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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[(check)] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
For the transition period from to
Commission File Number: 1-10646
CENTURA BANKS, INC.
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1688522
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
134 North Church Street, Rocky Mount,
North Carolina 27804
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 977-4400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [(check)] No
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 28, 1998, there were 25,980,541 shares outstanding of the
Registrant's common stock, no par value. The aggregate market value of the
Registrant's common stock held by those persons deemed by the Registrant to be
nonaffiliates was approximately $1.7 billion. Portions of the Proxy Statement
of the Registrant for the Annual Meeting of Shareholders to be held on April
15, 1998, are incorporated by reference in Part III of this report.
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II-1
CROSS REFERENCE
PART I Item 1 Business Page II-
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Description of Business 4-11
Year 2000 Compliance 11-12
Selected Financial Data 13
Loans 15-17, 40-41, 48
Investment Securities 18-19, 39, 46-47
Funding Sources 19-20, 50-52
Average Balance Sheets 17
Net Interest Income and Net Interest Margin 20-21
Net Interest Income Analysis -- Taxable Equivalent Basis 17
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent
Basis 21
Asset Quality and Allowance for Loan Losses 22-24, 40, 48-49
Noninterest Income and Noninterest Expense 24-25, 57
Equity and Capital Resources 25-26, 37, 64-65
Liquidity 26
Market Risk 26-29
Asset/Liability and Interest Rate Risk Management 27-29
Item 2 Properties 12, 40, 49
Item 3 Legal Proceedings
Registrant and its subsidiary Centura Bank had been parties since 1994
in a civil action and a related administrative proceeding instituted by
seven individuals claiming to represent the depositors of First Savings
Bank of Forest City, SSB ("First Savings"), a mutual thrift institution
acquired by Registrant and its subsidiary Centura Bank in 1993. The
action was originally filed in the Superior Court of Wake County, North
Carolina, against the Registrant, Centura Bank, the North Carolina
Savings Institutions Division ("NCSID") and six individuals who were
directors of First Savings at the time of the acquisition (the "First
Savings directors") and sought damages and injunctive relief on a
number of theories including breach of fiduciary duty by the First
Savings directors in connection with the acquisition. In 1995, the civil
case was certified as a class action and the claims against NCSID were
severed from the claims against Registrant, Centura Bank and the First
Savings directors. The court in the NCSID case, after a hearing on the
matter, remanded the NCSID decision approving the transaction to that
agency for a hearing on plaintiffs' claims of fiduciary breach, on the
basis of which plaintiffs sought an order unwinding the transaction or
obtaining from the First Savings directors a disgorgement of benefits
alleged to have been wrongfully obtained. By agreement of the parties,
approved by the plaintiff class and a final order of the court having
jurisdiction, both the civil and administrative proceedings were settled,
effective February 4, 1998. Both proceedings were dismissed with
prejudice as of that date upon payment by Registrant of an agreed
amount to the representatives of the plaintiff class. The Registrant,
Centura Bank and the First Savings directors did not admit any
wrongdoing in connection with the settlement. The settlement was agreed
to by Registrant to end an expensive and time-consuming piece of
litigation. The settlement of these proceedings have been accounted for
in the consolidated financial statements of Registrant and its subsidiaries
at December 31, 1997, and for the year then ended. Registrant is of the
view that the settlement is not material to the financial position or results
of operations of the Registrant and its subsidiaries taken as a whole.
Various other legal proceedings against the Registrant and its subsidiaries
have arisen from time to time in the normal course of business.
Management believes liabilities arising from these proceedings, if any,
will have no material adverse effect on the financial position or results of
operations of the Registrant or its subsidiaries.
II-2
Page II-
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Item 4 Submission of Matters to a Vote of Security Holders
There has been no submission of matters to a vote of shareholders
during the quarter ended December 31, 1997.
PART II Item 5 Market for the Registrant's Common Equity and Related 7, 8, 25-26, 55-56
Stockholder Matters 30, 64-65
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-32
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26-29
Item 8 Financial Statements and Supplementary Data
Independent Auditors' Report 34
Consolidated Balance Sheets at December 31, 1997 and 1996 35
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1997 36
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1997 37
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997 38
Notes to Consolidated Financial Statements 39-65
Quarterly Financial Summary for 1997 and 1996 30
Item 9 Changes in and disagreements with accountants on accounting and
financial disclosure
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
PART III Item 10 Directors and Executive Officers of the Registrant *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management *
Item 13 Certain Relationships and Related Transactions *
PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8 for reference)
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable or because the required
information is included in the Consolidated Financial Statements
or related Notes to Consolidated Financial Statements.
(3) Exhibits have been filed separately with the Commission and are
available upon written request. 66-67
(b) Reports on Form 8-K:
On October 6, 1997, the Registrant filed a Form 8-K announcing
earnings for the nine months ended September 30, 1997. A press
release dated October 6, 1997 was included as an exhibit.
On November 20, 1997, the Registrant filed a Form 8-K
announcing the completion of the purchase of five North Carolina
banking centers from NationsBank, N.A. The transaction added
approximately $86 million in deposits and $52 million in loans.
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* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission.
II-3
DESCRIPTION OF BUSINESS
Registrant
Centura Banks, Inc. (the "Registrant") is a bank holding company
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve") and operating under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). The Registrant has two wholly-owned subsidiaries,
Centura Bank, a North Carolina chartered bank (the "Bank"), and Centura Capital
Trust I ("CCTI"). The Registrant, the Bank, and CCTI are collectively referred
to as "Centura". The Registrant provides services and assistance to the Bank
and the Bank's subsidiaries in the areas of strategic planning, administration,
and general corporate activities. In return, the Registrant receives income and
dividends from the Bank, where most of the operations of the Registrant are
carried on. The Registrant also receives income from its 49 percent ownership
interest in First Greensboro Home Equity, Inc., a home equity mortgage company
headquartered in Greensboro, North Carolina ("FGHE"). The majority of the
Registrant's executive officers, who are also officers of the Bank, receive
their entire salaries from the Registrant. The executive offices of the
Registrant and the Bank are located at 134 North Church Street, Rocky Mount,
Nash County, North Carolina. At December 31, 1997, the Registrant had total
consolidated assets of $7.1 billion.
CCTI is a statutory business trust created under the laws of the State of
Delaware. In June 1997, CCTI issued $100 million of fixed-rate 8.845 percent
Capital Securities, Series A ("Capital Securities"). The proceeds from the
Capital Securities issuance and from the common stock issued to the Registrant
were invested in Junior Subordinated Deferrable Interest Debentures (the
"junior debentures") issued by the Registrant. The junior debentures are the
primary assets of CCTI. The Registrant has guaranteed the obligations of CCTI
under the Capital Securities.
The Bank is a North Carolina banking corporation and Federal Reserve
member bank with deposits insured by the Bank Insurance Fund (the "BIF") and
the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit
Insurance Corporation (the "FDIC"). As of December 31, 1997, the Bank had 2,211
full-time and 464 part-time employees. The Bank is not a party to any
collective bargaining agreements, and, in the opinion of management, the Bank
enjoys good relations with its employees. The Bank, either directly or through
its wholly-owned subsidiaries, provides a wide range of financial services
through a variety of delivery channels.
Centura's strategic intent is to become the primary provider of financial
services for each of its customers. Therefore, Centura offers: full-service
commercial and consumer banking services, including bill paying services;
retail securities brokerage services; insurance brokerage services covering a
full line of personal and commercial lines; commercial and retail leasing;
trust department activities for individual estates and for various types of
employee benefit plans; and mortgage banking activities.
Another component of the strategic intent is the convenient delivery of
financial products and services to each customer. At December 31, 1997, Centura
serviced its customers through 192 financial stores, including 23 supermarket
locations, and through more than 300 automated teller machines throughout North
Carolina, Virginia, and South Carolina. Alternatively, Centura offers Centura
Highway, a centralized telephone operation which handles a full line of
financial services; a home page on the Internet; and home banking through a
telephone network operated by a third party and connected to the personal
computers of customers.
In keeping with its strategic intent Centura concentrates on expanding its
customer knowledge through the use of a customer database and sales tracking
system that combines financial, demographic, behavioral and psychographic data.
The information supports decision making about services offered, delivery
channels, locations, staffing, and marketing. Management anticipates it will
continue to refine Centura's product and service offerings and related delivery
systems and technologies in order to achieve Centura's strategic intent.
Centura's growth plan continues to include acquisitions that create
strategic market entry or enhancement opportunities. During 1997, Centura
completed three deposit assumption transactions within North Carolina and one
acquisition of an insurance agency. These transactions are described further in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 2 of the notes to consolidated financial statements.
II-4
Competition
The financial services industry is highly competitive. Centura, through
the Bank, competes for all types of loans, deposits, and financial services
with other bank and nonbank institutions located within the State. Since the
amount of money a state bank may lend to a single borrower, or to a group of
related borrowers, is limited to a percentage of the bank's shareholders'
equity, the Bank's larger competitors for commercial loan customers have higher
lending limits than does the Bank. Centura was the seventh largest bank holding
company in North Carolina based on its assets at December 31, 1997.
Centura also competes with out-of-state banks and bank holding companies
serving North Carolina, various savings and loan associations, money market and
other mutual funds, brokerage houses, and various other financial institutions.
Additionally, Centura competes with insurance companies, leasing companies,
regulated small loan companies, credit unions, governmental agencies and
commercial entities offering financial services products.
Supervision and Regulation
The following discussion is intended to be a summary of the material
regulations and policies applicable to the Registrant and its subsidiaries and
does not purport to be a comprehensive discussion.
General. The Registrant is a bank holding company, registered with the
Federal Reserve under the BHC Act and with the North Carolina Commissioner of
Banks (the "Commissioner") under the North Carolina Bank Holding Company Act of
1984, as amended (the "North Carolina Act"). As such, the Registrant and its
subsidiaries are subject to the supervision, examination, and reporting
requirements of the BHC Act and the North Carolina Act and the regulations of
the Federal Reserve and the Commissioner.
The Bank is a member of the FDIC, and as such, its deposits are insured by
the FDIC to the extent provided by law. The Bank is also subject to numerous
state and federal statutes and regulations that affect its business,
activities, and operations, and the Bank, as a North Carolina bank and member
of the Federal Reserve, is supervised and examined by the Federal Reserve and
the Commissioner, and is also subject to the backup supervisory authority of
the FDIC. Such agencies regularly examine the operations of the Bank and are
given authority to approve or disapprove mergers, consolidations, the
establishment of branches, and similar corporate actions. Such agencies also
have the power to prevent the continuance or development of unsafe or unsound
banking practices or other violations of law.
Regulation of Bank Holding Companies
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or
control more than 5 percent of the voting shares of the bank, (ii) it or any of
its subsidiaries, other than a bank, may acquire all or substantially all of
the assets of the bank, or (iii) it may merge or consolidate with any other
bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business
of banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues includes the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA").
Both capital adequacy and the CRA are discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks
by bank holding companies, such that Centura and any other bank holding company
located in North Carolina may now acquire a bank located in any other state,
and any bank holding company located outside North Carolina may lawfully
acquire any North Carolina-based bank, regardless of state law to the contrary,
in either case subject to certain deposit-percentage limitations, aging
requirements, and other restrictions. The Interstate Banking Act also generally
provides that, after June 1, 1997, national and state-chartered banks may
branch interstate through acquisitions of banks in other states. By adopting
legislation prior to that date, a state has the ability either to "opt in" and
accelerate the date after which interstate branching is permissible or "opt
out" and prohibit interstate branching altogether.
II-5
North Carolina has enacted "opt in" legislation that permits interstate
branching in North Carolina on a reciprocal basis through June 1, 1997, and on
an unlimited basis thereafter. Accordingly, the Bank is able to establish and
operate branches in other states, unless such states have enacted "opt out"
legislation.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted.
The BHC Act generally prohibits the Registrant from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or
unsound banking practices. For example, factoring accounts receivable,
acquiring or servicing loans, leasing personal property, conducting discount
securities brokerage activities, performing certain data processing services,
acting as agent or broker in selling credit life insurance and certain other
types of insurance in connection with credit transactions, and performing
certain insurance underwriting activities all have been determined by the
Federal Reserve to be permissible activities of bank holding companies. The BHC
Act does not place territorial limitations on permissible bank-related
activities of bank holding companies. Despite prior approval, the Federal
Reserve has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.
Capital Adequacy
The Registrant and the Bank are required to comply with the capital
adequacy standards established by the Federal Reserve. There are two basic
measures of capital adequacy: a risk-based measure and a leverage measure. All
applicable capital standards must be satisfied for an institution to be
considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items.
The minimum guideline for the ratio ("Risk Based Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0 percent. At
least half of the Total Capital must be composed of common equity, retained
earnings, minority interests in the equity accounts of consolidated
subsidiaries, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less goodwill and certain other
intangible assets ("Tier 1 Capital"). The remainder may consist of subordinated
debt, other preferred stock, and a limited amount of loan loss reserves ("Tier
II Capital"). At December 31, 1997, the Registrant and the Bank were in
compliance with the total capital ratio and the Tier I capital ratio
requirements. Note 19 of the notes to consolidated financial statements
presents Centura's and the Bank's capital ratios.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets (the "Leverage Ratio") of 3.0 percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally are required to
maintain a Leverage Ratio of at least 3.0 percent plus an additional cushion of
100 to 200 basis points. The Registrant was in compliance with the minimum
Leverage Ratio requirement as of December 31, 1997. The guidelines also provide
that bank holding companies experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital leverage ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
II-6
The Bank is subject to risk-based and leverage capital requirements
adopted by the Federal Reserve and was in compliance with applicable minimum
capital requirements as of December 31, 1997. Neither the Registrant nor the
Bank has been advised by any federal banking agency of any specific minimum
Leverage Ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the federal banking agencies have, pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FIDICIA"),
proposed an amendment to the risk-based capital standards that would calculate
the change in an institution's net economic value attributable to increases and
decreases in market interest rates and would require banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
Support of Subsidiary Bank
Under Federal Reserve policy, the Registrant is expected to act as a
source of financial strength to, and to commit resources to support, the Bank.
This support may be required at times when, absent such Federal Reserve policy,
the Registrant may not be inclined to provide it. In addition, any capital
loans by a bank holding company to its subsidiary bank are subordinate in right
of payment to deposits and to certain other indebtedness of the subsidiary
bank. In the event of a bank holding company's bankruptcy, any commitment by
the bank holding company to a federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Payment of Dividends
The Registrant is a legal entity separate and distinct from the Bank. The
principal source of cash flow of the Registrant, including cash flow to pay
dividends to its shareholders, is dividends from the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Registrant as well as the Registrant to its shareholders.
Under North Carolina law, the Bank may pay cash dividends only out of
undivided profits and only if the Bank has surplus of a specified level. If a
bank having capital stock of $15,000 or more has surplus of less than 50
percent of its paid-in capital stock, no cash dividend may be declared until
the bank has transferred from undivided profits to surplus 25 percent of its
undivided profits or any lesser percentage sufficient to raise the bank surplus
to an amount equal to 50 percent of its paid-in capital. Furthermore, if, in
the opinion of the federal regulatory agencies, a bank under its jurisdiction
is engaged in or is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank, could include the payment of
dividends), such authority may require, after notice and hearing, that such
bank cease and desist from such practice. The Federal Reserve and the FDIC have
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. Under the
FIDICIA an insured bank may not pay any dividend if payment would cause it to
become undercapitalized or once it is undercapitalized. See "Prompt Corrective
Action." Moreover, the Federal Reserve and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings. See Note 19 of
the notes to consolidated financial statements for amounts available for
dividends.
The payment of dividends by the Registrant and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Community Reinvestment Act ("CRA")
The Bank is subject to the provisions of the CRA. Under the terms of the
CRA, the appropriate federal bank regulatory agency is required, in connection
with its examination of a bank, to assess such bank's record in meeting the
credit needs of the communities served by that bank, including low and
moderate-income neighborhoods. The regulatory agency's assessment of the bank's
record is made available to the public. Further, such assessment is required of
any bank which has applied to (i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution, (iii) establish a new
branch office that will accept deposits, (iv) relocate an office, or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application.
II-7
Under CRA regulations jointly adopted by all federal bank regulatory
agencies, the former process-based CRA assessment factors were replaced with a
new evaluation system that rates institutions based on their actual performance
in meeting community credit needs. The evaluation system used to judge an
institution's CRA performance consists of three tests: a lending test; an
investment test; and a service test. Each of these tests will be applied by the
institution's federal regulator in an assessment context that would take into
account such factors as: (i) demographic data about the community; (ii) the
institution's capacity and constraints; (iii) the institution product offerings
and business strategy; and (iv) data on the prior performance of the
institution and similarly-situated lenders. The new lending test -- the most
important of the three tests for all institutions other than wholesale and
limited purpose (e.g. credit card) banks -- will evaluate an institution's
lending activities as measured by its home mortgage loans, small business and
farm loans, community development loans, and, at the option of the institution,
its consumer loans. The institution's regulator will weigh each of these
lending categories to reflect its relative importance to the institution's
overall business and, in the case of community development loans, the
characteristics and needs of the institution's service area and the
opportunities available for this type of lending. Assessment criteria for the
lending test will include: (i) geographic distribution of the institution's
lending; (ii) distribution of the institution's home mortgage and consumer
loans among different economic segments of the community; (iii) the number and
amount of small business and small farm loans made by the institution; (iv) the
number and amount of community development loans outstanding; and (v) the
institution's use of innovative or flexible lending practices to meet the needs
of low-to-moderate income individuals and neighborhoods. At the election of an
institution, or if particular circumstances so warrant, the banking agencies
will take into account in making their assessments lending by the institution's
affiliates as well as community development loans made by the lending consortia
and other lenders in which the institution has invested. All financial
institutions will be required to report data on their small business and small
farm loans as well as their home mortgage loans.
The joint agency CRA regulations provide that an institution evaluated
under a given test would receive one of five ratings for that test:
outstanding; high satisfactory; low satisfactory; needs to improve; or
substantial non-compliance. The ratings for each test would then be combined to
produce an overall composite rating of either outstanding, satisfactory
(including both high and low satisfactory), needs to improve, or substantial
non-compliance. In the case of a retail-oriented institution, its lending test
rating would form the basis for its composite rating. That rating would then be
increased by up to two levels in the case of outstanding or high satisfactory
investment performance, increased by one level in the case of outstanding
service, and decreased by one level in the case of substantial non-compliance
in service. An institution found to have engaged in illegal lending
discrimination would be rebuttably presumed to have a less-than-satisfactory
composite CRA rating. The Bank's current CRA rating is Satisfactory.
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system the federal
banking regulators are required to rate supervised institutions on the basis of
five capital categories ("well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized") and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to
a narrow exception, FDICIA requires the banking regulator to appoint a receiver
or conservator for an institution that is critically undercapitalized. The
federal banking agencies have specified by regulation the relevant capital
level for each category.
Under the Federal Reserve rule implementing the prompt corrective action
provisions, a bank that (i) has a Total Capital ratio of 10.0 percent or
greater, a Tier 1 Capital ratio of 6.0 percent or greater, and a Leverage Ratio
of 5.0 percent or greater, and (ii) is not subject to any written agreement,
order, capital directive, or prompt corrective action directive issued by the
Federal Reserve, is deemed to be "well-capitalized." An institution with a
Total Capital ratio of 8.0 percent or greater, a Tier 1 Capital ratio of 4.0
percent or greater and a Leverage Ratio of 4.0 percent or greater (or 3.0
percent or greater in the case of an institution rated composite 1 under the
CAMEL rating system) is considered to be "adequately capitalized." A bank that
has a Total Capital ratio of less than 8.0 percent or a Tier 1 Capital ratio of
less than 4.0 percent or a Leverage Ratio that is less than 4.0 percent (or
less than 3.0 percent in the case of a bank rated composite 1 under the CAMEL
rating system) is considered to be "undercapitalized." A bank that has a Total
Capital ratio of less than 6.0 percent, a Tier 1 Capital ratio of less than 3
percent, or a Leverage Ratio that is less than 3.0 percent is considered to be
"significantly undercapitalized" and an institution that has a tangible equity
capital to assets ratio equal to or less than 2.0 percent is deemed to be
"critically undercapitalized." For purposes of the regulation, the term
"tangible equity" includes core capital elements
II-8
counted as Tier 1 capital for purposes of the risk-based capital standards plus
the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with certain exceptions. A bank
may be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives an unsatisfactory
examination rating.
In the case of a bank that is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, the institution
is required to submit an acceptable capital restoration plan to its appropriate
federal banking agency. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches, or engaging in any new line of business except in
accordance with an accepted capital restoration plan or with the approval of
the FDIC. In addition, the appropriate federal banking agency is given
authority with respect to any undercapitalized depository institution to take
any of the actions it is required to or may take with respect to a
significantly undercapitalized institution as described below if it determines
"that those actions are necessary to carry out the purposes" of FDICIA.
At December 31, 1997, the Bank had the requisite capital levels to qualify
as well-capitalized.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The
risk-based system, which went into effect January 1, 1994, assigns an
institution to one of three capital categories: (i) well-capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned.
Under the final risk-based assessment system there are nine assessment
risk classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted by
Congress as part of omnibus budget legislation and signed into law on September
30, 1996. As directed by the Funds Act, the FDIC implemented a special one-time
assessment of approximately 65.7 basis points (0.657 percent) on a depository
institution's SAIF-insured deposits held as of March 31, 1995 (or approximately
52.6 basis points on SAIF deposits acquired by banks in certain qualifying
transactions). The Bank recorded a pre-tax charge against earnings for the
special assessment in the quarter ended September 30, 1996 in the amount of
approximately $7.3 million.
In addition, on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's capitalization rate at 1.25 percent of aggregate
insured deposits, the FDIC revised the SAIF assessment rate schedule, which
retroactively resulted in, as of December 11, 1996, (i) a widening in the
assessment rate spread among institutions in the different capital and risk
assessment categories, (ii) an overall reduction of the assessment rate range
assessable on SAIF deposits of from 0 to 27 basis points, and (iii) a special
interim assessment rate range for the last quarter of 1996 of from 18 to 27
basis points on institutions subject to Financing Corporation ("FICO")
assessments. Effective January 1, 1997, FICO assessments are imposed on both
BIF- and SAIF-insured deposits in annual amounts presently estimated at 1.29
basis points and 6.44 basis points, respectively. The Bank anticipates that the
net effect of the decrease in the premium assessment rate on SAIF deposits will
result in a reduction in its total deposit insurance premium assessments for
the years 1997 through 1999, assuming no further changes in announced premium
assessment rates.
Under the Federal Deposit Insurance Act, ("FDIA") insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged
in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. Management does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
II-9
Safety and Soundness Standards
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits
and such other operational and managerial standards as the agencies deem
appropriate. The federal bank regulatory agencies have adopted a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation,
fees, and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholders. The federal banking agencies determined that stock valuation
standards were not appropriate. In addition, the agencies adopted regulations
that authorize, but do not require, an agency to order an institution that has
been given notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan, the agency must
issue an order directing action to correct the deficiency and may issue an
order directing other actions of the types to which an undercapitalized
association is subject under the prompt correction action provisions of FDICIA.
See "Prompt Corrective Action." If an institution fails to comply with such an
order, the agency may seek to enforce such order in judicial proceedings and to
impose civil money penalties. The federal bank regulatory agencies also
proposed guidelines for asset quality and earnings standards.
Depositor Preference
Legislation enacted by Congress establishes a nationwide depositor
preference rule in the event of a bank failure. Under this arrangement, all
deposits and certain other claims against a bank, including the claim of the
FDIC as subrogee of insured depositors, would receive payment in full before
any general creditor of the bank would be entitled to any payment in the event
of an insolvency or liquidation of the bank.
Technology Risk Management
Federal banking regulators have recently issued various policy statements
emphasizing the importance of technology risk management and supervision in
evaluating the safety and soundness of depository institutions. A fundamental
change in the banking business has been brought on by advances in technology.
Notably, banks are contracting increasingly with outside vendors to provide
data processing and core banking functions. Furthermore, the use of
technology-related products, services, delivery channels, and processes expose
a bank to various risks, particularly transaction, strategic, reputation and
compliance risk. Banks are generally expected to successfully manage technology
related risks with all other risks to ensure that a bank's risk management is
integrated and comprehensive, primarily through identifying, measuring,
monitoring and controlling risks associated with the use of technology.
Registrant and Centura Bank are engaged in an active program of risk
management related to technology. Management has adopted, and the Audit
Committee of the Board has reviewed and approved, an Information Security
Policy for Registrant and its subsidiaries, covering (i) information security
generally, (ii) end user computing, (iii) electronic mail, (iv) the Internet,
and (v) remote access to corporate systems. In addition, Registrant has
retained an independent auditing firm to audit the information technology
systems of the Registrant on all platforms, including the security of such
systems. The initial audit has been completed and has found the systems to be
acceptable. The audit report contained a number of suggestions for further
improvements that management has reviewed with the Audit Committee. Management
continues to work on system security as a matter of priority among corporate
goals.
Transactions with Related Parties
The Bank's authority to engage in transactions with its "affiliates" is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA") and the
regulations of the Federal Reserve thereunder. In general, an affiliate of the
Bank is any company that controls the Bank or any other company that is under
common control with the Bank, excluding the Bank's subsidiaries. At present,
the provisions of Sections 23A and 23B apply to extensions of credit by the
Bank to the Registrant, CCTI and FGHE. Section 23A limits the aggregate amount
of transactions with any individual affiliate to 10% of capital and surplus and
also limits the aggregate amount of transactions with all affiliates to 20% of
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount of a type described in Section 23A and
purchase
II-10
of low quality assets from affiliates is generally prohibited. Section 23B
provides that certain transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit standards
that are substantially the same or at least as favorable to the Bank as those
prevailing at the time for comparable transactions with nonaffiliated
companies.
