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 September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from _________ to ________
Commission File Number: 1-10646
CENTURA BANKS, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1688522
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(State of Incorporation) (IRS Employer Identification No.)
134 North Church Street, Rocky Mount, North Carolina 27804
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(Address of principal executive office) (Zip Code)
(252) 454-4400
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(Registrant's telephone number, including area code)
N/A
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 26,572,143
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(Class of Stock) (Shares outstanding as of October 31, 1998)
Exhibit Index on sequential page number 35.
<PAGE>
CENTURA BANKS, INC.
FORM 10-Q
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1998 and 1997, and December 31, 1997 4
Consolidated Statements of Income -
Three months and nine months ended September 30, 1998 and 1997 5
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1998 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30-31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Securities Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
<PAGE>
CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
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(In thousands, except share data) 1998 1997 1997
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<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 240,958 $ 303,724 $ 268,248
Due from banks, interest-bearing 18,344 15,114 13,873
Federal funds sold 1,234 7,774 29,552
Investment securities:
Available for sale (cost of $1,961,740, $1,448,475
and $1,623,330, respectively) 1,995,157 1,460,930 1,639,500
Held to maturity (market value of $102,730,
$233,938 and $191,689, respectively) 99,312 232,417 188,556
Loans 5,012,758 4,511,074 4,586,582
Less allowance for loan losses 67,105 62,282 64,279
- -----------------------------------------------------------------------------------------------------------------
Net loans 4,945,653 4,448,792 4,522,303
Bank premises and equipment 114,927 114,952 115,464
Other assets 389,263 307,578 347,934
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Total assets $ 7,804,848 $ 6,891,281 $ 7,125,430
=================================================================================================================
LIABILITIES
Deposits:
Demand, noninterest-bearing $ 895,160 $ 824,703 $ 816,475
Interest-bearing 4,169,495 3,973,992 4,076,372
Time deposits over $100 504,325 411,141 472,078
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Total deposits 5,568,980 5,209,836 5,364,925
Borrowed funds 1,006,809 732,013 733,192
Long-term debt 482,779 337,975 382,129
Other liabilities 127,892 81,993 106,848
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Total liabilities 7,186,460 6,361,817 6,587,094
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 25,000,000 shares
authorized; none issued - - -
Common stock, no par value,
50,000,000 shares authorized; shares issued
and outstanding of 26,560,264, 25,893,357
and 25,862,375, respectively 193,584 190,083 187,435
Common stock acquired by ESOP (143) (287) (251)
Unrealized securities gains, net 20,821 7,826 9,970
Retained earnings 404,126 331,842 341,182
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Total shareholders' equity 618,388 529,464 538,336
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Total liabilities and shareholders' equity $ 7,804,848 $ 6,891,281 $ 7,125,430
=================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CENTURA BANKS, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 116,524 $ 103,936 $ 337,615 $ 298,163
Investment securities:
Taxable 29,841 26,856 87,685 76,644
Tax-exempt 457 596 1,591 1,875
Short-term investments 348 456 1,042 1,271
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Total interest income 147,170 131,844 427,933 377,953
INTEREST EXPENSE
Deposits 51,326 46,904 150,092 134,719
Borrowed funds 11,481 11,150 34,231 29,824
Long-term debt 7,701 6,331 21,908 16,600
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Total interest expense 70,508 64,385 206,231 181,143
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NET INTEREST INCOME 76,662 67,459 221,702 196,810
Provision for loan losses 4,041 3,486 11,069 9,569
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Net interest income after provision for loan losses 72,621 63,973 210,633 187,241
NONINTEREST INCOME
Service charges on deposit accounts 12,786 10,744 34,909 29,588
Credit card and related fees 2,333 1,951 5,927 4,721
Other service charges, commissions and fees 7,556 5,424 22,577 15,766
Fees for trust services 2,400 1,830 6,900 5,730
Mortgage income 4,691 2,801 12,516 8,268
Other noninterest income 5,534 5,474 17,325 13,651
Securities gains, net 341 161 570 35
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Total noninterest income 35,641 28,385 100,724 77,759
NONINTEREST EXPENSE
Personnel 34,060 28,608 98,579 83,521
Occupancy 4,084 3,618 11,794 10,399
Equipment 5,191 5,455 15,711 15,920
Foreclosed real estate losses and related
operating expense 336 265 930 987
Other operating 26,552 21,685 75,982 63,025
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Total noninterest expense 70,223 59,631 202,996 173,852
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Income before income taxes 38,039 32,727 108,361 91,148
Income taxes 12,904 11,027 36,695 31,594
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NET INCOME $ 25,135 $ 21,700 $ 71,666 $ 59,554
========================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.95 $ 0.84 $ 2.72 $ 2.31
Diluted 0.93 0.82 2.67 2.26
========================================================================================================
AVERAGE COMMON SHARES OUTSTANDING
Basic 26,549,022 25,842,902 26,364,975 25,779,234
Diluted 27,030,789 26,415,293 26,873,328 26,303,968
========================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Centura Banks, Inc. and Subsidiaries
Nine months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Unrealized
Stock Securities Total
Common Stock Acquired Gains, Retained Shareholders'
Shares Amount by ESOP Net Earnings Equity
----------- ---------- -------------------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 25,862,375 $ 187,435 $ (251) $ 9,970 $ 341,182 $ 538,336
Net income - - - - 71,666 71,666
Common stock issued:
Stock option plans and stock awards 116,905 2,217 - - - 2,217
Acquisitions 625,984 6,179 - - 6,713 12,892
Redemption of common stock (45,000) (3,041) - - - (3,041)
Unrealized securities gains, net - - - 10,851 - 10,851
Other - 794 108 - - 902
