-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2wPeiX3CRa+UqoEqdiTurQ7ua8Iyj8Ytk6/li53nmNGfr93YdQ7Pc7ijxHgfSwt 3Sp56u9DOHl0d1tCyhEigg== 0000950168-96-002309.txt : 19961202 0000950168-96-002309.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950168-96-002309 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCB FINANCIAL CORP CENTRAL INDEX KEY: 0000714612 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561347849 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-12437 FILM NUMBER: 96674144 BUSINESS ADDRESS: STREET 1: 111 CORCORAN ST STREET 2: PO BOX 931 CITY: DURHAM STATE: NC ZIP: 27702 BUSINESS PHONE: 9196837777 MAIL ADDRESS: STREET 1: 111 CORCORAN STREET STREET 2: P O BOX 931 CITY: DURHAM STATE: NC ZIP: 27702 424B2 1 CCB #46493.2 SALEM TRUST BANK 2140 COUNTRY CLUB ROAD WINSTON-SALEM, NORTH CAROLINA 27104 TELEPHONE: (910) 777-1400 NOTICE OF THE RECONVENING OF THE SPECIAL MEETING OF SHAREHOLDERS NOTICE is hereby given that the Special Meeting of Shareholders of Salem Trust Bank ("Salem") adjourned on November 21, 1996 will be reconvened at the Arts Council Theater, 610 Coliseum Drive, Winston-Salem, North Carolina, at 10:00 o'clock, a.m., E.S.T. on Tuesday, January 21, 1997, for the following purpose: 1. PROPOSAL TO APPROVE PROPOSED MERGER. To consider and vote on a proposal to approve the Second Amended Agreement of Combination, dated initially as of July 1, 1996 and amended as of September 6, 1996 and November 21, 1996, and the related plan of merger (collectively, the "Amended Merger Agreement"), among Salem, CCB Financial Corporation ("CCBF") and Central Carolina Bank and Trust Company ("CCB Bank") (a copy of the Agreement as amended as of September 6, 1996 is attached as Appendix A to the Prospectus/Proxy Statement previously distributed to Salem's shareholders and a copy of the amendments thereto as of November 21, 1996 comprising the Amended Merger Agreement is attached as Appendix A to the Prospectus/Proxy Statement Supplement which accompanies this Notice), and to approve the transactions described therein, including without limitation the merger of Salem with and into CCB Bank (the "Merger") with the result that all outstanding shares of Salem's $2.50 par value common stock will be converted into shares of CCBF's $5.00 par value common stock (each with an attached preferred stock purchase right); and, 2. OTHER BUSINESS. To transact such other business as properly may be presented for action at the reconvened Special Meeting. At the effective time of the Merger, each outstanding share of Salem's $2.50 par value common stock ("Salem Stock") will be converted into that fraction of a share of CCBF's $5.00 par value common stock and that fraction of a CCBF preferred stock purchase right computed under the Exchange Ratio set forth in the Amended Merger Agreement. UNDER NORTH CAROLINA LAW EACH SALEM SHAREHOLDER HAS THE RIGHT TO DISSENT FROM THE MERGER AND TO DEMAND PAYMENT OF THE FAIR VALUE OF HIS OR HER SHARES OF SALEM STOCK. A SALEM SHAREHOLDER'S RIGHT TO DISSENT IS CONTINGENT UPON HIS OR HER STRICT COMPLIANCE WITH THE REQUIREMENTS OF ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION ACT. THE FULL TEXT OF ARTICLE 13 IS ATTACHED AS APPENDIX B TO THE PROSPECTUS/PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. EACH SALEM SHAREHOLDER IS INVITED TO ATTEND THE RECONVENED SPECIAL MEETING IN PERSON. HOWEVER, TO ENSURE THAT A QUORUM IS PRESENT AT THE RECONVENED SPECIAL MEETING, EACH SALEM SHAREHOLDER IS REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED APPOINTMENT OF PROXY AND RETURN IT PROMPTLY TO SALEM IN THE ENCLOSED STAMPED, RETURN ENVELOPE. SIGNING AND RETURNING AN APPOINTMENT OF PROXY WILL NOT AFFECT A SALEM SHAREHOLDER'S RIGHT TO ATTEND THE RECONVENED SPECIAL MEETING AND VOTE IN PERSON. PREVIOUSLY SUBMITTED APPOINTMENTS OF PROXY WILL NOT BE VOTED AT THE RECONVENED SPECIAL MEETING. ACCORDINGLY, PLEASE COMPLETE AND RETURN THE ACCOMPANYING APPOINTMENT OF PROXY TO SALEM AT YOUR EARLIEST CONVENIENCE. By Order of the Board of Directors (Signature of Sheeran appears here) PRESIDENT AND CHIEF EXECUTIVE OFFICER November 27, 1996 SALEM'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SALEM'S SHAREHOLDERS VOTE TO APPROVE THE AMENDED MERGER AGREEMENT PROSPECTUS/PROXY STATEMENT SUPPLEMENT (TO PROSPECTUS/PROXY STATEMENT DATED OCTOBER 4, 1996) CCB FINANCIAL CORPORATION COMMON STOCK THE PURPOSES OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ARE TO PROVIDE INFORMATION RELATING TO CERTAIN AMENDMENTS TO THE MERGER AGREEMENT ATTACHED AS APPENDIX A TO THE PROSPECTUS/PROXY STATEMENT, DATED OCTOBER 4, 1996; TO PROVIDE CERTAIN UPDATED FINANCIAL INFORMATION RELATING TO SALEM AND TO CCBF ON HISTORICAL AND PRO FORMA COMBINED BASES; AND, TO RE-SOLICIT APPOINTMENTS OF PROXY FROM SALEM'S SHAREHOLDERS TO BE VOTED AT THE RECONVENED SPECIAL MEETING. THE INFORMATION INCLUDED IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS/PROXY STATEMENT PURSUANT TO WHICH CCBF STOCK WAS OFFERED IN CONNECTION WITH THE MERGER. UNLESS OTHERWISE SPECIFICALLY DEFINED HEREIN, CAPITALIZED TERMS ARE USED IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AS SUCH TERMS ARE DEFINED IN THE PROSPECTUS/PROXY STATEMENT. THE SECTION AND SUBSECTION HEADINGS HEREIN REFER TO THE SECTIONS AND SUBSECTIONS OF THE PROSPECTUS/PROXY STATEMENT THAT ARE HEREBY SUPPLEMENTED. CROSS-REFERENCES IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ARE TO RELEVANT SECTIONS AND SUBSECTIONS OF THE PROSPECTUS/PROXY STATEMENT AND TO THE RELEVANT SECTIONS AND SUBSECTIONS HEREIN SUPPLEMENTING, AS APPLICABLE, THOSE SECTIONS AND SUBSECTIONS OF THE PROSPECTUS/PROXY STATEMENT. EXCEPT AS SUPPLEMENTED HEREBY, THE STATEMENTS MADE IN THE PROSPECTUS/PROXY STATEMENT CONTINUE IN EFFECT. IF YOU HAVE DISCARDED THE PROSPECTUS/PROXY STATEMENT PREVIOUSLY RECEIVED BY YOU AND DESIRE ANOTHER COPY, YOU SHOULD CONTACT NORMAN D. POTTER, SALEM'S CHIEF FINANCIAL OFFICER AND SECRETARY, AT SALEM TRUST BANK, 2140 COUNTRY CLUB ROAD, WINSTON-SALEM, NORTH CAROLINA 27104, TELEPHONE (910) 777-1400 AT YOUR EARLIEST CONVENIENCE. COVER PAGE OF PROSPECTUS/PROXY STATEMENT The Special Meeting was called for and convened at 10:00 o'clock a.m., on Thursday, November 21, 1996. However, the Special Meeting was adjourned for reconvening at a time, place and date to be noticed to Salem's shareholders for the reasons discussed below. Prior to the convening of the Special Meeting, the market price of CCBF Stock increased significantly from the range of market prices generally existing at the time the Merger Agreement was initially executed (July 1, 1996) and subsequently amended (as of September 6, 1996). The Merger Agreement permitted CCBF and CCB Bank or Salem to terminate the Merger Agreement if the average closing price of CCBF stock over the 60 trading days preceding the closing of the Merger was less than $46.78 or more than $57.18. On November 15, 1996, the closing price for a share of CCBF Stock on the NYSE was $62.00. As a consequence, during the second week of November, CCBF and Salem began discussing possible amendments to the provisions of the Merger Agreement relating to the exchange ratio for the conversion of Salem Stock into CCBF Stock and CCBF Rights and the rights of the parties to terminate the Merger Agreement. Ultimately, the Boards of Directors of CCBF and CCB Bank and the Board of Directors of Salem adopted a Second Amended Agreement of Combination, dated as of November 21, 1996 (the "Amended Merger Agreement"), amending the Merger Agreement attached to the Prospectus/Proxy Statement as Appendix A generally as follows: (Bullet) Section 3.1. If the average closing price for a share of CCBF Stock on the NYSE over the 60 trading days preceding the scheduled Closing Date (the "Average Price") is equal to or greater than $46.78, but equal to or less than $57.18, each outstanding share of Salem Stock (excluding shares held by Salem, CCBF, CCB Bank or any of their subsidiaries, other than in a fiduciary capacity or as a result of debts previously contracted, and excluding shares held by Salem shareholders who exercise their statutory dissenters' rights in accordance with North Carolina law) will be converted into .41 of a share of CCBF Stock and .41 of a CCBF Right. If the Average Price is greater than $57.18, each share of Salem Stock will be converted into that fraction of a share of CCBF Stock and that fraction of a CCBF Right computed by dividing the Average Price into $57.18 and multiplying the resulting quotient by .41. If such Average Price is less than $46.78, each share of Salem Stock will be converted into that fraction of a share of CCBF Stock and that fraction of a CCBF Right computed by dividing $46.78 by the Average Price and multiplying the resulting quotient by .41. See "THE MERGER -- Terms of the Merger" and "RIGHTS OF DISSENTING SHAREHOLDERS." (Bullet) The parties' rights in the Merger Agreement to terminate that Agreement if the Average Price of CCBF Stock is less than $46.78 or greater than $57.18 have been deleted. (Bullet) Salem has been granted a right to terminate the Amended Merger Agreement if, on or before the Closing Date and prior to the Effective Time, CCBF announces its merger with and into another company. (Bullet) Certain non-substantive changes (e.g. date of execution, name of document, etc.) have been made. The amendments contained in the Amended Merger Agreement and relating to the Exchange Ratio and termination rights are set forth in excerpted form as Appendix A to this Prospectus/Proxy Statement Supplement. Except as described above, the provisions of the Merger Agreement, as amended as of September 6, 1996, have been carried forward into the Amended Merger Agreement. The date of this Prospectus/Proxy Statement Supplement is November 27, 1996. AVAILABLE INFORMATION CCBF is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by CCBF can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located in Chicago (Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511) and in New York (7 World Trade Center, 13th Floor, New York, New York 10048). Copies of such material can be obtained by mail from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxies and other information regarding CCBF and other registrants. Copies of reports, proxy statements and other information filed by CCBF with the NYSE may be inspected at 20 Broad Street, New York, New York 10005. CCBF has filed with the Commission a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "1933 Act"), and a Post-Effective Amendment No. 1 to such Registration Statement, with respect to the CCBF Stock and CCBF Rights offered hereby. As permitted by the rules and regulations of the Commission, the Prospectus/Proxy Statement and this Prospectus/Proxy Statement Supplement do not contain all the information set forth in the Registration Statement, the Post-Effective Amendment No. 1 and the exhibits and schedules thereto, all of which may be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees. AS FURTHER DESCRIBED BELOW, THE PROSPECTUS/PROXY STATEMENT AND THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT INCORPORATE BY REFERENCE DOCUMENTS RELATING TO CCBF WHICH ARE NOT PRESENTED IN THE PROSPECTUS/PROXY STATEMENT OR HEREIN OR DELIVERED THEREWITH OR HEREWITH. STATEMENTS CONTAINED THEREIN OR HEREIN OR IN ANY DOCUMENT INCORPORATED THEREIN OR HEREIN BY REFERENCE AS TO THE CONTENTS OF ANY CONTRACTS OR OTHER DOCUMENTS REFERRED TO THEREIN OR HEREIN ARE NOT NECESSARILY COMPLETE, AND IN EACH INSTANCE REFERENCE IS MADE TO THE COPY OF SUCH CONTRACT OR OTHER DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, THE POST-EFFECTIVE AMENDMENT NO. 1 THERETO, OR SUCH OTHER DOCUMENT, EACH SUCH STATEMENT BEING QUALIFIED IN ALL RESPECTS BY SUCH REFERENCE. COPIES OF THOSE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) WILL BE PROVIDED WITHOUT CHARGE UPON REQUEST AS DESCRIBED BELOW. REQUESTS FOR DOCUMENTS REGARDING CCBF SHOULD BE DIRECTED TO W. HAROLD PARKER, JR., SENIOR VICE PRESIDENT AND CONTROLLER, CCB FINANCIAL CORPORATION, POST OFFICE BOX 931, DURHAM, N.C. 27702, TELEPHONE (919) 683-7631. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS BEFORE THE RECONVENED SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE MADE BY FIVE (5) BUSINESS DAYS PRIOR TO THE RECONVENED SPECIAL MEETING. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by CCBF with the Commission (SEC File No. 0-12358) are incorporated by reference into the Prospectus/Proxy Statement and this Prospectus/Proxy Statement Supplement: (i) CCBF's Annual Report on Form 10-K for the year ended December 31, 1995; (ii) CCBF's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996; (iii) CCBF's Current Reports on Form 8-K dated April 16, 1996, May 14, 1996, October 4, 1996 and November 26, 1996; and (iv) the description of CCBF Stock contained in its current report on Form 8-K dated July 1, 1983, as amended by Form 8-K/A2 dated June 14, 1996, and its Forms 8-A dated July 29, 1996, as each is amended by CCBF's subsequent reports filed under the 1934 Act. In addition, all other documents filed by CCBF pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to the date the reconvened Special Meeting has been finally adjourned shall be deemed to be incorporated by reference herein. Any statements contained in a document incorporated or deemed to be incorporated by reference herein will be deemed to be modified or superseded for purposes of the Prospectus/Proxy Statement and this Prospectus/Proxy Statement Supplement to the extent that a statement contained therein or herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference therein or herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part thereof or hereof. 2 SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION ABOUT THE RECONVENED SPECIAL MEETING, THE AMENDED MERGER AGREEMENT AND THE TRANSACTIONS DESCRIBED THEREIN AND IS NOT TO BE A COMPLETE DESCRIPTION OF ALL MATERIAL FACTS REGARDING SALEM, CCBF, CCB BANK, THE MERGER OR OTHER MATTERS TO BE CONSIDERED AT THE RECONVENED SPECIAL MEETING. THE SUMMARY IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED INFORMATION INCLUDED IN THE PROSPECTUS/PROXY STATEMENT AND THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT, THE APPENDICES THERETO AND HERETO AND THE DOCUMENTS INCORPORATED THEREIN AND HEREIN BY REFERENCE. SHAREHOLDERS OF SALEM ARE URGED TO READ CAREFULLY THE ENTIRE PROSPECTUS/PROXY STATEMENT AND THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT, INCLUDING ALL APPENDICES. IF YOU HAVE DISCARDED THE PROSPECTUS/PROXY STATEMENT PREVIOUSLY RECEIVED BY YOU AND DESIRE ANOTHER COPY, YOU SHOULD CONTACT NORMAN D. POTTER, SALEM'S CHIEF FINANCIAL OFFICER AND SECRETARY, AT SALEM TRUST BANK, 2140 COUNTRY CLUB ROAD, WINSTON-SALEM, NORTH CAROLINA 27104, TELEPHONE (910) 777-1400 AT YOUR EARLIEST CONVENIENCE. SPECIAL MEETING OF SALEM SHAREHOLDERS DATE, PLACE AND TIME. The Special Meeting will be reconvened at the Arts Council Theater, 610 Coliseum Drive, Winston-Salem, North Carolina, on Tuesday, January 21, 1997 at 10:00 o'clock, a.m., E.S.T. RECORD DATE. The close of business on October 2, 1996 remains fixed as the Record Date for the determination of shareholders entitled to notice of and to vote at the reconvened Special Meeting. Only those Salem shareholders of record on the Record Date will be eligible to vote at the reconvened Special Meeting. See "THE SPECIAL MEETING -- Record Date". REVOCATION OF APPOINTMENTS OF PROXY. Any Salem shareholder who executes an appointment of proxy has the right to revoke it at any time before it is exercised by filing with the Secretary of Salem either an instrument revoking it or a duly executed appointment of proxy bearing a later date, or by attending the reconvened Special Meeting and announcing his or her intention to vote in person. See "THE SPECIAL MEETING -- Voting and Revocation of Proxies". THE MERGER GENERAL. Salem, CCBF and CCBF's primary banking subsidiary, CCB Bank, have entered into the Amended Merger Agreement which provides for the Merger and certain other transactions as described therein. Salem is a North Carolina commercial bank. At September 30, 1996, Salem had assets of $158 million, deposits of $139 million, and shareholders' equity of $17 million. Its principal offices are located at 2140 Country Club Road, Winston-Salem, North Carolina 27104 and its telephone number at that address is (910) 777-1400. See "SALEM TRUST BANK". CCBF is a North Carolina corporation which is 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"), as a bank holding company. CCBF's principal subsidiaries are (i) CCB Bank, a North Carolina commercial bank headquartered in Durham, North Carolina and (ii) Central Carolina Bank-Georgia, a Georgia credit card bank headquartered in Columbus, Georgia. CCB Bank's subsidiaries are CCB Investment and Insurance Service Corporation, Southland Associates, Inc., and CCBDE, Inc. CCBF merged Graham Savings Bank, Inc., SSB, a savings bank subsidiary, with and into CCB Bank on October 4, 1996. See "CCB FINANCIAL CORPORATION -- Subsidiaries". At September 30, 1996, CCBF had consolidated assets of $5.2 billion, consolidated deposits of $4.4 billion, and consolidated shareholders' equity of $461.7 million. CCBF's principal offices are located at 111 Corcoran Street (Post Office Box 931), Durham, North Carolina 27702, and its telephone number at that address is (919) 683-7777. See "CCB FINANCIAL CORPORATION". CONVERSION OF SALEM STOCK AND EXCHANGE RATIO. At the Effective Time, each outstanding share of Salem Stock (other than shares as to which Salem's shareholders exercise their "Dissenters' Rights" under North Carolina law and shares held by CCBF, subsidiaries of CCBF or Salem other than in a fiduciary capacity or as a result of debts previously contracted) will be converted into, and thereafter may be exchanged for, (a) if the Average Price of a share of CCBF Stock is equal to or greater than $46.78, but equal to or less than $57.18, .41 of a share of CCBF Stock and .41 of a CCBF Right, (b) if the Average Price is greater than $57.18, that fraction of a share of CCBF Stock and that fraction of a CCBF Right computed by dividing the Average Price into $57.18 and multiplying the resulting quotient by .41, or (c) if the Average Price is less than $46.78, that fraction of a share of CCBF Stock and that fraction of a CCBF Right computed by dividing $46.78 by the Average Price and multiplying the resulting quotient by .41 (the "Exchange Ratio"). See "THE MERGER -- Conversion of Salem Stock and Stock Options; Exchange Ratio" and " -- Surrender and Exchange of Certificates", "RIGHTS OF DISSENTING SHAREHOLDERS", and "CAPITAL STOCK OF CCBF AND SALEM". 