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 June 30, 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 clas
ses of
common stock, as of the latest practicable date.
Common Stock, $5 Par value 39,699,268
(Class of Stock) (Shares outstanding as
of August 9, 1999)
CCB FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999, December 31, 1998 and June 30, 1998 3
Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity and
Comprehensive Income
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements
Six Months Ended June 30, 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 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCB Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Unaudited)
June December June
30, 31, 30,
1999 1998 1998
--------- -------- -------
(In Thousands Except Share Data)
Assets:
Cash and due from banks $ 235,174 250,922 226,419
Time deposits in other banks 22,218 59,529 55,699
Federal funds sold and other
short-term investments 220,194 430,000 307,000
Investment securities:
Available for sale (amortized
costs of $1,524,962,
$1,262,476 and $1,297,411) 1,524,871 1,284,198 1,315,158
Held to maturity (market values
of $77,691, $85,277 and $85,115) 74,795 80,189 80,562
Loans and lease financing (notes
2 and 4) 5,492,776 5,487,337 5,217,204
Less reserve for loan and
lease losses (notes 2 and 3) 72,813 73,182 69,645
---------- --------- ----------
Net loans and lease financing 5,419,963 5,414,155 5,147,559
Premises and equipment 94,607 92,770 87,668
Goodwill 24,432 26,241 27,945
Other assets (note 4) 129,440 102,349 102,324
---------- --------- ----------
Total assets $ 7,745,694 7,740,353 7,350,334
=========== ========= ==========
Liabilities:
Deposits:
Demand (noninterest-bearing) $ 882,155 854,938 823,645
Savings and NOW accounts 799,014 863,920 754,044
Money market accounts 1,868,415 1,784,091 1,724,431
Jumbo time deposits 364,717 452,808 418,954
Consumer time deposits 2,589,711 2,504,007 2,447,245
---------- --------- ----------
Total deposits 6,504,012 6,459,764 6,168,319
Short-term borrowed funds 263,562 288,256 256,215
Long-term debt 166,538 216,695 176,372
Other liabilities 105,325 87,744 89,154
---------- --------- ----------
Total liabilities 7,039,437 7,052,459 6,690,060
---------- --------- ----------
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;
39,798,903, 40,345,214
and 40,589,696 shares issued 198,994 201,726 202,948
Additional paid-in capital 43,253 73,771 88,145
Retained earnings 464,091 399,066 358,220
Accumulated other comprehensive
income (loss) (81) 13,331 10,961
---------- --------- ----------
Total shareholders' equity 706,257 687,894 660,274
---------- --------- ----------
Total liabilities and
shareholders' equity $ 7,745,694 7,740,353 7,350,334
========== ========= ==========
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended June 30,
1999 1998
----- -----
(In Thousands
Except Per Share Data)
Interest income:
Interest and fees on loans
and lease financing $ 118,496 117,097
Interest and dividends on
investment securities:
U.S. Treasury 5,766 7,206
U.S. Government agencies
and corporations 15,362 13,440
States and political subdivisions
(primarily tax-exempt) 1,076 1,187
Equity and other securities 776 783
Interest on time deposits in other banks 401 401
Interest on federal funds sold
and other short-term investments 3,919 4,452
------- -------
Total interest income 145,796 144,566
------- -------
Interest expense:
Deposits 56,269 58,526
Short-term borrowed funds 2,683 3,021
Long-term debt 3,119 2,687
------- -------
Total interest expense 62,071 64,234
------- -------
Net interest income 83,725 80,332
Provision for loan and lease ------- -------
losses (note 3) 5,676 3,646
Net interest income after provision ------- -------
for loan and lease losses 78,049 76,686
------- -------
Other income:
Service charges on deposit accounts 15,289 13,745
Trust and custodian fees 3,163 2,792
Sales and insurance commissions 3,430 3,059
Merchant discount 3,240 2,135
Other service charges and fees 1,587 1,225
Secondary marketing and servicing - mortgages 2,893 4,303
Other operating income 2,541 1,884
Gain on sale of credit card receivables (note 2) 32,837 -
Investment securities gains 408 361
Investment securities losses - -
------- -------
Total other income 65,388 29,504
------- -------
Other expenses:
Personnel expense 34,408 32,111
Net occupancy expense 4,298 3,899
Equipment expense 4,090 3,379
Other operating expense 18,800 19,529
------ ------
Total other expenses 61,596 58,918
------- -------
Income before income taxes 81,841 47,272
Income taxes 29,756 17,296
------- -------
Net income $ 52,085 29,976
======= ========
Earnings per common share (note 5):
Basic $ 1.30 .73
Diluted 1.29 .72
Weighted average shares
outstanding (note 5):
Basic 39,953 40,952
Diluted 40,349 41,498
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME, continued