Cash dividends - - - - (15,435) (15,435)
----------- ---------- -------- --------- ---------- ----------
Balance, September 30, 1998 26,560,264 $ 193,584 $ (143) $ 20,821 $ 404,126 $ 618,388
=========== ========== ======== ========= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Centura Banks, Inc. and Subsidiaries
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
(Dollars in thousands) 1998 1997
<S> <C> <C>
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 71,666 $ 59,554
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 11,069 9,569
Depreciation on assets under operating leases 9,491 5,345
Depreciation and amortization, excluding depreciation on assets under operating leases 26,794 22,782
Decrease in deferred income taxes 8,902 6,521
Loan fees deferred, net 608 97
Bond premium amortization and discount accretion, net 662 1,730
Gain on sales of investment securities (570) (35)
Loss on sales of foreclosed real estate 137 -
Gain on sales of equipment under lease (4,525) (1,372)
Proceeds from sales of mortgage loans held for sale 540,455 263,455
Originations, net of principal repayments, of mortgage loans held for sale (571,016) (267,634)
Increase in accrued interest receivable (4,301) (6,755)
Decrease in accrued interest payable 4,336 1,453
Net increase in other assets and other liabilities (56,821) (8,880)
----------- ----------
Net cash provided by operating activities 36,887 85,830
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (310,314) (238,036)
Purchases of:
Securities available for sale (881,534) (907,184)
Securities held to maturity - (45,583)
Premises and equipment (10,906) (12,774)
Other - (50,000)
Proceeds from:
Sales of securities available for sale 176,139 455,620
Maturities and issuer calls of securities available for sale 395,822 320,679
Maturities and issuer calls of securities held to maturity 89,235 69,136
Sales of foreclosed real estate 1,730 2,691
Dispositions of premises and equipment 2,062 1,509
Dispositions of equipment used in leasing activities 13,389 3,666
Cash acquired, net of cash paid, in purchase acquisitions 26,664 106,871
----------- ----------
Net cash used by investing activities (497,713) (293,405)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 62,090 163,218
Net increase in short-term borrowings 273,420 46,722
Proceeds from issuance of long-term debt 199,472 123,210
Repayment of long-term debt (100,540) (96,037)
Cash dividends paid (22,416) (20,373)
Proceeds from issuance of common stock, net 1,281 3,025
Redemption of common stock (3,041) -
Other (577) (1,469)
----------- ----------
Net cash provided by financing activities 409,689 218,296
----------- ----------
(Decrease) increase in cash and cash equivalents (51,137) 10,721
Cash and cash equivalents at January 1 311,673 315,891
----------- ----------
Cash and cash equivalents at September 30 $ 260,536 $ 326,612
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the nine
months for:
Interest $ 201,895 $ 179,690
Income taxes 14,033 17,215
Noncash transactions:
Stock issued in purchase acquisitions and other stock issuances, net 12,915 -
Unrealized securities gains (losses), net of taxes 20,821 7,826
Other 1,043 1,325
Loans transferred to foreclosed property 1,343 4,650
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Centura Banks, Inc. and Subsidiaries
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Centura Banks, Inc. ("Centura") and its wholly-owned subsidiaries
Centura Bank (the "Bank") and Centura Capital Trust I. The Bank also has various
wholly-owned subsidiaries. The interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements. All significant intercompany transactions are eliminated
in consolidation and all adjustments considered necessary for a fair
presentation of the results for the interim periods presented have been included
(such adjustments are normal and recurring in nature).
The information contained in the consolidated financial statements and
accompanying footnotes in Centura's annual report on Form 10-K should be
referenced when reading these unaudited interim financial statements. Operating
results for the three-month and nine-month periods ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
Note 2: Mergers and Acquisitions
Acquisition activity through September 30, 1998 and for 1997 is summarized
below. Data for the completed transactions is as of the
date of acquisition.
<TABLE>
<CAPTION>
Acquisition Banking Shares
Institution Date Offices Assets Loans Deposits Issued
Completed Acquisitions ___________ ___________ _______ ______ _____ ________ ______
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
1998
Moore and Johnson, Inc. ("Moore and Johnson") (2) 1/30/98 ---- $ 3 ---- ---- 48,950
Pee Dee Bankshares, Inc. ("Pee Dee") (1) 3/27/98 6 $138 $ 93 $125 577,034
Deposit assumption from NBC Bank, FSB (2) 7/24/98 4 $ 17 $ 4 $ 17 ----
1997
Deposit assumption from Branch Banking and Trust
Company and United Carolina Bank ("BB&T") (2) 8/15/97 13 $313 $171 $313 ----
Betts & Company ("Betts") (2) 11/3/97 ---- $ 1 ---- ---- 44,443
Deposit assumption from NationsBank, N.A. 11/13/97
("NationsBank") (2) 5 $ 88 $ 52 $ 86 ----
Deposit assumption from First Union National Bank
("First Union") (2) 12/5/97 ---- $ 16 ---- $ 16 ----
(1) Merger accounted for as a pooling-of-interests
(2) Acquisition accounted for as a purchase
</TABLE>
On January 30, 1998, Centura completed its acquisition of Moore and Johnson
located in Raleigh, North Carolina. Under the terms of the acquisition, the
shareholders of Moore and Johnson received 48,950 shares of Centura common stock
for their interests in Moore and Johnson. The acquisition was accounted for as a
purchase with Centura recording $3.0 million of goodwill. Moore and Johnson
offers a full range of insurance products and will continue to operate through
Centura Insurance Services, Inc., a wholly-owned subsidiary of Centura Bank.
<PAGE>
On March 27, 1998, Centura completed its merger with of Pee Dee Bankshares, Inc.
and its wholly-owned subsidiary, Pee Dee State Bank (collectively, Pee Dee)
headquartered in Timmonsville, South Carolina. Pee Dee represents Centura's
entrance into the South Carolina banking market. Under the terms of the
agreement, the shareholders of Pee Dee received 577,034 shares of Centura common
stock for the issued and outstanding common shares of Pee Dee. Although the
transaction was accounted for as a pooling-of-interests, the merger was not
material and, accordingly, prior period financial statements have not been
restated.
On July 24, 1998, Centura assumed approximately $17 million of deposits from NBC
Bank, FSB. The transaction added approximately $1.6 million in goodwill. Located
in the Winston-Salem area of North Carolina, these supermarket locations
complement Centura's existing supermarket delivery channel.
