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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, 1997
[ ] 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)
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North Carolina 56-1347849
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
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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:
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$5.00 par value Common Stock New York Stock Exchange
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(Title of class) (Name of exchange on which registered)
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Securities issued pursuant to Section 12(g) of the Act:
None
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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 6, 1998 was $2,219,117,794. On March 6, 1998, there
were 20,770,510 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 21, 1998 are incorporated in Part III of this
report.
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CROSS REFERENCE INDEX
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Page
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Part I.
Item 1. Business ................................................................... 3
Description ................................................................ 3
Average Balance Sheets ..................................................... 12
Net Interest Income Analysis -- Taxable Equivalent Basis ................... 12
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis .. 13
Investment Securities Portfolio ............................................ 19
Investment Securities -- Maturity/Yield Schedule ........................... 19
Types of Loans ............................................................. 17
Maturities and Sensitivities of Loans to Changes in Interest Rates ......... 18
Nonperforming and Risk Assets .............................................. 24
Loan Loss Experience ....................................................... 25
Average Deposits ........................................................... 20
Maturity Distribution of Large Denomination Time Deposits .................. 26
Return on Equity and Assets ................................................ 8
Short-Term Borrowings ...................................................... 43
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 .................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................. 29
Item 8. Financial Statements and Supplementary Data ................................ 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ....................................................... 61
Part III.
Item 10. Directors and Executive Officers of the Registrant ......................... 61
Item 11. Executive Compensation ..................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 61
Item 13. Certain Relationships and Related Transactions ............................. 61
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............ 61
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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, 1997, the
Corporation had consolidated assets of approximately $7.1 billion and was the
sixth 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 159 offices located in 63 cities and towns in North
Carolina. CCB had approximately $5.9 billion in assets at December 31, 1997 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 2 trust offices. AmFed had approximately $1.3 billion in assets at
December 31, 1997. 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, 1997, CCB-Ga. had approximately $103.6 million in
assets.
NON-BANK SUBSIDIARIES
CCB has three wholly-owned non-bank subsidiaries: Southland Associates,
Inc., CCBDE, Inc., and CCB Investment and Insurance Service Corporation
("CCBIISC"). Southland Associates, Inc. engages in real estate development and
is in the process of liquidating its assets through the sale of its remaining
inventory of residential lots. CCBDE, Inc. is an investment holding company
headquartered in Wilmington, Delaware. CCBIISC provides full brokerage services
through an independent discount brokerage firm and sells annuity and mutual
fund products.
AmFed has four wholly-owned non-bank subsidiaries: American Service
Corporation of S.C. ("ASC"), AMFEDDE, Inc., Finance South, Inc. ("Finance
South") and Mortgage North. ASC sells insurance, annuity and mutual fund
products as well as providing full brokerage services through an independent
discount brokerage firm. AMFEDDE, Inc. is an investment holding company
headquartered in Wilmington, Delaware. Mortgage North is a service related
company in the process of winding-down operations. During the second quarter of
1997, AmFed sold substantially all of the assets of Finance South. Finance
South made short-term consumer loans, typically financing household appliances
and furnishings, and second mortgage loans for the purpose of home improvement
or bill consolidation.
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 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 institution
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industry, along with other regulatory changes effected by the primary federal
regulators of the various types of financial institutions, the practical
distinctions between a commercial bank and a thrift institution have been
almost totally eliminated.
INTERSTATE BANKING AND BRANCHING
Recently enacted federal law permits adequately capitalized and managed
bank holding companies to acquire control of the assets of banks in any state
(the "Interstate Banking Law"). Acquisitions will be subject to anti-trust
provisions that cap at 10% the portion of the total deposits of insured
depository institutions in the United States that a single bank holding company
may control, and generally cap at 30% the portion of the total deposits of
insured depository institutions in a state that a single bank holding company
may control. Under certain circumstances, states have the authority to increase
or decrease the 30% cap, and states may set minimum age requirements of up to
five years on target banks within their borders.
Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permits interstate branching by allowing a bank to merge with
a bank located in a different state. A state may accelerate the effective date
for interstate mergers by adopting a law authorizing such transactions prior to
June 1, 1997, or it can "opt out" and thereby prohibit interstate branching by
enacting legislation to that effect. The Interstate Banking Law also permits
banks to open new branches or acquire existing branches of banks located in
other states that 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 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
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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.
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.
AmFed
AmFed is a federally-chartered savings bank subject to extensive
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.
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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, 1997, AmFed's QTL percentage was 71.37% 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 1997 were .013% for BIF insured deposits and .0648% for
SAIF insured deposits. In November 1997, the FDIC's Board of Directors voted to
maintain premium rates at their current levels through the first half of 1998.
The insurance premiums will be used to service the interest on the Financing
Corporation's bond obligations issued by the Federal government to recapitalize
the SAIF. Proposals are currently being considered by committees of the United
States Congress concerning a possible merger of the SAIF and BIF as well as the
merger of the charters of commercial banks and thrift institutions.
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.
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 27,
1998, the executive officers of the Corporation were as follows:
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Has Served as
an Executive
Officer of the
Name Age at 12/31/97 Position Corporation Since
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W. L. Burns, Jr. 69 Chairman of the Board 1968
Ernest C. Roessler 56 Vice Chairman of the Board, 1988
President and Chief Executive Officer
David B. Jordan 61 Vice Chairman of the Board 1995 (1)
William L. Abercrombie, Jr. 50 Vice Chairman of the Board 1997 (2)
J. Scott Edwards 51 Executive Vice President 1988
Richard L. Furr 48 Executive Vice President 1988
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(1) Prior to May 1995, Mr. Jordan served as Vice Chairman and Chief Executive
Officer of Security Capital Bancorp which was acquired by the Corporation
on May 19, 1995.
(2) 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.
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EMPLOYEE RELATIONS
As of December 31, 1997, the Corporation and its Subsidiary Banks employed
2,643 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 199 banking offices, approximately 87 of
which are either leased buildings or leased property on which the Subsidiary
Banks have constructed banking offices.
Southland Associates, Inc. owns real estate, other than premises, with a
net book value of approximately $445,000 at December 31, 1997. This real estate
consists of various parcels of land that have been developed for residential
use in the City of Durham and in Durham County, North Carolina.
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, 1997.
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 1997 and 1996 and discussion of other
shareholder matters. On January 20, 1998, a dividend of $.47 per share was
declared for payment on April 1, 1998 to shareholders of record as of March 16,
1998.
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. Cash dividends per share have not been restated for
the mergers.
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Six Year Summary of Selected Financial Data
(In Thousands Except Per Share Data)
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Years Ended December 31
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1997 1996 1995 1994 1993
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Summary of Operations
Interest income $ 550,463 512,575 492,409 401,588 339,137
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Interest expense 250,099 237,572 234,880 168,483 139,037
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Net interest income 300,364 275,003 257,529 233,105 200,100
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Provision for loan and lease losses 16,376 17,361 11,007 10,761 8,339
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Net interest income after provision 283,988 257,642 246,522 222,344 191,761
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Other income (1) 92,919 84,767 67,001 58,128 54,652
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Net investment securities gains (losses) 480 (2,161) (816) 357 2,962
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Other expenses (2) 226,198 209,833 198,207 180,963 162,330
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Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 151,189 130,415 114,500 99,866 87,045
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Income taxes (3) 55,765 43,589 37,356 38,421 30,070
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Income before extraordinary item and
cumulative effect of changes in accounting
principles 95,424 86,826 77,144 61,445 56,975
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Extraordinary item (4) -- -- (1,709) -- --
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Cumulative effect of changes in accounting
principles (5) -- -- -- -- (36,549)
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Net income $ 95,424 86,826 75,435 61,445 20,426
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Per Share
Income before extraordinary item and
cumulative effect of changes in accounting
principles:
Basic $ 4.61 4.22 3.80 3.01 3.04
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Diluted (6) 4.55 4.15 3.69 2.93 2.89
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Net income:
Basic 4.61 4.22 3.72 3.01 1.09
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Diluted (6) 4.55 4.15 3.61 2.93 1.06
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Cash dividends 1.78 1.60 1.44 1.32 1.24
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Book value 32.79 29.63 27.32 23.37 22.57
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Average shares outstanding:
Basic 20,719 20,553 20,295 20,437 18,764
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Diluted (6) 20,973 20,908 20,900 20,979 19,890
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Average Balances
Assets $ 6,943,989 6,570,573 6,218,290 5,575,057 4,715,319
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Loans and lease financing 4,877,187 4,464,026 4,113,207 3,569,065 3,027,617
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Earning assets 6,594,704 6,216,419 5,850,981 5,230,756 4,396,756
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Deposits 5,800,128 5,449,912 5,153,952 4,581,111 4,029,018
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Interest-bearing liabilities 5,495,194 5,242,467 5,047,523 4,496,256 3,785,448
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Shareholders' equity 638,988 574,759 511,031 478,314 407,635
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Selected Period End Balances
Assets $ 7,138,528 6,880,205 6,589,762 6,065,652 5,386,653
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Loans and lease financing 5,093,569 4,745,663 4,267,175 3,952,160 3,384,291
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Reserve for loan and lease losses 67,594 61,257 55,114 50,902 43,357
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Deposits 5,984,597 5,741,454 5,421,376 4,980,250 4,506,361
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Shareholders' equity 681,360 611,449 556,917 472,091 463,820
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Ratios
Income before extraordinary item and
cumulative effect of changes in accounting
principles to:
Average assets 1.37% 1.32 1.24 1.10 1.21
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Average shareholders' equity 14.93 15.11 15.10 12.85 13.98
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Net income to:
Average assets 1.37 1.32 1.21 1.10 .43
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Average shareholders' equity 14.93 15.11 14.76 12.85 5.01
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Net interest margin, taxable equivalent (7) 4.70 4.56 4.56 4.61 4.72
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Net loan and lease losses to average loans and
lease financing .21 .25 .17 .16 .19
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Dividend payout ratio 38.61 37.91 38.71 43.85 113.76
- -----------------------------------------------
Equity to assets ratio 9.20 8.75 8.22 8.58 8.64
- -----------------------------------------------
<CAPTION>
Year Ended Five Year
December 31 Compound
----------- Growth
1992 Rate %
------------ ----------
<S> <C> <C>
Summary of Operations
Interest income 333,285 10.6
- -----------------------------------------------
Interest expense 153,535 10.3
- ----------------------------------------------- --------
Net interest income 179,750 10.8
- -----------------------------------------------
Provision for loan and lease losses 11,322 7.7
- ----------------------------------------------- --------
Net interest income after provision 168,428 11.0
- -----------------------------------------------
Other income (1) 48,910 13.7
- -----------------------------------------------
Net investment securities gains (losses) 2,230 --
- -----------------------------------------------
Other expenses (2) 146,950 9.0
- ----------------------------------------------- --------
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 72,618 15.8
- -----------------------------------------------
Income taxes (3) 25,480 17.0
- ----------------------------------------------- --------
Income before extraordinary item and
cumulative effect of changes in accounting
principles 47,138 15.1
- -----------------------------------------------
Extraordinary item (4) -- --
- -----------------------------------------------
Cumulative effect of changes in accounting
principles (5) 61 --
- ----------------------------------------------- --------
Net income 47,199 15.1
=============================================== ======== ====
Per Share
Income before extraordinary item and
cumulative effect of changes in accounting
principles:
Basic 2.84 10.2
- -----------------------------------------------
Diluted (6) 2.63 11.6
- -----------------------------------------------
Net income:
Basic 2.84 10.2
- -----------------------------------------------
Diluted (6) 2.63 11.6
- -----------------------------------------------
Cash dividends 1.14 9.3
- -----------------------------------------------
Book value 26.04 4.7
- -----------------------------------------------
Average shares outstanding:
Basic 16,604 4.5
- -----------------------------------------------
Diluted (6) 18,753 2.3
- -----------------------------------------------
Average Balances
Assets 4,246,324 10.3
- -----------------------------------------------
Loans and lease financing 2,797,590 11.8
- -----------------------------------------------
Earning assets 3,910,104 11.0
- -----------------------------------------------
Deposits 3,581,536 10.1
- -----------------------------------------------
Interest-bearing liabilities 3,424,968 9.9
- -----------------------------------------------
Shareholders' equity 365,624 11.8
- -----------------------------------------------
Selected Period End Balances
Assets 4,351,535 10.4
- -----------------------------------------------
Loans and lease financing 2,780,538 12.9
- -----------------------------------------------
Reserve for loan and lease losses 34,930 14.1
- -----------------------------------------------
Deposits 3,702,341 10.1
- -----------------------------------------------
Shareholders' equity 389,242 11.8
- -----------------------------------------------
Ratios
Income before extraordinary item and
cumulative effect of changes in accounting
principles to:
Average assets 1.11
- -----------------------------------------------
Average shareholders' equity 12.89
- -----------------------------------------------
Net income to:
Average assets 1.11
- -----------------------------------------------
Average shareholders' equity 12.91
- -----------------------------------------------
Net interest margin, taxable equivalent (7) 4.74
- -----------------------------------------------
Net loan and lease losses to average loans and
lease financing .30
- -----------------------------------------------
Dividend payout ratio 40.14
- -----------------------------------------------
Equity to assets ratio 8.61
- -----------------------------------------------
</TABLE>
8
<PAGE>
(1) Other income in 1997 includes $2.3 million of gain ($1.4 million after-tax)
on the sale of an AmFed subsidiary which increased diluted net income per
share by $.06.
(2) Other expenses include merger-related expense of $17.9 million in 1997
related to the Corporation's mergers with AmFed and Salem Trust, $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 includes 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 items was
to decrease diluted net income per share by $.62 in 1997, $.37 per share
in 1996, $.35 per share in 1995 and $.03 per share in 1994.
(3) During 1996, a tax benefit of $1.6 million ($.07 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 $5.6 million ($.27 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 and $61,000 in 1992.
(6) 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, when applicable.
(7) Net interest margin is computed by dividing taxable equivalent net interest
income by average earning assets.
- --------------------------------------------------------------------------------
9
<PAGE>
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
(collectively, the "Subsidiary Banks") for the years ended December 31, 1997,
1996 and 1995. The consolidated financial statements also include the accounts
and results of operations of CCB's wholly-owned subsidiaries, CCB Investment
and Insurance Service Corporation ("CCBIISC"), CCBDE, Inc., and Southland
Associates, Inc. and AmFed's wholly-owned subsidiaries, American Service
Corporation of S.C., AMFEDDE, Inc., and Finance South, Inc. ("Finance South").
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.
Mergers and Other Changes in Corporate Structure
On January 31, 1997, the Corporation consummated its acquisition of Salem
Trust Bank ("Salem Trust"), 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 .36 of a share of
the Corporation's common stock for each share of Salem Trust stock outstanding
and .445 of a share for each share of AmFed stock outstanding. Consequently,
the Corporation issued 5.6 million shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Salem Trust and AmFed.
The former offices of Salem Trust 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.
During the second quarter of 1997, AmFed sold substantially all of the
assets of its subsidiary Finance South, a consumer finance operation. The
transaction, which consisted of the sale of loans ($14.3 million) and other
assets, resulted in a gain of $2.3 million ($1.4 million after-tax).
On May 19, 1995, the Corporation merged with Security Capital Bancorp
("Security Capital"), a $1.2 billion bank holding company based in Salisbury,
North Carolina. The merger was accounted for as a pooling-of-interests and was
effected through a tax-free exchange of stock. Each share of Security Capital
common stock outstanding on the date of the merger was converted into .5 shares
of the Corporation's common stock. Consequently, the Corporation issued
approximately 5.9 million shares of common stock and cash in lieu of fractional
shares for all of the outstanding shares of Security Capital. The former
offices of Security Capital are operated as offices of CCB. In accordance with
pooling-of-interests accounting, the financial statements of the Corporation
were restated to reflect the Security Capital merger as if it had been
effective as of the earliest period presented.
Results of Operations
Performance Overview
With the completion of the AmFed and Salem Trust mergers in 1997 and the
Security Capital merger in 1995, the Corporation has positioned its franchise
across the more economically vibrant urban areas of North and South Carolina.
With the customer base and the economic forces present in those market areas
and the Corporation's focus on increasing revenues while controlling
noninterest expense, the Corporation's 1997 net income increased 9.9% over
1996's results. Net income in 1997 of $95.4 million, or $4.55 per diluted
share, exceeded 1996's net income of $86.8 million, or $4.15 per diluted share.
Returns on average assets and average shareholders' equity were 1.37% and
14.93%, respectively, in 1997 compared to 1.32% and 15.11%, respectively, in
1996 and 1.21% and 14.76%, respectively, in 1995. Table 1 compares the
contributions to net income per diluted share for each income statement caption
for the years ended December 31, 1997, 1996 and 1995 and the respective changes
from year to year.
10
<PAGE>
T A B L E 1
Components Of Diluted Income Per Share
<TABLE>
<CAPTION>
Years Ended December 31 Change From
------------------------------------- ------------------------
1997 1996 1995 1997/1996 1996/1995
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 26.25 24.52 23.56 1.73 .96
- --------------------------------------
Interest expense 11.92 11.36 11.24 .56 .12
- -------------------------------------- -------- ----- ----- ---- ---
Net interest income 14.33 13.16 12.32 1.17 .84
- --------------------------------------
Provision for loan and lease losses .78 .83 .53 (.05) .30
- -------------------------------------- -------- ----- ----- ----- ---
Net interest income after provision 13.55 12.33 11.79 1.22 .54
- --------------------------------------
Other income (1) 4.44 3.94 3.17 .50 .77
- --------------------------------------
Other expenses (2) 10.78 10.04 9.48 .74 .56
- -------------------------------------- -------- ----- ----- ----- ---
Income before income taxes 7.21 6.23 5.48 .98 .75
- --------------------------------------
Income taxes (3) 2.66 2.08 1.79 .58 .29
- -------------------------------------- -------- ----- ----- ----- ---
Net income before extraordinary item 4.55 4.15 3.69 .40 .46
- --------------------------------------
Extraordinary item (4) -- -- ( .08) -- .08
- -------------------------------------- -------- ----- ------ ----- ---
Net income $ 4.55 4.15 3.61 .40 .54
====================================== ======== ===== ====== ===== ===
</TABLE>
(1) Other income includes a $2.3 million gain realized in the sale of a
subsidiary during 1997.
(2) Other expenses include merger-related expense of $17.9 million in 1997, the
FDIC Special Assessment of $13.9 million in 1996 and merger-related
expense of $10.3 million in 1995.
(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 savings bank
subsidiary.
(4) In 1995, AmFed recognized an extraordinary item of $1.7 million, net of
taxes, for the loss on extinguishment of debt.
(5) Excluding the impact of the non-recurring items discussed in (1), (2), (3)
and (4), income per diluted share would be $5.11, $4.45 and $4.04 for the
years ended December 31, 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
Operating Income
Operating income, defined as income before non-recurring items, increased
15.0% in 1997 compared to 1996's operating income. Operating income per diluted
share was $5.11 in 1997 versus 1996's $4.45. Over the past three years, the
Corporation's results of operations have been significantly impacted by the
following non-recurring items which are described below.
To effect the Salem Trust and AmFed mergers, the Corporation incurred
$17.9 million of merger-related expense in 1997 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 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").
To effect the 1995 Security Capital merger, the Corporation incurred $10.3
million of merger-related expense which included severance and other employee
benefit costs, costs related to branch closures, system conversion costs and
other transaction-related expenses. The after-tax effect of the merger-related
expense was $7.3 million for 1995.
Excluding the effects of the non-recurring items, return on average assets
was 1.54% for 1997 compared to 1.42% for 1996 and return on average
shareholders' equity was 16.76% for 1997 compared to 1996's 16.20%. Return on
average assets was 1.36% and return on average shareholders' equity was 16.53%
for 1995.
Net Interest Income
Net interest income is one of the major determining factors in a financial
institution's performance as it is its principal source of earnings. 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, 1997.
