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 June 30, 2000
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
As of July 31, 2000, Centura Banks, Inc. had 39,888,290 shares of Common Stock,
no par value, outstanding.
Exhibit Index on sequential page number 29.
CENTURA BANKS, INC.
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2000, June 30, 1999, and December 31, 1999 4
Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999 5
Consolidated Statement of Shareholders' Equity -
Six months ended June 30, 2000 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Securities Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
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
3
CONSOLIDATED BALANCE SHEETS
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
June 30, December 31,
---------------------------- -------------
(In thousands, except share data) 2000 1999 1999
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 338,326 $ 314,615 $ 356,416
Due from banks, interest-bearing 30,020 29,609 39,279
Federal funds sold 44,889 14,067 28,686
Investment securities:
Available for sale (cost of $2,590,477, $2,664,283
and $2,794,678, respectively) 2,540,527 2,625,903 2,727,514
Held to maturity (fair value of $49,820,
$99,579 and $114,521, respectively) 49,703 98,181 114,574
Loans 7,656,212 7,266,983 7,442,238
Less allowance for loan losses 103,271 96,125 95,500
- --------------------------------------------------------------------------------------------------
Net loans 7,552,941 7,170,858 7,346,738
Mortgage loans held for sale 45,187 83,983 86,532
Bank premises and equipment 146,595 162,887 159,300
Other assets 590,644 541,983 527,643
- --------------------------------------------------------------------------------------------------
Total assets $ 11,338,832 $ 11,042,086 $ 11,386,682
==================================================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 1,195,965 $ 1,220,468 $ 1,136,119
Interest-bearing 5,776,085 5,673,883 5,882,744
Time deposits over $100 776,054 891,065 878,189
- --------------------------------------------------------------------------------------------------
Total deposits 7,748,104 7,785,416 7,897,052
Borrowed funds 1,529,856 1,370,929 1,601,238
Long-term debt 1,064,936 898,407 904,354
Other liabilities 115,427 134,897 124,303
- --------------------------------------------------------------------------------------------------
Total liabilities 10,458,323 10,189,649 10,526,947
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 25,000,000 shares
authorized; none issued - - -
Common stock, no par value,
100,000,000 shares authorized; shares issued
and outstanding of 39,859,195; 39,754,091;
and 39,496,410, respectively 290,158 296,865 278,689
Common stock acquired by ESOP - (57) (28)
Retained earnings 626,615 580,176 623,870
Unearned compensation (4,635) - -
Accumulated other comprehensive loss (31,629) (24,547) (42,796)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 880,509 852,437 859,735
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,338,832 $ 11,042,086 $ 11,386,682
==================================================================================================
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
(In thousands, except share and per share data) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 175,324 $ 155,520 $ 343,146 $ 308,324
Investment securities:
Taxable 40,169 38,369 83,843 76,077
Tax-exempt 554 1,444 1,854 2,945
Short-term investments 792 453 1,919 964
Mortgage loans held for sale 879 2,065 2,388 4,737
- -----------------------------------------------------------------------------------------------------------------
Total interest income 217,718 197,851 433,150 393,047
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 74,947 65,299 148,199 130,722
Borrowed funds 22,126 15,609 45,690 33,212
Long-term debt 17,129 13,153 30,937 24,037
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 114,202 94,061 224,826 187,971
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 103,516 103,790 208,324 205,076
Provision for loan losses 11,920 8,347 17,895 15,928
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 91,596 95,443 190,429 189,148
NONINTEREST INCOME
Service charges on deposit accounts 15,993 15,930 31,348 30,924
Credit card and related fees 2,050 1,933 4,121 3,857
Other service charges, commissions and fees 9,125 9,825 19,937 19,214
Fees for trust services 2,758 2,743 5,509 5,182
Mortgage income 5,543 6,351 9,248 14,102
Other noninterest income 7,384 6,795 15,814 12,217
Securities (losses) gains, net (8,950) 235 (23,805) 1,010
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income 33,903 43,812 62,172 86,506
NONINTEREST EXPENSE
Personnel 43,710 41,652 87,476 86,178
Occupancy 5,778 6,026 12,231 12,341
Equipment 5,881 7,284 12,029 14,071
Foreclosed real estate losses and related
operating expense 444 286 1,106 723
Merger-related and other significant charges 4,178 - 28,516 6,858
Other operating 32,283 31,154 61,558 60,681
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Total noninterest expense 92,274 86,402 202,916 180,852
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 33,225 52,853 49,685 94,802
Income taxes 12,302 17,197 20,727 31,967
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 20,923 $ 35,656 $ 28,958 $ 62,835
=================================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.53 $ 0.90 $ 0.73 $ 1.58
Diluted 0.52 0.88 0.72 1.55
=================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING
Basic 39,784,411 39,768,801 39,691,391 39,784,247
Diluted 40,096,213 40,451,069 40,011,875 40,515,759
=================================================================================================================
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CENTURA BANKS, INC. AND SUBSIDIARIES
Six months ended June 30, 2000
Common
Common Stock Stock
------------------------ Acquired Retained Unearned
Shares Amount by ESOP Earnings Compensation
----------------------------------------------------------------
(Dollars in thousands)
Balance, December 31, 1999 39,496,410 $ 278,689 $ (28) $ 623,870 $ -
Comprehensive Income:
Net income - - - 28,958 -
Change in unrealized gains/losses on
securities, net of tax - - - - -
Comprehensive Income - - - - -
Common stock issued:
Stock option plans and stock awards 226,353 3,915 - - -
Restricted stock, net 123,049 5,114 - - (4,635)
Cash dividends declared, $0.66 per share - - - (26,228) -
Other 13,383 2,440 28 15 -
----------------------------------------------------------------
Balance, June 30, 2000 39,859,195 $ 290,158 $ - $ 626,615 $ (4,635)
================================================================
Accumulated Other
Comprehensive Income (Loss)
----------------------------------------
Unrealized Gains/ Minimum Total
(Losses) on Securities Pension Shareholders'
Available for Sale Liability Equity
-------------------------------------------------------
(Dollars in thousands)
Balance, December 31, 1999 $ (42,794) $ (2) $ 859,735
Comprehensive Income:
Net income - - 28,958
Change in unrealized gains/losses on
securities, net of tax 11,167 - 11,167
-----------
Comprehensive Income - - 40,125
Common stock issued:
Stock option plans and stock awards - - 3,915
Restricted stock, net - - 479
Cash dividends declared, $0.66 per share - - (26,228)
Other - - 2,483
-------------------------------------------------------
Balance, June 30, 2000 $ (31,627) $ (2) $ 880,509
=======================================================
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Centura Banks, Inc. and Subsidiaries
For the Six Months Ended
June 30,