The Bank's authority to extend credit to its directors, executive officers
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of of Sections 22(g) and 22(h) of the
FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) do not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the Bank's
capital.
Federal Securities Law
The Registrant's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Registrant is subject to information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
Year 2000 Compliance
The "Year 2000" issue confronting Registrant and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits
to identify the calendar year in the date field, without considering the
upcoming change in the century. With the impending new millennium, these
programs and computers will recognize "00" as the year 1900 rather than the
year 2000. Like most financial service providers, Centura and its operations
may be significantly affected by the Year 2000 issue due to its dependence on
computer generated financial information. Software, hardware, and equipment
both within and outside Centura's direct control and with whom Centura
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer
systems, and credit bureau information) are likely to be affected. Furthermore,
if computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and Centura could experience a temporary inability to
process transactions, prepare statements or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 issue could adversely affect the viability of Centura's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 matter could result in a significant
adverse impact on products, services and the competitive condition of Centura.
Financial institution regulators have recently increased their focus upon
Year 2000 compliance issues, issuing guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Year
2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the Year 2000 implications of
reliance on vendors, data exchange and potential impact on customers, suppliers
and borrowers. These statements also require each federally regulated financial
institution to survey its exposure, measure its risk and prepare a plan in
order to solve the Year 2000 issue. In addition, the federal banking regulators
have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Year
2000 problems. The federal banking agencies have asserted that Year 2000
testing and certification is a key safety and soundness issue in conjunction
with regulatory exams, and thus an institution's failure to address
appropriately the Year 2000 issue could result in supervisory action, including
such enforcement actions as the reduction of the institution's supervisory
ratings, the denial of applications for approval of a merger or acquisition, or
the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000, assess their potential impact on the operations of
the Bank, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. The plan
is divided into the five phases: (1) awareness, (2) assessment, (3) renovation,
(4) validation, and (5) implementation.
Centura has substantially completed the first two phases of the plan and
is currently working internally and with external vendors on the final three
phases. Because Centura outsources its item processing operations, a
significant component
II-11
of the Year 2000 plan is working with external vendors to test and certify
their systems as Year 2000 compliant. Centura's inquiries indicate that
Centura's external vendors have surveyed their programs to inventory the
necessary changes and have begun correcting the applicable computer programs
and replacing equipment so that information systems will be Year 2000 compliant
prior to the end of 1998. This will enable Centura to devote substantial time
to the testing of the upgraded systems prior to the arrival of the millennium
in order to comply with all applicable regulations.
For additional discussion on Year 2000 matters, see "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
Properties
The main executive offices of the Registrant and the Bank are located in
Rocky Mount, North Carolina. The Bank operates 192 financial stores, the
substantial majority of which are located in North Carolina. The Bank also
operates financial stores in South Carolina and the Hampton Roads region of
Virginia.
II-12
Table 1
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
Five-Year
Compounded
Growth
1997 1996 1995 1994 1993 Rate
------------- ------------- ------------- ------------- ------------- -----------
SUMMARY OF OPERATIONS
(thousands, except per share)
Interest income ............................. $ 515,089 $ 469,760 $ 417,635 $ 324,950 $ 282,819 13.4%
Interest expense ............................ 247,184 219,676 192,990 123,657 112,306 14.7
--------- --------- --------- --------- ---------
Net interest income ......................... 267,905 250,084 224,645 201,293 170,513 12.3
Provision for loan losses ................... 13,418 9,596 7,904 7,220 9,151 (4.9)
Noninterest income .......................... 117,221 100,847 80,110 63,756 66,642 15.6
Noninterest expense ......................... 246,230 233,981 195,777 170,207 157,040 12.0
Income taxes ................................ 42,420 39,203 36,421 31,849 26,688 20.7
--------- --------- --------- --------- ---------
Net icome .................................. $ 83,058 $ 68,151 $ 64,653 $ 55,773 $ 44,276 19.9
========= ========= ========= ========= =========
Net interest income, taxable equivalent ..... $ 275,632 $ 256,109 $ 229,827 $ 207,033 $ 176,610 12.0
========= ========= ========= ========= =========
Cash dividends paid ......................... $ 27,354 $ 24,001 $ 18,731 $ 15,874 $ 12,833 22.3
========= ========= ========= ========= =========
PER COMMON SHARE
Net income -- basic ......................... $ 3.22 $ 2.66 $ 2.50 $ 2.23 $ 1.92 15.2%
Net income -- diluted ....................... 3.15 2.60 2.45 2.19 1.90 15.1
Cash dividends .............................. 1.06 1.00 .85 .74 .69 11.0
Book value .................................. 20.82 18.51 17.19 14.95 14.09 11.2
SELECTED AVERAGE BALANCES
(millions)
Assets ...................................... $ 6,601 $ 5,956 $ 5,178 $ 4,478 $ 3,937 13.7%
Earning assets .............................. 6,056 5,485 4,754 4,118 3,614 13.8
Loans ....................................... 4,309 4,014 3,638 3,005 2,650 12.6
Investment securities ....................... 1,716 1,436 1,083 1,083 905 19.4
Core deposits ............................... 4,512 4,102 3,646 3,445 3,058 10.6
Total deposits .............................. 4,899 4,505 4,036 3,718 3,334 10.5
Shareholders' equity ........................ 510 454 425 360 301 14.9
SELECTED YEAR-END BALANCES
(millions)
Assets ...................................... $ 7,125 $ 6,294 $ 5,785 $ 4,658 $ 4,518 14.3%
Earning assets .............................. 6,458 5,720 5,274 4,230 4,091 14.5
Loans ....................................... 4,587 4,109 3,898 3,244 2,834 13.2
Investment securities ....................... 1,828 1,578 1,329 966 1,201 20.1
Core deposits ............................... 4,893 4,387 3,948 3,428 3,538 11.5
Total deposits .............................. 5,365 4,733 4,444 3,736 3,854 11.5
Shareholders' equity ........................ 538 475 443 369 351 15.1
SELECTED RATIOS
Return on average assets .................... 1.26% 1.14% 1.25% 1.25% 1.12%
Return on average equity .................... 16.28 15.02 15.22 15.48 14.73
Average equity to average assets ............ 7.73 7.62 8.21 8.04 7.64
Dividend payout ratio ....................... 32.93 35.22 28.97 28.46 28.98
II-13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Centura Banks, Inc. ("Centura"). It should be read in conjunction
with the audited consolidated financial statements and footnotes presented on
pages 35-65 and the supplemental financial data appearing throughout this
report. Centura is a bank holding company operating in North Carolina and
Virginia. Note 1 of the notes to consolidated financial statements discusses
its wholly-owned subsidiaries, Centura Bank (the "Bank") and Centura Capital
Trust I ("CCTI").
Much of the financial discussion that follows refers to the impact of
Centura's merger and acquisition activity. The following table provides a
summary of merger and acquisition activity for the three-year period ending
December 31, 1997. The transactions allowed Centura to leverage upon existing
market presence as well as expand into adjacent and complimentary markets
within North Carolina.
Table 2
- --------------------------------------------------------------------------------
Institution Acquisition Date Total Assets
- ------------------------------------------------------------------------ ------------------ -------------
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
(Dollars in millions)
Branch Banking and Trust Company and United Carolina Bank, deposit
assumption ("BB&T") ................................................... 8/15/97 $313
Betts & Company ("Betts"), insurance agency ............................ 11/03/97 1
NationsBank, N.A., deposit assumption ("NationsBank") .................. 11/13/97 86
First Union National Bank, deposit assumption ("First Union") .......... 12/05/97 16
----
Total 1997 Purchase Acquisitions ...................................... $416
====
Essex Savings Bank, deposit assumption ................................. 7/26/96 $ 71
First Community Bank, Gastonia ......................................... 8/16/96 121
First Greensboro Home Equity, Inc., Greensboro, 49% purchase ("FGHE") .. 10/01/96 --
----
Total 1996 Purchase Acquisitions ...................................... $192
====
Cleveland Federal Bank, A Savings Bank, Shelby ......................... 3/30/95 $ 86
First Southern Bancorp, Inc., Asheboro ................................. 6/02/95 325
----
Total 1995 Purchase Acquisitions ...................................... $411
====
MERGERS ACCOUNTED FOR AS POOLINGS OF INTERESTS:
First Commercial Holding Corp., Asheville .............................. 2/27/96 $172
FirstSouth Bank, Burlington ............................................ 10/25/96 170
CLG, Inc., Raleigh ..................................................... 11/01/96 126
----
Total 1996 Mergers .................................................... $468
====
The 1996 mergers were accounted for as poolings-of-interests. Therefore,
all financial data previously reported prior to the dates of merger have been
restated as though the entities had been combined for all the periods
presented. For the completed acquisitions accounted for under the purchase
method of accounting, the financial position and results of operations of each
entity were not included in the consolidated financial statements until the
consummation date of the transaction.
On January 30, 1998, Centura consummated the acquisition of Moore and
Johnson, Inc. ("M&J"), an insurance agency with its principal operations in
Raleigh, North Carolina. M&J added approximately $3 million in assets. As this
transaction was accounted for as a purchase, its financial position and results
of operations are not included in the consolidated financial statements until
the consummation of the transaction.
Centura has one merger of a South Carolina financial institution, Pee Dee
Bankshares, Inc. ("Pee Dee"), pending completion during the first quarter of
1998. Pee Dee is expected to be accounted for as a pooling-of-interests. At
December 31, 1997, Pee Dee had $138 million in assets, $119 million in deposits
and $90 million in loans.
Centura continually evaluates acquisition opportunities and will continue
seeking to acquire healthy thrift and banking institutions and financial
services entities as allowed under current regulatory guidelines.
II-14
SUMMARY
Centura recorded net earnings of $83.1 million for the year ended December
31, 1997, an increase of $14.9 million or 21.9 percent from the year ended
December 31, 1996. Earnings per diluted share were $3.15 compared to $2.60 for
the prior year. Excluding a one-time Savings Association Insurance Fund
("SAIF") charge in 1996, net income for 1997 rose 14.7 percent and earnings per
diluted share increased $0.39. Key factors responsible for such results follow:
o Taxable equivalent net interest income increased by $19.5 million, or
7.6 percent, to $275.6 million in 1997 despite a 10 basis point decline
in the net interest margin to 4.56 percent. The volume of average
interest earning assets increased $570.6 million to $6.1 billion which
outpaced the $520.2 million increase in interest-bearing liabilities,
producing a $22.2 million rise in taxable equivalent net interest
income. The net impact of changes in interest rates and product spreads
lowered taxable equivalent net interest income by $2.7 million.
o Excluding acquisition activity, average loan volume increased 5.6
percent over 1996 while average deposits grew 5.8 percent over last
year. Including 1997 acquisitions, average loan and deposit growth over
last year was 7.3 percent and 8.7 percent, respectively. At December 31,
1997, loans and deposits were $4.6 billion and $5.4 billion,
respectively, compared to loans of $4.1 billion and deposits of $4.7
billion at year-end 1996.
o Asset quality measures remained sound for 1997. Nonperforming assets
were $27.9 million at December 31, 1997, representing only 0.39 percent
of total assets, compared to $22.9 million, or 0.36 percent of total
assets last year.
o The allowance for loan losses was $64.3 million, representing 1.40
percent of outstanding loans at December 31, 1997, compared to $58.7
million, or 1.43 percent of loans, the previous year. Net charge-offs
were 0.25 percent of average loans, compared to 0.18 percent of average
loans for the year ended December 31, 1996.
o Noninterest income, before securities transactions, for 1997 increased
$18.0 million to $117.1 million compared to $99.0 million last year.
Service charges on deposit accounts, insurance and brokerage
commissions, ATM fees and credit card activity accounted for the
majority of the increase.
o Noninterest expenses for 1997 increased 8.6 percent to $246.2 million
over the 1996 SAIF-adjusted level. Personnel expenses, professional
fees, and outsourcing charges were responsible for a majority of this
increase.
INTEREST-EARNING ASSETS
Interest-earning assets, consisting primarily of loans and investment
securities, averaged $6.1 billion for the year ended December 31, 1997 as
compared to $5.5 billion for the prior year. At December 31, 1997, earning
assets were $6.5 billion, representing a $738.1 million or 12.9 percent
increase over the $5.7 billion at December 31, 1996. These assets are subject
to credit risk and interest rate risk, which are discussed in detail in the
"Asset Quality and Allowance for Loan Losses" section and the "Market Risk" and
"Asset/Liability and Interest Rate Risk Management" sections, respectively.
Loans
Loans and leases (collectively referred to as "loans") at December 31,
1997, were $4.6 billion, an increase of $477.1 million or 11.6 percent, over
the $4.1 billion recorded last year. Loans of approximately $223 million were
acquired in connection with the 1997 acquisitions. Excluding these
acquisitions, period-end loans grew 6.2 percent. Table 3 summarizes the mix of
total loans outstanding. The portfolio mix did not change significantly from
year-end 1996. The commercial loan portfolio (commercial mortgage, commercial,
industrial and agricultural; and real estate construction) comprised 51.6
percent of the loan portfolio at December 31, 1997, compared to 51.7 percent
last year. Consumer loans and leases ended the year at 38.1 percent and 10.3
percent, respectively, of total loans versus 38.1 percent and 10.2 percent,
respectively, at December 31, 1996.
Commercial loans at December 31, 1997 were $2.4 billion with over 90
percent of the commercial loans secured. Centura, by preference, is a secured
lender. Unsecured commercial loans are generally seasonal in nature (to be
repaid in one year or less) and, like secured loans, are supported by current
financial statements and cash flow analyses. Commercial loans secured by
commercial real estate are supported by appraisals prepared by independent
appraisers approved by the Bank in accordance with regulatory guidelines and by
current financial statements, cash flow analyses, and such other information
deemed necessary by the Bank to evaluate each proposed credit. All loans of
$500,000 or more require complete and thorough financial and nonfinancial
analyses, including in-depth credit memos and ratio analyses. In some cases,
borrowers are visited at their places of business and most collateral is
inspected by a lending officer. Systematic independent credit
II-15
reviews ensure proper monitoring of post-closing compliance. Weaknesses in
credit and noncompliance with terms, conditions and loan agreements are
promptly reported to the credit review area and reviewed.
In connection with commercial lending activities, Centura had $64.2
million of standby letters of credit outstanding at December 31, 1997. These
letters of credit are subject to the same credit approval and monitoring
process as commercial loans.
Consumer loans (equity lines, residential mortgages, installment loans,
and other credit line loans) increased $182.1 million to $1.7 billion at
December 31, 1997. During the last half of 1997, Centura completed a loan
campaign focusing sales efforts on consumer loan growth. Equity lines and other
credit lines increased $101.2 million between the year-ends. Residential
mortgages at December 31, 1997 increased $63.2 million over the prior year-end.
The continued integration of CLG, Inc., acquired in late 1996, and the
increased demand for lease financing in the markets served, supported the $50.1
million growth in leases from year-end 1996.
Credit is extended by the Bank principally to customers in its market
areas of North Carolina and the Hampton Roads region of Virginia. Although not
a significant part of Centura's lending activities, foreign credit is extended
on a case by case basis and is subject to the same credit and approval process
as other commercial loans including an assessment of country risk. Management
discourages loans to high technology start-up companies, to highly speculative
real estate development projects, and to participation in highly leveraged
transactions. The loan portfolio is reviewed on an on-going basis to maintain
diversification by industry, geography, type of loan, collateral, and borrower.
Loans and other assets which were not performing in accordance with their
original terms and past-due loans are discussed under the section "Asset
Quality and Allowance for Loan Losses."
Average loan volume increased to $4.3 billion during 1997, up $294.7
million, or 7.3 percent, over 1996. Excluding acquisitions, average loans grew
5.6 percent over 1996 levels. During 1997, average loans as a percent of
average earning assets declined slightly to 71.2 percent, compared to 73.2
percent last year.
Taxable equivalent interest income generated by loans increased $27.1
million or 7.1 percent during 1997 to $406.5 million compared to $379.4 million
for the prior year. Given that over 50 percent of the loan portfolio is
affected by changes in the prime rate or other indices, loan interest income is
impacted by changes in the rate environment. As shown in Table 5, "Net Interest
Income Analysis -- Taxable Equivalent Basis," the average loan yield declined 2
basis points to 9.43 percent in 1997. Consequently, most of the increase in the
taxable equivalent interest income was due to volume as illustrated in Table 7,
"Net Interest Income and Volume/Rate Variance Taxable Equivalent Basis."
Interest income on loans without the taxable equivalent adjustment for 1997 was
$406.1 million as compared to $379.0 million for the prior year.
Table 3
- --------------------------------------------------------------------------------
TYPES OF LOANS
- --------------------------------------------------------------------------------
1997 1996
------------------------- -------------------------
% of % of
Amount Total Amount Total
------------- ----------- ------------- -----------
(thousands)
Commercial, financial and
agricultural .................. $ 846,074 18.45% $ 743,477 18.09%
Consumer ....................... 321,513 7.00 274,733 6.69
Real estate -- mortgage(1) ..... 2,320,320 50.59 2,097,757 51.05
Real estate -- construction
and land development .......... 578,304 12.61 524,246 12.76
Leases ......................... 470,376 10.26 420,240 10.23
Other .......................... 49,995 1.09 49,001 1.18
---------- ------ ---------- ------
Total loans .................... $4,586,582 100.00% $4,109,454 100.00%
========== ====== ========== ======
1995 1994 1993
------------------------- ------------------------- -------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------- ----------- ------------- ----------- ------------- -----------
(thousands)
Commercial, financial and
agricultural .................. $ 671,803 17.23% $ 591,317 18.23% $ 493,021 17.39%
Consumer ....................... 270,889 6.95 234,438 7.23 208,001 7.34
Real estate -- mortgage(1) ..... 2,211,607 56.73 1,843,423 56.82 1,712,254 60.41
Real estate -- construction
and land development .......... 434,014 11.13 336,889 10.38 246,781 8.71
Leases ......................... 269,677 6.92 199,982 6.16 141,383 4.99
Other .......................... 40,446 1.04 38,106 1.18 32,924 1.16
---------- ------ ---------- ------ ---------- ------
Total loans .................... $3,898,436 100.00 % $3,244,155 100.00% $2,834,364 100.00%
========== ========= ========== ====== ========== ======
- ---------
(1) Real estate -- mortgage represents loans secured by real estate, which
includes loans secured by multifamily residential property, residential
mortgage loans, residential mortgage loans held for sale, loans secured by
farmland, and loans secured by other commercial property.
II-16
Table 4
- --------------------------------------------------------------------------------
MATURITY SCHEDULE OF SELECTED LOANS
- --------------------------------------------------------------------------------
As of December 31, 1997
-----------------------------------------------------
One
Within Through Over
One Five Five
Year Years Years Total
------------ ----------- ---------- -----------
(thousands)
Commercial, financial, and agricultural:
Fixed interest rates ........................... $ 68,093 $ 91,275 $ 13,530 $ 172,898
Floating interest rates ........................ 367,707 266,812 38,657 673,176
--------- --------- -------- ---------
Total ........................................ $ 435,800 $ 358,087 $ 52,187 $ 846,074
========= ========= ======== =========
Real estate -- construction and land development:
Fixed interest rates ........................... $ 28,026 $ 51,820 $ 4,785 $ 84,631
Floating interest rates ........................ 274,552 203,362 15,759 493,673
--------- --------- -------- ---------
Total ........................................ $ 302,578 $ 255,182 $ 20,544 $ 578,304
========= ========= ======== =========
Table 5
- --------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS -- TAXABLE EQUIVALENT BASIS
- --------------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------------- ---------- ------------ ------------- ---------- ------------
(thousands)
ASSETS
Loans ........................... $4,309,064 $406,487 9.43% $4,014,391 $379,411 9.45%
Taxable securities .............. 1,669,017 110,906 6.64 1,394,307 90,374 6.48
Tax-exempt securities ........... 42,272 3,775 8.93 47,450 4,211 8.87
Short-term investments .......... 30,741 1,648 5.36 34,368 1,789 5.20
---------- -------- ---------- --------
Interest-earning assets,
gross .......................... 6,051,094 522,816 8.64 5,490,516 475,785 8.67
Net unrealized gains
(losses) on available
for sale securities ............ 4,512 (5,542)
Other assets, net ............... 545,478 471,316
---------- ----------
Total assets .................. $6,601,084 $5,956,290
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest checking ............... $ 651,774 $ 10,828 1.66% $ 611,342 $ 11,085 1.81%
Money market .................... 795,397 33,633 4.23 489,281 17,093 3.49
Savings ......................... 288,128 5,451 1.89 306,772 6,311 2.06
Time ............................ 2,446,648 134,029 5.48 2,450,809 134,556 5.49
---------- -------- ---------- --------
Total interest-bearing
deposits ....................... 4,181,947 183,941 4.40 3,858,204 169,045 4.38
Borrowed funds .................. 763,043 40,453 5.30 588,008 30,427 5.17
Long-term debt .................. 341,067 22,790 6.68 319,634 20,204 6.32
---------- -------- ---------- --------
Interest-bearing liabilities 5,286,057 247,184 4.68 4,765,846 219,676 4.61
-------- --------
Demand, noninterest-
bearing ........................ 717,506 647,245
Other liabilities ............... 87,191 89,453
Shareholders' equity ............ 510,330 453,746
---------- ----------
Total liabilities and
shareholders'
equity ....................... $6,601,084 $5,956,290
========== ==========
Interest rate spread ............ 3.96% 4.06%
Net yield on interest-
earning assets, gross .......... $6,051,094 $275,632 4.56% $5,490,516 $256,109 4.66%
========== ======== ========== ========
Taxable equivalent
adjustment ..................... $ 7,727 $ 6,025
======== ========
1995
-------------------------------------
Interest
Average Income/ Average
Balance Expense Yield/Rate
------------- ----------- -----------
(thousands)
ASSETS
Loans ........................... $3,638,129 $349,301 9.60%
Taxable securities .............. 1,041,994 66,956 6.43
Tax-exempt securities ........... 50,765 4,418 8.70
Short-term investments .......... 33,022 2,142 6.49
---------- --------
Interest-earning assets,
gross .......................... 4,763,910 422,817 8.88
Net unrealized gains
(losses) on available
for sale securities ............ (10,064)
Other assets, net ............... 424,005
----------
Total assets .................. $5,177,851
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest checking ............... $ 567,764 $ 12,866 2.27%
Money market .................... 396,841 12,833 3.23
Savings ......................... 329,877 8,057 2.44
Time ............................ 2,169,535 120,151 5.54
---------- --------
Total interest-bearing
deposits ....................... 3,464,017 153,907 4.44
Borrowed funds .................. 364,293 21,144 5.80
Long-term debt .................. 270,269 17,939 6.64
---------- --------
Interest-bearing liabilities 4,098,579 192,990 4.71
--------
Demand, noninterest-
bearing ........................ 571,606
Other liabilities ............... 82,789
Shareholders' equity ............ 424,877
----------
Total liabilities and
shareholders'
equity ....................... $5,177,851
==========
Interest rate spread ............ 4.17%
Net yield on interest-
earning assets, gross .......... $4,763,910 $229,827 4.82%
========== ========
Taxable equivalent
adjustment ..................... $ 5,182
========
- ---------
(1) Nonaccrual loans are included in average balances for yield computations.
(2) Yields related to loans and securities exempt from both federal and state
income taxes, federal income taxes only, or state income taxes only are
stated on a taxable equivalent basis assuming statutory tax rates for 1997
of 35% and 7.50%, for 1996 of 35% and 7.75%, and for 1995 of 35% and 7.75%
for federal and state purposes, respectively.
(3) Average balances of taxable and tax-exempt securities available for sale do
not include the unrealized gains (losses) recorded on such securities.
Such amounts, net of taxes, are included in the average balances of
shareholders' equity.
II-17
Investment Securities
The investment portfolio at year-end 1997 was $1.8 billion, up 15.9
percent from the $1.6 billion at the end of 1996. On average, investments
increased $279.6 million or 19.5 percent to $1.7 billion for 1997 versus $1.4
billion for 1996. As a percentage of average earning assets, investments gained
ground during 1997, representing 28.3 percent of average earnings assets
compared to 26.2 percent for the prior year, primarily a result of deposit
growth out-pacing loan growth. Refer to Note 3 of the notes to consolidated
financial statements for a summary of investment securities as of December 31,
1997, 1996 and 1995.
The investment portfolio consists primarily of securities for which an
active market exists. Centura's policy is to invest primarily in securities of
the U.S. Government and its agencies and in other high grade fixed income
securities so as to minimize any credit risk in the investment portfolio. At
the end of 1997, over 97 percent of the investment portfolio consisted of
obligations of the U.S. Government and its agencies or other investment grade
fixed income securities. At December 31, 1997, the average duration of the
investment portfolio was approximately 2.13 years, compared to 2.34 years at
year-end 1996. The duration of a financial instrument is the weighted average
maturity of the instrument's total cash flows in present value terms. See Table
6, "Investment Securities -- Maturity/Yield Schedule," for a more detailed
analysis of the investment portfolio's remaining contractual maturities.
