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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ------------------ to ----------------------
Commission File Number: 0-12358
CCB FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
North Carolina 56-1347849
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
111 Corcoran Street, Post Office Box 931, Durham, NC 27702
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(Address of principal executive offices)
Registrant's telephone number, including area code (919) 683-7777
Securities issued pursuant to Section 12(b) of the Act:
$5.00 par value Common Stock New York Stock Exchange
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(Title of class) (Name of exchange on which registered)
Securities issued pursuant to Section 12(g) of the Act:
None
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 8, 1999 was $2,209,480,627. On March 8, 1999, there
were 40,177,175 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 27, 1999 are incorporated in Part III of this
report.
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CROSS REFERENCE INDEX
Page
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Part I.
Item 1. Business ................................................................ 3
Description ............................................................. 3
Average Balance Sheets .................................................. 13
Net Interest Income Analysis -- Taxable Equivalent Basis ................ 13
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis 14
Investment Securities Portfolio ......................................... 20
Investment Securities -- Maturity/Yield Schedule ........................ 20
Types of Loans .......................................................... 18
Maturities and Sensitivities of Loans to Changes in Interest Rates ...... 19
Nonperforming and Risk Assets ........................................... 25
Loan Loss Experience .................................................... 26
Average Deposits ........................................................ 21
Maturity Distribution of Large Denomination Time Deposits ............... 28
Return on Equity and Assets ............................................. 9
Short-Term Borrowings ................................................... 45
Item 2. Properties .............................................................. 7
Item 3. Legal Proceedings ....................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders ..................... 7
Part II.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 7
Item 6. Selected Financial Data ................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations ...................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............. 31
Item 8. Financial Statements and Supplementary Data ............................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting and 62
Financial Disclosure ....................................................
Part III.
Item 10. Directors and Executive Officers of the Registrant ...................... 62
Item 11. Executive Compensation .................................................. 62
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 62
Item 13. Certain Relationships and Related Transactions .......................... 62
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 62
PART I.
Item 1. 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 ("CCB"), American Federal Bank, FSB ("AmFed") and Central Carolina
Bank-Georgia ("CCB-Ga.") (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, 1998, the Corporation had consolidated assets of
approximately $7.7 billion and was the seventh largest banking organization
headquartered in North Carolina.
SUBSIDIARY BANKS
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 161 offices located in 63 cities and towns in North
Carolina. In addition, CCB offers trust services through an office located in
Virginia and through a subsidiary headquartered in Florida. CCB had
approximately $6.5 billion in assets at December 31, 1998 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.
AmFed is a federally chartered savings bank located in Greenville, South
Carolina. AmFed offers commercial and retail banking through 40 offices located
in 24 cities and towns in South Carolina. Trust services are currently offered
through two trust offices. AmFed had approximately $1.3 billion in assets at
December 31, 1998. AmFed 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.
CCB-Ga. is a Georgia-chartered special purpose credit card bank which
provides nationwide credit card services from its headquarters in Columbus,
Georgia. As of December 31, 1998, CCB-Ga. had approximately $85.9 million in
assets.
NON-BANK SUBSIDIARIES
CCB has five wholly-owned non-bank subsidiaries: CCBDE, Inc., CCB
Investment and Insurance Service Corporation ("CCBI"), Salem Trust Company,
Corcoran Holdings, Inc ("Corcoran") and Southland Associates, Inc. CCBDE, Inc.
is an investment holding company headquartered in Wilmington, Delaware. CCBI
provides full brokerage services through an independent discount brokerage firm
and sells annuity and mutual fund products. Salem Trust Company, which was
formed upon CCB's acquisition of certain trust operations from the former
Barnett Bank, provides institutional trust services in Florida. Corcoran is a
holding company and sole owner of a real estate investment trust formed in 1998,
Watts Properties, Inc. Southland Associates, Inc. previously engaged in real
estate development and is in the process of winding-down operations.
AmFed has five wholly-owned non-bank subsidiaries: AMFEDDE, Inc., American
Service Corporation of S.C. ("ASC"), McBee Holdings, Inc. ("McBee"), Finance
South, Inc. ("Finance South") and Mortgage North. AMFEDDE, Inc. is an
investment holding company headquartered in Wilmington, Delaware. ASC sells
insurance, annuity and mutual fund products as well as providing full brokerage
services through an independent discount brokerage firm. McBee is a holding
company and sole owner of a loan participation company formed in 1998,
Greenville Participations, Inc. During the second quarter of 1997, AmFed sold
substantially all of the assets of Finance South, a short-term consumer finance
operation. Mortgage North is a service related company in the process of
winding-down operations.
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 $8 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
3
in-state competition, CCB and AmFed have a high degree of competition from
out-of-state financial service companies through the presence of loan production
offices.
In recent years, competition between commercial banks, thrift institutions
and credit unions has intensified significantly, especially in their
deposit-taking activities. Primarily as a result of legislation aimed at
effecting a deregulation of the financial institutions 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
Federal law permits adequately capitalized and managed bank holding
companies to acquire control of the assets of banks in any state (the
"Interstate Banking Law"). Acquisitions are 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.
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 prohibit interstate branching by enacting
legislation to "opt out" of the Interstate Banking Law. The Interstate Banking
Law also permits banks to open new branches or acquire existing branches of
banks located in other states that specifically 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. It is anticipated that the Interstate Banking Law will
increase (and, in some instances, has increased) competition within the markets
in which the Corporation now operates, although the extent to which such
competition will increase throughout such markets and the timing of such
increase cannot be predicted.
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 a 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, decrease 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 acquired 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 acquirer 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 Federal Deposit
Insurance Corporation ("FDIC") insurance funds. For example, if a bank holding
company's insured depository institution subsidiary becomes "undercapitalized",
the
4
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 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 1 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 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.
There are also various legal restrictions on the extent to which the
Corporation and its nonbank subsidiaries can borrow or otherwise obtain credit
from banking subsidiaries. In general, these restrictions require that any such
extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of the Corporation or such nonbank
subsidiaries, to 10% of the lending bank's capital stock and surplus, as to the
Corporation and all such nonbank subsidiaries in the aggregate, to 20% of such
lending bank's capital stock and surplus.
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 (the "Commissioner") under the state's bank
holding company laws.
CCB
CCB is a North Carolina commercial bank and is subject to supervision and
examination by and regulations and reporting requirements of the Commissioner
and the FDIC. CCB is a member of the Federal Home Loan Bank ("FHLB") system and
its deposits are insured by the FDIC. CCB is subject to legal limitations on the
amounts of dividends it is permitted to pay. 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 transfer to surplus. Insured depository institutions
also are prohibited from making capital distributions, including the payment of
dividends, if, after making such distributions, the institution would become
"undercapitalized" (as such term is defined in the Federal Deposit Insurance
Act).
CCB is also 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 1 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 to have
a ratio of total capital to risk-weighted assets of at least 8%.
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 a 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 is 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
an insured institution, CCB is 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.
5
AmFed
AmFed is a federally-chartered savings bank subject to regulation,
examination and supervision by the Office of Thrift Supervision ("OTS"), as its
chartering agency, and by the FDIC, as its deposit insurer. AmFed is also a
member of the FHLB system. AmFed is subject to legal limitations on the amounts
of dividends it is permitted to pay. Under OTS regulations, if a savings
institution exceeds all fully phased-in capital requirements and has not been
advised that it is in need of more than normal supervision, it could make
dividend payments during a calendar year equal to the greater of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (ii)
75% of its net income for the previous four quarters.
AmFed is required to comply with the capital requirements promulgated by
the OTS. The OTS capital regulations require tangible capital of at least 1.5%
of adjusted total assets (as defined by regulation); core capital in an amount
equal to at least 3% of adjusted total assets and total capital to risk-weighted
assets of at least 8%.
The business activities of savings institutions are governed by the Home
Owners' Loan Act of 1933, as amended ("HOLA"). The HOLA requires savings
institutions to meet a Qualified Thrift Lender Test ("QTL test"). Under the QTL
test, as modified by the Federal Deposit Insurance Corporation Improvement Act
of 1991("FDICIA"), a savings institution is required to maintain at least 65% of
its "portfolio assets" (total assets less (i) specified liquid assets up to 20%
of total assets, (ii) intangible assets, including goodwill, and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
such as home mortgage loans and other residential real estate-related assets on
a monthly average basis in 9 out of every 12 months. A savings association that
fails the QTL test and does not convert to a bank charter generally will be
subject to certain prohibitions including: (i) not engaging in any new activity
not permissible for a national bank; (ii) not paying dividends not permissible
under national bank regulations and (iii) not obtaining any advances from the
FHLB. In addition, beginning three years after the savings association failed
the QTL test, the savings association would be prohibited from engaging in any
activity not permissible for a national bank and would have to repay any
outstanding advances from an FHLB as promptly as possible. As of December 31,
1998, AmFed's QTL percentage was 77.89% which exceeded the current QTL
requirements.
Insurance Assessments
CCB and AmFed are subject to insurance assessments imposed by the FDIC.
Approximately two-thirds of CCB's deposits are insured through the FDIC's Bank
Insurance Fund (the "BIF") and the remainder are insured by the Savings
Association Insurance Fund ("SAIF") due to deposits acquired through the
acquisition of thrift institutions in prior years which remain insured by the
SAIF. Effective January 1, 1996, the FDIC reduced the BIF assessments, to a
range of 0% to .27% of deposits. The premium reductions did not affect the
deposit premiums paid on 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. During 1996, the FDIC imposed a special
assessment on SAIF insured deposits to recapitalize the SAIF. CCB's special
assessment amounted to $7.4 million and AmFed's amounted to $5.6 million. FDIC
insurance premiums for 1998 and 1997 were .013% for BIF insured deposits and
.0648% for SAIF insured deposits.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Growth Act") was enacted. This legislation contained
a comprehensive approach to recapitalize the SAIF and to assure payment of the
Financing Corporation (the "FICO") obligations. Under the Growth Act, banks with
deposits that are insured under the BIF are required to pay a portion of the
interest due on bonds that were issued by FICO to help shore up the ailing
Federal Savings and Loan Insurance Corporation in 1987. The Growth Act
stipulates that the BIF assessment rate to contribute toward the FICO
obligations must be equal to one-fifth the SAIF assessment rate through year-end
1999, or until the insurance funds are merged, whichever occurs first. The
amount of FICO debt service to be paid by all BIF-insured institutions is
approximately $0.0126 per $100 of BIF-insured deposits for each year from 1997
through 1999 when the obligation of BIF-insured institutions increases to
approximately $0.0240 per $100 of BIF-insured deposits per year through the year
2019, subject in all cases to adjustments by the FDIC on a quarterly basis. The
Growth Act also contained provisions protecting banks from liability for
environmental clean-up costs; prohibiting credit unions sponsored by Farm Credit
System banks; easing application requirements for most bank holding companies
when they acquire a thrift or a permissible non-bank operation; easing Fair
Credit Reporting Act restrictions between bank holding company affiliates; and
reducing the regulatory burden under the Real Estate Settlement Procedures Act,
the Truth-in-Savings Act, the Truth-in-Lending Act and the Home Savings Mortgage
Disclosure Act.
6
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.
YEAR 2000 ISSUE
The Year 2000 Issue presents a number of challenges to financial
institutions' management; correction of Year 2000 Issues will be costly and
complex for the entire industry. See "Year 2000 Issue" in Management's
Discussion and Analysis of Financial Condition and Results of Operations for
information regarding the impact of the Year 2000 Issue on the Corporation's
operations and the progress made on remediating that impact.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Corporation are elected or appointed by the board of
directors to hold their offices at the pleasure of the board. At February 28,
1999, the executive officers of the Corporation were as follows:
Age at
Name December 31, 1998
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Ernest C. Roessler 57
Eugene J. McDonald 66
David B. Jordan 62
William L. Abercrombie, Jr. 51
J. Scott Edwards 52
Richard L. Furr 49
Has Served as
an Executive
Officer of the
Name Position Corporation Since
- ----------------------------- -------------------------------------------------------------- ------------------
Ernest C. Roessler Chairman of the Board, President and Chief Executive Officer 1988
Eugene J. McDonald Executive Vice Chairman of the Board 1998
David B. Jordan Vice Chairman of the Board 1995
William L. Abercrombie, Jr. Vice Chairman of the Board 1997 (1)
J. Scott Edwards Executive Vice President 1988
Richard L. Furr Executive Vice President 1988
(1) Prior to August 1997, Mr. Abercrombie served as Chairman, President and
Chief Executive Officer of American Federal Bank, FSB which was acquired by
the Corporation on August 1, 1997. He continues to serve in those
capacities.
EMPLOYEE RELATIONS
As of December 31, 1998, the Corporation and its Subsidiary Banks employed
2,740 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.
Item 2. 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 administrative 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 201 banking offices, approximately 81 of
which are either leased buildings or leased property on which the Subsidiary
Banks have constructed banking offices.
Item 3. LEGAL PROCEEDINGS
See Note 14 to the Consolidated Financial Statements for a discussion of
legal proceedings.
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, 1998.
PART II.
Item 5. 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 1998 and 1997 and discussion of other shareholder
matters. Such prices and
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dividends have been adjusted to reflect a two-for-one stock split effected in
the form of a 100 percent common stock dividend paid on October 1, 1998 to
shareholders of record on September 15, 1998. On January 19, 1999, a dividend of
$.26 per share was declared for payment on April 1, 1999 to shareholders of
record as of March 15, 1999.
Each outstanding share of the Corporation's common stock has attached to it
one right (a "Right") issued pursuant to an Amended and Restated Rights
Agreement (the "Rights Agreement") as discussed in Note 11 to the Consolidated
Financial Statements. The Rights will not prevent a takeover of the Corporation.
However, the Rights may cause substantial dilution to a person or group that
acquires 15 percent or more (or 10% or more in certain circumstances) of the
Corporation's common stock unless the Rights are redeemed prior to such
acquisition or terminated by the Board of Directors. Nevertheless, the Rights
should not interfere with a transaction that is in the best interests of the
Corporation and its shareholders because the Rights can be redeemed or
terminated, as described in Note 11 to the Consolidated Financial Statements,
before the consummation of such transaction.
The complete terms of the Rights are set forth in the Rights Agreement and
the Corporation's Amended and Restated Articles of Incorporation, as amended.
The description of the Rights and the Rights Agreement is qualified in its
entirety by reference to such documents. A copy of the Rights Agreement can be
obtained upon written request to W. Harold Parker, Jr., Senior Vice President
and Controller, CCB Financial Corporation, P.O. Box 931, Durham, North Carolina
27702.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Corporation's Consolidated Financial Statements and the accompanying notes
presented elsewhere herein. Prior year amounts have been restated to reflect the
1997 mergers with AmFed and Salem Trust Bank and the 1995 merger with Security
Capital Bancorp ("Security Capital") all of which were accounted for as
poolings-of-interests. Prior year amounts have been restated to reflect the
two-for-one stock split effected in the form of a 100% stock dividend paid
October 1, 1998. Cash dividends per share have not been restated for the
mergers.
8
Six Year Summary of Selected Financial Data
(In Thousands Except Per Share Data)
Year Ended December 31
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
Summary of Operations
Interest income $ 577,307 550,463 512,575 492,409 401,588
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Interest expense 254,562 250,099 237,572 234,880 168,483
- ----------------------------------------------- ---------- ------- ------- ------- -------
Net interest income 322,745 300,364 275,003 257,529 233,105
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Provision for loan and lease losses 15,884 16,376 17,361 11,007 10,761
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Net interest income after provision 306,861 283,988 257,642 246,522 222,344
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Other income (1) 111,022 92,919 84,767 67,001 58,128
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Net investment securities gains (losses) 2,178 480 (2,161) (816) 357
- -----------------------------------------------
Other expenses (2) 230,217 226,198 209,833 198,207 180,963
- ----------------------------------------------- ---------- ------- ------- ------- -------
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 189,844 151,189 130,415 114,500 99,866
- -----------------------------------------------
Income taxes (3) 68,632 55,765 43,589 37,356 38,421
- ----------------------------------------------- ---------- ------- ------- ------- -------
Income before extraordinary item and
cumulative effect of changes in accounting
principles 121,212 95,424 86,826 77,144 61,445
- -----------------------------------------------
Extraordinary item (4) -- -- -- (1,709) --
- -----------------------------------------------
Cumulative effect of changes in accounting
principles (5) -- -- -- -- --
- ----------------------------------------------- ---------- ------- ------- ------- -------
Net income $ 121,212 95,424 86,826 75,435 61,445
- ----------------------------------------------- ---------- ------- ------- ------- -------
Per Share (6)
Income before extraordinary item and
cumulative effect of changes in accounting
principles:
Basic $ 2.96 2.31 2.11 1.90 1.50
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Diluted (7) 2.93 2.28 2.08 1.85 1.47
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Net income:
Basic 2.96 2.31 2.11 1.86 1.50
- -----------------------------------------------
Diluted (7) 2.93 2.28 2.08 1.81 1.47
- -----------------------------------------------
Cash dividends .99 .89 .80 .72 .66
- -----------------------------------------------
Book value 17.05 16.40 14.82 13.66 11.69
- -----------------------------------------------
Average shares outstanding:
Basic 40,898 41,438 41,107 40,589 40,874
- -----------------------------------------------
Diluted (7) 41,409 41,947 41,815 41,800 41,959
- -----------------------------------------------
Average Balances
Assets $7,332,506 6,943,989 6,570,573 6,218,2 90 5,575,057
- -----------------------------------------------
Loans and lease financing 5,276,042 4,877,187 4,464,026 4,113,207 3,569,065
- -----------------------------------------------
Earning assets 6,975,753 6,594,704 6,216,419 5,850,981 5,230,756
- -----------------------------------------------
Deposits 6,141,074 5,800,128 5,449,912 5,153,952 4,581,111
- -----------------------------------------------
Interest-bearing liabilities 5,780,005 5,495,194 5,242,467 5,047,523 4,496,256
- -----------------------------------------------
Shareholders' equity 678,264 638,988 574,759 511,031 478,314
- -----------------------------------------------
Selected Period End Balances
Assets $7,740,353 7,138,528 6,880,205 6,589,762 6,065,652
- -----------------------------------------------
Loans and lease financing 5,487,337 5,093,569 4,745,663 4,267,175 3,952,160
- -----------------------------------------------
Reserve for loan and lease losses 73,182 67,594 61,257 55,114 50,902
- -----------------------------------------------
Deposits 6,459,764 5,984,597 5,741,454 5,421,376 4,980,250
- -----------------------------------------------
Shareholders' equity 687,894 681,360 611,449 556,917 472,091
- -----------------------------------------------
Ratios
Income before extraordinary item and
effect of cumulative changes in accounting
principles to:
Average assets 1.65 % 1.37 1.32 1.24 1.10
- -----------------------------------------------
Average shareholders' equity 17.87 14.93 15.11 15.10 12.85
- -----------------------------------------------
Net income to:
Average assets 1.65 1.37 1.32 1.21 1.10
- -----------------------------------------------
Average shareholders' equity 17.87 14.93 15.11 14.76 12.85
- -----------------------------------------------
Net interest margin, taxable equivalent (8) 4.75 4.70 4.56 4.56 4.61
- -----------------------------------------------
Net loan and lease losses to average loans and
lease financing .20 .21 .25 .17 .16
- -----------------------------------------------
Dividend payout ratio 33.45 38.53 37.91 38.71 44.00
- -----------------------------------------------
Equity to assets ratio 9.25 9.20 8.75 8.22 8.58
- -----------------------------------------------
Year
Ended December
31
Five Year
Compound
Growth
1993 Rate %
------------- ----------
Summary of Operations
Interest income 339,137 11.2
- -----------------------------------------------
Interest expense 139,037 12.9
- ----------------------------------------------- -------
Net interest income 200,100 10.0
- -----------------------------------------------
Provision for loan and lease losses 8,339 13.8
- ----------------------------------------------- -------
Net interest income after provision 191,761 9.9
- -----------------------------------------------
Other income (1) 54,652 15.2
- -----------------------------------------------
Net investment securities gains (losses) 2,962
- -----------------------------------------------
Other expenses (2) 162,330 7.2
- ----------------------------------------------- -------
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 87,045 16.9
- -----------------------------------------------
Income taxes (3) 30,070 17.9
- ----------------------------------------------- -------
Income before extraordinary item and
cumulative effect of changes in accounting
principles 56,975 16.3
- -----------------------------------------------
Extraordinary item (4) -- --
- -----------------------------------------------
Cumulative effect of changes in accounting
principles (5) (36,549) --
- ----------------------------------------------- -------
Net income 20,426 42.8
- ----------------------------------------------- ------- ----
Per Share (6)
Income before extraordinary item and
cumulative effect of changes in accounting
principles:
Basic 1.52 14.3
- -----------------------------------------------
Diluted (7) 1.45 15.1
- -----------------------------------------------
Net income:
Basic .54 40.5
- -----------------------------------------------
Diluted (7) .53 40.8
- -----------------------------------------------
Cash dividends .62 9.8
- -----------------------------------------------
Book value 11.28 8.6
- -----------------------------------------------
Average shares outstanding:
Basic 37,528 1.7
- -----------------------------------------------
Diluted (7) 39,780 .8
- -----------------------------------------------
Average Balances
Assets 4,715,319 9.2
- -----------------------------------------------
Loans and lease financing 3,027,617 11.7
- -----------------------------------------------
Earning assets 4,396,756 9.7
- -----------------------------------------------
Deposits 4,029,018 8.8
- -----------------------------------------------
Interest-bearing liabilities 3,785,448 8.8
- -----------------------------------------------
Shareholders' equity 407,635 10.7
- -----------------------------------------------
Selected Period End Balances
Assets 5,386,653 7.5
- -----------------------------------------------
Loans and lease financing 3,384,291 10.1
- -----------------------------------------------
Reserve for loan and lease losses 43,357 11.0
- -----------------------------------------------
Deposits 4,506,361 7.5
- -----------------------------------------------
Shareholders' equity 463,820 8.2
- -----------------------------------------------
Ratios
Income before extraordinary item and
effect of cumulative changes in accounting
principles to:
Average assets 1.21
- -----------------------------------------------
Average shareholders' equity 13.98
- -----------------------------------------------
Net income to:
Average assets .43
- -----------------------------------------------
Average shareholders' equity 5.01
- -----------------------------------------------
Net interest margin, taxable equivalent (8) 4.72
- -----------------------------------------------
Net loan and lease losses to average loans and
lease financing .19
- -----------------------------------------------
Dividend payout ratio 114.81
- -----------------------------------------------
Equity to assets ratio 8.64
- -----------------------------------------------
9
(1) Other income in 1997 includes $2.3 million of gain ($1.4 million after-tax)
on the sale of a subsidiary acquired through merger which increased diluted
net income per share by $.03.
(2) Other expenses include merger-related expense of $17.9 million in 1997
related to the Corporation's mergers with AmFed and Salem Trust Bank, $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. Other expenses also include the levy in 1996
of a $12.9 million special assessment by the FDIC to recapitalize the SAIF.
The after-tax effect of the aforementioned non-recurring expense items was
to decrease diluted net income per share by $.31 in 1997, $.19 per share in
1996, $.17 per share in 1995 and $.02 per share in 1994.
(3) During 1996, a tax benefit of $1.6 million ($.04 per diluted share) was
recorded for forgiveness of the recapture of tax bad debt reserves of a
former savings bank subsidiary. During 1994, Security Capital recognized a
one-time charge of approximately $5.6 million ($.13 per diluted share) of
deferred tax liabilities recorded in anticipation of the merger of Security
Capital's three savings subsidiaries into its commercial bank subsidiary.
(4) The extraordinary item resulted from a prepayment penalty on the early
extinguishment of debt by AmFed.
(5) The after-tax cumulative effect of changes in accounting principles reflect
adoption of SFAS No. 72, "Accounting for Goodwill", which resulted in a
one-time charge of $36.2 million in 1993, 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 in 1993 and adoption
of SFAS No. 109, "Accounting for Income Taxes", which resulted in a one-time
benefit of $1.9 million in 1993.
(6) Amounts for 1997 and prior years have been restated to give effect to the
two-for-one stock split effected in the form of a 100% stock dividend paid
October 1, 1998.
(7) Diluted earnings per share is computed considering the impact on average
shares outstanding and net income of the exercise of stock options,
conversion of convertible subordinated debentures and the exercise of stock
warrants, where applicable.
(8) Net interest margin is computed by dividing taxable equivalent net interest
income by average earning assets.
- --------------------------------------------------------------------------------
10
Item 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
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"), American Federal
Bank, FSB ("AmFed") and Central Carolina Bank-Georgia ("CCB- Ga.")
(collectively, the "Subsidiary Banks") for the years ended December 31, 1998,
1997 and 1996. The consolidated financial statements also include the accounts
and results of operations of CCB's wholly-owned subsidiaries: CCBDE, Inc.; CCB
Investment and Insurance Service Corporation ("CCBI"); Salem Trust Company;
Corcoran Holdings, Inc., and its wholly-owned subsidiary, Watts Properties,
Inc.; and Southland Associates, Inc. AmFed's wholly-owned subsidiaries are also
included in the consolidated financial statements: AMFEDDE, Inc.; American
Service Corporation of S.C. ("ASC"); McBee Holdings, Inc. and its wholly-owned
subsidiary, Greenville Participations, Inc.; Finance South, Inc. ("Finance
South") and Mortgage North. The discussion and analysis of financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and accompanying notes appearing elsewhere in this report
and are discussed as a single business segment.
This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) related to anticipated future
operating and financial performance, growth opportunities and growth rates, Year
2000 compliance and other similar forecasts and statements of expectations.
