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, 2002
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
RBC 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.)
1417 Centura Highway, 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)
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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
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 2,219,614,882 /(1)/
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(Class of Stock) (Shares outstanding as of July 31, 2002)
(1) One hundred percent owned directly or indirectly by Royal Bank of Canada.
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Report with the reduced disclosure
format.
RBC CENTURA BANKS, INC.
FORM 10-Q
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. (a) RBC Centura Banks, Inc. Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2002, and December 31, 2001 5
Consolidated Statements of Operations -
Three and Six months ended June 30, 2002 and 2001 6
Consolidated Statement of Shareholder's Equity -
Six months ended June 30, 2002 7
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001 8
Notes to Consolidated Financial Statements 9-12
(b) RBC Centura Banks, Inc. and Predecessor
Historical Consolidated Financials Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 14
Consolidated Statement of Operations -
June 6, 2001 through June 30, 2001,
April 1, 2001 through June 5, 2001,
Three months ended June 30, 2000,
June 6, 2001 through June 30, 2001,
January 1, 2001 through June 5, 2001,
and Six months ended June 30, 2000 15-16
Consolidated Statement of Shareholder's Equity -
January 1, 2001 through June 5, 2001,
and June 6, 2001 through June 30, 2001 17
Consolidated Statement of Cash Flows -
June 6, 2001 through June 30, 2001,
January 1, 2001 through June 5, 2001,
and Six months ended June 30, 2000 18
Notes to Consolidated Financial Statements 19-28
Item 2. Management's Discussion and Analysis of Financial Condition
2
and Results of Operations 29-38
Item 3. Quantitative and Qualitative Disclosure About Market Risk 39
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Change in Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURES 40
3
RBC CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 1. (a) RBC Centura Banks, Inc. Consolidated Financial Statements
(Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
4
CONSOLIDATED BALANCE SHEETS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
June 30, December 31,
-------- ------------
(In thousands, except share data) 2002 2001
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ASSETS
Cash and due from banks $ 286,301 $ 290,226
Due from banks, interest-bearing 18,531 16,197
Federal funds sold 8,292 39,937
Investment securities:
Available for sale (cost of $3,945,173 and $3,738,100
respectively) 4,037,503 3,798,889
Loans 7,769,727 7,783,383
Less allowance for loan losses 107,163 103,828
- ---------------------------------------------------------------------------------------------------------
Net loans 7,662,564 7,679,555
Mortgage loans held for sale 183,505 114,966
Bank premises and equipment 158,325 164,138
Goodwill and intangibles 1,463,398 1,452,430
Other assets 426,542 497,594
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Total assets $ 14,244,961 $ 14,053,932
=========================================================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 1,194,012 $ 1,201,382
Interest-bearing 5,481,790 5,765,039
Time deposits over $100 628,741 463,286
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Total deposits 7,304,543 7,429,707
Borrowed funds 1,954,545 1,830,065
Long-term debt 2,326,628 2,165,355
Other liabilities 269,238 315,375
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Total liabilities 11,854,954 11,740,502
SHAREHOLDER'S EQUITY
Common stock, no par value,
2,500,000,000 shares authorized; shares issued
and outstanding of 2,219,614,882 2,357,190 2,357,190
Accumulated other comprehensive income 55,849 29,965
Retained earnings (23,032) (73,725)
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Total shareholder's equity 2,390,007 2,313,430
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Total liabilities and shareholder's equity $ 14,244,961 $ 14,053,932
=========================================================================================================
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF OPERATIONS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
Three months Six months
ended June 30, ended June 30,
----------------------------- ---------------------------
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------- ---------------------------
INTEREST INCOME
Loans, including fees $ 109,407 $ 51,826 $ 221,360 $ 55,951
Investment securities:
Taxable 53,848 16,336 107,532 16,901
Tax-exempt 268 151 531 151
Short-term investments 144 1,093 316 2,319
Mortgage loans held for sale 2,786 1,298 4,854 1,298
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Total interest income 166,453 70,704 334,593 76,620
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INTEREST EXPENSE
Deposits 33,843 20,388 63,121 23,319
Borrowed funds 7,720 6,612 15,029 6,608
Long-term debt 20,497 6,757 40,052 7,304
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Total interest expense 62,060 33,757 118,202 37,231
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NET INTEREST INCOME 104,393 36,947 216,391 39,389
Provision for loan losses 10,400 3,084 21,961 3,426
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Net interest income after provision for loan losses 93,993 33,863 194,430 35,963
NONINTEREST INCOME
Service charges on deposit accounts 16,525 6,222 33,014 6,312
Credit card and related fees 2,028 876 4,349 876
Other service charges, commissions and fees 6,815 2,555 13,680 2,555
Fees for trust services 2,320 895 4,670 895
Mortgage income 5,400 2,003 10,031 2,003
Other noninterest income 5,516 2,407 10,275 2,407
Securities gains, net 1,568 1,593 2,424 1,593
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Total noninterest income 40,172 16,551 78,443 16,641
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NONINTEREST EXPENSE
Personnel 47,669 22,758 97,037 27,220
Occupancy 6,885 4,529 13,516 7,722
Equipment 6,641 2,269 13,498 2,269
Foreclosed real estate losses and related
operating expense 730 87 1,639 87
Merger-related and other significant charges - 38,629 - 38,629
Goodwill and intangible amortization 6,477 7,074 12,954 7,074
Other operating 30,417 10,787 57,992 14,582
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Total noninterest expense 98,819 86,133 196,636 97,583
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Income (loss) before income taxes 35,346 (35,719) 76,237 (44,979)
Income tax expense (benefit) 11,849 (9,168) 25,544 (12,527)
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NET INCOME (LOSS) $ 23,497 $ (26,551) $ 50,693 $ (32,452)
======================================================================================== ===========================
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
Six months ended June 30, 2002
Unrealized Gains Total
Common Stock Retained on Securities Shareholder's
---------------------------------
Shares Amount Earnings Available for Sale Equity
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, December 31, 2001 2,219,614,882 $ 2,357,190 $ (73,725) $ 29,965 $ 2,313,430
Comprehensive income:
Net income - - 50,693 - 50,693
Unrealized gains on available for sale
securities, net of tax - - - 25,884 25,884
-----------
Comprehensive income - - - - 76,577
----------------------------------------------------------------------------------
Balance, June 30, 2002 2,219,614,882 $ 2,357,190 $ (23,032) $ 55,849 $ 2,390,007
==================================================================================
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
Six months Six months
ended ended
(Dollars in thousands) June 30, 2002 June 30, 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 50,693 $ (32,452)
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses 21,961 3,426
Depreciation on assets under operating leases 1,310 377
Depreciation and amortization, excluding depreciation on assets under operating leases 27,899 11,435
Amortization of purchase accounting adjustments 31,236 412
Deferred income taxes (16,816) (14,828)
Loan fees deferred, net (92) 385
Impairment loss on goodwill - 1,900
Impairment loss- premises, equipment, and capitalized software held for sale - 27,190
Bond premium amortization and (discount accretion), net 4,870 789
Gains on sales of investment securities (2,424) (1,593)
Loss on sales of foreclosed real estate 807 -
Proceeds from sales of mortgage loans held for sale 466,364 96,891
Originations, net of principal repayments, of mortgage loans held for sale (417,670) (97,045)
Increase in accrued interest receivable (1,450) (4,798)
Decrease in accrued interest payable (4,111) (6,654)
Net change in other assets and other liabilities (2,674) (56,390)
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Net cash provided (used) by operating activities 159,903 (70,955)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans (26,688) 24,319
Purchases of:
Securities available for sale (905,856) (159,957)
Premises and equipment (9,670) (9,668)
Mortgage loans held for sale from related party (120,880) -
Proceeds from:
Sales of securities available for sale 278,223 99,489
Maturities and issuer calls of securities available for sale 429,894 12,459
Sales of foreclosed real estate 6,493 548
Dispositions of premises and equipment 3,517 2,126
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Net cash used by investing activities (344,967) (30,684)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (134,857) 48,616
Net increase (decrease) in borrowed funds 124,480 (3,776)
Proceeds from issuance of long-term debt 460,250 50,000
Repayment of long-term debt (298,045) (2,448)
------------ -------------
Net cash provided by financing activities 151,828 92,392
------------ -------------
Decrease in cash and cash equivalents (33,236) (9,247)
Cash and cash equivalents at beginning of period 346,360 526,822
------------ -------------
Cash and cash equivalents at end of period $ 313,124 $ 517,575
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 122,313 $ 43,885
Income taxes 34,684 5,225
Noncash transactions:
Unrealized securities gains (losses), net 43,729 17,542
Loans transferred to foreclosed property 3,204 373
============ =============
See accompanying notes to consolidated financial statements.
8
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
As previously disclosed, at the close of business on June 5, 2001, Rock
Merger Subsidiary, Inc., a wholly owned subsidiary of Royal Bank of Canada
("Royal Bank"), a Canadian chartered bank, merged with and into Centura Banks,
Inc. ("Predecessor") and the surviving corporation was Predecessor, which was
renamed RBC Centura Banks, Inc. ("RBC Centura"). As a result of the transaction,
RBC Centura became a wholly owned subsidiary of Royal Bank. Each share of Rock
Merger Subsidiary, Inc. common stock issued and outstanding immediately prior to
the effective time of the merger was converted into one share of common stock of
RBC Centura. There are 2,219,614,882 shares of common stock currently
outstanding, all of which are owned directly or indirectly by Royal Bank. The
common stock is registered under Section 12(g) of the Securities Exchange Act of
1934, as amended.
On June 1, 2002, RBC Centura Bank, a wholly owned subsidiary of RBC
Centura completed a merger with Security First Network Bank ("SFNB"), herein
referred to as the SFNB Merger. SFNB was a financial institution wholly owned by
Royal Bank. RBC Centura issued approximately 53.1 million shares to an indirect
wholly owned subsidiary of Royal Bank to effect the combination and acquired
$66.0 million in assets ($51.2 million in loans) along with deposits of $17.4
million. SFNB offered traditional banking services over the Internet and was
acquired by Royal Bank on September 30, 1998 for a purchase price of
approximately $13 million, which resulted in goodwill of $2.3 million being
recorded and pushed down to SFNB. Due to the fact that RBC Centura and SFNB were
under common control at the time of the SFNB Merger, the transfer of the assets
and liabilities of SFNB has been accounted for at historical cost in a manner
similar to a pooling of interests. For financial accounting purposes, the SFNB
Merger resulted in a change in reporting entity and the restatement of the
financial statements for all periods prior to June 1, 2002. This restatement
reflects SFNB as being the historical accounting entity and only includes the
assets and results of operations of RBC Centura from the date of its acquisition
by Royal Bank on June 5, 2001. The merger of SFNB with RBC Centura Bank was the
second phase of the consolidation of Royal Bank's U.S. retail banking operations
with the first phase involving the sale of certain banking assets and the
assumption of certain deposits by RBC Centura Bank from SFNB on August 17, 2001.