3 RECOMMENDATION AND REASONS. SALEM'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SALEM'S SHAREHOLDERS VOTE TO APPROVE THE AMENDED MERGER AGREEMENT. Salem's Board of Directors has adopted the Amended Merger Agreement and believes the Merger and the actions to be taken in connection therewith are in the best interests of Salem and its shareholders, and unanimously recommends that Salem's shareholders vote FOR approval of the Amended Merger Agreement. In making its recommendation, the Salem Board considered, among other things, the opinion of its financial advisor issued prior to the execution of the Amended Merger Agreement that the proposed consideration to be paid by CCBF to Salem's shareholders under the Merger Agreement (i.e., .41 of a share of CCBF Stock and .41 of a CCBF Right for each outstanding share of Salem Stock) was fair to Salem's shareholders from a financial point of view. The Salem Board has concluded that the Exchange Ratio under the Amended Merger Agreement should provide a value to Salem's shareholders comparable to that computed under the exchange ratio provisions of the Merger Agreement prior to its amendment and, if the closing price of CCBF Stock on the Closing Date exceeds the Average Price (and both exceed $57.18), would provide an increase in the value received by Salem's shareholders over that contemplated in the Merger Agreement. See "THE MERGER -- Recommendation and Reasons" and " -- Salem Fairness Opinion". TERMINATION OF AMENDED MERGER AGREEMENT. The Amended Merger Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after any requisite shareholder approval, (i) by mutual consent of the Board of Directors of Salem and the Boards of Directors of CCBF and CCB Bank; or (ii) by the Board of Directors of Salem or the Boards of Directors of CCBF and CCB Bank: (A) at any time after March 31, 1997 (unless the Merger is to be accounted for under the purchase method of accounting, in which case this date shall be June 30, 1997); (B) if any appropriate regulatory authority has denied approval of the Merger, or an order, judgment or decree of any such regulatory authority or court having jurisdiction has imposed any condition or requirement which would so substantially and adversely impact the economic or business benefits of the Merger as to render the consummation of the Merger inadvisable in the reasonable opinion of the Board of Directors of Salem or the Boards of Directors of CCBF and CCB Bank, and such denial or imposition has become final and nonappealable; (C) in the event of a material breach by the other party of any representation, warranty, covenant or other agreement contained in the Amended Merger Agreement, which breach is not cured within 30 days after written notice thereof is given by the non-breaching party; or (D) if there has occurred a suit or other proceeding by any governmental regulatory agency or body to restrain or prohibit the Merger, or a suit by a Salem or CCBF shareholder seeking to restrain the Merger or seeking material monetary damages should such transaction be consummated. The Salem Board may terminate the Amended Merger Agreement if, on or prior to the Closing Date and prior to the Effective Time, CCBF announces its merger with and into another company. See "THE MERGER -- Termination of Amended Merger Agreement". The provision of the Merger Agreement allowing CCBF and CCB Bank of Salem to terminate that Agreement if the Average Price is less than $46.78 or more than $57.18 has been deleted and is not contained in the Amended Merger Agreement. EFFECTIVE TIME. Assuming the receipt of all required approvals, it currently is expected that the Merger will become effective on January 24, 1997. See "THE MERGER -- Effective Time and Closing Date". The Board of Directors of Salem or the Boards of Directors of CCBF and CCB Bank may terminate the Amended Merger Agreement if the Effective Time shall not have occurred by March 31, 1997 (or June 30, 1997, if the Merger is to be accounted for as a purchase). See "THE MERGER -- Termination of Amended Merger Agreement". RIGHTS OF DISSENTING SHAREHOLDERS. Subject to certain conditions, each Salem shareholder has the right under the North Carolina Business Corporation Act (the "NCBCA") to "dissent" from the Merger and receive the "fair value" of the shareholder's shares of Salem Stock in cash ("Dissenters' Rights"). A Salem shareholder who (i) does not vote in favor of the Amended Merger Agreement, (ii) submits timely written notice of intent to demand payment for the shareholder's shares, (iii) demands payment and deposits the shareholder's share certificates by the date set forth in and in accordance with the terms and conditions of the "dissenters' notice" sent to such shareholder, and (iv) otherwise satisfies the requirements specified in Appendix B to the Prospectus/Proxy Statement, will be offered the amount Salem estimates to be the fair value of the shareholder's shares of Salem Stock, plus accrued interest to the date of payment, and will be paid such amount in cash provided the shareholder agrees in writing to accept such amount in full satisfaction of the shareholder's demand. In order to exercise Dissenters' Rights, a Salem shareholder must follow carefully all steps described in Appendix B. See "RIGHTS OF DISSENTING SHAREHOLDERS" and Appendix B to the Prospectus/Proxy Statement. If you have discarded your Prospectus/Proxy Statement, one will be provided to you upon request. A Salem shareholder who returns a signed appointment of proxy, but fails to provide instructions as to the manner in which such shares are to be voted, will be deemed to have voted in favor of the Amended Merger Agreement and will not be entitled to assert Dissenters' Rights. 4 CCBF STOCK AND SALEM STOCK; DIVIDENDS CCBF STOCK AND SALEM STOCK. Transactions in CCBF Stock were quoted on the National Market System of The Nasdaq Stock Market, Inc. (the "Nasdaq National Market") until August 13, 1996. On August 14, 1996, CCBF Stock was listed on the NYSE, and the reporting of transactions in CCBF Stock on the Nasdaq National Market terminated. As of September 30, 1996, there were 15,061,334 shares of CCBF Stock outstanding and held by approximately 7,400 holders of record. Currently there is no established market on which Salem Stock is regularly traded nor are transactions in Salem Stock reported by any quotations system. Purchases and sales of Salem Stock occur, from time to time, in private transactions in an informal match market. As of the Record Date, there were 1,841,232 shares of Salem Stock outstanding and held by approximately 509 holders of record. The following table sets forth for the periods indicated (i) information on the price range of CCBF Stock and shows the high and low closing sales prices as quoted by the Nasdaq National Market or reported by the NYSE, as applicable, (ii) the high and low sales prices of privately negotiated transactions in Salem Stock of which Salem is aware, and (iii) the cash dividends declared per share by each of CCBF and Salem. All sales prices for CCBF Stock and Salem Stock are shown without retail markups, markdowns, or commissions. Because transactions in Salem Stock occur in private transactions and Salem may not be aware of all such transactions occurring during the periods indicated, the sales prices for Salem Stock shown should not be taken as indicative of the market value of Salem Stock at any specific time or of the existence of any established trading market for Salem Stock.
CCBF STOCK SALEM STOCK HIGH LOW DIVIDEND HIGH LOW DIVIDEND 1996 1st Quarter...................................................... $55.75 $49.25 $.38 $14.00 $13.50 $.10(2) 2nd Quarter...................................................... 54.75 49.75 .38 14.50 14.50 -- 3rd Quarter...................................................... 55.00 49.50 .42 14.50 14.50 -- 4th Quarter (1).................................................. 62.00 54.75 .42 14.50 14.50 -- 1995 1st Quarter...................................................... 38.75 34.00 .34 9.00 9.00 -- 2nd Quarter...................................................... 42.75 38.00 .34 9.13 9.00 -- 3rd Quarter...................................................... 51.63 41.75 .38 12.25 9.75 -- 4th Quarter...................................................... 56.50 48.50 .38 13.50 12.25 -- 1994 1st Quarter...................................................... 37.50 32.75 .32 8.00 8.00 -- 2nd Quarter...................................................... 40.00 33.25 .32 8.00 8.00 -- 3rd Quarter...................................................... 44.50 39.25 .34 8.50 8.00 -- 4th Quarter...................................................... 44.00 32.75 .34 9.00 8.63 .08
(1) Through November 15, 1996. (2) Although this dividend was declared in January, 1996, it represents a dividend to shareholders based on 1995 net income. The following table sets forth the closing sales prices per share of CCBF Stock, the sales prices per share of Salem Stock of which Salem is aware, and the per share prices of Salem Stock equivalent to the closing sales prices of CCBF Stock (which prices represent the closing prices per share of CCBF Stock multiplied by the Exchange Ratio) on May 13, 1996, the business day preceding the public announcement of the Merger, on October 2, 1996, the most recent practicable business day prior to the date of the Prospectus/Proxy Statement, and on November 15, 1996, the most recent practicable business day prior to the date of this Prospectus/Proxy Statement Prospectus:
EQUIVALENT PER PRICE PER SHARE AT CCBF STOCK SALEM STOCK SHARE PRICE May 13, 1996............................................... $52.75 14.50(1) $21.63 October 2, 1996............................................ 55.25 14.50(2) 22.65 November 15, 1996.......................................... 62.00 14.50(2) 24.22(3)
(1) Sales price of trade of Salem Stock on April 30, 1996, the last trade in Salem Stock known by Salem's management to have occurred before May 13, 1996. (2) No transactions in Salem Stock are known by Salem's management to have occurred since April 30, 1996. 5 (3) Assumes Average Price of $60.01 (the average closing price for the first 14 days of the 60 trading day period ending January 23, 1997). SELECTED FINANCIAL INFORMATION The following tables set forth certain selected consolidated financial information for CCBF and Salem on a historical basis and for CCBF on an unaudited pro forma combined basis. This financial information has been based on, and should be read in conjunction with, CCBF's audited financial statements and interim unaudited financial statements, including the related notes thereto, which are incorporated herein by reference, see "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", and Salem's audited financial statements and interim unaudited financial statements, including the related notes thereto, which are set forth herein. In the opinion of the respective managements of CCBF and Salem, all adjustments necessary for a fair presentation of results of interim periods of CCBF and Salem (none of which were other than normal accruals) have been included. The selected unaudited pro forma combined financial information has been prepared using historical financial information for CCBF and Salem and assuming that the Merger had been effective prior to the periods presented and was accounted for under the pooling-of-interests method of accounting. For a description of the pooling-of-interests accounting method with respect to the Merger and the related effects on the historical financial statements of CCBF, see "THE MERGER -- Accounting Treatment". The pro forma combined share information was computed by adding CCBF's historical share information and the resultant of multiplying Salem's historical share information by the Exchange Ratio. The Exchange Ratio was calculated by dividing the Average Price as of November 15, 1996 of $60.01 (the "Assumed CCBF Average Price") into $57.18 and multiplying the resulting quotient by .41. The pro forma combined financial information presented is not necessarily indicative of actual results that might have been achieved had the Merger been consummated prior to the periods presented, and is not indicative of future results that may be obtained on a combined basis. The pro forma combined financial information does not reflect any Merger-related expenses which may be recognized or cost savings from operating efficiencies which may be realized in connection with the Merger. Current estimates of Merger-related expenses are $1.4 million. CCBF currently anticipates cost savings of approximately $1.5 million associated with possible operating efficiencies and synergies, but no such savings are assured. It is anticipated that any such cost savings will be achieved, if at all, only in the fiscal quarters following the quarter in which the expenses of the Merger are recognized. 6 CCB FINANCIAL CORPORATION
NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 (IN THOUSANDS EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest income....................... $ 294,537 285,019 383,514 309,899 254,912 241,589 269,638 Interest expense...................... 134,433 132,941 179,404 126,366 101,956 105,766 143,989 Net interest income................... 160,104 152,078 204,110 183,533 152,956 135,823 125,649 Provision for loan and lease losses........................ 9,000 5,776 8,183 9,279 7,106 7,831 9,331 Net interest income after provision........................... 151,104 146,302 195,927 174,254 145,850 127,992 116,318 Other income.......................... 45,563 39,888 53,267 48,630 46,617 39,570 41,261 Net investment securities gains (losses)............................ 510 (982) (978) 357 2,962 2,073 605 Other expenses (1).................... 121,659 123,106 160,223 147,287 129,452 116,114 110,983 Income before income taxes and cumulative changes in accounting principles.......................... 75,518 62,102 87,993 75,954 65,977 53,521 47,201 Income taxes (2)...................... 24,367 21,305 30,133 30,843 21,913 18,238 14,470 Income before cumulative changes in accounting principles............... 51,151 40,797 57,860 45,111 44,064 35,283 32,731 Cumulative changes in accounting principles (3)...................... -- -- -- -- (1,371) -- -- Net income............................ $ 51,151 40,797 57,860 45,111 42,693 35,283 32,731 PER SHARE Income before cumulative changes in accounting principles: Primary............................. $ 3.40 2.73 3.87 2.94 3.10 2.60 2.42 Fully diluted (4)................... 3.40 2.73 3.87 2.94 3.05 2.52 2.35 Net income: Primary............................. 3.40 2.73 3.87 2.94 3.00 2.60 2.42 Fully diluted (4)................... 3.40 2.73 3.87 2.94 2.95 2.52 2.35 Cash dividends........................ 1.18 1.06 1.44 1.32 1.24 1.14 1.047 Book value............................ 30.65 27.73 28.98 24.75 24.43 22.42 20.66 Average shares outstanding: Primary............................. 15,042 14,948 14,949 15,354 14,230 13,580 13,539 Fully diluted (4)................... 15,042 14,948 14,949 15,354 14,612 14,494 14,476 AVERAGE BALANCES Assets................................ $5,001,830 4,767,516 4,811,108 4,297,775 3,613,333 3,095,352 2,983,978 Loans and lease financing............. 3,462,469 3,234,469 3,251,613 2,823,525 2,299,599 2,018,812 1,979,879 Earning assets........................ 4,717,983 4,477,320 4,521,780 4,021,814 3,365,274 2,875,280 2,766,431 Deposits.............................. 4,272,649 4,109,736 4,148,526 3,676,139 3,137,037 2,687,980 2,584,251 Interest-bearing liabilities.......... 3,944,877 3,795,894 3,824,793 3,376,509 2,820,219 2,412,176 2,368,185 Shareholders' equity.................. 443,582 391,092 397,504 382,884 330,679 289,291 265,743
7 CCB FINANCIAL CORPORATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 (IN THOUSANDS EXCEPT PER SHARE DATA) SELECTED PERIOD END BALANCES Assets............................ $5,157,844 4,902,122 5,089,786 4,720,688 4,186,578 3,225,929 3,072,968 Loans and lease financing......... 3,622,345 3,267,536 3,345,345 3,158,863 2,651,100 2,033,829 1,999,955 Reserve for loan and lease losses.......................... 47,254 42,979 43,578 41,046 34,190 25,936 23,171 Deposits.......................... 4,397,815 4,231,360 4,297,411 4,057,680 3,601,227 2,802,141 2,660,737 Shareholders' equity.............. 461,704 414,610 433,517 371,151 375,224 306,773 279,992 RATIOS (ANNUALIZED) Income before cumulative changes in accounting principles to: Average assets.................. 1.37% 1.14 1.20 1.05 1.22 1.14 1.10 Average shareholders' equity....................... 15.40 13.95 14.56 11.78 13.33 12.20 12.32 Net income to: Average assets.................. 1.37 1.14 1.20 1.05 1.18 1.14 1.10 Average shareholders' equity....................... 15.40 13.95 14.56 11.78 12.91 12.20 12.32 Net interest margin, taxable equivalent (5).................. 4.70 4.73 4.70 4.75 4.76 4.88 4.72 Net loan and lease losses to average loans and lease financing....................... .21 .16 .17 .17 .20 .25 .37 Dividend payout ratio............. 34.71 38.83 37.21 44.90 41.33 43.85 43.26
(1) Other expenses for the nine months ended September 30, 1996 include an FDIC special assessment of $8.4 million to recapitalize the Savings Association Insurance Fund. The after-tax effect was to decrease net income by $.33 per share. Other expenses in 1995 and 1994 include merger-related expense of $10.3 million in 1995 related to CCBF's merger with Security Capital Bancorp ("SCBC") and $1.1 million in 1994 related to SCBC's acquisition of a savings and loan association. As a result, income per share was decreased by $.49 per share in 1995 and $.04 per share in 1994. (2) During the third quarter of 1996, a tax benefit of $1.6 million was recorded for forgiveness of the recapture of tax bad debt reserves of a savings bank subsidiary which previously would have been required upon its merger with a commercial bank. Net income per share was increased by $.10 as a result thereof. Income taxes for 1994 include a one-time charge of approximately $5.6 million of deferred tax liabilities recorded in conjunction with the merger of SCBC's three savings bank subsidiaries into its commercial bank subsidiary. As a result, income per share was decreased by $.37 for the year. (3) The cumulative changes in accounting principles reflect the 1993 adoptions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") which resulted in a one-time net charge of $2.3 million ($3.7 million pre-tax) in recognition of the entire Accumulated Postretirement Benefit Obligation, and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which resulted in a one-time benefit of $900,000. (4) Assumes full conversion of convertible subordinated debentures issued by CCBF in 1985. The convertible subordinated debentures were called for redemption during 1993 and substantially all were converted into CCBF Stock. (5) Net interest margin is computed by dividing taxable equivalent net interest income by average earnings assets. 8 SALEM TRUST BANK
NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 (IN THOUSANDS EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest income....................... $ 9,307 6,595 9,337 5,320 4,457 4,490 5,230 Interest expense...................... 4,605 3,074 4,571 2,397 2,307 2,664 3,459 Net interest income................... 4,702 3,521 4,766 2,923 2,150 1,826 1,771 Provision for loan losses............. 132 338 545 50 -- 40 118 Net interest income after provision... 4,570 3,183 4,221 2,873 2,150 1,786 1,653 Other income.......................... 896 556 928 646 434 167 79 Other expenses........................ 3,086 2,513 3,385 2,210 1,876 1,403 1,232 Income before income taxes and cumulative change in accounting principles.......................... 2,380 1,226 1,764 1,309 708 550 500 Income taxes.......................... 928 595 720 506 250 196 123 Income before cumulative change in accounting principles............... 1,452 631 1,044 803 458 354 377 Cumulative change in accounting principles (1)...................... -- -- -- -- -- 61 -- Net income............................ $ 1,452 631 1,044 803 458 415 377 PER SHARE Net income: Primary............................. $ .83 .49 .72 .76 .44 .40 .36 Fully diluted (2)................... .80 .46 .67 .70 .42 .40 .36 Cash dividends........................ .10(3) -- -- .08 -- -- -- Book value............................ 9.36 8.27 8.52 7.29 6.60 6.16 5.76 Average shares outstanding: Primary............................. 1,744 1,292 1,448 1,051 1,040 1,040 1,035 Fully diluted (2)................... 1,835 1,505 1,685 1,267 1,207 1,040 1,035 AVERAGE BALANCES Assets................................ $156,336 103,229 113,881 83,481 80,884 76,319 66,805 Loans................................. 112,854 82,601 87,414 61,111 59,388 55,702 46,917 Earning assets........................ 150,307 98,119 107,750 77,812 76,439 72,570 63,425 Deposits.............................. 138,230 89,670 98,414 71,555 71,626 69,584 60,328 Interest-bearing liabilities.......... 127,912 83,990 93,055 69,040 67,463 65,055 57,728 Stockholders' equity.................. 15,578 10,313 11,104 7,226 6,618 6,215 5,837 SELECTED PERIOD END BALANCES Assets................................ $158,069 137,348 154,091 90,545 88,066 86,088 79,999 Loans................................. 116,707 100,068 106,231 66,966 60,447 58,500 59,213 Allowance for loan losses............. 1,434 1,095 1,302 757 714 714 674 Deposits.............................. 139,187 120,686 136,451 79,316 78,314 79,042 73,367 Stockholders' equity.................. 17,227 13,199 13,608 7,581 6,861 6,404 5,989 RATIOS (ANNUALIZED) Net income to: Average assets...................... 1.24% .82 .92 .96 .57 .54 .56 Average stockholders' equity........ 12.45 8.18 9.40 11.11 6.92 6.68 6.46 Net interest margin, taxable equivalent (4)...................... 4.24 4.81 4.43 3.78 2.84 2.54 2.81 Net loan losses to average loans...... -- -- -- .01 -- -- -- Dividend payout ratio................. 12.05 -- -- 10.53 -- -- --
(1) The cumulative change in accounting principles reflects the 1992 adoption of SFAS 109 which resulted in a one-time benefit of $61,000. (2) Assumes full conversion of convertible subordinated notes issued in 1993. The convertible subordinated notes were called for redemption in 1996 and substantially all were converted into Salem Stock. (3) Although this dividend was declared in January, 1996, it represents a dividend to shareholders based on 1995 net income. (4) Net interest margin is computed by dividing taxable equivalent net interest income by average earning assets. 9 CCB FINANCIAL CORPORATION PRO FORMA COMBINED
NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 (IN THOUSANDS EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest income................... $ 303,844 291,614 392,851 315,219 259,369 246,079 274,868 Interest expense.................. 139,038 136,015 183,975 128,763 104,263 108,430 147,448 Net interest income............... 164,806 155,599 208,876 186,456 155,106 137,649 127,420 Provision for loan and lease losses.......................... 9,132 6,114 8,728 9,329 7,106 7,871 9,449 Net interest income after provision....................... 155,674 149,485 200,148 177,127 148,000 129,778 117,971 Other income...................... 46,459 40,444 54,195 49,276 47,051 39,737 41,340 Net investment securities gains (losses)........................ 510 (982) (978) 357 2,962 2,073 605 Other expenses (1)................ 124,745 125,619 163,608 149,497 131,328 117,517 112,215 Income before income taxes and cumulative changes in accounting principles...................... 77,898 63,328 89,757 77,263 66,685 54,071 47,701 Income taxes (2).................. 25,295 21,900 30,853 31,349 22,163 18,434 14,593 Income before cumulative changes in accounting principles........ 52,603 41,428 58,904 45,914 44,522 35,637 33,108 Cumulative changes in accounting principles (3).................. -- -- -- -- (1,371) 61 -- Net income........................ $ 52,603 41,428 58,904 45,914 43,151 35,698 33,108 PER SHARE Income before cumulative changes in accounting principles: Primary......................... $ 3.35 2.68 3.80 2.91 3.04 2.55 2.37 Fully diluted (4)............... 3.34 2.67 3.78 2.90 2.99 2.48 2.31 Net income: Primary......................... 3.35 2.68 3.80 2.91 2.95 2.55 2.37 Fully diluted (4)............... 3.34 2.67 3.78 2.90 2.90 2.48 2.31 Cash dividends (5)................ 1.18 1.06 1.44 1.32 1.24 1.14 1.047 Book value........................ 30.35 27.47 28.69 24.59 24.24 22.23 20.49 Average shares outstanding: Primary......................... 15,722 15,452 15,514 15,764 14,636 13,985 13,943 Fully diluted (4)............... 15,757 15,535 15,606 15,848 15,082 14,899 14,880 AVERAGE BALANCES Assets............................ $5,158,166 4,870,745 4,924,989 4,381,256 3,694,217 3,171,671 3,050,783 Loans and lease financing......... 3,575,323 3,317,070 3,339,027 2,884,636 2,358,987 2,074,514 2,026,796 Earning assets.................... 4,868,290 4,575,439 4,629,530 4,099,626 3,441,713 2,947,850 2,829,856 Deposits.......................... 4,410,879 4,199,406 4,246,940 3,747,694 3,208,663 2,757,564 2,644,579 Interest-bearing liabilities...... 4,072,789 3,879,884 3,917,848 3,445,549 2,887,682 2,477,231 2,425,913 Shareholders' equity.............. 459,160 401,405 408,608 390,110 337,297 295,506 271,580
10 CCB FINANCIAL CORPORATION PRO FORMA COMBINED (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 (IN THOUSANDS EXCEPT PER SHARE DATA) SELECTED PERIOD END BALANCES Assets............................ $5,315,913 5,039,470 5,243,877 4,811,233 4,274,644 3,312,017 3,152,967 Loans and lease financing......... 3,739,052 3,367,604 3,451,576 3,225,829 2,711,547 2,092,329 2,059,168 Reserve for loan and lease losses.......................... 48,688 44,074 44,880 41,803 34,904 26,650 23,845 Deposits.......................... 4,537,002 4,352,046 4,433,862 4,136,996 3,679,541 2,881,183 2,734,104 Shareholders' equity.............. 478,931 427,809 447,125 378,732 382,085 313,177 285,981 RATIOS (ANNUALIZED) Income before cumulative changes in accounting principles to: Average assets.................. 1.36% 1.14 1.20 1.05 1.21 1.12 1.09 Average shareholders' equity....................... 15.30 13.80 14.42 11.77 13.20 12.06 12.19 Net income to: Average assets.................. 1.36 1.14 1.20 1.05 1.17 1.13 1.09 Average shareholders' equity....................... 15.30 13.80 14.42 11.77 12.79 12.08 12.19 Net interest margin, taxable equivalent (6).................. 4.68 4.74 4.70 4.73 4.72 4.90 4.76 Net loan and lease losses to average loans and lease financing....................... .20 .15 .17 .17 .20 .24 .36 Dividend payout ratio (5)......... 35.22 39.55 37.89 45.36 42.03 44.71 44.18
(1) Other expenses for the nine months ended September 30, 1996 include an FDIC special assessment of $8.4 million to recapitalize the Savings Association Insurance Fund. The after-tax effect was to decrease net income by $.32 per share. Other expenses in 1995 and 1994 include merger-related expense of $10.3 million in 1995 related to CCBF's merger with SCBC and $1.1 million in 1994 related to SCBC's acquisition of a savings and loan association. The after-tax effect of the merger-related expense was to decrease net income per share by $.47 per share in 1995 and $.04 per share in 1994. (2) During the third quarter of 1996, a tax benefit of $1.6 million was recorded for forgiveness of the recapture of tax bad debt reserves of a savings bank subsidiary which previously would have been required upon its merger with a commercial bank. Net income per share was increased by $.10 as a result thereof. Income taxes for 1994 include a one-time charge of approximately $5.6 million of deferred tax liabilities recorded in conjunction with the merger of SCBC's three savings subsidiaries into its commercial bank subsidiary. As a result, income per share was decreased by $.35 for the year. (3) The 1993 cumulative changes in accounting principles reflect CCBF's adoption of SFAS 106 which resulted in a one-time net charge of $2.3 million ($3.7 million pre-tax) and adoption of SFAS 109 which resulted in a one-time benefit of $900,000. The 1992 cumulative change in accounting principles reflects Salem's adoption of SFAS 109 which resulted in a one-time benefit of $61,000. (4) Assumes (i) full conversion of convertible subordinated debentures issued by CCBF in 1985 which were outstanding until 1993 when substantially all were converted into CCBF Stock and (ii) full conversion of convertible subordinated notes issued by Salem in 1993 which were outstanding until 1996 when substantially all were converted into Salem's Stock. (5) CCBF pro forma combined dividends per share represent historical dividends per share paid by CCBF. (6) Net interest margin is computed by dividing taxable equivalent net interest income by average earning assets. 11 COMPARATIVE PER SHARE DATA The following unaudited consolidated financial information reflects certain comparative per share data at the dates and for the periods presented relating to (i) net income, book value and cash dividends per common share of CCBF Stock and Salem Stock on a historical basis, and (ii) net income, book value and cash dividends per common share on a pro forma combined and equivalent per share of Salem Stock basis (each assuming the Merger became effective prior to the periods presented and was accounted for as a pooling-of-interests). See "THE MERGER -- Accounting Treatment". The data presented should be read in conjunction with and has been derived from the historical consolidated financial statements of CCBF and the related notes thereto, incorporated herein by reference, and the historical financial statements of Salem and the related notes thereto, contained herein, and in conjunction with the unaudited pro forma combined condensed financial information, including the related notes thereto, included elsewhere in this Prospectus/Proxy Statement Supplement. See "PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION".