During 1997, Centura completed three deposit assumption acquisitions. In
aggregate, the acquisitions added approximately $415 million in deposits and
$223 million in loans in the second half of 1997. All locations acquired were
located in North Carolina. The combined purchase price exceeded the combined
fair value of the net assets acquired and accordingly, goodwill of approximately
$43.2 million was recorded. The unamortized balance of this goodwill is included
in other assets. In addition, Centura purchased Betts, an independent insurance
agency based in Rocky Mount, North Carolina. Betts offers all forms of property
and liability insurance, as well as medical malpractice and surety insurance.
Betts merged into and continues to offer its services through Centura Insurance
Services, Inc., a wholly-owned subsidiary of Centura Bank. Goodwill of $2.6
million was recorded in connection with the Betts acquisition.
For the acquisitions accounted for under the purchase method of accounting, the
financial position and results of operations relative to each transaction are
included in the consolidated financial statements since the date of
consummation.
On October 28, 1998, Centura announced the execution of a definitive agreement
to merge with First Coastal Bankshares, Inc.("First Coastal") of Virginia Beach,
Virginia. Pursuant to the terms of the agreement, First Coastal shareholders
will receive 0.3400 shares of Centura common stock for each share of First
Coastal common stock as long as Centura's closing stock price for the ten days
prior to closing of the transaction is between $58.7563 and $79.4938. The
exchange ratio is subject to adjustment should the average closing price fall
below $58.7563 or exceed $79.4938. First Coastal has also granted Centura an
option to purchase under certain conditions up to 19.9 percent of First
Coastal's outstanding shares of common stock. The transaction is expected to be
accounted for as a pooling-of-interests and is subject to shareholder and
regulatory approvals and the satisfaction of certain other conditions. First
Coastal operates 17 locations in the Hampton Roads region of Virginia. At
September 30, 1998, First Coastal had total assets of approximately $578
million. It is anticipated that the merger will occur during the first quarter
of 1999.
Note 3: Reclassifications
Certain items in the September 30, 1997 and the December 31, 1997 consolidated
financial statements have been reclassified to conform with the September 30,
1998 presentation. Such reclassifications had no impact on net income or
shareholders' equity.
<PAGE>
Note 4: Adoption of Statements of Financial Accounting Standards ("SFAS")
On January 1, 1998, Centura adopted SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") which establishes standards for the reporting and
display of comprehensive income and its components in a full set of financial
statements. Comprehensive income is defined as the change in equity during a
period for non-owner transactions and is divided into net income and other
comprehensive income. Other comprehensive income includes revenues, expenses,
gains, and losses that are excluded from earnings under current accounting
standards. This statement does not change or modify the reporting or display in
the income statement. SFAS No. 130 is effective for interim and annual periods
beginning after December 15, 1997. Comparative financial statements provided for
earlier periods are required to be reclassed to reflect the application of this
statement.
For the nine months ended September 30, 1998 and 1997, total comprehensive
income, consisting of net income and unrealized securities gains and losses, net
of taxes, was $82.5 million and $65.8 million, respectively. For the three
months ended September 30, 1998 and 1997, total comprehensive income was $35.8
million and $25.9 million, respectively.
For the year ended December 31, 1997, Centura adopted SFAS No. 128, "Earnings
Per Share" ("SFAS No. 128"). The standard provides guidance for computing and
presenting earnings per share. In accordance with this statement, primary net
income per common share is replaced with basic income per common share which is
calculated by dividing net income by the weighted-average number of common
shares outstanding for the period. Fully diluted net income per common share is
replaced with diluted net income per common share reflecting the maximum
dilutive effect of common stock issuable upon exercise of stock options. The
difference between the weighted average shares outstanding used in the basic net
income per share computation and the weighted average shares outstanding used in
the diluted net income per share calculation is attributable to shares which
arise from the assumed exercise of dilutive stock options. Prior period per
share data has been restated to reflect the adoption of SFAS No. 128.
Note 5: Commitments and Contingencies
Registrant's subsidiary, Centura Bank ("Bank"), is a co-defendant in two
actions consolidated for discovery in the Superior Court of Forsyth County,
North Carolina, in which it is alleged that Bank breached its duties and
committed other violations of law (i) as depository of substantial sums of money
allegedly converted by the personal and financial advisors of the owners of such
money and (ii) in connection with the creation of charitable trusts established
with a portion of the funds. The cases consolidated into the subject case
(Philip A. R. Staton, Ingeborg Staton, Mercedes Staton, et. als. v. G. Thomas
Brame, Jerr Russell (formerly Jerri Brame), Centura Bank, et als.) were
originally brought in 1996; however, no claim for a specific monetary amount was
made until 1998, in connection with motion practice in the matter. The amount of
Plaintiffs' claims are material to Registrant and its subsidiaries taken as a
whole. Registrant and Bank believe that Bank has meritorious defenses to all
claims asserted in these cases and Bank is defending the cases vigorously.
In a separate and related case (Piedmont Institute of Pain Management; T. Stuart
Meloy, M.D.; Nancy J. Faller, D.O.; v. Poyner & Spruill, L.L.P. and Centura
Bank, consolidated for discovery with the Staton cases in the Superior Court of
Forsyth County, North Carolina, Bank is alleged to have provided plaintiffs with
false information regarding the establishment and funding of a medical clinic
failed to exercise reasonable care or competence in obtaining such information
and committed other violations of law. Plaintiffs allege that they were damaged
as a result and seek specific performance or recovery of money damages in an
amount that is material to Registrant and its subsidiaries taken as a whole.
Registrant and Bank believe Bank has meritorious defenses to all claims asserted
in this case and Bank is defending the case vigorously.
<PAGE>
CENTURA BANKS, INC.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Nine Months Ended September 30, 1998
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Centura Banks, Inc. ("Centura"). Centura is a bank holding company
operating in North Carolina, Virginia and South Carolina. Through Centura Bank
and its subsidiaries, Centura seeks to not only become the primary provider of
financial services for each of its customers but to also deliver the services
through convenient channels as evidenced by the Centura Highway telephone
banking center, supermarket locations, and home banking through leading online
money management packages.
