UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
(Fee Required)
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from to
COMMISSION FILE NUMBER: 0-12358
CCB FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 56-1347849
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
111 Corcoran Street, Post Office Box 931, Durham, NC 27702
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (919) 683-7777
Securities issued pursuant to Section 12(b) of the Act:
None
Securities issued pursuant to Section 12(g) of the Act:
$5.00 par value Common Stock
(TITLE OF CLASS)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 1, 1996 was $727,400,322. On March 1, 1996, there
were 15,053,616 outstanding shares of the Registrant's $5.00 par value Common
Stock.
DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF REGISTRANT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 16, 1996 ARE INCORPORATED IN PART III OF THIS
REPORT.
CROSS REFERENCE INDEX
PART I. Item 1 Business
Description 3-6
Average Balance Sheets 10
Net Interest Income Analysis -- Taxable Equivalent Basis 10
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis 11
Investment Securities Portfolio 17
Investment Securities -- Maturity/Yield Schedule 17
Types of Loans 16
Maturities and Sensitivities of Loans to Changes in Interest Rates 16
Nonperforming and Risk Assets 21
Loan Loss Experience 22
Average Deposits 12
Maturity Distribution of Large Denomination Time Deposits 23
Return on Equity and Assets 27
Short-Term Borrowings 41
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders.
There has been no submission of matters to a vote of shareholders during the quarter ended
December 31, 1995.
PART II. Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters 7
Item 6 Selected Financial Data 27-28
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-28
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 1995 and 1994 30
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1995 31
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period
ended December 31, 1995 32
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1995 33
Notes to Consolidated Financial Statements 34-53
Independent Auditors' Report 55
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting and financial
disclosures.
PART III. Item 10 Directors and Executive Officers of the Registrant 4-6*
Item 11 Executive Compensation 9-12*
Item 12 Security Ownership of Certain Beneficial Owners and Management 2-4*
Item 13 Certain Relationships and Related Transactions 14*
PART IV. Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for Reference).
(2) Financial Statement Schedules normally required on Form 10-K are omitted since they are
not applicable.
(3) Exhibits have been filed separately with the Commission and are available upon written
request.
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this
Report.
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission. Page number
references are to the location of such information in the Proxy Statement.
DESCRIPTION OF BUSINESS
REGISTRANT
CCB Financial Corporation (the "Corporation") is a registered bank holding
company headquartered in Durham, North Carolina whose principal business is
providing banking and other financial services through its banking subsidiaries.
The Corporation is the parent holding company of Central Carolina Bank and Trust
Company, a North Carolina-chartered commercial bank; Graham Savings Bank, Inc.,
SSB, a North Carolina-chartered state savings bank; and Central Carolina
Bank-Georgia, a Georgia-chartered special purpose credit card bank (collectively
referred to as the "Subsidiary Banks"). The principal assets of the Corporation
are all of the outstanding shares of common stock of the Subsidiary Banks and
the Corporation's principal sources of revenue are the interest income and
dividends it receives from the Subsidiary Banks. At December 31, 1995, the
Corporation had consolidated assets of approximately $5.1 billion and was the
seventh largest banking organization headquartered in North Carolina.
On May 19, 1995, the Corporation merged with Security Capital Bancorp
("Security Capital"), a $1.2 billion bank holding company based in Salisbury,
North Carolina. The merger was accounted for as a pooling-of-interests and was
effected through a tax-free exchange of stock. Each share of Security Capital
common stock outstanding on the merger date was converted into .5 shares of the
Corporation's common stock. Consequently, the Corporation issued approximately
5.9 million shares of common stock and cash in lieu of fractional shares for all
of the outstanding shares of Security Capital. The former offices of Security
Capital are operated as offices of Central Carolina Bank and Trust Company, the
Corporation's lead bank.
SUBSIDIARY BANKS
Central Carolina Bank and Trust Company ("CCB") is chartered under the laws
of the state of North Carolina to engage in general banking business. CCB offers
commercial and retail banking, savings and trust services through 153 offices
located in 59 cities and towns in North Carolina. CCB had approximately $5
billion in assets at December 31, 1995 and was the seventh largest bank in North
Carolina. CCB provides a full range of financial services including accepting
deposits; making secured and unsecured loans; renting safe deposit boxes;
performing trust functions for corporations, employee benefit plans and
individuals; and providing certain insurance and brokerage services. During
1994, the Corporation owned CCB Savings Bank, Inc., SSB ("CCB Savings"), a North
Carolina-chartered state savings bank based in Lenoir, North Carolina. CCB
Savings operated 4 branch offices in 3 North Carolina cities and towns. On
February 3, 1995, CCB Savings was merged with and into CCB and its branch
offices are operated as CCB branch offices.
Graham Savings Bank, Inc., SSB ("Graham Savings") is a full-service state
savings bank that provides commercial and retail banking and savings services.
Graham Savings is based in Graham, North Carolina and operates 2 branch offices
in 2 North Carolina cities and towns.
Central Carolina Bank-Georgia ("CCB-Ga.") provides nationwide credit card
services from its headquarters in Columbus, Georgia.
NON-BANK SUBSIDIARIES
CCB has four wholly-owned non-bank subsidiaries: Southland Associates,
Inc., CCBDE, Inc., 1st Home Mortgage Acceptance Corporation ("HMAC") and CCB
Investment and Insurance Service Corporation ("CCBIISC"). Southland Associates,
Inc. engages in real estate development. CCBDE, Inc. is an investment holding
company headquartered in Wilmington, Delaware. HMAC is an issuer of
collateralized mortgage obligations which was acquired through the 1993
acquisition of certain assets and assumption of certain liabilities of 1st Home
Federal Savings and Loan Association, F.A., of Greensboro, North Carolina.
CCBIISC engages in the sale of various annuity and mutual fund products.
COMPETITION
Vigorous competition exists in all major areas where the Corporation is
presently engaged in business. Its Subsidiary Banks compete not only with other
major commercial banks but also with other diversified financial institutions
such as thrift institutions, money market and other mutual funds, mortgage
companies, leasing companies, finance companies and a variety of financial
services and advisory companies. Competitor commercial banks larger than the
Corporation range in size from $6 billion to over $100 billion in total assets,
including assets attributable to affiliates in other states. Consequently, these
competing commercial banks may be able to offer services and products that are
not cost-efficient for the Subsidiary Banks to offer. In addition, the competing
commercial banks have access to greater financial resources that allow higher
lending limits than the Subsidiary Banks. In addition to in-state competition,
banks in North Carolina have a high degree of competition from out-of-state
financial service companies through the presence of loan production offices and
their North Carolina affiliates.
3
In recent years, competition between commercial banks, thrift institutions
and credit unions has intensified significantly. Primarily as a result of
legislation aimed at effecting a deregulation of the financial institution
industry, along with other regulatory changes effected by the primary federal
regulators of the various types of financial institutions, the practical
distinctions between a commercial bank and a thrift institution have been almost
totally eliminated.
INTERSTATE BANKING AND BRANCHING
Recently enacted federal law permits adequately capitalized and managed
bank holding companies to acquire control or the assets of banks in any state
(the "Interstate Banking Law"). Acquisitions will be subject to anti-trust
provisions that cap at 10% the portion of the total deposits of insured
depository institutions in the United States that a single bank holding company
may control, and generally cap at 30% the portion of the total deposits of
insured depository institutions in a state that a single bank holding company
may control. Under certain circumstances, states have the authority to increase
or decrease the 30% cap, and states may set minimum age requirements of up to
five years on target banks within their borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permits interstate branching by allowing a bank to merge with a
bank located in a different state. A state may accelerate the effective date for
interstate mergers by adopting a law authorizing such transactions prior to June
1, 1997, or it can "opt out" and thereby prohibit interstate branching by
enacting legislation to that effect. The Interstate Banking Law also permits
banks to open new branches or acquire existing branches of banks located in
other states that permit that form of interstate branching.
North Carolina has adopted statutes which, subject to conditions contained
therein, specifically authorize out-of-state bank holding companies and banks to
acquire or merge with North Carolina banks and to establish or acquire branches
in North Carolina.
SUPERVISION AND REGULATION
The business and operations of the Corporation and its Subsidiary Banks are
subject to extensive federal and state governmental regulation and supervision.
BANK HOLDING COMPANY REGULATION
The Corporation is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is subject to
supervision and examination by and the regulations and reporting requirements of
the Federal Reserve. Under the BHCA, the activities of the Corporation are
limited to banking, managing or controlling banks, furnishing services to or
performing services for their subsidiaries or engaging in any other activity
which the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Corporation from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all of
the assets of any financial institution, or merging or consolidating with
another bank holding company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Corporation from engaging in, or acquiring
ownership or control of more than 5% of the outstanding voting stock of any
company engaged in a non-banking activity unless such activity is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. In approving an application by the Corporation to engage in a
non-banking activity, the Federal Reserve must consider whether that activity
can reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices.
Federal Reserve approval generally must be obtained before any person may
acquire control of a bank holding company. Control is presumed to exist if,
among other things, a person acquires more than 25% of any class of voting stock
of a holding company or if a person acquires more than 10% of any class of
voting stock and the holding company has registered securities under Section 12
of the 1934 Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed by law on a bank
holding company and its insured depository institution subsidiaries that are
designed to minimize potential loss to depositors and the FDIC insurance funds.
For example, if a bank holding company's insured depository institution
subsidiary becomes "undercapitalized," the bank holding company is required to
guarantee (subject to certain limits) the subsidiary's compliance with the terms
of any capital restoration plan filed with its appropriate federal banking
agency. Also, a bank holding company is required to serve as a source of
financial strength to its depository institution subsidiaries and to commit
resources to support such institutions in circumstances where it might not do
4
so absent such policy. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary upon the Federal Reserve's determination that
such activity or control constitutes a serious risk to the financial soundness
and stability of a depository institution subsidiary of the bank holding
company.
Bank holding companies are required to comply with the Federal Reserve'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 I capital. 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 level of Tier I 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.
As a result of its ownership of a North Carolina-chartered commercial bank,
the Corporation also is registered with and subject to regulation by the North
Carolina Commissioner of Banks under the state's bank holding company laws. The
Commissioner has asserted authority to examine North Carolina bank holding
companies and their affiliates and in the process of formulating regulations in
this area.
CCB AND GRAHAM SAVINGS
CCB is a North Carolina commercial bank and is subject to supervision and
examination by and the regulations and reporting requirements of the North
Carolina Commissioner of Banks (the "Commissioner") and the FDIC. Graham Savings
is a North Carolina stock savings bank and is subject to supervision and
examination by and the regulations and reporting requirements of the
Administrator of the North Carolina Savings Institutions Division (the
"Administrator") and the FDIC. Both CCB and Graham Savings are members of the
Federal Home Loan Bank system.
CCB and Graham Savings are subject to legal limitations on the amounts of
dividends they are permitted to pay. In the case of CCB, prior approval of the
Commissioner is required if the total of all dividends declared by CCB in any
calendar year exceeds its net profits (as defined by statute) for that year
combined with its retained net profits (as defined by statute) for the preceding
two calendar years, less any required transfers to surplus. Graham Savings may
not declare or pay a cash dividend on its capital stock if the effect of such
transaction would be to reduce the net worth of the institution to an amount
which is less than the minimum amount required by applicable federal and state
regulations or if the effect thereof would be to cause its net worth to be
reduced below the amount of the liquidation account established in connection
with its conversion from mutual to stock form. In addition, a savings bank, such
as Graham Savings, which has been converted from mutual form for less than five
years may not, without the prior written approval of the Administrator, declare
or pay a cash dividend on its capital stock in an amount in excess of one-half
of the greater of (i) its net income for the most recent fiscal year or (ii) the
average of its net income after dividends for the most recent fiscal year end
and not more than two of the immediately preceding fiscal year ends.
Insured depository institutions also are prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (a such term is
defined in the Federal Deposit Insurance Act).
CCB and Graham Savings are subject to capital requirements imposed by the
FDIC. Under the FDIC's regulations, insured institutions that receive the
highest rating during the examination process and are not anticipating or
experiencing any significant growth are required to maintain a minimum leverage
ratio of 3% of Tier I capital to average total consolidated assets. All other
insured institutions are required to maintain a minimum ratio of 1% or 2% above
the stated minimum, with a minimum leverage ratio of not less than 4%. The FDIC
also requires CCB and Graham Savings to have a ratio of total capital to
risk-weighted assets of at least 8%. Additionally, the Administrator requires
Graham Savings to have a net worth equal to at least 5% of total assets.
Under current federal law, certain transactions between a depository
institution and its affiliates are governed by Section 23A and 23B of the
Federal Reserve Act. An affiliate of a depository institution is any company or
entity that controls, is controlled by or is under common control with the
institution, and, in a holding company context, the parent holding company of a
depository institution and any companies which are controlled by such parent
holding company are affiliates of the depository institution. Generally,
Sections 23A and 23B (i) limit the extent to which depository institution or its
subsidiaries may engage in covered transactions with any one affiliate, and (ii)
require that such transactions be on terms and under circumstances substantially
the same, or at least as favorable, to the institution or the subsidiary as
those provided to a nonaffiliate.
CCB and Graham Savings are subject to various other state and federal laws
and regulations, including state usury laws, laws relating to fiduciaries,
consumer credit and equal credit, fair credit reporting laws and laws relating
to branch banking. As insured
5
institutions, CCB and Graham Savings are prohibited from engaging as a principal
in activities that are not permitted for national banks unless (i) the FDIC
determines that the activity would pose no significant risk to the appropriate
deposit insurance fund and (ii) the institution is, and continues to be, in
compliance with all applicable capital standards. Insured institutions also are
prohibited from directly acquiring or retaining any equity investment of a type
or in an amount not permitted for national banks.
INSURANCE ASSESSMENTS
CCB and Graham Savings are subject to insurance assessments imposed by the
FDIC. Effective January 1, 1993, the FDIC adopted a transitional risk-based
assessment schedule which became fully effective in January 1994 and provided
for annual assessment rates ranging from .23% to .31% of an institution's
average assessment base. During 1995, the FDIC reduced Bank Insurance Fund
("BIF") assessment rates for the highest rated banks to .04%, but left unchanged
the .31% rate for the weakest banks; and, effective January 1, 1996, the FDIC
again reduced BIF assessments to a range of 0% to .27%. These recent premium
reductions do not affect the deposit premiums paid on Savings Association
Insurance Fund ("SAIF") insured deposits. The actual assessment to be paid by
each insured institution is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized," "adequately capitalized" or "under capitalized,"
as such terms have been defined in applicable federal regulations, and whether
the institution is considered by its supervisory agency to be financially sound
or to have supervisory concerns. The FDIC also is authorized to impose one or
more special assessments in any amount deemed necessary to enable repayment of
amounts borrowed by the FDIC from the United States Treasury Department.
Proposals are currently being considered by committees of the United States
Congress concerning a possible merger of the SAIF and BIF insurance funds of the
FDIC. One of the principal issues under discussion is the amount of additional
funds needed to recapitalize the SAIF prior to such a merger. These proposals
generally contemplate a one-time special assessment to be levied on SAIF-insured
deposits (including such deposits held by commercial banks), with the amount of
such an assessment possibly being as much as $.85 for each $100 in SAIF-insured
deposits held as of the assessment date. At December 31, 1995, CCB and Graham
Savings had approximately $1.3 billion and $100 million, respectively, in
SAIF-insured deposits. Due to the uncertainty as to whether any such proposals
will be adopted and the ultimate amount and tax deductibility of any assessment
that may be levied on CCB and Graham Savings, it currently is not possible to
predict the impact of these proposals or such an assessment on the Subsidiary
Banks.
EFFECT OF GOVERNMENTAL POLICIES
The earnings and business of the Corporation are and will be affected by
the policies of various regulatory authorities of the United States, especially
the Federal Reserve. The Federal Reserve, among other functions, regulates the
supply of credit and deals with general economic conditions within the United
States. The instruments of monetary policy employed by the Federal Reserve for
these purposes influence in various ways the overall level of investments,
loans, other extensions of credit and deposits, and the interest rates paid on
liabilities and received on assets.
EMPLOYEE RELATIONS
As of December 31, 1995, the Corporation and its Subsidiary Banks employed
1,940 full-time equivalent employees. The Corporation and its Subsidiary Banks
are not parties to any collective bargaining agreements and employee relations
are considered to be good.
PROPERTIES
The Corporation's principal executive offices are located at 111 Corcoran
Street, Durham, North Carolina in a 17-story office building constructed in
1937. This office building is owned in fee simple by CCB and also serves as the
home office of CCB. A majority of the major staff functions are located therein.
The Corporation's Customer Service Center is a one-story leased building also
located in Durham, North Carolina that has been occupied since 1990. The
Subsidiary Banks operate 155 branch bank locations, approximately 70 of which
are either leased buildings or leased property on which the Subsidiary Banks
have constructed banking offices.
Southland Associates, Inc. owns real estate, other than premises, with a
net book value of approximately $724,000 at December 31, 1995. This real estate
consists of various parcels of land that are being developed for commercial and
residential use in the City of Durham and in Durham County, North Carolina.
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LEGAL PROCEEDINGS
See Note 14 to the Consolidated Financial Statements for a discussion of
legal proceedings.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
See "Capital Resources" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Corporation's stock prices
and dividends paid during 1995 and 1994 and discussion of other shareholder
matters. On January 23, 1996, a dividend of $.38 per share was declared for
payment on April 1, 1996 to shareholders of record as of March 15, 1996.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition 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"),
Graham Savings Bank, Inc., SSB ("Graham Savings") and Central Carolina
Bank-Georgia (collectively, the "Subsidiary Banks") for the years ended December
31, 1995, 1994 and 1993. 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"), CCBDE, Inc., 1st Home
Mortgage Acceptance Corporation ("HMAC") and Southland Associates, Inc.
This discussion and analysis is intended to complement the audited
financial statements and footnotes and the supplemental financial data and
charts appearing elsewhere in this report, and should be read in conjunction
therewith. This discussion and analysis will focus on the following major areas:
Merger and Other Acquisitions, Results of Operations, Financial Position,
Capital Resources, Asset Quality, and Liquidity and Interest-Sensitivity.
MERGER AND OTHER ACQUISITIONS
On May 19, 1995, the Corporation merged with Security Capital Bancorp
("Security Capital"), a $1.2 billion bank holding company based in Salisbury,
North Carolina (the "Merger"). The Merger was accounted for as a
pooling-of-interests and was effected through a tax-free exchange of stock. Each
share of Security Capital common stock outstanding on the date of the Merger was
converted into .5 shares of the Corporation's common stock. Consequently, the
Corporation issued approximately 5.9 million shares of common stock and cash in
lieu of fractional shares for all of the outstanding shares of Security Capital.
The former offices of Security Capital are operated as offices of CCB, the
Corporation's lead bank. In accordance with pooling-of-interests accounting, the
financial statements of the Corporation have been restated to reflect the Merger
as if it had been effective as of the earliest period presented.
On June 9, 1995, the Corporation acquired and assumed deposit liabilities
totaling $37.5 million of three branches of a North Carolina bank. Deposit base
premium of $2.9 million was recorded as a result of the acquisition which is
being amortized over 10 years; no goodwill was recorded in the transaction. As
the acquisition was accounted for as a purchase, the results of operations of
the branches acquired are included in the Corporation's results of operations
only from the date of acquisition.
During the third quarter of 1994, Security Capital purchased the
outstanding stock of First Federal Savings and Loan Association of Charlotte,
North Carolina ("First Federal") in an acquisition accounted for as a purchase.
First Federal had assets totaling $302 million at acquisition date, including
$135 million of loans. Concurrent with the acquisition, First Federal was merged
into Security Capital's commercial bank subsidiary.
During 1993, the Corporation completed the acquisition of three mutual
savings banks and CCB acquired certain assets and assumed certain liabilities of
the Greensboro, North Carolina operations of a savings and loan association
(collectively, the "1993 Acquisitions"). As the 1993 Acquisitions were accounted
for as purchases, the results of operations of the financial institutions
acquired prior to the dates of acquisition are not included in the consolidated
financial statements. The assets of the 1993 Acquisitions totaled $778 million
at their respective acquisition dates. The acquisitions of the mutual savings
banks involved their conversions from mutual savings banks to stock savings
banks and their simultaneous acquisition by the Corporation. In conjunction with
these transactions, the Corporation sold 688,742 shares of its common stock.
Subsequent to acquisition, two of the mutual savings banks were merged to form a
new savings bank and on February 1, 1995, it was merged with and into CCB and
its offices are operated as CCB offices.
RESULTS OF OPERATIONS
SUMMARY
(Bullet) The Corporation's net income for the year ended December 31, 1995
totaled $57.9 million, a $12.7 million or 28.3% increase over the $45.1
million earned in 1994. The Corporation's 1994 net income was an
increase of $2.4 million or 5.7% over net income for the year ended
1993. The five-year compound annual growth rate for net income has been
12.7%.
(Bullet) Earnings in 1995 and 1994 were impacted by the following significant
items:
Approximately $10.3 million ($7.3 million after-tax) of merger-related
expense was incurred in 1995 to effect the Merger which decreased
earnings by $.49 per share;
8
(Diamond) Approximately $1.1 million ($660,000 after-tax) of merger-related
expense was incurred in 1994 to effect Security Capital's acquisition
of First Federal which decreased earnings by $.04 per share;
(Diamond) Approximately $5.6 million of deferred tax liabilities were recorded
in 1994 in conjunction with Security Capital's three savings bank
subsidiaries merging into its commercial bank subsidiary which
decreased earnings by $.37 per share; and,
(Diamond) Average earning assets increased $500 million in 1995 from 1994's
level and taxable equivalent net interest income increased $21.7
million during that same period.
(Bullet) Assets at December 31, 1995 exceeded $5 billion, a 7.8% increase over
1994.
(Bullet) Shareholders' equity increased $62.4 million during 1995 while
dividends paid to shareholders increased $4.5 million.
Excluding the effects of the merger-related expense and tax bad debt
recapture, income per share totaled $4.36 in 1995 and $3.35 in 1994. Primary net
income per share was $3.87 in 1995 compared to $2.94 and $3.00, respectively, in
1994 and 1993. Table 1 compares the contributions to primary net income per
share for each income statement caption for the years ended December 31, 1995,
1994 and 1993 and the respective change from year to year.
