 | | | Percentage | |
| | | (Dollars in thousands) | |
| | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Government-sponsored enterprises and FFCB bonds | | $ | 1,032 | | | | 0.3 | % | | $ | 24,781 | | | | 9.1 | % | | $ | 35,843 | | | | 15.0 | % |
Collaterized mortgage obligations | | | 4,333 | | | | 1.3 | | | | 21,683 | | | | 7.9 | | | | 25,285 | | | | 10.6 | |
Corporate bonds | | | 30,771 | | | | 9.1 | | | | 28,527 | | | | 10.4 | | | | 5,860 | | | | 2.5 | |
Mortgage-backed securities | | | 127,959 | | | | 37.7 | | | | 128,407 | | | | 47.0 | | | | 92,851 | | | | 38.8 | |
SBA-backed securities | | | 146,637 | | | | 43.2 | | | | 56,853 | | | | 20.8 | | | | 32,665 | | | | 13.6 | |
Municipal securities | | | 28,718 | | | | 8.4 | | | | 12,978 | | | | 4.8 | | | | 46,022 | | | | 19.2 | |
Equity securities | | | — | | | | — | | | | — | | | | — | | | | 806 | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 339,450 | | | | 100.0 | % | | $ | 273,229 | | | | 100.0 | % | | $ | 239,332 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
The following table shows maturities of the carrying values and the weighted-average yields of investment securities held by us at December 31, 2011.
Investment Portfolio Maturity Schedule
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3 months
or less | | | Over
3 months
through
1 year | | | Over
1 year
through
5 years | | | Over
5 years
through
10 years | | | Over
10 years | | | Total/
Yield | |
| | | Amount/
Yield | | | Amount/
Yield | | | Amount/
Yield | | | Amount/
Yield | | | Amount/
Yield | | |
| | | (Dollars in thousands) | |
| | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Government-sponsored enterprises and FFCB bonds | | $ | — | | | $ | — | | | $ | 28 | | | $ | 1,004 | | | $ | — | | | $ | 1,032 | |
| | | — | % | | | — | % | | | 3.25 | % | | | 2.00 | % | | | — | % | | | 2.00 | % |
Collaterized mortgage obligations(1) | | | 134 | | | | 161 | | | | 4,038 | | | | — | | | | — | | | | 4,333 | |
| | | 0.91 | | | | 4.15 | | | | 1.84 | | | | — | | | | — | | | | 1.89 | |
Corporate bonds | | | — | | | | — | | | | 13,081 | | | | 17,690 | | | | — | | | | 30,771 | |
| | | — | | | | — | | | | 3.40 | | | | 4.34 | | | | — | | | | 3.96 | |
Mortgage-backed securities(1) | | | — | | | | — | | | | 82,426 | | | | 40,438 | | | | 5,095 | | | | 127,959 | |
| | | — | | | | — | | | | 2.06 | | | | 2.16 | | | | 3.39 | | | | 2.14 | |
SBA-backed | | | — | | | | — | | | | — | | | | 3,007 | | | | 143,630 | | | | 146,637 | |
| | | — | | | | — | | | | — | | | | 1.77 | | | | 2.74 | | | | 2.72 | |
Municipal securities(2) | | | 100 | | | | 151 | | | | 1,034 | | | | 12,083 | | | | 15,350 | | | | 28,718 | |
| | | 7.76 | | | | 7.08 | | | | 5.52 | | | | 4.06 | | | | 4.56 | | | | 4.41 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 234 | | | $ | 312 | | | $ | 100,607 | | | $ | 74,222 | | | $ | 164,075 | | | $ | 339,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3.84 | % | | | 5.58 | % | | | 2.26 | % | | | 3.00 | % | | | 2.92 | % | | | 2.75 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | Mortgage-backed securities (MBS) and collaterized mortgage obligations (CMO) maturities are based on the average life at the projected prepayment assumptions. All other bond maturities are based on maturity date. |
| (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 weighted average yields shown are calculated on the basis of cost and effective yields for the scheduled maturity of each security. At December 31, 2011, the market value of the investment portfolio was approximately $765 thousand above its book value, which is primarily the result of lower market interest rates compared to the interest rates on the investments in the portfolio.
49
We currently have the ability to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All but two securities held are traded in liquid markets. As of December 31, 2011, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our common shareholders’ equity. As of December 31, 2011 the amortized cost and market value of the securities from each issuer were as follows:
| | | | | | | | |
| | | Amortized Cost | | | Market Value | |
| | | (Dollars in thousands) | |
Federal National Mortgage Corporation | | $ | 78,554 | | | $ | 79,386 | |
Federal Home Loan Mortgage Corporation | | | 35,460 | | | | 35,699 | |
Goldman Sachs Group | | | 7,368 | | | | 6,984 | |
Government National Mortgage Association | | | 16,935 | | | | 17,206 | |
Morgan Stanley | | | 7,456 | | | | 6,710 | |
Small Business Administration | | | 146,195 | | | | 146,637 | |
At December 31, 2011, we held $11.8 million in bank owned life insurance, compared to $9.0 million at December 31, 2010.
Deposits
Deposits increased to $797.6 million at December 31, 2011, an increase of 1.5% compared to deposits of $785.9 million at December 31, 2010. Non-interest-bearing deposits increased $30.8 million from year-end 2010 to year-end 2011, while total interest-bearing deposits decreased $19.1 million over the same period, primarily as a result of a decrease in time deposits. Time deposits, including wholesale time deposits, decreased $51.8 million year over year. Time deposits of less than $100,000 decreased $71.3 million and time deposits of $100,000 or more increased $19.5 million. We believe that we can improve our core deposit funding by improving our branch network and providing more convenient opportunities for customers to bank with us. We anticipate that our deposits will continue to increase throughout 2012.
Total deposits increased to $785.9 million, up 4.1% as of December 31, 2010 compared to deposits of $754.7 million at December 31, 2009. Non-interest-bearing deposits increased $11.4 million from year-end 2009 to year-end 2010, while total interest-bearing deposits increased $19.8 million over the same period, primarily as a result of an increase in interest- bearing demand deposits. During 2010, we experienced a 150% increase of public funds interest-bearing demand deposits as municipalities desiring to maintain more liquidity moved monies from lower rate certificates of deposits into highly liquid money market accounts at favorable interest rates. Time deposits, including wholesale time deposits, decreased $111.6 million year over year. Time deposits of less than $100,000 decreased $6.1 million and time deposits of $100,000 or more decreased $105.5 million.
The average balance of deposits and interest rates thereon for the years ended December 31, 2011, 2010, and 2009 are summarized below.
Average Deposits
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Average
Balance | | | Rate | | | Average
Balance | | | Rate | | | Average
Balance | | | Rate | |
| | | (Dollars in thousands) | |
Interest-bearing demand deposits | | $ | 257,903 | | | | 0.77 | % | | $ | 202,951 | | | | 0.75 | % | | $ | 112,971 | | | | 0.74 | % |
Savings deposits | | | 42,277 | | | | 0.73 | | | | 22,795 | | | | 0.40 | | | | 18,429 | | | | 0.25 | |
Time deposits | | | 380,396 | | | | 1.82 | | | | 455,174 | | | | 2.06 | | | | 476,480 | | | | 2.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits | | | 680,576 | | | | 1.35 | | | | 680,920 | | | | 1.62 | | | | 607,880 | | | | 2.13 | |
Non-interest-bearing deposits | | | 115,847 | | | | | | | | 102,039 | | | | | | | | 90,732 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total deposits | | $ | 796,423 | | | | 1.16 | % | | $ | 782,959 | | | | 1.41 | % | | $ | 698,612 | | | | 1.85 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
For the years ended December 31, 2011, 2010 and 2009, our average non-interest-bearing deposits have been approximately 14.5%, 13.0% and 13.0%, respectively, of our average total deposits. At year-end 2011 and 2010, we had approximately $42.1 million and $77.9 million, respectively, in these types of deposits, most of which have a maturity of two years or less.
50
As of December 31, 2011, we held approximately $95.8 million in time deposits of $100,000 or more of individuals, local governments or municipal entities and $16.6 million of wholesale deposits of $100,000 or more. Non-wholesale time deposits less than $100,000 were approximately $171.3 million at December 31, 2011. The following table is a maturity schedule of our time deposits as of December 31, 2011.
Time Deposit Maturity Schedule
| | | | | | | | | | | | | | | | | | | | |
| | | 3 months
or less | | | Over 3-6
months | | | Over 6-12
months | | | Over 12
months | | | Total | |
| | | (Dollars in thousands) | |
Non-wholesale time certificates of deposit of less than $100,000 | | $ | 50,958 | | | $ | 21,609 | | | $ | 31,022 | | | $ | 67,686 | | | $ | 171,275 | |
Non-wholesale time certificates of deposit of $100,000 or more | | | 24,250 | | | | 16,794 | | | | 23,020 | | | | 31,707 | | | | 95,771 | |
Wholesale time certificates of deposit of less than $100,000 | | | 14,000 | | | | 10,502 | | | | 3,538 | | | | 24,585 | | | | 52,625 | |
Wholesale time certificates of deposit of $100,000 or more | | | — | | | | 3,731 | | | | 9,922 | | | | 2,953 | | | | 16,606 | |
| | | | | | | | | | | | | | | | | | | | |
Total time deposits | | $ | 89,208 | | | $ | 52,636 | | | $ | 67,502 | | | $ | 126,931 | | | $ | 336,277 | |
| | | | | | | | | | | | | | | | | | | | |
Borrowings
Short-term borrowings include sweep accounts and advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) having maturities of one year or less. Our short-term borrowings totaled $11.7 million on December 31, 2011, compared to $11.5 million on December 31, 2010, an increase of approximately $170 thousand. Our short-term advances from FHLB increased $1.0 million while sweep accounts decreased $830 thousand from December 31, 2010 to December 31, 2011. For additional discussion concerning borrowings refer to Note 7 of our consolidated financial statements.
The following table details the maturities and rates of our borrowings from the FHLB, as of December 31, 2011.
| | | | | | | | | | | | | | |
Borrow Date | | Type | | Principal | | | Term | | Rate | | | Maturity |
| (Dollars in thousands) |
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 |
August 17, 2010 | | Fixed rate | | | 3,000 | | | 4 years | | | 1.49 | | | August 18, 2014 |
August 17, 2010 | | Fixed rate | | | 4,500 | | | 5 years | | | 1.85 | | | August 17, 2015 |
August 17, 2010 | | Fixed rate | | | 2,500 | | | 6 years | | | 2.21 | | | August 17, 2016 |
August 20, 2010 | | Fixed rate | | | 2,000 | | | 3 years | | | 1.09 | | | August 20, 2013 |
August 20, 2010 | | Fixed rate | | | 3,000 | | | 4 years | | | 1.48 | | | August 20, 2014 |
August 20, 2010 | | Fixed rate | | | 3,000 | | | 5 years | | | 1.83 | | | August 20, 2015 |
September 1, 2010 | | Fixed rate | | | 2,000 | | | 2 years | | | 0.66 | | | September 4, 2012 |
Total Borrowings: $ 34,500 Composite rate: 2.34%
Long-Term Obligations
Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowings from the FHLB totaled $25.5 million on December 31, 2011, compared to $34.5 million long-term FHLB advances on December 31, 2010.
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
51
portfolio. All our debt securities are of investment grade quality and, if the need arises, can promptly be 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 a core of local deposits, proceeds from retail repurchase agreements and excess Bank capital. During 2011 the Bank relied more heavily on saving deposits, non-interest-bearing demand deposits and interest bearing demand deposits to meet our liquidity needs. Savings deposits, non-interest bearing demand deposits and interest bearing demand deposits increased $25.6 million, $30.8 million and $7.1 million, respectively, from December 31, 2010 to December 31, 2011. The Bank reduced its reliance on time deposits as these deposits decreased $51.8 million from December 31, 2010 to December 31, 2011. The Bank intends to continue to focus on increasing core deposits.
We are a member of the FHLB of Atlanta. 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 $184.3 million, $184.0 million and $177.7 million of advances from the FHLB at December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, we had outstanding FHLB advances totaling $34.5 million compared to $42.5 million and $41.0 million at December 31, 2010 and 2009, respectively.
As a requirement for membership, we invest in stock of the FHLB of Atlanta in the amount of 1.0% of our outstanding residential loans or 5.0% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At December 31, 2011, we owned 34,558 shares of the FHLB’s $100 par value capital stock, compared to 45,708 and 51,160 shares at December 31, 2010 and 2009, respectively. No ready market exists for FHLB of Atlanta stock, which is carried at cost.
We also had unsecured federal funds lines in the aggregate amount of $36.0 million available to us at December 31, 2011 under which we can borrow funds to meet short-term liquidity needs. At December 31, 2011, we did not have any advances under these federal funds lines. We also have the ability to borrow from the Federal Reserve Discount Window by pledging certain types of collateral. Another source of funding available is loan participations sold to other commercial banks (in which we retain the servicing rights). As of December 31, 2011, we did not have any loan participations sold. We believe that our liquidity sources are adequate to meet our operating needs.
Capital Resources and Shareholders’ Equity
As of December 31, 2011, our total shareholders’ equity was $80.4 million (consisting of common shareholders’ equity of $63.0 million and preferred stock of $17.4 million) compared with total shareholders’ equity of $80.9 million as of December 31, 2010 (consisting of common shareholders’ equity of $63.6 million and preferred stock of $17.3 million).
Common shareholders’ equity decreased by approximately $617 thousand to $63.0 million at December 31, 2011 from $63.6 million at December 31, 2010. We had a net loss of $1.0 million, experienced an increase in net unrealized gains on available-for-sale securities of $2.1 million, and recognized a decrease of $113 thousand related to post retirement benefit plan and stock based compensation of $21 thousand on incentive stock awards. In 2011 we declared cash dividends of $541 thousand on our common shares or $0.19 per share, and dividends of $897 thousand on preferred shares.
Common shareholders’ equity decreased by approximately $3.7 million to $63.6 million at December 31, 2010 from $67.3 million at December 31, 2009. We experienced net income in 2010 of $0.9 million and recognized stock compensation of $36 thousand on stock options. We had a decrease in net unrealized gains on available-for-sale securities of $2.7 million. During 2010, we declared cash dividends of $798 thousand on our common shares, or $0.28 per share, and dividends of $897 thousand on preferred shares.
52
The following table presents information concerning capital required of us and our actual capital ratios.
| | | | | | | | | | | | | | | | |
| | | To be well
capitalized
under prompt
corrective action
provisions | | | Minimum
required for
capital
adequacy
purposes | | | Our
Ratio | | | Bank’s
Ratio | |
| | | Ratio | | | Ratio | | | |
As of December 31, 2011: | | | | | | | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | | | ³ 5.00 | % | | | ³3.00 | % | | | 8.25 | % | | | 8.25 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | ³ 6.00 | | | | ³4.00 | | | | 12.59 | | | | 12.59 | |
Total Capital (to Risk Weighted Assets) | | | ³10.00 | | | | ³8.00 | | | | 13.85 | | | | 13.85 | |
As of December 31, 2010: | | | | | | | | | | | | | | | | |
Tier 1 Capital (to Average Assets) | | | ³ 5.00 | % | | | ³3.00 | % | | | 8.66 | % | | | 8.66 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | ³ 6.00 | | | | ³4.00 | | | | 12.08 | | | | 12.08 | |
Total Capital (to Risk Weighted Assets) | | | ³10.00 | | | | ³8.00 | | | | 13.34 | | | | 13.34 | |
Inflation and Other Issues
Because our assets and liabilities are primarily monetary in nature, the effect of inflation on our assets is less significant compared to most commercial and industrial companies. However, inflation does have an impact on the growth of total assets in the banking industry and the resulting need to increase capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also has a significant effect on other expenses, which tend to rise during periods of general inflation. Notwithstanding these effects of inflation, management believes our financial results are influenced more by our ability to react to changes in interest rates than by inflation.
Except as discussed in this Management’s Discussion and Analysis, management is not aware of trends, events or uncertainties that will have or that are reasonably likely to have a material adverse effect on the liquidity, capital resources or operations. Management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have such an effect.
Recent Accounting Pronouncements
Please refer to Note (1) (S) of our consolidated financial statements for a summary of recent authoritative pronouncements that could impact our accounting, reporting, and/or disclosure of financial information.
