UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from __________ to ________
Commission File Number: 1-10646
CENTURA BANKS, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1688522
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(State of Incorporation) (IRS Employer Identification No.)
134 North Church Street, Rocky Mount, North Carolina 27804
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(Address of principal executive office) (Zip Code)
(252) 454-4400
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(Registrant's telephone number, including area code)
N/A
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark has filed all documents and reports required to be filed
by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 28,444,986
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(Class of Stock) (Shares outstanding as of April 30, 1999)
Exhibit Index on sequential page number 32.
CENTURA BANKS, INC.
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1999 and 1998, and December 31, 1998 4
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 5
Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 1999 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Securities Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
March 31 December 31,
------------------------------------- -----------------
(In thousands, except share data) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 270,385 $ 269,704 $ 289,230
Due from banks, interest-bearing 25,635 20,295 21,963
Federal funds sold 33,396 4,347 17,646
Investment securities:
Available for sale (cost of $2,021,388, $1,867,223
and $2,036,707, respectively) 2,031,859 1,880,919 2,057,270
Held to maturity (fair value of $67,879,
$213,810 and $106,432, respectively) 65,659 211,216 103,767
Loans 5,814,127 5,322,018 5,852,830
Less allowance for loan losses 74,139 71,121 72,310
- -----------------------------------------------------------------------------------------------------------------
Net loans 5,739,988 5,250,897 5,780,520
Bank premises and equipment 117,935 123,129 120,405
Other assets 454,983 381,850 404,759
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 8,739,840 $ 8,142,357 $ 8,795,560
=================================================================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 927,808 $ 899,074 $ 979,346
Interest-bearing 4,573,593 4,535,903 4,569,243
Time deposits over $100 544,158 493,185 520,060
- -----------------------------------------------------------------------------------------------------------------
Total deposits 6,045,559 5,928,162 6,068,649
Borrowed funds 1,137,345 1,028,171 1,299,337
Long-term debt 734,874 447,219 614,284
Other liabilities 129,498 119,933 137,085
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 8,047,276 7,523,485 8,119,355
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 25,000,000 shares
authorized; none issued - - -
Common stock, no par value,
50,000,000 shares authorized; shares issued
and outstanding of 28,494,755; 28,253,683;
and 28,318,226, respectively 215,314 204,936 205,237
Common stock acquired by ESOP (71) (215) (107)
Retained earnings 470,809 405,638 458,298
Accumulated other comprehensive income 6,512 8,513 12,777
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Total shareholders' equity 692,564 618,872 676,205
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,739,840 $ 8,142,357 $ 8,795,560
=================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
Three Months Ended
March 31,
-------------------------------
(In thousands, except share and per share data) 1999 1998
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 125,108 $ 117,301
Investment securities:
Taxable 31,416 30,674
Tax-exempt 473 585
Short-term investments 575 416
- -----------------------------------------------------------------------------------------------------
Total interest income 157,572 148,976
INTEREST EXPENSE
Deposits 50,114 54,007
Borrowed funds 15,920 12,976
Long-term debt 8,750 6,515
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Total interest expense 74,784 73,498
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NET INTEREST INCOME 82,788 75,478
Provision for loan losses 6,266 3,393
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Net interest income after provision for loan losses 76,522 72,085
NONINTEREST INCOME
Service charges on deposit accounts 12,888 10,789
Credit card and related fees 1,769 1,430
Other service charges, commissions and fees 8,604 7,772
Fees for trust services 2,439 2,100
Mortgage income 7,036 4,127
Other noninterest income 5,014 5,794
Securities gains, net 483 302
- -----------------------------------------------------------------------------------------------------
Total noninterest income 38,233 32,314
NONINTEREST EXPENSE
Personnel 39,325 33,446
Occupancy 5,095 4,395
Equipment 5,175 5,528
Foreclosed real estate losses and related
operating expense 428 428
Merger-related expenses 6,858 -
Other operating 25,937 24,865
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Total noninterest expense 82,818 68,662
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Income before income taxes 31,937 35,737
Income taxes 11,360 12,249
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NET INCOME $ 20,577 $ 23,488
=====================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.72 $ 0.85
Diluted 0.71 0.83
=====================================================================================================
AVERAGE COMMON SHARES OUTSTANDING
Basic 28,464,482 27,675,911
Diluted 28,965,826 28,273,364
=====================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CENTURA BANKS, INC. AND SUBSIDIARIES
Three months ended March 31, 1999
Common
Stock Total
Common Stock Acquired Retained Accumulated Other Shareholders'
Shares Amount by ESOP Earnings Comprehensive Income Equity
----------------------------------------------------------------------------------
December 31, 1998, as originally reported 26,618,931 $ 195,516 $ (107) $ 421,464 $ 12,975 $ (5) $ 629,843
Adjustments for pooling-of-interests 1,699,295 9,721 - 36,834 (193) - 46,362
----------- ---------- -------- --------- ---------- -------- --------
December 31, 1998, restated 28,318,226 205,237 (107) 458,298 12,782 (5) 676,205
Comprehensive Income:
Net income - - - 20,577 - - 20,577
Minimum pension liability - - - - - - -
Unrealized gains on securities, net of tax - - - - (6,265) - (6,265)
---------
Comprehensive Income - - - - - 14,312 -
Common stock issued:
Stock option plans and stock awards 61,160 1,512 1,512
Acquisitions 115,369 7,711 - (301) - - 7,410
Redemption of common stock - - - - - - -
Cash dividends declared, $0.29 per share - - - (7,765) - - (7,765)
Other - 854 36 - - - 890
--------------------------------------------------------------------------------------
Balance, March 31, 1999 28,494,755 $ 215,314 $ (71) $ 470,809 $ 6,517 $ (5) $ 692,564
======================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Centura Banks, Inc. and Subsidiaries
For the Three Months Ended
March 31,
(Dollars in thousands) 1999 1998
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,577 $ 23,488
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses 6,266 3,393
Depreciation on assets under operating leases 3,458 2,494
Depreciation and amortization, excluding depreciation on assets under operating 9,900 9,057
Decrease in deferred income taxes 5,247 4,289
Loan fees deferred, net 1,301 185
Bond premium amortization and discount accretion, net 283 (76)
Gains on sales of investment securities (483) (302)
Gain on sales of equipment under lease (823) (470)
Proceeds from sales of mortgage loans held for sale 316,987 162,922
Originations, net of principal repayments, of mortgage loans held for sale (263,783) (202,240)
Decrease (increase) in accrued interest receivable 4,232 (199)
(Increase) decrease in accrued interest payable (1,692) 4,264
Net increase in other assets and other liabilities (50,805) (22,858)
---------- ---------
Net cash provided (used) by operating activities 50,665 (16,053)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans 17,514 (140,628)
Purchases of:
Securities available for sale (179,194) (259,954)
Securities held to maturity (6,608) -
Premises and equipment (2,890) (2,879)
Other - (12)
Proceeds from:
Sales of securities available for sale 65,306 17,158
Maturities and issuer calls of securities available for sale 131,060 126,755
Maturities and issuer calls of securities held to maturity 44,785 9,134
Sales of foreclosed real estate 2,776 1,497
Dispositions of premises and equipment 1,730 160
Dispositions of equipment used in leasing activities 2,055 1,843
Cash acquired, net of cash paid, in mergers and acquisitions (15,479) 15,447
---------- ---------
Net cash provided (used) by investing activities 61,055 (231,479)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (62,672) 28,587
Net (decrease) increase in borrowed funds (161,992) 188,347
Proceeds from issuance of long-term debt 126,466 91,381
Repayment of long-term debt (5,840) (79,151)
Cash dividends paid (7,765) (7,314)
Proceeds from issuance of common stock, net 660 665
Other - 260
---------- ---------
Net cash provided by financing activities (111,143) 222,775
---------- ---------
Increase (decrease) in cash and cash equivalents 577 (24,757)
Cash and cash equivalents at January 1 328,839 319,103
---------- ---------
Cash and cash equivalents at March 31 $ 329,416 $ 294,346
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the three months for:
Interest $ 73,092 $ 69,077
Income taxes 12,279 1,055
Noncash transactions:
Net equity adjustment of merged entity - 9,636
Stock issued in purchase acquisitions and other stock issuances, net 8,264 3,279
Change in unrealized securities gains (losses), net (10,093) (2,545)
Other - 971
Loans transferred to foreclosed property 2,624 1,918
========== =========
See accompanying notes to consolidated financial statements.