AT AT SEPTEMBER 30, DECEMBER 31, 1996 1995 BOOK VALUE PER COMMON SHARE: CCBF (1)...................................................................................... $ 30.65 28.98 Salem (1)..................................................................................... 9.36 8.52 Pro Forma Combined (2)........................................................................ 30.35 28.69 Equivalent per share of Salem Stock (3)....................................................... 11.84 11.19
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1996 1995 1995 1994 1993 1992 1991 CASH DIVIDENDS PER COMMON SHARE: CCBF................................................................ $1.18 1.06 1.44 1.32 1.24 1.14 1.047 Salem............................................................... .10(4) -- -- .08 -- -- -- Pro Forma Combined (5).............................................. 1.18 1.06 1.44 1.32 1.24 1.14 1.047 Equivalent per share of Salem Stock (3)............................. .46 .41 .56 .51 .48 .44 .41 INCOME BEFORE CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES PER PRIMARY COMMON SHARE: CCBF................................................................ 3.40 2.73 3.87 2.94 3.10 2.60 2.42 Salem............................................................... .83 .49 .72 .76 .44 .34 .36 Pro Forma Combined (6).............................................. 3.35 2.68 3.80 2.91 3.04 2.55 2.37 Equivalent per share of Salem Stock (3)............................. 1.31 1.05 1.48 1.13 1.19 .99 .92 INCOME BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLES PER FULLY DILUTED COMMON SHARE (7): CCBF................................................................ 3.40 2.73 3.87 2.94 3.05 2.52 2.35 Salem............................................................... .80 .46 .67 .70 .42 .34 .36 Pro Forma Combined (8).............................................. 3.34 2.67 3.78 2.90 2.99 2.48 2.31 Equivalent per share of Salem Stock (3)............................. 1.30 1.04 1.47 1.13 1.17 .97 .90
(1) CCBF and Salem historical book values per share are computed using period end shares outstanding and do not include common share equivalents. (2) The pro forma combined book values per share of CCBF Stock are based upon the combined historical total common equity for CCBF and Salem divided by total pro forma shares of CCBF Stock, assuming conversion of the Salem Stock at the Exchange Ratio using the Assumed CCBF Average Price. (3) Salem pro forma equivalent per share amounts are computed by multiplying the CCBF pro forma combined amounts by the Exchange Ratio using the Assumed CCBF Average Price. (4) Although this dividend was declared in January, 1996, it represents a dividend to shareholders based on 1995 net income. (5) CCBF pro forma combined dividends per share represent historical dividends per share paid by CCBF. (6) The pro forma combined income per primary common share before cumulative changes in accounting principles is based on the combined historical income before cumulative changes in accounting principles of CCBF and Salem divided by the pro forma combined weighted average primary common shares of CCBF. (7) Assumes (i) full conversion of convertible subordinated debentures issued by CCBF in 1985 which were called for redemption during 1993 and substantially all were converted into shares of CCBF Stock, and (ii) full conversion of convertible subordinated notes issued by Salem in 1993 which were outstanding until 1996 when substantially all were converted into shares of Salem Stock. (8) The pro forma combined income before cumulative changes in accounting principles per fully diluted share is based on the combined historical income before cumulative changes in accounting principles of CCBF and Salem divided by the weighted average pro forma combined fully diluted common shares of CCBF. 12 THE SPECIAL MEETING GENERAL; PROPOSALS TO BE CONSIDERED The Prospectus/Proxy Statement was furnished, and this Prospectus/Proxy Statement Supplement is being furnished, to holders of Salem Stock in connection with the solicitation of proxies by Salem's Board of Directors for use at the Special Meeting (and the reconvening of the Special Meeting) which was called to consider and vote upon (i) a proposal to approve the Amended Merger Agreement, and (ii) to transact such other business as may properly come before the reconvened Special Meeting or any further adjournments thereof. Each copy of this Prospectus/Proxy Statement Supplement mailed to holders of Salem Stock is accompanied by an appointment of proxy for use at the reconvened Special Meeting. HOLDERS OF SALEM STOCK ARE URGED TO COMPLETE, DATE AND SIGN THE APPOINTMENT OF PROXY WHICH ACCOMPANIES THEIR COPY OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND TO RETURN IT IMMEDIATELY TO SALEM. APPOINTMENTS OF PROXY COMPLETED AND RETURNED IN RESPONSE TO THE PROSPECTUS/PROXY STATEMENT WILL NOT BE USED AT THE RECONVENED SPECIAL MEETING. IN ORDER TO VOTE BY PROXY AT THE RECONVENED SPECIAL MEETING THE ACCOMPANYING APPOINTMENT OF PROXY MUST BE COMPLETED, DATED, SIGNED AND RETURNED TO SALEM. DATE, PLACE AND TIME The reconvened Special Meeting will be held at Arts Council Theater, 610 Coliseum Drive, Winston-Salem, North Carolina on Tuesday, January 21, 1997 at 10:00 o'clock, a.m., E.S.T. RECORD DATE The Record Date fixed by Salem's Board of Directors, the close of business on October 2, 1996, for the determination of the holders of Salem Stock entitled to receive notice and to vote at the Special Meeting remains the Record Date for such determination in connection with the reconvened Special Meeting. VOTING AND REVOCATION OF PROXIES Proxies previously submitted in response to the Prospectus/Proxy Statement will not be voted at the reconvened Special Meeting. New proxies are being solicited pursuant to this Prospectus/Proxy Statement Supplement. Shares of Salem Stock represented by an appointment of proxy properly signed and received at or prior to the reconvened Special Meeting will be voted as instructed therein, unless subsequently revoked by the death or incapacity of the shareholder executing it, and notice of such death or incapacity is filed with the Secretary of Salem or with any other person authorized to tabulate votes on behalf of Salem before such shares are voted. If an appointment of proxy is signed and returned without indicating any voting instructions, shares of Salem Stock represented thereby will be voted FOR the Amended Merger Agreement. An appointment of proxy may be revoked by the person giving it at any time before the shares represented thereby are voted by the filing with the Secretary of Salem prior to or at the reconvened Special Meeting of an instrument revoking it or of a duly executed appointment of proxy bearing a later date, or by voting in person at the reconvened Special Meeting. All written notices of revocation and other communications with respect to revocation of Salem proxies should be addressed as follows: Salem Trust Bank, 2140 Country Club Road, Winston-Salem, North Carolina 27104, Attn: Norman D. Potter, Chief Financial Officer and Secretary. Attendance at the reconvened Special Meeting will not in and of itself constitute revocation of an appointment of proxy. The Board of Directors of Salem is not aware of any business to be acted upon at the reconvened Special Meeting other than as described herein. If, however, other matters are properly brought before the reconvened Special Meeting, or any further adjournments thereof, the Proxies appointed for the reconvened Special Meeting will have discretionary authority to vote on such matters in accordance with their best judgment; provided, however, that such discretionary authority will only be exercised to the extent permissible under the applicable state law and federal securities law. RECOMMENDATION AND REASONS Salem's Board of Directors has unanimously adopted the Amended Merger Agreement. The Board believes the Merger will provide Salem's shareholders with an increase in the value of their stockholdings, an increase in the current individual return on their investments, and an opportunity to participate in further appreciation in the value of the shares of CCBF Stock they acquire in the Merger. The Board believes the combination of Salem and CCBF will allow Salem's shareholders to 13 participate in the ownership of a larger entity which will be able to compete more effectively in the economic and competitive environments facing financial institutions than would Salem on an independent basis. On this basis, Salem's Board has concluded that the Merger is fair to, and in the best interests of, Salem's shareholders, and has adopted and determined to recommend that Salem's shareholders approve the Amended Merger Agreement. See "THE MERGER -- Recommendation and Reasons". THE MERGER THE FOLLOWING SUPPLEMENTS THE SUMMARY OF INFORMATION ABOUT THE MERGER AND CERTAIN OF THE IMPORTANT TERMS AND CONDITIONS OF THE MERGER AGREEMENT AND THE OTHER TRANSACTIONS DESCRIBED THEREIN SET FORTH IN THE PROSPECTUS/PROXY STATEMENT, AND IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF ALL MATERIAL FACTS REGARDING THE MERGER. THIS SUPPLEMENTAL DISCUSSION AND SUCH SUMMARY IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE FULL MERGER AGREEMENT ATTACHED AS APPENDIX A TO THE PROSPECTUS/PROXY STATEMENT, THE AMENDMENTS TO THE MERGER AGREEMENT ATTACHED AS APPENDIX A TO THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT COMPRISING THE AMENDED MERGER AGREEMENT, THE STATUTES REGARDING DISSENTERS' RIGHTS ATTACHED AS APPENDIX B TO THE PROSPECTUS/PROXY STATEMENT, AND THE OTHER APPENDICES TO THE PROSPECTUS/PROXY STATEMENT (EACH OF WHICH IS INCORPORATED HEREIN BY REFERENCE). ALL SALEM SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, APPENDIX A TO THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT, AND THE OTHER APPENDICES IN THEIR ENTIRETY. CONVERSION OF SALEM STOCK AND SALEM OPTIONS; EXCHANGE RATIO At the Effective Time, and without any further action on the part of Salem or its shareholders, each outstanding share of Salem Stock (other than shares held by CCBF, subsidiaries of CCBF or Salem, and other than shares as to which Salem shareholders properly exercise Dissenters' Rights) automatically will be converted into and become, and thereafter may be exchanged for a fraction of a newly issued share of CCBF Stock and a fraction of a CCBF Right. The Exchange Ratio set forth in the Amended Merger Agreement provides that such fraction will be: (a) if the Average Price is equal to or greater than $46.78, but equal to or less than $57.18, .41, (b) if the Average Price is greater than $57.18, the fraction computed by dividing $57.18 by the Average Price and multiplying the resulting quotient by .41; or (c) if the Average Price is less than $46.78, the fraction computed by dividing $46.78 by the Average Price and multiplying the resulting quotient by .41. At the Effective Time, all rights with respect to then outstanding Salem Options, whether or not then exercisable, will be converted into (at the Exchange Ratio) and will become rights with respect to CCBF Stock, and CCBF will assume Salem's obligations with respect to each such Salem Option in accordance with the terms of the applicable Salem Option Plan under which such Salem Option was granted and the related option agreement; provided, however, that pursuant to the Salem Option Plans all unvested Salem Options will become fully vested as a consequence of the Merger. See " -- Interests of Certain Persons with Respect to the Merger". RECOMMENDATION AND REASONS SALEM'S BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE AMENDED MERGER AGREEMENT AND RECOMMENDS THAT SALEM'S SHAREHOLDERS VOTE "FOR" APPROVAL OF THE AMENDED MERGER AGREEMENT AND THE MERGER. At the time the Merger Agreement was initially entered into (July 1, 1996) and the time it was first amended (as of September 6, 1996), CCBF Stock generally was trading within a range of $50.00 to $53.00 per share. The initial Merger Agreement provided that if the closing sales price of CCBF Stock on the NYSE on the Closing Date was less than $46.78 or more than $57.18 either CCBF and CCB Bank or Salem could terminate the Merger Agreement. The parties subsequently amended the Merger Agreement as of September 6, 1996 to provide that if the Average Price of CCBF Stock was less than $46.78 or more than $57.18, such termination rights would be available. The 60 trading day period preceding January 24, 1997 commenced on October 29, 1996. During the first 14 days of that period (October 29th through November 15th), the closing price of CCBF Stock on the NYSE rose from $57.00 to $62.00 per share, and the average closing price for those 14 days was $60.01. As a consequence of this trend in the market price of CCBF Stock, CCBF and Salem entered into discussions about amending the Merger Agreement to establish a revised exchange ratio providing that, assuming the Average Price of CCBF Stock remains in excess of $57.18 (and the closing price of CCBF Stock on the Closing Date equals the Average Price), Salem's shareholders would receive at the Effective Time for each share of Salem Stock held CCBF Stock having a market 14 value of at least $23.44 ($57.18 multiplied by .41), and providing further that if the closing price of CCBF Stock on the Closing Date exceeds the Average Price, Salem's shareholders would receive additional value equal to the excess of such closing price over the Average Price multiplied by the Exchange Ratio. For example, if the Average Price were $60.01 (the Average Price for October 29th through November 15th) and the closing price on the Closing Date were $62.00 (the closing price on November 15th), Salem's shareholders would receive .391 of a share of CCBF Stock for each of their shares of Salem Stock, a value in CCBF Stock as of the Effective Time of $24.24 ($62.00 multiplied by .391). If the closing price of CCBF Stock on the Closing Date is less than the Average Price, Salem's shareholders would receive less than $23.44 per share of Salem Stock. Salem also requested in these discussions, and CCBF and CCB Bank agreed to, a further modification to the Exchange Ratio calculation designed to provide that, assuming the market price of CCBF Stock at the Effective Time is less than $46.78, in certain circumstances Salem's shareholders would receive CCBF Stock having a market value of at least $19.18 ($46.78 multiplied by .41). For example, if the Average Price were $44.00 and the closing price on the Closing Date were an amount equal to or greater than the Average Price (e.g. $45.00), Salem's shareholders would receive .436 of a share of CCBF Stock for each of their shares of Salem Stock, a value in CCBF Stock at the Effective Time of $19.62. It should be noted, however, that the closing price of CCBF Stock on, and the Average Price as of, January 24, 1997 may be higher or lower than the figures used in the foregoing examples or may be within the range of $46.78 to $57.18. The amendments to the exchange ratio provisions of the Merger Agreement agreed upon by CCBF, CCB Bank and Salem are described in the explanation of the Exchange Ratio provisions of the Amended Merger Agreement herein and are set forth in Appendix A hereto. The modifications to the exchange ratio provisions of the Merger Agreement resulting in the Exchange Ratio provisions of the Amended Merger Agreement necessitated the deletion from the Amended Merger Agreement of the provision of the Merger Agreement permitting CCBF and CCB Bank or Salem to terminate the Merger Agreement if the Average Price is less than $46.78 or more than $57.18. As part of this negotiation process, Salem requested, and CCBF and CCB Bank agreed to, a new termination right for Salem. If, on or prior to the Closing Date and prior to the Effective Time, CCBF announces its merger with and into another company, Salem may terminate the Amended Merger Agreement. In the judgment of the Salem Board, the Exchange Ratio provisions of the Amended Merger Agreement, considered in light of the current level of CCBF Stock's market price, are reasonable and in the best interests of Salem and its shareholders. AMENDMENT OF AMENDED MERGER AGREEMENT; WAIVER Prior to the Effective Time, any provision of the Amended Merger Agreement may be waived by the party entitled to the benefit of such provision; provided, however, that no condition may be waived which, if not satisfied, would result in a violation of any law or applicable governmental regulation. The Amended Merger Agreement may be amended, modified or supplemented at any time prior to the Effective Time, and whether before or after the reconvened Special Meeting, by an agreement in writing approved by Salem's, CCBF's and CCB Bank's respective Boards of Directors. However, following the reconvened Special Meeting and approval of the Amended Merger Agreement by CCB Bank's shareholder, no changes involving material matters, including the manner or basis in which shares of Salem Stock will be converted into and exchanged for CCBF Stock, may be made without the approval of Salem's shareholders and CCB Bank's shareholder. TERMINATION OF AMENDED MERGER AGREEMENT The Amended Merger Agreement may be terminated, whether before or after the reconvened Special Meeting, upon the mutual consent of the Board of Directors of Salem and the Boards of Directors of CCBF and CCB Bank, and may be terminated by the Board of Directors of either Salem or CCBF and CCB Bank in the event, among other things, (i) of a material breach by the other party of any representations, warranty, covenant or other agreement in the Amended Merger Agreement which is not cured within 30 days after written notice to the party committing such breach; (ii) that any regulatory authority has denied approval of any of the transactions contemplated by the Amended Merger Agreement, or that an order, judgment or decree from any regulatory authority or any court having competent jurisdiction has imposed any condition or requirement which would so substantially and adversely impact the economic or business benefits of the Merger to such party as to render inadvisable in the reasonable opinion of such party's Board of Directors the consummation of the Merger (provided that such denial or imposition has become final and nonappealable); (iii) of the occurrence of a suit or other proceeding by any regulatory authority or other governmental body or agency to restrain or prohibit any of the transactions contemplated by the Amended Merger Agreement, or a suit by a Salem or CCBF shareholder seeking to restrain such transactions or to obtain material money damages should such transactions be consummated (unless counsel for the party wishing to proceed with the Merger renders an opinion that such a suit is likely to be resolved in a way which would not deprive any party of the 15 material benefits of the Merger or in a way which would not result in substantial money damages to one or more directors of such party which would not be covered by insurance); or (iv) that the Effective Time shall not have occurred on or before March 31, 1997; provided, however, that if pooling-of-interests accounting treatment is not permissible, this date shall be extended to June 30, 1997. Additionally, Salem may terminate the Amended Merger Agreement if, on or before the Closing Date and prior to the Effective Time, CCBF announces its merger with and into another company. The provision of the Merger Agreement allowing CCBF and CCB Bank or Salem to terminate that Agreement if the Average Price is less than $46.78 or more than $57.18 has been deleted and is not contained in the Amended Merger Agreement. EFFECTIVE TIME AND CLOSING DATE It is currently anticipated that the Closing Date will be, and the Effective Time will occur on, January 24, 1997. 16 PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited Pro Forma Combined Condensed Balance Sheet and Statements of Income and accompanying notes are presented to show the impact of the Merger on CCBF's and Salem's historical financial position and results of operations. The Merger is reflected in the Pro Forma Combined Condensed Balance Sheet and Statements of Income under the pooling-of-interests method of accounting. CCBF currently intends for the Merger to be accounted for under the pooling-of-interests method. However, if application of such accounting method should not be permissible, the Merger would be accounted for under the purchase method of accounting. See "THE MERGER -- Accounting Treatment" and " -- Conditions to Merger". Under the purchase method of accounting, the acquiring corporation records at its costs the acquired assets less liabilities assumed. The difference between the cost of the acquired enterprise and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed is recorded as goodwill. The reported income of an acquiring corporation includes the operations of the acquired enterprise after acquisition, adjusted for amortization of any assets arising from the acquisition. The unaudited Pro Forma Combined Condensed Balance Sheet presented assumes that the Merger was consummated on September 30, 1996 and the unaudited Pro Forma Combined Condensed Statements of Income assume that the Merger was consummated at the beginning of each period presented. The pro forma earnings are not necessarily indicative of actual results that might have been achieved had the Merger been consummated at the beginning of the periods presented, and may not be indicative of future results that will be obtained on a combined basis. The Pro Forma Combined Condensed Balance Sheet and Statements of Income do not reflect any Merger-related expenses which may be recognized or cost savings from operating efficiencies which may be realized in connection with the Merger. Current estimates of Merger-related expenses are $1.4 million. CCBF currently anticipates cost savings of approximately $1.5 million associated with these possible operating efficiencies and synergies, but no such savings are assured. It is anticipated that any such cost savings will not be achieved until the fiscal quarters following the quarter in which the expenses of the Merger are recognized. 17 PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