Much of the financial discussion that follows refers to the impact of Centura's
merger and acquisition activity. See Note 2 of the notes to consolidated
financial statements for detail on the acquisitions. Centura continually
evaluates acquisition opportunities and will continue seeking to acquire healthy
thrift and banking institutions as well as other financial services providers
allowed under current regulatory guidelines.
SUMMARY
Net income for the nine months ended September 30, 1998 totaled $71.7 million,
an increase of $12.1 million or 20.3 percent over the $59.6 million earned
during the same period of 1997. On a diluted per share basis, net income was
$2.67, an increase of $0.41 over the nine months ended September 30, 1997.
Operating results for the first nine months of 1998 generated an annualized
return on assets of 1.29 percent and an annualized return on equity of 16.42
percent compared to 1.23 percent and 15.83 percent, respectively, for the
comparable period in 1997. Key factors responsible for these results were as
follows:
o Taxable equivalent net interest income increased $24.5 million to $227.2
million for the nine months ended September 30, 1998 as compared to $202.6
million for the same period in 1997. This increase was primarily
attributable to an $843.7 million increase in average earning assets
between the two periods.
o Average loans increased to $4.9 billion for the nine months ended September
30, 1998 compared to $4.2 billion for the same period of 1997. Deposits
averaged $5.4 billion for the first nine months of 1998, an increase of
$659.3 million over the prior year period. Deposit and loan growth averaged
13.8 percent and 14.9 percent, respectively.
o Centura earned $100.7 million of noninterest income for the nine-month
period ended September 30, 1998 which represented a 29.5 percent increase
over the $77.8 million earned for the comparable prior year period. Each
significant noninterest income area demonstrated growth between the
periods. Non-interest expense growth was held to 16.8 percent between the
periods with noninterest expenses totaling $203.0 million and $173.9
million, respectively, for the nine months ended September 30, 1998 and
1997.
o Nonperforming assets of $32.1 million at September 30, 1998 increased $3.5
million from September 30, 1997, representing 0.41 percent and 0.42 percent
of total assets, respectively. The majority of this increase was in the
leasing portfolio.
<PAGE>
o The allowance for loan losses was $67.1 million, representing 1.34 percent
of total loans at September 30, 1998, compared to $62.3 million and 1.38
percent at September 30, 1997. Gross charge-offs were $13.0 million, up
$2.5 million from the $10.5 million recorded for the prior year period.
Recoveries totaled $2.7 million and $2.1 million, respectively, for the
nine months ended September 30, 1998 and 1997. The provision for loan
losses was $11.1 million for the nine months ended September 30, 1998
versus $9.6 million for the same period of 1997.
INTEREST-EARNING ASSETS
Interest-earning assets averaged $6.8 billion for the nine months ended
September 30, 1998, an increase of $843.7 million or 14.2 percent over the
average earning assets of $5.9 billion for the nine months ended September 30,
1997. The primary components of the increase were loans and leases, which grew
$629.7 million and the investment portfolio, which increased $217.7 million.
At September 30, 1998, earning assets were $7.1 billion, representing a $899.5
million or 14.4 percent increase over the level at September 30, 1997. For
additional information on average interest-earning assets, refer to Table 3,
"Net Interest Income Analysis, Taxable Equivalent Basis," and Table 8, "Net
Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis."
Loans
Loans at September 30, 1998 were $5.0 billion, an increase of $501.7 million, or
11.1 percent over the $4.5 billion at September 30, 1997. Excluding the fourth
quarter 1997 acquisitions and the 1998 Pee Dee transaction, growth between the
periods was approximately 7.9 percent. Table 1 summarizes total loans
outstanding and the mix of loans being held. Loan growth was generally present
for each category. The commercial portfolio represented 52.0 percent and 50.9
percent, respectively, of total loans at September 30, 1998 and 1997. Of these
commercial loans, over 90 percent are secured.
Loans averaged $4.9 billion for the nine months ended September 30, 1998,
increasing 14.9 percent over the average loan volume of $4.2 billion for the
comparable prior year period. Loans of approximately $93 million were added this
year through the acquisition of Pee Dee. Excluding the impact of acquisition
activity, average loan growth was approximately 9.1 percent between the two
periods.
Average loan growth was driven primarily by volume generated in the commercial
loan portfolio. On average, commercial loans increased $396.6 million between
the two nine-month periods. Consumer loans (equity lines, residential mortgages,
installment loans, and other credit line loans) were higher, on average, by
$235.4 million or 16.9 percent over the prior year period. Growth in installment
type loans, influenced by a fourth quarter 1997 loan campaign, was responsible
for over half of the increase. Acquisition activity also contributed to the
growth between the periods. The loan campaign involved direct marketing and
utilized Centura's normal underwriting guidelines. Average loans represented
71.6 percent of average earning assets for the nine months ended September 30,
1998, increasing 40 basis points from the 71.2 percent for the same prior year
period.
Credit is extended by Centura Bank almost exclusively to customers in its market
areas of North Carolina, the Hampton Roads area of Virginia, and South Carolina.
Although not a significant part of Centura's lending activities, foreign credit
is extended on a case by case basis and is subject to the same credit and
approval process as other commercial loans including an assessment of country
risk. Management discourages loans to high technology start-up companies, to
highly speculative real estate development projects, and to participation in
highly leveraged transactions. The loan portfolio is reviewed on an on-going
basis to maintain diversification by industry, geography, type of loan,
collateral and borrower.
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Loans generated $338.1 million of taxable equivalent interest income for the
nine months ended September 30, 1998 compared to $298.5 million for the same
period last year. Growth in the average loan volume was responsible for $43.9
million of the increase while the rate environment impacted interest income
negatively by $4.2 million. The average yield on the loan portfolio declined 13
basis points to 9.24 percent. The average yield on the mortgage loan portfolio
experienced the greatest decline, decreasing 70 basis points to 7.40 percent as
compared to the prior year period. See Table 3, "Net Interest Income
Analysis-Taxable Equivalent Basis," for further detail.