(Unaudited)
Six Months Ended
June 30,
1999 1998
------ ------
(In Thousands
Except Per
Share Data)
Interest income:
Interest and fees on loans
and lease financing 234,167 232,208
Interest and dividends on
investment securities:
U.S. Treasury 11,759 14,633
U.S. Government agencies
and corporations 28,813 27,403
States and political subdivisions
(primarily tax-exempt) 2,213 2,382
Equity and other securities 1,559 1,544
Interest on time deposits in other banks 905 805
Interest on federal funds sold
and other short-term investments 9,353 7,231
------- -------
Total interest income 288,769 286,206
------- -------
Interest expense:
Deposits 112,505 116,446
Short-term borrowed funds 5,232 6,070
Long-term debt 6,449 4,686
------- -------
Total interest expense 124,186 127,202
------- -------
Net interest income 164,583 159,004
Provision for loan and lease
losses (note 3) 7,487 6,786
Net interest income after provision ------- -------
for loan and lease losses 157,096 152,218
------- -------
Other income:
Service charges on deposit accounts 29,520 25,830
Trust and custodian fees 6,159 5,063
Sales and insurance commissions 6,172 5,574
Merchant discount 5,816 4,143
Other service charges and fees 3,093 2,455
Secondary marketing and servicing - mortgages 7,302 6,232
Other operating income 6,001 3,958
Gain on sale of credit card receivables (note 2) 32,837 -
Investment securities gains 532 1,010
Investment securities losses (3) (27)
------- -------
Total other income 97,429 54,238
------- -------
Other expenses:
Personnel expense 67,297 62,554
Net occupancy expense 8,391 7,646
Equipment expense 8,180 6,728
Other operating expense 36,950 36,082
------- -------
Total other expenses 120,818 113,010
------- -------
Income before income taxes 133,707 93,446
Income taxes 47,869 34,186
------- -------
Net income 85,838 59,260
======= ========
Earnings per common share (note 5):
Basic 2.14 1.43
Diluted 2.12 1.42
Weighted average shares
outstanding (note 5):
Basic 40,094 41,244
Diluted 40,501 41,805
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Six Months Ended June 30, 1999 and 1998
(Unaudited)
Accumulated
Other Total
Additional Compre- Management Share-
Common Paid-In Retained hensive Recognition holders'
Stock Capital Earnings Income Plans Equity
------- -------- -------- -------- ---------- --------
(In Thousands)
Balance December 31, 1997,
as originally reported $ 103,882 143,784 419,746 13,980 32 681,424
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 32 681,424
Net income - - 59,260 - - 59,260
Other comprehensive income -
Unrealized losses on securit-
ies, net of deferred tax bene-
fit of $1,965 and reclassifi-
cation adjustment (note 1) - - - (3,019) - (3,019)
Total comprehensive income 56,241
Stock options exercised, net of
shares tendered 594 1,090 (297) - - 1,387
Tax benefit from stock options
exercised - 444 - - - 444
Transactions pursuant to
restricted stock (4) 36 2 - - 34
Shares repurchased and retired (5,404) (57,200) 2,702 - - (59,902)
Earned portion of management
recognition plans - - - - (32) (32)
Cash dividends ($.47 per share) - - (19,312) - - (19,312)
Other transactions, net (2) (9) 1 - - (10)
-------- -------- -------- -------- -------- --------
Balance June 30, 1998 $ 202,948 88,145 358,220 10,961 - 660,274
======== ======== ======== ======== ======== ========
Balance December 31, 1998 $ 201,726 73,771 399,066 13,331 - 687,894
Net income - - 85,838 - - 85,838
Other comprehensive income -
Unrealized losses on secur-
ities, net of deferred tax
benefit of $8,398 and reclass-
ification adjustment (note 1) - - - (13,412) - (13,412)
Total comprehensive income 72,426
Stock options exercised, net of
shares tendered 331 (266) - - - 65
Transactions pursuant to
restricted stock (1) (1) - - - (2)
Shares repurchased and retired (3,062) (30,249) - - - (33,311)
Cash dividends ($.52 per share) - - (20,813) - - (20,813)
Other transactions, net - (2) - - - (2)
------- ------- ------- ------- ------- -------
Balance June 30, 1999 $ 198,994 43,253 464,091 (81) - 706,257
======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
(Unaudited)
1999 1998
----- -----
(In Thousands)
Operating activities:
Net income $ 85,838 59,260
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 11,099 10,130
Provision for loan and lease losses 7,487 6,786
Net gain on sales of investment securities (529) (983)
Sale of mortgage loans 199,343 -
Sale of credit card receivables 184,179 -
Sales of loans held for sale 347,153 273,297
Origination of loans held for sale (388,172) (291,696)
Changes in:
Accrued interest receivable (2,132) 662
Accrued interest payable (787) (287)
Other assets (14,391) 19,879
Other liabilities 27,608 (5,296)
Other operating activities, net (5,684) (9,685)
---------- ----------
Net cash provided by operating activities 451,012 62,067
---------- ----------
Investing activities:
