UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from _________to _________
Commission File Number: 1-10646
RBC CENTURA BANKS, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1688522
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(State of Incorporation) (IRS Employer Identification No.)
1417 Centura Highway, Rocky Mount, North Carolina 27804
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(Address of principal executive office) (Zip Code)
(252) 454-4400
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(Registrant's telephone number, including area code)
Centura Banks, Inc. 134 North Church Street, Rocky Mount, NC, 27804
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 2,166,517,536 /(1)/
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(Class of Stock) (Shares outstanding as of July 31, 2001)
(1) One hundred percent owned by Royal Bank of Canada.
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
RBC CENTURA BANKS, INC.
FORM 10-Q
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 4
Consolidated Statement of Operations -
June 6, 2001 through June 30, 2001,
April 1, 2001 through June 5, 2001,
Three months ended June 30, 2000,
June 6, 2001 through June 30, 2001,
January 1, 2001 through June 5, 2001,
and Six months ended June 30, 2000 5-6
Consolidated Statement of Shareholder's Equity -
January 1, 2001 through June 5, 2001,
and June 6, 2001 through June 30, 2001 7
Consolidated Statement of Cash Flows -
June 6, 2001 through June 30, 2001,
January 1, 2001 through June 5, 2001,
and Six months ended June 30, 2000 8
Notes to Consolidated Financial Statements 9-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19-32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
2
RBC CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statement of Operations
Consolidated Statement of Shareholder's Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
------------ ------------
June 30, December 31,
------------ ------------
(In thousands, except share data) 2001 2000
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 301,042 $ 356,602
Due from banks, interest-bearing 19,169 14,928
Federal funds sold 4,544 7,547
Investment securities:
Available for sale (cost of $3,219,248
and $2,623,159, respectively) 3,236,580 2,655,612
Held to maturity (fair value of $0,
and $50,298, respectively) -- 49,493
Loans 7,805,842 7,671,691
Less allowance for loan losses 103,250 104,275
- -------------------------------------------------------------------------------
Net loans 7,702,592 7,567,416
Mortgage loans held for sale 165,172 56,907
Bank premises and equipment 162,820 157,959
Goodwill and intangibles 1,492,880 146,445
Other assets 435,624 469,100
- -------------------------------------------------------------------------------
Total assets $ 13,520,423 $ 11,482,009
===============================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 1,131,479 $ 1,131,121
Interest-bearing 5,735,952 5,871,582
Time deposits over $100 516,261 704,437
- -------------------------------------------------------------------------------
Total deposits 7,383,692 7,707,140
Borrowed funds 2,107,810 1,566,611
Long-term debt 1,565,359 1,084,762
Other liabilities 260,310 167,071
- -------------------------------------------------------------------------------
Total liabilities 11,317,171 10,525,584
SHAREHOLDER'S EQUITY
Common stock, no par value,
2,500,000,000 shares authorized; shares issued
and outstanding of 2,166,517,536
and 39,427,056, respectively 2,187,684 272,119
Accumulated other comprehensive income 10,658 18,939
Unearned compensation -- (4,084)
Retained earnings 4,910 669,451
- -------------------------------------------------------------------------------
Total shareholder's equity 2,203,252 956,425
- -------------------------------------------------------------------------------
Total liabilities and shareholder's equity $ 13,520,423 $ 11,482,009
===============================================================================
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF OPERATIONS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
------------- ---------------------------
June 6, 2001 April 1, 2001 Three months
through through ended
(In thousands) June 30, 2001 June 5, 2001 June 30, 2000
- ----------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 47,701 $ 109,329 $ 175,324
Investment securities:
Taxable 15,749 34,558 40,169
Tax-exempt 151 345 554
Short-term investments 89 228 792
Mortgage loans held for sale 1,298 1,748 879
- ----------------------------------------------------------------------------------------------
Total interest income 64,988 146,208 217,718
- ----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 17,023 44,312 74,947
Borrowed funds 6,608 14,579 22,126
Long-term debt 6,211 12,815 17,129
- ----------------------------------------------------------------------------------------------
Total interest expense 29,842 71,706 114,202
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NET INTEREST INCOME 35,146 74,502 103,516
Provision for loan losses 2,432 18,250 11,920
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Net interest income after provision for loan losses 32,714 56,252 91,596
NONINTEREST INCOME
Service charges on deposit accounts 5,749 11,552 15,993
Credit card and related fees 876 1,532 2,050
Other service charges, commissions and fees 2,555 6,269 9,125
Fees for trust services 895 1,516 2,758
Mortgage income 2,003 3,178 5,543
Other noninterest income 1,998 3,607 7,384
Securities gains (losses), net 1,593 26,771 (8,950)
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Total noninterest income 15,669 54,425 33,903
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NONINTEREST EXPENSE
Personnel 16,276 32,329 43,710
Occupancy 2,122 4,196 5,778
Equipment 2,269 4,687 5,881
Foreclosed real estate losses and related
operating expense 87 366 444
Loss on equity investment -- 42,203 --
Merger-related and other significant charges -- 91,820 4,178
Goodwill and Intangible amortization 7,074 2,514 3,550
Other operating 8,346 37,537 28,733
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Total noninterest expense 36,174 215,652 92,274
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Income (loss) before income taxes 12,209 (104,975) 33,225
Income tax expense (benefit) 7,299 (18,272) 12,302
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NET INCOME (LOSS) $ 4,910 $ (86,703) $ 20,923
==============================================================================================
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF OPERATIONS
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
RBC Centura Predecessor
------------- ------------------------------
June 6, 2001 January 1, 2001 Six months
through through ended
(In thousands) June 30, 2001 June 5, 2001 June 30, 2000
- -------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $ 47,701 $ 282,986 $ 343,146
Investment securities:
Taxable 15,749 84,734 83,843
Tax-exempt 151 878 1,854
Short-term investments 89 604 1,919
Mortgage loans held for sale 1,298 3,266 2,388
- -------------------------------------------------------------------------------------------------
Total interest income 64,988 372,468 433,150
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INTEREST EXPENSE
Deposits 17,023 119,044 148,199
Borrowed funds 6,608 41,148 45,690
Long-term debt 6,211 30,509 30,937
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Total interest expense 29,842 190,701 224,826
- -------------------------------------------------------------------------------------------------
NET INTEREST INCOME 35,146 181,767 208,324
Provision for loan losses 2,432 25,420 17,895
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Net interest income after provision for loan losses 32,714 156,347 190,429
NONINTEREST INCOME
Service charges on deposit accounts 5,749 26,847 31,348
Credit card and related fees 876 3,656 4,121
Other service charges, commissions and fees 2,555 15,582 19,937
Fees for trust services 895 4,181 5,509
Mortgage income 2,003 8,641 9,248
Other noninterest income 1,998 13,112 15,814
Securities gains (losses), net 1,593 27,521 (23,805)
- -------------------------------------------------------------------------------------------------
Total noninterest income 15,669 99,540 62,172
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NONINTEREST EXPENSE
Personnel 16,276 80,265 87,476
Occupancy 2,122 10,563 12,231
Equipment 2,269 11,441 12,029
Foreclosed real estate losses and related
operating expense 87 971 1,106
Loss on equity investment -- 42,203 --
Merger-related and other significant charges -- 91,502 28,516
Goodwill and Intangible Amortization 7,074 6,284 6,167
Other operating 8,346 63,405 55,391
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Total noninterest expense 36,174 306,634 202,916
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Income (loss) before income taxes 12,209 (50,747) 49,685
Income tax expense 7,299 435 20,727
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NET INCOME (LOSS) $ 4,910 $ (51,182) $ 28,958
=================================================================================================
See accompanying notes to consolidated financial statements.