Investment Securities
Investment securities represent the second largest component of earning assets.
At September 30, 1998, investment securities totaled $2.1 billion, an increase
of $401.1 million or 23.7 percent over the $1.7 billion at September 30, 1997.
On average, the investment portfolio grew $217.7 million to $1.9 billion for the
nine-month period ending September 30, 1998 as compared with the same prior year
period. As a percentage of average earning assets, the investment portfolio
represented 28.0 percent and 28.3 percent, respectively, for the nine months
ended September 30, 1998 and 1997.
The investment portfolio consists primarily of securities for which an active
market exists. Centura's policy is to invest primarily in securities of the U.S.
Government and its agencies and in other high grade fixed income securities so
as to balance liquidity risk, credit risk, and price risk with an acceptable
market return in the investment portfolio. Accordingly, at September 30, 1998,
approximately 97 percent of the total investment portfolio consisted of
obligations of the U.S. Government and its agencies and other investment grade
fixed income securities.
The held to maturity ("HTM") investment portfolio declined $133.1 million
compared to the same prior year period to $99.3 million at September 30, 1998.
The decrease was due to the scheduled maturities within the portfolio. At
September 30, 1998, the fair value of the HTM portfolio was $102.7 million,
representing $3.4 million more than amortized cost.
The available for sale ("AFS") investment portfolio, which comprises the
remainder and majority of the securities portfolio, is reported at estimated
fair value. These securities are used as a part of Centura's asset/liability
management strategy and may be sold in response to changes in interest rates,
changes in prepayment risk, the need to manage regulatory capital and other
factors. At September 30, 1998, AFS investments were $2.0 billion, up $534.2
million compared with $1.5 billion at September 30, 1997. The recorded fair
value of the AFS portfolio exceeded the amortized cost by $33.4 million at
September 30, 1998, which amount has been recorded, net of tax, as a separate
component of shareholders' equity. Marking the AFS securities to fair value at
September 30, 1997, resulted in an unrealized gain of $12.5 million, pretax. Net
realized gains of $570,000 were generated during the first nine months of 1998
from sales and issuer call activity compared to net gains of $35,000 during the
comparable 1997 period.
Investment securities contributed $94.2 million in taxable equivalent interest
income for the nine months ended September 30, 1998, an increase of $10.2
million over the $84.0 million earned in the comparable period of 1997. The
average investment yield was unchanged between the two periods at 6.68 percent.
FUNDING SOURCES
Total funding sources averaged $6.7 billion for the nine month period ended
September 30, 1998, a $872.9 million or 14.9 percent increase from the average
volume of $5.9 billion for the comparable 1997 period. Funding sources include
total deposits, short-term borrowings and long-term debt. For additional
information on funding sources refer to Table 3, "Net Interest Income Analysis,
Taxable Equivalent Basis", and Table 8, "Net Interest Income and Volume/Rate
Analysis, Taxable Equivalent Basis".
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Deposits
The deposit base at September 30, 1998 of $5.6 billion was up $359.1 million, or
6.9 percent, from the $5.2 billion level held at September 30, 1997.
For the first nine months of 1998, average deposits increased $659.3 million to
$5.4 billion, or 13.8 percent over the comparable 1997 period. Average money
market accounts grew $266.9 million, average certificates of deposit increased
$167.2 million while average interest checking and noninterest-bearing deposits
were higher by $93.1 million and $125.6 million, respectively. Centura's deposit
mix trends demonstrate a slight shift from time deposits to money market
accounts. On average, money market accounts represented 18.9 percent of the
average deposit mix for the nine months ended September 30, 1998 compared to
only 16.0 percent for the same period in 1997. Time deposits represented 47.2
percent of total average deposits for the nine-month period ended September 30,
1998 compared to 50.2 percent for the comparable 1997 period. The growth in
money market accounts is due to the product's characteristics which include
offering competitive rates while providing greater customer flexibility than the
traditional certificates of deposits. Transaction accounts (interest checking
and non-interest bearing demand deposits) on average increased 16.4 percent
between the two nine-month periods and represented 28.5 percent and 27.8
percent, respectively, of average total deposits for the nine months ended
September 30, 1998 and 1997. For additional information on deposits, see Table
2, "Average Deposit Mix for the Nine Months Ended." Excluding acquisition
activity, total average deposits increased 4.6 percent over the nine months
ended September 30, 1997.
Interest expense on deposits increased $15.4 million to $150.1 million for the
nine months ending September 30, 1998 versus $134.7 million for the comparable
period of 1997. The average rate paid for deposits decreased 6 basis points as
shown in Table 3, "Net Interest Income Analysis-Taxable Equivalent Basis". The
average rate paid for all deposits types, excluding money market accounts,
declined between the two nine-month periods. The 18 basis point increase in the
cost of money market accounts was primarily attributable to changes in product
pricing. As detailed further in Table 8, $16.7 million of the increase in
deposit interest expense was due to increased volume while the rates paid for
deposits resulted in a decrease of $1.3 million.
Other Funding Sources
The availability of alternative funding sources and slower deposit growth in
recent periods influenced management to increase the utilization of nondeposit
funding sources. The use of both short-term and long-term debt continues to be
in line with management's asset/liability strategies. Consequently, borrowed
funds, predominantly Federal funds purchased, securities sold under repurchase
agreements and master notes, averaged $858.2 million for the nine months ended
September 30, 1998, compared to the $756.6 million average volume for the period
ending September 30, 1997. At September 30, 1998 and 1997, borrowings totaled
$1.0 billion and $732.0 million, respectively. The increase was driven by an
increase in federal funds purchased. Interest expense on borrowings increased by
$4.4 million, primarily due to higher volume. The average rate paid for these
funds increased 6 basis points over the comparable 1997 period to 5.26 percent.