53
Summary Quarterly Financial Information
The following table contains summary financial information for each quarterly period listed below. This information has been derived from our unaudited interim consolidated financial statements. This information has not been audited but, in the opinion of our management, it includes all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of our results for those periods. You should read this information in conjunction with our audited year end consolidated financial statements that appear in Item 8 of this report. Our results for quarterly periods shown in the table are not necessarily indicative of our results for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010 | |
| | | Fourth
Quarter | | | Third
Quarter | | | Second
Quarter | | | First
Quarter | | | Fourth
Quarter | | | Third
Quarter | | | Second
Quarter | | | First
Quarter | |
| | | (Dollars in thousands, except per share data) | |
| | | | | | | | |
Summary of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 8,818 | | | $ | 9,189 | | | $ | 9,632 | | | $ | 9,438 | | | $ | 9,840 | | | $ | 9,982 | | | $ | 9,965 | | | $ | 10,020 | |
Interest expense | | | 2,283 | | | | 2,566 | | | | 2,587 | | | | 2,670 | | | | 2,926 | | | | 3,005 | | | | 2,932 | | | | 3,025 | |
Net interest income | | | 6,535 | | | | 6,623 | | | | 7,045 | | | | 6,768 | | | | 6,914 | | | | 6,977 | | | | 7,033 | | | | 6,995 | |
Provision for loan losses | | | 2,252 | | | | 1,028 | | | | 1,273 | | | | 3,930 | | | | 4,337 | | | | 3,863 | | | | 1,780 | | | | 3,000 | |
Net interest income after provision | | | 4,283 | | | | 5,595 | | | | 5,772 | | | | 2,838 | | | | 2,577 | | | | 3,114 | | | | 5,253 | | | | 3,995 | |
Non-interest income | | | 2,262 | | | | 2,568 | | | | 2,539 | | | | 1,431 | | | | 3,661 | | | | 3,800 | | | | 1,866 | | | | 2,668 | |
Non-interest expense | | | 9,416 | | | | 7,539 | | | | 6,657 | | | | 6,244 | | | | 8,307 | | | | 6,379 | | | | 5,916 | | | | 6,238 | |
Income (loss) before income taxes | | | (2,871 | ) | | | 624 | | | | 1,654 | | | | (1,975 | ) | | | (2,069 | ) | | | 535 | | | | 1,203 | | | | 425 | |
Income taxes | | | (1,259 | ) | | | 97 | | | | 509 | | | | (891 | ) | | | (945 | ) | | | (5 | ) | | | 246 | | | | (62 | ) |
Net income(loss) | | | (1,612 | ) | | | 527 | | | | 1,145 | | | | (1,084 | ) | | | (1,124 | ) | | | 540 | | | | 957 | | | | 487 | |
Preferred stock dividend & accretion of discount | | | 266 | | | | 267 | | | | 265 | | | | 265 | | | | 266 | | | | 267 | | | | 265 | | | | 265 | |
Net income (loss) available to common shareholders | | | (1,878 | ) | | | 260 | | | | 880 | | | | (1,349 | ) | | | (1,390 | ) | | | 273 | | | | 692 | | | | 222 | |
| | | | | | | | |
Per Share Data and Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss)—basic | | $ | (0.66 | ) | | $ | 0.09 | | | $ | 0.31 | | | $ | (0.47 | ) | | $ | (0.49 | ) | | $ | 0.10 | | | $ | 0.24 | | | $ | 0.08 | |
Net income (loss)—diluted | | | (0.66 | ) | | | 0.09 | | | | 0.31 | | | | (0.47 | ) | | | (0.49 | ) | | | 0.10 | | | | 0.24 | | | | 0.08 | |
Cash dividends | | | 0.0500 | | | | 0.0000 | | | | 0.0700 | | | | 0.0700 | | | | 0.0700 | | | | 0.0700 | | | | 0.0700 | | | | 0.0700 | |
Book value at period end | | | 22.10 | | | | 23.10 | | | | 22.79 | | | | 21.71 | | | | 22.32 | | | | 24.70 | | | | 24.46 | | | | 23.56 | |
Shares outstanding at period end | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | | | | 2,849,841 | |
| | | | | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 921,277 | | | $ | 923,695 | | | $ | 941,463 | | | $ | 916,571 | | | $ | 919,869 | | | $ | 932,209 | | | $ | 921,840 | | | $ | 897,754 | |
Investments | | | 339,450 | | | | 327,066 | | | | 298,116 | | | | 304,975 | | | | 273,229 | | | | 263,946 | | | | 268,064 | | | | 197,520 | |
Loans | | | 496,542 | | | | 521,626 | | | | 542,687 | | | | 546,641 | | | | 567,631 | | | | 575,003 | | | | 570,174 | | | | 577,964 | |
Interest-earning assets | | | 848,682 | | | | 858,914 | | | | 880,814 | | | | 856,840 | | | | 858,002 | | | | 877,540 | | | | 862,410 | | | | 841,344 | |
Deposits | | | 797,645 | | | | 796,609 | | | | 812,774 | | | | 786,754 | | | | 785,941 | | | | 790,592 | | | | 792,454 | | | | 772,927 | |
Long-term obligations | | | 25,500 | | | | 25,500 | | | | 27,500 | | | | 27,500 | | | | 34,500 | | | | 34,500 | | | | 14,500 | | | | 14,500 | |
Shareholders’ equity | | | 80,443 | | | | 83,248 | | | | 82,320 | | | | 79,213 | | | | 80,894 | | | | 87,632 | | | | 86,918 | | | | 84,292 | |
| | | | | | | | |
Selected Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rate of return (annualized) on: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | (0.70 | )% | | | 0.22 | % | | | 0.49 | % | | | (0.48 | )% | | | (0.48 | )% | | | 0.23 | % | | | 0.43 | % | | | 0.22 | % |
Shareholders’ equity | | | (7.85 | ) | | | 2.56 | | | | 5.71 | | | | (5.38 | ) | | | (5.15 | ) | | | 2.44 | | | | 4.48 | | | | 2.28 | |
Dividend payout ratio | | | (7.58 | ) | | | — | | | | 22.58 | | | | (14.89 | ) | | | (14.29 | ) | | | 70.00 | | | | 29.17 | | | | 87.50 | |
54
CAUTIONARY NOTE ABOUT 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 “Risk Factors” and in other documents filed by us 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,” “feels,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, (a) pressures on the our earnings, capital and liquidity resulting from current and future conditions in the credit and equity markets, (b) continued or unexpected increases in credit losses in our loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets; (h) weather and similar conditions, particularly the effect of hurricanes on our banking and operations facilities and on our customers and the communities in which we do business; and (i) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements in this Report are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend, to update these forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 under the caption “Market Risk.”
55
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | | Page | |
Audited Financial Statements for the years ended December 31, 2011, 2010 and 2009 | | | | |
Report of Dixon Hughes Goodman LLP | | | 57 | |
Consolidated Balance Sheets as of December 31, 2011 and 2010 | | | 58 | |
Consolidated Results of Operations for the years ended December 31, 2011, 2010 and 2009 | | | 59 | |
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009 | | | 60 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 | | | 61 | |
Notes to Consolidated Financial Statements—December 31, 2011 and 2010 | | | 63 | |
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
ECB Bancorp, Inc.
Engelhard, North Carolina
We have audited the accompanying consolidated balance sheets of ECB Bancorp, Inc. and Subsidiary (the “Company”) as of December 31, 2011 and 2010 and the related consolidated results of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ECB Bancorp, Inc. and Subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ECB Bancorp, Inc. and Subsidiary’s internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 30, 2012 expressed an unqualified opinion.
/s/ Dixon Hughes Goodman LLP
Greenville, North Carolina
March 30, 2012
57
ECB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
(Dollars in thousands, except per share data)
| | | | | | | | |
| | | 2011 | | | 2010 | |
ASSETS | | | | | | | | |
Non-interest bearing deposits and cash | | $ | 18,363 | | | $ | 11,731 | |
Interest-bearing deposits | | | 63 | | | | 20 | |
Overnight investments | | | 6,305 | | | | 8,415 | |
| | | | | | | | |
Total cash and cash equivalents | | | 24,731 | | | | 20,166 | |
| | | | | | | | |
Investment securities available-for-sale, at fair value (cost of $338,685 and $275,883 at December 31, 2011 and 2010, respectively) | | | 339,450 | | | | 273,229 | |
Loans held for sale | | | 2,866 | | | | 4,136 | |
Loans | | | 496,542 | | | | 567,631 | |
Allowance for loan losses | | | (12,092 | ) | | | (13,247 | ) |
| | | | | | | | |
Loans, net | | | 484,450 | | | | 554,384 | |
| | | | | | | | |
Real estate and repossessions acquired in settlement of loans, net | | | 6,573 | | | | 4,536 | |
Federal Home Loan Bank common stock, at cost | | | 3,456 | | | | 4,571 | |
Bank premises and equipment, net | | | 26,289 | | | | 26,636 | |
Accrued interest receivable | | | 5,308 | | | | 5,243 | |
Bank owned life insurance | | | 11,778 | | | | 8,954 | |
Other assets | | | 16,376 | | | | 18,014 | |
| | | | | | | | |
Total | | $ | 921,277 | | | $ | 919,869 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Deposits | | | | | | | | |
Demand, non-interest-bearing | | $ | 135,732 | | | $ | 104,932 | |
Demand, interest-bearing | | | 270,119 | | | | 262,977 | |
Savings | | | 55,517 | | | | 29,938 | |
Time | | | 336,277 | | | | 388,094 | |
| | | | | | | | |
Total deposits | | | 797,645 | | | | 785,941 | |
| | | | | | | | |
Accrued interest payable | | | 519 | | | | 631 | |
Short-term borrowings | | | 11,679 | | | | 11,509 | |
Long-term obligations | | | 25,500 | | | | 34,500 | |
Other liabilities | | | 5,491 | | | | 6,394 | |
| | | | | | | | |
Total liabilities | | | 840,834 | | | | 838,975 | |
| | | | | | | | |
Commitments and contingent liabilities | | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Preferred stock, Series A | | | 17,454 | | | | 17,288 | |
Common stock, par value $3.50 per share | | | 9,974 | | | | 9,974 | |
Capital surplus | | | 25,873 | | | | 25,852 | |
Warrant | | | 878 | | | | 878 | |
Retained earnings | | | 25,926 | | | | 28,554 | |
Accumulated other comprehensive income (loss) | | | 338 | | | | (1,652 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 80,443 | | | | 80,894 | |
| | | | | | | | |
Total | | $ | 921,277 | | | $ | 919,869 | |
| | | | | | | | |
Common shares outstanding | | | 2,849,841 | | | | 2,849,841 | |
Common shares authorized | | | 50,000,000 | | | | 10,000,000 | |
Preferred shares outstanding | | | 17,949 | | | | 17,949 | |
Preferred shares authorized | | | 2,000,000 | | | | 2,000,000 | |
Non-voting common shares authorized | | | 2,000,000 | | | | — | |
See accompanying Notes to Consolidated Financial Statements.
58
ECB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(Dollars in thousands, except per share data)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
INTEREST INCOME | | | | | | | | | | | | |
Interest and fees on loans | | $ | 28,652 | | | $ | 30,745 | | | $ | 30,595 | |
Interest on investment securities: | | | | | | | | | | | | |
Interest exempt from federal income taxes | | | 485 | | | | 1,541 | | | | 1,406 | |
Taxable interest income | | | 7,862 | | | | 7,464 | | | | 8,774 | |
Dividend income | | | 34 | | | | 44 | | | | 127 | |
Other interest | | | 44 | | | | 13 | | | | 3 | |
| | | | | | | | | | | | |
Total interest income | | | 37,077 | | | | 39,807 | | | | 40,905 | |
| | | | | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | |
Demand accounts | | | 1,973 | | | | 1,527 | | | | 833 | |
Savings | | | 310 | | | | 91 | | | | 46 | |
Time | | | 6,925 | | | | 9,392 | | | | 12,079 | |
Short-term borrowings | | | 284 | | | | 241 | | | | 462 | |
Long-term obligations | | | 614 | | | | 637 | | | | 707 | |
Other interest expense | | | — | | | | — | | | | 30 | |
| | | | | | | | | | | | |
Total interest expense | | | 10,106 | | | | 11,888 | | | | 14,157 | |
| | | | | | | | | | | | |
Net interest income | | | 26,971 | | | | 27,919 | | | | 26,748 | |
Provision for loan losses | | | 8,483 | | | | 12,980 | | | | 11,100 | |
| | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 18,488 | | | | 14,939 | | | | 15,648 | |
| | | | | | | | | | | | |
NON-INTEREST INCOME | | | | | | | | | | | | |
Service charges on deposit accounts | | | 3,262 | | | | 3,418 | | | | 3,652 | |
Other service charges and fees | | | 1,225 | | | | 1,419 | | | | 1,160 | |
Mortgage origination fees | | | 1,300 | | | | 1,283 | | | | 950 | |
Net gain on sale of securities | | | 2,631 | | | | 5,508 | | | | 2,565 | |
Income from bank owned life insurance | | | 324 | | | | 297 | | | | 310 | |
Other operating income | | | 58 | | | | 70 | | | | 12 | |
| | | | | | | | | | | | |
Total non-interest income | | | 8,800 | | | | 11,995 | | | | 8,649 | |
| | | | | | | | | | | | |
NON-INTEREST EXPENSE | | | | | | | | | | | | |
Salaries | | | 10,869 | | | | 9,832 | | | | 8,287 | |
Retirement and other employee benefits | | | 2,814 | | | | 2,924 | | | | 2,488 | |
Occupancy | | | 2,041 | | | | 1,876 | | | | 1,832 | |
Equipment | | | 2,173 | | | | 2,160 | | | | 1,763 | |
Professional fees | | | 1,386 | | | | 936 | | | | 832 | |
Supplies | | | 238 | | | | 221 | | | | 216 | |
Communications/Data lines | | | 710 | | | | 663 | | | | 642 | |
FDIC insurance | | | 941 | | | | 1,445 | | | | 1,689 | |
Other outside services | | | 602 | | | | 528 | | | | 470 | |
Net cost of real estate and repossessions acquired in settlement of loans | | | 1,438 | | | | 1,104 | | | | 1,345 | |
Data processing and related expenses | | | 1,062 | | | | 295 | | | | 304 | |
Securities purchase agreement termination fees | | | 1,686 | | | | — | | | | — | |
Contract early termination fees | | | — | | | | 1,141 | | | | — | |
Other operating expenses | | | 3,896 | | | | 3,715 | | | | 3,284 | |
| | | | | | | | | | | | |
Total non-interest expense | | | 29,856 | | | | 26,840 | | | | 23,152 | |
| | | | | | | | | | | | |
(Loss) income before income taxes | | | (2,568 | ) | | | 94 | | | | 1,145 | |
Income tax (benefit) | | | (1,544 | ) | | | (766 | ) | | | (357 | ) |
| | | | | | | | | | | | |
Net income (loss) | | | (1,024 | ) | | | 860 | | | | 1,502 | |
| | | | | | | | | | | | |
Preferred stock dividends | | | 897 | | | | 897 | | | | 853 | |
Accretion of discount | | | 166 | | | | 166 | | | | 150 | |
| | | | | | | | | | | | |
Income (loss) available to common shareholders | | $ | (2,087 | ) | | $ | (203 | ) | | $ | 499 | |
| | | | | | | | | | | | |
Net income (loss) per share—basic | | $ | (0.73 | ) | | $ | (0.07 | ) | | $ | 0.18 | |
| | | | | | | | | | | | |
Net income (loss) per share—diluted | | $ | (0.73 | ) | | $ | (0.07 | ) | | $ | 0.18 | |
| | | �� | | | | | | | | | |
Weighted average shares outstanding—basic | | | 2,849,841 | | | | 2,849,594 | | | | 2,884,950 | |
| | | | | | | | | | | | |
Weighted average shares outstanding—diluted | | | 2,849,841 | | | | 2,849,594 | | | | 2,845,966 | |
| | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
59
ECB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred
Stock | | | Common stock | | | Common
Stock
warrant | | | Capital
surplus | | | Retained
earnings | | | Accumulated
other
comprehensive
income (loss) | | | Comprehensive
income (loss) | | | Total | |
| | | Number | | | Amount | | | | | | | |
BALANCE—December 31, 2008 | | $ | — | | | | 2,844,489 | | | $ | 9,956 | | | $ | — | | | $ | 25,707 | | | $ | 31,026 | | | $ | 1,254 | | | | | | | $ | 67,943 | |
Unrealized loss, net of income tax benefit of $128 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (205 | ) | | $ | (205 | ) | | | (205 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,502 | | | | — | | | | 1,502 | | | | 1,502 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,297 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of preferred stock in connection with Capital Purchase Program, net of discount on preferred stock | | | 17,067 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | 17,067 | |
Issuance of common stock warrant in connection with Capital Purchase Program | | | — | | | | — | | | | — | | | | 882 | | | | — | | | | — | | | | — | | | | | | | | 882 | |
Cost associated with issuance of preferred stock and common warrant | | | (95 | ) | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | — | | | | | | | | (99 | ) |
Stock based compensation | | | — | | | | — | | | | — | | | | — | | | | 61 | | | | — | | | | — | | | | | | | | 61 | |
Stock options exercised | | | — | | | | 1,892 | | | | 7 | | | | — | | | | 16 | | | | — | | | | — | | | | | | | | 23 | |
Issuance of restricted stock | | | — | | | | 1,500 | | | | 5 | | | | | | | | 19 | | | | — | | | | — | | | | | | | | 24 | |
Preferred stock accretion | | | 150 | | | | — | | | | — | | | | — | | | | — | | | | (150 | ) | | | — | | | | | | | | | |
Cash dividends on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (745 | ) | | | — | | | | | | | | (745 | ) |
Cash dividends ($ .73 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,078 | ) | | | — | | | | | | | | (2,078 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2009 | | | 17,122 | | | | 2,847,881 | | | | 9,968 | | | | 878 | | | | 25,803 | | | | 29,555 | | | | 1,049 | | | | | | | | 84,375 | |
Unrealized loss, net of income tax benefit of $1,691 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,701 | ) | | $ | (2,701 | ) | | | (2,701 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 860 | | | | — | | | | 860 | | | | 860 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,841 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock based compensation | | | — | | | | — | | | | — | | | | — | | | | 36 | | | | — | | | | — | | | | | | | | 36 | |
Stock options exercised | | | — | | | | 1,960 | | | | 6 | | | | — | | | | 13 | | | | — | | | | — | | | | | | | | 19 | |
Preferred stock accretion | | | 166 | | | | | | | | | | | | | | | | | | | | (166 | ) | | | — | | | | | | | | | |
Cash dividends on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (897 | ) | | | — | | | | | | | | (897 | ) |
Cash dividends ($ .28 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (798 | ) | | | — | | | | | | | | (798 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2010 | | | 17,288 | | | | 2,849,841 | | | | 9,974 | | | | 878 | | | | 25,852 | | | | 28,554 | | | | (1,652 | ) | | | | | | | 80,894 | |
Unrealized gain, net of income tax expense of $1,316 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,103 | | | $ | 2,103 | | | | 2,103 | |
Post-retirement health insurance benefit adjustment, net of income tax benefit of $42 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (113 | ) | | | (113 | ) | | | (113 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,024 | ) | | | — | | | | (1,024 | ) | | | (1,024 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | — | | | | | | | | | | | | | | | | | | | $ | 966 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock based compensation | | | — | | | | — | | | | — | | | | — | | | | 21 | | | | — | | | | — | | | | | | | | 21 | |
Preferred stock accretion | | | 166 | | | | — | | | | | | | | — | | | | — | | | | (166 | ) | | | — | | | | | | | | | |
Cash dividends on preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | (897 | ) | | | — | | | | | | | | (897 | ) |
Cash dividends ($ .19 per share) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (541 | ) | | | — | | | | | | | | (541 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE—December 31, 2011 | | $ | 17,454 | | | | 2,849,841 | | | $ | 9,974 | | | $ | 878 | | | $ | 25,873 | | | $ | 25,926 | | | $ | 338 | | | | | | | $ | 80,443 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
60
ECB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income (loss) | | $ | (1,024 | ) | | $ | 860 | | | $ | 1,502 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 1,435 | | | | 1,365 | | | | 1,351 | |
Amortization of premium on investment securities, net | | | 3,372 | | | | 2,084 | | | | 940 | |
Provision for loan losses | | | 8,483 | | | | 12,980 | | | | 11,100 | |
Deferred income taxes | | | (596 | ) | | | (1,732 | ) | | | (3,918 | ) |