6
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
RBC CENTURA BANKS, INC. AND SUBSIDIARIES
Predecessor
- -----------
Unrealized
Common Stock Gains (Losses) Total
---------------------------- Unearned Retained on Securities Shareholder's
Shares Amount Compensation Earnings Available for Sale Equity
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, December 31, 2000 39,427,056 $ 272,119 $ (4,084) $ 669,451 $ 18,939 $ 956,425
Comprehensive income:
Net loss, January 1 to June 5, 2001 -- -- -- (51,182) -- (51,182)
Unrealized losses on available for
sale securities, net of taxes -- -- -- -- (11,436) (11,436)
-----------
Comprehensive income -- -- -- -- -- (62,618)
Common stock issued:
Stock option plans and stock awards 495,997 13,285 -- -- -- 13,285
Restricted stock, net -- -- 4,084 -- -- 4,084
Cash dividends declared, $0.70 per
share -- -- -- (27,761) -- (27,761)
Other 49,984 2,549 -- -- -- 2,549
--------------------------------------------------------------------------------------------
Balance, June 5, 2001 39,973,037 $ 287,953 $ -- $ 590,508 $ 7,503 $ 885,964
============================================================================================
RBC Centura
- -----------
Common Stock Unrealized Gains Total
---------------------------- Unearned Retained on Securities Shareholder's
Shares Amount Compensation Earnings Available for Sale Equity
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Issuance of Common Stock
on June 5, 2001 2,166,517,536 $ 2,187,684 $ -- $ -- $ -- $ 2,187,684
Comprehensive income:
Net income, June 6 to June 30, 2001 -- -- -- 4,910 -- 4,910
Unrealized gains on available for
sale securities, net of taxes -- -- -- -- 10,658 10,658
-----------
Comprehensive income -- -- -- -- -- 15,568
--------------------------------------------------------------------------------------------
Balance, June 30, 2001 2,166,517,536 $ 2,187,684 $ -- $ 4,910 $ 10,658 $ 2,203,252
============================================================================================
See accompanying notes to consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CASH FLOWS
RBC Centura Banks, Inc. and Subsidiaries
RBC Centura Predecessor
----------- -----------
June 6, 2001 January 1, 2001 For the Six
through through Months ended
June 30, 2001 June 5, 2001 June 30, 2000
(Dollars in thousands) ---------------------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 4,910 $ (51,182) $ 28,958
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan losses 2,432 25,420 17,895
Depreciation of assets under operating leases 377 2,192 3,812
Depreciation and amortization, excluding depreciation of assets under
operating leases 9,221 20,508 19,916
Amortization of purchase accounting adjustments 412 -- --
Deferred income tax expense (benefit) 4,285 (10,802) 1,416
Loan fees deferred, net 385 (134) 1,194
Loss on equity investment -- 42,203 --
Bond premium amortization and discount accretion, net 789 (3,644) (192)
(Gains) losses on sales of available for sale securities (1,593) (27,521) 23,805
Proceeds from sales of mortgage loans held for sale 96,891 375,348 181,521
Originations, net of principal repayments, of mortgage loans held for sale (97,045) (475,771) (185,330)
(Increase) decrease in accrued interest receivable (2,826) 10,800 341
(Decrease) increase in accrued interest payable (7,884) (3,911) 2,799
Net change in other assets and other liabilities (62,977) 96,642 (4,758)
----------- ----------- -----------
Net cash (used) provided by operating activities (52,623) 148 91,377
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans 4,630 (116,700) (184,123)
Purchases of:
Securities available for sale (154,876) (1,872,595) (496,006)
Premises and equipment (3,553) (18,060) (16,882)
Other -- -- (80,000)
Proceeds from:
Sales of securities available for sale 99,489 1,199,303 552,874
Maturities and issuer calls of securities available for sale 1,993 201,026 178,355
Maturities and issuer calls of securities held to maturity -- 5,647 10,234
Sales of foreclosed real estate 548 2,902 5,242
Dispositions of premises and equipment -- 602 11,066
Cash acquired, net of cash paid, in mergers and acquisitions -- -- (1,250)
----------- ----------- -----------
Net cash used by investing activities (51,769) (597,875) (20,490)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 35,130 (387,657) (148,948)
Net (decrease) increase in borrowed funds (3,776) 544,975 (71,382)
Proceeds from issuance of long-term debt 50,000 550,500 435,500
Repayment of long-term debt (19) (126,880) (274,890)
Cash dividends paid -- (27,761) (26,228)
Proceeds from issuance of common stock, net -- 13,285 3,915
----------- ----------- -----------
Net cash provided (used) by financing activities 81,335 566,462 (82,033)
----------- ----------- -----------
Decrease in cash and cash equivalents (23,057) (31,265) (11,146)
Cash and cash equivalents at beginning of period 347,812 379,077 424,381
----------- ----------- -----------
Cash and cash equivalents at end of period $ 324,755 $ 347,812 $ 413,235
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period months for:
Interest $ 37,726 $ 194,613 $ 222,027
Income taxes 5,255 5,868 21,942
Noncash transactions:
Stock issued in purchase acquisitions and other stock issuances, net -- 6,631 7,657
Change in unrealized securities gains (losses), net 17,333 (20,148) 17,213
Income tax benefit from exercise of employee stock options -- 1,843 7,657
Loans transferred to foreclosed property 373 2,004 3,985
=========== =========== ===========
See accompanying notes to consolidated financial statements.
8
RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
Note 1: Basis of Presentation
At the close of business on June 5, 2001, Royal Bank of Canada ("Royal
Bank"), a Canadian chartered bank, acquired all of the outstanding common stock
of Centura Banks, Inc. ("Predecessor"). As a result of the transaction,
Predecessor became a wholly-owned subsidiary of Royal Bank. Rock Merger
Subsidiary, Inc., a wholly owned subsidiary of Royal Bank merged with and into
Predecessor and the surviving corporation was Predecessor which was re-named RBC
Centura Banks, Inc. ("RBC Centura"). Reference herein to RBC Centura relates to
the period subsequent to and including June 6, 2001, while reference to the
Predecessor relates to periods prior to and including June 5, 2001. Royal Bank's
basis in RBC Centura was "pushed down" to RBC Centura and is therefore reflected
in RBC Centura's balance sheet and results of operations. See Note 2 for
information regarding this acquisition.
The accompanying unaudited consolidated financial statements include
the accounts of RBC Centura and its wholly-owned subsidiaries, Centura Bank (the
"Bank"), Centura Capital Trust I, Triangle Capital Trust, and NCS Mortgage
Lending Company ("NCS"). Centura Bank also has various wholly-owned
subsidiaries. The interim financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") for interim financial
statements and with instructions to Form 10-Q and Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. Because the accompanying consolidated financial
statements do not include all of the information and footnotes required by GAAP,
they should be read in conjunction with the audited financial statements and
accompanying footnotes in Predecessor's Annual Report on Form 10-K for the year
ended December 31, 2000. Operating results for the periods from January 1, 2001
through June 5, 2001 and June 6, 2001 through June 30, 2001 are not necessarily
indicative of the results that may be expected for the year.
All significant intercompany transactions are eliminated in
consolidation. In the opinion of RBC Centura, all adjustments considered
necessary for a fair statement of the results for the interim periods presented
have been included (such adjustments are normal and recurring in nature).
Accounting policies followed in the presentation of interim financial results
are presented on pages 40 to 45 of Predecessor's Annual Report on Form 10-K for
the year ended December 31, 2000. Goodwill recorded as a result of the
acquisition by Royal Bank is being amortized over 20 years in compliance with
Royal Bank's accounting policy. See the Recent Accounting Developments section
in Management's Discussion and Analysis for accounting changes related to
goodwill.
Certain items reported in prior periods have been reclassified to
conform to current period presentation. Such reclassifications had no impact on
net income or shareholder's equity.
Note 2: Mergers and Acquisitions
At the close of business on June 5, 2001, Royal Bank acquired all of
the outstanding common stock of Predecessor. As a result of the transaction,
Predecessor became a wholly-owned subsidiary of Royal Bank. Rock Merger
Subsidiary, Inc., a wholly owned subsidiary of Royal Bank, merged with and into
Predecessor and the surviving corporation was Predecessor which was re-named RBC
Centura. Each share of Predecessor's outstanding common stock was converted into
the right to receive 1.684 common shares of Royal Bank. The value of the
transaction was approximately $2.2 billion. The business combination was
accounted for as a purchase with Royal Bank's basis being "pushed down" to RBC
Centura. The purchase price was allocated to the estimated fair values of RBC
Centura's tangible and intangible assets and liabilities with the remainder
allocated to
9
goodwill. As a result of the application of purchase accounting, RBC Centura
recorded premiums of $11.6 million and $70.8 million on the investment and loan
portfolios, respectively, and discounts of $32.3 million and $5.5 million on
deposits and long term debt, respectively, which will be amortized over the
average life of the respective instruments.
In connection with the acquisition RBC Centura recorded $1.2 billion
and $259.1 million in goodwill and core deposit intangibles, respectively, and
issued 2,166,517,536 shares to Royal Bank. The period for goodwill amortization
is 20 years and the core deposit intangible will be amortized over 10 years. In
connection with the transaction, RBC Centura incurred merger-related and other
significant charges of $91.8 million, before tax. Merger-related charges include
termination of employment contracts, change of control payments, costs of the
transaction including legal, accounting, and investment banking fees, cash
settlement of the Predecessor's outstanding stock options, and certain other
expenses. Also included is a $1.9 million pension plan curtailment loss
resulting from the Predecessor discontinuing accruing benefits under its pension
plan for all participants except for certain groups of employees.
The following table summarizes activity for merger-related accruals for
the period ended June 30, 2001 related to the June 5, 2001 acquisition by Royal
Bank:
- ---------------------------------------------------------------------------------------------------------------------
Liability Amount utilized Remaining
accrued during during 2001 Balance
(in thousands) 2001
- ---------------------------------------------------------------------------------------------------------------------
Severance, change in control, other employee-related costs, and
director related costs $70,335 $61,303 $ 9,032
Write-off of unrealizable assets 650 650 --
Non-employee related contract terminations 1,776 115 1,661
Professional costs 17,204 13,994 3,210
Other merger-related expenses 1,855 1,855 --
- ---------------------------------------------------------------------------------------------------------------------
Merger-related expenses $91,820 $77,917 $13,903
=====================================================================================================================
On February 18, 2000, Predecessor merged with Triangle Bancorp, Inc.