Table 6
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES -- MATURITY/YIELD SCHEDULE
- --------------------------------------------------------------------------------
As of December 31, 1997
---------------------------------------------------------------------------------------------------
Remaining Maturities
---------------------------------------------------------------------------------------------------
Within 1 Year 1 to 5 Years 6 to 10 Years Over 10 Years
------------------------ ------------------------ ------------------------ ------------------------
Taxable Taxable Taxable Taxable
Amortized Equivalent Amortized Equivalent Amortized Equivalent Amortized Equivalent
Cost Yield (1) Cost Yield (1) Cost Yield (1) Cost Yield (1)
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(thousands)
Held to Maturity:
U.S. Treasury .............. $52,188 5.56% $34,756 6.37% $ -- --% $ -- --%
U.S. Government agencies
and corporations .......... 22,249 5.75 26,778 6.34 -- -- -- --
State and municipal ........ 4,136 9.63 16,287 9.65 12,088 8.09 5,953 7.90
Mortgage-backed ............ -- -- 6,912 5.70 5,359 6.75 -- --
Other securities ........... 1,800 6.00 50 10.25 -- -- -- --
------- ---- ------- ----- ------- ---- ------ ----
Total held to maturity ..... $80,373 5.83% $84,783 6.94% $17,447 7.68% $5,953 7.90%
======= ==== ======= ===== ======= ==== ====== ====
As of December 31, 1997
-----------------------
Total
-----------------------
Taxable
Amortized Equivalent
Cost Yield (1)
----------- -----------
(thousands)
Held to Maturity:
U.S. Treasury .............. $ 86,944 5.88%
U.S. Government agencies
and corporations .......... 49,027 6.07
State and municipal ........ 38,464 8.89
Mortgage-backed ............ 12,271 6.16
Other securities ........... 1,850 6.11
-------- ----
Total held to maturity ..... $188,556 6.57%
======== ====
Remaining Maturities
--------------------------------------------------------------------------
Within 1 Year 1 to 5 Years 6 to 10 Years
------------------------ ------------------------ ------------------------
Taxable Taxable Taxable
Amortized Equivalent Amortized Equivalent Amortized Equivalent
Cost Yield (1) Cost Yield (1) Cost Yield (1)
----------- ------------ ----------- ------------ ----------- ------------
(thousands)
Available for Sale:
U.S. Treasury .................. $ 63,703 5.81% $122,797 6.80% $ --- --%
U.S. Government agencies
and corporations .............. 60,609 6.13 98,784 7.01 -- --
State and municipal ............ 275 6.55 465 7.87 1,403 7.68
Mortgage-backed and
asset-backed .................. -- -- 62,104 6.72 44,181 6.72
Other securities ............... 24,725 5.13 7,651 6.00 8,750 7.71
-------- ---- -------- ---- ------- ----
Total held to maturity ......... $149,312 5.83% $291,801 6.84% $54,334 6.90%
======== ==== ======== ==== ======= ====
Remaining Maturities
--------------------------
Over 10 Years Total
-------------------------- -------------------------
Taxable Taxable
Amortized Equivalent Amortized Equivalent
Cost Yield (1) Cost Yield (1)
------------- ------------ ------------- -----------
(thousands)
Available for Sale:
U.S. Treasury .................. $ -- --% $ 186,500 6.46%
U.S. Government agencies
and corporations .............. 19,836 7.03 179,229 6.71
State and municipal ............ -- -- 2,143 7.57
Mortgage-backed and
asset-backed .................. 964,610 6.78 1,070,895 6.78
Other securities ............... 143,437 6.55 184,563 6.39
---------- ---- ---------- ----
Total held to maturity ......... $1,127,883 6.76% $1,623,330 6.69%
========== ==== ========== ====
- ---------
(1) Yields are based on amortized cost, and yields related to securities exempt
from federal and/or state income taxes are stated on a taxable equivalent
basis assuming statutory tax rates of 35% for federal and 7.50% for state
purposes.
II-18
The classification of securities as held to maturity ("HTM") or available
for sale ("AFS") is determined at the time of purchase. Centura intends and has
the ability to hold its HTM portfolio until maturity. The HTM portfolio is
carried at amortized cost. At December 31, 1997, HTM securities amounted to
$188.6 million compared with $257.8 million at year-end 1996. The decrease was
primarily a result of scheduled maturities within the portfolio. At December
31, 1997 and 1996, the fair value of the HTM portfolio exceeded its amortized
cost by $3.1 million and $246,000, respectively.
The AFS portfolio, representing the remainder of the investment portfolio,
is reported at estimated fair value. These securities are used as a part of
Centura's asset/liability management strategy and may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital and other factors. At December 31, 1997, the AFS portfolio
was $1.6 billion compared with $1.3 billion at year-end 1996. At December 31,
1997, the recorded fair value of the AFS portfolio was greater than cost by
$16.2 million, which amount has been recorded, net of tax, as a separate
component of shareholders' equity. The fair value of the AFS securities at
December 31, 1996 was $2.6 million above amortized cost. Net gains of $136,000
on AFS investment securities were realized during 1997 from sales and issuer
call activity, compared to $1.8 million of realized net gains during 1996.
Investment securities contributed $114.7 million in taxable equivalent
interest income during 1997, up from the $94.6 million earned in 1996. The
average yield on investments was 6.70 percent in 1997 versus 6.56 percent in
1996. The increase in investment securities volume was responsible for $17.7
million of the increase in taxable equivalent interest income while changes in
interest rates and in the mix of the investment portfolio contributed $2.4
million. For additional information see Table 5 "Net Interest Income -- Taxable
Equivalent Basis" and Table 7 "Net Interest Income and Volume/Rate Variance --
Taxable Equivalent Basis." Investment interest income, as recorded in the
consolidated income statement, was $107.4 million for 1997 versus $88.9 million
for 1996.
FUNDING SOURCES
Total funding sources averaged $6.0 billion during 1997, an increase of
$590.5 million or 10.9 percent from the average volume in 1996. Funding sources
include deposits, short-term borrowings and long-term borrowings.
Deposits
The deposit base increased $631.9 million to $5.4 billion at December 31,
1997, compared to $4.7 billion at December 31, 1996. Internal growth was
supported by the addition of approximately 45,000 new households during 1997,
excluding those acquired through acquisition. Deposit assumption transactions
added $415 million in deposits. Excluding the 1997 acquisitions, total deposits
increased 4.6 percent over the prior year end.
On average, total deposits increased $394.0 million in 1997 to $4.9
billion, or 8.7 percent over the 1996 average of $4.5 billion. Excluding the
acquired deposits, average deposit growth over 1996 was approximately 5.8
percent.
Deposit mix trends demonstrated a shift from passbook savings and
certificates of deposits to market sensitive money market accounts. On average,
money market accounts grew dramatically in 1997 to $795.4 million, a $306.1
million increase from the 1996 average, and grew to represent 16.2 percent of
average total deposits during 1997, increasing from 10.9 percent averaged
during 1996. Time deposits declined by $4.2 million, and as a percent of total
deposits fell from 54.4 percent in 1996 to 49.9 percent in 1997. Total time
deposits with denominations of $100,000 or greater averaged $381.9 million
during 1997 and $403.7 million during 1996. Transaction account balances
(interest checking and noninterest-bearing demand deposits) on average
increased 8.8 percent, while holding steady at approximately 28.0 percent of
average total deposits.
Core deposits include noninterest-bearing demand, interest checking, money
market, savings and certificates of deposits with balances less than $100,000.
Core deposits grew $506.2 million between the year-end periods to $4.9 billion
at December 31, 1997. Average core deposit growth between the periods was
moderate at 10.0 percent. Core deposits provide a stable source of low cost
funds and continued to represent a majority of Centura's total deposit base at
year-end 1997, 91.2 percent compared to 92.7 percent at December 31, 1996.
These are very high levels by industry standards. The acquisition activity
during 1997 contributed to adding core deposits.
Interest expense on deposits increased $14.9 million to $183.9 million for
1997 compared to $169.0 million for 1996. As shown in Table 5, "Net Interest
Income Analysis -- Taxable Equivalent Basis," the cost of interest-bearing
deposits increased 2 basis points to average 4.40 percent for 1997. The
increase in deposit interest expense was due primarily to volume. The change in
interest rates paid on deposits was responsible for an increase of $2.4 million
in interest expense while the increased volume of interest-bearing deposits
contributed $12.5 million.
II-19
Other Funding Sources
Borrowed funds at December 31, 1997 were $733.2 million, compared with
$685.3 million at year-end 1996. Borrowed funds, consisting principally of
federal funds purchased, securities sold under agreements to repurchase, and
master notes, averaged $763.0 million in 1997, representing a 29.8 percent
increase over the 1996 average volume of $588.0 million. On average, borrowed
funds represented 12.7 percent of Centura's total average funding sources for
1996 compared with 10.9 percent in 1996. Interest expense on borrowed funds
increased by $10.0 million, of which $9.3 million was due to higher volume. A
13 basis point increase in the interest rates paid for borrowed funds impacted
interest expense by $763,000. The average interest rate paid for these funds
for 1997 was 5.30 percent and 5.17 percent for 1996.
Long-term debt at December 31, 1997 was $382.1 million, increasing $71.3
million over year-end 1996. Long-term debt at year-end 1997 consisted
predominantly of Federal Home Loan Bank Advances and the $100 million of
Capital Securities issued in June 1997 (described in the "Liquidity" section).
The average volume of long-term debt increased $21.4 million to $341.1 million
during 1997, compared to $319.6 million last year. Interest expense on
long-term debt increased $2.6 million, $1.4 million due to greater volume and
$1.2 million due to an increase in interest rates paid. Capital Securities
carry an interest rate of 8.845 percent, influencing the 36 basis point
increase in the 1997 average rate paid on long-term debt as compared with 1996.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for 1997 was $267.9 million up $17.8 million from the
$250.1 million for 1996. Taxable equivalent net interest income in 1997
increased by $19.5 million, or 7.6 percent, to $275.6 million from $256.1
million in 1996. This increase was primarily due to a $570.6 million increase
in average earning asset volume, which outpaced the $520.2 million increase in
interest-bearing liabilities volume. The mix of this growth impacted net
interest income positively by $22.2 million while the interest rate
environment's impact was less dramatic, lowering net interest income by $2.7
million. Management's focus is to stimulate growth in net interest income.
The net interest margin, net taxable equivalent interest income divided by
average interest-earning assets, declined 10 basis points to 4.56 percent for
1997 compared to 4.66 percent for 1996. The interest rate spread, the
difference between the average earning asset yield and the average rate paid on
interest-bearing liabilities, also declined 10 basis points to 3.96 percent for
1997. The average yield on earning assets was 8.64 percent in 1997 and 8.67
percent in 1996 while the rate paid for funding was 4.68 percent and 4.61
percent, respectively. The margin was negatively impacted by investments
growing to represent a greater percentage of earning assets during 1997,
principally because investments carry lower yields than loans. Although
moderate, the seven basis point increased funding costs and the three basis
point decline in the average asset yield also compressed the net interest
margin.
Table 5 and Table 7 provide additional information related to net interest
income and the net interest margin.
II-20
Table 7
- --------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE VARIANCE -- TAXABLE EQUIVALENT BASIS
- --------------------------------------------------------------------------------
1997-1996 1996-1995
--------------------------------------- ---------------------------------------
Variances Variance
Income/ Attributable to Income/ Attributable to
Expense ------------------------- Expense -------------------------
Variance Volume Rate Variance Rate Volume
----------- ---------- ------------ ----------- ---------- ------------
(thousands)
INTEREST INCOME
Loans ...................................... $27,076 $27,799 $ (723) $ 30,110 $35,635 $ (5,525)
Taxable securities ......................... 20,532 18,204 2,328 23,418 22,831 587
Tax-exempt securities ...................... (436) (462) 26 (207) (293) 86
Short-term investments ..................... (141) (193) 52 (354) 84 (438)
------- ------- -------- -------- ------- --------
Total interest income ................... 47,031 45,348 1,683 52,967 58,257 (5,290)
------- ------- -------- -------- ------- --------
INTEREST EXPENSE
Interest-bearing deposits
Interest checking ......................... (257) 706 (963) (1,781) 933 (2,714)
Money market .............................. 16,540 12,378 4,162 4,260 3,168 1,092
Savings deposits .......................... (860) (370) (490) (1,746) (537) (1,209)
Time deposits ............................. (527) (228) (299) 14,405 15,451 (1,046)
------- ------- -------- -------- ------- --------
Total interest-bearing deposits ......... 14,896 12,486 2,410 15,138 19,015 (3,877)
Borrowed funds ............................. 10,026 9,263 763 9,283 11,788 (2,505)
Long-term debt ............................. 2,586 1,397 1,189 2,264 3,153 (889)
------- ------- -------- -------- ------- --------
Total interest expense .................. 27,508 23,146 4,362 26,685 33,956 (7,271)
------- ------- -------- -------- ------- --------
Net interest income ..................... $19,523 $22,202 $ (2,679) $ 26,282 $24,301 $ 1,981
======= ======= ======== ======== ======= ========
The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the relationship
of the absolute dollar change in each.
II-21
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The investment and loan portfolios are the primary types of interest
earning assets for Centura. While the investment portfolio is structured with
minimum credit exposure to Centura, the loan portfolio is the primary asset
subject to credit risk. Credit risk is controlled and monitored through the use
of lending standards, thorough review of potential borrowers and on-going
review of loan payment performance.
Total nonperforming assets, including nonperforming loans and foreclosed
properties, were $27.9 million at December 31, 1997 compared with $22.9 million
at December 31, 1996. Nonperforming assets at year-end 1997 were 0.39 percent
of total assets, up 3 basis points from the 0.36 percent at year-end 1996.
Table 10, "Nonperforming Assets and Past Due Loans," discloses the components
and balances of nonperforming assets over the past five years. Based on
nonaccrual loans segmented by regulatory definition, real estate nonaccrual
loans were responsible for $4.7 million of the increase while industrial and
agricultural commercial loan nonaccruals increased by $556,000. Real estate
nonaccrual loans as a percent of the real estate portfolio were 0.67 percent
and 0.52 percent at December 31, 1997 and 1996, respectively.
Net charge-offs were 0.25 percent of average loans for 1997 versus 0.18
percent for 1996, while the volume of net charge-offs increased $3.8 million to
$11.0 million. Gross charge-offs were $14.4 million for the year-ended December
31, 1997 compared with $10.4 million for the prior year. Recoveries remained
relatively unchanged at $3.4 million and $3.2 million for December 31, 1997 and
1996, respectively. In response to the level of charge-offs and growth in the
loan portfolio, the provision for loan losses increased $3.8 million to $13.4
million for 1997. The provision for loan losses exceeded net charge-offs by
$2.4 million during 1997 and 1996.
The allowance for loan losses ("AFLL") grew by 9.5 percent to $64.3
million at December 31, 1997, compared to $58.7 million last year. As of
year-end 1997, the AFLL to total loans was 1.40 percent and covered 271 percent
of nonperforming loans, compared to 1.43 percent and 306 percent, respectively,
at December 31, 1996. For additional information with respect to the activity
in the AFLL, see Tables 8 and 9, "Analysis of Allowance for Loan Losses" and
"Allocation of the Allowance for Loan Losses," respectively.
The AFLL represents management's estimate of an amount adequate to provide
for potential losses inherent in the loan portfolio. Management's evaluation of
the adequacy of the AFLL is based on management's ongoing review and grading of
the loan portfolio, and consideration of past loan loss experience, trends in
past due and nonperforming loans, risk characteristics of the various
classifications of loans, current economic conditions, the fair value of
underlying collateral and other factors which affect potential credit losses.
Based on the current loan portfolio and levels of current problem assets and
potential problem loans, management believes the AFLL to be adequate at
December 31, 1997. While management uses available information to recognize
losses on loans, future additions to the AFLL may be necessary based on changes
in economic conditions and the impact of such change on the Bank's borrowers.
As an integral part of their examination process, various regulatory agencies
also review the AFLL. Such agencies may require that changes in the AFLL be
recognized when their credit evaluations differ from those of management, based
on their judgments about information available to them at the time of their
examination.
Loans past due ninety or more days were $7.0 million at December 31, 1997,
compared to $8.9 million at December 31, 1996. Accrual of interest on loans is
discontinued when management has serious doubts that such interest will be
collected in a reasonable period of time. Generally, open-end credit lines that
reach 120 days or more past due and substantially all other loans that reach 90
days or more past due are placed on nonaccrual status unless the loan is
adequately secured and in the process of collection. Generally, all loans past
due 180 days are placed on nonaccrual status regardless of security. Recorded
accrued interest is reversed or charged off. When borrowers demonstrate, over
an extended period, the ability to repay a loan Centura has classified as
nonaccrual in accordance with its contractual terms, such loan is returned to
accrual status.
Asset quality measures for 1997 and 1996 moved in line with industry
averages. While the loan portfolio is evaluated by sector and credit quality
analysis, and existing credit policies are reviewed in light of current
economic conditions, management recognizes that growth in the loan portfolio
opens opportunity for new credit problems to develop. The impact of
ever-changing economic conditions and changes to interest rates and/or
inflation on the operations of Centura's customers is unknown, but gives
opportunity for increased nonperforming asset levels. In addition to the
nonperforming assets and past due loans shown in Table 10, management believes
that an estimated $10 to $15 million of additional nonperforming and past due
loans may exist, depending upon economic conditions generally and the
particular situations of various borrowers whose loans are currently
"performing" in accordance with their contractual terms.
II-22
Table 8
- --------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(thousands)
Allowance for loan losses at beginning of year ........... $ 58,715 $ 55,070 $ 48,164 $ 43,430 $ 35,344
Allowance for acquired loans ............................. 3,133 1,240 3,460 170 4,670
Provision for loan losses ................................ 13,418 9,596 7,904 7,220 9,151
Loans charged off:
Real estate loans ....................................... 1,662 1,024 1,526 2,525 3,078
Commercial and industrial loans ......................... 4,674 3,900 2,893 1,189 3,080
Agricultural loans (excluding real estate) .............. 256 70 229 61 46
Consumer loans .......................................... 5,536 4,690 3,226 1,971 1,596
Leases .................................................. 2,164 668 381 245 232
Other ................................................... 133 56 51 30 40
-------- -------- -------- -------- --------
Total ................................................. 14,425 10,408 8,306 6,021 8,072
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Real estate loans ....................................... 699 543 641 659 725
Commercial and industrial loans ......................... 1,640 1,391 2,166 1,867 631
Agricultural loans (excluding real estate) .............. 45 10 -- 8 2
Consumer loans .......................................... 1,007 1,195 1,019 766 963
Leases .................................................. 47 78 22 65 16
-------- -------- -------- -------- --------
Total ................................................. 3,438 3,217 3,848 3,365 2,337
-------- -------- -------- -------- --------
Net loans charged off .................................... 10,987 7,191 4,458 2,656 5,735
-------- -------- -------- -------- --------
Allowance for loan losses at end of year ................. $ 64,279 $ 58,715 $ 55,070 $ 48,164 $ 43,430
======== ======== ======== ======== ========
Allowance for loan losses to loans at year-end ........... 1.40% 1.43% 1.41% 1.48% 1.53%
Net charge-offs to average loans ......................... .25 .18 .12 .09 .22
Allowance for loan losses to nonperforming loans ......... 2.71x 3.06x 2.86x 2.59x 2.07x
Table 9
- --------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
(thousands)
Commercial, financial and agricultural ................... $14,230 $13,255 $12,442 $ 7,163 $ 7,320
Consumer ................................................. 10,819 8,249 8,572 8,684 6,241
Real estate -- mortgage .................................. 14,502 15,663 17,851 12,700 13,088
Real estate -- construction and land development ......... 5,922 7,267 6,561 4,810 3,808
Leases ................................................... 5,865 2,142 1,060 921 366
Unallocated .............................................. 12,941 12,139 8,584 13,886 12,607
------- ------- ------- ------- -------
Allowance for loan losses at end of year ................. $64,279 $58,715 $55,070 $48,164 $43,430
======= ======= ======= ======= =======
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to
total loans.
II-23
Table 10
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(thousands)
Nonaccrual loans ............................. $ 23,722 $ 18,713 $ 18,321 $ 18,375 $ 20,261
Restructured loans ........................... -- 497 954 222 745
-------- -------- -------- -------- --------
Nonperforming loans ......................... 23,722 19,210 19,275 18,597 21,006
Foreclosed property .......................... 4,155 3,663 2,872 2,907 5,803
-------- -------- -------- -------- --------
Total nonperforming assets ................... $ 27,877 $ 22,873 $ 22,147 $ 21,504 $ 26,809
======== ======== ======== ======== ========
Accruing loans past due ninety days .......... $ 6,985 $ 8,916 $ 6,132 $ 3,700 $ 4,250
======== ======== ======== ======== ========
Nonperforming assets to:
Loans and total foreclosed property ......... 0.61% 0.56% 0.57% 0.66% 0.94%
Total assets ................................ 0.39 0.36 0.38 0.46 0.59
======== ======== ======== ======== ========
NONINTEREST INCOME AND EXPENSE
Traditionally, Centura has generated most of its revenue from net interest
income. With Centura's strategic goal to become the primary financial services
provider, opportunities to enhance noninterest revenue sources have developed.
Noninterest income ("NII") as a percentage of total revenues, defined as the
sum of taxable equivalent net interest income and noninterest income, trended
upward during 1997, reaching 29.8 percent compared with 28.3 percent in 1996.
Total NII increased $16.4 million, or 16.2 percent, to $117.2 million for 1997.
NII excluding securities gains totaled $117.1 million in 1997 increasing $18.0
million over the 1996 level.
Service charges on deposits, the largest component of NII, increased $5.9
million to $40.7 million, principally due to growth in new deposits, a mid-year
increase to non-sufficient funds ("NSF) charges, and the reduction of waived
service charges. Service charges on deposits represented 34.7 percent of NII
for 1997 versus 34.5 percent for 1996, indicating that growth in NII continued
to be generated from the traditional banking activities as well as alternative
sources. As compared to 1996, insurance and brokerage revenue increased $1.2
million and $1.7 million, respectively, through the delivery of a broad range
of mutual fund, insurance and annuity services offered by the Bank's
broker-dealer and insurance subsidiaries. The acquisition of Betts had minimal
impact on 1997 NII, but the acquisition of Betts & M&J should support growth in
1998 insurance commissions. Other deposit related fees increased $2.0 million
to $7.9 million for 1997 as compared to 1996, primarily due to an increase in
ATM fees assessed on non-Centura customers who use Centura ATMs and to a
significant increase in debit card activity, fueled by marketing campaigns.
Credit card fees and trust fees were $6.6 million and $7.7 million,
respectively, for 1997, up from the $5.0 million and $6.8 million,
respectively, earned in 1996. Operating leases, the investment in First
Greensboro, and bank-owned life insurance contributed an additional $5.3
million increase to NII over the 1996 level.
Noninterest expense ("NIE") increased 8.6 percent to $246.2 million for
year-end 1997, compared to the SAIF-adjusted 1996 NIE of $226.7 million. During
1996, Centura expensed $7.3 million or $4.2 million, net of tax, related to the
one-time special assessment on financial institutions to capitalize the "SAIF"
fund. Including the SAIF assessment, NIE increased 5.2 percent over the prior
year.
The increase in personnel costs, the single largest component of NIE, was
held to 3.6 percent or $4.0 million over the 1996 level although Centura added
personnel from acquisitions and instore financial offices. Occupancy and
equipment expenses in 1997 carried the full expenditures related to the ten
"instores" opened in late 1996, costs associated with the twelve instores
opened this year and the depreciation for equipment upgrades and enhancements.
Accordingly, occupancy and equipment expenses increased $1.1 million and $2.1
million, respectively, over 1996. Professional fees were $15.9 million for 1997
as compared with $11.3 million for 1996. Efforts to evaluate operational
efficiencies, both in the branch network and in support areas, contributed to a
majority of the increase in professional fees with some of the benefit derived
in reduced personnel expenses. Fees for outsourced services continued to rise
in 1997, reaching $8.2 million in comparison with $3.3 million for 1996.
Centura outsources several functions including item processing, property
management, and call processing generated from the Centura Highway. Outsourcing
these functions contributed to the slow growth in personnel expenses. A
combination of increased volumes and absorbing a full year of item processing
outsourcing expenses in 1997
II-24
contributed to the rise in outsourcing expenditures over 1996. Marketing
expenses increased by $1.5 million over 1996 in response to an expanded
customer base, the support of new markets, and an increased emphasis on
target-marketing customer segments. The amortization of intangibles increased
$1.5 million in 1997 over 1996 due to increased goodwill recorded for the 1997
acquisitions. The reduction in the rates of federal deposit insurance premiums
that began in late 1996 was responsible for a $1.6 million decline in other
operating SAIF-adjusted NIE.
In 1997, the efficiency ratio, an important productivity measure, improved
83 basis points to 62.68 percent from 63.51 percent, the SAIF-adjusted ratio
for 1996. The efficiency ratio for 1996 including the SAIF assessment was 65.55
percent. Total revenues increased by $35.9 million while noninterest expenses
increased over last year by $19.5 million, excluding the SAIF assessment,
benefiting the efficiency ratio. Since 1995, Centura has invested significant
resources to expand product services and delivery channels and to enhance
technologies in response to a competitive and changing industry. These
investments included the rollout of loan platform automation and customer
profitability database efforts. During 1997, Centura began to benefit from
these strategic investments as revenue growth outpaced noninterest expense
increases.
INCOME TAX EXPENSE
The amount of income tax expense for 1997 was $42.4 million compared to
$39.2 million in 1996. The 1997 and 1996 effective tax rates were 33.81 percent
and 36.52 percent, respectively. Refer to Note 14 of the notes to consolidated
financial statements for a reconciliation of the statutory Federal income tax
rate of 35% to the effective tax rates for 1997, 1996, and 1995.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity at the end of 1997 was $538.3 million, compared to
$475.2 million and $443.3 million at December 31, 1996 and 1995, respectively.
The ratio of shareholders' equity to year-end assets was 7.6 percent, 7.6
percent, and 7.7 percent for 1997, 1996 and 1995, respectively. The growth in
shareholders' equity has been a function of the retention of earnings and the
issuance of common stock in connection with Centura's insurance agency
acquisition and the exercise of stock options, curbed by dividends paid and by
the repurchase of common stock. From time to time, management repurchases
Centura common stock.
Centura's common stock is traded on the New York Stock Exchange under the
symbol CBC. At December 31, 1997, Centura had approximately 13,535 shareholders
and 25,862,375 shares outstanding. Annual cash dividends have increased
consistently and have been paid without interruption over the past 31 years.