11
<PAGE>
T A B L E 2
Average Balances and Net Interest Income Analysis
(Taxable Equivalent Basis -- In Thousands) (1)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans and lease financing (2) $4,877,187 442,917 9.08 % 4,464,026 406,473 9.10
- --------------------------------------------
U.S. Treasury and U.S. Government
agencies and corporations (3) 1,348,214 92,749 6.88 1,313,695 86,759 6.60
- --------------------------------------------
States and political subdivisions 81,967 7,254 8.85 77,015 7,102 9.22
- --------------------------------------------
Equity and other securities (3) 47,327 3,676 7.77 48,529 3,783 7.80
- --------------------------------------------
Federal funds sold and other
short-term investments 184,653 10,342 5.60 248,879 13,524 5.43
- --------------------------------------------
Time deposits in other banks 55,356 2,716 4.91 64,275 3,263 5.08
- -------------------------------------------- ---------- ------- ---- --------- ------- ----
Total earning assets 6,594,704 559,654 8.49% 6,216,419 520,904 8.38
- -------------------------------------------- ---------- ------- ---- --------- ------- ----
Non-earning assets:
Cash and due from banks 184,261 198,091
- --------------------------------------------
Premises and equipment 85,815 86,469
- --------------------------------------------
All other assets, net 79,209 69,594
- -------------------------------------------- ---------- ---------
Total assets $6,943,989 6,570,573
============================================ ========== =========
Interest-bearing liabilities:
Savings and time deposits $5,111,486 229,600 4.49 % 4,813,311 214,500 4.46
- --------------------------------------------
Short-term borrowed funds 304,372 15,371 5.05 361,091 18,713 5.18
- --------------------------------------------
Long-term debt 79,336 5,128 6.46 68,065 4,359 6.40
- -------------------------------------------- ---------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 5,495,194 250,099 4.55% 5,242,467 237,572 4.53
- -------------------------------------------- ---------- ------- ---- --------- ------- ----
Other liabilities and shareholders' equity:
Demand deposits 688,642 636,601
- --------------------------------------------
Other liabilities 121,165 116,746
- --------------------------------------------
Shareholders' equity 638,988 574,759
- -------------------------------------------- ---------- ---------
Total liabilities and
shareholders' equity $6,943,989 6,570,573
============================================ ========== =========
Net interest income and
net interest margin (4) $309,555 4.70% 283,332 4.56
============================================ ======== ==== ======= ====
Interest rate spread (5) 3.94% 3.85
============================================ ==== ====
<CAPTION>
Years Ended December 31
-------------------------------
1995
-------------------------------
Interest Average
Average Income/ Yield/
Balance Expense Rate
----------- ---------- --------
<S> <C> <C> <C>
Earning assets:
Loans and lease financing (2) 4,113,207 384,154 9.34
- --------------------------------------------
U.S. Treasury and U.S. Government
agencies and corporations (3) 1,302,641 87,084 6.69
- --------------------------------------------
States and political subdivisions 80,199 7,861 9.80
- --------------------------------------------
Equity and other securities (3) 43,865 3,339 7.61
- --------------------------------------------
Federal funds sold and other
short-term investments 260,913 16,066 6.16
- --------------------------------------------
Time deposits in other banks 50,156 2,937 5.86
- -------------------------------------------- --------- ------- ----
Total earning assets 5,850,981 501,441 8.57
- -------------------------------------------- --------- ------- ----
Non-earning assets:
Cash and due from banks 212,857
- --------------------------------------------
Premises and equipment 87,607
- --------------------------------------------
All other assets, net 66,845
- -------------------------------------------- ---------
Total assets 6,218,290
============================================ =========
Interest-bearing liabilities:
Savings and time deposits 4,621,251 208,921 4.52
- --------------------------------------------
Short-term borrowed funds 285,363 16,568 5.81
- --------------------------------------------
Long-term debt 140,909 9,391 6.66
- -------------------------------------------- --------- ------- ----
Total interest-bearing liabilities 5,047,523 234,880 4.65
- -------------------------------------------- --------- ------- ----
Other liabilities and shareholders' equity:
Demand deposits 532,701
- --------------------------------------------
Other liabilities 127,035
- --------------------------------------------
Shareholders' equity 511,031
- -------------------------------------------- ---------
Total liabilities and
shareholders' equity 6,218,290
============================================ =========
Net interest income and
net interest margin (4) 266,561 4.56
============================================ ======= ====
Interest rate spread (5) 3.92
============================================ ====
</TABLE>
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 1997, 1996 and 1995.
(2) The average loan and lease financing balances include non-accruing loans
and lease financing. Loan fees of $13.2 million for 1997 and $11 million
for 1996 and 1995 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 $559.7 million in 1997. Average earning asset increases of
$378.3 million in 1997 were due to internal growth. The percentage of loans and
leases to total earning assets increased to 74% during 1997 from 72% in 1996.
This 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%. Increases in the
volume of earning assets, aided by increases in the rates earned on these
assets, resulted in a $38.7 million increase in total interest income.
Offsetting the increased interest income were increased volumes of
interest-bearing liabilities and the rates paid on those liabilities which
resulted in a net increase in net interest income of $26.2 million and a net
interest margin of 4.70% for 1997. This compares to a 4.56% net interest margin
for both 1996 and 1995. 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 interest rate
spread grew 9 basis points to 3.94% for 1997 which compares to 3.85% in 1996
and 3.92% in 1995. See Table 3 for further analysis of the effects of volume
and rate on net interest income.
12
<PAGE>
T A B L E 3
Volume and Rate Variance Analysis
(Taxable Equivalent Basis -- In Thousands) (1)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1997
----------------------------------------
Volume Rate Total
Variance (2) Variance (2) Variance
-------------- -------------- ----------
<S> <C> <C> <C>
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
============================================================= ======== ===== ======
<CAPTION>
Years Ended December 31
-----------------------------------------
1996
-----------------------------------------
Volume Rate Total
Variance (2) Variance (2) Variance
-------------- -------------- -----------
<S> <C> <C> <C>
Interest income:
Loans and lease financing 32,324 (10,005) 22,319
- -------------------------------------------------------------
U.S. Treasury and U.S. Government agencies and corporations 781 (1,106) (325)
- -------------------------------------------------------------
States and political subdivisions (305) (454) (759)
- -------------------------------------------------------------
Equity and other securities 360 84 444
- -------------------------------------------------------------
Federal funds sold and short-term investments (712) (1,830) (2,542)
- -------------------------------------------------------------
Time deposits in other banks 753 (427) 326
- ------------------------------------------------------------- ------ ------- ------
Total interest income 33,201 (13,738) 19,463
- ------------------------------------------------------------- ------ ------- ------
Interest expense:
Savings and time deposits 8,431 (2,852) 5,579
- -------------------------------------------------------------
Short-term borrowed funds 4,075 (1,930) 2,145
- -------------------------------------------------------------
Long-term debt (4,679) (353) (5,032)
- ------------------------------------------------------------- ------ ------- ------
Total interest expense 7,827 (5,135) 2,692
- ------------------------------------------------------------- ------ ------- ------
Increase (decrease) in net interest income 25,374 (8,603) 16,771
============================================================= ====== ======= ======
</TABLE>
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 1997, 1996 and 1995.
(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 1996, the Corporation realized net taxable equivalent interest income
of $283.3 million. Average earning asset increases of $365.4 million in 1996
were due to internal growth. Changes in the mix of earning assets toward
higher-earning loans and lease financing and increases in net interest income
due to higher volumes were partially offset by lower rates earned on assets.
Consequently, the interest rate spread fell to 3.85% in 1996 from 1995's 3.92%.
However, the contribution of free liabilities to the net interest margin rose
to 71 basis points in 1996 from 64 basis points in 1995. As a result, the net
interest margin remained steady at 4.56%, the same rate as 1995. The overall
increase in net interest income of $16.8 million was due to increases in volume
of $25.4 million offset by decreases in rate of $8.6 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 $350.2 million or 6.4% in 1997 and $296
million or 5.7% in 1996.
Other Income and Other Expenses
Other 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 and accretion
of negative goodwill resulting from prior acquisitions. Other income, excluding
net securities gains or losses, totaled $92.9 million for the year ended 1997,
an $8.2 million increase over 1996. Increases in other 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, a heightened
sales focus accompanied by expansion of incentive-based compensation plans and
the strength of the economic base in the markets served should result in higher
revenues in 1998. Other income, excluding net securities gains or losses,
totaled $84.8 million in 1996 and $67 million in 1995. The five-year compound
growth rate for other income was 13.7% at December 31, 1997.
As in prior years, service charges on deposit accounts were the largest
source of other income. These service charges amounted to $44.9 million in
1997, a 12.1% increase over 1996. The increase was due primarily to growth in
the deposit base, repricing of certain customer services and additional
surcharge income from foreign (non-Subsidiary Bank customers) ATM use on the
Subsidiary Banks' expanded ATM network. In addition, a greater emphasis was
placed on developing potential commercial customers. During 1997, service
charges on commercial accounts increased $720,000 over 1996's level due to
higher volume of accounts and
13
<PAGE>
expansion of services offered. The Corporation monitors service charges closely
and evaluates such fees periodically to ensure that they reflect the costs of
providing the services and to consider competitive factors.
Trust and custodian fees rose to $8.4 million in 1997 from $7.3 million in
1996 due to growth in assets managed by the trust department and the continued
promotion of employee benefit trust products introduced in 1996. Trust and
custodian fees totaled $6.8 million in 1995. In July 1997, AmFed opened a trust
department which currently has two offices located in South Carolina.
Management is positioning the trust departments to attract new consumer trust
business as the number of people aged 55 and over 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 401K Spectrum(R) product. Managed assets totaled $2.2 billion
at December 31, 1997 and $1.5 billion at December 31, 1996.
Sales and insurance commissions income totaled $9.4 million in 1997 and
$7.8 million in 1996. The Corporation offers complete brokerage services to
customers through its subsidiaries, CCBIISC and ASC, and an independent
brokerage firm which generated $7 million of income in 1997 and $5.2 million in
1996. Through a correspondent bank program initiated in 1997, CCBIISC began
providing brokerage services to another financial institution which will
provide additional commission income. CCBIISC will continue to pursue other
correspondent bank relationships. Revenue in this category is also derived from
the sale of insurance products and annuity products. Management anticipates a
greater emphasis in 1998 on the sale of insurance products, particularly credit
life insurance, by adopting some of AmFed's successful insurance programs
across the Corporation's franchise.
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 1997, 1996 and
1995.
Included in 1997 and 1996's other operating income are mortgage servicing
rights capitalization gains of $4.1 million and $2.3 million, respectively,
from the sale of mortgage loans with servicing retained. During 1996, the
Corporation adopted accounting standards which require the recognition of
mortgage servicing rights ("MSR") as an asset when mortgages are sold or
securitized and servicing rights retained, regardless of how those servicing
rights were acquired. At December 31, 1997 and 1996, there was no impairment of
the recorded MSR and no adjustment to the MSR valuation account was made during
1997 or 1996. The Corporation may periodically sell mortgages with servicing
released through a contract with an out-of-state financial institution. The
Corporation may elect to sell its originated servicing since it does not have
the economies of scale needed to make mortgage servicing a profitable line of
business over the long term.
Net securities gains (losses) of $480,000, $(2.2)million and $(816,000)
were realized in 1997, 1996 and 1995, respectively, through the sale of
securities held in the available for sale portfolio. 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.
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. The noninterest
income ratio for 1993 was significantly impacted by net gains on sales of
investment securities of $3 million.
T A B L E 4
Operating Efficiency Ratios
<TABLE>
<CAPTION>
Years Ended December
31
--------------------
1997 1996
---------- ---------
<S> <C> <C>
As a percentage of average assets (1):
Noninterest income 1.31% 1.26
- ------------------------------------------------------------------------------------- ----- -----
Personnel expense 1.65 1.61
- -------------------------------------------------------------------------------------
Occupancy and equipment expense .41 .43
- -------------------------------------------------------------------------------------
Other operating expense .93 .95
- ------------------------------------------------------------------------------------- ------ -----
Total noninterest expense 2.99 2.99
- ------------------------------------------------------------------------------------- ------ -----
Net overhead (noninterest expense less noninterest income) 1.68 % 1.73
===================================================================================== ========= =====
Noninterest expense as a percentage of net interest income and other income (1) (2) 51.99% 53.80
- -------------------------------------------------------------------------------------
Average assets per employee (in millions) $ 2.63 2.47
- -------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31
-----------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
As a percentage of average assets (1):
Noninterest income 1.06 1.05 1.22
- ------------------------------------------------------------------------------------- ----- ----- -----
Personnel expense 1.60 1.62 1.75
- -------------------------------------------------------------------------------------
Occupancy and equipment expense .41 .51 .56
- -------------------------------------------------------------------------------------
Other operating expense 1.01 1.10 1.13
- ------------------------------------------------------------------------------------- ----- ----- -----
Total noninterest expense 3.02 3.23 3.44
- ------------------------------------------------------------------------------------- ----- ----- -----
Net overhead (noninterest expense less noninterest income) 1.96 2.18 2.22
===================================================================================== ===== ===== =====
Noninterest expense as a percentage of net interest income and other income (1) (2) 56.46 60.07 61.19
- -------------------------------------------------------------------------------------
Average assets per employee (in millions) 2.36 2.15 1.83
- -------------------------------------------------------------------------------------
</TABLE>
(1) Excludes $2.3 million gain on sale of subsidiary in 1997, the FDIC Special
Assessment of $12.9 million incurred in 1996 and merger-related expenses
incurred in 1997, 1995 and 1994 of $17.9 million, $10.3 million and $1.1
million, respectively.
(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.
- --------------------------------------------------------------------------------
14
<PAGE>
Noninterest expenses, excluding non-recurring items, rose $11.4 million or
5.8% in 1997 over 1996's level of $196.9 million. This increase was due
primarily to a $8.6 million increase in personnel expense. Despite the
increases, noninterest expenses are growing at a slower rate than average
assets. As reported in Table 4, total noninterest expense as a percentage of
average assets continued to show improvement, falling to 2.99% for 1997 from a
high of 3.44% in 1993.
The increase in personnel expense was due in part to general wage and
employee benefit increases and a greater emphasis on incentive-based
compensation. Within personnel expense, salaries and wages increased $6.2
million, employee benefits increased $1.7 million and the remaining increases
were in employee training and other costs.
Net occupancy and equipment expense remained stable for the three-year
period ended December 31, 1997. The costs of disposing of excess facilities and
operational systems are included in merger-related expense and are excluded
from the analysis in Table 4.
Other operating expenses, excluding non-recurring items, increased by $2.6
million in 1997 or 4.1% from 1996. Overall, other operating expenses have
increased due to the expanded branch network. Increases were experienced in
data processing, printing and office supplies, postage and telecommunications.
Additional marketing expense of $312,000 was incurred due in part to the
marketing of the alternative service delivery channels introduced over the last
three years. These service delivery initiatives include on-line banking,
extended-hour in-store branches and telebanking.
For 1996, noninterest expenses, excluding non-recurring items, increased
$9 million over 1995's level of $187.9 million. As shown in Table 4,
noninterest expense, excluding non-recurring items, decreased as a percentage
of average assets from 3.02% in 1995 to 2.99% in 1996. Excluding the impact of
the Special Assessment, 1996's other operating expenses of $62.6 million
increased 4.1% over 1995's $60.2 million. The $4.2 million decrease in deposit
and other insurance expense resulting from reduced FDIC deposit insurance
premiums was offset by a $3.1 million increase in professional services fees
for the engagement of consultants to recommend opportunities to earn additional
noninterest revenues or to decrease noninterest expenses through improvement of
operating processes and procedures. The improvement in the operating efficiency
ratios disclosed in Table 4 are due in part to implementation of those
recommendations.
The Corporation's efficiency ratio (noninterest expense as a percentage of
taxable equivalent net interest income and other income) has improved over the
past four years from 61.19% in 1993 to 51.99% in 1997 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 revenue-enhancement opportunities are identified and
cost-containment programs are continued.
Income Taxes
Income tax expense was $55.8 million in 1997, $43.6 million in 1996, and
$37.4 million in 1995. The Corporation's effective income tax rates were 36.9%,
33.4%, and 32.6% in 1997, 1996 and 1995, 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. The impact on 1995's effective tax rate by non-deductible merger-related
expense was partially offset by a $1.5 million adjustment of estimated tax
liability by AmFed. Deferred tax assets of $32.7 million and deferred tax
liabilities of $20.3 million are recorded on the Consolidated Balance Sheets as
of December 31, 1997. The Corporation has determined that a valuation allowance
for the deferred tax assets is not warranted at December 31, 1997.
Fourth Quarter Results
During the fourth quarter of 1997, the Corporation recorded net income of
$27.7 million or $1.32 per diluted share compared to 1996's fourth quarter
results of $24.4 million or $1.17 per diluted share. Return on average assets
was 1.56% in 1997 and 1.44% in 1996; return on average shareholders' equity was
16.58% in 1997 compared to 16.34% in 1996. During the fourth quarter of 1997,
the Corporation incurred $647,000 of non-recurring merger-related expense.
During the fourth quarter of 1996, CCB protested the FDIC special assessment
levied on portions of the SAIF deposit base and was granted a $1 million
decrease. Excluding the impact of these non-recurring items, the returns on
average assets and average shareholders' equity were 1.58% and 16.83%,
respectively, in 1997 and 1.41% and 15.94%, respectively, in 1996.
Average assets for the three months ended December 31, 1997 totaled $7.1
billion, a 5.2% increase over the same period in 1996. Average earning assets
increased by approximately the same percentage from $6.4 billion in 1996 to
$6.7 billion for the same period in 1997. The net interest margin for the
fourth quarter of 1997 was 4.75%, a 14 basis point increase from 1996's 4.61%.
Noninterest income as a percentage of average assets was 1.36% for the
fourth quarter of 1997 compared to 1996's 1.28%. Noninterest expense, excluding
the non-recurring items discussed above, as a percentage of average assets held
at 3.06% for the fourth quarters of 1997 and 1996. The efficiency ratio for
these periods in 1997 and 1996 was 52.29% and 54.50%, respectively.
Income statements for each of the quarters in the five-quarter period
ended December 31, 1997 are included in Table 5.
15
<PAGE>
T A B L E 5
Income Statements for Five Quarters Ended December 31, 1997
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income $ 141,495 138,932 136,946 133,090 131,526
- --------------------------------------------------
Total interest expense 64,034 63,529 61,582 60,954 60,132
- -------------------------------------------------- --------- ------- ------- ------- -------
Net interest income 77,461 75,403 75,364 72,136 71,394
- --------------------------------------------------
Provision for loan and lease losses 3,472 5,355 4,885 2,664 4,787
- -------------------------------------------------- --------- ------- ------- ------- -------
Net interest income after provision 73,989 70,048 70,479 69,472 66,607
- -------------------------------------------------- --------- ------- ------- ------- -------
Service charges on deposits 11,972 11,252 11,227 10,486 10,609
- --------------------------------------------------
Trust income 2,324 2,189 2,061 1,841 1,968
- --------------------------------------------------
Sales and insurance commissions 2,262 2,625 2,203 2,343 2,181
- --------------------------------------------------
Accretion of negative goodwill 839 839 839 839 839
- --------------------------------------------------
Other (1) 6,590 5,964 7,882 6,342 8,860
- --------------------------------------------------
Securities gains (losses), net 236 172 11 61 (2,757)
- -------------------------------------------------- --------- ------- ------- ------- -------
Total other income 24,223 23,041 24,223 21,912 21,700
- -------------------------------------------------- --------- ------- ------- ------- -------
Personnel 29,024 28,501 28,495 28,552 27,612
- --------------------------------------------------
Occupancy and equipment 7,279 6,860 7,255 7,068 7,148
- --------------------------------------------------
Deposit and other insurance 767 691 644 533 735
- --------------------------------------------------
Amortization of intangible assets 1,036 1,036 1,306 1,055 1,073
- --------------------------------------------------
Merger-related expense (1) 647 16,253 -- 1,016 --
- --------------------------------------------------
Other operating (1) 16,324 13,378 14,674 13,804 14,353
- -------------------------------------------------- --------- ------- ------- ------- -------
Total other expenses 55,077 66,719 52,374 52,028 50,921
- -------------------------------------------------- --------- ------- ------- ------- -------
Income before income taxes 43,135 26,370 42,328 39,356 37,386
- --------------------------------------------------
Income taxes 15,390 11,062 14,847 14,466 12,998
- -------------------------------------------------- --------- ------- ------- ------- -------
Net income $ 27,745 15,308 27,481 24,890 24,388
================================================== ========= ======= ======= ======= =======
Income before non-recurring items per share (1):
Basic $ 1.36 1.31 1.26 1.24 1.16
- --------------------------------------------------
Diluted 1.34 1.29 1.25 1.23 1.14
- --------------------------------------------------
Net income per share:
Basic 1.34 .74 1.33 1.20 1.18
- --------------------------------------------------
Diluted 1.32 .73 1.31 1.19 1.17
- --------------------------------------------------
</TABLE>
(1) Non-recurring items include the following items for the applicable
quarters:
* Merger-related expense of $409,000 (after-tax) or $.02 per diluted share
for the fourth quarter of 1997;
* Merger-related expense of $11.9 million (after-tax) or $.56 per diluted
share for the third quarter of 1997;
* Gain on sale of an AmFed subsidiary of $1.4 million (after-tax) or $.07
per diluted share for the second quarter of 1997;
* Merger-related expense of $792,000 (after-tax) or $.04 per diluted share
for the first quarter of 1997; and
* Refund of $600,000 of FDIC Special Assessment (after-tax) or $.03 per
diluted share for the fourth quarter of 1996.