("Triangle"), a Raleigh, North Carolina based bank holding company in a
transaction accounted for as a pooling-of-interests. Predecessor issued
approximately 11.4 million shares to effect the combination. Each Triangle
shareholder received 0.45 shares of Predecessor common stock in exchange for
each Triangle share. In connection with this combination, Predecessor incurred
merger-related charges of $26.8 million. As of June 30, 2001 $1.2 million of
merger-related liabilities remained on the balance sheet.
Note 3: Commitments and Contingencies
All claims against Centura Bank in an action filed in 1999 by Ingeborg
Staton, Mercedes Staton and trusts created by Ingeborg Staton and Mercedes
Staton were dismissed in March 2001. All claims against Centura Bank in two
related actions filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes
Staton, and trusts created by Ingeborg Staton and Mercedes Staton were settled
in April 2001 for an aggregate amount that Predecessor and Centura Bank consider
immaterial to their financial condition. In the aggregate, Predecessor recorded
$19.1 million in litigation provisions for the period ended June 5, 2001 for the
settled cases and certain other legal proceedings.
In addition, various other legal proceedings against RBC Centura and
its subsidiaries have arisen from time to time in the normal course of business.
RBC Centura believes liabilities arising from these proceedings, if any, will
have no material adverse effect on the financial position or results of
operations of RBC Centura or its subsidiaries, taken as a whole.
Note 4: Segment Information
10
Refer to Predecessor's Annual Report on Form 10-K for the year ended
December 31, 2000 for information with respect to RBC Centura's policies for
defining and accounting for its segments. Royal Bank acquired RBC Centura on
June 5, 2001, and in accordance with "push-down" accounting established a new
basis of accounting in RBC Centura's financial statements. It is generally not
appropriate to combine pre and post "push down" periods; however, to make this
presentation more meaningful the following information is presented for the full
three months ended June 30, 2001. RBC Centura's measure of profitability is a
non-GAAP measure and excludes all merger-related charges. Financial information
by segment for the three months ended June 30, 2001 and 2000 is as follows:
2001
-------------------------------------------------------------------------------------------------
(In thousands) Retail Treasury Other Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 141,535 $ 54,815 $ 7,156 $ 203,506 $ 7,690 (A) $ 211,196
Interest expense 65,354 35,577 1,365 102,296 (748)(A) 101,548
Funds transfer pricing allocation 10,614 (8,492) (3,581) (1,459) 1,459 (B) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 86,795 10,746 2,210 99,751 9,897 109,648
Provision for loan losses 15,227 -- 6,361 21,588 (906)(C) 20,682
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 71,568 10,746 (4,151) 78,163 10,803 88,966
Noninterest income 32,728 173 14,244 47,145 22,949 (A) 70,094
Loss on equity investment -- -- 42,203 42,203 -- 42,203
Noninterest expense 72,557 2,764 27,038 102,359 107,264 (A) 209,623
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,739 8,155 (59,148) (19,254) (73,512) (92,766)
Income tax expense/(benefit) 12,381 822 1,765 14,968 (25,941)(C) (10,973)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 19,358 $ 7,333 $ (60,913) $ (34,222) $ (47,571) $ (81,793)
====================================================================================================================================
Period-end assets $ 7,051,703 $ 3,446,394 $ 288,642 $ 10,786,739 $ 2,733,684 (D) $ 13,520,423
2000
-------------------------------------------------------------------------------------------------
(In thousands) Retail Treasury Other Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 152,914 $ 54,104 $ 7,456 $ 214,474 $ 3,244 (A) $ 217,718
Interest expense 77,079 32,656 889 110,624 3,578 (A) 114,202
Funds transfer pricing allocation 15,451 (16,438) (3,096) (4,083) 4,083 (B) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 91,286 5,010 3,471 99,767 3,749 103,516
Provision for loan losses 5,151 -- 950 6,101 5,819 (C) 11,920
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 86,135 5,010 2,521 93,666 (2,070) 91,596
Noninterest income 31,425 147 7,423 38,995 (5,092)(A) 33,903
Noninterest expense 69,654 2,734 9,271 81,659 10,615 (A) 92,274
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 47,906 2,423 673 51,002 (17,777) 33,225
Income tax expense/(benefit) 14,876 (720) (524) 13,632 (1,330)(C) 12,302
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 33,030 $ 3,143 $ 1,197 $ 37,370 $ (16,447) $ 20,923
====================================================================================================================================
Period-end assets $ 6,773,230 $ 3,262,477 $ 237,835 $ 10,273,542 $ 1,065,290 (D) $ 11,338,832
(A) Reconciling item reflects adjustments that are necessary to reconcile to
consolidated totals, including merger-related charges.
(B) Reconciling item relates to the elimination of funds transfer pricing
credits and charges.
(C) Reconciling item adjusts balances from cash basis to accrual method of
accounting.
(D) Reconciling item relates to assets not allocated to segments including
premises and equipment, cash and due from banks, and certain other assets.
11
Note 5: Derivative Instruments and Hedging Activities
RBC Centura adopted Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by Statement of Financial Accounting Standards No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133 (referred to hereafter as "SFAS 133"), on January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair value hedge
transactions hedging changes in the fair value of an asset, liability, or firm
commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's fair
value. For cash flow hedge transactions hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified to earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current period earnings. The amount of hedge ineffectiveness recorded for the
six months ended June 30, 2001 was not considered significant. Derivatives that
do not meet the hedge accounting criteria and, therefore, do not qualify for
hedge accounting, will be accounted for at fair value with changes in fair value
recorded in other noninterest income in the income statement. Refer to the
Predecessor's March 31, 2001 Form 10-Q for additional disclosures regarding
derivative instruments and hedging activities.
Note 6: Investment Securities
As part of the application of purchase accounting, a premium of $11.6
million was recorded as a fair value adjustment and will be amortized based on
the effective yield method over the remaining life of the securities. In
connection with the acquisition, RBC Centura transferred approximately $44
million of investment securities from the held to maturity portfolio to
available for sale in order to align RBC Centura's interest rate risk position
and credit risk policy with those of Royal Bank.
12
A summary of investment securities by type at June 30, 2001 follows:
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------
(thousands)
Available For Sale:
U.S. Treasury ............................... $ 129,988 $ 98 $ -- $ 130,086
U.S. government agencies and corporations ... 778,453 2,614 192 780,875
Mortgage-backed securities .................. 1,748,636 12,343 1,266 1,759,713
Asset-backed securities ..................... 150,365 1,507 1 151,871
State and municipal ......................... 38,277 40 1 38,316
Common and preferred stock .................. 260,403 1,126 358 261,171
Other securities ............................ 113,126 1,423 1 114,548
---------- ---------- ---------- ----------
Total available for sale .................... $3,219,248 $ 19,151 $ 1,819 $3,236,580
========== ========== ========== ==========
The following is a summary of investment securities by contractual maturity at
June 30, 2001:
Available for Sale
-----------------------------
Amortized Cost Fair Value
-----------------------------
(thousands)
Due in one year or less .......................... $ 149,691 $ 149,776
Due after one year through five years ............ 833,398 836,172
Due after five years through ten years ........... 64,558 65,566
Due after ten years .............................. 12,197 12,310
Mortgage-backed and asset-backed securities ...... 1,899,001 1,911,585
Common and preferred stock ....................... 260,403 261,171
---------- ----------
Total ............................................ $3,219,248 $3,236,580
========== ==========
At June 30, 2001 investment securities with a book value of
approximately $1.4 billion were pledged to secure public funds on deposit and
for other purposes required by law or contractual arrangements.
During 2001, the sale of securities generated gross realized gains and
losses of $70.1 million and $42.6 million, respectively, by the Predecessor and
gross realized gains and losses of $2.0 million and $407,000, respectively, by
RBC Centura.
13
Note 7: Loans
As part of the application of purchase accounting, a premium of $70.8
million was recorded as a fair value adjustment to the loan portfolio and will
be amortized on a straight line basis over the average life of the loans. A
summary of loans at June 30, 2001 follows:
(thousands)
Commercial, financial, and agricultural ...................... $ 2,233,051
Consumer ..................................................... 590,762
Real estate -- mortgage ...................................... 3,593,977
Real estate -- construction and land development ............. 1,064,882
Leases ....................................................... 223,747
Other ........................................................ 99,423
-----------
Total loans, net of unearned income .......................... $ 7,805,842
===========
Included in the above:
Nonaccrual loans ............................................. $ 57,997
Accruing loans past due ninety days or more .................. 8,508
Note 8: Allowance for Loan Losses
A summary of changes in the allowance for loan losses ("AFLL") follows:
RBC
---
Centura Predecessor Predecessor
------- ----------- -----------
June 6, January 1,
2001 2001 Six months
through through ended
June 30, June 5, June 30,
2000 2001 2000
(thousands)
-------------------------------------
AFLL at beginning of period ..................... $ 103,044 $ 104,275 $ 95,500
Provision for loan losses ....................... 2,432 25,420 17,895
Charge-offs ..................................... (2,614) (28,857) (13,965)
Recoveries on loans previously charged-off ...... 388 2,206 3,841
--------- --------- ---------
Net Charge-offs ................................. (2,226) (26,651) (10,124)
--------- --------- ---------
AFLL at end of period ........................... $ 103,250 $ 103,044 $ 103,271
========= ========= =========
14
The following tables summarize individually impaired loan information
as of June 30, 2001:
(thousands)
Individually impaired loans with related allowance ............... $19,771
Individually impaired loans with no related allowance ............ 15,930
-------
Total individually impaired loans ................................ $35,701
=======
Allowance on individually impaired loans ......................... $ 6,891
=======
Note 9: Long-Term Debt
As part of the application of purchase accounting, a discount of $5.5
million was recorded as a fair value adjustment to long term debt and will be
amortized on a straight line basis over the average life of the debt. Long-term
debt consisted of the following at June 30, 2001:
(thousands)
Federal Home Loan Bank advances ............................ $1,322,484
Capital Securities ......................................... 122,738
Bank notes ................................................. 119,539
Obligations under capitalized leases ....................... 598
Other ...................................................... --
----------
Total long-term debt ....................................... $1,565,359
==========
Refer to the Predecessor's Annual Report on form 10-K for details
regarding RBC Centura's borrowing obligations, interest rates, and maturities.
