UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 1999
Commission File Number: 0-12358
CCB FINANCIAL CORPORATION
(Exact name of issuer as specified in charter)
North Carolina 56-1347849
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
111 Corcoran Street, Post Office Box 931, Durham, NC 27702
(Address of principal executive offices)
Registrant's telephone number, including area code (919) 683-7777
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $5 Par value 39,979,267
(Class of Stock) (Shares outstanding as of May 10, 1999)
CCB FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999, December 31, 1998 and
March 31, 1998 3
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity and
Comprehensive Income
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999 and 1998 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCB Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Unaudited)
March December March
31, 31, 31,
1999 1998 1998
(In Thousands Except Share Data)
Assets:
Cash and due from banks $ 268,788 250,922 237,308
Time deposits in other banks 48,328 59,529 31,173
Federal funds sold and other
short-term investments 468,500 430,000 363,500
Investment securities:
Available for sale (amortized
costs of $1,363,886,
$1,262,476 and $1,309,501) 1,378,658 1,284,198 1,330,797
Held to maturity (market values
of $80,210, $85,277 and $85,774) 75,435 80,189 81,061
Loans and lease financing (notes
2 and 4) 5,406,258 5,487,337 5,157,079
Less reserve for loan and
lease losses (note 3) 72,093 73,182 68,403
Net loans and lease financing 5,334,165 5,414,155 5,088,676
Premises and equipment 94,301 92,770 86,618
Goodwill 25,337 26,241 28,390
Other assets (note 4) 109,913 102,349 96,538
Total assets $ 7,803,425 7,740,353 7,344,061
Liabilities:
Deposits:
Demand (noninterest-bearing) $ 886,208 854,938 773,043
Savings and NOW accounts 817,104 863,920 758,784
Money market accounts 1,823,907 1,784,091 1,710,410
Jumbo time deposits 433,432 452,808 439,785
Consumer time deposits 2,587,532 2,504,007 2,451,353
Total deposits 6,548,183 6,459,764 6,133,375
Short-term borrowed funds 250,308 288,256 249,440
Long-term debt 216,595 216,695 175,441
Other liabilities 99,106 87,744 103,287
Total liabilities 7,114,192 7,052,459 6,661,543
Shareholders' equity (note 5):
Serial preferred stock. Authorized
10,000,000 shares; none issued -- -- --
Common stock of $5 par value.
Authorized 100,000,000 shares;
40,058,092, 40,345,214
and 41,296,328 shares issued 200,290 201,726 206,482
Additional paid-in capital 57,470 73,771 126,860
Retained earnings 422,373 399,066 336,037
Accumulated other comprehensive
income 9,100 13,331 13,139
Total shareholders' equity 689,233 687,894 682,518
Total liabilities and
shareholders' equity $ 7,803,425 7,740,353 7,344,061
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
1999 1998
(In Thousands Except Per Share Data)
Interest income:
Interest and fees on loans
and lease financing $ 115,683 115,111
Interest and dividends on
investment securities:
U.S. Treasury 5,993 7,427
U.S. Government agencies
and corporations 13,451 13,963
States and political subdivisions
(primarily tax-exempt) 1,137 1,195
Equity and other securities 784 761
Interest on time deposits
in other banks 504 403
Interest on federal funds sold
and other short-term investments 5,389 2,777
Total interest income 142,941 141,637
Interest expense:
Deposits 56,236 57,920
Short-term borrowed funds 2,549 3,049
Long-term debt 3,330 1,999
Total interest expense 62,115 62,968
Net interest income 80,826 78,669
Provision for loan and lease
losses (note 3) 1,811 3,140
Net interest income after provision
for loan and lease losses 79,015 75,529
Other income:
Service charges on deposit accounts 14,231 12,085
Trust and custodian fees 2,996 2,271
Sales and insurance commissions 2,742 2,515
Merchant discount 2,576 2,008
Other service charges and fees 1,506 1,229
Secondary marketing and
servicing - mortgages 4,409 1,930
Other operating income 3,492 2,077
Investment securities gains 124 649
Investment securities losses (3) (27)
Total other income 32,073 24,737
Other expenses:
Personnel expense 32,889 30,443
Net occupancy expense 4,093 3,747
Equipment expense 4,090 3,349
Amortization of goodwill 905 891
Other operating expense 17,245 15,662
Total other expenses 59,222 54,092
Income before income taxes 51,866 46,174
Income taxes 18,113 16,890
Net income $ 33,753 29,284
Earnings per common share (note 5):
Basic $ .84 .70
Diluted .83 .70
Weighted average shares
outstanding (note 5):
Basic 40,237 41,538
Diluted 40,655 42,116
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Accumulated
Other Management
Additional Compre- Recog- Total
Common Paid-In Retained hensive nition Shareholders'
Stock Capital Earnings Income Plans Equity
(In Thousands)
Balance December 31, 1997,
as originally reported $ 103,882 143,784 419,746 13,980 (32) 681,360
Common stock issued in 1998
in two-for-one stock split 103,882 - (103,882) - - -
Balance December 31, 1997
as restated 207,764 143,784 315,864 13,980 (32) 681,360
Net income - - 29,284 - - 29,284
Other comprehensive income -
Unrealized losses on
securities, net of