Proceeds from:
Maturities and issuer calls of investment securities
held to maturity 5,463 1,045
Sales of investment securities available for sale 5,148 31,399
Maturities and issuer calls of investment securities
available for sale 397,348 214,476
Purchases of:
Investment securities available for sale (667,943) (186,037)
Premises and equipment (8,023) (6,923)
Net originations of loans and leases receivable (361,594) (107,603)
Net cash paid in branch dispositions (12,200) -
---------- ----------
Net cash used by investing activities (641,801) (53,643)
---------- ----------
Financing activities:
Net increase in deposit accounts 56,836 183,722
Net decrease in short-term borrowed funds (24,694) (20,221)
Proceeds from issuance of long-term debt - 76,140
Repayments of long-term debt (50,157) (454)
Issuances of common stock from exercise of
stock options, net 65 1,387
Purchase and retirement of common stock (33,311) (59,902)
Other equity transactions, net (2) (10)
Cash dividends paid (20,813) (19,312)
---------- ----------
Net cash provided (used) by financing activities (72,076) 161,350
---------- ----------
Net increase (decrease) in cash and cash equivalents (262,865) 169,774
Cash and cash equivalents at beginning of year 740,451 419,344
---------- ----------
Cash and cash equivalents at end of period $ 477,586 589,118
========== ==========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 124,973 127,488
========== ==========
Income taxes paid during the period $ 16,674 36,297
========== ==========
Supplemental disclosures of noncash investing and
financing activities:
Change in market value of securities available
for sale, net of deferred tax benefit of
$8,398 and $1,965, respectively $ (13,412) (3,019)
Transactions pursuant to restricted stock, net of
deferred tax expense of $484 in 1998 $ (2) 34
========== ==========
See accompanying notes to consolidated financial statements.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Six Months Ended June 30, 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 six month period ended
June 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
Certain amounts for 1998 have been reclassified to conform to the 1999
presentation. These reclassifications have no effect on shareholders'
equity or net income as previously reported.
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.
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. 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.
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.
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(1) Consolidation and Presentation - Continued
The Corporation's "other comprehensive income" for the six months
ended June 30, 1999 and 1998 and "accumulated other comprehensive
income" as of June 30, 1999 and 1998 are comprised solely of
unrealized gains and losses on certain investments in debt and equity
securities. Other comprehensive income for the six months ended June
30, 1999 and 1998 follows (in thousands):
1999 1998
----- -----
Unrealized holding losses arising
during period, net of taxes $ (13,095) (2,429)
Less reclassification adjustment for
realized gains, net of taxes 317 590
------- -------
Unrealized losses on securities, net
of taxes $ (13,412) (3,019)
======= =======
(2) Loans and Lease Financing
A summary of loans and lease financing at June 30, 1999 and 1998
follows (in thousands):
1999 1998
---- ----
Commercial, financial and agricultural $ 726,430 668,698
Real estate-construction 1,027,927 784,036
Real estate-mortgage 3,111,909 3,023,743
Instalment loans to individuals 511,814 492,012
Revolving credit 56,221 206,215
Lease financing 66,908 48,916
--------- ----------
Gross loans and lease financing 5,501,209 5,223,620
Less unearned income 8,433 6,416
--------- ---------
Total loans and lease financing $ 5,492,776 5,217,204
========== ==========
During the second quarter of 1999, the Subsidiary Banks sold
$151,342,000 of consumer credit card receivables to MBNA, a large
credit card issuer. As a result of the sale, the Subsidiary Banks
recognized a gain of $32,837,000, net of various contractual exit
fees. The gain on sale increased basic and diluted earnings per share
by $.50 and $.49, respectively. Under an agent bank arrangement, the
Subsidiary Banks will continue to offer consumer credit card products
through MBNA. The Subsidiary Banks retained the commercial credit
card portfolio.
Mortgage loans held for sale totaled $42,751,000 and $46,287,000 at
June 30, 1999 and 1998, respectively, and are reported at the lower of
cost or market. At June 30, 1999, impaired loans amounted to
$15,235,000 compared to $15,766,000 at December 31, 1998 and
$14,799,000 at June 30, 1998. The related reserve for loan and lease
losses on these loans amounted to $2,638,000 at June 30, 1999,
$2,574,000 at December 31, 1998 and $2,573,000 at June 30, 1998.