- --------------------------------------------------------------------------------
Financial Position
Strong loan growth during 1997 resulted in a 9.3% increase in average
loans and lease financing and a 5.7% increase in average assets. This loan
growth percentage was achieved despite the 1997 securitization and sale of
$138.3 million of mortgage loans and the sale of Finance South's $14.3 million
of consumer loans. The five-year compound growth rate for average loans and
lease financing was 11.8% and for average assets was 10.3%.
16
<PAGE>
Loans and Lease Financing
The Subsidiary Banks' loan portfolios are comprised primarily of
diversified credits with little borrower or industry concentration. Management
believes that lending to smaller-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
$347.9 million over 1996's outstandings. All of the 1997 loan growth was
internally generated.
Substantially all loans are made on a secured basis with the exception of
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 in Table 6.
T A B L E 6
Loans and Lease Financing
(In Thousands)
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------------
1997 1996 (1) 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 688,040 549,831 629,814 660,452 524,617
- -----------------------------------------
Real estate -- construction 733,026 629,829 504,461 401,486 258,672
- -----------------------------------------
Real estate -- mortgage 2,915,851 2,602,639 2,279,621 2,133,560 1,917,027
- -----------------------------------------
Instalment loans to individuals 506,339 739,991 594,508 527,898 476,301
- -----------------------------------------
Revolving credit 212,794 193,561 230,142 202,846 187,584
- -----------------------------------------
Lease financing 43,265 38,323 37,223 33,433 25,932
- ----------------------------------------- ---------- --------- --------- --------- ---------
Total gross loans and lease financing 5,099,315 4,754,174 4,275,769 3,959,675 3,390,133
- -----------------------------------------
Less: Unearned income 5,746 8,511 8,594 7,515 5,842
- ----------------------------------------- ---------- --------- --------- --------- ---------
Total loans and lease financing $5,093,569 4,745,663 4,267,175 3,952,160 3,384,291
========================================= ========== ========= ========= =========
</TABLE>
(1) During 1996, certain loans were reviewed and found to have been improperly
classified as to loan type. Consequently, loans totaling $186 million were
reclassified from commercial, financial and agricultural to real
estate-mortgage ($146 million) and real estate-construction ($40 million).
- --------------------------------------------------------------------------------
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 to continue in these categories during 1998. 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 the commercial borrower's real property
in addition to other collateral. It is the Subsidiary Banks' general policy to
retain adjustable rate, first deed of trust mortgage loans within the portfolio
and sell all fixed rate production. While the lower-interest rate environment
anticipated for 1998 is favorable to home buyers and borrowers seeking to
re-finance their mortgages, with the Subsidiary Banks' plans to sell all
marketable fixed rate mortgages, the mortgage portfolios may not grow in
proportion to 1998's expected production volume. Consequently, Management
anticipates only moderate growth in this category for 1998.
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. Customers have
more options based on credit card interest rates and annual fees. Additionally,
a credit card product
17
<PAGE>
offering travel awards for airline flights based on card usage was introduced.
This product, which is administered by a third party, is expected to generate
significant consumer interest as 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 1998.
The leasing portfolio, net of unearned income, increased 12.7% in 1997 to
$37.8 million. The leasing portfolio is not concentrated in any one line of
business or type of equipment. Management intends to expand the leasing
portfolio through an emphasis on commercial equipment leases, which it feels is
a more profitable market than consumer leases.
T A B L E 7
Maturities and Sensitivities of Loans to Changes in Interest Rates
(In Thousands)
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------
Commercial,
Financial
and Real Estate-
Agricultural Construction Total
-------------- -------------- ------------
<S> <C> <C> <C>
Due in one year or less $177,194 25,561 202,755
- ---------------------------------------
Due after one year through five years:
Fixed interest rates 289,145 211,878 501,023
- ---------------------------------------
Floating interest rates 154,852 434,587 589,439
- ---------------------------------------
Due after five years:
Fixed interest rates 23,399 28,260 51,659
- ---------------------------------------
Floating interest rates 43,450 32,740 76,190
- --------------------------------------- -------- ------- -------
Total $688,040 733,026 1,421,066
======================================= ======== ======= =========
</TABLE>
Investment Securities
Investment securities increased 8.3% from year-end 1996 to $1.5 billion at
December 31, 1997. 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
reinvested in shorter-term U.S. Treasury securities and U.S. Government
agencies as there is not an interest rate advantage in committing funds to
longer-term investments. Despite investment securities' period to period
increase, investment securities as a percentage of total earning assets
declined due to the previously discussed shift in earning assets to
higher-yielding loans. Average investment securities totaled 22.4% of total
average earning assets for 1997 versus 23.2% for 1996. Taxable securities
remain the primary component of the 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 $81.6 million or 5.6% of the total investment securities portfolio at
December 31, 1997. 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,
1997, 1996 or 1995 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, 1997,
securities available for sale totaled $1.4 billion, which represented over 90%
of the total portfolio. The mark-to-market adjustment for available for sale
securities totaled $22.7 million in unrealized gains at December 31, 1997 and,
after considering applicable taxes, resulted in a $14 million addition to total
shareholders' equity. As of December 31, 1996, the mark-to-market adjustment
for available for sale securities totaled $12.1 million and resulted in a $7.3
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.
18
<PAGE>
T A B L E 8
Investment Securities Portfolio
(In Thousands)
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ------------------------
Amortized Carrying Amortized Carrying Amortized Carrying
Cost Value Cost Value Cost Value
------------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury $ 472,396 480,659 442,410 447,577 476,009 485,817
- ----------------------------------------------------
U.S. Government agencies and corporations 841,034 854,481 761,136 768,090 894,160 904,168
- ----------------------------------------------------
Equity securities 45,946 46,967 51,851 51,852 37,936 36,875
- ---------------------------------------------------- ---------- ------- ------- ------- ------- -------
Total securities available for sale $1,359,376 1,382,107 1,255,397 1,267,519 1,408,105 1,426,860
==================================================== ========== ========= ========= ========= ========= =========
</TABLE>
Maturity and Yield Schedule as of December 31, 1997
<TABLE>
<CAPTION>
Weighted
Carrying Average
Value Yield (1)
------------- ----------
<S> <C> <C>
U.S. Treasury:
Within 1 year $ 79,659 6.66%
- ---------------------------------------------------
After 1 but within 5 years 388,014 6.89
- ---------------------------------------------------
After 5 but within 10 years 12,986 7.65
- --------------------------------------------------- ---------- -----
Total U.S. Treasury 480,659 6.87
- --------------------------------------------------- ---------- -----
U.S. Government agencies and corporations:
Within 1 year 38,743 6.73
- ---------------------------------------------------
After 1 but within 5 years 335,425 7.35
- ---------------------------------------------------
After 5 but within 10 years 235,688 7.38
- ---------------------------------------------------
After 10 years (2) 244,625 8.19
- --------------------------------------------------- ---------- -----
Total U.S. Government agencies and corporations 854,481 7.57
- --------------------------------------------------- ---------- -----
Equity securities 46,967 6.58
- --------------------------------------------------- ---------- -----
Total securities available for sale $1,382,107 7.29%
=================================================== ========== =====
</TABLE>
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- --------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity
States and political subdivisions $81,617 87,002 84,262 88,504 76,769 81,739
- ----------------------------------------------------
Corporate debt and other securities -- -- -- -- 1,347 1,346
- ---------------------------------------------------- ------- ------- ------- ------- ------- -------
Total securities held to maturity $81,617 87,002 84,262 88,504 78,116 83,085
==================================================== ======= ======= ======= ======= ======= =======
</TABLE>
Maturity and Yield Schedule As of December 31, 1997
<TABLE>
<CAPTION>
Weighted
Carrying Average
Value Yield (1)
---------- ------------
<S> <C> <C>
States and political subdivisions:
Within 1 year $ 225 10.09%
- -------------------------------------
After 1 but within 5 years 3,638 8.82
- -------------------------------------
After 5 but within 10 years 44,950 8.66
- -------------------------------------
After 10 years 32,804 8.64
- ------------------------------------- ------- ------
Total securities held to maturity $81,617 8.66%
===================================== ======= ======
</TABLE>
(1) Where applicable, the weighted average yield is computed on a taxable
equivalent basis using 35% federal tax rate and applicable state tax rates.
(2) The amount shown consists primarily of Government National Mortgage
Association securities which have monthly curtailments of principal even
though the final maturity of each security is in excess of 10 years.
- --------------------------------------------------------------------------------
19
<PAGE>
Deposits
During 1997, average deposits rose to $5.8 billion from $5.4 billion in
1996. The largest increases were experienced in average retail time deposits,
$170.3 million, and average jumbo certificates of deposit, $58.8 million. As a
percentage of average total deposits, interest-bearing deposits remained
relatively constant at 88.1% in 1997 compared to 88.3% in 1996. Demand deposits
on average grew $52 million in 1997. See Table 9 for average deposits by type
for the three-year period ended December 31, 1997. 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)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ -----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------- --------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Savings and time deposits:
- -----------------------------------
Savings and NOW accounts $ 691,365 1.27 % 669,913 1.48 741,899 2.05
- -----------------------------------
Money market accounts 1,608,929 3.78 1,561,222 3.66 1,381,845 3.93
- -----------------------------------
Time 2,811,192 5.69 2,582,176 5.71 2,497,507 5.58
- ----------------------------------- ---------- ---- --------- ---- --------- ----
Total savings and time deposits 5,111,486 4.49% 4,813,311 4.46 4,621,251 4.52
- ----------------------------------- ==== ==== ====
Demand deposits 688,642 636,601 532,701
- ----------------------------------- ---------- --------- ---------
Total deposits $5,800,128 5,449,912 5,153,952
=================================== ========== ========= =========
</TABLE>
In October 1995, CCB opened its first in-store banking office, CCB7,
within a newly constructed Harris Teeter supermarket in Wilmington, North
Carolina. CCB opened six new in-store banking offices in both 1997 and 1996.
All CCB7 offices are located in high volume Harris Teeter stores in North
Carolina. These banking offices have extended hours during the weekday and are
open on weekends and holidays. An additional seven new CCB7 offices are planned
for 1998. In-store banking offices are a new source of consumer loans and
deposits and noninterest fee income.
Long-Term Debt and Other Borrowings
The Corporation's ratio of long-term debt to shareholders' equity
increased to 14.8% at December 31, 1997 from 9.6% at December 31, 1996. The
increase was due to obtaining additional advances from the Federal Home Loan
Bank of Atlanta ("FHLB") at favorable interest rates. The advances were used to
fund loan growth. During 1995, the Corporation repurchased and retired $7
million of the $40 million of 6.75% subordinated notes issued during 1993. The
early retirement resulted in a net gain of $800,000. Also during 1995, AmFed
prepaid two FHLB advances with interest rates from 8.3% to 9.9% which resulted
in prepayment penalties of $1.7 million, after tax. The prepayment penalties
are reflected as an extraordinary item in the accompanying Consolidated
Statements of Income.
20
<PAGE>
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 9.20% and 8.75% for 1997 and 1996, 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.
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, 1997 and 1996.
T A B L E 10
Capital Ratios
<TABLE>
<CAPTION>
As of December 31
------------------------ Regulatory
1997 1996 Minimum
----------- ---------- -----------
<S> <C> <C> <C>
Tier I Capital: 4.00%
Corporation 12.14% 11.99
- -----------------
CCB 11.98 11.67
- -----------------
AmFed 13.35 13.26
- -----------------
CCB-Ga. 12.23 10.10
================= ===== =====
Total Capital: 8.00
Corporation 14.02 13.93
- -----------------
CCB 13.15 12.94
- -----------------
AmFed 14.60 14.51
- -----------------
CCB-Ga. 13.51 11.35
================= ===== =====
Leverage: 4.00
Corporation 9.02 8.47
- -----------------
CCB 8.92 8.53
- -----------------
AmFed 8.89 8.08
- -----------------
CCB-Ga. 10.24 8.63
================= ===== ====
</TABLE>
- --------------------------------------------------------------------------------
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 $58.7 million, $58.2
million and $50.3 million to capital in 1997, 1996 and 1995, respectively.
Table 11 presents the rate of internal capital growth for the Corporation for
each of the five previous years. Fluctuations in the capital growth rate are
due in part to the differing dividend rates paid by AmFed, Salem Trust and
Security Capital to their respective shareholders prior to their merger with
the Corporation.
21
<PAGE>
T A B L E 11
Rate of Internal Capital Growth
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------
1997 (1) 1996 (1) 1995 (1) 1994 (1) 1993 (2)
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Average assets to average equity times 10.87 x 11.43 12.17 11.66 11.57
- ----------------------------------------------
Return on average assets equals 1.54 % 1.42 1.36 1.21 1.21
- ---------------------------------------------- -------- ----- ----- ----- -----
Return on average shareholders' equity times 16.76 % 16.20 16.53 14.15 13.98
- ----------------------------------------------
Earnings retained equals 65.68 % 69.31 70.21 70.38 71.81
- ---------------------------------------------- -------- ----- ----- ----- -----
Rate of internal capital growth 11.01% 11.23 11.61 9.96 10.04
============================================== ===== ===== ===== ===== =====
</TABLE>
(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.
(2) Excludes the impact of cumulative changes in accounting principles from the
adoption of SFAS No. 72, "Accounting for Goodwill", SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
and SFAS No. 109, "Accounting for Income Taxes".
- --------------------------------------------------------------------------------
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, 1997, the Corporation had approximately 9,200
shareholders of record.
In connection with the Security Capital merger, the Corporation
repurchased and immediately retired approximately 518,000 shares of its
outstanding common stock at an aggregate purchase price of $20 million. The
shares were repurchased through open market transactions during the period of
November 1994 through May 1995. Approximately 19,000 shares were repurchased at
an aggregate purchase price of $1 million and retired during 1996. No shares
were repurchased during 1997.
T A B L E 12
Stock Prices and Dividends
<TABLE>
<CAPTION>
Prices Cash
-------------------------------------- Dividends
High Low Close Declared
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
First Quarter $ 70.00 63.75 63.88 .42
- ----------------
Second Quarter 74.00 61.88 73.13 .42
- ----------------
Third Quarter 83.63 73.38 80.63 .47
- ----------------
Fourth Quarter 110.00 81.13 107.50 .47
- ----------------
1996
First Quarter $ 55.75 49.25 50.25 .38
- ----------------
Second Quarter 54.75 49.75 51.25 .38
- ----------------
Third Quarter 55.00 49.50 54.75 .42
- ----------------
Fourth Quarter 71.75 54.75 68.25 .42
- ----------------
</TABLE>
- --------------------------------------------------------------------------------
Dividends have been increased from $1.44 in 1995 to $1.60 in 1996 and to
$1.78 in 1997. The 1997 increase continues the Corporation's thirty-three year
trend of annual dividend increases. Dividends paid as a percentage of earnings,
excluding non-recurring items, equaled 34.43%, 35.32% and 34.62% for the years
ended 1997, 1996 and 1995, 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 $10.6 million in 1997, $9.8 million in 1996 and $14.4
million in 1995. There were no significant capital resource commitments at
December 31, 1997 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. Internally, the Corporation has
budgeted $27 million in 1998 for technological improvements and new or
renovated facilities. Technology improvements planned for 1998 include tools to
enhance cross-selling, track profitability of individual customers and measure
product profitability.
22
<PAGE>
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 there is no accommodation for the full four-digit year, a
serious problem occurs when "00" is used to identify the Year 2000. It is not
only impossible to distinguish 2000 from 1900 but it also becomes difficult to
calculate the passage of time between preceding years and the Year 2000. This
error could result in system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
customer transactions, properly accrue interest income and expense or engage in
similar normal business activities. In addition, non-banking systems such as
security alarms, elevators, telephones, etc. are subject to malfunction due to
their dependence upon computers for proper operation. As described, the Year
2000 Issue presents a number of challenges to financial institution management;
correction of Year 2000 Issues will be costly and complex for the entire
industry.
Based on a recently completed assessment, the Corporation has determined
that it will be required to modify a significant portion of its software so
that its computer systems will properly utilize dates beyond December 31, 1999.
Due to the Corporation's use of one integrated financial management system for
many of its primary applications (loans, deposits, general ledger, etc.) and
restrictions on custom coding, the Corporation has no reason to believe that
these applications will not become Year 2000 compliant through upgrades of the
existing software. These upgrades were provided to the Corporation in early
1998 after the software vendor completed its testing of Year 2000 compliance.
Outside consultants assisting in the assessment phase of Year 2000 Issues
determined that the Corporation's policy of controlling custom code saved
approximately $3 million to $3.5 million in Year 2000 expense. The assessment
phase also identified certain software systems and hardware that will have to
be replaced. The Corporation presently believes that with the identified
modifications to existing software and conversions to new software and
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed on a timely basis, the Year
2000 Issue could have a material impact on the operations of the Corporation.
The Corporation will utilize both internal and external resources to
modify or replace and test software for Year 2000 modifications. The
Corporation anticipates that its critical applications will be modified or
replaced by the end of 1998 which will allow testing and any subsequent
modifications to be completed in 1999. As the Corporation and its Subsidiary
Banks are regulated by federal and state banking regulatory agencies, they will
be required to comply with those agencies' Year 2000 modification schedules.
The federal banking agencies plan to conduct a supervisory review of all
financial institutions' Year 2000 conversion efforts by mid-1998. Federal
regulators are currently conducting such a review of CCB; management does not
anticipate criticism of its Year 2000 progress-to-date or its anticipated
schedule to complete the Year 2000 project as it has adopted the regulators'
project management process. Management believes that it will meet the
regulators' timeframe for Year 2000 compliance.
During 1996 and 1997, the Corporation incurred less than $75,000 of
expenses attributable to the Year 2000 project. The total remaining cost of the
Year 2000 project is estimated at $4.1 million, of which $2 million is
attributable to the purchase of new software and hardware which will be
capitalized. The remaining $2.1 million, which will be expensed as incurred
over the next three years, is not expected to have a material effect on the
Corporation's results of operations.
The Corporation is communicating with its significant vendors to determine
the extent to which the Corporation is vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. In addition, the Corporation
will initiate communication with its significant corporate customers to
determine the extent of their Year 2000 preparedness. As most corporate
customers depend on computer systems that must be Year 2000 compliant, a
disruption in their business may result in potentially significant financial
difficulties that could affect their creditworthiness. Finally, financial
institutions such as the Subsidiary Banks exchange large volumes of date
sensitive data electronically between other financial institutions, customers
and their regulatory agencies. There can be no guarantee that those external
systems will properly exchange date/time data with the Corporation's systems.
The Corporation will test and verify, as appropriate, data exchanges with
clearing associations, governmental entities, customers and other financial
institutions. The estimated costs to assess the impact on third parties are
included in the Corporation's total Year 2000 project costs and estimates.
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, would not have an adverse effect on the Corporation.
The costs of the Year 2000 project and the date on which 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
23
<PAGE>
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.
Asset Quality
Nonperforming and risk assets have declined steadily from $34.6 million in
1993 to $21.1 million in 1997. 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. At December 31,
1997, risk assets amounted to $21.1 million compared to 1996's $22.1 million.
Risk assets to total assets were .30%, .32% and .39% at December 31, 1997, 1996
and 1995, respectively. The reserve for loan and lease losses to risk assets
was 3.20 times at December 31, 1997 compared to 2.77 times and 2.14 times at
December 31, 1996 and 1995, respectively. Real estate acquired through loan
foreclosures decreased to $845,000 at December 31, 1997 from $9.8 million at
December 31, 1993. In the opinion of management, all loans and lease financing,
where serious doubts exist as to the ability of borrowers to comply with the
present repayment terms, are included in Table 13.