deferred
tax benefit of $594 and
reclassification
adjustment (note 1) - - - (841) - (841)
Total comprehensive
income 28,443
Stock options exercised, net
of shares tendered 336 287 (168) - - 455
Transactions pursuant to
restricted stock (8) (48) 4 - - (52)
Shares repurchased and retired (1,610) (17,155) 805 - - (17,960)
Earned portion of management
recognition plans - - - - 32 32
Other transactions, net - (8) - - - (8)
Cash dividends ($.235 per share) - - (9,752) - - (9,752)
Balance March 31, 1998 $ 206,482 126,860 336,037 13,139 - 682,518
Balance December 31, 1998 $ 201,726 73,771 399,066 13,331 - 687,894
Net income - - 33,753 - - 33,753
Other comprehensive income -
Unrealized losses on
securities, net of
deferred tax benefit of
$2,718 and
reclassification
adjustment (note 1) - - - (4,231) - (4,231)
Total comprehensive
income 29,522
Stock options exercised, net
of shares tendered 203 (300) - - - (97)
Transactions pursuant to
restricted stock (1) (2) - - - (3)
Shares repurchased
and retired (1,638) (15,999) - - - (17,637)
Cash dividends ($.26 per share) - - (10,446) - - (10,446)
Balance March 31, 1999 $ 200,290 57,470 422,373 9,100 - 689,233
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
(In Thousands)
Operating activities:
Net income $ 33,753 29,284
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion, net 5,649 4,726
Provision for loan and lease losses 1,811 3,140
Net gain on sales of investment
securities (121) (622)
Sales of loans held for sale 393,493 106,490
Origination of loans held for sale (429,701) (93,844)
Changes in:
Accrued interest receivable (201) 1,848
Accrued interest payable 1,157 187
Other assets (1,900) 18,035
Other liabilities 14,346 8,631
Other operating activities, net (2,760) (3,111)
Net cash provided by operating activities 15,526 74,764
Investing activities:
Proceeds from:
Maturities and issuer calls of investment
securities held to maturity 4,827 550
Sales of investment securities available
for sale 5,014 19,747
Maturities and issuer calls of investment
securities available for sale 193,138 106,135
Purchases of:
Investment securities available for sale (301,166) (77,031)
Premises and equipment (4,577) (3,183)
Net originations of loans and leases receivable 109,825 (77,617)
Net cash paid in branch dispositions (12,200) -
Net cash used by investing activities (5,139) (31,399)
Financing activities:
Net increase in deposit accounts 101,007 148,779
Net decrease in short-term borrowed funds (37,948) (26,997)
Proceeds from issuance of long-term debt - 75,000
Repayments of long-term debt (100) (245)
Issuances of common stock from exercise
of stock options, net (97) 455
Purchase and retirement of common stock (17,637) (17,960)
Other equity transactions, net (1) (8)
Cash dividends paid (10,446) (9,752)
Net cash provided by financing activities 34,778 169,272
Net increase in cash and cash equivalents 45,165 212,637
Cash and cash equivalents at beginning of year 740,451 419,344
Cash and cash equivalents at end of period $ 785,616 631,981
Supplemental disclosures of cash flow
information:
Interest paid during the period $ 60,992 62,781
Income taxes paid (refunded) during the period $ (376) 2,668
Supplemental disclosures of noncash investing
and financing activities:
Change in market value of securities available
for sale, net of deferred tax benefit of
$2,718 and $594, respectively $ (4,231) (841)
Transactions pursuant to restricted stock $ (2) (52)
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999 and 1998
(Unaudited)
(1) Consolidation and Presentation
The accompanying unaudited consolidated financial statements of CCB
Financial Corporation (the "Corporation") have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the statements reflect all adjustments necessary for a
fair presentation of the financial position, results of operations and
cash flows of the Corporation on a consolidated basis, and all such
adjustments are of a normal recurring nature. These financial
statements and the notes thereto should be read in conjunction with
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998. Operating results for the three month period ended
March 31, 1999, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
Consolidation
The consolidated financial statements include the accounts and results
of operations of the Corporation and its wholly-owned subsidiaries,
Central Carolina Bank and Trust Company ("CCB"), American Federal
Bank, FSB ("AmFed") and Central Carolina Bank - Georgia (collectively
the "Subsidiary Banks"). The consolidated financial statements also
include the accounts and results of operations of the wholly-owned
subsidiaries of CCB (CCB Investment and Insurance Service Corporation;
Salem Trust Company; CCBDE, Inc.; Southland Associates, Inc. and
Corcoran Holdings, Inc. and its subsidiary, Watts Properties, Inc.)
and AmFed (American Service Corporation of S.C.; Mortgage North;
AMFEDDE, Inc.; Finance South, Inc. and McBee Holdings, Inc. and its
subsidiary, Greenville Participations, Inc.). All significant
intercompany accounts are eliminated in consolidation. The
Corporation operates as one business segment.