15
Note 10 -- Income Taxes
The components of income tax expense were:
RBC Centura Predecessor Predecessor
----------- ----------- -----------
June 6, 2001 January 1, Six Months
through June 2001 through ended June
30, 2001 June 5, 2001 30, 2001
-------------------------------------------
Current expense (benefit):
Federal ......................... $ 2,946 $ (3,971) $ 17,694
State ........................... 66 159 1,617
-------- -------- --------
3,012 (3,812) 19,311
Deferred expense
Federal ......................... 4,073 4,160 1,318
State ........................... 214 87 98
-------- -------- --------
4,287 4,247 1,416
Total income tax expense ........... $ 7,299 $ 435 $ 20,727
======== ======== ========
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
RBC Centura Predecessor Predecessor
----------- ----------- -----------
June 6, 2001 January 1, 2001 Six Months ended
through June 30, 2001 through June 5, 2001 June 30, 2000
-------------------------------------------------------------------
Income taxes at Federal statutory tax rate $ 4,272 35.00% $(17,761) 35.00% $ 17,390 35.00%
Non-taxable income ....................... (592) (4.85) (2,898) 5.71 (5,495) (11.06)
Acquisition adjustments, net ............. 1,690 13.84 14,002 (27.59) 5,453 10.98
State income tax, net of federal benefit . 187 1.54 358 (0.70) 1,261 2.54
Other, net ............................... 1,742 14.25 6,734 (13.28) 2,118 4.26
-------- ----- -------- ------ -------- ------
Effective tax rate ....................... $ 7,299 59.78% $ 435 (0.86)% $ 20,727 41.72%
======== ===== ======== ====== ======== ======
16
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets and liabilities at June 30, 2001 and
December 31, 2000 are summarized as follows:
June 30, December 31,
2001 2000
---------------------------
(thousands) (thousands)
---------------------------
Deferred tax assets:
Loan loss reserve ............................ $ 40,493 $ 40,593
Other reserves ............................... 15,036 7,078
Deferred compensation ........................ 15,152 13,984
Other assets ................................. 20,312 4,966
--------- ---------
Gross Deferred Tax Assets .................... 90,993 66,621
Deferred tax liabilities:
Premises and equipment ....................... 5,745 7,718
Deposits ..................................... 72,847 (538)
Investment securities ........................ 10,767 5,518
Leasing activities ........................... 78,663 61,668
Lending activities ........................... 25,428 244
Other Liabilities ............................ 31,704 31,082
Net unrealized securities gains .............. 6,674 13,081
--------- ---------
Gross deferred tax liabilities ............... 231,828 118,773
Net deferred tax (liability) ................. $(140,835) $ (52,152)
========= =========
A valuation allowance for deferred tax assets was not required as of
June 30, 2001 or December 31, 2000. Management has determined that it is more
likely than not that the deferred tax assets could be realized by carrybacks to
federal taxable income in the federal carryback period or offset against
deferred tax liabilities. As part of the application of purchase accounting, the
deferred tax liability was increased by the amount of $87.9 million due to fair
value adjustments of the balance sheet, decreased by $6.4 million due to fair
value adjustments required under SFAS 115 for securities available for sale and
decreased due to other adjustments totaling $1.3 million.
Note 11 -- Strategic Repositioning of Mortgage Business.
During the second quarter of 2001, Predecessor made an assessment of
its mortgage business with an emphasis on current and prospective interest rate
and macroeconomic conditions. Predecessor decided to reevaluate its
participation in making consumer mortgages with individuals with less than
prime-rated credit profiles. Specifically, Predecessor had a 49 percent equity
interest in First Greensboro Home Equity, Inc. ("FGHE"). Predecessor also had a
wholly-owned subsidiary, NCS. Both FGHE and NCS are primarily in the business of
making mortgages to consumers with less than prime-rated credit profiles. As a
result of this assessment Predecessor decided to take actions to no longer
provide credit support to these mortgage companies.
Predecessor also purchased an outstanding FGHE debenture from an
unaffiliated third party for which Predecessor was providing backup credit
support. This purchase did not change the Predecessor's credit exposure.
In the second quarter, based on FGHE's inability to access the
securitization market and FGHE's limited success in selling loans in the whole-
loan market, management informed FGHE of management's intention to not further
extend credit support or financing activities. Management estimated the cash
flows to be received from FGHE in future periods to be inadequate for the full
recovery of its investment and the debenture discussed above. A charge to
earnings totaling $42.2 million, pre-tax, for other than temporary impairment
was recorded as loss on equity investment in the income statement. In addition,
$2.3 million of unsecured loans to FGHE were charged off, and a $2.1 million
provision for loan losses was recorded related to these loans.
17
Certain fixed assets of NCS were sold during the second quarter. The
purchaser also assumed a majority of the employees. Predecessor retained the
loan portfolio of approximately $75 million existing at sale date with the
intention to sell the loans. A provision for credit losses of $300,000 was
recorded prior to the transfer of these loans to held for sale. In addition, a
charge of $1.9 million was classified in merger-related and other significant
charges on the income statement, which included severance, goodwill associated
with NCS, and the loss on the fixed assets sold.
18
RBC CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Six Months Ended June 30, 2001
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
- ----------------------------------------------------
A number of statements in this Form 10-Q concerning RBC Centura Banks,
Inc. ("RBC Centura" or the "Company") and its wholly-owned subsidiaries, Centura
Bank (the "Bank"), Centura Capital Trust I, Triangle Capital Trust and NCS
Mortgage Lending Company ("NCS"), are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding the financial conditions, results of operations and
businesses of RBC Centura, RBC Centura's plans, goals, objectives, expectations,
projections, estimates, and intentions. One can identify these forward-looking
statements by the use of words such as "expects," "plans," "believes," "will,"
"estimates," "intends," "projects," "goals," and other words of similar meaning.
One can identify them by the fact that they do not relate strictly to historical
or current facts. By their very nature, forward-looking statements involve
inherent risks and uncertainties, both general and specific, and risks exist
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. RBC Centura cautions readers not to place undue reliance
on these statements as a number of important factors could cause actual results
to differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements. Factors that might
cause such a change include, but are not limited to (i) customer and deposit
attrition, or loss of revenue, following completed mergers may be greater than
expected; (ii) competitive pressure in the banking industry may increase
significantly; (iii) changes in the interest rate, currency exchange rate and
inflation rate may reduce margins; (iv) general economic conditions, globally,
nationally or regionally, may be less favorable than expected, resulting in,
among other things, credit quality deterioration and the possible impairment of
collectibility of loans; (v) the impact of changes in monetary and fiscal
policies, laws, rules and regulations; (vi) the impact of the Gramm-Leach-Bliley
Act of 1999; (vii) changes in business conditions and inflation; (viii) the
impact to revenue and expenses in the event that announced mergers do not
consummate as anticipated; (ix) the failure to realize expected benefits the
acquisition of Centura Banks, Inc., the predecessor of RBC Centura
("Predecessor"), by Royal Bank of Canada ("Royal Bank"); and (x) other risks and
factors identified in Predecessor's Annual Report for the year ended December
31, 2000, and the Quarterly Report for the three months ended March 31, 2001,
and in Predecessor's and RBC Centura's other past and future filings with the
Securities and Exchange Commission and other regulatory bodies.
RBC Centura cautions that the foregoing list of important factors is
not exhaustive. When relying on forward-looking statements to make decisions
with respect to RBC Centura, investors and others should carefully consider the
foregoing factors and other uncertainties and events. Additional information
with respect to factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements is included in
Predecessor's and RBC Centura's current and subsequent filings with the
Securities and Exchange Commission. RBC Centura does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
RBC Centura.
GENERAL
- -------
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of RBC Centura. RBC Centura is a bank holding company operating
primarily in North Carolina, South Carolina and Virginia. RBC Centura currently
provides a full range of personal and commercial banking products and services,
investment services and insurance services. These products and services are
delivered through our customers' channel of preference. At June 30, 2001, RBC
Centura served its customers through 244 financial stores located throughout
North Carolina, South Carolina, and Virginia. RBC
19
Centura also serves its customers through Centura Highway, its multifaceted
customer access system that includes telephone banking, PC banking, online bill
payment and a suite of Internet products and services that can be found at
www.centura.com. The contents of RBC Centura's website are not part of this Form
- ---------------
10-Q and such contents are not incorporated by reference herein.