T A B L E 13
Nonperforming and Risk Assets
(In Thousands)
<TABLE>
<CAPTION>
As of December 31
------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Nonaccrual loans and lease financing (1) $ 16,088 15,752 17,518
- -----------------------------------------------------------------------------------
Other real estate acquired through loan foreclosures 845 2,469 3,198
- -----------------------------------------------------------------------------------
Restructured loans and lease financing 784 838 915
- ----------------------------------------------------------------------------------- -------- ------ ------
Total nonperforming assets 17,717 19,059 21,631
- -----------------------------------------------------------------------------------
Accruing loans and lease financing 90 days or more past due 3,423 3,066 4,120
- ----------------------------------------------------------------------------------- -------- ------ ------
Total risk assets $ 21,140 22,125 25,751
=================================================================================== ======== ====== ======
Ratio of nonperforming assets to:
Loans and lease financing outstanding and other real estate acquired through loan .35% .40 .51
- -----------------------------------------------------------------------------------
foreclosures
- -----------------------------------------------------------------------------------
Total assets .25 .28 .33
- -----------------------------------------------------------------------------------
Ratio of total risk assets to:
Loans and lease financing outstanding and other real estate acquired through loan .41 .47 .60
- -----------------------------------------------------------------------------------
foreclosures
- -----------------------------------------------------------------------------------
Total assets .30 .32 .39
- -----------------------------------------------------------------------------------
Reserve for loan and lease losses to total risk assets 3.20x 2.77 2.14
- -----------------------------------------------------------------------------------
<CAPTION>
As of December 31
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
Nonaccrual loans and lease financing (1) 14,915 19,763
- -----------------------------------------------------------------------------------
Other real estate acquired through loan foreclosures 5,892 9,799
- -----------------------------------------------------------------------------------
Restructured loans and lease financing 1,545 2,322
- ----------------------------------------------------------------------------------- ------ ------
Total nonperforming assets 22,352 31,884
- -----------------------------------------------------------------------------------
Accruing loans and lease financing 90 days or more past due 3,913 2,714
- ----------------------------------------------------------------------------------- ------ ------
Total risk assets 26,265 34,598
=================================================================================== ====== ======
Ratio of nonperforming assets to:
Loans and lease financing outstanding and other real estate acquired through loan .56 .94
- -----------------------------------------------------------------------------------
foreclosures
- -----------------------------------------------------------------------------------
Total assets .37 .59
- -----------------------------------------------------------------------------------
Ratio of total risk assets to:
Loans and lease financing outstanding and other real estate acquired through loan .66 1.02
- -----------------------------------------------------------------------------------
foreclosures
- -----------------------------------------------------------------------------------
Total assets .43 .64
- -----------------------------------------------------------------------------------
Reserve for loan and lease losses to total risk assets 1.94 1.25
- -----------------------------------------------------------------------------------
</TABLE>
(1) For the years ended December 31, 1997, 1996 and 1995, gross interest income
that would have been recorded during the year on the nonaccrual loans and
lease financing listed above, if the loans and lease financing had been
current in accordance with their original terms, would have amounted to
approximately $1,055,000 in 1997, $1,359,000 in 1996 and $1,225,000 in
1995. Gross interest income included in net income on these nonaccrual and
restructured loans and lease financing amounted to approximately $171,000,
$412,000 and $335,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The amounts also include interest from prior years
collected during 1997, 1996, or 1995.
- --------------------------------------------------------------------------------
The Corporation's general nonaccrual policy is to place business credits
in a nonaccrual status when there are doubts regarding the collectibility of
principal or interest or when payment of principal or interest is ninety days
or more past due (unless management determines that the collectibility is not
reasonably considered in doubt). Generally, instalment loans to individuals and
revolving credit accounts which are past due more than 90 and 120 days,
respectively, are charged-off.
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 1997 occurred primarily in instalment loans to individuals and
revolving credit. The out-of-market credit risk from credit card receivables
(included within the revolving credit category) which are offered on a
nationwide basis, is considered in the Corporation's review of the adequacy of
the reserve for loan and lease losses.
Provisions for loan and lease losses amounted to $16.4 million, $17.4
million and $11.0 million in 1997, 1996 and 1995, respectively. As disclosed in
Table 13, the ratio of the reserve for loan and lease losses to total risk
assets has improved significantly during the periods presented as a result of
the Corporation's credit risk management policies and general improvements in
the economy. An allocation of the reserve for loan and lease losses as of the
end of the previous five years is presented in Table 15.
24
<PAGE>
T A B L E 14
Summary of Loan and Lease Financing Loss Experience
and the Reserve for Loan and Lease Losses
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------
1997 1996 1995 1994
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 61,257 55,114 50,902 43,357
- ------------------------------------------------------------------------
Loan and lease losses charged to reserve:
- ------------------------------------------------------------------------
Commercial, financial and agricultural (673) (438) (343) (463)
- ------------------------------------------------------------------------
Real estate -- construction (25) (38) (392) (567)
- ------------------------------------------------------------------------
Real estate -- mortgage (545) (869) (328) (1,112)
- ------------------------------------------------------------------------
Instalment loans to individuals (4,514) (5,136) (3,337) (2,845)
- ------------------------------------------------------------------------
Revolving credit (7,344) (7,633) (4,334) (3,122)
- ------------------------------------------------------------------------
Lease financing (43) (166) (71) (84)
- ------------------------------------------------------------------------ ----------- ------ ------ ------
Total loan and lease losses charged to reserve (13,144) (14,280) (8,805) (8,193)
- ------------------------------------------------------------------------ ----------- ------- ------ ------
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 63 445 176 454
- ------------------------------------------------------------------------
Real estate -- construction 41 61 38 60
- ------------------------------------------------------------------------
Real estate -- mortgage 136 305 77 224
- ------------------------------------------------------------------------
Instalment loans to individuals 1,431 1,127 680 964
- ------------------------------------------------------------------------
Revolving credit 1,339 1,083 1,024 684
- ------------------------------------------------------------------------
Lease financing 95 41 15 91
- ------------------------------------------------------------------------ ----------- ------- ------ ------
Total recoveries of loans and leases previously charged-off 3,105 3,062 2,010 2,477
- ------------------------------------------------------------------------ ----------- ------- ------ ------
Net charge-offs (10,039) (11,218) (6,795) (5,716)
- ------------------------------------------------------------------------
Provision charged to operations 16,376 17,361 11,007 10,761
- ------------------------------------------------------------------------
Reserves related to acquisitions -- -- -- 2,500
- ------------------------------------------------------------------------ ----------- ------- ------ ------
Balance at end of year $ 67,594 61,257 55,114 50,902
======================================================================== =========== ======= ====== ======
Loans and lease financing outstanding at end of year $ 5,093,569 4,745,663 4,267,175 3,952,160
- ------------------------------------------------------------------------
Ratio of reserve for loan and lease losses to loans and lease financing
outstanding at end of year 1.33% 1.29 1.29 1.29
- ------------------------------------------------------------------------
Average loans and lease financing outstanding $ 4,877,187 4,464,026 4,113,207 3,569,065
- ------------------------------------------------------------------------
Ratio of net charge-offs of loans and lease financing to average loans
and lease financing:
- ------------------------------------------------------------------------
Total .21% .25 .17 .16
- ------------------------------------------------------------------------
Excluding revolving credit .09 .11 .09 .10
- ------------------------------------------------------------------------
Revolving credit 2.87 2.85 1.47 1.18
- ------------------------------------------------------------------------
<CAPTION>
Years Ended
December 31
-------------
1993
-------------
<S> <C>
Balance at beginning of year 34,930
- ------------------------------------------------------------------------
Loan and lease losses charged to reserve:
- ------------------------------------------------------------------------
Commercial, financial and agricultural (991)
- ------------------------------------------------------------------------
Real estate -- construction (412)
- ------------------------------------------------------------------------
Real estate -- mortgage (813)
- ------------------------------------------------------------------------
Instalment loans to individuals (3,090)
- ------------------------------------------------------------------------
Revolving credit (2,738)
- ------------------------------------------------------------------------
Lease financing (160)
- ------------------------------------------------------------------------ ------
Total loan and lease losses charged to reserve (8,204)
- ------------------------------------------------------------------------ ------
Recoveries of loans and leases previously charged-off:
Commercial, financial and agricultural 505
- ------------------------------------------------------------------------
Real estate -- construction 59
- ------------------------------------------------------------------------
Real estate -- mortgage 252
- ------------------------------------------------------------------------
Instalment loans to individuals 1,050
- ------------------------------------------------------------------------
Revolving credit 596
- ------------------------------------------------------------------------
Lease financing 58
- ------------------------------------------------------------------------ ------
Total recoveries of loans and leases previously charged-off 2,520
- ------------------------------------------------------------------------ ------
Net charge-offs (5,684)
- ------------------------------------------------------------------------
Provision charged to operations 8,339
- ------------------------------------------------------------------------
Reserves related to acquisitions 5,772
- ------------------------------------------------------------------------ ------
Balance at end of year 43,357
======================================================================== ======
Loans and lease financing outstanding at end of year 3,384,291
- ------------------------------------------------------------------------
Ratio of reserve for loan and lease losses to loans and lease financing
outstanding at end of year 1.28
- ------------------------------------------------------------------------
Average loans and lease financing outstanding 3,027,617
- ------------------------------------------------------------------------
Ratio of net charge-offs of loans and lease financing to average loans
and lease financing:
- ------------------------------------------------------------------------
Total .19
- ------------------------------------------------------------------------
Excluding revolving credit .12
- ------------------------------------------------------------------------
Revolving credit 1.13
- ------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
T A B L E 15
Allocation of the Reserve for Loan and Lease Losses (1)
(In Thousands)
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
% of % of
Amount Loans Amount Loans
of and Leases of and Leases
Reserve in Each Reserve in Each
Allocated Category Allocated Category
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Commerical, financial and agricultural $ 12,831 13.5% 11,628 11.6
- ----------------------------------------
Real estate -- construction 7,036 14.4 6,376 13.3
- ----------------------------------------
Real estate -- mortgage 13,520 57.2 18,313 54.8
- ----------------------------------------
Instalment loans to individuals 13,041 9.9 11,818 15.6
- ----------------------------------------
Revolving credit 12,416 4.2 5,192 4.1
- ----------------------------------------
Lease financing 625 .8 566 .6
- ----------------------------------------
Unallocated portion of reserve 8,125 -- 7,364 --
- ---------------------------------------- -------- ----- ------ -----
Total $ 67,594 100.0 % 61,257 100.0
======================================== ======== ===== ====== ======
<CAPTION>
1995 1994 1993
------------------------ ------------------------ -----------------------
% 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
----------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commerical, financial and agricultural 10,269 14.8 9,500 16.7 7,989 15.5
- ----------------------------------------
Real estate -- construction 5,660 11.8 5,118 10.2 4,515 7.7
- ----------------------------------------
Real estate -- mortgage 16,522 53.4 15,759 54.0 13,522 56.6
- ----------------------------------------
Instalment loans to individuals 10,104 13.9 9,351 13.4 8,260 14.1
- ----------------------------------------
Revolving credit 5,516 5.4 4,305 5.1 3,581 5.5
- ----------------------------------------
Lease financing 503 .7 559 .6 552 .6
- ----------------------------------------
Unallocated portion of reserve 6,540 -- 6,310 -- 4,938 --
- ---------------------------------------- ------ ----- ------ ----- ------ -----
Total 55,114 100.0 50,902 100.0 43,357 100.0
======================================== ====== ===== ====== ===== ====== =====
</TABLE>
(1) The allocation of the reserve for loan and lease losses by loan type is
based on management's on-going evaluation of the adequacy of the reserve
for loan and lease losses. Since the factors involved in such evaluation
are subject to change, the allocation of the reserve to the respective
loan types is not necessarily indicative of future losses in each loan
type. Additionally, no assurances can be made that the allocation shown
will be indicative of future allocations.
25
<PAGE>
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 (1) the present value of
the impaired loan's expected future cash flows discounted at the loan's
original effective interest rate, (2) the observable market price of the
impaired loan, or (3) the fair value of the collateral for a
collateral-dependent loan. Any measurement losses are recognized through
additions to the allowance for loan losses. At December 31, 1997 and 1996,
impaired loans amounted to $14.3 million and $12 million, respectively. The
related reserve for loan and lease losses on these loans amounted to $2.8
million and $2.4 million at December 31, 1997 and 1996, respectively.
Management believes that the reserve for loan and lease losses is adequate
to absorb known and inherent risks in the loan and lease financing portfolio. A
key tool in controlling loan losses is the Corporation's loan grading system
that begins at the inception of the credit relationship. Under this grading
system, substantially all credit relationships greater than $100,000 (excluding
residential mortgage and home equity lines) are assigned grades that direct the
timing and intensity of loan review activity throughout the life of the
relationship. All significant relationships are reviewed at least annually.
Relationships that have the lowest grade are reviewed each thirty days.
Management periodically reviews the adequacy of the reserve through a model
which incorporates the results of credit reviews, historical loss experience
and other factors. Based on this review, the loan and lease loss reserve is
adequate to cover known and inherent losses in the loan 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 primary sources of liquidity for the Corporation. Net cash
provided by operating activities amounted to approximately $152.7 million,
$103.6 million and $125.3 million in 1997, 1996 and 1995, respectively. Average
total deposits have grown by $350.2 million, $296 million and $572.8 million
during 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, 6.7% in 1997 versus 6.1% in 1996. These deposits
increased on the average $58.8 million from 1996 to 1997. 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, 1997, time certificates of deposit in amounts of $100,000
or more were $392.4 million compared to $407.9 million at December 31, 1996.
During 1997, the maximum month-end balance for time certificates of deposit in
amounts of $100,000 totaled $418.9 million. The following is a remaining
maturity schedule of these deposits at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Over 3 Over 6
3 Months Through Through 12
or Less 6 Months Months Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Jumbo deposits $203,259 84,721 104,455 $392,435
</TABLE>
As previously discussed, due to increased loan demand, the Subsidiary
Banks have become net short-term borrowers. The Corporation's average
short-term borrowings, net of average short-term investments, were $119.7
million, $112.2 million and $24.4 million in the years ended December 31, 1997,
1996 and 1995, respectively. Correspondent relationships are maintained with
several larger banks to be able 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 $118.6 million mature in 1998. 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 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.
26
<PAGE>
Liquidity at the Parent Company level is provided through cash dividends
from the Subsidiary Banks, the repayment of demand notes payable to the Parent
Company from the Subsidiary Banks and the capacity of the Parent Company to
raise additional funds as needed.
In addition to ensuring adequate liquidity, the Corporation is concerned
with the management of its balance sheet to maintain relatively stable net
interest margins despite changes in the interest rate environment.
Responsibility for both liquidity and interest-sensitivity management rests
with the Corporation's Asset/Liability Management Committee ("ALCO") comprised
of senior management. ALCO reviews the Corporation's interest rate and
liquidity exposures and, based on its view of existing and expected market
conditions, adopts balance sheet strategies that are intended to optimize net
interest income to the extent possible while minimizing the risk associated
with unanticipated changes in interest rates. Determining and monitoring the
appropriate balance between interest-sensitive assets and interest-sensitive
liabilities and the impact on earnings of changes in interest rates is
accomplished through ALCO's use of Gap Analysis and Simulation Analysis.
Gap Analysis measures the interest-sensitivity of assets and liabilities
at a given point in time. The interest-sensitivity of assets and liabilities is
based on the timing of contractual maturities and repricing opportunities.
Prepayments of loans and certain investment securities and early withdrawals of
deposits represent options which may or may not be exercised. 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, 1997 is
presented in Table 16. At December 31, 1997, the Corporation had a cumulative
"negative gap" (interest-sensitive liabilities exceeding interest-sensitive
assets) of $502.2 million or 7.52% of total earning assets over a twelve-month
horizon. The ratio of interest-sensitive assets to interest-sensitive
liabilities was .86x. Gap Analysis is a limited measurement tool, however,
because it does not incorporate the interrelationships between interest rates
charged or paid, balance sheet trends and management's reaction in response to
interest rate changes. In addition, a gap analysis model does not consider that
changes in interest rates do not affect all categories of assets and
liabilities equally or simultaneously. Therefore, ALCO uses Gap Analysis as a
tool to monitor changes in the balance sheet structure. To estimate the impact
that changes in interest rates would have on the Corporation's earnings, ALCO
uses Simulation Analysis.
T A B L E 16
Interest-Sensitivity Analysis (1)
(In Thousands)
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------------------------------------------------------------
6 Month
30 Day 60 Day 90 Day 6 Month to 1 Year Total
Sensitive Sensitive Sensitive Sensitive Sensitive Sensitive
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits in other banks $ 19,775 -- -- -- 100 19,875
- ----------------------------------------------
Federal funds sold and other
short-term investments 122,000 -- -- -- -- 122,000
- ----------------------------------------------
Investment securities (2) 68,718 23,926 32,049 85,697 165,515 375,905
- ----------------------------------------------
Loans and lease financing 1,192,985 561,183 83,476 262,634 536,543 2,636,821
- ---------------------------------------------- --------- ------- ------ ------- ------- ---------
Total earning assets 1,403,478 585,109 115,525 348,331 702,158 3,154,601
============================================== ========= ======= ======= ======= ======= =========
Interest-bearing liabilities:
Savings deposits 893,910 560,879 -- -- -- 1,454,789
- ----------------------------------------------
Other time deposits 321,913 232,603 285,027 504,881 630,400 1,974,824
- ----------------------------------------------
Short-term borrowed funds 196,437 -- -- 10,000 20,000 226,437
- ----------------------------------------------
Long-term debt 109 68 68 207 289 741
- ---------------------------------------------- --------- ------- ------- ------- ------- ---------
Total interest-bearing liabilities 1,412,369 793,550 285,095 515,088 650,689 3,656,791
- ---------------------------------------------- --------- ------- ------- ------- ------- ---------
Interest-sensitivity gap $ (8,891) (208,441) (169,570) (166,757) 51,469 (502,190)
============================================== ========= ======== ======== ======== ======= =========
Cumulative gap $ (8,891) (217,332) (386,902) (553,659) (502,190)
============================================== ========= ======== ======== ======== =======
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities .99 x .90 .84 .82 .86
============================================== ========= ======== ======== ========= =======
Cumulative gap to total earning assets (.13) % (3.26) (5.80) (8.29) (7.52)
============================================== ========= ======== ======== ========= =======
<CAPTION>
As of December 31, 1997
--------------------------
Non-Interest
Sensitive Total
------------- ------------
<S> <C> <C>
Earning assets:
Time deposits in other banks -- 19,875
- ----------------------------------------------
Federal funds sold and other
short-term investments -- 122,000
- ----------------------------------------------
Investment securities (2) 1,065,088 1,440,993
- ----------------------------------------------
Loans and lease financing 2,456,748 5,093,569
- ---------------------------------------------- --------- ---------
Total earning assets 3,521,836 6,676,437
============================================== ========= =========
Interest-bearing liabilities:
Savings deposits 909,002 2,363,791
- ----------------------------------------------
Other time deposits 905,644 2,880,468
- ----------------------------------------------
Short-term borrowed funds 50,000 276,437
- ----------------------------------------------
Long-term debt 99,945 100,686
- ---------------------------------------------- --------- ---------
Total interest-bearing liabilities 1,964,591 5,621,382
============================================== ========= =========
Interest-sensitivity gap
==============================================
Cumulative gap
==============================================
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities
==============================================
Cumulative gap to total earning assets
==============================================
</TABLE>
(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 $22,731,000 for available for sale securities
is not included.
- --------------------------------------------------------------------------------
27
<PAGE>
Simulation Analysis is performed using a computer-based asset/liability
model which incorporates current portfolio balances and rates, contractual
maturities, repricing opportunities, and assumptions about prepayments, future
interest rates, and future volumes. Using this information, the model
calculates earnings estimates for the Corporation under multiple interest rate
scenarios. To measure the sensitivity of the Corporation's earnings, the
results of multiple simulations, which assume changes in interest rates, are
compared to the "base case" simulation, which assumes no changes in interest
rates. The sensitivity of earnings is expressed as a percentage change in
comparison to the "base case" simulation. As a matter of policy, ALCO has
stated that the maximum negative impact to net income from a positive or
negative 100 basis point change in interest rates over a 12-month period should
not exceed 6%, which was achieved during 1997. At December 31, 1997, interest
sensitivity was well under this guideline. ALCO actually manages earnings
sensitivity, however, with a targeted goal of only a 2% to 3% impact on net
income. If simulation results show that earnings sensitivity exceeds the
targeted limits, ALCO will adopt on-balance sheet and/or off-balance sheet
strategies to bring earnings sensitivity within target guidelines.
Management uses both on- and off-balance sheet strategies to manage the
balance sheet. 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 23.4% 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, 1997.
Within the Corporation's overall interest rate risk management strategy,
off-balance sheet derivatives have been and may be used in the future as a
cost- and capital-efficient way to manage interest rate sensitivity by
modifying the repricing or maturity of on-balance sheet assets or liabilities.
As of December 31, 1997, the Corporation had an off-balance sheet derivative
financial instrument in the form of an interest rate swap (a basis swap) with a
notional principal of $100 million. The interest rate swap was entered into in
November 1997 and has a two-year term. The purpose of entering into the
interest rate swap 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. This financial instrument had a nominal positive effect on interest
expense for 1997. The Corporation was not party to any other off-balance sheet
derivative financial instruments during 1997. 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 would be monitored through routine review of the
counterparty's financial ratings.
The Corporation has not experienced any liquidity problems in the past nor
are problems anticipated in the future. Reliance will continue to be placed on
the same funding sources, primarily financial resources provided by operating
activities and expansion of the "core" deposit base. Management will continue
to monitor the Corporation's interest-sensitivity position with goals of
ensuring adequate liquidity while at the same time seeking profitable spreads
between the yields on funding uses and the rates paid for funding sources.