TABLE 1
COMPONENTS OF INCOME PER PRIMARY SHARE
Change
Years Ended December 31 From
1995 1994 1993 1995/1994
Interest income $25.66 20.18 17.92 5.48
Interest expense 12.00 8.23 7.16 3.77
Net interest income 13.66 11.95 10.76 1.71
Provision for loan and lease losses .55 .60 .50 (.05)
Net interest income after provision 13.11 11.35 10.26 1.76
Other income 3.50 3.19 3.48 .31
Other expenses (1) 10.72 9.59 9.10 1.13
Income before income taxes and cumulative changes in accounting principles 5.89 4.95 4.64 .94
Income taxes (2) 2.02 2.01 1.54 .01
Income before cumulative changes in accounting principles 3.87 2.94 3.10 .93
Cumulative changes in accounting principles (3) -- -- (.10) --
Net income $ 3.87 2.94 3.00 .93
Change
From
1994/1993
Interest income 2.26
Interest expense 1.07
Net interest income 1.19
Provision for loan and lease losses .10
Net interest income after provision 1.09
Other income (.29)
Other expenses (1) .49
Income before income taxes and cumulative changes in accounting principles .31
Income taxes (2) .47
Income before cumulative changes in accounting principles (.16)
Cumulative changes in accounting principles (3) .10
Net income (.06)
(1) Other expenses include merger-related expense of $10.3 million in 1995
related to the Corporation's merger with Security Capital and $1.1 million
in 1994 related to Security Capital's acquisition of a savings and loan
association. The after-tax effect of the merger-related expense was to
decrease net income per share by $.49 per share in 1995 and $.04 per share
in 1994.
(2) Income taxes for 1994 include a one-time charge of approximately $5.6
million of deferred tax liabilities recorded in conjunction with the merger
of Security Capital's three savings bank subsidiaries into its commercial
bank subsidiary. Income per share was decreased by $.37 for the year.
(3) The cumulative changes in accounting principles reflect the 1993 adoption of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions", which resulted in a
one-time net charge of $2.3 million ($3.7 million pre-tax) in recognition of
the entire Accumulated Postretirement Benefit Obligation and adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which resulted in a one-time benefit of $900,000.
On a fully diluted basis (assuming conversion of the Corporation's
convertible subordinated debentures issued in 1985 which were outstanding until
the second quarter of 1993), net income per share in 1994 was $2.94 compared to
1993's $2.95.
Excluding the effects of the merger-related expense and tax bad debt
recapture, return on average assets was 1.35% for 1995 compared to 1.20% for
1994 and return on average shareholders' equity was 16.34% for 1995 compared to
1994's 13.46%. Computed on net income, the return on average assets was 1.20% in
1995 compared to 1.05% and 1.18% in 1994 and 1993, respectively. Return on
average shareholders' equity was 14.56%, 11.78% and 12.91% in 1995, 1994 and
1993, respectively.
NET INTEREST INCOME
Net interest income is one of the major determining factors in a financial
institution's performance as it is its principal source of earnings. Table 2
presents average balance sheets and a net interest income analysis on a taxable
equivalent basis for each of the years in the three-year period ended December
31, 1995.
9
As shown in Table 2, the Corporation realized net taxable equivalent
interest income of $212.7 million in 1995. Average earning assets increases of
$500 million in 1995 were due to a full year's ownership of First Federal's
assets and internal growth. Changes in the mix of earning assets toward
higher-earning loans and lease financing did not fully offset the rise in rates
paid on interest-bearing liabilities with the result that the net interest
margin fell 5 basis points in 1995. The increased rate paid for interest-bearing
liabilities followed earlier increases in rates earned on interest-earning
assets as, generally, increases in interest rates affect a large percentage of
the Corporation's interest-earning assets immediately while the interest-bearing
liabilities reprice as they mature in subsequent months. Consequently, the
interest rate spread fell to 3.98% in 1995 from 1994's 4.15%. The contribution
of free liabilities to the net interest margin rose to 72 basis points in 1995
from 60 basis points in 1994. The overall increase in net interest income of
$21.7 million was due to increases in volume of $25.4 million offset by
decreases in rate of $3.7 million.
TABLE 2
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
Years Ended December 31, 1995, 1994 and 1993
(Taxable Equivalent Basis -- In Thousands) (1)
1995 1994 1993
INTEREST AVERAGE Interest Average Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/
BALANCE EXPENSE RATE Balance Expense Rate Balance Expense
EARNING ASSETS:
Loans and lease financing (2) $3,251,613 305,951 9.41% 2,823,525 243,910 8.64 2,299,599 196,884
U.S. Treasury and U.S. Government
agencies and corporations 869,267 58,521 6.73 908,937 55,872 6.15 794,261 50,517
States and political subdivisions 80,125 7,856 9.81 65,204 6,900 10.58 54,772 6,593
Equity and other securities 30,708 2,180 7.10 36,412 2,311 6.35 43,772 2,691
Federal funds sold and other
short-term investments 239,912 14,696 6.13 149,387 6,464 4.33 139,569 4,332
Time deposits in other banks 50,156 2,937 5.86 38,349 1,900 4.95 33,301 1,113
Total earning assets 4,521,781 392,141 8.67% 4,021,814 317,357 7.89 3,365,274 262,130
NON-EARNING ASSETS:
Cash and due from banks 167,105 166,445 158,541
Premises and equipment 65,746 62,049 62,406
All other assets, net 56,476 47,467 27,112
Total assets $4,811,108 4,297,775 3,613,333
INTEREST-BEARING LIABILITIES:
Savings and time deposits $3,654,420 168,983 4.62% 3,222,263 117,408 3.64 2,722,005 97,194
Short-term borrowed funds 86,045 4,421 5.14 66,878 2,491 3.72 50,132 1,232
Long-term debt 84,328 6,000 7.11 87,368 6,467 7.40 48,082 3,530
Total interest-bearing
liabilities 3,824,793 179,404 4.69% 3,376,509 126,366 3.74 2,820,219 101,956
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits 494,106 453,876 415,032
Other liabilities 94,705 84,506 47,403
Shareholders' equity 397,504 382,884 330,679
Total liabilities and
shareholders' equity $4,811,108 4,297,775 3,613,333
NET INTEREST INCOME AND NET
INTEREST MARGIN (3) $212,737 4.70% 190,991 4.75 160,174
INTEREST RATE SPREAD (4) 3.98% 4.15
1993
Average
Yield/
Rate
EARNING ASSETS:
Loans and lease financing (2) 8.56
U.S. Treasury and U.S. Government
agencies and corporations 6.36
States and political subdivisions 12.04
Equity and other securities 6.15
Federal funds sold and other
short-term investments 3.10
Time deposits in other banks 3.34
Total earning assets 7.79
NON-EARNING ASSETS:
Cash and due from banks
Premises and equipment
All other assets, net
Total assets
INTEREST-BEARING LIABILITIES:
Savings and time deposits 3.57
Short-term borrowed funds 2.46
Long-term debt 7.34
Total interest-bearing
liabilities 3.62
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
NET INTEREST INCOME AND NET
INTEREST MARGIN (3) 4.76
INTEREST RATE SPREAD (4) 4.17
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state
tax rates in 1995, 35% federal and 7.83% state tax rates in 1994 and 35%
federal and 7.91% state tax rates in 1993 where applicable.
(2) The average loan and lease financing balances include nonaccruing loans and
lease financing. Loan fees of $10.3 million, $7.6 million and $7.3 million
for 1995, 1994, and 1993, respectively, are included in interest income.
(3) Net interest margin is computed by dividing net interest income by total
earning assets.
(4) Interest rate spread equals the earning asset yield minus the
interest-bearing liability rate.
10
In 1994, the average earning asset base was expanded by $656.5 million to
$4 billion, a 19.5% increase over 1993's level due primarily to a full year's
ownership of the 1993 Acquisitions and the third quarter acquisition of First
Federal by Security Capital. Declines in the interest spreads in 1994 and the
effect of the acquisitions, whose interest spreads and margins were less than
the Corporation's, resulted in the net interest margin falling slightly to 4.75%
from 1993's 4.76%. Yields on earning assets rose 10 basis points in 1994 which
was entirely offset by the 12 basis point increase in the cost of
interest-bearing liabilities. Consequently, the interest rate spread fell to
4.15% in 1994 from 1993's 4.17%. The 1994 contribution of free liabilities rose
1 basis point from 1993's level to 60 basis points.
Growth in the average earning asset base in the two previous years has
primarily occurred in the loans and lease financing portfolio and federal funds
sold and other short-term investments. Average loans and lease financing
increased by $428 million or 15.2% in 1995 and $523.9 million or 22.8% in 1994,
primarily as a result of the acquisitions in 1993 and 1994. Federal funds sold
and other short-term investments increased in 1995 as the relatively flat yield
curve provided little incentive to invest the excess funds in longer-term
investment securities. Management anticipates that the excess funds will be used
to fund loan growth in 1996. In 1995, the mix in earning assets shifted slightly
due to increased loan demand with loans and lease financing comprising 71.9% of
average earning assets versus 70.2% in 1994. Other than the acquisitions over
the past three years, expansion of the earning asset base during the periods
presented has been funded primarily with increases in the deposit base and the
proceeds from the 1993 sale of the Corporation's common stock and subordinated
notes in a public offering. Substantially all deposits originate within the
Subsidiary Banks' market areas. Average total deposits increased by
approximately $472 million or 12.9% in 1995; in 1994, the increase was $539.1
million or 17.2% due primarily to the acquisitions in 1994 and 1993.
TABLE 3
VOLUME AND RATE VARIANCE ANALYSIS
Years Ended December 31, 1995 and 1994
(Taxable Equivalent Basis -- In Thousands) (1)
1995 1994
VOLUME RATE TOTAL Volume
VARIANCE (2) VARIANCE (2) VARIANCE Variance (2)
INTEREST INCOME:
Loans and lease financing $ 39,073 22,968 62,041 45,173
U.S. Treasury and U.S. Government agencies and corporations (2,498) 5,147 2,649 7,073
States and political subdivisions 1,487 (531) 956 1,165
Equity and other securities (386) 255 (131) (465)
Federal funds sold and short-term investments 4,883 3,349 8,232 321
Time deposits in other banks 649 388 1,037 188
Total interest income 43,208 31,576 74,784 53,455
INTEREST EXPENSE:
Savings and time deposits 17,149 34,426 51,575 18,265
Short-term borrowed funds 828 1,102 1,930 497
Long-term debt (220) (247) (467) 2,908
Total interest expense 17,757 35,281 53,038 21,670
INCREASE (DECREASE) IN NET INTEREST INCOME $ 25,451 (3,705) 21,746 31,785
1994
Rate Total
Variance (2) Variance
INTEREST INCOME:
Loans and lease financing 1,853 47,026
U.S. Treasury and U.S. Government agencies and corporations (1,718) 5,355
States and political subdivisions (858) 307
Equity and other securities 85 (380)
Federal funds sold and short-term investments 1,811 2,132
Time deposits in other banks 599 787
Total interest income 1,772 55,227
INTEREST EXPENSE:
Savings and time deposits 1,949 20,214
Short-term borrowed funds 762 1,259
Long-term debt 29 2,937
Total interest expense 2,740 24,410
INCREASE (DECREASE) IN NET INTEREST INCOME (968) 30,817
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state
tax rates in 1995, 35% federal and 7.83% state tax rates in 1994 and 35%
federal and 7.91% state tax rates in 1993 where applicable.
(2) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of the rate or volume variance to the sum of the absolute value of the two
variances.
11
TABLE 4
AVERAGE TOTAL DEPOSITS
Years Ended December 31, 1995, 1994 and 1993
(In Thousands)
1995 1994 1993
AVERAGE AVERAGE Average Average Average
BALANCE RATE Balance Rate Balance
SAVINGS AND TIME DEPOSITS:
Savings and NOW accounts $ 492,034 2.43% 495,348 2.16 508,600
Money market accounts 1,261,315 4.01 1,083,913 3.05 818,639
Time 1,901,071 5.65 1,643,002 4.49 1,394,766
Total savings and time deposits 3,654,420 4.62% 3,222,263 3.64 2,722,005
DEMAND DEPOSITS 494,106 453,876 415,032
Total deposits $4,148,526 3,676,139 3,137,037
1993
Average
Rate
SAVINGS AND TIME DEPOSITS:
Savings and NOW accounts 2.18
Money market accounts 2.75
Time 4.56
Total savings and time deposits 3.57
DEMAND DEPOSITS
Total deposits
OTHER INCOME AND OTHER EXPENSES
Other income consists primarily of service charges on deposit accounts,
trust and custodian fees, brokerage and insurance commissions, fees and service
charges for various other banking services provided to customers and accretion
of negative goodwill resulting from the 1993 Acquisitions. Other income,
excluding net securities gains or losses, totaled $53.2 million for the year
ended 1995, a $4.6 million increase over 1994. Increases in other income were
experienced in 1995 in all categories of other income except for trust and
custodian fees and brokerage and insurance commissions. The increases were due
in part to increases in the asset and customer bases from the 1993-1995
acquisitions. Other income, excluding net securities gains or losses, totaled
$48,630,000 in 1994 and $46,617,000 in 1993. The five-year compound growth rate
for other income was 8.0% at December 31, 1995.
As in prior years, service charges on deposit accounts were the largest
source of other income. These service charges amounted to $25.6 million in 1995,
a 9.2% increase over 1994. Fees and service charges are evaluated periodically
to reflect the costs of providing the services and to consider competitive
factors.
Trust and custodian fees fell to $6.3 million in 1995 from $7.3 million in
1994 due primarily to decreased revenues from personal and employee benefit
trust services. Trust and custodian fees totaled $7.8 million in 1993. Managed
assets totaled $1.2 billion at December 31, 1995.
The Corporation offers full brokerage services to customers through a
discount brokerage firm which provided $2.3 million of income in 1995, $1.7
million in 1994 and $1.4 million in 1993. Security Capital had previously
provided discount brokerage services through the same firm. Additional
noninterest revenue is provided by the selling of insurance products to banking
customers and by the selling of annuity products through CCB's subsidiary,
CCBIISC. Proprietary mutual funds were launched in late 1994 and are being sold
through CCBIISC. Annuity and mutual fund commissions declined $1.1 million due
to greater emphasis on the brokerage services. Brokerage and insurance
commissions income totaled $3.8 million in 1995, $4.5 million in 1994 and $2.2
million in 1993.
Negative goodwill (the excess of net assets acquired over costs) totaling
$33.6 million was recorded in the 1993 Acquisitions and is being accreted to
income over a ten-year period on a straight-line basis. Accretion of negative
goodwill totaled $3.4 million in 1995 and 1994.
Net securities gains (losses) of $(978,000), $357,000 and $2.9 million were
realized in 1995, 1994 and 1993, respectively. The net securities losses in 1995
were primarily realized from sales of U.S. Treasury and U.S. Government agencies
and corporations which were all classified as available for sale. The net
securities gains in 1994 were realized primarily through the sales of U.S.
Treasury securities and equity securities. The securities sold were included in
the available for sale portfolio. Approximately $1.8 million of the securities
gains in 1993 were realized through the sales of U.S. Treasury securities.
Another $116,000 of the 1993 net gains on sales of investment securities were
due to the sales of investment securities acquired through the 1993 Acquisitions
that did not fit into the Corporation's investment strategy.
Table 5 presents various operating efficiency ratios for the Corporation for
the prior five years (excluding the impact of merger-related expenses).
Noninterest income as a percentage of average assets in 1995 and 1994 are lower
than 1993's level as a
12
result of the rise in average assets not immediately equating to a proportionate
increase in noninterest income. In addition, the noninterest income ratio for
1995 and 1994 dropped from 1993's level as a result of the decreases in gains on
sales of investment securities and sales of mortgage loans.
TABLE 5
OPERATING EFFICIENCY RATIOS
Years Ended December 31
1995 1994 1993 1992 1991
As a percentage of average assets (1):
Noninterest income 1.09% 1.14 1.37 1.35 1.40
Personnel expense 1.65 1.68 1.85 1.95 1.97
Occupancy and equipment expense .44 .50 .55 .62 .61
Other operating expense 1.03 1.23 1.18 1.18 1.14
Total noninterest expense 3.12 3.41 3.58 3.75 3.72
Net overhead (noninterest expense less noninterest income) 2.03% 2.27 2.21 2.40 2.32
Noninterest expense as a percentage of net interest income and other income (2) 56.56% 60.92 61.72 63.29 63.63
Average assets per employee (in millions) $ 2.48 2.15 1.83 1.73 1.75
(1) Excludes merger-related expense incurred in 1995 in connection with the
Corporation's merger with Security Capital totaling $10.3 million and
expense incurred in 1994 in connection with Security Capital's acquisition
of a savings and loan association totaling $1.1 million.
(2) Presented using taxable equivalent net interest income. The taxable
equivalent basis is computed using 35% federal and 7.75% state tax rates in
1995, 35% federal and 7.83% state tax rates in 1994, 35% federal and 7.91%
state tax rates in 1993, 34% federal and 7.98% state tax rates in 1992 and
34% federal and 8.06% state tax rates in 1991 where applicable.
Other expenses, excluding merger-related expense, rose $3.7 million in 1995
over 1994's level of $146.2 million. This increase was due primarily to
increases in personnel expense of $7.3 million which were partially offset by
decreases in other expenses of $3 million. As reported in Table 5, total
noninterest expense as a percentage of average assets continued to show
improvement, falling to 3.12% for 1995 from a high of 3.75% in 1992.
The increase in personnel expense was due in part to growth from the First
Federal acquisition. Despite the $7.3 million increase in personnel expense,
average assets per employee rose from a low of $1.73 million in 1992 to $2.48
million in 1995. Within personnel expense, salaries and wages increased $4.7
million and related employee benefits increased $2.6 million.
Net occupancy and equipment expense remained relatively constant for the
years ended December 31, 1995 and 1994. Costs of converting acquired branches
and systems are included in merger-related expense.
A significant component of the decrease in other operating expenses was the
$2.4 million decrease in deposit and other insurance expense due to the Federal
Deposit Insurance Corporation lowering during 1995 certain bank deposit
insurance premiums from .23% of deposits to .04%. The positive impact of the
premium reduction will be tempered somewhat by a possible future special
assessment(s) on banks to help bolster Savings Association Insurance Fund (the
"SAIF"). At present, the Corporation anticipates a special one-time assessment
of approximately $12 million. This amount assumes an assessment of .85% on the
approximately $1.4 billion of deposits that are insured by the SAIF. These
deposits were assumed through prior thrift acquisitions. Amortization of
intangible assets included in other operating expenses increased $1.4 million
from 1994's level due to a full year of amortization of intangible assets
recorded in the First Federal acquisition in 1994.
Other expenses, excluding merger-related expense, increased by $16.7
million in 1994 or 12.9% over 1993. This increase was due primarily to a full
year of operating expenses for the 1993 Acquisitions' operations and three
months of operating expenses for the First Federal acquisition. Deposit and
other insurance expense increased $1.7 million due to increased deposit bases.
However, as shown in Table 5, noninterest expense excluding merger-related
expense decreased as a percentage of average assets from 3.58% in 1993 to 3.41%
in 1994. Personnel expense increased $5.3 million in 1994 or 7.9% primarily as a
result of the acquisition of First Federal and the 1993 Acquisitions. Other
operating expense increased $10 million in 1994 due in part to increased legal
and professional fees of $1.7 million, increased amortization of goodwill and
other intangible assets of $1.3 million, and increased deposit and other
insurance expense of $1.8 million.
The Corporation's efficiency ratio (noninterest expense as a percentage of
net interest income and other income) has improved over the past four years from
63.63% in 1991 to 56.56% in 1995 as shown in Table 5. Management will continue
to
13
closely monitor this ratio and anticipates continuing improvement as
cost-containment programs continue to show positive results.
Merger-related expense of $10.3 million was incurred in 1995 to effect the
Merger and $1.1 million was incurred in 1994 to effect the First Federal
acquisition. This expense category included severance and other employee benefit
costs, costs related to branch closures, system conversion costs and other
transaction-related expenses. The after-tax effect of the merger-related expense
was $7.3 million for 1995 and $660,000 for 1994.
INCOME TAXES
Income tax expense was $30.1 million in 1995, $30.8 million in 1994, and
$21.9 million in 1993. The Corporation's effective income tax rate was 34.3%,
40.6% and 33.3% in 1995, 1994 and 1993, respectively. The effective income tax
rate for 1995 was negatively impacted by non-deductible merger-related expense.
The income tax expense recorded in 1994 included a one-time charge of $5.6
million for deferred tax liabilities recorded in anticipation of Security
Capital's savings bank subsidiaries merging into its commercial bank subsidiary.
Deferred tax assets of $17 million and deferred tax liabilities of $13.3 million
are recorded on the Consolidated Balance Sheets as of December 31, 1995. The
Corporation has determined that a valuation allowance for the deferred tax
assets is not needed at December 31, 1995.
CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES
During 1993, the Corporation adopted two accounting standards, Statement of
Financial Accounting Standards ("SFAS") No. 106 and SFAS No. 109, whose impacts
on the financial position and results of operations of the Corporation were
properly recorded as cumulative changes in accounting principles. Upon the
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions", the Corporation recorded a one-time charge of $2.3 million
($3.7 million pre-tax) in recognition of the entire accumulated postretirement
benefit obligation. The Corporation's adoption of SFAS No. 109, "Accounting for
Income Taxes", resulted in a favorable one-time benefit of $900,000.
FOURTH QUARTER RESULTS
During the fourth quarter of 1995, the Corporation recorded net income of
$17.1 million or $1.14 per share compared to 1994's fourth quarter results of
$13.9 million or $.91 per share. Return on average assets was 1.37% in 1995 and
1.18% in 1994; return on average shareholders' equity was 16.25% in 1995
compared to 14.45% in 1994.
Average assets for the three months ended December 31, 1995 totaled $4.9
billion, a 6.2% increase over the same period in 1994. Average earning assets
increased by approximately the same percentage from $4.4 billion to $4.6
billion. The net interest margin for the fourth quarter of 1995 was 4.64%, a 13
basis point decline from 1994's 4.77%. The decrease was due primarily to a 60
basis point increase in the rate paid on interest-bearing liabilities which was
not wholly offset by the 34 basis point increase in the rate earned on earning
assets.
Noninterest income as a percentage of average assets was 1.07% for the
fourth quarter of 1995 compared to 1994's 1.08%. Noninterest expense as a
percentage of average assets fell from 3.33% for the fourth quarter of 1994 to
2.99% for the same period in 1995. Consequently, the efficiency ratio for these
periods in 1995 and 1994 was 55.00% and 60.21%, respectively.
Income statements for each of the quarters in the five-quarter period ended
December 31, 1995 are included in Table 6.