(Dollars in thousands) 2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,958 $ 62,835
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 17,895 15,928
Depreciation on assets under operating leases 3,812 7,233
Depreciation and amortization, excluding depreciation on assets under operating leases 19,916 23,560
Deferred income tax expense (benefit) 1,416 (6,868)
Loan fees deferred, net 1,194 2,114
Bond discount accretion and premium amortization, net (192) 3,429
Losses (gains) on sales of investment securities 23,805 (1,010)
Gain on sales of equipment under lease - (1,923)
Proceeds from sales of mortgage loans held for sale 181,521 602,346
Originations, net of principal repayments, of mortgage loans held for sale (185,330) (527,366)
Decrease in accrued interest receivable 341 2,660
Increase in accrued interest payable 2,799 587
Net change in other assets and other liabilities (4,758) (42,434)
--------- ---------
Net cash provided by operating activities 91,377 141,091
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (184,123) (164,483)
Purchases of:
Securities available for sale (496,006) (628,228)
Premises and equipment (16,882) (8,303)
Other (80,000) (20,704)
Proceeds from:
Sales of securities available for sale 552,874 149,170
Maturities and issuer calls of securities available for sale 178,355 367,714
Maturities and issuer calls of securities held to maturity 10,234 58,906
Sales of foreclosed real estate 5,242 2,943
Dispositions of premises and equipment 11,066 1,801
Dispositions of equipment used in leasing activities - 3,862
Other - 855
Cash acquired, net of cash paid, in mergers and acquisitions (1,250) (15,479)
--------- ---------
Net cash used by investing activities (20,490) (251,946)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (148,948) 44,044
Net decrease in borrowed funds (71,382) (94,188)
Proceeds from issuance of long-term debt 435,500 152,408
Repayment of long-term debt (274,890) (11,688)
Cash dividends paid (26,228) (21,408)
Proceeds from issuance of common stock, net 3,915 2,780
Repurchases of common stock - (9,176)
--------- ---------
Net cash (used)/provided by financing activities (82,033) 62,772
--------- ---------
Decrease in cash and cash equivalents (11,146) (48,083)
Cash and cash equivalents at January 1 424,381 406,374
--------- ---------
Cash and cash equivalents at June 30 $ 413,235 $ 358,291
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the six months for:
Interest $ 222,027 $ 187,384
Income taxes 21,942 16,872
Noncash transactions:
Stock issued in purchase acquisitions and other stock issuances, net 7,657 9,365
Change in unrealized securities gains (losses), net 17,213 52,278
Loans transferred to foreclosed property 3,985 1,062
========= =========
See accompanying notes to consolidated financial statements.
7
CENTURA BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(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"), Centura Capital Trust I, Triangle
Capital Trust, and NCS Mortgage Lending Company. Centura Bank also has various
wholly-owned subsidiaries. The interim financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP") for interim
financial statements and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. Because the accompanying consolidated
financial statements do not include all of the information and footnotes
required by GAAP, they should be read in conjunction with the audited financial
statements and accompanying footnotes in Centura's Annual Report on Form 10-K
for the year ended December 31, 1999. Operating results for the six and three
month periods ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the full year.
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.
Certain items reported in prior periods have been reclassified to
conform to current period presentation. Such reclassifications had no impact on
net income or shareholders' equity.
Note 2: Mergers and Acquisitions
The following table summarizes activity for merger-related charges
through June 30, 2000 related to the first quarter 2000 merger with Triangle
Bancorp, Inc. and the first quarter 1999 merger with First Coastal Bankshares,
Inc.:
- ------------------------------------------- ------------- -------------- ------------- ------------- -------------
Initial Liability Liability Amount
accrued balance accrued utilized in Remaining
(in thousands) liability 12/31/99 in 2000 2000 Balance
- ------------------------------------------- ------------- -------------- ------------- ------------- -------------
Severance, change in control and
other employee-related costs $ 770 $ 424 $ 7,627 $ 6,240 $ 1,811
Write-off of unrealizable assets 1,259 200 634 834 --
Non-employee related contract terminations 2,071 317 1,438 634 1,121
Professional costs 1,683 -- 10,122 10,122 --
Other merger-related charges 1,075 -- 7,022 5,237 1,785
- ------------------------------------------- ------------- -------------- ------------- ------------- -------------
Merger-related charges $ 6,858 $ 941 $ 26,843 $ 23,067 $ 4,717
=========================================== ============= ============== ============= ============= =============
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 320,484
shares and 731,512 shares for the six months ended June 30, 2000 and 1999,
respectively.
8
Note 4: Commitments and Contingencies
Centura Bank is a co-defendant in two actions (the "Staton Cases") in the
Superior Court of Forsyth County, North Carolina, which were filed in 1996 and
have been consolidated for discovery. The plaintiffs are Philip A.R. Staton,
Ingeborg Staton, Mercedes Staton, and trusts created by Ingeborg Staton and
Mercedes Staton. They allege that Centura Bank breached its duties and committed
other violations of law 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. No claim for a specific amount of monetary damages was made in the
cases until 1999. Plaintiffs seek compensatory and treble damages in amounts
that are material to Centura and its subsidiaries taken as a whole. Centura and
Centura Bank believe that Centura Bank has meritorious defenses to all claims
asserted in these cases and Centura Bank is defending the cases vigorously.
In 1999, Ingeborg Staton, Mercedes Staton and trusts created by Ingeborg
Staton and Mercedes Staton filed a motion to amend their complaint in the Staton
Cases to add allegations of fraudulent concealment, violation of the Bank
Bribery Act, and negligent supervision of employees. Centura Bank filed a
response opposing the proposed amendments. The movants thereupon filed a new
action (the "1999 Case") in Forsyth County, North Carolina Superior Court
asserting those claims against Centura Bank, certain of its named current and
former officers and persons described as "one or more John Does and one or more
Jane Does" who are identified in the complaint as current or former directors of
the Bank. By consent of the parties, the 1999 Case has been consolidated with
the Staton Cases and the PIPM Case. Centura and Centura Bank believe that
Centura Bank has meritorious defenses to all claims asserted in this case and
Centura Bank intends to defend it vigorously. Management does not believe that
Centura or Centura Bank has liability with respect to these cases, and
accordingly, is unable to estimate a risk or range of loss.
In a separate and related case, also instituted in 1996 in the Superior
Court of Forsyth County, North Carolina by Piedmont Institute of Pain Management
and three physicians associated with it (the "PIPM Case"), which has been
consolidated for discovery with the Staton Cases, 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 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.
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, taken as a whole.