Other Accounting Matters
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 129, "Disclosures of Information About
Capital Structure". SFAS No. 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions
of its requirements. Specifically, SFAS No. 129 requires all entities to
provide the capital structure disclosures previously required by APB Opinion
No. 15. Companies that were exempt from the provisions of Opinion No. 15 will
now need to make those disclosures. SFAS No. 129 will have no impact on the
Corporation's consolidated financial statements.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The objective of the Statement is to report a measure of all
changes in equity of an enterprise that result from transactions and other
economic events during the period other than transaction with owners (therein
defined as "comprehensive income"). Comprehensive income is the total of net
income and all other nonshareholder changes in equity. The Statement is
effective for fiscal years beginning after December 15, 1997 with earlier
application permitted. If comparative financial statements are provided for
earlier periods, those financial statements shall be reclassified to reflect
application of the provisions of SFAS No. 130. Adoption of this Statement will
not change total shareholders' equity as previously reported.
28
<PAGE>
In July 1997, the FASB also issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information". SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. The Statement
is effective for fiscal years beginning after December 15, 1997 with earlier
application permitted. Adoption of this Statement is not expected to have a
significant impact on the Corporation's consolidated financial statements as
the Corporation has one operating segment.
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 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 actually 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, 1997 is as follows:
<TABLE>
<S> <C> <C>
Basis point change in interest rates (100) 100
- ---------------------------------------------
Projected percentage change in net income (1.0)% (.5)%
- ---------------------------------------------
</TABLE>
As of December 31, 1997, Management believes that it has accomplished its
objective to avoid material negative changes in net income resulting from
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, 1997, the Corporation had an
off-balance sheet derivative financial instrument outstanding in the form of an
interest rate swap (a basis swap) with a notional amount of $100 million. The
two-year term basis swap was entered into in November 1997 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 1997.
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.
29
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
-----
<S> <C>
(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, 1997 and 1996 ............................... 31
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1997 ........................................................ 32
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 1997 ............................................. 33
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1997 ........................................................ 34
Notes to Consolidated Financial Statements .............................................. 35
Report of Management Regarding Responsibility for Financial Statements ................... 59
Independent Auditors' Report ............................................................. 60
(b) The following supplementary data is set forth in this Annual Report on Form 10-K on
the page indicated:
Quarterly Financial Data ............................................................... 56
</TABLE>
30
<PAGE>
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
(In Thousands Except Share
Data)
<S> <C> <C>
Assets:
Cash and due from banks (note 3) $ 277,469 246,934
- -------------------------------------------------------------------------------------- ----------- -------
Time deposits in other banks 19,875 99,794
- -------------------------------------------------------------------------------------- ----------- -------
Federal funds sold 22,000 211,394
- -------------------------------------------------------------------------------------- ----------- -------
Other short-term investments 100,000 59,896
- -------------------------------------------------------------------------------------- ----------- -------
Investment securities (notes 4 and 8):
Available for sale (Amortized cost of $1,359,376 and $1,255,397) 1,382,107 1,267,519
- -------------------------------------------------------------------------------------- ----------- ---------
Held to maturity (Market values of $87,002 and $88,504) 81,617 84,262
- -------------------------------------------------------------------------------------- ----------- ---------
Loans and lease financing (notes 5, 8 and 9) 5,093,569 4,745,663
- --------------------------------------------------------------------------------------
Less reserve for loan and lease losses (note 6) 67,594 61,257
- -------------------------------------------------------------------------------------- ----------- ---------
Net loans and lease financing 5,025,975 4,684,406
- -------------------------------------------------------------------------------------- ----------- ---------
Premises and equipment (notes 7 and 9) 86,035 85,793
- --------------------------------------------------------------------------------------
Other assets (notes 5 and 13) 143,450 140,207
- -------------------------------------------------------------------------------------- ----------- ---------
Total assets $ 7,138,528 6,880,205
====================================================================================== =========== =========
Liabilities:
Deposits:
Demand (noninterest-bearing) $ 740,338 712,888
- --------------------------------------------------------------------------------------
Savings and NOW accounts 727,108 705,357
- --------------------------------------------------------------------------------------
Money market accounts 1,636,683 1,588,242
- --------------------------------------------------------------------------------------
Jumbo time deposits (note 8) 392,435 407,850
- --------------------------------------------------------------------------------------
Time deposits (note 8) 2,488,033 2,327,117
- -------------------------------------------------------------------------------------- ----------- ---------
Total deposits 5,984,597 5,741,454
- --------------------------------------------------------------------------------------
Short-term borrowed funds (note 8) 276,437 356,839
- --------------------------------------------------------------------------------------
Long-term debt (note 9) 100,686 58,449
- --------------------------------------------------------------------------------------
Other liabilities (notes 10 and 13) 95,448 112,014
- -------------------------------------------------------------------------------------- ----------- ---------
Total liabilities 6,457,168 6,268,756
- -------------------------------------------------------------------------------------- ----------- ---------
Shareholders' equity (notes 4, 11 and 15):
Serial preferred stock. Authorized 5,000,000 shares; none issued
- --------------------------------------------------------------------------------------
Common stock of $5 par value. Authorized 50,000,000 shares; 20,776,412 and 20,633,945
shares issued in 1997 and 1996, respectively 103,882 103,169
- --------------------------------------------------------------------------------------
Additional paid-in capital 143,784 140,617
- --------------------------------------------------------------------------------------
Retained earnings 419,746 361,072
- --------------------------------------------------------------------------------------
Unrealized gain on investment securities available for sale, net of applicable taxes 13,980 7,329
- --------------------------------------------------------------------------------------
Less: Unearned common stock held by management recognition plans (32) (738)
- -------------------------------------------------------------------------------------- ----------- ---------
Total shareholders' equity 681,360 611,449
- -------------------------------------------------------------------------------------- ----------- ---------
Total liabilities and shareholders' equity $ 7,138,528 6,880,205
====================================================================================== =========== =========
</TABLE>
Commitments and contingencies (note 14)
See accompanying notes to consolidated financial statements.
31
<PAGE>
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and lease financing $442,618 405,894 383,368
- ---------------------------------------------------------------------------
Interest and dividends on investment securities:
U.S. Treasury 31,546 28,957 30,801
- ---------------------------------------------------------------------------
U.S. Government agencies and corporations 55,613 53,222 51,840
- ---------------------------------------------------------------------------
States and political subdivisions (primarily tax-exempt) 4,840 4,593 5,076
- ---------------------------------------------------------------------------
Equity and other securities 3,070 3,374 2,887
- ---------------------------------------------------------------------------
Interest on time deposits in other banks 2,716 3,263 2,937
- ---------------------------------------------------------------------------
Interest on federal funds sold and other short-term investments 10,060 13,272 15,500
- --------------------------------------------------------------------------- -------- ------- --------
Total interest income 550,463 512,575 492,409
- --------------------------------------------------------------------------- -------- ------- --------
Interest expense:
Deposits 229,600 214,500 208,921
- ---------------------------------------------------------------------------
Short-term borrowed funds (note 8) 15,371 18,713 16,568
- ---------------------------------------------------------------------------
Long-term debt (note 9) 5,128 4,359 9,391
- --------------------------------------------------------------------------- -------- ------- --------
Total interest expense 250,099 237,572 234,880
- --------------------------------------------------------------------------- -------- ------- --------
Net interest income 300,364 275,003 257,529
- ---------------------------------------------------------------------------
Provision for loan and lease losses (note 6) 16,376 17,361 11,007
- --------------------------------------------------------------------------- -------- ------- --------
Net interest income after provision for loan and lease losses 283,988 257,642 246,522
- --------------------------------------------------------------------------- -------- ------- --------
Other income:
Service charges on deposit accounts 44,937 40,070 35,883
- ---------------------------------------------------------------------------
Trust and custodian fees 8,415 7,348 6,815
- ---------------------------------------------------------------------------
Sales and insurance commissions 9,433 7,816 5,188
- ---------------------------------------------------------------------------
Merchant discount 7,017 6,116 4,666
- ---------------------------------------------------------------------------
Accretion of negative goodwill from acquisitions 3,356 3,356 3,356
- ---------------------------------------------------------------------------
Other operating 19,761 20,061 11,093
- ---------------------------------------------------------------------------
Investment securities gains (note 4) 578 2,198 1,106
- ---------------------------------------------------------------------------
Investment securities losses (note 4) (98) (4,359) (1,922)
- --------------------------------------------------------------------------- -------- ------- --------
Total other income 93,399 82,606 66,185
- --------------------------------------------------------------------------- -------- ------- --------
Other expenses:
Personnel (note 10) 114,572 105,991 99,628
- ---------------------------------------------------------------------------
Net occupancy (note 14) 15,595 16,189 15,682
- ---------------------------------------------------------------------------
Equipment (note 14) 12,867 12,032 12,347
- ---------------------------------------------------------------------------
Merger-related expense (note 2) 17,916 -- 10,333
- ---------------------------------------------------------------------------
Other operating (note 12) 65,248 75,621 60,217
- --------------------------------------------------------------------------- -------- ------- --------
Total other expenses 226,198 209,833 198,207
- --------------------------------------------------------------------------- -------- ------- --------
Income before income taxes and extraordinary item 151,189 130,415 114,500
- ---------------------------------------------------------------------------
Income taxes (note 13) 55,765 43,589 37,356
- --------------------------------------------------------------------------- -------- ------- --------
Income before extraordinary item 95,424 86,826 77,144
- ---------------------------------------------------------------------------
Extraordinary item -- loss on extinguishment of debt, net of income taxes -- -- (1,709)
- --------------------------------------------------------------------------- -------- ------- --------
Net income $ 95,424 86,826 75,435
=========================================================================== ======== ======= ========
Earnings per common share -- basic (note 11):
Income before extraordinary item $ 4.61 4.22 3.80
- ---------------------------------------------------------------------------
Extraordinary item -- -- (0.08)
- --------------------------------------------------------------------------- -------- -------- --------
Net income $ 4.61 4.22 3.72
=========================================================================== ======== ======== ========
Earnings per common share -- diluted (note 11):
Income before extraordinary item $ 4.55 4.15 3.69
- ---------------------------------------------------------------------------
Extraordinary item -- -- (0.08)
- --------------------------------------------------------------------------- -------- -------- --------
Net income $ 4.55 4.15 3.61
=========================================================================== ======== ======== ========
Weighted average shares outstanding (note 11):
Basic 20,719 20,553 20,295
- ---------------------------------------------------------------------------
Diluted 20,973 20,908 20,900
- ---------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Investment
Additional Securities Management
Common Paid-In Retained Available Recognition
Stock Capital Earnings for Sale Plans
---------------- ------------ ------------ --------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
CCB Financial Corporation $74,984 92,283 225,499 (18,644) (2,970)
- -----------------------------------------------
American Federal Bank, FSB 10,851 54,346 29,791 (1,630) --
- -----------------------------------------------
Salem Trust Bank 2,599 2,756 2,226 -- --
- -----------------------------------------------
Adjustments for poolings-of-interests 12,566 (12,566) -- -- --
- ----------------------------------------------- --------- ------- ------- ------- ------
Balance December 31, 1994, restated 101,000 136,819 257,516 (20,274) (2,970)
Net income -- -- 75,435 -- --
- -----------------------------------------------
Stock options exercised (note 10) 489 1,315 -- -- --
- -----------------------------------------------
Earned portion of management recognition plans
(note 10) -- -- -- -- 1,236
- -----------------------------------------------
Purchase and retirement of shares (550) (3,881) -- -- --
- -----------------------------------------------
Conversion of debentures (note 11) 3 12 -- -- --
- -----------------------------------------------
Common stock warrants repurchased (note 11) -- (130) (460) -- --
- -----------------------------------------------
Public offering of shares 1,000 3,966 -- -- --
- -----------------------------------------------
Other transactions, net (4) (28) -- -- --
- -----------------------------------------------
Cash dividends ($1.44 per share) -- -- (25,157) -- --
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) -- -- -- 31,580 --
- ----------------------------------------------- --------- ------- ------- ------- ------
Balance December 31, 1995 101,938 138,073 307,334 11,306 (1,734)
Net income -- -- 86,826 -- --
- -----------------------------------------------
Transactions pursuant to restricted
stock, net (note 10) 20 728 -- -- --
- -----------------------------------------------
Stock options exercised, net of
shares tendered (note 10) 926 2,152 -- -- --
- -----------------------------------------------
Earned portion of management
recognition plans (note 10) -- -- -- -- 996
- -----------------------------------------------
Purchase and retirement of shares (96) (901) -- -- --
- -----------------------------------------------
Conversion of debentures (note 11) 381 1,737 -- -- --
- -----------------------------------------------
Common stock warrants repurchased (note 11) -- (1,172) (4,509) -- --
- -----------------------------------------------
Cash dividends ($1.60 per share) -- -- (28,579) -- --
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) -- -- -- (3,977) --
- ----------------------------------------------- --------- ------- ------- ------- ------
Balance December 31, 1996 103,169 140,617 361,072 7,329 (738)
Net income -- -- 95,424 -- --
- -----------------------------------------------
Transactions pursuant to restricted
stock, net (note 10) 27 373 -- -- --
- -----------------------------------------------
Stock options exercised, net of
shares tendered (note 10) 688 2,729 -- -- --
- -----------------------------------------------
Earned portion of management
recognition plans (note 10) -- -- -- -- 706
- -----------------------------------------------
Other transactions, net (2) 65 -- -- --
- -----------------------------------------------
Cash dividends ($1.78 per share) -- -- (36,750) -- --
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) -- -- -- 6,651 --
- ----------------------------------------------- --------- ------- ------- ------- ------
Balance December 31, 1997 $103,882 143,784 419,746 13,980 (32)
=============================================== ========= ======= ======= ======= ======
<CAPTION>
Total
Shareholders'
Equity
--------------
(In Thousands)
<S> <C>
CCB Financial Corporation 371,152
- -----------------------------------------------
American Federal Bank, FSB 93,358
- -----------------------------------------------
Salem Trust Bank 7,581
- -----------------------------------------------
Adjustments for poolings-of-interests --
- ----------------------------------------------- -------
Balance December 31, 1994, restated 472,091
Net income 75,435
- -----------------------------------------------
Stock options exercised (note 10) 1,804
- -----------------------------------------------
Earned portion of management recognition plans
(note 10) 1,236
- -----------------------------------------------
Purchase and retirement of shares (4,431)
- -----------------------------------------------
Conversion of debentures (note 11) 15
- -----------------------------------------------
Common stock warrants repurchased (note 11) (590)
- -----------------------------------------------
Public offering of shares 4,966
- -----------------------------------------------
Other transactions, net (32)
- -----------------------------------------------
Cash dividends ($1.44 per share) (25,157)
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) 31,580
- ----------------------------------------------- -------
Balance December 31, 1995 556,917
Net income 86,826
- -----------------------------------------------
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 ($1.60 per share) (28,579)
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) (3,977)
- ----------------------------------------------- -------
Balance December 31, 1996 611,449
Net income 95,424
- -----------------------------------------------
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 ($1.78 per share) (36,750)
- -----------------------------------------------
Change in unrealized gains (losses),
net of applicable income taxes (note 4) 6,651
- ----------------------------------------------- -------
Balance December 31, 1997 681,360
=============================================== =======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CCB FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 95,424 86,826 75,435
- ---------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
- ---------------------------------------------------------------------------------------
Depreciation, amortization and accretion, net 23,418 10,361 21,523
- ---------------------------------------------------------------------------------------
Provision for loan and lease losses 16,376 17,361 11,007
- ---------------------------------------------------------------------------------------
Net (gain) loss on sales of investment securities (480) 2,161 816
- ---------------------------------------------------------------------------------------
Extraordinary loss on extinguishment of debt, net of income taxes -- -- 1,709
- ---------------------------------------------------------------------------------------
Sale of securitized mortgage loans 25,658 -- --
- ---------------------------------------------------------------------------------------
Sales of loans held for sale 232,095 181,310 279,483
- ---------------------------------------------------------------------------------------
Origination of loans held for sale (214,170) (187,555) (284,386)
- ---------------------------------------------------------------------------------------
Change in deferred income taxes 16 (2,184) (6,749)
- ---------------------------------------------------------------------------------------
Increase in accrued interest receivable (4,202) (592) (1,690)
- ---------------------------------------------------------------------------------------
Increase (decrease) in accrued interest payable (17,550) 4,809 8,904
- ---------------------------------------------------------------------------------------
Decrease (increase) in other assets 821 (13,426) 10,078
- ---------------------------------------------------------------------------------------
Increase in other liabilities 905 5,309 14,147
- ---------------------------------------------------------------------------------------
Other operating activities, net (5,616) (743) (5,011)
- --------------------------------------------------------------------------------------- ----------- -------- --------
Net cash provided by operating activities 152,695 103,637 125,266
- --------------------------------------------------------------------------------------- ----------- -------- --------
Investing activities:
Proceeds from maturities and issuer calls of investment securities held to maturity 2,622 9,973 15,467
- ---------------------------------------------------------------------------------------
Purchases of investment securities held to maturity -- (16,005) (8,265)
- ---------------------------------------------------------------------------------------
Proceeds from sales of investment securities available for sale 176,481 195,363 188,437
- ---------------------------------------------------------------------------------------
Proceeds from maturities and issuer calls of investment securities available for sale 501,394 474,889 253,785
- ---------------------------------------------------------------------------------------
Purchases of investment securities available for sale (677,990) (517,477) (428,164)
- ---------------------------------------------------------------------------------------
Net originations of loans and leases receivable (529,365) (487,972) (324,559)
- ---------------------------------------------------------------------------------------
Purchases of premises and equipment (10,584) (9,768) (14,431)
- ---------------------------------------------------------------------------------------
Net cash acquired (paid) in acquisitions (dispositions) 14,577 (50,926) 135,164
- --------------------------------------------------------------------------------------- ----------- -------- --------
Net cash used by investing activities (522,865) (401,923) (182,566)
- --------------------------------------------------------------------------------------- ----------- -------- --------
Financing activities:
Net increase in deposit accounts 243,143 375,900 293,472
- ---------------------------------------------------------------------------------------
Net increase (decrease) in short-term borrowed funds (80,402) 43,897 52,230
- ---------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 50,129 -- 4,515
- ---------------------------------------------------------------------------------------
Repayments of long-term debt (7,997) (122,699) (80,615)
- ---------------------------------------------------------------------------------------
Issuances of common stock from exercise of stock options, net 3,417 3,078 1,804
- ---------------------------------------------------------------------------------------
Issuance of common stock in public offering -- -- 4,966
- ---------------------------------------------------------------------------------------
Purchase and retirement of common stock -- (997) (4,431)
- ---------------------------------------------------------------------------------------
Purchase and retirement of common stock warrants -- (5,681) (590)
- ---------------------------------------------------------------------------------------
Other equity transactions, net (44) -- --
- ---------------------------------------------------------------------------------------
Cash dividends (36,750) (28,579) (25,157)
- --------------------------------------------------------------------------------------- ----------- -------- --------
Net cash provided by financing activities 171,496 264,919 246,194
- --------------------------------------------------------------------------------------- ----------- -------- --------
Net increase (decrease) in cash and cash equivalents (198,674) (33,367) 188,894
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year (note 1) 618,018 651,385 462,491
- --------------------------------------------------------------------------------------- ----------- -------- --------
Cash and cash equivalents at end of year (note 1) $ 419,344 618,018 651,385
======================================================================================= =========== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 267,649 232,763 225,586
======================================================================================= =========== ======== ========
Income taxes paid during the year $ 57,597 45,530 41,884
======================================================================================= =========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
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. and Southland Associates, Inc.) and AmFed (American
Service Corporation of S.C., Mortgage North, AMFEDDE, Inc. and Finance South,
Inc.). All significant intercompany transactions and accounts are eliminated in
consolidation.
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-Ga. is a special purpose bank that provides
nationwide credit card 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
1997 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.
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
35
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
ability to repay their loans in accordance with the contractual terms of the
notes, the loans are returned to accrual status. Certain fees and direct loan
origination costs are deferred and amortized as an adjustment of the related
loan's yield by a level-yield method.
Reserve for Loan and Lease Losses
The reserve for loan and lease losses is increased by provisions charged
to 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 known and inherent loan and lease losses based on
management's evaluation of the loan and lease financing portfolio, including
historical loss experience, identified problem loans, volumes and outstandings,
as well as on current economic conditions. 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 a discounted cash flow methodology. This analysis
incorporates current market assumptions, including discount, prepayment and
delinquency rates, with net cash flows. The predominant characteristics used as
the basis for stratifying MSR are investor type, product type and interest
rate. If the carrying value 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 using the interest method.