As previously disclosed, that transaction involved the acquisition of
approximately $184 million in deposits and $95 million in loans.
Reference herein to RBC Centura relates to the financial condition and
the results of operations for the restated periods as discussed above.
Predecessor historical results are presented separately for periods prior to and
including June 5, 2001 in which common control did not exist in Item 1., Section
(b). As previously discussed, Royal Bank's basis in both RBC Centura and SFNB
was "pushed down" to each respective entity and is therefore reflected in the
combined balance sheet and results of operations.
The accompanying unaudited consolidated financial statements include
the accounts of RBC Centura and its wholly owned subsidiaries, RBC Centura Bank
(named Centura Bank prior to October 30, 2001, the "Bank"), Centura Capital
Trust I, Triangle Capital Trust, and NCS Mortgage Lending Company ("NCS"). Until
the divestiture of the interest in the third quarter of 2001, RBC Centura also
had a 49 percent ownership interest in First Greensboro Home Equity, Inc.
("FGHE"), a home equity mortgage company, that was accounted for under the
equity method. The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") for interim financial
statements and with 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
9
footnotes required by GAAP, they should be read in conjunction with the audited
financial statements and accompanying footnotes in RBC Centura's Annual Report
on Form 10-K for the year ended December 31, 2001. Operating results for the six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year.
All significant intercompany transactions are eliminated in
consolidation. In the opinion of RBC Centura, all adjustments considered
necessary for a fair statement of the results for the interim periods presented
have been included (such adjustments are normal and recurring in nature).
Accounting policies followed in the presentation of interim financial results
are presented on pages 36 to 42 of RBC Centura's Annual Report on Form 10-K for
the year ended December 31, 2001. See discussion below for changes to existing
accounting policy subsequent to December 31, 2001 for financial information by
segment and goodwill and other intangibles.
Certain items reported in prior periods have been reclassified to
conform to current period presentation. Such reclassifications had no impact on
net income or shareholder's equity.
Recently Issued Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method of accounting. The new standard also requires intangible assets acquired
in a business combination to be recognized as an asset apart from goodwill if
they meet certain criteria. SFAS No. 142 applies to all goodwill and intangible
assets acquired in a business combination. Under the new standard, all goodwill,
including goodwill acquired before initial application of the standard, is not
amortized but must be tested for impairment at least annually at the reporting
unit level, as defined in the standard. Intangible assets other than goodwill
are to be amortized over their useful lives and reviewed for impairment. As
required by the standard, goodwill currently carried on the balance sheet was
subject to an initial assessment for impairment. RBC Centura completed its
initial assessment review and determined that there was no impairment of
goodwill as of January 1, 2002. RBC Centura has evaluated the lives of
intangible assets as required by SFAS No. 142 and no change was made regarding
lives upon adoption. Based on goodwill of $1.2 billion, RBC Centura would have,
under previous accounting guidance, recorded approximately $62 million annually
of goodwill amortization. With the adoption of this statement this goodwill
amortization will no longer be charged to earnings but rather the intangible
goodwill asset will be evaluated periodically for impairment as noted above.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 was effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 became effective for RBC Centura on
January 1, 2002. The adoption of this pronouncement had no significant impact on
RBC Centura's results of operations or financial condition.
Financial Information by Segment
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") requires public companies to report certain financial
information about operating segments for which such information is available and
utilized by the chief operating decision maker in determining the allocation of
resources and also in assessing performance. Historically, RBC Centura presented
financial information for Retail, Treasury, and Other in accordance with SFAS
131. As a result of the acquisition of RBC Centura by Royal Bank and as part of
the continued integration, management has re-evaluated its reportable operating
segments and determined that it no longer has any distinct operating segments
based on the requirements of SFAS 131. The chief operating decision maker
includes certain members of Royal Bank's management and committees and no
significant, discrete financial information, other than the results of RBC
Centura consolidated, is being reviewed by the chief operating decision maker.
10
Goodwill and Other Intangibles
Net assets of companies acquired in purchase transactions are recorded
at fair value at the date of acquisition and as such, the historical cost basis
of individual assets and liabilities are adjusted to reflect their fair value.
Identified intangibles are amortized on an accelerated or straight-line basis
over the period benefited. Goodwill is not amortized, but is reviewed for
potential impairment on an annual basis at the reporting unit level. The
impairment test is performed in two phases. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value
of the reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired; however, if the carrying amount of
the reporting unit exceeds its fair value an additional procedure must be
performed. That additional procedure compares the implied fair value of the
reporting unit's goodwill (as defined in SFAS 142) with the carrying amount of
that goodwill. An impairment loss is recorded to the extent that the carrying
amount of goodwill exceeds its implied fair value. Other intangible assets are
evaluated for impairment if events and circumstances indicate a possible
impairment. Such evaluation of other intangibles is based on various analyses,
including undiscounted cash flow projections.
Note 2: Mergers and Acquisitions
Predecessor incurred $91.5 million in merger-related expenses upon
being acquired by Royal Bank during the second quarter of 2001. These expenses
are no longer reflected in the historical results of operations due to the
change in reporting entity for financial statement purposes discussed in Note 1.
However, these expenses are discussed in further detail in Predecessor's
financial statements included in Item 1. Section (b) included herein and in the
2001 RBC Centura Form 10-K. As of June 30, 2002, approximately $11.0 million in
reserves remained, primarily relating to change in control and other
contractual-related costs.
For the period from January 1, 2001 through June 30, 2001, SFNB
recorded a restructuring charge of approximately $38.6 million. This
restructuring related to Royal Bank's decision to consolidate its U.S. retail
banking operations by completing the sale of certain SFNB assets and liabilities
to the Bank on August 17, 2001, consolidating the operations of SFNB into the
Bank, and selling SFNB's credit card portfolio. In conjunction with the
restructuring substantially all of the employees of SFNB were terminated. As a
result of the expected merger with the Bank, SFNB conducted a balance sheet
review that identified assets whose carrying amounts were not recoverable. As a
result of the review, $29.1 million of the total $38.6 million restructuring
charge was recorded in asset impairment charges. These charges include the
write-off of goodwill of $1.9 million (due to SFNB's restructuring of its
Internet banking platform) and the write-off of unamortized software costs and
equipment of $27.2 million (for capitalized costs associated with projects that
were subsequently abandoned). The majority of the remaining components of the
$38.6 million restructuring charge were severance and employee related costs of
$7.2 million.
Note 3: Goodwill and Other Intangibles
In accordance with SFAS 142, no goodwill amortization was recorded for
the six months ended June 30, 2002. RBC Centura recognized $5.2 million in
goodwill amortization expense for the six months ended June 30, 2001. Excluding
goodwill amortization, RBC Centura would have recognized a net loss of $27.2
million for the six months ending June 30, 2001.
At June 30, 2002, the gross carrying value and accumulated amortization
related to core deposits and other intangibles was $264.0 million and $29.1
million, respectively. At December 31, 2001, the gross carrying value and
accumulated amortization related to core deposits and other intangibles was
$264.1 million and $15.7 million, respectively. Amortization expense on core
deposits and other intangibles was $13.0 million for the six months ended June
30, 2002 and $2.2 million for the six months ended June 30, 2001. RBC Centura
estimates that aggregate amortization expense (exclusive of that for mortgage
servicing rights and intangibles acquired as part of the transaction discussed
in Note 6 of the Notes to Consolidated Financial Statements) will be $26.9
million for 2002, $26.9 million for 2003, $26.9 million for 2004, $26.9 million
for 2005 and $26.3 million for 2006.
11
Note 4: Commitments and Contingencies
Various legal proceedings against RBC Centura and its subsidiaries have
arisen from time to time in the normal course of business. RBC Centura believes
liabilities arising from these proceedings, if any, will have no material
adverse effect on the financial position or results of operations of RBC Centura
or its subsidiaries, taken as a whole.
Note 5: Related Party Transactions
During 2002, RBC Centura began purchasing Adjustable Rate Mortgage
loans ("ARMs") from RBC Mortgage, an indirect, wholly owned subsidiary of Royal
Bank. Loans purchased during the first six months of 2002 amounted to $120.9
million and were purchased at market prices prevailing at the time of sale.
Note 6: Subsequent Events (Unaudited)
On July 22, 2002 RBC Centura acquired 100% of the common shares of
Eagle Bancshares, Inc. ("Eagle"). The cash consideration paid with respect to
the acquisition amounted to approximately $149 million. As of acquisition date,
Eagle had $1.2 billion in assets ($684.7 million of which were loans), $821.7
million in deposits, and $70.8 million in stockholder's equity. The excess of
the purchase price over the estimated fair value of the net tangible assets
acquired was first allocated to core deposit intangibles of approximately $14
million, with the residual of approximately $84 million allocated to goodwill.
The goodwill is not tax-deductible. The core deposit intangible will be
amortized on a straight-line basis over the estimated useful life of 10 years.