9
Note 5: Segment Information
Refer to Centura's Annual Report on Form 10-K for the year ended
December 31, 1999 for information with respect to Centura's policies for
defining and accounting for its segments. Financial information by segment for
the three months ended June 30, 2000 and 1999 is as follows:
2000
---------------------------------------------------------------------------------
(In thousands) Retail Treasury Other Total Adjustments Consolidated
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Interest income $ 152,914 $ 54,104 $ 7,456 $ 214,474 $ 3,244 (A) $ 217,718
Interest expense 77,079 32,656 889 110,624 3,578 (A) 114,202
Funds transfer pricing allocation 15,451 (16,438) (3,096) (4,083) 4,083 (B) ---
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net interest income 91,286 5,010 3,471 99,767 3,749 103,516
Provision for loan losses 5,151 --- 950 6,101 5,819 (C) 11,920
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net interest income after
provision for loan losses 86,135 5,010 2,521 93,666 (2,070) 91,596
Noninterest income 31,425 147 7,423 38,995 (5,092) (A) 33,903
Noninterest expense 69,654 2,734 9,271 81,659 10,615 (A) 92,274
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Income before income taxes 47,906 2,423 673 51,002 (17,777) 33,225
Income tax expense/(benefit) 14,876 (720) (524) 13,632 (1,330) (C) 12,302
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net income $ 33,030 $ 3,143 $ 1,197 $ 37,370 $(16,447) $ 20,923
=================================== ============ =========== ============ ============= =============== =============
Period-end assets $6,773,230 $3,262,477 $ 237,835 $ 10,273,542 $1,065,290(D) $ 11,338,832
1999
---------------------------------------------------------------------------------
(In thousands) Retail Treasury Other Total Adjustments Consolidated
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Interest income $ 133,198 $ 48,167 $ 10,900 $ 192,265 $ 5,586 (A) $ 197,851
Interest expense 67,110 23,503 1,156 91,769 2,292 (A) 94,061
Funds transfer pricing allocation 17,824 (17,707) (5,547) (5,430) 5,430 (B) ---
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net interest income 83,912 6,957 4,197 95,066 8,724 103,790
Provision for loan losses 5,872 --- 866 6,738 1,609 (C) 8,347
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net interest income after
provision for loan losses 78,040 6,957 3,331 88,328 7,115 95,443
Noninterest income 35,232 1,458 13,492 50,182 (6,370) (A) 43,812
Noninterest expense 70,718 6,042 9,452 86,212 190 (A) 86,402
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Income before income taxes 42,554 2,373 7,371 52,298 555 52,853
Income tax expense/(benefit) 12,944 1,494 (81) 14,357 2,840 (C) 17,197
- ----------------------------------- ------------ ----------- ------------ ------------- --------------- -------------
Net income $ 29,610 $ 879 $ 7,452 $ 37,941 (2,285) 35,656
=================================== ============ =========== ============ ============= =============== =============
Period-end assets $6,371,359 $3,254,240 $ 613,962 $ 10,239,561 $ 802,525 (D) $ 11,042,086
- -------------------------------------
(A) Reconciling item reflects adjustments that are necessary to reconcile to
consolidated totals, including merger-related charges.
(B) Reconciling item relates to the elimination of funds transfer pricing
credits and charges.
(C) Reconciling item adjusts balances from cash basis
to accrual method of accounting.
(D) Reconciling item relates to assets not allocated to segments including
premises and equipment, cash and due from banks, and certain other assets.
10
CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations For the Six Months Ended June 30, 2000
Some of the statements in this Form 10-Q, as well as statements made by
Centura Banks, Inc. ("Centura") in filings with certain governmental regulatory
bodies, periodic press releases and other public communications, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "estimates," "plans," "projects," "expects,"
"may," "will," "should," "approximately," or "anticipates" or the negative
thereof or other variations thereof or comparable terminology, or by discussion
of strategies, each of which involves risks and uncertainties. Centura has based
these forward-looking statements on its current expectations and projections
about future events based upon its knowledge of facts as of the date of this
Form 10-Q and its assumptions about future events. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
outside of Centura's control that may cause the actual results or performance of
Centura to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Those
factors include, but are not limited to, the following: (i) expected cost
savings from completed 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 completed 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, and (viii) changes may occur in the
securities markets.
Centura has no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
GENERAL
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of 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 more
than 250 full-service financial offices, the Centura Highway, Centura's
multifaceted customer access system that includes telephone banking, an
extensive ATM network, PC banking with on-line bill payment, and a suite of
Internet products and services.
Centura's common stock is traded on the New York Stock Exchange under
the symbol "CBC."
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
EARNINGS SUMMARY
Net income for the six months ended June 30, 2000 totaled
$64.7 million or $1.62 per diluted share, excluding merger-related and other
significant charges of $50.7 million incurred principally as a result of the
February 18, 2000 merger with Triangle Bancorp, Inc. ("Triangle"). Included in
these charges were $22.1 million in losses on securities sales incurred as a
result of restructuring Triangle's investment portfolio and $1.7 million of
fixed asset write-offs resulting from the unexpected Hannaford in-store
closings. Net income for the comparable period in 1999 was $69.6 million or
$1.72 per diluted share, excluding merger-related charges of $8.4 million
incurred in connection with the combination of First Coastal Bankshares, Inc.
("First Coastal") and Centura on March 26, 1999. Including merger-related and
other significant charges, net income and diluted earnings per share
11
were $29.0 million and $0.72, respectively, for the six months ended June 30,
2000, compared with $62.8 million and $1.55, respectively, for the six months
ended June 30, 1999. Other key factors responsible for Centura's results of
operations are discussed throughout Management's Discussion and Analysis below.
INTEREST-EARNING ASSETS
Interest-earning assets, net, consisting primarily of loans and
investment securities, averaged $10.3 billion for the six months ended June 30,
2000, an increase of $279.5 million or 2.8 percent over the average balance for
the first six months of 1999. Growth in the commercial loan portfolio accounted
for the majority of the increase as discussed below. Period-end interest-earning
assets at June 30, 2000 and 1999 were $10.4 billion and $10.1 billion,
respectively, an increase of 2.4 percent.
For additional information on average interest-earning assets, refer to
the discussion below, Table 3, "Net Interest Income Analysis-Taxable Equivalent
Basis," and Table 8, "Net Interest Income and Volume/Rate Analysis, Taxable
Equivalent Basis."
Loans
Loans represent the largest component of interest-earning assets. Loans
ended the period at $7.7 billion, up 5.4 percent over the period-end balance of
$7.3 billion at June 30, 1999. The loan portfolio balance at June 30, 2000
reflects required divestitures of approximately $74.5 million divested in
connection with the merger with Triangle.