Words such as "expects", "plans", "estimates", "projects", "objectives" and
"goals" and similar expressions are intended to identify these forward-looking
statements. These forward-looking statements are based on estimates, beliefs and
assumptions made by Management and are not guarantees of future performance.
Factors that may cause actual results to differ from those expressed or
implied include, but are not limited to, changes in political and economic
conditions, interest rate movements, competitive product and pricing pressures
within the Corporation's markets, success and timing of business initiatives,
technological change and changes in legal, regulatory and tax policies.
Readers should also consider information on risk and uncertainties noted in
the discussions of competition, interstate banking and branching, and
supervision and regulation contained elsewhere in this report on Form 10-K.
Mergers and Other Changes in Corporate Structure
On October 1, 1998, the Corporation's shareholders received a two-for-one
stock split effected in the form of a 100% stock dividend. The accompanying
discussion and analysis of financial condition and results of operations and the
consolidated financial statements have been restated as if the stock split had
occurred at the beginning of the earliest period presented.
On January 31, 1997, the Corporation consummated its acquisition of Salem
Trust Bank, a $165 million commercial bank headquartered in Winston-Salem, North
Carolina. On August 1, 1997, the Corporation consummated its acquisition of
AmFed, a $1.3 billion savings bank headquartered in Greenville, South Carolina
(collectively, the "1997 Mergers"). Under the terms of the respective merger
agreements, the Corporation issued 11.2 million shares of common stock and cash
in lieu of fractional shares for all of the outstanding shares of Salem Trust
Bank and AmFed. The former offices of Salem Trust Bank are operated as offices
of CCB and AmFed continues to operate as a separate federal savings bank. The
1997 Mergers were accounted for as poolings-of-interests and accordingly, the
Corporation's historical consolidated financial statements have been restated to
include the accounts and results of operations of Salem Trust Bank and AmFed as
if the mergers had been effective as of the earliest period presented.
Results of Operations
Performance Overview
As a result of the mergers consummated over the past five years, the
Corporation has positioned its franchise to be in economically vibrant
metropolitan areas of North and South Carolina. With the customer base and the
economic forces present in those market areas and the Corporation's focused
strategy of increasing revenues while controlling noninterest expense, the
Corporation's 1998 net income increased 27% over 1997's results. Net income in
1998 totaled $121.2 million, or $2.93 per diluted share compared to 1997's net
income of $95.4 million, or $2.28 per diluted share. Net income per diluted
share was $2.08 in 1996. Returns on average assets and average shareholders'
equity were 1.65% and 17.87%, respectively, in 1998 compared to 1.37% and
14.93%, respectively, in 1997 and 1.32% and 15.11%, respectively, in 1996. Table
1 compares the contributions to net income per diluted share for each income
statement caption for the years ended December 31, 1998, 1997 and 1996 and the
respective changes from year to year.
11
T A B L E 1
Components of Diluted Income Per Share
Years Ended December 31 Change From
-------------------------------------- ------------------------
1998 1997 1996 1998/1997 1997/1996
------------ ---------- ---------- ----------- ----------
Interest income $ 13.95 13.12 12.26 .83 .86
- -------------------------------------
Interest expense 6.15 5.96 5.68 .19 .28
- ------------------------------------- --------- ----- ----- ---- ----
Net interest income 7.80 7.16 6.58 .64 .58
- -------------------------------------
Provision for loan and lease losses .38 .39 .42 (.01) (.03)
- ------------------------------------- --------- ----- ----- ----- -----
Net interest income after provision 7.42 6.77 6.16 .65 .61
- -------------------------------------
Other income (1) 2.73 2.23 1.98 .50 .25
- -------------------------------------
Other expenses (2) 5.56 5.39 5.02 .17 .37
- ------------------------------------- --------- ----- ----- ----- -----
Income before income taxes 4.59 3.61 3.12 .98 .49
- -------------------------------------
Income taxes (3) 1.66 1.33 1.04 .33 .29
- ------------------------------------- --------- ----- ----- ----- -----
Net income $ 2.93 2.28 2.08 .65 .20
- ------------------------------------- --------- ----- ----- ----- -----
(1) Other income includes $2.3 million of gain realized in the sale of a
subsidiary during 1997.
(2) Other expenses include merger-related expense of $17.9 million in 1997 and
a FDIC special assessment of $12.9 million in 1996.
(3) Income taxes for 1996 include a tax benefit of $1.6 million from the
forgiveness of recapture of tax bad debt reserves of a former savings bank
subsidiary.
- --------------------------------------------------------------------------------
Operating Income
In 1998, operating income, defined as income before non-recurring items,
increased 13.2% over 1997. Operating income per diluted share was $2.93, $2.56
and $2.23 in 1998, 1997 and 1996, respectively. Over the past three years, the
Corporation's results of operations have been significantly impacted by the
non-recurring items described below.
To effect the 1997 Mergers, the Corporation incurred $17.9 million of
merger-related expense which included severance and other employee benefit
costs, excess facilities costs, system conversion costs and other
transaction-related expenses. The after-tax effect of the merger-related expense
was $13.1 million. During 1997, AmFed sold substantially all the assets of
Finance South resulting in a gain of $2.3 million or $1.4 million after-tax.
During 1996, the Corporation experienced two non-recurring items. First,
the Federal Deposit Insurance Corporation (the "FDIC") assessed a special
one-time levy (the "FDIC Special Assessment") to recapitalize the Savings
Association Insurance Fund (the "SAIF") which resulted in a special assessment
totaling $13.9 million for the Subsidiary Banks in the third quarter of 1996.
During the fourth quarter of 1996, CCB protested the amount of special
assessment levied on certain portions of the SAIF deposit base and received a $1
million reduction in the assessment. CCB's SAIF deposits resulted from its prior
acquisitions of thrift institutions. Second, through Congressional legislative
action, the recapture of tax bad debt reserves required upon a savings bank's
conversion to a commercial bank was forgiven. Consequently, a $1.6 million tax
benefit was recorded prior to a former savings bank's merger into CCB (the
"Recapture Tax Benefit").
Excluding the effects of the non-recurring items, returns on average assets
were 1.65% for 1998 and 1.54% for 1997 and returns on average shareholders'
equity were 17.87% for 1998 and 16.76% for 1997. Return on average assets was
1.42% and return on average shareholders' equity was 16.20% for 1996 after
excluding the effects of the non-recurring items.
Net Interest Income
Net interest income is one of the major determining factors in a financial
institution's performance as it is the principal source of earnings, in most
cases. It is impacted by the volume, yield/cost and relative mix of both earning
assets and interest-bearing and noninterest-bearing sources of funds. 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, 1998.
12
T A B L E 2
Average Balances and Net Interest Income Analysis
(Taxable Equivalent Basis -- In Thousands) (1)
Years Ended December 31
-------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------ -----------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average
Balance Expense Rate Balance Expense Rate Balance
------------- -------- -------- ----------- -------- ------- -----------
Earning assets:
Loans and lease financing (2) $ 5,276,042 470,888 8.92 % 4,877,187 442,917 9.08 4,464,026
- --------------------------------------------
U.S. Treasury and U.S. Government agencies
and corporations (3) 1,230,904 86,148 6.99 1,348,214 92,749 6.88 1,313,695
- --------------------------------------------
States and political subdivisions 80,693 7,093 8.79 81,967 7,254 8.85 77,015
- --------------------------------------------
Equity and other securities (3) 46,775 3,707 7.93 47,327 3,676 7.77 48,529
- --------------------------------------------
Federal funds sold and other short-term
investments 292,855 16,221 5.54 184,653 10,342 5.60 248,879
- --------------------------------------------
Time deposits in other banks 48,484 2,377 4.90 55,356 2,716 4.91 64,275
- -------------------------------------------- ----------- ------- ---- --------- ------- ---- ---------
Total earning assets 6,975,753 586,434 8.40% 6,594,704 559,654 8.49 6,216,419
- -------------------------------------------- ----------- ------- ---- --------- ------- ---- ---------
Non-earning assets:
Cash and due from banks 204,985 184,261 198,091
- --------------------------------------------
Premises and equipment 89,236 85,815 86,469
- --------------------------------------------
All other assets, net 62,532 79,209 69,594
- -------------------------------------------- ----------- --------- ---------
Total assets $ 7,332,506 6,943,989 6,570,573
- -------------------------------------------- ----------- --------- ---------
Interest-bearing liabilities:
Savings and time deposits $ 5,364,255 232,609 4.34 % 5,111,486 229,600 4.49 4,813,311
- --------------------------------------------
Short-term borrowed funds 245,778 11,822 4.81 304,372 15,371 5.05 361,091
- --------------------------------------------
Long-term debt 169,972 10,131 5.96 79,336 5,128 6.46 68,065
- -------------------------------------------- ----------- ------- ---- --------- ------- ---- ---------
Total interest-bearing liabilities 5,780,005 254,562 4.41% 5,495,194 250,099 4.55 5,242,467
- -------------------------------------------- ----------- ------- ---- --------- ------- ---- ---------
Other liabilities and shareholders' equity:
Demand deposits 776,819 688,642 636,601
- --------------------------------------------
Other liabilities 97,418 121,165 116,746
- --------------------------------------------
Shareholders' equity 678,264 638,988 574,759
- -------------------------------------------- ----------- --------- ---------
Total liabilities and
shareholders' equity $ 7,332,506 6,943,989 6,570,573
- -------------------------------------------- ----------- --------- ---------
Net interest income and
net interest margin (4) $331,872 4.75 % 309,555 4.70
- -------------------------------------------- -------- -------- ------- ----
Interest rate spread (5) 3.99% 3.94
- -------------------------------------------- ---- ----
Years Ended
December 31
------------------
1996
------------------
Interest Average
Income/ Yield/
Expense Rate
------------------
Earning assets:
Loans and lease financing (2) 406,473 9.10
- --------------------------------------------
U.S. Treasury and U.S. Government agencies
and corporations (3) 86,759 6.60
- --------------------------------------------
States and political subdivisions 7,102 9.22
- --------------------------------------------
Equity and other securities (3) 3,783 7.80
- --------------------------------------------
Federal funds sold and other short-term
investments 13,524 5.43
- --------------------------------------------
Time deposits in other banks 3,263 5.08
- -------------------------------------------- ------- ----
Total earning assets 520,904 8.38
- -------------------------------------------- ------- ----
Non-earning assets:
Cash and due from banks
- --------------------------------------------
Premises and equipment
- --------------------------------------------
All other assets, net
- --------------------------------------------
Total assets
- --------------------------------------------
Interest-bearing liabilities:
Savings and time deposits 214,500 4.46
- --------------------------------------------
Short-term borrowed funds 18,713 5.18
- --------------------------------------------
Long-term debt 4,359 6.40
- -------------------------------------------- ------- ----
Total interest-bearing liabilities 237,572 4.53
- -------------------------------------------- ------- ----
Other liabilities and shareholders' equity:
Demand deposits
- --------------------------------------------
Other liabilities
- --------------------------------------------
Shareholders' equity
- --------------------------------------------
Total liabilities and
shareholders' equity
- --------------------------------------------
Net interest income and
net interest margin (4) 283,332 4.56
- -------------------------------------------- ------- ----
Interest rate spread (5) 3.85
- -------------------------------------------- ----
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 1998, 1997 and 1996.
(2) The average loan and lease financing balances include non-accruing loans and
lease financing. Loan fees of $16.2 million, $13.2 million, and $11 million
for 1998, 1997, and 1996, respectively, are included in interest income.
(3) The average balances for debt and equity securities exclude the effect of
their mark-to-market adjustment, if any.
(4) Net interest margin is computed by dividing net interest income by total
earning assets.
(5) Interest rate spread equals the earning asset yield minus the
interest-bearing liability rate.
- --------------------------------------------------------------------------------
As shown in Table 2, the Corporation realized net taxable equivalent
interest income of $586.4 million in 1998. Average earning asset increases of
$381 million in 1998 were due solely to internal growth. The percentage of loans
and leases to total earning assets increased to 76% during 1998 from 74% in
1997. Increases in the volume of earning assets resulted in a $33.3 million
increase in total interest income which was partially offset by declines in
rate. The overall yield on earning assets decreased 9 basis points to 8.40% from
1997's 8.49% primarily due to decreased loan yields. The cost of
interest-bearing liabilities decreased 14 basis points to 4.41% from 1997's
4.55% primarily due to the lower rates paid for savings and time deposits, 4.34%
in 1998 versus 4.49% in 1997. As a result, net interest income on a taxable
equivalent basis increased by $22.3 million or 7.2%. The net interest margin
increased by 5 basis points to 4.75% for 1998. This compares to a 4.70% net
interest margin for 1997 and 4.56% for 1996. The interest rate spread grew 5
basis points to 3.99% for 1998 which compares to 3.94% in 1997 and 3.85% in
1996. See Table 3 for further analysis of the effects of volume and rate on net
interest income.
13
T A B L E 3
Volume and Rate Variance Analysis
(Taxable Equivalent Basis -- In Thousands) (1)
Years Ended December 31
----------------------------------------
1998
----------------------------------------
Volume Rate Total
Variance (2) Variance (2) Variance
-------------- -------------- ----------
Interest income:
Loans and lease financing $ 35,853 (7,882) 27,971
- -------------------------------------------------------------
U.S. Treasury and U.S. Government agencies and corporations (8,082) 1,481 (6,601)
- -------------------------------------------------------------
States and political subdivisions (112) (49) (161)
- -------------------------------------------------------------
Equity and other securities (44) 75 31
- -------------------------------------------------------------
Federal funds sold and short-term investments 5,991 (112) 5,879
- -------------------------------------------------------------
Time deposits in other banks (334) (5) (339)
- ------------------------------------------------------------- -------- --------- ------
Total interest income 33,272 (6,492) 26,780
- ------------------------------------------------------------- -------- -------- ------
Interest expense:
Savings and time deposits 10,948 (7,939) 3,009
- -------------------------------------------------------------
Short-term borrowed funds (2,846) (703) (3,549)
- -------------------------------------------------------------
Long-term debt 5,429 (426) 5,003
- ------------------------------------------------------------- -------- -------- ------
Total interest expense 13,531 (9,068) 4,463
- ------------------------------------------------------------- -------- -------- ------
Increase (decrease) in net interest income $ 19,741 2,576 22,317
- ------------------------------------------------------------- -------- -------- ------
Years Ended December 31
-----------------------------------------
1997
-----------------------------------------
Volume Rate Total
Variance (2) Variance (2) Variance
-------------- -------------- -----------
Interest income:
Loans and lease financing 37,343 (899) 36,444
- -------------------------------------------------------------
U.S. Treasury and U.S. Government agencies and corporations 2,291 3,699 5,990
- -------------------------------------------------------------
States and political subdivisions 444 (292) 152
- -------------------------------------------------------------
Equity and other securities (93) (14) (107)
- -------------------------------------------------------------
Federal funds sold and short-term investments (3,592) 410 (3,182)
- -------------------------------------------------------------
Time deposits in other banks (441) (106) (547)
- ------------------------------------------------------------- ------ ----- ------
Total interest income 35,952 2,798 38,750
- ------------------------------------------------------------- ------ ----- ------
Interest expense:
Savings and time deposits 13,621 1,479 15,100
- -------------------------------------------------------------
Short-term borrowed funds (2,882) (460) (3,342)
- -------------------------------------------------------------
Long-term debt 728 41 769
- ------------------------------------------------------------- ------ ----- ------
Total interest expense 11,467 1,060 12,527
- ------------------------------------------------------------- ------ ----- ------
Increase (decrease) in net interest income 24,485 1,738 26,223
- ------------------------------------------------------------- ------ ----- ------
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 1998, 1997 and 1996.
(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.
- --------------------------------------------------------------------------------
In 1997, the Corporation realized net taxable equivalent interest income of
$309.6 million. Average earning asset increases of $378.3 million in 1997 were
due to internal growth. The shift from lower-yielding investments and other
short-term funds to higher-yielding loans and leases had a moderate effect on
the yield on earning assets as it increased from 1996's 8.38% to 1997's 8.49%.
The contribution of free liabilities to the net interest margin (computed as net
interest margin less the interest rate spread) rose to 76 basis points in 1997
from 71 basis points in 1996. The overall increase in net interest income of
$26.2 million was due to increases in volume of $24.5 million and rate of $1.7
million.
Growth in the average earning asset base in the previous three years has
primarily occurred in the loans and lease financing portfolio. Following a trend
begun in 1995, the mix in earning assets continued to shift toward loans and
lease financing due to increased loan demand. Expansion of the earning asset
base during the periods presented has been funded primarily with increases in
the deposit base and the retention of earnings. Substantially all deposits
originate within the market areas of CCB and AmFed. Average total deposits
increased by approximately $340.9 million or 5.9% in 1998 and $350.2 million or
6.4% in 1997.
Noninterest Income and Noninterest Expenses
Noninterest income consists primarily of service charges on deposit
accounts, trust and custodian fees, sales and insurance commissions, fees and
service charges for various other banking services provided to customers,
mortgage servicing and secondary marketing income and accretion of negative
goodwill resulting from past acquisitions. Noninterest income, excluding net
securities gains and losses, totaled $111 million for the year ended 1998, an
$18.1 million increase over 1997. Increases in noninterest income were
experienced in all categories of other income due to growth of the asset and
customer bases, a stronger emphasis on the collection of fees for services
rendered and new revenue-generating customer service initiatives. In addition,
the Subsidiary Banks adopted a heightened sales focus which resulted in higher
revenues in 1998. Noninterest income, excluding net securities gains and losses,
totaled $92.9 million in 1997 and $84.8 million in 1996. The five-year compound
growth rate for noninterest income is 15.2% at December 31, 1998.
Service charges on deposit accounts continue to be the largest source of
noninterest income totaling $54.1 million in 1998 compared to $44.9 million in
1997, a 20.4% increase. The increase was due primarily to growth in the deposit
base, repricing of certain customer services and surcharge income from foreign
(non-Subsidiary Bank customers) ATM use on the Subsidiary Banks' expanded ATM
network. Additionally, over the past several years, a greater emphasis has been
placed on developing new commercial service products and attracting commercial
customers. Service charges on commercial accounts have increased from $6.3
million in 1996 to $7.9 million in 1998 due to the higher volume of accounts and
expansion of products offered. The Corporation
14
monitors service charges closely and evaluates such fees periodically to ensure
that they reflect the costs of providing the services and are competitive in the
marketplace.
Trust and custodian fees rose to $10.2 million in 1998 from $8.4 million in
1997 due to growth of assets managed, new trust business acquired in 1998 and
the continued promotion of employee benefit trust products introduced in 1996.
Trust and custodian fees totaled $7.3 million in 1996. Expansion of trust
operations have resulted from the mid-1998 acquisition of institutional trust
business from Barnett Bank which operates from Salem Trust Company's three
Florida offices, the opening of a trust office in Virginia in the third quarter
of 1998 and the mid-1997 opening of a two-office trust department by AmFed. In
addition to the 1998 focus on institutional trust business, Management is
positioning the trust departments to attract new consumer trust business. The
number of people aged 55+ with incomes exceeding $100,000 is projected to grow
significantly over the next five years as the "baby boomer" population reaches
retirement age. In addition, employee benefit-related trust business will
continue to be pursued as the Subsidiary Banks market the 401(k) Spectrum(R)
product. Managed assets totaled $4 billion at December 31, 1998 and $2.2 billion
at December 31, 1997.
Sales and insurance commissions income totaled $10.8 million in 1998 and
$9.4 million in 1997. Complete brokerage services are offered to customers
through CCBI's and ASC's affiliation with an independent brokerage firm.
Brokerage fees of $8.2 million were generated in 1998 and $7 million in 1997.
Through a correspondent bank program initiated in 1997, CCBI provides brokerage
services to two other financial institutions which generate additional
commission income. CCBI will continue to pursue other correspondent bank
relationships. Revenue in this category is also derived from the sale of
insurance and annuity products.
Negative goodwill (the excess of net assets acquired over costs) totaling
$33.6 million was recorded in connection with acquisitions completed in 1993 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 1998, 1997 and 1996.
Mortgage loan origination volume of nearly $1 billion in 1998 contributed
to the increase in mortgage operations income to $12.9 million, a 57.3% increase
over 1997's $8.2 million. Income from mortgage operations, included in "other
operating income", was comprised of servicing income ($4 million), origination
fees on loans held for sale ($4.5 million) and secondary marketing income ($4.4
million) in 1998. Included within secondary marketing income is the
capitalization of mortgage servicing rights ("MSR") from the sale of mortgage
loans with servicing retained. At December 31, 1998 and 1997, there was no
impairment of the recorded MSR and no adjustment to the MSR valuation account
was made during 1998 or 1997. In the past two years, the Corporation has
periodically sold mortgages with servicing released through contracts with
out-of-state financial institutions. The Corporation intends to continue selling
the majority of its originated servicing in recognition of the economies of
scale needed to make mortgage servicing a profitable line of business over the
long term.
Also included in "other operating income" are gains on sales of branches
totaling $1.1 million in 1998 and $645,000 in 1997.
Net securities gains (losses) of $2.2 million, $480,000 and $(2.2) million
were realized in 1998, 1997 and 1996, respectively, through the sale of
securities held in the available for sale portfolio. The net securities gains in
1998 were realized through the sale of mortgage-backed securities. The net
securities losses in 1996 were realized through losses on marketable equity
securities partially offset by gains on sales of obligations of U. S.
Government agencies and corporations.
Despite the advances made in increasing noninterest income over the past
three years, Management believes significant future growth opportunities are
available through branch optimization and further expansion of trust, brokerage
and insurance services and professional banking.
Branch optimization includes not only placing branches in the right
locations and closing duplicate facilities but designing branch operations for
maximum productivity/profitability. During 1997, CCB experimented with a new
branch design called sales centers. The new design seeks to increase
productivity from the traditional branch model by employing energetic,
sales-oriented individuals who are trained to function as a teller, sales and
service representative and loan originator. These individuals are compensated
based on their revenue production. The sales center approach was initially
instituted at three branches in Greensboro, North Carolina; improvements in
sales and profitability in those pilot sales centers were very encouraging.
During 1998, three branches were opened as sales centers; Management plans to
convert 50% of existing branches to the sales center model by 2001.
Beginning in 1998, the Subsidiary Banks expanded trust services to Florida
and Virginia. While Salem Trust Company's Florida operations were founded upon a
book of business acquired from Barnett Bank, it is pursuing new institutional
customers. CCB's Virginia trust office was opened in response to growth
opportunities identified in that market. In order to compete with other
financial service providers, CCBI and ASC must expand their investment and
insurance offerings. Beginning in 1998, CCBI began a series of initiatives
related to expanding its life insurance services. Growth in this area is
anticipated to come from existing insurance customers, referrals from within the
Subsidiary Banks and target-marketing potential customers. Insurance products
will be offered
15
through a combination of dedicated insurance agents, direct mail solicitations,
telephone sales specialists, joint ventures with third-party sales forces and
eventually, over the Internet. New professional banking offices are planned for
certain metropolitan areas; these offices will cater to higher-wealth
individuals with a focus on providing high-touch quality service.
Table 4 presents various operating efficiency ratios for the Corporation
for the prior five years (excluding the impact of non-recurring items).
Noninterest income as a percentage of average assets has risen significantly
since 1994 due to a greater focus on identifying additional sources of
noninterest revenue and collecting the resulting revenues.
T A B L E 4
Operating Efficiency Ratios
Years Ended December 31
------------------------------
1998 1997 1996
---------- --------- ---------
As a percentage of average assets (1):
Noninterest income 1.54% 1.31 1.26
- ------------------------------------------------------------------------------------------- ----- ----- -----
Personnel expense 1.70 1.65 1.61
- -------------------------------------------------------------------------------------------
Occupancy and equipment expense .42 .41 .43
- -------------------------------------------------------------------------------------------
Other operating expense 1.03 .93 .95
- ------------------------------------------------------------------------------------------- ------ ----- -----
Total noninterest expense 3.15 2.99 2.99
- ------------------------------------------------------------------------------------------- ------ ----- -----
Net overhead (noninterest expense less noninterest income) 1.61% 1.68 1.73
- ------------------------------------------------------------------------------------------- ------ ----- -----
Noninterest expense as a percentage of net interest income and noninterest income (1) (2) 51.73% 51.99 53.80
- -------------------------------------------------------------------------------------------
Average assets per employee (in millions) $ 2.68 2.63 2.47
- -------------------------------------------------------------------------------------------
Years Ended December
31
-------------------
1995 1994
--------- ---------
As a percentage of average assets (1):
Noninterest income 1.06 1.05
- ------------------------------------------------------------------------------------------- ----- -----
Personnel expense 1.60 1.62
- -------------------------------------------------------------------------------------------
Occupancy and equipment expense .41 .51
- -------------------------------------------------------------------------------------------
Other operating expense 1.01 1.10
- ------------------------------------------------------------------------------------------- ----- -----
Total noninterest expense 3.02 3.23
- ------------------------------------------------------------------------------------------- ----- -----
Net overhead (noninterest expense less noninterest income) 1.96 2.18
- ------------------------------------------------------------------------------------------- ----- -----
Noninterest expense as a percentage of net interest income and noninterest income (1) (2) 56.46 60.07
- -------------------------------------------------------------------------------------------
Average assets per employee (in millions) 2.36 2.15
- -------------------------------------------------------------------------------------------
(1) Excludes the 1997 gain on sale of a subsidiary, the FDIC Special Assessment
incurred in 1996 and merger-related expenses incurred in 1997, 1995 and
1994.
(2) Presented using taxable equivalent net interest income. The taxable
equivalent basis is computed using a 35% federal tax rate and applicable
state tax rates.