CENTURA BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Centura Banks, Inc. ("Centura") and its wholly-owned
subsidiaries Centura Bank (the "Bank") and Centura Capital Trust I. The Bank
also has various wholly-owned subsidiaries. The interim financial statements
have been prepared in conformity with generally accepted accounting principles
for interim financial statements. All significant intercompany transactions are
eliminated in consolidation and all adjustments considered necessary for a fair
presentation of the results for the interim periods presented have been included
(such adjustments are normal and recurring in nature). All prior period
financial information has been restated to include historical information for
companies acquired in transactions accounted for as poolings-of-interests.
The information contained in the consolidated financial statements and
accompanying footnotes in Centura's annual report on Form 10-K should be
referenced when reading these unaudited interim financial statements. Operating
results for the three-month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
Note 2: Mergers and Acquisitions
Acquisition activity through March 31, 1999 is summarized below.
Data for the completed transactions is as of the date of acquisition.
Acquisition Shares
Date Offices Assets Loans Deposits Issued
- ------------------------------------------------------------------------------------------------------------
(dollars in millions)
Capital Advisors ** 01/07/99 -- $ 0.6 $ -- $ -- 107,789
Scotland Savings Bank ** 02/05/99 2 56.8 41.0 39.6 --
First Coastal Bankshares, Inc. * 03/26/99 18 526.5 433.1 380.0 1,706,875
- ------------------------------------------
* Merger accounted for as a pooling-of-interests
** Acquisition accounted for as a purchase
On January 7, 1999, Centura acquired Capital Advisors of North
Carolina, LLC, Capital Advisors of South Carolina, Inc., Capital Advisors of
Mississippi, Inc. Selken, Inc., and Capital Advisors, Inc., collectively
referred to as Capital Advisors. With this transaction, Capital Advisors became
a wholly-owned subsidiary of Centura Bank. Capital Advisors, with offices in
North Carolina, South Carolina, Georgia, and Mississippi, is engaged in the
business of commercial real estate financing and consulting primarily through
brokering and servicing commercial mortgage loans. The acquisition was accounted
for using the purchase method of accounting and approximately $14.3 million of
goodwill was recorded as an other asset on the consolidated balance sheet.
On February 5, 1999, Centura completed the acquisition of Scotland
Bancorp, Inc. ("Scotland") based in Laurinburg, North Carolina. The acquisition
was accounted for as a purchase. Goodwill of approximately $6.6 million was
recorded as an other asset on the consolidated balance sheet.
On March 26, 1999, Centura merged with First Coastal Bankshares, Inc.
("First Coastal") headquartered in Virginia Beach, Virginia. Each share of First
Coastal common stock was exchanged for 0.34 shares of Centura common stock. The
combination was accounted for as a pooling-of-interests, and accordingly,
historical financial information for all periods presented has been restated to
include First Coastal's historical financial information. This combination
increases Centura's presence in the Hampton Roads region of Virginia by 18
financial stores. In connection with the merger, Centura recorded non-recurring
pre-tax merger-related charges of $8.4 million. Included in these merger-related
expenses are severance and termination-related accruals, costs of the
transaction, and the write-off of certain assets deemed to have no ongoing
benefit to Centura. The severance costs include payments to be made in
connection with the involuntary termination of employees who were specifically
identified and notified of their termination and severance benefits in December,
1998. The remaining balance of the accrued severance expenses are expected to be
paid in 1999. An additional $1.5 million in provision for loan losses was also
recorded to align the allowance for loan loss factors between the two entities.
The following table summarizes these merger-related charges as well as the
remaining liability at March 31, 1999:
- --------------------------------------------------------------------------------
Remaining
Utilized in Balance
Merger-Related Charges Pre-tax 1999 March 31, 1999
- ---------------------------------- ------------- -------------- ----------------
(In thousands)
Severance costs $ 770 $ - $ 770
Write-off of unrealizable assets 1,259 1,059 200
Contract terminations 2,071 429 1,642
Professional costs 1,683 1,247 436
Other merger-related expenses 1,075 546 529
---------- ---------- ------------
Merger-related expenses 6,858 3,281 3,577
Provision for loan losses 1,500 1,500 -
---------- ---------- ------------
Total merger-related charges $ 8,358 $ 4,781 $ 3,577
========== ========== ============
The following table summarizes the historical results of operations for
Centura and First Coastal prior to the date of merger and the consolidated
results of operations after giving effect to the merger:
- --------------------------------------------------------------------------------
Historical
-------------------------------
(thousands, except share data) Centura First Coastal Combined
- --------------------------------- ------------ -------------- -----------
Year ended December 31, 1998
Net interest income $ 284,174 $ 18,273 $ 302,447
Noninterest income 134,700 5,821 140,521
Noninterest expense 271,689 18,708 290,397
Net income 96,871 3,443 100,314
Net income per common share:
Basic $ 3.67 $ 0.69 $ 3.57
Diluted 3.60 0.68 3.50
Year ended December 31, 1997
Net interest income $ 254,487 $ 18,737 $ 273,224
Noninterest income 109,974 3,901 113,875
Noninterest expense 238,983 15,981 254,964
Net income 83,058 4,103 87,161
Net income per common share:
Basic $ 3.22 $ 0.82 $ 3.17
Diluted 3.15 0.81 3.11
For the acquisitions accounted for under the purchase method of accounting,
the financial position and results of operations relative to each transaction
are included in the consolidated financial statements since the date of
consummation.
Note 3: Net Income Per Share
Basic earnings per common share is calculated by dividing net income by the
weighted-average number of common shares outstanding during each period. Diluted
earnings per common share is based on the weighted-average number of common
shares outstanding during each period plus the maximum dilutive effect of common
stock issuable upon exercise of stock options which totaled 501,344 and 597,453
at March 31, 1999 and 1998, respectively.
Note 4: Reclassifications
Certain items reported in prior periods have been reclassified to
conform with current period presentation. Such reclassifications had no impact
on net income or shareholders' equity.
Note 5: Adoption of Statements of Financial Accounting Standards ("SFAS")
On January 1, 1999, Centura adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). This Statement
amends SFAS 65 to require that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. Adoption of this Statement
did not materially impact Centura's financial position or results of operations.
Note 6: Commitments and Contingencies
Centura Bank is a co-defendant in two actions consolidated for
discovery in the Superior Court of Forsyth County, North Carolina. The
plaintiffs in these actions allege that Centura Bank breached its duties and
committed other violations of law while acting as depository of substantial sums
of money allegedly converted by the personal and financial advisors of the
owners of such money and in connection with the creation of charitable trusts
established with a portion of the funds. The cases consolidated into the subject
case (Philip A.R. Staton, Ingeborg Staton, Mercedes Staton, et als. v. G. Thomas
Brame, Jerri Russell (formerly Jerri Brame), Centura Bank, et als.) were
originally brought in 1996. No claim for a specific amount of monetary damages
was made in the cases until 1999. Plaintiffs are seeking compensatory and treble
damages in amounts that are material to Centura and its subsidiaries taken as a
whole. Centura believes that Centura Bank has meritorious defenses to all claims
asserted in these cases and Centura Bank is defending the cases vigorously. In a
separate and related case instituted in 1996 (Piedmont Institute of Pain
Management; T. Stuart Meloy, M.D.; Nancy J. Faller, D.O. v. Poyner & Spruill,
L.L.P. and Centura Bank), consolidated for discovery with the Staton cases in
the Superior Court of Forsyth County, North Carolina, Centura Bank is alleged to
have provided the plaintiffs with false information regarding the establishment
and funding of a medical clinic by failing to exercise reasonable care or
competence in obtaining such information, and to have committed other violations
of law. Plaintiffs allege that they were damaged as a result of Centura Bank's
actions and seek specific performance or recovery of money damages in an amount
that is material to Centura and its subsidiaries taken as a whole. Centura and
Centura Bank believe Centura Bank has meritorious defenses to all claims
asserted in this case and Centura Bank is defending the case vigorously.