On average, the loan portfolio grew 5.1 percent to average $7.5 billion
for the first six months of 2000 compared with $7.2 billion averaged for the
same period in 1999. Table 1 provides a summary of the loan portfolio and mix
percentages as of June 30, 2000, June 30, 1999 and December 31, 1999. Average
loan growth was driven primarily by volume generated in the commercial and
consumer loan portfolios. On average, commercial loans increased $310.4 million
between the two six-month periods while consumer loans (equity lines,
installment loans, and other credit line loans) were higher, on average, by
$231.9 million. The leasing portfolio, on average, declined $164.0 million,
driven by the continued decreased emphasis on the product and normal
amortization.
Taxable equivalent interest income earned on the loan portfolio for the
six months ended June 30, 2000 and 1999, was $343.9 million and $308.9 million,
respectively. The growth in interest income on loans was driven mainly by rate
variances, which drove $19.5 million of the increase while volume variances
generated $15.4 million. Overall, the loan portfolio yielded 9.07 percent for
the first half of 2000 compared with 8.60 percent for the first half of 1999 and
8.75 percent for 1999's full year.
Investment Securities
The investment portfolio provides Centura with a source of earnings and
liquidity. The investment portfolio consists predominantly of securities of the
US Government and its agencies and other high grade, fixed income securities. At
June 30, 2000 and 1999, investment securities totaled $2.6 billion and $2.7
billion, respectively. For the six months ended June 30, 2000, the investment
portfolio averaged $2.6 billion, declining 1.9 percent from the comparable
period for 1999.
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. This portfolio is carried at fair value
with unrealized gains or losses recorded, net of tax, in accumulated other
comprehensive income. At June 30, 2000, AFS investments had a market value of
$2.5 billion, down $85.4 million compared with June 30, 1999. Included in the
market value of the AFS portfolio are unrealized losses of $50.0 million or
$31.6 million on a net of tax basis. Rising interest rates during 1999
contributed to these losses.
The held to maturity ("HTM") investment portfolio declined $48.5
million between June 30, 1999 and June 30, 2000 to total $49.7 million for the
current period-end. This decline primarily resulted from scheduled maturities in
the portfolio and management's election under Statement of Financial Accounting
Standards No. 115
12
("SFAS 115") to transfer $55.4 million from the HTM portfolio
acquired with the Triangle merger to the AFS portfolio. Unrealized losses on the
transferred securities of $708,000 were recorded as a separate component of
equity on the date of transfer.
In connection with the Triangle merger, Centura incurred losses of
$22.1 million on sales of investment securities as a result of restructuring
Triangle's investment portfolio. This restructuring was in response to the
current interest rate environment and to conform the interest rate risk position
of the Triangle investment portfolio to the overall risk position of Centura.
FUNDING SOURCES
Funding sources include deposits, short-term borrowings and long-term
debt. Funding sources averaged $9.1 billion for the six-month period ended June
30, 2000, increasing $349.1 million over the $8.8 billion averaged for the six
months ended June 30, 1999.
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, time deposits and transaction
accounts, ended the period at $7.7 billion and also averaged $7.7 billion for
the first six months of 2000. At and for the period ended June 30, 1999, total
deposits were $7.8 billion and $7.7 billion on average, respectively. The
decline in the deposit portfolio was partially due to deposits divested in
February and April 2000 in connection with the Triangle merger, which totaled
approximately $307.0 million.
Table 2 details average balances for the deposit portfolio and the mix
of deposits for the six months ended June 30, 2000 and 1999. On average, money
market accounts grew $142.8 million or 9.2 percent. This growth was offset by
declines of $94.2 million and $72.4 million in savings accounts and transaction
accounts, respectively. Total interest paid on deposits and the cost of funds on
deposits for the six months ended June 30, 2000 and 1999, influenced by changes
in the portfolio mix and the interest rate environment, were $148.2 million and
4.53 percent compared with $130.7 million and 4.03 percent, respectively. As
shown in Table 8, the increase of $17.5 million in interest expense paid on
deposits between periods was driven principally by rate variances, which
increased expense by $14.4 million, followed by volume variances which
contributed $3.1 million to expense.
Other Funding Sources
Management continues to utilize alternative funding sources in addition
to traditional deposits to fund balance sheet growth. Alternative short-term
borrowed funds principally include Federal funds purchased, securities sold
under repurchase agreements and master notes. On average, short-term borrowed
funds averaged $1.5 billion for the six months ended June 30, 2000, an increase
of $145.3 million over the same period for 1999. Period-end short-term
borrowings also totaled $1.5 billion at June 30, 2000 compared to $1.4 billion
at June 30, 1999. The growth in short-term borrowings principally stems from
loan growth modestly exceeding deposit growth, resulting in an increase in the
usage of repurchase agreements, whose average balance grew $72.7 million between
periods, followed by an increase of $45.1 million in the average balance for
Federal funds purchased. The cost of funds for short-term debt increased 113
basis points to 5.86 percent when comparing the first six months of 2000 with
the first six months of 1999, a result of the above mentioned increased
utilization of higher cost Federal funds purchased and repurchase agreements in
combination with rising interest rates. From a rate/volume perspective, as shown
in Table 8, changes in the rate environment accounted for $8.8 million of the
$12.5 million increase in short-term borrowing expense followed by volume
variances which contributed $3.7 million.
13
Long-term debt consists predominantly of FHLB advances, Capital
Securities and subordinated bank notes and averaged $990.3 million for the
period ended June 30, 2000 compared with $827.5 million for 1999's first half of
the year. At the end of June 30, 2000 and 1999, long-term debt was $1.1 billion
and $898.4 million, respectively. An increase of $193.8 million in FHLB
borrowings offset by a $27.6 million decrease in notes payable as a result of
selling CLG, Inc. ("CLG"), Centura's technology leasing subsidiary, in the third
quarter of 1999, attributed to the increase. The cost of funds increased 40
basis points to 6.18 percent for year-to-date 2000 compared with 5.78 percent
for year-to-date 1999. The increase in cost of funds on long-term debt is
attributable to repricing variable rate debt combined with rising interest
rates.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the six months ended June 30, 2000 and 1999 was
$208.3 million and $205.1 million, respectively. On a taxable equivalent basis,
net interest income increased $2.5 million to $213.4 million from $210.9 million
earned in the prior year. As shown in Table 8, Net Interest Income and
Volume/Rate Analysis, the increase in net interest income, taxable equivalent,
was driven by volume variances which contributed $1.9 million of the increase
whereas rate variances added $619,000.