12
RBC CENTURA BANKS, INC. AND PREDECESSOR
PART I. FINANCIAL INFORMATION
Item 1. (b) RBC Centura Banks, Inc. and Predecessor Historical Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Shareholder's Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
13
CONSOLIDATED BALANCE SHEETS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
--------------- --------------
June 30, December 31,
--------------- --------------
(In thousands, except share data) 2001 2000
- -------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 301,042 $ 356,602
Due from banks, interest-bearing 19,169 14,928
Federal funds sold 4,544 7,547
Investment securities:
Available for sale (cost of $3,219,248
and $2,623,159, respectively) 3,236,580 2,655,612
Held to maturity (fair value of $0,
and $50,298, respectively) - 49,493
Loans 7,805,842 7,671,691
Less allowance for loan losses 103,250 104,275
- -------------------------------------------------------------------------------------
Net loans 7,702,592 7,567,416
Mortgage loans held for sale 165,172 56,907
Bank premises and equipment 162,820 157,959
Goodwill and intangibles 1,492,880 146,445
Other assets 435,624 469,100
- -------------------------------------------------------------------------------------
Total assets $ 13,520,423 $ 11,482,009
=====================================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 1,131,479 $ 1,131,121
Interest-bearing 5,735,952 5,871,582
Time deposits over $100 516,261 704,437
- -------------------------------------------------------------------------------------
Total deposits 7,383,692 7,707,140
Borrowed funds 2,107,810 1,566,611
Long-term debt 1,565,359 1,084,762
Other liabilities 260,310 167,071
- -------------------------------------------------------------------------------------
Total liabilities 11,317,171 10,525,584
SHAREHOLDER'S EQUITY
Common stock, no par value,
2,500,000,000 shares authorized; shares issued
and outstanding of 2,166,517,536
and 39,427,056, respectively 2,187,684 272,119
Accumulated other comprehensive income 10,658 18,939
Unearned compensation - (4,084)
Retained earnings 4,910 669,451
- -------------------------------------------------------------------------------------
Total shareholder's equity 2,203,252 956,425
- -------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 13,520,423 $ 11,482,009
=====================================================================================
See accompanying notes to consolidated financial statements.
14
CONSOLIDATED STATEMENT OF OPERATIONS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
------------ ----------------------------
June 6, 2001 April 1, 2001 Three months
through through ended
(In thousands) June 30, 2001 June 5, 2001 June 30, 2000
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 47,701 $ 109,329 $ 175,324
Investment securities:
Taxable 15,749 34,558 40,169
Tax-exempt 151 345 554
Short-term investments 89 228 792
Mortgage loans held for sale 1,298 1,748 879
- -----------------------------------------------------------------------------------------------------
Total interest income 64,988 146,208 217,718
- -----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 17,023 44,312 74,947
Borrowed funds 6,608 14,579 22,126
Long-term debt 6,211 12,815 17,129
- -----------------------------------------------------------------------------------------------------
Total interest expense 29,842 71,706 114,202
- -----------------------------------------------------------------------------------------------------
NET INTEREST INCOME 35,146 74,502 103,516
Provision for loan losses 2,432 18,250 11,920
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 32,714 56,252 91,596
NONINTEREST INCOME
Service charges on deposit accounts 5,749 11,552 15,993
Credit card and related fees 876 1,532 2,050
Other service charges, commissions and fees 2,555 6,269 9,125
Fees for trust services 895 1,516 2,758
Mortgage income 2,003 3,178 5,543
Other noninterest income 1,998 3,607 7,384
Securities gains (losses), net 1,593 26,771 (8,950)
- -----------------------------------------------------------------------------------------------------
Total noninterest income 15,669 54,425 33,903
- -----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Personnel 16,276 32,329 43,710
Occupancy 2,122 4,196 5,778
Equipment 2,269 4,687 5,881
Foreclosed real estate losses and related
operating expense 87 366 444
Loss on equity investment - 42,203 -
Merger-related and other significant charges - 91,820 4,178
Goodwill and Intangible amortization 7,074 2,514 3,550
Other operating 8,346 37,537 28,733
- -----------------------------------------------------------------------------------------------------
Total noninterest expense 36,174 215,652 92,274
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 12,209 (104,975) 33,225
Income tax expense (benefit) 7,299 (18,272) 12,302
- -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,910 $ (86,703) $ 20,923
=====================================================================================================
See accompanying notes to consolidated financial statements.
15
CONSOLIDATED STATEMENT OF OPERATIONS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
------------- ---------------------------------
June 6, 2001 January 1, 2001 Six months
through through ended
(In thousands) June 30, 2001 June 5, 2001 June 30, 2000
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 47,701 $ 282,986 $ 343,146
Investment securities:
Taxable 15,749 84,734 83,843
Tax-exempt 151 878 1,854
Short-term investments 89 604 1,919
Mortgage loans held for sale 1,298 3,266 2,388
- ----------------------------------------------------------------------------------------------------------
Total interest income 64,988 372,468 433,150
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 17,023 119,044 148,199
Borrowed funds 6,608 41,148 45,690
Long-term debt 6,211 30,509 30,937
- ----------------------------------------------------------------------------------------------------------
Total interest expense 29,842 190,701 224,826
- ----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 35,146 181,767 208,324
Provision for loan losses 2,432 25,420 17,895
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 32,714 156,347 190,429
NONINTEREST INCOME
Service charges on deposit accounts 5,749 26,847 31,348
Credit card and related fees 876 3,656 4,121
Other service charges, commissions and fees 2,555 15,582 19,937
Fees for trust services 895 4,181 5,509
Mortgage income 2,003 8,641 9,248
Other noninterest income 1,998 13,112 15,814
Securities gains (losses), net 1,593 27,521 (23,805)
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 15,669 99,540 62,172
- ----------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Personnel 16,276 80,265 87,476
Occupancy 2,122 10,563 12,231
Equipment 2,269 11,441 12,029
Foreclosed real estate losses and related
operating expense 87 971 1,106
Loss on equity investment - 42,203 -
Merger-related and other significant charges - 91,502 28,516
Goodwill and Intangible Amortization 7,074 6,284 6,167
Other operating 8,346 63,405 55,391
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense 36,174 306,634 202,916
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 12,209 (50,747) 49,685
Income tax expense 7,299 435 20,727
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,910 $ (51,182) $ 28,958
==========================================================================================================
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
Predecessor
- -----------
Unrealized
Gains (Losses) Total
Common Stock Unearned Retained on Securities Shareholder's
-----------------------
Shares Amount Compensation Earnings Available for Sale Equity
-------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, December 31, 2000 39,427,056 $ 272,119 $ (4,084) $ 669,451 $ 18,939 $ 956,425
Comprehensive income:
Net loss, January 1 to June 5, 2001 - - - (51,182) - (51,182)
Unrealized losses on available for sale
securities, net of taxes - - - - (11,436) (11,436)
----------
Comprehensive income - - - - - (62,618)
Common stock issued:
Stock option plans and stock awards 495,997 13,285 - - - 13,285
Restricted stock, net - - 4,084 - - 4,084
Cash dividends declared, $0.70 per share - - - (27,761) - (27,761)
Other 49,984 2,549 - - - 2,549
------------------------------------------------------------------------------------
Balance, June 5, 2001 39,973,037 $ 287,953 $ - $ 590,508 $ 7,503 $ 885,964
====================================================================================
RBC Centura
- ----------- Unrealized Gains Total
Common Stock Unearned Retained on Securities Shareholder's
-----------------------
Shares Amount Compensation Earnings Available for Sale Equity
-------------------------------------------------------------------------------------
(Dollars in thousands)
Issuance of Common Stock
on June 5, 2001 2,166,517,536 $2,187,684 $ - $ - $ - $2,187,684
Comprehensive income:
Net income, June 6 to June 30, 2001 - - - 4,910 - 4,910
Unrealized gains on available for sale
securities, net of taxes - - - - 10,658 10,658
----------
Comprehensive income - - - - - 15,568
------------------------------------------------------------------------------------
Balance, June 30, 2001 2,166,517,536 $2,187,684 $ - $ 4,910 $ 10,658 $2,203,252
====================================================================================
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENT OF CASH FLOWS RBC Centura Predecessor
RBC Centura Banks, Inc. and Subsidiaries -------------- -----------
June 6, 2001 January 1, 2001 For the Six
through through Months ended
(Dollars in thousands) June 30, 2001 June 5, 2001 June 30, 2000
-------------------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,910 $ (51,182) $ 28,958
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for loan losses 2,432 25,420 17,895
Depreciation of assets under operating leases 377 2,192 3,812
Depreciation and amortization, excluding depreciation of assets
under operating leases 9,221 20,508 19,916
Amortization of purchase accounting adjustments 412 - -
Increase (decrease) in deferred income tax expense 4,285 (10,802) 1,416
Loan fees deferred, net 385 (134) 1,194
Loss on equity investment - 42,203 -
Bond premium amortization and discount accretion, net 789 (3,644) (192)
(Gains) losses on sales of available for sale securities (1,593) (27,521) 23,805
Proceeds from sales of mortgage loans held for sale 96,891 375,348 181,521
Originations, net of principal repayments, of mortgage loans
held for sale (97,045) (475,771) (185,330)
(Decrease) increase in accrued interest receivable (2,826) 10,800 341
(Increase) decrease in accrued interest payable (7,884) (3,911) 2,799
Net change in other assets and other liabilities (62,977) 97,305 (4,758)
------------- ------------ -----------
Net cash (used) provided by operating activities (52,623) 811 91,377
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in loans 4,630 (113,155) (184,123)
Purchases of:
Securities available for sale (154,876) (1,872,595) (496,006)
Premises and equipment (3,553) (18,060) (16,882)
Other - - (80,000)
Proceeds from:
Sales of securities available for sale 99,489 1,199,303 552,874
Maturities and issuer calls of securities available for sale 1,993 201,026 178,355
Maturities and issuer calls of securities held to maturity - 5,647 10,234
Sales of foreclosed real estate 548 (643) 5,242
Dispositions of premises and equipment - 602 11,066
Cash acquired, net of cash paid, in mergers and acquisitions - - (1,250)
------------- ------------ -----------
Net cash (used) provided by investing activities (51,769) (597,875) (20,490)
------------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 35,130 (387,657) (148,948)
Net (decrease) increase in borrowed funds (3,776) 544,975 (71,382)
Proceeds from issuance of long-term debt 50,000 550,500 435,500
Repayment of long-term debt (19) (126,880) (274,890)
Cash dividends paid - (27,761) (26,228)
Proceeds from issuance of common stock, net - 12,622 3,915
------------- ------------ -----------
Net cash provided (used) by financing activities 81,335 565,799 (82,033)
------------- ------------ -----------
Decrease in cash and cash equivalents (23,057) (31,265) (11,146)
Cash and cash equivalents at beginning of period 347,812 379,077 424,381
------------- ------------ -----------
Cash and cash equivalents end of period $ 324,755 $ 347,812 $ 413,235
============= ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period months for:
Interest $ 37,726 $ 194,613 $ 222,027
Income taxes 5,255 5,868 21,942
Noncash transactions:
Stock issued in purchase acquisitions and other stock issuances, net - 6,631 7,657
Change in unrealized securities gains (losses), net 17,333 (20,148) 17,213
Income tax benefit from exercise of employee stock options - 1,843 7,657
Loans transferred to foreclosed property 373 2,004 3,985
============= ============ ===========
See accompanying notes to consolidated financial statements.