Gain on sale of securities | | | (2,631 | ) | | | (5,508 | ) | | | (2,565 | ) |
Stock based compensation | | | 21 | | | | 36 | | | | 85 | |
Impairment of real estate and repossessions acquired in settlement of loans | | | 875 | | | | 366 | | | | 1,034 | |
Loss on sale of real estate and repossessions acquired in settlement of loans | | | 363 | | | | 638 | | | | 122 | |
Loss on disposal of premises and equipment | | | — | | | | 11 | | | | 15 | |
Increase in accrued interest receivable | | | (65 | ) | | | (276 | ) | | | (304 | ) |
Income from bank owned life insurance | | | (324 | ) | | | (297 | ) | | | (310 | ) |
Origination of loans held for sale | | | (53,778 | ) | | | (35,452 | ) | | | — | |
Proceeds from sale of loans held for sale | | | 55,048 | | | | 31,316 | | | | — | |
(Increase) decrease in other assets | | | 805 | | | | (342 | ) | | | (3,973 | ) |
Decrease in accrued interest payable | | | (112 | ) | | | (490 | ) | | | (1,768 | ) |
(Decrease) increase in other liabilities | | | (903 | ) | | | 2,130 | | | | (13 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 10,969 | | | | 7,689 | | | | 3,298 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
Proceeds from sales of investment securities classified as available-for-sale | | | 147,698 | | | | 191,192 | | | | 120,310 | |
Proceeds from maturities of investment securities classified as available-for-sale | | | 51,050 | | | | 55,657 | | | | 55,613 | |
Purchases of investment securities classified as available-for-sale | | | (262,291 | ) | | | (281,964 | ) | | | (227,680 | ) |
Redemption (purchase) of Federal Home Loan Bank common stock | | | 1,115 | | | | 545 | | | | (1,257 | ) |
Proceeds from disposal of premises and equipment | | | — | | | | — | | | | 12 | |
Purchases of premises and equipment | | | (1,088 | ) | | | (2,285 | ) | | | (970 | ) |
Proceeds from disposal of real estate and repossessions acquired in settlement of loans | | | 3,266 | | | | 2,775 | | | | 2,801 | |
Purchase of bank owned life insurance | | | (2,500 | ) | | | — | | | | — | |
Net loan repayments (originations) | | | 54,910 | | | | (2,568 | ) | | | (51,937 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (7,840 | ) | | | (36,648 | ) | | | (103,108 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
Net increase in deposits | | | 11,704 | | | | 31,211 | | | | 125,578 | |
Net increase (decrease) in borrowings | | | (8,830 | ) | | | 2,099 | | | | (39,806 | ) |
Dividends paid to common shareholders | | | (541 | ) | | | (1,118 | ) | | | (2,078 | ) |
Dividends paid on preferred stock | | | (897 | ) | | | (897 | ) | | | (745 | ) |
Net proceeds from stock options exercised | | | — | | | | 19 | | | | 23 | |
Net proceeds from issuance of preferred stock and warrant to purchase common stock | | | — | | | | — | | | | 17,850 | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 1,436 | | | | 31,314 | | | | 100,822 | |
| | | | | | | | | | | | |
Increase in cash and cash equivalents | | | 4,565 | | | | 2,355 | | | | 1,012 | |
Cash and cash equivalents at beginning of year | | | 20,166 | | | | 17,811 | | | | 16,799 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 24,731 | | | $ | 20,166 | | | $ | 17,811 | |
| | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
61
ECB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(Dollars in thousands)
| | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES | | | | | | | | | | | | |
Unrealized gains on available-for-sale securities, net of deferred taxes | | $ | 2,103 | | | $ | (2,702 | ) | | $ | (205 | ) |
| | | | | | | | | | | | |
Post-retirement health insurance benefit adjustment, net of deferred taxes | | $ | (113 | ) | | $ | — | | | $ | — | |
Transfer from long-term to short-term borrowings | | $ | 9,000 | | | $ | 6,500 | | | $ | 5,000 | |
| | | | | | | | | | | | |
Cash dividends declared but not paid | | $ | — | | | $ | 199 | | | $ | 520 | |
| | | | | | | | | | | | |
Transfer from investments to other assets | | $ | — | | | $ | 250 | | | $ | — | |
| | | | | | | | | | | | |
Transfer from loans to real estate and repossessions acquired in settlement of loans | | $ | 6,541 | | | $ | 3,270 | | | $ | 5,676 | |
| | | | | | | | | | | | |
Transfer from real estate and repossessions acquired in settlement of loans to bank premises and equipment | | $ | — | | | $ | 398 | | | $ | — | |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | | | | | | |
Interest paid | | $ | 10,218 | | | $ | 12,378 | | | $ | 15,925 | |
| | | | | | | | | | | | |
Taxes paid | | $ | 20 | | | $ | 1,792 | | | $ | 3,455 | |
| | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements.
62
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 and 2010
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Consolidation
The consolidated financial statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly owned subsidiary, The East Carolina Bank (the Bank) (collectively referred to hereafter as the Company). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All significant inter-company transactions and balances have been eliminated in consolidation.
(B) Basis of Financial Statement Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, real estate and repossessions acquired in settlement of loans, net and the valuation of the deferred tax asset.
(C) Business
Bancorp is a bank holding company incorporated in North Carolina on March 4, 1998. The principal activity of Bancorp is ownership of the Bank. The Bank provides financial services through its branch network located in eastern North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Company’s customers are principally located in eastern North Carolina.
(D) Cash and Cash Equivalents
Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial institutions and overnight investments. Overnight investments include federal funds sold which are generally outstanding for one-day periods.
(E) Investment Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
63
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
(F) Loans
Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.
Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.
Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled debt restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.
(G) Loans Held for Sale
Loans held for sale represent residential real estate loans originated by the mortgage department. Generally, commitments to sell these loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting by the investor that purchases the loan. Loans held for sale are recorded at fair value when loans are originated and subsequently measured at the lower of cost or fair value. The Company is exposed to certain risks relating to its ongoing mortgage origination business. The Company enters into interest rate lock commitments and commitments to sell mortgages. The primary risks managed by derivative instruments are these interest rate lock commitments and forward-loan-sale commitments. Interest rate lock commitments are entered into to manage interest rate risk associated with the Company’s fixed rate loan commitments. The period of time between the issuance of a loan commitment and the closing and sale of the loan generally ranges from 10 to 60 days. Such interest rate lock commitments and forward-loan-sale commitments represent derivative instruments which are required to be carried at fair value. These derivative instruments do not qualify as hedges under the Derivatives and Hedging topic of the FASB Accounting Standards Codification. The fair value of the Company’s interest rate lock commitments are based on current secondary market pricing and included on the balance sheet in other assets and on the income statement in gain on sale of mortgages. The balance of forward loan sales commitments is deemed insignificant. The gains and losses from the future sales of the mortgages is recognized when the Company, the borrower and the investor enter into the loan contract and the resulting gain or loss is recorded on the consolidated results of operations.
(H) Allowance for Loan Losses
The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the
64
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.
In evaluating the allowance for loan losses, the Company prepares an analysis of its 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.
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. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not 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 AFLL 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 portion determined through general qualitative and quantitative internal and external factors, the general portion 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. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, 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.
Unsecured loans are charged-off in full against the Company’s AFLL 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.
65
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
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.
(I) Real Estate and Repossessions Acquired in Settlement of Loans
Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Repossessions are recorded at the lower of cost or market.
(J) Membership/Investment in Federal Home Loan Bank Stock
The Company is a member of the Federal Home Loan Bank of Atlanta (FHLB). Membership, along with a signed blanket collateral agreement, provided the Company with the ability to draw $184.3 million and $184.0 million of advances from the FHLB at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, the Company had outstanding advances totaling $34.5 million and $42.5 million, respectively, from the FHLB.
As a requirement for membership, the Company invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Company. At December 31, 2011 and 2010, the Company owned 34,558 and 45,708 shares, respectively, of the FHLB’s $100 par value capital stock. No ready market exists for such stock, which is carried at cost. Due to the redemption provisions of the FHLB, cost approximates market value.
(K) Premises and Equipment
Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 25 to 50 years for bank premises and 3 to 10 years for furniture and equipment. Construction in progress includes buildings and equipment carried at cost and depreciated once placed into service.
Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated.
(L) Short-Term Borrowings
Short-term borrowings consist of securities sold under agreements to repurchase, overnight sweep accounts, federal funds purchased and short-term FHLB advances.
(M) 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 $25.5 million on December 31, 2011, compared to $34.5 million long-term FHLB advances on December 31, 2010.
66
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
(N) Income Taxes
The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities and gives current recognition to changes in tax rates and laws.
Tax positions are analyzed in accordance with generally accepted accounting principles and are discussed in Note 6. Interest recognized as a result of our analysis of tax positions would be classified as interest expense. Penalties would be classified as noninterest expense.
(O) Advertising Costs
Advertising costs are expensed as incurred.
(P) Stock Option Plan
The Company recognizes compensation cost relating to share-based payment transactions in the financial statements in accordance with generally accepted accounting principles. The cost is measured based on the fair value of the equity or liability instruments issued. The expense measures the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and recognizes the cost over the period the employee is required to provide services for the award.
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. It is the Company’s policy to issue new shares to satisfy option exercises. Stock options generally vest one-third each year beginning three years after the grant date and expire after 10 years. However, certain grants vest one-third each year, beginning one year after the grant date. Restricted stock generally vests one-third each year beginning three years after the grant date.
(Q) Shares Outstanding and Net Income Per Share
A special meeting of the stockholders of the Company was held on October 12, 2011 at which the stockholders approved amending the Company’s Articles of Incorporation increasing the number of authorized shares of the Company’s common stock from 10,000,000 to 50,000,000 and to authorize 2,000,000 shares of a new class of mandatorily convertible non-voting common stock.
Basic net income per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. For purposes of basic net income per share, unvested 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 affect on diluted weighted-average shares outstanding for the years ended December 31, 2011, December 31, 2010 and December 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
67
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted-average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. Diluted weighted-average shares outstanding did not increase for 2011 or 2010 due to the Company’s reported net losses, and increased 1 thousand shares for 2009 due to the dilutive impact of options. As of December 31, 2011, 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 for the period because its exercise price exceeded the average market price of the Company’s stock for the periods.
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share.
| | | | | | | | | | | | |
| | | Year Ended December 31, 2011 | |
| | | Income
(Numerator) | | | Shares
(Denominator) | | | Per
Share
Amount | |
| | | (Amounts in thousands, except per share data) | |
Basic net loss per share | | $ | (2,087 | ) | | | 2,850 | | | $ | (0.73 | ) |
| | | | | | | | | | | | |
Effect of dilutive securities | | | — | | | | — | | | | | |
| | | | | | | | | | | | |
Diluted net loss per share | | $ | (2,087 | ) | | | 2,850 | | | $ | (0.73 | ) |
| | | | | | | | | | | | |
At December 31, 2011, there were 29 thousand options outstanding and a warrant covering 145 thousand shares which would have had an anti-dilutive affect on the loss per share.
| | | | | | | | | | | | |
| | | Year Ended December 31, 2010 | |
| | | Income
(Numerator) | | | Shares
(Denominator) | | | Per
Share
Amount | |
| | | (Amounts in thousands, except per share data) | |
Basic net income per share | | $ | (203 | ) | | | 2,850 | | | $ | (0.07 | ) |
| | | | | | | | | | | | |
Effect of dilutive securities | | | — | | | | — | | | | | |
| | | | | | | | | | | | |
Diluted net income per share | | $ | (203 | ) | | | 2,850 | | | $ | (0.07 | ) |
| | | | | | | | | | | | |
At December 31, 2010, there were 29 thousand options outstanding and a warrant covering 145 thousand shares which would have had an anti-dilutive affect on the loss per share.
| | | | | | | | | | | | |
| | | Year Ended December 31, 2009 | |
| | | Income
(Numerator) | | | Shares
(Denominator) | | | Per
Share
Amount | |
| | | (Amounts in thousands, except per share data) | |
Basic net income per share | | $ | 499 | | | | 2,845 | | | $ | 0.18 | |
| | | | | | | | | | | | |
Effect of dilutive securities | | | — | | | | 1 | | | | | |
| | | | | | | | | | | | |
Diluted net income per share | | $ | 499 | | | | 2,846 | | | $ | 0.18 | |
| | | | | | | | | | | | |
At December 31, 2009, there were 54 thousand options outstanding and a warrant covering 145 thousand shares with an exercise price above the average market value of the Company’s stock for the period.
68
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
(R) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of other comprehensive income (loss) included in comprehensive income for the periods presented are as follows:
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Unrealized gains arising during the period | | $ | 6,050 | | | $ | 1,116 | | | $ | 2,232 | |
Tax expense | | | (2,329 | ) | | | (430 | ) | | | (860 | ) |
Reclassification to realized gains | | | (2,631 | ) | | | (5,508 | ) | | | (2,565 | ) |
Tax expense | | | 1,013 | | | | 2,121 | | | | 988 | |
Defined benefit pension adjustment | | | (184 | ) | | | — | | | | — | |
Tax benefit | | | 71 | | | | — | | | | — | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | $ | 1,990 | | | $ | (2,701 | ) | | $ | (205 | ) |
| | | | | | | | | | | | |
(S) New Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements. See Note 4.
Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 have been presented in Note 4.
In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the consolidated financial statements.
ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the consolidated financial statements.
The Comprehensive Income topic of the ASC was amended in June 2011 by ASU 2011-05. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. In December 2011, the topic
69
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.
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 or cash flows.
(T) Reclassification
Certain reclassifications have been made to the prior period’s consolidated 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.
(U) Subsequent Events
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.
Termination of Material Definitive Agreement.
On February 8, 2012, the Company, and FIE I LLC, an affiliate of PIMCO BRAVO Fund, L.P. , Patriot Financial Partners, L.P. , an affiliate of Endicott Management Company and three other institutional investors the “Investors”) mutually agreed to terminate their previously announced Securities Purchase Agreement, as amended and restated (the “Agreement”). As previously disclosed, the Company and each of the Investors had entered into the Agreement under which the Company would issue $79.7 million in Company common stock in a private placement offering at a price of $16.00 per share. Pursuant to the terms of the Agreement, the Company had also agreed to issue to the Investors warrants to purchase shares of either voting common stock or a new class of the Company’s mandatorily convertible non-voting common stock at a purchase price of $8.00 per share and in an amount equal to 25% of the number of shares of common stock each Investor would purchase in the Offering. The Agreement was terminated on February 8, 2012 because not all the required regulatory approvals necessary to complete the transaction had been received by all of the Investors as of the termination date.
Pursuant to the terms of the agreement, the Company had also agreed to reimburse the lead investors for certain out-of-pocket expenses such as legal fees, asset review fees and travel expense incurred during their due diligence process during 2011 of approximately $300 thousand dollars. In addition, pursuant to its engagement letter dated July 19, 2010 with its investment banking group, the Company agreed to reimburse out-of-pocket expenses such as legal fees, asset review fees and travel expense incurred on behalf of the Company in connection with the private placement that totaled approximately $425 thousand dollars. These reimbursable expenses are included in other liabilities on the balance sheet at December 31, 2011. The Bank incurred expense of approximately $965 thousand dollars related to the equity raise during 2011. As a result of the agreement termination, the Bank recorded a Securities Purchase Agreement termination expense of $1.7 million at December 31, 2011.