CCBF PRO FORMA PRO FORMA CCBF SALEM ADJUSTMENTS COMBINED (IN THOUSANDS) ASSETS Cash and due from banks................................................... $ 190,217 5,884 -- 196,101 Time deposits in other banks.............................................. 60,137 -- -- 60,137 Federal funds sold and other short-term investments....................... 170,800 14,055 -- 184,855 Investment securities: Available for sale...................................................... 904,857 2,462 -- 907,319 Held to maturity........................................................ 74,197 16,805 -- 91,002 Loans and lease financing................................................. 3,622,345 116,707 -- 3,739,052 Less reserve for loan and lease losses.................................. 47,254 1,434 -- 48,688 Net loans and lease financing........................................ 3,575,091 115,273 -- 3,690,364 Premises and equipment.................................................... 66,273 1,865 -- 68,138 Other assets.............................................................. 116,272 1,725 -- 117,997 Total assets......................................................... $5,157,844 158,069 -- 5,315,913 LIABILITIES Deposits: Noninterest-bearing..................................................... $ 554,294 16,823 -- 571,117 Interest-bearing........................................................ 3,843,521 122,364 -- 3,965,885 Total deposits....................................................... 4,397,815 139,187 -- 4,537,002 Short-term borrowed funds................................................. 143,058 -- -- 143,058 Long-term debt............................................................ 59,046 -- -- 59,046 Other liabilities......................................................... 96,221 1,655 -- 97,876 Total liabilities.................................................... 4,696,140 140,842 -- 4,836,982 SHAREHOLDERS' EQUITY Common stock.............................................................. 75,307 4,603 (1,013)(1) 78,897 Additional paid-in capital................................................ 90,253 8,063 1,013(1) 99,329 Retained earnings......................................................... 294,632 4,561 -- 299,193(2) Unrealized gain on investment securities available for sale............... 2,504 -- -- 2,504 Less: Unearned common stock held by management recognition plans....................................................... (992) -- -- (992) Total shareholders' equity........................................... 461,704 17,227 -- 478,931 Total liabilities and shareholders' equity........................... $5,157,844 158,069 -- 5,315,913
(1) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. At September 30, 1996, CCBF and Salem had 15,061,334 and 1,841,232 shares outstanding, respectively. (2) The pro forma combined retained earnings do not reflect any Merger-related expenses which may be recognized or cost savings from operating efficiencies which may be realized in connection with the Merger. 18 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
CCBF PRO FORMA CCBF SALEM COMBINED (1) (DOLLARS IN THOUSANDS) INTEREST INCOME Loans and leases................................................................... $238,042 7,779 245,821 Investment securities.............................................................. 45,445 785 46,230 Other.............................................................................. 11,050 743 11,793 Total interest income........................................................... 294,537 9,307 303,844 INTEREST EXPENSE Deposits........................................................................... 126,938 4,564 131,502 Long-term debt and other borrowings................................................ 7,495 41 7,536 Total interest expense.......................................................... 134,433 4,605 139,038 Net interest income.................................................................. 160,104 4,702 164,806 Provision for loan and lease losses.................................................. 9,000 132 9,132 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........................ 151,104 4,570 155,674 OTHER INCOME Service charges on deposit accounts................................................ 21,571 107 21,678 Nondeposit fees and commissions.................................................... 12,424 776 13,200 Merchant discount.................................................................. 4,114 -- 4,114 Other.............................................................................. 7,454 13 7,467 Investment securities gains, net................................................... 510 -- 510 Total other income.............................................................. 46,073 896 46,969 OTHER EXPENSES Personnel expense.................................................................. 61,419 1,906 63,325 Net occupancy and equipment expense................................................ 16,261 322 16,583 FDIC special assessment............................................................ 8,400 -- 8,400 Other operating expenses........................................................... 35,579 858 36,437 Total other expenses............................................................ 121,659 3,086 124,745 INCOME BEFORE INCOME TAXES........................................................... 75,518 2,380 77,898 Income taxes......................................................................... 24,367 928 25,295 NET INCOME........................................................................... $ 51,151 1,452 52,603 INCOME PER SHARE: Primary............................................................................ $ 3.40 .83 3.35 Fully diluted...................................................................... 3.40 .80 3.34 WEIGHTED AVERAGE SHARES OUTSTANDING: Primary............................................................................ 15,041,590 1,743,707 15,721,636(2) Fully diluted...................................................................... 15,041,590 1,835,019 15,757,247(2)
(1) No pro forma adjustments are reflected in the Pro Forma Combined Condensed Statement of Income. (2) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. 19 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
CCBF PRO FORMA CCBF SALEM COMBINED (1) (DOLLARS IN THOUSANDS) INTEREST INCOME Loans and leases................................................................... $227,018 5,931 232,949 Investment securities.............................................................. 46,472 154 46,626 Other.............................................................................. 11,529 510 12,039 Total interest income........................................................... 285,019 6,595 291,614 INTEREST EXPENSE Deposits........................................................................... 124,880 2,972 127,852 Long-term debt and other borrowings................................................ 8,061 102 8,163 Total interest expense.......................................................... 132,941 3,074 136,015 Net interest income.................................................................. 152,078 3,521 155,599 Provision for loan and lease losses.................................................. 5,776 338 6,114 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........................ 146,302 3,183 149,485 OTHER INCOME Service charges on deposit accounts................................................ 18,937 57 18,994 Nondeposit fees and commissions.................................................... 10,419 465 10,884 Other.............................................................................. 10,532 34 10,566 Investment securities losses, net.................................................. (982) -- (982) Total other income.............................................................. 38,906 556 39,462 OTHER EXPENSES Personnel expense.................................................................. 59,039 1,545 60,584 Net occupancy and equipment expense................................................ 16,224 263 16,487 Other operating expenses........................................................... 37,510 705 38,215 Merger-related expense............................................................. 10,333 -- 10,333 Total other expenses............................................................ 123,106 2,513 125,619 INCOME BEFORE INCOME TAXES........................................................... 62,102 1,226 63,328 Income taxes......................................................................... 21,305 595 21,900 NET INCOME........................................................................... $ 40,797 631 41,428 NET INCOME PER SHARE: Primary............................................................................ $ 2.73 .49 2.68 Fully diluted...................................................................... 2.73 .46 2.67 WEIGHTED AVERAGE SHARES OUTSTANDING: Primary............................................................................ 14,947,700 1,292,033 15,451,593(2) Fully diluted...................................................................... 14,947,700 1,505,328 15,534,778(2)
(1) No pro forma adjustments are reflected in the Pro Forma Combined Condensed Statement of Income. (2) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. 20 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
CCBF PRO FORMA CCBF SALEM COMBINED (1) (DOLLARS IN THOUSANDS) INTEREST INCOME Loans and leases.................................................................... $305,165 8,145 313,310 Investment securities............................................................... 61,281 267 61,548 Other............................................................................... 17,068 925 17,993 Total interest income............................................................ 383,514 9,337 392,851 INTEREST EXPENSE Deposits............................................................................ 168,983 4,437 173,420 Long-term debt and other borrowings................................................. 10,421 134 10,555 Total interest expense........................................................... 179,404 4,571 183,975 Net interest income................................................................... 204,110 4,766 208,876 Provision for loan and lease losses................................................... 8,183 545 8,728 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES......................... 195,927 4,221 200,148 OTHER INCOME Service charges on deposit accounts................................................. 25,600 99 25,699 Non-deposit fees and commissions.................................................... 18,827 471 19,298 Other............................................................................... 8,840 358 9,198 Investment securities losses, net................................................... (978) -- (978) Total other income............................................................... 52,289 928 53,217 OTHER EXPENSES Personnel........................................................................... 79,298 2,061 81,359 Net occupancy and equipment......................................................... 20,929 353 21,282 Deposit and other insurance......................................................... 7,096 87 7,183 Merger-related expenses............................................................. 10,333 -- 10,333 Other operating..................................................................... 42,567 884 43,451 Total other expenses............................................................. 160,223 3,385 163,608 Income before income taxes............................................................ 87,993 1,764 89,757 Income taxes.......................................................................... 30,133 720 30,853 NET INCOME............................................................................ $ 57,860 1,044 58,904 NET INCOME PER SHARE: Primary............................................................................. $ 3.87 .72 3.80 Fully diluted....................................................................... 3.87 .67 3.78 WEIGHTED AVERAGE SHARES OUTSTANDING: Primary............................................................................. 14,949,063 1,447,700 15,513,666(2) Fully diluted....................................................................... 14,949,063 1,684,659 15,606,080(2)
(1) No pro forma adjustments are reflected in the Pro Forma Combined Condensed Statement of Income. (2) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. 21 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
CCBF PRO FORMA CCBF SALEM COMBINED (1) (DOLLARS IN THOUSANDS) INTEREST INCOME Loans and leases.................................................................... $243,577 4,620 248,197 Investment securities............................................................... 58,301 319 58,620 Other............................................................................... 8,021 381 8,402 Total interest income............................................................ 309,899 5,320 315,219 INTEREST EXPENSE Deposits............................................................................ 117,408 2,267 119,675 Long-term debt and other borrowings................................................. 8,958 130 9,088 Total interest expense........................................................... 126,366 2,397 128,763 Net interest income................................................................... 183,533 2,923 186,456 Provision for loan and lease losses................................................... 9,279 50 9,329 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES......................... 174,254 2,873 177,127 OTHER INCOME Service charges on deposit accounts................................................. 23,452 78 23,530 Non-deposit fees and commissions.................................................... 18,923 315 19,238 Other............................................................................... 6,255 253 6,508 Investment securities gains, net.................................................... 357 -- 357 Total other income............................................................... 48,987 646 49,633 OTHER EXPENSES Personnel........................................................................... 71,990 1,312 73,302 Net occupancy and equipment......................................................... 21,492 228 21,720 Deposit and other insurance......................................................... 9,032 170 9,202 Merger-related expense.............................................................. 1,100 -- 1,100 Other operating..................................................................... 43,673 500 44,173 Total other expenses............................................................. 147,287 2,210 149,497 Income before income taxes............................................................ 75,954 1,309 77,263 Income taxes.......................................................................... 30,843 506 31,349 NET INCOME............................................................................ $ 45,111 803 45,914 NET INCOME PER SHARE: Primary............................................................................. $ 2.94 .76 2.91 Fully diluted....................................................................... 2.94 .70 2.90 WEIGHTED AVERAGE SHARES OUTSTANDING: Primary............................................................................. 15,354,319 1,050,534 15,764,027(2) Fully diluted....................................................................... 15,354,319 1,267,064 15,848,474(2)
(1) No pro forma adjustments are reflected in the Pro Forma Combined Condensed Statement of Income. (2) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. 22 PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1993 (UNAUDITED)
CCBF PRO FORMA CCBF SALEM COMBINED (1) (DOLLARS IN THOUSANDS) INTEREST INCOME Loans and leases.................................................................... $196,588 3,872 200,460 Investment securities............................................................... 53,011 319 53,330 Other............................................................................... 5,313 266 5,579 Total interest income............................................................ 254,912 4,457 259,369 INTEREST EXPENSE Deposits............................................................................ 97,194 2,200 99,394 Long-term debt and other borrowings................................................. 4,762 107 4,869 Total interest expense........................................................... 101,956 2,307 104,263 Net interest income................................................................... 152,956 2,150 155,106 Provision for loan and lease losses................................................... 7,106 -- 7,106 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES......................... 145,850 2,150 148,000 OTHER INCOME Service charges on deposit accounts................................................. 23,184 95 23,279 Non-deposit fees and commissions.................................................... 16,143 131 16,274 Other............................................................................... 7,290 208 7,498 Investment securities gains, net.................................................... 2,962 -- 2,962 Total other income............................................................... 49,579 434 50,013 OTHER EXPENSES Personnel........................................................................... 66,718 1,034 67,752 Net occupancy and equipment......................................................... 20,034 182 20,216 Deposit and other insurance......................................................... 7,300 171 7,471 Other operating..................................................................... 35,400 489 35,889 Total other expenses............................................................. 129,452 1,876 131,328 Income before income taxes and cumulative changes in accounting principles............ 65,977 708 66,685 Income taxes.......................................................................... 21,913 250 22,163 INCOME BEFORE CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLES (2)......................... $ 44,064 458 44,522 INCOME BEFORE CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLE PER SHARE (2): Primary............................................................................. $ 3.10 .44 3.04 Fully diluted....................................................................... 3.05 .42 2.99 WEIGHTED AVERAGE SHARES OUTSTANDING Primary............................................................................. 14,230,099 1,039,676 14,635,573(3) Fully diluted....................................................................... 14,611,692 1,206,702 15,082,306(3)
(1) No pro forma adjustments are reflected in the Pro Forma Combined Condensed Statement of Income. (2) Income before cumulative changes in accounting principles and primary and fully diluted income per share before cumulative changes in accounting principles do not include the cumulative effect of changes in accounting principles resulting from the adoption by CCBF on January 1, 1993 of SFAS 106 and SFAS 109. The impact of adoption of SFAS 106 and SFAS 109 on net income, primary net income per share and fully diluted net income per share was a net charge of $1,371,000, $(.10) and $(.09), respectively. (3) Using an Exchange Ratio based on the Assumed CCBF Average Price for conversion of Salem Stock into CCBF Stock. 23 PRO FORMA CAPITALIZATION The following table sets forth: (i) the unaudited historical capitalization of CCBF as of September 30, 1996; (ii) the unaudited historical capitalization of Salem as of September 30, 1996; and (iii) the unaudited pro forma capitalization of CCBF and Salem assuming the Merger had been consummated on September 30, 1996. This financial information has been based on, and should be read in conjunction with, CCBF's unaudited financial statements, including the related notes thereto, which are incorporated by reference in this Prospectus/Proxy Statement Supplement (see "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"), and Salem's interim unaudited financial statements, including the related notes thereto, which are attached hereto and incorporated herein by reference.