18
RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
Note 1: Basis of Presentation
As noted in the Notes to Consolidated Financial Statements included
herein in Item 1. Section (a), the common control merger of RBC Centura Banks,
Inc. and Security First Network Bank ("SFNB") was consummated on June 1, 2002.
As a result of this merger, the historical financial statements of RBC Centura
have been restated to reflect the change in reporting entity. The historical
financial statements described within this section are of Predecessor (as
defined below) and RBC Centura but the statements only relate to periods prior
to June 30, 2001 and have been included for information purposes only. These
financial statements have been combined with the restated financial information
in Item 1. Section (a) for purposes of Management's Discussion and Analysis.
At the close of business on June 5, 2001, Royal Bank of Canada ("Royal
Bank"), a Canadian chartered bank, acquired all of the outstanding common stock
of Centura Banks, Inc. ("Predecessor"). As a result of the transaction,
Predecessor became a wholly owned subsidiary of Royal Bank. Rock Merger
Subsidiary, Inc., a wholly owned subsidiary of Royal Bank merged with and into
Predecessor and the surviving corporation was Predecessor, which was re-named
RBC Centura Banks, Inc. ("RBC Centura"). Reference herein to RBC Centura relates
to the period subsequent to and including June 6, 2001, while reference to the
Predecessor relates to periods prior to and including June 5, 2001. Royal Bank's
basis in RBC Centura was "pushed down" to RBC Centura and is therefore reflected
in RBC Centura's balance sheet and results of operations. See Note 2 for
information regarding this acquisition.
The accompanying unaudited consolidated financial statements include
the accounts of RBC Centura and its wholly owned subsidiaries, Centura Bank (the
"Bank"), Centura Capital Trust I, Triangle Capital Trust, and NCS Mortgage
Lending Company ("NCS"). 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 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 Predecessor's Annual Report on Form 10-K for the year
ended December 31, 2000. Operating results for the periods from January 1, 2001
through June 5, 2001 and June 6, 2001 through June 30, 2001 are not necessarily
indicative of the results that may be expected for the year.
All significant intercompany transactions are eliminated in
consolidation. In the opinion of RBC Centura, all adjustments considered
necessary for a fair statement of the results for the interim periods presented
have been included (such adjustments are normal and recurring in nature).
Accounting policies followed in the presentation of interim financial results
are presented on pages 40 to 45 of Predecessor's Annual Report on Form 10-K for
the year ended December 31, 2000. Goodwill recorded as a result of the
acquisition by Royal Bank is being amortized over 20 years in compliance with
Royal Bank's accounting policy. See the Recent Accounting Developments section
in Management's Discussion and Analysis for accounting changes related to
goodwill.
Certain items reported in prior periods have been reclassified to
conform to current period presentation. Such reclassifications had no impact on
net income or shareholder's equity.
19
Note 2: Mergers and Acquisitions
At the close of business on June 5, 2001, Royal Bank acquired all of
the outstanding common stock of Predecessor. As a result of the transaction,
Predecessor became a wholly owned subsidiary of Royal Bank. Rock Merger
Subsidiary, Inc., a wholly owned subsidiary of Royal Bank, merged with and into
Predecessor and the surviving corporation was Predecessor, which was re-named
RBC Centura. Each share of Predecessor's outstanding common stock was converted
into the right to receive 1.684 common shares of Royal Bank. The value of the
transaction was approximately $2.2 billion. The business combination was
accounted for as a purchase with Royal Bank's basis being "pushed down" to RBC
Centura. The purchase price was allocated to the estimated fair values of RBC
Centura's tangible and intangible assets and liabilities with the remainder
allocated to goodwill. As a result of the application of purchase accounting,
RBC Centura recorded premiums of $11.6 million and $70.8 million on the
investment and loan portfolios, respectively, and discounts of $32.3 million and
$5.5 million on deposits and long-term debt, respectively, which will be
amortized over the average life of the respective instruments.
In connection with the acquisition RBC Centura recorded $1.2 billion
and $259.1 million in goodwill and core deposit intangibles, respectively, and
issued 2,166,517,536 shares to Royal Bank. The period for goodwill amortization
is 20 years and the core deposit intangible will be amortized over 10 years. In
connection with the transaction, RBC Centura incurred merger-related and other
significant charges of $91.8 million, before tax. Merger-related charges include
termination of employment contracts, change of control payments, costs of the
transaction including legal, accounting, and investment banking fees, cash
settlement of the Predecessor's outstanding stock options, and certain other
expenses. Also included is a $1.9 million pension plan curtailment loss
resulting from the Predecessor discontinuing accruing benefits under its pension
plan for all participants except for certain groups of employees.
The following table summarizes activity for merger-related accruals for
the period ended June 30, 2001 related to the June 5, 2001 acquisition by Royal
Bank:
- ---------------------------------------------------------------------------------------------------------------------
Liability Amount utilized Remaining
accrued during during 2001 Balance
(in thousands) 2001
- ---------------------------------------------------------------------------------------------------------------------
Severance, change in control, other employee-related costs, and
director related costs $ 70,335 $ 61,303 $ 9,032
Write-off of unrealizable assets 650 650 --
Non-employee related contract terminations 1,776 115 1,661
Professional costs 17,204 13,994 3,210
Other merger-related expenses 1,855 1,855 --
- ---------------------------------------------------------------------------------------------------------------------
Merger-related expenses $ 91,820 $ 77,917 $ 13,903
=====================================================================================================================
On February 18, 2000, Predecessor merged with Triangle Bancorp, Inc.
("Triangle"), a Raleigh, North Carolina based bank holding company in a
transaction accounted for as a pooling-of-interests. Predecessor issued
approximately 11.4 million shares to effect the combination. Each Triangle
shareholder received 0.45 shares of Predecessor common stock in exchange for
each Triangle share. In connection with this combination, Predecessor incurred
merger-related charges of $26.8 million. As of June 30, 2001 $1.2 million of
merger-related liabilities remained on the balance sheet.
Note 3: Commitments and Contingencies
All claims against Centura Bank in an action filed in 1999 by Ingeborg
Staton, Mercedes Staton and trusts created by Ingeborg Staton and Mercedes
Staton were dismissed in March 2001. All claims against Centura Bank in two
related actions filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes
Staton, and trusts created by Ingeborg Staton and Mercedes Staton were settled
in April 2001 for an aggregate amount that Predecessor and Centura Bank consider
immaterial to their financial condition. In the aggregate, Predecessor recorded
$19.1 million in litigation provisions for the period ended June 5, 2001 for the
settled cases and certain other legal proceedings.
20
In addition, various other legal proceedings against RBC Centura and
its subsidiaries have arisen from time to time in the normal course of business.
RBC Centura believes liabilities arising from these proceedings, if any, will
have no material adverse effect on the financial position or results of
operations of RBC Centura or its subsidiaries, taken as a whole.
Note 4: Segment Information
Refer to Predecessor's Annual Report on Form 10-K for the year ended
December 31, 2000 for information with respect to RBC Centura's policies for
defining and accounting for its segments. Royal Bank acquired RBC Centura on
June 5, 2001, and in accordance with "push-down" accounting established a new
basis of accounting in RBC Centura's financial statements. It is generally not
appropriate to combine pre and post "push down" periods; however, to make this
presentation more meaningful the following information is presented for the full
three months ended June 30, 2001. RBC Centura's measure of profitability is a
non-GAAP measure and excludes all merger-related charges. Financial information
by segment for the three months ended June 30, 2001 and 2000 is as follows:
2001
-------------------------------------------------------------------------------------
(In thousands) Retail Treasury Other Total Adjustments Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest income $ 141,535 $ 54,815 $ 7,156 $ 203,506 $ 7,690 (A) $ 211,196
Interest expense 65,354 35,577 1,365 102,296 (748)(A) 101,548
Funds transfer pricing allocation 10,614 (8,492) (3,581) (1,459) 1,459 (B) --
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 86,795 10,746 2,210 99,751 9,897 109,648
Provision for loan losses 15,227 -- 6,361 21,588 (906)(C) 20,682
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 71,568 10,746 (4,151) 78,163 10,803 88,966
Noninterest income 32,728 173 14,244 47,145 22,949 (A) 70,094
Loss on equity investment -- -- 42,203 42,203 -- 42,203
Noninterest expense 72,557 2,764 27,038 102,359 107,264 (A) 209,623
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,739 8,155 (59,148) (19,254) (73,512) (92,766)
Income tax expense/(benefit) 12,381 822 1,765 14,968 (25,941)(C) (10,973)
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 19,358 $ 7,333 $ (60,913) $ (34,222) $ (47,571) $ (81,793)
=========================================================================================================================
Period-end assets $7,051,703 $3,446,394 $ 288,642 $10,786,739 $2,733,684 (D) $ 13,520,423
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
21
(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.
Note 5: Derivative Instruments and Hedging Activities
RBC Centura adopted Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by Statement of Financial Accounting Standards No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133 (referred to hereafter as "SFAS 133"), on January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair value hedge
transactions hedging changes in the fair value of an asset, liability, or firm
commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash flow hedge transactions hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified to earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current period earnings. The amount of hedge ineffectiveness recorded for the
six months ended June 30, 2001 was not considered significant. Derivatives that
do not meet the hedge accounting criteria and, therefore, do not qualify for
hedge accounting, will be accounted for at fair value with changes in fair value
recorded in other noninterest income in the income statement. Refer to the
Predecessor's March 31, 2001 Form 10-Q for additional disclosures regarding
derivative instruments and hedging activities.
Note 6: Investment Securities
As part of the application of purchase accounting, a premium of $11.6
million was recorded as a fair value adjustment and will be amortized based on
the effective yield method over the remaining life of the securities. In
connection with the acquisition, RBC Centura transferred approximately $44
million of investment securities from the held to maturity portfolio to
available for sale in order to align RBC Centura's interest rate risk position
and credit risk policy with those of Royal Bank.