During the six months ended June 30, 1999 and 1998, loans totaling
$1,200,000 and $1,234,000, 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 six months ended June 30, 1999 and 1998 (in thousands):
1999 1998
----- -----
Balance at beginning of year $73,182 67,594
Provision charged to operations 7,487 6,786
Decrease from sale of credit card
receivables (1,967) -
Recoveries of loans and leases
previously charged-off 1,460 1,308
Loan and lease losses charged to reserve (7,349) (6,043)
------ ------
Balance at end of period $72,813 69,645
====== ======
Net charge-offs to average loans (annualized):
Total .22% .18
Excluding revolving credit .12 .08
Reserve for loan and lease losses to
period-end loans and leases 1.33 1.33
Reserve for loan and lease losses to
total risk assets 3.19x 3.56
(4) Risk Assets
Following is a summary of risk assets at June 30, 1999, December 31,
1998, and June 30, 1998 (in thousands):
June 30, December 31, June 30,
1999 1998 1998
----- ---------- ------
Nonaccrual loans and lease financing $16,535 16,761 14,976
Other real estate acquired through
loan foreclosures 952 791 1,000
Restructured loans and lease financing 725 739 769
Accruing loans and lease financing
90 days or more past due 4,582 5,889 2,795
------ ------- ------
Total risk assets $22,794 24,180 19,540
======= ====== ======
CCB Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(5) Share and Per Share Data
The following schedule reconciles the numerators and denominators of
the basic and diluted EPS computations for the six months ended June
30, 1999 and 1998 (in thousands except for per share data):
1999 1998
---- ----
Basic:
Average common shares outstanding 40,094 41,244
Net income $ 85,838 59,260
Earnings per share $ 2.14 1.43
Diluted:
Average common shares outstanding 40,094 41,244
Dilutive effect of stock options 407 561
------ ------
Total average common shares 40,501 41,805
Net income $ 85,838 59,260
Earnings per share $ 2.12 1.42
(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) Pending 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 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 six months ended June 30, 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.
Results of Operations - Three Months Ended June 30, 1999 and 1998
Net income in the second quarter of 1999 amounted to $52.1 million
compared to 1998's $30 million. Basic earnings per share totaled
$1.30 in 1999 compared to $.73 in the second quarter of 1998.
Included in 1999's income was an after-tax gain of $19.9 million or
$.50 per share from the sale of credit card receivables (the "credit
card gain"). Excluding the credit card gain, basic earnings per share
increased 10% over 1998's level. Excluding the credit card gain,
returns on average assets and shareholders' equity in 1999 were 1.67%
and 18.64%, respectively, compared to 1998's 1.65% and 17.92%.
In the past several years, the credit card industry has experienced
rapid consolidation resulting in the evolution of large, specialized
credit card companies that are able to provide superior levels of
service and diverse product offerings. While the Subsidiary Banks'
credit card products have been very competitive in the marketplace,
they only comprised approximately 3% of the total loan and lease
portfolio and have not kept pace with the growth levels experienced in
the other segments of the portfolio. In addition, this segment of the
portfolio has historically experienced the highest levels of charge-
offs. Consequently, Management determined that it was prudent to sell
its consumer credit card receivables to MBNA effective June 30, 1999.
The sale freed up capital which can be redeployed in other growth
initiatives, will improve the Corporation's overall credit quality and
will allow Management to focus on businesses that will create more
value for customers and shareholders. Under an agent bank
arrangement, the Subsidiary Banks will continue to offer customers
credit card products, using the CCB name, through MBNA. CCB will
continue to offer business credit cards in its markets and will retain
its existing portfolio of business credit card receivables.
Net Interest Income
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 $416.7 million or 6% in the 1999
period. The overall yield on earning assets decreased 31 basis points
to 8.15% from 1998's 8.46% due to decreased loan and investment
yields. However, overall decreases in rates earned on assets were
offset by increases in volume; consequently, interest income increased
$3 million. The cost of interest-bearing funds decreased by 39 basis
points in the 1999 period to 4.08% due primarily to the lower rates
paid for savings and time deposits, 4.01% in 1999 versus 4.40% in
1998. Decreases in interest-bearing liabilities costs due to lower
interest rates paid offset increased volume to result in a $2.2
million decrease in interest costs. The net interest margin increased
1 basis point from second-quarter 1998 and on a linked-quarter basis
with the first quarter of 1999, increased 8 basis points. Net
interest income on a taxable equivalent basis increased $5.2 million
or 6% over 1998.