PRO FORMA CCBF SALEM COMBINED (DOLLARS IN THOUSANDS) LONG-TERM DEBT CCBF: Advances from Federal Home Loan Bank with varying maturities to 2016 with rates from 3.0% to 9.25% (1)........................................................... $ 25,929 25,929 6 3/4% subordinated notes due 2003................................................ 32,985 32,985 Other long-term debt.............................................................. 132 132 Salem................................................................................ -- Total long-term debt............................................................ 59,046 -- 59,046 SHAREHOLDERS' EQUITY CCBF: Serial preferred stock. Authorized 5,000,000 shares; none issued.................. -- -- Common stock, $5 par value; 50,000,000 shares authorized; 15,061,334 shares issued and 15,779,414 pro forma combined issued, respectively (2)....................... 75,307 78,897 Additional paid-in capital........................................................ 90,253 99,329 Retained earnings (3)............................................................. 294,632 299,193 Plus: Unrealized gain on investment securities available for sale................. 2,504 2,504 Less: Unearned common stock held by management recognition plans.................. (992) (992) Salem: Preferred stock, $25.00 par value; 60,000 shares authorized; none issued.......... -- Common stock, $2.50 par value; 5,000,000 shares authorized, 1,841,232 issued................................................................ 4,603 Additional paid-in capital........................................................ 8,063 Retained earnings................................................................. 4,561 Total shareholders' equity...................................................... 461,704 17,227 478,931 Total long-term debt and shareholders' equity................................... $520,750 17,227 537,977
(1) These obligations are direct obligations of subsidiaries of CCBF and, as such, constitute claims against such subsidiaries prior to CCBF's equity interest therein. (2) Using an Exchange Ratio based on the Assumed Average CCBF Stock Price for conversion of Salem Stock into CCBF Stock. (3) The pro forma combined retained earnings do not reflect any Merger-related expenses which may be recognized or cost savings from operating efficiencies which may be realized in connection with the Merger. 24 SALEM TRUST BANK DESCRIPTION OF BUSINESS Salem is a state-chartered financial institution that is engaged in general commercial and retail banking in Forsyth and New Hanover Counties, North Carolina. Salem operates a single office in each of Winston-Salem and Wilmington, North Carolina. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to complement Salem's unaudited financial statements as of September 30, 1996 and 1995 and its audited financial statements as of December 31, 1995 and 1994 and for the three-years ended December 31, 1995 and should be read in conjunction therewith. RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET INCOME. Net income for the nine months ended September 30, 1996 totaled $1,452,000, an $821,000 increase over the same period in 1995. The increase was due primarily to a higher volume of loans. Primary earnings per share for the nine months ended September 30, 1996 amounted to $.83 compared to $.49 for the comparable period in 1995. Fully diluted earnings per share for the same periods were $.80 and $.46, respectively. Return on assets equaled 1.24% for the 1996 period compared to .82% for 1995. Return on average stockholders equity was 12.45% for the first nine months of 1996 and 8.18% for the same period in 1995. Net income for the year ended December 31, 1995 was $1 million which represented a 30.1% increase over net income of $803,000 for 1994. Despite this increase, primary earnings per share declined $.04 from the $.76 earned in 1994 due to the higher number of average shares outstanding during 1995. The increased average shares outstanding resulted from Salem's 1995 secondary stock offering which increased average shares outstanding by 37.8% from year end 1994 to year end 1995. Net income for 1994 increased 75.5% from $458,000 in 1993 to $803,000 in 1994. Primary earnings per share increased $.32 to $.76 per share for the year ended December 31, 1994. Fully diluted earnings per share totaled $.70 compared to $.42 in 1993. Return on average assets and average stockholders equity was .96% and 11.11%, respectively, for 1994 compared to .57% and 6.92%, respectively, for 1993. INTEREST-EARNING ASSETS. Salem's financial condition and results of operations can be analyzed in part by reviewing the changes and trends in its interest-earning assets and interest-bearing liabilities. Table 1 sets forth average balance sheets and net interest income analyses for the nine-month periods ended September 30, 1996 and 1995 and Table 3 discloses the same analyses for the three-year period ended December 31, 1995. 25 TABLE 1 AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (TAXABLE EQUIVALENT BASIS -- IN THOUSANDS) (1)
NINE MONTHS ENDED SEPTEMBER 30 1996 1995 INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE EARNING ASSETS: Loans (2)...................................................... $112,854 7,779 9.21% 82,601 5,931 9.60 U.S. Treasury and U.S. Government agencies and corporations.... 16,785 756 6.02 3,284 141 5.74 States and political subdivisions.............................. 1,484 70 6.30 91 3 4.41 Equity and other securities.................................... 414 32 10.32 287 16 7.45 Other earning assets........................................... 18,770 743 5.29 11,856 510 5.75 Total earning assets........................................... 150,307 9,380 8.34% 98,119 6,601 8.99 NON-EARNING ASSETS: Cash and due from banks........................................ 4,276 3,681 Premises and equipment......................................... 1,884 1,782 All other assets, net.......................................... (131) (353) Total assets................................................... $156,336 103,229 INTEREST-BEARING LIABILITIES: Savings and time deposits...................................... $126,997 4,564 4.80% 81,733 2,972 4.86 Other borrowed funds........................................... 915 41 5.99 2,257 102 6.04 Total interest-bearing liabilities............................. 127,912 4,605 4.81% 83,990 3,074 4.89 OTHER LIABILITIES AND SHAREHOLDERS' EQUITY: Demand deposits................................................ 11,233 7,937 Other liabilities.............................................. 1,613 989 Shareholders' equity........................................... 15,578 10,313 Total liabilities and shareholders' equity..................... $156,336 103,229 NET INTEREST INCOME AND NET INTEREST MARGIN (3)................ $4,775 4.24% 3,527 4.81 INTEREST RATE SPREAD (4)....................................... 3.53% 4.10
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state tax rates where applicable. (2) Loan fees of $194,000 and $149,000 for the nine months ended September 30, 1996 and 1995, respectively, are included in interest income. (3) Net interest margin is computed by dividing net interest income by total earning assets. (4) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate. As shown in Table 1, average earning assets at September 30, 1996 grew $52.2 million (or 53%) from the September 30, 1995 level. Average loan growth during this period of $30.3 million was due primarily to increased loan demand from the Wilmington office which opened in the first quarter of 1995. 26 Table 2 presents Salem's outstanding loans by category as of September 30, 1996 and 1995 and for each of the past five years: TABLE 2 LOANS (IN THOUSANDS)
AS OF SEPTEMBER 30 AS OF DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 Commercial, financial and agricultural........... $ 19,902 16,934 18,307 9,879 9,765 9,395 16,758 Real estate -- construction...................... 18,027 9,247 12,253 4,259 2,040 3,035 2,820 Real estate -- mortgage.......................... 74,818 70,052 71,297 48,765 43,965 41,309 34,186 Installment loans to individuals................. 3,292 3,213 3,736 3,512 3,940 4,216 5,029 Credit card receivables.......................... 668 622 638 551 737 545 420 Total loans and lease financing.................. $116,707 100,068 106,231 66,966 60,447 58,500 59,213
Despite increases in average loans, loans as a percentage of total average interest-earning assets fell from 84% for the nine months ended September 30, 1995 to 75% for the same period in 1996. The shift from loans to lower-yielding investment securities and other interest-earning assets was a result of management's decision to improve Salem's overall liquidity position. The mix of average interest-earning assets also shifted during the year ended December 31, 1995. Average loans outstanding comprised 81% of average earning assets for 1995 compared to 79% for 1994. This shift occurred due to strong loan demand. 27 As shown in Table 3, average earning assets for the year ended December 31, 1995 grew $30 million over the level for the prior year, with average loan growth comprising $26.3 million of the increase. Most of this growth resulted from the opening of the Wilmington office. The higher loan levels were funded primarily by increases in savings and time deposits. TABLE 3 AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (TAXABLE EQUIVALENT BASIS -- IN THOUSANDS) (1)
YEARS ENDED DECEMBER 31 1995 1994 1993 INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE EARNING ASSETS: Loans (2)....................................... $ 87,414 8,145 9.32% 61,111 4,620 7.56 59,388 3,872 U.S. Treasury and U.S. Government agencies and corporations.................................. 4,215 241 5.72 5,800 259 4.47 5,655 239 States and political subdivisions............... 74 5 6.76 313 16 5.11 377 13 Equity and other securities..................... 458 31 6.77 1,077 62 5.76 995 90 Other earning assets............................ 15,589 925 5.93 9,511 380 4.00 10,024 266 Total earning assets............................ 107,750 9,347 8.67% 77,812 5,337 6.86 76,439 4,480 NON-EARNING ASSETS: Cash and due from banks......................... 3,736 2,349 2,478 Premises and equipment.......................... 1,809 1,741 1,735 All other assets, net........................... 586 1,579 232 Total assets.................................... $113,881 83,481 80,884 INTEREST-BEARING LIABILITIES: Savings and time deposits....................... $ 89,860 4,437 4.94% 65,025 2,267 3.49 65,424 2,199 Other borrowed funds............................ 3,195 134 4.19 4,015 130 3.24 2,039 107 Total interest-bearing liabilities.............. 93,055 4,571 4.91% 69,040 2,397 3.47 67,463 2,306 OTHER LIABILITIES AND SHAREHOLDERS' EQUITY: Demand deposits................................. 8,554 6,530 6,202 Other liabilities............................... 1,168 685 601 Shareholders' equity............................ 11,104 7,226 6,618 Total liabilities and shareholders' equity...... $113,881 83,481 80,884 NET INTEREST INCOME AND NET INTEREST MARGIN (3).................................... $4,776 4.43% 2,940 3.78 2,174 Interest rate spread (4)........................ 3.76% 3.39 [ta][ta] 1993 AVERAGE YIELD/ RATE EARNING ASSETS: Loans (2)....................................... 6.52 U.S. Treasury and U.S. Government agencies and corporations.................................. 4.23 States and political subdivisions............... 3.45 Equity and other securities..................... 9.05 Other earning assets............................ 2.65 Total earning assets............................ 5.86 NON-EARNING ASSETS: Cash and due from banks......................... Premises and equipment.......................... All other assets, net........................... Total assets.................................... INTEREST-BEARING LIABILITIES: Savings and time deposits....................... 3.36 Other borrowed funds............................ 5.25 Total interest-bearing liabilities.............. 3.42 OTHER LIABILITIES AND SHAREHOLDERS' EQUITY: Demand deposits................................. Other liabilities............................... Shareholders' equity............................ Total liabilities and shareholders' equity...... NET INTEREST INCOME AND NET INTEREST MARGIN (3).................................... 2.84 Interest rate spread (4)........................ 2.44
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state tax rates where applicable. (2) The average loan balances include nonaccruing loans. Loan fees of $194,000, $88,000 and $76,000 for the years ended December 31, 1995, 1994, and 1993, respectively, are included in interest income. (3) Net interest margin is computed by dividing net interest income by total earning assets. (4) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate. Salem's investment securities portfolio is comprised primarily of U. S. Government and state, county and municipal obligations. The portfolio can be segregated into three possible categories: available for sale, held to maturity and held for trading. Salem categorizes the majority of its investment securities as held to maturity. Salem has never held any investments for trading. Table 4 sets forth detailed schedules of investment securities as of September 30, 1996 and 1995 and as of December 31 for the three-year period ended December 31, 1995. As of September 30, 1996 and December 31, 1995, the carrying value of Salem's investments held to maturity exceeded their market value by $150,000 and $14,000, respectively. 28 TABLE 4 INVESTMENT SECURITIES PORTFOLIO (IN THOUSANDS)
AS OF SEPTEMBER 30 AS OF DECEMBER 31 1996 1995 1995 1994 1993 AMORTIZED CARRYING AMORTIZED CARRYING AMORTIZED CARRYING AMORTIZED CARRYING AMORTIZED COST VALUE COST VALUE COST VALUE COST VALUE COST SECURITIES AVAILABLE FOR SALE States and political subdivisions............ $ 2,000 2,000 -- -- -- -- -- -- -- Equity securities......... 462 462 295 295 295 295 269 269 -- Total securities available for sale............ $ 2,462 2,462 295 295 295 295 269 269 -- Maturity and Yield Schedule as of September 30, 1996 WEIGHTED CARRYING AVERAGE VALUE YIELD States and political subdivisions: Within 1 year........... $ 2,000 5.25% Equity securities......... 462 5.50 Total securities available for sale............ $ 2,462 5.30% AS OF SEPTEMBER 30 AS OF DECEMBER 31 1996 1995 1995 1994 1993 CARRYING MARKET CARRYING MARKET CARRYING MARKET CARRYING MARKET CARRYING VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE SECURITIES HELD TO MATURITY U.S. Treasury............. $ 7,477 7,415 1,492 1,494 500 503 1,476 1,466 1,482 U.S. Governmental agencies and corporations........ 9,303 9,216 1,489 1,485 16,650 16,632 2,975 2,941 3,982 States and political subdivisions............ 25 24 24 25 24 25 500 498 -- Corporate debt and other securities.............. -- -- -- -- -- -- -- -- 2,821 Total securities held to maturity............ $16,805 16,655 3,005 3,004 17,174 17,160 4,951 4,905 8,285 Maturity and Yield Schedule as of September 30, 1996 WEIGHTED CARRYING AVERAGE VALUE YIELD U.S. Treasury: Within 1 year........... $ 2,515 5.49% After 1 but within 5 years................... 4,962 5.74 Total U.S. Treasury... 7,477 5.66 U.S. Governmental agencies and corporations: Within 1 year........... 7,307 5.32 After 1 but within 5 years................... 1,996 6.39 Total U.S. Govenmental agencies and corporations........ 9,303 5.55 States and political subdivisions: After 1 but within 5 years................... 25 5.26 Total securities held to maturity............ $16,805 5.60% 1993 CARRYING VALUE SECURITIES AVAILABLE FOR SALE States and political subdivisions............ -- Equity securities......... -- Total securities available for sale............ -- 1993 MARKET VALUE SECURITIES HELD TO MATURITY U.S. Treasury............. 1,480 U.S. Governmental agencies and corporations........ 3,988 States and political subdivisions............ -- Corporate debt and other securities.............. 2,801 Total securities held to maturity......... 8,269
29 INTEREST-BEARING LIABILITIES. Interest-bearing liabilities, Salem's primary source of funding, are mainly comprised of savings and time deposits. Table 5 provides a summary of average total deposits and average rates paid thereon as of September 30, 1996 and 1995 and for the three-year period ended December 31, 1995. Demand deposits comprise approximately 10% of total deposits and serve as an interest-free funding source for interest-earning assets. Included within savings and time deposits are higher-costing deposits in denominations greater than $100,000. For the nine months ended September 30, 1996 and year ended December 31, 1995, average deposits greater than $100,000 amounted to $52.7 million and $48.8 million, respectively. TABLE 5 AVERAGE TOTAL DEPOSITS AND RATES (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE Savings and time deposits: Savings and NOW accounts................. $ 10,831 1.63% 8,298 2.11 8,638 2.06 7,298 1.99 6,087 Money market accounts.................... 28,986 3.86 19,071 3.55 20,538 3.66 19,459 2.72 20,386 Time deposits............................ 87,180 5.51 54,364 5.74 60,684 5.78 38,268 4.16 38,951 Total savings and time deposits.......... 126,997 4.80% 81,733 4.86 89,860 4.94 65,025 3.49 65,424 Demand deposits.......................... 11,233 7,937 8,554 6,530 6,202 Total deposits........................... $138,230 89,670 98,414 71,555 71,626 1993 RATE Savings and time deposits: Savings and NOW accounts................. 2.14 Money market accounts.................... 2.60 Time deposits............................ 3.95 Total savings and time deposits.......... 3.36 Demand deposits.......................... Total deposits...........................
