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| ECBE > SEC Filings for ECBE > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
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" in the Company's Annual Report on Form 10-K and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "forecasts", "potential" or "continue," or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company's management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to: (a) pressures on the earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and equity markets and the banking industry in general, (b) the financial success or changing strategies of the Company's customers, (c) actions of government regulators, (d) the level of market interest rates, (e) weather and similar conditions, particularly the effect of hurricanes on the Company's banking and operations facilities and on the Company's customers and the communities in which it does business, (f) changes in general economic conditions and the real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral), (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against larger financial institutions in our banking market. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligations, and does not intend, to update these forward-looking statements.
Executive Summary
ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the "Bank"), is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, "we," "us" and "our" refers to the Bank and the bank holding company as a single, consolidated entity unless the context otherwise indicates.
As of September 30, 2009, we had consolidated assets of approximately $858.7 million, total loans of approximately $573.8 million, total deposits of approximately $696.6 million and shareholders' equity of approximately $87.9 million. For the three months ended September 30, 2009, we had income available to common shareholders of $83 thousand or $0.03 basic and diluted earnings per share, compared to income available to common shareholders of $1.0 million or $0.35 basic and diluted earnings per share for the three months ended September 30, 2008. For the nine months ended September 30, 2009, we had income available to common shareholders of $1.7 million or $0.58 basic and diluted earnings per share, compared to income available to common shareholders of $3.2 million or $1.09 basic and diluted earnings per share for the nine months ended September 30, 2008.
Critical Accounting Policies
The Company's significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2008. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Company's allowance for loan losses and related matters, see "Asset Quality".
We also consider our determination of retirement plans and other postretirement benefit cost to be a critical accounting estimate as it requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Our retirement plans and other post-retirement benefit costs are actuarially determined based on assumptions on the discount rate, estimated future return on plan assets and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs could have a material impact on our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year. For additional discussion concerning our retirement plans and other postretirement benefits refer to Note 8 to the Consolidated Financial Statements contained in our Form 10-K Annual Report for the fiscal year ended December 31, 2008.
Comparison of the Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2009 and 2008
Results of Operations
The following table summarizes components of income and expense and the changes in those components for the three- and nine-month periods ended September 30, 2009 as compared to the same periods in 2008.
For the Three Changes from the For the Nine Changes from the Months Ended Prior Year Months Ended Prior Year
September 30, September 30,
2009 Amount % 2009 Amount %
Total interest income $ 10,320 $ 446 4.5 $ 30,854 $ 1,468 5.0
Total interest expense 3,244 (1,330 ) (29.1 ) 11,124 (2,645 ) (19.2 )
Net interest income 7,076 1,776 33.5 19,730 4,113 26.3
Provision for loan losses 2,675 2,235 508.0 5,425 4,085 304.9
Net interest income after
Provision for loan losses 4,401 (459 ) (9.44 ) 14,305 28 0.2
Noninterest income 1,954 89 4.8 5,709 186 3.4
Noninterest expense 6,163 687 12.5 17,119 1,345 8.5
Income before income taxes 192 (1,057 ) (84.6 ) 2,895 (1,131 ) (28.1 )
Income tax provision (154 ) (394 ) (164.2 ) 496 (373 ) (42.9 )
Net income 346 (663 ) (65.7 ) 2,399 (758 ) (24.0 )
Preferred stock dividend and
accretion of discount 263 263 NA 738 738 NA
Net income available to common
shareholders $ 83 $ (926 ) (91.8 ) $ 1,661 $ (1,496 ) (47.4 )
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Net Interest Income
Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended September 30, 2009 was $7.1 million, an increase of $1.8 million or 33.5% when compared to net interest income of $5.3 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net interest income was $19.7 million, an increase of $4.1 million or 26.3% when compared to net interest income of $15.6 million for the period in 2008
The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as non-interest-bearing deposits.
Interest income increased $446 thousand or 4.5% for the three months ended September 30, 2009 compared to the same three months of 2008. Interest income increased $1.5 million or 5.0% for the nine months ended September 30, 2009 compared to the same nine months in 2008. The increases for the three and nine months ended September 30, 2009 are due to the increase in the volume of our average earning assets which was partially offset by decreases in the rates earned on these earning assets. The tax equivalent yield on average earning assets decreased 56 basis points for the quarter ended September 30, 2009 to 5.19% from 5.75% for the same period in 2008. For the first nine months of 2009, the yield on average earning assets, on a tax-equivalent basis, decreased 87 basis points to 5.20% compared to 6.07% at September 30, 2008. Management attributes the decrease in the yield on our earning assets to the decrease in short-term market interest rates. Approximately $335.4 million or 58.5% of our loan portfolio consists of variable rate loans that adjust with the movement of the Bank's prime rate. As a result, composite yield
on our loans decreased approximately 54 basis points for the third quarter of 2009 compared to the third quarter of 2008 and 89 basis points for the nine-month periods ended September 30, 2009 and 2008. The increase in volume of the Bank's investment portfolio during the three- and nine-month periods ended September 30, 2009 compared with the same periods of 2008 more than offset the reduction of interest income earned on loans for the comparative periods due to a lower prime rate.