Termination of Material Definitive Agreement.
On March 14, 2012, the Bank and The Bank of Hampton Roads (“Hampton Roads”) mutually agreed to terminate their previously announced Purchase and Assumption Agreement dated as of July 14, 2011 (the “P & A Agreement”). As previously disclosed, pursuant to the terms of the P & A Agreement, the Bank had agreed to purchase all deposits and selected assets associated with seven Gateway Bank branches in North Carolina.
70
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The termination of the P & A Agreement was a direct result of the Company’s termination of the Securities Purchase Agreement. Pursuant to the terms of the Securities Purchase Agreement, the Company had agreed to issue $79.7 million in Company common stock to the investors in a private placement offering. The Company had planned to consummate the transaction contemplated by the P & A Agreement with a portion of the capital raised in the private placement offering.
2. INVESTMENT SECURITIES
The following is a summary of the securities portfolio by major classification:
| | | | | | | | | | | | | | | | |
| | | December 31, 2011 | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
| Securities available-for-sale: | | (Dollars in thousands) | |
Government-sponsored enterprises and FFCB bonds | | $ | 1,003 | | | $ | 29 | | | $ | — | | | $ | 1,032 | |
Obligations of states and political subdivisions | | | 27,855 | | | | 863 | | | | — | | | | 28,718 | |
Mortgage-backed securities | | | 130,949 | | | | 1,460 | | | | (117 | ) | | | 132,292 | |
SBA-backed securities | | | 146,195 | | | | 774 | | | | (332 | ) | | | 146,637 | |
Corporate bonds | | | 32,683 | | | | 88 | | | | (2,000 | ) | | | 30,771 | |
| | | | | | | | | | | | | | | | |
| | $ | 338,685 | | | $ | 3,214 | | | $ | (2,449 | ) | | $ | 339,450 | |
| | | | | | | | | | | | | | | | |
| | | December 31, 2010 | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
| Securities available-for-sale: | | (Dollars in thousands) | |
Government-sponsored enterprises and FFCB bonds | | $ | 25,466 | | | $ | 183 | | | $ | (868 | ) | | $ | 24,781 | |
Obligations of states and political subdivisions | | | 12,818 | | | | 240 | | | | (80 | ) | | | 12,978 | |
Mortgage-backed securities | | | 150,850 | | | | 837 | | | | (1,597 | ) | | | 150,090 | |
SBA-backed securities | | | 57,362 | | | | 258 | | | | (767 | ) | | | 56,853 | |
Corporate bonds | | | 29,387 | | | | 77 | | | | (937 | ) | | | 28,527 | |
| | | | | | | | | | | | | | | | |
| | $ | 275,883 | | | $ | 1,595 | | | $ | (4,249 | ) | | $ | 273,229 | |
Gross realized gains and losses on sales of securities for the years ended December 31, 2011, 2010 and 2009 were as follows:
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Gross realized gains | | $ | 2,795 | | | $ | 5,943 | | | $ | 2,579 | |
Gross realized losses | | | (164 | ) | | | (435 | ) | | | (14 | ) |
| | | | | | | | | | | | |
Net realized (losses) gains | | $ | 2,631 | | | $ | 5,508 | | | $ | 2,565 | |
| | | | | | | | | | | | |
71
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Impairment of Certain Investments in Debt and Equity Securities. The following tables set forth the amount of unrealized losses at December 31, 2011 and 2010 (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.
December 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or longer | | | Total | |
| | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
| | | (Dollars in thousands) | |
Mortgage-backed securities | | $ | 25,011 | | | $ | 81 | | | $ | 2,880 | | | $ | 36 | | | $ | 27,891 | | | $ | 117 | |
SBA-backed securities | | | 62,543 | | | | 332 | | | | — | | | | — | | | | 62,543 | | | | 332 | |
Corporate bonds | | | 11,824 | | | | 485 | | | | 13,755 | | | | 1,515 | | | | 25,579 | | | | 2,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 99,378 | | | $ | 898 | | | $ | 16,635 | | | $ | 1,551 | | | $ | 116,013 | | | $ | 2,449 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2010
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or longer | | | Total | |
| | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | | | Fair
Value | | | Unrealized
Losses | |
| | | (Dollars in thousands) | |
Government-sponsored enterprises and FFCB bonds | | $ | 17,410 | | | $ | 868 | | | $ | — | | | $ | — | | | $ | 17,410 | | | $ | 868 | |
Obligations of states and political subdivisions | | | 3,548 | | | | 80 | | | | — | | | | — | | | | 3,548 | | | | 80 | |
Mortgage-backed securities | | | 99,549 | | | | 1,597 | | | | — | | | | — | | | | 99,549 | | | | 1,597 | |
SBA-backed securities | | | 31,963 | | | | 767 | | | | — | | | | — | | | | 31,963 | | | | 767 | |
Corporate bonds | | | 20,815 | | | | 654 | | | | 1,717 | | | | 283 | | | | 22,532 | | | | 937 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 173,285 | | | $ | 3,966 | | | $ | 1,717 | | | $ | 283 | | | $ | 175,002 | | | $ | 4,249 | |
As of December 31, 2011 and December 31, 2010, management concluded that the unrealized losses presented above, which consisted of fifty securities at December 31, 2011 and seventy-nine securities at December 31, 2010, are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent to hold these investments for a time necessary to recover their cost and it is not likely that the Bank would be required to sell prior to recovery. The fifty securities at December 31, 2011 were comprised of twelve mortgage-backed securities, twelve corporate bonds and twenty-six SBA-backed securities. The seventy-nine securities at December 31, 2010 were comprised of ten government-sponsored enterprises and FFCB bonds, nine obligations of states and political subdivisions, thirty-six mortgage-backed securities, nine corporate bonds and fifteen SBA-backed securities. The losses above are on debt securities that have contractual maturity dates and are primarily related to market interest rates. 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 December 31, 2011 and December 31, 2010, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company was $3.5 million and $4.6 million, respectively. The FHLB paid a dividend for the third quarter of 2011 with an annualized rate of 0.80%. The dividend rate was equal to the average three month LIBOR for the period of July 1, 2011 to September 30, 2011 plus 0.50%, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of December 31, 2011 or
72
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
December 31, 2010. 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 of Atlanta stock held by the Company.
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2011 by remaining contractual maturity are as follows:
| | | | | | | | |
| | | Amortized
Cost | | | Fair
Value | |
| | | (Dollars in thousands) | |
Government-sponsored enterprises and FFCB bonds: | | | | | | | | |
Due in one through five years | | $ | 3 | | | $ | 28 | |
Due in five through ten years | | | 1,000 | | | | 1,004 | |
Obligations of states and political subdivisions: | | | | | | | | |
Due in one year or less | | | 250 | | | | 252 | |
Due in one through five years | | | 961 | | | | 1,033 | |
Due in five through ten years | | | 11,768 | | | | 12,083 | |
Due after ten years | | | 14,876 | | | | 15,350 | |
Mortgage-backed securities: | | | | | | | | |
Due in five through ten years | | | 7,415 | | | | 7,490 | |
Due after ten years | | | 123,534 | | | | 124,802 | |
SBA-backed securities: | | | | | | | | |
Due in five through ten years | | | 2,967 | | | | 3,007 | |
Due after ten years | | | 143,228 | | | | 143,630 | |
Corporate bonds: | | | | | | | | |
Due in one through five years | | | 13,338 | | | | 13,081 | |
Due five through ten years | | | 19,345 | | | | 17,690 | |
| | | | | | | | |
Total securities | | $ | 338,685 | | | $ | 339,450 | |
| | | | | | | | |
Securities with an amortized cost of $197.6 million at December 31, 2011 are pledged as collateral. Of this total, amortized cost of $47.4 million and fair value of $48.0 million are pledged as collateral for FHLB advances.
73
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2010 by remaining contractual maturity are as follows:
| | | | | | | | |
| | | Amortized
Cost | | | Fair
Value | |
| | | (Dollars in thousands) | |
Government-sponsored enterprises and FFCB bonds: | | | | | | | | |
Due in one through five years | | $ | 2,000 | | | $ | 1,972 | |
Due in five through ten years | | | 16,108 | | | | 15,982 | |
Due after ten years | | | 7,358 | | | | 6,827 | |
Obligations of states and political subdivisions: | | | | | | | | |
Due in one year or less | | | 370 | | | | 373 | |
Due in one through five years | | | 252 | | | | 253 | |
Due in five through ten years | | | 5,203 | | | | 5,354 | |
Due after ten years | | | 6,993 | | | | 6,998 | |
Mortgage-backed securities: | | | | | | | | |
Due in five through ten years | | | 4,307 | | | | 4,551 | |
Due after ten years | | | 146,543 | | | | 145,539 | |
SBA-backed securities: | | | | | | | | |
Due in five through ten years | | | 5,889 | | | | 5,973 | |
Due after ten years | | | 51,473 | | | | 50,880 | |
Corporate bonds: | | | | | | | | |
Due in one year or less | | | 8,779 | | | | 8,712 | |
Due in five through ten years | | | 17,421 | | | | 16,767 | |
Due after ten years | | | 3,187 | | | | 3,048 | |
| | | | | | | | |
Total securities | | $ | 275,883 | | | $ | 273,229 | |
| | | | | | | | |
Securities with an amortized cost of $212.2 million at December 31, 2010 are pledged as collateral. Of this total, amortized cost of $52.9 million and fair value of $52.2 million are pledged as collateral for FHLB advances.
74
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
3. LOANS
Loans at December 31, 2011 and 2010 classified by type are as follows:
| | | | | | | | |
| | | 2011 | | | 2010 | |
| | | (Dollars in thousands) | |
Real estate loans: | | | | | | | | |
Construction and land development | | $ | 67,232 | | | $ | 90,267 | |
Secured by farmland | | | 29,947 | | | | 26,694 | |
Secured by residential properties | | | 110,238 | | | | 120,183 | |
Secured by nonfarm, nonresidential properties | | | 203,287 | | | | 218,028 | |
Consumer installment | | | 6,485 | | | | 4,096 | |
Credit cards and related plans | | | 1,660 | | | | 2,261 | |
Commercial and all other loans: | | | | | | | | |
Commercial and industrial | | | 45,649 | | | | 60,242 | |
Loans to finance agricultural production | | | 21,524 | | | | 28,217 | |
All other loans | | | 10,587 | | | | 17,863 | |
| | | | | | | | |
| | | 496,609 | | | | 567,851 | |
Less deferred fees and costs, net | | | 67 | | | | 220 | |
| | | | | | | | |
| | $ | 496,542 | | | $ | 567,631 | |
| | | | | | | | |
Included in the above: | | | | | | | | |
Nonaccrual loans | | $ | 15,973 | | | $ | 15,896 | |
Restructured loans1 | | | 10,138 | | | | 6,193 | |
| 1. | | Restructured loans includes loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans. |
There were no loans outstanding that were past due ninety days or more that were still accruing at December 31, 2011 or December 31, 2010.
The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company’s policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.
The following describe the risk characteristics relevant to each of the portfolio segments.
Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.
Construction and land development loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related
75
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected “as built” appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.
Loans secured by farmland are made to agricultural customers for the purpose of acquisition or improvement of farmland. The loans are typically secured by land which is cultivated for primarily row- crop production and related interests, such as grain elevator facilities and farming operations buildings. Repayment of loans secured by farmland may depend on successful crop production or other farm related operations.
Residential loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. Loans with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years.
Nonfarm and nonresidential loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.
Consumer Installment Loans, Credit Cards and Related Plans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.
Commercial and Industrial and Agricultural Loans. Our commercial and industrial loan and loans to finance agriculture includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.
At December 31, 2011 and 2010, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $53.2 million and $55.5 million, respectively.
Loans with a book value of approximately $25.8 million at December 31, 2011 are pledged as eligible collateral for FHLB advances.
76
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
4. CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES
During 2011, the following circumstances occurred which represent the primary factors contributing to changes in the AFLL:
| | • | | The Company experienced a significant decline in the outstanding balance of construction and land development as well as commercial and industrial loans. Additionally, the overall risk grade of the remaining loans within these segments has improved. Given the significance of historical loss rates attributable to these loan segments, the declining loan balances and improved average risk grades had a substantial impact on our general reserves, effectively lowering them by approximately 41 basis points, or $1.9 million, as compared to prior year end. |
| | • | | During 2011, management also conducted an impairment migration study using the Bank’s historical data from the preceding two years. From this study we determined that our years to impairment AFLL model assumption should be reduced in all but two of our loan segments. Management also evaluated the AFLL model’s unallocated internal and external qualitative factor percentages during 2011. In doing so, we determined that certain internal controls of the credit function had strengthened, thereby resulting in specific internal factors which have been scored to ensure they were consistent with such improved Bank policies and procedures. We further determined that increases in certain internal and external factors were warranted, primarily as a result of continued suppressed market conditions and trends in portfolio key performance indicators. Overall, our net internal and external qualitative factors increased by approximately 47 basis points, or $2.1 million, as compared to the prior year end. |
Management’s migration study was supplemented by an independent study of the allowance model. During 2011, the Bank also engaged an independent specialist to perform a loss migration analysis on the Bank’s loan portfolio in order to provide additional statistical data and validation for the Bank’s AFLL modeling process. That analysis provided the Bank with useful data regarding its loss migration history and mean level of loss history given our credit migration, and served as an independent validation of our overall allowance position at period end. Management and the Board of Directors have evaluated the impact of these AFLL model updates and determined that the allowance represents an amount necessary to absorb estimated probable losses in the loan portfolio.
An analysis of the allowance for loan losses for the years ended December 31, 2011, 2010 and 2009 follows:
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Beginning balance | | $ | 13,247 | | | $ | 9,725 | | | $ | 5,931 | |
Provision for loan losses | | | 8,483 | | | | 12,980 | | | | 11,100 | |
Recoveries | | | 320 | | | | 287 | | | | 260 | |
Loans charged off | | | (9,958 | ) | | | (9,745 | ) | | | (7,566 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | 12,092 | | | $ | 13,247 | | | $ | 9,725 | |
| | | | | | | | | | | | |
77
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table summarizes the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the years ending December 31, 2011 and December 31, 2010:
Allowance for Loan Losses
As of December 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses | | Real Estate
Construction
and Land
Development | | | Real
Estate
Secured by
Farmland | | | Real
Estate
Secured by
Residential
Properties | | | Real Estate
Secured by
Nonfarm
Nonresidential | | | Consumer
Installment | | | Credit
Cards and
Related
Plans | | | Commercial
and
Industrial | | | Loans to
Finance
Agricultural
Production | | | All
Other
Loans | | | General
Qualitative
Portion | | | Total | |
| | | (Dollars in thousands) | |
Beginning balance | | $ | 6,168 | | | $ | 28 | | | $ | 3,450 | | | $ | 1,007 | | | $ | 12 | | | $ | 21 | | | $ | 882 | | | $ | 18 | | | $ | 139 | | | $ | 1,522 | | | $ | 13,247 | |
Charge-offs | | | (5,150 | ) | | | (—) | | | | (1,985 | ) | | | (1,887 | ) | | | (20 | ) | | | (294 | ) | | | (385 | ) | | | (—) | | | | (237 | ) | | | (—) | | | | (9,958 | ) |
Recoveries | | | 10 | | | | — | | | | 12 | | | | 43 | | | | 5 | | | | 3 | | | | 103 | | | | — | | | | 144 | | | | — | | | | 320 | |
Provisions | | | 2,627 | | | | (13 | ) | | | 941 | | | | 2,577 | | | | 49 | | | | 288 | | | | (45 | ) | | | 97 | | | | (20 | ) | | | 1,982 | | | | 8,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 3,655 | | | $ | 15 | | | $ | 2,418 | | | $ | 1,740 | | | $ | 46 | | | $ | 18 | | | $ | 555 | | | $ | 115 | | | $ | 26 | | | $ | 3,504 | | | $ | 12,092 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 637 | | | $ | — | | | $ | 480 | | | $ | 1,181 | | | $ | — | | | $ | — | | | $ | 165 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | $ | 3,018 | | | $ | 15 | | | $ | 1,938 | | | $ | 559 | | | $ | 46 | | | $ | 18 | | | $ | 390 | | | $ | 115 | | | $ | 26 | | | $ | 3,504 | | | $ | 9,629 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 67,127 | | | $ | 29,890 | | | $ | 110,374 | | | $ | 203,063 | | | $ | 6,620 | | | $ | 1,661 | | | $ | 45,679 | | | $ | 21,539 | | | $ | 10,589 | | | $ | — | | | $ | 496,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance: individually evaluated for impairment | | $ | 10,074 | | | $ | — | | | $ | 5,514 | | | $ | 14,029 | | | $ | — | | | $ | — | | | $ | 561 | | | $ | 1,111 | | | $ | — | | | $ | — | | | $ | 31,289 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance: collectively evaluated for impairment | | $ | 57,053 | | | $ | 29,890 | | | $ | 104,860 | | | $ | 189,034 | | | $ | 6,620 | | | $ | 1,661 | | | $ | 45,118 | | | $ | 20,428 | | | $ | 10,589 | | | $ | — | | | $ | 465,253 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
78
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Allowance for Loan Losses
As of December 31, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses | | Real Estate
Construction
and Land
Development | | | Real
Estate
Secured by
Farmland | | | Real
Estate
Secured by
Residential
Properties | | | Real Estate
Secured by
Nonfarm
Nonresidential | | | Consumer
Installment | | | Credit
Cards and
Related
Plans | | | Commercial
and
Industrial | | | Loans to
Finance
Agricultural
Production | | | All
Other
Loans | | | General
Qualitative
&
Quantitative
Portion | | | Total | |
| | | (Dollars in thousands) | |
Beginning balance | | $ | 4,623 | | | $ | 25 | | | $ | 2,383 | | | $ | 541 | | | $ | 23 | | | $ | 13 | | | $ | 523 | | | $ | 16 | | | $ | 169 | | | $ | 1,409 | | | $ | 9,725 | |
Charge-offs | | | (5,977 | ) | | | (—) | | | | (2,022 | ) | | | (213 | ) | | | (54 | ) | | | (11 | ) | | | (1,191 | ) | | | (—) | | | | (277 | ) | | | (—) | | | | (9,745 | ) |
Recoveries | | | 111 | | | | — | | | | 19 | | | | — | | | | 7 | | | | 1 | | | | 19 | | | | — | | | | 130 | | | | — | | | | 287 | |
Provisions | | | 7,411 | | | | 3 | | | | 3,070 | | | | 679 | | | | 36 | | | | 18 | | | | 1,531 | | | | 2 | | | | 117 | | | | 113 | | | | 12,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 6,168 | | | $ | 28 | | | $ | 3,450 | | | $ | 1,007 | | | $ | 12 | | | $ | 21 | | | $ | 882 | | | $ | 18 | | | $ | 139 | | | $ | 1,522 | | | $ | 13,247 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 803 | | | $ | — | | | $ | 916 | | | $ | 546 | | | $ | — | | | $ | — | | | $ | 102 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,367 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | $ | 5,365 | | | $ | 28 | | | $ | 2,534 | | | $ | 461 | | | $ | 12 | | | $ | 21 | | | $ | 780 | | | $ | 18 | | | $ | 139 | | | $ | 1,522 | | | $ | 10,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 90,145 | | | $ | 26,661 | | | $ | 120,278 | | | $ | 217,709 | | | $ | 4,209 | | | $ | 2,261 | | | $ | 60,238 | | | $ | 28,215 | | | $ | 17,915 | | | $ | — | | | $ | 567,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance: individually evaluated for impairment | | $ | 15,940 | | | $ | — | | | $ | 6,103 | | | $ | 3,812 | | | $ | — | | | $ | — | | | $ | 397 | | | $ | — | | | $ | — | | | $ | — | | | $ | 26,252 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance: collectively evaluated for impairment | | $ | 74,205 | | | $ | 26,661 | | | $ | 114,175 | | | $ | 213,897 | | | $ | 4,209 | | | $ | 2,261 | | | $ | 59,841 | | | $ | 28,215 | | | $ | 17,915 | | | $ | — | | | $ | 541,379 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
79
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings.