Management Recognition Plans
The Corporation has two Management Recognition Plans (the "MRP") designed
to provide an ownership interest in the Corporation through the issuance of
restricted common stock to certain officers and directors of financial
institutions acquired by the Corporation as an incentive for those persons to
remain with the Subsidiary Banks. The shares of common stock issued are being
earned in instalments over a period of up to five years and the cost of the
shares is being charged to operating expense over the period the shares are
earned. Prior to vesting, each participant granted shares under the MRP may
direct the voting of the shares allocated to the participant and will be
entitled to receive any dividends or other distributions paid on such shares.
36
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Intangibles Arising from Acquisitions
Intangibles arising from acquisitions result from the Corporation paying
amounts in excess of fair value for businesses, core deposits and tangible
assets acquired. Such amounts are being amortized by systematic charges to
income over a period no greater than the estimated remaining life of the assets
acquired or not exceeding the estimated remaining life of the existing deposit
base assumed (primarily for up to 10 years).
Negative goodwill, included in "other liabilities" on the Consolidated
Balance Sheets, represents the excess of fair value of net assets acquired over
cost after recording the liability for recaptured tax bad debt reserves and
after reducing the basis in noncurrent assets acquired to zero. Negative
goodwill is being accreted into earnings on a straight-line basis over the
estimated periods to be benefited (generally 10 years).
Income Taxes
The provision for income taxes is based on income and expense reported for
financial statement purposes after adjustment for permanent differences such as
tax-exempt interest income. Deferred income taxes are provided when there is a
difference between the periods items are reported for financial statement
purposes and when they are reported for tax purposes and are recorded at the
enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. Subsequent
changes in tax rates will require adjustment to these assets and liabilities.
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. Most of the Corporation's
stock options have no intrinsic value at grant date, and consequently, no
compensation cost is recognized for them.
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.
Per Share Data
The Corporation adopted the provisions of SFAS No. 128, "Earnings Per
Share", during 1997. The Statement establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 simplifies the standards
for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share",
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement.
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. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. In accordance with SFAS No. 128,
all prior period EPS data has been restated.
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
37
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 which have been 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.
The merger was effected through a tax-free exchange of stock whereby each
outstanding share of AmFed common stock was exchanged for .445 of a share of
the Corporation's common stock. Consequently, the Corporation issued
approximately 4,933,000 shares of common stock and cash in-lieu of fractional
shares for all of the outstanding shares of AmFed. AmFed is continuing to
operate as a wholly-owned subsidiary of the Corporation.
On January 31, 1997, the Corporation merged with Salem Trust Bank ("Salem
Trust"), a $165 million commercial bank based in Winston-Salem, North Carolina.
The merger was effected through a tax-free exchange of stock whereby each
outstanding share of Salem Trust common stock was exchanged for .36 shares of
the Corporation's common stock. Consequently, the Corporation issued
approximately 680,000 shares of common stock and cash in-lieu of fractional
shares for all of the outstanding shares of Salem Trust. The former offices of
Salem Trust are operated as offices of CCB.
38
<PAGE>
(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 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 three years ended December 31, 1997 (1997
includes AmFed for the six months ended June 30, 1997 and Salem Trust for the
month ended January 31, 1997) were as follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Total income:
CCB Financial Corporation $580,403 460,353 435,803
- ---------------------------------------------------------------
American Federal Bank, FSB 62,326 121,081 112,526
- ---------------------------------------------------------------
Salem Trust Bank 1,133 13,747 10,265
- --------------------------------------------------------------- -------- ------- -------
Combined $643,862 595,181 558,594
=============================================================== ======== ======= =======
Net interest income after provision for loan and lease losses:
CCB Financial Corporation $256,228 200,670 195,927
- ---------------------------------------------------------------
American Federal Bank, FSB 27,207 50,799 46,374
- ---------------------------------------------------------------
Salem Trust Bank 553 6,173 4,221
- --------------------------------------------------------------- -------- ------- -------
Combined $283,988 257,642 246,522
=============================================================== ======== ======= =======
Net income:
CCB Financial Corporation $ 84,306 70,315 57,860
- ---------------------------------------------------------------
American Federal Bank, FSB 11,202 14,492 16,531
- ---------------------------------------------------------------
Salem Trust Bank (84) 2,019 1,044
- --------------------------------------------------------------- -------- ------- -------
Combined $ 95,424 86,826 75,435
=============================================================== ======== ======= =======
</TABLE>
AmFed and Salem Trust'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 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.
On May 19, 1995, the Corporation consummated its merger with Security
Capital Bancorp ("Security Capital"), a $1.2 billion bank holding company based
in Salisbury, North Carolina. The Merger was accounted for as a
pooling-of-interests and was effected through a tax-free exchange of stock with
the issuance of approximately 5,890,000 shares of the Corporation's common
stock. In connection with the Security Capital merger, the Corporation incurred
merger-related expense of $10,333,000, or $7,300,000 after-tax, during 1995.
This expense included severance and other employee benefit costs, costs related
to branch closures, system conversion costs and other transaction-related
expenses.
(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, 1997 and 1996, the Subsidiary
Banks were required to maintain average reserve and clearing balances of
approximately $18,366,000 and $23,303,000, respectively.
(4) INVESTMENT SECURITIES
Investment securities with amortized costs of approximately $598,600,000
at December 31, 1997 and $396,976,000 at December 31, 1996 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.
39
<PAGE>
(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, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
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
============================ ========== ====== === =========
<CAPTION>
1996
--------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury 442,410 5,781 (614) 447,577
- ----------------------------
U.S. Government agencies
and corporations 398,780 4,350 (534) 402,596
- ----------------------------
Mortgage-backed securities 362,356 4,226 (1,088) 365,494
- ----------------------------
Equity securities 51,851 1 -- 51,852
- ---------------------------- ------- ----- ------ -------
Total 1,255,397 14,358 (2,236) 1,267,519
============================ ========= ====== ====== =========
</TABLE>
Equity securities include CCB's and AmFed's required investment in stock
of the Federal Home Loan Bank (the "FHLB") which totaled $24,432,000 at
December 31, 1997 and $28,059,000 at December 31, 1996. 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 $22,731,000,
$12,122,000 and $18,755,000 at December 31, 1997, 1996 and 1995, respectively,
and are included as a component of shareholders' equity, net of deferred tax
liabilities of $8,751,000, $4,793,000 and $7,449,000 at December 31, 1997, 1996
and 1995, 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 $578,000 and $98,000, respectively, in 1997, totaled $2,058,000
and $4,359,000, respectively, in 1996 and totaled $1,073,000 and $1,919,000,
respectively, in 1995.
Following is a maturity schedule of securities available for sale at
December 31, 1997:
<TABLE>
<CAPTION>
Amortized Carrying
Cost Value
------------- ------------
(In Thousands)
<S> <C> <C>
Within 1 year $ 114,672 114,870
- ------------------------------------------------
After 1 but within 5 years 699,898 710,229
- ------------------------------------------------
After 5 but within 10 years 209,656 212,120
- ------------------------------------------------ ---------- -------
Subtotal 1,024,226 1,037,219
- ------------------------------------------------
Mortgage-backed securities 289,204 297,921
- ------------------------------------------------
Equity securities 45,946 46,967
- ------------------------------------------------ ---------- ---------
Total securities available for sale $1,359,376 1,382,107
================================================ ========== =========
</TABLE>
Securities Held to Maturity
The carrying values and approximate market values of securities held to
maturity at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------- --------------------------------------------
Carrying Unrealized Unrealized Market Carrying Unrealized Unrealized Market
Value Gains Losses Value Value Gains Losses Value
---------- ------------ ------------ -------- ---------- ------------ ------------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
States and political subdivisions $81,617 5,385 -- 87,002 84,262 4,277 (35) 88,504
=================================== ======= ===== == ====== ====== ===== === ======
</TABLE>
Following is a maturity schedule of securities held to maturity at
December 31, 1997:
<TABLE>
<CAPTION>
Carrying Market
Value Value
---------- ---------
(In Thousands)
<S> <C> <C>
Within 1 year $ 225 226
- -----------------------------------------------
After 1 but within 5 years 3,638 3,774
- -----------------------------------------------
After 5 but within 10 years 44,950 47,705
- -----------------------------------------------
After 10 years 32,804 35,297
- ----------------------------------------------- ------- ------
Total securities held to maturity $81,617 87,002
=============================================== ======= ======
</TABLE>
40
<PAGE>
(4) INVESTMENT SECURITIES -- Continued
Gains from calls of securities held to maturity totaled $140,000 during
1996 and $33,000 during 1995. Losses from calls of securities held to maturity
during 1995 totaled $3,000.
(5) LOANS AND LEASE FINANCING
A summary of loans and lease financing at December 31, 1997 and 1996
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 688,040 549,831
- ----------------------------------------
Real estate-construction 733,026 629,829
- ----------------------------------------
Real estate-mortgage 2,915,851 2,602,639
- ----------------------------------------
Instalment loans to individuals 506,339 739,991
- ----------------------------------------
Revolving credit 212,794 193,561
- ----------------------------------------
Lease financing 43,265 38,323
- ---------------------------------------- ----------- ---------
Total gross loans and lease financing 5,099,315 4,754,174
- ----------------------------------------
Less: Unearned income 5,746 8,511
- ---------------------------------------- ----------- ---------
Total loans and lease financing $ 5,093,569 4,745,663
======================================== =========== =========
</TABLE>
Loans and lease financing of $16,088,000 and $15,752,000 at December 31,
1997 and 1996, respectively, were not accruing interest. Loans transferred from
loans to other real estate acquired through loan foreclosure totaled $2,281,000
in 1997, $2,666,000 in 1996 and $2,404,000 in 1995. Other real estate acquired
through loan foreclosures amounted to $845,000 and $2,469,000 at December 31,
1997 and 1996, 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, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Interest income that would have been recognized if the loans had been current at original $1,055 1,359 1,225
- ------------------------------------------------------------------------------------------
contractual rates
- ------------------------------------------------------------------------------------------
Amount recognized as interest income 171 412 335
- ------------------------------------------------------------------------------------------ ------ ----- -----
Difference $ 884 947 890
========================================================================================== ====== ===== =====
</TABLE>
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 $25,700,000 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 $31,490,000 and $14,977,000 at December
31, 1997 and 1996, 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, 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. At December 31, 1996, impaired
loans totaled $12,008,000, of which $6,061,000 were on nonaccrual status, and
their related reserve for loan losses totaled $2,412,000. The average carrying
value of impaired loans was $13,997,000 during 1996 and gross interest income
recorded on impaired loans totaled $551,000.
41
<PAGE>
(5) LOANS AND LEASE FINANCING -- Continued
During 1997 and 1996, 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, 1997 (in
thousands):
<TABLE>
<CAPTION>
Balance at
Beginning New Balance at
of Year Loans Repayments End of Year
----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Directors, Executive Officers and Associates $13,336 34,457 6,811 $40,982
============================================== ======= ====== ===== =======
</TABLE>
Loans serviced for the benefit of others totaled $1.2 billion at December
31, 1997, 1996 and 1995. Mortgage servicing fees totaled $3,978,000 in 1997,
$3,969,000 in 1996, and $3,407,000 in 1995. Mortgage servicing rights totaled
$3,640,000 and $2,889,000 at December 31, 1997 and 1996, respectively, and are
included in "other assets" on the Consolidated Balance Sheets. The fair value
of mortgage servicing rights was $3,982,000 at December 31, 1997 and $3,118,000
at December 31, 1996. 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, 1997. The following table summarizes the changes in mortgage
servicing rights during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- --------
(In Thousands)
<S> <C> <C>
Balance at beginning of year $ 2,889 953
- ---------------------------------------
Capitalized mortgage servicing rights 4,106 2,343
- ---------------------------------------
Amortization (871) (407)
- ---------------------------------------
Sale of mortgage servicing (2,484) --
- --------------------------------------- -------- -----
Balance at end of year $ 3,640 2,889
======================================= ======== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 61,257 55,114 50,902
- ------------------------------------------------------
Provision charged to operations 16,376 17,361 11,007
- ------------------------------------------------------
Recoveries of loan and leases previously charged-off 3,105 3,062 2,010
- ------------------------------------------------------
Loan and lease losses charged to reserve (13,144) (14,280) (8,805)
- ------------------------------------------------------ --------- ------- ------
Balance at end of year $ 67,594 61,257 55,114
====================================================== ========= ======= ======
</TABLE>
(7) PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
<TABLE>
<CAPTION>
Accumulated
Depreciation Net
and Book
Cost Amortization Value
------------ -------------- ---------
December 31, 1997: (In Thousands)
<S> <C> <C> <C>
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
=============================== ========= ====== ======
December 31, 1996:
Land $ 18,386 -- 18,386
- -------------------------------
Buildings 67,038 30,060 36,978
- -------------------------------
Leasehold improvements 8,546 3,087 5,459
- -------------------------------
Furniture and equipment 96,642 71,672 24,970
- ------------------------------- --------- ------- ------
Total premises and equipment $ 190,612 104,819 85,793
=============================== ========= ======= ======
</TABLE>
42
<PAGE>
(8) TIME DEPOSITS AND SHORT-TERM BORROWED FUNDS
Maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Total
Year Ending December 31 Maturities
- --------------------------------- ---------------
(In Thousands)
<S> <C>
1998 $1,966,869
- ----------------
1999 702,466
- ----------------
2000 179,645
- ----------------
2001 30,790
- ----------------
2002 and thereafter 698
- --------------------------------- ----------
Total $2,880,468
================================= ==========
</TABLE>
Short-term borrowed funds outstanding at December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
(In Thousands)
<S> <C> <C>
FHLB short-term advances $ 50,000 136,400
- ------------------------------------------------
Federal funds purchased and master notes 137,372 84,867
- ------------------------------------------------
Treasury tax and loan depository note account 12,565 15,515
- ------------------------------------------------
Securities sold under agreements to repurchase 76,500 120,057
- ------------------------------------------------ --------- -------
Total short-term borrowed funds $ 276,437 356,839
================================================ ========= =======
</TABLE>
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 $171,273,000 at December 31,
1997. 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:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Balance at December 31 $ 76,500 120,057 180,213
- ------------------------------------------------------------- --------- ------- -------
Weighted average interest rate at December 31 5.30% 5.33 4.96
- ------------------------------------------------------------- --------- -------- --------
Maximum amount outstanding at any month end during the year $ 125,383 207,412 197,439
- ------------------------------------------------------------- --------- -------- --------
Average daily balance outstanding during the year $ 101,159 167,259 127,515
- ------------------------------------------------------------- --------- -------- --------
Average annual interest rate paid during the year 5.29% 5.31 5.95
============================================================= ========= ======== ========
</TABLE>
The Corporation has an unsecured $30 million line of credit with a
commercial bank. No draws were outstanding as of December 31, 1997 or 1996 nor
during the years then ended. The maximum outstanding during 1995 was
$5,000,000. Interest expense on the draws from the line of credit totaled
$2,000 during 1995.
(9) LONG-TERM DEBT
Following is a summary of long-term debt at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
(In Thousands)
<S> <C> <C>
Mortgage payable at 9%, collateralized by bank premises $ 109 128
- ---------------------------------------------------------
FHLB advances maturing through 2014 67,592 25,336
- ---------------------------------------------------------
6.75% subordinated notes 32,985 32,985
- --------------------------------------------------------- -------- ------
Total long-term debt $100,686 58,449
========================================================= ======== ======
</TABLE>
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. Of the total
FHLB advances outstanding at December 31, 1997, $50,000,000 were drawn for
general funding requirements and the remainder of the advances were drawn to
fund matched maturity loans. In 1995, AmFed prepaid advances of $25,000,000 at
9.9% due in 1998 and $10,500,000 at 8.3%
43
<PAGE>
(9) LONG-TERM DEBT -- Continued
due in 1996. As a result, prepayment penalties totaling $1,700,000, net of
taxes, were paid and recorded as an extraordinary item in the Statement of
Income. Interest on the FHLB advances totaled $2,891,000 in 1997, $1,997,000 in
1996 and $6,357,000 in 1995.
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 1997 and 1996 and $2,249,000 in 1995.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31 Total Maturities
- ------------------------- -----------------
(In Thousands)
<S> <C>
1998 $ 738
- ----------------
1999 50,652
- ----------------
2000 93
- ----------------
2001 765
- ----------------
2002 808
- ----------------
Thereafter 47,630
- ---------------- ---------
Total $ 100,686
================ =========
</TABLE>
(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 1997, 1996 and 1995, the Corporation contributed $2,871,000,
$2,928,000 and $680,000, respectively, to its pension plan.
AmFed also has a noncontributory, defined benefit pension plan covering
substantially all full-time salaried employees. An employee's benefits are
based on years of service and compensation during the last five years of
employment. AmFed's funding policy is to contribute annually the maximum amount
that can be deducted for Federal income tax purposes. In 1997, 1996 and 1995,
AmFed contributed $590,000, $528,000 and $689,000, respectively, to its pension
plan. AmFed's pension plan will be merged into the Corporation's pension plan
effective January 1, 1998.
The combined pension expense components for the Corporation and AmFed's
pension plans for the years ended December 31, 1997, 1996 and 1995 are shown
below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Service cost of benefits earned during the period $ 3,576 3,325 2,739
- ---------------------------------------------------
Interest cost on projected benefit obligation 4,569 4,136 3,823
- ---------------------------------------------------
Return on pension plan assets (12,038) (8,724) (8,451)
- ---------------------------------------------------
Net amortization and deferral 6,478 4,054 4,466
- ---------------------------------------------------
Gain on curtailment -- -- (176)
- --------------------------------------------------- --------- ------ ------
Net pension expense $ 2,585 2,791 2,401
=================================================== ========= ====== ======
</TABLE>
At December 31, 1997, pension plan assets of both plans consist primarily
of corporate stocks and bonds including 32,050 shares of the Corporation's
common stock. The plans' assets are held and administered by CCB in a trust
fund. The combined 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, 1997 and 1996 are shown below:
44
<PAGE>
(10) EMPLOYEE BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $53,487 47,935
- -----------------------------------------------------------------------
Nonvested 895 624
- ----------------------------------------------------------------------- ------- ------
Accumulated benefit obligation $54,382 48,559
======================================================================= ======= ======
Pension plan assets at fair value (primarily listed stocks and bonds) $79,161 65,102
- -----------------------------------------------------------------------
Projected benefit obligation 69,834 61,554
- ----------------------------------------------------------------------- ------- ------
Pension plan assets in excess of projected benefit obligation 9,327 3,548
- -----------------------------------------------------------------------
Unrecognized prior service costs, includes impact of plan amendments 3,474 3,328
- -----------------------------------------------------------------------
Unrecognized net (gain) loss (14,579) (9,042)
- -----------------------------------------------------------------------
Unrecognized net excess pension plan assets at transition (297) (615)
- ----------------------------------------------------------------------- -------- ------
Accrued pension expense $(2,075) (2,781)
======================================================================= ======== ======
Assumptions used in computing the actuarial present value of the
Corporation's projected benefit obligation were as follows:
Discount rate 7.25% 7.75
- -----------------------------------------------------------------------
Rate of increase in compensation level of employees 5.00% 6.00
- -----------------------------------------------------------------------
Expected long-term rate of return on pension plan assets 8.00% 8.00
- -----------------------------------------------------------------------
Assumptions used in computing the actuarial present value of AmFed's
projected benefit obligation were as follows:
Discount rate 7.25% 7.50
- -----------------------------------------------------------------------
Rate of increase in compensation level of employees 5.00 % 4.75
- -----------------------------------------------------------------------
Expected long-term rate of return on pension plan assets 8.00% 9.00
- -----------------------------------------------------------------------
</TABLE>
Savings and Profit Sharing Plans
The Corporation, AmFed and Salem Trust had defined contribution employee
benefit plans covering substantially all employees with one year's service.