With the Federal Reserves' 25 basis point increase in the federal
funds rate at the end of the second quarter and its return to a
"neutral bias" on interest rates, the market will return to watching
for any inflationary pressure that could result in additional interest
rate increases. The U.S. economy continues to grow at a robust pace
with full employment, high consumer confidence and spending, rising
commodity prices and record low consumer saving rates. Management
anticipates continued upward pressure on interest rates during the
remainder of 1999.
Provision for Loan and Lease Losses
The provision for loan and lease losses for the second quarter of 1999
was $5.7 million compared to $3.6 million in 1998. The increase was
necessary to keep pace with loan growth; the reserve for loan and
lease losses was equal to 1.33% of loans and leases outstanding at
both June 30, 1999 and 1998. Annualized net charge-offs as a
percentage of average loans were .22% in 1999 and .19% in 1998.
Excluding revolving credit net charge-offs, the ratios drop to .13%
and .09%, respectively. Annualized revolving credit net charge-offs
during the second quarter of 1999 were 2.54% compared to 2.59%
experienced in 1998.
Noninterest Income and Expense
Other income, excluding the credit card gain and investment securities
transactions, increased $3 million in the second quarter of 1999 to
$32.1 million. The Subsidiary Banks realized a $1.5 million increase
in service charges on deposit accounts from increased deposit volumes
and higher revenues from commercial services. Merchant discount
increased $1.1 million from 1998 due to increased volume of business
and changes in the pricing structure. Income from secondary marketing
and servicing of mortgage loans dropped $1.4 million from June 1998's
level due to less originations and refinances in second quarter 1999's
higher interest rate environment.
Table 1
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis
Three Months Ended June 30, 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) $ 5,521,156 120,239 8.73 %
U.S. Treasury and agency obligations (3) 1,365,211 22,584 6.62
States and political subdivision
obligations 75,232 1,616 8.59
Equity securities and other securities (3) 46,441 921 7.94
Federal funds sold and other short-term
investments 333,415 4,110 4.94
Time deposits in other banks 31,150 401 5.16
-------- -------- --------
Total earning assets (3) 7,372,605 149,871 8.15
-------- --------
Non-earning assets:
Cash and due from banks 207,916
Premises and equipment 94,919
All other assets, net 61,542
--------
Total assets $ 7,736,982
Interest-bearing liabilities:
Savings and time deposits $ 5,633,951 56,269 4.01 %
Other short-term borrowed funds 253,345 2,683 4.25
Long-term debt 214,911 3,119 5.82
-------- -------- --------
Total interest-bearing liabilities 6,102,207 62,071 4.08
-------- --------
Other liabilities and shareholders'
equity:
Demand deposits 845,563
Other liabilities 97,472
Shareholders' equity 691,740
Total liabilities and shareholders' --------
equity $ 7,736,982
=========
Net interest income and net interest
margin (4) $ 87,800 4.77 %
======== =======
Interest rate spread (5) 4.07 %
=======
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis, continued
Three Months Ended June 30, 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) $ 5,205,732 117,155 9.02 %
U.S. Treasury and agency obligations (3) 1,260,137 22,053 7.00
States and political subdivision
obligations 80,882 1,776 8.79
Equity securities and other securities (3) 46,980 928 7.90
Federal funds sold and other short-term
investments 325,336 4,562 5.62
Time deposits in other banks 36,846 405 4.37
--------- --------- -------
Total earning assets (3) 6,955,913 146,879 8.46
--------- -------
Non-earning assets:
Cash and due from banks 200,518
Premises and equipment 87,468
All other assets, net 54,210
---------
Total assets $ 7,298,109
=========
Interest-bearing liabilities:
Savings and time deposits $ 5,338,386 58,526 4.40 %
Other short-term borrowed funds 247,858 3,021 4.89
Long-term debt 176,023 2,687 6.12
--------- --------- --------
Total interest-bearing liabilities 5,762,267 64,234 4.47
--------- --------
Other liabilities and shareholders'
equity:
Demand deposits 766,378
Other liabilities 98,516
Shareholders' equity 670,948
Total liabilities and shareholders' ---------
equity $ 7,298,109
=========
Net interest income and net interest
margin (4) 82,645 4.76 %
========= =======
Interest rate spread (5) 3.99 %
=======
(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 $4,703,000 and $4,318,000 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.
Other expenses increased in the 1999 period by $2.7 million or 5%.
This is partially explained by a $2.3 million increase in personnel
expense from 1998's level due to general salary increases and a larger
workforce. Average assets per employee increased from $2.70 million
in June 1998 to $2.75 million in June 1999. Occupancy and equipment
increased $1.1 million due to growth of the Subsidiary Banks'
operations and improvement in infrastructure. Other operating
expenses decreased $729,000 due to declines in advertising expense,
printing and office supplies and professional services.