At September 30, 1998, long-term debt, consisting predominantly of FHLB
advances, Capital Securities and notes secured by lease rentals, totaled $482.8
million as compared to $338.0 million at September 30, 1997. The majority of the
growth resulted from increased borrowings of $163.0 million from the Federal
Home Loan Bank of Atlanta. The average amount of long-term debt increased $111.9
million to $445.0 million for the first nine months of 1998 compared to $333.1
million for the comparable prior year period. Rates paid for long-term funding
decreased to 6.49 percent, an 8 basis points decline over the prior year period.
<PAGE>
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the nine months ended September 30, 1998 was $221.7
million, up $24.9 million from the $196.8 million earned during the nine months
ended September 30, 1997. Net interest income on a fully taxable equivalent
basis was $227.2 million for the first nine months of 1998 compared to $202.6
million for the same period in 1997, an increase of 12.1 percent. As indicated
on Table 8, "Net Interest Income and Volume/Rate Analysis-Taxable Equivalent
Basis", the distribution of balance sheet growth contributed $27.6 million to
taxable equivalent net interest income with the rate environment impacting
taxable equivalent net interest income unfavorably by $3.0 million.
The net interest margin declined 7 basis points between the two nine-month
periods to 4.45 percent. The interest rate spread, the difference between the
average earning asset yield and the average rate paid on interest-bearing
liabilities, decreased 6 basis points to 3.87 percent for the nine months ended
September 30, 1998. The earning asset yield was 8.51 percent for the nine months
ended September 30, 1998, an 8 basis point decline from the comparable prior
year period. The cost of interest bearing liabilities decreased 2 basis points
to 4.64 percent. The decline in the net interest margin is, in part, due to
average loan yields declining faster than the average rates on the corresponding
funding sources.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
For the nine months ended September 30, 1998, provision for loan losses totaled
$11.1 million, representing a $1.5 million increase over the comparable 1997
period. Provision has increased in response to loan growth and increases in
charge-off trends. Net charge-offs totaled $10.3 million for the first nine
months of 1998 while net charge-off activity for the same period in 1997
resulted in $8.4 million of net charge-offs. Segmented based on regulatory
definitions, the most significant increases in net charge-offs were in credit
cards and other consumer lending which experienced an increase in net
charge-offs of $1.5 million between the two nine-month periods. Leasing
charge-offs increased by $622,000 while commercial loans charge-offs declined
slightly. Net charge-offs as a percent of average loans and leases, on an
annualized basis were 0.28 percent and 0.27 percent, respectively, for the nine
months ended September 30, 1998 and 1997.
The allowance for loan losses was $67.1 million at September 30, 1998,
representing 1.34 percent of loans outstanding, compared to $62.3 million, or
1.38 percent of loans outstanding at September 30, 1997, and compared to $64.3
million or 1.40 percent of loans outstanding at December 31, 1997. After taking
into consideration the growth of the loan portfolio and levels of current
problem assets and potential problem loans, management believes the allowance
for loan losses to be adequate. Regulators, as part of their examination
process, periodically review the allowance for loan losses and may require
Centura to recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their review. For
additional information with respect to the activity in the allowance for loan
losses, see Table 4 "Analysis of Allowance for Loan Losses." At September 30,
1998, the allowance for loan losses was 2.36 times nonperforming loans, down
from 2.66 times at September 30, 1997 and 2.71 times at December 31, 1997.
Table 5, "Nonperforming Assets and Past Due Loans," discloses the components and
balances of nonperforming assets. Nonperforming assets increased $3.5 million to
$32.1 million at September 30, 1998 and represented 0.41 percent of total assets
at the end of the period. Nonperforming loans represented $5.1 million of the
increase while foreclosed properties declined $1.6 million. Nonperforming assets
were $28.6 million at September 30, 1997, or 0.42 percent of total assets. At
December 31, 1997, nonperforming assets were $27.9 million or 0.39 percent of
total assets. The increase in the nonperforming loans between the periods was
principally from the leasing portfolio. Foreclosed property totaled $3.6
million, $5.2 million, and $4.2 million at September 30, 1998, September 30,
1997, and December 31, 1997, respectively.
<PAGE>
Accruing loans past due ninety or more days were $10.1 million, $10.9 million
and $7.0 million at September 30, 1998, September 30, 1997 and December 31,
1997, respectively, which represented 0.20 percent, 0.24 percent and 0.15
percent of outstanding loans, respectively.
While the loan portfolio is evaluated by sector and credit quality analysis, and
existing credit policies are reviewed in light of current economic conditions,
management recognizes that growth in the loan portfolio opens opportunity for
new credit problems to develop. The impact of ever-changing economic conditions
and changes to interest rates and/or inflation on the operations of Centura's
customers is unknown, but gives opportunity for increased nonperforming asset
levels. In addition to the nonperforming assets and past due loans shown in
Table 5, management believes that an estimated $10 to $15 million of additional
nonperforming and past due loans may exist which are currently "performing" in
accordance with their contractual terms.
NONINTEREST INCOME AND EXPENSE
Noninterest income ("NII") increased $23.0 million, or 29.5 percent, to $100.7
million for the nine months ended September 30, 1998 as compared with the same
period in 1997. Centura experienced growth in all significant areas of NII. The
percentage of total revenues derived from NII, taxable equivalent, was 30.72
percent for the first nine months of 1998 compared to 27.73 percent for the
comparable prior year period. Total revenues are defined as NII plus net
interest income.
Service charges on deposits, the largest component of NII, increased $5.3
million between the two nine-month periods. This increase was principally the
result of growth in the deposit base, a late 1997 increase in non-sufficient
funds ("NSF") charges, and the reduction of waived service charges. Insurance
and brokerage commissions were higher by $4.9 million or 48.5 percent. Insurance
commissions represented $4.0 million of the increase particularly due to the
timing of the Betts and Moore and Johnson agency acquisitions, while the
remaining increase of $889,000 was generated from increased volume in brokerage
activities. Mortgage income (composed of servicing revenues, origination fees,
servicing release premiums, and net gains or losses on the sales of mortgage
loans) increased $4.2 million, or 51.4 percent, between the comparable
nine-month periods, particularly due to strong mortgage loan originations in
1998 and subsequent secondary market activity. Net operating lease income,
credit card fees and trust fees were up $2.2 million, $1.2 million and $1.2
million, respectively, driven primarily by greater volumes. Other NII, which
includes such items as earnings from Centura's investment in First Greensboro
Home Equity, Inc. and bank-owned life insurance, increased $1.4 million compared
to the same period in 1997.