In future periods, the management of Royal Bank and RBC Centura may
evaluate and analyze current products and the various distribution channels of
RBC Centura and potential synergies between the two entities. These efforts will
be primarily focused on strengthening RBC Centura's retail delivery platform and
commercial market delivery. In addition, RBC Centura assessed its mortgage
business as described in Note 11 in the unaudited financial statements for the
six months ended June 30, 2001, and has decided to be more selective on future
commercial real estate transactions in the coming months.
Percentage calculations contained herein have been calculated based
upon actual, not rounded, results.
On June 5, 2001, Royal Bank, a Canadian chartered bank, acquired all of
the outstanding common stock of Predecessor. As a result of the transaction,
Predecessor became a wholly-owned subsidiary of Royal Bank, and was renamed RBC
Centura Banks Inc. The business combination was accounted for as a purchase with
Royal Bank's accounting basis being "pushed down" to RBC Centura. See Note 2 of
the consolidated financial statements for additional information regarding this
business combination. It is generally not appropriate to combine pre and post
"push down" periods; however, for purposes of comparison only, the following
table combines RBC Centura's results of operations from June 6, 2001 through
June 30, 2001 with those of the Predecessor for the period January 1, 2001
through June 5, 2001. The combined results will generally serve as comparable
amounts to the six month period ended June 30, 2000 and will be utilized for
purposes of providing discussion and analysis of results of operations.
RBC Centura Predecessor Combined Predecessor
----------- ----------- -------- -----------
June 6, 2001 January 1, Six months Six months
through June 30, 2001 through ended June ended June
2001 June 5, 2001 30, 2001 30, 2000
-------------------------------------------------------------
Net Interest Income $ 35,146 $ 181,767 $ 216,913 $ 208,324
Provision for loan losses 2,432 25,420 27,852 17,895
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 32,714 156,347 189,061 190,429
Noninterest income 14,076 72,019 86,095 85,977
Securities gains (losses), net 1,593 27,521 29,114 (23,805)
Loss on equity Investment -- 42,203 42,203 --
Merger-related and other significant
charges -- 91,502 91,502 28,516
Noninterest expense 36,174 172,929 209,103 174,400
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 12,209 (50,747) (38,538) 49,685
Income tax expense 7,299 435 7,734 20,727
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 4,910 $ (51,182) $ (46,272) $ 28,958
- -------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY
Net income for the six months ended June 30, 2001 totaled $54.9
million, excluding the after-tax loss on an equity investment of $26.7 million,
and merger-related and other significant charges of $74.4 million, after tax,
incurred mainly as a result of the acquisition by Royal Bank. Net income for the
comparable period in 2000 was $64.7 million, excluding pre-tax merger charges
and other significant items of $50.7 million incurred as a result of the
February 18, 2000 merger with Triangle Bancorp, Inc. ("Triangle"). Included in
the merger-related charges and other significant items for 2000 were $22.1
million in pre-tax losses on securities sales incurred as a result of
restructuring Triangle's investment portfolio. Including merger-related and
other significant charges, RBC Centura incurred a net loss of $46.3 million and
recorded net income of $29.0 million for the six months ended June 30, 2001
20
and 2000, respectively. Key factors responsible for RBC Centura's results of
operations are discussed throughout Management's Discussion and Analysis below.
INTEREST-EARNING ASSETS
Interest-earning assets, net, consisting primarily of loans and
investment securities, averaged $10.9 billion for the six months ended June 30,
2001, an increase of $658.9 million or 6.4 percent over the average balance for
the six months ended June 30, 2000. As discussed below, growth in the commercial
loan and investment portfolios accounted for the majority of the increase.
Period-end interest-earning assets were $11.2 billion at June 30, 2001, an
increase of $775.1 million over December 31, 2000's balance of $10.5 billion.
For additional information on average interest-earning assets, refer to
the discussion below, Table 3, "Net Interest Income Analysis-Taxable Equivalent
Basis," and Table 8, "Net Interest Income and Volume/Rate Analysis, Taxable
Equivalent Basis."
Loans
Loans represent the largest component of interest-earning assets. Loans
ended the period at $7.8 billion, an increase of $134.2 million when compared to
the balance as of December 31, 2000. As a result of the Royal Bank acquisition,
RBC Centura marked the loan portfolio to its fair value, which resulted in a
$70.8 million premium on loans being recorded. Excluding the loan premium, loans
increased $67.1 million from December 31, 2000, primarily in the commercial loan
category. Table 1 provides a summary of the loan portfolio and mix percentages
as of June 30, 2001, June 30, 2000 and December 31, 2000.
Loans averaged $7.8 billion for the six months ended June 30, 2001 as
compared to $7.5 billion for the six months ended June 30, 2000. Average loan
growth was driven primarily by volume generated in the commercial and consumer
loan portfolios. On average, commercial loans increased $260.5 million or 10.8
percent annualized between comparable periods. Consumer loans (equity lines,
installment loans, and other credit line loans), increased 2.1 percent
annualized, despite the sale of approximately $107 million of retail loans in
the fourth quarter 2000. On average the mortgage portfolio declined $35.2
million. The leasing portfolio, on average, declined $33.4 million, driven by
the continued decreased emphasis on the product and normal amortization.
Taxable equivalent interest earned on the loan portfolio for the six
months ended June 30, 2001 and 2000 totaled $331.3 million and $343.9 million,
respectively. The decline in interest income on loans was driven mainly by rate
variances, which contributed $22.1 million to the decrease, offset by a $9.6
million increase attributable to volume variances. Overall, the loan portfolio
yielded 8.53 percent for the first six months of 2001 compared with 9.07 percent
for the first six months of 2000, a decrease of 54 basis points, mainly due to
the declining rate environment which occurred in the latter part of 2000 and
continued into the first six months of 2001.
Although the loan premium amortization did not have a significant
impact on the loan yield for the current period, given the timing of the
acquisition by Royal Bank late in the second quarter, it is expected that the
loan premium amortization will negatively impact loan yields by approximately 55
to 60 basis points for the last half of 2001 and the majority of 2002. Excluding
the loan premium amortization recorded in connection with the revaluation,
taxable equivalent interest would have been $335.0 million for the six months
ended June 30, 2001.
Investment Securities
The investment portfolio provides RBC Centura with a source of earnings
and liquidity, and consists predominantly of securities of the US Government and
its agencies and other high grade, fixed income securities. The investment
portfolio ended the second quarter of 2001 at $3.2 billion, an increase of 19.7
percent from a December 31, 2000 balance of $2.7 billion. The investment
portfolio averaged $3.0 billion for the six months ended June 30, 2001, growing
16.6 percent or $433.1 million over the comparable period for 2000. The growth
in the investment portfolio provided a means of optimizing capital in the
absence of share repurchases. Predecessor was
21
precluded from repurchasing its own stock as part of its January 26, 2001
agreement to be acquired by Royal Bank, and as a result, the Board of Directors
rescinded the previously announced share repurchase program. In connection with
the acquisition, RBC Centura transferred approximately $44 million of investment
securities from the held to maturity portfolio to available for sale in order to
align RBC Centura's interest rate risk position and credit risk policy with
those of Royal Bank.
The available for sale ("AFS") investment portfolio is used as a part
of RBC Centura's asset/liability management strategy and may be sold in response
to changes in interest rates, changes in prepayment risk, the need to manage
regulatory capital and other factors. At June 5, 2001 all unrealized gains and
losses were transferred to the related securities basis in accordance with
purchase accounting. This portfolio is carried at fair value with unrealized
gains or losses recorded, net of tax, in accumulated other comprehensive income.
At June 30, 2001, AFS investments had a market value of $3.2 billion, up $581.0
million compared to December 31, 2000. Included in the market value of the AFS
portfolio as of June 30, 2001 are unrealized gains of $17.3 million, $10.7
million net of tax, compared with unrealized gains of $32.5 million, $18.9
million net of tax as of December 31, 2000. The change in unrealized
gains/losses was the result of a portfolio restructuring performed in the second
quarter of 2001 and the increase in the securities basis due to purchase
accounting. The restructuring was performed in order to mitigate the risk of
rising interest rates and resulted in a $26.8 million securities gain.
FUNDING SOURCES
Total funding includes deposits, short-term borrowings and long-term
debt and averaged $10.7 billion for the six-month period ended June 30, 2001,
increasing $486.3 million over the $10.2 billion averaged for the six months
ended June 30, 2000.
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, time deposits and transaction
accounts, ended the period at $7.4 billion, down $323.4 million from its
December 31, 2000 balance of $7.7 billion. The deposit balance as of June 30,
2001 reflects a fair value adjustment of $32.3 million recorded as a result of
the Royal Bank acquisition. Excluding this discount, deposits would have
decreased $355.7 million, principally attributable to the anticipated seasonal
decline in commercial deposits and the attrition of unprofitable single-service
CD accounts from Triangle households with which RBC Centura was unable to
establish multiple service relationships.