As a result of the aforementioned changes, net overhead (noninterest
expense less noninterest income, excluding the credit card gain) as a
percentage of average assets decreased to 1.49% for the three months
ended June 30, 1999 from 1.61% 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, excluding the
credit card gain) improved from 52.54% for the three months ended June
30, 1998 to 51.18% for the same period in 1999. The improvement in
these ratios indicates that the Corporation's revenues are increasing
faster than its expenses.
The following schedule presents noninterest income and expense as a
percentage of average assets for the three months ended June 30, 1999
and 1998.
1999 1998
---- ----
Noninterest income 1.69 % 1.62
---- ----
Personnel expense 1.78 1.76
Occupancy and equipment expense .43 .40
Other operating expense .97 1.07
---- ----
Noninterest expense 3.18 3.23
---- ----
Net overhead 1.49 % 1.61
==== ====
The effective income tax rate was 36.4% in 1999 compared to 36.6% in
the same period of 1998.
Results of Operations - Six Months Ended June 30, 1999 and 1998
Net income for the six months ended June 30, 1999 amounted to $85.8
million which resulted in basic earnings per share of $2.14 in 1999
compared to 1998's $59.3 million or $1.43 basic earnings per share.
Included in net income is the previously discussed $19.9 million
(after-tax) credit card gain. Excluding the credit card gain, basic
earnings per share were $1.64 which was a $.21 or 15% increase over
the 1998 six-month period. Excluding the credit card gain, returns on
average assets and shareholders' equity in 1999 were 1.72% and 19.25%,
respectively, compared to 1.65% and 17.66%, respectively, in the 1998
period. Computed on net income, returns on average assets and
shareholders' equity in 1999 were 2.25% and 25.07%, respectively.
Net Interest Income
Average Balance Sheets and Net Interest Income Analyses on a taxable
equivalent basis for each of the periods are included in Table 2.
Interest-earning assets increased by $459.9 million or 7% in the 1999
period. The overall yield on earning assets decreased to 8.14% from
1998's 8.51% due to the lower interest rate environment experienced
during most of the first six months of 1999. The cost of interest-
bearing funds decreased by 37 basis points in the 1999 period to 4.12%
from 4.49% in 1998. Despite the drop in the cost of funds, the net
interest margin decreased 6 basis points from 1998. The interest rate
spread remained constant at 4.02%. Net interest income on a taxable
equivalent basis increased by $9 million or 6%.
Provision for Loan and Lease Losses
The provision for loan and lease losses for the first six months of
1999 was $7.5 million compared to $6.8 million in 1998. Annualized
net charge-offs as a percentage of average loans were .22% in 1999 and
.18% in 1998. Excluding revolving credit net charge-offs, the ratios
drop to .12% and .08%, respectively. Annualized revolving credit net
charge-offs during the first six months of 1999 were 2.78% compared to
the 2.60% experienced in 1998. Credit card loans had a significantly
higher net charge-off rate than other loan types and it is anticipated
that net charge-offs will decline in future quarters.
Noninterest Income and Expense
Other income, excluding investment securities transactions, the
previously discussed credit card gain and a $1.1 million first quarter
1999 branch sale gain, increased $9.7 million or 18% in the first six
months of 1999. The increase was due primarily to a $3.7 million
increase in service charges on deposit accounts from increased deposit
volume. Other increases over 1998's levels included trust and
custodian fees ($1.1 million) due to increased volume of trust assets
managed, merchant discount ($1.7 million) and secondary marketing and
servicing of mortgages ($1.1 million).
Other expenses increased in the 1999 period by $7.8 million or 7%.
This is partially explained by the increase in personnel expense which
increased $4.7 million from 1998's level. The increase was due to
general salary increases and a larger workforce with corresponding
increases in employee benefits and payroll taxes. Additional smaller
increases were recognized for professional services fees, data
processing and printing and office supplies.
As a result of the aforementioned changes, net overhead as a
percentage of average assets, excluding the impact of the credit card
gain, improved to 1.47% for the six months ended June 30, 1999 from
1.64% for the same period in 1998. The Corporation's efficiency
ratio, excluding the impact of the credit card gain, improved from
51.87% for the six months ended June 30, 1998 to 50.92% for the same
period in 1999. The improvement in both of these ratios indicates
that the Corporation's revenues are increasing faster than its
expenses.
The following schedule presents noninterest income and expense as a
percentage of average assets, excluding the credit card gain, for the
six months ended June 30, 1999 and 1998.
1999 1998
---- ----
Noninterest income 1.69 % 1.51
---- ----
Personnel expense 1.76 1.74
Occupancy and equipment expense .43 .40
Other operating expense .97 1.01
---- ----
Noninterest expense 3.16 3.15
---- ----
Net overhead 1.47 % 1.64
The effective income tax rate was 35.8% in 1999 compared to 36.6%
in the same period of 1998.