Pass:Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.
Weak Pass:Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.
Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Some loans that are substandard do not meet the definition of an impaired loan and therefore are not deemed impaired.
The following tables present loans as of December 31, 2011 and December 31, 2010 classified by risk type:
Credit Quality Indicators
As of December 31, 2011
| | | | | | | | | | | | | | | | | | | | |
| | | Pass | | | Weak
Pass | | | Special
Mention | | | Substandard | | | Total | |
| | | (Dollars in thousands) | |
Real Estate—Construction and Land Development Loans | | $ | 27,833 | | | $ | 23,237 | | | $ | 4,853 | | | $ | 11,204 | | | $ | 67,127 | |
Real Estate—Secured by Farmland | | | 22,008 | | | | 4,430 | | | | 3,452 | | | | — | | | | 29,890 | |
Real Estate—Secured by Residential Properties | | | 60,121 | | | | 31,146 | | | | 12,302 | | | | 6,805 | | | | 110,374 | |
Real Estate—Secured by Nonfarm Nonresidential | | | 90,099 | | | | 75,384 | | | | 18,663 | | | | 18,917 | | | | 203,063 | |
Consumer Installment | | | 4,025 | | | | 2,212 | | | | 254 | | | | 129 | | | | 6,620 | |
Credit Cards and Related Plans | | | 850 | | | | 529 | | | | 279 | | | | 3 | | | | 1,661 | |
Commercial and Industrial | | | 25,133 | | | | 16,146 | | | | 2,686 | | | | 1,714 | | | | 45,679 | |
Loans to Finance Agriculture Production | | | 16,473 | | | | 3,290 | | | | 584 | | | | 1,192 | | | | 21,539 | |
All Other Loans | | | 3,171 | | | | 7,393 | | | | 25 | | | | — | | | | 10,589 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 249,713 | | | $ | 163,767 | | | $ | 43,098 | | | $ | 39,964 | | | $ | 496,542 | |
| | | | | | | | | | | | | | | | | | | | |
80
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Credit Quality Indicators
As of December 31, 2010
| | | | | | | | | | | | | | | | | | | | |
| | | Pass | | | Weak
Pass | | | Special
Mention | | | Substandard | | | Total | |
| | | (Dollars in thousands) | |
Real Estate—Construction and Land Development Loans | | $ | 35,356 | | | $ | 27,978 | | | $ | 9,466 | | | $ | 17,345 | | | $ | 90,145 | |
Real Estate—Secured by Farmland | | | 17,869 | | | | 6,294 | | | | 2,495 | | | | 3 | | | | 26,661 | |
Real Estate—Secured by Residential Properties | | | 64,457 | | | | 43,364 | | | | 3,469 | | | | 8,988 | | | | 120,278 | |
Real Estate—Secured by Nonfarm Nonresidential | | | 94,208 | | | | 96,287 | | | | 20,107 | | | | 7,107 | | | | 217,709 | |
Consumer Installment | | | 2,466 | | | | 1,460 | | | | 265 | | | | 18 | | | | 4,209 | |
Credit Cards and Related Plans | | | 1,211 | | | | 869 | | | | 89 | | | | 92 | | | | 2,261 | |
Commercial and Industrial | | | 33,416 | | | | 22,805 | | | | 3,292 | | | | 725 | | | | 60,238 | |
Loans to Finance Agriculture Production | | | 18,346 | | | | 7,230 | | | | 2,639 | | | | — | | | | 28,215 | |
All Other Loans | | | 8,442 | | | | 9,341 | | | | 119 | | | | 13 | | | | 17,915 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 275,771 | | | $ | 215,628 | | | $ | 41,941 | | | $ | 34,291 | | | $ | 567,631 | |
| | | | | | | | | | | | | | | | | | | | |
The following table summarizes the past due loans by category as of December 31, 2011 and December 31, 2010:
Past Due Loans
As of December 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-59 Days
Past Due | | | 60-89 Days
Past Due | | | Greater than
89 Days (1) | | | Total Past
Due | | | Current | | | Total | |
| | | (Dollars in thousands) | |
Real Estate Construction and Land Development | | $ | 447 | | | $ | 198 | | | $ | 6,142 | | | $ | 6,787 | | | $ | 60,340 | | | $ | 67,127 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | 29,890 | | | | 29,890 | |
Real Estate Secured by Residential Properties | | | 1,055 | | | | 993 | | | | 1,278 | | | | 3,326 | | | | 107,048 | | | | 110,374 | |
Real Estate Secured by Nonfarm Nonresidential | | | 2,357 | | | | — | | | | 4,446 | | | | 6,803 | | | | 196,260 | | | | 203,063 | |
Consumer Installment | | | 65 | | | | — | | | | 22 | | | | 87 | | | | 6,533 | | | | 6,620 | |
Credit Cards and Related Plans | | | 2 | | | | 2 | | | | — | | | | 4 | | | | 1,657 | | | | 1,661 | |
Commercial and Industrial | | | 294 | | | | — | | | | 205 | | | | 499 | | | | 45,180 | | | | 45,679 | |
Loans to Finance Agricultural Production | | | — | | | | — | | | | — | | | | — | | | | 21,539 | | | | 21,539 | |
All Other Loans | | | — | | | | — | | | | — | | | | — | | | | 10,589 | | | | 10,589 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 4,220 | | | $ | 1,193 | | | $ | 12,093 | | | $ | 17,506 | | | $ | 479,036 | | | $ | 496,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-accrual Loans Included in above Totals | | $ | 1,426 | | | $ | 588 | | | $ | 12,093 | | | $ | 14,107 | | | $ | 1,866 | | | $ | 15,973 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | There were no loans outstanding that were past due ninety days or more that were still accruing at December 31, 2011. |
81
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Past Due Loans
As of December 31, 2010
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-59 Days
Past Due | | | 60-89 Days
Past Due | | | Greater than
89 Days (1) | | | Total Past
Due | | | Current | | | Total | |
| | | (Dollars in thousands) | |
Real Estate Construction and Land Development | | $ | 2,997 | | | $ | 929 | | | $ | 9,627 | | | $ | 13,553 | | | $ | 76,592 | | | $ | 90,145 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | 26,661 | | | | 26,661 | |
Real Estate Secured by Residential Properties | | | 251 | | | | 389 | | | | 2,526 | | | | 3,166 | | | | 117,112 | | | | 120,278 | |
Real Estate Secured by Nonfarm Nonresidential | | | 545 | | | | — | | | | 919 | | | | 1,464 | | | | 216,245 | | | | 217,709 | |
Consumer Installment | | | 35 | | | | 6 | | | | 5 | | | | 46 | | | | 4,163 | | | | 4,209 | |
Credit Cards and Related Plans | | | 3 | | | | — | | | | — | | | | 3 | | | | 2,258 | | | | 2,261 | |
Commercial and Industrial | | | 111 | | | | 19 | | | | 553 | | | | 683 | | | | 59,555 | | | | 60,238 | |
Loans to Finance Agricultural Production | | | — | | | | — | | | | — | | | | — | | | | 28,215 | | | | 28,215 | |
All Other Loans | | | 22 | | | | 4 | | | | — | | | | 26 | | | | 17,889 | | | | 17,915 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,964 | | | $ | 1,347 | | | $ | 13,630 | | | $ | 18,941 | | | $ | 548,690 | | | $ | 567,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-accrual Loans Included in above Totals | | $ | 53 | | | $ | 625 | | | $ | 13,630 | | | $ | 14,308 | | | $ | 1,588 | | | $ | 15,896 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | There were no loans outstanding that were past due ninety days or more that were still accruing at December 31, 2010. |
82
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table presents impaired loans as of December 31, 2011 and December 31, 2010. The recorded investment balance includes the loan balance and accrued interest. The deferred fees that have yet to be recognized are not material for both periods.
Impaired Loans
As of December 31, 2011
| | | | | | | | | | | | | | | | | | | | |
| | | Recorded
Investment | | | Unpaid
Principal
Balance | | | Related
Allowance | | | Average
Recorded
Investment | | | Interest
Income
Recognized | |
| | | (Dollars in thousands) | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Real Estate Construction and Land Development | | $ | 6,280 | | | $ | 11,137 | | | $ | — | | | $ | 7,940 | | | $ | 143 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | — | |
Real Estate Secured by Residential Properties | | | 2,135 | | | | 2,611 | | | | — | | | | 3,575 | | | | 77 | |
Real Estate Secured by Nonfarm Nonresidential | | | 7,075 | | | | 7,484 | | | | — | | | | 3,209 | | | | 98 | |
Consumer Installment | | | — | | | | — | | | | — | | | | — | | | | — | |
Credit Cards and Related Plans | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial and Industrial | | | 379 | | | | 500 | | | | — | | | | 364 | | | | 14 | |
Loans to Finance Agricultural Production | | | 1,109 | | | | 1,110 | | | | — | | | | 93 | | | | 6 | |
All Other Loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans with no related allowance recorded | | $ | 16,978 | | | $ | 22,842 | | | $ | — | | | $ | 15,181 | | | $ | 338 | |
| | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Real Estate Construction and Land Development | | $ | 3,806 | | | $ | 3,794 | | | $ | 637 | | | $ | 6,410 | | | | 116 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | — | |
Real Estate Secured by Residential Properties | | | 3,391 | | | | 3,382 | | | | 480 | | | | 4,099 | | | | 89 | |
Real Estate Secured by Nonfarm Nonresidential | | | 6,976 | | | | 6,957 | | | | 1,181 | | | | 4,550 | | | | 139 | |
Consumer Installment | | | — | | | | — | | | | — | | | | — | | | | — | |
Credit Cards and Related Plans | | | — | | | | — | | | | — | | | | 150 | | | | 5 | |
Commercial and Industrial | | | 186 | | | | 186 | | | | 165 | | | | 625 | | | | 24 | |
Loans to Finance Agricultural Production | | | — | | | | — | | | | — | | | | — | | | | — | |
All Other Loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans with related allowance recorded | | $ | 14,359 | | | $ | 14,319 | | | $ | 2,463 | | | $ | 15,834 | | | $ | 373 | |
| | | | | |
Total | | | | | | | | | | | | | | | | | | | | |
Construction and Land Development | | $ | 10,086 | | | $ | 14,931 | | | $ | 637 | | | $ | 14,350 | | | $ | 259 | |
Residential | | | 5,526 | | | | 5,993 | | | | 480 | | | | 7,674 | | | | 166 | |
Commercial | | | 15,725 | | | | 16,237 | | | | 1,346 | | | | 8,841 | | | | 281 | |
Consumer | | | — | | | | — | | | | — | | | | 150 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans | | $ | 31,337 | | | $ | 37,161 | | | $ | 2,463 | | | $ | 31,015 | | | $ | 711 | |
83
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Impaired Loans
As of December 31, 2010
| | | | | | | | | | | | | | | | | | | | |
| | | Recorded
Investment | | | Unpaid
Principal
Balance | | | Related
Allowance | | | Average
Recorded
Investment | | | Interest
Income
Recognized | |
| | | (Dollars in thousands) | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Real Estate Construction and Land Development | | $ | 9,212 | | | $ | 13,354 | | | $ | — | | | $ | 9,146 | | | $ | 190 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | — | |
Real Estate Secured by Residential Properties | | | 2,700 | | | | 2,972 | | | | — | | | | 3,909 | | | | 81 | |
Real Estate Secured by Nonfarm Nonresidential | | | 1,029 | | | | 1,097 | | | | — | | | | 5,662 | | | | 117 | |
Consumer Installment | | | — | | | | — | | | | — | | | | — | | | | — | |
Credit Cards and Related Plans | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial and Industrial | | | 218 | | | | 217 | | | | — | | | | 385 | | | | 8 | |
Loans to Finance Agricultural Production | | | — | | | | — | | | | — | | | | — | | | | — | |
All Other Loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans with no related allowance recorded | | $ | 13,159 | | | $ | 17,640 | | | $ | — | | | $ | 19,102 | | | $ | 396 | |
| | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Real Estate Construction and Land Development | | $ | 6,771 | | | $ | 9,497 | | | $ | 803 | | | $ | 6,571 | | | | 136 | |
Real Estate Secured by Farmland | | | — | | | | — | | | | — | | | | — | | | | — | |
Real Estate Secured by Residential Properties | | | 3,411 | | | | 3,405 | | | | 915 | | | | 3,312 | | | | 69 | |
Real Estate Secured by Nonfarm Nonresidential | | | 2,794 | | | | 2,784 | | | | 546 | | | | 1,241 | | | | 26 | |
Consumer Installment | | | — | | | | — | | | | — | | | | — | | | | — | |
Credit Cards and Related Plans | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial and Industrial | | | 179 | | | | 199 | | | | 102 | | | | 925 | | | | 19 | |
Loans to Finance Agricultural Production | | | — | | | | — | | | | — | | | | — | | | | — | |
All Other Loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans with related allowance recorded | | $ | 13,155 | | | $ | 15,885 | | | $ | 2,366 | | | $ | 12,049 | | | $ | 250 | |
| | | | | |
Total | | | | | | | | | | | | | | | | | | | | |
Construction and Land Development | | $ | 15,983 | | | $ | 22,851 | | | $ | 803 | | | $ | 15,717 | | | $ | 326 | |
Residential | | | 6,111 | | | | 6,377 | | | | 915 | | | | 7,221 | | | | 150 | |
Commercial | | | 4,220 | | | | 4,297 | | | | 648 | | | | 8,213 | | | | 170 | |
Consumer | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total impaired loans | | $ | 26,314 | | | $ | 33,525 | | | $ | 2,366 | | | $ | 31,151 | | | $ | 646 | |
84
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table presents nonaccrual loans as of December 31, 2011 and December 31, 2010 by loan category:
Nonaccrual Loans
| | | | | | | | |
| | | December 31,
2011 | | | December 31,
2010 | |
| | | (Dollars in thousands) | |
Real Estate Construction and Land Development | | $ | 6,795 | | | $ | 10,839 | |
Real Estate Secured by Farmland | | | — | | | | — | |
Real Estate Secured by Residential Properties | | | 2,113 | | | | 3,268 | |
Real Estate Secured by Nonfarm Nonresidential | | | 6,767 | | | | 1,231 | |
Consumer Installment | | | 22 | | | | 5 | |
Credit Cards and Related Plans | | | — | | | | — | |
Commercial and Industrial | | | 276 | | | | 553 | |
Loans to Finance Agricultural Production | | | — | | | | — | |
All Other Loans | | | — | | | | — | |
| | | | | | | | |
Total | | $ | 15,973 | | | $ | 15,896 | |
| | | | | | | | |
Interest income not recognized due to loans being on nonaccrual status during the years ended December 31, 2011 and 2010 was approximately $850 thousand and $1.1 million, respectively.