A summary of investment securities by type at June 30, 2001 follows:
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------------------------
(thousands)
Available For Sale:
U.S. Treasury .................................. $ 129,988 $ 98 $ --- $ 130,086
U.S. government agencies and corporations ...... 778,453 2,614 192 780,875
Mortgage-backed securities ..................... 1,748,636 12,343 1,266 1,759,713
Asset-backed securities ........................ 150,365 1,507 1 151,871
State and municipal ............................ 38,277 40 1 38,316
Common and preferred stock ..................... 260,403 1,126 358 261,171
22
Other securities .................................... 113,126 1,423 1 114,548
----------- -------- ------- -----------
Total available for sale ............................ $ 3,219,248 $ 19,151 $ 1,819 $ 3,236,580
=========== ======== ======= ===========
The following is a summary of investment securities by contractual maturity at
June 30, 2001:
Available for Sale
------------------
Amortized Cost Fair Value
---------------------------------------
(thousands)
Due in one year or less .............................................. $ 149,691 $ 149,776
Due after one year through five years. ............................... 833,398 836,172
Due after five years through ten years ............................... 64,558 65,566
Due after ten years .................................................. 12,197 12,310
Mortgage-backed and asset-backed securities .......................... 1,899,001 1,911,585
Common and preferred stock ........................................... 260,403 261,171
------------ -----------
Total ................................................................ $ 3,219,248 $ 3,236,580
============ ===========
At June 30, 2001 investment securities with a book value of
approximately $1.4 billion were pledged to secure public funds on deposit and
for other purposes required by law or contractual arrangements.
During 2001, the sale of securities generated gross realized gains and
losses of $70.1 million and $42.6 million, respectively, by the Predecessor and
gross realized gains and losses of $2.6 million and $635,000, respectively, by
RBC Centura.
Note 7: Loans
As part of the application of purchase accounting, a premium of $70.8
million was recorded as a fair value adjustment to the loan portfolio and will
be amortized on a straight-line basis over the average life of the loans. A
summary of loans at June 30, 2001 follows:
(thousands)
Commercial, financial, and agricultural .......................... $ 2,233,051
Consumer ......................................................... 590,762
Real estate-- mortgage ........................................... 3,593,977
Real estate-- construction and land development .................. 1,064,882
Leases ........................................................... 223,747
Other ............................................................ 99,423
-----------
Total loans, net of unearned income .............................. $ 7,805,842
===========
Included in the above:
Nonaccrual loans ................................................. $ 57,997
Accruing loans past due ninety days or more ...................... 8,508
23
Note 8: Allowance for Loan Losses
A summary of changes in the allowance for loan losses ("AFLL") follows:
RBC
---
Centura Predecessor Predecessor
------- ----------- -----------
June 6, January 1,
2001 2001 Six months
through through ended
June 30, June 5, June 30,
2001 2001 2000
----------------------------------------
(thousands)
AFLL at beginning of period ........................................... $ 103,044 $ 104,275 $ 95,500
Provision for loan losses ............................................. 2,432 25,420 17,895
Charge-offs ........................................................... (2,614) (28,857) (13,965)
Recoveries on loans previously charged-off ............................ 388 2,206 3,841
--------- --------- ---------
Net Charge-offs ....................................................... (2,226) (26,651) (10,124)
--------- --------- ---------
AFLL at end of period ................................................. $ 103,250 $ 103,044 $ 103,271
========= ========= =========
The following tables summarize individually impaired loan information
as of June 30, 2001:
(thousands)
Individually impaired loans with related allowance ............. $ 19,771
Individually impaired loans with no related allowance .......... 15,930
-------------
Total individually impaired loans .............................. $ 35,701
=============
Allowance on individually impaired loans ....................... $ 6,891
=============
Note 9: Long-Term Debt
As part of the application of purchase accounting, a discount of $5.5
million was recorded as a fair value adjustment to long-term debt and will be
amortized on a straight-line basis over the average life of the debt. Long-term
debt consisted of the following at June 30, 2001:
(thousands)
Federal Home Loan Bank advances ................................ $ 1,322,484
Capital Securities ............................................. 122,738
Bank notes ..................................................... 119,539
Obligations under capitalized leases ........................... 598
Other .......................................................... ---
-----------
24
Total long-term debt .............................................. $ 1,565,359
===========
Refer to the Predecessor's Annual Report on form 10-K for details
regarding RBC Centura's borrowing obligations, interest rates, and maturities.
25
Note 10: Income Taxes
The components of income tax expense were:
RBC Centura Predecessor Predecessor
----------- ----------- -----------
June 6, 2001 January 1, Six Months
through June 30, 2001 through ended June 30,
2001 June 5, 2001 2000
---------------------------------------------------
Current expense (benefit):
Federal .............................................. $ 2,946 $ (3,971) $ 17,694
State ................................................ 66 159 1,617
-------- -------- ----------
3,012 (3,812) 19,311
Deferred expense
Federal .............................................. 4,073 4,160 1,318
State ................................................ 214 87 98
-------- -------- ----------
4,287 4,247 1,416
Total income tax expense .................................. $ 7,299 $ 435 $ 20,727
======== ======== ==========
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
RBC Centura Predecessor Predecessor
----------- ----------- -----------
June 6, 2001 January 1, 2001 Six months ended
through June 30, through June 5, 2001 June 30, 2000
2001
---------------------------------------------------------------------
Income taxes at Federal statutory tax rate ........ $4,272 35.00% $(17,761) 35.00% $17,390 35.00%
Non-taxable income ................................ (592) (4.85) (2,898) 5.71 (5,495) (11.06)
Acquisition adjustments, net ...................... 1,690 13.84 14,002 (27.59) 5,453 10.98
State income tax, net of federal benefit .......... 187 1.54 358 (0.70) 1,261 2.54
Other, net ........................................ 1,742 14.25 6,734 (13.28) 2,118 4.26
------ ------ -------- ------- ------- ------
Effective tax rate ................................ $7,299 59.78% $ 435 (0.86)% $20,727 41.72%
====== ====== ======== ======= ======= ======
26
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and liabilities at June 30, 2001 and
December 31, 2000 are summarized as follows:
June 30, 2001 December 31,
2000
------------------------------
(thousands) (thousands)
------------------------------
Deferred tax assets:
Loan loss reserve ........................................................ $ 40,493 $ 40,593
Other reserves ........................................................... 15,036 7,078
Deferred compensation .................................................... 15,152 13,984
Other assets ............................................................. 20,312 4,966
--------- ---------
Gross Deferred Tax Assets ................................................ 90,993 66,621
Deferred tax liabilities:
Premises and equipment ................................................... 5,745 7,718
Deposits ................................................................. 72,847 (538)
Investment securities .................................................... 10,767 5,518
Leasing activities ....................................................... 78,663 61,668
Lending activities ....................................................... 25,428 244
Other Liabilities ........................................................ 31,704 31,082
Net unrealized securities gains .......................................... 6,674 13,081
--------- ---------
Gross deferred tax liabilities ........................................... 231,828 118,773
Net deferred tax (liability) ............................................. $(140,835) $ (52,152)
========= =========
A valuation allowance for deferred tax assets was not required as of
June 30, 2001 or December 31, 2001. Management has determined that it is more
likely than not that the deferred tax assets could be realized by carrybacks to
federal taxable income in the federal carryback period or offset against
deferred tax liabilities. As part of the application of purchase accounting, the
deferred tax liability was increased by the amount of $87.9 million due to fair
value adjustments of the balance sheet, decreased by $ 6.4 million due to fair
value adjustments required under SFAS 115 for securities available for sale and
decreased due to other adjustments totaling $1.3 million.
Note 11: Strategic Repositioning of Mortgage Business
During the second quarter of 2001, Predecessor made an assessment of
its mortgage business with an emphasis on current and prospective interest rate
and macroeconomic conditions. Predecessor decided to reevaluate its
participation in making consumer mortgages available to individuals with less
than prime-rated credit profiles. Specifically, Predecessor had a 49 percent
equity interest in First Greensboro Home Equity, Inc. ("FGHE"). Predecessor also
had a wholly owned subsidiary, NCS. Both FGHE and NCS are primarily in the
business of making mortgages available to consumers with less than prime-rated
credit profiles. As a result of this assessment, Predecessor decided to take
actions to no longer provide credit support to these mortgage companies.
Predecessor also purchased an outstanding FGHE debenture from an
unaffiliated third party for which Predecessor was providing backup credit
support. This purchase did not change the Predecessor's credit exposure.
In the second quarter of 2001, based on FGHE's inability to access the
securitization market and FGHE's limited success in selling loans in the
whole-loan market, management informed FGHE of management's intention to not
further extend credit support or financing activities. Management estimated the
cash flows to be received from FGHE in future periods to be inadequate for the
full recovery of its investment in the equity of FGHE and the debentures
discussed above. A charge to earnings totaling $42.2 million, pre-tax, for other
than temporary impairment was recorded as loss on
27
equity investment in the income statement. In addition, $2.3 million of
unsecured loans to FGHE were charged off, and a $2.1 million provision for loan
losses was recorded related to these loans.
Certain fixed assets of NCS were sold during the second quarter of
2001. The purchaser also assumed a majority of the employees. Predecessor
retained the loan portfolio of approximately $75 million existing at sale date
with the intention to sell the loans. A provision for credit losses of $300,000
was recorded prior to the transfer of these loans to held for sale. In addition,
a charge of $1.9 million was classified in merger-related and other significant
charges on the income statement, which included severance, goodwill associated
with NCS, and the loss on the fixed assets sold.