Accounting Policies
Effective January 1, 1999, the Corporation adopted the provisions of
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use.
The adoption of SOP 98-1 has not and is not expected to have a
material impact on the Corporation's consolidated financial
statements.
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding during each period.
Diluted EPS reflects the potential dilution that would have occurred
if securities or other contracts to issue common stock were exercised
or converted into common stock. The Corporation's diluted EPS is
computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding plus dilutive
stock options (as computed under the treasury stock method) assumed to
have been exercised during each period.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Consolidation and Presentation - Continued
Comprehensive Income
Comprehensive income is the change in the Corporation's equity during
the period from transactions and other events and circumstances from
non-owner sources. Total comprehensive income is comprised of net
income and other comprehensive income.
The Corporation's "other comprehensive income" for the three months
ended March 31, 1999 and 1998 and "accumulated other comprehensive
income" as of March 31, 1999 and 1998 are comprised solely of
unrealized gains and losses on certain investments in debt and equity
securities. Other comprehensive income for the three months ended
March 31, 1999 and 1998 follows (in thousands):
1999 1998
Unrealized holding losses arising
during period $ (4,158) (468)
Less reclassification adjustment for
realized gains, net of tax 73 373
Unrealized losses on securities,
net of applicable income taxes $ (4,231) (841)
(2) Loans and Lease Financing
A summary of loans and lease financing at March 31, 1999 and 1998
follows (in thousands):
1999 1998
Commercial, financial and agricultural $ 688,930 682,354
Real estate-construction 965,694 766,627
Real estate-mortgage 2,999,630 2,966,948
Instalment loans to individuals 496,200 498,365
Revolving credit 205,636 203,324
Lease financing 57,477 45,422
Gross loans and lease financing 5,413,567 5,163,040
Less unearned income 7,309 5,961
Total loans and lease financing $ 5,406,258 5,157,079
Mortgage loans held for sale totaled $45,084,000 and $42,687,000 at
March 31, 1999 and 1998, respectively, and are reported at the lower
of cost or market. At March 31, 1999, impaired loans amounted to
$17,622,000 compared to $15,766,000 at December 31, 1998 and
$15,432,000 at March 31, 1998. The related reserve for loan and lease
losses on these loans amounted to $3,101,000 at March 31, 1999,
$2,574,000 at December 31, 1998 and $2,754,000 at March 31, 1998.
During the three months ended March 31, 1999 and 1998, loans totaling
$477,000 and $579,000, respectively, were transferred to "other
assets" due to loan foreclosure.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(3) Reserve for Loan and Lease Losses
Following is a summary of the reserve for loan and lease losses for
the three months ended March 31, 1999 and 1998 (in thousands):
1999 1998
Balance at beginning of year $ 73,182 67,594
Provision charged to operations 1,811 3,140
Recoveries of loans and leases
previously charged-off 708 590
Loan and lease losses charged to reserve (3,608) (2,921)
Balance at end of period $72,093 68,403
(4) Risk Assets
Following is a summary of risk assets at March 31, 1999, December 31,
1998, and March 31, 1998 (in thousands):
March 31, December 31, March 31,
1999 1998 1998
Nonaccrual loans and
lease financing $18,231 16,761 17,571
Other real estate acquired through
loan foreclosures 649 791 975
Restructured loans and
lease financing 736 739 772
Accruing loans and lease financing
90 days or more past due 3,722 5,889 2,982
Total risk assets $ 23,338 24,180 22,300
(5) Share and Per Share Data
On July 21, 1998, the Corporation's Board of Directors approved a two-
for-one stock split to be effected in the form of a 100% common stock
dividend for each outstanding share. The stock dividend was issued on
October 1, 1998, to shareholders of record as of September 15, 1998.
The consolidated financial statements have been adjusted for the
impact of the stock dividend as if it had occurred at the beginning of
the earliest period presented.