Management does not believe that Centura or Centura Bank have liability with
respect to these cases and is unable to estimate a range of loss.
Note 7: Segment Information
Centura has two reportable segments: retail banking and treasury.
Centura's reportable segments represent business units that are managed
separately. Each segment requires specific industry knowledge and products and
services offered have varying customer bases.
The retail banking segment includes commercial loans, retail loans,
retail lines of credit, credit cards, transaction deposits, time deposits,
master notes and repurchase agreements, and mortgage servicing and origination.
The retail bank offers its products to individuals, small businesses, and
commercial customers. Treasury is responsible for the Bank's asset/liability
management including managing the Bank's investment portfolio.
The `other' segment includes the asset management division, leasing
activities, Centura Securities, Inc., Centura Insurance Services, Inc., and
FGHE. Centura's asset management division provides trust and fiduciary services
as well as retirement plan design and administration. Leasing activities include
Centura's technology leasing subsidiary CLG, Inc. as well as the Centura Bank
Leasing Division which together offer a broad range of lease products including
automobile, equipment, and recreational vehicle leases. Centura Securities, Inc.
offers a competitive line of brokerage services. Centura Insurance Services,
Inc. offers various insurance products to commercial and consumer customers.
FGHE is a mortgage and finance company specializing in alternative equity
lending for homeowners whose borrowing needs are generally not met by
traditional financial institutions. Centura has a 49 percent ownership interest
in FGHE.
Financial information by segment as of March 31, 1999 and 1998 is as
follows:
(in thousands) 1999
----
Retail Treasury Other Total Adjustments Consolidated
----------------------------------------------------------------------------
Interest income $99,941 $46,664 $8,487 $155,092 2,480(1) 157,572
Interest expense 51,595 21,484 1,278 74,357 427(2) 74,784
Funds transfer pricing allocation 20,370 (16,362) (4,008) -- -- --
-----------------------------------------------------------------------
Net interest income 68,716 8,818 3,201 80,735 2,053 82,788
Provision for loan losses 3,350 -- 1,176 4,526 1,740(3) 6,266
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 65,366 8,818 2,025 76,209 313 76,522
Noninterest income 28,831 2,614 10,994 42,439 (4,206)(4) 38,233
Noninterest expense 61,703 3,738 9,079 74,520 8,298(5) 82,818
------------------------------------------------------------------------
Income before income taxes 32,494 7,694 3,940 44,128 (12,191) 31,937
Income tax expense/(benefit) 4,903 540 2,257 7,700 3,660(3) 11,360
-----------------------------------------------------------------------
Net income $ 27,591 $ 7,154 $ 1,683 $ 36,428 $(15,851) $ 20,577
======== ======= ======= ======== ========= ========
Period end assets $4,767,625 $2,684,952 $457,961 $7,910,538 $829,302(6) $8,739,840
- ----------------------- ---------- ---------- ---------- ---------- ----------- -----------
1998
----
Retail Treasury Other Total Adjustments Consolidated
-------------------------------------------------------------------------
Interest income $91,407 $44,922 $11,096 $147,425 1,551(1) 148,976
Interest expense 53,706 17,498 1,602 72,806 692(2) 73,498
Funds transfer pricing allocation 25,540 (20,099) (5,441) -- -- --
-----------------------------------------------------------------------
Net interest income 63,241 7,325 4,053 74,619 859 75,478
Provision for loan losses 2,485 9 417 2,911 482(3) 3,393
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 60,756 7,316 3,636 71,708 377 72,085
Noninterest income 22,102 1,269 12,294 35,665 (3,351)(4) 32,314
Noninterest expense 51,293 4,081 9,049 64,423 4,239(5) 68,662
------------------------------------------------------------------------
Income before income taxes 31,565 4,054 6,881 42,950 (7,213) 35,737
Income tax expense/(benefit) 7,419 (761) 1,204 7,862 4,387(3) 12,249
------------------------------------------------------------------------
Net income $ 24,146 $5,265 $ 5,677 $ 35,088 $(11,600) $ 23,488
======== ======= ======= ======== ========= ========
Period end assets $4,149,350 $2,699,792 $532,938 $7,382,080 $760,277(6) $8,142,357
(1) Reconciling item relates to loan fees and taxable equivalent adjustments
which are excluded and included, respectively, in interest income for
management reporting purposes.
(2) Reconciling item relates to interest expense on certain borrowings which
are excluded from interest expense for management reporting purposes.
(3) Reconciling item adjusts balances from cash basis to accrual method of
accounting. Additionally, the three months ended March 31, 1999 includes
$1.5 million of additional provision recorded as a result of the merger
with First Coastal Bankshares, Inc.
(4) Reconciling item relates to loan fees which are included in noninterest
income for management reporting purposes.
(5) Reconciling item relates to amortization expense which is excluded from
noninterest expense for management reporting purposes as well as
offsetting entries from above adjustments. In addition, merger
expenses of $6.9 million are included as an adjustment.
(6) Reconciling item relates to assets that are not allocated among segments
including premises and equipment, cash and due from banks, and other
assets.
CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three Months Ended March 31, 1999
This document contains forward-looking statements about Centura Banks,
Inc. ("Centura"). These statements can be identified by the use of words such as
"expect," "may," "could," "intend," "estimate," or "anticipate." These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties and other factors. Those factors
include, but are not limited to, the following: (i) expected cost savings from
pending mergers may not be fully realized or costs or difficulties related to
the integration of the businesses of Centura and merged institutions may be
greater than expected, (ii) deposit attrition, customer loss, or revenue loss
following pending mergers may be greater than expected, (iii) competitive
pressure in the banking industry may increase significantly, (iv) changes in the
interest rate environment may reduce margins, (v) general economic conditions,
either nationally or regionally, may be less favorable than expected, resulting
in, among other things, credit quality deterioration, (vi) changes may occur in
the regulatory environment, (vii) changes may occur in business conditions and
inflation, (viii) changes may occur in the securities markets, and (ix)
disruptions of the operations of Centura or any of its subsidiaries, or any
other governmental or private entity may occur as a result of the "Year 2000"
problem.
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Centura Banks, Inc. ("Centura"). Centura is a bank holding company
operating in North Carolina, South Carolina and Virginia. Through Centura Bank
and its subsidiaries, Centura seeks to not only become the primary provider of
financial services for each of its customers but to also deliver the services
through convenient channels as evidenced by the Centura Highway telephone
banking center, supermarket locations, and home banking through leading online
money management packages.
SUMMARY
Net income for the three months ended March 31, 1999 totaled $20.6 million,
as compared to $23.5 million earned during the same period of 1998. Including an
$8.4 million restructuring charge related to the merger with First Coastal
Bankshares, Inc., diluted earnings per share for the first quarter of 1999 was
$0.71 per share compared to the $0.83 per share earned for the first quarter of
1998. Merger-related expenses adversely impacted earnings per diluted share by
$0.19. Key factors responsible for these results were as follows:
o Taxable equivalent net interest income totaled $84.5 million for the
three months ended March 31, 1999, an increase of $7.2 million over the
$77.3 million earned for the same period in 1998.
o Average loans increased to $5.8 billion for the three months ended March
31, 1999 compared to $5.1 billion for the same period of 1998. Deposits
averaged $6.0 billion for the first three months of 1999, an increase of
$264.1 million over the prior year period.
o Noninterest income, before securities transactions, increased $5.7 million
or 17.9 percent to $37.8 million for the three months ended March 31, 1999
compared to $32.0 million earned for the first quarter of 1998. Excluding
$6.9 million of non-recurring merger-related charges, noninterest expense
increased $7.3 million or 10.6 percent for the period ended March 31, 1999.