- --------------------------------------------------------------------------------
Noninterest expenses, excluding non-recurring items, rose $21.9 million or
10.5% in 1998 over 1997's level of $208.3 million. This increase was due
primarily to a $9.8 million increase in personnel expense. As reported in Table
4, total noninterest expense as a percentage of average assets rose to 3.15%
from 1997's 2.99% indicating that noninterest expenses grew at a faster rate
than average assets.
The increase in personnel expense was due in part to general wage increases
and a greater emphasis on incentive-based compensation. Commissions and
incentive pay totaled $14.2 million in 1998 compared to $9.9 million in 1997.
Temporary and contract personnel costs rose $750,000 due to a tight labor market
in the Subsidiary Banks' market area and the need for specialized personnel to
complete various 1998 initiatives.
Net occupancy and equipment expenses were up $2 million for the year ended
December 31, 1998. The increases experienced in 1998 were due primarily to
increased computer equipment costs incurred as a result of Year 2000 remediation
as discussed later and other technological initiatives such as implementation of
a data warehouse and improved branch platforms.
Other operating expenses, excluding non-recurring items, increased by $10.1
million in 1998 or 15.5% from 1997. Overall, other operating expenses have
increased due to improvements in the branch network, Year 2000 remediation and
other initiatives undertaken to improve future revenue streams. Increased
expenses were experienced in professional services, printing and office
supplies, credit card program-related expenses and data processing.
The Corporation's efficiency ratio (noninterest expense as a percentage of
taxable equivalent net interest income and noninterest income) has improved over
the past four years from 60.07% in 1994 to 51.73% in 1998 as disclosed in Table
4. Management's goal is to reach and maintain an efficiency ratio of less than
50%. Management will continue to closely monitor this ratio and anticipates
continuing improvement as additional revenue-enhancement opportunities are
identified and cost-containment programs are continued.
Income Taxes
Income tax expense was $68.6 million in 1998, $55.8 million in 1997 and
$43.6 million in 1996. The Corporation's effective income tax rates were 36.2%,
36.9% and 33.4% in 1998, 1997 and 1996, respectively. Non-deductible
merger-related expense had an adverse impact on 1997's effective tax rate. The
Recapture Tax Benefit had a positive impact on 1996's effective income tax rate.
Deferred tax assets of $37.4 million and deferred tax liabilities of $20 million
are recorded on the Consolidated Balance Sheets as of December 31, 1998. The
Corporation has determined that a valuation allowance for the deferred tax
assets was not warranted at December 31, 1998.
16
Fourth Quarter Results
During the fourth quarter of 1998, the Corporation recorded net income of
$31.6 million or $.77 per diluted share compared to 1997's fourth quarter
results of $27.7 million or $.66 per diluted share. Income statements for each
of the quarters in the five-quarter period ended December 31, 1998 are included
in Table 5. Returns on average assets were 1.66% in 1998 and 1.56% in 1997;
return on average shareholders' equity was 18.13% in 1998 compared to 16.58% in
1997. During the fourth quarter of 1997, the Corporation incurred $647,000 of
non-recurring merger-related expense. Excluding the impact of this non-recurring
item, returns on average assets and average shareholders' equity in 1997 were
1.58% and 16.83%, respectively.
T A B L E 5
Income Statements for Five Quarters Ended December 31, 1998
(In Thousands Except Per Share Data)
Three Months Ended
-------------------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97
------------- --------- --------- --------- ---------
Total interest income $ 145,425 145,683 144,562 141,637 141,495
- -------------------------------------------------
Total interest expense 62,756 64,604 64,234 62,968 64,034
- ------------------------------------------------- --------- ------- ------- ------- -------
Net interest income 82,669 81,079 80,328 78,669 77,461
- -------------------------------------------------
Provision for loan and lease losses 4,320 4,778 3,646 3,140 3,472
- ------------------------------------------------- --------- ------- ------- ------- -------
Net interest income after provision 78,349 76,301 76,682 75,529 73,989
- ------------------------------------------------- --------- ------- ------- ------- -------
Service charges on deposits 14,368 13,919 13,745 12,085 11,972
- -------------------------------------------------
Trust income 2,766 2,392 2,792 2,271 2,324
- -------------------------------------------------
Sales and insurance commissions 2,324 2,937 3,059 2,515 2,262
- -------------------------------------------------
Accretion of negative goodwill 839 839 839 839 839
- -------------------------------------------------
Other 9,281 8,095 8,712 6,405 6,590
- -------------------------------------------------
Securities gains (losses), net 789 406 361 622 236
- ------------------------------------------------- --------- ------- ------- ------- -------
Total other income 30,367 28,588 29,508 24,737 24,223
- ------------------------------------------------- --------- ------- ------- ------- -------
Personnel 30,358 31,507 32,111 30,443 29,024
- -------------------------------------------------
Occupancy and equipment 8,180 7,858 7,278 7,096 7,279
- -------------------------------------------------
Deposit and other insurance 565 587 619 774 767
- -------------------------------------------------
Amortization of intangible assets 1,040 1,034 1,080 968 1,036
- -------------------------------------------------
Merger-related expense (1) -- -- -- -- 647
- -------------------------------------------------
Other operating 18,170 17,908 17,830 14,811 16,324
- ------------------------------------------------- --------- ------- ------- ------- -------
Total other expenses 58,313 58,894 58,918 54,092 55,077
- ------------------------------------------------- --------- ------- ------- ------- -------
Income before income taxes 50,403 45,995 47,272 46,174 43,135
- -------------------------------------------------
Income taxes 18,814 15,632 17,296 16,890 15,390
- ------------------------------------------------- --------- ------- ------- ------- -------
Net income $ 31,589 30,363 29,976 29,284 27,745
- ------------------------------------------------- --------- ------- ------- ------- -------
Income before non-recurring items per share (1):
Basic $ .78 .75 .73 .70 .68
- -------------------------------------------------
Diluted .77 .74 .72 .70 .67
- -------------------------------------------------
Net income per share:
Basic .78 .75 .73 .70 .67
- -------------------------------------------------
Diluted .77 .74 .72 .70 .66
- -------------------------------------------------
(1) Non-recurring items include merger-related expense of $409,000 (after-tax)
or $.01 per diluted share for the fourth quarter of 1997.
- --------------------------------------------------------------------------------
Average assets for the three months ended December 31, 1998 totaled $7.5
billion, a 6.6% increase over the same period in 1997. Average earning assets
increased 7.1% from $6.7 billion in 1997 to $7.2 billion for the same period in
1998. The net interest margin for the fourth quarter of 1998 was 4.72%, a 3
basis point decrease from 1997's 4.75%.
17
Noninterest income as a percentage of average assets was 1.60% for the
fourth quarter of 1998 compared to 1997's 1.36%. Noninterest expense, excluding
the non-recurring item discussed above, as a percentage of average assets was
3.07% for the fourth quarter of 1998 compared to 1997's 3.05%. The efficiency
ratio for these periods in 1998 and 1997 was 50.58% and 52.29%, respectively.
Financial Position
Earning Assets
The percentage of earning assets to total assets measures how efficiently
Management utilizes the Corporation's financial resources. Average earning
assets as a percentage of total average assets has been stable at 95% for the
past three years.
Loans and Lease Financing
Loans are the largest category of earning assets and produce the highest
yields. Strong loan growth during 1998 resulted in an 8.2% increase in average
loans and lease financing and a 5.6% increase in average assets. The five-year
compound growth rate for average loans and lease financing is 11.7% and for
average assets is 9.2%.
The Subsidiary Banks' loan portfolios are comprised primarily of
diversified credits with little borrower or industry concentration. Management
believes that lending to medium-sized commercial customers and consumers allows
a higher interest rate spread which helps support the net interest margin. Table
6 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 $393.8 million
over 1997's outstandings. All of the 1998 loan growth was internally generated.
Substantially all loans are made on a secured basis with the exception of
certain revolving credit accounts 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 and
South Carolina except for credit card receivables which are offered on a
nationwide basis and automobile loans which are offered from Virginia to Georgia
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. 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
included in Table 6.
T A B L E 6
Loans and Lease Financing
(In Thousands)
As of December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------ ------------ ------------ ------------
Commercial, financial and agricultural $ 686,133 688,040 549,831 629,814 660,452
- ----------------------------------------
Real estate -- construction 906,916 733,026 629,829 504,461 401,486
- ----------------------------------------
Real estate -- mortgage 3,143,637 2,915,851 2,602,639 2,279,621 2,133,560
- ----------------------------------------
Instalment loans to individuals 488,110 506,339 739,991 594,508 527,898
- ----------------------------------------
Revolving credit 214,685 212,794 193,561 230,142 202,846
- ----------------------------------------
Lease financing 54,955 43,265 38,323 37,223 33,433
- ---------------------------------------- ----------- --------- --------- --------- ---------
Total gross loans and lease financing 5,494,436 5,099,315 4,754,174 4,275,769 3,959,675
- ----------------------------------------
Less: Unearned income 7,099 5,746 8,511 8,594 7,515
- ---------------------------------------- ----------- --------- --------- --------- ---------
Total loans and lease financing $ 5,487,337 5,093,569 4,745,663 4,267,175 3,952,160
- ---------------------------------------- ----------- --------- --------- --------- ---------
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 1999. The Subsidiary Banks will
maintain their focus on quality credit underwriting. See Table 7 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 (70% of total real estate-mortgage
loans). The remainder of real estate-mortgage loans are primarily for commercial
purposes and often include
18
the commercial borrower's real property in addition to other collateral. It is
the Subsidiary Banks' general policy to sell current originations and retain
only certain adjustable and fixed rate loans in the portfolio. The
lower-interest rate environment experienced in 1998 is expected to continue in
1999. While these rates may generate high production volume, with the Subsidiary
Banks' planned sales of loans, the mortgage portfolio will not grow in
proportion to 1999's anticipated production volume. Consequently, Management
anticipates only moderate growth in this category during 1999.
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 company agents, has increased the amount of automobile loans
outstanding. The agreements with the insurance company cover a market area
stretching from Virginia to Georgia.
Revolving credit includes overdraft protection and traditional credit card
products. The credit card program was restructured in late 1997 resulting in
more options based on credit card interest rates and annual fees. Additionally,
a credit card product offering travel awards for airline flights based on card
usage was introduced where the travel awards are not limited to a particular
travel partner but can be used with any of the major airlines. AmFed did not
offer credit cards at the time of the merger and thus their customer base
provides an additional opportunity to grow the credit card portfolio. With
continued emphasis on prudent underwriting standards, Management expects
moderate growth during 1999.
The leasing portfolio, net of unearned income, increased 27.1% in 1998 to
$48 million. The leasing portfolio is not concentrated in any one line of
business or type of equipment. The lease growth in 1998 resulted from
instituting a leasing program at AmFed and expanding of the number of CCB
lenders originating leases.
T A B L E 7
Maturities and Sensitivities of Loans to Changes in Interest Rates
(In Thousands)
As of December 31, 1998
----------------------------------------------
Commercial,
Financial and Real Estate-
Agricultural Construction Total
-------------- -------------- ------------
Due in one year or less $198,196 51,223 249,419
- ---------------------------------------
Due after one year through five years:
Fixed interest rates 276,241 215,065 491,306
- ---------------------------------------
Floating interest rates 50,926 40,185 91,111
- ---------------------------------------
Due after five years:
- ---------------------------------------
Fixed interest rates 46,238 130,453 176,691
- ---------------------------------------
Floating interest rates 114,532 469,990 584,522
- --------------------------------------- -------- ------- -------
Total $686,133 906,916 1,593,049
- --------------------------------------- -------- ------- ---------
Investment Securities
Investment securities decreased 6.8% from year-end 1997 to $1.4 billion at
December 31, 1998. Due to the interest rate environment, the Corporation is
experiencing higher levels of paydowns for mortgage-backed securities (included
within U.S. Government agencies and corporations). These funds are being
primarily reinvested in shorter-term U.S. Government agencies as there is not an
interest rate advantage in committing funds to longer-term investments.
Investment securities as a percentage of earning assets declined due to the
previously discussed shift in earning assets to higher-yielding loans. Average
investment securities totaled 19.5% of average earning assets for 1998 versus
22.4% for 1997. Taxable securities remain the primary component of the
portfolio. See Table 8 for additional information about the Corporation's
investment securities portfolio.
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
$80.2 million or 5.9% of the total investment securities portfolio at December
31, 1998. 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, 1998,
1997 or 1996 nor 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, 1998, securities available
for sale totaled $1.3 billion,
19
which represented over 90% of the total portfolio. The mark-to-market adjustment
for available for sale securities totaled $21.7 million in unrealized gains at
December 31, 1998 and, after considering applicable taxes, resulted in a $13.3
million addition to total shareholders' equity. As of December 31, 1997, the
mark-to-market adjustment for available for sale securities totaled $22.7
million and resulted in a net $14 million addition to total shareholders' equity
after applying applicable taxes. 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.
T A B L E 8
Investment Securities Portfolio
(In Thousands)
As of December 31
-------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------- -------------------------
Amortized Carrying Amortized Carrying Amortized Carrying
Cost Value Cost Value Cost Value
-------------- ------------ ------------ ------------ ------------ ------------
Securities Available for Sale
U.S. Treasury $ 389,043 400,914 472,396 480,659 442,410 447,577
- -------------------------------------------
U.S. Government agencies and corporations 826,367 835,128 841,034 854,481 761,136 768,090
- -------------------------------------------
Equity securities 47,067 48,156 45,946 46,967 51,851 51,852
- ------------------------------------------- ----------- ------- ------- ------- ------- -------
Total securities available for sale $ 1,262,477 1,284,198 1,359,376 1,382,107 1,255,397 1,267,519
- ------------------------------------------- ----------- --------- --------- --------- --------- ---------
Maturity and Yield Schedule as of December 31, 1998
Weighted
Carrying Yield (1)
Value Average
-------------- ----------
U.S. Treasury:
Within 1 year $ 108,769 6.65%
- ---------------------------------------------------
After 1 but within 5 years 292,145 6.99
- --------------------------------------------------- ----------- -------
Total U.S. Treasury 400,914 6.90
- --------------------------------------------------- ----------- -------
U.S. Government agencies and corporations:
Within 1 year 47,533 6.85
- ---------------------------------------------------
After 1 but within 5 years 236,249 6.83
- ---------------------------------------------------
After 5 but within 10 years 416,153 6.56
- ---------------------------------------------------
After 10 years (2) 135,193 7.84
- --------------------------------------------------- ----------- -------
Total U.S. Government agencies and corporations 835,128 6.86
- --------------------------------------------------- ----------- -------
Equity securities 48,156 7.64
- --------------------------------------------------- ----------- -------
Total securities available for sale $ 1,284,198 6.90%
- --------------------------------------------------- ----------- ----------
As of December 31
----------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----------- --------- --------- --------- --------- --------
Securities Held to Maturity
States and political subdivisions $ 80,189 85,277 81,617 87,002 84,262 88,504
- ----------------------------------- -------- ------- ------- ------- ------- -------
Maturity and Yield Schedule As of December 31, 1998
Weighted
Carrying Yield (1)
Value Average
--------- ---------
States and political subdivisions:
Within 1 year $ 500 9.98 %
- -------------------------------------
After 1 but within 5 years 7,709 7.98
- -------------------------------------
After 5 but within 10 years 48,997 8.56
- -------------------------------------
After 10 years 22,983 8.65
- ------------------------------------- ------- ------
Total securities held to maturity $80,189 8.54 %
- ------------------------------------- ------- ------
(1) Where applicable, the weighted average yield is computed on a taxable
equivalent basis using a 35% federal tax rate and applicable state tax
rates.
(2) The amount shown consists primarily of mortgage-backed securities which
have monthly curtailments of principal even though the final maturity of
each security is in excess of 10 years.
- --------------------------------------------------------------------------------
20
Deposits
During 1998, average deposits rose to $6.1 billion from $5.8 billion in
1997. The largest increase was experienced in average money market accounts,
$120.3 million. As a percentage of average total deposits, interest-bearing
deposits remained relatively constant at 87.4% in 1998 compared to 88.1% in
1997. Demand deposits on average grew $88.2 million in 1998. See Table 9 for
average deposits by type for the three-year period ended December 31, 1998. As
with the rest of the financial institutions industry, CCB and AmFed have seen
decreased growth trends in traditional deposits as consumers elect other
investment/savings opportunities. However, as discussed in Liquidity and
Interest-Sensitivity, the Subsidiary Banks have alternative sources to fund
future loan growth if deposit growth does not keep pace with loan demand.
T A B L E 9
Average Deposits
(In Thousands)
Years Ended December 31
-------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------- -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- ---------- ------------ -------- ------------ --------
Savings and time deposits:
- -----------------------------------
Savings and NOW accounts $ 736,548 1.06 % 691,365 1.27 669,913 1.48
- -----------------------------------
Money market accounts 1,729,207 3.72 1,608,929 3.78 1,561,222 3.66
- -----------------------------------
Time 2,898,500 5.54 2,811,192 5.69 2,582,176 5.71
- ----------------------------------- ----------- ---- --------- ---- --------- ----
Total savings and time deposits 5,364,255 4.34 % 5,111,486 4.49 4,813,311 4.46
- ----------------------------------- -------- ---- ----
Demand deposits 776,819 688,642 636,601
- ----------------------------------- ----------- --------- ---------
Total deposits $ 6,141,074 5,800,128 5,449,912
- ----------------------------------- ----------- --------- ---------
In October 1995, CCB opened its first in-store banking office, CCB7, within
a newly constructed Harris Teeter supermarket. Since 1995 an additional
seventeen in-store banking offices located in high-volume Harris Teeter stores
have been opened. These banking offices have extended hours during the weekday
and are open on weekends and holidays. An additional eight new CCB7 offices are
planned for 1999. In-store banking offices are an additional source of consumer
loans and deposits and generate noninterest fee income.
Long-Term Debt and Other Borrowings
The Corporation's ratio of long-term debt to shareholders' equity increased
to 31.5% at December 31, 1998 from 14.8% at December 31, 1997. The increase was
due to obtaining additional advances from the Federal Home Loan Bank of Atlanta
("FHLB") at favorable interest rates. The advances were replacements of
Subsidiary Banks' funds that were dividended up to the Parent Company for
funding its stock repurchase program discussed below. Of the $183.6 million of
FHLB advances outstanding at December 31, 1998, approximately $150 million is
due within five years.
Capital Resources
The Corporation has had a strong capital position historically as evidenced
by the Corporation's ratio of average shareholders' equity to average total
assets of 9.25% and 9.20% for 1998 and 1997, respectively.
Regulatory Capital
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 I" 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 II" 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 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.
21
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, 1998 and 1997.
T A B L E 10
Capital Ratios
As of December 31
------------------------ Regulatory
1998 1997 Minimum
----------- ---------- -----------
Tier I Capital: 4.00%
Corporation 11.23% 12.14
- -----------------
CCB 10.31 11.98
- -----------------
AmFed 11.94 13.35
- -----------------
CCB-Ga. 20.79 12.23
- ----------------- ----- -----
Total Capital: 8.00
Corporation 12.95 14.02
- -----------------
CCB 11.50 13.15
- -----------------
AmFed 13.25 14.60
- -----------------
CCB-Ga. 22.09 13.51
- ----------------- ----- -----
Leverage: 4.00
Corporation 8.57 9.02
- -----------------
CCB 7.82 8.92
- -----------------
AmFed 8.64 8.89
- -----------------
CCB-Ga. 14.48 10.20
- ----------------- ----- -----
The Subsidiary Banks also have the highest rating in regards to the FDIC
insurance assessment and, accordingly, pay the lowest deposit insurance premium.
Equity Capital
The Corporation's primary source of additional equity capital has
historically been the retention of earnings which added $80.8 million, $58.7
million and $58.2 million to capital in 1998, 1997 and 1996, respectively. Table
11 presents the rate of internal capital growth for the Corporation for each of
the five previous years. The Corporation's stock repurchase program, discussed
below, positively impacted 1998's rate of internal capital growth.
T A B L E 11
Rate Of Internal Capital Growth
Years Ended December 31
------------------------------------------------------------
1998 1997 (1) 1996 (1) 1995 (1) 1994 (1)
--------- ---------- ---------- ---------- ---------
Average assets to average equity times 10.81 x 10.87 11.43 12.17 11.66
- ----------------------------------------------
Return on average assets equals 1.65 % 1.54 1.42 1.36 1.21
- ---------------------------------------------- --------- ----- ----- ----- -----
Return on average shareholders' equity times 17.87 % 16.76 16.20 16.53 14.15
- ----------------------------------------------
Earnings retained equals 66.67 % 65.68 69.31 70.21 70.38
- ---------------------------------------------- --------- ----- ----- ----- -----
Rate of internal capital growth 11.91 % 11.01 11.23 11.61 9.96
- ---------------------------------------------- --------- ----- ----- ----- -----
(1) Excludes the after-tax impact of non-recurring items, as applicable: for
1997, merger-related expense of $13.1 million and gain on sale of
subsidiary of $1.4 million; for 1996, the FDIC Special Assessment and the
Recapture Tax Benefit; for 1995, merger-related expense of $7.3 million;
and for 1994, merger-related expense of $660,000 and a $5.6 million charge
for the recapture of tax bad debt reserves by savings bank subsidiaries of
Security Capital.
- --------------------------------------------------------------------------------
Since August 14, 1996, the Corporation's common stock has been traded on
The New York Stock Exchange under the symbol CCB. Prior to that date, the
Corporation's common stock had been traded on The Nasdaq Stock Market under the
symbol CCBF. At December 31, 1998, the Corporation had approximately 9,900
shareholders of record.
During 1998, the Corporation adopted a continuing stock repurchase program
to better manage its capital position. The Board of Directors authorized the
repurchase and subsequent retirement of up to 2,000,000 shares of common stock
plus additional purchases needed to retire any shares issued for the exercise of
options, restricted stock awards, or other corporate purposes. Through December
31, 1998, 1,391,300 shares had been repurchased and retired at an average cost
of $55.06 per share.
22
T A B L E 12
Stock Prices and Dividends
Prices Cash
-------------------------------------- Dividends
High Low Close Declared
------------ ---------- ---------- ----------
1998
First Quarter $ 57.00 47.00 55.28 .235
- ----------------
Second Quarter 56.06 51.75 53.13 .235
- ----------------
Third Quarter 58.50 46.25 50.38 .260
- ----------------
Fourth Quarter 57.38 43.13 57.00 .260
- ----------------
1997
First Quarter $ 35.00 31.88 31.94 .210
- ----------------
Second Quarter 37.00 30.94 36.57 .210
- ----------------
Third Quarter 41.82 36.69 40.32 .235
- ----------------
Fourth Quarter 55.00 40.57 53.75 .235
- ---------------- --------- ----- ----- ----
Dividends per share have increased from $.80 in 1996 to $.89 in 1997 to
$.99 in 1998. The 1998 increase continues the Corporation's thirty-four year
trend of annual dividend increases, a record that places the Corporation first
among U.S. banks tracked by Moody's Investors Service. Dividends paid as a
percentage of earnings, excluding non-recurring items, equaled 33.45%, 34.36%
and 35.40% for the years ended 1998, 1997 and 1996, respectively. The
Corporation's dividend guideline is to pay approximately 30% to 40% of operating
earnings in dividends. Management feels that this guideline 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 $17.8 million in 1998, $10.6 million in 1997 and $9.8
million in 1996. There were no significant capital resource commitments at
December 31, 1998 other than the operating lease commitments specified in the
notes to the Consolidated Financial Statements and resolution of Year 2000
technology concerns as discussed below. Additionally, the Corporation has
budgeted $28 million in 1999 for technological improvements and new or renovated
facilities. Technology improvements totaling $12.6 million planned for 1999
include tools to enhance cross-selling, track profitability of individual
customers and measure product profitability.
Year 2000 Issue
The Corporation is in the midst of its project to assess and correct the
impact of the "Year 2000 Issue". The Year 2000 Issue resulted from many computer
programs having been written using two digit dates rather than four to define
the applicable year. Historically, the first two digits were eliminated to save
memory. Since in such systems there is no accommodation for the full four-digit
year, a serious problem may occur when "00" is used to identify the Year 2000.
For these systems, it is not only impossible to distinguish 2000 from 1900 but
it also becomes difficult to calculate the passage of time between preceding or
succeeding years and the Year 2000. This error could result in system failure or
miscalculations causing disruption of operations, including, among other things,
an inability to process customer transactions, properly accrue interest income
and expense or engage in normal business activities. In addition,
non-information technology ("non-IT") systems such as security alarms,
elevators, telephones, etc. may be subject to a Year 2000 malfunction due to
their dependence upon computer technology for proper operation. As described,
the Year 2000 Issue presents a number of challenges to financial institutions'
management; correction of Year 2000 Issues has been and will continue to be
costly and complex for the entire industry.
The Corporation began discussing the Year 2000 Issue more than two years
ago and adopted a Year 2000 Strategic Project Plan to address the issue. The
Corporation's Year 2000 plan follows guidelines outlined by the Federal
Financial Institutions Examination Council ("FFIEC"). The FFIEC requires all
financial institutions to develop plans with five critical phases: awareness,
assessment, renovation, validation and implementation. The awareness phase
defined the Year 2000 Issue and the potential challenges associated with the
date change. The assessment phase consisted of an evaluation of the size and
complexity of ensuring that the Corporation will be ready for the Year 2000.
During the assessment phase, the Corporation determined that it would be
required to modify a significant portion of its software and replace certain
software and hardware so that its computer systems will properly utilize dates
beyond December 31, 1999. During the renovation phase, system upgrades were
implemented and applicable hardware was replaced. The validation phase involves
testing all computer systems. Even if software has been tested by the vendor and
certified Year 2000-ready, the Corporation's Year 2000 project team is
re-testing and validating all software to ensure compatibility with the
Corporation's information systems environment. The implementation phase is the
final step which involves incorporating Year 2000-ready systems into the
day-to-day operations of the Corporation.