Total deposits averaged $7.4 billion for the first six months of 2001
as compared to the $7.7 billion averaged for the six months of 2000. The
annualized average cost of total interest-bearing deposits for the first six
months of 2001 was 4.32 percent, a decrease of 21 basis points compared to the
comparable period in 2000, influenced by the rate environment and product mix.
Table 2 details average balances for the deposit portfolio and the mix of
deposits for the six months ended June 30, 2001 and 2000.
Although the time deposit discount accretion did not have a significant
impact on the cost of funds for the current period given the timing of the
acquisition by Royal Bank late in the second quarter, it is expected that it
will decrease the cost of interest bearing liabilities by approximately 50 basis
points for the last half of 2001 and the first quarter of 2002.
22
Other Funding Sources
Management utilizes alternative funding sources in addition to
traditional deposits to fund balance sheet growth. Alternative short-term
borrowed funds principally include Federal funds purchased, securities sold
under repurchase agreements and master notes. On average, short-term borrowed
funds increased $449.4 million to total $2.0 billion for the six months ended
June 30, 2001 principally in Federal funds purchased and securities sold under
repurchase agreements. Period-end short-term borrowings totaled $2.1 billion and
$1.6 billion at June 30, 2001 and December 31, 2000, respectively. The growth in
short term borrowed funds principally stemmed from loan growth exceeding deposit
growth. The cost of funds for the first six months of 2001 for short-term
borrowings declined 109 basis points from prior year's June 30, 2000 year to
date rate of 5.86 percent. The change was a result of decreasing interest rates
which occurred in the latter part of 2000 and continued into the first six
months of 2001.
Long-term debt consists predominantly of FHLB advances, Capital
Securities and subordinated bank notes and ended the period at $1.6 billion
compared to $1.1 billion as of December 31, 2000. Long-term debt averaged $1.3
billion for the six months ended June 30, 2001 compared with $990.3 million for
first six months of 2000. The main contributor of the increase was FHLB
borrowings, which grew on average $354.9 million for the first six months of
2001 when compared to the first six months of 2000. The cost of funds for
long-term debt decreased by 61 basis points to 5.57 percent for the first six
months of 2001, compared to a similar period in 2000. The decrease in cost of
funds in mainly attributable to decreasing rates.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the six months ended June 30, 2001 and 2000 was
$216.9 million and $208.3 million, respectively. On a taxable equivalent basis,
net interest income in the first six months of 2001 increased $8.5 million over
the prior year to total $222.0 million. As shown in Table 8, "Net Interest
Income and Volume/Rate Analysis," the increase in net interest income, taxable
equivalent, was driven by volume variances, which contributed $8.0 million to
the increase whereas rate variances added $571,000.
Net interest margin for the first six months of 2001 was 4.05 percent,
a 3 basis point decrease over 2000's year to date net interest margin of 4.08
percent. Although current period net interest margin has not been significantly
impacted by the amortization of premiums and discounts previously discussed,
management expects the amortization and accretion in the aggregate will decrease
net interest margin by approximately 20 to 25 basis points for the remainder of
2001 and into the first quarter of 2002. During the last three quarters of 2002
the decline is expected to total approximately 50 basis points.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES (AFLL)
As of June 30, 2001 and December 31, 2000, the AFLL was $103.3 million
and $104.3 million, respectively. As a percentage of loans and leases
outstanding, the AFLL decreased from 1.36 percent at December 31, 2000 to 1.32
percent at the end of the first six months of 2001. Excluding the purchase
accounting adjustments to loan and lease portfolios, the AFLL would have been
1.33 percent of loans and leases at June 30, 2001. The decrease was principally
driven by increased charge-offs in the second quarter 2001 as discussed below.
In fourth quarter 2000, approximately $6 million of nonperforming loans
were transferred to held for sale and are carried at lower of cost or market as
a component of other assets. These loans were sold in July 2001 to an
unaffiliated third party. Accordingly, these loans are excluded from loans,
nonperforming assets and related ratios for all periods presented.
Net charge-offs for the first half of 2001 were $28.9 million, compared
to $10.1 million for the same period in 2000. As a percentage of average loans,
net charge-offs were 0.75 percent and 0.27 percent for the six months ended June
30, 2001 and 2000, respectively. The increases in net charge-offs were
principally in the commercial loan portfolio and in non-strategic lines of
businesses, including leasing and sub prime lending, for which collection
23
prospects have been significantly diminished. The provision for loan losses
increased $10.0 million to $27.9 million for the six months ended June 30, 2001
as a result of increased net charge-offs as compared to the same period a year
ago.
Nonperforming assets ("NPA's") were $66.4 million at June 30, 2001, an
increase of $12.0 million over the December 31, 2000 balance of $54.4 million.
The increase was principally in the residential mortgage portfolio, a
significant portion repurchased in accordance with the contractual obligations
related to the third quarter 2000 sale of mortgage servicing. NPA's as a
percentage of total assets were 0.49 percent and 0.47 percent at June 30, 2001
and December 31, 2000, respectively.
Management believes the AFLL adequately covers nonperforming loans,
providing coverage at 1.78 times and 2.15 times the nonperforming loan balance
at June 30, 2001 and December 31, 2000, respectively. Refer to Table 4 "Analysis
for Allowance for Loan Losses" for additional asset quality information.
Management believes the AFLL is adequate based upon its current
judgment, evaluation, and analysis of the loan portfolio. RBC Centura
continuously monitors overall credit quality and manages its credit processes,
including loans in past due and nonaccrual status. The AFLL represents
management's estimate of an amount adequate to provide for probable incurred
losses in the loan portfolio. However, there are risks of additional losses that
cannot be quantified precisely or attributed to particular loans or classes of
loans. Because those risks include general economic trends as well as conditions
affecting individual borrowers, management's judgment of the AFLL is necessarily
approximate and imprecise. No assurances can be given that the ongoing
evaluation of the loan portfolio in light of economic conditions and other
factors then prevailing will not require significant future additions to the
AFLL, thus adversely affecting the operating results of RBC Centura.
In addition to nonperforming assets and past due loans shown in Table
5, management has identified approximately $45.0 million in loans that are
currently performing in accordance with contractual terms that management
believes may become nonperforming during the remaining term of the loan.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the six months ended June 30, 2001, excluding
gains and losses on sales of investment securities, totaled $86.1 million, up
$118,000 from the $86.0 million earned for the six months ended June 30, 2000.
As a percentage of total revenues (defined as the sum of net interest income,
taxable equivalent plus noninterest income excluding securities gains and
losses), noninterest income was 27.9 percent and 28.7 percent for the six months
ended June 30, 2001 and 2000, respectively. Including gains and losses on sales
of investment securities, noninterest income was $115.2 million and $62.2
million for the six months ended June 30, 2001 and 2000, respectively. Sales of
investment securities resulted in net realized losses of $23.8 million for the
six months ended June 30, 2000 compared with net realized gains of $29.1 in the
first six months of 2001. RBC Centura performed a restructuring of the
investment portfolio during the second quarter of 2001 in order to mitigate
interest rate risk, which resulted in gains of $26.8 million. Included in the
2000 net realized losses of $23.8 million were $22.1 million of securities
losses related to the restructuring of the investment portfolio acquired in the
Triangle merger.
Service charges on deposit accounts, comprising approximately 37.9
percent of noninterest income before gains and losses on sales of investment
securities, continue to be the largest component of noninterest income. Service
charges on deposits for the current period, despite a decline in average
deposits, increased $1.2 million to $32.6 million for the first six months of
2001 as compared to $31.3 million for the first six months of 2000. The main
driver of the increase was service fees on checking accounts, which were up $1.5
million when compared to the six months ended June 30, 2000. This increase was a
result of a change to RBC Centura's price structure in order to be more in line
with the current market. This increase was partially offset by a decrease in
non-sufficient fund fees of $337,000. Brokerage commissions were down $1.9
million during the first six months of 2001 when compared to the first six
months of 2000 due to the slowing economy and other market conditions.
24
Mortgage income for the first six months of 2001 was $10.6 million, an
increase of $1.4 million over the first six months of 2000. This increase was
mainly driven by origination fees, which were up $2.1 million, favorably
impacted by an increase in mortgage origination volume and refinancings in a
declining rate environment. The rate environment also had a positive influence
on mortgage loan sales, which modestly increased by $247,000, despite the
discontinuation of originations by NCS. See Note 11 of the consolidated
financial statements for additional information regarding NCS. Servicing
commissions and mortgage servicing rights amortization, components of mortgage
income, decreased $4.2 million and $3.2 million, respectively, for the six
months ended June 30, 2001, a direct result of the sale of approximately $2.1
billion of the mortgage servicing portfolio which occurred in the third quarter
of 2000.
Other noninterest income decreased $704,000 to $15.1 million for the
six months ended June 30, 2001 when compared to the first six months of 2000.