Including the merger-related expenses, noninterest expense totaled $82.8
million for the first quarter.
o Nonperforming assets of $42.0 million at March 31, 1999 increased
$436,000 from March 31, 1998, representing 0.48 percent and 0.51 percent
of total assets, respectively.
o The allowance for loan losses was $74.1 million, representing 1.30 percent
of total loans(1) at March 31, 1999, compared to $71.1 million and
1.36 percent of total loans(1) at March 31, 1998. Gross charge-offs were
$5.9 million, up $2.0 million from the $3.9 million recorded for the prior
year period. Recoveries totaled $824,000 and $935,000 for the three months
ended March 31, 1999 and 1998, respectively. The provision for loan
losses was $6.3 million for the three months ended March 31, 1999 versus
$3.4 million for the same period of 1998.
INTEREST-EARNING ASSETS
Interest-earning assets, consisting primarily of loans and investment
securities, averaged $8.0 billion for the three months ended March 31, 1999, an
increase of $861.9 million or 12.1 percent over the average interest-earning
assets of $7.1 billion for the three months ended March 31, 1998. The primary
component of the increase was in the commercial loan portfolio which grew $632.3
million.
Period end interest-earning assets at March 31, 1999 were $8.0 billion,
representing a $531.9 million or 7.2 percent increase over the level at March
31, 1998. For additional information on average interest-earning assets, refer
to Table 3, "Net Interest Income Analysis, Taxable Equivalent Basis," and Table
8, "Net Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis."
Loans
Loans, the largest component of interest-earning assets, were $5.8
billion at March 31, 1999, an increase of $492.1 million, or 9.2 percent over
the $5.3 billion at March 31, 1998. Table 1 summarizes total loans outstanding
and the mix of loans being held. Commercial loans represent the largest portion
of the loan portfolio at 52.9 percent and 49.2 percent at March 31, 1999 and
1998, respectively, while the second largest component, residential mortgages,
comprised 31.3 percent and 33.3 percent, respectively.
Loans averaged $5.8 billion for the three months ended March 31, 1999,
increasing 14.0 percent over the average loan balance of $5.1 billion for the
comparable prior year period. Average loan growth was driven primarily by volume
generated in the commercial loan portfolio. On average, commercial loans
increased $632.3 million between the two three-month periods. Consumer loans
(equity lines, residential mortgages, installment loans, and other credit line
loans) were higher, on average, by $126.5 million or 6.8 percent over the prior
year period. Average loans represented 73.0 percent of average interest-earning
assets for the three months ended March 31, 1999, increasing 120 basis points
from the 71.8 percent for the same prior year period.
Credit is extended by Centura Bank almost exclusively to customers in
its market areas of North Carolina, the Hampton Roads region of Virginia, and
South Carolina. Although not a significant part of Centura's lending activities,
foreign credit is extended on a case by case basis and is subject to the same
credit and approval process as other commercial loans including an assessment of
country risk. Management discourages loans to high technology start-up
companies, to highly speculative real estate development projects, and to
participation in highly leveraged transactions. The loan portfolio is reviewed
on an on-going basis to maintain diversification by industry, geographic
location, type of loan, collateral and borrower.
Loans generated $125.3 million of taxable equivalent interest income
for the three months ended March 31, 1999 compared to $117.4 million generated
in 1998. Growth in average loan volume was responsible for $16.0 million of the
increase while the rate environment and changes in product mix impacted interest
income negatively by $8.1 million. The average yield on the loan portfolio
declined 61 basis points to 8.60 percent.
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1 Excludes mortgage loans held for sale of $105.6 million and $95.9 million at
March 31, 1999 and 1998, respectively.
Investment Securities
Investment securities represent the second largest component of
interest-earning assets. The investment portfolio consists primarily of
securities for which an active market exists. Centura's policy is to invest
primarily in securities of the U.S. Government and its agencies and in other
high grade fixed income securities so as to balance liquidity risk, credit risk,
and price risk with an acceptable market return in the investment portfolio. At
March 31, 1999, investment securities totaled $2.1 billion, an increase of $5.4
million or 0.3 percent over the $2.1 billion at March 31, 1998. On average, the
investment portfolio grew $128.2 million to $2.1 billion for the three-month
period ending March 31, 1999 as compared with the same prior year period. As a
percentage of average interest-earning assets, the investment portfolio
represented 26.3 percent and 27.7 percent, respectively, for the three months
ended March 31, 1999 and 1998.
The held to maturity ("HTM") investment portfolio declined $145.6
million between comparable periods to total $65.7 million at March 31, 1999. The
decrease was due to scheduled maturities within the portfolio. At March 31,
1999, the fair value of the HTM portfolio was $67.9 million, representing $2.2
million more than amortized cost.
The available for sale ("AFS") investment portfolio is used as a part
of Centura's asset/liability management strategy and may be sold in response to
changes in interest rates, changes in prepayment risk, the need to manage
regulatory capital and other factors. At March 31, 1999, AFS investments were
$2.0 billion, up $150.9 million compared with $1.9 billion at March 31, 1998.
The recorded fair value of the AFS portfolio exceeded the amortized cost by
$10.5 million at March 31, 1999, which amount has been recorded, net of tax, as
a separate component of other comprehensive income.
Taxable equivalent interest income on investment securities for the
three months ended March 31, 1999 was $33.4 million, an increase of $458,000
over the $32.9 million earned in the comparable period of 1998. Changes in
interest rates, product mix, and credit spreads reduced taxable equivalent
interest income by $1.5 million whereas volume increases contributed $2.0
million. The average yield on investments declined 33 basis points to 6.39
percent between the two periods.
FUNDING SOURCES
Funding sources include total deposits, short-term borrowings and
long-term debt. Funding sources averaged $7.9 billion for the three month period
ended March 31, 1999, an $854.1 million or 12.1 percent increase from the
average balance of $7.1 billion at March 31, 1998. For additional information on
funding sources refer to Table 3, "Net Interest Income Analysis, Taxable
Equivalent Basis", and Table 8, "Net Interest Income and Volume/Rate Analysis,
Taxable Equivalent Basis".
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, time deposits and transaction
accounts increased moderately to $6.0 billion, up $117.4 million or 2.0 percent
over 1998.
Average deposits increased $264.1 million or 4.6 percent to total $6.0
billion at March 31, 1999. Average deposits for the three-month period ended
March 31, 1998 were $5.7 billion. Average certificates of deposit ("CD's") with
balances less than $100,000, decreased $144.1 million or 7.3 percent. Money
market accounts experienced the largest growth in the portfolio growing, on
average, $276.4 million or 26.9 percent as compared to the same period for 1998.
Centura's money market accounts offer competitive rates and provide greater
customer flexibility. Average checking and noninterest-bearing deposits grew
$38.6 million or 5.2 percent and $105.9 million or 13.3 percent, respectively.
From a portfolio mix perspective, the largest changes occurred between the money
market accounts, increasing from 17.9 percent to 21.7 percent and CD's less than
$100,000, decreasing from 34.3 percent to 30.4 percent. For additional
information on deposits, see Table 2, "Average Deposit Mix for the Three Months
Ended."
Interest expense on deposits decreased $3.9 million to $50.1 million
for the three months ended March 31, 1999 versus $54.0 million for the
comparable period of 1998. As shown in Table 3, "Net Interest Income
Analysis-Taxable Equivalent Basis", the cost of interest-bearing deposits
declined 45 basis points to 3.98 percent. The decline in the cost of funds was
evident throughout all deposit products.
Other Funding Sources
Slower deposit growth in recent periods influenced management to
increase the utilization of alternative nondeposit funding sources. During the
first quarter, Centura issued $125 million of 6.5 percent subordinated bank
notes. Consistent with Centura's asset/liability strategy, Centura also
continues to utilize short-term and long-term debt as a funding source.