Generally, dividends are paid on or about the 15th day of the final month in
the quarter. Cash dividends paid were $27.4 million, $24.0 million and $18.7
million during 1997, 1996 and 1995, respectively, which represents $1.06,
$1.00, and $.85 on a per share basis, respectively. Of the cash dividends paid
during 1997, $6.4 million were declared and accrued during the fourth quarter
of 1996. During the fourth quarter of 1997, Centura declared and accrued $7.0
million in dividends, or $.27 per share, for the first quarter of 1998 cash
dividend.
Unrealized net gains or losses, net of tax, on AFS securities held by
Centura are included as a component of shareholders' equity. At December 31,
1997 and 1996, the unrealized net gains, net of tax, were $10.0 million and
$1.6 million, respectively. The unrealized net gains, net of tax, on AFS
securities were $631,000 at December 31, 1995.
Centura's capital ratios are greater than the minimums required by
regulatory guidelines. It is Centura's intent to maintain an optimal capital
and leverage mix. At December 31, 1997, Centura had the requisite capital
levels to qualify as well-capitalized. At December 31, 1997, Tier I capital was
$520.2 million and total capital was $549.3 million. Centura's and the Bank's
capital ratios are presented in Note 19 of the notes to consolidated financial
statements. As discussed in the "Liquidity" section, Capital Securities are a
component of Tier I capital.
Table 11
- --------------------------------------------------------------------------------
CAPITAL RATIOS OF CENTURA
- --------------------------------------------------------------------------------
Tier I Total Tier I
Capital Capital Leverage
----------- ----------- -------------
1997 ........................ 10.60% 11.19% 7.51%
1996 ........................ 9.48 10.02 6.56
Minimum requirement ......... 4.00 8.00 3.00-5.00
II-25
Regulatory agencies have generally taken the position not to include net
unrealized gains or losses on investment securities in calculating Tier 1
capital.
As a result of its well-capitalized status, the Bank is assessed at the
lowest FDIC insurance premium rates available for financial institutions under
each insurance fund. Centura has deposits insured under both of the FDIC's
insurance funds, the BIF and the SAIF. On September 30, 1996, legislation was
enacted to recapitalize the SAIF, which consisted of a one-time special
assessment on financial institutions that had or had acquired SAIF-insured
deposits in recent years. The special SAIF assessment for Centura of $7.3
million, or $4.2 million after tax, was expensed on September 30, 1996.
LIQUIDITY
Centura's liquidity management objective is to meet maturing debt
obligations, provide a reliable source of funding to borrowers, and fund
operations on a cost effective basis. Management believes that sufficient
resources are available to meet Centura's liquidity objective through its debt
maturity structure, holdings of liquid assets, and access to the capital
markets through a variety of funding vehicles.
Investment securities are an important tool to Centura's liquidity
management objective. Some AFS securities were sold during 1997 and 1996 to
reposition the investment portfolio in a fluctuating interest rate environment.
Management may continue to reposition the investment portfolio in order to
enhance future results of operations with no expected material impact on
liquidity.
The Bank has multiple funding sources that could be used to increase
liquidity and provide additional financial flexibility. These sources consist
primarily of established federal funds lines with major banks totaling
approximately $1.6 billion, and the ability to borrow approximately $500
million from the FHLB ($229 million outstanding to FHLB at December 31, 1997
and 1996, respectively). The Bank also has the ability to issue debt up to a
maximum of $300 million under an offering by the Bank to institutional
investors of unsecured bank notes due from 30 days to 15 years from the date of
issue. Each bank note would be a direct, unconditional and unsecured general
obligation solely of the Bank and would not be an obligation of or guaranteed
by Centura. Interest rate and maturity terms would be negotiated between the
Bank and the purchaser, within certain parameters set forth in the offering
circular. At December 31, 1996, an aggregate principal amount of $16 million in
bank notes were outstanding. There were no bank notes outstanding at year-end
1997. In addition, Centura also accepts Eurodeposits, has a master note
commercial paper facility, and offers brokered certificates of deposits.
Long-term debt includes $100 million of fixed-rate, thirty-year Capital
Securities issued in June 1997 by CCTI, a consolidated subsidiary of Centura.
CCTI issued $3.1 million of common securities to the Holding Company of
Centura. CCTI invested the proceeds of $103.1 million, generated from the
Capital Securities and common securities issuances, in fixed-rate Junior
Subordinated Deferrable Interest Debentures ("the junior debentures") issued by
Centura. The junior debentures, scheduled to mature in June 2027, are the
primary assets of CCTI. Centura has guaranteed the obligations of CCTI under
the Capital Securities. For risk-based capital calculations, the Capital
Securities are included as a component of Tier I capital.
Centura also has an unsecured line of credit of $60 million bearing a
variable interest rate with $40 million and $60 million outstanding under this
line of credit at December 31, 1997 and 1996, respectively.
Management is not aware of any events that are reasonably likely to have a
material effect on Centura's liquidity, capital resources or operations. In
addition, management is not aware of any regulatory recommendations which, if
implemented, would have a material effect on Centura.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Centura's market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. Centura's objective is to
manage the mix of interest-sensitive assets and liabilities to moderate
interest rate risk and stabilize the net interest margin while enhancing
profitability. Centura does not maintain a trading account nor is the
corporation subject to currency exchange risk or commodity price risk.
II-26
The table below illustrates the scheduled maturity of selected on-balance
sheet financial instruments and their estimated fair values at December 31,
1997. For loans, investment securities, and long-term debt obligations,
principal cashflows are presented by expected maturity date including the
weighted average interest rate by exposure category. Weighted average variable
rates are based on implied forward rates in the yield curve at year-end.
Prepayment assumptions are based on rates evolving along the implied forward
yield curve at year-end and reflect market conventional prepayment behavior.
For deposits without contractual maturities, including interest checking,
savings, and money market accounts, cashflows are separated into a core and
"non-core" component. The "non-core" cashflows are scheduled to mature in 1998
while the core cashflows are presented based on management's assessment of
runoff.
Centura utilizes off-balance sheet derivative financial instruments as one
means of managing its interest rate risk associated with on-balance sheet
financial instruments. Refer to Table 13 for a summary of market risk
information relative to off-balance sheet financial instruments and to the
section "Asset/Liability and Interest Risk Management" for further information
on how Centura manages its interest rate risk.
Table 12
- --------------------------------------------------------------------------------
RATE SENSITIVE ON-BALANCE SHEET FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Principal Maturing in:
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
-------------- ------------- ------------- ------------- ------------- ------------
(In thousands)
Rate Sensitive Assets:
Loans
Fixed rate ................... $ 761,740 $ 447,505 $ 324,473 $ 191,180 $ 130,693 $ 118,241
Average rate (%) ............. 8.79 8.94 9.36 9.08 9.06 10.41
Variable rate ................ 1,046,587 297,739 279,660 219,335 219,239 485,911
Average rate (%) ............. 9.07 8.98 9.09 9.27 9.41 9.91
Investment securities
Fixed rate ................... 279,488 153,978 124,655 124,670 141,287 289,904
Average rate (%) ............. 6.09 6.69 6.57 6.42 6.37 6.57
Variable rate ................ 167,174 77,482 78,937 90,046 48,160 252,275
Average rate (%) ............. 5.90 5.76 6.31 5.89 5.93 5.68
Rate Sensitive Liabilities:
Interest-bearing checking,
savings, money market ........ $1,200,236 $ 126,987 $ 126,987 $ 126,987 $ 126,987 $ 253,975
Average rate (%) ............. 3.93 1.27 1.27 1.27 1.27 1.27
Certificates of deposit ....... 1,759,368 523,851 102,508 37,298 163,266 --
Average rate (%) ............. 5.39 5.78 6.02 5.77 6.21 --
Borrowed funds ................ 733,192 -- -- -- -- --
Average rate (%) ............. 5.39 -- -- -- -- --
Long-term debt ................ 92,759 130,664 7,310 1,168 50,202 100,026
Average rate (%) ............. 6.12 5.69 7.40 8.16 6.15 8.84
Fair Value
December 31,
Total 1997
--------------- -------------
(In thousands)
Rate Sensitive Assets:
Loans
Fixed rate ................... $ 1,973,832 $2,033,397
Average rate (%) ............. 9.06
Variable rate ................ 2,548,471 2,553,609
Average rate (%) ............. 9.27
Investment securities
Fixed rate ................... 1,113,982 1,305,578
Average rate (%) ............. 6.42
Variable rate ................ 714,074 525,611
Average rate (%) ............. 5.85
Rate Sensitive Liabilities:
Interest-bearing checking,
savings, money market ........ $ 1,962,159 $1,962,159
Average rate (%) ............. 2.90
Certificates of deposit ....... 2,586,291 2,582,900
Average rate (%) ............. 5.52
Borrowed funds ................ 733,192 733,192
Average rate (%) ............. 5.39
Long-term debt ................ 382,129 420,943
Average rate (%) ............. 6.77
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
Centura's Asset/Liability Management Committee seeks to maintain a general
balance between interest-sensitive assets and liabilities to insulate net
interest income and shareholders' equity from significant adverse changes in
market interest rates. Mismatches in interest rate repricings of assets and
liabilities arise from the interaction of customer business needs and Centura's
discretionary asset and liability management activities. Exposure to changes in
the level and direction of interest rates is managed by adjusting the
asset/liability mix through the use of various interest rate risk management
products, including derivative financial instruments.
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures and
option contracts ("swaps, floors, caps, futures and options," respectively),
are an integral part of Centura's interest rate risk management activities.
Centura has principally utilized interest rate swaps. Swaps are used to
II-27
manage interest rate risk, reduce funding costs, and diversify sources of
funding. Floors are used to protect certain designated variable rate financial
instruments from the downward effects of their repricing in the event of a
decreasing rate environment. Caps are used to protect certain designated
financial instruments from the negative repricing effects of an increasing rate
environment. Options provide the right, but not the obligation, to put or call
securities back to another third party at an agreed upon price under the
specific terms of each agreement. Table 13 summarizes Centura's off-balance
sheet derivative financial instruments at December 31, 1997. Notional amounts
represent the amount on which calculations of interest payments to be exchanged
are based. Refer to Note 16 of the notes to consolidated financial statements
for a comparative summary of off-balance sheet derivative financial instruments
at December 31, 1997 and 1996 and for a detailed discussion of related risks
and to Note 1 of notes to the consolidated financial statements for discussion
of the accounting policy for these off-balance sheet financial instruments.
On-balance-sheet and off-balance-sheet financial instruments are managed on an
integrated basis as part of Centura's overall asset/liability management
function. The value of any single component of the balance sheet or
off-balance-sheet position should not be viewed independently.
Table 13
- --------------------------------------------------------------------------------
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Notional Amounts Maturing In:
-------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
------------ ------------ ------------ ------------ ------------ ------------ -------------
(In thousands)
Corporation pays fixed
rates/receives variable ........... $ 75,000 $ 55,000 $ 63,000 $ 25,000 $ 60,000 $ -- $ 278,000
Average rate paid (%) ............. 6.75 6.52 6.27 6.04 6.22 -- 6.42
Average rate received (%) ......... 5.82 5.82 5.94 5.91 5.84 -- 5.86
Corporation pays variable
rates/receives fixed .............. -- -- 3,000 100,000 140,000 30,000 273,000
Average rate paid (%) ............. -- -- 8.50 5.87 5.70 5.91 5.83
Average rate received (%) ......... -- -- 8.90 6.30 6.44 7.65 6.55
Corporation pays variable/receives
variable .......................... 100,000 100,000 -- -- -- -- 200,000
Average rate paid (%) LIBOR ....... 5.75 5.88 -- -- -- -- 5.82
Average rate received (%) (US
T-Bill) .......................... 5.83 5.81 -- -- -- -- 5.82
Interest rate floors ............... 50,000 50,000 50,000 30,000 50,000 -- 230,000
Average strike rate ............... 6.00 5.50 6.00 6.00 5.50 5.78
Interest rate caps ................. -- -- -- -- 20,000 18,000 38,000
Average strike rate ............... -- -- -- -- 7.50 7.00 7.26
Call options ....................... 2,000 -- -- -- -- -- 2,000
Weighted
Average
Fair Value Carrying Remaining
December Value Contractual
31, 1997 December Term
Gain/(Loss) 31, 1997 (Years)
------------- ---------- ------------
(In thousands)
Corporation pays fixed
rates/receives variable ........... $ (1,737) -- 2.5
Average rate paid (%) .............
Average rate received (%) .........
Corporation pays variable
rates/receives fixed .............. 4,660 -- 6.8
Average rate paid (%) .............
Average rate received (%) .........
Corporation pays variable/receives
variable .......................... (370) -- 1.0
Average rate paid (%) LIBOR .......
Average rate received (%) (US
T-Bill) ..........................
Interest rate floors ............... 1,589 907 2.3
Average strike rate ...............
Interest rate caps ................. (465) 972 5.5
Average strike rate ...............
Call options ....................... 16 7 0.2
The Financial Accounting Standards Board is developing new accounting
standards which could significantly affect the accounting treatment of
Centura's derivatives and other financial instruments. It is not possible to
determine at this time how such changes could affect the nature and extent of
these activities.
Asset/liability simulation models are utilized to evaluate the dynamics of
the balance sheet and to estimate earnings' volatility under different interest
rate environments. These simulations include calculating the impact of
significant fluctuations in interest rates, both increases and decreases, on
net interest income and the estimated fair value of assets and liabilities.
Based on a 100 basis point rate shock in either direction, this simulation as
of December 31, 1997 shows Centura's interest rate risk position to be
relatively neutral: net interest income would not vary by more than
approximately 1 percent and the estimated market value of equity would not vary
by more than approximately 2 percent. Centura seeks a reasonable balance
between a satisfactorily high and stable return on average shareholders' equity
and a satisfactorily high and stable estimated market value of equity.
Centura's interest rate gap analysis is shown in Table 14 as of December
31, 1997. Gap analysis is generally based on the timing of contractual
maturities and repricing opportunities of interest-sensitive assets and
liabilities including management assumptions relative to financial instruments
subject to prepayment and indeterminate life deposits. A gap is considered
positive when the amount of interest sensitive assets exceeds the amount of
interest sensitive liabilities. At December 31, 1997, Centura had a positive
one-year cumulative interest-sensitivity gap of approximately $69.0 million.
The interest rate gap analysis is a static indicator which does not reflect
various repricing characteristics and may not necessarily indicate the
sensitivity of net interest income in a changing interest rate environment.
II-28
Table 14
- --------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
As of December 31, 1997(2)(3)
--------------------------------------------
1-30 31-60 61-90
Days Days Days
--------------- ------------- --------------
(Thousands)
INTEREST-EARNING ASSETS
Loans .................................... $ 1,882,375 $ 457,863 $ 437,638
Investment securities .................... 148,040 130,908 66,192
Other short-term investments ............. 43,425 -- --
----------- --------- ----------
Total interest-earning assets ............ 2,073,840 588,771 503,830
Notional amount of interest rate
swaps ................................... 343,000 60,000 50,000
- ------------------------------------------ ----------- --------- ----------
Total interest-earning assets and
off-balance sheet derivative
financial instruments ................... $ 2,416,840 $ 648,771 $ 553,830
=========== ========= ==========
INTEREST-BEARING LIABILITIES
Time deposits over $100 .................. $ 123,590 $ 52,112 $ 50,923
All other deposits (1) ................... 990,440 258,022 543,416
Short-term borrowed funds ................ 560,192 25,000 25,000
Long-term debt ........................... 36,266 62,874 76,282
----------- --------- ----------
Total interest-bearing liabilities ....... 1,710,488 398,008 695,621
Notional amount of interest rate
swaps ................................... 48,000 270,000 120,000
- ------------------------------------------ ----------- --------- ----------
Total interest-bearing liabilities and
off-balance sheet derivative
financial instruments ................... $ 1,758,488 $ 668,008 $ 815,621
=========== ========= ==========
Interest sensitivity gap per period ...... $ 658,352 $ (19,237) $ (261,791)
Cumulative interest sensitivity gap ...... 658,352 639,115 377,324
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities ................... 1.37x 1.26x 1.12x
As of December 31, 1997(2)(3)
-----------------------------------------------------------------------
Total Total
91-180 181-365 Under Over
Days Days One Year One Year Total
-------------- -------------- ------------- ------------- -------------
(Thousands)
INTEREST-EARNING ASSETS
Loans .................................... $ 215,711 $ 371,919 $3,365,506 $1,221,076 $4,586,582
Investment securities .................... 269,268 286,668 901,076 926,980 1,828,056
Other short-term investments ............. -- -- 43,425 -- 43,425
---------- ---------- ---------- ---------- ----------
Total interest-earning assets ............ 484,979 658,587 4,310,007 2,148,056 6,458,063
Notional amount of interest rate
swaps ................................... 25,000 -- 478,000 273,000 751,000
- ------------------------------------------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets and
off-balance sheet derivative
financial instruments ................... $ 509,979 $ 658,587 $4,788,007 $2,421,056 $7,209,063
========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
Time deposits over $100 .................. $ 79,013 $ 90,543 $ 396,181 $ 75,897 $ 472,078
All other deposits (1) ................... 365,431 692,950 2,850,259 2,042,588 4,892,847
Short-term borrowed funds ................ 98,000 25,000 733,192 -- 733,192
Long-term debt ........................... 5,896 10,022 191,340 190,789 382,129
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ....... 548,340 818,515 4,170,972 2,309,274 6,480,246
Notional amount of interest rate
swaps ................................... 85,000 25,000 548,000 203,000 751,000
- ------------------------------------------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities and
off-balance sheet derivative
financial instruments ................... $ 633,340 $ 843,515 $4,718,972 $2,512,274 $7,231,246
========== ========== ========== ========== ==========
Interest sensitivity gap per period ...... $ (123,361) $ (184,928) $ 69,035
Cumulative interest sensitivity gap ...... 253,963 69,035
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities ................... 1.07x 1.01x
- ---------
(1) To be consistent with simulation modeling, NOW, money market, and regular
savings accounts are separated into a core and non-core component. The
non-core component is treated as a bullet security and reprices in the
61-90 days category. The core component's principal cash flows are spread
evenly over a 7 year period.
(2) Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations with or without call or
prepayment penalties. Mortgages and mortgage-backed securities' principal
cash flows are modeled by aggregating similar coupon and age instruments
and applying the appropriate median prepayment speeds.
(3) All prime based loans are assumed to reprice such that 50% of the principal
cashflows run-off in the first month and 50% are spread evenly over the
next three months.
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1997 was $23.5 million, up $5.0
million over the prior year fourth quarter. Primary factors for the increase in
earnings were increased net interest income and noninterest income. Average
earning assets for the fourth quarter of 1997 were $6.4 billion, up $713
million from the quarter ending December 31, 1996. Taxable equivalent interest
income increased $14.0 million due to the growth in average earning assets.
Average interest-bearing liabilities increased 13.3 percent over the prior year
fourth quarter while the rates paid for these funds increased 7 basis points.
Interest expense for the three months ended December 31, 1997 was $66.0
million, an increase of $9.0 million over the prior year quarter, with $8.0
million additional interest expense due to greater volume and $1.0 million
attributed to the increase in interest rates paid. The net interest margin
declined 15 basis points to 4.51 percent for fourth quarter 1997 compared to
4.66 percent for fourth quarter 1996. Total noninterest income increased to
$34.1 million for fourth quarter 1997, $6.8 million over the comparable quarter
last year. Noninterest revenue sources showing improvement were service charges
on deposit accounts, credit card and related fees, and other financial services
income sources. Noninterest expense increased to $67.0 million, $5.2 million
greater than the comparable quarter last year. Increases in personnel expenses,
outsourcing fees, intangible amortization, and depreciation on leased equipment
were responsible for most of the rise in noninterest expenses. The efficiency
ratio improved to 62.58 percent compared to the prior year fourth quarter of
65.09 percent.
II-29
Table 15, "Quarterly Financial Summary," presents the quarterly results of
operations, selected average balances and certain other selected data for the
years ended December 31, 1997 and 1996.
Table 15
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
1997
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
SUMMARY OF OPERATIONS
(thousands, except per share)
Interest income ................... $ 137,136 $ 131,844 $ 126,266 $ 119,843
Interest expense .................. 66,041 64,385 60,800 55,958
--------- --------- --------- ---------
Net interest income ............... 71,095 67,459 65,466 63,885
Provision for loan losses ......... 3,849 3,486 3,189 2,894
Noninterest income ................ 34,117 29,923 27,196 25,985
Noninterest expense ............... 67,033 61,169 58,996 59,033
Income taxes ...................... 10,826 11,027 10,497 10,069
--------- --------- --------- ---------
Net income ........................ $ 23,504 $ 21,700 $ 19,980 $ 17,874
========= ========= ========= =========
PER COMMON SHARES
Net income -- basic ............... $ .91 $ .84 $ .78 $ .69
Net income -- diluted ............. .89 .82 .76 .68
Cash dividends paid ............... .27 .27 .27 .25
SELECTED AVERAGE BALANCES
(millions)
Assets ............................ $ 7,016 $ 6,739 $ 6,454 $ 6,185
Loans ............................. 4,562 4,372 4,189 4,107
Deposits .......................... 5,241 4,967 4,726 4,657
Shareholders' equity .............. 532 519 501 489
MARKET PRICES
High ............................. $ 69.000 $ 58.500 $ 47.625 $ 44.875
Low .............................. 55.875 47.625 35.750 39.000
Close ............................ 69.000 55.0625 45.875 39.000
1996
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
SUMMARY OF OPERATIONS
(thousands, except per share)
Interest income ................... $ 123,095 $ 118,995 $ 114,366 $ 113,304
Interest expense .................. 57,011 55,201 53,188 54,276
--------- --------- --------- ---------
Net interest income ............... 66,084 63,794 61,178 59,028
Provision for loan losses ......... 2,746 2,400 2,385 2,065
Noninterest income ................ 27,303 25,132 23,833 24,579
Noninterest expense ............... 61,860 63,573 55,086 53,462
Income taxes ...................... 10,246 8,237 10,281 10,439
--------- --------- --------- ---------
Net income ........................ $ 18,535 $ 14,716 $ 17,259 $ 17,641
========= ========= ========= =========
PER COMMON SHARES
Net income -- basic ............... $ .72 $ .57 $ .68 $ .69
Net income -- diluted ............. .70 .57 .66 .67
Cash dividends paid ............... .25 .25 .25 .25
SELECTED AVERAGE BALANCES
(millions)
Assets ............................ $ 6,198 $ 6,024 $ 5,848 $ 5,751
Loans ............................. 4,182 4,098 3,955 3,820
Deposits .......................... 4,723 4,593 4,349 4,354
Shareholders' equity .............. 472 457 438 447
MARKET PRICES
High ............................. $ 47.000 $ 40.125 $ 37.500 $ 36.750
Low .............................. 38.000 35.125 36.000 33.875
Close ............................ 44.625 38.625 36.750 36.750
II-30
1996 COMPARED TO 1995
Centura recorded net earnings of $68.2 million for the year ended December
31, 1996, an increase of $3.5 million or 5.4 percent from the year ended
December 31, 1995. Earnings per diluted share were $2.60 compared to $2.45 for
the prior year. Items of specific importance are discussed below.
Taxable equivalent net interest income increased by $26.3 million, or 11.4
percent, to $256.1 million in 1996, principally as a function of continued
growth in earning assets. This increase in volume compensated for the decline
in the net interest spread earned. The net interest margin decreased to 4.66
percent during 1996 from 4.82 percent during 1995. The change in the mix of
interest-earning assets was a primary factor in the continued decline in the
net interest margin. Net interest income, excluding the taxable equivalent
adjustment, was $250.1 million in 1996, compared to $224.6 million in 1995.
The mix of average interest-earning assets and interest-bearing funding
sources returned to historical levels in 1996 compared to 1995. Loans decreased
to comprise 73.2 percent of average earning assets for 1996 compared to 76.5
percent for 1995. Despite several acquisitions in 1996, interest-bearing
deposits, which have a lower cost of funds in the aggregate than external
funding sources, declined to represent only 81.0 percent of interest-bearing
liabilities in 1996 compared to 84.5 percent in 1995. This decline increased
the overall cost of funds.
Nonperforming assets remained low at $22.9 million at December 31, 1996,
representing only 0.36 percent of total assets, compared to $22.1 million, or
0.38 percent of total assets in 1995. The allowance for loan losses grew to
$58.7 million, representing 1.43 percent of outstanding loans at December 31,
1996, compared to $55.1 million, or 1.41 percent of loans, the previous year.
Net charge-offs also remained low at 0.18 percent of average loans, compared to
0.12 percent of average loans for the year ended December 31, 1995, despite an
increase of $2.7 million in net charge-off volume.
Noninterest income, before securities transactions, for 1996 increased
$18.3 million to $99.0 million compared to $80.7 million last year. Insurance
and brokerage commissions and service charges on deposit accounts continued to
account for the majority of the increase, increasing $9.2 million over 1995.
Income from mortgage activities also kept pace in 1996, increasing $4.4 million
to $11.5 million. This trend was primarily the result of a favorable rate
environment which positively impacted mortgage loan production and secondary
marketing activities. Additionally, CLG's operating lease activity added a new
revenue source in 1996, contributing $12.7 million in operating fee income, an
8.2 percent increase over 1995 results.
Noninterest expense for 1996 increased by 19.5 percent to $234.0 million
compared to $195.8 million in 1995. Excluding the third quarter special SAIF
assessment of $7.3 million, total noninterest expense increased only 15.8
percent to $226.7 million. Expenses for 1996 continued to be impacted by
Centura's strategy to further the progress of technological, delivery channel
and product initiatives ("reinvention strategy"). In 1996, Centura incurred
costs of approximately $13 million related to this strategy compared to
approximately $14 million in 1995. The majority of these expenses are reflected
in equipment costs and professional fees related to the rollout of Sellstation
automation and customer profitability database efforts. Additionally, the
start-up costs of the instore locations added almost $2 million of additional
expenses in 1996 with revenues being realized in later years. Personnel
expenses increased $13.9 million to $109.7 million in 1996 compared to $95.8
million in the prior year. This increase was primarily due to the addition of
personnel related to the 1996 acquisitions, increased bonus accruals, and
commissions from the sales force incentive system responding to loan, deposit
and financial services growth. Equipment expense increased $5.1 million to
$12.7 million in 1996 compared to the prior year. As indicated above, the
increase was primarily the result of Centura's reinvention strategy. Legal and
professional fees were $11.3 million in 1996, up $1.9 million over 1995, due to
a greater number of acquisitions in 1996 compared to 1995 and to an increase
use of information system professionals related to the reinvention strategy
noted above. The outsourcing of items processing lead to a $3.3 million
increase over 1995 in fees for outsourcing.