14
TABLE 6
INCOME STATEMENTS FOR FIVE QUARTERS ENDED DECEMBER 31, 1995
(In Thousands Except Per Share Data)
Three Months Ended
12/31/95 9/30/95 6/30/95 3/31/95
Total interest income $ 98,495 96,545 95,607 92,867
Total interest expense 46,463 45,884 45,386 41,671
Net interest income 52,032 50,661 50,221 51,196
Provision for loan and lease losses 2,407 2,027 1,599 2,150
Net interest income after provision 49,625 48,634 48,622 49,046
Service charges on deposits 6,663 6,585 6,174 6,178
Trust income 1,557 1,560 1,499 1,728
Brokerage and insurance commissions 1,118 841 946 897
Accretion of negative goodwill 839 839 839 839
Other 3,202 2,778 4,153 4,032
Securities gains (losses), net 4 (5) 349 (1,326)
Total other income 13,383 12,598 13,960 12,348
Personnel 20,259 19,366 19,795 19,878
Occupancy and equipment 4,705 5,428 5,242 5,554
Deposit and other insurance 1,129 684 2,377 2,410
Amortization of intangible assets 1,131 1,132 1,048 947
Merger-related expense -- -- 10,333 --
Other operating 9,893 9,714 8,942 10,256
Total other expenses 37,117 36,324 47,737 39,045
Income before income taxes 25,891 24,908 14,845 22,349
Income taxes 8,828 8,198 5,657 7,450
Net income $ 17,063 16,710 9,188 14,899
Net income per share $ 1.14 1.12 .62 .99
Three Months Ended
12/31/94
Total interest income 88,259
Total interest expense 38,326
Net interest income 49,933
Provision for loan and lease losses 3,210
Net interest income after provision 46,723
Service charges on deposits 6,129
Trust income 2,407
Brokerage and insurance commissions 562
Accretion of negative goodwill 825
Other 2,410
Securities gains (losses), net 382
Total other income 12,715
Personnel 18,466
Occupancy and equipment 5,425
Deposit and other insurance 2,423
Amortization of intangible assets 947
Merger-related expense --
Other operating 11,742
Total other expenses 39,003
Income before income taxes 20,435
Income taxes 6,550
Net income 13,885
Net income per share .91
FINANCIAL POSITION
During 1995, the Corporation exceeded the $5 billion asset mark and ended
the year with assets at $5.1 billion. Average assets for 1995 were $4.8 billion
versus $4.3 billion in 1994. The five-year compound growth rate for period-end
assets was 11.1% and for average assets was 10.8%. This growth rate was enhanced
by the approximately $1.1 billion of assets added through acquisitions during
the prior three years.
Table 7 shows the year-end breakdown of the major categories of the loans
and lease financing portfolio for the previous five years based upon regulatory
classifications. Outstanding loans and lease financing increased $186 million
over 1994's total. The loan mix at year-end 1995 is generally consistent with
the loan mix at December 31, 1994. All of the 1995 loan growth was internally
generated versus the $507.8 million loan growth in 1994 of which 26.1% was due
to the First Federal acquisition. Substantially all loans are made on a secured
basis with the exception of credit card receivables and, with the exception of
marketable mortgage loans, are originated for retention in the Subsidiary Banks'
portfolios. In general, the Subsidiary Banks do not purchase loans or
participate with others in the origination of loans and confine their lending
activities to North Carolina except for credit card receivables which are
offered on a nationwide basis and automobile loans which are offered in Georgia
and Virginia through referrals from a major automobile insurance company.
Lending officers of the Subsidiary Banks generally consider the cash flow or
earnings power of the borrower as the primary source of repayment and determine
on a case-by-case or product-by-product basis whether to obtain collateral to
provide an additional degree of security. The Subsidiary Banks do not engage in
highly leveraged transactions or foreign lending activities. There were no
concentrations of loans exceeding 10% of total loans other than those categories
in Table 7.
15
TABLE 7
LOANS AND LEASE FINANCING
(In Thousands)
As of December 31
1995 1994 1993 1992 1991
Commercial, financial and agricultural $ 530,807 576,589 450,943 390,086 417,212
Real estate -- construction 465,245 356,361 230,480 181,856 182,025
Real estate -- mortgage 1,817,045 1,710,028 1,510,647 1,046,961 993,550
Instalment loans to individuals 305,455 288,161 256,086 225,500 254,281
Credit card receivables 194,680 199,224 183,724 171,278 130,445
Lease financing 37,223 33,433 25,062 24,241 29,767
Total gross loans and lease financing 3,350,455 3,163,796 2,656,942 2,039,922 2,007,280
Less: unearned income 5,110 4,933 5,842 6,093 7,325
Total loans and lease financing $3,345,345 3,158,863 2,651,100 2,033,829 1,999,955
Loans in the commercial, financial and agricultural category consist
primarily of short-term and/or floating rate commercial loans made to
medium-sized companies. There is no substantial loan concentration in any one
industry or to any one borrower. Real estate-construction loans are primarily
made to commercial developers and residential contractors on a floating rate
basis. Cash flow analyses for each project are the primary decision factor, with
additional reliance upon collateral values. Management expects moderate to
strong growth in these categories during 1996 as the economy continues to
strengthen. See Table 8 for a schedule of maturities and sensitivities of
certain loan types to changes in interest rates.
Real estate-mortgage loans consist primarily of loans secured by first or
second deeds of trust on primary residences (73% of total real estate-mortgage
loans). It is the Subsidiary Banks' general policy to retain primarily
adjustable rate first mortgage loans within the portfolio. The remaining portion
(27%) of real estate-mortgage loans are primarily for commercial purposes and
often include the commercial borrower's real property in addition to other
collateral. Management anticipates moderate growth in this category considering
the lower interest rate environment experienced in 1995 and expected for 1996.
TABLE 8
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
(In Thousands)
AS OF DECEMBER 31, 1995
COMMERCIAL,
FINANCIAL AND REAL ESTATE-
AGRICULTURAL CONSTRUCTION
Due in one year or less $ 111,203 22,475
Due after one year through five years:
Fixed interest rates 140,394 48,413
Floating interest rates 182,991 348,095
Due after five years:
Fixed interest rates 41,075 15,047
Floating interest rates 55,144 31,215
Total $ 530,807 465,245
As of December 31, 1995
TOTAL
Due in one year or less 133,678
Due after one year through five years:
Fixed interest rates 188,807
Floating interest rates 531,086
Due after five years:
Fixed interest rates 56,122
Floating interest rates 86,359
Total 996,052
Instalment loans to individuals consist primarily of loans secured by
automobiles and other consumer personal property. Lending officers consider the
customer's debt obligations, ability and willingness to repay and general
economic trends in their decision to extend credit. Since 1993, the Corporation
has had an alliance with a major automobile insurance company, which, through
referrals from the insurance company, has increased the amount of automobile
loans outstanding. During 1995, CCB signed an agreement to extend the market
area for loan referrals from the automobile insurance company into Virginia.
Credit card products offered within this category include revolving lines of
credit, overdraft protection and traditional credit card services. The
nationwide introduction of a new credit card product in 1993 that has interest
rates lower than many competitors' contributed to the increase in credit card
balances outstanding from 1992's level of $171.2 million. Management expects
moderate growth in this line of business during 1996.
The net leasing portfolio increased 12.7% in 1995 to $37.2 million. The
leasing portfolio is not concentrated in any one line of business or type of
equipment.
Investment securities increased 2.9% to $1 billion at December 31, 1995.
Average investment securities totaled 21.7% of total average earning assets for
1995 versus 25.1% for 1994 as a result of the previously discussed shift in the
earning asset mix toward higher-earning loans and lease financing. Taxable
securities remain the primary component of the portfolio.
16
TABLE 9
INVESTMENT SECURITIES PORTFOLIO
(In Thousands)
As of December 31
1995 1994 1993
AMORTIZED CARRYING Amortized Carrying Carrying
COST VALUE Cost Value Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 475,506 485,317 520,082 501,734 266,465
U.S. Government agencies and corporations 440,565 448,033 265,553 256,077 242,353
Equity securities 29,351 28,290 10,066 8,291 44,474
Total securities available for sale $ 945,422 961,640 795,701 766,102 553,292
As of December 31, 1993
Market
Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury 275,346
U.S. Government agencies and corporations 243,368
Equity securities 44,474
Total securities available for sale 563,188
MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 1995
WEIGHTED
CARRYING AVERAGE
VALUE YIELD(1)
U.S. Treasury:
Within 1 year $120,134 6.23%
After 1 but within 5 years 337,739 6.55
After 5 but within 10 years 27,444 8.04
Total U.S. Treasury 485,317 6.55
U.S. Government agencies and corporations:
Within 1 year 15,049 6.31
After 1 but within 5 years 135,430 6.84
After 5 but within 10 years 277,709 7.54
After 10 years (2) 19,845 9.25
Total U.S. Government agencies and corporations 448,033 6.89
Equity securities 28,290 7.98
Total securities available for sale $961,640 6.75%
As of December 31
1995 1994 1993
CARRYING MARKET Carrying Market Carrying
VALUE VALUE Value Value Value
SECURITIES HELD TO MATURITY
U.S. Treasury $ -- -- 43,622 41,669 305,180
U.S. Government agencies and corporations -- -- 96,297 92,590 53,085
States and political subdivisions 76,745 81,714 83,591 83,158 60,363
Corporate debt and other securities 1,347 1,346 20,670 20,641 13,851
Total securities held to maturity $ 78,092 83,060 244,180 238,058 432,479
As of December 31, 1993
Market
Value
SECURITIES HELD TO MATURITY
U.S. Treasury 310,759
U.S. Government agencies and corporations 53,503
States and political subdivisions 65,466
Corporate debt and other securities 13,871
Total securities held to maturity 443,599
MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 1995
WEIGHTED
CARRYING AVERAGE
VALUE YIELD(1)
States and political subdivisions:
Within 1 year $ 110 12.80%
After 1 but within 5 years 7,377 10.17
After 5 but within 10 years 21,593 5.64
After 10 years 47,665 3.19
Total states and political subdivisions 76,745 4.56
Corporate debt securities:
Within 1 year 1,347 5.07
Total securities held to maturity $ 78,092 4.57%
(1) The weighted average yield is computed on a taxable equivalent basis using
35% federal and 7.75% state tax rates where applicable.
(2) The amount shown consists primarily of Government National Mortgage
Association securities which have monthly curtailments of principal even
though the final maturity of each security is in excess of 10 years.
17
The Corporation segregates debt and equity securities that have readily
determinable fair values into one of three categories for accounting and
reporting purposes. Debt and equity securities that the Corporation has the
positive intent and ability to hold until maturity are classified as held to
maturity and are reported at amortized cost. Securities held to maturity totaled
$78.1 million or 7.5% of the total investment securities portfolio at December
31, 1995. Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. The Corporation had no trading securities at December 31, 1995 or
1994 or at any time during those years. Debt and equity securities not
classified as either held to maturity or as trading securities are classified as
available for sale securities and are reported at fair value, with unrealized
gains and losses excluded from earnings and reported in a separate component of
shareholders' equity, net of taxes. At December 31, 1995, securities available
for sale totaled $961.6 million or 92.5% of the total investment securities
portfolio. Due to lower market rates during 1995, the mark-to-market adjustment
for available for sale securities totaled $16.2 million at December 31, 1995 and
resulted in $9.8 million being added to total shareholders' equity after
applying applicable taxes. As of December 31, 1994, the mark-to-market
adjustment for available for sale securities totaled $(29.6) million and
resulted in a $18.6 million decrease in total shareholders' equity after
applying applicable tax benefits. The Corporation does not currently anticipate
selling a significant amount of the securities available for sale in the near
future. Future fluctuations in shareholders' equity may occur due to changes in
the market values of debt and equity securities classified as available for
sale. The Corporation did not reclassify any securities between categories
during 1995 with the exception of $139.7 million of investments that Security
Capital had classified as held to maturity that the Corporation reclassified as
available for sale in accordance with its securities classification policies.
These securities were marked to their market value upon their reclassification.
Average deposits rose in 1995 to $4.1 billion from $3.7 billion in 1994.
The largest increases were experienced in average money market accounts, $177.4
million, and average retail time deposits, $189.8 million. As a percentage of
average total deposits, interest-bearing deposits remained relatively constant
at 88.1% in 1995 versus 87.7% in 1994. Demand deposits on average grew $40.2
million in 1995.
In October 1995, CCB opened its first in-store banking office in a newly
constructed Harris Teeter supermarket in Wilmington, North Carolina. In the next
several months, CCB anticipates opening four additional in-store banking offices
in new Harris Teeter stores in Cary, Greensboro (2), and Winston-Salem, North
Carolina. These banking offices will have extended hours during the weekdays and
on weekends. CCB considers these in-store banking offices to be new sources of
deposits and loans as well as a convenient source of services for current
customers.
In November 1995, CCB entered into an agreement to sell four branch offices
to another North Carolina financial institution. The transaction, which will
consist of the sale of all deposit accounts (approximately $60 million) and
fixed assets, is expected to be completed during the second quarter of 1996,
subject to regulatory approval. The branches to be sold are located outside of
CCB's primary market area.
The Corporation's ratio of long-term debt to shareholders' equity decreased
slightly and stood at 18.2% at December 31, 1995 compared to 25.8% at December
31, 1994. During 1995, the Corporation repurchased and retired $7 million of its
$40 million of 6.75% subordinated notes issued during 1993. This early
retirement resulted in a net gain of $800,000.
The Corporation has notified holders of the collateralized mortgage
obligations (the "CMO's") issued by HMAC that the CMO's will be redeemed as of
February 1, 1996, their earliest redemption date. As of December 31, 1995, $8.9
million of CMO's were outstanding. Subsequent to the CMO's redemption, HMAC will
be dissolved.
CAPITAL RESOURCES
The Corporation's capital position has historically been strong as
evidenced by the Corporation's ratios of average shareholders' equity to average
total assets of 8.26% and 8.91% for 1995 and 1994, respectively. 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 Board 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.
18
The Corporation and the Subsidiary Banks continue to maintain higher
capital ratios than required under regulatory guidelines. Table 10 shows that
the Corporation and the Subsidiary Banks significantly exceeded all risk-based
capital requirements at December 31, 1995 and 1994. Graham Savings' capital
ratios decreased significantly from 1994's levels due to a return of capital to
the Corporation in the form of a dividend, and CCB-Ga.'s capital ratios
decreased due to higher asset levels without corresponding increases in capital,
but their capital ratios still exceed the risk-based capital requirements.
TABLE 10
CAPITAL RATIOS
Regulatory
1995 1994 Minimum
Tier I Capital: 4.00%
Corporation 10.41% 10.80
CCB 10.56 12.88
Graham Savings 19.73 37.70
CCB-Ga. 7.99 23.05
Total Capital: 8.00
Corporation 12.47 13.27
CCB 11.96 14.73
Graham Savings 21.37 39.40
CCB-Ga. 9.09 23.70
Leverage: 4.00
Corporation 7.89 7.26
CCB 7.98 7.19
Graham Savings 10.07 18.53
CCB-Ga. 33.30 36.14
The Subsidiary Banks also have the highest rating in regards to the FDIC
insurance assessment and, accordingly, pay the lowest deposit insurance premium.
The Corporation's primary source of additional equity capital has
historically been the retention of earnings which added $35.7 million, $27.5
million and $27.7 million to capital in 1995, 1994 and 1993, respectively.
However, during 1993, issuances of common stock, net of repurchases, totaling
$39.9 million, were the primary source of additional equity capital. The common
stock proceeds in 1993 were derived from the conversion of convertible
subordinated debentures and issuances for the 1993 Acquisitions and from a
public offering. Table 11 presents the rate of internal capital growth for the
Corporation for each of the five previous years. This growth rate increased to
10.79% in 1995 from 1994's 8.29%.
TABLE 11
RATE OF INTERNAL CAPITAL GROWTH
Years Ended December 31
1995(1) 1994(1)(2) 1993(3) 1992
Average assets to average equity 12.10X 11.22 10.93 10.70
x
Return on average assets 1.35% 1.20 1.22 1.14
=
Return on average shareholders' equity 16.34% 13.46 13.33 12.20
x
Earnings retained 66.06% 61.57 66.00 64.63
=
Rate of internal capital growth 10.79% 8.29 8.80 7.88
Years Ended December 31,
1991
Average assets to average equity 11.23
x
Return on average assets 1.10
=
Return on average shareholders' equity 12.32
x
Earnings retained 67.26
=
Rate of internal capital growth 8.29
(1) Excludes merger-related expense incurred in 1995 in connection with the
Corporation's merger with Security Capital totaling $7.3 million after-tax
and expense incurred in 1994 in connection with Security Capital's
acquisition of First Federal totaling $660,000 after-tax.
(2) Excludes a one-time charge of $5.6 million of deferred tax liabilities
recorded in anticipation of the merger of Security Capital's three savings
bank subsidiaries into its commercial bank subsidiary.
(3) Excludes the impact of cumulative changes in accounting principles from the
adoption of SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions and SFAS No. 109, Accounting for Income Taxes.
19
The Corporation's common stock is traded on The Nasdaq Stock Market under
the symbol CCBF. At December 31, 1995, the Corporation had 6,822 shareholders of
record.
In connection with the Merger, the Corporation repurchased and immediately
retired approximately 518,000 shares of its outstanding common stock repurchased
at an aggregate purchase price of $20 million during the period of November 1994
through May 1995. The shares were repurchased through open market transactions.
TABLE 12
STOCK PRICES AND DIVIDENDS
Cash
Prices Dividends
1995 High Low Close Declared
FIRST QUARTER $ 38.75 34.00 38.50 .34
SECOND QUARTER 42.75 38.00 41.75 .34
THIRD QUARTER 51.63 41.75 51.13 .38
FOURTH QUARTER 56.50 48.50 55.50 .38
1994
First Quarter $ 37.50 32.75 35.00 .32
Second Quarter 40.00 33.25 39.75 .32
Third Quarter 44.50 39.25 43.50 .34
Fourth Quarter 44.00 32.75 34.75 .34
Dividends have been increased during each of the three previous years from
$1.24 per share in 1993, to $1.32 in 1994, and to $1.44 in 1995. This continues
the Corporation's thirty-one year trend of annual dividend increases. Dividends
paid as a percentage of operating earnings (net income excluding merger-related
expense and one-time tax charges) equaled 33.94%, 34.24%, and 35.09% for the
years ended 1995, 1994 and 1993, respectively. The Corporation's dividend
guideline is to pay approximately 30 to 40% of operating earnings in dividends.
Management feels that this policy provides a reasonable cash return to
shareholders and at the same time maintains sufficient equity to support future
growth and expansion.
Capital expenditures for new and improved facilities as well as furniture
and equipment amounted to approximately $9.9 million in 1995, $8.6 million in
1994 and $9.6 million in 1993. There were no significant capital resource
commitments at December 31, 1995 other than the operating lease commitments
specified in Note 14 to the Consolidated Financial Statements.
ASSET QUALITY
Continuing improvement has been realized in the levels of nonperforming and
risk assets over the prior four years. Nonperforming assets (nonaccrual loans
and lease financing, other real estate acquired through loan foreclosure and
restructured loans and lease financing) and risk assets (nonperforming assets
plus accruing loans and lease financing 90 days or more past due) at the end of
each of the previous five years are presented in Table 13. At December 31, 1995,
risk assets amounted to $16.2 million, $3.8 million lower than 1994's level of
$20.0 million. Risk assets to total assets were .32%, .42% and .63% at December
31, 1995, 1994 and 1993, respectively. The reserve for loan and lease losses to
risk assets was 2.69 times at December 31, 1995 compared to 2.05 times and 1.30
times at December 31, 1994 and 1993, respectively. Real estate acquired through
loan foreclosures decreased to $2.5 million at December 31, 1995 from $10.9
million at December 31, 1991. No material losses from the remaining foreclosures
are anticipated at present. In the opinion of management, all loans and lease
financing, where serious doubts exist as to the ability of borrowers to comply
with the present repayment terms, are included in Table 13.
20
TABLE 13
NONPERFORMING AND RISK ASSETS
(In Thousands)
As of December 31
1995 1994 1993 1992 1991
Nonaccrual loans and lease financing (1) $ 9,616 10,835 14,548 13,574 19,389
Other real estate acquired through loan foreclosures 2,467 5,115 8,984 10,279 10,902
Restructured loans and lease financing -- 129 186 565 1,843
Total nonperforming assets 12,083 16,079 23,718 24,418 32,134
Accruing loans and lease financing 90 days or more past due 4,120 3,913 2,664 4,251 6,355
Total risk assets $16,203 19,992 26,382 28,669 38,489
Ratio of nonperforming assets to:
Loans and lease financing outstanding and other real estate acquired through
loan foreclosures .36% .51 .90 1.20 1.60
Total assets .24 .34 .57 .76 1.05
Ratio of total risk assets to:
Loans and lease financing outstanding and other real estate acquired through
loan foreclosures .48 .63 1.00 1.40 1.92
Total assets .32 .42 .63 .89 1.25
Reserve for loan and lease losses to total risk assets 2.69X 2.05 1.30 .90 .60
(1) For the year ended December 31, 1995, gross interest income that would have
been recorded during the year on the nonaccrual loans and lease financing
listed above, if the loans and lease financing had been current in
accordance with their original terms, would have amounted to approximately
$685,000. Gross interest income included in net income on these nonaccrual
and restructured loans and lease financing amounted to approximately $65,000
for the year ended December 31, 1995. This amount also includes interest
from prior years collected during 1995.
The Corporation's general nonaccrual policy is to place business credits in
a nonaccrual status when there are doubts regarding the collectibility of
principal or interest or when payment of principal or interest is ninety days or
more past due (unless management determines that the collectibility is not
reasonably considered in doubt). Generally, instalment loans to individuals and
credit card receivables which are past due more than ninety and 120 days,
respectively, are considered nonaccrual and are charged-off.
Table 14 presents a summary of loss experience and the reserve for loan and
lease losses for the previous five years. Loss experience, as measured by net
charge-offs to average loans and lease financing outstanding, has shown
significant improvement during the past five years. This ratio was stable during
1995 and 1994 at .17% and compares to .20% in 1993. Net charge-offs in the
five-year period ended 1995 occurred primarily in instalment loans to
individuals and credit card receivables. The out-of-market credit risk from
credit card receivables, which are offered on a nationwide basis, is considered
in the Corporation's review of the adequacy of the reserve for loan and lease
losses.
Provisions for loan and lease losses amounted to $8.2 million, $9.3 million
and $7.1 million in 1995, 1994 and 1993, respectively. The provision for loan
and lease losses increased significantly in 1994 due to the $372 million
increase (excluding loans acquired from First Federal) in the loan and lease
financing portfolio from year-end 1993. Reserves recorded through the First
Federal acquisition totaled $2.5 million. As noted in Table 13, the ratio of the
reserve for loan and lease losses to total risk assets has improved
significantly during the periods presented as a result of the Corporation's
credit risk management policies and general improvements in the economy. An
allocation of the reserve for loan and lease losses as of the end of the
previous five years is presented in Table 15.