The following schedule reconciles the numerators and denominators of
the basic and diluted EPS computations for income before extraordinary
items and net income for the three months ended March 31, 1999 and
March 31, 1998.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(5) Share and Per Share Data, continued
Income Share Per Share
(Numerator) (Denominator) Amount
(In Thousand Except Per Share Data)
For the three months ended March 31, 1999:
Basic EPS:
Net income $ 33,753 40,237 $.84
Effect of dilutive securities:
Stock options - 418
Diluted EPS $ 33,753 40,655 $.83
For the three months ended March 31, 1998:
Basic EPS:
Net income $ 29,284 41,538 $.70
Effect of dilutive securities:
Stock options - 578
Diluted EPS $ 29,284 42,116 $.70
(6) Contingencies
Certain legal claims have arisen in the normal course of business,
which, in the opinion of management and counsel, will have no material
adverse effect on the financial position of the Corporation or its
subsidiaries.
(7) Subsequent Event
On April 14, 1999, the Corporation announced that it signed a
definitive agreement to acquire Stone Street Bancorp, Inc., which is
headquartered in Mocksville, North Carolina. Stone Street Bancorp
operates two branches and had $127 million in assets as of December
31, 1998. The transaction is valued at approximately $35 million and
will be accounted for as a purchase. The acquisition is subject to
approval by regulators and the shareholders of Stone Street Bancorp
and is tentatively scheduled to be completed early in the fourth
quarter of 1999.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The purpose of this discussion and analysis is to aid in the
understanding and evaluation of financial conditions and changes
therein and results of operations of CCB Financial Corporation (the
"Corporation") and its wholly-owned subsidiaries, Central Carolina
Bank and Trust Company ("CCB"), American Federal Bank, FSB ("AmFed")
and Central Carolina Bank-Georgia ("CCB-Ga.") (collectively the
"Subsidiary Banks") for the three months ended March 31, 1999 and
1998. The consolidated financial statements also include the accounts
and results of operations of CCB's wholly-owned subsidiaries: CCB
Investment and Insurance Service Corporation ("CCBIISC"); Salem Trust
Company; CCBDE, Inc.; Southland Associates, Inc. and Corcoran
Holdings, Inc. and its subsidiary, Watts Properties, Inc. AmFed's
wholly-owned subsidiaries are also included in the consolidated
financial statements: American Service Corporation of S.C.; AMFEDDE,
Inc.; Mortgage North; Finance South, Inc. and McBee Holdings, Inc. and
its wholly-owned subsidiary, Greenville Participations, Inc. This
discussion and analysis is intended to complement the unaudited
financial statements and footnotes and the supplemental financial data
appearing elsewhere in this Form 10-Q, and should be read in
conjunction therewith.
This report contains certain forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) related to
anticipated future operating and financial performance, growth
opportunities and growth rates, Year 2000 compliance and other similar
forecasts and statements of expectations. Words such as "expects",
"plans", "estimates", "projects", "objectives" and "goals" and similar
expressions are intended to identify these forward-looking statements.
These forward-looking statements are based on estimates, beliefs and
assumptions made by management and are not guarantees of future
performance.
Factors that may cause actual results to differ from those expressed
or implied include, but are not limited to, changes in political and
economic conditions, interest rate movements, competitive product and
pricing pressures within the Corporation's markets, success and timing
of business initiatives, technological change, and changes in legal,
regulatory and tax policies.
Readers should also consider information on risks and uncertainties
contained in the discussions of competition, interstate banking and
branching, and supervision and regulation in the Corporation's most
recent report on Form 10-K.
On July 21, 1998, the Corporation's Board of Directors approved a two-
for-one stock split to be effected in the form of a 100% common stock
dividend for each outstanding share. The stock dividend was issued on
October 1, 1998, to shareholders of record as of September 15, 1998.
The following discussion and accompanying unaudited financial
statements have been restated to include the impact of the stock
dividend as if it had occurred at the beginning of the earliest period
presented.
Results of Operations - Three Months Ended March 31, 1999 and 1998
Net income for the three months ended March 31, 1999 amounted to $33.8
million compared to 1998's $29.3 million. Basic income per share
totaled $.84 in 1999 compared to $.70 in the first quarter of 1998.
Returns on average assets and shareholders' equity were 1.78% and
19.86%, respectively, in 1999 compared to 1998's 1.66% and 17.39%.
Average Balance Sheets and Net Interest Income Analyses on a taxable
equivalent basis for each of the periods are included in Table 1.
Interest-earning assets increased by $497.5 million or 7.3% in the
1999 period. The overall yield on earning assets decreased 41 basis
points to 8.14% from 1998's 8.55% primarily due to decreased loan
yields. The cost of interest-bearing funds decreased by 36 basis
points in the 1999 period to 4.15% due primarily to the lower rates
paid for savings and time deposits, 4.07% in 1999 versus 4.45% in
1998. The interest rate spread and net interest margin decreased by 5
and 10 basis points to 3.99% and 4.69%, respectively, compared with
one year ago. Management anticipates continuing tightening of the
interest rate spread throughout 1999 and expects the net interest
margin to drop to the mid-4.60% range by the end of 1999. Net
interest income on a taxable equivalent basis increased by $3.8
million or 4.7%.