For the year ended December 31, 2011 the following table presents a breakdown of the types of concessions made by loan class. The recorded investment balances presented are balances at the time of concessions.
Troubled Debt Restructurings
| | | | | | | | | | | | |
| | | December 31, 2011 | |
| | | Number
of
Loans | | | Pre-Modification
Outstanding
Recorded
Investment | | | Post-Modification
Outstanding
Recorded
Investment | |
| | | (Dollars in thousands) | |
Below market interest rate: | | | | | | | | | | | | |
Real Estate Secured by Residential Properties | | | 1 | | | $ | 219 | | | $ | 219 | |
Real Estate Secured by Nonfarm Nonresidential | | | 4 | | | | 3,424 | | | | 3,424 | |
Credit Cards and Related Plans | | | 1 | | | | 33 | | | | 33 | |
| | | | | | | | | | | | |
Total below market interest rate | | | 6 | | | $ | 3,676 | | | $ | 3,676 | |
| | | |
Extended payment terms: | | | | | | | | | | | | |
Real Estate Construction and Land Development | | | 2 | | | $ | 258 | | | $ | 258 | |
Real Estate Secured by Residential Properties | | | 3 | | | | 1,549 | | | | 1,549 | |
Real Estate Secured by Nonfarm Nonresidential | | | 3 | | | | 918 | | | | 918 | |
Commercial and Industrial | | | 2 | | | | 227 | | | | 227 | |
| | | | | | | | | | | | |
Total Extended Payment Terms | | | 10 | | | $ | 2,952 | | | $ | 2,952 | |
| | | |
Forgiveness of principal: | | | | | | | | | | | | |
Real Estate Construction and Land Development | | | 10 | | | $ | 925 | | | $ | 860 | |
| | | | | | | | | | | | |
Total forgiveness of principal | | | 10 | | | $ | 925 | | | $ | 860 | |
| | | | | | | | | | | | |
Total | | | 26 | | | $ | 7,553 | | | $ | 7,488 | |
| | | | | | | | | | | | |
85
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table presents the successes and failures of the types of modifications for the year ended December 31, 2011. The recorded investment balances presented are as of December 31, 2011.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Paid in Full | | | Paying as
Restructured | | | Converted to
Non-accrual | | | Foreclosure/Default | |
| | | Number
of
Loans | | | Recorded
Investment | | | Number
of
Loans | | | Recorded
Investment | | | Number
of
Loans | | | Recorded
Investment | | | Number
of
Loans | | | Recorded
Investment | |
| | | (Dollars in thousands) | |
Below market interest rate | | | — | | | $ | — | | | | 6 | | | $ | 3,679 | | | | — | | | $ | — | | | | — | | | $ | — | |
Extended payment terms | | | 1 | | | | — | | | | 8 | | | | 2,750 | | | | 1 | | | | 161 | | | | — | | | | — | |
Forgiveness of principal | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 11 | | | $ | — | | | | 14 | | | $ | 6,429 | | | | 1 | | | $ | 161 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
There were no loans that were restructured during the year ending on December 31, 2011 that were ninety or more past due and therefore had a payment default. As noted in the previous table there was one loan that, while the loan was not ninety days past due, was moved into nonaccrual status due to payment concerns.
Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as “troubled debt restructurings” or “TDRs”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Company identified no loans as TDRs which the allowance for loan losses had previously been measured under a general allowance methodology. TDRs are treated as impaired loans in determining the adequacy of the allowance for loan loss.
5. BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment at December 31, 2011 and 2010 are as follows:
| | | | | | | | | | | | |
| | | Cost | | | Accumulated
Depreciation | | | Undepreciated
Cost | |
| | | (Dollars in thousands) | |
December 31, 2011: | | | | |
Land | | $ | 10,241 | | | $ | — | | | $ | 10,241 | |
Land improvements | | | 394 | | | | 207 | | | | 187 | |
Buildings | | | 19,393 | | | | 6,045 | | | | 13,348 | |
Construction in progress | | | 260 | | | | — | | | | 260 | |
Furniture and equipment | | | 7,627 | | | | 5,374 | | | | 2,253 | |
| | | | | | | | | | | | |
Total | | $ | 37,915 | | | $ | 11,626 | | | $ | 26,289 | |
| | | | | | | | | | | | |
December 31, 2010: | | | | | | | | | | | | |
Land | | $ | 10,241 | | | $ | — | | | $ | 10,241 | |
Land improvements | | | 302 | | | | 203 | | | | 99 | |
Buildings | | | 18,993 | | | | 5,430 | | | | 13,563 | |
Construction in progress | | | 463 | | | | — | | | | 463 | |
Furniture and equipment | | | 7,253 | | | | 4,983 | | | | 2,270 | |
| | | | | | | | | | | | |
Total | | $ | 37,252 | | | $ | 10,616 | | | $ | 26,636 | |
| | | | | | | | | | | | |
86
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
6. INCOME TAXES
The components of income tax expense (benefit) are as follows:
| | | | | | | | | | | | |
| | | Current | | | Deferred* | | | Total | |
| | | (Dollars in thousands) | |
Year ended December 31, 2011: | | | | |
Federal | | $ | (948 | ) | | $ | (397 | ) | | $ | (1,345 | ) |
State | | | — | | | | (199 | ) | | | (199 | ) |
| | | | | | | | | | | | |
| | $ | (948 | ) | | $ | (596 | ) | | $ | (1,544 | ) |
| | | | | | | | | | | | |
Year ended December 31, 2010: | | | | | | | | | | | | |
Federal | | $ | 831 | | | $ | (1,439 | ) | | $ | (608 | ) |
State | | | 135 | | | | (293 | ) | | | (158 | ) |
| | | | | | | | | | | | |
| | $ | 966 | | | $ | (1,732 | ) | | $ | (766 | ) |
| | | | | | | | | | | | |
Year ended December 31, 2009: | | | | | | | | | | | | |
Federal | | $ | 2,863 | | | $ | (3,455 | ) | | $ | (592 | ) |
State | | | 698 | | | | (463 | ) | | | 235 | |
| | | | | | | | | | | | |
| | $ | 3,561 | | | $ | (3,918 | ) | | $ | (357 | ) |
| | | | | | | | | | | | |
| * | | Included in deferred tax is release of valuation allowance adjustment of $62 thousand for year ending December 31, 2009. |
Total income tax expense was less than the amount computed by applying the federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows:
| | | | | | | | | | | | |
| | | Years ended
December 31, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Income taxes at statutory rate | | $ | (873 | ) | | $ | 32 | | | $ | 389 | |
Increase (decrease) resulting from: | | | | | | | | | | | | |
Effect of non-taxable interest income | | | (284 | ) | | | (539 | ) | | | (548 | ) |
Decrease in valuation allowance | | | (36 | ) | | | — | | | | (62 | ) |
Bank owned life insurance | | | (110 | ) | | | (101 | ) | | | (105 | ) |
State taxes, net of federal benefit | | | (131 | ) | | | (105 | ) | | | 155 | |
CAHEC tax credits | | | (145 | ) | | | (145 | ) | | | (144 | ) |
Other, net | | | 35 | | | | 92 | | | | (42 | ) |
| | | | | | | | | | | | |
Applicable income taxes | | $ | (1,544 | ) | | $ | (766 | ) | | $ | (357 | ) |
| | | | | | | | | | | | |
87
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented below:
| | | | | | | | |
| | | 2011 | | | 2010 | |
| | | (Dollars in thousands) | |
Deferred tax assets: | | | | |
Allowance for loan losses | | $ | 4,661 | | | $ | 5,107 | |
Capital loss carry forward | | | 7 | | | | 43 | |
Postretirement benefits | | | 228 | | | | 282 | |
Unrealized losses on available-for-sale investment securities | | | — | | | | 1,022 | |
Unfunded postretirement benefits | | | 83 | | | | 12 | |
Bank premises and equipment, principally due to differences in depreciation | | | — | | | | 75 | |
Carry forward of tax credits | | | 1,034 | | | | — | |
Other | | | 1,775 | | | | 1,573 | |
| | | | | | | | |
Total gross deferred tax assets | | $ | 7,788 | | | $ | 8,114 | |
Valuation allowance | | | (7 | ) | | | (43 | ) |
| | | | | | | | |
Total net deferred tax assets | | | 7,781 | | | | 8,071 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Bank premises and equipment, principally due to differences in depreciation | | | 295 | | | | — | |
Unrealized gains on securities available for sale | | | 183 | | | | — | |
Other | | | 24 | | | | 143 | |
| | | | | | | | |
Total gross deferred tax liabilities | | | 502 | | | | 143 | |
| | | | | | | | |
Net deferred tax asset | | $ | 7,279 | | | $ | 7,928 | |
| | | | | | | | |
The valuation allowance for deferred tax assets was $7 thousand and $43 thousand at December 31, 2011 and December 31, 2010. The valuation allowance required at December 31, 2011 and 2010 was for certain capital losses related to investments in equity securities. These losses are capital in character and the corporation may not have current capital gain capacity to offset these losses. In order for these capital losses to be realized, the Company would need capital gains to offset them.
During 2009, the Company recognized capital gains which decreased the valuation allowance. However the Company does not have plans in place to generate any capital gains in the future. Accordingly, it is more likely than not that these capital losses will fail to be realized and a valuation allowance is required on this portion of the deferred tax asset.
Based on the Company’s historical and current earnings, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets which are not provided for under the valuation allowance.
The Company and its subsidiary file a consolidated income tax return with the federal government separate income tax returns with the state of North Carolina. With few exceptions, the Company and its subsidiary are no longer subject to federal or state income tax examinations by tax authorities for years before 2008. Net economic loss carry forwards for North Carolina tax purposes as of December 31, 2011 will expire in 2026.
The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions. The years ended December 31, 2008 through December 31, 2010 remain open for audit for all major jurisdictions.
88
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
7. BORROWED FUNDS
Borrowed funds and the corresponding weighted average rates (WAR) at December 31, 2011 and 2010 are summarized as follows:
| | | | | | | | | | | | | | | | |
| | | 2011 | | | WAR | | | 2010 | | | WAR | |
| | | (Dollars in thousands) | |
Sweep accounts | | $ | 2,679 | | | | 1.00 | % | | $ | 3,509 | | | | 1.00 | % |
Advances from FHLB | | | 9,000 | | | | 2.64 | | | | 8,000 | | | | 2.42 | |
| | | | | | | | | | | | | | | | |
Total short-term borrowings | | | 11,679 | | | | 2.26 | | | | 11,509 | | | | 1.98 | |
| | | | | | | | | | | | | | | | |
Advances from FHLB | | | 25,500 | | | | 2.23 | | | | 34,500 | | | | 2.34 | |
| | | | | | | | | | | | | | | | |
Total long-term obligations | | | 25,500 | | | | 2.23 | | | | 34,500 | | | | 2.34 | |
| | | | | | | | | | | | | | | | |
Total borrowed funds | | $ | 37,179 | | | | 2.24 | % | | $ | 46,009 | | | | 2.25 | % |
| | | | | | | | | | | | | | | | |
The average amount of short-term borrowings and the weighted average rates for the years ended December 31, 2011 and 2010 were $14.5 million and 1.95% and $15.8 million and 1.52%, respectively.
The following table details the maturities and rates of our borrowings from the FHLB, as of December 31, 2011.
| | | | | | | | | | | | | | |
Borrow Date | | Type | | Principal | | | Term | | Rate | | | Maturity |
| | | (Dollars in thousands) |
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 |
August 17, 2010 | | Fixed rate | | | 3,000 | | | 4 years | | | 1.49 | | | August 18, 2014 |
August 17, 2010 | | Fixed rate | | | 4,500 | | | 5 years | | | 1.85 | | | August 17, 2015 |
August 17, 2010 | | Fixed rate | | | 2,500 | | | 6 years | | | 2.21 | | | August 17, 2016 |
August 20, 2010 | | Fixed rate | | | 2,000 | | | 3 years | | | 1.09 | | | August 20, 2013 |
August 20, 2010 | | Fixed rate | | | 3,000 | | | 4 years | | | 1.48 | | | August 20, 2014 |
August 20, 2010 | | Fixed rate | | | 3,000 | | | 5 years | | | 1.83 | | | August 20, 2015 |
September 1, 2010 | | Fixed rate | | | 2,000 | | | 2 years | | | 0.66 | | | September 4, 2012 |
Pursuant to a collateral agreement with the FHLB, advances are collateralized by all the Company’s FHLB stock and qualifying first mortgage loans. The eligible residential 1-4 family first mortgage loans as of December 31, 2011, were $25.8 million. This agreement with the FHLB provides for a line of credit up to 20% of the Bank’s assets. In addition, the Bank had investment securities with a market value of $48.0 million and a book value of $47.4 million held as collateral by the FHLB on advances as of December 31, 2011. The maximum month end balances were $46.0 million, $42.5 million and $107.0 million during the years ended December 31, 2011, 2010 and 2009, respectively.
The Company has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of credit with correspondent banks totaling $36.0 million.
The Company enters into agreements with customers to transfer excess funds in demand accounts into repurchase agreements. Under the repurchase agreement, the Company sells the customer an interest in government-sponsored enterprise securities. The customer’s interest in the underlying security shall be repurchased by the Company at the opening of the next banking day. The rate paid fluctuates with the weekly average federal funds rate minus 125 basis points and has a floor of 50 basis points. Securities with a fair value of $7.4 million secured customer sweep accounts as of December 31, 2011.
89
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has a defined contribution 401(k) plan that covers all eligible employees. The Company matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $504 thousand, $451 thousand and $414 thousand in 2011, 2010 and 2009, respectively.
In 2002, the Company adopted a supplemental executive retirement plan to provide benefits for members of management and directors. The liability was calculated by discounting the anticipated future cash flows for the years ended December 31, 2011 and 2010 at 5.00% and 5.50%, respectively. The liability accrued for this obligation was $2.4 million and $2.5 million at December 31, 2011 and 2010, respectively. Charges to income are based on changes in the cash value of insurance, which funds the liability. The related expense for the years ended December 31, 2011, 2010 and 2009 was $163 thousand, $343 thousand and $216 thousand, respectively.
The Company recognizes a liability for the future death benefit provided to certain employees in relation to the postretirement benefit related to split-dollar life insurance arrangements. During 2011 the Company did not have any expense associated with the postretirement benefit related to split-dollar life insurance arrangements. During 2010 and 2009, the Company expensed $80 thousand and $18 thousand, respectively. The liability amounted to $561 at both December 31, 2011 and December 31, 2010. The calculation of the liability is based on the present value of the post-retirement cost of insurance.
The Company also has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. The following tables provide information relating to the Company’s postretirement health care benefit plan using a measurement date of December 31:
| | | | | | | | |
| | | 2011 | | | 2010 | |
| | | (Dollars in thousands) | |
Reconciliation of benefit obligation: | | | | | | | | |
Net benefit obligation, January 1 | | $ | 799 | | | $ | 748 | |
Service cost | | | 7 | | | | 6 | |
Interest cost | | | 36 | | | | 39 | |
Actuarial (gain) loss | | | 76 | | | | 39 | |
Benefit paid | | | (43 | ) | | | (33 | ) |
| | | | | | | | |
Net benefit obligation, December 31 | | $ | 875 | | | $ | 799 | |
| | | | | | | | |
Fair value of plan assets | | $ | — | | | $ | — | |
| | | | | | | | |
Funding status, net amount recognized in other liabilities and accumulated post retirement benefit obligation | | $ | 875 | | | $ | 799 | |
| | | | | | | | |
90
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
| | | | | | | | |
| | | 2011 | | | 2010 | |
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | — | | | $ | — | |
Employer contribution | | | 43 | | | | 33 | |
Benefits paid | | | (43 | ) | | | (33 | ) |
| | | | | | | | |
Fair value of plan assets at end of year | | $ | — | | | $ | — | |
| | | | | | | | |
Recognized on balance sheet | | | | | | | | |
Other assets (deferred tax) | | $ | 59 | | | $ | (19 | ) |
Other liabilities | | | (875 | ) | | | (762 | ) |
Accumulated other comprehensive loss, net of tax benefit | | | 93 | | | | (20 | ) |
| | | | | | | | |
Net amount recognized | | $ | (723 | ) | | $ | (801 | ) |
| | | | | | | | |
Recognized in accumulated other comprehensive income | | | | | | | | |
Unrecognized net (loss) gain | | $ | (152 | ) | | $ | 39 | |
Deferred tax | | | 59 | | | | (19 | ) |
| | | | | | | | |
Net amount recognized | | $ | (93 | ) | | $ | 20 | |
| | | | | | | | |
Net periodic postretirement benefit cost for 2011, 2010 and 2009 includes the following components:
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Service cost | | $ | 7 | | | $ | 6 | | | $ | 5 | |
Interest cost | | | 36 | | | | 39 | | | | 47 | |
Amortization of prior year service cost | | | — | | | | (8 | ) | | | (8 | ) |
| | | | | | | | | | | | |
Net periodic postretirement benefit cost | | $ | 43 | | | $ | 37 | | | $ | 44 | |
| | | | | | | | | | | | |
The following table presents assumptions relating to the plan at December 31, 2011 and 2010:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Discount rate in determining benefit obligation | | | 4.0 | % | | | 4.5 | % |
Annual health care cost trend rate | | | 7.0 | % | | | 7.0 | % |
Ultimate medical trend rate | | | 7.0 | % | | | 7.0 | % |
Medical trend rate period (in years) | | | 4 | | | | 4 | |
Effect of 1% increase in assumed health care cost on: | | | | | | | | |
Service and interest cost | | | 14.2 | % | | | 13.6 | % |
Benefit obligation | | | 13.0 | % | | | 12.5 | % |
Effect of 1% decrease in assumed health care cost on: | | | | | | | | |
Service and interest cost | | | (11.8 | )% | | | (10.6 | )% |
Benefit obligation | | | (10.9 | )% | | | (10.5 | )% |
Health care cost trend rates are estimated at 7.0% for 2012-2015, 6.0% for years 2016-2020, and 5.0% for subsequent years.