CURRENT ACCOUNTING ISSUES
In June 1997, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. Comprehensive income is
defined as the change in equity during a period for non-owner transactions and
is divided into net income and other comprehensive income. Other comprehensive
income includes revenues, expenses, gains, and losses that are excluded from
earnings under current accounting standards. This statement does not change or
modify the reporting or display in the income statement. SFAS No. 130 is
effective for interim
II-31
and annual periods beginning after December 15, 1997 although early adoption is
permitted. Comparative financial statements provided for earlier periods are
required to be reclassed to reflect the application of this statement. Centura
has elected not to adopt this statement early. Centura, as required, will adopt
SFAS No. 130 with first quarter 1998 financial reporting.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). The statement requires
management to report selected financial and descriptive information about
reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Generally, disclosures are required for segments internally identified to
evaluate performance and resource allocation. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier periods is to
be restated, if it is practical to do so. SFAS No. 131 does not have to be
applied to interim financial statements in the initial year of application,
but, comparative information must be provided for interim periods in the second
year of application. Centura, as required, will adopt this statement for year
ended December 31, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). The
statement revises the required disclosures for pensions and other post
retirement plans but does not change the measurement or recognition of such
plans. SFAS No. 132 is effective for fiscal years beginning after December 31,
1997. Centura, as required, will adopt this statement during 1998.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of Centura
and monitors the status of changes to issued exposure drafts and to proposed
effective dates.
YEAR 2000
Monitoring and managing the Year 2000 project will result in additional
direct costs. Direct costs include potential charges by third party software
vendors for product enhancements, costs involved in testing software products
for Year 2000 compliance, and any resulting costs for developing and
implementing contingency plans for critical software products which are not
enhanced. The Emerging Issues Task Force provided guidance concerning the
accounting for these costs related to Year 2000 modification. The costs of the
modifications should be treated as regular maintenance and repair and be
charged to expense as incurred. Management currently estimates that the
aggregate direct costs for 1998 and 1999 will be approximately $1.7 million and
$1.0 million, respectively. In addition to the direct costs, indirect costs
will also be incurred. These indirect costs will consist principally of the
time devoted by existing employees in monitoring software vendor progress,
testing enhanced software products and implementing any necessary contingency
plans. During 1997, Centura expensed approximately $1.3 million in direct costs
related to the Year 2000 issue. Expenditures for Year 2000 compliance including
direct and indirect costs are estimated to total $6-$8 million.
Management presently believes that with modifications to existing software
and conversions to new software, the Year 2000 matter will be mitigated without
causing a material adverse impact on the operations of Centura. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 issue could have a material impact on the operations of Centura.
In addition, Centura has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which it
is vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Year 2000 project cost estimates include the estimated costs and
time associated with the assessment and monitoring of a third party's Year 2000
risk, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which Centura's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with Centura's systems, would not have a
material adverse effect on Centura in future periods.
The Year 2000 Compliance is also discussed under "Description of
Business".
II-32
STATEMENT OF MANAGEMENT RESPONSIBILITY
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CENTURA BANKS, INC.
Management of Centura Banks, Inc. and its subsidiaries has prepared the
consolidated financial statements and other information in the annual report in
accordance with generally accepted accounting principles and is responsible for
its accuracy.
In meeting its responsibility, management relies on internal controls,
which include selection and training of qualified personnel, establishment and
communication of accounting and administrative policies and procedures, and
appropriate segregation of responsibilities and programs of internal audits.
These controls are designed to provide reasonable assurance that financial
records are reliable for preparing financial statements and maintaining
accountability for assets, and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of inherent
limitations in internal controls.
Management also recognizes its responsibility to foster a climate in which
corporate affairs are conducted with the highest ethical standards. Centura's
Code of Ethics, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of Centura's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting and related
matters. KPMG Peat Marwick LLP and the Corporation's internal auditors have
direct access to the Audit Committee.
/s/ Cecil W. Sewell, Jr.
Cecil W. Sewell, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Steven J. Goldstein
Steven J. Goldstein
Chief Financial Officer
II-33
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CENTURA BANKS, INC.
We have audited the accompanying consolidated balance sheets of Centura
Banks, Inc. and subsidiaries (the "Corporation") as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centura
Banks, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
January 7, 1998
II-34
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1997 1996
------------- -------------
(thousands, except share data)
ASSETS
Cash and due from banks ................................................... $ 268,248 $ 283,224
Due from banks, interest-bearing .......................................... 13,873 11,254
Federal funds sold ........................................................ 29,552 21,413
Investment securities:
Available for sale (cost of $1,623,330 and $1,317,449, respectively)..... 1,639,500 1,320,074
Held to maturity (fair value of $191,689 and $258,052, respectively)..... 188,556 257,806
Loans ..................................................................... 4,586,582 4,109,454
Less allowance for loan losses .......................................... 64,279 58,715
---------- ----------
Net loans ............................................................. 4,522,303 4,050,739
Premises and equipment .................................................... 115,464 112,198
Other assets .............................................................. 347,934 237,264
---------- ----------
Total assets .............................................................. $7,125,430 $6,293,972
========== ==========
LIABILITIES
Deposits:
Demand, noninterest-bearing ............................................. $ 816,475 $ 721,029
Interest-bearing ........................................................ 4,076,372 3,665,587
Time deposits over $100.................................................. 472,078 346,453
---------- ----------
Total deposits ........................................................ 5,364,925 4,733,069
Borrowed funds ............................................................ 733,192 685,291
Long-term debt ............................................................ 382,129 310,802
Other liabilities ......................................................... 106,848 89,575
---------- ----------
Total liabilities ......................................................... 6,587,094 5,818,737
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 25,000,000 shares authorized; none issued .. -- --
Common stock, no par value, 50,000,000 shares authorized; shares issued and
outstanding of 25,862,375 and 25,668,524, respectively .................. 187,435 187,563
Common stock acquired by ESOP ............................................. (251) (395)
Unrealized securities gains, net .......................................... 9,970 1,568
Retained earnings ......................................................... 341,182 286,499
---------- ----------
Total shareholders' equity ................................................ 538,336 475,235
---------- ----------
Total liabilities and shareholders' equity ................................ $7,125,430 $6,293,972
========== ==========
See accompanying notes to consolidated financial statements.
II-35
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -----------
(thousands, except share and per share data)
INTEREST INCOME
Loans, including fees .................................................... $ 406,078 $ 379,044 $348,823
Investment securities:
Taxable ................................................................. 104,885 86,162 63,672
Tax-exempt .............................................................. 2,484 2,766 2,998
Short-term investments ................................................... 1,642 1,788 2,142
--------- --------- --------
Total interest income .................................................... 515,089 469,760 417,635
INTEREST EXPENSE
Deposits ................................................................. 183,941 169,046 153,907
Borrowed funds ........................................................... 40,453 30,427 21,144
Long-term debt ........................................................... 22,790 20,203 17,939
--------- --------- --------
Total interest expense ................................................... 247,184 219,676 192,990
--------- --------- --------
NET INTEREST INCOME ...................................................... 267,905 250,084 224,645
Provision for loan losses ................................................ 13,418 9,596 7,904
--------- --------- --------
Net interest income after provision for loan losses ...................... 254,487 240,488 216,741
NONINTEREST INCOME
Service charges on deposit accounts ...................................... 40,703 34,758 29,686
Credit card and related fees ............................................. 6,643 4,979 4,220
Other service charges, commissions and fees .............................. 21,956 17,023 10,416
Fees for trust services .................................................. 7,737 6,841 6,108
Mortgage income .......................................................... 11,568 11,486 7,104
Other noninterest income ................................................. 28,478 23,962 23,190
Securities gains (losses), net ........................................... 136 1,798 (614)
--------- --------- --------
Total noninterest income ................................................. 117,221 100,847 80,110
NONINTEREST EXPENSE
Personnel ................................................................ 113,625 109,667 95,786
Occupancy ................................................................ 13,796 12,657 11,732
Equipment ................................................................ 21,632 19,556 14,478
Foreclosed real estate losses and related operating expense, net ......... 1,373 756 682
Other operating expense .................................................. 95,804 91,345 73,099
--------- --------- --------
Total noninterest expense ................................................ 246,230 233,981 195,777
--------- --------- --------
Income before income taxes ............................................... 125,478 107,354 101,074
Income taxes ............................................................. 42,420 39,203 36,421
--------- --------- --------
NET INCOME ............................................................... $ 83,058 $ 68,151 $ 64,653
========= ========= ========
NET INCOME PER COMMON SHARE
Basic .................................................................... $ 3.22 $ 2.66 $ 2.50
Diluted .................................................................. 3.15 2.60 2.45
AVERAGE COMMON SHARES OUTSTANDING
Basic .................................................................... 25,798,324 25,605,621 25,840,915
Diluted .................................................................. 26,331,392 26,261,830 26,367,771
See accompanying notes to consolidated financial statements.
II-36
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Common Securities
Common Stock Stock Gains Total
---------------------------- Acquired (Losses), Retained Shareholders'
Shares Amount By ESOP Net Earnings Equity
--------------- ------------ ---------- ------------- ------------ --------------
(thousands, except share data)
December 31, 1994 .......................... 24,705,480 $ 178,936 $ (683) $ (12,238) $ 203,416 $ 369,431
Net income ................................. -- -- -- -- 64,653 64,653
Common stock issued:
Stock option plans and stock awards ....... 252,819 3,384 -- -- -- 3,384
Acquisitions .............................. 2,812,271 75,794 -- -- -- 75,794
Redemption of common stock ................. (1,985,200) (58,822) -- -- -- (58,822)
Unrealized securities gains, net ........... -- -- -- 12,869 -- 12,869
Cash dividends declared .................... -- -- -- -- (24,142) (24,142)
Other ...................................... -- -- 144 -- -- 144
---------- --------- ------ --------- --------- ---------
December 31, 1995 .......................... 25,785,370 $ 199,292 $ (539) $ 631 $ 243,927 $ 443,311
Net income ................................. -- -- -- -- 68,151 68,151
Common stock issued:
Stock option plans ........................ 344,550 5,523 -- -- -- 5,523
Acquisitions .............................. 776,441 28,261 -- -- -- 28,261
Redemption of common stock ................. (1,237,837) (45,513) -- -- -- (45,513)
Net equity adjustment of merged entity ..... -- -- -- -- (818) (818)
Unrealized securities gains, net ........... -- -- -- 937 -- 937
Cash dividends declared .................... -- -- -- -- (25,005) (25,005)
Other ...................................... -- -- 144 -- 244 388
---------- --------- ------ --------- --------- ---------
December 31, 1996 .......................... 25,668,524 $ 187,563 $ (395) $ 1,568 $ 286,499 $ 475,235
Net income ................................. -- -- -- -- 83,058 83,058
Common stock issued:
Stock option plans and stock awards ....... 324,408 5,443 -- -- -- 5,443
Acquisition ............................... 44,443 2,528 -- -- -- 2,528
Redemption of common stock ................. (175,000) (10,289) -- -- -- (10,289)
Unrealized securities gains, net ........... -- -- -- 8,402 -- 8,402
Cash dividends declared .................... -- -- -- -- (27,920) (27,920)
Other ...................................... -- 2,190 144 -- (455) 1,879
---------- --------- ------ --------- --------- ---------
December 31, 1997 .......................... 25,862,375 $ 187,435 $ (251) $ 9,970 $ 341,182 $ 538,336
========== ========= ====== ========= ========= =========
See accompanying notes to consolidated financial statements.
II-37
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------------------------
1997 1996 1995
--------------- ------------- ------------
(thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................................... $ 83,058 $ 68,151 $ 64,653
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................ 13,418 9,596 7,904
Depreciation and amortization .................................................... 38,190 33,736 23,316
Deferred income taxes ............................................................ 12,587 493 (10,476)
Loan fees deferred ............................................................... 211 51 1,247
Bond premium amortization and discount accretion, net ............................ 1,956 2,966 1,709
(Gain) loss on sales of investment securities .................................... (136) (1,798) 614
Loss on sales of foreclosed real estate .......................................... 661 176 27
Gain on sales of equipment used in leasing activities ............................ (3,534) (3,075) (3,815)
Proceeds from sales of mortgage loans held for sale .............................. 372,841 424,039 443,281
Originations, net of principal repayments, of mortgage loans held for sale ....... (385,418) (425,622) (464,139)
Increase in accrued interest receivable .......................................... (2,400) (2,030) (8,791)
Increase (decrease) in accrued interest payable .................................. 382 (4,004) 10,687
Net (increase) decrease in other ................................................. (33,625) (17,158) 6,444
------------ ---------- ----------
Net cash provided by operating activities ........................................ 98,191 85,521 72,661
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans ............................................................ (256,696) (380,724) (446,163)
Purchases of:
Securities available for sale ................................................... (1,470,876) (594,186) (542,684)
Securities held to maturity ..................................................... (52,222) (213,023) (142,250)
Premises and equipment .......................................................... (17,505) (26,177) (17,772)
Other ........................................................................... (50,000) (29,250) --
Proceeds from:
Sales of securities available for sale .......................................... 576,752 398,139 215,112
Maturities and issuer calls of securities available for sale .................... 608,485 167,318 50,993
Maturities and issuer calls of securities held to maturity ...................... 99,410 258,238 167,016
Sales of foreclosed real estate ................................................. 4,349 3,216 2,214
Dispositions of premises and equipment .......................................... 1,858 4,412 6,214
Dispositions of equipment utilized in leasing activities ........................ 4,016 4,689 18,002
Cash acquired, net of cash paid, in purchase acquisitions ........................ 149,315 13,371 79,677
------------ ---------- ----------
Net cash used by investing activities ............................................ (403,114) (393,977) (609,641)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ......................................................... 216,315 190,132 367,770
Net increase in short-term borrowings ............................................ 47,901 152,854 202,518
Proceeds from issuance of long-term debt ......................................... 178,691 218,298 163,938
Repayment of long-term debt ...................................................... (107,364) (188,082) (62,454)
Cash dividends paid .............................................................. (27,354) (24,001) (18,731)
Proceeds from issuance of common stock, net ...................................... 4,274 4,442 3,209
Redemption of common stock ....................................................... (10,289) (45,513) (58,822)
Other ............................................................................ (1,469) -- --
------------ ---------- ----------
Net cash provided by financing activities ........................................ 300,705 308,130 597,428
------------ ---------- ----------
Increase (decrease) in cash and cash equivalents ................................. (4,218) (326) 60,448
Cash and cash equivalents, beginning of year ..................................... 315,891 316,217 255,769
------------ ---------- ----------
Cash and cash equivalents, end of year ........................................... $ 311,673 $ 315,891 $ 316,217
============ ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ........................................................................ $ 246,802 $ 223,680 $ 182,304
Income taxes .................................................................... 26,390 29,073 43,039
Noncash transactions:
Net equity adjustment of merged entity .......................................... -- 818 --
Stock issued for acquisitions and other stock issuances, net .................... 4,045 28,649 76,113
Unrealized securities gains, net ................................................ 13,545 1,681 21,274
Dividends declared, but not yet paid ............................................ 6,981 6,415 5,411
Transfer of securities between portfolios ....................................... -- -- 243,195
Loans securitized into mortgage-backed securities ............................... -- 242,729 56,971
Loans transferred to foreclosed property ........................................ 5,502 4,183 1,574
============ ========== ==========
See accompanying notes to consolidated financial statements.
II-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Centura Banks, Inc. ("Centura") and its wholly-owned subsidiaries, Centura
Capital Trust I ("CCTI") and Centura Bank (the "Bank"). The Bank also has
various wholly-owned subsidiaries which in the aggregate represent less than 15
percent of total assets. All significant intercompany transactions are
eliminated in consolidation.
In addition, certain amounts for prior years have been reclassified to
conform with statement presentations for 1997. The reclassifications have no
effect on shareholders' equity or net income as previously reported.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheets and income statements for the periods presented. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosure or in satisfaction of loans.
Business
The Bank, either directly or through its subsidiaries, provides a wide
range of financial services, including: full-service commercial and consumer
banking services; retail securities brokerage services; insurance brokerage
services covering a full line of personal and commercial lines; mortgage
banking services; commercial and retail leasing; and trust activities. The Bank
principally offers its services through its branch and automated teller network
located throughout North Carolina and the Hampton Roads region of Virginia and
through alternative delivery channels that include a centralized telephone
operation offering a full line of financial services, and home banking through
a telephone network operated by a third party and connected to the personal
computers of customers. The Bank is subject to competition from other
depository institutions and numerous other non-depository institutions offering
financial services products. The Bank is further subject to the regulations of
certain Federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
The primary function of CCTI is to facilitate the issuance of the Capital
Securities described in detail in Note 10 to the consolidated financial
statements
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks,
interest-bearing balances due from other banks, and federal funds sold.
Investment Securities
Centura's investments are classified in three categories and accounted for
as follows: (1) debt securities that the entity has the positive intent and the
ability to hold to maturity are classified as held to maturity ("HTM") and
reported at amortized cost; (2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; and (3) debt and equity securities not
classified as either held to maturity securities or trading securities are
classified as available for sale ("AFS") securities and reported at fair value,
with net unrealized gains or losses excluded from earnings and reported as a
separate component of shareholders' equity.
The classification of securities is determined at the time of purchase.
Investment securities HTM are stated at cost, net of the amortization of
premium and the accretion of discount. Centura intends and has the ability to
hold such securities until maturity. Investment securities AFS will be used as
a part of Centura's asset/liability management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk, the need to
increase regulatory capital and other factors.
The cost of securities sold is determined on a specific identification,
trade-date basis. Premiums and discounts are amortized or accreted into income
using the level-yield method over the estimated lives of the assets.
II-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
In November 1995 the Financial Accounting Standards Board ("FASB")
published an implementation guide for Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The FASB stated that the transition provisions included in
this guide permit a one-time opportunity for companies to reconsider their
ability and intent to hold securities accounted for under SFAS No. 115 to
maturity, allowing entities to transfer securities from the HTM category
without "tainting" their remaining HTM securities. The FASB emphasized that
this would be a one-time event where entities would have until December 31,
1995 to make any transfers from the HTM category under this provision.
Management transferred $243 million of investment securities from the HTM
category to the AFS category as allowed under the provisions of the
implementation guide. On the date of the transfer, the HTM investment
securities were recorded as AFS investment securities at their current fair
value, which resulted in the recognition of an unrealized loss of $1.3 million
that was recorded net of tax as a component of shareholders' equity.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation expense is
computed by the straight-line method based upon the estimated useful lives of
the assets. Leasehold improvements and assets acquired under capital leases are
amortized on a straight-line basis over the shorter of the life of the leased
asset or the lease term. Expenditures for maintenance and repairs are charged
to expense as incurred and gains or losses on disposal of assets are reflected
in current operations.
Allowance for Loan Losses
The allowance for loan losses ("AFLL") is established through provisions
for losses charged against income. Loans deemed to be uncollectible are charged
against the AFLL, and subsequent recoveries, if any, are credited to the AFLL.
The AFLL represents management's estimate of the amount necessary to provide
for potential future losses in the loan portfolio. Management believes that the
AFLL is adequate. Management's periodic evaluation of the adequacy of the
allowance is based on individual loan reviews, the loan loss experience of
prior years, economic conditions in the Bank's market areas, the fair value and
adequacy of underlying collateral, and the growth and risk composition of the
loan portfolio. This evaluation is inherently subjective as it requires
material estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans, that may be susceptible to
significant change. Thus, future additions to the AFLL may be necessary based
on the impact of changes in economic conditions on the Bank's borrowers. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's AFLL. Such agencies may require the
Bank to recognize additions to the AFLL based on their judgments about
information available to them at the time of their examination.
Impaired Loans, Nonaccrual Loans and Other Real Estate
A loan is considered to be impaired when, based on current information, it
is probable Centura will not receive all amounts due in accordance with the
contractual terms of a loan agreement. The discounted expected cash flow method
is used in determining the value of impaired loans, except in cases involving
collateral-dependent loans, in which case the fair value is determined using
the fair value of the collateral. When the ultimate collectibility of an
impaired loan's principal is in doubt, wholly or partially, all cash receipts
are applied to principal. Once the recorded principal balance has been reduced
to zero, future cash receipts are applied to interest income, to the extent any
interest has been foregone, and then they are recorded as recoveries of any
amounts previously charged off. When this doubt does not exist, cash receipts
are applied under the contractual terms of the loan agreement. The accrual of
interest is generally discontinued on all loans when management has doubts that
principal and interest will be collected in a reasonable period of time.
Generally, open-end credit lines that reach 120 days or more past due and
substantially all other loans that reach 90 days or more past due are placed on
nonaccrual status unless the loan is adequately secured and in the process of
collection. Generally, all loans past due 180 days are placed on nonaccrual
status regardless of security. Recorded accrued interest is reversed or charged
off.
Interest received on nonaccrual loans is generally applied against
principal or may be reported as interest income depending on management's
judgment as to the collectibility of principal. A loan classified as nonaccrual
is returned to accrual status when the obligation has been brought current, has
performed in accordance with its contractual terms over an extended period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
II-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Other real estate is included in other assets and is comprised of property
acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure and loans classified as in-substance foreclosure. At December 31,
1997 and 1996, the net book value of other real estate properties was
$4,155,000 and $3,663,000, respectively.
Loans
Substantially all loans accrue interest using the level-yield method based
on the principal amount outstanding.
Centura originates certain residential mortgage loans with the intent to
sell. Such loans held for sale are included in loans in the accompanying
consolidated balance sheets and are carried at the lower of cost or fair value
on an aggregate loan basis as determined by outstanding commitments from
investors or current quoted market prices.
Mortgage Servicing Rights
The rights to service mortgage loans for others are included in other
assets on the consolidated balance sheet. Capitalization of the allocated cost
of MSRs occurs when the underlying loans are sold or securitized. Capitalized
MSRs are amortized in proportion to and over the period of estimated net
servicing income using a method that is designed to approximate a level-yield
method, taking into consideration the estimated prepayment of the underlying
loans. Additionally, capitalized MSRs are evaluated periodically for impairment
based on the excess of the carrying amount of such rights over their fair
value. For purposes of measuring impairment, capitalized MSRs are stratified on
the basis of one or more of the predominant risk characteristics of the
underlying loans, including loan type, term and interest rate. Fair value is
estimated using current commitment prices from investors or current quoted
market prices to sell similar products.
Effective January 1, 1997, Centura adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 125"). Among other provisions, SFAS No. 125 provides accounting
standards for contractually specified servicing fees and for excess servicing
fees receivables. Centura's excess servicing fees generally do not exceed
contractually specified servicing fees, and as a result the present value of
such excess servicing fees are classified as mortgage servicing rights in the
accompanying financial statements in accordance with SFAS No. 125. Amounts
classified as excess servicing fees receivable for all periods prior to January
1, 1997, have been combined with mortgage servicing rights for all periods
presented in accordance with SFAS No. 125.
Other Assets and Other Liabilities
Intangibles are principally comprised of goodwill and are included in
other assets. Goodwill represents the excess of cost over the fair value of net
assets acquired in purchase acquisitions and is being amortized generally over
15 years. At December 31, 1997 and 1996 goodwill, net of accumulated
amortization, was $106.1 million and $66.8 million, respectively.
Negative goodwill, included in other liabilities, represents the excess of
fair value of net assets acquired over cost after recording the liability for
recaptured tax bad debt reserve and reducing the basis in bank premises and
equipment and other noncurrent assets acquired to zero. Negative goodwill is
being accreted into earnings on a straight-line basis over a period of ten
years, the period estimated to be benefited.
Centura has included as other assets equipment under operating lease
contracts. For the years ended December 31, 1997, 1996, and 1995, $11.9
million, $12.7 million, and $11.8 million, respectively, of operating lease
rental income was recorded in other noninterest income.
Long-lived assets and certain intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. An impairment loss is recognized if the sum of the
undiscounted future cash flows is less than the carrying amount of the asset.
Those assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
Income Taxes
Centura uses the asset and liability method to account for income taxes.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the income tax basis of Centura's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
II-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Net Income Per Share
For the year ended December 31, 1997, Centura adopted SFAS No. 128,
"Earnings Per Share" ("SFAS No. 128"). The standard provides guidance for
computing and presenting earnings per share. In accordance with this statement,
primary net income per common share is replaced with basic income per common
share which is calculated by dividing net income by the weighted-average number
of common shares outstanding for the period. Fully diluted net income per
common share is replaced with diluted net income per common share reflecting
the maximum dilutive effect of common stock issuable upon exercise of stock
options. The difference between the weighted average shares outstanding used in
the basic net income per share computation and the weighted average shares
outstanding used in the diluted net income per share calculation is
attributable to shares which arise from the assumed exercise of dilutive stock
options. Prior period per share data has been restated to reflect the adoption
of SFAS No. 128.
Stock-Based Employee Compensation
Most of Centura's stock-based employee compensation plans provide for the
deferral of compensation in exchange for stock options. As allowed under SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), Centura
measures stock-based compensation cost using APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). See Note 12.