During the first quarter of 1999, the Corporation sold approximately
$200 million in mortgage loans into the secondary market, in addition
to all fixed-rate mortgage production. The reserve for loan and lease
losses to loans and lease financing outstanding remained stable at
1.33%, with the reserve adjusted for the sale of mortgage loans. This
resulted in a decline in the provision for loan and lease losses for
the first quarter of 1999 to $1.8 million compared to $3.1 million in
1998. Net 1999 quarterly loan and lease charge-offs amounted to $2.9
million or .22% (annualized) of average loans and lease financing
compared to .18% (annualized) in the first quarter of 1998. Excluding
revolving credit net charge-offs, the ratios drop to .11% and .08%
(annualized), respectively.
Other income, excluding investment securities transactions, increased
$7.8 million or 32.5% in the first quarter of 1999 to $32 million.
This increase is partially explained by a $2.5 million increase in the
Corporation's secondary mortgage income due to increased mortgage
originations and the previously mentioned $200 million sale of
mortgage loans. In addition, there was a $2.1 million increase in
service charges on deposit accounts. The service charge increase
resulted primarily from increased deposit volumes and repricing of
certain deposit services based upon the results of product
profitability analyses. Merchant discount increased $568,000 from
1998 due to an increased volume of business and a review of the
pricing structure. Trust and custodian fees increased $725,000 due to
growth in assets managed. First quarter 1999 other operating income
included a branch sale gain of approximately $1.1 million.
Other expenses increased in the 1999 period by $5.1 million or 9.5%.
This is partially explained by a $2.4 million increase in personnel
expense from 1998's level. The increase was due to general salary
increases and a larger workforce. Average assets per employee has
improved from $2.68 million in March 1998 to $2.79 million in March
1999. Occupancy and equipment increased $1.1 million and professional
services fees increased $594,000; these increases were due to growth
of the Subsidiary Banks' operations.
As a result of the aforementioned changes, net overhead (noninterest
expense less noninterest income) as a percentage of average assets
decreased to 1.45% for the three months ended March 31, 1999 from
1.66% for the same period in 1998. The Corporation's efficiency ratio
(noninterest expense as a percentage of taxable equivalent net
interest income and other income) improved from 51.17% for the three
months ended March 31, 1998 to 50.67% for the same period in 1999.
The improvement in these ratios indicates that the Corporation's
revenues are increasing faster than its expenses.
Table 1
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis
Three Months Ended March 31, 1999 and 1998
(Taxable Equivalent Basis - In Thousands) (1)
1999
Interest Average
Average Income/ Yield/
Balance Expense Rate
Earning assets:
Loans and lease financing (2) $ 5,424,018 117,431 8.76 %
U.S. Treasury and agency
obligations (3) 1,232,462 20,770 6.74
States and political subdivision
obligations 78,312 1,703 8.69
Equity and other securities (3) 47,161 928 7.97
Federal funds sold and other
short-term investments 466,584 5,579 4.85
Time deposits in other banks 41,384 504 4.94
Total earning assets (3) 7,289,921 146,915 8.14
Non-earning assets:
Cash and due from banks 222,738
Premises and equipment 93,833
All other assets, net 69,472
Total assets $ 7,675,964
Interest-bearing liabilities:
Savings and time deposits $ 5,598,192 56,236 4.07 %
Short-term borrowed funds 244,873 2,549 4.22
Long-term debt 216,618 3,330 6.22
Total interest-bearing liabilities 6,059,683 62,115 4.15
Other liabilities and shareholders'
equity:
Demand deposits 829,826
Other liabilities 97,154
Shareholders' equity 689,301
Total liabilities and
shareholders' equity $ 7,675,964
Net interest income and net
interest margin (4) $ 84,800 4.69 %
Interest rate spread (5) 3.99 %
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis, Continued
Three Months Ended March 31, 1999 and 1998
(Taxable Equivalent Basis - In Thousands) (1)
1998
Interest Average
Average Income/ Yield/
Balance Expense Rate
Earning assets:
Loans and lease financing (2) $ 5,132,578 115,172 9.07 %
U.S. Treasury and agency
obligations (3) 1,292,999 22,819 7.05
States and political subdivision
obligations 81,169 1,787 8.80
Equity and other securities (3) 46,066 898 7.79
Federal funds sold and other
short-term investments 205,663 2,871 5.66
Time deposits in other banks 33,995 403 4.81
Total earning assets (3) 6,792,470 143,950 8.55
Non-earning assets:
Cash and due from banks 207,437
Premises and equipment 86,679
All other assets, net 77,865
Total assets $ 7,164,451
Interest-bearing liabilities:
Savings and time deposits $ 5,284,230 57,920 4.45 %
Short-term borrowed funds 251,418 3,049 4.91
Long-term debt 130,264 1,999 6.19
Total interest-bearing liabilities 5,665,912 62,968 4.51
Other liabilities and shareholders'
equity:
Demand deposits 716,009
Other liabilities 99,746
Shareholders' equity 682,784
Total liabilities and
shareholders' equity $ 7,164,451
Net interest income and net
interest margin (4) 80,982 4.79 %
Interest rate spread (5) 4.04 %
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 1999 and 1998.