Noninterest expense ("NIE") increased 16.8 percent, or $29.1 million to $203.0
million compared to the nine-month period in 1997. Personnel expenses, the
largest component of noninterest expense, contributed $15.1 million to this
increase, influenced strongly by additional personnel related to the 1997 and
early 1998 acquisitions and to increases in incentives as a result of achieving
target performance measures.
Fees for outsourced services, i.e. the outsourcing of various functions such as
items processing, property management, and call processing generated from
Centura's telephone banking center, are strongly volume based, and increased
$3.6 million over the nine months ending September 30, 1997. The increase was
due to greater volumes associated with growth in the customers base and the
integration of new customers gained through acquisition as well as additional
locations. Expenses related to Year 2000 efforts also impacted total outsourced
services. The amortization of intangibles increased $2.2 million for the first
nine months of 1998 compared to the same period last year due to the increased
goodwill recorded for the late 1997 and 1998 purchase acquisitions.
Occupancy and equipment expense of $27.5 million for year to date 1998 increased
$1.2 million over the comparable 1997 period, principally in rent and
depreciation associated with the continued opening of retail in-store locations
and the depreciation for equipment upgrades and enhancements. Primary operating
expenses, including marketing, office supplies, postage, phone and employee
education and travel were, in
<PAGE>
the aggregate, up by $4.0 million in response to an expanded customer base, and
the support of new markets, new locations and new employees.
The efficiency ratio for the nine-month period ended September 30, 1998 was
61.91 percent, an improvement of 9 basis points as compared to the 62.00 percent
recorded for the same period in 1997.
INCOME TAX EXPENSE
The amount of income tax expense for the nine months ended September 30, 1998
was $36.7 million compared to $31.6 million in the prior period. The current
effective tax rate is 33.86 percent, down from the 34.66 percent at September
30, 1997.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity increased to $618.4 million at September 30, 1998 compared
to $529.5 million at September 30, 1997. The change in equity between the two
periods was influenced by the retention of earnings, the issuance of common
stock in connection with Centura's insurance agency acquisitions and the 1998
acquisition of Pee Dee, the exercise of stock options, mitigated by the payment
of dividends and the repurchase of common stock. During the first quarter of
1998, Centura repurchased 45,000 shares of common stock at an aggregate cost of
$3.0 million. Shareholder's equity also included unrealized gains, net of tax,
on securities available for sale of $20.8 million at September 30, 1998 compared
to $7.8 million for the comparable period last year. The ratio of shareholders'
equity to period end assets was 7.92 percent at September 30, 1998, up from 7.68
percent at period end September 30, 1997.
Centura's common stock is traded on the New York Stock Exchange under the symbol
CBC. At September 30, 1998, Centura had 26,560,264 shares outstanding. Cash
dividends of $22.4 million were paid for the first nine months of 1998.
Centura's capital ratios are greater than minimums required by regulatory
guidelines. It is Centura's intent to maintain an optimal capital and leverage
mix within the regulatory framework while providing a basis for future growth.
At September 30, 1998, Centura had the required capital levels to qualify as
well capitalized. At September 30, 1998, Tier I capital was $590.7 million and
total capital was $624.0 million. For risk-based capital calculations, Centura's
Capital Securities are included as a component of Tier I capital. Centura's
capital ratios are outlined in Table 6 titled "Capital Ratios."
LIQUIDITY
Centura's liquidity management objective is to meet maturing debt obligations,
provide a reliable source of funding to borrowers, and fund operations on a cost
effective basis. Management believes that sufficient resources are available to
meet Centura's liquidity objective through its debt maturity structure, holdings
of liquid assets, and access to the capital markets through a variety of funding
vehicles.
Investment securities are an important tool to Centura's liquidity management
objective. Some AFS securities were sold during 1997 and the first nine months
of 1998 to reposition the investment portfolio in a fluctuating interest rate
environment. Management may continue to reposition the investment portfolio in
order to enhance future results of operations with no expected material impact
on liquidity.
The Bank has multiple funding sources that could be used to increase liquidity
and provide additional financing flexibility. These sources consist primarily of
established federal fund lines with major banks, advances from the Federal Home
Loan Bank ("FHLB"), and an unsecured bank note facility for institutional
investors. There were no bank notes outstanding at September 30, 1998 and 1997.
In
<PAGE>
addition, Centura accepts Eurodeposits, has a master note commercial paper
facility, and offers brokered certificates of deposits.
Management is not aware of any events or uncertainties that are reasonably
likely to have a material effect on Centura's liquidity, capital resources, or
operations. In addition, management is not aware of any pending regulatory
developments or proposals, which, if implemented, would have a material effect
on Centura.
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and rates.
Centura's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities.
Centura's Asset/Liability Management Committee seeks to maintain a general
balance between interest-sensitive assets and liabilities to insulate net
interest income and shareholders' equity from significant adverse changes in
market interest rates. Mismatches in interest rate repricings of assets and
liabilities arise from the interaction of customer business needs and Centura's
discretionary asset and liability management activities. Exposure to changes in
the level and direction of interest rates is managed by adjusting the
asset/liability mix through the use of various interest rate risk management
products, including derivative financial instruments.