Consequently, short-term borrowed funds, predominantly Federal funds purchased,
securities sold under repurchase agreements and master notes, increased $400.6
million on average to total $1.3 billion at March 31, 1999. At March 31, 1999
and 1998, borrowings totaled $1.1 billion and $1.0 billion, respectively. The
increase was driven by increases of $92.6 million and $79.8 million in federal
funds purchased and master notes, respectively. Interest expense on borrowings
increased by $2.9 million, primarily due to higher volume. The average rate paid
for these funds dropped 85 basis points over the comparable 1998 period to 4.86
percent.
At March 31, 1999, long-term debt, consisting predominantly of FHLB
advances, Capital Securities, subordinated bank notes and notes secured by lease
rentals, totaled $734.9 million as compared to $447.2 million at March 31, 1998.
The majority of the increase resulted from the issuance of the $125 million in
subordinated bank notes described above and an increase of $178.3 million in
borrowings from the Federal Home Loan Bank of Atlanta. The average amount of
long-term debt increased $189.4 million to $622.6 million for the first three
months of 1999 compared to $433.2 million for the comparable prior year period.
Rates paid for long-term funding decreased to 5.62 percent, a 40 basis point
decline over the prior year period.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the three months ended March 31, 1999 and 1998
was $82.8 million and $75.5 million, respectively. On a taxable equivalent
basis, net interest income increased $7.2 million to $84.5 million from $77.3
million the prior year. The increase was primarily due to a $861.9 million
increase in average interest-earning asset volume which outpaced the $748.2
million increase in average interest-bearing liabilities. As indicated on Table
8, "Net Interest Income and Volume/Rate Analysis-Taxable Equivalent Basis", the
distribution of balance sheet growth contributed $9.2 million to taxable
equivalent net interest income with the rate environment impacting taxable
equivalent net interest income unfavorably by $2.0 million.
The net interest margin, taxable equivalent net interest income divided
by average interest-earning assets, declined 10 basis points between the two
three-month periods to 4.22 percent. The margin was impacted by the interest
rate environment, tighter credit spreads, increased competition, and changes in
the product mix. The yield earned on interest-earning assets declined 49 basis
points between the two comparable periods while the rate paid on
interest-bearing liabilities declined only 43 basis points.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
Total nonperforming assets ("NPA's"), including nonperforming loans and
foreclosed properties, were $42.0 million at March 31, 1999 compared with $41.5
million at March 31, 1998. As a percentage of total assets, NPA's were 0.48
percent and 0.51 percent at March 31, 1999 and 1998, respectively. As a
percentage of total loans and foreclosed property(2), NPA's declined 6 basis
points to 0.73 percent. The increase in nonperforming loans between the periods
was principally from the leasing portfolio. Foreclosed property totaled $5.6
million and $6.8 million at March 31, 1999 and March 31, 1998, respectively.
Net charge-offs were 0.36 percent of average loans(3) for the first
quarter of 1999 versus 0.23 percent for the same period of 1998. Gross
charge-offs were $5.9 million and $3.9 million while recoveries were $824,000
and $935,000 for the three months ended March 31, 1999 and 1998, respectively.
Commercial loan charge-offs increased $1.1 million, representing 33.6 percent of
net charge-offs for the first quarter. Leasing charge-offs increased $785,000,
a result of increases in problem assets in the leasing portfolio and represented
23.0 percent of first quarter net charge-offs. The remainder of the increase in
charge-offs is spread amongst various loan categories.
For the three months ended March 31, 1999 and 1998, the provision for
loan losses was $6.3 million and $3.4 million, respectively, an increase of $2.9
million. Of the $6.3 million charged in 1999, $1.5 million was incurred as a
result of the merger with First Coastal in order to align the allowance for loan
loss factors between the two merged entities. The remaining increase in the
provision for loan losses was in response to growth in the loan portfolio and
the higher level of charge-offs.
The allowance for loan losses was $74.1 million at March 31, 1999,
representing 1.30 percent of loans outstanding(2), compared to $71.1 million, or
1.36 percent of loans outstanding(2) at March 31, 1998. At March 31, 1999, the
allowance for loan losses was 2.04 times nonperforming loans, a 1 basis point
decline from the coverage at March 31, 1998. For additional information with
respect to the activity in the allowance for loan losses, see Table 4 "Analysis
of Allowance for Loan Losses."
Accruing loans past due ninety or more days were $12.1 million, $11.5 million
and $9.1 million at March 31, 1999, March 31, 1998 and December 31, 1998,
respectively, which represented 0.21 percent, 0.22 percent and 0.16 percent of
outstanding loans, respectively
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2 Excludes mortgage loans held for sale of $105.6 million and $95.9 million at
March 31, 1999 and 1998, respectively.
3 Excludes mortgage loans held for sale, on average, of $124.9 million and
$67.2 million at March 31, 1999 and 1998, respectively.
Management believes the AFLL to be adequate based upon its current
judgment, evaluation, and analysis of the loan portfolio. Centura continuously
monitors overall credit quality and manages its credit processes, including
loans in past due and nonaccrual status. The AFLL represents management's
estimate of an amount adequate to provide for potential current losses inherent
in the loan portfolio. However, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because those risks include general economic trends as well as
conditions affecting individual borrowers, management's judgment of the AFLL is
necessarily approximate and imprecise. The AFLL is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the AFLL and the size of the AFLL
in comparison to peer banks identified by the regulatory agencies. No assurances
can be given that the ongoing evaluation of the loan portfolio in light of
economic conditions and other factors then prevailing will not require
significant future additions to the AFLL, thus adversely affecting the operating
results of Centura.
In addition to nonperforming assets and past due loans shown in Table
5, management has identified approximately $50 million in loans that are
currently performing in accordance with contractual terms that management
believes may become nonperforming during the remaining term of the loan. One
loan accounts for approximately $25 million of this amount. This loan is a
participation in a secured loan to a manufacturing corporation.
NONINTEREST INCOME AND EXPENSE
Noninterest income ("NII") grew $5.9 million, or 18.3 percent, to $38.2
million for the three months ended March 31, 1999 as compared with the same
period in 1998. Total revenues, defined as the sum of taxable equivalent net
interest income and noninterest income, as a percentage of noninterest income,
grew 166 basis points to 31.2 percent during the first quarter compared to 29.5
percent in the first quarter of 1998. NII, excluding securities gains, was $37.8
million and $32.0 million at March 31, 1999 and 1998, respectively.
The growth in NII was driven by increases in service charges on deposits
and mortgage income. Service charges on deposits, the largest component of NII,
increased $2.1 million between the two three-month periods. This increase was
principally the result of a mid-1998 restructuring of fees related to retail
checking account products. Mortgage income (composed of servicing revenues,
origination fees, servicing release premiums, and net gains or losses on the
sales of mortgage loans) increased $2.9 million between the comparable
three-month periods, principally as a result of increased loan volume and a
decrease of $53.2 million in the mortgage warehouse portfolio. Further impacting
the growth in NII was the acquisition of Capital Advisors, which, in the first
quarter, generated $803,000 of broker loan fees. Fees for trust services,
insurance and brokerage commissions, and other service charges were up by
$339,000, $403,000 and $429,000, respectively.
Excluding $6.9 million of non-recurring merger-related charges, noninterest
expense totaled $76.0 million, an increase of $7.3 million or 10.6 percent for
the period ended March 31, 1999. Including the merger-related expenses,
noninterest expense totaled $82.8 million for the first quarter of 1999.
Personnel expenses, the largest component of NIE, contributed $5.9 million to
this increase, influenced strongly by additional personnel related to the first
quarter 1999 acquisitions as well as the merger with Pee Dee Bankshares, Inc.
which was completed on March 27, 1998. Full-time equivalent additions were 168
between the two periods.
Fees for outsourced services, i.e. the outsourcing of various functions
such as items processing, property management, and call processing generated
from Centura's telephone banking center, are strongly volume based, and
increased $627,000 over the three months ended March 31, 1998. The increase was
due to greater volumes associated with growth in the customer base and the
integration of new customers gained through acquisitions. Other components to
the increase in NIE included increases of $700,000 in occupancy expense,
$656,000 in telephone costs, $347,000 in intangibles amortization and $822,000
for other expenses. Favorably impacting NIE were decreases of $625,000 in
marketing expense, $353,000 in equipment expense and $241,000 in data processing
and software costs.