(2) The average loan and lease financing balances include non-accruing loans and
lease financing. Loan fees of $4,536,000 and $3,607,000 for 1999 and 1998,
respectively, are included in interest income.
(3) The average balances for debt and equity securities exclude the effect of
their mark-to-market adjustment, if any.
(4) Net interest margin is computed by dividing net interest income by total
earning assets.
(5) Interest rate spread equals the earning asset yield minus the interest-
bearing liability rate.
The following schedule presents noninterest income and expense as a
percentage of average assets for the three months ended March 31, 1999
and 1998.
1999 1998
Noninterest income 1.69 % 1.40
Personnel expense 1.74 1.72
Occupancy and equipment expense .44 .40
Other operating expense .96 .94
Noninterest expense 3.14 3.06
Net overhead 1.45 % 1.66
_______________________________
The effective income tax rate was 34.9% in 1999 compared to 36.6% in
the same period of 1998.
Financial Condition
Total assets have increased $459.4 million since March 31, 1998 due
solely to internal growth. The majority of the increase occurred in
interest-earning assets. Average assets have increased from $7.2
billion for the quarter ended March 31, 1998 to $7.7 billion for the
quarter ended March 31, 1999 and compared to $7.5 billion for the
three months ended December 31, 1998.
At March 31, 1999, risk assets (consisting of nonaccrual loans and
lease financing, foreclosed real estate, restructured loans and lease
financing and accruing loans 90 days or more past due) amounted to
$23.3 million or .43% of outstanding loans and lease financing and
foreclosed real estate. This compares to $22.3 million or .43% at
March 31, 1998. The reserve for loan and lease losses to risk assets
was 3.09x at March 31, 1999 compared to 3.03x at December 31, 1998
and 3.07x at March 31, 1998.
The Corporation's capital position has historically been strong as
evidenced by the Corporation's ratio of average shareholders' equity
to average total assets of 8.98% and 9.53% for the three months ended
March 31, 1999 and 1998, respectively. Under a previously announced
stock repurchase plan, the Corporation has repurchased and retired
327,534 shares of its common stock during 1999 and 1,391,300 shares
during the year ended December 31, 1998. The average cost of the
shares repurchased was $53.84 and $55.06 per share for 1999 and 1998,
respectively. Book value per share increased from $16.53 at March 31,
1998 to $17.21 at March 31, 1999, a 4.1% increase.
The unrealized gains on investment securities available for sale, net
of applicable taxes, decreased $4.2 million from December 31, 1998 to
result in an after-tax unrealized gain at March 31, 1999 of $9.1
million. As of March 31, 1999, unrealized gains on investment
securities available for sale, net of applicable taxes, added $.23 per
share to book value.
The Corporation has increased its annual cash dividends consistently
over the past 34 years. On April 27, 1999, the Board of Directors of
the Corporation declared a quarterly cash dividend on common stock of
$.26. The dividend is payable July 1, 1999, to shareholders of record
as of June 15, 1999.
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines which require a minimum ratio of
total capital to risk-weighted assets of 8%. At least half of the
total capital is required to be "Tier 1" capital, principally
consisting of common shareholders' equity, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual
preferred stock less certain goodwill items. The remainder, "Tier 2
capital", may consist of a limited amount of subordinated debt,
certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general reserve
for loan and lease losses. In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a minimum leverage capital
ratio under which a bank holding company must maintain a minimum level
of Tier 1 capital to average total consolidated assets of at least 3%
in the case of a bank holding company which has the highest regulatory
examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain
a leverage capital ratio of at least 1% to 2% above the stated
minimum.
The Corporation and the Subsidiary Banks continue to maintain higher
capital ratios than required under regulatory guidelines at March 31,
1999 as indicated below:
March 31, Regulatory
Ratio 1999 1998 Minimums
Tier 1 Capital 4.00%
Corporation 11.62% 11.97
CCB 11.00 10.90
AmFed 13.55 14.07
CCB-Ga. 21.78 14.45
Total Capital 8.00
Corporation 13.35 13.84
CCB 12.18 12.07
AmFed 14.87 15.32
CCB-Ga. 23.07 15.73
Leverage 4.00
Corporation 8.53 8.96
CCB 8.13 8.16
AmFed 8.84 9.52
CCB-Ga. 13.73 11.33
Year 2000 Issue
The Corporation is nearing completion of its project to assess and
correct the impact of the "Year 2000 Issue". The Year 2000 Issue
resulted from many computer programs having been written using two
digit dates rather than four to define the applicable year.