In January 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures". SFAS No. 114
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings. When a loan is impaired, a creditor must measure
impairment based on (1) the present value of the impaired loan's expected future
cash flows discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan, or (3) the fair value of the
collateral for a collateral-dependent loan. Any measurement losses are to be
recognized through additions to the allowance for loan losses. SFAS No. 118
allows a creditor to use existing methods for recognizing interest income on an
impaired loan and by requiring additional disclosure about how a creditor
recognizes interest income related to impaired loans. The adoption of SFAS Nos.
114 and 118 required no increase to the reserve for loan and lease losses and
had no impact on net income for 1995. At December 31, 1995, impaired loans
amounted to $14.5 million. The related reserve for loan and lease losses on
these loans amounted to $2.3 million.
21
TABLE 14
SUMMARY OF LOAN AND LEASE FINANCING LOSS EXPERIENCE
AND THE RESERVE FOR LOAN AND LEASE LOSSES
(In Thousands)
Years Ended December 31
1995 1994 1993 1992 1991
BALANCE AT BEGINNING OF YEAR $ 41,046 34,190 25,936 23,171 20,966
Loan and lease losses charged to reserve:
Commercial, financial and agricultural (113) (168) (443) (1,377) (2,035)
Real estate -- construction (392) (567) (412) (255) (552)
Real estate -- mortgage (294) (767) (787) (636) (535)
Instalment loans to individuals (2,284) (1,994) (2,032) (2,166) (3,395)
Credit card receivables (4,030) (3,121) (2,738) (2,629) (2,132)
Lease financing (71) (84) (160) (158) (393)
Total loan and lease losses charged to reserve (7,184) (6,701) (6,572) (7,221) (9,042)
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 100 129 311 495 368
Real estate -- construction 38 60 59 16 113
Real estate -- mortgage 77 224 252 97 132
Instalment loans to individuals 570 590 672 771 556
Credit card receivables 733 684 596 572 375
Lease financing 15 91 58 204 162
Total recoveries of loans and leases previously charged-off 1,533 1,778 1,948 2,155 1,706
Net charge-offs (5,651) (4,923) (4,624) (5,066) (7,336)
Provision charged to operations 8,183 9,279 7,106 7,831 9,331
Reserves related to acquisitions -- 2,500 5,772 -- 210
BALANCE AT END OF YEAR $ 43,578 41,046 34,190 25,936 23,171
Loans and lease financing outstanding at end of year $3,345,345 3,158,863 2,651,100 2,033,829 1,999,995
Ratio of reserve for loan and lease losses to loans and lease
financing outstanding at end of year 1.30% 1.30 1.29 1.28 1.16
Average loans and lease financing outstanding $3,251,613 2,823,525 2,299,599 2,018,812 1,979,879
Ratio of net charge-offs of loans and lease financing to average
loans and lease financing .17% .17 .20 .25 .37
Management feels that the reserve for loan and lease losses is adequate to
absorb known and inherent risks in the loans and lease financing portfolio. A
key tool in controlling loan losses is the Corporation's loan grading system
that begins at the inception of the credit relationship. Under this grading
system, substantially all credit relationships greater than $100,000 (excluding
residential mortgage and home equity lines) are assigned grades that direct the
timing and intensity of loan review activity throughout the life of the
relationship. All relationships are reviewed at least annually. Relationships
that have the lowest grade are reviewed each thirty days. Management
periodically reviews the adequacy of the reserve through a model which
incorporates the results of credit reviews, historical loss experience and other
factors. Based on this review, the loan and lease loss reserve is adequate to
cover known and inherent losses in the loan portfolio. The most recent
regulatory agency examinations have not revealed any material problem credits
that had not been previously identified; however, future regulatory examinations
may result in the regulatory agencies requiring additions to the reserve for
loan and lease losses based on information available at the examination date.
LIQUIDITY AND INTEREST-SENSITIVITY
Liquidity ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for dividends, debt service
and other commitments and operate the organization on an ongoing basis. Funds
are primarily provided by the Subsidiary Banks through financial resources from
operating activities, expansion of the deposit base, borrowing funds in money
market operations and through the sale or maturity of assets.
22
TABLE 15
ALLOCATION OF THE RESERVE FOR LOAN AND LEASE LOSSES (1)
(In Thousands)
As of December 31
1995 1994 1993 1992
% OF LOANS % of Loans % of Loans
AMOUNT OF AND LEASES Amount of and Leases Amount of and Leases Amount of
RESERVE IN EACH Reserve in Each Reserve in Each Reserve
ALLOCATED CATEGORY Allocated Category Allocated Category Allocated
Loan Type
Commercial, financial and
agricultural $ 7,780 15.9% 7,372 18.3 6,070 17.0 4,980
Real estate -- construction 5,465 13.9 5,005 11.3 4,408 8.7 3,413
Real estate -- mortgage 13,606 54.4 12,923 54.1 10,347 57.0 6,165
Instalment loans to individuals 5,334 9.1 4,724 9.1 4,436 9.7 4,290
Credit card receivables 4,480 5.8 4,229 6.3 3,510 6.9 3,237
Lease financing 503 .9 559 .9 552 .7 383
Unallocated portion of reserve 6,410 -- 6,234 -- 4,867 -- 3,468
Total $43,578 100.0% 41,046 100.0 34,190 100.0 25,936
As of December 31,
1991
% of Loans % of Loans
and Leases Amount of and Leases
in Each Reserve in Each
Category Allocated Category
Loan Type
Commercial, financial and
agricultural 19.2 5,383 20.9
Real estate -- construction 8.9 3,327 9.1
Real estate -- mortgage 51.5 4,685 49.7
Instalment loans to individuals 11.1 4,200 12.7
Credit card receivables 8.4 2,385 6.5
Lease financing .9 608 1.1
Unallocated portion of reserve -- 2,583 --
Total 100.0 23,171 100.0
(1) The allocation of the reserve for loan and lease losses by loan type is
based on management's on-going evaluation of the adequacy of the reserve for
loan and lease losses as referenced above. Since the factors involved in
such evaluation are subject to change, the allocation of the reserve to the
respective loan types is not necessarily indicative of future losses in each
loan type. Additionally, no assurances can be made that the allocation shown
will be indicative of future allocations.
Net cash provided by operating activities and deposits from customers have
historically been primary sources of liquidity for the Corporation. Net cash
provided by operating activities amounted to approximately $102.9 million, $87.5
million and $47.4 million in 1995, 1994 and 1993, respectively. Average total
deposits have grown by $472.4 million, $539.1 million and $449 million during
the three previous years. The majority of the deposit growth was due to the
First Federal and 1993 Acquisitions which had combined deposits of $966 million
as of their respective acquisition dates. Average certificates of deposit in
denominations of $100,000 or more still comprise a relatively small percentage
of average total deposits (6.9% in 1995 compared to 1994's 5.9%). These deposits
increased on the average $68.3 million from 1994 to 1995 as they were used to
help fund increased loan demand. Management intentionally keeps the
Corporation's reliance on the higher-cost large certificates of deposit low
because of the availability of less expensive sources of funding and considers
them a secondary source of liquidity that can be obtained as needed.
At December 31, 1995, time certificates of deposit in amounts of $100,000
or more were approximately $294.8 million. The following is a remaining maturity
schedule of these deposits (in thousands):
Over 6
Over 3 Through
3 Months Through 12
or Less 6 Months Months Total
Jumbo deposits $ 42,446 99,239 153,143 $294,828
The Subsidiary Banks do not rely heavily on borrowing funds in money market
operations such as federal funds purchased or repurchase agreements to provide
liquidity. The Subsidiary Banks have historically been a net seller of federal
funds and only rarely purchased federal funds to meet liquidity requirements.
Correspondent relationships are maintained with several larger banks in order to
have access to federal funds purchases when needed. Also available as liquidity
sources are access to the Federal Reserve discount window and a $600 million
line of credit maintained with the Federal Home Loan Bank (the "FHLB") which is
secured by a blanket collateral agreement on CCB's mortgage loan portfolio. The
Corporation's average short-term investments net of average short-term
borrowings were $153.9 million, $82.5 million and $89.4 million in the years
ended December 31, 1995, 1994 and 1993, respectively. Outstanding long-term FHLB
advances decreased by $7.8 million at December 31, 1995 to $37 million. The FHLB
advances were drawn primarily to fund matched-maturity loans.
Maturities of securities held for investment and sales and maturities of
securities categorized as available for sale are other sources of liquidity.
Securities with carrying values of $136.6 million mature in 1996. The available
for sale portfolio is comprised of U.S. Treasury securities, obligations of U.S.
Government agencies and corporations and investments in mutual funds. Securities
available for sale will be considered in the Corporation's asset/liability
management strategies and may be sold in response to changes in interest rates,
liquidity needs and/or significant prepayment risk.
23
Liquidity at the Parent Company level is provided through cash dividends
from the Subsidiary Banks, the repayment of demand notes payable to the Parent
Company from the Subsidiary Banks and the capacity of the Parent Company to
raise additional funds as needed.
In addition to ensuring adequate liquidity, the Corporation is concerned
with the management of its balance sheet to maintain relatively stable net
interest margins despite changes in the interest rate environment.
Responsibility for both liquidity and interest-sensitivity management rests with
the Corporation's Asset/Liability Management Committee ("ALCO") comprised of
senior management. ALCO reviews the Corporation's interest rate and liquidity
exposures and, based on its view of existing and expected market conditions,
adopts balance sheet strategies that are intended to optimize net interest
income to the extent possible while minimizing the risk associated with
unanticipated changes in interest rates. Determining and monitoring the
appropriate balance between interest-sensitive assets and interest-sensitive
liabilities and the impact on earnings of changes in interest rates is
accomplished through ALCO's use of Gap Analysis and Simulation Analysis.
Gap Analysis measures the interest-sensitivity of assets and liabilities at
a given point in time. The interest-sensitivity of assets and liabilities is
based on the timing of contractual maturities and repricing opportunities.
Prepayments of loans and certain investment securities and early withdrawals of
deposits represent options which may or may not be exercised. Due to the
uncertain nature of prepayments and early withdrawals, ALCO has chosen to
exclude them from consideration in the review of Gap Analysis. A positive
interest-sensitive gap occurs when interest-sensitive assets exceed
interest-sensitive liabilities. The reverse situation results in a negative gap.
Management feels that an essentially balanced position (+/- 10% of total earning
assets) between interest-sensitive assets and liabilities is necessary in order
to protect against wide fluctuations in interest rates. An analysis of the
Corporation's interest-sensitivity position at December 31, 1995 is presented in
Table 16. At December 31, 1995, the Corporation had a cumulative "negative gap"
(interest-sensitive liabilities exceeding interest-sensitive assets) of $487.9
million or 10.27% of total earning assets over a twelve-month horizon. The ratio
of interest-sensitive assets to interest-sensitive liabilities was .85x. Gap
Analysis is a limited measurement tool, however, because it does not incorporate
the interrelationships between interest rates charged or paid, balance sheet
trends and management's reaction in response to interest rate changes. In
addition, a gap analysis model does not consider that changes in interest rates
do not affect all categories of assets and liabilities equally or
simultaneously. Therefore, ALCO uses Gap Analysis as a tool to monitor changes
in the balance sheet structure. To estimate the impact that changes in interest
rates would have on the Corporation's earnings, ALCO uses Simulation Analysis.
Simulation Analysis is performed using a computer-based asset/liability
model which incorporates current portfolio balances and rates, contractual
maturities, repricing opportunities, and assumptions about prepayments, future
interest rates, and future volumes. Using this information, the model calculates
earnings estimates for the Corporation under multiple interest rate scenarios.
To measure the sensitivity of the Corporation's earnings, the results of
multiple simulations, which assume changes in interest rates, are compared to
the "base case" simulation, which assumes no changes in interest rates. The
sensitivity of earnings is expressed as a percentage change in comparison to the
"base case" simulation. As a matter of policy, ALCO has stated that the maximum
negative impact to net income from a positive or negative 1% change in interest
rates over a 12-month period should not exceed 12%, which was achieved in 1995.
ALCO actually manages earnings sensitivity, however, with a targeted goal of
only a 2% to 3% impact on net income. If simulation results show that earnings
sensitivity exceeds the targeted limits, ALCO will adopt on-balance sheet and/or
off-balance sheet strategies to bring earnings sensitivity within target
guidelines.
Management uses both on- and off-balance sheet strategies to manage the
balance sheet in accordance with their projected interest rate environment. The
most efficient and cost-effective method of on-balance sheet management is
creating desired maturity and repricing streams through the strategic pricing of
interest-earning and interest-bearing on-balance sheet products. ALCO reviews
the interest-earning and interest-bearing portfolios to ensure that the
Corporation has a proper mix of fixed and variable rate products. Emphasis will
continue to be placed on granting loans with short maturities and floating rates
where possible. This strategy increases liquidity and is necessitated by the
continued shortening of maturities and more frequent repricing opportunities of
the Corporation's funding sources. As of year-end, approximately 30.3% of all
loans reprice or mature within 30 days. See Table 8 for additional detail
regarding loan maturity and sensitivity to changes in interest rates at December
31, 1995.
24
TABLE 16
INTEREST-SENSITIVITY ANALYSIS (1)
(In Thousands)
December 31, 1995
6 Month Non-
30 Day 60 Day 90 Day 6 Month to 1 Year Total Interest
Sensitive Sensitive Sensitive Sensitive Sensitive Sensitive Sensitive
EARNING ASSETS:
Time deposits in other banks $ 72,031 -- -- -- 100 72,131 --
Federal funds sold and other
short-term investments 308,082 -- -- -- -- 308,082 --
Investment securities (2) 84,097 43,441 53,293 66,051 89,071 335,953 687,561
Loans and lease financing 1,013,695 432,588 49,995 155,209 330,059 1,981,546 1,363,799
Total earning assets 1,477,905 476,029 103,288 221,260 419,230 2,697,712 2,051,360
INTEREST-BEARING LIABILITIES:
Savings deposits 1,558,852 -- -- -- -- 1,558,852 --
Other time deposits 167,862 169,845 140,663 380,726 568,427 1,427,523 772,858
Short-term borrowed funds 177,959 -- -- -- -- 177,959 --
Long-term debt 75 8,949 1,073 7,728 3,462 21,287 57,706
Total interest-bearing liabilities 1,904,748 178,794 141,736 388,454 571,889 3,185,621 830,564
INTEREST-SENSITIVITY GAP $ (426,843) 297,235 (38,448) (167,194) (152,659) (487,909)
CUMULATIVE GAP $ (426,843) (129,608) (168,056) (335,250) (487,909)
CUMULATIVE RATIO OF
INTEREST-SENSITIVE ASSETS TO
INTEREST-SENSITIVE LIABILITIES .78x .94 .92 .87 .85
CUMULATIVE GAP TO TOTAL EARNING
ASSETS (8.99)% (2.73) (3.54) (7.06) (10.27)
December 31,1995
Total
EARNING ASSETS:
Time deposits in other banks 72,131
Federal funds sold and other
short-term investments 308,082
Investment securities (2) 1,023,514
Loans and lease financing 3,345,345
Total earning assets 4,749,072
INTEREST-BEARING LIABILITIES:
Savings deposits 1,558,852
Other time deposits 2,200,381
Short-term borrowed funds 177,959
Long-term debt 78,993
Total interest-bearing liabilities 4,016,185
INTEREST-SENSITIVITY GAP
CUMULATIVE GAP
CUMULATIVE RATIO OF
INTEREST-SENSITIVE ASSETS TO
INTEREST-SENSITIVE LIABILITIES
CUMULATIVE GAP TO TOTAL EARNING
ASSETS
(1) Assets and liabilities that mature in six months or less and/or have
interest rates that can be adjusted during this period are considered
interest-sensitive. The interest-sensitivity position has meaning only as of
the date for which it is prepared.
(2) Investment securities are presented at their amortized cost. The
mark-to-market of $16,218,000 for available for sale securities is not
included.
Within the Corporation's overall interest rate risk management strategy,
off-balance sheet derivatives have been and may be used in the future as a cost-
and capital-efficient way to manage interest rate sensitivity by modifying the
repricing or maturity of on-balance sheet assets or liabilities. As of December
31, 1995, the Corporation did not have any off-balance sheet derivative
financial instruments. Although such financial instruments would not expose the
Corporation to credit risk equal to the notional amount of the contracts, the
Corporation would be exposed to credit risk to the extent of the fair value of
the unrealized gain (if any) in the off-balance sheet derivative instrument if
the counterparty failed to perform. Credit risk resulting from a counterparty's
nonperformance of any contracts would be monitored through routine review of the
counterparty's financial ratings.
The Corporation has not experienced any liquidity problems in the past nor
are problems anticipated in the future. Reliance will continue to be placed on
the same funding sources, primarily financial resources provided by operating
activities and expansion of the "core" deposit base. Management will continue to
monitor the Corporation's interest-sensitivity position with goals of ensuring
adequate liquidity while at the same time seeking profitable spreads between the
yields on funding uses and the rates paid for funding sources.
25
SIX YEAR SUMMARY OF SELECTED FINANCIAL DATA
The Six Year Summary of Selected Financial Data appearing in Table 17
provides a summary of the Corporation's operations for the past six years. Prior
year amounts have been restated to reflect the Merger, consummated on May 19,
1995, and the three for two stock split effected in the form of a 50% stock
dividend paid October 1, 1992. Cash dividends per share have not been restated.
Reviewing this schedule and the financial ratios included therein allows the
reader to compare the results of one year with those of other years and to
compare the Corporation's performance with that of other banks and bank holding
companies.
OTHER ACCOUNTING MATTERS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
amendment to Statement No. 65" ("SFAS No. 122"), on May 12, 1995. SFAS No. 122
provides guidance for recognition of mortgage servicing rights ("MSR") as an
asset when a mortgage loan is sold or securitized and servicing rights retained,
regardless of how those servicing rights were acquired. This eliminates the
previously existing accounting distinction between rights to service mortgage
loans for others that are acquired through loan origination activities and those
acquired through purchase transactions. Impairment of the recorded MSR is to be
measured periodically using a current fair value applied to each stratum of the
disaggregated mortgage-servicing portfolio. Provisions of SFAS No. 122 will be
effective for fiscal years ending after December 15, 1995. While earlier is
allowed, the Corporation will not adopt SFAS No. 122 until January 1, 1996. The
Corporation is unable to estimate the impact of SFAS No. 122 as of December 31,
1995 as its impact is dependent upon the number of mortgage loans originated and
sold with servicing retained and financial market factors.
SFAS No. 123, "Accounting for Stock-Based Compensation", was issued on
October 23, 1995 and establishes a fair value method of accounting for such
compensation plans. Stock-based compensation plans include all arrangements by
which employees receive shares of stock or other equity instruments of the
employer. SFAS No. 123 also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees. Under
SFAS No. 123, these types of transactions must be accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured. While SFAS No. 123
encourages all entities to adopt the fair value method of accounting, it does
allow an entity to continue to measure the compensation cost of stock
compensation plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. Most fixed stock
option plans (the most common type of stock compensation plan) have no intrinsic
value at grant date, and under APB Opinion No. 25 no compensation cost is
recognized. Entities electing to continue using the guidance under APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value method of accounting prescribed by SFAS No. 123 had been
applied. The requirements of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. The Corporation intends to continue measuring
stock compensation expense under APB Opinion No. 25.
26
TABLE 17
SIX YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In Thousands Except Per Share Data)
Years Ended December 31
1995 1994 1993 1992 1991
SUMMARY OF OPERATIONS
Interest income $383,514 309,899 254,912 241,589 269,638
Interest expense 179,404 126,366 101,956 105,766 143,989
Net interest income 204,110 183,533 152,956 135,823 125,649
Provision for loan and lease losses 8,183 9,279 7,106 7,831 9,331
Net interest income after provision 195,927 174,254 145,850 127,992 116,318
Other income 53,267 48,630 46,617 39,570 41,261
Net investment security gains (losses) (978) 357 2,962 2,073 605
Other expenses (1) 160,223 147,287 129,452 116,114 110,983
Income before income taxes and cumulative changes in
accounting principles 87,993 75,954 65,977 53,521 47,201
Income taxes (2) 30,133 30,843 21,913 18,238 14,470
Income before cumulative changes in accounting
principles 57,860 45,111 44,064 35,283 32,731
Cumulative changes in accounting principles (3) -- -- (1,371) -- --
Net income $ 57,860 45,111 42,693 35,283 32,731
PER SHARE
Income before cumulative changes in accounting
principles:
Primary $ 3.87 2.94 3.10 2.60 2.42
Fully diluted (4) 3.87 2.94 3.05 2.52 2.35
Net income:
Primary 3.87 2.94 3.00 2.60 2.42
Fully diluted (4) 3.87 2.94 2.95 2.52 2.35
Cash dividends 1.44 1.32 1.24 1.14 1.047
Book value 28.98 24.75 24.43 22.42 20.66
Average shares outstanding (000's):
Primary 14,949 15,354 14,230 13,580 13,539
Fully diluted (4) 14,949 15,354 14,612 14,494 14,476
Years Ended
December 31
Five
Year
Compound
Growth
1990 Rate %
SUMMARY OF OPERATIONS
Interest income 281,658 6.4
Interest expense 161,468 2.1
Net interest income 120,190 11.2
Provision for loan and lease losses 7,965 .5
Net interest income after provision 112,225 11.8
Other income 36,310 8.0
Net investment security gains (losses) 905 --
Other expenses (1) 102,252 9.4
Income before income taxes and cumulative changes in
accounting principles 47,188 13.3
Income taxes (2) 15,378 14.4
Income before cumulative changes in accounting
principles 31,810 12.7
Cumulative changes in accounting principles (3) -- --
Net income 31,810 12.7
PER SHARE
Income before cumulative changes in accounting
principles:
Primary 2.35 10.5
Fully diluted (4) 2.29 11.1
Net income:
Primary 2.35 10.5
Fully diluted (4) 2.29 11.1
Cash dividends .987 7.8
Book value 18.97 8.8
Average shares outstanding (000's):
Primary 13,513 2.0
Fully diluted (4) 14,451 .7
AVERAGE BALANCES
Assets $4,811,108 4,297,775 3,613,333 3,095,352 2,983,978
Loans and lease financing 3,251,613 2,823,525 2,299,599 2,018,812 1,979,879
Earning assets 4,521,780 4,021,814 3,365,274 2,875,280 2,766,431
Deposits 4,148,526 3,676,139 3,137,037 2,687,980 2,584,251
Interest-bearing liabilities 3,824,793 3,376,509 2,820,219 2,412,176 2,368,185
Shareholders' equity 397,504 382,884 330,679 289,291 265,743
SELECTED PERIOD END ASSETS AND LIABILITIES
Assets $5,089,786 4,720,688 4,186,578 3,225,929 3,072,968
Loans and lease financing 3,345,345 3,158,863 2,651,100 2,033,829 1,999,955
Reserve for loan and lease losses 43,578 41,046 34,190 25,936 23,171
Deposits 4,297,411 4,057,680 3,601,227 2,802,141 2,660,737
Shareholders' equity 433,517 371,151 375,224 306,773 279,992
RATIOS
Income before cumulative changes in accounting
principles to:
Average assets 1.20% 1.05 1.22 1.14 1.10
Average shareholders' equity 14.56 11.78 13.33 12.20 12.32
Net income to:
Average assets 1.20 1.05 1.18 1.14 1.10
Average shareholders' equity 14.56 11.78 12.91 12.20 12.32
Net interest margin, taxable equivalent 4.70 4.75 4.76 4.88 4.72
Net loan and lease losses to average loans and lease
financing .17 .17 .20 .25 .37
Dividend payout ratio 37.21 44.90 41.33 43.85 43.26
AVERAGE BALANCES
Years Ended
December 31
Five Year
Compounded
Growth
1990 Rate %
Assets 2,881,320 10.8
Loans and lease financing 1,899,844 11.3
Earning assets 2,652,924 11.3
Deposits 2,504,225 10.6
Interest-bearing liabilities 2,277,839 10.9
Shareholders' equity 243,352 10.3
SELECTED PERIOD END ASSETS AND LIABILITIES
Assets 3,009,508 11.1
Loans and lease financing 1,964,856 11.2
Reserve for loan and lease losses 20,966 15.8
Deposits 2,612,983 10.5
Shareholders' equity 256,203 11.1
RATIOS
Income before cumulative changes in accounting
principles to:
Average assets 1.10
Average shareholders' equity 13.07
Net income to:
Average assets 1.10
Average shareholders' equity 13.07
Net interest margin, taxable equivalent 4.71
Net loan and lease losses to average loans and lease
financing .33
Dividend payout ratio 42.00
27
(1) Other expenses include merger-related expense of $10.3 million in 1995
related to the Corporation's merger with Security Capital and $1.1 million
in 1994 related to Security Capital's acquisition of First Federal. The
after-tax effect of the merger-related expense was to decrease net income
per share by $.49 per share in 1995 and $.04 per share in 1994.