23
The renovation of all major software applications was completed in early
September 1998. Testing of mission critical systems was substantially completed
by the end of 1998. This consisted of performing tests on the mainframe
hardware, operating system, and application software; PC and server hardware and
software; data and telecommunications systems; and non-IT systems. A new Year
2000-ready mainframe computer was put into production during mid-January 1999.
Substantially all non-mission critical testing and replacement of non-mission
critical personal computers is scheduled to be completed by the end of March
1999. The Corporation plans to complete the Year 2000 project by the end of June
1999. Testing of hardware and software acquired or modified since initial
testing was completed will be done in the remainder of 1999 as part of on-going
due diligence.
In addition to ensuring the proper operation of its systems, the
Corporation is also monitoring the remediation efforts of third-party entities
whose own Year 2000 disruptions would impact the Corporation's operations. The
incurred to date and estimated costs to assess the impact of third parties'
remediation efforts are included in the Corporation's total Year 2000 project
costs and estimates. The project team identified the vendors whose operations
were deemed mission critical to the Corporation's operations and contacted those
vendors regarding their progress in correcting their Year 2000 Issues. In
addition, the Corporation initiated communication with its major customers to
determine the extent of their Year 2000 preparedness. As most corporate
customers depend on computer systems for normal operations, a disruption in
their business could result in potentially significant financial difficulties.
In the loan and deposit areas, major customers of $1 million or more have been
identified. As of December 31, 1998, the Corporation had contacted in excess of
97% of major customers and evaluated the risk to the Corporation based upon the
results of the customer communication. Also, the Corporation has reviewed
certain issuers of debt securities held in the investment securities portfolio
as well as federal funds counter-parties. In the Trust area, the Corporation has
reviewed certain issuers of debt and equity securities held as managed
investment assets. Finally, financial institutions such as the Subsidiary Banks
exchange large volumes of date-sensitive data electronically between other
financial institutions, clearing houses, customers and regulatory agencies. The
Corporation has tested and verified, as appropriate, these data exchanges. Based
on these reviews of critical vendors, major customers and other major
counter-parties, at present the Corporation feels that there is not an
inordinate amount of risk which would require the establishment of any special
reserves for the Year 2000 Issue. The Corporation will continue to monitor and
test the remediation efforts of these third parties and determine if it needs to
modify its own operations due to their failure to remediate their Year 2000
Issue. However, there can be no guarantee that the systems of other companies on
which the Corporation's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Corporation's systems, will not have an adverse effect on the Corporation's
results of operations.
The Corporation has a contingency plan that outlines emergency response
procedures that meet regulatory guidelines. The goal of the contingency plan is
to facilitate the resumption of business in the event there is a disruption of
critical systems necessary to operate. Contingency plans include alternative
power sources, off-site processing, etc. The FFIEC's contingency planning
guidelines require the completion of organizational planning guidelines and
business impact analysis by March 31, 1999. FFIEC guidelines further require
that the development and validation of the business resumption contingency plans
be completed by June 30, 1999. The Corporation completed its organizational
planning guidelines and business impact analysis in October 1998. The
Corporation's contingency plans include consideration of the most reasonably
likely worst-case scenario. Development and validation of the contingency plans
and independent review and verification of the contingency plans were completed
in February 1999. The last contingency planning requirement, developing detailed
Year 2000 rollover event plans, is scheduled to be completed during the second
quarter of 1999.
While the Corporation's project team is monitoring the progress of the Year
2000 plan, consulting firms are also being used to keep track of the readiness
program. A Year 2000 independent consulting services group is overseeing the
Year 2000 Project Management Office on an on-going basis. In addition, the
Corporation retained the services of another independent consulting firm to
review its Year 2000 readiness plans. As the Corporation and its Subsidiary
Banks are regulated by federal and state banking regulatory agencies, they are
required to comply with those agencies' Year 2000 modification schedules.
Federal regulatory agencies periodically review the Corporation's Year 2000
conversion efforts and have had no adverse criticism on the progress-to-date or
its anticipated schedule to complete the Year 2000 project. Management believes
that it will meet the regulators' timeframe for Year 2000 compliance.
The total cost of the Year 2000 project is currently estimated at $5.3
million, of which $2.3 million is attributable to the purchase of capitalizable
software and hardware. Since the third quarter of 1998, estimated costs for the
Year 2000 project have increased by $500,000. Estimated hardware and software
costs were increased by $146,000 and the remaining $354,000 was earmarked for
the development of detailed business resumption plans and a support contract
with the Corporation's Year 2000 independent consulting services group to extend
through the millennium rollover. During 1998, the Corporation incurred $2.2
million of non-capitalizable expense attributable to the Year 2000 project.
Total non-capitalizable expense incurred prior to 1998 was less than $75,000.
The remainder of the cost will be expensed as incurred over the next two years
and is not expected to have a material effect on the Corporation's results of
operations.
24
The costs of the Year 2000 project and the dates the Corporation plans to
complete the Year 2000 modifications are based on Management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved at the cost disclosed or within the timeframe anticipated.
Management presently believes that with its identified modifications to
existing software and conversions to new software and hardware and the
successful completion of third-party remediation efforts, the Year 2000 Issue
can be mitigated. However, if the Corporation's modifications and conversions
are not made, or are not completed on a timely basis or if mission critical
third-parties do not remediate their own Year 2000 Issues, disruptions in
operations could occur and could have a material adverse impact on the financial
position of the Corporation.
Asset Quality
Total risk assets have declined from $26.3 million in 1994 to $24.2 million
in 1998. Nonperforming assets (nonaccrual loans and lease financing, other real
estate acquired through loan foreclosures 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. Risk assets to total assets were .31%, .30% and
.32% at December 31, 1998, 1997 and 1996, respectively. The reserve for loan and
lease losses to risk assets was 3.03 times at December 31, 1998 compared to 3.20
times and 2.77 times at December 31, 1997 and 1996, respectively. Real estate
acquired through loan foreclosures decreased to $791,000 at December 31, 1998
from $5.9 million at December 31, 1994. In addition to total risk assets
disclosed in Table 13, Management has identified $6.8 million of loans whose
borrowers have possible credit problems that cause Management to have serious
doubts about the ability of such borrowers to comply with the present loan
repayment terms.
T A B L E 13
Nonperforming and Risk Assets
(In Thousands)
As of December 31
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Nonaccrual loans and lease financing (1) $ 16,761 16,088 15,752
- -----------------------------------------------------------------------------------
Other real estate acquired through loan foreclosures 791 845 2,469
- -----------------------------------------------------------------------------------
Restructured loans and lease financing 739 784 838
- ----------------------------------------------------------------------------------- -------- ------ ------
Total nonperforming assets 18,291 17,717 19,059
- -----------------------------------------------------------------------------------
Accruing loans and lease financing 90 days or more past due 5,889 3,423 3,066
- ----------------------------------------------------------------------------------- -------- ------ ------
Total risk assets $ 24,180 21,140 22,125
- ----------------------------------------------------------------------------------- -------- ------ ------
Ratio of nonperforming assets to:
Loans and lease financing outstanding and other real estate acquired through loan
foreclosures .33 % .35 .40
- -----------------------------------------------------------------------------------
Total assets .24 .25 .28
- -----------------------------------------------------------------------------------
Ratio of total risk assets to:
Loans and lease financing outstanding and other real estate acquired through loan
foreclosures .44 .41 .47
- -----------------------------------------------------------------------------------
Total assets .31 .30 .32
- -----------------------------------------------------------------------------------
Reserve for loan and lease losses to total risk assets 3.03 x 3.20 2.77
- -----------------------------------------------------------------------------------
As of December 31
-----------------------
1995 1994
----------- -----------
Nonaccrual loans and lease financing (1) 17,518 14,915
- -----------------------------------------------------------------------------------
Other real estate acquired through loan foreclosures 3,198 5,892
- -----------------------------------------------------------------------------------
Restructured loans and lease financing 915 1,545
- ----------------------------------------------------------------------------------- ------ ------
Total nonperforming assets 21,631 22,352
- -----------------------------------------------------------------------------------
Accruing loans and lease financing 90 days or more past due 4,120 3,913
- ----------------------------------------------------------------------------------- ------ ------
Total risk assets 25,751 26,265
- ----------------------------------------------------------------------------------- ------ ------
Ratio of nonperforming assets to:
Loans and lease financing outstanding and other real estate acquired through loan
foreclosures .51 .56
- -----------------------------------------------------------------------------------
Total assets .33 .37
- -----------------------------------------------------------------------------------
Ratio of total risk assets to:
Loans and lease financing outstanding and other real estate acquired through loan
foreclosures .60 .66
- -----------------------------------------------------------------------------------
Total assets .39 .43
- -----------------------------------------------------------------------------------
Reserve for loan and lease losses to total risk assets 2.14 1.94
- -----------------------------------------------------------------------------------
(1) For the years ended December 31, 1998, 1997 and 1996, 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 $1,138,000 in 1998, $1,055,000 in 1997, and $1,359,000 in
1996. Gross interest income included in net income on these nonaccrual and
restructured loans and lease financing amounted to approximately $288,000,
$171,000, and $412,000 for the years ended December 31, 1998, 1997, and
1996, respectively. The amounts also include interest from prior years
collected during 1998, 1997, or 1996.
- --------------------------------------------------------------------------------
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
revolving credit accounts past due more than 90 and 120 days, respectively, are
charged-off.
Loans are considered impaired if it is probable that the Subsidiary Banks
will be unable to collect all amounts due under the terms of the loan agreement.
The value of the impaired loan is based on discounted cash flows or the fair
value of the collateral for a collateral-dependent loan. Any impairment losses
are recognized through charges to the reserve for loan and lease losses. At
December 31, 1998 and 1997, impaired loans amounted to $15.8 million and $14.3
million, respectively. Impaired loans totaling $9 million were not accruing
interest at December 31, 1998 and $7.8 million were not accruing interest at
December 31, 1997. The related reserve for loan and lease losses on these loans
amounted to $2.6 million and $2.8 million at December 31, 1998 and 1997,
respectively.
25
Table 14 presents a summary of loss experience and the reserve for loan and
lease losses for the previous five years. Net charge-offs in the five-year
period ended 1998 occurred primarily in revolving credit and instalment loans to
individuals. The out-of-market credit risk from credit card receivables
(included within the revolving credit category) which are offered nationwide, is
considered in the Corporation's review of the adequacy of the reserve for loan
and lease losses.
T A B L E 14
Summary of Loan and Lease Financing Loss Experience
and the Reserve for Loan and Lease Losses
(In Thousands)
Years Ended December 31
-----------------------------
1998 1997
--------------- -------------
Balance at beginning of year $ 67,594 61,257
- -------------------------------------------------------------------------------------------
Loan and lease losses charged to reserve:
- -------------------------------------------------------------------------------------------
Commercial, financial and agricultural (269) (673)
- -------------------------------------------------------------------------------------------
Real estate -- construction (111) (25)
- -------------------------------------------------------------------------------------------
Real estate -- mortgage (424) (545)
- -------------------------------------------------------------------------------------------
Instalment loans to individuals (4,971) (4,514)
- -------------------------------------------------------------------------------------------
Revolving credit (7,066) (7,344)
- -------------------------------------------------------------------------------------------
Lease financing (68) (43)
- ------------------------------------------------------------------------------------------- ---------- ------
Total loan and lease losses charged to reserve (12,909) (13,144)
- ------------------------------------------------------------------------------------------- ---------- -------
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 51 63
- -------------------------------------------------------------------------------------------
Real estate -- construction 64 41
- -------------------------------------------------------------------------------------------
Real estate -- mortgage 143 136
- -------------------------------------------------------------------------------------------
Instalment loans to individuals 842 1,431
- -------------------------------------------------------------------------------------------
Revolving credit 1,490 1,339
- -------------------------------------------------------------------------------------------
Lease financing 23 95
- ------------------------------------------------------------------------------------------- ---------- -------
Total recoveries of loans and leases previously charged-off 2,613 3,105
- ------------------------------------------------------------------------------------------- ---------- -------
Net charge-offs (10,296) (10,039)
- -------------------------------------------------------------------------------------------
Provision charged to operations 15,884 16,376
- -------------------------------------------------------------------------------------------
Reserves related to acquisitions -- --
- ------------------------------------------------------------------------------------------- ---------- -------
Balance at end of year $ 73,182 67,594
- ------------------------------------------------------------------------------------------- ---------- -------
Loans and lease financing outstanding at end of year $ 5,487,337 5,093,569
- -------------------------------------------------------------------------------------------
Ratio of reserve for loan and lease losses to loans and lease financing outstanding at end
of year 1.33% 1.33
- -------------------------------------------------------------------------------------------
Average loans and lease financing outstanding $ 5,276,042 4,877,187
- -------------------------------------------------------------------------------------------
Ratio of net charge-offs of loans and lease financing to average loans and lease
financing:
- -------------------------------------------------------------------------------------------
Total .20% .21
- -------------------------------------------------------------------------------------------
Excluding revolving credit .09 .09
- -------------------------------------------------------------------------------------------
Revolving credit 2.66 2.87
- ---------------------------------------------------------------------------------------------------------- ---------
Years Ended December 31
----------------------------
1996 1995
------------- -------------
Balance at beginning of year 55,114 50,902
- -------------------------------------------------------------------------------------------
Loan and lease losses charged to reserve:
- -------------------------------------------------------------------------------------------
Commercial, financial and agricultural (438) (343)
- -------------------------------------------------------------------------------------------
Real estate -- construction (38) (392)
- -------------------------------------------------------------------------------------------
Real estate -- mortgage (869) (328)
- -------------------------------------------------------------------------------------------
Instalment loans to individuals (5,136) (3,337)
- -------------------------------------------------------------------------------------------
Revolving credit (7,633) (4,334)
- -------------------------------------------------------------------------------------------
Lease financing (166) (71)
- ------------------------------------------------------------------------------------------- ------ ------
Total loan and lease losses charged to reserve (14,280) (8,805)
- ------------------------------------------------------------------------------------------- ------- ------
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 445 176
- -------------------------------------------------------------------------------------------
Real estate -- construction 61 38
- -------------------------------------------------------------------------------------------
Real estate -- mortgage 305 77
- -------------------------------------------------------------------------------------------
Instalment loans to individuals 1,127 680
- -------------------------------------------------------------------------------------------
Revolving credit 1,083 1,024
- -------------------------------------------------------------------------------------------
Lease financing 41 15
- ------------------------------------------------------------------------------------------- ------- ------
Total recoveries of loans and leases previously charged-off 3,062 2,010
- ------------------------------------------------------------------------------------------- ------- ------
Net charge-offs (11,218) (6,795)
- -------------------------------------------------------------------------------------------
Provision charged to operations 17,361 11,007
- -------------------------------------------------------------------------------------------
Reserves related to acquisitions -- --
- ------------------------------------------------------------------------------------------- ------- ------
Balance at end of year 61,257 55,114
- ------------------------------------------------------------------------------------------- ------- ------
Loans and lease financing outstanding at end of year 4,745,663 4,267,175
- -------------------------------------------------------------------------------------------
Ratio of reserve for loan and lease losses to loans and lease financing outstanding at end
of year 1.29 1.29
- -------------------------------------------------------------------------------------------
Average loans and lease financing outstanding 4,464,026 4,113,207
- -------------------------------------------------------------------------------------------
Ratio of net charge-offs of loans and lease financing to average loans and lease
- -------------------------------------------------------------------------------------------
financing:
- --------------------------------------------------------------------------------------- --
Total .25 .17
- -------------------------------------------------------------------------------------------
Excluding revolving credit .11 .09
- -------------------------------------------------------------------------------------------
Revolving credit 2.85 1.47
- ------------------------------------------------------------------------------------------- ---------- ----------
Years Ended
December 31
-------------
1994
-------------
Balance at beginning of year 43,357
- -------------------------------------------------------------------------------------------
Loan and lease losses charged to reserve:
- -------------------------------------------------------------------------------------------
Commercial, financial and agricultural (463)
- -------------------------------------------------------------------------------------------
Real estate -- construction (567)
- -------------------------------------------------------------------------------------------
Real estate -- mortgage (1,112)
- -------------------------------------------------------------------------------------------
Instalment loans to individuals (2,845)
- -------------------------------------------------------------------------------------------
Revolving credit (3,122)
- -------------------------------------------------------------------------------------------
Lease financing (84)
- ------------------------------------------------------------------------------------------- ------
Total loan and lease losses charged to reserve (8,193)
- ------------------------------------------------------------------------------------------- ------
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 454
- -------------------------------------------------------------------------------------------
Real estate -- construction 60
- -------------------------------------------------------------------------------------------
Real estate -- mortgage 224
- -------------------------------------------------------------------------------------------
Instalment loans to individuals 964
- -------------------------------------------------------------------------------------------
Revolving credit 684
- -------------------------------------------------------------------------------------------
Lease financing 91
- ------------------------------------------------------------------------------------------- ------
Total recoveries of loans and leases previously charged-off 2,477
- ------------------------------------------------------------------------------------------- ------
Net charge-offs (5,716)
- -------------------------------------------------------------------------------------------
Provision charged to operations 10,761
- -------------------------------------------------------------------------------------------
Reserves related to acquisitions 2,500
- ------------------------------------------------------------------------------------------- ------
Balance at end of year 50,902
- ------------------------------------------------------------------------------------------- ------
Loans and lease financing outstanding at end of year 3,952,160
- -------------------------------------------------------------------------------------------
Ratio of reserve for loan and lease losses to loans and lease financing outstanding at end
of year 1.29
- -------------------------------------------------------------------------------------------
Average loans and lease financing outstanding 3,569,065
- -------------------------------------------------------------------------------------------
Ratio of net charge-offs of loans and lease financing to average loans and lease
- -------------------------------------------------------------------------------------------
financing:
- --------------------------------------------------------------------------------------- --
Total .16
- -------------------------------------------------------------------------------------------
Excluding revolving credit .10
- -------------------------------------------------------------------------------------------
Revolving credit 1.18
- ------------------------------------------------------------------------------------------- ----------
Despite a modest increase in 1998's actual net charge-offs, charge-offs as
a percentage of average loans and leases fell 1 basis point from 1997's level.
The largest category of charge-off's, revolving credit, experienced a 21 basis
point decrease from 1997's level. Provisions for loan and lease losses amounted
to $15.9 million, $16.4 million and $17.4 million in 1998, 1997 and 1996,
respectively. An allocation of the reserve for loan and lease losses as of the
end of the previous five years is presented in Table 15. Data presented for
prior years has been restated to better present the data reflected in the
Corporation's loan and lease loss reserve model.
26
T A B L E 15
Allocation of the Reserve for Loan and Lease Losses
(In Thousands)
1998 1997
----------------------- -----------------------
% of % of
Amount Loans Amount Loans
of and Leases of and Leases
Reserve in Each Reserve in Each
Allocated Category Allocated Category
----------- ----------- ----------- -----------
Commercial, financial and
agricultural $ 13,085 12.5 % 8,492 13.5
- ---------------------------------
Real estate -- construction 8,850 16.5 4,420 14.4
- ---------------------------------
Real estate -- mortgage 4,969 57.3 4,339 57.2
- ---------------------------------
Instalment loans to individuals 13,901 8.9 10,648 9.9
- ---------------------------------
Revolving credit 10,270 3.9 8,507 4.2
- ---------------------------------
Lease financing 463 .9 319 .8
- ---------------------------------
Unallocated portion of reserve 21,644 -- 30,869 --
- --------------------------------- -------- ---- ------ -----
Total $ 73,182 100.0 % 67,594 100.0
- --------------------------------- -------- --------- ------ -----
1996 1995 1994
----------------------- ----------------------- -----------------------
% of % of % of
Amount Loans Amount Loans Amount Loans
of and Leases of and Leases of and Leases
Reserve in Each Reserve in Each Reserve in Each
Allocated Category Allocated Category Allocated Category
----------- ----------- ----------- ----------- ----------- -----------
Commercial, financial and
agricultural 9,955 11.6 6,113 14.8 6,590 16.7
- ---------------------------------
Real estate -- construction 2,584 13.3 3,185 11.8 4,551 10.2
- ---------------------------------
Real estate -- mortgage 7,034 54.8 9,823 53.4 13,126 54.0
- ---------------------------------
Instalment loans to individuals 9,743 15.6 5,185 13.9 10,885 13.4
- ---------------------------------
Revolving credit 5,937 4.1 4,929 5.4 3,756 5.1
- ---------------------------------
Lease financing 314 .6 240 .7 281 .6
- ---------------------------------
Unallocated portion of reserve 25,690 -- 25,639 -- 11,713 --
- --------------------------------- ------ ----- ------ ----- ------ -----
Total 61,257 100.0 55,114 100.0 50,902 100.0
- --------------------------------- ------ ----- ------ ----- ------ -----
Management performs a detailed analysis of the loan and lease portfolio to
determine the adequacy of the reserve for loan and lease losses. The reserve is
comprised of allocated and unallocated portions.
The allocated reserve consists of specific as well as general allocations.
Specific loan loss allocations are determined for significant credits where
Management believes that a risk of loss exists. 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 significant
relationships are reviewed at least annually. Relationships that have the lowest
grade are reviewed each thirty days. All relationships in excess of $100,000
which have been internally classified as "Special Mention", "Substandard" or
"Loss" are evaluated individually for their potential loss; factors such as
collateral value and guarantor strength are included in the evaluation process.
In addition, general allocations are determined for each loan type by assigning
a risk factor to compute their respective loss reserve. The risk factors have
been developed using historical loss levels, economic trends, market conditions
and other factors. The allocated reserve is determined as a result of this
analysis which includes the specific and general reserves discussed above.
During 1998, Management adjusted the risk factors used for general allocation of
the reserve among the respective loan categories. The risk factors were adjusted
upward in consideration of historical charge-off rates, recent trends in
consumer debt levels, increased consumer bankruptcy rates nationally and in
North Carolina and other pertinent factors. Management reviews risk assets and
charge-offs by loan type on a monthly basis.
For the unallocated portion of the reserve for loan and lease losses,
Management determines the appropriate level of unallocated reserve to provide
for probable losses inherent in the loan and lease portfolios and for
unfavorable credit events that may have occurred for specific borrowers of which
Management is not yet aware. Factors considered in Management's determination of
the appropriate level of unallocated reserve are general economic and lending
trends. The level of unallocated reserves as of year-end 1998 has declined from
prior years.
Management believes that the reserve for loan and lease losses is adequate
to absorb estimated probable losses inherent in the loan and lease financing
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.
Net cash provided by operating activities and deposits from customers have
historically been the primary sources of liquidity for the Corporation. Net cash
provided by operating activities amounted to $100.6 million, $152.7 million and
$103.6 million in 1998, 1997 and 1996, respectively. Average total deposits have
grown by $340.9 million, $350.2 million and $296 million during
27
the three previous years. Average certificates of deposit in denominations of
$100,000 or more still comprise a relatively small percentage of average total
deposits, 7.4% in 1998 versus 6.8% in 1997. These deposits grew on average $43.6
million from 1997 to 1998. 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, 1998, time certificates of deposit in amounts of $100,000
or more were $452.8 million compared to $392.4 million at December 31, 1997.
During 1998, the maximum month-end balance for time certificates of deposit in
amounts of $100,000 or more totaled $465.4 million. The following is a remaining
maturity schedule of these deposits at December 31, 1998 (in thousands):
Over 3 Over 6
3 Months Through Through
or Less 6 Months 12 Months Total
----------- --------- --------- -----------
Jumbo deposits $269,397 110,689 72,722 $452,808
At December 31, 1998, the Subsidiary Banks were net short-term lenders as
average short-term investments exceeded average short-term liabilities by $47.1
million. In the past several years, the Subsidiary Banks have been net
short-term borrowers. The change to being a net short-term lender was due to
1998's interest rate environment: the Subsidiary Banks received higher than
normal paydowns on mortgage-backed securities due to the fall in mortgage
interest rates, excess funds were not reinvested in longer-term investment
securities due to the flat yield curve and the Subsidiary Banks were able to
obtain longer-term borrowings at attractive interest rates. In 1997 and 1996,
average short-term borrowings exceeded short-term investments by $119.7 million
and $112.2 million, respectively, due to high loan demand.
Correspondent relationships are maintained with several larger banks
enabling the Subsidiary Banks to purchase federal funds when needed. Also
available as liquidity sources are access to the Federal Reserve discount window
and CCB's $600 million line of credit maintained with the FHLB. This line of
credit is secured by a blanket collateral agreement on CCB's mortgage loan
portfolio.
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 $156.8 million mature in 1999. The available
for sale portfolio is comprised of U.S. Treasury securities, obligations of U.S.
Government agencies and corporations and equity securities. Securities available
for sale are 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.
Liquidity at the Parent Company level is provided through cash dividends
from the Subsidiary Banks and the capacity of the Parent Company to raise
additional borrowed funds as needed. At December 31, 1998, the Parent Company
had an unused $50 million credit agreement with a financial institution. The
credit agreement is unsecured and expires in November 2001.
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 and thus are not
considered in the 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, 1998 is presented in Table 16. At
December 31, 1998, the Corporation had a cumulative "negative gap"
(interest-sensitive liabilities exceeding interest-sensitive assets) of $352.6
million or 4.82% of total earning assets over a twelve-month horizon. The ratio
of interest-sensitive assets to interest-sensitive liabilities was .91x. 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,
28
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.