The net interest margin, taxable equivalent, for year-to-date 2000 was
4.08 percent compared with 4.20 percent for 1999. Pressure on the net interest
margin largely resulted from Centura's liability sensitive balance sheet
configuration, gradual changes in the deposit mix, targeted retail product
pricing to ensure retention of Triangle's high value customers and Centura's
investment in a bank-owned life insurance transaction.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES (AFLL)
As of June 30, 2000 and 1999, the AFLL was $103.3 million and $96.1
million, respectively, or 1.35 percent and 1.32 percent, respectively, of total
loans outstanding. The AFLL continues to adequately cover nonperforming loans
("NPL's"), providing coverage at 2.50 times and 1.61 times the nonperforming
loan balance at June 30, 2000 and 1999, respectively.
Total nonperforming assets ("NPA's"), including NPL's and foreclosed
properties, were $45.9 million at June 30, 2000, compared to June 30, 1999's
balance of $65.2 million, representing a decline of $19.3 million or 29.6
percent. During the second quarter of 1999, Centura placed on nonperforming
status $23.0 million of loans to Pluma, Inc., an Eden, North Carolina based
manufacturer and distributor of fleece and jersey sportswear. A portion of these
loans to Pluma were subsequently charged-off later in 1999. As a percentage of
total assets, NPA's were 0.41 percent at June 30, 2000 and 0.38 percent at June
30, 1999, excluding the Pluma credit. With the Pluma credit, NPA's were 0.59
percent of total assets at June 30, 1999.
Net charge-offs for the six months ended June 30, 2000 declined $2.1
million from the prior year comparable period to total $10.1 million. Net
charge-offs to average loans were 0.27 percent and 0.34 percent for year-to-date
June 30, 2000 and 1999, respectively. Commercial and industrial net charge-offs
accounted for the majority of the decline, decreasing $3.1 million between
periods. The remaining difference was spread throughout various loan categories.
The amount provided for the AFLL included in the year-to-date 2000
results of operations totaled $17.9 million compared with $15.9 million recorded
in 1999. The amount provided for in 2000 includes $5.0 million of additional
loan loss provisions recorded in order to align the credit risk management
methodologies of Triangle with those of Centura. Similarly, of the amount
recorded in 1999, $1.5 million of additional provision was recorded as a result
of the merger with First Coastal.
14
Management believes the AFLL is 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 probable incurred losses in the
loan portfolio. However, there are risks of additional losses that 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 $40.0 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.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the six months ended June 30, 2000, excluding
gains and losses on sales of investment securities, totaled $86.0 million, up
$481,000 from the $85.5 million earned for the six months ended June 30, 1999.
As a percentage on total revenues (defined as the sum of net interest income,
taxable equivalent plus noninterest income), noninterest income before
securities gains and losses was 28.7 percent and 28.8 percent for year-to-date
2000 and 1999, respectively. Including gains and losses on sales of investment
securities, noninterest income was $62.2 million and $86.5 million for the
six-month periods ended June 30, respectively. Sales of investment securities
resulted in net realized losses of $23.8 million for 2000 compared with net
realized gains of $1.0 million for 1999. Included in the 2000 net realized
losses were $22.1 million of securities losses related to restructuring the
investment portfolio acquired in the Triangle merger.
Service charges on deposit accounts, comprising approximately 36.5
percent of noninterest income before gains and losses on sales of investment
securities, represents Centura's largest source of noninterest income. Service
charges on deposits remained relatively flat between periods, growing $424,000.
Mortgage income for the six months ended June 30, 2000 was $9.2 million,
declining $4.9 million from 1999. Mortgage loan origination fees and loan sale
income, unfavorably affected by rising interest rates, declined $3.4 million and
$3.1 million, respectively, between the six month periods. Included in 1999's
loan sale income were gains as a result of balance sheet restructuring totaling
$2.2 million. Offsetting a portion of the decline in mortgage income in 2000
were $1.5 million of earnings generated by NCS Mortgage Lending Company, a
subsidiary of Centura that was acquired in the first quarter of 2000. Operating
lease income, directly impacted by the third quarter 1999 sale of CLG, declined
$2.3 million between 1999 and 2000.
Included in current period other noninterest income are gains of $10.2
million received on the sale of branches required by the Federal Reserve and
Department of Justice to be divested as a result of the merger with Triangle.
Approximately $4.9 million of this gain was offset by write-downs and losses on
investments classified in other assets and losses on sales of securities from
the investment portfolio, other than those losses associated with the Triangle
investment portfolio restructuring. Finally, the sale of CLG resulted in a
decline to other noninterest income of approximately $1.9 million that CLG
generated from its leasing activities.
Excluding merger-related expenses of $28.5 million and $6.9 million for
the six months ended June 30, 2000 and 1999, respectively, noninterest expenses
remained flat, increasing $406,000 or 0.2 percent. Personnel related expenses
rose $1.3 million. Included in 2000's personnel costs are incremental salary
expenses related to the addition of the newly acquired NCS employees, the
filling of previously vacant positions, an increase in 401(k) expense as a
result of management's decision to increase the employer matching contribution
and an increase in incentive compensation accruals. Favorably impacting
personnel expense in 2000 were the third quarter 1999 sale of CLG, Inc and
efficiencies realized from the merger with Triangle. Professional fees, which
included fees totaling approximately $1.1 million paid for Year 2000 remediation
during 1999, declined $682,000. Fees for outsourced services, a volume driven
expense, rose $949,000 while losses other than loans also increased, rising
$812,000.
15
Marketing and equipment expenses declined $987,000 and $2.0 million,
respectively. The remaining difference was spread across various other
noninterest expense categories.
INCOME TAX EXPENSE
Income tax expense recorded for the six months ended June 30, 2000 was
$20.7 million compared to $32.0 million in the prior year period. For the six
months ended June 30, 2000, the effective tax rate was 41.72 percent, impacted
by certain merger-related charges which were not tax deductible. This compares
with an effective tax rate of 33.72 percent for the six months ended June 30,
1999.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity as of June 30, 2000 was $880.5 million compared to
$852.4 million at June 30, 1999. The change in equity between the two periods
was influenced by the retention of earnings, the exercise of stock options and
changes in unrealized gains or losses on securities available for sale. Also
impacting the equity balance were the payment of dividends to shareholders which
totaled $26.2 million for the first six months of 2000 compared with $21.4
million paid for the same period in 1999. Unrealized losses on available for
sale securities, net of tax, were $31.6 million and $24.5 million at June 30,
2000 and 1999, respectively. As of June 30, 2000 and 1999, the ratio of
shareholders' equity to period-end assets was 7.77 percent and 7.72 percent,
respectively.