(2) During 1994, Security Capital recognized a one-time charge of approximately
$5.6 million of deferred tax liabilities recorded in anticipation of the
merger of Security Capital's three savings subsidiaries into its commercial
bank subsidiary.
(3) The cumulative changes in accounting principles reflect the Corporation's
adoption of SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, which resulted in a one-time net charge of $2.3 million
($3.7 million pre-tax) and adoption of SFAS No. 109, Accounting for Income
Taxes, which resulted in a one-time benefit of $900,000.
(4) Assumes full conversion of convertible subordinated debentures issued by the
Corporation in 1985. The convertible subordinated debentures were called for
redemption during 1993 and substantially all were converted into the
Corporation's common stock.
28
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29
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
1995 1994
ASSETS:
Cash and due from banks (note 3) $ 189,320,033 204,890,083
Time deposits in other banks 72,131,355 35,852,838
Federal funds sold and other short-term investments 308,081,862 161,948,000
Investment securities (notes 4, 8 and 9):
Available for sale 961,640,464 766,101,623
Held to maturity (market values of $83,060,136 and $238,058,296) 78,091,957 244,179,959
Loans and lease financing (notes 5, 8 and 9) 3,345,345,231 3,158,862,557
Less reserve for loan and lease losses (note 6) 43,577,725 41,045,712
Net loans and lease financing 3,301,767,506 3,117,816,845
Premises and equipment (notes 7 and 9) 66,977,333 64,617,815
Other assets (note 13) 111,775,658 125,281,076
Total assets $5,089,786,168 4,720,688,239
LIABILITIES:
Deposits:
Demand (noninterest-bearing) $ 538,177,666 511,356,573
Savings and NOW accounts 522,556,768 520,080,718
Money market accounts 1,309,544,849 1,209,037,486
Jumbo time deposits 294,828,281 257,444,500
Time 1,632,303,560 1,559,761,213
Total deposits 4,297,411,124 4,057,680,490
Short-term borrowed funds (note 8) 177,958,782 114,816,619
Long-term debt (note 9) 78,992,856 95,615,336
Other liabilities (note 13) 101,906,403 81,424,698
Total liabilities 4,656,269,165 4,349,537,143
SHAREHOLDERS' EQUITY (notes 4, 11 and 15):
Serial preferred stock. Authorized 5,000,000 shares; none issued -- --
Common stock of $5 par value. Authorized 30,000,000 shares; 14,960,716 and 14,996,829 shares
issued in 1995 and 1994, respectively 74,803,580 74,984,145
Additional paid-in capital 89,437,260 92,283,003
Retained earnings 261,245,259 225,499,020
Unrealized gain (loss) on investment securities available for sale, net of applicable taxes 9,765,025 (18,644,387)
Less: Unearned common stock held by management recognition plans (1,734,121) (2,970,685)
Total shareholders' equity 433,517,003 371,151,096
Total liabilities and shareholders' equity $5,089,786,168 4,720,688,239
Commitments and contingencies (note 14)
See accompanying notes to consolidated financial statements.
30
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
1995 1994
INTEREST INCOME:
Interest and fees on loans and lease financing $305,165,435 243,577,202
Interest and dividends on investment securities:
U.S. Treasury 30,701,679 34,783,154
U.S. Government agencies and corporations 23,384,201 16,832,807
States and political subdivisions (primarily tax-exempt) 5,070,598 4,458,247
Equity and other securities 2,124,875 2,226,992
Interest on time deposits in other banks 2,936,895 1,781,128
Interest on federal funds sold and other short-term investments 14,130,160 6,239,515
Total interest income 383,513,843 309,899,045
INTEREST EXPENSE:
Deposits 168,983,151 117,408,280
Short-term borrowed funds (note 8) 4,421,487 2,490,020
Long-term debt (note 9) 5,999,032 6,467,293
Total interest expense 179,403,670 126,365,593
NET INTEREST INCOME 204,110,173 183,533,452
Provision for loan and lease losses (note 6) 8,183,024 9,279,255
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 195,927,149 174,254,197
OTHER INCOME:
Service charges on deposit accounts 25,600,091 23,452,315
Trust and custodian fees 6,344,454 7,284,549
Brokerage and insurance commissions 3,801,819 4,501,911
Merchant discount 4,665,910 3,863,762
Other service charges and fees 4,014,457 3,272,742
Accretion of negative goodwill from acquisitions 3,355,811 3,351,399
Other operating 5,485,097 2,903,344
Investment securities gains 943,875 810,698
Investment securities losses (1,922,271) (453,779)
Total other income 52,289,243 48,986,941
OTHER EXPENSES:
Personnel (note 10) 79,297,686 71,990,311
Net occupancy (note 14) 10,730,344 11,201,944
Equipment (note 14) 10,199,150 10,290,130
Merger-related expense (note 2) 10,332,596 1,100,000
Other operating (note 12) 49,662,803 52,704,149
Total other expenses 160,222,579 147,286,534
INCOME BEFORE INCOME TAXES AND CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES 87,993,813 75,954,604
Income taxes (note 13) 30,133,357 30,843,400
INCOME BEFORE CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES 57,860,456 45,111,204
Cumulative changes in accounting principles (notes 1, 10 and 13) -- --
NET INCOME $ 57,860,456 45,111,204
INCOME PER SHARE (note 1):
Income before cumulative changes in accounting principles:
Primary $ 3.87 2.94
Fully diluted 3.87 2.94
Net income:
Primary 3.87 2.94
Fully diluted 3.87 2.94
WEIGHTED AVERAGE SHARES OUTSTANDING (note 1):
Primary 14,949,063 15,354,319
Fully diluted 14,949,063 15,354,319
1993
INTEREST INCOME:
Interest and fees on loans and lease financing 196,588,381
Interest and dividends on investment securities:
U.S. Treasury 36,725,627
U.S. Government agencies and corporations 9,874,221
States and political subdivisions (primarily tax-exempt) 4,248,216
Equity and other securities 2,163,050
Interest on time deposits in other banks 1,112,516
Interest on federal funds sold and other short-term investments 4,200,146
Total interest income 254,912,157
INTEREST EXPENSE:
Deposits 97,193,845
Short-term borrowed funds (note 8) 1,232,136
Long-term debt (note 9) 3,529,525
Total interest expense 101,955,506
NET INTEREST INCOME 152,956,651
Provision for loan and lease losses (note 6) 7,106,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 145,850,651
OTHER INCOME:
Service charges on deposit accounts 23,183,880
Trust and custodian fees 7,836,684
Brokerage and insurance commissions 2,241,682
Merchant discount 2,904,160
Other service charges and fees 3,160,429
Accretion of negative goodwill from acquisitions 1,196,260
Other operating 6,093,484
Investment securities gains 2,967,322
Investment securities losses (5,153)
Total other income 49,578,748
OTHER EXPENSES:
Personnel (note 10) 66,718,550
Net occupancy (note 14) 11,602,255
Equipment (note 14) 8,432,080
Merger-related expense (note 2) --
Other operating (note 12) 42,699,368
Total other expenses 129,452,253
INCOME BEFORE INCOME TAXES AND CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES 65,977,146
Income taxes (note 13) 21,913,300
INCOME BEFORE CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES 44,063,846
Cumulative changes in accounting principles (notes 1, 10 and 13) (1,371,234)
NET INCOME 42,692,612
INCOME PER SHARE (note 1):
Income before cumulative changes in accounting principles:
Primary 3.10
Fully diluted 3.05
Net income:
Primary 3.00
Fully diluted 2.95
WEIGHTED AVERAGE SHARES OUTSTANDING (note 1):
Primary 14,230,099
Fully diluted 14,611,692
See accompanying notes to consolidated financial statements.
31
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
Unrealized
Gain (Loss) on Management
Additional Retained Investment Securities Recognition
Common Stock Paid-In Capital Earnings Available for Sale Plans
CCB Financial Corporation $ 38,895,530 44,095,683 107,454,940 (600,877) --
Security Capital Bancorp 54,120,000 -- 62,808,000 -- --
Adjustments for pooling-of-interests (24,592,195) 24,592,195 -- -- --
BALANCE DECEMBER 31, 1992, RESTATED 68,423,335 68,687,878 170,262,940 (600,877) --
Net income -- -- 42,692,612 -- --
Conversion of subordinated debentures 3,965,390 16,903,532 -- -- --
Shares issued for acquisitions 3,443,710 17,331,383 -- -- --
Stock issued pursuant to restricted
stock plan, net of forfeitures (note
11) 11,155 97,365 -- -- --
Stock options exercised (note 11) 342,165 263,803 -- -- --
Common stock issued pursuant to
management recognition plans (note 11) 590,600 3,789,040 -- -- (4,379,640)
Earned portion of management recognition
plans (note 11) -- -- -- -- 361,352
Public offering of shares 2,930,000 15,352,009 -- -- --
Purchase and retirement of shares (2,912,875) (17,115,963) -- -- --
Cash dividends ($1.24 per share) -- -- (14,980,052) -- --
Revaluation of marketable equity
securities -- -- -- (234,800) --
BALANCE DECEMBER 31, 1993 76,793,480 105,309,047 197,975,500 (835,677) (4,018,288)
Mark to market adjustment, net of
applicable income taxes (note 4) -- -- -- 10,299,318 --
BALANCE JANUARY 1, 1994 76,793,480 105,309,047 197,975,500 9,463,641 (4,018,288)
Net income -- -- 45,111,204 -- --
Transactions pursuant to restricted
stock plan, net (note 11) (4,910) 237,763 -- -- --
Stock options exercised (note 11) 235,100 226,910 -- -- --
Earned portion of management recognition
plans (note 11) -- -- -- -- 1,047,603
Purchase and retirement of shares (2,039,525) (13,490,717) -- -- --
Cash dividends ($1.32 per share) -- -- (17,587,684) -- --
Change in unrealized gains (losses), net
of applicable income taxes (note 4) -- -- -- (28,108,028) --
BALANCE DECEMBER 31, 1994 74,984,145 92,283,003 225,499,020 (18,644,387) (2,970,685)
Net income -- -- 57,860,456 -- --
Other transactions, net (3,955) (27,580) -- -- --
Stock options exercised (note 11) 374,210 1,063,267 -- -- --
Earned portion of management recognition
plans (note 11) -- -- -- -- 1,236,564
Purchase and retirement of shares (550,820) (3,881,430) -- -- --
Cash dividends ($1.44 per share) -- -- (22,114,217) -- --
Change in unrealized gains (losses), net
of applicable income taxes (note 4) -- -- -- 28,409,412 --
BALANCE DECEMBER 31, 1995 $ 74,803,580 89,437,260 261,245,259 9,765,025 (1,734,121)
Total
Shareholders'
Equity
CCB Financial Corporation 189,845,276
Security Capital Bancorp 116,928,000
Adjustments for pooling-of-interests --
BALANCE DECEMBER 31, 1992, RESTATED 306,773,276
Net income 42,692,612
Conversion of subordinated debentures 20,868,922
Shares issued for acquisitions 20,775,093
Stock issued pursuant to restricted
stock plan, net of forfeitures (note
11) 108,520
Stock options exercised (note 11) 605,968
Common stock issued pursuant to
management recognition plans (note 11) --
Earned portion of management recognition
plans (note 11) 361,352
Public offering of shares 18,282,009
Purchase and retirement of shares (20,028,838)
Cash dividends ($1.24 per share) (14,980,052)
Revaluation of marketable equity
securities (234,800)
BALANCE DECEMBER 31, 1993 375,224,062
Mark to market adjustment, net of
applicable income taxes (note 4) 10,299,318
BALANCE JANUARY 1, 1994 385,523,380
Net income 45,111,204
Transactions pursuant to restricted
stock plan, net (note 11) 232,853
Stock options exercised (note 11) 462,010
Earned portion of management recognition
plans (note 11) 1,047,603
Purchase and retirement of shares (15,530,242)
Cash dividends ($1.32 per share) (17,587,684)
Change in unrealized gains (losses), net
of applicable income taxes (note 4) (28,108,028)
BALANCE DECEMBER 31, 1994 371,151,096
Net income 57,860,456
Other transactions, net (31,535)
Stock options exercised (note 11) 1,437,477
Earned portion of management recognition
plans (note 11) 1,236,564
Purchase and retirement of shares (4,432,250)
Cash dividends ($1.44 per share) (22,114,217)
Change in unrealized gains (losses), net
of applicable income taxes (note 4) 28,409,412
BALANCE DECEMBER 31, 1995 433,517,003
See accompanying notes to consolidated financial statements.
32
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
OPERATING ACTIVITIES:
Net income $ 57,860,456 45,111,204 42,692,612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 7,960,524 8,123,768 7,015,420
Provision for loan and lease losses 8,183,024 9,279,255 7,106,000
Net (gain) loss on sales of investment securities 978,396 (356,795) (2,962,169)
Net amortization and accretion on investment securities 6,011,825 7,895,392 6,113,093
Amortization of intangibles and other assets 5,373,588 3,679,021 1,944,706
Accretion of negative goodwill (3,355,811) (3,351,399) (1,196,260)
Deferred income taxes (9,339,000) 4,660,000 (1,084,000)
Increase in accrued interest receivable (1,383,532) (9,337,190) (28,613)
Increase (decrease) in accrued interest payable 7,968,051 2,711,676 (1,405,975)
Decrease (increase) in other assets 7,953,418 21,651,737 (14,107,081)
Increase (decrease) in other liabilities 14,183,289 (3,220,422) 2,861,608
Vesting of shares held by management recognition plans 1,236,564 1,047,603 361,352
Other, net (737,612) (398,887) 108,520
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,893,180 87,494,963 47,419,213
INVESTING ACTIVITIES:
Proceeds from sales of investment securities held to maturity -- -- 3,048,951
Proceeds from sales of investment securities acquired in purchase acquisitions -- -- 53,438,906
Proceeds from maturities and issuer calls of investment securities held to
maturity 14,964,757 9,463,984 406,646,564
Purchases of investment securities held to maturity (8,238,516) (141,689,524) (593,396,220)
Proceeds from sales of investment securities available for sale 150,844,582 188,611,337 57,708,429
Proceeds from maturities and issuer calls of investment securities available for
sale 186,784,794 428,285,197 139,076,025
Purchases of investment securities available for sale (334,978,211) (475,611,246) (145,508,300)
Net increase in loans and leases receivable (194,009,335) (390,151,078) (150,111,225)
Purchases of premises and equipment (9,880,042) (8,572,398) (9,631,292)
Cash acquired, net of cash paid, in purchase acquisitions -- 31,182,000 173,630,030
NET CASH USED BY INVESTING ACTIVITIES (194,511,971) (358,481,728) (65,098,132)
FINANCING ACTIVITIES:
Net increase in deposit accounts 202,358,656 205,381,729 84,275,542
Net increase (decrease) in short-term borrowed funds 63,142,163 71,323,291 (2,867,504)
Proceeds from issuance of long-term debt 4,230,381 20,040,662 69,857,878
Repayments of long-term debt (20,115,249) (23,159,428) (23,830,945)
Issuances of common stock in public offering, net -- -- 18,282,009
Issuances of common stock in acquisitions, net -- -- 20,775,093
Issuances of common stock from exercise of stock options 1,437,477 462,010 605,968
Purchase and retirement of common stock (4,432,250) (15,530,242) (20,028,838)
Cash dividends (22,114,217) (17,587,684) (14,980,052)
NET CASH PROVIDED BY FINANCING ACTIVITIES 224,506,961 240,930,338 132,089,151
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132,888,170 (30,056,427) 114,410,232
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (NOTE 1) 402,690,921 432,747,348 318,337,116
CASH AND CASH EQUIVALENTS AT END OF YEAR (NOTE 1) $ 535,579,091 402,690,921 432,747,348
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 171,435,619 123,653,917 103,188,481
Income taxes paid during the year $ 36,982,247 27,981,900 22,504,133
See accompanying notes to consolidated financial statements.
33
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of CCB Financial Corporation (the "Corporation") and its wholly-owned
subsidiaries, Central Carolina Bank and Trust Company ("CCB"), Graham Savings
Bank, Inc., SSB ("Graham Savings") and Central Carolina Bank-Georgia
(collectively, the "Subsidiary Banks"). The consolidated financial statements
also include the accounts and results of operations of CCB's wholly-owned
subsidiaries, CCB Investment and Insurance Service Corporation, CCBDE, Inc. 1st
Home Mortgage Acceptance Corporation ("HMAC") and Southland Associates, Inc. All
significant intercompany transactions and accounts are eliminated in
consolidation.
The Subsidiary Banks provide a full range of banking services to individual
and corporate customers through their North Carolina branch offices. The
Subsidiary Banks are subject to competition from other financial entities and
are subject to the regulations of certain Federal and state agencies and undergo
periodic examinations by those regulatory agencies.
Prior year consolidated financial statements have been restated to include
the balances of companies combined and accounted for as poolings-of-interests as
discussed in Note 2. Certain amounts for prior years have been reclassified to
conform to the 1995 presentation. These reclassifications have no effect on
shareholders' equity or net income as previously reported.
FINANCIAL STATEMENT PRESENTATION
In 1993, the Corporation adopted on a prospective basis two newly effective
accounting standards, Statements of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and
No. 109, "Accounting for Income Taxes". The cumulative impact of adoption of
SFAS No. 106 was to reduce net income by $2,271,234 ($3,736,834 pre-tax), or
$.16 per primary common share and the cumulative impact of adopting SFAS No. 109
was to increase net income by $900,000, or $.06 per primary common share. Prior
years' financial statements were not restated to apply the provisions of either
SFAS.
In preparing the financial statements, management of the Corporation is
required to make estimates and assumptions that affect the reported balances of
assets and liabilities as of the date of the balance sheet and income and
expenses for the period presented.
For purposes of the Statements of Cash Flows, the Corporation considers
time deposits in other banks, federal funds sold and other short-term
investments to be cash equivalents.
INVESTMENT SECURITIES
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", on January 1, 1994. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. These
investments are classified in three categories and are accounted for as follows:
(a) debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as held for investment and reported at amortized
cost; (b) debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings; and (c) debt and equity securities not classified as either held
for investment securities or trading securities are classified as available for
sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. The Corporation has had no securities classified as trading securities.
The net unrealized gains or losses on investment securities available for sale,
net of taxes, are reported as a separate component of shareholders' equity. SFAS
No. 115 will cause fluctuations in shareholders' equity based on changes in
values of debt and equity securities classified as available for sale.
Investment securities classified as available for sale will be considered
in the Corporation's asset/liability management strategies and may be sold in
response to changes in interest rates, liquidity needs and/or significant
prepayment risk. The cost of investment securities sold is determined by the
"identified certificate" method.
Included in equity securities available for sale are investments in mutual
funds that were carried at the lower of cost or market prior to the adoption of
SFAS No. 115.
34
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
LOAN AND LEASE FINANCING
The loan portfolio is comprised of the following types of loans:
commercial, financial and agricultural; real estate-construction; real
estate-mortgage; instalment loans to individuals and credit card receivables.
The lease portfolio includes rolling stock such as automobiles, trucks and
trailers as well as a broadly diversified base of equipment.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", requires
that creditors value all specifically reviewed loans for which it is probable
that the creditors will be unable to collect all amounts due according to the
terms of the loan agreement at either the present value of expected cash flows
discounted at the loan's effective interest rate, or if more practical, the
market price or value of the collateral. If the resulting value of the impaired
loan is less than the recorded balance, the impairment must be recognized by
creating a valuation allowance for the difference and recognizing a
corresponding bad debt expense. SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures", amends SFAS No. 114
to allow a creditor to use existing methods for recognizing interest income on
an impaired loan and requires additional disclosures about how a creditor
recognizes interest income related to impaired loans. The Corporation adopted
the provision of SFAS No. 114 and No. 118 effective January 1, 1995. The
adoption of these Standards required no increase to the reserve for loan and
lease losses and had no impact on net income during 1995.