T A B L E 16
Interest-Sensitivity Analysis (1)
(In Thousands)
As of December 31, 1998
-------------------------------------------------------------------
6 Month
30 Day 60 Day 90 Day 6 Month Sensitive
Sensitive Sensitive Sensitive Sensitive to 1 Year
------------ ------------- ----------- ------------- -------------
Earning assets:
Time deposits in other banks $ 59,429 -- -- -- 100
- -------------------------------------------------
Federal funds sold and other short-term
investments 430,000 -- -- -- --
- -------------------------------------------------
Investment securities (2) 124,690 44,800 48,125 157,849 109,359
- -------------------------------------------------
Loans and lease financing 1,294,270 595,862 84,502 252,998 529,174
- ------------------------------------------------- ---------- ------- ------ ------- -------
Total earning assets 1,908,389 640,662 132,627 410,847 638,633
- ------------------------------------------------- ---------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings deposits 1,040,904 631,886 -- -- --
- -------------------------------------------------
Other time deposits 345,696 195,326 203,421 554,013 823,957
- -------------------------------------------------
Short-term borrowed funds 238,256 -- -- -- --
- -------------------------------------------------
Long-term debt 63 19 19 50,057 117
- ------------------------------------------------- ---------- ------- ------- ------- -------
Total interest-bearing liabilities 1,624,919 827,231 203,440 604,070 824,074
- ------------------------------------------------- ---------- ------- ------- ------- -------
Interest-sensitivity gap $ 283,470 (186,569) (70,813) (193,223) (185,441)
- ------------------------------------------------- ---------- -------- ------- -------- --------
Cumulative gap $ 283,470 96,901 26,088 (167,135) (352,576)
- ------------------------------------------------- ---------- -------- ------- -------- --------
Cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities 1.17 x 1.04 1.01 .95 .91
- ------------------------------------------------- ----------- --------- -------- --------- ---------
Cumulative gap to total earning assets 3.87 % 1.32 .36 (2.28) (4.82)
- ------------------------------------------------- ----------- --------- -------- --------- ---------
As of December 31, 1998
----------------------------------------
Total Non-Interest
Sensitive Sensitive Total
------------- ------------- ------------
Earning assets:
Time deposits in other banks 59,529 -- 59,529
- -------------------------------------------------
Federal funds sold and other short-term
investments 430,000 -- 430,000
- -------------------------------------------------
Investment securities (2) 484,823 857,843 1,342,666
- -------------------------------------------------
Loans and lease financing 2,756,806 2,730,531 5,487,337
- ------------------------------------------------- --------- --------- ---------
Total earning assets 3,731,158 3,588,374 7,319,532
- ------------------------------------------------- --------- --------- ---------
Interest-bearing liabilities:
Savings deposits 1,672,790 975,221 2,648,011
- -------------------------------------------------
Other time deposits 2,122,413 834,402 2,956,815
- -------------------------------------------------
Short-term borrowed funds 238,256 50,000 288,256
- -------------------------------------------------
Long-term debt 50,275 166,420 216,695
- ------------------------------------------------- --------- --------- ---------
Total interest-bearing liabilities 4,083,734 2,026,043 6,109,777
- ------------------------------------------------- --------- --------- ---------
Interest-sensitivity gap (352,576)
- ------------------------------------------------- ---------
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 one year 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 adjustment of $21,721,000 for available for sale securities
is not included.
- --------------------------------------------------------------------------------
Simulation Analysis is performed using a computer-based asset/liability
model incorporating 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 100 basis point change
in interest rates over a 12-month period should not exceed 6%, which was
achieved during 1998 and 1997. At December 31, 1998, earnings sensitivity was
well under this guideline as a 100 basis point increase is projected to decrease
net income .2% and a 100 basis point decrease is projected to decrease net
income .9%. ALCO in practice 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. The most efficient and cost-effective method of on-balance sheet
management is creating desired maturity and repricing streams through the
tactical 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 23.6% of all loans reprice or mature within 30 days. See Table 7
for additional detail regarding loan maturity and sensitivity to changes in
interest rates at December 31, 1998.
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
29
on-balance sheet assets or liabilities. As of December 31, 1998, the Corporation
had off-balance sheet derivative financial instruments in the form of interest
rate swaps (basis swaps) with notional principal of $200 million. The interest
rate swaps were entered into in November 1997 and April 1998 and have two-year
terms. The purpose of entering into the interest rate swaps was to synthetically
convert U.S. Treasury-based liabilities into prime rate-based liabilities and to
lock-in a wide spread between the two indices. These financial instruments had a
nominal negative effect on interest expense for 1998 and 1997. The Corporation
was not party to any other off-balance sheet derivative financial instruments
during 1998. Although off-balance sheet derivative 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 is being 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.
Other Accounting Matters
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and hedging activities. It requires that all
derivatives be included as assets or liabilities in the balance sheet and that
such instruments be carried at fair market value through adjustments to either
other comprehensive income or current earnings or both, as appropriate. The
Corporation is in the process of assessing the impact of this Standard. The
Standard is effective for financial statements issued for all fiscal quarters of
fiscal years beginning after June 15, 1999.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," establishes accounting and
reporting standards for certain mortgage banking activities. It also conforms
the subsequent accounting for securities retained after the securitization of
other types of assets. The Corporation is in the process of assessing the impact
of this Standard. The Standard is effective for financial statements for the
first fiscal quarter beginning after December 15, 1998.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be reflected
in diminished current market values and/or reduced potential net interest income
in future periods.
The Corporation's market risk arises primarily from interest rate risk
inherent in its lending and deposit-taking activities. The structure of the
Corporation's loan and deposit portfolios is such that a significant rise or
decline in interest rates may adversely impact net market values and net
interest income. The Corporation does not maintain a trading account nor is the
Corporation subject to currency exchange risk or commodity price risk.
Responsibility for monitoring interest rate risk rests with the Asset/ Liability
Management Committee ("ALCO") which is comprised of senior management. ALCO
regularly reviews the Corporation's interest rate risk position and adopts
balance sheet strategies that are intended to optimize net interest income while
maintaining market risk within a set of Board-approved guidelines. 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. To measure the sensitivity of the
Corporation's earnings, the result 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. The model assumes
an immediate parallel shift in interest rates. As a matter of policy, ALCO has
stated that the maximum negative impact to net income from a positive or
negative 100 basis point change in interest rates over a 12-month period should
not exceed 6%. However, ALCO in practice manages earnings sensitivity within a
targeted range of only a 2% to 3% impact on net income. The Corporation's
interest rate risk position based on simulation results as of December 31, 1998
is as follows:
Basis point change in interest rates (100) 100
- ---------------------------------------------
Projected percentage change in net income (.9)% (.2)%
- ---------------------------------------------
As of December 31, 1998, Management believes that it has accomplished its
objective to avoid material negative changes in net income resulting from
possible future changes in interest rates. Projected percentage changes in net
income brought about by changes in interest rates are not material relative to
the Corporation's net income.
If simulation results indicate earnings sensitivity in excess of the
targeted limits, ALCO will adopt on-balance sheet and/or off-balance sheet
strategies to bring earnings sensitivity within target guidelines. On-balance
sheet strategies involve the creation of desired maturity and repricing streams
through the tactical pricing of interest-earning and interest-bearing portfolios
to ensure that the Corporation has a proper mix of fixed and variable rate
products. As of December 31, 1998, the Corporation had off-balance sheet
derivative financial instruments outstanding in the form of interest rate swaps
(basis swaps) with a notional amount of $200 million. The two-year term basis
swaps were entered into in November 1997 and April 1998 to synthetically convert
U.S. Treasury-based liabilities into prime rate-based liabilities and to lock-in
the favorable spread between the two indices. The Corporation was not a party to
any other off-balance sheet derivative financial instruments during 1998.
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. Management will
continue to monitor the Corporation's interest rate risk position to minimize
the adverse impact of earnings caused by changes in interest rates.
31
(THIS PAGE INTENTIONALLY LEFT BLANK)
32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
-
(a) The following audited consolidated financial statements and related
documents are set forth in this
Annual Report on Form 10-K on the pages indicated:
CCB Financial Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1998 and 1997 ............................... 34
Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 1998 ............................................................... 35
Consolidated Statements of Shareholders' Equity and Comprehensive Income for each
of the years in the three-year period ended December 31, 1998 ......................... 36
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1998 ............................................................... 37
Notes to Consolidated Financial Statements .............................................. 38
Report of Management Regarding Responsibility for Financial Statements ................... 60
Independent Auditors' Report ............................................................. 61
(b) The following supplementary data is set forth in this Annual Report on Form 10-K on
the page indicated:
Quarterly Financial Data ............................................................... 58
33
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------- ------------
(In Thousands Except for
Share Data)
Assets:
Cash and due from banks (note 3) $ 250,922 277,469
- --------------------------------------------------------------------------------------- ----------- -------
Time deposits in other banks 59,529 19,875
- --------------------------------------------------------------------------------------- ----------- -------
Federal funds sold and other short-term investments 430,000 122,000
- --------------------------------------------------------------------------------------- ----------- -------
Investment securities (notes 4 and 8):
Available for sale (Amortized cost of $1,262,477 and $1,359,376) 1,284,198 1,382,107
- --------------------------------------------------------------------------------------- ----------- ---------
Held to maturity (Market values of $85,277 and $87,002) 80,189 81,617
- --------------------------------------------------------------------------------------- ----------- ---------
Loans and lease financing (notes 5, 8 and 9) 5,487,337 5,093,569
- ---------------------------------------------------------------------------------------
Less reserve for loan and lease losses (note 6) 73,182 67,594
- --------------------------------------------------------------------------------------- ----------- ---------
Net loans and lease financing 5,414,155 5,025,975
- --------------------------------------------------------------------------------------- ----------- ---------
Premises and equipment (notes 7 and 9) 92,770 86,035
- ---------------------------------------------------------------------------------------
Other assets (notes 5 and 13) 128,590 143,450
- --------------------------------------------------------------------------------------- ----------- ---------
Total assets $ 7,740,353 7,138,528
- --------------------------------------------------------------------------------------- ----------- ---------
Liabilities:
Deposits:
Demand (noninterest-bearing) $ 854,938 740,338
- ---------------------------------------------------------------------------------------
Savings and NOW accounts 863,920 727,108
- ---------------------------------------------------------------------------------------
Money market accounts 1,784,091 1,636,683
- ---------------------------------------------------------------------------------------
Jumbo time deposits (note 8) 452,808 392,435
- ---------------------------------------------------------------------------------------
Time deposits (note 8) 2,504,007 2,488,033
- --------------------------------------------------------------------------------------- ----------- ---------
Total deposits 6,459,764 5,984,597
- ---------------------------------------------------------------------------------------
Short-term borrowed funds (note 8) 288,256 276,437
- ---------------------------------------------------------------------------------------
Long-term debt (note 9) 216,695 100,686
- ---------------------------------------------------------------------------------------
Other liabilities (notes 10 and 13) 87,744 95,448
- --------------------------------------------------------------------------------------- ----------- ---------
Total liabilities 7,052,459 6,457,168
- --------------------------------------------------------------------------------------- ----------- ---------
Shareholders' equity (notes 4, 11 and 15):
Serial preferred stock. Authorized 10,000,000 shares; none issued -- --
- ---------------------------------------------------------------------------------------
Common stock of $5 par value. Authorized 100,000,000 shares; 40,345,214 and 41,552,824
shares
issued in 1998 and 1997, respectively 201,726 207,764
- ---------------------------------------------------------------------------------------
Additional paid-in capital 73,771 143,784
- ---------------------------------------------------------------------------------------
Retained earnings 399,066 315,864
- ---------------------------------------------------------------------------------------
Accumulated other comprehensive income 13,331 13,980
- ---------------------------------------------------------------------------------------
Less: Unearned common stock held by management recognition plans -- (32)
- --------------------------------------------------------------------------------------- ----------- ---------
Total shareholders' equity 687,894 681,360
- --------------------------------------------------------------------------------------- ----------- ---------
Total liabilities and shareholders' equity $ 7,740,353 7,138,528
- --------------------------------------------------------------------------------------- ----------- ---------
Commitments and contingencies (note 14)
See accompanying notes to consolidated financial statements.
34
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ----------- ----------
(In Thousands Except Per Share Data)
Interest income:
Interest and fees on loans and lease financing $ 470,664 442,618 405,894
- -----------------------------------------------------------------
Interest and dividends on investment securities:
U.S. Treasury 27,502 31,546 28,957
- -----------------------------------------------------------------
U.S. Government agencies and corporations 53,117 55,613 53,222
- -----------------------------------------------------------------
States and political subdivisions (primarily tax-exempt) 4,738 4,840 4,593
- -----------------------------------------------------------------
Equity and other securities 3,135 3,070 3,374
- -----------------------------------------------------------------
Interest on time deposits in other banks 2,377 2,716 3,263
- -----------------------------------------------------------------
Interest on federal funds sold and other short-term investments 15,774 10,060 13,272
- ----------------------------------------------------------------- --------- ------- --------
Total interest income 577,307 550,463 512,575
- ----------------------------------------------------------------- --------- ------- --------
Interest expense:
Deposits 232,609 229,600 214,500
- -----------------------------------------------------------------
Short-term borrowed funds (note 8) 11,822 15,371 18,713
- -----------------------------------------------------------------
Long-term debt (note 9) 10,131 5,128 4,359
- ----------------------------------------------------------------- --------- ------- --------
Total interest expense 254,562 250,099 237,572
- ----------------------------------------------------------------- --------- ------- --------
Net interest income 322,745 300,364 275,003
- -----------------------------------------------------------------
Provision for loan and lease losses (note 6) 15,884 16,376 17,361
- ----------------------------------------------------------------- --------- ------- --------
Net interest income after provision for loan and lease losses 306,861 283,988 257,642
- ----------------------------------------------------------------- --------- ------- --------
Other income:
Service charges on deposit accounts 54,117 44,937 40,070
- -----------------------------------------------------------------
Trust and custodian fees 10,221 8,415 7,348
- -----------------------------------------------------------------
Sales and insurance commissions 10,835 9,433 7,816
- -----------------------------------------------------------------
Merchant discount 8,826 7,017 6,116
- -----------------------------------------------------------------
Accretion of negative goodwill from acquisitions 3,356 3,356 3,356
- -----------------------------------------------------------------
Other operating 23,667 19,761 20,061
- -----------------------------------------------------------------
Investment securities gains (note 4) 2,205 578 2,198
- -----------------------------------------------------------------
Investment securities losses (note 4) (27) (98) (4,359)
- ----------------------------------------------------------------- --------- ------- --------
Total other income 113,200 93,399 82,606
- ----------------------------------------------------------------- --------- ------- --------
Other expenses:
Personnel (note 10) 124,419 114,572 105,991
- -----------------------------------------------------------------
Net occupancy (note 14) 15,890 15,595 16,189
- -----------------------------------------------------------------
Equipment (note 14) 14,522 12,867 12,032
- -----------------------------------------------------------------
Merger-related expense (note 2) -- 17,916 --
- -----------------------------------------------------------------
Other operating (note 12) 75,386 65,248 75,621
- ----------------------------------------------------------------- --------- ------- --------
Total other expenses 230,217 226,198 209,833
- ----------------------------------------------------------------- --------- ------- --------
Income before income taxes 189,844 151,189 130,415
- -----------------------------------------------------------------
Income taxes (note 13) 68,632 55,765 43,589
- ----------------------------------------------------------------- --------- ------- --------
Net income $ 121,212 95,424 86,826
- ----------------------------------------------------------------- --------- ------- --------
Earnings per common share (note 11):
Basic $ 2.96 2.31 2.11
- -----------------------------------------------------------------
Diluted 2.93 2.28 2.08
- -----------------------------------------------------------------
Weighted average shares outstanding (note 11):
Basic 40,898 41,438 41,107
- -----------------------------------------------------------------
Diluted 41,409 41,947 41,815
- -----------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
and Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Additional Other Management
Common Paid-In Retained Comprehensive Recognition
Stock Capital Earnings Income Plans
--------------- ---------- ------------ ------------- -----------
(In Thousands)
Balance December 31, 1995, as originally reported $ 101,938 138,073 307,334 11,306 (1,734)
- ----------------------------------------------------------
Common stock issued in 1998 in a two-for-one
stock split 101,938 -- (101,938) -- --
- ---------------------------------------------------------- --------- ------- -------- ------ ------
Balance December 31, 1995, as restated 203,876 138,073 205,396 11,306 (1,734)
Net income -- -- 86,826 -- --
- ----------------------------------------------------------
Other comprehensive income --
Unrealized losses on securities, net of deferred tax
benefit of $2,656 and reclassification adjustment
(note 4) -- -- -- (3,977) --
- ----------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 40 728 (20) -- --
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 1,852 2,152 (926) -- --
- ----------------------------------------------------------
Earned portion of management recognition plans (note
10) -- -- -- -- 996
- ----------------------------------------------------------
Purchase and retirement of shares (192) (901) 96 -- --
- ----------------------------------------------------------
Conversion of debentures (note 11) 762 1,737 (381) -- --
- ----------------------------------------------------------
Common stock warrants repurchased (note 11) -- (1,172) (4,509) -- --
- ----------------------------------------------------------
Cash dividends ($.80 per share) -- -- (28,579) -- --
- ---------------------------------------------------------- --------- ------- -------- ------ ------
Balance December 31, 1996 206,338 140,617 257,903 7,329 (738)
Net income -- -- 95,424 -- --
- ----------------------------------------------------------
Other comprehensive income --
Unrealized gains on securities, net of deferred tax
expense of $3,956 and reclassification adjustment
(note 4) -- -- -- 6,651 --
- ----------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 54 373 (27) -- --
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 1,377 2,729 (689) -- --
- ----------------------------------------------------------
Earned portion of management recognition plans (note
10) -- -- -- -- 706
- ----------------------------------------------------------
Other transactions, net (5) 65 3 -- --
- ----------------------------------------------------------
Cash dividends ($.89 per share) -- -- (36,750) -- --
- ---------------------------------------------------------- ---------- ------- -------- ------ ------
Balance December 31, 1997 207,764 143,784 315,864 13,980 (32)
Net income -- -- 121,212 -- --
- ----------------------------------------------------------
Other comprehensive income --
Unrealized losses on securities, net of deferred tax
benefit of $484 and reclassification adjustment
(note 4) -- -- -- (649) --
- --------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 42 503 (10) -- --
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 879 1,497 (403) -- --
- ----------------------------------------------------------
Earned portion of management recognition plans (note
10) -- -- -- -- 32
- ----------------------------------------------------------
Purchase and retirement of shares (6,957) (72,445) 2,801 -- --
- ----------------------------------------------------------
Other transactions, net (2) 432 -- -- --
- ----------------------------------------------------------
Cash dividends ($.99 per share) -- -- (40,398) -- --
- ---------------------------------------------------------- ---------- ------- -------- ------ ------
Balance December 31, 1998 $ 201,726 73,771 399,066 13,331 --
- ---------------------------------------------------------- ---------- ------- -------- ------ ------
Total
Shareholders'
Equity
(In Thousands)
Balance December 31, 1995, as originally reported 556,917
- ----------------------------------------------------------
Common stock issued in 1998 in a two-for-one
stock split --
- ---------------------------------------------------------- -------
Balance December 31, 1995, as restated 556,917
Net income 86,826
- ----------------------------------------------------------
Other comprehensive income --
Unrealized losses on securities, net of deferred tax
benefit of $2,656 and reclassification adjustment
(note 4) (3,977)
- -------------------------------------------------------- -------
Total comprehensive income 82,849
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 748
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 3,078
- --------------------------------------------------------
Earned portion of management recognition plans (note
10) 996
- ----------------------------------------------------------
Purchase and retirement of shares (997)
- ----------------------------------------------------------
Conversion of debentures (note 11) 2,118
- ----------------------------------------------------------
Common stock warrants repurchased (note 11) (5,681)
- ----------------------------------------------------------
Cash dividends ($.80 per share) (28,579)
- ---------------------------------------------------------- -------
Balance December 31, 1996 611,449
Net income 95,424
- ----------------------------------------------------------
Other comprehensive income --
Unrealized gains on securities, net of deferred tax
expense of $3,956 and reclassification adjustment
(note 4) 6,651
- -------------------------------------------------------- -------
Total comprehensive income 102,075
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 400
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 3,417
- --------------------------------------------------------
Earned portion of management recognition plans (note
10) 706
- ----------------------------------------------------------
Other transactions, net 63
- ----------------------------------------------------------
Cash dividends ($.89 per share) (36,750)
- ---------------------------------------------------------- -------
Balance December 31, 1997 681,360
Net income 121,212
- ----------------------------------------------------------
Other comprehensive income --
Unrealized losses on securities, net of deferred tax
benefit of $484 and reclassification adjustment
(note 4) (649)
- ---------------------------------------------------------- -------
Total comprehensive income 120,563
- ----------------------------------------------------------
Transactions pursuant to restricted stock, net (note 10) 535
- ----------------------------------------------------------
Stock options exercised, net of shares tendered
(note 10) 1,973
- ----------------------------------------------------------
Earned portion of management recognition plans (note
10) 32
- ----------------------------------------------------------
Purchase and retirement of shares (76,601)
- ----------------------------------------------------------
Other transactions, net 430
- ----------------------------------------------------------
Cash dividends ($.99 per share) (40,398)
- ---------------------------------------------------------- -------
Balance December 31, 1998 687,894
- ---------------------------------------------------------- -------
See accompanying notes to consolidated financial statements.
36
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------- -------------
(In Thousands)
Operating activities:
Net income $ 121,212 95,424 86,826
- ----------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
- ----------------------------------------------------------------------------------
Depreciation, amortization and accretion, net 16,859 23,418 10,361
- ----------------------------------------------------------------------------------
Provision for loan and lease losses 15,884 16,376 17,361
- ----------------------------------------------------------------------------------
Net (gain) loss on sales of investment securities (2,178) (480) 2,161
- ----------------------------------------------------------------------------------
Sale of securitized mortgage loans at par -- 25,658 --
- ----------------------------------------------------------------------------------
Sales of loans held for sale 576,595 232,095 181,310
- ----------------------------------------------------------------------------------
Origination of loans held for sale (630,658) (214,170) (187,555)
- ----------------------------------------------------------------------------------
Changes in:
Accrued interest receivable 2,084 (4,202) (592)
- ----------------------------------------------------------------------------------
Accrued interest payable (1,668) (17,550) 4,809
- ----------------------------------------------------------------------------------
Other assets 27,631 821 (13,426)
- ----------------------------------------------------------------------------------
Other liabilities (4,282) 905 5,309
- ----------------------------------------------------------------------------------
Other operating activities, net (5,053) (5,600) (2,927)
- ---------------------------------------------------------------------------------- ---------- -------- --------
Net cash provided by operating activities 116,426 152,695 103,637
- ---------------------------------------------------------------------------------- ---------- -------- --------
Investing activities:
Proceeds from:
Maturities and issuer calls of investment securities held to maturity 1,407 2,622 9,973
- ----------------------------------------------------------------------------------
Sales of investment securities available for sale 36,036 176,481 195,363
- ----------------------------------------------------------------------------------
Maturities and issuer calls of investment securities available for sale 628,252 501,394 474,889
- ----------------------------------------------------------------------------------
Purchases of:
Investment securities held to maturity -- -- (16,005)
- ----------------------------------------------------------------------------------
Investment securities available for sale (571,024) (677,990) (517,477)
- ----------------------------------------------------------------------------------
Premises and equipment (18,129) (10,584) (9,768)
- ----------------------------------------------------------------------------------
Net originations of loans and leases receivable (360,194) (529,365) (487,972)
- ----------------------------------------------------------------------------------
Net cash acquired (paid) in acquisitions (dispositions) (8,675) 14,577 (50,926)
- ---------------------------------------------------------------------------------- ---------- -------- --------
Net cash used by investing activities (292,327) (522,865) (401,923)
- ---------------------------------------------------------------------------------- ---------- -------- --------
Financing activities:
Net increase in deposit accounts 484,220 243,143 375,900
- ----------------------------------------------------------------------------------
Net increase (decrease) in short-term borrowed funds 11,819 (80,402) 43,897
- ----------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 126,140 50,129 --
- ----------------------------------------------------------------------------------
Repayments of long-term debt (10,131) (7,997) (122,699)
- ----------------------------------------------------------------------------------
Issuances of common stock from exercise of stock options, net 1,973 3,417 3,078
- ----------------------------------------------------------------------------------
Purchase and retirement of common stock (76,601) -- (997)
- ----------------------------------------------------------------------------------
Purchase and retirement of common stock warrants -- -- (5,681)
- ----------------------------------------------------------------------------------
Other equity transactions, net (14) (44) --
- ----------------------------------------------------------------------------------
Cash dividends paid (40,398) (36,750) (28,579)
- ---------------------------------------------------------------------------------- ---------- -------- --------
Net cash provided by financing activities 497,008 171,496 264,919
- ---------------------------------------------------------------------------------- ---------- -------- --------
Net increase (decrease) in cash and cash equivalents 321,107 (198,674) (33,367)
- ----------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year (note 1) 419,344 618,018 651,385
- ---------------------------------------------------------------------------------- ---------- -------- --------
Cash and cash equivalents at end of year (note 1) $ 740,451 419,344 618,018
- ---------------------------------------------------------------------------------- ---------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 256,250 267,649 232,763
- ---------------------------------------------------------------------------------- ---------- -------- --------
Income taxes paid during the year $ 71,618 57,597 45,530
- ---------------------------------------------------------------------------------- ---------- -------- --------
See accompanying notes to consolidated financial statements.