28
RBC 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, 2002
The information below in response to Item 2 of Form 10-Q, Part 1, is
provided pursuant to General Instruction H. (2)(a) of Form 10-Q, which permits
the omission of the information required by such item so long as a narrative
analysis such as that set forth below is provided.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements in this Form 10-Q concerning RBC Centura Banks,
Inc. ("RBC Centura" or the "Company") and its principal, wholly owned
subsidiary, RBC Centura Bank (named Centura Bank prior to October 30, 2001, the
"Bank") are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding the
financial conditions, results of operations and businesses of RBC Centura, RBC
Centura's plans, goals, objectives, expectations, projections, estimates, and
intentions. One can identify these forward-looking statements by the use of
words such as "expects," "plans," "believes," "will," "estimates," "intends,"
"projects," "goals," and other words of similar meaning. One can also identify
them by the fact that they do not relate strictly to historical or current
facts. By their very nature, forward-looking statements involve inherent risks
and uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. RBC Centura cautions readers not to place undue reliance on these
statements as a number of important factors could cause actual results to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements. Factors that might cause such a
change include, but are not limited to (i) customer and deposit attrition or
loss of revenue following completed mergers may be greater than expected; (ii)
competitive pressure in the banking industry may increase significantly; (iii)
changes in the interest rate, currency exchange rate and inflation rate may
reduce margins; (iv) general economic conditions, globally, nationally or
regionally, may be less favorable than expected, resulting in, among other
things, credit quality deterioration and the possible impairment of
collectibility of loans; (v) the impact of changes in monetary and fiscal
policies, laws, rules and regulations; (vi) the impact of the Gramm-Leach-Bliley
Act of 1999; (vii) changes in business conditions and inflation; (viii) the
impact to revenue and expenses in the event that announced mergers are not
consummated as anticipated; (ix) the failure to realize expected benefits from
the acquisition of Centura Banks, Inc. ("Predecessor") by Royal Bank of Canada
("Royal Bank"); and (x) other risks and factors identified in Predecessor's and
RBC Centura's other past and future filings with the Securities and Exchange
Commission and other regulatory bodies.
RBC Centura cautions that the foregoing list of important factors is
not exhaustive. When relying on forward-looking statements to make decisions
with respect to RBC Centura, investors and others should carefully consider the
foregoing factors and other uncertainties and events. Additional information
with respect to factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements is included in
Predecessor's and RBC Centura's current and subsequent filings with the
Securities and Exchange Commission. RBC Centura does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
RBC Centura.
GENERAL
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of RBC Centura. RBC Centura is a bank holding company operating
primarily in North Carolina, South Carolina and Virginia. RBC Centura currently
provides a full range of personal and commercial banking products and services,
investment services and certain insurance services. These products and services
are delivered through our customers' channel of preference. At June 30, 2002,
RBC Centura served its customers through 229 financial stores located throughout
North Carolina, South Carolina, and Virginia. RBC Centura also serves its
customers through RBC Centura Highway, its multifaceted customer access system
that includes telephone banking, personal computer banking, online bill payment
and a suite of Internet products and
29
services that can be found at centura.com. The contents of RBC Centura's website
are not part of this Form 10-Q and such contents are not incorporated by
reference herein.
As discussed in RBC Centura's Form 10-K for the year ended December 31,
2001, during the fourth quarter of 2001 and the first quarter of 2002, RBC
Centura filed applications with the Board of Governors of the Federal Reserve
System and other applicable regulatory authorities to acquire Prism Mortgage
Company (renamed RBC Mortgage Company as of April 8, 2002, "Prism") and RBC
Trade Finance (USA), Inc. ("TFI"), two indirect, wholly owned subsidiaries of
Royal Bank. Prism is primarily engaged in the business of originating, selling
and brokering the sale of residential mortgage loans while its Builder Finance
Group is involved in originating and servicing commercial residential real
estate loans. TFI provides financing to U.S. subsidiaries of clients of Royal
Bank. Management received approval of all applications associated with these
acquisitions during the second quarter of 2002 and expects to acquire these
entities prior to December 31, 2002.
Percentage calculations contained herein have been calculated based upon
actual, not rounded, results.
As a result of the acquisition by Royal Bank, Predecessor became a
wholly owned subsidiary of Royal Bank, and was renamed RBC Centura Banks Inc.
The business combination was accounted for as a purchase with Royal Bank's
accounting basis being "pushed down" to RBC Centura. In order to consolidate the
U.S. retail banking operations of Royal Bank, RBC Centura acquired Security
First Network Bank ("SFNB") from an indirect wholly owned subsidiary of Royal
Bank on June 1, 2002. As further discussed in Note 1 to these consolidated
financial statements, the SFNB merger resulted in a change in reporting entity
for financial statement purposes and restatement of certain historical financial
information giving consideration as to when RBC Centura and SFNB were under
common control of Royal Bank.
It is generally not appropriate to combine pre and post "push down"
periods when analyzing results of operations. In addition, due to the
restatement as noted above, the historical results of RBC Centura have been
restated to only include SFNB prior to June 5, 2001, the date that RBC Centura
was acquired by Royal Bank. However, for purposes of comparison only and to
facilitate discussion and analysis of results of operations, the following
pro-forma income statement combines RBC Centura's results of operations from
January 1, 2001 through June 30, 2001(which actually represents the historical
results for SFNB for the six months ended June 30, 2001 and the results of RBC
Centura for the period June 6, 2001 through June 30, 2001) with those of the
Predecessor for the period January 1, 2001 through June 5, 2001. All discussion
of the six month period ending June 30, 2001 refers to proforma results
including Predecessor activity during the period from January 1, 2001 through
June 5, 2001.
Pro Forma
---------
RBC Centura Predecessor RBC Centura RBC Centura
----------- ----------- ----------- -----------
January 1, 2001 January 1, Six months Six months
2001 through 2001 through ended June 30, ended June 30,
June 30, 2001 June 5, 2001 2001 2002
------------------------------------------------------------------------
Net interest income $ 39,389 $ 181,767 $ 221,156 $ 216,391
Provision for loan losses 3,426 25,420 28,846 21,961
- ----------------------------------------------------------------------------------------------------------
Net interest income after 35,963 156,347 192,310 194,430
provision for loan losses
Noninterest income 15,048 72,019 87,067 76,019
Securities gains, net 1,593 27,521 29,114 2,424
Loss on equity investment -- 42,203 42,203 --
Merger-related and other
significant charges 38,629 91,502 130,131 --
Noninterest expense 58,954 172,929 231,883 196,636
- ----------------------------------------------------------------------------------------------------------
Income before income taxes (44,979) (50,747) (95,726) 76,237
Income tax expense (12,527) 435 (12,092) 25,544
- ----------------------------------------------------------------------------------------------------------
Net income $ (32,452) $ (51,182) $ (83,634) $ 50,693
- ----------------------------------------------------------------------------------------------------------
30
Summary of Significant Accounting Policies
RBC Centura's accounting policies are fundamental to understanding
Management's Discussion and Analysis of Results of Operations and Financial
Condition. Many of RBC Centura's accounting policies require significant
judgment regarding valuation of assets and liabilities and/or significant
interpretation of the specific accounting guidance. RBC Centura's significant
accounting policies are discussed in detail in Note One of the Notes to
Consolidated Financial Statements on pages 36 to 42 of RBC Centura's Annual
Report on Form 10-K for the year ended December 31, 2001. The following is a
summary of the more judgmental and complex accounting policies of RBC Centura.
Many of RBC Centura's assets and liabilities are recorded using various
valuation techniques that require significant judgment as to recoverability. The
collectibility of loans is reflected through RBC Centura's estimate of the
allowance for credit losses, RBC Centura performs periodic and systematic
detailed reviews of its lending portfolio to assess overall collectibility. In
addition, certain assets and liabilities are reflected at their estimated fair
value in the consolidated financial statements. Such amounts are based on either
quoted market prices or estimated values derived by RBC Centura utilizing
dealer quotes, market comparisons or internally generated modeling techniques.
RBC Centura's internal models generally involve present value of cash flow
techniques. RBC Centura adopted SFAS 142 during the first quarter of 2002. A
discounted cash flow model was used to determine the fair value of its reporting
units as required by the Standard. Cash flow estimates require judgement and RBC
Centura believes that assumptions used in determining the cash flows are
consistent with assumptions marketplace participants would use in estimates of
their fair value. The various valuation techniques are discussed in greater
detail elsewhere in Management's Discussion and Analysis and in the Notes to
Consolidated Financial Statements on pages 36 to 42 of RBC Centura's Annual
Report on Form 10-K for the year ended December 31, 2001.
The remainder of Management's Discussion and Analysis of RBC Centura's
Results of Operations and Financial Condition should be read in conjunction with
the consolidated financial statements and related notes presented on pages 4
through 28.
EARNINGS SUMMARY
Net income for the six months ended June 30, 2002 totaled $50.7 million,
compared with a pro forma net loss of $83.6 million for the comparable period in
2001. Key factors responsible for RBC 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 $11.8 billion for the six months ended June 30, 2002, an
increase of $472.2 million or 4.2 percent over the pro forma average balance for
the six months ended June 30, 2001. Period-end interest-earning assets were
$12.0 billion at June 30, 2002, an increase of $264.2 million over December 31,
2001's balance of $11.8 billion. As discussed below, most of the growth
experienced took place in the investment portfolio, offset by decreases in the
loan portfolio.
For additional information on average interest-earning assets, refer to the
discussion below, Table 3, "Net Interest Income Analysis-Taxable Equivalent
Basis" and Table 7, "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 $7.8 billion, decreasing slightly by $13.7 million from the
balance as of December 31, 2001. Table 1, "Loan Portfolio" provides a summary of
the loan portfolio and mix percentages as of June 30, 2002, June 30, 2001 and
December 31, 2001.
Loans averaged $7.7 billion during the six months ended June 30, 2002, a
decrease of $249.6 million over the year-earlier period (pro forma). Most of
this fluctuation occurred within commercial loans, which exhibited a decline of
$174.3 million predominantly due to the economic slowdown. The remaining
components of the loan portfolio demonstrated counterbalancing changes from the
year-earlier period with consumer loans (equity lines, installment loans, and
other credit line loans) increasing by $127.1 million and mortgage loans
decreasing by $144.8 million. The decrease in mortgage loans was principally the
result of the expected payoffs within the SFNB portfolio.
Taxable equivalent interest earned on the loan portfolio for the six months
ended June 30, 2002 and 2001 (pro forma) totaled $221.7 million and $339.6
million, respectively. The declining rate environment resulted in a $107.5
million decrease in interest income while decreasing loan volume generated a
$10.3 million interest income reduction. Overall, the loan portfolio yielded
5.79 percent for the first six months of 2002 compared with 8.59 percent during
the first six months of 2001 (pro forma), mainly due to the declining rate
environment that prevailed during 2001 and 2002. Also contributing 58 basis
points to the decline was the amortization of loan premiums recorded as a result
of the acquisition of Predecessor by Royal Bank.
Investment Securities
The investment portfolio provides RBC 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.