Interest income on loans and lease financing is recorded on the accrual
basis. Accrual of interest on loans and lease financing (including loans
impaired under SFAS 114) is discontinued when management deems that collection
of additional interest is doubtful. Interest received on nonaccrual loans and
impaired loans is generally applied against principal or may be reported as
interest income depending on management's judgment as to the collectibility of
principal. When borrowers with loans on a nonaccrual status demonstrate their
ability to repay their loans in accordance with the contractual terms of the
notes, the loans are returned to accrual status. Certain fees and direct loan
origination costs are deferred and amortized as an adjustment of the related
loan's yield by a level-yield method.
RESERVE FOR LOAN AND LEASE LOSSES
The reserve for loan and lease losses is increased by provisions charged to
operating expense and reduced by loans and lease financings charged-off, net of
recoveries. The reserve is maintained at a level considered adequate by
management to provide for known and inherent loan and lease losses based on
management's evaluation of the loan and lease financing portfolio, including
historical loss experience, identified problem loans, volumes and outstandings,
as well as on current economic conditions. Additionally, bank regulatory agency
examiners periodically review the loan and lease financing portfolio and may
require the Corporation to charge-off loans and lease financing and/or increase
the reserve for loan and lease losses to reflect their assessment of the
collectibility of loans and lease financing in the portfolio based on available
information at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated lives of the assets on
accelerated and straight-line methods. Leasehold improvements are amortized over
the term of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
OTHER REAL ESTATE
Other real estate acquired through loan foreclosures is valued at the lower
of cost or fair value less estimated cost of sale.
SUBORDINATED NOTES
Underwriting discounts and commissions and issuance expenses of the
subordinated notes are included in "other assets" on the Consolidated Balance
Sheets. These expenses are being amortized over a ten-year period using the
interest method.
MANAGEMENT RECOGNITION PLANS
The Corporation has two Management Recognition Plans (the "MRPs") designed
to provide an ownership interest in the Corporation through the issuance of
restricted common stock to certain officers and directors of the Subsidiary
Banks as an incentive for those persons to remain with the Subsidiary Banks. The
shares of common stock issued will be earned in instalments over a period of up
to five years and the cost of the shares is being charged to operating expense
over the period the shares are earned. Prior to vesting, each participant
granted shares under the MRPs' may direct the voting of the shares allocated to
the participant and will be entitled to receive any dividends or other
distributions paid on such shares.
35
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
INTANGIBLES ARISING FROM ACQUISITIONS
Intangibles arising from acquisitions result from the Corporation paying
amounts in excess of fair value for businesses, core deposits and tangible
assets acquired. Such amounts are being amortized by systematic charges to
income over a period no greater than the estimated remaining life of the assets
acquired or not exceeding the estimated average remaining life of the assets
acquired or not exceeding the estimated average remaining life of the existing
deposit base assumed (primarily for up to 10 years).
Negative goodwill, included in "other liabilities" on the Consolidated
Balance Sheets, represents the excess of fair value of net assets acquired over
cost after recording the liability for recaptured tax bad debt reserves and
after reducing the basis in noncurrent assets acquired to zero. Negative
goodwill is being accreted into earnings on a straight-line basis over the
estimated periods to be benefited (generally 10 years).
INCOME TAXES
The provision for income taxes is based on income and expense reported for
financial statement purposes after adjustment for permanent differences such as
tax-exempt interest income. Deferred income taxes are provided when there is a
difference between the periods items are reported for financial statement
purposes and when they are reported for tax purposes and are recorded at the
enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. Subsequent
changes in tax rates will require adjustment to these assets and liabilities.
RESTRICTED STOCK AND PERFORMANCE UNIT PLANS
The Corporation has Restricted Stock and Performance Unit Plans covering
certain officers of the Corporation and Subsidiary Banks. The market value of
shares issued under the Restricted Stock Plans, along with a provision for the
estimated value of performance units awarded under the Performance Unit Plans,
is being charged to operating expense over five-year periods.
PER SHARE DATA
Primary income per share is computed based on the weighted average number
of common shares outstanding during each period. Fully diluted income per share
is computed based on the weighted average number of common shares outstanding
and common shares issuable upon full conversion of convertible debt (which was
fully converted or redeemed at December 31, 1993). In this computation, interest
expense on convertible debt, net of applicable income taxes, is added back to
income as if the debt was converted into common stock at the beginning of the
period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements include disclosure of fair values information
about financial instruments, whether or not recognized on the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the financial instrument. As the fair value of
certain financial instruments and all nonfinancial instruments are not
presented, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation may use off-balance sheet derivative contracts for interest
rate risk management. These contracts are accounted for on an accrual basis and
the net interest differential, including premiums paid, if any, are recognized
as an adjustment to interest income of the related asset. The Corporation does
not utilize derivative financial instruments for trading purposes.
(2) MERGER AND OTHER ACQUISITIONS
On May 19, 1995, the Corporation consummated its merger (the "Merger") with
Security Capital Bancorp ("Security Capital"), a $1.2 billion bank holding
company based in Salisbury, North Carolina. The Merger was accounted for as a
pooling-of-interests and was effected through a tax-free exchange of stock. Each
share of Security Capital common stock outstanding on the date of the Merger was
converted into .5 shares of the Corporation's common stock. Consequently, the
Corporation issued 5,890,000 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Security Capital. The
former offices of Security Capital are operating as offices of CCB.
36
(2) MERGER AND OTHER ACQUISITIONS -- Continued
In accordance with poolings-of-interests accounting, the financial
statements of the Corporation have been restated to reflect the Merger as if it
had been effective as of the earliest period presented. The respective
contributions of the pooled entities to consolidated total income, net interest
income after provision for loan and lease losses and net income for the quarter
ended March 31, 1995 and the years ended December 31, 1994 and 1993 were as
follows (in thousands):
1995 1994 1993
Total income:
CCB Financial Corporation $ 81,407 282,265 229,749
Security Capital 23,808 76,621 74,742
Combined $105,215 358,886 304,491
Net interest income after provision for loan and lease losses:
CCB Financial Corporation $ 38,244 135,836 110,416
Security Capital 10,802 38,418 35,435
Combined $ 49,046 174,254 145,851
Net income:
CCB Financial Corporation $ 11,030 38,478 27,854
Security Capital 3,869 6,633 14,839
Combined $ 14,899 45,111 42,693
Security Capital's total income and net interest income after provision for
loan and lease losses has been adjusted from amounts previously reported to
reflect certain reclassifications from noninterest income and expense to
interest income and expense, in accordance with accounting classifications
followed by the Corporation.
In connection with the Merger, the Corporation incurred merger-related
expense of $10,332,596 during 1995. The expense category included severance and
other employee benefit costs, costs related to branch closures, system
conversion costs and other transaction-related expenses. The after-tax effect of
the merger-related expense was approximately $7,300,000 for 1995.
On June 9, 1995, the Corporation assumed the deposit liabilities of three
branches of a North Carolina bank. Deposit liabilities assumed totaled
$37,500,000. Deposit base premium of $2,987,000 was recorded as a result of the
acquisition which is being amortized over 10 years; no goodwill was recorded in
the transaction. As the acquisition was accounted for as a purchase, the results
of operations of the branches acquired are included in the Corporation's results
of operations only from the date of acquisition. The branch acquisitions are not
material to the financial position or net income of the Corporation and pro
forma information is not deemed necessary.
On September 23, 1994, Security Capital purchased the outstanding stock of
First Federal Savings & Loan Association of Charlotte, North Carolina ("First
Federal") for approximately $41,000,000. The acquisition was accounted for as a
purchase. Immediately prior to the acquisition date, First Federal had assets of
$302,163,000, net loans of $135,819,000, deposits of $250,929,000 and
stockholders' equity of $29,434,000. As a result of the acquisition, goodwill,
deposit base premium and mortgage servicing rights were increased by
$12,597,000, $3,222,000 and $1,042,000, respectively. These amounts are being
amortized on a straight-line basis over 20 years for goodwill and over 10 years
using an accelerated method for deposit base premium and mortgage servicing
rights.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain reserve and clearing balances
with the Federal Reserve Bank. These balances are included in "cash and due from
banks" on the Consolidated Balance Sheets. For the reserve maintenance periods
in effect at December 31, 1995 and 1994, the Subsidiary Banks were required to
maintain average reserve and clearing balances of approximately $2,052,000 and
$42,100,000, respectively.
(4) INVESTMENT SECURITIES
Investment securities with amortized costs of approximately $377,104,000 at
December 31, 1995 and $335,950,000 at December 31, 1994 were pledged to secure
public funds on deposit, collateralized mortgage obligations and for other
purposes required by law. The investment securities portfolio is segregated into
securities available for sale and securities held to maturity.
37
(4) INVESTMENT SECURITIES -- Continued
SECURITIES AVAILABLE FOR SALE
Securities available for sale are presented on the Consolidated Balance
Sheet at their market value. The amortized cost and approximate market values of
these securities at December 31, 1995 and 1994 were as follows:
1995 1994
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized
COST GAINS LOSSES VALUE Cost Gains Losses
U.S. Treasury $475,505,541 10,186,958 (375,053) 485,317,446 520,082,332 617,649 (18,965,971)
U.S. Government agencies and
corporations 367,510,817 6,369,187 (683,134) 373,196,870 181,856,792 187,333 (7,276,624)
Mortgage-backed securities 73,054,316 1,974,022 (192,184) 74,836,154 83,695,892 817,207 (3,203,554)
Equity securities 29,351,261 -- (1,061,267) 28,289,994 10,066,222 33,000 (1,808,655)
Total $945,421,935 18,530,167 (2,311,638) 961,640,464 795,701,238 1,655,189 (31,254,804)
1994
Market
Value
U.S. Treasury 501,734,010
U.S. Government agencies and
corporations 174,767,501
Mortgage-backed securities 81,309,545
Equity securities 8,290,567
Total 766,101,623
Equity securities include the subsidiary Banks' required investment in
stock of the Federal Home Loan Bank ("FHLB") amounting to $19,307,000 at
December 31, 1995 and 1994, which equals its cost basis. These securities were
classified as securities held to maturity at December 31, 1994.
Unrealized gains (losses) on securities available for sale totaled
$16,218,527 and $(29,599,939) at December 31, 1995 and 1994, respectively, and
are included as a component of shareholders' equity, net of deferred tax
(liabilities) benefits of $(6,453,502) and $10,955,552 at December 31, 1995 and
1994, respectively. In the opinion of management, the Corporation has no
securities which are other than temporarily impaired. Approximately $139,657,000
of investment securities that Security Capital had classified as held to
maturity were transferred to the available for sale category during 1995 in
accordance with the Corporation's investment securities classification policies.
These securities were marked to their market value as of the date of the
reclassification. During 1994, approximately $329,799,000 of securities
previously classified as held to maturity were reclassified as available for
sale upon Security Capital's January 1, 1994 adoption of SFAS No. 115. The
Corporation adopted SFAS No. 115 as of December 31, 1993.
During 1995, gross gains and losses from sales of investment securities
available for sale totaled $911,145 and $1,919,061, respectively, and in 1994,
totaled $788,478 and $453,779, respectively.
Following is a maturity schedule of securities available for sale at
December 31, 1995:
CARRYING
VALUE
Within 1 year $135,183,029
After 1 but within 5 years 443,150,103
After 5 but within 10 years 280,181,183
Subtotal 858,514,315
Mortgage-backed securities 74,836,155
Equity securities 28,289,994
Total securities available for sale $961,640,464
SECURITIES HELD TO MATURITY
The book values and approximate market values of securities held to
maturity at December 31, 1995 and 1994 were as follows:
1995 1994
BOOK UNREALIZED UNREALIZED MARKET Book Unrealized Unrealized
VALUE GAINS LOSSES VALUE Value Gains Losses
U.S. Treasury $ -- -- -- -- 43,622,000 -- (1,953,000)
U.S. Government agencies and
corporations -- -- -- -- 96,297,000 6,000 (3,713,000)
States and political subdivisions 76,745,306 5,002,112 (33,243) 81,714,175 83,591,349 1,732,815 (2,166,350)
Corporate debt and other securities 1,346,651 -- (690) 1,345,961 20,669,610 -- (28,128)
Total $78,091,957 5,002,112 (33,933) 83,060,136 244,179,959 1,738,815 (7,860,478)
1994
Market
Value
U.S. Treasury 41,669,000
U.S. Government agencies and
corporations 92,590,000
States and political subdivisions 83,157,814
Corporate debt and other securities 20,641,482
Total 238,058,296
38
(4) INVESTMENT SECURITIES -- Continued
Following is a maturity schedule of securities held to maturity at December
31, 1995:
BOOK MARKET
VALUE VALUE
Within 1 year $ 1,456,651 1,458,362
After 1 but within 5 years 7,376,550 7,674,973
After 5 but within 10 years 21,593,472 23,364,352
After 10 years 47,665,284 50,562,449
Total securities held to maturity $78,091,957 83,060,136
Gains from calls of securities held to maturity totaled $32,730 during 1995
and $22,220 during 1994. Losses from calls of securities held to maturity during
1995 totaled $3,210. During 1993, gross gains from the sale or call of
investment securities (prior to the adoption of SFAS No. 115) totaled $2,967,322
and gross losses totaled $5,153.
(5) LOANS AND LEASE FINANCING
A summary of loans and lease financing at December 31, 1995 and 1994
follows:
1995 1994
Commercial, financial and agricultural $ 530,807,146 576,588,827
Real estate -- construction 465,245,455 356,360,964
Real estate -- mortgage 1,817,045,155 1,710,027,715
Instalment loans to individuals 305,454,506 288,161,002
Credit card receivables 194,679,347 199,224,149
Lease financing 37,223,206 33,432,548
Total gross loans and lease financing 3,350,454,815 3,163,795,205
Less: Unearned income 5,109,584 4,932,648
Total loans and lease financing $3,345,345,231 3,158,862,557
Loans and lease financing of approximately $9,616,000 at December 31, 1995
and $10,835,000 at December 31, 1994 were not accruing interest. Loans with
outstanding balances of $1,876,000 in 1995, $1,963,000 in 1994 and $6,891,000 in
1993 were transferred from loans to other real estate acquired through
foreclosure. Other real estate acquired through loan foreclosures amounted to
$2,467,000 and $5,115,000 at December 31, 1995 and 1994, respectively, and is
included in "other assets" on the Consolidated Balance Sheets.
The following is an analysis of interest related to loans and lease
financing on nonaccrual status at December 31, 1995 and 1994:
1995 1994
Interest income that would have been recognized if the loans had been current at original contractual
rates $684,927 585,610
Amount recognized as interest income 65,486 26,326
Difference $619,441 559,284
In general, the Subsidiary Banks do not purchase loans or participate with
others in the origination of loans and confine their lending activities to North
Carolina with the exception of credit cards which are available to customers on
a nationwide basis and certain instalment loans which are available in Georgia
and Virginia. Substantially all loans are made on a secured basis and, with the
exception of marketable mortgage loans, are originated for retention in the
Subsidiary Banks' portfolios. The Subsidiary Banks do not engage in highly
leveraged transactions or foreign lending activities. The loan portfolios are
well diversified and there are no significant concentrations of credit risk.
At December 31, 1995, the carrying value of loans that are considered to be
impaired under SFAS No. 114 totaled approximately $14,482,000 (of which
$9,616,000 were on a nonaccrual basis). The related reserve for loan losses on
these impaired loans totaled approximately $2,277,000. The average carrying
value of impaired loans was $10,194,000 during the year ended December 31, 1995.
Gross interest income on the impaired loans, included in net income, totaled
$504,000 during 1995.
39
(5) LOANS AND LEASE FINANCING -- Continued
During 1995 and 1994, the Subsidiary Banks had loan, lease financing and
deposit relationships with Executive Officers and Directors of the Corporation
and their Associates. In the opinion of management, these loans and lease
financing arrangements do not involve more than the normal risk of
collectibility and are made on terms comparable to other borrowers. Following is
an analysis of these borrowings for the year ended December 31, 1995:
Balance at
Beginning New Balance at
of Year Loans Repayments End of Year
Directors, Executive Officers and Associates $9,390,000 7,413,000 4,832,000 $11,971,000
Loans serviced for the benefit of others totaled approximately
$1,079,033,000, $825,168,000 and $636,092,000 at December 31, 1995, 1994 and
1993, respectively. Servicing fees totaled $2,506,000 in 1995, $2,124,000 in
1994 and $1,204,000 in 1993. Purchased mortgage servicing rights totaled
$916,000 and $1,073,000 at December 31, 1995 and 1994, respectively, and are
included in "other assets" on the Consolidated Balance Sheets.
Certain real estate-mortgage loans are pledged as collateral for advances
from the FHLB as set forth in Note 9.
(6) RESERVE FOR LOAN AND LEASE LOSSES
Following is a summary of the reserve for loan and lease losses:
1995 1994 1993
Balance at beginning of year $41,045,712 34,189,965 25,935,395
Provision charged to operations 8,183,024 9,279,255 7,106,000
Reserves related to acquisitions -- 2,500,000 5,772,729
Recoveries of loans and leases previously charged-off 1,533,689 1,777,607 1,948,622
Loan and lease losses charged to reserve (7,184,700) (6,701,115) (6,572,781)
Balance at end of year $43,577,725 41,045,712 34,189,965
(7) PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
Accumulated
Depreciation Net
and Book
Cost Amortization Value
DECEMBER 31, 1995:
Land $ 13,153,818 -- 13,153,818
Buildings 58,573,365 26,554,500 32,018,865
Leasehold improvements 6,169,002 2,202,305 3,966,697
Furniture and equipment 68,574,999 50,737,046 17,837,953
Total premises and equipment $146,471,184 79,493,851 66,977,333
December 31, 1994:
Land $ 13,187,738 -- 13,187,738
Buildings 53,612,070 25,005,255 28,606,815
Leasehold improvements 5,510,450 1,957,468 3,552,982
Furniture and equipment 65,209,448 45,939,168 19,270,280
Total premises and equipment $137,519,706 72,901,891 64,617,815
40
(8) SHORT-TERM BORROWED FUNDS
Short-term borrowed funds outstanding at December 31, 1995 and 1994
consisted of the following:
1995 1994
Securities sold under agreements to repurchase $ 45,229,636 45,549,983
FHLB short-term borrowings 100,000,000 50,000,000
Master notes 16,720,058 --
Treasury tax and loan depository note accounts 16,009,088 14,266,636
Other -- 5,000,000
Total short-term borrowed funds $177,958,782 114,816,619
The following tables present certain information for the two major
categories of short-term borrowings. Securities sold under agreements to
repurchase represent short-term borrowings by the Subsidiary Banks
collateralized by U.S. Treasury and U.S. Government agency and corporation
securities with carrying and market values of $119,815,000 at December 31, 1995.
Following is a summary of this type of borrowing for the three previous years:
1995 1994 1993
Balance at December 31 $45,229,636 45,549,983 25,526,966
Weighted average interest rate at December 31 4.62% 4.48 2.13
Maximum amount outstanding at any month end during the year $45,229,636 45,932,113 37,265,241
Average daily balance outstanding during the year $ 6,787,810 39,210,807 29,016,000
Average annual interest rate paid during the year 4.95% 3.16 1.94
The short-term FHLB advances were drawn under CCB's $600 million FHLB line
of credit which was established in 1994. The short-term FHLB advances are
secured by a blanket collateral agreement on CCB's mortgage loan portfolio.
Interest expense on the short-term FHLB advances totaled $1,375,924 in 1995 and
$928,708 in 1994. Following is a summary of this type of borrowing for the two
previous years:
1995 1994
Balance at December 31 $100,000,000 50,000,000
Weighted average interest rate at December 31 5.79% 5.50
Maximum amount outstanding at any month end during the year $100,000,000 50,000,000
Average daily balance outstanding during the year $ 21,575,342 16,849,315
Average annual interest rate paid during the year 6.38% 5.51
During 1995, the Corporation began issuing master notes under a master note
agreement; borrowings under the agreement mature daily and are not
collateralized. Interest on master notes totaled $2,260,513 for 1995. The master
notes bore a weighted average interest rate of 4.59% at December 31, 1995.
The Subsidiary Banks' treasury tax and loan depository note accounts (the
"TTL accounts"), are payable on demand. Interest on borrowings under this
arrangement is payable at .25% below the weekly federal fund rate as quoted by
the Federal Reserve. The TTL accounts are collateralized by various investment
securities with book values of $31,108,000 and market values of $31,293,000 at
December 31, 1995. Interest expense on the TTL accounts amounted to $447,142,
$297,550 and $386,487 in 1995, 1994 and 1993, respectively.
Included in "other" short-term borrowings at December 31, 1994 were draws
upon the Corporation's unsecured $30 million line of credit with a commercial
bank and on which the Corporation paid no commitment fee. No draws were
outstanding as of December 31, 1995 and the maximum outstanding during 1995 was
$5,000,000. At December 31, 1994, the amount drawn upon the line of credit
totaled $5,000,000, the maximum outstanding during 1994, and bore interest at an
adjustable rate which was 6.99% at December 31, 1994. Interest expense on the
draws from the line of credit totaled $1,941 during 1995 and $24,262 during
1994.
41
(9) LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1995 and 1994:
1995 1994
Mortgage payable and other note payable with interest rates of 8% to 9% $ 144,719 180,323
Federal Home Loan Bank advances maturing through 2016 36,989,511 44,818,746
Collateralized mortgage obligations 8,873,626 10,616,267
6.75% Subordinated notes issued in 1993 and maturing on December 1, 2003 32,985,000 40,000,000
Total long-term debt $78,992,856 95,615,336
Mortgage payable, with an interest rate of 9%, is collateralized by
premises with an approximate book value of $465,000 at December 31, 1995. The
FHLB long-term advances are primarily at fixed rates of 3.00% to 9.65% and are
collateralized by liens on first mortgage loans with book values not less than
the outstanding principal balance of the obligations. The FHLB long-term
advances were drawn primarily to fund matched-maturity loans. Interest on the
FHLB long-term advances totaled $2,657,456 in 1995 and $2,253,031 in 1994.
In connection with the acquisition of certain assets and assumption of
certain liabilities of a thrift institution, the Corporation assumed the
liabilities of HMAC including collateralized mortgage obligations (the "CMO's").
The CMO's are collateralized by FNMA mortgage-backed securities, short-term
investments and time deposits in other banks of approximately $9,999,000 at
December 31, 1995 and bear a contractual 11% interest rate, payable quarterly.
The CMO's have a stated maturity of February 1, 2016 and are redeemable after
February 1, 1996 subject to certain restrictions at the option of HMAC. The
Corporation has notified holders of the CMO's that it intends to redeem the
CMO's on February 1, 1996.