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 June 30, 2000, Centura had the required capital levels to qualify as
well capitalized with total capital of $1.1 billion and Tier 1 capital of $907.8
million. See Table 6 for a summary of Centura's 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.
Centura's traditional funding sources include established Federal funds
lines with major banks, advances from the FHLB, repurchase agreements, proceeds
from matured investments, principal repayments on loans, and core deposit
growth. Centura also has an unsecured bank note facility for institutional
investors. In addition, Centura accepts Eurodeposits, has a master note
commercial paper facility, and offers brokered CD's.
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.
16
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 June 30, 2000. 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. Centura does not use derivative instruments in a speculative
manner.
SUMMARY RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
Net income before pre-tax merger-related and other significant charges
totaling $11.2 million was $28.7 million or $0.72 per diluted share for the
quarter ended June 30, 2000 compared to $35.7 million or $0.88 per diluted share
earned during the second quarter of 1999. Merger-related and other significant
charges included $1.7 million of fixed asset write-offs resulting from the
Hannaford in-store closings and $7.1 million related to the sales of certain
investment securities incurred as a result of completing the restructuring of
Triangle's investment portfolio. For second quarter 2000, excluding the $11.2
million of merger-related and other significant charges, the return on average
assets and average equity were 1.04 percent and 13.28 percent respectively,
compared with second quarter 1999 ratios of 1.30 percent and 16.52 percent,
respectively. Not included in the $11.2 million, but impacting second quarter
2000 results, was an additional $5 million of provision expense recorded to
align the credit risk management policies of Triangle with those of Centura.
Comparing current year and prior year second quarters, the net interest
margin fell 12 basis points to 4.10 percent. Pressure on the net interest margin
largely resulted from Centura's liability sensitive balance sheet configuration,
gradual changes in the deposit mix, targeted retail product pricing to ensure
retention of Triangle's high value customers and Centura's investment in a
bank-owned life insurance transaction.
Net charge-offs for the second quarter of 2000 were $6.1 million or
0.32 percent of average loans compared with second quarter 1999 net charge-offs
of $5.9 million, representing 0.33 percent of average loans. Commercial and
industrial net charge-offs declined approximately $607,000 between periods,
while leasing, credit cards, and other consumer net charge-offs rose $393,000,
$184,000, and $220,000, respectively. The provision for loan losses increased
$3.6 million between periods, resulting in total provision expense of $11.9
million for the second quarter of 2000, primarily a result of the additional
provision recorded during the quarter as mentioned above.
17
Noninterest income, before securities losses, was $42.9 million for the
three months ended June 30, 2000 as compared to $43.6 million for the three
months ended June 30, 1999. The decline in noninterest income was mainly due to
declines of $808,000 and $2.3 million in revenues received from mortgage and
leasing activities, respectively. With respect to mortgage revenue, reduced
volume caused by rising interest rates contributed to declines in origination
fees and loan sale income which outweighed the positive impact of income
generated by the newly acquired NCS Mortgage Lending Company and the gain on
sale of mortgage servicing of $793,000. Leasing income was down largely due to
the sale of CLG in the third quarter of 1999. Other noninterest income includes
gains of $4.7 million received on the sale of branches required by the Federal
Reserve and Department of Justice to be divested as a result of the merger with
Triangle. This gain was entirely offset by write-downs on investments classified
in other assets and losses on sales of securities from the investment portfolio,
other than those losses associated with the Triangle investment portfolio
restructuring. Including securities losses, noninterest income for the second
quarter 2000 decreased $9.9 million compared to second quarter 1999, totaling
$33.9 million. Securities losses in the second quarter of 2000 included $7.1
million in losses related to the restructuring of Triangle's investment
portfolio.
Noninterest expenses, before $4.2 million in merger-related charges,
increased $1.7 million to total $88.1 million for the three months ended June
30, 2000. Contributing to the increase in noninterest expenses were incremental
salary expenses related to the addition of the newly acquired NCS employees, the
filling of previously vacant positions, an increase in 401(k) expense as a
result of management's decision to increase the employer matching contribution
and an increase in incentive compensation accruals. Favorably impacting second
quarter 2000 personnel expenses were the third quarter 1999 sale of CLG and
efficiencies realized from the merger with Triangle. Fees for outsourced
services, a volume driven expense, increased $539,000 quarter to quarter. Cost
savings were realized on expenditures related to equipment, declining $1.4
million between periods.
CURRENT ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board ("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. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities- Deferral of the Effective Date of
FASB 133." This Statement defers the effective date of SFAS 133 for one year.
SFAS 133, as amended, is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management is in the process of evaluating
the impact of adopting SFAS 133. Centura anticipates adopting this Statement on
January 1, 2001.
18
TABLE 1
- ------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
June 30, 2000 June 30, 1999 December 31, 1999
-------------------------------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $1,984,562 25.9 % $1,362,424 18.7 % $1,759,546 23.6 %
Commercial mortgage 1,432,978 18.7 1,740,306 23.9 1,554,234 20.9
Real estate construction 986,325 12.9 949,838 13.2 942,719 12.7
-------------------------------------------------------------------------------------
Commercial loan portfolio 4,403,865 57.5 4,052,568 55.8 4,256,499 57.2
Consumer 559,641 7.3 566,264 7.8 587,590 7.9
Residential mortgage 2,334,318 30.5 2,113,073 29.1 2,214,522 29.8
Leases 249,453 3.3 416,940 5.7 292,672 3.9
Other 108,935 1.4 118,138 1.6 90,955 1.2
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $7,656,212 100.0 % $7,266,983 100.0 % $7,442,238 100.0 %
===========================================================================================================================
Residential mortgage servicing
portfolio for others $3,199,000 $3,488,000 $3,153,000
===========================================================================================================================
TABLE 2
- ------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT MIX FOR THE SIX MONTHS ENDED
June 30, 2000 June 30, 1999