37
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"), American Federal
Bank, FSB ("AmFed") and Central Carolina Bank-Georgia ("CCB-Ga.") (collectively,
the "Subsidiary Banks"). The consolidated financial statements also include the
accounts and results of operations of the wholly-owned subsidiaries of CCB (CCB
Investment and Insurance Service Corporation; CCBDE, Inc.; Southland Associates,
Inc. and Corcoran Holdings, Inc. and its subsidiary, Watts Properties, Inc.) and
AmFed (American Service Corporation of S.C.; AMFEDDE, Inc.; Mortgage North;
Finance South, Inc. and McBee Holdings, Inc. and its subsidiary, Greenville
Participations, Inc.). All significant intercompany transactions and accounts
are eliminated in consolidation. The Corporation operates as one business
segment.
CCB and AmFed provide a full range of banking services to individual and
corporate customers through their branch networks based in North Carolina and
South Carolina, respectively. CCB also provides trust services to customers in
Virginia and Florida through a trust office located in each of those states.
CCB-Ga. is a special purpose bank that provides nationwide credit card services.
Neither the Corporation nor its Subsidiary Banks have foreign operations. The
Corporation believes that there is no concentration of risk with any single
customer or supplier, or small group of customers or suppliers, whose failure or
nonperformance would materially affect the Corporation's results. Products and
services offered to customers include traditional banking services such as
accepting deposits; making secured and unsecured loans; renting safety deposit
boxes; performing trust functions for corporations, employee benefit plans and
individuals; and providing certain insurance and brokerage services. 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.
Certain amounts for prior years have been reclassified to conform to the
1998 presentation. These reclassifications have no effect on shareholders'
equity or net income as previously reported.
Financial Statement Presentation
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 periods presented. Actual results could differ from those
estimates.
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 classifies its investment securities in one of the three
following categories: (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 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 or trading are classified as available for sale 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 securities available for sale, net of taxes, are reported as a separate
component of shareholders' equity. Changes in market values of securities
classified as available for sale will cause fluctuations in shareholders'
equity. Unrealized losses on securities held to maturity due to fluctuations in
fair value are recognized when it is determined that an other than temporary
decline in value has occurred.
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. Premium amortization and discount accretion are
computed using the interest method.
38
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Loans 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 revolving credit accounts.
The lease portfolio includes rolling stock such as automobiles, trucks and
trailers as well as a broadly diversified base of equipment.
Interest income on loans and lease financing is recorded on the accrual
basis. Accrual of interest on loans and lease financing (including impaired
loans) 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.
Reserve for Loan and Lease Losses
The reserve for loan and lease losses is increased by provisions charged to
expense and reduced by loan and lease financing charge-offs, net of recoveries.
The reserve is maintained at a level considered adequate by Management to
provide for inherent loan and lease losses. The reserve is comprised of specific
loan loss allocations, nonaccrual loan and classified loan allocations, and
general allocations by loan type for all other loans. Specific loan loss
allocations are determined for significant credits where Management believes
that a risk of loss exists. All relationships in excess of $100,000 which have
been internally classified as "Special Mention", "Substandard" or "Loss" are
evaluated individually for their potential loss; consideration of factors such
as collateral value and guarantor strength is included in the evaluation
process. For the balance of loans not included in the previous categories, each
loan type is assigned a risk factor to compute their respective loss reserve.
The risk factors have been developed using actual loss levels, economic trends,
market conditions and other factors.
While Management uses the best information available on which to base
estimates, future adjustments to the reserve may be necessary if economic
conditions, particularly in the Subsidiary Banks' markets, differ substantially
from the assumptions used by Management. 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.
For all specifically reviewed loans for which it is probable that the
Subsidiary Banks will be unable to collect all amounts due according to the
terms of the loan agreement, the Subsidiary Banks determine a value 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, impairment is recognized by creating a valuation allowance for
the difference and recognizing a corresponding bad debt expense.
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.
Mortgage Servicing Rights
Mortgage servicing rights ("MSR") are the rights to service mortgage loans
for others which are capitalized and included in "other assets" on the
Consolidated Balance Sheets at the lower of their cost or market. The cost of
mortgage loans originated or purchased is allocated between the cost of the
loans and the MSR. Capitalization of the allocated cost of MSR occurs when the
underlying loans are sold or securitized. The cost of the MSR is amortized over
the estimated period of and in proportion to net servicing revenues. MSR for
loans originated by the Subsidiary Banks prior to 1996 were not capitalized in
accordance with the then current accounting standards.
The Corporation periodically evaluates MSR for impairment by estimating the
fair value based on market prices for similar servicing assets. For purposes of
impairment evaluation, the MSR are stratified based on predominate risk
characteristics of the underlying loans, including loan type (conventional or
government), term and amortization type (fixed or adjustable). If the carrying
value
39
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
of the MSR exceed the estimated fair value, a valuation allowance is
established. Changes to the valuation allowance are charged against or credited
to mortgage servicing income and fees up to the original cost of the MSR.
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 the life of the subordinated
notes.
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 remaining life of the existing deposit
base assumed (primarily for up to 10 years). Goodwill is amortized on a
straight-line basis over periods ranging from 10 to 20 years. The Corporation's
unamortized goodwill is reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable.
Unamortized goodwill associated with disposed assets is charged to current
earnings.
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).
Comprehensive Income
Comprehensive income is the change in the Corporation's equity during the
period from transactions and other events and circumstances from non-owner
sources. Total comprehensive income is divided into net income and other
comprehensive income. The Corporation's "other comprehensive income" for the
three-year period ended December 31, 1998 and "accumulated other comprehensive
income" as of December 31, 1998 and 1997 are comprised solely of unrealized
gains and losses on certain investments in debt and equity securities.
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.
Pensions and Other Postretirement Benefit Plans
The Corporation adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,
an amendment of Statements No. 87, 88 and 106" ("SFAS No. 132"), during 1998.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets and eliminates certain
disclosures previously required. The methods of measurement and recognition for
such plans remain unchanged. In accordance with the provisions of SFAS No. 132,
disclosures for earlier periods provided for comparative purposes have been
restated to reflect the provisions of this Statement.
Incentive and Performance Unit Plans
The Corporation has incentive and related performance unit plans covering
certain officers of the Corporation and Subsidiary Banks. The market value of
shares issued under the incentive plans and the estimated value of awards under
the performance unit plans are being charged to operating expense over periods
of up to three years.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" encourages but does not require that companies
record compensation cost for stock-based employee compensation plans at fair
value. The Corporation has chosen to account for stock-based compensation plans
using the intrinsic value method prescribed in Accounting Principles Board
("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. The Corporation's stock
options have no intrinsic value at grant date, and consequently, no compensation
cost is recognized for them.
40
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
An employer that continues to apply the intrinsic value accounting method
rather than the "fair value based method" must disclose certain pro forma
information. Under the fair value based method, compensation cost is measured at
the grant date of the option based on the value of the award and is recognized
over the service period, which is usually the vesting period. The required pro
forma amounts reflect the difference between compensation cost, if any, included
in net income and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the income statement
if the fair value based method had been used.
Stock Split and Per Share Data
All share and per share data has been retroactively restated for the
two-for-one stock split effected in the form of a 100% stock dividend paid on
October 1, 1998.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders, before and after the impact of extraordinary items, if any,
by the weighted average number of common shares outstanding during each period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Fair Value of Financial Instruments
The financial statements include disclosure of fair value 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 the accrual basis and
the net interest differential, including premiums paid, if any, are recognized
as an adjustment to interest income or expense of the related asset or
liability. The Corporation does not utilize derivative financial instruments for
trading purposes.
(2) MERGERS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS
The Corporation consummated two mergers in 1997 accounted for as
poolings-of-interests. In accordance with the accounting for
poolings-of-interests, the financial statements of the Corporation have been
restated to reflect the respective mergers as if they had been effective as of
the earliest period presented. On August 1, 1997, the Corporation merged with
AmFed, a $1.3 billion savings bank headquartered in Greenville, South Carolina.
AmFed operates as a wholly-owned subsidiary of the Corporation. On January 31,
1997, the Corporation merged with Salem Trust Bank, a $165 million commercial
bank based in Winston-Salem, North Carolina. The former offices of Salem Trust
Bank are operated as offices of CCB. The mergers were effected through tax-free
exchanges of stock, whereby the Corporation issued approximately 11,226,000
shares of common stock and cash in-lieu of fractional shares for all of the
outstanding shares of AmFed and Salem Trust Bank.
41
(2) MERGERS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS -- Continued
The financial statements of the Corporation have been restated to reflect
the AmFed and Salem Trust Bank mergers as if they 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 two years ended December 31, 1997 (1997
includes AmFed for the six months ended June 30, 1997 and Salem Trust Bank for
the month ended January 31, 1997) were as follows:
1997 1996
----------- ----------
(In Thousands)
Total income:
CCB Financial Corporation $580,403 460,353
- ---------------------------------------------------------------
American Federal Bank, FSB 62,326 121,081
- ---------------------------------------------------------------
Salem Trust Bank 1,133 13,747
- --------------------------------------------------------------- -------- -------
Combined $643,862 595,181
- --------------------------------------------------------------- -------- -------
Net interest income after provision for loan and lease losses:
CCB Financial Corporation $256,228 200,670
- ---------------------------------------------------------------
American Federal Bank, FSB 27,207 50,799
- ---------------------------------------------------------------
Salem Trust Bank 553 6,173
- --------------------------------------------------------------- -------- -------
Combined $283,988 257,642
- --------------------------------------------------------------- -------- -------
Net income:
CCB Financial Corporation $ 84,306 70,315
- ---------------------------------------------------------------
American Federal Bank, FSB 11,202 14,492
- ---------------------------------------------------------------
Salem Trust Bank (84) 2,019
- --------------------------------------------------------------- -------- -------
Combined $ 95,424 86,826
- --------------------------------------------------------------- -------- -------
AmFed and Salem Trust Bank's total income and net interest income after
provision for loan and lease losses have been adjusted from the amounts
previously reported by those entities. The adjustments were made to reclassify
certain items to the accounting classification followed by the Corporation in
its income statement categories.
In connection with the AmFed and Salem Trust Bank mergers, the Corporation
incurred merger-related expense of $17,916,000 during 1997. This expense was
comprised of severance and other employee benefit costs, excess facilities
costs, systems conversion costs and other transaction-related expenses. The
after-tax effect of the merger-related expense was $13,051,000.
(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, 1998 and 1997, the Subsidiary Banks were required to
maintain average reserve and clearing balances of $7,600,000 and $18,366,000,
respectively.
(4) INVESTMENT SECURITIES
Investment securities with amortized costs of approximately $638,400,000 at
December 31, 1998 and $598,600,000 at December 31, 1997 were pledged to secure
public funds on deposit, repurchase agreements and for other purposes required
by law. The investment securities portfolio is segregated into securities
available for sale and securities held to maturity.
The Corporation's other comprehensive income for the years ended December
31, 1998, 1997 and 1996 and accumulated other comprehensive income as of
December 31, 1998 and 1997 are comprised solely of unrealized gains and losses
on certain investments in debt and equity securities. Other comprehensive income
for the years ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
---------- ------- -----------
(In Thousands)
Unrealized holding gains (losses) arising during period $ 658 6,939 (5,274)
- --------------------------------------------------------------------------
Less reclassification adjustment for realized gains (losses), net of tax 1,307 288 (1,297)
- -------------------------------------------------------------------------- ------ ----- ------
Unrealized gains (losses) on securities, net of applicable income taxes $ (649) 6,651 (3,977)
- -------------------------------------------------------------------------- ------ ----- ------
42
(4) INVESTMENT SECURITIES -- Continued
Securities Available for Sale
Securities available for sale are presented on the Consolidated Balance
Sheets at their market value. The amortized cost and approximate market values
of these securities at December 31, 1998 and 1997 were as follows:
1998
---------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ----------- ----------- ------------
(In Thousands)
U.S. Treasury $ 389,043 11,871 -- 400,914
- -----------------------------
U.S. Government agencies and
corporations 672,502 4,222 (563) 676,161
- -----------------------------
Mortgage-backed securities 153,865 5,102 -- 158,967
- -----------------------------
Equity securities 47,067 1,090 (1) 48,156
- ----------------------------- ----------- ------ ------- -------
Total $ 1,262,477 22,285 (564) 1,284,198
- ----------------------------- ----------- ------ ------ ---------
1997
-------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ----------- ------------
(In Thousands)
U.S. Treasury 472,396 8,322 (59) 480,659
- -----------------------------
U.S. Government agencies and
corporations 551,830 4,813 (83) 556,560
- -----------------------------
Mortgage-backed securities 289,204 8,795 (78) 297,921
- -----------------------------
Equity securities 45,946 1,021 -- 46,967
- ----------------------------- ------- ----- --- -------
Total 1,359,376 22,951 (220) 1,382,107
- ----------------------------- --------- ------ ---- ---------
Equity securities include CCB's and AmFed's required investment in stock of
the Federal Home Loan Bank (the "FHLB") which totaled $25,423,000 at December
31, 1998 and $24,432,000 at December 31, 1997. No ready market exists for this
stock and it has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amounts were deemed to
be a reasonable estimate of fair value.
Net unrealized gains on securities available for sale totaled $21,721,000,
$22,731,000 and $12,122,000 at December 31, 1998, 1997 and 1996, respectively,
and are included as a component of shareholders' equity, net of deferred tax
liabilities of $8,390,000, $8,751,000 and $4,793,000 at December 31, 1998, 1997
and 1996, respectively. In the opinion of Management, the Corporation has no
securities which are other than temporarily impaired.
Gross gains and losses from sales of investment securities available for
sale totaled $2,203,000 and $26,000, respectively, in 1998, totaled $578,000 and
$98,000, respectively, in 1997 and totaled $2,058,000 and $4,359,000,
respectively, in 1996.
Following is a maturity schedule of securities available for sale at
December 31, 1998:
Amortized Carrying
Cost Value
-------------- ------------
(In Thousands)
Within 1 year $ 154,128 155,200
- -------------------------------------------------
After 1 but within 5 years 495,939 509,329
- -------------------------------------------------
After 5 but within 10 years 400,440 401,477
- -------------------------------------------------
After 10 years 11,038 11,069
- ------------------------------------------------- ----------- -------
Subtotal 1,061,545 1,077,075
- -------------------------------------------------
Mortgage-backed securities 153,865 158,967
- -------------------------------------------------
Equity securities 47,067 48,156
- ------------------------------------------------- ----------- ---------
Total securities available for sale $ 1,262,477 1,284,198
- ------------------------------------------------- ----------- ---------
Securities Held to Maturity
The carrying values and approximate market values of securities held to
maturity at December 31, 1998 and 1997 were as follows:
1998 1997
-------------------------------------------- -----------------------------------------
Carrying Unrealized Unrealized Market Carrying Unrealized Unrealized Market
Value Gains Losses Value Value Gains Losses Value
----------- ----------- ----------- -------- --------- ----------- ----------- -------
(In Thousands)
States and political subdivisions $ 80,189 5,088 -- 85,277 81,617 5,385 -- 87,002
- ----------------------------------- -------- ----- -- ------ ------ ----- -- ------
Following is a maturity schedule of securities held to maturity at December
31, 1998:
Carrying Market
Value Value
----------- ---------
(In Thousands)
Within 1 year $ 500 501
- -----------------------------------------------
After 1 but within 5 years 7,709 8,003
- -----------------------------------------------
After 5 but within 10 years 48,997 51,907
- -----------------------------------------------
After 10 years 22,983 24,866
- ----------------------------------------------- -------- ------
Total securities held to maturity $ 80,189 85,277
- ----------------------------------------------- -------- ------
Gains from calls of securities held to maturity totaled $2,000 during 1998
and $140,000 during 1996. Losses from calls of securities held to maturity
during 1998 totaled $1,000.
43
(5) LOANS AND LEASE FINANCING
A summary of loans and lease financing at December 31, 1998 and 1997
follows:
1998 1997
-------------- ------------
(In Thousands)
Commercial, financial and agricultural $ 686,133 688,040
- ----------------------------------------
Real estate-construction 906,916 733,026
- ----------------------------------------
Real estate-mortgage 3,143,637 2,915,851
- ----------------------------------------
Instalment loans to individuals 488,110 506,339
- ----------------------------------------
Revolving credit 214,685 212,794
- ----------------------------------------
Lease financing 54,955 43,265
- ---------------------------------------- ----------- ---------
Total gross loans and lease financing 5,494,436 5,099,315
- ----------------------------------------
Less: Unearned income 7,099 5,746
- ---------------------------------------- ----------- ---------
Total loans and lease financing $ 5,487,337 5,093,569
- ---------------------------------------- ----------- ---------
Loans and lease financing of $16,761,000 and $16,088,000 at December 31,
1998 and 1997, respectively, were not accruing interest. Loans with outstanding
balances of $2,205,000 in 1998, $2,281,000 in 1997 and $2,666,000 in 1996 were
transferred from loans to other real estate acquired through loan foreclosure.
Other real estate acquired through loan foreclosures amounted to $791,000 and
$845,000 at December 31, 1998 and 1997, respectively, and is included in "other
assets" on the Consolidated Balance Sheets.
The following is an analysis of interest income related to loans and lease
financing on nonaccrual status for the years ended December 31, 1998, 1997 and
1996:
1998 1997 1996
---------- ------- ------
(In Thousands)
Interest income that would have been recognized if the loans had been current at original $ 1,138 1,055 1,359
- ------------------------------------------------------------------------------------------
contractual rates
- ------------------------------------------------------------------------------------------
Amount recognized as interest income 288 171 412
- ------------------------------------------------------------------------------------------ ------- ----- -----
Difference $ 850 884 947
- ------------------------------------------------------------------------------------------ ------- ----- -----
During 1997, the Subsidiary Banks securitized $112,600,000 of mortgage
loans and retained the securities in the investment securities available for
sale portfolio. The securities were subsequently sold at a nominal gain. An
additional $25,658,000 of mortgage loans were securitized and immediately sold.
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
and South Carolina with the exception of credit cards which are available to
customers on a nationwide basis and certain instalment loans which are available
in market areas stretching from Virginia to Georgia. 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. Loans held for
sale totaled $77,626,000 and $31,490,000 at December 31, 1998 and 1997,
respectively. 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, 1998, impaired loans totaled $15,766,000, of which
$9,030,000 were on nonaccrual status, and their related reserve for loan losses
totaled $2,574,000. The average carrying value of impaired loans was $15,267,000
during 1998 and gross interest income recognized on impaired loans totaled
$845,000. At December 31, 1997, the carrying value of loans considered to be
impaired totaled $14,325,000, of which $7,810,000 were on nonaccrual status. The
related reserve for loan losses on the impaired loans totaled $2,846,000. The
average carrying value of impaired loans was $11,424,000 during the year ended
December 31, 1997. Gross interest income on the impaired loans, included in net
income, totaled $320,000 during 1997.
During 1998 and 1997, 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, 1998 (in
thousands):
Balance at
Beginning New Balance at
of Year Loans Repayments End of Year
----------- ------- ------------ ------------
Directors, Executive Officers and Associates $40,982 3,944 6,408 $38,518
- ---------------------------------------------- ------- ----- ----- -------
Loans serviced for the benefit of others totaled $1.1 billion at December
31, 1998 and $1.2 billion at December 31, 1997 and 1996. Mortgage servicing fees
totaled $3,980,000 in 1998, $3,978,000 in 1997 and $3,969,000 in 1996. Mortgage
servicing rights
44
(5) LOANS AND LEASE FINANCING -- Continued
totaled $4,981,000 and $3,640,000 at December 31, 1998 and 1997, respectively,
and are included in "other assets" on the Consolidated Balance Sheets. The fair
value of mortgage servicing rights was $5,333,000 at December 31, 1998 and
$3,982,000 at December 31, 1997. Additionally, there is value associated with
servicing originated prior to January 1, 1996 for which the carrying value is
zero. No valuation allowance for capitalized mortgage servicing rights was
required at December 31, 1998. The following table summarizes the changes in
mortgage servicing rights during 1998 and 1997:
1998 1997
------------ -----------
(In Thousands)
Balance at beginning of year $ 3,640 2,889
- ---------------------------------------
Capitalized mortgage servicing rights 12,980 4,106
- ---------------------------------------
Amortization (1,358) (871)
- ---------------------------------------
Sale of mortgage servicing (10,281) (2,484)
- --------------------------------------- --------- ------
Balance at end of year $ 4,981 3,640
- --------------------------------------- --------- ------
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:
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Balance at beginning of year $ 67,594 61,257 55,114
- ------------------------------------------------------
Provision charged to operations 15,884 16,376 17,361
- ------------------------------------------------------
Recoveries of loan and leases previously charged-off 2,613 3,105 3,062
- ------------------------------------------------------
Loan and lease losses charged to reserve (12,909) (13,144) (14,280)
- ------------------------------------------------------ --------- ------- -------
Balance at end of year $ 73,182 67,594 61,257
- ------------------------------------------------------ --------- ------- -------
(7) PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
Accumulated
Depreciation Net
and Value
Cost Amortization Book
----------- -------------- ------
(In Thousands)
December 31, 1998:
Land $ 18,282 -- 18,282
- -------------------------------
Buildings 68,755 33,905 34,850
- -------------------------------
Leasehold improvements 14,326 4,071 10,255
- -------------------------------
Furniture and equipment 105,964 76,581 29,383
- ------------------------------- --------- ------ ------
Total premises and equipment $ 207,327 114,557 92,770
- ------------------------------- --------- ------- ------
December 31, 1997:
Land $ 18,364 -- 18,364
- -------------------------------
Buildings 67,464 31,543 35,921
- -------------------------------
Leasehold improvements 11,488 3,555 7,933
- -------------------------------
Furniture and equipment 94,336 70,519 23,817
- ------------------------------- --------- ------- ------
Total premises and equipment $ 191,652 105,617 86,035
- ------------------------------- --------- ------- ------
(8) TIME DEPOSITS AND SHORT-TERM BORROWED FUNDS
Maturities of time deposits are as follows:
Year Ending December 31 Total Maturities
- --------------------------------- -----------------
(In Thousands)
1999 $2,113,261
- ----------------
2000 719,950
- ----------------
2001 87,584
- ----------------
2002 35,424
- ----------------
2003 and thereafter 596
- --------------------------------- ----------
Total $2,956,815
- ---------------- ----------
45
(8) TIME DEPOSITS AND SHORT-TERM BORROWED FUNDS -- Continued
Short-term borrowed funds outstanding at December 31, 1998 and 1997
consisted of the following:
1998 1997
----------- ---------
(In Thousands)
FHLB short-term advances $ 105,000 50,000
- ------------------------------------------------
Federal funds purchased and master notes 128,482 137,372
- ------------------------------------------------
Treasury tax and loan depository note account 8,513 12,565
- ------------------------------------------------
Securities sold under agreements to repurchase 46,261 76,500
- ------------------------------------------------ --------- -------
Total short-term borrowed funds $ 288,256 276,437
- ------------------------------------------------ --------- -------
The short-term FHLB advances were drawn under CCB's $600 million FHLB line
of credit and are secured by a blanket collateral agreement on CCB's mortgage
loan portfolio. Master note borrowings are unsecured obligations of the
Corporation which mature daily and bore a weighted average interest rate of
4.60% at December 31, 1997. The treasury tax and loan depository note account is
payable on demand and is collateralized by various investment securities with
carrying values of $32,649,000 and market values of $33,075,000 at December 31,
1997. Interest on borrowings under this arrangement is payable at .25% below the
weekly federal fund rate as quoted by the Federal Reserve.
The following table presents certain information for securities sold under
agreements to repurchase. These short-term borrowings by the Subsidiary Banks
are collateralized by U.S. Treasury and U.S. Government agency and corporation
securities with carrying and market values of $292,909,000 at December 31, 1998.
The securities collateralizing the short-term borrowings have been delivered to
a third-party custodian for safekeeping. Following is a summary of this type of
borrowing for the three previous years:
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Balance at December 31 $ 46,261 76,500 120,057
- ------------------------------------------------------------- -------- ------ -------
Weighted average interest rate at December 31 3.89 % 5.30 5.33
- ------------------------------------------------------------- ---------- ------- --------
Maximum amount outstanding at any month end during the year $ 70,398 125,383 207,412
- ------------------------------------------------------------- -------- -------- --------
Average daily balance outstanding during the year $ 59,638 101,159 167,259
- ------------------------------------------------------------- -------- -------- --------
Average annual interest rate paid during the year 4.88 % 5.29 5.31
- ------------------------------------------------------------- ---------- -------- --------
The Corporation has an unsecured $50 million line of credit with a
commercial bank. No draws were outstanding as of December 31, 1998. The maximum
outstanding during 1998 was $10,000,000. Interest expense on the draw from the
line of credit totaled $72,000 during 1998. The line of credit currently
requires an annual commitment fee of 12 basis points and may be withdrawn under
certain events of default including failure to comply with covenants, failure to
make principal or interest payments within the specified timeframe or voluntary
or involuntary liquidation, reorganization or other relief with respect to
indebtedness. No draws were outstanding as of December 31, 1997 or 1996 nor
during the years then ended.
(9) LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1998 and 1997:
1998 1997
------------ ---------
(In Thousands)
Mortgage payable at 9%, collateralized by bank premises $ 88 109
- ---------------------------------------------------------
Federal Home Loan Bank advances maturing through 2014 183,622 67,592
- ---------------------------------------------------------
6.75% subordinated notes 32,985 32,985
- --------------------------------------------------------- --------- ------
Total long-term debt $ 216,695 100,686
- --------------------------------------------------------- --------- -------
The FHLB long-term advances are primarily at fixed rates of up to 8.41% and
are collateralized by liens on first mortgage loans with book values not less
than the outstanding principal balance of the obligations. The majority of the
FHLB long-term advances outstanding at December 31, 1998 were drawn by the
Subsidiary Banks to replace funds paid in special dividends to the Corporation
for the stock repurchase program. Interest on the FHLB long-term advances
totaled $7,895,000 in 1998, $2,891,000 in 1997 and $1,997,000 in 1996.