In 1993, the Corporation issued $40 million of 6.75% subordinated notes due
December 1, 2003. Interest on the notes is payable semi-annually on June 1 and
December 1 beginning June 1, 1994. The notes are not redeemable prior to
maturity and there is no sinking fund. The notes are unsecured and subordinated
to all present and future senior indebtedness of the Corporation. During 1995,
the Corporation repurchased and extinguished $7,015,000 of the subordinated
notes with a resulting net gain of $800,187. Interest on the subordinated notes
totaled $2,248,848 in 1995, $2,700,000 in 1994 and $222,000 in 1993.
Maturities of long-term debt are as follows:
Total
Year Ending December 31 Maturities
1996 $12,271,428
1997 4,854,536
1998 869,106
1999 782,776
2000 838,567
Thereafter 59,376,443
Total $78,992,856
42
(10) EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation has a noncontributory, defined benefit pension plan
covering substantially all full-time employees. On July 1, 1995, Security
Capital's noncontributory pension plan was merged with and into the
Corporation's pension plan. The pension plan, which makes provisions for early
and delayed retirement as well as normal retirement, provides participants with
retirement benefits based on credited years of service and an average salary for
the five consecutive years within the last ten years preceding normal retirement
that will produce the highest average salary. In 1995 and 1994, the Corporation
contributed $679,679 and $2,330,302 to the pension plan. The Corporation made no
contribution to its pension plan during 1993 due to full funding limitations
imposed by federal tax laws. The Corporation paid benefits of $36,646 to
participants of First Federal's defined contribution plan which was terminated
in 1995. The Corporation's pension expense components for the years ended
December 31, 1995, 1994 and 1993 are shown below:
1995 1994 1993
Service cost of benefits earned during the period $2,342,982 2,306,288 1,888,809
Interest cost on projected benefit obligation 3,334,784 2,987,381 2,693,404
Return on pension plan assets (8,073,651) 285,557 (3,028,883)
Net amortization and deferral 4,395,542 (3,767,400) (504,854)
Gain on curtailment (176,085) -- --
Net pension expense $1,823,572 1,811,826 1,048,476
At December 31, 1995, pension plan assets consist primarily of corporate
stocks and bonds including 23,150 shares of the Corporation's common stock. All
plan assets are held and administered by CCB in a trust fund. The funded status
of the Corporation's pension plan and the amounts included in "other
liabilities" on the Consolidated Balance Sheets at December 31, 1995 and 1994
are shown below:
December 31,
1995 1994
Actuarial present value of accumulated benefit obligations:
Vested $35,932,235 29,999,163
Nonvested 402,733 444,466
Accumulated benefit obligation $36,334,968 30,443,629
Pension plan assets at fair value (primarily listed stocks and bonds) $48,511,746 41,579,863
Projected benefit obligation 53,195,937 42,126,856
Pension plan assets in excess of (less than) projected benefit obligation (4,684,191) (546,993)
Unrecognized prior service costs 692,919 2,626,015
Unrecognized net (gain) loss (1,349,307) (3,288,822)
Unrecognized net excess pension plan assets at transition (965,171) (1,290,089)
Pension liabilities recorded in acquisitions -- --
Accrued pension expense $(3,607,136) (2,499,889)
Assumptions used in computing the actuarial present value of the projected
benefit obligation were as follows:
Discount rate 7.25% 8.00
Rate of increase in compensation level of employees 6.00% 6.00
Expected long-term rate of return on pension plan assets 8.00% 8.00
SAVINGS AND PROFIT SHARING PLANS
The Corporation has a Retirement Savings Plan covering substantially all
employees with one year's service. Under the plan, employee contributions are
partially matched by the Corporation. In addition, the Corporation may make
discretionary contributions to the plan. Total expense under this plan was
$2,055,611, $1,895,526, and $1,400,379 in 1995, 1994 and 1993, respectively.
Prior to 1994, the Corporation had an Employee Stock Ownership Plan
covering substantially all employees with one year's service. Total expense
under this plan amounted to $580,711 in 1993. During 1993, this plan was merged
into the Retirement Savings Plan.
43
(10) EMPLOYEE BENEFIT PLANS -- Continued
STOCK OPTIONS, RESTRICTED STOCK AND OTHER INCENTIVE PLANS
See Note 11 for additional information about the Corporation's stock option
plans and restricted stock plans.
In 1994, the Corporation adopted the Long-Term Incentive Plan which was
designed to attract, retain and motivate key employees as well as to provide a
competitive reward for achieving longer-term goals, provide balance to
short-term incentive awards, and reinforce a one-company perspective. Under this
plan, performance-based stock and cash incentives and other equity-based
incentives will be awarded. A maximum of 500,000 shares of the Corporation's
common stock are available for award under this plan. As of December 31, 1995, a
total of 101,861 stock options to purchase shares of the Corporation's common
stock had been awarded and these options vest ratably over a three-year period.
No other awards have been made under this plan.
During 1993, the Corporation adopted nonstatutory and incentive stock
option plans for certain of the Subsidiary Banks. The stock options were granted
to the directors and certain officers of the applicable Subsidiary Banks
entitling them to purchase shares of the Corporation's common stock. The options
are earned and exercisable over a period of up to 10 years.
The Corporation has continued in effect Security Capital's nonstatutory and
incentive stock option plans in force at the date of the Merger. The stock
options under these plans were granted to directors and certain officers of
Security Capital's subsidiary banks and entitled them to purchase shares of
common stock at an exercise price equal to the fair market value of the stock on
the date of grant. The options granted under these plans were exercisable for
periods of up to ten years and some of the stock options included vesting
provisions of up to five years. All stock options outstanding at the time of the
Merger were converted into options to acquire common stock of the Corporation
and became fully vested. No more options will be granted under the Security
Capital option plans.
The Corporation had a Restricted Stock Plan in effect until December 31,
1993 which was designed to provide long-term incentive compensation to certain
officers of the Corporation and its subsidiaries. Total expense under this plan
was $236,340, $258,011 and $374,331 in 1995, 1994 and 1993, respectively.
Restrictions on shares remaining under this plan will lapse in 1996. During
1993, the Corporation adopted MRPs covering certain officers and directors of
the Subsidiary Banks. Shares of the Corporation's common stock awarded under the
MRPs vest over periods of up to five years. A participant becomes fully vested
in the event of the participant's death or disability. Total expense under the
MRPs was $1,701,192, $1,494,595 and $463,237 for 1995, 1994 and 1993,
respectively.
The Corporation has a Performance Unit Plan, which operates in conjunction
with the Restricted Stock Plan, covering certain senior officers of the
Corporation and its subsidiaries. Under this plan, eligible participants have
been awarded performance units with a target value of $100 each. At December 31,
1995, a total of 7,513 units were outstanding and will be deemed earned if and
to the extent the Corporation and its subsidiaries meet profit objectives
established by the Board of Directors. Total expense under this plan was
$496,672, $132,600 and $340,600 for 1995, 1994 and 1993, respectively.
CCB has a Management Performance Incentive Plan covering certain officers.
The total award is based on a percentage of base salary of the eligible
participants and financial performance of the Corporation as compared to certain
targets established by the Corporation's Board of Directors. Total expense under
this plan was $2,652,819, $1,605,316 and $1,000,000 in 1995, 1994 and 1993,
respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLAN
The Corporation maintains a defined dollar benefit plan which provides
postretirement health and life insurance for all employees who retire after age
55 with ten years of service. As discussed in Note 1, effective January 1, 1993,
the Corporation adopted SFAS No. 106 which requires the recognition of the
accumulated obligation for the Corporation's health care and life insurance
plans as well as the periodic costs of providing these coverages for retirees.
Prior to the adoption of SFAS No. 106, the costs of providing these coverages
were expensed as paid.
44
(10) EMPLOYEE BENEFIT PLANS -- Continued
The following table sets forth the plan's funded status and the amounts
included in "other liabilities" on the Corporation's Consolidated Balance Sheets
at December 31, 1995 and 1994:
December 31
1995 1994
Actuarial present value of accumulated postretirement benefit obligation:
Retirees $ 3,791,000 3,402,000
Active employees -- fully eligible 885,000 533,500
Active employees -- not fully eligible 1,200,000 1,208,500
Accumulated postretirement benefit obligation (5,876,000) 5,144,000
Plan assets at fair value -- --
Accumulated postretirement benefit obligation in excess of plan assets (5,876,000) (5,144,000)
Unrecognized net losses 1,309,276 855,778
Accrued postretirement benefit expense $(4,566,724) (4,288,222)
The accumulated postretirement benefit obligations at December 31, 1995 and
1994 were determined using the following assumptions:
Rate of return on plan assets N/A N/A
Discount rate 7.25 % 8.00
Rate of increase in health care costs:
Current year 9.00 % 10.00
Next year 8.00 % 9.00
1999 and later 5.00 % 5.00
Net periodic postretirement benefit expense charged to operations for the
years ended December 31, 1995, 1994 and 1993 included the following components:
1995 1994 1993
Service cost of benefits earned during the period $125,618 146,519 77,079
Interest cost on accumulated benefit obligation 412,004 389,375 336,315
Net amortization and deferral 34,683 94,070 --
Net postretirement benefit expense $572,305 629,964 413,394
A 1% increase in the assumed health care trend rates would result in a
$26,000 increase in net periodic postretirement benefits expense and a $330,000
increase in the accumulated postretirement benefit obligation.
(11) COMMON AND PREFERRED STOCK
Under various stock option plans adopted by the Corporation, options may be
periodically granted to directors, officers and other key personnel at a price
not less than the fair market value of the shares at the date of grant. Options
granted under the various plans must be exercised over the applicable exercise
period or they will be forfeited. The exercise periods for options granted under
the various plans are determined at the date of grant and are for periods no
longer than 10 years.
45
(11) COMMON AND PREFERRED STOCK -- Continued
The following table summarizes stock option transactions during 1995, 1994
and 1993:
Option Option Price Aggregate
Shares per Share Amount
Outstanding at December 31, 1992 271,976 $7.12-15.34 $ 2,886,339
Granted 128,771 $36.98-37.75 4,794,370
Exercised (68,433) $7.12-15.34 (605,968)
Outstanding at December 31, 1993 332,314 $7.12-37.75 7,074,741
Granted 91,340 $27.25-38.75 2,853,783
Exercised (47,020) $7.12-37.25 (462,010)
Forfeited (1,593) $36.98-37.25 (58,960)
Outstanding at December 31, 1994 375,041 $7.12-38.75 9,407,554
Granted 55,470 $36.63-50.00 2,038,276
Exercised (74,842) $7.12-37.75 (1,437,477)
Forfeited (2,076) $27.25-50.00 (69,984)
Outstanding at December 31, 1995 353,593 $7.12-38.75 $ 9,938,370
Exercisable at December 31, 1995 264,822
Stock awarded under the Restricted Stock Plan and MRPs are subject to
certain restrictions over a five-year period, during which time the holder is
entitled to full voting rights and dividend privileges. Under the Restricted
Stock Plan for certain officers of the Corporation and its subsidiaries, a
maximum of 300,000 shares of the Corporation's common stock was available for
award. At December 31, 1995, a total of 44,044 restricted shares remain
outstanding under this plan with all restrictions lapsing in 1996. The plan
expired on December 31, 1993 and no further grants will be awarded under the
plan. Under MRPs, 118,120 shares of the Corporation's common stock were awarded
to directors and certain officers of certain of the Subsidiary Banks. The MRP
shares will be earned in installments over a period of up to five years. During
1995, restrictions lapsed on 34,298 shares and 56 shares were forfeited. These
lapses and forfeitures resulted in $1,237,000 of additions to shareholders'
equity.
The Corporation is authorized to issue up to 5,000,000 shares of serial
preferred stock. No shares of preferred stock have been issued or are
outstanding at December 31, 1995 or 1994.
The Corporation adopted a Rights Agreement (the "Rights Agreement") which
provides for a plan (the "Rights Plan"). For use in connection with the Rights
Plan dated February 26, 1990 between the Corporation and CCB, the Corporation's
Board of Directors has established a series of preferred stock designated as
Series A Junior Participating Preferred Stock ("Series A Preferred") consisting
of 200,000 shares and having certain special rights for purposes of dividends
and other distributions, voting, dissolution and liquidation, and in connection
with certain mergers of the Corporation. No shares of Series A Preferred have
been issued.
Under the Rights Plan, one Right was distributed during 1990 to the
Corporation's shareholders for each of their shares of the Corporation's common
stock. Also under the Rights Plan, after the date of the Rights Agreement and
before the earlier of the "Distribution Date" (as defined below) or the date of
redemption or expiration of the Rights, each new share of common stock issued
after the date of the Rights Plan also has attached to it one Right.
The Rights currently are not exercisable, but may become so in the future
on a date (the "Distribution Date") which is 20 business days after (i) a public
announcement that any person or group has become an "Acquiring Person" by
acquiring beneficial ownership of 15% or more of the outstanding common stock of
the Corporation, or (ii) the date of commencement by any person of, or the
announcement by any person of his intention to commence, a tender or exchange
offer which would result in his becoming an Acquiring Person. However, after the
time any person becomes an Acquiring Person, all Rights held by or transferred
to such person (or any associate or affiliate of such person) shall be void and
of no effect.
Until the Distribution Date, each Right will be evidenced by the
certificate evidencing the common share to which it relates and may be
transferred only with such common share, and the surrender for transfer of any
common share certificate also will constitute the transfer of the Rights related
thereto. After the Distribution Date, separate certificates evidencing each
Right will be distributed to the record holders of the common stock to which
such Rights are attached, and each such Right may then be exercised to purchase
.01 of a share of Series A Preferred for a price of $100 (the "Purchase Price")
(all as adjusted from time to time as described in the Rights Agreement). In the
alternative (and subject to certain exceptions), after any person becomes an
Acquiring person (i) each Right may be exercised to purchase the number of
shares of the Corporation's common stock equal to the result obtained by
multiplying the then current Purchase Price by the number of Series A Preferred
interests covered by the
46
(11) COMMON AND PREFERRED STOCK -- Continued
Right, and dividing that product by 50% of the market price of a share of the
Corporation's common stock, or (ii) unless the Acquiring Person has become the
beneficial owner of more than 50% of the outstanding common stock, the
Corporation's Board of Directors at its option may exchange one share of the
Corporation's common stock, or a number of shares of Series A Preferred having
voting rights equivalent to one share of common stock, for all or part of the
outstanding Rights.
If the Corporation is acquired in a merger or other business combination or
if 50% of its consolidated assets or earning power is sold, each Right will
entitle the holder, other than the Acquiring Person, to purchase securities of
the surviving company having a market value equal to twice the exercise price of
the Right.
The Rights will expire on February 26, 2000, and may be redeemed by the
Corporation at any time prior to the acquisition by a person or group of 15% or
more the outstanding common stock at a price of $.01 per Right.
(12) SUPPLEMENTARY INCOME STATEMENT INFORMATION
Following is a breakdown of the components of "other operating expenses" on
the Consolidated Statements of Income:
Years Ended December 31
1995 1994 1993
Advertising $ 4,013,571 3,493,739 3,195,640
External data processing services 3,430,023 3,736,709 4,217,662
Deposit and other insurance 7,096,497 9,031,665 7,299,950
Postage and freight 3,059,618 2,731,171 2,610,492
Printing and office supplies 3,645,217 3,415,247 3,586,644
Telecommunications 3,537,501 3,532,848 3,057,093
Legal and professional fees 2,998,117 5,418,593 3,753,605
Amortization of intangible assets 4,257,972 2,875,774 1,570,374
All other 17,624,287 18,468,403 13,407,908
Total other operating expenses $49,662,803 52,704,149 42,699,368
(13) INCOME TAXES
As discussed in Note 1, the Corporation adopted SFAS No. 109 on January 1,
1993 and reported the cumulative effect of that change in method of accounting
for income taxes, a benefit of $900,000, in the Consolidated Statement of
Income. Prior years' financial statements were not restated to apply the
provisions of SFAS No. 109.
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 are as follows:
1995 1994 1993
TAXES CURRENTLY PAYABLE:
Federal $35,704,257 24,144,500 21,356,300
State 3,768,100 2,038,900 1,641,000
Total current tax expense 39,472,257 26,183,400 22,997,300
DEFERRED INCOME TAX (BENEFIT):
Federal (7,429,000) 4,104,000 (1,026,000)
State (1,910,000) 556,000 (58,000)
Total deferred tax expense (benefit) (9,339,000) 4,660,000 (1,084,000)
Total income tax expense $30,133,357 30,843,400 21,913,300
47
(13) INCOME TAXES -- Continued
A reconciliation of income tax expense to the amount computed by
multiplying income before income taxes by the statutory federal income tax rate
follows:
% of Pretax
Amount of Pretax Income Income
1995 1994 1993 1995 1994
Tax expense at statutory rate on income before income taxes $30,798,000 26,585,000 23,092,000 35.0% 35.0
State taxes, net of federal benefit 1,208,000 1,686,000 1,029,000 1.4 2.2
Increase (reduction) in taxes resulting from:
Thrift bad debt reserve recapture -- 4,906,000 -- -- 6.5
Tax-exempt interest on investment securities and loans (1,943,000) (1,434,700) (1,399,000) (2.2) (1.9)
Other, net 70,357 (898,900) (808,700) .1 (1.2)
Income tax expense $30,133,357 30,843,400 21,913,300 34.3% 40.6
% of Pretax
Income
1993
Tax expense at statutory rate on income before income taxes 35.0
State taxes, net of federal benefit 1.6
Increase (reduction) in taxes resulting from:
Thrift bad debt reserve recapture --
Tax-exempt interest on investment securities and loans (2.1)
Other, net (1.2)
Income tax expense 33.3
Under the Internal Revenue Code of 1986, thrift institutions are allowed a
special bad debt deduction related to additions to tax bad debt reserves
established for the purpose of absorbing losses. A reduction of such reserves
for purposes other than bad debt losses will create income for tax purposes
only, which will be subject to the then current corporate income tax rates.
Under the provisions of SFAS No. 109, a deferred tax liability is not currently
recognized for temporary differences resulting from a thrift institution's base
year tax bad debt reserve. As a result of a change in tax accounting method to
the specific charge-off method for bad debts, Security Capital recorded
additional federal income tax expense of $4,906,000 and additional state income
tax expense of $694,000 in 1994 to provide current and deferred tax liabilities
for all thrift bad debt reserves. At December 31, 1995 and 1994, there are no
remaining amounts included in retained earnings for which a provision for
federal or state income tax has not been made.
At December 31, 1995 and 1994, the Corporation had recorded net deferred
tax assets of $3,742,000 and $11,813,000, respectively, which are included in
"other assets" on the Consolidated Balance Sheets. A valuation allowance will be
provided when it is more likely than not that some portion of the deferred tax
asset will not be realized. Taxes paid during the carryback period exceed the
Corporation's recorded net deferred tax asset. In management's opinion, it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets. Consequently,
management has determined that a valuation allowance for deferred tax assets is
not required at December 31, 1995. The sources and tax effects of cumulative
temporary differences that give rise to significant portions of the net deferred
tax asset at December 31, 1995 and 1994 are shown below:
1995 1994
Deferred tax assets:
Reserve for loan losses $ 9,122,000 4,416,000
Unrealized losses on investment securities available for sale -- 10,956,000
Postretirement benefits 1,818,000 1,691,000
Pension expense 1,508,000 1,050,000
Deferred compensation 2,318,000 2,143,000
Purchase accounting adjustment on deposit rates 68,000 839,000
Other 2,181,000 1,531,000
Total gross deferred tax assets 17,015,000 22,626,000
Deferred tax liabilities:
Lease financing 354,000 1,229,000
Intangible assets 1,007,000 2,372,000
Deferred loan fees and costs 897,000 1,053,000
Premises and equipment 1,792,000 1,711,000
FHLB stock 1,757,000 1,757,000
Prepaid deposit insurance 423,000 1,745,000
Unrealized gains on investment securities available for sale 6,454,000 --
Other 589,000 946,000
Total gross deferred tax liabilities 13,273,000 10,813,000
Net deferred tax asset $ 3,742,000 11,813,000
48
(14) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
COMMITMENTS AND CONTINGENCIES
The Subsidiary Banks lease certain real property and equipment under
long-term operating leases expiring at various dates to 2009. Total rental
expense amounted to $4,557,253 in 1995, $4,430,256 in 1994 and $4,769,433 in
1993.
A summary of noncancellable, long-term lease commitments at December 31,
1995 follows:
Type of Property
Real Total
Year Ending December 31 Property Equipment Commitments
1996 $ 2,775,446 1,073,725 3,849,171
1997 2,692,681 819,619 3,512,300
1998 2,474,903 509,219 2,984,122
1999 2,114,646 106,701 2,221,347
2000 1,869,297 25,592 1,894,889
Thereafter 18,980,040 -- 18,980,040
Total lease commitments $30,907,013 2,534,856 33,441,869
Generally, real estate taxes, insurance, and maintenance expenses are
obligations of the Subsidiary Banks. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by leases on other
properties; thus, it is anticipated that future minimum lease commitments will
not be less than the amounts shown for 1996.
Certain legal claims have arisen in the normal course of business in which
the Corporation and certain of its Subsidiary Banks have been named as
defendants. Although the amount of any ultimate liability with respect to such
matters cannot be determined, in the opinion of management and counsel, any such
liability will have no material effect on the Corporation's financial position
or results of operations.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. These
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's credit
worthiness is evaluated on a case-by-case basis and collateral is obtained if
deemed necessary. At December 31, 1995 and 1994, the Subsidiary Banks had
commitments to extend credit of approximately $886 million and $811 million.
These amounts include unused credit card receivable and home mortgage equity
lines of $280 million and $215 million, respectively, at December 31, 1995 and
$239 million and $138 million, respectively, at December 31, 1994.
Standby letters of credit are commitments issued by the Subsidiary Banks to
guarantee the performance of a customer to a third party. The Subsidiary Banks
had approximately $24 million and $20 million in outstanding standby letters of
credit at December 31, 1995 and 1994.
OFF-BALANCE SHEET RISK
The Subsidiary Banks are parties to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of their
customers and to reduce their own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and interest rate contracts. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract or notional
amount of these instruments reflects the extent of involvement that the
Subsidiary Banks have in classes of financial instruments.
The Subsidiary Banks use the same credit policies in making commitments to
extend credit and in issuing standby letters of credit that are used for
on-balance sheet instruments. The Corporation's exposure to credit loss for
commitments to extend credit and standby letters of credit in the event of the
other party's nonperformance is represented by the contract amount of the
instrument and is essentially the same as that involved in extensions of loans
with collateral being obtained if deemed necessary.
For interest rate contracts, the contract or notional amounts do not
represent exposure to credit loss. Potential credit risk on these contracts
arises from the counterparty's inability to meet the terms of the contract.