In 2012, the Company expects to recognize $8 thousand of prior service costs, $35 thousand of interest costs and a deferred loss of $13 thousand.
Employer contributions for 2012 are expected to approximate $56 thousand. Benefits are expected to equal employer contributions for the next five years.
91
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
9. STOCK OPTION AND RESTRICTED STOCK PLANS
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.
Compensation cost charged to income for the years ended December 31, 2011 and 2010 was approximately $21 thousand and $36 thousand respectively, related to stock options. There was no expense related to restricted stock for the years ended December 31, 2011 and December 31, 2010 as no shares were issued. There was $37 thousand in expense related to restricted stock for the year ended December 31, 2009. There were no shares of restricted stock issued in 2011 or 2010 and there were 1,500 shares issued in 2009 that immediately vested. No income tax benefit was recognized for stock based compensation, as the Company does not have any outstanding nonqualified stock options.
Stock Options
Stock options may be issued as incentive stock options or as nonqualified stock options. The term of the option will be established at the time is it granted but shall not exceed ten years. Vesting will also be established at the time the option is granted. The exercise price 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.
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 on December 31, 2011 or December 31, 2010.
Performance Shares
Performance shares may be issued based on specific performance criteria such as net income, earnings per share, asset growth, etc. Performance criteria may be different for each issuance and shares will only be issued after the performance criteria have been met. As of December 31, 2011, no performance shares had been issued under the Equity Plan.
A summary of the status of stock options as of December 31, 2011, 2010, and 2009, and changes during the years then ended, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Number | | | Weighted
Average
Option
Price | | | Number | | | Weighted
Average
Option
Price | | | Number | | | Weighted
Average
Option
Price | |
Options outstanding, beginning of year | | | 28,513 | | | $ | 27.94 | | | | 57,335 | | | $ | 28.31 | | | | 59,227 | | | $ | 27.79 | |
Granted | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercised | | | — | | | | — | | | | (1,960 | ) | | | 10.00 | | | | (1,892 | ) | | | 11.98 | |
Expired | | | — | | | | — | | | | (26,862 | ) | | | 30.04 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options outstanding, end of year | | | 28,513 | | | $ | 27.94 | | | | 28,513 | | | $ | 27.94 | | | | 57,335 | | | $ | 28.31 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
92
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table summarizes information about the stock options outstanding at December 31, 2011:
| | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | | Options Exercisable | |
Exercise Price | | Number
Outstanding
December 31,
2011 | | | Weighted-
Average
Remaining
Contractual
Life (Years) | | | Number
Outstanding
December 31,
2011 | | | Weighted-
Average
Exercise
Price | | | Weighted-
Average
Remaining
Contractual
Life (Years) | |
$13.01 – $28.50 | | | 7,800 | | | | 5.0 | | | | 3,730 | | | $ | 19.37 | | | | 3.5 | |
$28.51 – $29.00 | | | 13,142 | | | | 3.8 | | | | 13,142 | | | | 28.76 | | | | 3.8 | |
$29.01 – $32.60 | | | 7,571 | | | | 5.2 | | | | 4,996 | | | | 32.60 | | | | 5.2 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 28,513 | | | | 4.5 | | | | 21,868 | | | $ | 28.04 | | | | 4.0 | |
| | | | | | | | | | | | | | | | | | | | |
No intrinsic value existed for options outstanding or options exercisable at December 31, 2011. The aggregate intrinsic value of both options outstanding and options exercisable at December 31, 2010 was less than $1 thousand. No options were exercised in 2011. Cash received for options exercised in 2010 was $19 thousand with an intrinsic value of $3 thousand.
The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. No options were granted in 2011, 2010 or 2009.
The total fair value of shares that contractually vested during 2011 and 2010 was $53 thousand and $60 thousand, respectively.
Anticipated total unrecognized compensation costs related to outstanding non-vested stock options will be recognized over the following periods (dollars in thousands):
10. DEPOSITS
At December 31, 2011 and 2010, certificates of deposit of $100,000 or more amounted to approximately $112.4 million and $92.9 million, respectively.
Time deposit accounts as of December 31, 2011, mature in the following years and amounts: 2012—$209.3 million; 2013—$40.4 million; 2014—$16.6 million; 2015—$44.0 million and 2016—$26.0 million.
For the years ended December 31, 2011, 2010 and 2009, interest expense on certificates of deposit of $100,000 or more amounted to approximately $1.7 million, $2.5 million and $6.8 million, respectively.
11. LEASES
The Company has noncancellable operating leases for three branch locations. These leases generally contain renewal options for periods ranging from three to twenty years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 2011, 2010 and 2009 was $539 thousand, $579 thousand and $485 thousand, respectively.
93
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Future minimum lease payments under noncancellable operating leases as of December 31, 2011 are as follows (dollars in thousands):
| | | | |
Year ending December 31, | |
2012 | | $ | 531 | |
2013 | | | 533 | |
2014 | | | 331 | |
2015 | | | 225 | |
2016 | | | 177 | |
Thereafter | | | 119 | |
| | | | |
Total minimum lease payments | | $ | 1,916 | |
| | | | |
12. RESERVE REQUIREMENTS
The aggregate net reserve balances maintained under the requirements of the Federal Reserve were approximately $478 thousand at December 31, 2011.
13. COMMITMENTS AND CONTINGENCIES
The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of $92.3 million and standby letters of credit of $1.5 million.
The Company’s exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer’s creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments and anticipates funding them from normal operations.
The Company is not involved in any legal proceedings which, in management’s opinion, could have a material effect on the consolidated financial position or results of operations of the Company.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.
94
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2011 and 2010:
| | | | | | | | | | | | | | | | |
| | | 2011 | | | 2010 | |
| | | Carrying
Value | | | Estimated Fair
Value | | | Carrying
Value | | | Estimated Fair
Value | |
| | | (Dollars in thousands) | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 24,731 | | | $ | 24,731 | | | $ | 20,166 | | | $ | 20,166 | |
Investment securities | | | 339,450 | | | | 339,450 | | | | 273,229 | | | | 273,229 | |
FHLB stock | | | 3,456 | | | | 3,456 | | | | 4,571 | | | | 4,571 | |
Accrued interest receivable | | | 5,308 | | | | 5,308 | | | | 5,243 | | | | 5,243 | |
Net loans | | | 484,450 | | | | 482,851 | | | | 554,384 | | | | 550,614 | |
Loans held for sale | | | 2,866 | | | | 2,866 | | | | 4,136 | | | | 4,136 | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | $ | 797,645 | | | $ | 804,742 | | | $ | 785,941 | | | $ | 790,105 | |
Short-term borrowings | | | 11,679 | | | | 11,679 | | | | 11,509 | | | | 11,509 | |
Accrued interest payable | | | 519 | | | | 519 | | | | 631 | | | | 631 | |
Long-term obligations | | | 25,500 | | | | 26,296 | | | | 34,500 | | | | 34,954 | |
The fair value of net loans is based on estimated cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This does not include consideration of liquidity that market participants would use to value such loans. The estimated fair values of deposits and long-term obligations at December 31 are based on estimated cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. Refer to Note 1(E) for investment securities fair value information. The fair value of off-balance sheet financial instruments is considered immaterial. As discussed in Note 13, 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 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.
95
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
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, 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.
Mortgage Banking Activity
The Company enters into interest rate lock commitments and commitments to sell mortgages. At December 31, 2011, the amount of fair value associated with these interest rate lock commitments was $76 thousand, which is included in other assets. At December 31, 2010, the amount of fair value associated with these interest rate lock commitments was $101 thousand, which was included in other assets. Forward loan sale commitments have been deemed insignificant.
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 December 31, 2011, the majority of the total 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 unadjusted 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. The fair values of impaired loans are generally based on judgment and therefore are considered to be level 3 assets.
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 unadjusted 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 further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. The fair values of foreclosed assets are generally based on judgment and therefore are considered to be level 3 assets.
96
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Assets recorded at fair value on a recurring basis
| | | | | | | | | | | | | | | | |
December 31, 2011 | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (Dollars in thousands) | |
Investment Securities Available-for-Sale | | | | |
Government-sponsored enterprises and FFCB bonds | | $ | 1,032 | | | $ | — | | | $ | 1,032 | | | $ | — | |
Obligations of states and political subdivisions | | | 28,718 | | | | 6,752 | | | | 21,966 | | | | — | |
Mortgage-backed securities | | | 132,292 | | | | — | | | | 132,292 | | | | — | |
SBA-backed securities | | | 146,637 | | | | 144,962 | | | | 1,675 | | | | — | |
Corporate bonds | | | 30,771 | | | | — | | | | 29,129 | | | | 1,642 | |
| | | | | | | | | | | | | | | | |
Total Securities | | $ | 339,450 | | | $ | 151,714 | | | $ | 186,094 | | | $ | 1,642 | |
Interest rate lock commitments | | $ | 76 | | | $ | — | | | $ | — | | | $ | 76 | |
| | | | |
Total assets at fair value | | | $339,526 | | | | $151,714 | | | | $186,094 | | | | $1,718 | |
| | | | |
December 31, 2010 | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (Dollars in thousands) | |
Investment Securities Available-for-Sale | | | | |
Government-sponsored enterprises and FFCB bonds | | $ | 24,781 | | | $ | — | | | $ | 24,781 | | | $ | — | |
Obligations of states and political subdivisions | | | 12,978 | | | | — | | | | 12,978 | | | | — | |
Mortgage-backed securities | | | 150,090 | | | | 4,200 | | | | 145,890 | | | | — | |
SBA-backed securities | | | 56,853 | | | | 55,422 | | | | 1,431 | | | | — | |
Corporate bonds | | | 28,527 | | | | — | | | | 26,811 | | | | 1,716 | |
| | | | | | | | | | | | | | | | |
Total Securities | | $ | 273,229 | | | $ | 59,622 | | | $ | 211,891 | | | $ | 1,716 | |
Interest rate lock commitments | | $ | 101 | | | $ | — | | | $ | — | | | $ | 101 | |
| | | | |
Total assets at fair value | | | $273,330 | | | | $59,622 | | | | $211,891 | | | | $1,817 | |
| | | | |
| Assets recorded at fair value on a nonrecurring basis | | | | | | | | | | | | | | | | |
| | | | |
December 31, 2011 | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (Dollars in thousands) | |
Impaired Loans | | | | |
Real estate—construction and land development | | $ | 9,169 | | | $ | — | | | $ | — | | | $ | 9,169 | |
Real estate—secured by residential properties | | | 3,893 | | | | — | | | | — | | | | 3,893 | |
Real estate—secured by nonfarm nonresidential properties | | | 8,805 | | | | — | | | | — | | | | 8,805 | |
Commercial and industrial | | | 196 | | | | — | | | | — | | | | 196 | |
Total impaired loans | | $ | 22,063 | | | $ | — | | | $ | — | | | $ | 22,063 | |
Real estate and repossessions acquired in settlement of loans | | | | | | | | | | | | | | | | |
Total real estate and repossessions acquired in settlement of loans | | $ | 6,573 | | | $ | — | | | $ | — | | | $ | 6,573 | |
Total assets at fair value | | $ | 28,636 | | | $ | — | | | $ | — | | | $ | 28,636 | |
| | | | |
December 31, 2010 | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (Dollars in thousands) | |
Impaired Loans | | | | |
Real estate—construction and land development | | $ | 11,077 | | | $ | — | | | $ | — | | | $ | 11,077 | |
Real estate—secured by residential properties | | | 3,834 | | | | — | | | | — | | | | 3,834 | |
Real estate—secured by nonfarm nonresidential properties | | | 2,550 | | | | — | | | | — | | | | 2,550 | |
Commercial and industrial | | | 77 | | | | — | | | | — | | | | 77 | |
Total impaired loans | | $ | 17,538 | | | $ | — | | | $ | — | | | $ | 17,538 | |
Real estate and repossessions acquired in settlement of loans | | | | | | | | | | | | | | | | |
Total real estate and repossessions acquired in settlement of loans | | $ | 4,536 | | | $ | — | | | $ | — | | | $ | 4,536 | |
Total assets at fair value | | $ | 22,074 | | | $ | — | | | $ | — | | | $ | 22,074 | |
97
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
As of December 31, 2011 there were $3.8 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2010. The bond was transferred from Level 1 to Level 2 during 2011 because the December 31, 2010 pricing was based on the Company’s actual trades for the security at initial purchase while the December 31, 2011 pricing was through a pricing system. During 2011 there were no investment securities transferred in or out of Level 3. As of December 31, 2009 there was one Level 3 investment security available for sale valued at $2.5 million based on its book value. Prior to sale during 2010, the investment was transferred to Level 2 given that the valuation was based on a third party market valuation that was based on quoted prices for similar instruments in active markets. 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 2011 and 2010.
| | | | | | | | |
| | | Corporate
Bonds | | | Available-for
Sale Debt
Securities | |
| | | (Dollars in thousands) | |
Balance, December 31, 2010 | | $ | 1,716 | | | $ | 1,716 | |
Total gains or losses (realized/unrealized): | | | | | | | | |
Included in earnings | | | — | | | | — | |
Included in other comprehensive income | | | (74 | ) | | | (74 | ) |
Purchases, issuances, and settlements | | | — | | | | — | |
Transfers in to/out of Level 3 | | | — | | | | — | |
Balance, December 31, 2011 | | $ | 1,642 | | | $ | 1,642 | |
| | | | | | | | | | | | |
| | | Government-
sponsored
enterprises and
FFCB bonds | | | Corporate
Bonds | | | Available-for
Sale Debt
Securities | |
| | | (Dollars in thousands) | |
Balance, December 31, 2009 | | $ | 2,480 | | | $ | 1,871 | | | $ | 4,351 | |
Total gains or losses (realized/unrealized): | | | | | | | | | | | | |
Included in earnings | | | — | | | | — | | | | — | |
Included in other comprehensive income | | | — | | | | (155 | ) | | | (155 | ) |
Purchases, issuances, and settlements | | | — | | | | — | | | | — | |
Transfers in to/out of Level 3 | | | (2,480 | ) | | | — | | | | (2,480 | ) |
Balance, December 31, 2010 | | $ | — | | | $ | 1,716 | | | $ | 1,716 | |
15. REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2011, that the Bank and the Company meet all capital adequacy requirements to which they are subject.
98
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts, in thousands, and ratios are presented in the following table:
| | | | | | | | | | | | | | | | |
| | | Actual | | | For Capital
Adequacy
Purposes | | | To be Well
Capitalized
Under Prompt
Corrective Action
Provisions | |
| | | Amount | | | Ratio | | | Ratio | | | Ratio | |
As of December 31, 2011: | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | $ | 83,209 | | | | 13.85 | % | | ³ | 8.00 | % | | ³ | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | 75,642 | | | | 12.59 | | | ³ | 4.00 | | | ³ | 6.00 | |
Tier 1 Capital (to Average Assets) | | | 75,642 | | | | 8.25 | | | ³ | 4.00 | | | ³ | 5.00 | |
As of December 31, 2010: | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | $ | 88,578 | | | | 13.34 | % | | ³ | 8.00 | % | | ³ | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | 80,217 | | | | 12.08 | | | ³ | 4.00 | | | ³ | 6.00 | |
Tier 1 Capital (to Average Assets) | | | 80,217 | | | | 8.66 | | | ³ | 4.00 | | | ³ | 5.00 | |
The following table lists Bancorp’s actual capital amounts, in thousands, and ratios:
| | | | | | | | | | | | | | | | |
| | | Actual | | | For Capital
Adequacy
Purposes | | | To be Well
Capitalized
Under Prompt
Corrective Action
Provisions | |
| | | Amount | | | Ratio | | | Ratio | | | Ratio | |
As of December 31, 2011: | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | $ | 83,209 | | | | 13.85 | % | | ³ | 8.00 | % | | ³ | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | 75,642 | | | | 12.59 | | | ³ | 4.00 | | | ³ | 6.00 | |
Tier 1 Capital (to Average Assets) | | | 75,642 | | | | 8.25 | | | ³ | 3.00 | | | ³ | 5.00 | |
As of December 31, 2010: | | | | | | | | | | | | | | | | |
Total Capital (to Risk Weighted Assets) | | $ | 88,578 | | | | 13.34 | % | | ³ | 8.00 | % | | ³ | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | | 80,217 | | | | 12.08 | | | ³ | 4.00 | | | ³ | 6.00 | |
Tier 1 Capital (to Average Assets) | | | 80,217 | | | | 8.66 | | | ³ | 3.00 | | | ³ | 5.00 | |
During April 2011, the Bank’s Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take various actions designed to address issues related to the Bank’s operations. The Resolution provides that, among other things, the Bank will (1) establish and continue to maintain an adequate reserve for loan losses, and review the adequacy of the reserve with the Board prior to each quarter-end and make appropriate provisions to the reserve; (2) in order to maintain sufficient capital levels, establish and document a prudent policy regarding cash dividends the Bank pays to Bancorp, document an analysis of amounts to be paid by each quarter-end prior to payment, and not pay any cash dividend to Bancorp without seeking the prior approval of the FDIC and N.C. Commissioner of Banks; (3) implement various recommendations regarding risk management policies and practices for the Bank’s funds management and investment functions; (4) provide for the internal audit program to include a review and coverage of activities sufficient to determine compliance with the Bank’s policies, applicable laws and regulations and sound banking principles, and identification of audit personnel who periodically report directly to the Board; (5) correct or eliminate various credit administration weaknesses and establish an effective credit administration function, and ascertain that all necessary supporting documentation is obtained and evaluated before loans are extended; and (6) correct violations of and ensure further compliance with applicable laws, rules and regulations.