Included in other noninterest income for the six months ended June 30, 2000 are
gains of $10.2 million received on the sale of branches required by the Federal
Reserve and Department of Justice to be divested as a result of the merger with
Triangle. Approximately $4.9 million of this gain was offset by write-downs and
losses on investments classified in other assets and losses on sales of
securities from the investment portfolio, other than those losses associated
with the Triangle investment portfolio restructuring. Included in current period
other noninterest income was a $2.8 million gain which resulted from the sale of
a private company in which RBC Centura held an interest. Other noninterest
income in the current period also reflects an increase of $2.1 million in income
primarily the result of revenue generated from RBC Centura's investment in
bank-owned life insurance purchased in the first quarter of 2000. The remaining
difference was spread across the various noninterest income categories.
Noninterest expense, excluding merger-related and other significant
charges and the loss on an equity investment, totaled $209.1 million, an
increase of $34.7 million over the first six months of 2000. The main driver of
the increase was $19.1 million in litigation provisions for the period ended
June 5, 2001, a significant portion related to previously disclosed litigation.
Personnel expenses accounted for $9.1 million of the increase between comparable
periods. A significant contributor to the increase was additional incentive
based compensation as current year results are expected to meet defined targets.
The remainder of the increase was a result of other personnel costs, including
fringe benefits, relocation costs, and signing bonuses. Contributing $6.5
million to the increase was additional core deposit intangible and goodwill
amortization recorded as a result of Royal Bank's acquisition of RBC Centura.
For description of the merger related and other significant charges of $91.8
million and the loss on equity investment of $42.2 million see Notes 2 and 11,
respectively, of the consolidated financial statements.
INCOME TAX EXPENSE
Income tax expense recorded for the six months ended June 30, 2001 was
$7.7 million compared to $20.7 million in the prior year period. The decrease in
income tax expense was mainly the result of lower reported income as a result of
merger-related and other significant charges. See Note 2 of the consolidated
financial statements for more details regarding the merger-related and other
significant charges.
RECENT ACCOUNTING DEVELOPMENTS
In September of 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a replacement of FASB Statement No. 125"
("SFAS 140"). This statement replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." It
revises the standard for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS No. 125's provisions without reconsideration. RBC Centura
adopted the disclosure provisions related to the securitization of financial
assets on December 31, 2000. All transactions entered into after March 31, 2001
were be accounted for in accordance with this standard. This adoption did not
have a material impact on the RBC Centura.
25
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting, and prohibits the use of the pooling-of-interest
method for such transactions. The new standard also requires intangible assets
acquired in a business combination to be recognized as an asset apart from
goodwill if they meet certain criteria.
SFAS No. 142 applies to all goodwill and intangible assets acquired in
a business combination. Under the new standard, all goodwill, including goodwill
acquired before initial application of the standard, should not be amortized but
should be tested for impairment at least annually at the reporting unit level,
as defined in the standard. Intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Within six months of initial application
of the new standard, a transitional impairment test must be performed on all
goodwill. Any impairment loss recognized as a result of the transitional
impairment test should be reported as a change in accounting principle. In
addition to the transitional impairment test, the required annual impairment
test should be performed in the year of adoption of the standard.
The new standard is effective for fiscal years beginning after December
15, 2001, and must be adopted as of the beginning of a fiscal year. Retroactive
application is not permitted. RBC Centura will adopt the standard on January 1,
2002. Based on goodwill of $1.2 billion, RBC Centura would record approximately
$60 million annually of goodwill amortization. With the adoption of this
Statement this goodwill amortization will no longer be charged to earnings but
rather the intangible goodwill asset will be evaluated for impairment.
26
TABLE 1
- ------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
June 30, 2001 June 30, 2000 December 31, 2000
------------------------------------------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $2,233,051 28.6% $1,984,562 25.9% $2,067,962 27.0%
Commercial mortgage 1,380,687 17.7 1,432,978 18.7 1,432,226 18.7
Real estate construction 1,064,882 13.6 986,325 12.9 1,025,597 13.3
------------------------------------------------------------------------------
Commercial loan portfolio 4,678,620 59.9 4,403,865 57.5 4,525,785 59.0
Consumer 590,762 7.6 559,641 7.3 571,375 7.4
Residential mortgage 2,213,290 28.4 2,334,318 30.5 2,214,560 28.9
Leases 223,747 2.9 249,453 3.3 254,858 3.3
Other 99,423 1.2 108,935 1.4 105,113 1.4
- ------------------------------------------------------------------------------------------------------------------------------
Total loans $7,805,842 100.0% $7,656,212 100.0% $7,671,691 100.0%
==============================================================================================================================
Residential mortgage servicing
portfolio for others - Centura Portfolio $ 705,752 $3,036,791 $ 615,255
Residential mortgage servicing
portfolio for others - subservicing 324,838 162,014 2,243,745
==============================================================================================================================
TABLE 2
- -----------------------------------------------------------------------------------------------
AVERAGE DEPOSIT MIX FOR THE SIX MONTHS ENDED
June 30, 2001 June 30, 2000
---------------------------------------------
(Dollars in thousands) Balance % of Total Balance % of Total
- -----------------------------------------------------------------------------------------------
Demand, noninterest bearing $1,069,323 14.4% $1,117,918 14.5%
Interest checking 972,035 13.1 907,275 11.8
Money market 1,779,144 24.0 1,694,806 22.0
Savings 215,570 2.9 270,367 3.5
- -----------------------------------------------------------------------------------------------
Time deposits:
Certificates of deposit (less than) $100,000 2,328,332 31.4 2,467,541 32.0
Certificates of deposit (more than) $100,000 620,199 8.4 813,852 10.6
IRA 432,465 5.8 428,804 5.6
- -----------------------------------------------------------------------------------------------
Total time deposits 3,380,996 45.6 3,710,197 48.2
- -----------------------------------------------------------------------------------------------
Total average deposits $7,417,068 100.0% $7,700,563 100.0%
===============================================================================================
27
TABLE 3
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
It is generally not appropriate to combine pre and post "push down" periods;
however, for purposes of comparison only, the following table combines results
of operations from June 6, 2001 through June 30, 2001 with those of the
Predecessor for the April 1, 2001 through June 5, 2001.
Three months ended Three months ended
June 30, 2001 June 30, 2000
---------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 7,786,517 $ 157,333 8.03% $ 7,604,252 $ 175,651 9.19%
Taxable securities 3,036,383 52,215 6.88 2,484,962 41,719 6.72
Tax-exempt securities 38,870 754 7.76 38,489 847 8.80
Short-term investments 27,737 316 4.51 62,499 792 5.01
Mortgage loans held for sale 150,467 3,046 8.10 38,387 879 9.16
------------ ------------ ------------ ------------
Interest-earning assets, gross 11,039,974 213,664 7.71 10,228,589 219,888 8.56
Net unrealized gains (losses) on
available for sale securities 40,064 (66,639)
Other assets, net 1,398,263 926,041
------------ ------------
Total assets $ 12,478,301 $ 11,087,991
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest checking $ 982,758 $ 2,958 1.21% $ 870,212 $ 2,795 1.29%
Money market 1,791,181 14,791 3.31 1,676,769 19,142 4.59
Savings 216,032 587 1.09 259,689 886 1.37
Time 3,285,737 43,000 5.25 3,644,556 52,124 5.75
------------ ------------ ------------ ------------
Total interest-bearing deposits 6,275,708 61,336 3.92 6,451,226 74,947 4.67
Borrowed funds 2,022,449 21,187 4.14 1,477,197 22,126 5.93
Long-term debt 1,472,794 19,026 5.11 1,046,180 17,129 6.48
------------ ------------ ------------ ------------
Interest-bearing liabilities 9,770,951 101,549 4.15 8,974,603 114,202 5.09
Demand, noninterest-bearing 1,075,059 1,130,684
Other liabilities 224,044 113,385
Shareholder's equity 1,408,247 869,319
------------ ------------
Total liabilities and
shareholder's equity $ 12,478,301 $ 11,087,991
============ ============
Interest rate spread 3.56% 3.47%
Net yield on interest-
earning assets $ 11,039,974 $ 112,115 4.04% $ 10,228,589 $ 105,686 4.10%
============ ============ ============ ============
Taxable equivalent adjustment $ 2,467 $ 2,170
============ ============
28
TABLE 3, Continued
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
It is generally not appropriate to combine pre and post "push down" periods;
however, for purposes of comparison only, the following table combines results
of operations from June 6, 2001 through June 30, 2001 with those of the
Predecessor for the January 1, 2001 through June 5, 2001.