In the first quarter, Centura also incurred expense related to Year
2000 remediation efforts. Direct and indirect expenses incurred in the first
quarter, which are included throughout the various components of NIE, totaled
$2.0 million. Refer to the "Year 2000" section for additional information
concerning the Year 2000 issue.
The efficiency ratio for the three-month period ended March 31, 1999
was 61.88 percent, an improvement of 77 basis points as compared to the 62.65
percent recorded for the same period in 1998.
INCOME TAX EXPENSE
Income tax expense recorded for the three months ended March 31, 1999
was $11.4 million compared to $12.2 million in the prior period. The current
effective tax rate is 35.57 percent, up from the 34.28 percent at March 31,
1998.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity as of March 31, 1999 was $692.6 million compared
to $618.9 at March 31, 1998. The ratio of shareholders' equity to period end
assets was 7.92 percent at March 31, 1999, up from 7.60 percent at period end
March 31, 1998. The change in equity between the two periods was influenced by
the retention of earnings, the issuance of common stock in connection with the
acquisition of Capital Advisors, and the exercise of stock options. Offsetting
increases to shareholders' equity between the two periods was the payment of
dividends. Shareholders' equity also included unrealized gains, net of tax, on
securities available for sale of $6.5 million at March 31, 1999 compared to $8.5
million for the comparable period last year.
Centura's common stock is traded on the New York Stock Exchange under
the symbol CBC. At March 31, 1999, Centura had 28,494,755 shares outstanding.
Cash dividends of $7.8 million were paid for the first three months of 1999.
Centura's capital ratios are greater than minimums required by
regulatory guidelines. It is Centura's intent to maintain an optimal capital and
leverage mix within the regulatory framework while providing a basis for future
growth. At March 31, 1999, Centura had the required capital levels to qualify as
well capitalized. At March 31, 1999, Tier I capital was $662.0 million and total
capital was $829.3 million. For risk-based capital calculations, Centura's
Capital Securities are included as a component of Tier I capital. Centura's
capital ratios are outlined in Table 6 titled "Capital Ratios."
LIQUIDITY
Centura's liquidity management objective is to meet maturing debt
obligations, fund loan commitments and deposit withdrawals, and manage
operations on a cost effective basis. Management believes that sufficient
resources are available to meet Centura's liquidity objective through its debt
maturity structure, holdings of liquid assets, and access to the capital markets
through a variety of funding vehicles.
Investment securities are an important tool to Centura's liquidity
management objective. Management, at its discretion, may elect to sell
investments from its available for sale portfolio to meet liquidity needs.
Centura's traditional funding sources include established federal funds
lines with major banks, advances from the Federal Home Loan Bank, proceeds from
matured investments, principal repayments on loans, and core deposit growth.
Centura also has an unsecured bank note facility for institutional investors. As
of March 31, 1999 and 1998, $125 million and $0 in bank notes were outstanding.
In addition, Centura accepts Eurodeposits, has a master note commercial paper
facility, and offers brokered certificates of deposits.
Management is not aware of any events or uncertainties that are
reasonably likely to have a material effect on Centura's liquidity, capital
resources, or operations. In addition, management is not aware of any pending
regulatory developments or proposals, which, if implemented, would have a
material effect on Centura.
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices
and rates. Centura's market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. Centura's objective is to
manage the mix of interest-sensitive assets and liabilities to minimize interest
rate risk and stabilize the net interest margin and the market value of equity
while optimizing profit potential.
Centura's Asset/Liability Management Committee seeks to maintain a
general balance between interest-sensitive assets and liabilities to insulate
net interest income and shareholders' equity from significant adverse changes in
market interest rates. Mismatches in interest rate repricings of assets and
liabilities arise from the interaction of customer business needs and Centura's
discretionary asset and liability management activities. Exposure to changes in
the level and direction of interest rates is managed by adjusting the
asset/liability mix through the use of various interest rate risk management
products, including derivative financial instruments.
Off-balance sheet derivative financial instruments, such as interest
rate swaps, interest rate floor and cap arrangements and interest rate futures
and option contracts ("swaps", "floors", "caps", "futures" and "options,"
respectively), are an integral part of Centura's interest rate risk management
activities. Centura has principally utilized interest rate swaps. Swaps are used
to manage interest rate risk, reduce funding costs, and allow Centura to utilize
diversified funding sources. Floors are used to protect certain designated
variable rate financial instruments from the downward effects of their repricing
in the event of a decreasing rate environment. Caps are used to protect certain
designated financial instruments from the negative repricing effects of an
increasing rate environment. Options provide the right, but not the obligation,
to put or call securities back to a third party at an agreed upon price under
the specific terms of each agreement. Table 7, "Off-Balance Sheet Derivative
Financial Instruments", summarizes Centura's off-balance sheet derivative
financial positions at March 31, 1999. On-balance sheet and off-balance sheet
financial instruments are managed on an integrated basis as part of Centura's
overall asset/liability management function. The value of any single component
of the on-balance sheet or off-balance sheet position should not be viewed
independently.
CURRENT ACCOUNTING ISSUES
In June 1999, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The statement addresses
accounting and reporting requirements for derivative instruments and for hedging
activities. SFAS 133 requires that all derivatives be recognized as either
assets or liabilities in the consolidated balance sheet and that those
instruments be measured at fair value. If certain conditions are met, a
derivative may be designated as a hedge of exposure to changes in fair value of
an asset or liability, exposure to variable cashflows of a forecasted
transaction or exposure of foreign currency denominated forecasted transactions.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivatives and its resulting designation. SFAS 133 is
effective for all quarters of fiscal years beginning after June 15, 1999. This
statement should not be applied retroactively to financial statements of prior
periods. Management has not quantified the impact of adopting SFAS 133 nor has
the timing of the adoption been determined.
The FASB also issues exposure drafts for proposed statements of
financial accounting standards. Such exposure drafts are subject to comment from
the public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect of
the proposed statements on the consolidated financial statements of Centura and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
YEAR 2000
The Year 2000 issue confronting Centura and its suppliers, customers,
customers' suppliers, and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year, without considering the upcoming change in the
century.
Centura formulated the initial Year 2000 awareness program in 1996. A
steering committee with representation from all the major areas of the bank and
executive management was established to determine internal operational
requirements to make its systems Year 2000 compliant. A formal Year 2000 Project
Plan was drafted and approved by the board of directors in 1998. In this effort,
Centura has followed the five management phases recommended by the Federal
Financial Institutions Examination Council: (1) awareness, (2) assessment, (3)
renovation, (4) validation, and (5) implementation. The project has been
organized along functional lines to ensure that information technology
(mainframe and distributed applications), vendors and other third parties, and
the customer base will receive adequate resource attention.
For its internal systems, Centura has completed the assessment phase
with a complete inventory of all hardware and software that could potentially be
impacted. A risk scoping analysis determined the schedule for remediation and
testing to ensure that mission critical systems would have ample time for
extensive validation. Through code enhancements, hardware and software upgrades,
and systems replacement, where needed, Centura has completed renovation or
replacement of all of its mission-critical systems. Initial system testing and
validation of internal and external mission-critical systems is complete. Final
integrated testing and validation of all systems is on schedule to be completed
by June 30, 1999.
Centura's assessment phase included the identification of external
vendors, significant customers and borrowers, market partners, and fund
providers whose operations and state of Year 2000 readiness may have a potential
impact on Centura. Relationships with third parties in which electronic data is
exchanged exposes Centura to some risk of loss in the event the other party
makes a mistake or is unable to perform. In the Year 2000 context, Centura
continues to work to identify where such exposure may exist and has developed
contingency plans in order to minimize risk of loss due to third parties' Year
2000 vulnerabilities.