Under the respective plans, employee contributions are partially matched. In
addition, the Corporation may make discretionary contributions to its defined
contribution plan. Salem Trust and AmFed's plans were frozen as of their
respective merger dates with the Corporation and participants under those plans
were enrolled in the Corporation's plan. The AmFed plan will continue in effect
but will be frozen as to future contributions. The Salem plan will be
terminated during 1998. Total expense under these plans was $2,850,000,
$2,612,000 and $2,540,000 in 1997, 1996 and 1995, 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 500,000 shares of the Corporation's
common stock are available for award under this plan. As of December 31, 1997,
a total of 379,974 stock options to purchase shares of the Corporation's common
stock and 9,310 restricted shares of the Corporation's common stock had been
awarded. The options and restricted stock vest over varying periods, from
immediately 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 and Security Capital. 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 the AmFed, Salem Trust or
Security Capital 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
45
<PAGE>
(10) EMPLOYEE BENEFIT PLANS -- Continued
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, 1997, 1996
and 1995 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.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
(In Thousands Except Per Share
Data)
<S> <C> <C> <C> <C>
Net income As reported $ 95,424 86,826 75,435
- ----------------
Pro forma 94,343 86,356 75,250
Basic EPS As reported 4.61 4.22 3.72
- ----------------
Pro forma 4.55 4.20 3.71
Diluted EPS As reported 4.55 4.15 3.61
- ----------------
Pro forma 4.50 4.13 3.60
</TABLE>
The weighted average fair value of options granted approximated $16.65 in
1997, $10.55 in 1996 and $9.00 in 1995. The fair values of the options granted
in 1997, 1996 and 1995 are estimated on the date of the grants using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield 2.0% 2.30 2.30
- ---------------------------
Expected volatility 19.51 20.26 20.26
- ---------------------------
Risk-free interest rate 6.68 6.15 6.15
- ---------------------------
Expected average life 5 years 5 years 5 years
- ---------------------------
</TABLE>
A summary of the Corporation's stock option activity and related
information for the years ended December 31 follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------- ------------------------------
Option Weighted Average Option Weighted Average
Shares Exercise Price Shares Exercise Price
------------ ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
At December 31, 1994 614,695 $ 22.65
- ----------------------
Granted 95,821 33.06
- ----------------------
Exercised (98,082) 18.40
- ----------------------
Forfeited (871) 42.34
- ---------------------- ------- --------
At December 31, 1995 611,563 24.93 495,744 $ 22.97
====================== ======= =======
Granted 107,103 43.11
- ----------------------
Exercised (193,785) 18.20
- ----------------------
Forfeited (7,008) 25.88
- ---------------------- -------- --------
At December 31, 1996 517,873 31.20 391,154 $ 28.01
====================== ======= =======
Granted 221,083 65.80
- ----------------------
Exercised (143,791) 27.32
- ----------------------
Forfeited (12,255) 42.00
- ---------------------- -------- --------
At December 31, 1997 582,910 $ 45.05 374,749 $ 36.44
====================== ======== ======== ======= =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged
from $5.20 to $81.88. The following table summarizes information about the
Corporation's stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Range of Number Average Years Average Number Average
Exercise Prices of Options Remaining Exercise Price of Options Exercise Price
- -------------------- ------------ --------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$5.20 to $7.12 4,267 1.54 $ 7.01 4,267 $ 7.01
- --------------------
$11.24 to $27.25 127,673 4.98 21.42 127,673 21.42
- --------------------
$30.90 to $38.75 178,866 7.05 36.03 161,450 35.96
- --------------------
$50.06 to $81.88 272,104 9.16 62.66 81,359 62.49
- -------------------- ------- ---- ------- ------- -------
$5.20 to $81.88 582,910 7.54 $ 45.05 374,749 $ 36.44
==================== ======= ==== ======= ======= =======
</TABLE>
During 1997, 5,310 shares 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 value of $388,000 on the dates of grant and
had a weighted average fair value of $73.13 per share. During 1997, $176,000 of
compensation expense was recognized for restricted stock granted under
46
<PAGE>
(10) EMPLOYEE BENEFIT PLANS -- Continued
the Long-Term Incentive Plan. During 1996, 4,000 shares of the Corporation's
common stock were awarded as restricted stock and were recorded at their fair
value of $200,000. In 1996, $76,000 of compensation expense was recorded for
such restricted stock awards.
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 range in value from $0 to $200
each, with a target value of $100 each. At December 31, 1997, a total of 17,614
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, 1998. Total
expense under this plan was $1,100,000, $1,087,000 and $497,000 for 1997, 1996
and 1995, 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 $3,278,000, $2,524,000 and $2,653,000 in 1997, 1996
and 1995, respectively.
The Corporation had a Restricted Stock Plan in effect until December 31,
1993 which was designed to provide long-term incentive compensation to certain
officers of the Corporation and its subsidiaries. Total expense under this plan
was $115,000 and $236,000 in 1996 and 1995, respectively. Restrictions on
shares remaining under this plan lapsed in 1996.
During 1993, the Corporation adopted MRP covering certain officers and
directors of the Subsidiary Banks. Shares of the Corporation's common stock
awarded under the MRP vest over periods of up to five years; all MRP will be
fully vested in 1998. A participant becomes fully vested in the event of the
participant's death or disability. Total expense under the MRP was $1,411,000,
$1,533,000 and $1,701,00 for 1997, 1996 and 1995, respectively. Stock awarded
under the MRP is subject to certain restrictions up to a five-year period,
during which time the holder is entitled to full voting rights and dividend
privileges. Under the MRP, 118,120 shares of the Corporation's common stock
were awarded to directors and certain officers of certain of the Subsidiary
Banks. The MRP shares will vest over a period of up to five years. During 1997,
restrictions lapsed on 22,474 shares which increased shareholders' equity by
$706,000.
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 funded status and the amounts
included in "other liabilities" on the Consolidated Balance Sheets at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit obligation:
Retirees $ 4,620 4,140
- --------------------------------------------------------------------------
Active employees -- fully eligible 1,000 1,000
- --------------------------------------------------------------------------
Active employees -- not fully eligible 1,830 1,900
- -------------------------------------------------------------------------- -------- -----
Accumulated postretirement benefit obligation 7,450 7,040
- --------------------------------------------------------------------------
Plan assets at fair value -- --
- -------------------------------------------------------------------------- -------- -----
Accumulated postretirement benefit obligation in excess of plan assets (7,450) (7,040)
- --------------------------------------------------------------------------
Unrecognized net losses 1,939 1,985
- -------------------------------------------------------------------------- -------- ------
Accrued postretirement benefit expense $ (5,511) (5,055)
========================================================================== ======== ======
</TABLE>
The accumulated postretirement benefit obligations at December 31, 1997
and 1996 were determined using discount rates of 7.25% for 1997 and 7.75% for
1996.
47
<PAGE>
(10) EMPLOYEE BENEFIT PLANS -- Continued
Net periodic postretirement benefit expense charged to operations for the
years ended December 31, 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(In Thousands)
<S> <C> <C> <C>
Service cost of benefits earned during the period $202 214 126
- ---------------------------------------------------
Interest cost on accumulated benefit obligation 513 471 412
- ---------------------------------------------------
Net amortization and deferral 90 127 34
- --------------------------------------------------- ---- --- ---
Net postretirement benefit expense $805 812 572
=================================================== ==== === ===
</TABLE>
The health care trend rate was projected to be 7.00% for 1997, 6.00% for
1998 and decrease to 5.00% for 1999 and thereafter. A 1% increase in the
assumed health care trend rates would result in a $31,000 increase in net
periodic postretirement benefits expense and a $399,000 increase in the
accumulated postretirement benefit obligation.
(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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Income Share Per Share
(Numerator) (Denominator) Amount
------------- --------------- ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
For the year ended December 31, 1997:
Basic EPS:
Net income $ 95,424 20,719 $ 4.61
- -------------------------------------- ------
Effect of dilutive securities:
Stock options -- 254
- -------------------------------------- -------- ------
Diluted EPS $ 95,424 20,973 $ 4.55
====================================== ======== ====== ======
For the year ended December 31, 1996:
Basic EPS:
Net income $ 86,826 20,553 $ 4.22
- -------------------------------------- ------
Effect of dilutive securities:
Warrants -- 91
- --------------------------------------
Convertible debentures 22 22
- --------------------------------------
Stock options -- 242
- -------------------------------------- -------- ------
Diluted EPS $ 86,848 20,908 $ 4.15
====================================== ======== ====== ======
For the year ended December 31, 1995:
Basic EPS:
Income before extraordinary item $ 77,144 20,295 $ 3.80
- -------------------------------------- ------
Effect of dilutive securities:
Warrants -- 245
- --------------------------------------
Convertible debentures 78 76
- --------------------------------------
Stock options -- 284
- -------------------------------------- -------- ------
Diluted EPS $ 77,222 20,900 $ 3.69
====================================== ======== ====== ======
Basic EPS:
Net income $ 75,435 20,295 $ 3.72
- -------------------------------------- ------
Effect of dilutive securities:
Warrants -- 245
- --------------------------------------
Convertible debentures 78 76
- --------------------------------------
Stock options -- 284
- -------------------------------------- -------- ------
Diluted EPS $ 75,513 20,900 $ 3.61
====================================== ======== ====== ======
</TABLE>
48
<PAGE>
(11) SHAREHOLDERS' EQUITY -- Continued
Changes in Shareholders' Equity
Salem Trust 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's option, in whole or in part, at any
time after December 31, 1995 at par. During 1996, Salem Trust 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 and $15,000 in 1995.
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 holder of the warrants to purchase 600,000 shares of AmFed common
stock at a price of $5.00 per share. During 1995 and 1996, AmFed repurchased
all of the remaining common stock warrants outstanding at a cost of $5,681,000
in 1996 and $590,000 in 1995.
Preferred Stock
The Corporation is authorized to issue up to 5,000,000 shares of serial
preferred stock. No shares of preferred stock have been issued or were
outstanding at December 31, 1997 or 1996.
Rights Plan
The Corporation adopted a Rights Agreement (the "Rights Agreement") which
provides for a plan (the "Rights Plan"). For use in connection with the Rights
Plan dated February 26, 1990 between the Corporation and CCB, the Corporation's
Board of Directors has established a series of preferred stock designated as
Series A Junior Participating Preferred Stock ("Series A Preferred") consisting
of 200,000 shares and having certain special rights for purposes of dividends
and other distributions, voting, dissolution and liquidation, and in connection
with certain mergers of the Corporation. No shares of Series A Preferred have
been issued.
Under the Rights Plan, one Right was distributed during 1990 to the
Corporation's shareholders for each of their shares of the Corporation's common
stock. Also under the Rights Plan, after the date of the Rights Agreement and
before the earlier of the "Distribution Date" (as defined below) or the date of
redemption or expiration of the Rights, each new share of common stock issued
after the date of the Rights Plan also has attached to it one Right.
The Rights currently are not exercisable, but may become so in the future
on a date (the "Distribution Date") which is 20 business days after (i) a
public announcement that any person or group has become an "Acquiring Person"
by acquiring beneficial ownership of 15% or more of the outstanding common
stock of the Corporation, or (ii) the date of commencement by any person of, or
the announcement by any person of his intention to commence, a tender or
exchange offer which would result in his becoming an Acquiring Person. However,
after the time any person becomes an Acquiring Person, all Rights held by or
transferred to such person (or any associate or affiliate of such person) shall
be void and of no effect.
Until the Distribution Date, each Right will be evidenced by the
certificate evidencing the common share to which it relates and may be
transferred only with such common share, and the surrender for transfer of any
common share certificate also will constitute the transfer of the Rights
related thereto. After the Distribution Date, separate certificates evidencing
each Right will be distributed to the record holders of the common stock to
which such Rights are attached, and each such Right may then be exercised to
purchase .01 of a share of Series A Preferred for a price of $100 (the
"Purchase Price") (all as adjusted from time to time as described in the Rights
Agreement). In the alternative (and subject to certain exceptions), after any
person becomes an Acquiring person (i) each Right may be exercised to purchase
the number of shares of the Corporation's common stock equal to the result
obtained by multiplying the then current Purchase Price by the number of Series
A Preferred interests covered by the Right, and dividing that product by 50% of
the market price of a share of the Corporation's common stock, or (ii) unless
the Acquiring Person has become the beneficial owner of more than 50% of the
outstanding common stock, the Corporation's Board of Directors at its option
may exchange one share of the Corporation's common stock, or a number of shares
of Series A Preferred having voting rights equivalent to one share of common
stock, for all or part of the outstanding Rights.
If the Corporation is acquired in a merger or other business combination
or if 50% of its consolidated assets or earning power is sold, each Right will
entitle the holder, other than the Acquiring Person, to purchase securities of
the surviving company having a market value equal to twice the exercise price
of the Right.
The Rights will expire on February 26, 2000, and may be redeemed by the
Corporation at any time prior to the acquisition by a person or group of 15% or
more of the outstanding common stock at a price of $.01 per Right.
49
<PAGE>
(11) SHAREHOLDERS' EQUITY -- Continued
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 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, 1997, the Corporation and the Subsidiary Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997 (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, 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
CCB AmFed
----------------------------- -----------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Tier I capital $ 520,279 461,344 115,088 105,704
- --------------------------------------------------------------
Total capital 571,185 511,684 125,890 115,678
- --------------------------------------------------------------
Risk weighted assets 4,343,721 3,954,328 862,072 797,189
- --------------------------------------------------------------
Adjusted quarterly average assets 5,835,963 5,407,100 1,295,122 1,308,218
- --------------------------------------------------------------
Risk-based capital ratios:
Tier I capital to risk weighted assets:
Actual 11.98% 11.67 13.35 13.26
- --------------------------------------------------------------
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 13.15 12.94 14.60 14.51
- --------------------------------------------------------------
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 8.92 8.53 8.89 8.08
- --------------------------------------------------------------
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
============================================================== ============ ========== =========== ==========
<CAPTION>
CCB-Ga.
-----------------------
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Tier I capital 9,613 8,338
- --------------------------------------------------------------
Total capital 10,620 9,376
- --------------------------------------------------------------
Risk weighted assets 78,602 82,590
- --------------------------------------------------------------
Adjusted quarterly average assets 93,867 96,602
- --------------------------------------------------------------
Risk-based capital ratios:
Tier I capital to risk weighted assets:
Actual 12.23 10.10
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 6.00 6.00
- --------------------------------------------------------------
Total capital to risk weighted assets:
Actual 13.51 11.35
- --------------------------------------------------------------
Regulatory minimum 8.00 8.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 10.00 10.00
- --------------------------------------------------------------
Leverage ratio:
Actual 10.24 8.63
- --------------------------------------------------------------
Regulatory minimum 4.00 4.00
- --------------------------------------------------------------
Well-capitalized under prompt corrective action provisions 5.00 5.00
============================================================== ======= =======
</TABLE>
50
<PAGE>
(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, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Marketing $ 7,303 6,991 5,219
- -----------------------------------------
External data processing services 4,446 4,025 3,430
- -----------------------------------------
FDIC special assessment, net of refunds -- 12,959 --
- -----------------------------------------
Deposit and other insurance 3,346 4,912 9,153
- -----------------------------------------
Postage and freight 4,107 3,863 4,178
- -----------------------------------------
Printing and office supplies 6,178 5,457 4,838
- -----------------------------------------
Telecommunications 5,765 4,895 4,339
- -----------------------------------------
Legal and professional fees 6,340 7,350 3,509
- -----------------------------------------
Amortization of intangible assets 4,433 4,366 4,667
- -----------------------------------------
All other 23,330 20,803 20,884
- ----------------------------------------- ------- ------ ------
Total other operating expenses $65,248 75,621 60,217
========================================= ======= ====== ======
</TABLE>
The FDIC special assessment was levied by the FDIC to recapitalize the
Savings Association Insurance Fund.
(13) INCOME TAXES
The components of income tax expense for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Current income taxes:
Federal $ 57,809 42,011 39,110
- ------------------------------
State 5,172 4,594 4,995
- ------------------------------ -------- ------ ------
Total current tax expense 62,981 46,605 44,105
- ------------------------------ -------- ------ ------
Deferred income tax benefit:
Federal (6,245) (2,344) (5,016)
- ------------------------------
State (971) (672) (1,733)
- ------------------------------ -------- ------ ------
Total deferred tax benefit (7,216) (3,016) (6,749)
- ------------------------------ -------- ------ ------
Total income tax expense $ 55,765 43,589 37,356
============================== ======== ====== ======
</TABLE>
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 1997, a total of $118,000 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.
51
<PAGE>
(13) INCOME TAXES -- Continued
A reconciliation of income tax expense to the amount computed by
multiplying income before income taxes by the statutory federal income tax rate
follows:
<TABLE>
<CAPTION>
Amount
----------------------------------
1997 1996 1995
---------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Tax expense at statutory rate on income before income taxes $ 52,916 45,645 40,075
- -------------------------------------------------------------
State taxes, net of federal benefit 2,731 2,549 2,121
- -------------------------------------------------------------
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 (1,411) (1,654) (1,944)
- -------------------------------------------------------------
Decrease in valuation allowance for deferred tax assets -- (600) (1,000)
- -------------------------------------------------------------
Other, net 1,529 (993) (1,896)
- ------------------------------------------------------------- -------- ------ ------
Income tax expense $ 55,765 43,589 37,356
============================================================= ======== ====== ======
<CAPTION>
% of Pretax Income
---------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Tax expense at statutory rate on income before income taxes 35.00% 35.00 35.00
- -------------------------------------------------------------
State taxes, net of federal benefit 1.81 1.95 1.85
- -------------------------------------------------------------
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 ( .93) (1.27) (1.70)
- -------------------------------------------------------------
Decrease in valuation allowance for deferred tax assets -- ( .46) ( .87)
- -------------------------------------------------------------
Other, net 1.00 ( .76) (1.65)
- ------------------------------------------------------------- ----- ------ ------
Income tax expense 36.88% 33.42 32.63
============================================================= ===== ====== ======
</TABLE>
At December 31, 1997 and 1996, the Corporation had recorded net deferred
tax assets of $12,341,000 and $9,084,000, 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, 1997 or 1996. The sources and tax
effects of cumulative temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1997 and 1996 are shown
below:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $22,904 18,137
- ---------------------------------------------------------------
Postretirement benefits 2,245 1,990
- ---------------------------------------------------------------
Deferred compensation 2,508 2,445
- ---------------------------------------------------------------
Other 5,002 3,410
- --------------------------------------------------------------- ------- ------
Total gross deferred tax assets 32,659 25,982
- --------------------------------------------------------------- ------- ------
Deferred tax liabilities:
Intangible assets 1,764 2,315
- ---------------------------------------------------------------
Deferred loan fees and costs 3,230 3,045
- ---------------------------------------------------------------
Premises and equipment 1,213 1,481
- ---------------------------------------------------------------
FHLB dividends 2,695 3,015
- ---------------------------------------------------------------
Unrealized gains on investment securities available for sale 8,751 4,792
- ---------------------------------------------------------------
Mortgage servicing rights gain 1,227 820
- ---------------------------------------------------------------
Other 1,438 1,430
- --------------------------------------------------------------- ------- ------
Total gross deferred tax liabilities 20,318 16,898
- --------------------------------------------------------------- ------- ------
Net deferred tax asset $12,341 9,084
=============================================================== ======= ======
</TABLE>
(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 $6,319,000 in 1997, $6,852,000 in 1996 and $6,457,000 in
1995. A summary of noncancellable, long-term lease commitments at December 31,
1997 follows:
<TABLE>
<CAPTION>
Type of Property
-----------------------------
Total
Year Ending December 31 Real Property Equipment Commitments
- -------------------------- --------------- ----------- ------------
(In Thousands)
<S> <C> <C> <C>
1998 $ 4,461 1,714 6,175
- ----
1999 4,039 1,100 5,139
- ----
2000 3,534 360 3,894
- ----
2001 2,715 57 2,772
- ----
2002 2,474 57 2,531
- ----
Thereafter 21,855 -- 21,855
- ---- -------- ----- ------
Total lease commitments $ 39,078 3,288 42,366
========================== ======== ===== ======
</TABLE>
52
<PAGE>
(14) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK -- Continued
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 1998.
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 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, 1997 and
1996, the Subsidiary Banks had commitments to extend credit of approximately
$1.4 billion and $1.3 billion. These amounts include unused revolving credit
lines and home mortgage equity lines of $309 million and $334 million,
respectively, at December 31, 1997 and $392 million and $334 million,
respectively, at December 31, 1996.
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 $24 million and $28 million in outstanding
standby letters of credit at December 31, 1997 and 1996.
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 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, 1997, the Corporation had an off-balance sheet
derivative financial instrument in the form of an interest rate swap (a basis
swap) with a notional principal of $100 million. The basis swap was entered
into in November 1997 with a major regional commercial bank and has a two-year
term. No fee was paid upon entering into the basis swap. The purpose of
entering into the basis swap was to synthetically convert U.S. Treasury-based
liabilities into prime rate-based liabilities and to lock-in the spread
53
<PAGE>
(14) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK -- Continued
between the two indices. This financial instrument had a nominal positive
effect on 1997's interest expense and had a carrying value of $13,000 at
December 31, 1997. The Corporation was not party to any other off-balance sheet
derivative financial instruments during 1997. The Subsidiary Banks had no
off-balance sheet derivative financial instruments in effect at December 31,
1996 or during the year then ended.
(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 $303,366,000
in retained earnings at December 31, 1997 that can be transferred to the
Corporation in the form of cash dividends. Total dividends declared by the
Subsidiary Banks to the Corporation in 1997 were $32,100,000.
As a result of the above requirements, consolidated net assets of the
Subsidiary Banks amounting to approximately $422,752,000 at December 31, 1997
were restricted from transfer to the Corporation.