Salem's convertible subordinated notes are included within other borrowed funds in Table 1 and Table 2. The notes, which bore interest at 6%, were called in May 1996 and averaged $913,000 in the nine months ended September 30, 1996 and $2.1 million for the same period in 1995. No convertible subordinated notes were outstanding at September 30, 1996. NET INTEREST INCOME. Net interest income, which is Salem's principal source of earnings, has increased steadily over the past three years in conjunction with its balance sheet growth. Tables 1, 2 and 6 present information about net interest income earned and the effects of changes in rate and volume thereon. As shown in Table 6, decreases in rates earned on interest-earning assets during the nine-month period in 1996 ($447,000) were more than offset by increases in interest income due to higher volume ($3.2 million). However, due to the previously discussed shift in the mix of interest-earning assets and the changes in rates earned, the yield on interest-earning assets fell from 8.99% in 1995 to 8.34% in 1996. Interest expense was impacted by the lower rates paid on savings and time deposits which was more than offset by the higher volume of accounts. The rate paid on other borrowed funds remained relatively constant from September 30, 1995 to September 30, 1996. As a result of these factors, the rate paid on interest-bearing liabilities fell from 4.89% for the nine-month period ended September 30, 1995 to 4.81% for 1996. Consequently, the net interest margin on a taxable equivalent basis fell from 4.81% for 1995 to 4.24% for 1996 and the interest rate spread tightened from 4.10% to 3.53% for the same periods. 30 TABLE 6 VOLUME AND RATE VARIANCE ANALYSIS (TAXABLE EQUIVALENT BASIS -- IN THOUSANDS) (1)
YEARS ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1994 VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME VARIANCE (2) VARIANCE (2) VARIANCE VARIANCE (2) VARIANCE (2) VARIANCE VARIANCE (2) INTEREST INCOME: Loans...................... $2,243 (395) 1,848 2,283 1,242 3,525 119 U.S. Treasury and U.S. Government agencies and corporations............... 608 7 615 (81) 63 (18) 6 States and political subdivisions............... 65 2 67 (15) 4 (11) (2) Equity and other securities................. 9 7 16 (40) 9 (31) 7 Other earning assets....... 301 (68) 233 314 231 545 (16) Total interest income.... 3,226 (447) 2,779 2,461 1,549 4,010 114 INTEREST EXPENSE: Savings and time deposits................... 1,653 (61) 1,592 1,038 1,132 2,170 (14) Other borrowed funds....... (60) (1) (61) (30) 34 4 75 Total interest expense... 1,593 (62) 1,531 1,008 1,166 2,174 61 INCREASE (DECREASE) IN NET INTEREST INCOME.......... $1,633 (385) 1,248 1,453 383 1,836 53 < YEARS ENDED DECEMBER 31 1994 RATE TOTAL VARIANCE (2) VARIANCE < INTEREST INCOME: Loans...................... 629 748 U.S. Treasury and U.S. Government agencies and corporations............... 14 20 States and political subdivisions............... 5 3 Equity and other securities................. (35) (28) Other earning assets....... 130 114 Total interest income.... 743 857 INTEREST EXPENSE: Savings and time deposits................... 82 68 Other borrowed funds....... (52) 23 Total interest expense... 30 91 INCREASE (DECREASE) IN NET INTEREST INCOME.......... 713 766
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state tax rates where applicable. (2) The rate /volume variance for each category has been allocated on a consistent basis between rate and volume variances based on the percentage of the rate or volume variance to the sum of the absolute value of the two variances. For the year ended December 31, 1995, average yields on earning assets increased significantly from those earned in 1994. Loan yields increased from 7.56% in 1994 to 9.32% in 1995 due to a higher volume of loans earning higher rates. Increases in volume accounted for two-thirds of the increase in loan interest income as reflected in Table 6. Rates paid on savings and time deposits increased from 3.49% for 1994 to 4.94% for 1995 due to increased volume and increased rate. A new time deposit product offered in the Wilmington market caused the cost of interest-bearing deposits to go up 50 to 60 basis points but brought in significant amounts of deposits. The combination of these factors resulted in the net interest margin rising 65 basis points to 4.43% and the interest rate spread growing 37 basis points during 1995. OTHER INCOME AND EXPENSES. Other income rose $340,000 in the nine months ended September 30, 1996 from the $556,000 earned in the 1995 period. Service charges on deposit accounts rose to $107,000 from 1995's $57,000 due to the previously discussed increased deposit volume. Income from trust activities increased $113,000 from 1995 due to the higher level of assets managed. Salem's trust operations provide investment management services to individuals and companies and operational services to institutional clients. Salem's investment operations provide discount brokerage services to individuals and institutional clients. Fees from investment operations decreased $11,000 to $83,000 due to decreased trading volumes. Salem's mortgage operations generate income through the sale of mortgage loans that are originated by Salem or are purchased by it for resale. All purchased loans are presold to secondary market investors prior to their purchase by Salem. Income from the mortgage operation increased $74,000 to $335,000 for the nine months ended June 30, 1996. Other expenses, comprised primarily of personnel expenses, increased $573,000 from 1995's level to $3.1 million for the nine months ended September 30, 1996. Personnel expense increased $361,000 due in part to the Wilmington branch being open only four months during the nine months ended September 30, 1995 but all of the nine month period ended September 30, 1996. Equipment and occupancy expense increased between the two nine-month periods for the same reason. Deposit and other insurance experienced a significant drop from $78,000 for the nine months ended September 30, 1995 to $25,000 for the same period in 1996 due to a reduction in FDIC deposit premium rates. The provision for loan losses fell from $338,000 for the nine months ended September 30, 1995 to $132,000 for the same period in 1996. The decreased provision was due primarily to the low level of nonperforming assets and nonaccrual loans as will be discussed below. 31 For the year ended December 31, 1995, other income increased $282,000. Of that increase, $239,000 is due to higher levels of activity in Salem's mortgage, trust and investment operations. Mortgage operations increased due in part to the opening of a mortgage origination office in Wilmington and due to improved overall volumes. As of December 31, 1995, the trust operation managed assets totaling $195.4 million versus $78.4 million at year end 1994. The investment operation had assets in brokerage accounts totaling $21.2 million at year end 1995 compared to $26.2 million at year end 1994. Other expenses increased $1.2 million in 1995 over 1994. The largest increase was experienced in personnel expense, $750,000, due primarily to the opening of the Wilmington office during 1995. Net occupancy and equipment also increased $125,000 for this same reason. FDIC insurance expense fell 48% to $88,000 for 1995 due to the previously discussed reduction in deposit assessment rates. The provision for loan losses totaled $545,000 for 1995 compared to $50,000 for 1994. The increased provision was a result of the dramatic loan growth experienced in 1995, not from an increase in nonperforming loans. For the year ended December 31, 1994, other income increased $212,000 over the prior year's level. The largest increases were experienced in higher levels of fees earned from the mortgage, trust and investment operations. Assets managed by trust operations grew from $36.5 million at year end 1993 to $78.4 million at year end 1994. Other expenses increased $333,000 from 1993 to 1994 due primarily to increased personnel expense. Salem made a $50,000 provision for loan losses in 1994; no provision was deemed necessary in 1993 due to the level of the allowance for loan losses in comparison to the perceived risks in the loan portfolio. Table 7 sets forth certain of Salem's operating efficiency ratios. Salem's noninterest income as a percentage of average assets has improved steadily over the prior three years due to the previously discussed increases in fee revenues. The noninterest expense items as a percentage of average assets for both the nine months ended September 30, 1995 and the year ended December 31, 1995 were adversely impacted by non-recurring expenses incurred in the March 1995 opening of the Wilmington office, including overtime paid to employees, marketing expenses and legal and consulting fees. Salem's operating efficiency ratio (noninterest income as a percentage of net interest income and other income) has improved steadily from year end 1993 through September 30, 1996. TABLE 7 OPERATING EFFICIENCY RATIOS (ANNUALIZED)
NINE MONTHS ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 As a percentage of average assets: Noninterest income................................................... .77% .72 .81 .77 .54 Personnel expense.................................................... 1.63 2.00 1.81 1.57 1.28 Occupancy and equipment expense...................................... .28 .34 .31 .27 .23 Other operating expense.............................................. .73 .91 .85 .80 .81 Total noninterest expense............................................ 2.64 3.25 2.97 2.64 2.32 Net overhead (noninterest expense less noninterest income)........... 1.87% 2.53 2.16 1.87 1.78 Noninterest expense as a percentage of net interest income and other income (1)........................................................... 54.42% 61.55 59.34 61.63 71.93
(1) The taxable equivalent basis is computed using 35% federal and 7.75% state tax rates where applicable. NONPERFORMING LOANS Nonperforming loans consist of nonaccrual and restructured loans. Risk assets are comprised of nonperforming loans and accruing loans 90 days or more past due. As shown in Table 8, Salem has experienced very few instances of non- performing loans or risk assets over the past five years. 32 TABLE 8 NONPERFORMING AND RISK ASSETS (IN THOUSANDS)
AS OF SEPTEMBER 30 AS OF DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 Nonaccrual loans...................................... $ -- -- -- 1 -- -- -- Restructured loans.................................... -- 5 -- 6 7 8 8 Total nonperforming assets.......................... -- 5 -- 7 7 8 8 Accruing loans 90 days or more past due............... -- -- -- -- 50 -- -- Total risk assets..................................... $ -- 5 -- 7 57 8 8 Ratio of nonperforming assets to: Loans outstanding................................... -- % -- -- .01 .01 .01 .01 Total assets........................................ -- -- -- .01 .01 .01 .01 Ratio of risk assets to: Loans outstanding................................... -- -- -- .01 .09 .01 .01 Total assets........................................ -- -- -- .01 .06 .01 .01 Allowance for loan losses to risk assets.............. -- x 219.00 -- 108.14 12.53 89.25 84.25
ALLOWANCE FOR LOAN LOSSES Salem's management analyzes the growth and risk characteristics of the loan portfolio under current and anticipated future economic conditions to evaluate the adequacy of the allowance for loan losses. The financial condition of the borrower, value of collateral and general economic projections are among the factors considered in evaluation of the allowance's adequacy. Management strives to maintain the allowance at a level sufficient to absorb both potential losses on identified nonperforming assets as well as projected general losses. The allowance for loan losses stood at $1.4 million as of September 30, 1996 and $1.3 million as of December 31, 1995. Table 9 summarizes the allowance for loan losses for the nine months ended September 30, 1996 and 1995 and for the prior five years and Table 10 sets forth the allocation of the allowance for loan losses to the various types of loans as of September 30, 1996 and 1995 and as of the end of the year for the prior five years. Management considers the allowance at September 30, 1996 adequate to absorb future losses that relate to loans outstanding as of that date. TABLE 9 SUMMARY OF LOAN LOSS EXPERIENCE AND THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31 1996 1995 1995 1994 1993 1992 1991 Balance at beginning of period............................ $ 1,302 757 757 714 714 674 556 Loan losses charged to allowance: Installment loans to individuals........................ -- -- -- (9) -- -- -- Credit card receivables................................. -- -- -- (1) -- -- -- Total loan losses charged to allowance................ -- -- -- (10) -- -- -- Recoveries of loans previously charged off: Installment loans to individuals........................ -- -- -- 3 -- -- -- Net charge-offs........................................... -- -- -- (7) -- -- -- Provision charged to operations........................... 132 338 545 50 -- 40 118 Balance at end of period.................................. $ 1,434 1,095 1,302 757 714 714 674 Loans outstanding at end of period........................ $116,707 100,068 106,231 66,966 60,447 58,500 59,213 Ratio of allowance for loan losses to loans outstanding at end of period........................................... 1.27% 1.09 1.23 1.13 1.18 1.22 1.14 Average loans outstanding................................. $112,854 82,601 87,414 61,111 59,388 55,702 46,917 Ratio of net charge-offs of loans to average loans........ --% -- -- 0.01 -- -- --
33 TABLE 10 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (1) (IN THOUSANDS)
AS OF SEPTEMBER 30 AS OF DECEMBER 31 1996 1995 1995 1994 1993 % OF % OF % OF % OF AMOUNT OF LOAN IN AMOUNT OF LOAN IN AMOUNT OF LOAN IN AMOUNT OF LOAN IN AMOUNT OF ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE ALLOCATED CATEGORY ALLOCATED CATEGORY ALLOCATED CATEGORY ALLOCATED CATEGORY ALLOCATED Commercial, financial and agricultural...... $ 359 17.1 274 16.9 326 17.2 190 14.8 179 Real estate-construction... 215 15.4 164 9.2 195 11.6 113 6.4 107 Real estate-mortgage.... 215 64.1 164 70.0 195 67.1 113 72.8 107 Installment loans to individuals........... 359 2.8 274 3.3 326 3.5 189 5.2 179 Credit card receivables........... 143 .6 109 .6 130 .6 76 .8 71 Unallocated portion of reserve............... 143 -- 110 -- 130 -- 76 -- 71 Total................... $ 1,434 100.0% 1,095 100.0 1,302 100.0 757 100.0 714 AS OF DECEMBER 31 1992 1991 % OF % OF % OF LOAN IN AMOUNT OF LOAN IN AMOUNT OF LOAN IN EACH ALLOWANCE EACH ALLOWANCE EACH CATEGORY ALLOCATED CATEGORY ALLOCATED CATEGORY Commercial, financial and agricultural...... 16.2 179 16.1 169 28.3 Real estate-construction... 3.4 107 5.2 101 4.8 Real estate-mortgage.... 72.7 107 70.6 101 57.7 Installment loans to individuals........... 6.5 179 7.2 169 8.5 Credit card receivables........... 1.2 71 .9 67 .7 Unallocated portion of reserve............... -- 71 -- 67 -- Total................... 100.0 714 100.0 674 100.0
(1) The allocation of the allowance for loan losses by loan type is based on management's on-going evaluation of the adequacy of the allowance for loan losses as referenced above. Since the factors involved in such an evaluation are subject to change, the allocation of the allowance 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. 34 CAPITAL RESOURCES Prior to 1995, Salem's primary source of equity capital was the retention of earnings. During May of 1996, Salem's convertible subordinated notes were called for redemption and substantially all were converted into shares of Salem's stock which added $2.1 million of equity capital. During 1995, Salem completed a $5 million secondary stock offering which resulted in the issuance of 556,000 additional shares of Salem Stock. The net proceeds from the offering were used primarily for Salem's expansion in the Wilmington market. The majority of these shares were purchased by residents of the Wilmington market. Dividends of $.10 and $.08 per share were paid in the nine months ended September 30, 1996 and the year ended December 31, 1994, respectively. No dividends were paid in 1995 or prior to 1994. Banks are required to comply with the risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be "Tier 1" capital, principally consisting of common shareholders equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock less certain goodwill items. The remainder, "Tier 2" capital, may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general reserve for loan and lease losses. In addition to the risk-based capital guidelines, regulatory agencies have adopted a minimum leverage capital ratio under which a bank must maintain a minimum level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other banks are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum. Salem continues to maintain higher capital ratios than required under regulatory guidelines. Salem's Tier 1 capital, total capital and leverage ratios are 16.08%, 17.33% and 11.04%, respectively, at September 30, 1996. LIQUIDITY AND INTEREST-SENSITIVITY Liquidity is the ability to meet present and future financial obligations, particularly the funding of loans or withdrawal of deposits. Management ensures adequate liquidity by maintaining a significant portion of Salem's earning assets in short-term instruments that are easily convertible to cash and by monitoring and improving its ability to attract deposits and alternative sources of funds in the money and capital markets. Deposits from Salem's customers are its primary source of funding. Core deposits, defined as deposits less than $100,000, grew 27% from September 30, 1995 to September 30, 1996. In addition, Salem utilizes deposits greater than $100,000 as a source of funding. During the nine months ended September 30, 1996, these deposits averaged from 35% to 40% of total average deposits. Due to the nature of Salem's business, individual deposit relationships are higher than those at a traditional commercial bank. Consequently, unlike traditional commercial banks, Salem considers deposits greater than $100,000 to be relatively stable. At September 30, 1996, time deposits in amounts of $100,000 or more totaled $53.8 million. The following is a remaining maturity schedule of these deposits (in thousands):
3 OVER 3 MONTHS THROUGH OVER 6 OR LESS 6 MONTHS MONTHS TOTAL Jumbo deposits............................... $25,985 25,664 2,130 $ 53,779
Another source of funding was Salem's convertible subordinated notes until their call and redemption in May of 1996. In February 1993, Salem issued $2.1 million of these notes bearing interest at 6%. Additional sources of liquidity are short-term borrowed funds such as federal funds purchased or repurchase agreements. In addition, Salem has the ability to access a $10 million line of credit maintained with the Federal Home Loan Bank. Maturities of investment securities also provide liquidity. Management is also concerned with managing Salem's balance sheet to maintain relatively stable net interest margins despite changes in the interest rate environment. This objective is achieved by balancing the impact of changes in interest rates on interest-sensitive assets and interest-sensitive liabilities. Management monitors Salem's interest-sensitivity by means of gap analyses prepared on a periodic basis. Table 11 sets forth Salem's gap analysis as of September 30, 1996. In reviewing this gap analysis, it is important to note that such an analysis represents Salem's sensitivity position as of a point in time and can be changed significantly by management within a short period of time. 35 TABLE 11 INTEREST-SENSITIVITY ANALYSIS (1) (IN THOUSANDS)
3 MONTH NON- 3 MONTH TO 1 YEAR TOTAL INTEREST SENSITIVE SENSITIVE SENSITIVE SENSITIVE TOTAL Earning assets: Federal funds sold and other short-term investments................... $ 14,055 -- 14,055 -- 14,055 Investment securities................................................. 10,606 4,199 14,805 4,462 19,267 Loans................................................................. 105,611 3,238 108,849 7,858 116,707 Total earning assets................................................ 130,272 7,437 137,709 12,320 150,029 Interest-bearing liabilities: Savings deposits...................................................... 36,938 -- 36,938 -- 36,938 Other time deposits................................................... 40,425 42,949 83,374 2,052 85,426 Total interest-bearing liabilities.................................. 77,363 42,949 120,312 2,052 122,364 Interest-sensitivity gap.............................................. $ 52,909 (35,512) 17,397 Cumulative gap........................................................ $ 52,909 17,397 Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities......................................................... 1.68x 1.14 Cumulative gap to total earning assets................................ 40.61% 12.63
(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. Salem utilizes strategic pricing of asset and liability accounts to control interest rate volatility. Most of Salem's loans are tied to the prime rate which would result in greater asset sensitivity. However, most of Salem's deposits also are of shorter-term and would reprice soon after changes in the prime rate. While there is some lag before interest-bearing deposits reprice, Salem's strategy is to match up the repricing periods of their interest-earning assets and interest-bearing liabilities as much as possible. Table 12 presents a schedule of loan maturity distribution and interest rate sensitivity at September 30, 1996 and December 31, 1995. TABLE 12 MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (IN THOUSANDS)
AS OF SEPTEMBER 30, 1996 AS OF DECEMBER 31, 1995 COMMERCIAL, COMMERCIAL, FINANCIAL AND REAL ESTATE- FINANCIAL AND REAL ESTATE- AGRICULTURAL CONSTRUCTION TOTAL AGRICULTURAL CONSTRUCTION Due in one year or less......................... $10,748 18,027 28,775 12,631 12,253 Due after one year through five years: Fixed interest rates.......................... 1,198 -- 1,198 1,025 -- Floating interest rates....................... 7,359 -- 7,359 4,101 -- Due after five years: Fixed interest rates.......................... 83 -- 83 110 -- Floating interest rates....................... 514 -- 514 440 -- Total........................................... $19,902 18,027 37,929 18,307 12,253 AS OF DECEMBER 31, 1995 TOTAL Due in one year or less......................... 24,884 Due after one year through five years: Fixed interest rates.......................... 1,025 Floating interest rates....................... 4,101 Due after five years: Fixed interest rates.......................... 110 Floating interest rates....................... 440 Total........................................... 30,560