Off-Balance Sheet Derivative Financial Instruments
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements, and interest rate futures and
options contracts, are available to Centura to assist in managing its exposure
to changes in interest rates. Centura has principally utilized interest rate
swaps and interest rate floor and cap arrangements. The fair value of these
off-balance sheet derivative financial instruments are based on dealer quotes
and third party financial models. Interest rate swaps, floors and caps are
accounted for on an accrual basis, and the net interest differential, including
premiums paid, if any, is recognized as an adjustment to interest income or
interest expense of the related designated asset or liability. Centura
considers its interest rate swaps to be a synthetic alteration of an asset or
liability as long as (i) the swap is designated with a specific asset or
liability or a finite pool of assets or liabilities; (ii) there is a high
correlation, at inception and throughout the period of the synthetic
alteration, between changes in the interest income or expense generated by the
swap and changes in the interest income or expense generated by the designated
asset or liability; (iii) the notional amount of the swap is less than or equal
to the principal amount of the designated asset or liability or pools of assets
or liabilities; and (iv) the swap term is less than or equal to the remaining
term of the designated asset or liability or pools of assets or liabilities. If
these criteria are not met, then changes in the fair value of the floors,
swaps, and caps are no longer considered a synthetic alteration and changes in
their fair value are included in other income. The criteria for consideration
of a floor or cap as a synthetic alteration are generally the same as those for
a swap arrangement.
If the swap, floor, or cap arrangements are terminated before their
maturity, the net proceeds received or paid are deferred and amortized over the
shorter of the remaining contract life or the maturity of the designated asset
or liability as an adjustment to interest income or expense. If the designated
asset or liability is sold or matures, the swap agreement is marked to market
and the gain or loss is included with the gain or loss on the sale/maturity of
the designated asset or liability. Changes in the fair value of any
undesignated swaps, floors, and caps would be included in other income in the
consolidated statement of income.
Fair Value of Financial Instruments
The following methods and assumptions were used by Centura in estimating
the fair value disclosures for financial instruments in 1997 and 1996.
Cash and Due From Banks (including those that are interest-bearing),
Federal Funds Sold, and Accrued Interest Receivable -- The fair value of these
instruments are considered equal to their carrying amounts due to the
short-term nature of these financial instruments.
Investment Securities -- The fair value of investment securities is
estimated based on bid quotations received from securities dealers.
II-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Loans -- For disclosure purposes, loans are segregated into performing and
nonperforming loan categories. Each performing loan category is further
segmented into fixed and adjustable rate interest terms. The fair value of
adjustable rate performing loans with repricing dates less than 90 days from
December 31, 1997 is assumed to be equal to the book value of such loans. The
fair value of fixed rate performing loans and adjustable rate loans with more
than 90 days to repricing are calculated by discounting scheduled cash flows
through the loan's estimated maturity or repricing using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity, except for residential mortgage loans, is based
on the stated term of the loan or Centura's estimates of prepayments for each
loan classification considering current economic and lending conditions. For
residential mortgage loans, maturity is estimated using the contractual term
adjusted for prepayment estimates based on secondary market sources. The fair
value of nonperforming loans is based on the book value of each loan less an
applicable reserve for credit losses. This reserve for credit losses is
determined on a loan by loan basis based on one or a combination of the
following: external appraisals, internal assessments using available market
information and specific borrower information, or discounted cash flow
analysis.
Deposits -- The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, interest checking, money market and
savings accounts, is considered to be equal to the amount payable on demand at
year-end. The fair value of individual retirement accounts and time deposits
are based on the discounted values of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar
remaining maturities.
Borrowed Funds, Accrued Interest Payable and Long-term Debt -- The fair
values for borrowed funds and accrued interest payable are considered equal to
their carrying amounts due to the short-term nature of these financial
instruments. The fair value of long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
Centura for debt of the same remaining maturities.
Current Accounting Matters
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130") which establishes standards for the reporting and
display of comprehensive income and its components in a full set of financial
statements. Comprehensive income is defined as the change in equity during a
period for non-owner transactions and is divided into net income and other
comprehensive income. Other comprehensive income includes revenues, expenses,
gains, and losses that are excluded from earnings under current accounting
standards. This statement does not change or modify the reporting or display in
the income statement. SFAS No. 130 is effective for interim and annual periods
beginning after December 15, 1997 although early adoption is permitted.
Comparative financial statements provided for earlier periods are required to
be reclassed to reflect the application of this statement. Centura has elected
not to adopt this statement early. Centura, as required, will adopt SFAS No.
130 with first quarter 1998 financial reporting.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). The statement requires
management to report selected financial and descriptive information about
reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Generally, disclosures are required for segments internally identified to
evaluate performance and resource allocation. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier periods is to
be restated, if it is practical to do so. SFAS No. 131 does not have to be
applied to interim financial statements in the initial year of application,
but, comparative information must be provided for interim periods in the second
year of application. Centura, as required, will adopt this statement for 1998.
II-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- MERGERS AND ACQUISITIONS
Centura consummated the following mergers and acquisitions of North
Carolina financial institutions during 1997, 1996 and 1995.
(Millions, except shares)
------------------------------------------
Acquisition
Institution Date Assets Loans Deposits Shares Issued
- ----------------------------------------------------------------- ------------ -------- ------- ---------- --------------
ACQUISITIONS ACCOUNTED FOR AS PURCHASES IN 1997:
Branch Banking and Trust Company and United Carolina Bank
("BB&T"), deposit assumption 8/15/97 $313 $171 $313 --
Betts & Company ("Betts") 11/3/97 1 -- -- 44,443
NationsBank, N.A., deposit assumption ("NationsBank") 11/13/97 86 52 86 --
First Union National Bank, deposit assumption ("First Union") 12/5/97 16 -- 16 --
- ----------------------------------------------------------------- -------- ---- ---- ---- ------
Total 1997 Purchase Acquisitions $416 $223 $415 44,443
==== ==== ==== ======
ACQUISITIONS ACCOUNTED FOR AS PURCHASES IN 1996:
Essex Savings Bank, FSB ("Essex"), deposit assumption 7/26/96 $ 71 $ -- $ 71 --
First Community Bank ("First Community") 8/16/96 121 83 99 776,441
- ----------------------------------------------------------------- -------- ---- ---- ---- -------
Total 1996 Purchase Acquisitions $192 $ 83 $170 776,441
==== ==== ==== =======
MERGERS ACCOUNTED FOR AS POOLINGS IN 1996:
First Commercial Holding Company ("FCHC") 2/27/96 172 120 140 1,607,564
FirstSouth Bank ("FirstSouth") 10/25/96 170 132 150 1,075,559
CLG, Inc. ("CLG") 11/01/96 126 85 -- 1,661,970
- ----------------------------------------------------------------- -------- ---- ---- ---- ---------
Total 1996 Mergers $468 $337 $290 4,345,093
- ----------------------------------------------------------------- ---- ---- ---- ---------
Total 1996 Acquisitions and Mergers $660 $420 $460 5,121,534
==== ==== ==== =========
ACQUISITIONS ACCOUNTED FOR AS PURCHASES IN 1995:
Cleveland Federal Bank, A Savings Bank ("Cleveland") 3/30/95 86 69 74 645,719
First Southern Bancorp, Inc. ("First Southern") 6/02/95 325 224 266 2,166,552
- ----------------------------------------------------------------- -------- ---- ---- ---- ---------
Total 1995 Purchase Acquisitions $411 $293 $340 2,812,271
==== ==== ==== =========
II-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- MERGERS AND ACQUISITIONS -- Continued
For the mergers accounted for under the pooling-of-interests method, all
financial data previously reported prior to the date of merger were restated as
though the entities had been combined for the periods presented. CLG was on a
January 31 fiscal year while Centura is on a calendar year. Therefore, an
adjustment to retained earnings in the consolidated statement of stockholders'
equity for the period ended December 31, 1996 of $818,000 was made for the
one-month period ended January 31, 1996 to bring the combination of accounts
with CLG in line with Centura's calendar year reporting basis.
For the acquisitions accounted for under the purchase method, the results
of their operations prior to their respective consummation dates are not
included in the accompanying consolidated financial statements. The pro forma
results of operations as though Centura had consummated each of the 1997
acquisitions at the beginning of the periods presented are considered
immaterial.
On August 15, 1997, Centura consummated its assumption of deposit
liabilities and acquisition of certain loans from BB&T. Centura acquired
thirteen offices located in ten communities in eastern and southeastern North
Carolina. The purchase price exceeded the fair value of net assets acquired
which resulted in $34.7 million recorded as goodwill, included in other assets
on the consolidated balance sheet.
On November 3, 1997, Centura consummated its acquisition of Betts, an
independent insurance agency based in Rocky Mount, North Carolina. The merger
was consummated through the issuance of 44,443 shares of Centura common stock.
The purchase price exceeded the fair value of the net assets acquired and
accordingly, goodwill of $2.6 million was recorded as an other asset on the
consolidated balance sheet. The activities of Betts continue through Centura
Insurance Services, Inc., a wholly-owned subsidiary of Centura Bank.
On November 13, 1997, Centura consummated its assumption of deposit
liabilities and acquisition of certain loans from NationsBank. Centura acquired
five banking centers, all located in North Carolina. Goodwill of $7.7 million
was recorded as an other asset on the consolidated balance sheet. In addition,
on December 5, 1997, Centura completed the deposit assumption transaction with
First Union resulting in the recording of $820,000 of goodwill.
During 1996, Centura completed the acquisition of three financial
institutions and one deposit assumption transaction. For the acquisitions
accounted for as purchases, goodwill was increased by $16.7 million. The merger
with FCHC was consummated through the issuance of 0.63 shares of Centura common
stock for each share of FCHC outstanding common stock while First Community and
FirstSouth were consummated under exchange ratios of 0.96 and 0.55,
respectively. In addition, Centura completed its merger with CLG, a privately
owned company based in Raleigh, North Carolina, that specializes in leasing
computer equipment to companies throughout the United States. CLG operates as a
wholly-owned subsidiary of Centura Bank.
On October 1, 1996, Centura completed the cash transaction to purchase 49
percent of First Greensboro Home Equity, Inc. ("First Greensboro"). First
Greensboro, headquartered in Greensboro, North Carolina, is a mortgage and
finance company specializing in alternative equity lending for homeowners whose
borrowing needs are generally not met by traditional financial institutions.
First Greensboro retains the controlling interest of the company. Centura
recorded this investment as an other asset and recognizes 49 percent of the net
income of First Greensboro into the earnings stream as required under the
equity method of accounting for investments. The excess of the purchase price
over the net assets acquired is amortized over 20 years as a charge against
earnings of future periods.
In 1995, Centura completed the acquisitions of Cleveland and First
Southern. Cleveland was consummated under an exchange ratio of 3.381 shares of
Centura common stock for each outstanding share of Cleveland, while First
Southern was consummated under an exchange ratio of 1.25. Both acquisitions
were accounted for as purchases. The purchase price exceeded the fair value of
net assets acquired for each transaction. Accordingly, Centura recorded $25.7
million of goodwill relative to the Cleveland and First Southern transactions.
The unamortized goodwill is recorded in other assets on the consolidated
balance sheet.
Centura and Pee Dee Bankshares, Inc. ("Pee Dee"), a South Carolina bank
holding company with its principal office in Timmonsville, South Carolina have
executed an agreement pursuant to which Pee Dee will merge with and into
Centura. In addition, Pee Dee State Bank, a subsidiary of Pee Dee, will merge
with and into the Bank. Pee Dee owns 95.73 percent of the issued and
outstanding shares of Pee Dee State Bank while the remaining shares are owned
by individuals. The shareholders of Pee Dee and Pee Dee State Bank will be
entitled to receive shares of Centura common stock under the exchange ratio as
defined, subject to adjustment, in the agreement. Pee Dee has also granted to
Centura an option to purchase up to
II-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- MERGERS AND ACQUISITIONS -- Continued
11,170 shares of Pee Dee common stock under certain conditions as outlined in
the executed stock option agreement. Pee Dee operates six branches located in
South Carolina, three in Florence and one each in Timmonsville, Dillon, and
Sumter. At December 31, 1997, Pee Dee had total consolidated assets of
approximately $138 million. Assuming satisfaction of certain conditions and
requisite approvals, it is anticipated that this merger will occur in the first
quarter of 1998. The Pee Dee merger is expected to be accounted for as a
pooling-of-interests.
On January 30, 1998, Centura acquired Moore and Johnson, Inc. ("Moore and
Johnson"), a North Carolina corporation with its principal office in Raleigh,
North Carolina. The transaction was consummated through the issuance of 48,950
shares of Centura common stock. Moore and Johnson is engaged in the insurance
brokerage business, primarily serving the eastern North Carolina market. The
transaction was accounted for as a purchase and, therefore, is appropriately
not reflected in the accompanying consolidated financial statements.
NOTE 3 -- INVESTMENT SECURITIES
A summary of amortized cost, fair values, and unrealized gains and losses
of investment securities by type at December 31, follows:
1997 1996 1995
------------------------------ ----------------------------- ------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
---------------- ------------- ---------------- ------------ ---------------- -------------
(thousands)
Held to maturity:
U.S. Treasury .................. $ 86,944 $ 87,516 $ 76,373 $ 76,019 $ 127,405 $ 127,593
U.S. Government agencies and
corporations ................. 49,027 50,136 139,752 138,947 143,625 144,018
Mortgage-backed securities ..... 12,271 12,298 -- -- -- --
State and municipal ............ 38,464 39,879 40,669 42,074 47,992 50,201
Other securities ............... 1,850 1,860 1,012 1,012 83 83
---------- ---------- ---------- ---------- ---------- ----------
Total held to maturity ......... $ 188,556 $ 191,689 $ 257,806 $ 258,052 $ 319,105 $ 321,895
========== ========== ========== ========== ========== ==========
Available for sale:
U.S. Treasury .................. $ 186,500 $ 188,021 $ 193,577 $ 192,169 $ 156,600 $ 155,515
U.S. Government agencies and
corporations ................. 179,229 179,234 262,147 266,141 245,586 245,414
Mortgage-backed securities ..... 977,020 985,529 763,423 763,471 554,963 557,236
Asset-backed securities ........ 93,875 94,159 -- -- -- --
State and municipal ............ 2,143 2,183 3,334 3,325 10,000 10,000
Other securities ............... 184,563 190,374 94,968 94,968 41,427 41,355
---------- ---------- ---------- ---------- ---------- ----------
Total available for sale ....... $1,623,330 $1,639,500 $1,317,449 $1,320,074 $1,008,576 $1,009,520
========== ========== ========== ========== ========== ==========
II-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- INVESTMENT SECURITIES -- Continued
1997 1996 1995
------------------ ------------------ -------------------
Unrealized Unrealized Unrealized
------------------ ------------------ -------------------
Gains Losses Gains Losses Gains Losses
--------- -------- --------- -------- --------- ---------
(thousands)
Held to maturity:
U.S. Treasury .............................. $ 660 $ 88 $ 81 $ 435 $ 588 $ 400
U.S. Government agencies and corporations .. 1,283 174 278 1,083 858 465
Mortgage-backed securities ................. 183 156 -- -- -- --
State and municipal ........................ 1,427 12 1,452 47 2,239 30
Other securities ........................... 10 -- -- -- -- --
------- ------ ------- ------ ------ ------
Total held to maturity ..................... $ 3,563 $ 430 $ 1,811 $1,565 $3,685 $ 895
======= ====== ======= ====== ====== ======
Available for sale:
U.S. Treasury .............................. $ 1,548 $ 27 $ 99 $1,507 $ 369 $1,454
U.S. Government agencies and corporations .. 475 470 4,474 480 1,407 1,579
Mortgage-backed securities ................. 10,939 2,430 5,525 5,477 4,905 2,632
Asset-backed securities .................... 299 15 -- -- -- --
State and municipal ........................ 40 -- 2 11 -- --
Other securities ........................... 6,006 195 -- -- -- 72
------- ------ ------- ------ ------ ------
Total available for sale ................... $19,307 $3,137 $10,100 $7,475 $6,681 $5,737
======= ====== ======= ====== ====== ======
The following is a summary of investment securities by maturity at December 31,
1997:
Held to Maturity Available for Sale
----------------------------- ------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
---------------- ------------ ---------------- -------------
(thousands)
Remaining maturities:
Within one year ............................ $ 80,373 $ 80,376 $ 149,312 $ 150,190
One to five years .......................... 77,871 80,240 229,697 231,679
Six to ten years ........................... 12,088 12,643 10,153 10,186
Over ten years ............................. 5,953 6,132 163,273 167,757
Mortgage-backed and asset-backed securities 12,271 12,298 1,070,895 1,079,688
-------- -------- ---------- ----------
Total ...................................... $188,556 $191,689 $1,623,330 $1,639,500
======== ======== ========== ==========
At December 31, 1997 and 1996, investment securities with book values of
approximately $750 million and $612 million, respectively, were pledged to
secure public funds on deposit and for other purposes required by law or
contractual arrangements. Securities collateralized in repurchase agreements as
set forth in Note 9 have been transferred to a third party. Sales of debt
securities during 1997 generated gross realized gains of $3,644,000 and losses
of $3,508,000. Gross gains of $3,212,000 and $1,432,000 and gross losses of
$1,414,000 and $2,046,000 were realized during 1996 and 1995, respectively.
II-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- LOANS
A summary of loans at December 31 follows:
1997 1996
------------- -------------
(thousands)
Commercial, financial and agricultural ................... $ 846,074 $ 743,477
Consumer ................................................. 321,642 274,885
Real estate -- mortgage .................................. 2,320,320 2,097,757
Real estate -- construction and land development ......... 578,304 524,246
Leases ................................................... 470,376 420,240
Other .................................................... 49,995 49,001
---------- ----------
Gross loans .............................................. 4,586,711 4,109,606
Less unearned income on loans ............................ 129 152
---------- ----------
Total loans .............................................. $4,586,582 $4,109,454
========== ==========
Included in the above:
Nonaccrual loans ......................................... $ 23,722 $ 18,713
Restructured loans ....................................... -- 497
Accruing loans past due ninety days ...................... 6,985 8,916
========== ==========
Loans classified as real estate - mortgage include mortgage loans held for sale
of $48.2 million and $53.6 million in 1997 and 1996, respectively. Most of
Centura's loan business is with customers located within North Carolina.
For the years ended December 31, 1997, 1996 and 1995 interest income that would
have been recorded on nonaccrual and restructured loans had they performed in
accordance with the original terms amounted to approximately $2.0 million, $1.7
million and $1.7 million, respectively. Interest income on all such loans
included in the results of operations amounted to approximately $634,000,
$624,000 and $527,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. During 1997 and 1996, approximately $5,502,000 and $4,183,000,
respectively, in loans were transferred to foreclosed property.
The Bank makes loans to executive officers and directors of Centura and
the Bank and to their associates. It is management's opinion that such loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility. A
summary of the loan transactions with related parties is as follows:
Beginning New Ending
Balance Loans Repayments Balance
----------- --------- ------------ ----------
(thousands)
Year ended December 31, 1997 ......... $23,208 $6,222 $ (7,150) $22,280
======= ====== ======== =======
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
1997 1996 1995
------------ ------------ ----------
(thousands)
Balance at beginning of year ....................... $ 58,715 $ 55,070 $ 48,164
Provision for loan losses .......................... 13,418 9,596 7,904
Allowance from acquired loans ...................... 3,133 1,240 3,460
Loans charged off .................................. (14,425) (10,408) (8,306)
Recoveries on loans previously charged off ......... 3,438 3,217 3,848
--------- --------- --------
Net loans charged off .............................. (10,987) (7,191) (4,458)
--------- --------- --------
Balance at end of year ............................. $ 64,279 $ 58,715 $ 55,070
========= ========= ========
II-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES -- Continued
At December 31, 1997, the recorded investment in loans that were
considered to be impaired was $16.1 million (of which $12.7 million were on a
nonaccrual basis). Included in this amount is $11.4 million of impaired loans
for which the related AFLL is $5.3 million, and $4.7 million of impaired loans
for which there is no related allowance determined in accordance with SFAS No.
114.
At December 31, 1996, the recorded investment in loans that were
considered to be impaired was $10.9 million (of which $10.8 million were on a
nonaccrual basis). Included in this amount is $6.1 million of impaired loans
for which the related AFLL is $2.0 million, and $4.8 million of impaired loans
for which there is no related allowance determined in accordance with SFAS No.
114.
The average recorded investment in impaired loans for the years ended
December 31, 1997, 1996, and 1995 was approximately $14.2 million, $12.2
million, and $13.5 million, respectively. Interest recognized on a cash-basis
method of accounting and included in the results of operations on those
impaired loans for each of the years in the three-year period ended December
31, 1997, 1996, and 1995 was approximately $207,000, $50,000, and $111,000,
respectively.
NOTE 6 -- MORTGAGE SERVICING RIGHTS
A summary of capitalized MSRs follows:
1997 1996
---------- ----------
(thousands)
Balance at beginning of year ......... $ 21,046 $ 14,388
MSRs capitalized during the year ..... 13,703 11,246
MSRs amortized during the year ....... (6,511) (4,588)
-------- --------
Balance at end of year ............... $ 28,238 $ 21,046
======== ========
The fair value of capitalized MSRs at December 31, 1997 and 1996 was
approximately $35.9 million and $27.6 million, respectively. No valuation
allowance for capitalized MSRs was required during the years ended December 31,
1997 and 1996.
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1997 1996
---------- ----------
(thousands)
Land ........................................... $ 17,389 $ 17,369
Buildings ...................................... 70,732 64,686
Buildings and equipment under capital lease .... 890 890
Leasehold improvements ......................... 13,320 10,750
Furniture, fixtures and equipment .............. 92,398 85,795
Construction in progress ....................... 6,704 8,636
-------- --------
Total .......................................... 201,433 188,126
Less accumulated depreciation and amortization . 85,969 75,928
-------- --------
Premises and equipment ......................... $115,464 $112,198
======== ========
Depreciation and amortization on premises and equipment, included in
operating expenses, amounted to $16,288,000, $15,312,000, and $11,296,000 in
1997, 1996 and 1995, respectively.
II-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- DEPOSITS
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
1998 ........................ $1,759,368
1999 ........................ 523,851
2000 ........................ 102,508
2001 ........................ 37,298
2002 and thereafter ......... 163,266
----------
$2,586,291
==========
NOTE 9 -- BORROWED FUNDS
At December 31, 1997 and 1996, borrowed funds consisted of the following:
1997 1996
----------- -----------
(thousands)
Federal funds purchased and securities sold under agreements
to repurchase ................................................. $460,324 $435,470
Master notes ................................................... 195,391 141,649
U.S. Treasury demand note ...................................... 37,477 32,402
Bank note ...................................................... -- 15,770
Line of credit ................................................. 40,000 60,000
-------- --------
Total borrowed funds ........................................... $733,192 $685,291
======== ========
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to 30 days from the transaction date. Securities
collateralizing repurchase agreements have been transferred to a third party.
Master notes are issued by Centura under a master agreement with a term not to
exceed 270 days and mature on a daily basis. The bank's U.S. Treasury demand
note is payable on demand and interest on borrowings under this arrangement is
payable at 0.25 percent below the weekly federal funds rate as quoted by the
Federal Reserve.
The Bank has the ability to borrow up to a maximum of $300 million under
an offering by the Bank to institutional investors only of unsecured bank notes
due from 30 days to 15 years from the date of issue. Each bank note would be a
direct, unconditional and unsecured general obligation solely of the Bank and
would not be an obligation of or guaranteed by Centura. Interest rate and
maturity terms would generally be negotiated between the Bank and the
purchaser, within certain parameters set forth in the offering circular.
Borrowed funds as of December 31, 1996 included $15.8 million outstanding under
one fixed interest rate note which matured during 1997.
Centura has an unsecured line of credit of $60 million bearing a variable
interest rate (1 month LIBOR+ 25 basis points). On December 31, 1997, the line
was refinanced and assigned a December 1998 maturity.
II-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9 -- BORROWED FUNDS -- Continued
The following table presents certain information for federal funds
purchased and securities sold under agreements to repurchase and master notes:
1997 1996 1995
------------- ------------- -------------
(thousands)
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Amount outstanding at December 31 ........................................ $ 460,324 $ 435,470 $ 362,654
Average outstanding balance .............................................. 516,958 405,373 224,616
Maximum amount outstanding at end of any month during the year ........... 647,219 554,699 364,773
Interest expense ......................................................... $ 28,607 $ 21,385 $ 13,068
Approximate weighted average interest rate:
During the year ......................................................... 5.53% 5.28% 5.82%
End of year ............................................................. 5.30 4.67 5.66
Master Notes
Amount outstanding at December 31 ........................................ $ 195,391 $ 141,649 $ 101,178
Average outstanding balance .............................................. 169,215 119,819 79,189
Maximum amount outstanding at end of any month during the year ........... 204,709 155,252 109,717
Interest expense ......................................................... $ 8,117 $ 5,613 $ 4,091
Approximate weighted average interest rate:
During the year ......................................................... 4.80% 4.68% 5.17%
End of year ............................................................. 4.82 5.00 5.00
NOTE 10 -- LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consisted of the following:
1997 1996
----------- -----------
(thousands)
Federal Home Loan Bank advances ............ $229,052 $228,918
Capital Securities ......................... 100,000 --
Notes payable secured by lease rentals ..... 52,253 80,811
Obligations under capitalized leases ....... 458 531
Other ...................................... 366 542
-------- --------
Total long-term debt ....................... $382,129 $310,802
======== ========
Centura has the ability to borrow up to $500 million under a blanket
collateral agreement with the FHLB whereby Centura maintains, free of other
encumbrances, qualifying mortgages (as defined) with unpaid principal balances
at least equal to, when discounted at 75 percent of the unpaid principal
balance, 100 percent of the FHLB advances. At December 31, 1997, FHLB advances
had maturities of up to 4.9 years and were at rates ranging from 5.00 percent
to 6.125 percent. At December 31, 1996, FHLB advances had maturities of up to
3.5 years and were at rates ranging from 5.00 percent to 8.90 percent.
On June 2, 1997, Centura Capital Trust I, a wholly-owned statutory
business trust of Centura, (the "Trust") issued $100 million of 8.845% Capital
Securities maturing June 2027 (the "Capital Securities"). The Trust also issued
$3.1 million of common securities to Centura. The Trust invested the proceeds
of $103.1 million, from the Capital Securities and common securities issuances,
in 8.845% Junior Subordinated Deferrable Interest Debentures issued by Centura
(the "Junior Debentures"), which upon consolidation are eliminated. The Junior
Debentures, with a maturity of June 2027, are the primary assets of the Trust.