54
<PAGE>
(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,
1997 and 1996 and the related Condensed Statements of Income and Cash Flows for
the three-years ended December 31, 1997 are as follows:
Condensed Balance Sheets
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ---------
(In Thousands)
<S> <C> <C>
Cash and short-term investments $119,273 94,195
- ----------------------------------------------
Note receivable from subsidiary 10,000 10,000
- ----------------------------------------------
Loans 60,877 53,042
- ----------------------------------------------
Less reserve for loan losses 792 690
- ---------------------------------------------- -------- ------
Net loans 60,085 52,352
- ----------------------------------------------
Investment in subsidiaries 689,386 618,862
- ----------------------------------------------
Other assets 13,447 9,639
- ---------------------------------------------- -------- -------
Total assets $892,191 785,048
============================================== ======== =======
Master notes $117,372 84,867
- ----------------------------------------------
Note payable to subsidiary 49,000 44,200
- ----------------------------------------------
Subordinated notes 32,985 32,985
- ----------------------------------------------
Other liabilities 11,474 11,547
- ---------------------------------------------- -------- -------
Total liabilities 210,831 173,599
- ----------------------------------------------
Shareholders' equity 681,360 611,449
- ---------------------------------------------- -------- -------
Total liabilities and shareholders' equity $892,191 785,048
- ---------------------------------------------- -------- -------
</TABLE>
Condensed Income Statements
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Dividends from subsidiaries $32,100 30,000 38,100
- ------------------------------------------------------------------
Interest income 9,811 8,010 4,271
- ------------------------------------------------------------------
Other income 8 5 883
- ------------------------------------------------------------------ ------- ------ ------
Total operating income 41,919 38,015 43,254
- ------------------------------------------------------------------ ------- ------ ------
Interest expense 8,881 7,342 4,527
- ------------------------------------------------------------------
Provision for loan losses 102 40 650
- ------------------------------------------------------------------
Merger-related expense 3,873 -- 2,761
- ------------------------------------------------------------------
Management fees 150 150 120
- ------------------------------------------------------------------
Other operating expenses 870 898 756
- ------------------------------------------------------------------ ------- ------ ------
Total operating expenses 13,876 8,430 8,814
- ------------------------------------------------------------------ ------- ------ ------
Income before income taxes 28,043 29,585 34,440
- ------------------------------------------------------------------
Income taxes (910) (145) (314)
- ------------------------------------------------------------------ ------- ------ ------
Income before equity in undistributed net income of subsidiaries 28,953 29,730 34,754
- ------------------------------------------------------------------
Equity in undistributed net income of subsidiaries 66,471 57,096 40,681
- ------------------------------------------------------------------ ------- ------ ------
Net income $95,424 86,826 75,435
================================================================== ======= ====== ======
</TABLE>
55
<PAGE>
(16) CCB FINANCIAL CORPORATION (PARENT COMPANY) -- Continued
Condensed Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- ------------
(In Thousands)
<S> <C> <C> <C>
Net cash provided by operating activities $ 26,347 29,470 35,493
- ------------------------------------------------------ --------- ------ ------
Investment in subsidiaries 2,598 9,317 (724)
- ------------------------------------------------------
Net decrease in loans to subsidiaries -- -- 11,940
- ------------------------------------------------------
Net increase in loans (7,835) (3,041) (50,001)
- ------------------------------------------------------
Other, net (4) (215) --
- ------------------------------------------------------ ----------- ------ -------
Net cash provided (used) by investing activities (5,241) 6,061 (38,785)
- ------------------------------------------------------ ---------- ------ -------
Increase in master notes 32,505 68,147 16,720
- ------------------------------------------------------
Decrease in short-term borrowed funds -- -- (5,000)
- ------------------------------------------------------
Proceeds from issuance of debt to subsidiaries 4,800 4,200 40,000
- ------------------------------------------------------
Repurchase and extinguishment of subordinated notes -- -- (7,015)
- ------------------------------------------------------
Purchase and retirement of common stock -- (997) (4,431)
- ------------------------------------------------------
Cash dividends (36,750) (28,579) (25,157)
- ------------------------------------------------------
Purchase and retirement of common stock warrants -- (5,681) (590)
- ------------------------------------------------------
Issuance of common stock in public offering -- -- 4,966
- ------------------------------------------------------
Other, net 3,417 3,078 1,804
- ------------------------------------------------------ ---------- ------- -------
Net cash provided by financing activities 3,972 40,168 21,297
- ------------------------------------------------------ ---------- ------- -------
Net increase in cash and short-term investments 25,078 75,699 18,005
- ------------------------------------------------------
Cash and short-term investments at beginning of year 94,195 18,496 491
- ------------------------------------------------------ ---------- ------- -------
Cash and short-term investments at end of year $119,273 94,195 18,496
====================================================== ========== ======= =======
</TABLE>
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized consolidated quarterly financial data for the years ended
December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
------------- ---------- ---------- ----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
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 $ 1.34 .74 1.33 1.20
- ---------------------------------------------------------------
Diluted 1.32 .73 1.31 1.19
=============================================================== ========= ======= ======== ========
<CAPTION>
1996
--------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
---------- ---------- ---------- -----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income 131,526 129,731 126,150 125,168
- ---------------------------------------------------------------
Interest expense 60,132 60,284 58,494 58,662
- --------------------------------------------------------------- ------- ------- ------- -------
Net interest income 71,394 69,447 67,656 66,506
- ---------------------------------------------------------------
Provision for loan and lease losses 4,787 5,446 4,273 2,855
- --------------------------------------------------------------- ------- ------- ------- -------
Net interest income after provision for loan and lease losses 66,607 64,001 63,383 63,651
- ---------------------------------------------------------------
Other income 21,700 22,141 19,955 18,810
- ---------------------------------------------------------------
Other expenses 50,921 63,585 47,272 48,055
- --------------------------------------------------------------- ------- ------- ------- -------
Income before income taxes 37,386 22,557 36,066 34,406
- ---------------------------------------------------------------
Income taxes 12,998 5,967 12,722 11,902
- --------------------------------------------------------------- ------- ------- ------- -------
Net income 24,388 16,590 23,344 22,504
=============================================================== ======= ======= ======= =======
Net income per share:
Basic 1.18 .81 1.14 1.09
- ---------------------------------------------------------------
Diluted 1.17 .80 1.11 1.07
=============================================================== ======== ======= ======== ========
</TABLE>
56
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value estimates of on- and off-balance sheet financial
instruments is required under SFAS No. 107. Certain financial instruments and
all non-financial instruments are excluded from its disclosure requirements.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business. Significant
assets and liabilities that are not considered financial instruments include
premises and equipment, intangibles assets, negative goodwill, the trust
department and mortgage banking operations. In addition, the tax ramifications
resulting from the realization of the unrealized gains and losses of the
financial instruments would have a significant impact on the fair value
estimates presented and have not been considered in any of the fair value
estimates. Estimated fair values of certain on- and off-balance sheet financial
instruments of the Corporation at December 31, 1997 and 1996 are presented
below (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash, time deposits in other banks and other short-term investments $ 419,344 419,344 618,018 618,018
- ----------------------------------------------------------------------- ---------- ------- ------- -------
Investment securities 1,463,724 1,469,109 1,351,781 1,356,023
- ----------------------------------------------------------------------- ---------- --------- --------- ---------
Other financial assets -- -- 3,850 3,850
- ----------------------------------------------------------------------- ---------- --------- --------- ---------
Loans 5,055,775 -- 4,712,131 --
- -----------------------------------------------------------------------
Reserve for loan losses (67,063) -- (60,779) --
- ----------------------------------------------------------------------- ---------- --------- --------- ---------
Net loans 4,988,712 5,078,213 4,651,352 4,718,384
- ----------------------------------------------------------------------- ---------- --------- --------- ---------
Total financial assets $6,871,780 6,966,666 6,625,001 6,696,275
======================================================================= ========== ========= ========= =========
Financial liabilities:
Deposits $5,984,597 5,992,450 5,741,454 5,753,453
- -----------------------------------------------------------------------
Short-term borrowings 276,437 276,437 356,839 356,839
- -----------------------------------------------------------------------
Long-term debt 100,686 100,524 58,449 57,056
- ----------------------------------------------------------------------- ---------- --------- --------- ---------
Total financial liabilities $6,361,720 6,369,411 6,156,742 6,167,348
======================================================================= ========== ========= ========= =========
Off-balance sheet financial instruments:
Interest rate swap $ 13 218 -- --
======================================================================= ========== ========= ========= =========
</TABLE>
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 and is calculated based upon the number of trading units of the
financial instrument times its market price. The fair value of net loans is
based on the discounting of scheduled cash flows through estimated maturity
using market rates and management's judgment about the credit risk inherent in
the different segments of the loan portfolio. Estimates of maturity, except for
residential mortgage loans, are based on the stated term of the loan or the
Corporation's estimates of prepayments considering current economic and lending
conditions. Estimates of maturity for residential mortgage loans are based on
prepayments estimated by secondary market sources.
Financial Liabilities
The fair value of noninterest-bearing deposits, savings and NOW accounts
and money market accounts is the amount payable on demand at December 31, 1997
and 1996. 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.
57
<PAGE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
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.
58
<PAGE>
REPORT OF MANAGEMENT REGARDING RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the content of the financial information
included in this annual report. The financial statements from which the
financial information has been drawn are prepared in accordance with generally
accepted accounting principles. Other information in this report is consistent
with the financial statements.
In meeting its responsibility, management relies on the system of internal
accounting control and related control systems. Elements of these systems
include selection and training of qualified personnel, establishment and
communication of accounting and administrative policies and procedures,
appropriate segregation of responsibilities, and programs of internal audits.
These systems are designed to provide reasonable assurance that financial
records are reliable for preparing financial statements and maintaining
accountability for assets, and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of inherent
limitations in any system of internal control. The concept of reasonable
assurance recognizes that the cost of a system of internal control should not
exceed the benefit derived and that the evaluation of such cost and benefit
necessarily requires estimates and judgments.
KPMG Peat Marwick LLP, independent auditors, audited the Corporation's
consolidated financial statements in accordance with generally accepted
auditing standards. These standards include a study and evaluation of internal
control for the purpose of establishing a basis for reliance thereon relative
to the determination of the scope of their audits.
The voting members of the Corporation's Audit Committee of the Board of
Directors consist solely of outside Directors. The Audit Committee meets
periodically with management, the Corporation's internal auditors and the
independent auditors to discuss audit, financial reporting, and related
matters. KPMG Peat Marwick LLP and the internal auditors have direct access to
the Audit Committee.
/s/ Ernest C. Roessler
ERNEST C. ROESSLER
President and Chief Executive Officer
/s/ Robert L. Savage, Jr.
ROBERT L. SAVAGE, JR.
Senior Vice President and Chief Financial Officer
/s/ W. Harold Parker, Jr.
W. HAROLD PARKER, JR.
Senior Vice President and Controller
January 20, 1998
59
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
January 20, 1998
60
<PAGE>
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, 1998
(the "Proxy Statement"), pages 6 to 7, under the heading "Proposal 2. 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 9 to 16, 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 5, 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 18, 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 62 of this
Annual Report.
(b) Reports on Form 8-K:
A report on Form 8-K dated October 21, 1997 was filed under Items 5 and 7
reporting the Corporation's adoption of a severance plan for employees that
would be implemented in the event of a change in control.
61
<PAGE>
DESCRIPTION OF EXHIBITS
Amended and Restated Agreement of Combination among Registrant, Central
Carolina Bank and Trust Company and Salem Trust Bank
Agreement and Plan of Reorganization between Registrant and American Federal
Bank, FSB
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
Rights Agreement dated February 26, 1990 between Registrant and Central
Carolina Bank and Trust Company
Form of Indenture dated as of November 1, 1993, between Registrant and 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 Management Recognition Plan for CCB Savings Bank of Lenoir, Inc., SSB
1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB
Amendment No. 1 to 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of
Lenoir, Inc., SSB
1993 Incentive Stock Option Plan of Registrant
Long-Term Incentive Plan of Registrant
Security Capital Omnibus Stock Ownership and Long-Term Incentive Plan, as
assumed by the Registrant
Omni Capital Group, Inc. 1988 Incentive Stock Option Plan, as assumed by the
Registrant
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 Central
Carolina Bank and Trust Company and Ernest C. Roessler
Employment and Amended and Restated Change of Control Agreement between Central
Carolina Bank and Trust Company and Richard L. Furr
Employment and Amended and Restated Change of Control Agreement between Central
Carolina Bank and Trust Company and J. Scott Edwards
Plan for Severance Compensation After a Change in Control dated October 21,
1997
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 Peat Marwick LLP
Financial Data Schedule
Registrant's Proxy Statement to Shareholders for the 1998 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
62
<PAGE>
<PAGE>
Form 10-K 5172-2 (3/98)
<PAGE>
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
President and Chief Executive Officer
Date: March 17, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------- -------------------------------- ---------------
<S> <C> <C>
March 17, 1998
Vice Chairman and President
/s/ ERNEST C. ROESSLER
- ----------------------------------
Ernest C. Roessler (Chief Executive Officer)
/s/ WILLIAM L. ABERCROMBIE, JR. Vice Chairman March 17, 1998
- ----------------------------------
William L. Abercrombie, Jr.
/s/ JOHN M. BARNHARDT Director March 17, 1998
- ----------------------------------
John M. Barnhardt
/s/ J. HARPER BEALL, III Director March 17, 1998
- ----------------------------------
J. Harper Beall, III
/s/ JAMES B. BRAME, JR. Director March 17, 1998
- ----------------------------------
James B. Brame, Jr.
/s/ TIMOTHY B. BURNETT Director March 17, 1998
- ----------------------------------
Timothy B. Burnett
/s/ W. L. BURNS, JR. Chairman of Board of Directors March 17, 1998
- ----------------------------------
W. L. Burns, Jr.
/s/ BLAKE P. GARRETT, JR. Director March 17, 1998
- ----------------------------------
Blake P. Garrett, Jr.
Director March , 1998
- ----------------------------------
Edward S. Holmes
/s/ BONNIE MCELVEEN-HUNTER Director March 17, 1998
- ----------------------------------
Bonnie McElveen-Hunter
Vice Chairman March , 1998
- ----------------------------------
David B. Jordan
/s/ C. DAN JOYNER Director March 17, 1998
- ----------------------------------
C. Dan Joyner
/s/ OWEN G. KENAN Director March 17, 1998
- ----------------------------------
Owen G. Kenan
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------------- -------------------------------------- ---------------
<S> <C> <C>
/s/ EUGENE J. MCDONALD Director March 17, 1998
- ----------------------------------
Eugene J. McDonald
/s/ HAMILTON W. MCKAY. JR., M.D. Director March 17, 1998
- ----------------------------------
Hamilton W. McKay, Jr., M.D.
/s/ GEORGE J. MORROW Director March 17, 1998
- ----------------------------------
George J. Morrow
/s/ ERIC B. MUNSON Director March 17, 1998
- ----------------------------------
Eric B. Munson
Director March , 1998
- ----------------------------------
Dr. David E. Shi
/s/ MILES J. SMITH, JR. Director March 17, 1998
- ----------------------------------
Miles J. Smith, Jr.
/s/ JIMMY K. STEGALL Director March 17, 1998
- ----------------------------------
Jimmy K. Stegall
/s/ H. ALLEN TATE, JR. Director March 17, 1998
- ----------------------------------
H. Allen Tate, Jr.
/s/ JAMES L. WILLIAMSON Director March 17, 1998
- ----------------------------------
James L. Williamson
/s/ DR. PHAIL WYNN, JR. Director March 17, 1998
- ----------------------------------
Dr. Phail Wynn, Jr.
/s/ ROBERT L. SAVAGE, JR. Senior Vice President and March 17, 1998
- ----------------------------------
Robert L. Savage, Jr. Chief Financial Officer
/s/ W. HAROLD PARKER, JR. Senior Vice President and Controller March 17, 1998
- ----------------------------------
W. Harold Parker, Jr. (Chief Accounting Officer)
</TABLE>
66
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number
per Item 601 of
Regulation S-K Description Exhibit No.
- ---------------- ------------------------------------------------------------------------------------ ------------
<S> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
a. Amended and Restated Agreement of Combination among Registrant, Central
Carolina Bank and Trust Company and Salem Trust Bank is incorporated
herein by reference from Appendix A of the Registrant's Registration Statement
No. 333-12437 on Form S-4.
b. Agreement and Plan of Reorganization between Registrant and American
Federal Bank, FSB is incorporated herein by reference from Appendix A of the
Registrant's Registration Statement No. 333-25705 on Form S-4.
(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 Amended and Restated Bylaws 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. Rights Agreement dated February 26, 1990 between Registrant and Central
Carolina Bank and Trust Company is incorporated herein by reference from
Exhibit 4 of Registrant's Current Report on Form 8-K dated February 26,
1990.
b. 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 Management Recognition Plan for CCB Savings Bank of Lenoir, Inc.,
SSB is incorporated herein by reference from Exhibit 28 of Registrant's
Registration Statement No. 33-61272 on Form S-8.
c. 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.
d. 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.
e. 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.
f. 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.
g. 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.
h. Omni Capital Group, Inc. 1988 Incentive Stock Option Plan, as assumed by
the Registrant, is incorporated herein by reference from Exhibit 99 of
Registrant's Registration Statement No. 33-61797 on Form S-8.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number
per Item 601 of
Regulation S-K Description Exhibit No.
- ---------------- ------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
i. 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.
j. 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.
k. 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.
l. 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.
m. 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.
n. Employment and Amended and Restated Change of Control Agreement dated
January 21, 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.
o. Registrant's Plan for Severance Compensation After a Change in Control dated
October 21, 1997 is incorporated herein by reference from Exhibit 99.1 of
Registrant's Form 8-K dated October 21, 1997.
p. 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.
q. 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 Peat Marwick LLP. 23
(27) Financial Data Schedule. 27
(99) Additional exhibits.
Proxy Statement for 1997 Annual Meeting of Shareholders on April 21, 1998. Not Required
to be Re-filed
</TABLE>
68
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CCB Financial Corporation
We consent to incorporation by reference in Registration Statements (No.
33-61268) on Form S-8, (No. 33-61272) on Form S-8, (No. 33-53595) on Form S-8,
(No. 33-53593) on Form S-8, (No. 33-53599) on Form S-8, (No. 33-53597) on Form
S-8, (No. 33-51657) on Form S-8, (No. 33-54645) on Form S-8, (No. 33-61270) on
Form S-8, (No. 33-61791) on Form S-8, (No. 33-61797) on Form S-8, (No.
333-22031) on Form S-8, (No. 333-20457) on Form S-8, (No. 333-34207) on Form
S-8, (No. 333-34231) on Form S-8 and (No. 333-47721) on Form S-8 of CCB
Financial Corporation of our report dated January 20, 1998, relating to the
consolidated balance sheets of CCB Financial Corporation and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the December 31, 1997
annual report on Form 10-K of CCB Financial Corporation.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
Raleigh, North Carolina
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CCB FINANCIAL CORPORATION AND SUBSIDIARIES
AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 277,469
<INT-BEARING-DEPOSITS> 19,875
<FED-FUNDS-SOLD> 122,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,382,107
<INVESTMENTS-CARRYING> 81,617
<INVESTMENTS-MARKET> 87,002
<LOANS> 5,093,569
<ALLOWANCE> 67,594
<TOTAL-ASSETS> 7,138,528
<DEPOSITS> 5,984,597
<SHORT-TERM> 276,437
<LIABILITIES-OTHER> 95,448
<LONG-TERM> 100,686
0
0
<COMMON> 103,882
<OTHER-SE> 577,478
<TOTAL-LIABILITIES-AND-EQUITY> 7,138,528
<INTEREST-LOAN> 442,618
<INTEREST-INVEST> 95,069
<INTEREST-OTHER> 12,776
<INTEREST-TOTAL> 550,463
<INTEREST-DEPOSIT> 229,600
<INTEREST-EXPENSE> 250,099
<INTEREST-INCOME-NET> 300,364
<LOAN-LOSSES> 16,376
<SECURITIES-GAINS> 480
<EXPENSE-OTHER> 226,198
<INCOME-PRETAX> 151,189
<INCOME-PRE-EXTRAORDINARY> 95,424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,424
<EPS-PRIMARY> 4.61
<EPS-DILUTED> 4.55
<YIELD-ACTUAL> 4.55
<LOANS-NON> 16,088
<LOANS-PAST> 3,423
<LOANS-TROUBLED> 784
<LOANS-PROBLEM> 6,515
<ALLOWANCE-OPEN> 61,257
<CHARGE-OFFS> 13,144
<RECOVERIES> 3,105
<ALLOWANCE-CLOSE> 67,594
<ALLOWANCE-DOMESTIC> 67,594
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,125
</TABLE>