In 1993, the Corporation issued $40,000,000 of 6.75% subordinated notes due
December 1, 2003. Interest on the notes is payable semi-annually on June 1 and
December 1. 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 gain of
$880,000. Interest on the subordinated notes totaled $2,226,000 in 1998, 1997
and 1996.
46
(9) LONG-TERM DEBT -- Continued
Maturities of long-term debt are as follows:
Year Ending December 31 Total Maturities
- ------------------------- -----------------
(In Thousands)
1999 $ 50,273
- ----------------
2000 296
- ----------------
2001 50,377
- ----------------
2002 322
- ----------------
2003 58,310
- ----------------
Thereafter 57,117
- ---------------- --------
Total $216,695
- ---------------- --------
(10) EMPLOYEE BENEFIT PLANS
Pension Plan
The Corporation has a noncontributory, defined benefit pension plan
covering substantially all full-time employees. 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 1998, 1997 and 1996, the Corporation contributed $2,614,000, $2,871,000 and
$2,928,000, respectively, to its pension plan.
AmFed also had a noncontributory, defined benefit pension plan covering
substantially all full-time salaried employees. An employee's benefits were
based on years of service and compensation during the last five years of
employment. AmFed's funding policy was to contribute annually the maximum amount
that could be deducted for Federal income tax purposes. In 1997 and 1996, AmFed
contributed $590,000 and $528,000 respectively, to its pension plan. AmFed's
pension plan was merged into the Corporation's pension plan effective January 1,
1998.
At December 31, 1998, pension plan assets consist primarily of corporate
stocks and bonds including 64,100 shares of the Corporation's common stock. The
plan's assets are held and administered by CCB in a trust fund. The combined
change in benefit obligation, change in plan assets and funded status of the
Corporation and AmFed's pension plans and the amounts included in "other
liabilities" on the Consolidated Balance Sheets at December 31, 1998 and 1997
are shown below:
1998 1997
------------ -----------
Change in benefit obligation: (In Thousands)
Benefit obligation at January 1 $ 69,834 63,770
- --------------------------------------------
Service cost 3,677 3,576
- --------------------------------------------
Interest cost 4,859 4,570
- --------------------------------------------
Actuarial (gain) loss (899) 6
- --------------------------------------------
Benefit payments (2,347) (2,088)
- -------------------------------------------- --------- ------
Benefit obligation at December 31 $ 75,124 69,834
- -------------------------------------------- --------- ------
Change in plan assets:
Fair value of plan assets at January 1 $ 79,161 65,139
- --------------------------------------------
Actual return on plan assets 10,479 12,649
- --------------------------------------------
Employer contributions 2,614 3,461
- --------------------------------------------
Benefit payments (2,347) (2,088)
- -------------------------------------------- --------- ------
Fair value of plan assets at December 31 $ 89,907 79,161
- -------------------------------------------- --------- ------
Funded status:
As of end of year $ 14,782 9,327
- --------------------------------------------
Unrecognized transition (asset) obligation (250) (297)
- --------------------------------------------
Unrecognized prior-service cost 968 1,123
- --------------------------------------------
Unrecognized net (gain) loss (16,672) (12,228)
- -------------------------------------------- --------- -------
Accrued pension expense $ (1,172) (2,075)
- -------------------------------------------- --------- -------
47
(10) EMPLOYEE BENEFIT PLANS -- Continued
The combined pension expense components for the Corporation and AmFed's
pension plans for the years ended December 31, 1998, 1997 and 1996 are shown
below:
1998 1997 1996
---------- ------------- -----------
(In Thousands)
Service cost of benefits earned during the period $ 3,677 3,576 3,325
- ---------------------------------------------------
Interest cost on projected benefit obligation 4,859 4,569 4,136
- ---------------------------------------------------
Expected return on plan assets (6,412) (5,395) (4,479)
- ---------------------------------------------------
Amortization of transition (asset) obligation (46) (319) (319)
- ---------------------------------------------------
Amortization of prior-service cost 155 155 128
- ---------------------------------------------------
Amortization of net (gain) loss (523) (1) --
- --------------------------------------------------- -------- --------- ------
Net pension expense $ 1,710 2,585 2,791
- --------------------------------------------------- -------- -------- ------
Assumptions used in computing the actuarial present value of the
Corporation's and AmFed's projected benefit obligation were as follows:
1998 1997
---------- ---------
Discount rate 7.00% 7.25
- ----------------------------------------------------------
Rate of increase in compensation level of employees 5.00 % 5.00
- ----------------------------------------------------------
Expected long-term rate of return on pension plan assets 8.00 % 8.00
- ----------------------------------------------------------
Savings and Profit Sharing Plans
The Corporation has a defined contribution employee benefit plan covering
substantially all employees with one year's service. Under the plan, employee
contributions are partially matched. In addition, the Corporation may make
discretionary contributions to the plan. Total expense under this plan was
$2,882,000, $2,850,000 and $2,612,000 in 1998, 1997 and 1996, respectively.
Stock Options, Restricted Stock and Other Incentive 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 can be awarded. A maximum of 2,000,000 shares of the Corporation's
common stock is available for award under this plan. As of December 31, 1998, a
total of 1,077,346 stock options to purchase shares of the Corporation's common
stock and 29,668 restricted shares of the Corporation's common stock had been
awarded under this plan. The options and restricted stock vest over varying
periods of up to three years. No other awards have been made under this plan.
During 1993, the Corporation adopted nonstatutory and incentive stock
option plans as part of transactions to acquire financial institutions. The
stock options were granted to the directors and certain officers of the acquired
financial institutions entitling them to purchase shares of the Corporation's
common stock. The options are earned and exercisable over a period of up to ten
years.
The Corporation continued in effect nonstatutory and incentive stock option
plans in force at the date of the mergers with AmFed, Salem Trust Bank and other
acquired institutions. The stock options under these plans were granted to
directors and certain officers of the respective financial institutions 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 certain of
the stock options included vesting provisions of up to five years. All stock
options outstanding at the time of the respective mergers were converted into
options to acquire common stock of the Corporation. No additional options have
been granted under these option plans.
The Corporation has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options as permitted under
SFAS No. 123. In accordance with APB No. 25, no compensation expense is
recognized by the Corporation when stock options are granted because the
exercise price of the Corporation's stock options equals the market price of the
underlying stock on the date of grant. Had compensation expense for the
Corporation's stock option plans been determined consistent with SFAS No. 123,
the Corporation's net income and net income per share for the years ended
December 31, 1998, 1997 and 1996 would have been reduced to the pro forma
amounts indicated below. Pro forma net income reflects only options granted
since December 31, 1994. Therefore, the effects of applying SFAS No. 123 during
the initial phase-in period may not be representative of the effect on reported
net income in future years.
48
(10) EMPLOYEE BENEFIT PLANS -- Continued
1998 1997 1996
------------- ---------- ----------
(In Thousands Except Per Share Data)
Net income As reported $ 121,212 95,424 86,826
- ----------------
Pro forma 119,815 94,343 86,356
Basic EPS As reported 2.96 2.31 2.11
- ----------------
Pro forma 2.93 2.27 2.10
Diluted EPS As reported 2.93 2.28 2.08
- ----------------
Pro forma 2.89 2.25 2.06
The weighted average fair value of options granted approximated $10.91 in
1998, $8.32 in 1997 and $5.27 in 1996. The fair values of the options granted in
1998, 1997 and 1996 are estimated on the date of the grants using the
Black-Scholes option-pricing model. Option pricing models require the use of
highly subjective assumptions, including expected stock volatility, which when
changed can materially affect fair value estimates. Accordingly, the model does
not necessarily provide a reliable single measure of the fair value of the
Corporation's stock options. The fair values were estimated using the following
weighted-average assumptions:
1998 1997 1996
---------- --------- ---------
Dividend yield 2.00% 2.00 2.30
- ---------------------------
Expected volatility 15.00 19.51 20.26
- ---------------------------
Risk-free interest rate 5.47 6.68 6.15
- ---------------------------
Expected average life 5 years 5 years 5 years
- ---------------------------
A summary of the Corporation's stock option activity and related
information for the years ended December 31, 1998, 1997 and 1996 follows:
Outstanding Exercisable
--------------------------------- ------------------------------
Option Weighted Average Option Weighted Average
Shares Exercise Price Shares Exercise Price
------------- ----------------- ---------- -----------------
At December 31, 1995 1,223,126 $ 12.47
- ----------------------
Granted 214,206 21.56
- ----------------------
Exercised (387,570) 9.10
- ----------------------
Forfeited (14,016) 12.94
- ---------------------- --------- --------
At December 31, 1996 1,035,746 15.60 782,308 $ 14.01
- ---------------------- ------- -------
Granted 442,166 32.90
- ----------------------
Exercised (287,582) 13.66
- ----------------------
Forfeited (24,510) 21.00
- ---------------------- --------- --------
At December 31, 1997 1,165,820 22.53 749,498 $ 18.22
- ---------------------- ------- -------
Granted 348,460 55.72
- ----------------------
Exercised (209,313) 54.06
- ----------------------
Forfeited (32,448) 42.06
- ---------------------- --------- --------
At December 31, 1998 1,272,519 $ 31.81 800,464 $ 22.11
- ---------------------- --------- -------- ------- -------
Exercise prices for options outstanding as of December 31, 1998 ranged from
$2.60 to $56.00. The following table summarizes information about the
Corporation's stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Prices of Options Remaining Exercise Price of Options Exercise Price
- -------------------- ------------ Average Years Average ------------ Average
$2.60 to $18.49 359,519 5.04 $ 13.81 359,518 $ 13.81
- --------------------
$18.63 to $31.56 321,131 6.81 25.67 286,702 25.75
- --------------------
$31.94 to $55.25 284,809 8.34 35.40 153,044 34.54
- --------------------
$55.97 to $56.00 307,060 9.21 55.97 1,200 55.97
- -------------------- ------- ---- -------- ------- --------
$2.60 to $56.00 1,272,519 7.23 $ 31.81 800,464 $ 22.11
- -------------------- --------- ---- -------- ------- --------
During 1998, 1997 and 1996, 10,648 shares, 11,020 shares and 8,000 shares,
respectively, of the Corporation's common stock were awarded as restricted stock
under the Long-Term Incentive Plan. The restricted stock awards were recorded at
their fair values of $580,000, $388,000 and $200,000, respectively, on the dates
of grant and had weighted average fair values of $54.52, $36.56 and $25.25 per
share. During 1998, 2,720 shares of restricted stock were forfeited. During
1998, 1997 and 1996, $195,000, $176,000 and $76,000, respectively, of
compensation expense was recognized for restricted stock awards.
49
(10) EMPLOYEE BENEFIT PLANS -- Continued
The Corporation has a Performance Unit Plan which operates in conjunction
with the Long-Term Incentive Plan and covers certain senior officers of the
Corporation and its subsidiaries. Under this plan, eligible participants have
been awarded performance units which have a value in range from $0 to $200 each,
with a target value of $100 each. At December 31, 1998, a total of 13,330 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 over the three-year period ended December 31, 2000. Total expense
under this plan was $1,200,000, $1,100,000 and $1,087,000 for 1998, 1997 and
1996, 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 $4,125,000, $3,278,000 and $2,524,000 in 1998, 1997 and 1996,
respectively.
During 1993, the Corporation adopted Management Recognition Plans ("MRP")
covering certain officers and directors of the Subsidiary Banks. Shares of the
Corporation's common stock totaling 236,240 shares were awarded under the MRP
and vested over periods of up to five years; all MRP shares were fully vested in
1998. Total expense under the MRP was $32,000, $1,411,000 and $1,533,000 for
1998, 1997 and 1996, respectively. During 1998 and 1997, lapsed restrictions on
MRP shares increased shareholders' equity by $32,000 and $706,000, 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. The Corporation is required to recognize 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.
The following table sets forth the plan's change in benefit obligation,
funded status and the amounts included in "other liabilities" on the
Consolidated Balance Sheets at December 31, 1998 and 1997:
1998 1997
------------- -----------
(In Thousands)
Change in benefit obligation:
Benefit obligation at January 1 $ 7,450 7,040
- ----------------------------------------
Service cost 285 202
- ----------------------------------------
Interest cost 527 513
- ----------------------------------------
Actuarial (gain) loss 97 44
- ----------------------------------------
Benefit payments (375) (349)
- ---------------------------------------- --------- -----
Benefit obligation at December 31 $ 7,984 7,450
- ---------------------------------------- --------- -----
Funded status:
As of end of year $ (7,984) (7,450)
- ----------------------------------------
Unrecognized net (gain) loss 1,933 1,939
- ---------------------------------------- --------- ------
Accrued postretirement benefit expense $ (6,051) (5,511)
- ---------------------------------------- --------- ------
Net periodic postretirement benefit expense charged to operations for the
years ended December 31, 1998, 1997 and 1996 included the following components:
1998 1997 1996
------ ------ -----
(In Thousands)
Service cost of benefits earned during the period $285 202 214
- ---------------------------------------------------
Interest cost on accumulated benefit obligation 527 513 471
- ---------------------------------------------------
Amortization of net (gain) loss 103 90 127
- --------------------------------------------------- ---- --- ---
Net postretirement benefit expense $915 805 812
- --------------------------------------------------- ---- --- ---
The accumulated postretirement benefit obligations at December 31, 1998 and
1997 were determined using discount rates of 7.00% for 1998 and 7.25% for 1997.
50
(10) EMPLOYEE BENEFIT PLANS -- Continued
The health care trend rate was projected to be 6.00% for 1998 and decrease
to 5.00% for 1999 and thereafter. A 1% change in the assumed health care trend
rates would have the following effects:
1% Increase 1% Decrease
------------- ------------
(In Thousands)
Effect on total of service and interest cost components of net periodic
postretirement benefits expense $ 29 (25)
- -------------------------------------------------------------------------------
Effect on the accumulated postretirement benefit obligation 394 (346)
- -------------------------------------------------------------------------------
(11) SHAREHOLDERS' EQUITY
Earnings per Share
The following schedule reconciles the numerators and denominators of the
basic and diluted EPS computations for income before extraordinary items and net
income for the years ended December 31, 1998, 1997 and 1996:
Income Share Per Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(In Thousands Except Per Share Data)
For the year ended December 31, 1998:
Basic EPS:
Net income $ 121,212 40,898 $ 2.96
- -------------------------------------- ------
Effect of dilutive securities --
Stock options -- 511
- -------------------------------------- --------- ------
Diluted EPS $ 121,212 41,409 $ 2.93
- -------------------------------------- --------- ------ ------
For the year ended December 31, 1997:
Basic EPS:
- --------------------------------------
Net income $ 95,424 41,438 $ 2.31
- -------------------------------------- ------
Effect of dilutive securities --
Stock options -- 509
- -------------------------------------- --------- ------
Diluted EPS $ 95,424 41,947 $ 2.28
- -------------------------------------- --------- ------ ------
For the year ended December 31, 1996:
Basic EPS:
- ---------------------------------------
Net income $ 86,826 41,107 $ 2.11
- -------------------------------------- ------
Effect of dilutive securities:
Warrants -- 180
- --------------------------------------
Convertible debentures 22 44
- --------------------------------------
Stock options -- 484
- -------------------------------------- --------- ------
Diluted EPS $ 86,848 41,815 $ 2.08
- -------------------------------------- --------- ------ ------
Changes in Shareholders' Equity
Salem Trust Bank issued $2,133,000 of convertible subordinated notes in
1993 which bore interest at 6%. The notes were convertible at the option of the
holder or could be called at Salem Trust Bank's option, in whole or in part, at
any time after December 31, 1995 at par. During 1996, Salem Trust Bank called
the remaining convertible subordinated notes and substantially all were
converted into shares of common stock. Conversion of subordinated notes added
$2,118,000 to shareholders' equity in 1996.
As part of AmFed's 1989 conversion from a mutual to a stock savings bank,
AmFed issued certain equity instruments including common stock warrants which
allowed the holders of the warrants to purchase 600,000 shares of AmFed common
stock at a price of $5.00 per share. During 1996, AmFed repurchased all of the
remaining common stock warrants outstanding at a cost of $5,681,000.
Preferred Stock
The Corporation is authorized to issue up to 10,000,000 shares of serial
preferred stock, of which 800,000 have been designated as Series A Junior
Participating Preferred Stock. No shares of preferred stock have been issued or
were outstanding at December 31, 1998 or 1997.
51
(11) SHAREHOLDERS' EQUITY -- Continued
Rights Plan
In 1990, the Corporation entered into a Rights Agreement (the "Rights
Agreement") with CCB which provided for a plan (the "Rights Plan") under which
preferred stock purchase rights were authorized (the "Rights"). During 1998, the
Rights Agreement was amended and restated to extend its term and to make other
changes necessary to update the Rights Plan. For use in connection with the
Rights Plan, the Corporation's Board of Directors has designated a series of
preferred stock designated as Series A Junior Participating Preferred Stock
("Preferred Shares") consisting of 800,000 shares and having certain special
rights for purposes of dividends and other distributions, voting, dissolution
and liquidation, and in connection with certain mergers or acquisitions of the
common stock of the Corporation. No Preferred Shares have been issued.
In accordance with 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 ten 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 (or 10% in certain circumstances)
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
one one-hundredth (1/100) of a Preferred Share for a price of $187.50 (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
Preferred Shares interests covered by the Right, and dividing that product by
50% of the "current 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 Preferred Shares having voting rights equivalent to one share of
common stock, for all or part of the outstanding Rights (all as adjusted from
time to time as described in the Rights Agreement).
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 an Acquiring Person, to purchase securities of
the surviving company equal to the current Purchase Price multiplied by the
number of Preferred Shares interests covered by the Right, and dividing that
product by 50% of the "current market price" of a share of the common stock of
the surviving or acquiring company.
The Rights will expire on October 1, 2008, and may be redeemed by the
Corporation at a price of $.01 per Right at any time prior to the acquisition by
a person or group of 15% or more (or 10% in certain circumstances) of the
Corporation's outstanding common stock.
Regulatory Matters
The Corporation and the Subsidiary Banks are subject to risk-based capital
guidelines requiring minimum capital levels based on the perceived risk of
assets and off-balance sheet instruments. As required by the Federal Deposit
Insurance Corporation Improvement Act, the federal bank regulatory agencies have
jointly issued rules which implement a system of prompt corrective action for
financial institutions. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, there are minimum ratios of capital to
weighted risk assets. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly discretionary actions by regulators that, if undertaken
could have a material effect on the Corporation's consolidated financial
statements.
Disclosure about the Subsidiary Banks' capital adequacy are set forth in
the table below. Tier I capital consists of common equity less goodwill and
certain other intangible assets. Tier I excludes the equity impact of adjusting
available for sale securities to market value. Total Capital is comprised of
Tier I and Tier II capital. Tier II capital includes subordinated notes and loan
loss reserves, as
52
(11) SHAREHOLDERS' EQUITY -- Continued
defined and limited according to regulatory guidelines. Balance sheet assets and
the credit equivalent amount of off-balance sheet items per regulatory
guidelines are assigned to broad risk categories and a category risk weight is
then applied. Management believes that as of December 31, 1998, the Corporation
and the Subsidiary Banks met all capital adequacy requirements to which they
were subject.
As of December 31, 1998 (the most recent notification), the Federal Deposit
Insurance Corporation ("FDIC") categorized the Subsidiary Banks as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Subsidiary Banks must meet minimum
ratios for total risk-based, Tier I risk-based, and Tier I leverage (the ratio
of Tier I capital to average assets) as set forth in the following table. There
are no conditions or events since the latest notification that Management
believes have changed the Subsidiary Banks' category.
The risk-based capital and leverage ratios for CCB, AmFed and CCB-Ga. as of
December 31, 1998 and 1997 are presented below.
CCB AmFed
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(In Thousands)
Tier I capital $ 500,016 520,279 105,287 115,088
- --------------------------------------------------------------
Total capital 557,567 571,185 116,807 125,890
- --------------------------------------------------------------
Risk weighted assets 4,848,586 4,343,721 881,471 862,072
- --------------------------------------------------------------
Adjusted quarterly average assets 6,396,674 5,835,963 1,218,405 1,295,122
- --------------------------------------------------------------
Risk-based capital ratios: Tier I capital to risk weighted assets:
Actual 10.31 % 11.98 11.94 13.35
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 6.00 6.00 6.00 6.00
- --------------------------------------------------------------
Total capital to risk weighted assets:
Actual 11.50 13.15 13.25 14.60
- --------------------------------------------------------------
Regulatory minimum 8.00 8.00 8.00 8.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 10.00 10.00 10.00 10.00
- --------------------------------------------------------------
Leverage ratio:
Actual 7.82 8.92 8.64 8.89
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 5.00 5.00 5.00 5.00
- -------------------------------------------------------------- --------- ---------- ---------- -------
CCB-Ga.
----------------------
1998 1997
---------- -----------
(In Thousands)
Tier I capital 12,781 9,613
- --------------------------------------------------------------
Total capital 13,577 10,620
- --------------------------------------------------------------
Risk weighted assets 61,470 78,602
- --------------------------------------------------------------
Adjusted quarterly average assets 88,290 93,867
- --------------------------------------------------------------
Risk-based capital ratios: Tier I capital to risk weighted assets:
Actual 20.79 12.23
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 6.00 6.00
- --------------------------------------------------------------
Total capital to risk weighted assets:
Actual 22.09 13.51
- --------------------------------------------------------------
Regulatory minimum 8.00 8.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 10.00 10.00
- --------------------------------------------------------------
Leverage ratio:
Actual 14.48 10.24
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 5.00 5.00
- -------------------------------------------------------------- ------- -------
(12) SUPPLEMENTARY INCOME STATEMENT INFORMATION
Following is a breakdown of the components of "other operating" expenses on
the Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996:
1998 1997 1996
---------- -------- --------
(In Thousands )
Marketing $ 7,370 7,303 6,991
- ----------------------------------------
External data processing services 5,364 4,446 4,025
- ----------------------------------------
FDIC special assessment, net of refund -- -- 12,959
- ----------------------------------------
Deposit and other insurance 3,415 3,346 4,912
- ----------------------------------------
Postage and freight 4,486 4,107 3,863
- ----------------------------------------
Printing and office supplies 7,935 6,178 5,457
- ----------------------------------------
Telecommunications 6,341 5,765 4,895
- ----------------------------------------
Legal and professional fees 10,331 6,340 7,350
- ----------------------------------------
Amortization of intangible assets 4,122 4,433 4,366
- ----------------------------------------
All other 26,022 23,330 20,803
- ---------------------------------------- -------- ------ ------
Total other operating expenses $ 75,386 65,248 75,621
- ---------------------------------------- -------- ------ ------
The FDIC special assessment was levied by the FDIC to recapitalize the
Savings Association Insurance Fund.
53
(13) INCOME TAXES
The components of income tax expense for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Current income taxes:
Federal $ 66,004 57,809 42,011
- ------------------------------
State 7,552 5,172 4,594
- ------------------------------ -------- ------ ------
Total current tax expense 73,556 62,981 46,605
- ------------------------------ -------- ------ ------
Deferred income tax benefit:
Federal (4,071) (6,245) (2,344)
- ------------------------------
State (853) (971) (672)
- ------------------------------ -------- ------ ------
Total deferred tax benefit (4,924) (7,216) (3,016)
- ------------------------------ -------- ------ ------
Total income tax expense $ 68,632 55,765 43,589
- ------------------------------ -------- ------ ------
Income tax expense for 1996 was favorably impacted by Congressional
legislation enacted in 1996 that repealed the tax bad debt reserve method for
thrift institutions and froze the amount of such reserves existing at December
31, 1987. Under the Internal Revenue Code of 1986, thrift institutions had been
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 created income for tax purposes
only, which was subject to the then current corporate income tax rates. Deferred
tax liabilities totaling $1,553,000 had been previously recorded for a former
thrift subsidiary's tax bad debt reserves (the thrift subsidiary was merged into
CCB in 1996). Due to the 1996 Congressional legislation, a federal income tax
benefit of $1,358,000 and a state income tax benefit of $195,000 were recorded
related to the thrift subsidiary's tax bad debt reserves, which can only be
recaptured in certain remote circumstances.
During 1998 and 1997, a total of $495,000 and $118,000, respectively, of
income tax benefit was credited to additional paid-in capital as a result of the
exercise of certain stock options which were subsequently disposed of by the
optionees and as a result of the lapse of restrictions on restricted stock.
During 1996, a total of $546,000 of income tax benefit was credited to
additional paid-in capital as a result of the lapse of restrictions on
restricted stock.