Our average cost of funds during the third quarter of 2009 was 1.90%, a decrease of 121 basis points when compared to 3.11% for the third quarter of 2008. Average rates paid on bank certificates of deposit decreased 156 basis points from 3.87% for the quarter ended September 30, 2008 to 2.31% for the quarter ended September 30, 2009, while our average cost of borrowed funds decreased 121 basis points during the third quarter of 2009 compared to the same period in 2008. Total interest expense decreased $1.3 million or 29.1% during the third quarter of 2009 compared to the same period in 2008, primarily the result of decreased market rates paid on these liabilities. For the nine months ended September 30, 2009, our cost of funds was 2.18% a decrease of 116 basis points when compared to 3.34% for the same period in 2008. Average rates paid on bank certificates of deposit decreased 152 basis points from 4.22% to 2.70% for the first nine months of 2009, while our cost of borrowed funds decreased 135 basis points compared to the same period a year ago. Total interest expense decreased $2.6 million or 19.2% during the first nine months of 2009 compared to the same period in 2008, primarily the result of decreased market rates paid on these liabilities. The volume of average interest-bearing liabilities increased approximately $131.7 million for the first nine months of 2009 compared with the same period in 2008.
The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.
Margin continued to improve during the third quarter of 2009. Margins could continue to improve further over the next several months as a result of low funding cost. We continue to experience the effect of repricing our interest-bearing liabilities at much lower rates while yields on our earning assets are remaining steady.
Our annualized net interest margin, on a tax-equivalent basis and net of the allowance for loan losses, for the three months ended September 30, 2009 was 3.58% compared to 3.13% in the third quarter of 2008 while our net interest spread increased 65 basis points during the same period. For the nine months ended September 30, 2009, our net interest margin, on a tax-equivalent basis and net of allowance for loan losses, was 3.36% compared to 3.28% in the first nine months of 2008 while our net interest spread increased 29 basis points.
Our funding growth year-over-year has been primarily in the form of CDs and we have experienced a decline in our percentage of transaction accounts to total deposits. Average interest-bearing liabilities, as a percentage of interest-earning assets for the quarters ended September 30, 2009 and 2008 were 84.2% and 84.3%, respectively. For the nine months ended September 30, 2009, average interest-bearing liabilities as a percentage of interest-earning assets were 84.7% compared to 83.7% for the nine months ended September 30, 2008.
Average Consolidated Balance Sheets and Net Interest Analysis on Fully Tax
Equivalent Basis
For the three months ended September 30, 2009 and 2008
2009 2008
Average Yield/ Income/ Average Yield/ Income/
Balance Rate(5) Expense Balance Rate(5) Expense
(Dollars in thousands)
Assets
Loans - net (1) $ 563,923 5.49 % $ 7,807 $ 514,267 6.03 % $ 7,812
Taxable securities 189,796 4.51 % 2,159 127,083 5.18 % 1,659
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Non-taxable securities (2) 37,044 5.74 % 536 35,217 5.63 % 500 Other investments 12,791 - % - 16,238 1.78 % 73 Total interest-earning assets 803,554 5.19 % $ 10,502 692,805 5.75 % $ 10,044 Cash and due from banks 11,459 12,818 Bank premises and equipment, net 25,490 25,300 Other assets 24,672 20,417 Total assets $ 865,175 $ 751,340 Liabilities and Shareholders' Equity Interest-bearing deposits $ 606,512 1.95 % $ 2,978 $ 499,628 3.17 % $ 3,998 Short-term borrowings 49,343 0.76 % 95 58,163 2.65 % 388 Long-term obligations 21,000 3.23 % 171 26,000 2.87 % 188 Total interest-bearing liabilities 676,855 1.90 % 3,244 583,791 3.11 % 4,574 Non-interest-bearing deposits 97,068 96,061 Other liabilities 4,014 6,690 Shareholders' equity 87,238 64,798 Total liabilities and Shareholders' equity $ 865,175 $ 751,340 Net interest income and net interest margin (FTE) (3) 3.58 % $ 7,258 3.13 % $ 5,470 Interest rate spread (FTE) (4) 3.29 % 2.64 % |
(1) Average loans include non-accruing loans, net of allowance for loan losses.
(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $182 thousand and $170 thousand for periods ended September 30, 2009 and 2008, respectively.