Historically, the first two digits were eliminated to save memory.
Since in such systems there is no accommodation for the full four-
digit year, a serious problem may occur when "00" is used to identify
the Year 2000. For these systems, it is not only impossible to
distinguish 2000 from 1900 but it also becomes difficult to calculate
the passage of time between preceding or succeeding years and the Year
2000. This error could result in system failure or miscalculations
causing disruption of operations, including, among other things, an
inability to process customer transactions, properly accrue interest
income and expense or engage in normal business activities. In
addition, non-information technology ("non-IT") systems such as
security alarms, elevators, telephones, etc. may be subject to a Year
2000 malfunction due to their dependence upon computer technology for
proper operation. As described, the Year 2000 Issue presents a number
of challenges to financial institutions' management; correction of
Year 2000 Issues has been and will continue to be costly and complex
for the entire industry.
The Corporation began discussing the Year 2000 Issue more than two
years ago and adopted a Year 2000 Strategic Project Plan to address
the issue. The Corporation's Year 2000 plan follows guidelines
outlined by the Federal Financial Institutions Examination Council
("FFIEC"). The FFIEC requires all financial institutions to develop
plans with five critical phases: awareness, assessment, renovation,
validation and implementation. The awareness phase defined the Year
2000 Issue and the potential challenges associated with the date
change. The assessment phase consisted of an evaluation of the size
and complexity of ensuring that the Corporation will be ready for the
Year 2000. During the assessment phase, the Corporation determined
that it would be required to modify a significant portion of its
software and replace certain software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999.
During the renovation phase, system upgrades were implemented and
applicable hardware was replaced. The validation phase involves
testing all computer systems. Even if software has been tested by the
vendor and certified Year 2000-ready, the Corporation's Year 2000
project team is re-testing and validating all software to ensure
compatibility with the Corporation's information systems environment.
The implementation phase is the final step which involves
incorporating Year 2000-ready systems into the day-to-day operations
of the Corporation.
The renovation of all major software applications was completed in
early September 1998. A new Year 2000-ready mainframe computer was
put into production during mid-January 1999. Testing of mission
critical systems was completed in March 1999. This consisted of
performing tests on the mainframe hardware, operating system, and
application software; PC and server hardware and software; data and
telecommunications systems; and non-IT systems. Substantially all non-
mission critical testing and replacement of non-mission critical
personal computers was completed in March 1999. The Corporation plans
to complete the Year 2000 project by the end of June 1999. Further
testing of hardware and software acquired or modified since initial
testing was completed will be done in the remainder of 1999 as part of
on-going due diligence.
In addition to ensuring the proper operation of its systems, the
Corporation is also monitoring the remediation efforts of third-party
entities whose own Year 2000 disruptions would impact the
Corporation's operations. The incurred to date and estimated costs to
assess the impact of third parties' remediation efforts are included
in the Corporation's total Year 2000 project costs and estimates. The
project team identified the vendors whose operations were deemed
mission critical to the Corporation's operations and contacted those
vendors regarding their progress in correcting their Year 2000 Issues.
In addition, the Corporation initiated communication with its major
customers to determine the extent of their Year 2000 preparedness. As
most corporate customers depend on computer systems for normal
operations, a disruption in their business could result in potentially
significant financial difficulties. In the loan and deposit areas,
major customers of $1 million or more have been identified. As of
March 31, 1999, the Corporation had contacted in excess of 97% of
major customers and evaluated the risk to the Corporation based upon
the results of the customer communication. Also, the Corporation has
reviewed certain issuers of debt securities held in the investment
securities portfolio as well as federal funds counter-parties. In the
Trust area, the Corporation has reviewed certain issuers of debt and
equity securities held as managed investment assets. Finally,
financial institutions such as the Subsidiary Banks exchange large
volumes of date-sensitive data electronically between other financial
institutions, clearing houses, customers and regulatory agencies.
Testing of mission critical third-party entities was completed in
March 1999. Based on these reviews of critical vendors, major
customers and other major counter-parties, at present the Corporation
feels that there is not an inordinate amount of risk which would
require the establishment of any special reserves for the Year 2000
Issue. The Corporation will continue to monitor and test the
remediation efforts of non-mission critical third parties and
determine if it needs to modify its own operations due to their
failure to remediate their Year 2000 Issue. Testing is scheduled to
be completed by June 30, 1999. However, there can be no guarantee
that the systems of other companies on which the Corporation's systems
rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Corporation's
systems, will not have an adverse effect on the Corporation's results
of operations.