Centura is exposed to credit risk due to the failure of its borrowers
to properly remediate their own systems as well as address their own customers'
or suppliers' Year 2000 state of readiness. Centura continues its due diligence
process of identifying all borrowers representing a material Year 2000 related
risk, evaluating their Year 2000 preparedness, assessing the aggregate Year 2000
borrower risk to Centura, and developing appropriate risk controls to manage and
mitigate the Year 2000 customer risk. As part of this process, borrowers are
assigned a risk rating based on their Year 2000 compliance readiness which is
being used to assess the need for additional specific loan loss reserves.
Management is in the process of validating contingency plans in the
event that final validation efforts for remediated systems are not completed in
accordance with current expectations. The Year 2000 contingency plans have been
designed to address any validation failure and to address failures of systems
outside Centura. The plans incorporate the use of third party service providers,
alternate vendors, and other contingency service providers. Validation of
Centura's Year 2000 contingency plans is on schedule to be completed by June 30,
1999.
Monitoring and managing the Year 2000 project continues to result in
additional nonrecurring expenditures. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which were not enhanced. In addition to the direct costs, indirect costs have
also been incurred. These indirect costs consist principally of the time devoted
by existing employees in monitoring software vendor progress, testing enhanced
software products, and implementing any necessary contingency plans. The Year
2000 project cost estimates include the estimated costs and time associated with
the assessment and monitoring of a third party's Year 2000 risk, and are based
on presently available information. However, there can be no guarantee that the
systems of other companies on which Centura's systems rely will be timely
converted, or that failure to convert by another company, or a conversion that
is incompatible with Centura's systems, would not have a material adverse effect
on Centura in future periods. The Emerging Issues Task Force provided guidance
concerning the accounting for the costs related to Year 2000 modification. The
costs of the modifications continue to be treated as regular maintenance and
repair and are charged to expense as incurred.
The direct and indirect costs are not expected to have a material
effect on Centura's results of operations. However, the distribution of Year
2000 expenses between direct and indirect may change due to the allocation of
internal resources. Including direct and indirect expenditures, management
currently estimates that the total costs to become Year 2000 compliant will
range between $8.0 and $10.0 million. The revised estimate, made in the third
quarter of 1998, was a result of allocating a greater proportion of salary
expense to Year 2000 expense for those Centura employees who are working to
resolve the Year 2000 issue. There was no incremental increase to noninterest
expense as a result of this allocation. In total, Centura has expensed
approximately $8.1 million in indirect and direct costs related to Year 2000
compliance efforts of which $2.0 million was incurred during the first quarter
of 1999.
TABLE 1
- ---------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
March 31, 1999 March 31, 1998 December 31, 1998
-----------------------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total Balance % of Total
- ---------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $1,123,600 19.3% $961,878 18.1% $1,126,721 19.3%
Commercial mortgage 1,239,164 21.3 1,006,792 18.9 1,142,962 19.5
Real estate construction 712,190 12.3 648,792 12.2 750,156 12.8
-----------------------------------------------------------------------------
Commercial loan portfolio 3,074,954 52.9 2,617,462 49.2 3,019,839 51.6
Consumer 423,393 7.3 390,850 7.3 437,815 7.5
Residential mortgage 1,819,571 31.3 1,773,322 33.3 1,873,944 32.0
Leases 406,299 7.0 451,273 8.5 434,556 7.4
Other 89,910 1.5 89,111 1.7 86,676 1.5
- ---------------------------------------------------------------------------------------------------------------------
Total loans $5,814,127 100.0% $5,322,018 100.0% $5,852,830 100.0%
=====================================================================================================================
Residential mortgage servicing
portfolio for others $3,059,000 $2,925,000 $2,877,000
===========================================================================================================
TABLE 2
- ----------------------------------------------------------------------------------------------
AVERAGE DEPOSIT MIX FOR THE THREE MONTHS ENDED
March 31, 1999 March 31, 1998
------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total
- ----------------------------------------------------------------------------------------------
Demand, noninterest bearing $ 903,556 15.0 % $ 797,677 13.9 %
Interest checking 782,369 13.0 743,731 13.0
Money market 1,304,117 21.7 1,027,743 17.9
Savings 304,234 5.1 334,285 5.8
- ----------------------------------------------------------------------------------------------
Time deposits:
CD's less than $100,000 1,825,032 30.4 1,969,099 34.3
CD's greater than $100,000 529,758 8.8 501,538 8.7
IRA 357,393 6.0 368,267 6.4
- --------------------------------------------------------------------------------------------
Total time deposits 2,712,183 45.2 2,838,904 49.4
- ----------------------------------------------------------------------------------------------
Total average deposits $ 6,006,459 100.0 % $ 5,742,340 100.0 %
==============================================================================================
TABLE 3
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
Three months ended Three months ended
March 31, 1999 March 31, 1998
--------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 5,849,901 $ 125,336 8.60 % $ 5,119,789 $ 117,431 9.21 %
Taxable securities 2,059,868 32,673 6.35 1,924,455 32,034 6.67
Tax-exempt securities 31,093 714 9.19 42,291 895 8.89
Short-term investments 43,799 575 5.25 36,244 416 4.59
------------- --------- ----------- -----------
Interest-earning assets, gross 7,984,661 159,298 8.00 7,120,779 150,776 8.49
Net unrealized gains on available
for sale securities 16,844 14,819
Other assets, net 768,757 662,876
------------- -----------
Total assets $ 8,770,262 $ 7,798,474
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking $ 782,369 $ 2,061 1.07 % $ 743,731 $ 2,890 1.58 %
Money market 1,304,117 12,445 3.87 1,027,743 11,122 4.39
Savings 304,234 1,197 1.60 334,285 1,683 2.04
Time 2,712,183 34,411 5.15 2,838,904 38,312 5.47
------------- --------- ----------- -----------
Total interest-bearing deposits 5,102,903 50,114 3.98 4,944,663 54,007 4.43
Borrowed funds 1,309,850 15,920 4.86 909,251 12,976 5.71
Long-term debt 622,591 8,750 5.62 433,198 6,515 6.02
------------- --------- ----------- -----------
Interest-bearing liabilities 7,035,344 74,784 4.29 6,287,112 73,498 4.72
Demand, noninterest-bearing 903,556 797,677
Other liabilities 138,786 110,313
Shareholders' equity 692,576 603,372
------------- -----------
Total liabilities and
shareholder's equity $ 8,770,262 $ 7,798,474
============= ===========
Interest rate spread 3.71 % 3.77 %
Net yield on interest-
earning assets $ 7,984,661 $ 84,514 4.22 % $ 7,120,779 $ 77,278 4.32 %
============= ========= =========== ===========
Taxable equivalent adjustment $ 1,726 $ 1,800
========= ===========
TABLE 4
- --------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
At and for the three months At and for the year
ended March 31, ended December 31,
----------------------------------------------------
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 72,310 $ 68,576 $ 68,576
Allowance for acquired loans 605 2,068 2,068
Provision for loan losses 6,266 3,393 15,644
Loans charged off (5,866) (3,851) (17,358)
Recoveries on loans previously charged off 824 935 3,380
- -------------------------------------------------------------------------------------------------------
Net charge-offs (5,042) (2,916) (13,978)
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 74,139 $ 71,121 $ 72,310
========================================================================================================
Loans at period-end $ 5,814,127 $ 5,322,018 $5,852,830
Average loans 5,849,901 5,130,906 5,611,039
Nonperforming loans 36,363 34,718 32,293
Allowance for loan losses to total loans 1 1.30 % 1.36 % 1.27 %
Net charge-offs to average loans 2 0.36 0.23 0.26
Allowance for loan losses to nonperforming loans 2.04 x 2.05 x 2.24 x
========================================================================================================
1 Excludes mortgage loans held for sale of $105.6 million, $95.9 million, and
$158.8 million at March 31, 1999, March 31, 1998 and December 31, 1998,
respectively.
2 Excludes mortgage loans held for sale, on average, of $124.9 million,
$67.2 million and $110.0 million at March 31, 1999, March 31, 1998 and
December 31, 1998, respectively.