Salem does not utilize off-balance sheet or synthetic hedge instruments such as derivatives to control interest rate volatility. 36 ACCOUNTING ISSUES In March 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for those to be disposed of. This statement requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Adoption of SFAS No. 121 is required for fiscal years beginning after December 15, 1995. Salem adopted this statement on January 1, 1996 without any impact on its financial statements. Salem adopted SFAS No. 123, "Accounting for Stock-Based Compensation" on January 1, 1996. SFAS No. 123 establishes a fair value method of accounting for such compensation plans. Stock-based compensation plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or in which an entity issues its equity instruments to acquire goods or services from nonemployees. Under SFAS No. 123, these types of transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measured. While SFAS No. 123 encourages all entities to adopt the fair value method of accounting, it does allow an entity to continue to measure the compensation cost of stock compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). Most fixed stock option plans (the most common type of stock compensation plan) have no intrinsic value at grant date, and under APB Opinion No. 25 no compensation cost is recognized. Entities electing to continue using the guidance under APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting prescribed by SFAS No. 123 had been applied. Salem intends to continue measuring stock compensation expense under APB Opinion No. 25. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of Statement No. 65." The statement amends SFAS No. 65 to require that the rights to service mortgage loans for others, however those servicing rights are acquired, be recognized as separate assets, eliminating the previously existing accounting distinction between servicing rights acquired through purchase transactions and those acquired through loan originations. SFAS No. 122 is required to be adopted and applied prospectively for fiscal years beginning after December 15, 1995 to transactions involving the sale or securitization of mortgage loans with servicing rights retained. Salem adopted this statement on January 1, 1996 without any impact on its financial statements. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125") was issued in June of 1996. It provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities using a financial-components approach that focuses on control of the asset or liability. SFAS No. 125 requires that an entity recognize only assets it controls and liabilities it has incurred and should derecognize assets only when control has been surrendered and derecognize liabilities only when they have been extinguished. Adoption of SFAS No. 125 will impact transactions in which the transferor has some continuing involvement with the assets transferred or with the transferee including recourse, servicing, agreements to reacquire and options written or held. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application of SFAS No. 125 is not permitted. Salem is in the process of assessing the impact of adopting SFAS No. 125 but does not believe that its adoption will have a material impact upon Salem's financial condition or results of operations. 37 SUPERVISION AND REGULATION The following table sets forth the regulatory capital positions of CCBF and Salem on a historical basis, and of CCBF on a pro forma combined basis, as of September 30, 1996:
RISK-BASED CAPITAL LEVERAGE CAPITAL TIER 1 TOTAL AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT % OF ASSETS (DOLLARS IN THOUSANDS) CCBF Actual......................................... $429,365 8.53 $429,365 11.66 $508,379 13.81 Minimum capital standard....................... 110,432 3.00 147,243 4.00 294,485 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $318,933 5.53 $282,122 7.66 $213,894 5.81 SALEM Actual......................................... $ 17,227 11.04 $ 17,227 16.08 $ 18,566 17.33 Minimum capital standard....................... 3,213 3.00 4,284 4.00 8,568 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $ 14,014 8.04 $ 12,943 12.08 $ 9,998 9.33 CCBF PRO FORMA COMBINED Actual......................................... $446,592 8.60 $446,592 11.79 $526,945 13.91 Minimum capital standard....................... 113,645 3.00 151,527 4.00 303,053 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $332,947 5.60 $295,065 7.79 $223,892 5.91
The following table sets forth the regulatory capital positions of CCB Bank and Salem on a historical basis, and of CCB Bank on a pro forma combined basis, as of September 30, 1996:
RISK-BASED CAPITAL LEVERAGE CAPITAL TIER 1 TOTAL AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT % OF ASSETS (DOLLARS IN THOUSANDS) CCB BANK Actual......................................... $413,805 8.37 $413,805 11.40 $462,420 12.74 Minimum capital standard....................... 108,930 3.00 145,240 4.00 290,480 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $304,875 5.37 $268,565 7.40 $171,940 4.74 SALEM Actual......................................... $ 17,227 11.04 $ 17,227 16.08 $ 18,566 17.33 Minimum capital standard....................... 3,213 3.00 4,284 4.00 8,568 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $ 14,014 8.04 $ 12,943 12.08 $ 9,998 9.33 CCB BANK PRO FORMA COMBINED Actual......................................... $431,032 8.45 $431,032 11.53 $480,986 12.87 Minimum capital standard....................... 112,143 3.00 149,524 4.00 299,048 8.00 Excess of actual regulatory over minimum regulatory capital standard................. $318,889 5.45 $281,508 7.53 $181,938 4.87
38 REGULATION OF GRAHAM SAVINGS Until October 4, 1996, Graham Savings Bank, Inc., SSB. was a North Carolina-chartered savings bank and a subsidiary of CCBF. On that date, Graham Savings was merged with and into CCB Bank. CAPITAL STOCK OF CCBF AND SALEM AUTHORIZED CAPITAL STOCK Salem's authorized capital stock consists of 5,000,000 shares of common stock $2.50 par value per share, of which 1,841,232 shares were issued and outstanding at September 30, 1996. CCBF's authorized capital stock consists of 50,000,000 shares of $5.00 par value common stock of which 15,061,334 shares were issued and outstanding at September 30, 1996, and 5,000,000 shares of serial preferred stock, none of which were issued and outstanding at that date. OTHER MATTERS Salem's Board of Directors does not intend to bring any matter before the reconvened Special Meeting other than as specifically set forth in the Prospectus/Proxy Statement, this Prospectus/Proxy Statement Supplement and the accompanying Notice, and the Board knows of no other business that properly may be brought before the reconvened Special Meeting by any other person. However, should other matters properly be presented for action at the reconvened Special Meeting, the Proxies representing Salem shareholders at the reconvened Special Meeting, or their substitutes, will be authorized to vote shares of Salem Stock represented by those appointments of proxy according to their best judgment on such matters. 39 APPENDIX A TO PROSPECTUS/PROXY STATEMENT SUPPLEMENT EXCERPTED AMENDMENTS SECTION 3.1 3.1 CONVERSION OF SHARES. Subject to the provisions of this Article III, at the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, each of the shares of common stock, $2.50 par value per share, of Salem (the "Salem Common Stock") issued and outstanding immediately prior to the Effective Time (excluding shares held by CCBF, Salem, any CCBF Subsidiary or any Salem Subsidiary, in each case other than in a fiduciary capacity or as a result of debts previously contracted, and excluding shares held by Salem Dissenting Shareholders) shall be converted into and become the right to receive (a) if the CCBF Stock Price for the sixty (60) trading days preceding the scheduled Closing Date is equal to or less than $57.18, but equal to or more than $46.78, .41 of a share of the common stock, $5.00 par value per share, of CCBF (the "CCBF Common Stock") and .41 of a preferred share purchase right (a "CCBF Rights") as described in CCBF's Shareholder Rights Plan, adopted February 26, 1990 (the "CCBF Rights Plan"), (b) if the CCBF Stock Price for the sixty (60) trading days preceding the scheduled Closing Date is greater than $57.18, that fraction of a share of CCBF Common Stock and that fraction of an attached CCBF Right equal to $57.18 divided by such CCBF Stock Price, with the resulting quotient then being multiplied by .41, or (c) if the CCBF Stock Price for the sixty (60) trading days preceding the scheduled Closing Date is less than $46.78, that fraction of a share of CCBF Common Stock and that fraction of an attached CCBF Right equal to $46.78 divided by such CCBF Stock Price, with the resulting quotient then being multiplied by .41 (the "Exchange Ratio"). Each of the shares of CCBF Common Stock (and the attached CCBF Rights) and any shares of any CCBF Subsidiary outstanding immediately prior to the Effective Time shall continue to be issued and outstanding, and shall not be converted, exchanged or altered in any manner as a result of the Merger. SECTION 10.1(G) 10.1 TERMINATION. Nothwithstanding any other provision of this Agreement, and notwithstanding the approval of this Agreement, the Merger, and the other transactions contemplated hereby by the shareholder of CCB Bank or the shareholders of Salem, or each entity's shareholders, this Agreement may be terminated and such transactions abandoned at any time prior to the Effective Time: * * * (g) upon notice to CCBF and CCB Bank, by the Board of Directors of Salem if CCBF announces, on or prior to the Closing Date and prior to the Effective Time, that CCBF will merge with and into another company. A-1 INDEX TO SALEM FINANCIAL STATEMENTS Unaudited Financial Statements Balance Sheets as of September 30, 1996 and 1995..................................................................... F-2 Statements of Income for the Nine Months Ended September 30, 1996 and 1995........................................... F-3 Statements of Stockholders' Equity for the Nine Months Ended September 30, 1996 and 1995............................. F-4 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995....................................... F-5 Notes to Financial Statements........................................................................................ F-6
F-1 SALEM TRUST BANK BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1996 1995 1995 ASSETS: Cash and due from banks.......................................................... $ 5,884 6,145 5,301 Federal funds sold............................................................... 14,055 22,665 27,140 Investment securities: Available for sale............................................................. 2,462 295 295 Held to maturity (market values of $16,655, $17,160 and $3,004)................ 16,805 17,174 3,005 Loans (notes 2 and 4)............................................................ 116,707 106,231 100,068 Less allowance for loan losses (note 3)........................................ 1,434 1,302 1,095 Loans, net.................................................................. 115,273 104,929 98,973 Premises and equipment........................................................... 1,865 1,890 1,848 Other assets..................................................................... 1,725 993 786 Total assets.............................................................. $ 158,069 154,091 137,348 LIABILITIES: Deposits: Noninterest bearing............................................................ $ 16,823 16,473 12,263 Interest-bearing............................................................... 122,364 119,978 108,423 Total deposits.............................................................. 139,187 136,451 120,686 Long-term debt (note 5).......................................................... -- 2,118 2,118 Other liabilities................................................................ 1,655 1,914 1,345 Total liabilities......................................................... 140,842 140,483 124,149 STOCKHOLDERS' EQUITY: Preferred stock, $25.00 par value; authorized 60,000 shares...................... -- -- -- Common stock, $2.50 par value; authorized 5,000,000 shares; 1,841,232 1,597,132, and 1,596,732 shares issued.................................................... 4,603 3,993 3,992 Additional paid-in capital....................................................... 8,063 6,345 6,350 Retained earnings................................................................ 4,561 3,270 2,857 Total stockholders' equity................................................ 17,227 13,608 13,199 Total liabilities and stockholders' equity................................ $ 158,069 154,091 137,348
See accompanying notes to financial statements. F-2 SALEM TRUST BANK STATEMENTS OF INCOME (UNAUDITED, DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 INTEREST INCOME: Loans................................................................................................ $7,779 5,931 Investment securities................................................................................ 785 154 Other................................................................................................ 743 510 Total interest income............................................................................. 9,307 6,595 INTEREST EXPENSE: Deposits............................................................................................... 4,564 2,972 Long-term debt and other borrowings.................................................................... 41 102 Total interest expense............................................................................ 4,605 3,074 NET INTEREST INCOME.................................................................................... 4,702 3,521 Provision for loan losses (note 3)..................................................................... 132 338 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................................................... 4,570 3,183 OTHER INCOME: Service charges on deposit accounts.................................................................... 107 57 Non-deposit fees and commissions....................................................................... 776 465 Other.................................................................................................. 13 34 Total other income................................................................................ 896 556 OTHER EXPENSES: Personnel expense...................................................................................... 1,906 1,545 Net occupancy expense.................................................................................. 180 142 Equipment expense...................................................................................... 142 121 FDIC insurance......................................................................................... 25 78 Other operating expenses............................................................................... 833 627 Total other expenses.............................................................................. 3,086 2,513 INCOME BEFORE INCOME TAXES............................................................................. 2,380 1,226 Income taxes........................................................................................... 928 595 NET INCOME............................................................................................. $1,452 631 INCOME PER SHARE: Primary.............................................................................................. $ .83 .49 Fully diluted........................................................................................ .80 .46 WEIGHTED AVERAGE SHARES OUTSTANDING: Primary.............................................................................................. 1,743,707 1,292,033 Fully diluted........................................................................................ 1,835,019 1,505,328
See accompanying notes to financial statements. F-3 SALEM TRUST BANK STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED, IN THOUSANDS)
ADDITIONAL TOTAL COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK CAPITAL EARNINGS EQUITY Balance December 31, 1994.................................................... $2,599 2,756 2,226 7,581 Net income................................................................... -- -- 631 631 Stock offering............................................................... 1,389 3,583 -- 4,972 Conversion of subordinated notes............................................. 4 11 -- 15 Balance September 30, 1995................................................... $3,992 6,350 2,857 13,199 Balance December 31, 1995.................................................... $3,993 6,345 3,270 13,608 Net income................................................................... -- -- 1,452 1,452 Stock options exercised...................................................... 80 130 -- 210 Cash dividends ($.10 per share).............................................. -- -- (161) (161) Conversion of subordinated notes............................................. 530 1,588 -- 2,118 Balance September 30, 1996................................................... $4,603 8,063 4,561 17,227
See accompanying notes to financial statements. F-4 SALEM TRUST BANK STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED, IN THOUSANDS)
1996 1995 OPERATING ACTIVITIES: Net income.............................................................................................. $ 1,452 631 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................................................................... 114 102 Net amortization and accretion of investment securities............................................... (138) (22) Provision for loan losses............................................................................. 132 338 Increase in deferred costs on loan originations....................................................... (11) (37) Purchases and originations of loans for sale.......................................................... (21,692) (44,317) Proceeds from sale of loans........................................................................... 24,348 44,791 Increase in other assets.............................................................................. (732) (260) Increase (decrease) in other liabilities.............................................................. (259) 331 NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................................... 3,214 1,557 INVESTING ACTIVITIES: Maturities of interest-bearing deposits................................................................. -- 100 Proceeds from maturities of investment securities held to maturity...................................... 14,255 3,468 Purchases of investment securities held to maturity..................................................... (13,748) (1,500) Purchases of investment securities available for sale................................................... (2,167) (26) Net originations of loans............................................................................... (13,121) (33,539) Purchases of premises and equipment..................................................................... (89) (254) NET CASH USED BY INVESTING ACTIVITIES.............................................................. (14,870) (31,751) FINANCING ACTIVITIES: Net increase in deposit accounts........................................................................ 2,736 41,370 Net decrease in short-term borrowed funds............................................................... -- (500) Exercise of stock options............................................................................... 210 -- Proceeds from issuance of common stock.................................................................. -- 4,972 Cash dividends.......................................................................................... (161) -- NET CASH PROVIDED BY FINANCING ACTIVITIES.......................................................... 2,785 45,842 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................................... (8,871) 15,648 Cash and cash equivalents at January 1.................................................................. 28,810 16,793 CASH AND CASH EQUIVALENTS AT SEPTEMBER 30............................................................... $19,939 32,441 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the period......................................................................... $ 4,894 2,599 Income taxes paid during the period..................................................................... 875 695 NONCASH TRANSACTIONS: Conversion of convertible subordinated notes to common stock............................................ $ 2,118 15
See accompanying notes to financial statements. F-5 SALEM TRUST BANK NOTES TO FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND 1995 (1) MANAGEMENT OPINION The financial statements of Salem Trust Bank ("Salem") as of September 30, 1996 and 1995 are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. (2) LOANS A summary of loans at September 30, 1996 and 1995 follows (in thousands):
1996 1995 Commercial, financial and agricultural......................................... $ 19,902 16,934 Real estate-construction....................................................... 18,027 9,247 Real estate-mortgage........................................................... 74,818 70,052 Installment loans to individuals............................................... 3,292 3,213 Credit card receivables........................................................ 668 622 Total loans and lease financing.............................................. $116,707 100,068
Loans held for sale totaled $571,000 and $2,346,000 at September 30, 1996 and 1995, respectively, and are reported at the lower of aggregate cost or market. At September 30, 1996 and 1995, Salem had no impaired loans. (3) ALLOWANCE FOR LOAN LOSSES Following is a summary of the allowance for loan losses for the nine months ended September 30, 1996 and 1995 (in thousands):
1996 1995 Balance at beginning of year........................................................ $1,302 757 Provision charged to operations..................................................... 132 338 Balance at end of period............................................................ $1,434 1,095
(4) NONPERFORMING ASSETS As of September 30, 1996, Salem had no nonperforming assets. Nonperforming assets at September 30, 1995 were comprised of $5,000 of restructured loans. (5) SUBORDINATED NOTES In May 1996, Salem called its convertible subordinated notes which bore interest at 6.00%. Substantially all subordinated notes were converted into shares of Salem's $2.50 par value common stock. (6) CONTINGENCIES Certain legal claims have arisen in the normal course of business, which, in the opinion of management and counsel, will have no material adverse effect on the financial position of Salem. (7) ACCOUNTING ISSUES Salem adopted SFAS No. 123, "Accounting for Stock-Based Compensation" on January 1, 1996. SFAS No. 123 establishes a fair value method of accounting for such compensation plans. Stock-based compensation plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or in which an entity issues its F-6 SALEM TRUST BANK NOTES TO FINANCIAL STATEMENTS -- CONTINUED (7) ACCOUNTING ISSUES -- Continued equity instruments to acquire goods or services from nonemployees. Under SFAS No. 123, these types of transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measured. While SFAS No. 123 encourages all entities to adopt the fair value method of accounting, it does allow an entity to continue to measure the compensation cost of stock compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). Salem intends to continue measuring stock compensation expense under APB Opinion No. 25. F-7 -----END PRIVACY-ENHANCED MESSAGE-----