(3) Net interest margin is computed by dividing net interest income by total earning assets.
(4) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
(5) Annualized
For the nine months ended September 30, 2009 and 2008
2009 2008
Average Yield/ Income/ Average Yield/ Income/
Balance Rate(5) Expense Balance Rate(5) Expense
(Dollars in thousands)
Assets
Loans - net (1) $ 552,479 5.52 % $ 22,820 $ 491,543 6.41 % $ 23,574
Taxable securities 210,383 4.47 % 7,027 121,744 5.09 % 4,634
Non-taxable securities (2) 35,280 5.77 % 1,523 35,190 5.70 % 1,500
Other investments 8,024 0.03 % 2 9,507 2.64 % 188
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Total interest-earning assets 806,166 5.20 % $ 31,372 657,984 6.07 % $ 29,896 Cash and due from banks 10,538 12,652 Bank premises and equipment, net 25,528 25,067 Other assets 23,808 19,170 Total assets $ 866,040 $ 714,873 Liabilities and Shareholders' Equity Interest-bearing deposits $ 598,681 2.27 % $ 10,153 $ 473,603 3.41 % $ 12,095 Short-term borrowings 61,370 0.94 % 433 57,906 2.86 % 1,237 Long-term obligations 22,630 3.18 % 538 19,482 3.00 % 437 Total interest-bearing liabilities 682,681 2.18 % 11,124 550,991 3.34 % 13,769 Non-interest-bearing deposits 88,959 90,041 Other liabilities 8,175 7,123 Shareholders' equity 86, 225 66,718 Total liabilities and Shareholders' equity $ 866,040 $ 714,873 Net interest income and net interest margin (FTE) (3) 3.36 % $ 20,248 3.28 % $ 16,127 Interest rate spread (FTE) (4) 3.02 % 2.73 % |
(1) Average loans include non-accruing loans, net of allowance for loan losses.
(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $518 thousand and $510 thousand for periods ended September 30, 2009 and 2008, respectively.
(3) Net interest margin is computed by dividing net interest income by total earning assets.
(4) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
(5) Annualized
The following table presents the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.
Change in Interest Income and Expense on Tax Equivalent Basis
For the three months ended September 30, 2009 and 2008
Increase (Decrease) in interest income and expense due to changes in:
2009 compared to 2008
Volume (1) Rate (1) Net
(Dollars in thousands)
Loans $ 721 $ (726 ) $ (5 )
Taxable securities 766 (266 ) 500
Non-taxable securities (2) 26 10 36
Other investments (8 ) (65 ) (73 )
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Interest income 1,505 (1,047 ) 458
Interest-bearing deposits 690 (1,710 ) (1,020 )
Short-term borrowings (38 ) (255 ) (293 )
Long-term obligations (38 ) 21 (17 )
Interest expense 614 (1,944 ) (1,330 )
Net interest income $ 891 $ 897 $ 1,788
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(1) The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $182 thousand and $170 thousand for periods ended September 30, 2009 and 2008, respectively.
For the nine months ended September 30, 2009 and 2008
Increase (Decrease) in interest income and expense due to changes in:
2009 compared to 2008
Volume (1) Rate (1) Net
(Dollars in thousands)
Loans $ 2,720 $ (3,474 ) $ (754 )
Taxable securities 3,167 (774 ) 2,393
Non-taxable securities (2) 4 19 23
Other investments (15 ) (171 ) (186 )
Interest income 5,876 (4,400 ) 1,476
Interest-bearing deposits 2,658 (4,600 ) (1,942 )
Short-term borrowings 49 (853 ) (804 )
Long-term obligations 73 29 102
Interest expense 2,780 (5,424 ) (2,644 )
Net interest income $ 3,096 $ 1,024 $ 4,120
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(1) The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $518 thousand and $510 thousand for periods ended September 30, 2009 and 2008, respectively.
Provision for Loan Losses
The provision for loan losses charged to operations during the three- and nine-months ended September 30, 2009 was $2.7 million and $5.4 million, respectively. The Bank had net charge-offs of $663 thousand for the quarter ended September 30, 2009 compared to net charge-offs of $102 thousand during the third quarter of 2008. For the nine-month periods ended September 30, 2009 and 2008, the Bank had net charge-offs of $3.6 million and $346 thousand, respectively. Net charge-offs increased mainly due to the Bank writing-down several large collateral dependent loans. A large portion of these loans had previously been identified and reserved for in the allowance for loan loss in the previous year. Declining economic conditions, particularly in our southern coastal markets, resulted in an increased number of impaired collateral dependant loans. As a result the bank has been very proactive in recognizing the losses associated with these loans.
We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary. Additional information regarding our allowance for loan losses is contained in this discussion under the caption "Asset Quality."
Noninterest Income Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table . . . |
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