Table 2
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis
Six Months Ended June 30, 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) $ 5,472,855 237,658 8.74 %
U.S. Treasury and agency obligations (3) 1,299,204 43,354 6.67
States and political subdivision
obligations 76,764 3,319 8.65
Equity securities and other securities (3) 46,798 1,850 7.91
Federal funds sold and other short-term
investments 402,670 9,733 4.87
Time deposits in other banks 36,238 905 5.04
-------- -------- --------
Total earning assets (3) 7,334,529 296,819 8.14
-------- --------
Non-earning assets:
Cash and due from banks 212,248
Premises and equipment 94,379
All other assets, net 65,486
--------
Total assets $ 7,706,642
=========
Interest-bearing liabilities:
Savings and time deposits $ 5,616,170 112,505 4.04 %
Other short-term borrowed funds 249,132 5,232 4.24
Long-term debt 215,760 6,449 6.02
-------- -------- --------
Total interest-bearing liabilities 6,081,062 124,186 4.12
-------- --------
Other liabilities and shareholders'
equity:
Demand deposits 837,738
Other liabilities 97,315
Shareholders' equity 690,527
--------
Total liabilities and shareholders'
equity $ 7,706,642
========
Net interest income and net interest
margin (4) $ 172,633 4.72 %
======== ========
Interest rate spread (5) 4.02 %
========
CCB FINANCIAL CORPORATION
Average Balances and Net Interest Income Analysis, continued
Six Months Ended June 30, 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) $ 5,169,357 232,327 9.05 %
U.S. Treasury and agency obligations (3) 1,276,477 44,872 7.04
States and political subdivision
obligations 81,025 3,563 8.80
Equity securities and other securities (3) 46,526 1,826 7.85
Federal funds sold and other short-term
investments 265,830 7,439 5.64
Time deposits in other banks 35,428 805 4.58
--------- --------- -------
Total earning assets (3) 6,874,643 290,832 8.51
--------- -------
Non-earning assets:
Cash and due from banks 203,958
Premises and equipment 87,076
All other assets, net 65,972
---------
Total assets $ 7,231,649
=========
Interest-bearing liabilities:
Savings and time deposits $ 5,311,457 116,446 4.42 %
Other short-term borrowed funds 249,628 6,070 4.91
Long-term debt 153,270 4,686 6.16
--------- --------- -------
Total interest-bearing liabilities 5,714,355 127,202 4.49
--------- -------
Other liabilities and shareholders'
equity:
Demand deposits 741,333
Other liabilities 99,128
Shareholders' equity 676,833
Total liabilities and shareholders' ---------
equity $ 7,231,649
=========
Net interest income and net interest
margin (4) 163,630 4.78 %
========= =======
Interest rate spread (5) 4.02 %
=======
(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 $9,239,000 and $7,924,000 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.
Financial Condition
Total assets have increased $395.4 million or 5% since June 30, 1998
with the majority of the increase occurring in interest-earning
assets. Average assets have increased from $7.3 billion for the
quarter ended June 30, 1998 to $7.7 billion for the quarter ended June
30, 1999 and compared to $7.5 billion for the three months ended
December 31, 1998.
In addition to recurring sales of all fixed-rate mortgage production,
during the first quarter of 1999 the Corporation sold approximately
$200 million in mortgage loans into the secondary market. Adjusting
for the first quarter loan sale, average loans and leases grew 10% in
the second quarter of 1999 over the year-ago quarter. Average
deposits grew 6% to $6.5 billion during the second quarter of 1999
over the comparable quarter in 1998.
At June 30, 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
$22.8 million or .41% of outstanding loans and lease financing and
foreclosed real estate. This compares to $19.5 million or .37% at
June 30, 1998. The levels of nonaccrual loans grew $1.6 million and
loans 90 days past due grew $1.8 million. The reserve for loan and
lease losses to risk assets was 3.19x at June 30, 1999 compared to
3.03x at December 31, 1998 and 3.56x at June 30, 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 8.94% and 9.19% for the three months ended
June 30, 1999 and 1998, respectively. Under a previously announced
stock repurchase plan, the Corporation has repurchased and retired
612,434 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 $54.39 and $55.06 per share for 1999 and 1998,
respectively. There are approximately 219,000 shares remaining to be
repurchased under the current authorized plan. Book value per share
increased from $16.27 at June 30, 1998 to $17.75 at June 30, 1999, a
9% increase.
Due to generally higher interest rates in 1999, unrealized gains on
investment securities available for sale, net of applicable taxes,
decreased $13.4 million from December 31, 1998. As of June 30, 1999,
unrealized losses on investment securities available for sale, net of
applicable taxes, totaled $81,000 compared to June 30, 1998's $11
million net unrealized gains.