Six months ended Six months ended
June 30, 2001 June 30, 2000
---------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Loans $ 7,754,460 $ 331,321 8.53% $ 7,542,782 $ 343,872 9.07%
Taxable securities 2,965,173 104,389 7.04 2,615,910 87,256 6.67
Tax-exempt securities 37,541 1,540 8.20 70,075 2,815 8.04
Short-term investments 27,474 693 5.02 74,248 1,919 5.11
Mortgage loans held for sale 113,378 4,563 8.05 52,504 2,388 9.09
------------ ------------ ------------ ------------
Interest-earning assets, gross 10,898,026 442,506 8.11 10,355,519 438,250 8.43
Net unrealized (losses) gains on
available for sale securities 45,836 (70,540)
Other assets, net 1,178,617 925,525
------------ ------------
Total assets $ 12,122,479 $ 11,210,504
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest checking $ 972,035 $ 6,887 1.43% $ 907,275 $ 6,063 1.34%
Money market 1,779,144 33,289 3.77 1,694,806 37,555 4.46
Savings 215,570 1,213 1.13 270,367 1,908 1.42
Time 3,380,996 94,679 5.65 3,710,197 102,673 5.57
------------ ------------ ------------ ------------
Total interest-bearing deposits 6,347,745 136,068 4.32 6,582,645 148,199 4.53
Borrowed funds 1,992,039 47,756 4.77 1,542,624 45,690 5.86
Long-term debt 1,310,786 36,720 5.57 990,322 30,937 6.18
------------ ------------ ------------ ------------
Interest-bearing liabilities 9,650,570 220,544 4.58 9,115,591 224,826 4.93
Demand, noninterest-bearing 1,069,323 1,117,918
Other liabilities 205,069 112,288
Shareholder's equity 1,197,517 864,707
------------ ------------
Total liabilities and
shareholder's equity $ 12,122,479 $ 11,210,504
============ ============
Interest rate spread 3.53% 3.50%
Net yield on interest-
earning assets $ 10,898,026 $ 221,962 4.05% $ 10,355,519 $ 213,424 4.08%
============ ============ ============ ============
Taxable equivalent adjustment $ 5,049 $ 5,100
============ ============
29
TABLE 4
- ------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
At and for the six months At and for the year ended
ended June, ended December 31,
------------------------------------------------------
(Dollars in thousands) 2001 2000 2000
- ------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 104,275 $ 95,500 $ 95,500
Allowance related to loans transferred or sold -- -- (368)
Provision for loan losses 27,852 17,895 31,815
Loans charged off (31,471) (13,965) (28,161)
Recoveries on loans previously charged off 2,594 3,841 5,489
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (28,877) (10,124) (22,672)
- ------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 103,250 $ 103,271 $ 104,275
============================================================================================================
Loans at period-end(1) $ 7,805,842 $ 7,656,212 $ 7,671,691
Average loans(1) 7,754,460 7,542,782 7,606,163
Nonperforming loans(1) 57,997 41,286 48,475
Allowance for loan losses to total loans(1) 1.32% 1.35% 1.36%
Net charge-offs to average loans 0.75 0.27 0.30
Allowance for loan losses to nonperforming loans(1) 1.78x 2.50x 2.15x
============================================================================================================
(1) All periods presented exclude the nonperforming loans transferred to held for sale in fourth
quarter 2000.
TABLE 5
- ------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
June 30, December 31,
------------------------------------------------------
(Dollars in thousands) 2001 2000 2000
- ------------------------------------------------------------------------------------------------------------
Nonperforming loans(1) $ 57,997 $ 41,286 $ 48,475
Foreclosed property 8,369 4,643 5,897
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 66,366 $ 45,929 $ 54,372
============================================================================================================
Nonperforming assets (NPA's) to:(1)
Loans and foreclosed property 0.85% 0.60% 0.71%
Total assets 0.49 0.41 0.47
============================================================================================================
Accruing loans past due ninety days or greater $ 8,508 $ 13,251 $ 12,338
============================================================================================================
(1) All periods presented exclude the nonperforming loans transferred to held for sale in fourth
quarter 2000.
30
TABLE 6
- --------------------------------------------------------------------------------
CAPITAL RATIOS
Tier I Capital Total Capital Tier I Leverage
-------------- ------------- ---------------
June 30, 2001 9.9% 12.3% 7.5%
December 31, 2000 10.4 12.7 8.1
June 30, 2000 10.4 12.7 8.1
Minimum requirement 4.0 8.0 4.0
TABLE 7
- --------------------------------------------------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap and cap agreements at June 30, 2001 are summarized below:
Weighted Average Rate Weighted Avg.
During the Quarter Remaining Estimated Estimated
Notional --------------------- Contractual Fair Value Fair Value
(Dollars in thousands) Amount Received Paid Term (Years) Assets Liabilities
- --------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Corporation pays fixed/receives floating $ 51,004 4.16% 6.28% 10.2 $ 315 $ (1,246)
Corporation pays variable/receives fixed 146,060 6.48% 4.28% 9.5 2,301 (216)
-------------------------------------------------------------------------------
Total interest rate swaps $197,064 $ 2,616 $ (1,462)
===============================================================================
Other derivative financial instruments at June 30, 2001 are summarized below:
Fair
Value
Notional Assets
(Dollars in thousands) Amount (Liabilities)
- -------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
commitments to sell $ 3,639 $ 205
commitments to purchase 3,639 (189)
FORWARD CONTRACTS
commitments to sell 110,196 (709)
loan commitments 98,529 674
--------- ---------
Total forward contracts - assets $ 879
=========
Total forward contracts - liabilities $ (898)
=========
OTHER
Warrants N/A $ 910
=========
31
TABLE 8
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS
TAXABLE EQUIVALENT BASIS
It is generally not appropriate to combine pre and post "push down" periods;
however, for purposes of comparison only, the following table combines results
of operations from June 6, 2001 through June 30, 2001 with those of the
Predecessor for the January 1, 2001 through June 5, 2001.
Six months ended Three months ended
June 30, 2001 and 2000 June 30, 2001 and 2000
---------------------------------------------------------------------
Variance Variance
Income/ Attributable to Income/ Attributable to
Expense ----------------- Expense ---------------
(Dollars in thousands) Variance Volume Rate Variance Volume Rate
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $(12,551) $ 9,591 $(22,142) $(18,318) $ 4,378 $(22,696)
Taxable securities 17,133 12,106 5,027 10,496 9,460 1,036
Tax-exempt securities (1,275) (1,333) 58 (93) 8 (101)
Short-term investments (1,226) (1,181) (45) (476) (403) (73)
Mortgage loans held for sale 2,175 2,479 (304) 2,167 2,280 (113)
- -----------------------------------------------------------------------------------------------------------
Total interest income 4,256 21,662 (17,406) (6,224) 15,723 (21,947)
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking 824 447 377 163 346 (183)
Money market (4,266) 1,798 (6,064) (4,351) 1,235 (5,586)
Savings (695) (348) (347) (299) (135) (164)
Time (7,994) (9,206) 1,212 (9,124) (4,898) (4,226)
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (12,131) (7,309) (4,822) (13,611) (3,452) (10,159)
Borrowed funds 2,066 11,777 (9,711) (939) 6,814 (7,753)
Long-term debt 5,783 9,227 (3,444) 1,897 6,014 (4,117)
- -----------------------------------------------------------------------------------------------------------
Total interest expense (4,282) 13,695 (17,977) (12,653) 9,376 (22,029)
- -----------------------------------------------------------------------------------------------------------
Net interest income $ 8,538 $ 7,967 $ 571 $ 6,429 $ 6,347 $ 82
===========================================================================================================
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.
32
RBC CENTURA BANKS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
All claims against Centura Bank in an action filed in 1999 by Ingeborg
Staton, Mercedes Staton and trusts created by Ingeborg Staton and Mercedes
Staton were dismissed in March 2001. All claims against Centura Bank in two
related actions filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes
Staton, and trusts created by Ingeborg Staton and Mercedes Staton were settled
in April 2001 for an aggregate amount that Predecessor and Centura Bank consider
immaterial to their financial condition. In the aggregate, Predecessor recorded
$19.1 million in litigation provisions for the period ended June 5, 2001 for the
settled cases and certain other legal proceedings.
In addition, various other legal proceedings against RBC Centura and
its subsidiaries have arisen from time to time in the normal course of business.
RBC Centura believes liabilities arising from these proceedings, if any, will
have no material adverse effect on the financial position or results of
operations of RBC Centura or its subsidiaries, taken as a whole.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation of RBC Centura
(1) Articles of Incorporation of Rock Merger Subsidiary, Inc.
(2) Articles of Amendment of Rock Merger Subsidiary, Inc.
(3) Articles of Merger
4.1 Bylaws of RBC Centura
(b) Reports on Form 8-K:
(1) A report on Form 8-K dated April 12, 2001 was filed under Item 5,
Other Events, indicating Predecessor's announcement on April 12,
2001 of earnings for the quarter ended March 31, 2000.
(2) A report on Form 8-K dated June 5, 2001 was filed under Item 1,
change of Control of Registrant, indicating that Royal Bank of
Canada had acquired all of the outstanding shares of Centura
Banks, Inc.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
CENTURA BANKS, INC.
-------------------
Registrant
Date: August 14, 2001 By: /s/ CHARLES A. CASWELL
----------------------
Charles A. Caswell
Chief Financial Officer
34
RBC CENTURA BANKS, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of RBC Centura
(1) Articles of Incorporation of Rock Merger Subsidiary, Inc.
(2) Articles of Amendment of Rock Merger Subsidiary, Inc.
(3) Articles of Merger
4.1 Bylaws of RBC Centura
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO CHARLES CASWELL, CHIEF
FINANCIAL OFFICER OF RBC CENTURA BANKS, INC.
35