The investment portfolio ended the second quarter of 2002 at $4.0 billion, an
increase of 6.3 percent from a December 31, 2001 balance of $3.8 billion. For
the six month period ended June 30, 2002, the investment portfolio, gross,
averaged $3.8 billion compared with an average of $3.0 billion during the six
month period ended June 30, 2001 (pro forma). The investment portfolio growth
provided an additional means of leveraging capital while experiencing relatively
consistent loan volume.
The available for sale ("AFS") investment portfolio is used as a part of
RBC 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 also to provide bank liquidity. This portfolio is carried
at fair value with unrealized gains or losses recorded, net of tax, in
accumulated other comprehensive income. At June 30, 2002, AFS investments had a
market value of $4.0 billion, up $238.6 million compared to December 31, 2001.
Included in the market value of the AFS portfolio as of June 30, 2002 are
unrealized gains of $92.3 million, $56.5 million net of tax, compared with
unrealized gains of $48.6 million, $29.8 million net of tax as of December 31,
2001. The change in
31
unrealized gains/losses was mainly due to an overall decrease in interest rates
subsequent to December 31, 2001 that served to increase the market value of
fixed income securities.
FUNDING SOURCES
Total funding includes deposits, short-term borrowings and long-term debt
and averaged $11.4 billion for the six-month period ended June 30, 2002,
increasing $353.3 million or 3.2 percent over the $11.0 billion average
experienced during the six months ended June 30, 2001 (pro forma). The cost of
interest bearing liabilities during the first six months of 2002 was 2.33
percent compared with 4.62 percent during the comparable period in 2001 (pro
forma). The 229 basis point drop was predominantly due to the decreasing
interest rate environment, but also reflects a 21 basis point decrease resulting
from the accretion of discounts recorded as a result of the acquisition of
Predecessor by Royal Bank.
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, certificates of deposit
("CDs") and transaction accounts, ended the period at $7.3 billion, down $125.2
million from the December 31, 2001 balance of $7.4 billion. A decrease of $309.1
million in CDs was partially offset by an overall increase in the remaining
components of the deposit portfolio. The decline in CDs was principally
attributable to the attrition of single-service CD accounts, acquired in a
previous merger, with which RBC Centura was unable to establish multiple service
relationships.
Total deposits averaged $7.2 billion for the first six months of 2002 as
compared to the $7.7 billion averaged for the first six months of 2001 (pro
forma). This decline occurred almost exclusively in CDs as the average balance
of the remaining deposit account types increased by $315.9 million. Table 2,
"Average Deposit Mix" details average balances for the deposit portfolio and the
mix of deposits for the six months ended June 30, 2002 and 2001 (pro forma). The
annualized average cost of total interest-bearing deposits for the first six
months of 2002 was 2.08 percent, a decrease of 227 basis points compared to the
year-earlier period (pro forma), influenced by the accretion of time deposit
discounts, the rate environment, and product mix. The accretion of the purchase
accounting discount accounted for 32 basis points of the overall decrease in the
cost of interest bearing deposits.
Other Funding Sources
Management utilizes 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 decreased by
$111.0 million from the six months ended June 30, 2001 (pro forma) to average
$1.9 billion for the six months ended June 30, 2002. The cost of funds incurred
during the six months ended June 30, 2002(pro forma) for short-term borrowings
declined 322 basis points from the year-earlier period to a rate of 1.61
percent. The decline was mainly the result of the decreasing interest rate
environment that prevailed during 2001 and 2002. As depicted in Table 7, "Net
Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis" interest
expense on short-term borrowed funds decreased by $32.7 million between periods
(pro forma), as the effect of lower interest rates accounted for $30.2 million
of the decline while the remaining fluctuation was driven by volume variance.
Long-term debt consists predominantly of Federal Home Loan Bank ("FHLB")
advances, capital securities and subordinated bank notes and ended the period at
$2.3 billion compared to $2.2 billion as of December 31, 2001. Long-term debt
averaged $2.3 billion for the six months ended June 30, 2002 compared with $1.3
billion during the six months ended June 30, 2001 (pro forma). Additional FHLB
borrowings accounted for $396.0 million of the increase while the remaining
increase was due to the issuance of $500 million of LIBOR based 5-year
subordinated debt to an affiliate. When compared with the year-earlier period
(pro forma), the cost of funds for long-term debt decreased by 208 basis points
to 3.57 percent during the six months ended June 30, 2002. The decline was
mainly the result of the decreasing interest rate environment that prevailed
during 2001 and 2002. As shown in Table 7, "Net Interest Income and Volume/Rate
Analysis, Taxable Equivalent Basis" interest expense on long-term debt increased
by $2.4
32
million as the $19.6 million increase generated by increasing volume exceeded
the $17.2 million decrease resulting from declining interest rates.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the six months ended June 30, 2002 was $216.4
million compared to pro forma net interest income of $221.2 million for June 30,
2001. On a taxable equivalent basis, net interest income during the first six
months of 2002 decreased $4.5 million over the year earlier period (pro forma)
to total $221.9 million. As shown in Table 7, "Net Interest Income and
Volume/Rate Analysis, Taxable Equivalent Basis" the decrease in net interest
income, taxable equivalent, was driven by rate variances, which contributed
$14.7 million to the decrease, offset by an increase of $10.2 million due to
volume variances.
The net interest margin for the first six months of 2002 was 3.82 percent,
a 24 basis point decrease from the net interest margin of 4.06 experienced
during the first six months of 2001 (pro forma). The decline was predominantly
due to the amortization of purchase price premiums recorded in association with
the acquisition of Predecessor by Royal Bank, as well as the investment
portfolio restructuring performed in the second quarter of 2001.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES (AFLL)
As of June 30, 2002 and December 31, 2001, the AFLL was $107.1 million and
$103.8 million, respectively, or 1.38 percent and 1.33 percent, respectively, of
total loans outstanding. The increase in the AFLL on an absolute basis and
relative to total loans outstanding reflects an increase in the allowance in
response to an increasing trend in non-performing assets resulting from a
slowing economy. Refer to Table 5 "Nonperforming Assets and Past Due Loans" and
Table 4 "Analysis of Allowance for Loan Losses" for additional asset quality
information.
Total nonperforming assets ("NPA's") were $103.4 million at June 30, 2002,
an increase of $22.4 million over the December 31, 2001 balance of $81.0
million. NPA's as a percentage of total assets were 0.73 percent and 0.58
percent at June 30, 2002 and December 31, 2001, respectively. The increase
principally occurred in the residential mortgage and commercial loan portfolios.
A commercial relationship of $15.6 million, for which a specific allowance was
established, was moved to nonperforming status during the second quarter while
residential mortgages in foreclosure increased by $9.7 million. The AFLL
provides coverage at 1.16 times and 1.54 times the nonperforming loan balance at
June 30, 2002 and December 31, 2001, respectively. See Table 5, "Nonperforming
Assets and Past Due Loans" for further information.
Net charge-offs for the first six months of 2002 were $18.6 million,
compared to $29.8 million for the same period in 2001 (pro forma). As a
percentage of average loans, net charge-offs were 0.48 percent and 0.75 percent
for the first six months of 2002 and 2001 (pro forma), respectively. Chargeoffs
in 2001 principally occurred in the commercial loan portfolio and in
non-strategic lines of business, including leasing and sub-prime lending. A
majority of loans charged-off in the current year were commercial credits, $6.2
million of which related to four relationships. The provision for loan losses
decreased $6.9 million from the first six months of 2001 (pro forma) to $22.0
million during the first six months of 2002 as a result of a substantial
decrease in net-chargeoffs recognized from period to period.
Management believes the AFLL is adequate based upon its current judgment,
evaluation, and analysis of the loan portfolio. RBC 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. 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 RBC Centura.
33
NONINTEREST INCOME AND EXPENSE
Noninterest income for the six months ended June 30, 2002, excluding gains
and losses on sales of investment securities, totaled $76.0 million, down $11.1
million from the $87.1 million pro forma amount for the six months ended June
30, 2001. As a percentage of total revenues (defined as the sum of net interest
income, plus noninterest income excluding securities gains and losses),
noninterest income was 26.0 percent and 28.2 percent for the six months ended
June 30, 2002 and 2001 (pro forma), respectively. Including gains and losses on
sales of investment securities, noninterest income was $78.4 million and $116.2
million for the six months periods ended June 30, 2002 and 2001 (pro forma),
respectively.
Service charges on deposit accounts, comprising approximately 43.4 percent
of noninterest income before gains and losses on sales of investment securities,
continues to be the largest component of noninterest income. Service charges on
deposits for the current year remained relatively consistent on an absolute
dollar basis at $33.0 million when compared with the pro forma amount of $33.2
million during the first six months of 2001. Brokerage commissions were down
$3.3 million during the six month period ended June 30, 2002 when compared to
the year earlier period pro forma amount due to the slowing economy and other
market conditions. Insurance commissions also declined by $1.7 million from the
first two quarters of 2001 (pro forma) to the first two quarters of 2002 as a
result of the divestiture of the personal and commercial insurance business
lines during 2001. The decline in noninterest income from the first two quarters
of 2001 (pro forma) to the first two quarters of 2002 was also the result of the
recognition of a $2.8 million gain during the first quarter of 2001 resulting
from the sale of an interest held in a private company.
Mortgage income for the first six months of 2002 was $10.0 million, a
decrease of approximately $613,000 over the first six months of 2001 (pro
forma). This decline was mainly driven by mortgage loan sale income, which was
down $463,000 as a result of the sale of the mortgage loan production facilities
of NCS Mortgage Lending Company ("NCS") during the second quarter of 2001.
Growth in the amount of capitalized mortgage servicing rights resulted in an
increase of $1.5 million in mortgage servicing rights amortization during the
first quarter of 2002. The effect of decreasing mortgage loan sale income and
increasing mortgage servicing rights amortization was partially mitigated by an
increase of $760,000 in servicing commissions generated by the increase in the
amount of loans serviced. An additional mitigating factor was the $390,000
increase in origination fees that resulted from the lower mortgage lending rates
that prevailed during the first six months of 2002 as compared to the first six
months of 2001 (pro forma).
Noninterest expense excluding merger-related and other significant charges
and the loss on an equity investment totaled $196.6 million during the first
half of 2002, a decrease of $35.2 million over the first six months of 2001 (pro
forma). The main driver of the decrease was $19.1 million in litigation
provisions during the six months ended June 30, 2001 (recorded by Predecessor),
a significant portion of which related to previously disclosed litigation.