Management considers the credit risk of these contracts to be minimal and
manages this risk through routine review of the counterparty's financial
ratings.
During 1993, CCB entered into a corridor interest rate contract with a
major regional commercial bank (the "Counterparty") to manage interest rate
risk. A corridor interest rate contract involves the simultaneous purchase and
sale of
49
(14) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK -- Continued
interest rate caps. The interest rate caps each have a notional amount of $100
million and were entered into for a two-year period which expired July 1, 1995.
The 72 basis point fee on the corridor contract was amortized over the life of
the contract as an adjustment to interest income. The purpose of entering into
the corridor contract was to synthetically convert fixed rate assets to floating
rate assets within the strike rates of the contract in a rising interest rate
environment. Higher interest rates in 1994 created a favorable position for CCB
on the interest rate corridor contract. On August 29, 1994, CCB entered into an
interest rate floor contract with the same Counterparty to provide protection
against falling interest rates for a period of fourteen months after the
interest rate corridor contract expires. The interest rate floor contract has a
notional amount of $100 million, was entered into for a two-year period
beginning August 29, 1994, and the 14.5 basis point fee was amortized over the
life of the contract as an adjustment to interest income. Due to the structure
of the corridor and interest rate floor contracts, there are no future cash
payment requirements for the Corporation. The net impact of the contracts on
operating results was immaterial during 1995 and increased pre-tax earnings by
$295,000 or a 1 basis point favorable impact on the net interest margin for
1994.
(15) DIVIDEND RESTRICTIONS
Certain restrictions exist regarding the ability of the Subsidiary Banks to
transfer funds to the Corporation in the form of cash dividends. In addition to
restrictions under the General Statutes of North Carolina, there are regulatory
capital requirements which must be met by the Subsidiary Banks. Under these
requirements, the Subsidiary Banks have approximately $163,605,000 in retained
earnings at December 31, 1995 that can be transferred to the Corporation in the
form of cash dividends. Total dividends declared by the Subsidiary Banks to the
Corporation in 1995 were $38,100,000.
As a result of the above requirements, consolidated net assets of the
Subsidiary Banks amounting to approximately $302,794,000 at December 31, 1995
were restricted from transfer to the Corporation.
(16) CCB FINANCIAL CORPORATION (PARENT COMPANY)
CCB Financial Corporation's principal asset is its investment in its
Subsidiary Banks and its principal source of income is dividends from its
Subsidiary Banks. The Parent Company's Condensed Balance Sheets at December 31,
1995 and 1994 and the related Condensed Statements of Income and Cash Flows for
the years ended December 31, 1995, 1994 and 1993 are as follows:
BALANCE SHEETS
December 31
1995 1994
Cash and short-term investments $ 18,495,585 490,709
Notes receivable from subsidiaries 10,000,000 21,940,000
Loans 50,001,157 --
Less reserve for loan losses 650,000 --
Net loans 49,351,157 --
Investments in bank subsidiaries 449,542,275 399,003,327
Other assets 6,353,693 3,601,814
Total assets $533,742,710 425,035,850
Short-term borrowed funds $ -- 5,000,000
Masternotes 16,720,058 --
Notes payable to bank subsidiary 40,000,000 --
Subordinated notes 32,985,000 40,000,000
Other liabilities 10,520,649 8,884,754
Total liabilities 100,225,707 53,884,754
Shareholders' equity 433,517,003 371,151,096
Total liabilities and shareholders' equity $533,742,710 425,035,850
50
(16) CCB FINANCIAL CORPORATION (PARENT COMPANY) -- Continued
INCOME STATEMENTS
Years Ended December 31
1995 1994 1993
Dividends from bank subsidiaries $ 38,100,000 9,560,000 10,150,000
Interest income 4,270,870 2,869,841 1,231,674
Other income 883,176 -- --
Management fees -- 748,325 957,646
Total operating income 43,254,046 13,178,166 12,339,320
Interest expense 4,527,444 2,724,262 1,334,951
Provision for loan losses 650,000 -- --
Merger-related expense 2,761,377 -- --
Management fees 120,000 -- --
Other operating expenses 755,504 893,904 854,369
Total operating expenses 8,814,325 3,618,166 2,189,320
Income before income taxes 34,439,721 9,560,000 10,150,000
Income taxes (314,600) -- --
Income before equity in undistributed net income of bank subsidiaries 34,754,321 9,560,000 10,150,000
Equity in undistributed net income of bank subsidiaries 23,106,135 35,551,204 32,542,612
Net income $ 57,860,456 45,111,204 42,692,612
STATEMENTS OF CASH FLOWS
1995 1994 1993
Net cash provided by operating activities $ 34,613,615 14,270,323 19,414,359
Investment in acquired subsidiaries -- -- (39,675,291)
Investment in (return from) existing subsidiaries 976,599 -- (19,000,000)
Net increase in loans (50,001,157) -- --
Net (increase) decrease in loans to subsidiaries 11,940,000 11,325,000 (6,730,000)
Net cash provided (used) by investing activities (37,084,558) 11,325,000 (65,405,291)
Increase (decrease) in master notes 16,720,058 -- --
Increase (decrease) in short-term borrowed funds (5,000,000) 5,000,000 --
Proceeds from issuance of debt to subsidiaries 40,000,000 -- --
Public offering of common stock and subordinated notes, net -- -- 58,390,529
Repurchase and extinguishment of debt (6,135,249) -- --
Issuances of common stock in acquisitions, net -- -- 20,775,093
Purchase and retirement of common stock (4,432,250) (15,530,242) (16,470,000)
Cash dividends (22,114,217) (17,587,684) (14,980,052)
Other, net 1,437,477 251,664 --
Net cash provided (used) by financing activities 20,475,819 (27,866,262) 47,715,570
Net increase (decrease) in cash and short-term investments 18,004,876 (2,270,939) 1,724,638
Cash and short-term investments at beginning of year 490,709 2,761,648 1,037,010
Cash and short-term investments at end of year $ 18,495,585 490,709 2,761,648
51
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of the consolidated quarterly financial data for the
years ended December 31, 1995 and 1994 (in thousands except per share data):
1995 1994
4TH 3RD 1ST 4th 3rd
QTR. QTR. 2ND QTR. QTR. Qtr. Qtr. 2nd Qtr.
Interest income $98,495 96,545 95,607 92,867 88,259 78,397 74,121
Interest expense 46,463 45,884 45,386 41,671 38,326 31,578 28,782
Net interest income 52,032 50,661 50,221 51,196 49,933 46,819 45,339
Provision for loan and lease losses 2,407 2,027 1,599 2,150 3,210 2,422 2,308
Net interest income after provision for loan and
lease losses 49,625 48,634 48,622 49,046 46,723 44,397 43,031
Other income 13,383 12,598 13,960 12,348 12,715 11,485 12,127
Other expenses 37,117 36,324 47,737 39,045 39,003 38,035 35,365
Income before income taxes 25,891 24,908 14,845 22,349 20,435 17,847 19,793
Income taxes 8,828 8,198 5,657 7,450 6,550 11,739 6,582
Net income $17,063 16,710 9,188 14,899 13,885 6,108 13,211
Net income per share $ 1.14 1.12 .62 .99 .91 .40 .86
1994
1st Qtr.
Interest income 69,122
Interest expense 27,680
Net interest income 41,442
Provision for loan and lease losses 1,339
Net interest income after provision for loan and
lease losses 40,103
Other income 12,660
Other expenses 34,884
Income before income taxes 17,879
Income taxes 5,972
Net income 11,907
Net income per share .77
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value estimates of on- and off-balance sheet financial
instruments is required under SFAS No. 107. Certain financial instruments and
all non-financial instruments are excluded from its disclosure requirements.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business. Significant
assets and liabilities that are not considered financial instruments include
premises and equipment, intangibles assets, negative goodwill, the trust
department and mortgage banking operations. In addition, the tax ramifications
resulting from the realization of the unrealized gains and losses of the
financial instruments would have a significant impact on the fair value
estimates presented and have not been considered in any of the fair value
estimates. Estimated fair values of certain on- and off-balance sheet financial
instruments of the Corporation at December 31, 1995 and 1994 are presented below
(in thousands):
1995 1994
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
Financial assets:
Cash, time deposits in other banks and other short-term investments $ 569,533 569,533 402,691 402,691
Investment securities 1,039,732 1,044,701 1,010,282 1,004,160
Loans 3,312,944 -- 3,130,363 --
Reserve for loan losses (43,075) -- (40,041) --
Net loans 3,269,869 3,331,144 3,090,322 3,059,611
Total financial assets $4,879,134 4,945,378 4,503,295 4,466,462
Financial liabilities:
Deposits $4,297,411 4,303,581 4,057,680 4,036,190
Short-term borrowings 177,959 177,959 114,817 114,817
Long-term debt 78,993 79,182 95,615 88,750
Total financial liabilities $4,554,363 4,560,722 4,268,112 4,239,757
Off-balance sheet financial instruments:
Interest rate corridor $ -- -- 180 490
Interest rate floor -- -- 125 17
Fair value estimations are made at a point in time based on relevant market
information and the characteristics of the on- and off-balance sheet financial
instruments being valued. The estimated fair value presented does not represent
the gain or loss that could result if the Corporation chose to liquidate all of
its holdings of a financial instrument. Because no market exists for a large
portion of the Corporation's financial instruments, fair value estimates are
based on management's judgments about future expected loss experience, current
economic conditions, the risk characteristics of the individual financial
instruments and other factors. Accordingly, these estimates are subjective in
nature and involve a high degree of judgment and cannot be determined with a
high degree of precision. Changes in assumptions and/or the methodology used
could significantly impact the fair values presented above.
52
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
FINANCIAL ASSETS
The fair value of cash, time deposits in other banks and other short-term
investments is equal to their carrying value due to the nature of those
instruments. The fair value of investment securities is based on published
market values and is calculated based upon the number of trading units of the
financial instrument times its market price. The fair value of net loans is
based on the discounting of scheduled cash flows through estimated maturity
using market rates and management's judgment about the credit risk inherent in
the different segments of the loan portfolio. Estimates of maturity, except for
residential mortgage loans, are based on the stated term of the loan or the
Corporation's estimates of prepayments considering current economic and lending
conditions. Estimates of maturity for residential mortgage loans are based on
prepayments estimated by secondary market sources.
FINANCIAL LIABILITIES
The fair value of noninterest-bearing deposits, savings and NOW accounts
and money market accounts is the amount payable on demand at December 31, 1995
and 1994. The fair value of time deposits is estimated based on the discounted
value of contractual cash flows using the currently offered rate for deposits
with similar remaining maturities. Short-term borrowings are generally due
within 90 days, and, accordingly, the carrying amount of these instruments is
considered to be a reasonable approximation of their fair value. The estimated
fair value of long-term debt is based on quoted market rates for the same or
similar issues or is based on the market rates for debt of the same remaining
maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the interest rate corridor and interest rate floor are
based on quotes from an outside source considering current economic conditions
and the interest rates and maturities of the contracts. The estimated fair value
of commitments to extend credit and standby letters of credit are equal to their
carrying value due to the majority of these off-balance sheet instruments having
relatively short terms to maturity and being written at variable rates.
The carrying amounts of commitments to extend credit and standby letters of
credit are comprised of unamortized fee income, if any. These amounts are not
material to the Corporation. The carrying amounts are reasonable estimates of
the fair value of these off-balance sheet financial instruments due to their
maturity and repricing terms.
53
REPORT OF MANAGEMENT REGARDING RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the content of the financial information
included in this annual report. The financial statements from which the
financial information has been drawn are prepared in accordance with generally
accepted accounting principles. Other information in this report is consistent
with the financial statements.
In meeting its responsibility, management relies on the system of internal
accounting control and related control systems. Elements of these systems
include selection and training of qualified personnel, establishment and
communication of accounting and administrative policies and procedures,
appropriate segregation of responsibilities, and programs of internal audits.
These systems are designed to provide reasonable assurance that financial
records are reliable for preparing financial statements and maintaining
accountability for assets, and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of inherent
limitations in any system of internal control. The concept of reasonable
assurance recognizes that the cost of a system of internal control should not
exceed the benefit derived and that the evaluation of such cost and benefit
necessarily requires estimates and judgments.
KPMG Peat Marwick LLP, independent auditors, audited the Corporation's
consolidated financial statements in accordance with generally accepted auditing
standards. These standards include a study and evaluation of internal control
for the purpose of establishing a basis for reliance thereon relative to the
determination of the scope of their audits.
The voting members of the Corporation's Audit Committee of the Board of
Directors consist solely of outside Directors. The Audit Committee meets
periodically with management, the Corporation's internal auditors and the
independent auditors to discuss audit, financial reporting, and related matters.
KPMG Peat Marwick LLP and the internal auditors have direct access to the Audit
Committee.
ERNEST C. ROESSLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
W. HAROLD PARKER, JR.
SENIOR VICE PRESIDENT AND CONTROLLER
January 23, 1996
54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CCB Financial Corporation
We have audited the consolidated balance sheets of CCB Financial
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCB
Financial Corporation and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
On January 1, 1994, the Corporation adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". On January 1, 1993, the Corporation
adopted the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", and SFAS No. 109, "Accounting for
Income Taxes".
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
January 23, 1996
55
DESCRIPTION OF EXHIBITS
Amended and Restated Agreement of Combination among Registrant, Security Capital
Bancorp and
New Security Capital, Inc.
Amended and Restated Articles of Incorporation of Registrant
Bylaws of Registrant, as amended
Rights Agreement dated February 26, 1990 between Registrant and Central Carolina
Bank and Trust Company
Form of Indenture dated as of November 1, 1993, between Registrant and Wachovia
Bank of North Carolina, N.A., Trustee, pursuant to which Registrant's
Subordinated Notes are issued and held
Description of Management Performance Incentive Plan of Central Carolina Bank
and Trust Company
Performance Unit Plan of Registrant
Restricted Stock Plan of Registrant
1993 Management Recognition Plan for CCB Savings Bank of Lenoir, Inc., SSB
1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB
Amendment No. 1 to 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of
Lenoir, Inc., SSB
1993 Incentive Stock Option Plan of Registrant
Long-Term Incentive Plan of Registrant
Security Capital Omnibus Stock Ownership and Long-Term Incentive Plan, as
assumed by the Registrant
Omni Capital Group, Inc. 1988 Incentive Stock Option Plan, as assumed by the
Registrant
Omni Capital Group, Inc. 1988 Directors' Non-Qualified Stock Option Plan, as
assumed by the Registrant
Change of Control Agreement dated July 17, 1995 between Central Carolina Bank
and Trust Company and Ernest C. Roessler
Change of Control Agreement dated July 17, 1995 between Central Carolina Bank
and Trust Company and Richard L. Furr
Change of Control Agreement dated July 17, 1995 between Central Carolina Bank
and Trust Company and J. Scott Edwards
Amended and Restated Employment Agreement by and between Registrant, Central
Carolina Bank and Trust Company and David B. Jordan
Amended and Restated Employment Agreement by and between Registrant, Central
Carolina Bank and Trust Company and Ralph A. Barnhardt
Amended and Restated Employment Agreement by and between Registrant, Central
Carolina Bank and Trust Company and Lloyd G. Gurley
Subsidiaries of Registrant
Consent of KPMG Peat Marwick LLP
Financial Data Schedule
Registrant's Proxy Statement to Shareholders for the 1996 Annual Meeting of
Shareholders
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO
W. HAROLD PARKER, JR., SENIOR VICE PRESIDENT AND CONTROLLER
OF CCB FINANCIAL CORPORATION
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly casued this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CCB FINANCIAL CORPORATION
By: /s/ ERNEST C. ROESSLER
Ernest C. Roessler
President and Chief Executive Officer
Date: March 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ ERNEST C. ROESSLER President and Director March 12, 1996
Ernest C. Roessler (Chief Executive Officer)
/s/ JOHN M. BARNHARDT Director March 12, 1996
John M. Barnhardt
Director March , 1996
J. Haper Beall, III
Director March , 1996
James B. Brame, Jr.
Director March , 1996
Timothy B. Burnett
/s/ W.L. BURNS, JR. Chairman of March 12, 1996
W.L. Burns, Jr. Board of Directors
/s/ EDWARD S. HOLMES Director March 12, 1996
Edward S. Holmes
/s/ DAVID B. JORDAN Director March 12, 1996
David B. Jordan
Director March , 1996
Owen G. Kenan
/s/ EUGENE J. MCDONALD Director March 12, 1996
Eugene J. McDonald
Director March , 1996
Hamilton W. McKay, Jr., M.D.
/s/ ERIC B. MUNSON Director March 12, 1996
Eric B. Munson
/s/ J.G. RUTLEDGE, III Director March 12, 1996
J.G. Rutledge, III
/s/ MILES J. SMITH, JR. Director March 12, 1996
Miles J. Smith, Jr.
/s/ JIMMY K. STEGALL Director March 12, 1996
Jimmy K. Stegall
Director March , 1996
H. Allen Tate, Jr.
/s/ JAMES L. WILLIAMSON Director March 12, 1996
James L. Williamson
/s/ PHAIL WYNN, JR. Director March 12, 1996
Dr. Phail Wynn, Jr.
/s/ W. HAROLD PARKER, JR. Senior Vice President March 12, 1996
W. Harold Parker, Jr. and Controller (Chief
Accounting Officer)
EXHIBIT INDEX
Exhibit Number
per Item 601 of Exhibit No. in
Regulation S-K Description this Form 10-K
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession.
a. Amended and Restated Agreement of Combination among Registrant,
Security Capital Bancorp and New Security Capital, Inc. is
incorporated herein by reference from Appendix A of the Registrant's
Registration Statement No. 33-57005 on Form S-4.
(3) Articles of Incorporation and Bylaws.
a. Registrant's Amended and Restated Articles of Incorporation is
incorporated herein by reference from Exhibit 3 of Registrant's Form
8-K dated May 19, 1995.
b. Registrant's Bylaws as amended on April 20, 1993 is incorporated by
reference from Exhibit 3(B) of Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
c. Amendments to Registrant's Bylaws are incorporated by reference from
Exhibit 3 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(4) Instrument defining the rights of security holders, including
indentures.
a. Rights Agreement dated February 26, 1990 between Registrant and
Central Carolina Bank and Trust Company is incorporated herein by
reference from Exhibit 4 of Registrant's Current Report on Form 8-K
dated February 16, 1990.
b. Form of indenture dated November 1, 1993 between Registrant and
Wachovia Bank of North Carolina, N.A., Trustee, pursuant to which
Registrant's Subordinated Notes are issued and held is incorporated
herein by reference from Exhibit 4.2 of the Registrant's
Registration Statement No. 33-50793 on Form S-3.
(10) Material contracts.
a. Description of Management Performance Incentive Plan of Central
Carolina Bank and Trust Company is incorporated herein by reference
from Registrant's 1988 Annual Report on Form 10-K.
b. Performance Unit Plan of Registrant is incorporated herein by
reference from Registrant's 1993 Annual Report on Form 10-K.
c. Restricted Stock Plan of Registrant is incorporated herein by
reference from Registrant's 1984 Annual Report on Form 10-K.
d. 1993 Management Recognition Plan for CCB Savings Bank of Lenoir,
Inc., SSB is incorporated herein by reference from Exhibit 28 of
Registrant's Registration Statement No. 33-61268 on Form S-8.
e. 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir,
Inc., SSB is incorporated herein by reference from Exhibit 28 of
Registrant's Registration Statement No. 33-61272 on Form S-8.
f. Amendment No. 1 to the 1993 Nonstatutory Stock Option Plan for CCB
Savings Bank of Lenoir, Inc., SSB is incorporated herein by
reference from Exhibit 10(G) of Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
g. 1993 Incentive Stock Option Plan of Registrant is incorporated
herein by reference from Exhibit 28 of Registrant's Registration
Statement No. 33-61270 on Form S-8.
h. Long-Term Incentive Plan of Registrant is incorporated herein by
reference from Exhibit 99 of Registrant's Registration Statement No.
33-54645 on Form S-8.
i. Security Capital Omnibus Stock Ownership and Long-Term Incentive
Plan, as assumed by the Registrant, is incorporated herein by
reference from Exhibit 99 of Registrant's Registration Statement No.
33-61791 on Form S-8.
Exhibit Number
per Item 601 of Exhibit No. in
Regulation S-K Description this Form 10-K
j. Omni Capital Group, Inc. 1988 Incentive Stock Option Plan, as
assumed by the Registrant, is incorporated herein by reference from
Exhibit 99 of Registrant's Registration Statement No. 33-61797 on
Form S-8.
k. Omni Capital Group, Inc. 1988 Directors' Non-Qualified Stock Option
Plan, as assumed by the Registrant is incorporated herein by
reference from Exhibit 99 of Registrant Registration Statement No.
33-61793 on Form S-8.
l. Change of Control Agreement dated July 17, 1995 between Central
Carolina Bank and Trust Company and Ernest C. Roessler is
incorporated herein by reference from Exhibit 10.1 of Registrant's
Form 8-K dated July 17, 1995.
m. Change of Control Agreement dated July 17, 1995 between Central
Carolina Bank and Trust Company and Richard L. Furr is incorporated
herein by reference from Exhibit 10.2 of Registrant's Form 8-K dated
July 17, 1995.
n. Change of Control Agreement dated July 17, 1995 between Central
Carolina Bank and Trust Company and J. Scott Edwards is incorporated
herein by reference from Exhibit 10.3 of Registrant's Form 8-K dated
July 17, 1995.
o. Amendment and restated Employment Agreement by and between
Registrant, Central Carolina Bank and Trust Company and David B.
Jordan dated May 19, 1995 is incorporated herein by reference from
Exhibit 10.1 of Registrant's Form 8-K dated
May 19, 1995.
p. Amended and restated Employment Agreement by and between Registrant,
Central Carolina Bank and Trust Company and Ralph A. Barnhardt dated
May 19, 1995 is incorporated herein by reference from Exhibit 10.2
of Registrant's Form 8-K dated May 19, 1995.
q. Amended and restated Employment Agreement by and between Registrant,
Central Carolina Bank and Trust Company and Lloyd G. Gurley dated
May 19, 1995 is incorporated herein by reference from Exhibit 10.3
of Registrant's Form 8-K dated May 19, 1995.
(21) Subsidiaries of Registrant.
A listing of the direct and indirect subsidiaries of Registrant is
included in Note 1 to the Consolidated Financial Statements of
Registrant included in this Form 10-K.
(23) Consents of experts and counsel.
Consent of KPMG Peat Marwick LLP. 23
(27) Financial Data Schedule. 27
(99) Additional exhibits.
Proxy Statement for 1996 Annual Meeting of Shareholders on April 23, Not Required to
1996 be Refiled