A reconciliation of income tax expense to the amount computed by
multiplying income before income taxes by the statutory federal income tax rate
follows:
Amount
-----------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Tax expense at statutory rate on income before income taxes $ 66,445 52,916 45,645
- -------------------------------------------------------------
State taxes, net of federal benefit 4,354 2,731 2,549
- -------------------------------------------------------------
Increase (reduction) in taxes resulting from:
Tax law change regarding thrift bad debt reserve recapture -- -- (1,358)
- -------------------------------------------------------------
Tax-exempt interest on investment securities and loans (1,370) (1,411) (1,654)
- -------------------------------------------------------------
Decrease in valuation allowance for deferred tax assets -- -- (600)
- -------------------------------------------------------------
Other, net (797) 1,529 (993)
- ------------------------------------------------------------- -------- ------ ------
Income tax expense $ 68,632 55,765 43,589
- ------------------------------------------------------------- -------- ------ ------
% of Pretax Income
---------------------------------
1998 1997 1996
----------- ---------- ----------
Tax expense at statutory rate on income before income taxes 35.00 % 35.00 35.00
- -------------------------------------------------------------
State taxes, net of federal benefit 2.29 1.81 1.95
- -------------------------------------------------------------
Increase (reduction) in taxes resulting from:
Tax law change regarding thrift bad debt reserve recapture -- -- (1.04)
- -------------------------------------------------------------
Tax-exempt interest on investment securities and loans (.70) ( .93) (1.27)
- -------------------------------------------------------------
Decrease in valuation allowance for deferred tax assets -- -- ( .46)
- -------------------------------------------------------------
Other, net (.40) 1.00 ( .76)
- ------------------------------------------------------------- ----- ------ ------
Income tax expense 36.19 % 36.88 33.42
- ------------------------------------------------------------- --------- ------ ------
At December 31, 1998 and 1997, the Corporation had recorded net deferred
tax assets of $17,365,000 and $12,080,000, respectively, which are included in
"other assets" on the Consolidated Balance Sheets. A valuation allowance is
provided when it is more likely than not that some portion of the deferred tax
asset will not be realized. 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. In addition, taxes paid during the carryback
period exceed the Corporation's recorded net deferred tax asset. Consequently,
Management has determined that a valuation allowance for deferred tax assets was
not required at December 31, 1998 or 1997. The sources and tax effects of
cumulative temporary differences that give rise to significant portions of the
net deferred tax assets at December 31, 1998 and 1997 are shown below:
54
1998 1997
----------- ---------
(In Thousands)
Deferred tax assets:
Reserve for loan losses $ 27,047 22,851
- ---------------------------------------------------------------
Postretirement benefits 2,887 2,245
- ---------------------------------------------------------------
Deferred compensation 2,457 2,528
- ---------------------------------------------------------------
Other 5,013 4,934
- --------------------------------------------------------------- -------- ------
Total gross deferred tax assets 37,404 32,558
- --------------------------------------------------------------- -------- ------
Deferred tax liabilities:
Intangible assets 996 1,764
- ---------------------------------------------------------------
Deferred loan fees and costs 3,315 2,999
- ---------------------------------------------------------------
Premises and equipment 1,694 1,346
- ---------------------------------------------------------------
FHLB dividends 2,588 2,606
- ---------------------------------------------------------------
Unrealized gains on investment securities available for sale 8,390 8,751
- ---------------------------------------------------------------
Mortgage servicing rights gain 1,815 1,227
- ---------------------------------------------------------------
Other 1,241 1,785
- --------------------------------------------------------------- -------- ------
Total gross deferred tax liabilities 20,039 20,478
- --------------------------------------------------------------- -------- ------
Net deferred tax asset $ 17,365 12,080
- --------------------------------------------------------------- -------- ------
(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 $7,467,000 in 1998, $6,319,000 in 1997 and $6,852,000 in
1996. A summary of noncancellable, long-term lease commitments at December 31,
1998 follows:
Type of Property
-----------------------------
Total
Year Ending December 31 Real Property Equipment Commitments
- -------------------------- --------------- ----------- ------------
(In Thousands)
1999 $ 5,328 2,249 7,577
- ----
2000 4,844 1,937 6,781
- ----
2001 3,884 1,369 5,253
- ----
2002 3,528 496 4,024
- ----
2003 3,138 77 3,215
- ----
Thereafter 24,025 -- 24,025
- ---- -------- ----- ------
Total lease commitments $ 44,747 6,128 50,875
- -------------------------- -------- ----- ------
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 1999.
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.
In addition to legal actions in the normal course of business, AmFed filed
a claim against the United States of America in the Court of Federal Claims in
1995. The complaint seeks compensation for exclusion of supervisory goodwill
from the calculation of AmFed's regulatory capital requirements as a result of
enactment of the Financial Institution Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). During the 1980's, healthy thrift institutions were encouraged
to buy troubled thrifts through the regulatory agencies allowing the thrifts to
count supervisory goodwill as regulatory capital on their balance sheets and
amortize the purchase over several decades. Supervisory goodwill represented the
difference between the purchase price and the actual value of an insolvent
thrift's tangible assets. However, when the FIRREA legislation was enacted in
1989, the acquiring thrifts were required to write-off their supervisory
goodwill more rapidly, effectively wiping out a significant part of their
regulatory capital. Over 100 lawsuits have been filed by the acquiring thrifts
seeking compensation from the United States for the losses suffered from capital
restrictions. AmFed's supervisory goodwill arose from acquisitions in 1982. The
Corporation intends to vigorously pursue the litigation. The amount of recovery,
if any, which could result if AmFed were to prevail in its suit cannot be
determined at this time. Legal expenses incurred in pursuit of the claim have
been nominal.
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
55
(14) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK -- Continued
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, primarily real estate or business assets, is
generally obtained. At December 31, 1998 and 1997, the Subsidiary Banks had
commitments to extend credit of approximately $1.8 billion and $1.4 billion.
These amounts include unused revolving credit lines and home mortgage equity
lines of $403 million and $416 million, respectively, at December 31, 1998 and
$309 million and $334 million, respectively, at December 31, 1997.
Standby letters of credit are commitments issued by the Subsidiary Banks to
guarantee the performance of a customer to a third party. The standby letters of
credit are generally secured by non-depreciable assets. The Subsidiary Banks had
approximately $31 million and $24 million in outstanding standby letters of
credit at December 31, 1998 and 1997.
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 that are used for on-balance sheet instruments. For standby
letters of credit, the Subsidiary Banks use a more strict credit policy due to
the nature of the 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.
As of December 31, 1998, the Corporation had two off-balance sheet
derivative financial instruments in the form of interest rate swaps (basis
swaps) with a notional principal of $200 million. The basis swaps were entered
into in November 1997 and April 1998 with a major regional commercial bank and
have two-year terms. No fees were paid upon entering into the basis swaps. The
purpose of entering into the basis swaps was to synthetically convert U.S.
Treasury-based liabilities into prime rate-based liabilities and to lock-in the
spread between the two indices. The financial instruments had a nominal negative
effect on 1998's interest expense and a nominal positive effect on 1997's
interest expense. The financial instruments had a carrying value of $26,000 at
December 31, 1998. The Corporation was not a party to any other off-balance
sheet derivative financial instruments during 1998.
(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. Regulatory
capital requirements must be met by the Subsidiary Banks as well as restrictions
under the General Statutes of North Carolina in regard to CCB. Under these
requirements, the Subsidiary Banks have approximately $240,884,000 in retained
earnings at December 31, 1998 that can be transferred to the Corporation in the
form of cash dividends. Total dividends declared by the Subsidiary Banks to the
Corporation in 1998 were $151,700,000.
As a result of the above requirements, consolidated net assets of the
Subsidiary Banks amounting to approximately $463,322,000 at December 31, 1998
were restricted from transfer to the Corporation.
(16) CCB FINANCIAL CORPORATION (PARENT COMPANY)
CCB Financial Corporation's principal asset is the investment in its
Subsidiary Banks and its principal source of income is dividends from the
Subsidiary Banks. The Parent Company's Condensed Balance Sheets at December 31,
1998 and 1997 and the related Condensed Statements of Income and Cash Flows for
the three-years ended December 31, 1998 are as follows:
56
(16) CCB FINANCIAL CORPORATION (PARENT COMPANY) -- Continued
Condensed Balance Sheets
As of December 31, 1998 and 1997
1998 1997
------------ ----------
(In Thousands)
Cash and short-term investments $ 177,036 119,273
- ----------------------------------------------
Note receivable from subsidiary -- 10,000
- ----------------------------------------------
Loans 65,653 60,877
- ----------------------------------------------
Less reserve for loan losses 792 792
- ---------------------------------------------- --------- -------
Net loans 64,861 60,085
- ----------------------------------------------
Investment in subsidiaries 658,951 689,386
- ----------------------------------------------
Other assets 17,772 13,447
- ---------------------------------------------- --------- -------
Total assets $ 918,620 892,191
- ---------------------------------------------- --------- -------
Master notes $ 128,482 117,372
- ----------------------------------------------
Note payable to subsidiary 52,000 49,000
- ----------------------------------------------
Subordinated notes 32,985 32,985
- ----------------------------------------------
Other liabilities 17,259 11,474
- ---------------------------------------------- --------- -------
Total liabilities 230,726 210,831
- ----------------------------------------------
Shareholders' equity 687,894 681,360
- ---------------------------------------------- --------- -------
Total liabilities and shareholders' equity $ 918,620 892,191
- ---------------------------------------------- --------- -------
Condensed Income Statements
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ---------- ---------
(In Thousands)
Dividends from subsidiaries $ 151,700 32,100 30,000
- ------------------------------------------------------------------
Interest income 10,909 9,811 8,010
- ------------------------------------------------------------------
Other income 66 8 5
- ------------------------------------------------------------------ --------- ------ ------
Total operating income 162,675 41,919 38,015
- ------------------------------------------------------------------ --------- ------ ------
Interest expense 10,188 8,881 7,342
- ------------------------------------------------------------------
Provision for loan losses -- 102 40
- ------------------------------------------------------------------
Merger-related expense -- 3,873 --
- ------------------------------------------------------------------
Management fees 563 150 150
- ------------------------------------------------------------------
Other operating expenses 1,303 870 898
- ------------------------------------------------------------------ --------- ------ ------
Total operating expenses 12,054 13,876 8,430
- ------------------------------------------------------------------ --------- ------ ------
Income before income taxes 150,621 28,043 29,585
- ------------------------------------------------------------------
Income taxes (377) (910) (145)
- ------------------------------------------------------------------ --------- ------ ------
Income before equity in undistributed net income of subsidiaries 150,998 28,953 29,730
- ------------------------------------------------------------------
Equity in undistributed net income (loss) of subsidiaries (29,786) 66,471 57,096
- ------------------------------------------------------------------ --------- ------ ------
Net income $ 121,212 95,424 86,826
- ------------------------------------------------------------------ --------- ------ ------
Condensed Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------- -----------
(In Thousands)
Net cash provided by operating activities $ 153,493 26,347 29,470
- ------------------------------------------------------ ---------- ------- ------
Investment in subsidiaries -- 2,598 9,317
- ------------------------------------------------------
Net decrease in loans to subsidiaries 10,000 -- --
- ------------------------------------------------------
Net increase in loans (4,776) (7,835) (3,041)
- ------------------------------------------------------
Other, net (24) (4) (215)
- ------------------------------------------------------ ---------- --------- ------
Net cash provided (used) by investing activities 5,200 (5,241) 6,061
- ------------------------------------------------------ ---------- -------- ------
Increase in master notes 11,110 32,505 68,147
- ------------------------------------------------------
Proceeds from issuance of debt to subsidiaries 3,000 4,800 4,200
- ------------------------------------------------------
Purchase and retirement of common stock (76,601) -- (997)
- ------------------------------------------------------
Cash dividends (40,398) (36,750) (28,579)
- ------------------------------------------------------
Purchase and retirement of common stock warrants -- -- (5,681)
- ------------------------------------------------------
Other, net 1,959 3,417 3,078
- ------------------------------------------------------ ---------- --------- -------
Net cash provided (used) by financing activities (100,930) 3,972 40,168
- ------------------------------------------------------ ---------- --------- -------
Net increase in cash and short-term investments 57,763 25,078 75,699
- ------------------------------------------------------
Cash and short-term investments at beginning of year 119,273 94,195 18,496
- ------------------------------------------------------ ---------- --------- -------
Cash and short-term investments at end of year $ 177,036 119,273 94,195
- ------------------------------------------------------ ---------- --------- -------
57
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized consolidated quarterly financial data for the years ended
December 31, 1998 and 1997 follows:
1998
----------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
------------- ---------- ---------- ----------
(In Thousands Except Per Share Data)
Interest income $ 145,425 145,683 144,562 141,637
- ---------------------------------------------------------------
Interest expense 62,756 64,604 64,234 62,968
- --------------------------------------------------------------- --------- ------- ------- -------
Net interest income 82,669 81,079 80,328 78,669
- ---------------------------------------------------------------
Provision for loan and lease losses 4,320 4,778 3,646 3,140
- --------------------------------------------------------------- --------- ------- ------- -------
Net interest income after provision for loan and lease losses 78,349 76,301 76,682 75,529
- ---------------------------------------------------------------
Other income 30,367 28,588 29,508 24,737
- ---------------------------------------------------------------
Other expenses 58,313 58,894 58,918 54,092
- --------------------------------------------------------------- --------- ------- ------- -------
Income before income taxes 50,403 45,995 47,272 46,174
- ---------------------------------------------------------------
Income taxes 18,814 15,632 17,296 16,890
- --------------------------------------------------------------- --------- ------- ------- -------
Net income $ 31,589 30,363 29,976 29,284
- --------------------------------------------------------------- --------- ------- ------- -------
Net income per share:
Basic $ .78 .75 .73 .70
- ---------------------------------------------------------------
Diluted .77 .74 .72 .70
- --------------------------------------------------------------- --------- ------- ------- -------
1997
------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
---------- ---------- ---------- ---------
(In Thousands Except Per Share Data)
Interest income 141,495 138,932 136,946 133,090
- ---------------------------------------------------------------
Interest expense 64,034 63,529 61,582 60,954
- --------------------------------------------------------------- ------- ------- ------- -------
Net interest income 77,461 75,403 75,364 72,136
- ---------------------------------------------------------------
Provision for loan and lease losses 3,472 5,355 4,885 2,664
- --------------------------------------------------------------- ------- ------- ------- -------
Net interest income after provision for loan and lease losses 73,989 70,048 70,479 69,472
- ---------------------------------------------------------------
Other income 24,223 23,041 24,223 21,912
- ---------------------------------------------------------------
Other expenses 55,077 66,719 52,374 52,028
- --------------------------------------------------------------- ------- ------- ------- -------
Income before income taxes 43,135 26,370 42,328 39,356
- ---------------------------------------------------------------
Income taxes 15,390 11,062 14,847 14,466
- --------------------------------------------------------------- ------- ------- ------- -------
Net income 27,745 15,308 27,481 24,890
- --------------------------------------------------------------- ------- ------- ------- -------
Net income per share:
Basic .67 .37 .67 .60
- ---------------------------------------------------------------
Diluted .66 .37 .66 .59
- --------------------------------------------------------------- ------- ------- ------- -------
(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. Accordingly, the aggregate fair value amounts presented below do not
represent the underlying value of the Corporation. Estimated fair values of
certain on- and off-balance sheet financial instruments of the Corporation at
December 31, 1998 and 1997 are presented below (in thousands):
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(In Thousands)
Financial assets:
Cash, time deposits in other banks and other short-term investments $ 740,451 740,451 419,344 419,344
- ---------------------------------------------------------------------
Securities available for sale 1,284,198 1,284,198 1,382,107 1,382,107
- ---------------------------------------------------------------------
Securities held to maturity 80,189 85,277 81,617 87,002
- ---------------------------------------------------------------------
Net loans 5,414,155 5,527,581 5,025,975 5,115,476
- ---------------------------------------------------------------------
Mortgage servicing rights 4,981 5,333 3,640 3,982
- ---------------------------------------------------------------------
Financial liabilities:
Deposits 6,459,764 6,475,689 5,984,597 5,992,450
- ---------------------------------------------------------------------
Short-term borrowings 288,256 288,256 276,437 276,437
- ---------------------------------------------------------------------
Long-term debt 216,695 219,236 100,686 100,524
- ---------------------------------------------------------------------
Off-balance sheet financial instruments:
Interest rate swaps 26 (430) 13 218
- --------------------------------------------------------------------- ---------- --------- --------- ---------
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 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.
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. 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
58
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
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. The fair value of mortgage servicing rights is based
on market prices for similar servicing assets.
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, 1998
and 1997. 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 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.
59
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 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 LLP and the internal auditors have direct access to the Audit Committee.
/s/ Ernest C. Roessler
ERNEST C. ROESSLER
Chairman, President and Chief Executive Officer
/s/ Sheldon M. Fox
SHELDON M. FOX
Executive Vice President and Chief Financial Officer
/s/ W. Harold Parker, Jr.
W. HAROLD PARKER, JR.
Senior Vice President and Controller
January 19, 1999
60
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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Raleigh, North Carolina
January 19, 1999
61
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL AND
ACCOUNTING DISCLOSURE
There have been no disagreements with accountants on accounting and
financial disclosures.
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
CCB Financial Corporation's definitive Proxy Statement dated March 18, 1999 (the
"Proxy Statement"), pages 5 to 6, under the heading "Proposal 1. Election of
Directors" or appears under the heading "Executive Officers of the Registrant"
in Part I. of this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the Proxy Statement, pages 8 to 15, under the headings "Compensation Committee
Report", "Executive Compensation", "Pension Plan" and "Changes in Control and
Employment Arrangements".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the Proxy Statement, pages 2 to 4, under the heading "Amount and Nature of
Beneficial Ownership of Voting Securities".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the Proxy Statement, page 17, under the heading "Transactions with Management".
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data listed in the index set
forth in Item 8 of this Annual Report are filed as part of this Annual Report.
All schedules are omitted because of the absence of the condition under
which they are required or because the required information is included in the
financial statements or related notes.
(a) 3.
Exhibits are listed in the Exhibit Index beginning on page 63 of this
Annual Report.
(b) Reports on Form 8-K:
A report on Form 8-K dated October 2, 1998 was filed under Items 5 and 7
reporting the Corporation's amendment and restatement of the 1990 Shareholder
Rights Plan to extend its term and to make other changes considered necessary to
update the original Shareholder Rights Plan.
An amendment to Form 8-K dated July 1, 1983 was filed on October 1, 1998
under Item 5 to amend and update the description of the Corporation's capital
stock.
62
DESCRIPTION OF EXHIBITS
Amended and Restated Articles of Incorporation of Registrant
Articles of Amendment to the Amended and Restated Articles of Incorporation of
Registrant
Amended and Restated Bylaws of Registrant
Specimen of Common Stock of Registrant
Amended and Restated Rights Agreement dated October 1, 1998 between Registrant
and Central Carolina Bank and Trust Company
Form of Indenture dated as of November 1, 1993, between Registrant and Bank of
New York as successor to 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
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
Salem Trust Bank 1986 Incentive Stock Option Plan, as assumed by the Registrant
American Federal Bank, FSB Amended and Restated 1988 Stock Option and Incentive
Plan, as assumed by the Registrant
1995 Directors Performance Plan of American Federal Bank, FSB, as assumed by the
Registrant
Employment and Amended and Restated Change of Control Agreement between
Registrant, Central Carolina Bank and Trust Company and Ernest C. Roessler
Employment and Amended and Restated Change of Control Agreement between
Registrant, Central Carolina Bank and Trust Company and Richard L. Furr
Employment and Amended and Restated Change of Control Agreement between
Registrant, Central Carolina Bank and Trust Company and J. Scott Edwards
Plan for Severance Compensation After A Change in Control dated October
21, 1997 and amended October 19, 1998
Amended and Restated Employment Agreement by and between Registrant, Central
Carolina Bank and Trust Company and David B. Jordan
Employment Agreement by and between Registrant and William L. Abercrombie, Jr.
Subsidiaries of Registrant
Consent of KPMG LLP
Financial Data Schedule
Registrant's Proxy Statement to Shareholders for the 1999 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
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CCB FINANCIAL CORPORATION
By: /s/ ERNEST C. ROESSLER
-------------------------------------
Ernest C. Roessler
Chairman, President and Chief
Executive Officer
Date: March 15, 1999
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
- ---------------------------------- Chairman and President March 15, 1999
Ernest C. Roessler (Chief Executive Officer)
/s/ WILLIAM L. ABERCROMBIE, JR. Vice Chairman March 15, 1999
- ----------------------------------
William L. Abercrombie, Jr.
/s/ J. HARPER BEALL, III Director March 15, 1999
- ----------------------------------
J. Harper Beall, III
/s/ JAMES B. BRAME, JR. Director March 15, 1999
- ----------------------------------
James B. Brame, Jr.
/s/ TIMOTHY B. BURNETT Director March 15, 1999
- ----------------------------------
Timothy B. Burnett
/s/ BLAKE P. GARRETT, JR. Director March 15, 1999
- ----------------------------------
Blake P. Garrett, Jr.
/s/ EDWARD S. HOLMES Director March 15, 1999
- ----------------------------------
Edward S. Holmes
/s/ BONNIE MCELVEEN-HUNTER Vice Chairman March 15, 1999
- ----------------------------------
Bonnie McElveen-Hunter
/s/ DAVID B. JORDAN Director March 15, 1999
- ----------------------------------
David B. Jordan
/s/ C. DAN JOYNER Director March 15, 1999
- ----------------------------------
C. Dan Joyner
/s/ OWEN G. KENAN Director March 15, 1999
- ----------------------------------
Owen G. Kenan
/s/ EUGENE J. MCDONALD Executive Vice Chairman March 15, 1999
- ----------------------------------
Eugene J. McDonald
Director March , 1999
- ----------------------------------
Hamilton W. McKay, Jr., M.D.
65
Signature Title Date
- ----------------------------------- ------------------------- ---------------
/s/ GEORGE J. MORROW Director March 15, 1999
- ----------------------------------
George J. Morrow
/s/ ERIC B. MUNSON Director March 15, 1999
- ----------------------------------
Eric B. Munson
/s/ DAVID E. SHI Director March 15, 1999
- ----------------------------------
Dr. David E. Shi
Director March , 1999
- ----------------------------------
Jimmy K. Stegall
Director March , 1999
- ----------------------------------
H. Allen Tate, Jr.
/s/ JAMES L. WILLIAMSON Director March 15, 1999
- ----------------------------------
James L. Williamson
/s/ PHAIL WYNN, JR. Director March 15, 1999
- ----------------------------------
Dr. Phail Wynn, Jr.
/s/ SHELDON M. FOX Executive Vice President March 15, 1999
- ---------------------------------- and Chief Financial
Sheldon M. Fox Officer
/s/ W. HAROLD PARKER, JR. Senior Vice President March 15, 1999
- ---------------------------------- and Controller (Chief
W. Harold Parker, Jr. Accounting Officer)
66
EXHIBIT INDEX
Exhibit Number
per Item 601 of
Regulation S-K Description Exhibit No.
- ---------------- ------------------------------------------------------------------------------------- ------------
(3) Articles of Incorporation and Bylaws.
a. Registrant's Amended and Restated Articles of *
Incorporation are incorporated herein by reference from
Exhibit 3 of Registrant's Form 8-K dated May 19, 1995.
b. Registrant's Articles of Amendment to its Amended and *
Restated Articles of Incorporation are incorporated herein
by reference from Exhibit 3 of Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997.
c. Registrant's Articles of Amendment to its Amended and *
Restated Articles of Incorporation are incorporated herein
by reference from Exhibit 3 of Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
d. Registrant's Articles of Amendment to its Amended and *
Restated Articles of Incorporation are incorporated herein
by reference from Exhibit 3 of Registrant's Current Report
on Form 8-K dated October 1, 1998.
e. Registrant's Amended and Restated Bylaws dated October 22, *
1996 are incorporated by reference from Exhibit 3 of
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(4) Instruments defining the rights of security holders, including
indentures. *
a. Specimen of Common Stock of Registrant is incorporated
herein by reference from Exhibit 4.1 of Registrant's
Current Report on Form 8-K dated October 1, 1998.
b. Amended and Restated Rights Agreement dated October 1, *
1998 between Registrant and Central Carolina Bank and
Trust Company is incorporated herein by reference from
Exhibit 4.2 of Registrant's Current Report on Form 8-K
dated October 1, 1998.
c. Form of indenture dated November 1, 1993 between *
Registrant and Bank of New York as successor to 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. 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.
33-61268 on Form S-8.
c. 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.
d. 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.
e. 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.
f. 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.
g. Salem Trust Bank 1986 Incentive Stock Option Plan, as *
assumed by the Registrant, is incorporated herein by
reference from Exhibit 99 of Registrant's Registration
Statement No. 333-22031 on Form S-8.
67
Exhibit Number
per Item 601 of
Regulation S-K Description Exhibit No.
- ---------------- ------------------------------------------------------------------------------------ ----------------
h. American Federal Bank, FSB Amended and Restated 1988 Stock *
Option and Incentive Plan, as assumed by the Registrant,
is incorporated herein by reference from Exhibit 99 of
Registrant's Registration Statement No. 333-34207 on Form
S-8.
i. 1995 Directors Performance Plan of American Federal Bank, *
FSB, as assumed by the Registrant, is incorporated herein
by reference from Exhibit 99 of Registrant's Registration
Statement No. 333-34231 on Form S-8.
j. Employment and Amended and Restated Change of Control *
Agreement dated January 12, 1998 between Registrant,
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 March 16, 1998.
k. Employment and Amended and Restated Change of Control *
Agreement dated January 27, 1998 between Registrant,
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 March 16, 1998.
l. Employment and Amended and Restated Change of Control *
Agreement dated January 12, 1998 between Registrant,
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 March 16, 1998.
m. Registrant's Plan for Severance Compensation After A 10
Change in Control dated October 21, 1997 and amended
October 19, 1998.
n. Amended 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.
o. Employment Agreement by and between Registrant and William *
L. Abercrombie, Jr. dated July 31, 1997 is incorporated
herein by reference from Exhibit 10.1 of Registrant's
Registration Statement No. 333-25705 on Form S-4.
(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 LLP. 23
(27) Financial Data Schedule. 27
(99) Additional exhibits.
Proxy Statement for 1999 Annual Meeting of Shareholders to be held
on April 27, 1999. Not Required to
be Re-filed
* Previously filed
68