Personnel expenses accounted for $8.9 million of the decrease between comparable
periods as significant cost savings were realized once the operations of SFNB
were combined into those of RBC Centura. Another significant contributor was
occupancy expense, down $4.8 million, relating to reduced depreciation expense
as a result of the write-off of fixed assets previously used to support the
operations of SFNB. The remaining increase in noninterest expense was spread
across various other operating expense categories.
INCOME TAX EXPENSE
Income tax expense recorded for the six months ended June 30, 2002 was
$25.5 million compared to a pro forma $12.1 million benefit in the year earlier
period. The increase in income tax expense during 2002 was mainly the result of
lower reported income during 2001 due to merger-related and other significant
charges and operating losses generated by SFNB. See Note 2 of the Notes to
Consolidated Financial Statements for more details regarding the merger-related
and other significant charges.
EQUITY AND CAPITAL RESOURCES
Shareholder's equity amounted to $2.4 billion as of June 30, 2002 compared
with a balance of $2.3 billion at December 31, 2001. The growth was the result
of an increase in retained earnings due to income realized during 2002 in
addition to an increase in the amount of unrealized gains on available for sale
securities. Unrealized gains on available for sale securities, net of tax, were
$56.5 million as of June 30, 2002 compared with unrealized gains of $30.0
million as of December 31, 2001.
34
RBC Centura's capital ratios are greater than minimums required by
regulatory guidelines. It is RBC 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, 2002, RBC Centura had the required capital levels to
qualify as well capitalized. See Table 6, "Capital Ratios" for a summary of
capital ratios.
CURRENT ACCOUNTING ISSUES
See Note 1 of the Notes to Consolidated Financial Statements for discussion
concerning adoption of new accounting standards including SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets."
TABLE 1
- ------------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
June 30, 2002 June 30, 2001 December 31, 2001
-------------------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $2,335,191 30.0% $2,235,053 27.8% $2,209,518 28.4%
Commercial mortgage 1,130,908 14.6 1,380,687 17.2 1,199,508 15.4
Real estate construction 1,015,291 13.1 1,064,882 13.3 1,065,979 13.7
-------------------------------------------------------------------------
Commercial loan portfolio 4,481,390 57.7 4,680,622 58.3 4,475,005 57.5
Consumer 525,048 6.8 615,945 7.7 567,287 7.3
Residential mortgage 2,475,396 31.8 2,407,559 30.0 2,427,364 31.2
Leases 170,026 2.2 223,747 2.8 193,962 2.5
Other 117,867 1.5 99,423 1.2 119,765 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $7,769,727 100.0% $8,027,296 100.0% $7,783,383 100.0%
====================================================================================================================================
Residential mortgage servicing
portfolio for others - RBC Centura Portfolio $1,996,617 $ 705,752 $ 883,360
Residential mortgage servicing
portfolio for others - subservicing - 324,838 82,085
====================================================================================================================================
TABLE 2
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT MIX FOR THE SIX MONTHS ENDED (Pro forma)
June 30, 2002 June 30, 2001
-----------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------------------------
Demand, noninterest bearing $1,123,590 15.6% $ 1,088,802 14.2%
Interest checking 1,097,320 15.2 1,056,838 13.8
Money market 1,940,594 26.9 1,819,345 23.7
Savings 228,097 3.2 218,311 2.8
- ------------------------------------------------------------------------------------------------------------------------------------
Time deposits:
Certificates of deposit * $100,000 1,903,989 26.4 2,430,432 31.6
Certificates of deposit ** $100,000 513,440 7.1 640,318 8.3
IRA 405,174 5.6 432,465 5.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total time deposits 2,822,603 39.1 3,503,215 45.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total average deposits $7,212,204 100.0% $ 7,686,511 100.0%
====================================================================================================================================
* Denotes less than
** Denotes greater than
35
TABLE 3
- --------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS (Pro forma)
Six months ended Six months ended
June 30, 2002 June 30, 2001
-------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 7,722,051 $ 221,744 5.79% $ 7,971,683 $ 339,571 8.59%
Taxable securities 3,792,658 112,294 5.97 3,004,213 105,541 7.08
Tax-exempt securities 34,413 836 4.90 37,541 1,540 8.27
Short-term investments 30,869 315 2.06 124,368 2,923 4.74
Mortgage loans held for sale 128,350 4,893 7.69 113,378 4,563 8.12
------------ ----------- ----------- ---------
Interest-earning assets, gross 11,708,341 340,082 5.86 11,251,183 454,138 8.14
Net unrealized gains on
available for sale securities 60,938 45,878
Other assets, net 2,264,300 1,232,175
------------ -----------
Total assets $14,033,579 $12,529,236
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest checking $ 1,097,320 $ 2,607 0.48% $ 1,056,838 $ 8,170 1.56%
Money market 1,940,594 14,032 1.46 1,819,345 34,251 3.80
Savings 228,097 849 0.75 218,311 1,248 1.15
Time 2,843,029 45,633 3.24 3,503,215 98,695 5.68
------------ ----------- ----------- ---------
Total interest-bearing deposits 6,109,040 63,121 2.08 6,597,709 142,364 4.35
Borrowed funds 1,881,002 15,029 1.61 1,992,039 47,756 4.83
Long-term debt 2,260,355 40,053 3.57 1,342,118 37,631 5.65
------------ ----------- ----------- ---------
Interest-bearing liabilities 10,250,397 118,203 2.33 9,931,866 227,751 4.62
Demand, noninterest-bearing 1,123,590 1,088,802
Other liabilities 307,451 216,560
Shareholder's equity 2,352,141 1,292,008
------------ -----------
Total liabilities and
shareholder's equity $14,033,579 $12,529,236
============ ===========
Interest rate spread 3.53% 3.52%
Net yield on interest-
earning assets $11,708,341 $ 221,879 3.82% $11,251,183 $ 226,387 4.06%
============ =========== =========== =========
Taxable equivalent adjustment $ 5,492 $ 5,100
=========== =========
36
TABLE 4
- --------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Pro forma)
At and for the six months At and for the year ended
ended June 30, ended December 31,
-------------------------------------------------------------
(Dollars in thousands) 2002 2001 2001
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 103,828 $ 105,790 $ 105,790
Allowance related to loans transferred or sold - - (549)
Provision for loan losses 21,961 28,846 51,535
Loans charged off (21,655) (32,345) (59,884)
Recoveries on loans previously charged off 3,029 2,594 6,936
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (18,626) (29,751) (52,948)
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 107,163 $ 104,885 $ 103,828
======================================================================================================================
Loans at period-end/(1)/ $ 7,769,727 $ 7,748,130 $ 7,783,383
Average loans/(1)/ 7,722,051 7,971,683 7,885,111
Nonperforming loans/(1)/ 92,494 57,997 67,615
Allowance for loan losses to total loans/(1)/ 1.38% 1.35% 1.33%
Net charge-offs to average loans 0.49 0.75 0.67
Allowance for loan losses to nonperforming loans/(1)/ 1.16x 1.81x 1.54x
======================================================================================================================
(1) All periods presented exclude $6 million in nonperforming loans transferred
to held for sale in fourth quarter 2000 and sold in third quarter 2001.
TABLE 5
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
June 30, December 31,
--------------------------------------------------
(Dollars in thousands) 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------
Nonperforming loans/(1)/ $ 92,494 $ 57,997 $ 67,615
Foreclosed property 10,945 8,369 13,427
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 103,439 $ 66,366 $ 81,042
===========================================================================================================
Nonperforming assets (NPA's) to:/(1)/
Loans and foreclosed property. 1.33% 0.85% 1.05%
Total assets 0.73 0.49 0.58
===========================================================================================================
Accruing loans past due ninety days or greater $ 8,871 $ 8,508 $ 10,410
===========================================================================================================
(1) All periods presented exclude $6 million in nonperforming loans transferred
to held for sale in fourth quarter 2000 and sold in third quarter 2001.
37
TABLE 6
CAPITAL RATIOS
Tier I Capital Total Capital Tier I Leverage
-------------- ------------- ---------------
June 30, 2002 11.4 % 18.1 % 8.6 %
December 31, 2001 10.2 16.5 7.8
June 30, 2001 9.9 12.3 7.5
Minimum requirement 4.0 8.0 4.0
TABLE 7
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS
TAXABLE EQUIVALENT BASIS (Pro forma)
Six months ended
June 30, 2002 and 2001
----------------------------------------------------
Income/ Variance
Expense Attributable to
(Dollars in thousands) Variance Volume Rate
- ------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (117,827) $ (10,330) $ (107,497)
Taxable securities 6,753 24,976 (18,223)
Tax-exempt securities (704) (119) (585)
Short-term investments (2,608) (1,488) (1,120)
Mortgage loans held for sale 330 580 (250)
- ------------------------------------------------------------------------------------------
Total interest income (114,056) 13,619 (127,675)
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking (5,563) 302 (5,865)
Money market (20,219) 2,145 (22,364)
Savings (399) 54 (453)
Time (53,062) (16,162) (36,900)
- ------------------------------------------------------------------------------------------
Total interest-bearing deposits (79,243) (13,661) (65,582)
Borrowed funds (32,727) (2,525) (30,202)
Long-term debt 2,422 19,585 (17,163)
- ------------------------------------------------------------------------------------------
Total interest expense (109,548) 3,399 (112,947)
- ------------------------------------------------------------------------------------------
Net interest income $ (4,508) $ 10,220 $ (14,728)
==========================================================================================
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.
38
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Omitted Pursuant to General Instruction H. (2)(c) of Form 10-Q.
RBC CENTURA BANKS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings against RBC Centura and its subsidiaries have
arisen from time to time in the normal course of business. RBC Centura believes
liabilities arising from these proceedings, if any, will have no material
adverse effect on the financial position or results of operations of RBC Centura
or its subsidiaries, taken as a whole.
Item 2. Changes in Securities and Use of Proceeds
Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q.
Item 3. Defaults Upon Senior Securities
Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
39
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:
RBC CENTURA BANKS, INC.
-----------------------
Registrant
Date: August 14, 2002 By: /s/ Charles A. Caswell
----------------------
Charles A. Caswell
Chief Financial Officer
40