With respect to the Capital Securities, Centura has irrevocably and
unconditionally guaranteed the Trust's obligations. The Capital Securities are
included in Tier I capital for regulatory capital adequacy requirements.
To finance some of the equipment utilized in its leasing activities,
Centura has fixed rate debt secured by the future lease rentals to be received
under the leasing contracts and first liens on the related equipment.
Generally, the terms to maturity of these obligations are equal to the terms to
maturity of the underlying contracts. At December 31, 1997, the
II-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 -- LONG-TERM DEBT -- Continued
weighted average rate and maturity for the notes payable secured by lease
rentals were 8.64 percent and 2.3 years, respectively. At December 31, 1996,
the weighted average rate and maturity for the notes payable secured by lease
rentals were 7.98 percent and 2.7 years, respectively.
At December 31, 1997, maturities of long-term debt are as follows (in
thousands):
1998 ........................ $ 92,759
1999 ........................ 130,664
2000 ........................ 7,310
2001 ........................ 1,168
2002 ........................ 50,202
Thereafter .................. 100,026
--------
$382,129
========
NOTE 11 -- PENSION AND OTHER BENEFIT PLANS
Centura has a noncontributory, qualified defined benefit pension plan (the
"Pension Plan") covering substantially all full-time employees. Benefits are
determined by applying a benefit ratio to the employees' average compensation
for each year of participation. The plan is funded using the Projected Unit
Credit method. Annual contributions consist of a normal service cost amount and
an amortization amount of prior service costs.
Centura also has an Omnibus Supplemental Executive Retirement Plan
("SERP") which provides various officers with certain benefits in excess of
Centura's standard pension plan. One of the benefits offered under the Omnibus
Plan are Supplemental Pension Contracts ("SPCs") which are nonqualified pension
plans providing benefits payable upon retirement, death or disability of an
eligible participant. Insurance policies on the lives of the covered employees
have been purchased and are intended to be adequate to fund future benefits
plus full recovery of any corporate paid premiums.
The following table sets forth the plans' funded status and amounts
recognized in the consolidated financial statements:
Pension Plan SPCs-SERP
--------------------------- --------------------------
December 31, December 31,
1997 1996 1997 1996
------------- ------------- ------------- ------------
(thousands)
Actuarial present value of accumulated benefit obligation ("ABO"):
Vested benefits ...................................................... $ 29,567 $ 26,760 $ 6,170 $ 5,380
Nonvested benefits ................................................... 1,346 1,360 2,997 3,008
--------- --------- --------- --------
$ 30,913 $ 28,120 $ 9,167 $ 8,388
========= ========= ========= ========
Projected benefit obligation ("PBO") for services rendered to date ... $ (37,953) $ (34,432) $ (10,651) $ (9,584)
Plan assets at fair value, primarily listed stocks and U.S. Government
securities .......................................................... 30,006 27,516 -- --
--------- --------- --------- --------
Plan assets under the PBO ............................................ (7,947) (6,916) (10,651) (9,584)
Unrecognized net loss ................................................ 5,983 6,004 1,765 1,164
Unrecognized prior service cost ...................................... 2,882 3,374 1,280 2,663
Additional liability related to unfunded ABO ......................... (1,508) (2,643) (1,561) (2,631)
Unrecognized net (asset) liability ................................... (317) (423) -- --
--------- --------- --------- --------
Accrued pension cost included in other liabilities ................... $ (907) $ (604) $ (9,167) $ (8,388)
========= ========= ========= ========
II-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 -- PENSION AND OTHER BENEFIT PLANS -- Continued
Pension Plan
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(thousands)
Net periodic pension expense includes the following
components:
Service cost -- benefits earned during the period ............. $ 2,402 $ 1,965 $ 1,369
Interest cost on PBO .......................................... 2,552 2,394 1,987
Actual return on plan assets .................................. (3,272) (2,480) (4,220)
Net amortization and deferral ................................. 1,058 680 2,691
--------- --------- ---------
Net periodic pension expense included in personnel expense .... $ 2,740 $ 2,559 $ 1,827
========= ========= =========
Assumptions:
Weighted average discount rate at end of fiscal year .......... 7.25% 7.5% 7.5%
Rate of increase in future compensation levels used in
determining the actuarial present value of PBO ............... 5.5 5.5 5.5
Expected long-term rate of return on assets ................... 8.5 8.5 8.5
========= ========= =========
SPCs-SERP
-----------------------------------
1997 1996 1995
----------- ----------- -----------
(thousands)
Net periodic pension expense includes the following
components:
Service cost -- benefits earned during the period ............. $ 722 $ 475 $ 310
Interest cost on PBO .......................................... 720 587 366
Actual return on plan assets .................................. -- -- --
Net amortization and deferral ................................. 945 1,123 683
------- ------- -------
Net periodic pension expense included in personnel expense .... $ 2,387 $ 2,185 $ 1,359
======= ======= =======
Assumptions:
Weighted average discount rate at end of fiscal year .......... 7.25% 7.5% 7.5%
Rate of increase in future compensation levels used in
determining the actuarial present value of PBO ............... 5.5 5.5 5.5
Expected long-term rate of return on assets ................... -- -- --
======= ======= =======
In addition to providing pension benefits, Centura provides other employee
benefit plans. The amounts expensed for these are as follows:
1997 1996 1995
--------- --------- ---------
(thousands)
401-k .................................. $ 1,782 $ 2,016 $ 1,522
Sales commissions ...................... 9,409 8,320 7,394
EVA-based incentive compensation ....... 6,840 5,612 3,500
Other .................................. 234 340 296
------- ------- -------
$18,265 $16,288 $12,712
======= ======= =======
The 401-k plan permits eligible employees to make contributions, with the
Bank matching 50 percent of contributions up to 6 percent of the employees'
base compensation. The plan is available for full-time employees after
completion of six months consecutive service or for part-time employees after
completion of 1,000 hours of service during a consecutive 12-month period.
Centura's sales incentive plan rewards all sales officers for the value of
products and services sold after covering the costs of their individual
salaries, benefits and other direct costs of producing new business. The
Economic Value Added ("EVA") incentive program provides for a total EVA
incentive pool for all non-sales employees based upon meeting a specific EVA
target. Calculation of the target incorporates the ability of current net
operating profits after tax to cover the annual cost of capital utilized. The
program also incorporates the use of bonus banking of a defined percentage of
incentives earned that are then placed at risk dependent upon future
performance plus the granting of leveraged stock options to specific members of
management. Other miscellaneous bonus and incentive awards are made primarily
under individual contracts.
Centura accounts for retiree health benefits and other retiree welfare
benefits, under the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The statement requires that a
liability for such benefits be accrued and the projected costs of providing
these benefits be recognized currently as an expense rather than when paid.
Centura's Postretirement Health Care and Death Benefits Program is for all
employees who work at least 30 hours per week and who retire at age 55 or later
with ten or more years of service. The program provides a catastrophic
postretirement health care plan to pre-age 65 retirees and a postretirement
health care benefit consisting of a fixed dollar cash payment for post-age 65
retirees. The program is funded as benefits are paid.
II-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 -- PENSION AND OTHER BENEFIT PLANS -- Continued
The following table presents the plan's funded status reconciled with the
amounts recognized in Centura's consolidated financial statements:
December 31,
-----------------------
1997 1996
----------- -----------
(thousands)
Postretirement benefit obligation:
Retirees and beneficiaries ........................................... $ 2,350 $ 2,285
Dependents of retirees ............................................... 7 26
Fully eligible active employees ...................................... 971 895
Other active employees ............................................... 3,633 2,798
Less future service obligation ....................................... (1,967) (1,442)
-------- --------
Accumulated postretirement benefit obligation (APBO) .................. 4,994 4,562
Plan assets at fair value ............................................. -- --
-------- --------
Funded status ......................................................... 4,994 4,562
Unrecognized net gain ................................................. 181 447
Unrecognized transition obligation .................................... (3,329) (3,551)
-------- --------
Accrued postretirement benefit cost included in other liabilities ..... $ 1,846 $ 1,458
======== ========
The net periodic postretirement benefit cost includes the following
components:
December 31,
-----------------------------
1997 1996 1995
---------- ---------- -------
(thousands)
Service cost .................................................. $ 189 $161 $ 135
Interest cost ................................................. 337 322 328
Actual return on plan assets .................................. -- -- --
nrecognized net gain ......................................... (6) (3) (21)
Amortization of transition obligation over 20 years ........... 222 222 222
Prior service cost ............................................ 16 -- --
------- ------ -----
Net periodic postretirement benefit cost ...................... $ 758 $702 $ 664
======= ====== =====
Assumptions:
Weighted average discount rate used in determining APBO ..... 7.25% 7.5% 7.5%
Annual health care cost trend rate .......................... 5.5 7.0 8.0
Ultimate medical trend rate ................................. 5.5 5.5 5.5
Medical trend rate select period (in years) ................. 0 1 2
Effect of 1% increase in assumed medical trend rate on:
Service and interest cost ................................... 0% 0% 1.0%
APBO ........................................................ 0 0 1.0
======= ====== =====
II-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- STOCK OPTIONS, AWARDS AND SHAREHOLDERS' EQUITY
At December 31, 1997, 1996, and 1995 Centura had approximately 2,121,000,
2,487,000, and 2,445,000 shares, respectively, of its authorized but unissued
common stock reserved for its incentive, nonqualified and deferred compensation
stock option plans (the "Plans").
A summary of stock option transactions under these plans follows:
Option Option Price Weighted Average
Shares Per Share Exercise Price
----------- -------------- -----------------
Outstanding at December 31, 1994 .............. 1,293,700 $ 3-$25 $ 14.21
Assumed through purchase acquisitions ......... 181,000 9 9.00
Granted ....................................... 345,000 5- 37 23.65
Exercised ..................................... 242,900 3- 22 14.45
Forfeited ..................................... 9,800 14- 20 18.95
--------- -------- --------
Outstanding at December 31, 1995 .............. 1,567,000 $ 3-$37 14.38
Assumed through purchase acquisitions ......... 61,600 13- 19 16.00
Granted ....................................... 85,200 9- 32 26.59
Exercised ..................................... 351,900 5- 26 12.58
Forfeited ..................................... 22,200 7- 21 14.40
--------- -------- --------
Outstanding at December 31, 1996 .............. 1,339,700 $ 3-$37 15.24
Granted ....................................... 147,203 9- 39 32.94
Exercised ..................................... 331,900 4- 26 13.99
Forfeited ..................................... 17,500 3- 39 12.81
--------- -------- --------
Outstanding at December 31, 1997 .............. 1,137,503 $ 3-$39 20.11
========= ======== ========
Exercisable at December 31, 1997 .............. 830,410 $ 3-$39 17.08
========= ======== ========
The weighted-average fair values of options granted during 1997, 1996 and
1995 were $16.12, $26.08, and $8.13 respectively. The weighted average
remaining contractual lives of stock options were 5.03, 3.47, and 4.49 years at
December 31, 1997, 1996, and 1995, respectively.
The following table summarizes information related to stock options
outstanding on December 31, 1997:
Number of Options Outstanding Number of Options Exercisable
Range of Exercise Prices at December 31, 1997 at December 31, 1997
- -------------------------- ------------------------------- ------------------------------
$3.00 to $6.03 67,896 67,896
$6.04 to $8.59 20,423 20,423
$8.60 to $8.89 118,474 106,054
$8.90 to $14.37 213,768 213,574
$14.38 to $21.50 262,956 242,647
$21.51 to $31.13 109,857 37,426
$31.14 to $33.55 102,569 46,884
$33.56 to $35.50 124,998 47,242
$35.51 to $39.00 116,562 48,264
------- -------
1,137,503 830,410
========= =======
Prior to January 1, 1996, Centura accounted for the Plans in accordance
with the provisions of APB 25. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, as required, Centura adopted
SFAS No. 123, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock awards and stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. Centura elected to continue to apply the provisions of APB 25 for
expense recognition.
II-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- STOCK OPTIONS, AWARDS AND SHAREHOLDERS' EQUITY -- Continued
Centura, under APB 25, expensed approximately $1,636,200 in 1997,
$2,883,300 in 1996, and $905,900 in 1995 for employee stock awards and stock
option grants. Pro forma earnings per share disclosures are indicated below as
if the fair value based method of SFAS 123 had been adopted (dollars in
thousands except per share information):
As Reported Pro Forma
-------------------------------------- --------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
(thousands, except per share)
Net Income ...... $ 83,058 $ 68,151 $ 64,653 $ 82,763 $ 67,681 $ 64,617
Basic EPS ....... 3.22 2.66 2.50 3.21 2.64 2.50
Diluted EPS ..... 3.15 2.60 2.45 3.14 2.58 2.45
In determining the pro forma disclosures above, the fair value of options
granted was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Directors/Employee EVA Leveraged
Deferred Options Other
-------------------- -------------- ----------
1995
Risk free interest rates .......... 6.29% 6.22% 6.22%
Dividend yield .................... 2.90 2.90 2.90
Volatility ........................ 24.99 24.99 24.99
Expected lives (in years) ......... 2.98 6.05 2.20
1996
Risk free interest rates .......... 6.00% 5.91% 5.91%
Dividend yield .................... 2.50 2.50 2.50
Volatility ........................ 23.59 23.59 23.59
Expected lives (in years) ......... 2.84 6.02 2.20
1997
Risk free interest rates .......... 6.14% 6.02% 6.02%
Dividend yield .................... 2.00 2.00 2.00
Volatility ........................ 24.16 24.16 24.16
Expected lives (in years) ......... 3.30 6.01 2.20
The effects of applying SFAS No. 123 in the pro forma disclosures are not
indicative of future amounts.
Centura has a Dividend Reinvestment Stock Purchase Plan which allows
shareholders to invest dividends and optional cash payments in additional
shares of common stock. Shareholders of record are automatically eligible to
participate in the plan.
Cash dividends paid were $27.4 million, $24.0 million and $18.7 million
during 1997, 1996 and 1995, respectively, which represented $1.06, $1.00 and
$.85 on a per share basis, respectively. During the fourth quarter of 1997,
Centura declared and accrued $7.0 million, or $.27 per share, for the first
quarter of 1998 cash dividend.
Retained earnings at December 31, 1997 includes $3.8 million of
undistributed earnings of 50 percent or less owned investees accounted for by
the equity method.
II-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- OTHER OPERATING EXPENSE
Other operating expense consisted of the following:
1997 1996 1995
--------- --------- ---------
(thousands)
Marketing, advertising and public relations ......... $ 9,080 $ 7,549 $ 6,195
Stationery, printing and supplies ................... 5,921 6,712 5,458
Postage ............................................. 3,144 2,798 2,502
Telephone ........................................... 7,637 6,678 5,492
FDIC insurance ...................................... 1,304 10,197 5,727
Fees for outsourced services ........................ 8,219 3,299 --
Service and licensing fees .......................... 5,211 4,323 3,307
Legal and professional fees ......................... 15,914 11,290 9,432
Other administrative ................................ 8,555 8,544 7,930
Intangible amortization ............................. 6,520 5,034 4,148
Depreciation on equipment under operating lease ..... 7,247 7,944 7,192
Other ............................................... 17,052 16,977 15,716
------- ------- -------
Total other operating expense ....................... $95,804 $91,345 $73,099
======= ======= =======
On September 30, 1996, the Federal Deposit Insurance Corporation ("FDIC")
levied a one-time special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"). The assessment was levied on SAIF-insured deposits and
Centura recognized $7.3 million of FDIC expense relative to this assessment for
the year ended December 31, 1996. The after-tax assessment totaled
approximately $4.2 million.
NOTE 14 -- INCOME TAXES
The components of income tax expense for the years ended December 31 were:
1997 1996 1995
---------- ---------- ------------
(thousands)
Current expense:
Federal ......................... $28,943 $34,347 $ 40,242
State ........................... 890 4,363 6,655
------- ------- ---------
29,833 38,710 46,897
Deferred expense/ (benefit):
Federal ......................... 10,775 645 (8,114)
State ........................... 1,812 (152) (2,362)
------- ------- ---------
12,587 493 (10,476)
------- ------- ---------
Total income tax expense ......... $42,420 $39,203 $ 36,421
======= ======= =========
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
1997 1996 1995
----------- ----------- -----------
Federal statutory rate .................. 35.00% 35.00% 35.00%
Non-taxable income ...................... (2.54) (1.67) (1.24)
Goodwill amortization (accretion), net .. .55 .54 .08
Acquisition adjustments ................. .18 .39 .09
State income tax, net of federal benefit 1.40 2.59 2.73
Other, net .............................. ( .78) ( .33) ( .63)
----- ----- -----
Effective tax rate ...................... 33.81% 36.52% 36.03%
===== ===== =====
II-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 14 -- INCOME TAXES -- Continued
The tax effects of temporary differences which give rise to significant
portions of the net deferred tax liability at December 31, 1997 and 1996, are
summarized as follows:
1997 1996
------------- ---------------
(thousands)
Deferred tax assets:
Loan loss reserve .................... $ (23,687) $(20,436)
Other reserves ....................... (1,890) (2,050)
Deferred compensation ................ (12,097) (11,061)
Deferred loan and lease fees ......... (90) (5)
Other assets ......................... (4,084) (4,742)
--------- ----------
Gross deferred tax assets ............ (41,848) (38,294)
--------- ----------
Deferred tax liabilities:
Premises and equipment ............... 2,842 2,880
Employee retirement plans ............ 1,789 1,530
Investment securities ................ 980 950
Leasing activities ................... 31,971 21,825
Other liabilities .................... 20,027 17,202
Unrealized securities gains .......... 6,200 1,056
--------- ----------
Gross deferred tax liabilities ....... 63,809 45,443
--------- ----------
Net deferred tax liability ........... $ 21,961 $ 7,149
========= ==========
No valuation allowance for deferred tax assets was required at December
31, 1997 or 1996. Management has determined that it is more likely than not
that the deferred tax assets can be supported by carrybacks to federal taxable
income in the federal carryback period or offset against deferred tax
liabilities. During 1997, the net deferred tax liability increased
approximately $5,100,000 due to fair value adjustments required under SFAS 115
for securities available for sale, and decreased due to other adjustments
totaling $2,875,000.
NOTE 15 -- LEASE COMMITMENTS
At December 31, 1997, Centura was obligated under a number of
noncancelable leases for bank premises. In addition, obligations under
short-term equipment leases are generally cancelable upon thirty to ninety days
written notice. Most of the leases for bank premises provide that Centura pay
taxes, maintenance, insurance, and other expenses. It is expected that in the
normal course of business, leases that expire will be renewed or replaced by
other leases. Certain lease agreements contain options to renew for additional
periods of one to twenty years.
At December 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows (in thousands):
Operating
Leases
----------
1998 ............................. $ 4,569
1999 ............................. 4,287
2000 ............................. 4,086
2001 ............................. 3,366
2002 ............................. 2,667
Thereafter ....................... 9,001
-------
Total minimum lease payments ..... $27,976
=======
II-58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 15 -- LEASE COMMITMENTS -- Continued
Rent expense charged to operations was as follows:
1997 1996 1995
--------- --------- ---------
(thousands)
Bank premises ......... $4,581 $3,445 $3,146
Equipment ............. 3,151 2,247 2,601
------ ------ ------
Rent expense .......... $7,732 $5,692 $5,747
====== ====== ======
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Commitments and Off-Balance Sheet Risk
Centura may participate in various financial instruments with off-balance
sheet risk in order to satisfy the financing needs of its borrowers and to
manage its exposure to interest rate risk. These financial instruments include
commitments to extend credit, letters of credit, and off-balance sheet
derivative financial instruments.
At December 31, 1997 and 1996, Centura had commitments to extend credit of
$1.6 billion and $1.2 billion, respectively, and standby letters of credit of
$64.2 million and $75.8 million, respectively. These instruments at December
31, 1997 have no carrying value. With the exception of commitments to originate
residential mortgage loans which are discussed below, these financial
instruments are exercisable at the market rate prevailing at the date the
underlying transaction will be completed, and thus are deemed to have no
current fair value.
Commitments to extend credit are agreements to lend to customers at
predetermined interest rates as long as there is no violation of any condition
established in the contracts. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. These
commitments are subject to Centura's standard credit approval and monitoring
process. Centura's exposure to credit risk is represented by the contractual
amount of the commitment to extend credit. In the opinion of management, there
are no material commitments to extend credit that represent unusual risks.
Standby letters of credit are conditional commitments issued by Centura to
guarantee the performance of a customer to a third party. The risks and credit
approval process involved in issuing standby letters of credit are essentially
the same as that involved in commitments to extend credit.
Centura evaluates the collateral required for each extension of credit on
a case-by-case basis following the same guidelines set forth in normal lending
policy. The majority of commitments to extend credit and letters of credit are
secured, primarily with liquid financial instruments such as certificates of
deposit or income-producing assets. With the exception of guarantees for
approximately $29.4 million which extend for a period in excess of one year,
most guarantees in the form of commitments and letters of credit expire in less
than one year. If these commitments are drawn, Centura will obtain collateral
if it is deemed necessary based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts receivable,
inventory, and commercial or residential real estate. Management expects that
these commitments can be funded through normal operations.
Included in commitments to extend credit are commitments issued by the
Bank to originate residential mortgage loans held for sale ("pipeline loans")
of approximately $33.9 million and $32.2 million at December 31, 1997 and 1996,
respectively, with terms generally not exceeding 90 days. As discussed in Note
4, mortgage loans held for sale ("MLHFS"), which are carried at the lower of
cost or fair value and are included in total loans, were $48.2 million and
$53.6 million at December 31, 1997 and 1996, respectively. In connection with
these MLHFS and pipeline loans, management entered into forward commitments to
sell residential mortgage loans totaling $48.5 million and $58.5 million at
December 31, 1997 and 1996, respectively. Such forward commitments are entered
into to reduce the Bank's exposure to market risk arising from potential
changes in interest rates, which could alter the underlying market value of
MLHFS and pipeline loans. The forward commitments are at fixed prices and are
scheduled to settle at specified dates which generally do not exceed 90 days.
MLHFS and pipeline loans are valued utilizing the fixed prices of the forward
commitments. MLHFS and pipeline loans not covered by existing forward
commitments are valued using quoted market prices appropriate for the
associated loan characteristics
II-59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
and interest rate levels. Commitments not fully satisfied by MLHFS and
pipelines loans are valued based on what it would cost to purchase loans in the
open market to fulfill the commitments. The net result of this valuation
process is used in recording the carrying value of MLHFS at the lower of cost
or fair value. At December 31, 1997 and 1996, cost exceeded fair value by
approximately $261,000 and $380,000, respectively, requiring a valuation
allowance which was reflected in the carrying value of MLHFS.
In connection with its asset/liability management program, Centura has
entered into interest rate swap, cap, and floor arrangements with other
counterparties. Centura does not trade the instruments, and Centura's policy
governing the use of these instruments, as approved by Centura's board of
directors, strictly forbids speculation of any kind.
Interest rate swap agreements ("swaps") are used to reduce funding costs,
diversify funding sources, and manage interest rate risk with the objective of
stabilizing Centura's net interest income over time. These swaps are used to
convert the fixed interest rates (or variable rates) on designated investment
securities, loans and long-term debt to variable interest rates (or fixed
rates). Typically, Centura pays a fixed rate of interest for a fixed period of
time and receives a variable rate of interest indexed to the London Interbank
Offered Rate ("LIBOR") or vice versa. Centura also enters into interest rate
swap agreements in which both interest rates are floating in order to reduce
its basis risk with respect to a given index. The difference between the rate
paid and the rate received is recorded in the consolidated statements of income
as a component of interest income or interest expense, depending upon the
financial instrument to which the swap is designated. Unrealized fair values of
the swaps are not recorded in the consolidated statements of income because the
swap agreements are being treated as a synthetic alteration of the designated
assets or liabilities.
Centura's interest rate swap agreements at December 31, 1997 and 1996, are
summarized below:
Estimated
Notional Fair Value
Amount Gain (Loss)
---------- ------------
(thousands)
December 31, 1997
Corporation pays fixed rates/receives variable ..... $278,000 $ (1,737)
Corporation pays variable rates/receives fixed ..... 273,000 4,660
Corporation pays variable rates (LIBOR)/
receives variable (US T-Bill) ..................... 200,000 (370)
-------- --------
Total interest rate swaps .......................... $751,000 $ 2,553
======== ========
December 31, 1996
Corporation pays fixed rates/receives variable ..... $225,000 $ (2,296)
Corporation pays variable rates/receives fixed ..... 70,000 (222)
-------- --------
Total interest rate swaps .......................... $295,000 $ (2,518)
======== ========
At December 31, 1997 and 1996, Centura had interest rate floor
arrangements ("floors") and interest rate cap arrangements ("caps"). The floors
are being used to protect certain designated variable rate loans from the
downward effects of their repricing in the event of a decreasing rate
environment. The caps are being used to protect certain designated floating
rate debt securities from the negative effects of an increasing rate
environment. Unrealized fair values of the floors and caps are not recorded in
the consolidated statements of income because the floors and caps are being
treated as a synthetic alteration of the designated assets or liabilities.