On July 20, 1999, the Board of Directors of the Corporation declared a
quarterly cash dividend on common stock of $.29 per share payable
October 1, 1999 to shareholders of record as of September 15, 1999.
The 12% dividend increase is the Corporation's 35th consecutive year
of annual cash dividend increases.
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines that 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 June 30,
1999 as indicated below. CCB-Ga.'s capital ratios are significantly
higher at June 30, 1999 due to the sale of the majority of its assets
(credit card receivables) without returning excess capital to the
Parent Company.
June 30, Regulatory
Ratio 1999 1998 Minimums
----- ---- ---- ----------
Tier 1 Capital 4.00%
Corporation 11.94% 11.40
CCB 11.41 11.04
AmFed 13.83 14.44
CCB-Ga. 175.12 16.60
-------------------------------------------------
Total Capital 8.00
Corporation 13.66 13.26
CCB 12.59 12.22
AmFed 15.13 15.69
CCB-Ga. 176.57 17.89
-------------------------------------------------
Leverage 4.00
Corporation 8.83 8.50
CCB 8.57 8.21
AmFed 8.96 10.11
CCB-Ga. 23.80 12.60
-------------------------------------------------
Year 2000 Issue
The Corporation has completed its project to assess and correct the
impact of the "Year 2000 Issue" and is now in the Clean Management
Phase to ensure Year 2000 compliant systems remain compliant. 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 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.
* The validation phase involved testing all computer systems. Even
if software had been tested by the vendor and certified Year 2000-
ready, the Corporation's Year 2000 project team re-tested and
validated all software to ensure compatibility with the Corporation's
information systems environment. 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. All non-mission critical testing and replacement
of non-mission critical personal computers was completed by 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 Clean Management.
* Finally, the implementation phase involved incorporating Year
2000-ready systems into the day-to-day operations of the Corporation.
This phase was completed by June 1999. During the third quarter of
1999, the Year 2000 project team will continue to monitor Year 2000-
ready tested systems and ensure Year 2000-readiness is maintained.
From October 1999 through January 2000, only production critical or
regulatory required programming changes will be allowed by Management.
These changes will be tested for Year 2000 compliance before being put
into production.
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 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
project team 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 June 30,
1999, the project team had contacted substantially all major customers
and evaluated the risk to the Corporation based upon the results of
the customer communication. Also, the project team reviewed certain
issuers of debt securities held in the investment securities portfolio
as well as federal funds counter-parties. In the Trust area, the
project team 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 and due diligence
of mission critical third-party entities was completed in March 1999
and testing and due diligence of non-mission critical third parties
was completed in June 1999. Based on these reviews of critical
vendors, major customers and other major counter-parties, at present
Management feels that there is not an inordinate amount of risk that
would require the establishment of any special reserves for the Year
2000 Issue. 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. The Corporation completed its
organizational planning guidelines and business impact analysis in
October 1998. FFIEC guidelines further require that the development
and validation of the business resumption contingency plans be
completed by June 30, 1999. 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 by
the Corporation's internal auditors were completed in February 1999.
The last contingency planning requirement, developing detailed Year
2000 rollover event plans, was 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 the Corporation has met all Year 2000 deadlines
set by the regulators.
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 six months of
1999, the Corporation incurred $642,000 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 year and is not
expected to have a material effect on the Corporation's results of
operations.
The costs of the Year 2000 project 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.
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 June 30, 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 3 Registrants' Amended and Restated Bylaws dated April
28, 1998.
Exhibit 22 Report regarding matters submitted to vote of
security holders.
Exhibit 27 Financial Data Schedule as of June 30, 1999.
(b). Reports on Form 8-K
A Current Report on Form 8-K dated April 14, 1999 was filed
under Items 5 and 7 discussing the proposed acquisition of
Stone Street Bancorp, Inc.
A Current Report on Form 8-K dated April 27, 1999 was filed
under Item 5 discussing the extension and expansion of the
Corporation's previously authorized stock repurchase plan.
A Current Report on Form 8-K dated June 28, 1999 was filed
under Items 5 and 7 discussing the Corporation's sale of
consumer credit card receivables.
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: August 11, 1999 /s/ ERNEST C. ROESSLER
Ernest C. Roessler
Chairman, President and
Chief Executive Officer
Date: August 11, 1999 /s/ SHELDON M. FOX
Sheldon M. Fox
Executive Vice President and
Chief Financial Officer
Date: August 11, 1999 /s/ W. HAROLD PARKER, JR.
W. Harold Parker, Jr.
Senior Vice President and
Controller
(Chief Accounting Officer)