TABLE 5
- --------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
March 31, December 31,
----------------------------------------------------
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 36,363 $ 34,718 $ 32,293
Foreclosed property 5,616 6,825 5,812
- --------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 41,979 $ 41,543 $ 38,105
========================================================================================================
Nonperforming assets to:
Loans and foreclosed property 1 0.73 % 0.79 % 0.67 %
Total assets 0.48 0.51 0.43
========================================================================================================
Accruing loans past due ninety days or greater $ 12,065 $ 11,450 $ 9,095
========================================================================================================
1 Excludes mortgage loans held for sale of $105.6 million, $95.9 million, and $158.8 million at March 31, 1999,
March 31, 1998 and December 31, 1998, respectively.
TABLE 6
- --------------------------------------------------------------------------------
CAPITAL RATIOS
Tier I Capital Total Capital Tier I Leverage
March 31, 1999 10.13 % 12.69 % 7.67 %
December 31, 1998 10.18 10.79 7.79
March 31, 1998 10.66 11.31 7.78
Minimum requirement 4.00 8.00 3.00-5.00
TABLE 7
- --------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements at March 31, 1999 are summarized below:
Weighted Average
Weighted Average Rate Remaining Estimated
Notional During the Quarter Contractual Fair Value
Amount Received Paid Term (Year) Gain (Loss)
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST RATE SWAPS
Corporation pays fixed/receives floating 497,459 5.07% 5.85% 2.9 $ (3,059)
Corporation pays variable/receives fixed 411,000 6.04% 5.11% 5.8 3,785
Corporation pays variable/receives variab1e 100,000 5.13% 5.51% 0.7 (21)
---------- ----------
Total interest rate swaps $1,008,459 $ 705
========== ==========
Interest rate cap and floor agreements at March 31, 1999 are summarized below:
Weighted Average
Remaining
Notional Average Current Index Contractual Carrying Estimated
Amount Rate * Rate Term (Years) Value Fair Value
- --------------------------------------------------------------------------------------------------------------
Interest Rate Floors $ 305,000 5.50% 5.00% 2.8 $ 566 $ 2,535
========== ======= =========
Interest Rate Caps $ 147,000 6.95% 5.00% 4.5 $ 448 $(1,456)
========== ======= ==========
* Average rate represents the average of the strike rates above or below which
Centura will receive payments on the outstanding cap or floor agreements.
TABLE 8
- --------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS
TAXABLE EQUIVALENT BASIS
Three months ended
March 31, 1999 and 1998
----------------------------------
Income/ Variance
Expense Attributable to
(Dollars in thousands) Variance Volume Rate
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 7,905 $ 15,992 ($8,087)
Taxable securities 639 2,190 (1,551)
Tax-exempt securities (181) (210) 29
Short-term investments 159 94 65
----------- ----------- -----------
Total interest income 8,522 18,066 (9,544)
INTEREST EXPENSE Interest-bearing deposits:
Interest checking (829) 143 (972)
Money market 1,323 2,745 (1,422)
Savings (486) (142) (344)
Time (3,901) (1,666) (2,235)
----------- ----------- -----------
Total interest-bearing deposits (3,893) 1,080 (4,973)
Borrowed funds 2,944 5,083 (2,139)
Long-term debt 2,235 2,686 (451)
----------- ----------- -----------
Total interest expense 1,286 8,849 (7,563)
----------- ----------- -----------
Net interest income $7,236 $9,217 ($1,981)
=========== =========== ===========
The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the relationship
of the absolute dollar change in each.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in Centura's market risk since
December 31, 1998 as described in Item 7A of Centura's Annual Report on Form
10-K for the year ended December 31, 1998. Centura's market risk was not
materially impacted by mergers accounted for as pooling-of-interests.
CENTURA BANKS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Centura Bank is a co-defendant in two actions consolidated for
discovery in the Superior Court of Forsyth County, North Carolina. The
plaintiffs in these actions allege that Centura Bank breached its duties and
committed other violations of law while acting as depository of substantial sums
of money allegedly converted by the personal and financial advisors of the
owners of such money and in connection with the creation of charitable trusts
established with a portion of the funds. The cases consolidated into the subject
case (Philip A.R. Staton, Ingeborg Staton, Mercedes Staton, et als. v. G. Thomas
Brame, Jerri Russell (formerly Jerri Brame), Centura Bank, et als.) were
originally brought in 1996. No claim for a specific amount of monetary damages
was made in the cases until 1999. Plaintiffs are seeking compensatory and treble
damages in amounts that are material to Centura and its subsidiaries taken as a
whole. Centura believes that Centura Bank has meritorious defenses to all claims
asserted in these cases and Centura Bank is defending the cases vigorously. In a
separate and related case instituted in 1996 (Piedmont Institute of Pain
Management; T. Stuart Meloy, M.D.; Nancy J. Faller, D.O. v. Poyner & Spruill,
L.L.P. and Centura Bank), consolidated for discovery with the Staton cases in
the Superior Court of Forsyth County, North Carolina, Centura Bank is alleged to
have provided the plaintiffs with false information regarding the establishment
and funding of a medical clinic by failing to exercise reasonable care or
competence in obtaining such information, and to have committed other violations
of law. Plaintiffs allege that they were damaged as a result of Centura Bank's
actions and seek specific performance or recovery of money damages in an amount
that is material to Centura and its subsidiaries taken as a whole. Centura and
Centura Bank believe Centura Bank has meritorious defenses to all claims
asserted in this case and Centura Bank is defending the case vigorously.
Management does not believe that Centura or Centura Bank have liability with
respect to these cases and is unable to estimate a range of loss.
Various other legal proceedings against Centura and its subsidiaries have
arisen from time to time in the normal course of business. Management believes
liabilities arising from these proceedings, if any, will have no material
adverse effect on the financial position or results of operations of Centura or
its subsidiaries.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
<
(a) Exhibits:
Exhibit Exhibit
No. Description of Exhibit Reference
4.1 Excerpts from Centura's Articles of Incorporation and
Bylaws relating to rights of holders of Registrant's capital
stock 4.1 (1)
4.2 Specimen certificate of Centura common stock 4.2 (2)
27.1 Financial Data Schedule - included in the electronically filed document
as required.
27.2 Financial Data Schedule- (Restated for pooling-of-interests with First
Coastal Bankshares, Inc.) included in the electronically filed document
as required.
(1) Included as the identified exhibit in Centura Banks, Inc. Form S-4
dated March 8, 1990, as amended by amendment No. 1 dated May 14,
1990, and incorporated herein by reference.
(2) Included as the identified exhibit in Centura Banks, Inc. Annual
Report on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
(b) Reports on Form 8-K:
(1) A report on Form 8-K dated January 11, 1999 was filed under Item 5,
Other Events, indicating Centura's announcement on January 11, 1999
of earnings for the year ended December 31, 1998.
(2) A report on Form 8-K dated March 26, 1999 was filed under Item 2,
Acquisition or Disposition of Assets, to announce the completion of
the merger with First Coastal Bankshares, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
CENTURA BANKS, INC.
Registrant
Date: May 14, 1999 By: /s/ Steven J. Goldstein
------------------------
Steven J. Goldstein
Chief Financial Officer
CENTURA BANKS, INC.
EXHIBIT INDEX
Sequential
Exhibit Description of Exhibit Page No.
- ------------------------------------------------------------------------------------------------------------------------------------
4.1 Excerpts from Centura's Articles of Incorporation and Bylaws
relating to rights of holders of Registrant's capital stock *(1)
4.2 Specimen certificate of Centura common stock *(2)
27.1 Financial Data Schedule **
27.2 Financial Data Schedule- Restated **
* Incorporated by reference from the following documents as noted:
(1) Included as the identified exhibit in Centura Banks, Inc. Form S-4
dated March 8, 1990, as amended by amendment No. 1 dated May 14, 1990,
and incorporated herein by reference.
(2) Included as the identified exhibit in Centura Banks, Inc. Annual Report
on Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
** Included in the electronically filed document as required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN GOLDSTEIN, CHIEF
FINANCIAL OFFICER OF CENTURA BANKS, INC.