II-60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Interest rate cap and floor agreements at December 31 are summarized as
follows:
Estimated
Notional Carrying Fair Value
Amount Value Gain (Loss)
---------- ---------- ------------
(thousands)
December 31, 1997
Interest rate caps ........... $ 38,000 $972 $ (465)
Interest rate floors ......... 230,000 907 1,589
December 31, 1996
Interest rate caps ........... $ 26,000 $775 $ (645)
Interest rate floors ......... 180,000 821 2,114
Centura, on a limited basis, also utilizes financial futures contracts and
exchange traded options on financial futures contracts to reduce interest rate
risk in the AFS portfolio. Futures contract price changes settle on a daily
basis whereby Centura either makes or receives a cash payment. Such cash
receipt or cash payment is recorded as a component of the change in the value
of the securities held in the AFS portfolio. At December 31, 1997 and 1996
Centura had put options on 195 and call options on 2 ten-year Treasury futures
contracts, respectively. Each contract represents the notional amount of
$100,000 and gives Centura the right but not the obligation to exercise the
respective Treasury futures contracts. Cumulatively at December 31, 1997, the
carrying value and estimated fair value of the options were $7,000 and $16,000,
respectively. At December 31, 1996, the options had a carrying value of $97,000
and an estimated fair value of $75,000.
The risks generally associated with these derivative financial instruments
are the risk that the counterparty in the agreement may default ("credit
risk"); the risk that at the time of any such default, interest rates may have
moved unfavorably from the perspective of the nondefaulting party ("market
risk"); and the risk that amounts due to Centura previously reflected in the
consolidated balance sheets may not be received as a result of the default.
Centura's derivative financial instruments have been entered into with
nationally recognized commercial and investment banking firms. As such, Centura
does not anticipate non-performance by the counterparties. Additionally, to
mitigate credit risks, Centura's derivative contracts are generally governed by
master netting agreements and, where appropriate, Centura may obtain collateral
in the form of rights to securities. The master netting agreements provide for
net settlement of covered contracts with the same counterparty in the event of
default by the other party.
Contingencies
In December 1997, Centura settled a previously filed suit in connection
with a 1993 merger/conversion transaction with no material impact to the
consolidated financial position or results of operations of the company.
Various legal proceedings against Centura and the Bank have arisen from
time to time in the normal course of business. Management believes liabilities
arising from these proceedings, if any, will have no material adverse effect on
the financial position or results of operations of Centura or the Bank.
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the market.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time Centura's entire holdings of a particular
financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Because no market exists for a
significant portion of Centura's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and/or the methodology used
could significantly affect the estimates disclosed. Similarly, the fair values
disclosed could vary significantly from amounts realized in actual
transactions.
II-61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, Centura has a substantial trust department
that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment and
intangibles. In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The following table presents the carrying values and estimated fair values
of Centura's financial instruments at December 31:
1997 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(thousands)
FINANCIAL ASSETS:
Cash and due from banks, including interest-bearing $ 282,121 $ 282,121 $ 294,478 $ 294,478
Federal funds sold ................................. 29,552 29,552 21,413 21,413
Investment securities .............................. 1,828,056 1,831,189 1,577,880 1,578,126
Accrued interest receivable ........................ 45,130 45,130 42,729 42,729
Net loans .......................................... 4,522,303 4,587,006 4,050,739 4,176,237
FINANCIAL LIABILITIES:
Deposits ........................................... 5,364,925 5,361,534 4,733,069 4,732,011
Accrued interest payable ........................... 16,259 16,259 15,877 15,877
Borrowed funds ..................................... 733,192 733,192 685,291 685,291
Long-term debt ..................................... $ 382,129 $ 420,943 $ 310,802 $ 310,724
========== ========== ========== ==========
See Note 16 for information regarding the fair value of Centura's
off-balance sheet financial instruments at December 31, 1997 and 1996 and see
Note 6 for information regarding the fair value of Centura's capitalized
mortgage servicing rights.
NOTE 18 -- PARENT COMPANY FINANCIAL DATA
Centura's principal asset is its investment in the Bank; its primary
source of income is dividends and management fees from the Bank. Condensed
financial statements for the parent company are as follows:
December 31,
-----------------------
1997 1996
----------- -----------
(thousands)
BALANCE SHEETS
Assets:
Cash and deposits in banks ............................... $190,494 $158,076
Investment securities available for sale (cost of $91,531) 95,253 --
Loans to affiliate ....................................... 14,173 5,722
Investment in wholly-owned subsidiary, bank .............. 549,986 491,877
Investment in wholly-owned subsidiary, other ............. 3,116 --
Other assets ............................................. 40,221 35,774
-------- --------
Total assets ............................................. $893,243 $691,449
======== ========
Liabilities and Shareholder's Equity:
Junior subordinated debentures with affiliate ............ $103,093 $ --
Other liabilities ........................................ 251,814 216,214
Shareholders' equity ..................................... 538,336 475,235
-------- --------
Total liabilities and shareholders' equity ............... $893,243 $691,449
======== ========
II-62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 -- PARENT COMPANY FINANCIAL DATA -- Continued
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ------------ ----------
(thousands)
INCOME STATEMENTS
Income:
Dividends from subsidiaries ................................................... $47,490 $ 81,251 $18,731
Other ......................................................................... 33,642 21,550 13,456
------- --------- -------
Total income ................................................................... 81,132 102,801 32,187
Expenses:
Interest ...................................................................... 15,795 8,473 4,458
Other ......................................................................... 13,707 13,139 9,583
------- --------- -------
Total expenses ................................................................. 29,502 21,612 14,041
------- --------- -------
Income before income tax and equity in undistributed net income of subsidiaries 51,630 81,189 18,146
Income tax expense (benefit) ................................................... 602 (68) (76)
------- --------- -------
Income before equity in undistributed net income of subsidiaries ............... 51,028 81,257 18,222
Equity in undistributed net income of subsidiaries ............................. 32,030 (13,106) 46,431
------- --------- -------
Net income ..................................................................... $83,058 $ 68,151 $64,653
======= ========= =======
II-63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 -- PARENT COMPANY FINANCIAL DATA -- Continued
Years Ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(thousands)
STATEMENTS OF CASH FLOWS
Operating activities:
Net income .................................................................... $ 83,058 $ 68,151 $ 64,653
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ............................................... 1,724 634 276
(Increase) decrease in equity in undistributed net income of subsidiary ..... (32,030) 13,106 (46,431)
Other, net .................................................................. (4,345) (1,829) 3,098
---------- --------- ---------
Net cash provided by operating activities ..................................... 48,407 80,062 21,596
---------- --------- ---------
Investing activities:
Net increase in investment in subsidiary .................................... (3,093) -- --
Net decrease in receivables from the Bank ................................... -- -- 11,000
Net increase in loan with affiliate ......................................... (8,451) (5,722) --
Purchases of securities available for sale .................................. (107,381) -- --
Maturities and issuer calls of securities available for sale ................ 1,083 -- --
Other ....................................................................... -- (29,250) --
Cash acquired, net of cash paid, in purchase acquisition .................... -- -- 7,739
---------- --------- ---------
Net cash provided (used) by investing activities .............................. (117,842) (34,972) 18,739
---------- --------- ---------
Financing activities:
Net increase in borrowings .................................................. 136,691 74,327 78,374
Issuance of common stock, net ............................................... 4,274 4,442 3,209
Redemption of common stock .................................................. (10,289) (45,513) (58,822)
Cash dividends paid ......................................................... (27,354) (24,001) (18,730)
Other ....................................................................... (1,469) -- --
---------- --------- ---------
Net cash provided by financing activities ..................................... 101,853 9,255 4,031
---------- --------- ---------
Increase in cash .............................................................. 32,418 54,345 44,366
Cash at beginning of year ..................................................... 158,076 103,731 59,365
---------- --------- ---------
Cash at end of year ........................................................... $ 190,494 $ 158,076 $ 103,731
========== ========= =========
Noncash transactions:
Net equity adjustment of merged entity ...................................... $ -- $ 818 $ --
Stock issued for acquisitions and other stock issuances, net ................ 4,045 28,649 76,113
Unrealized securities gains, net of parent and subsidiary ................... 13,545 1,681 21,274
Available-for-sale securities contributed to subsidiary as capital .......... 14,763 -- --
Dividends declared, but not yet paid ........................................ 6,981 6,415 5,411
========== ========= =========
NOTE 19 -- REGULATORY MATTERS
Centura and the Bank are subject to certain requirements imposed by state
and federal banking statutes and regulations. These regulations require the
maintenance of a noninterest-bearing reserve balance at the Federal Reserve
Bank, restrict Bank dividend payments, and establish guidelines for minimum
capital levels. The total of the required Federal Reserve Bank reserve balances
at December 31, 1997 was $9,337,000. Subject to the regulatory restrictions,
the Bank had $58.9 million available from its retained earnings at December 31,
1997 for the payment of dividends from the Bank to Centura without obtaining
prior regulatory approval. The Bank is prohibited by law from paying dividends
from its capital stock account which totaled $78,207,000 at December 31, 1997.
Management believes that as of December 31, 1997, the Bank and Centura met all
capital adequacy requirements to which they are subject and was not aware of
any conditions or events that would change the capital categories.
II-64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 19 -- REGULATORY MATTERS -- Continued
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, there are minimum ratios of capital to risk-weighted assets
to which Centura and the Bank are subject. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly discretionary
actions by regulators that, if undertaken, could have a material effect on
Centura's consolidated financial statements.
Regulatory capital amounts and ratios are set forth in the table below.
Tier I capital consists of common stock, retained earnings, minority interests
in the equity accounts of consolidated subsidiaries less goodwill and certain
other intangible assets. For Centura, Tier I capital also consists of Capital
Securities described in Note 10. The remainder of Total Capital is Tier II
capital and includes subordinated debt, or other allowed equity equivalents and
a limited amount of loan loss reserves. Balance sheet assets and the credit
equivalent amount of off-balance sheet items per regulatory guidelines are
assigned to broad risk categories and a category risk weight is then applied.
The Bank is well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized the Bank must meet
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below.
Capital Amount Ratio
----------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(thousands)
Total Capital (to Risk-Weighted Assets)
Centura ................................ $549,279 $426,025 11.19% 10.02%
Bank ................................... $496,509 $474,220 10.24% 11.18%
Tier I Capital (to Risk-Weighted Assets)
Centura ................................ $520,178 $402,687 10.60% 9.48%
Bank ................................... $435,625 $421,146 8.98% 9.93%
Tier I Capital (to Average Assets) .....
Centura ................................ $520,178 $402,687 7.51% 6.56%
Bank ................................... $435,625 $421,146 6.46% 6.91%
To Be Well Capitalized
For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
------------------- ------------------------
Ratio Ratio
------------------- ------------------------
Total Capital (to Risk-Weighted Assets)
Centura ................................ >=8.00% NA
Bank ................................... >=8.00% >=10.00%
Tier I Capital (to Risk-Weighted Assets)
Centura ................................ >=4.00% NA
Bank ................................... >=4.00% >=6.00%
Tier I Capital (to Average Assets) .....
Centura ................................ >=4.00% NA
Bank ................................... >=4.00% >=5.00%
II-65
DESCRIPTION OF EXHIBITS
Restated Articles of Incorporation of Centura Banks, Inc.
Bylaws of Centura Banks, Inc., as amended
Excerpts from Centura's Articles of Incorporation and Bylaws relating to the
rights of holders of Centura capital stock
Specimen certificate of Centura common stock
Amended and Restated Trust Agreement between Centura Banks, Inc., as Depositor,
State Street Bank and Trust Company, as Property Trustee, Delaware Trust
Capital Management, as Delaware Trustee, and the Administrative Trustees named
therein relating to $100,000,000 Centura Capital Trust I, 8.845% Capital
Securities, Series A (the "Capital Securities")
Guarantee Agreement between Centura Banks, Inc., Guarantor, and State Street
Bank and Trust Company, as Guarantee Trustee, relating to the Capital
Securities
Junior Subordinated Indenture between Centura Banks, Inc. and State Street Bank
and Trust Company, as Trustee relating to $103,093,000 8.845% Junior
Subordinated Deferred Interest Debentures of the Corporation
Centura Banks, Inc. Omnibus Equity Compensation Plan, as amended and restated
effective April 16, 1997
Centura Banks, Inc. Directors' Deferred Compensation Plan, as amended and
restated effective February 15, 1995
Agreement, dated December 1996, by and between Centura Banks, Inc. and J.
Richard Futrell, Jr.
Centura Banks, Inc. Omnibus Supplemental Executive Retirement Plan
First Charlotte Financial Corporation 1984 Incentive Stock Option Plan
(including 1988 amendments), as assumed by Centura Banks, Inc.
Stock Grant Agreement Pursuant to Article X of Centura Banks, Inc. Omnibus
Equity Compensation Plan, dated November 20, 1996, between Centura Banks, Inc.
and Robert R. Mauldin
Centura Banks, Inc. Directors' Retirement Pay Plan as assumed by Centura Banks,
Inc.
The Planters Corporation Deferred Compensation Plan, as assumed by Centura
Banks, Inc.
Supplemental Executive Retirement Agreement dated May 14, 1996, between Centura
Banks, Inc. and Cecil W. Sewell, Jr.
Supplemental Executive Retirement Agreement as amended dated October 23, 1996,
between Centura Banks, Inc. and Cecil W. Sewell, Jr.
The Planters Corporation 1986 Incentive Stock Option Plan, as assumed by
Centura Banks, Inc.
The Planters Corporation 1988 Incentive Stock Option Plan, as assumed by
Centura Banks, Inc.
The Planters Corporation Non-qualified Stock Option Plan, as assumed by Centura
Banks, Inc.
Centura Banks, Inc. Split-Dollar Life Insurance Plan as assumed by Centura
Banks, Inc.
Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, as amended and
restated effective October 3, 1994
Supplemental Executive Retirement Agreement dated May 14, 1996, between Centura
Banks, Inc. and William H. Wilkerson
Peoples Bancorporation 1987 Stock Option Plan, as assumed by Centura Banks,
Inc.
Orange Federal Savings and Loan Association Nonstatutory Stock Option Plan for
Directors, as assumed by Centura Banks, Inc.
Supplemental Executive Retirement Agreement, as amended dated October 23, 1996,
between Centura Banks, Inc. and William H. Wilkerson
Executive Employment Agreement, dated November 15, 1995, between Robert R.
Mauldin and Centura Banks, Inc.
Centura Banks, Inc. Omnibus Equity Compensation Plan Nonqualified Stock Option
Award Agreement, dated November 15, 1995, between Centura Banks, Inc. and
Robert R. Mauldin
Supplemental Executive Retirement Agreement dated May 13, 1996 between Centura
Banks, Inc. and Frank L. Pattillo
II-66
DESCRIPTION OF EXHIBITS -- (continued)
Amendment Agreement, dated November 15, 1995, between Centura Banks, Inc. and
Robert R. Mauldin
Supplemental Executive Retirement Agreement as amended, dated October 23, 1996
between Centura Banks, Inc. and Frank L. Pattillo
Agreement of Assumption of Retirement Payment Agreement, dated as of June 2,
1995, by and between Centura Banks, Inc., First Southern Savings Bank, Inc.
SSB, and William H. Redding, Jr.
Agreement of Assumption of Agreement for Deferred Fees, dated as of June 2,
1995, by and between Centura Banks, Inc., First Southern Bancorp, Inc., and
William H. Redding, Jr.
1995 Outside Directors Stock Option Plan of First Commercial Holding
Corporation, as assumed by Centura Banks, Inc.
First Community Bank Omnibus Stock Plan of 1994, as assumed by Centura Banks,
Inc.
Amended and Restated FirstSouth Bank Stock Option Plan for Key Employees, as
assumed by Centura Banks, Inc.
FirstSouth Bank 1988 Stock Option Plan for Directors, as assumed by Centura
Banks, Inc.
First Southern Bancorp, Inc. Employee Stock Option Plan, as assumed by Centura
Banks, Inc.
First Southern Bancorp, Inc. Nonqualified Stock Option Plan for Directors, as
assumed by Centura Banks, Inc.
Executive Employment Agreement, dated November 1, 1996, between Dean E.
Painter, Jr. and CLG, Inc.
Executive Employment Agreement, dated November 3, 1997, between Thomas A.
Betts, Jr. and Centura Insurance Services, Inc.
Subsidiaries of Centura Banks, Inc.
Consent of KPMG Peat Marwick LLP
Financial Data Schedule included in the electronically filed document as
required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN J. GOLDSTEIN,
CHIEF FINANCIAL OFFICER OF CENTURA BANKS, INC.
II-67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Centura Banks, Inc. has duly caused this report to be signed on the
18th day of February, 1998, on its behalf by the undersigned, thereunto duly
authorized.
CENTURA BANKS, INC.
/s/ Cecil W. Sewell, Jr. /s/ Steven J. Goldstein
Cecil W. Sewell, Jr. Steven J. Goldstein
Chairman of the Board, Chief Financial Officer
Chief Executive Officer,
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this has
been signed below by the following persons on behalf of Centura Banks, Inc. and
in the capacities indicated on the 18th day of February, 1998.
/s/ Cecil W. Sewell, Jr. Chairman of the Board, Chief
Cecil W. Sewell, Jr. Executive Officer and President
/s/ Richard H. Barnhardt Director
Richard H. Barnhardt
/s/ Director
C. Wood Beasley
/s/ Thomas A. Betts, Jr. Director
Thomas A. Betts, Jr.
/s/ H. Tate Bowers Director
H. Tate Bowers
/s/ Ernest L. Evans Director
Ernest L. Evans
/s/ J. Richard Futrell, Jr. Director
J. Richard Futrell, Jr.
/s/ Director
John H. High
/s/ Michael K. Hooker Director
Michael K. Hooker
/s/ William D. Hoover Director
William D. Hoover
/s/ Robert L. Hubbard Director
Robert L. Hubbard
/s/ William H. Kincheloe Director
William H. Kincheloe
/s/ Charles T. Lane Director
Charles T. Lane
/s/ Robert R. Mauldin Director
Robert R. Mauldin
/s/ Joseph H. Nelson Director
Joseph H. Nelson
/s/ Director
Dean E. Painter, Jr.
/s/ O. Tracy Parks, III Director
O. Tracy Parks, III
/s/ Frank L. Pattillo Director, Vice Chairman,
Frank L. Pattillo Administration
/s/ William H. Redding, Jr. Director
William H. Redding, Jr.
/s/ Charles M. Reeves, III Director
Charles M. Reeves, III
/s/ George T. Stronach, III Director
George T. Stronach, III
/s/ A. P. Thorpe, III Director
A. P. Thorpe, III
/s/ Joseph L. Wallace, Jr. Director
Joseph L. Wallace, Jr.
/s/ William H. Wilkerson Director, Vice Chairman,
William H. Wilkerson Credit Risk Management
/s/ Charles P. Wilkins Director
Charles P. Wilkins
CENTURA BANKS, INC.
EXHIBIT LIST
Exhibit Description of Exhibit Sequential
No. Page No.
- --------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Centura Banks, Inc. *(2)
3.2 Bylaws of Centura Banks, Inc., as amended *(13)
4.1 Excerpts from Centura's Articles of Incorporation and Bylaws *(1)
relating to the rights of holders of Centura capital stock
4.2 Specimen certificate of Centura common stock *(2)
4.3 Amended and Restated Trust Agreement between Centura Banks,
Inc., as Depositor, State Street Bank and Trust Company, as
Property Trustee, Delaware Trust Capital Management, as
Delaware Trustee, and the Administrative Trustees named
therein relating to $100,000,000 Centura Capital Trust I,
8.845% Capital Securities, Series A (the "Capital Securities")
4.4 Guarantee Agreement between Centura Banks, Inc., Guarantor,
and State Street Bank and Trust Company, as Guarantee Trustee,
relating to the Capital Securities
4.5 Junior Subordinated Indenture between Centura Banks, Inc. and
State Street Bank and Trust Company, as Trustee relating to
$103,093,000 8.845% Junior Subordinated Deferred Interest
Debentures of the Corporation
10.1 Centura Banks, Inc. Omnibus Equity Compensation Plan, as
amended and restated effective April 16, 1997
10.2 Centura Banks, Inc. Directors' Deferred Compensation Plan, as *(15)
amended and restated effective February 15, 1995
10.3 Agreement, dated December 1996, by and between Centura Banks, *(19)
Inc. and J. Richard Futrell, Jr.
10.4 Centura Banks, Inc. Omnibus Supplemental Executive Retirement *(13)
Plan
10.5 First Charlotte Financial Corporation 1984 Incentive Stock *4.2(9)
Option Plan (including 1988 amendments), as assumed by Centura
Banks, Inc.
10.6 Stock Grant Agreement Pursuant to Article X of Centura Banks, *(19)
Inc. Omnibus Equity Compensation Plan, dated November 20,
1996, between Centura Banks, Inc. and Robert R. Mauldin
10.7 Centura Banks, Inc. Directors' Retirement Pay Plan (previously *(4)
referred to as Directors Retirement Pay Plan of the Board of
Directors of Planters), as assumed by Centura Banks, Inc.
10.8 The Planters Corporation Deferred Compensation Plan, as *(5)
assumed by Centura Banks, Inc.
10.9 Supplemental Executive Retirement Agreement dated May 14, *(19)
1996, between Centura Banks, Inc. and Cecil W. Sewell, Jr.
10.10 Supplemental Executive Retirement Agreement as amended dated *(19)
October 23, 1996, between Centura Banks, Inc. and Cecil W.
Sewell, Jr.
10.11 The Planters Corporation 1986 Incentive Stock Option Plan, as *(7)
assumed by Centura Banks, Inc.
10.12 The Planters Corporation 1988 Incentive Stock Option Plan, as *(6)
assumed by Centura Banks, Inc.
10.13 The Planters Corporation Non-qualified Stock Option Plan, as *(4)
assumed by Centura Banks, Inc.
10.14 Centura Banks, Inc. Split-Dollar Life Insurance Plan *(5)
(previously referred to as Split-Dollar Life Insurance Plan of
The Planters Corporation), as assumed by Centura Banks, Inc.
10.15 Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, *4.2(12)
as amended and restated effective October 3, 1994
10.16 Supplemental Executive Retirement Agreement dated May 14, *(19)
1996, between Centura Banks, Inc. and William H. Wilkerson
10.17 Peoples Bancorporation 1987 Stock Option Plan, as assumed by *(8)
Centura Banks, Inc.
10.18 Orange Federal Savings and Loan Association Nonstatutory Stock *4.3(3)
Option Plan for Directors, as assumed by Centura Banks, Inc.
10.19 Supplemental Executive Retirement Agreement, as amended dated *(19)
October 23, 1996, between Centura Banks, Inc. and William H.
Wilkerson
10.20 Executive Employment Agreement, dated November 15, 1995, *(10)
between Robert R. Mauldin and Centura Banks, Inc.
10.21 Centura Banks, Inc. Omnibus Equity Compensation Plan *(10)
Nonqualified Stock Option Award Agreement, dated November 15,
1995, between Centura Banks, Inc. and Robert R. Mauldin
10.22 Supplemental Executive Retirement Agreement dated May 13, 1996 *(19)
between Centura Banks, Inc. and Frank L. Pattillo
10.23 Amendment Agreement, dated November 15, 1995, between Centura *(10)
Banks, Inc. and Robert R. Mauldin
10.24 Supplemental Executive Retirement Agreement as amended, dated *(19)
October 23, 1996 between Centura Banks, Inc. and Frank L.
Pattillo
10.25 Agreement of Assumption of Retirement Payment Agreement, dated *(10)
as of June 2, 1995, by and between Centura Banks, Inc., First
Southern Savings Bank, Inc. SSB, and William H. Redding, Jr.
10.26 Agreement of Assumption of Agreement for Deferred Fees, dated *(10)
as of June 2, 1995, by and between Centura Banks, Inc., First
Southern Bancorp, Inc., and William H. Redding, Jr.
10.27 1995 Outside Directors Stock Option Plan of First Commercial *(17)
Holding Corporation, as assumed by Centura Banks, Inc.
10.28 First Community Bank Omnibus Stock Plan of 1994, as assumed by *4.3(16)
Centura Banks, Inc.
10.29 Amended and Restated FirstSouth Bank Stock Option Plan for Key *4.2(18)
Employees, as assumed by Centura Banks, Inc.
10.30 FirstSouth Bank 1988 Stock Option Plan for Directors, as *4.3(18)
assumed by Centura Banks, Inc.
10.31 First Southern Bancorp, Inc. Employee Stock Option Plan, as *4.2(11)
assumed by Centura Banks, Inc.
10.32 First Southern Bancorp, Inc. Nonqualified Stock Option Plan *4.2(11)
for Directors, as assumed by Centura Banks, Inc.
10.33 Executive Employment Agreement, dated November 1, 1996,
between Dean E. Painter, Jr. and CLG, Inc.
10.34 Executive Employment Agreement, dated November 3, 1997,
between Thomas A. Betts, Jr. and Centura Insurance Services,
Inc.
21 Subsidiaries of Centura Banks, Inc.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
* Incorporation by reference from the following document as noted:
(1) Included as the identified exhibit in Centura Banks, Inc. Form S-4 dated
March 8, 1990, as amended by Amendment No. 1 dated May 14, 1990.
(2) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1990.
(3) Included as the identified exhibit in Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-52160) filed on December 31,
1992.
(4) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 20, 1984.
(5) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 21, 1989.
(6) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 15, 1988.
(7) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 17, 1987.
(8) Included as the identified exhibit in Peoples Bancorporation Form 10-K
(File No. 0-10866) dated March 15, 1989.
(9) Included as the identified exhibit in Centura Banks, Inc. Form S-4
Registration Statement (No. 33-71198) filed on February 1, 1994.
(10) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1995.
(11) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-90568) filed on June 12, 1995.
(12) Included as the identified exhibit in Centura Banks, Inc. Post-Effective
Amendment No. 1 to Form S-3 Registration Statement filed as Post-Effective
Amendment No. 3 to Form S-4 Registration Statement (Registration No.
33-33773) filed on September 2, 1994.
(13) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1993.
(14) Included as the identified exhibit in Centura Banks, Inc. Current Report on
Form 8-K dated November 28, 1995. (15) Included as the identified exhibit
in Centura Banks, Inc. Annual Report on Form 10-K for the year ended
December 31, 1994.
(16) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 333-04949) filed on August 26,
1996.
(17) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-80989) filed on March 21, 1996.
(18) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 333-08503) filed on October 20,
1996.
(19) Included as the identified exhibit to Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1996.