The Corporation has a contingency plan that outlines emergency
response procedures that meet regulatory guidelines. The goal of the
contingency plan is to facilitate the resumption of business in the
event there is a disruption of critical systems necessary to operate.
Contingency plans include alternative power sources, off-site
processing, etc. The FFIEC's contingency planning guidelines required
the completion of organizational planning guidelines and business
impact analysis by March 31, 1999. FFIEC guidelines further require
that the development and validation of the business resumption
contingency plans be completed by June 30, 1999. The Corporation
completed its organizational planning guidelines and business impact
analysis in October 1998. The Corporation's contingency plans include
consideration of the most reasonably likely worst-case scenario.
Development and validation of the contingency plans and independent
review and verification of the contingency plans were completed in
February 1999. The last contingency planning requirement, developing
detailed Year 2000 rollover event plans, is scheduled to be completed
during the second quarter of 1999.
While the Corporation's project team is monitoring the progress of the
Year 2000 plan, consulting firms are also being used to keep track of
the readiness program. A Year 2000 independent consulting services
group is overseeing the Year 2000 Project Management Office on an on-
going basis. In addition, the Corporation retained the services of
another independent consulting firm to review its Year 2000 readiness
plans. As the Corporation and its Subsidiary Banks are regulated by
federal and state banking regulatory agencies, they are required to
comply with those agencies' Year 2000 modification schedules. Federal
regulatory agencies periodically review the Corporation's Year 2000
conversion efforts and have had no adverse criticism on the progress-
to-date or its anticipated schedule to complete the Year 2000 project.
Management believes that it will meet the regulators' timeframe for
Year 2000 compliance.
The total cost of the Year 2000 project is currently estimated at $5.3
million, of which $2.3 million is attributable to the purchase of
capitalizable software and hardware. During the first quarter of 1999,
the Corporation incurred $274,000 of non-capitalizable expense
attributable to the Year 2000 project. Total non-capitalizable
expense during 1998 was $2.2 million and total non-capitalizable
expense incurred prior to 1998 was less than $75,000. The remainder of
the cost will be expensed as incurred over the next two years and is
not expected to have a material effect on the Corporation's results of
operations.
The costs of the Year 2000 project and the dates the Corporation plans
to complete the Year 2000 modifications are based on Management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved at the cost
disclosed or within the timeframe anticipated.
Management presently believes that with its identified modifications
to existing software and conversions to new software and hardware and
the successful completion of third-party remediation efforts, the Year
2000 Issue can be mitigated. However, if the Corporation's
modifications and conversions are not made, or are not completed on a
timely basis or if mission critical third-parties do not remediate
their own Year 2000 Issues, disruptions in operations could occur and
could have a material adverse impact on the financial position of the
Corporation.
Stone Street Bancorp Acquisition
On April 14, 1999, the Corporation announced that it signed a
definitive agreement to acquire Stone Street Bancorp, Inc., which is
headquartered in Mocksville, North Carolina. Stone Street Bancorp
operates two branches and had $127 million in assets as of December
31, 1998. The transaction is valued at approximately $35 million and
will be accounted for as a purchase. The acquisition is subject to
approval by regulators and the shareholders of Stone Street Bancorp
and is tentatively scheduled to be completed early in the fourth
quarter of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential
net interest income in future periods.
The Corporation's market risk arises primarily from interest rate risk
inherent in its lending and deposit-taking activities. The structure
of the Corporation's loan and deposit portfolios is such that a
significant increase or decline in interest rates may adversely impact
net market values and net interest income. The Corporation does not
maintain a trading account nor is the Corporation subject to currency
exchange risk or commodity price risk. Responsibility for monitoring
interest rate risk rests with the Asset/Liability Management Committee
("ALCO") which is comprised of senior management. ALCO regularly
reviews the Corporation's interest rate risk position and adopts
balance sheet strategies that are intended to optimize net interest
income while maintaining market risk within a set of Board-approved
guidelines.
As of March 31, 1999, Management believes that there have been no
significant changes in market risk as disclosed in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998.
Management believes that it has accomplished its objective to avoid
material negative changes in net income resulting from changes in
interest rates.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit 27.1 Financial Data Schedule as of March 31, 1999.
(b). Reports on Form 8-K
No reports on Form 8-K were filed in the first quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CCB FINANCIAL CORPORATION
Registrant
Date: May 13, 1999 /s/ ERNEST C. ROESSLER
Ernest C. Roessler
Chairman, President and
Chief Executive Officer
Date: May 13, 1999 /s/ SHELDON M. FOX
Sheldon M. Fox
Executive Vice President and
Chief Financial Officer
Date: May 13, 1999 /s/ W. HAROLD PARKER, JR.
W. Harold Parker, Jr.
Senior Vice President and
Controller
(Chief Accounting Officer)