---------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------
Demand, noninterest bearing $ 1,117,918 14.5 % $ 1,134,919 14.8 %
Interest checking 907,275 11.8 962,676 12.5
Money market 1,694,806 22.0 1,552,018 20.2
Savings 270,367 3.5 364,556 4.7
- ------------------------------------------------------------------------------------------------------------------
Time deposits:
Certificates of deposit < $100,000 2,467,541 32.0 2,407,861 31.4
Certificates of deposit > $100,000 813,852 10.6 798,385 10.4
IRA 428,804 5.6 456,125 6.0
- -------------------------------------------------------------------------------------------------------------
Total time deposits 3,710,197 48.2 3,662,371 47.8
- ------------------------------------------------------------------------------------------------------------------
Total average deposits $ 7,700,563 100.0 % $ 7,676,540 100.0 %
==================================================================================================================
19
TABLE 3
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
Three months ended Three months ended
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 7,604,252 $ 175,651 9.19 % $ 7,231,015 155,881 8.57 %
Taxable securities 2,484,962 41,719 6.72 2,560,568 40,232 6.29
Tax-exempt securities 38,489 847 8.80 114,621 2,240 7.82
Short-term investments 62,499 792 5.01 38,371 453 5.46
Mortgage loans held for sale 38,387 879 9.16 113,277 2,065 7.29
------------ ------------ ------------ ------------
Interest-earning assets, gross 10,228,589 219,888 8.56 10,057,852 200,871 7.95
Net unrealized (losses) gains on
available for sale securities (66,639) (3,749)
Other assets, net 926,041 918,725
------------ ------------
Total assets $ 11,087,991 $ 10,972,828
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking $ 870,212 $ 2,795 1.29 % $ 957,844 $ 2,736 1.15 %
Money market 1,676,769 19,142 4.59 1,589,421 15,119 3.82
Savings 259,689 886 1.37 350,772 1,345 1.54
Time 3,644,556 52,124 5.75 3,666,671 46,099 5.04
------------ ------------ ------------ ------------
Total interest-bearing deposits 6,451,226 74,947 4.67 6,564,708 65,299 3.99
Borrowed funds 1,477,197 22,126 5.93 1,346,639 15,609 4.59
Long-term debt 1,046,180 17,129 6.48 888,269 13,153 5.86
------------ ------------ ------------ ------------
Interest-bearing liabilities 8,974,603 114,202 5.09 8,799,616 94,061 4.27
Demand, noninterest-bearing 1,130,684 1,152,537
Other liabilities 113,385 155,137
Shareholders' equity 869,319 865,538
------------ ------------
Total liabilities and
shareholder's equity $ 11,087,991 $ 10,972,828
Interest rate spread 3.47 % 3.68 %
Net yield on interest-
earning assets $ 10,228,589 $ 105,686 4.10 % $ 10,057,852 $ 106,810 4.22 %
============ ============ ============ ============
Taxable equivalent adjustment $ 2,170 $ 3,020
============ ============
20
TABLE 3, Continued
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
Six months ended Six months ended
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 7,542,782 $ 343,872 9.07 % $ 7,177,489 308,918 8.60 %
Taxable securities 2,615,910 87,256 6.67 2,547,685 79,704 6.26
Tax-exempt securities 70,075 2,815 8.04 114,852 4,548 7.92
Short-term investments 74,248 1,919 5.11 41,463 964 5.46
Mortgage loans held for sale 52,504 2,388 9.09 120,440 4,737 7.87
------------ ------------ ------------ ------------
Interest-earning assets, gross 10,355,519 438,250 8.43 10,001,929 398,871 7.97
Net unrealized (losses) gains on
available for sale securities (70,540) 3,570
Other assets, net 925,525 915,166
------------ ------------
Total assets $ 11,210,504 $ 10,920,665
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking $ 907,275 $ 6,063 1.34 % $ 962,676 $ 5,608 1.17 %
Money market 1,694,806 37,555 4.46 1,552,018 29,289 3.81
Savings 270,367 1,908 1.42 364,556 2,912 1.61
Time 3,710,197 102,673 5.57 3,662,371 92,913 5.12
------------ ------------ ------------ ------------
Total interest-bearing deposits 6,582,645 148,199 4.53 6,541,621 130,722 4.03
Borrowed funds 1,542,624 45,690 5.86 1,397,328 33,212 4.73
Long-term debt 990,322 30,937 6.18 827,494 24,037 5.78
------------ ------------ ------------ ------------
Interest-bearing liabilities 9,115,591 224,826 4.93 8,766,443 187,971 4.31
Demand, noninterest-bearing 1,117,918 1,134,919
Other liabilities 112,288 156,988
Shareholders' equity 864,707 862,315
------------ ------------
Total liabilities and
shareholder's equity $ 11,210,504 $ 10,920,665
============ ============
Interest rate spread 3.50 % 3.66 %
Net yield on interest-
earning assets $ 10,355,519 $ 213,424 4.08 % $ 10,001,929 $ 210,900 4.20 %
============ ============ ============ ============
Taxable equivalent adjustment $ 5,100 $ 5,824
============ ============
21
TABLE 4
- -----------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
At and for the six months At and for the year ended
ended June 30, ended December 31,
------------------------------------------------------
(Dollars in thousands) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 95,500 $ 91,894 $ 91,894
Allowance related to loans sold and subsidiary sale - (100) (556)
Allowance for acquired loans - 605 605
Provision for loan losses 17,895 15,928 40,828
Loans charged off (13,965) (14,008) (41,044)
Recoveries on loans previously charged off 3,841 1,806 3,773
- -----------------------------------------------------------------------------------------------------------
Net charge-offs (10,124) (12,202) (37,271)
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 103,271 $ 96,125 $ 95,500
===========================================================================================================
Loans at period-end $ 7,656,212 $ 7,266,983 $ 7,442,238
Average loans 7,542,782 7,177,489 7,258,979
Nonperforming loans 41,286 59,573 29,415
Allowance for loan losses to total loans 1.35 % 1.32 % 1.28 %
Net charge-offs to average loans 0.27 0.34 0.52
Allowance for loan losses to nonperforming loans 2.50 x 1.61 x 3.25 x
===========================================================================================================
TABLE 5
NONPERFORMING ASSETS AND PAST DUE LOANS
June 30, December 31,
------------------------------------------------------
(Dollars in thousands) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
Nonperforming loans $ 41,286 $ 59,573 $ 29,415
Foreclosed property 4,643 5,646 6,421
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 45,929 $ 65,219 $ 35,836
===========================================================================================================
Nonperforming assets to:
Loans and foreclosed property 0.60 % 0.90 % 0.48 %
Total assets 0.41 0.59 0.31
===========================================================================================================
Accruing loans past due ninety days or greater $ 13,251 $ 11,214 $ 14,366
===========================================================================================================
22
TABLE 6
- ----------------------------------------------------------------
CAPITAL RATIOS
Tier I Capital Total Capital Tier I Leverage
-------------- ------------- ---------------
June 30, 2000 10.4 % 12.7 % 8.1 %
December 31, 1999 10.3 12.8 7.9
June 30, 1999 10.3 12.9 7.9
Minimum requirement 4.0 8.0 3.0-5.0
TABLE 7
- ----------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements at June 30, 2000 are summarized below:
Weighted Average Rate Weighted Avg.