99
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
The Bank has complied with the necessary actions in all aspects of the board resolution as of December 31, 2011.
Dividends
The Company’s dividend payments are typically made from dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank. As noted above, in accordance with the Board Resolution, the Bank must seek approval from the FDIC and the NC Commissioner of Banks prior to paying dividends to Bancorp.
16. ECB BANCORP, INC. (PARENT COMPANY)
ECB Bancorp, Inc.’s principal asset is its investment in the Bank, and its principal source of income is dividends from the Bank. The Parent Company condensed balance sheets as of December 31, 2011 and 2010, and the related condensed statements of income and cash flows for the years ended December 31, 2011, 2010, and 2009 are as follows:
CONDENSED BALANCE SHEETS
| | | | | | | | |
| | | 2011 | | | 2010 | |
| | | (Dollars in thousands) | |
Assets | | | | | | | | |
Cash | | $ | — | | | $ | — | |
Receivable from subsidiary | | | — | | | | 199 | |
Investment in subsidiary | | | 80,443 | | | | 80,894 | |
| | | | | | | | |
Total assets | | $ | 80,443 | | | $ | 81,093 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Dividends payable | | $ | — | | | $ | 199 | |
| | | | | | | | |
Total liabilities | | | — | | | | 199 | |
| | | | | | | | |
Total shareholders’ equity | | | 80,443 | | | | 80,894 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 80,443 | | | $ | 81,093 | |
| | | | | | | | |
CONDENSED STATEMENTS OF INCOME (LOSS)
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
Dividends from bank subsidiary | | $ | 1,438 | | | $ | 1,695 | | | $ | 2,823 | |
Equity in undistributed income (losses) of subsidiary | | | (2,462 | ) | | | (835 | ) | | | (1,321 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (1,024 | ) | | $ | 860 | | | $ | 1,502 | |
| | | | | | | | | | | | |
100
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
DECEMBER 31, 2011 and 2010
CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | (Dollars in thousands) | |
OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | (1,024 | ) | | $ | 860 | | | $ | 1,502 | |
Undistributed (income) losses of subsidiary | | | 2,462 | | | | 835 | | | | 1,321 | |
Net change in other assets & other liabilities | | | — | | | | 321 | | | | (1 | ) |
Stock based compensation | | | 21 | | | | 36 | | | | 85 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 1,459 | | | | 2,052 | | | | 2,907 | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Payment for investments in subsidiary | | | (21 | ) | | | (17,927 | ) | | | (85 | ) |
| | | | | | | | | | | | |
Net cash used by investing activities | | | (21 | ) | | | (17,927 | ) | | | (85 | ) |
| | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from issuance of common stock | | | — | | | | 19 | | | | 23 | |
Proceeds from issuance of preferred stock | | | — | | | | — | | | | 17,850 | |
Cash dividends paid | | | (1,438 | ) | | | (2,016 | ) | | | (2,823 | ) |
| | | | | | | | | | | | |
Net cash provided (used) in financing activities | | | (1,438 | ) | | | (1,997 | ) | | | 15,050 | |
| | | | | | | | | | | | |
Net change in cash | | $ | (— | ) | | $ | (17,872 | ) | | $ | 17,872 | |
| | | | | | | | | | | | |
17. RELATED PARTY TRANSACTIONS
Bancorp and the Bank have had, and expect to have in the future, banking transactions in the ordinary course of business with directors, officers and their associates (“Related Parties”) on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Those transactions neither involve more than normal risk of collectability nor present any unfavorable features.
Loans at December 31, 2011 and 2010 include loans to officers and directors and their associates totaling approximately $2.8 million and $4.2 million, respectively. During 2011, $0.7 million in loans were disbursed to officers, directors and their associates and principal repayments of $0.8 million were received on such loans. Change in relationships accounted for a reduction of $1.3 million.
18. 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 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.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. 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.
Management’s Annual Report on Internal Control Over Financial Reporting, and a report of our independent registered public accounting firm regarding our internal control over financial reporting, appears on the following pages of this report.
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 our fourth quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of ECB Bancorp, Inc. (ECB) is responsible for establishing and maintaining adequate internal control over financial reporting. ECBs’ internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
ECB’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework. Based on that assessment, we believe that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.
ECB’s independent auditors have issued an audit report on the Company’s internal control over financial reporting. This report appears on the following page.
| | | | |
/S/ A. DWIGHT UTZ | | | | /S/ THOMAS M. CROWDER |
| A. Dwight Utz | | | | Thomas M. Crowder |
| Chief Executive Officer | | | | Chief Financial Officer |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ECB Bancorp, Inc. and Subsidiary
We have audited ECB Bancorp, Inc. and Subsidiary’s (the “Company”)’s internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, ECB Bancorp, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of ECB Bancorp, Inc. and Subsidiary as of and for the year ended December 31, 2011, and our report dated March 30, 2012, expressed an unqualified opinion on those consolidated financial statements.
/s/ Dixon Hughes Goodman LLP
Greenville, North Carolina
March 30, 2012
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Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers. Information regarding our directors and executive officers is incorporated by reference from the information under the headings“Proposal 1: Election of Directors” and “Executive Officers” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Audit Committee. Information regarding our Audit Committee is incorporated by reference from the information under the captions“Committees of Our Board—General” and “—Audit Committee”, including a discussion of our audit committee financial expert determination, in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Section 16(a) Beneficial Ownership Reporting Compliance. Information regarding compliance by our directors, executive officers and principal shareholders with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the information under the caption “Beneficial Ownership of Our Common Stock—Section 16(a) Beneficial Ownership Reporting Compliance”in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Code of Ethics. Information regarding our Code of Ethics that applies to our directors and to all our executive officers, including without limitation our principal executive officer and principal financial officer, is incorporated by reference from the information under the caption“Corporate Governance—Code of Ethics”in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting. A copy of our Code of Ethics is available in the “Investor Relations – Corporate Governance” section of our website (www.myecb.com)
Item 11. Executive Compensation
Information regarding compensation paid to our executive officers and directors is incorporated by reference from the information under the headings“Executive Compensation”and“Director Compensation” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Beneficial Ownership of Securities. Information regarding the beneficial ownership of our common stock by our directors, executive officers and principal shareholders is incorporated by reference from the information under the heading“Beneficial Ownership of Our Common Stock” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes all compensation arrangements which were in effect on December 31, 2011, and under which shares of our common stock have been authorized for issuance.
| | | | | | | | | | | | |
| | | EQUITY COMPENSATION PLAN INFORMATION(1) | |
Plan category | | (a)
Number of Shares to
be Issued Upon
Exercise of
Outstanding Options | | | (b)
Weighted-average
Exercise Price of
Outstanding Options | | | (c)
Number of Shares Remaining
Available for Future Issuance Under
Equity Compensation Plans (Excluding
Shares Reflected In Column (a)) | |
Equity compensation plans approved by our security holders | | | 28,513 | (1) | | $ | 27.94 | | | | 189,900 | (2) |
Equity compensation plans not approved by our security holders | | | -0- | | | | N/A | | | | -0- | |
Total | | | 28,513 | | | $ | 27.94 | | | | 189,900 | |
| (1) | | Reflects the number of shares that are subject to outstanding, unexercised options previously granted under both our Omnibus Stock Ownership and Long-Term Incentive Plan (which expired during January 2008), and our 2008 Omnibus Equity Plan (which was approved by our shareholders at our 2008 Annual Meeting). |
| (2) | | Reflects the number of shares that remained available for future issuance under the 2008 Omnibus Equity Plan on December 31, 2011. The Omnibus Stock Ownership and Long-Term Incentive Plan expired by its terms during January 2008 and no further awards may be granted under it. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Person Transactions. Information regarding transactions between us and our directors, executive officers and other related persons, and our policies and procedures for reviewing and approving related person transactions, is incorporated by reference from the information under the caption“Transactions with Related Persons” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Director Independence. Information regarding our independent directors is incorporated by reference from the information under the caption“Corporate Governance—Director Independence” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
Item 14. Principal Accounting Fees and Services
Information regarding services provided to us by our independent accountants is incorporated by reference from the information under the caption“Services and Fees During 2011 and 2010” in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2012 Annual Meeting.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements. The following financial statements are included in Item 8 of this Report:
Report of Dixon Hughes Goodman LLP
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Results of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements—December 31, 2011 and 2010
(b) 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.
(c) Financial Statement Schedules. No separate financial statement schedules are being filed as all required schedules either are not applicable or are contained in the financial statements listed above or in Item 7 of this Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
Date: March 30, 2012 | | ECB BANCORP, INC. |
| | |
| | By: | | /S/ A. DWIGHT UTZ |
| | | | | A. Dwight Utz |
| | | | | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | Date |
| | |
/S/ A. DWIGHT UTZ A. Dwight Utz | | President and Chief Executive Officer (principal executive officer) | | March 30, 2012 |
| | |
/S/ THOMAS M. CROWDER Thomas M. Crowder | | Executive Vice President and Chief Financial Officer (principle financial and accounting officer) | | March 30, 2012 |
| | |
/S/ GEORGE T. DAVIS George T. Davis, Jr. | | Vice Chairman | | March 30, 2012 |
| | |
/S/ JOHN F. HUGHES, JR. John F. Hughes, Jr. | | Director | | March 30, 2012 |
| | |
/S/ J. BRYANT KITTRELL III J. Bryant Kittrell III | | Director | | March 30, 2012 |
| | |
/S/ JOSEPH T. LAMB, JR. Joseph T. Lamb, Jr. | | Director | | March 30, 2012 |
| | |
/S/ B. MARTELLE MARSHALL B. Martelle Marshall | | Director | | March 30, 2012 |
| | |
/S/ R. S. SPENCER, JR. R. S. Spencer, Jr. | | Chairman | | March 30, 2012 |
| | |
/S/ MICHAEL D. WEEKS Michael D. Weeks | | Director | | March 30, 2012 |
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EXHIBIT INDEX
| | |
Exhibit
No. | | Description of Exhibit |
| 3.01 | | Registrant’s Articles of Incorporation, as amended (filed herewith) |
| |
| 3.02 | | Registrant’s Bylaws (incorporated by reference from Exhibits to the Registrant’s Current Report on Form 8-K dated February 21, 2012) |
| |
| 4.01 | | Specimen common stock certificate (incorporated by reference from Exhibits to Registration Statement on Form S-1, Reg. No. 333-128843) |
| |
| 4.02 | | Specimen Series A Preferred Stock certificate (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated January 15, 2009) |
| |
| 4.03 | | Warrant dated January 16, 2009, for the purchase of shares of Common Stock (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated January 15, 2009) |
| |
| 10.01 | | Letter Agreement dated January 16, 2009, between the Registrant and the United States Department of the Treasury (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated January 15, 2009) |
| |
| 10.02 | | Employment Agreement between A. Dwight Utz, the Bank and the Registrant (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated August 26, 2009)* |
| |
| 10.03 | | Amended and Restated Employment Agreement between T. Olin Davis and the Bank (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated December 23, 2008)* |
| |
| 10.04 | | Capital Purchase Program Compliance Agreement between T. Olin Davis and the Bank (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated January 15, 2009)* |
| |
| 10.05 | | Severance and Change in Control Agreement, as amended, between James J. Burson and the Bank (incorporated by reference from Exhibits to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010)* |
| |
| 10.06 | | 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 28, 2010)* |
| |
| 10.07 | | Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)* |
| |
| 10.08 | | 2008 Omnibus Equity Plan (incorporated by reference from Exhibits to Registrant’s Current Report on Form 8-K dated April 16, 2008)* |
| |
| 10.09 | | Form of Employee Stock Option Agreement (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839) * |
| |
| 10.10 | | Form of Restricted Stock Agreement (incorporated by reference from Exhibits to Registration Statement on Form S-8, Reg. No. 333-77689)* |
| |
| 10.11 | | Restricted Stock Award Agreement between A. Dwight Utz and the Registrant (incorporated by reference from Exhibits to Registrant’s September 30, 2009, Quarterly Report on Form 10-Q)* |
| |
| 10.12 | | Executive Supplemental Retirement Plan Agreement between the Bank and T. Olin Davis (incorporated by reference from Exhibits to Registrant’s 2007 Annual Report on for 10-KSB)* |
| 10.13 | | Amendment to Executive Supplemental Retirement Plan Agreement between the Bank and T. Olin Davis (incorporated by reference from Exhibits to Registrant’s 2008 Annual Report on Form 10-K)* |
| 10.14 | | Split-Dollar Life Insurance Agreement between the Bank and T. Olin Davis (incorporated by reference from Exhibits to Registrant’s 2007 Annual Report on for 10-KSB)* |
| |
| 10.15 | | Form of Director Supplemental Retirement Plan Agreements between the Bank and George T. Davis, Jr., John F. Hughes, Jr., Joseph T. Lamb, Jr., and R. S. Spencer, Jr. (incorporated by reference from Exhibits to Registrant’s March 31, 2002, Quarterly Report on Form 10-QSB)* |
109
| | |
Exhibit
No. | | Description of Exhibit |
| |
| 10.16 | | Form of Amendment to Director Supplemental Retirement Plan Agreements between the Bank and George T. Davis, Jr., John F. Hughes, Jr., Joseph T. Lamb, Jr., and R. S. Spencer, Jr. (incorporated by reference from Exhibits to Registrant’s 2008 Annual Report on Form 10-K)* |
| |
| 10.17 | | Form of Director Supplemental Retirement Plan Agreements between the Bank and J. Bryant Kittrell III, and B. Martelle Marshall (incorporated by reference from Exhibits to Registrant’s March 31, 2002, Quarterly Report on Form 10-QSB)* |
| |
| 10.18 | | Form of Amendment to Director Supplemental Retirement Plan Agreements between the Bank and J. Bryant Kittrell III, and B. Martelle Marshall (incorporated by reference from Exhibits to Registrant’s 2008 Annual Report on Form 10-K)* |
| |
| 10.19 | | Form of Director Supplemental Retirement Plan Agreement between the Bank and Michael D. Weeks (incorporated by reference from Exhibits to Registrant’s 2008 Annual Report on Form 10-K)* |
| |
| 10.20 | | Form of Amendment to Director Supplemental Retirement Plan Agreement between the Bank and Michael D. Weeks (incorporated by reference from Exhibits to Registrant’s 2008 Annual Report on Form 10-K)* |
| |
| 10.21 | | Form of Split-Dollar Life Insurance Agreements between the Bank and George T. Davis, Jr., John F. Hughes, Jr., J. Bryant Kittrell III, Joseph T. Lamb, Jr., B. Martelle Marshall, and R. S. Spencer, Jr. (incorporated by reference from Exhibits to Registrant’s March 31, 2002, Quarterly Report on Form 10-QSB)* |
| |
| 10.22 | | The East Carolina Bank Incentive Plan (incorporated by reference from Exhibits to Registrant’s 2004 Annual Report on Form 10-KSB)* |
| |
| 21.01 | | List of Registrant’s subsidiaries (incorporated by reference from Exhibits to Registrant’s 2004 Annual Report on Form 10-KSB) |
| |
| 23.01 | | Consent of Dixon Hughes Goodman LLP (filed herewith) |
| |
| 31.01 | | Certification of Chief Executive Officer (pursuant to Rule 13a-14) (filed herewith) |
| |
| 31.02 | | Certification of Chief Financial Officer (pursuant to Rule 13a-14) (filed herewith) |
| |
| 32.01 | | Certification of Chief Executive Officer and Chief Financial Officer (pursuant to 18 U.S.C. Section 1350) (filed herewith) |
| |
| 99.01 | | Certification of Chief Executive Officer and Chief Financial Officer (pursuant to Section III of EESA) (filed herewith) |
| |
| 101.0 | | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Results of Operations, (iii) the Consolidated Statement of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text. ** |
| * | | Management contract or compensatory plan, contract or arrangement. |
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO THOMAS M. CROWDER,
CHIEF FINANCIAL OFFICER, AT ECB BANCORP, INC., P.O. BOX 337, ENGELHARD,
NORTH CAROLINA 27824.
110