During the Quarter Remaining Estimated
Notional ------------------ Contractual Fair Value
(Dollars in thousands) Amount Received Paid Term (Years) Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Corporation pays fixed/receives floating $ 431,779 6.70% 5.86 % 2.4 $ 10,700
Corporation pays variable/receives fixed 786,000 6.94 7.06 4.0 (13,057)
-------------------------------------------------------------------------
Total interest rate swaps $ 1,217,779 $ (2,357)
=========================================================================
Interest rate cap and floor agreements at June 30, 2000 are summarized below:
Weighted Average
Remaining Estimated
Notional Average Current Index Contractual Carrying Fair Value
(Dollars in thousands) Amount Rate * Rate Term (Years) Value Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS
LIBOR $ 80,000 5.69 % 6.77 1.6 $ 271 $ 16
Constant Maturity Swap Rate 125,000 5.20 7.26 3.3 - 82
------------------------------------------------------------------------------------
$ 205,000 $ 271 $ 98
====================================================================================
INTEREST RATE CAPS
LIBOR $ 22,000 7.00 % 6.77 % 3.3 $ 325 $ 320
Constant Maturity Swap Rate 125,000 6.94 7.26 3.3 - (2,523)
------------------------------------------------------------------------------------
$ 147,000 $ 325 $ (2,203)
====================================================================================
* Average rate represents the average of the strike rates above or below which Centura will receive payments on the outstanding
cap or floor agreements.
23
TABLE 8
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS
TAXABLE EQUIVALENT BASIS
Six months ended Three months ended
June 30, 2000 and 1999 June 30, 2000 and 1999
------------------------------------ -----------------------------------
Variance Variance
Income/ Attributable to Income/ Attributable to
Expense ---------------------- Expense ---------------------
(Dollars in thousands) Variance Volume Rate Variance Volume Rate
- -----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 34,954 $ 15,440 $ 19,514 $ 19,770 $ 7,316 $ 12,454
Taxable securities 7,552 2,175 5,377 1,487 (1,212) 2,699
Tax-exempt securities (1,733) (1,798) 65 (1,393) (1,645) 252
Short-term investments 955 837 118 339 304 35
Mortgage loans held for sale (2,349) (2,999) 650 (1,186) (1,617) 431
- -----------------------------------------------------------------------------------------------------------------
Total interest income 39,379 13,655 25,724 19,017 3,146 15,871
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking 455 (336) 791 59 (264) 323
Money market 8,266 2,857 5,409 4,023 867 3,156
Savings (1,004) (692) (312) (459) (322) (137)
Time 9,760 1,227 8,533 6,025 (280) 6,305
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 17,477 3,056 14,421 9,648 1 9,647
Borrowed funds 12,478 3,706 8,772 6,517 1,623 4,894
Long-term debt 6,900 4,988 1,912 3,976 2,493 1,483
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 36,855 11,750 25,105 20,141 4,117 16,024
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 2,524 $ 1,905 $ 619 $ (1,124) $ (971) $ (153)
=================================================================================================================
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.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in Centura's exposure to market risk
since December 31, 1999 as described in Item 7A of Centura's Annual Report on
Form 10-K for the year ended December 31, 1999. Mergers accounted for as
pooling-of-interests did not materially impact Centura's market risk.
25
CENTURA BANKS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
26
Item 4. Submission of Matters to a Vote of Securities Holders
At the Registrant's Annual Meeting of Shareholders held April 19,2000,
all of the nominees for Director listed under the caption "Election of
Directors" in the Registrant's Proxy Statement dated March 17, 2000 were duly
elected Directors of the Registrant. Approximately 75.9 percent of the
outstanding shares were voted. Of the 30,081,582 shares voted, each director
received at least 28,575,674 shares or 95.0 percent in favor.
Also submitted to a vote of Shareholders at the Registrant's Annual
Meeting on April 19, 2000 was the approval to amend and restate Centura's
articles of incorporation, as fully described under the caption "Approval of
Amended and Restated Articles of Incorporation" in the Registrant's Proxy
Statement dated March 17, 2000. Approximately 75.9 percent of the outstanding
shares were voted. Of the 30,081,582 shares voted, 29,719,766 shares or
approximately 98.7 percent were voted in favor. A copy of the amended and
restated articles of incorporation is included as Exhibit 3.1 with this filing.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Exhibit
------------- ----------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Centura Banks, Inc.
10.1 Second Amendment to the Centura Banks, Inc. Omnibus Equity Compensation Plan
10.2 Form of Change of Control Agreement between Centura Banks, Inc. and B. Thomas
Rogers, Jr.
10.3 Form of Change of Control Agreement between Centura Banks, Inc. and H. Kel
Landis, III.
10.4 Form of Change of Control Agreement between Centura Banks, Inc. and Scott M.
Custer
10.5 Form of Change of Control Agreement between Centura Banks, Inc. and Steven J.
Goldstein
10.6 Employment Agreement dated July 18, 2000 between William H. Wilkerson and
Centura Banks, Inc.
27.1 Financial Data Schedule
27.2 Financial Data Schedule- (Restated for pooling-of-interests with Triangle
Bancorp, Inc.)
27
(b) Reports on Form 8-K:
(1) A report on Form 8-K dated April 14, 2000 was filed under Item 5,
Other Events, indicating Centura's announcement on April 14, 2000 of
earnings for the quarter ended March 31, 2000.
(2) A report on Form 8-K dated June 2, 2000 was filed under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits. Centura filed
as an exhibit to Item 7 consolidated financial statements for the
years ended December 31, 1999, 1998 and 1997 to reflect the merger
with Triangle Bancorp, Inc. as if the two entities had been combined
for all periods presented.
28
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: August 14, 2000 By: /s/ Steven J. Goldstein
-----------------------
Steven J. Goldstein
Chief Financial Officer
29
CENTURA BANKS, INC.
EXHIBIT INDEX
Sequential
Exhibit Description of Exhibit
- -------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Centura Banks, Inc.
10.1 Second Amendment to the Centura Banks, Inc. Omnibus Equity
Compensation Plan
10.2 Form of Change of Control Agreement between Centura Banks, Inc. and
B. Thomas Rogers, Jr.
10.3 Form of Change of Control Agreement between Centura Banks, Inc. and
H. Kel Landis, III.
10.4 Form of Change of Control Agreement between Centura Banks, Inc. and
Scott M. Custer
10.5 Form of Change of Control Agreement between Centura Banks, Inc. and
Steven J. Goldstein
10.6 Employment Agreement dated July 18, 2000 between William H.
Wilkerson and Centura Banks, Inc.
27.1 Financial Data Schedule
27.2 Financial Data Schedule- Restated for pooling-of-interests with Triangle
Bancorp, Inc.
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN GOLDSTEIN, CHIEF
FINANCIAL OFFICER OF CENTURA BANKS, INC.
30