Off-balance sheet derivative financial instruments, such as interest rate swaps,
interest rate floor and cap arrangements and interest rate futures and option
contracts ("swaps, floors, caps, futures and options," respectively), are an
integral part of Centura's interest rate risk management activities. Centura has
principally utilized interest rate swaps. Swaps are used to manage interest rate
risk, reduce funding costs, and diversify sources of funding. Floors are used to
protect certain financial instruments whose market value or earnings stream
would be adversely affected in a decreasing rate environment. Caps are used to
protect certain financial instruments which market value or earnings stream
would be affected in an increasing rate environment. Table 7, "Off-Balance Sheet
Derivative Financial Instruments", summarizes Centura's off-balance sheet
derivative financial positions at September 30, 1998. On-balance sheet and
off-balance sheet financial instruments are managed on an integrated basis as
part of Centura's overall asset/liability management function. The value of any
single component of the balance sheet or off-balance sheet position should not
be viewed independently.
THIRD QUARTER RESULTS
Centura's net income for the third quarter of 1998 was $25.1 million, up 15.8
percent from $21.7 million in the third quarter of 1997. Earnings per diluted
share of $0.93 represented an 11 cent increase over the $.82 for the prior year
quarter. The returns on average assets and average equity were 1.31% and 16.45%,
respectively, compared to 1.28% and 16.58%, respectively, for 1997's third
quarter. Key factors contributing to these results are discussed below.
The net interest margin and the interest rate spread both increased two basis
points between the quarters to 4.48 percent and 3.89 percent, respectively for
the third quarter of 1998. Interest income, taxable equivalent, for 1998's third
quarter was up $15.1 million to $149.0 million over 1997's third quarter. Growth
in earning assets was responsible for $16.9 million of this increase while the
rate environment had a negative impact of $1.8 million. Average earning assets
were up $773.5 million to $7.0 billion from the prior year quarter, with average
loans increasing $619.4 million and average investments rising $162.0 million.
The average yield on earning assets declined 9 basis points between the quarters
to 8.50 percent. Total interest expense of $70.5 million for the third quarter
of 1998 represented an increase of $6.1 million or 9.5 percent over 1997's third
quarter. The average rate paid for funding declined 11 basis points from
<PAGE>
the prior year quarter to 4.61 percent. The $653.8 million average growth
ininterest-bearing funding sources was responsible for $7.7 million of the
interest expense increase while the change in the rate environment offset the
increase by $1.6 million. Average deposits for the third quarters of 199 and
1997 were $5.6 billion and $5.0 billion, respectively. Short-term borrowed funds
averaged $855.8 million, up $46.4 million from the three months ended September
30, 1997 while long-term debt averaged $484.4 million, an increase of $127.9
million.
Net charge-offs were $3.9 million for the quarter ended September 30, 1998, or
.31 percent of average loans, compared to $2.8 million in the prior year
quarter, or .26 percent of average loans. Gross charge-offs and recoveries rose
$1.4 million and $258,000, respectively. Provision for loan losses was $4.0
million in the third quarter, up $555,000 from the third quarter of 1998.
Noninterest income increased $7.3 million, or 25.6 percent, to $35.6 million in
the third quarter of 1998. The most significant contributors to this improvement
were service charges on deposit accounts, mortgage income, and insurance and
brokerage commissions. A new pricing structure for deposit fees accounted for
the majority of the $2.0 million increase in service charges on deposits. Income
from mortgage activities rose $1.9 million, or 67.5 percent, to $4.7 million in
1998's third quarter. Additionally, insurance and brokerage commissions
increased $1.4 million, or 42.8 percent, over the third quarter of 1997.
The efficiency ratio for 1998's third quarter was 61.52 percent compared to
60.87 percent for the prior year comparable period. Noninterest expense totaled
$70.2 million, up 17.8 percent from the $59.6 million recorded for the quarter
ending September 30, 1997. Higher personnel costs were responsible for $5.5
million of the increase and primarily attributable to annual merit raises and
personnel added through acquisitions. Fees related to the outsourcing of various
activities were up $1.2 million reflecting increased item processing volumes and
expenditures related to the Year 2000 issue. The increase in the number of
financial stores and in the customer base influenced the $1.5 million increase
in supplies, postage, and telephone expenses.
CURRENT ACCOUNTING ISSUES
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The statement requires
management to report selected financial and descriptive information about
reportable operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Generally, disclosures are required for segments internally identified to
evaluate performance and resource allocation. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier periods is to
be restated, if it is practical to do so. SFAS No. 131 does not have to be
applied to interim financial statements in the initial year of application, but
comparative information must be provided for interim periods in the second year
of application. Centura, as required, will adopt this statement for the year
ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). The statement
revises the required disclosures for pensions and other postretirement plans but
does not change the measurement or recognition of such plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Centura, as
required, will adopt this statement for the year ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement addresses
accounting and reporting requirements for derivative instruments and for hedging
activities. SFAS No. 133 requires that all derivatives be recognized as either
assets or liabilities in the consolidated balance sheet and that those
instruments be measured at fair value. If certain conditions are met, a
derivative may be designated as a hedge of exposure to changes in fair value of
an asset or liability, exposure to variable cashflows of a forecasted
transaction or exposure of
<PAGE>
foreign currency denominated forecasted transactions. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivatives
and its resulting designation. SFAS No. 133 is effective for all quarters of
fiscal years beginning after June 15, 1999. This statement should not be applied
retroactively to financial statements of prior periods. Management has not
quantified the impact of adopting SFAS No. 133 nor has the timing of the
adoption been determined.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS No. 134"). This statement addresses the
classification by entities engaged in mortgage banking activities of
mortgage-backed securities resulting from a securitization. SFAS No. 134
conforms the accounting for securities retained after a securitization by a
mortgage banking enterprise with the accounting for such instruments by a
nonmortgage banking enterprise. After the securitization of a mortgage, any
retained mortgage securities shall be classified based on the entity's ability
and intent to sell or hold those investments in accordance with SFAS No. 115
"Accounting for Certain Debt and Equity Securities". SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. Centura will
adopt this statement for the quarter ending March 31, 1999.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of Centura and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
YEAR 2000
Background
The Year 2000 issue confronting Centura and its suppliers, customers, customers'
suppliers, and competitors centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year, without considering the upcoming change in the
century.
Centura formulated the initial Year 2000 awareness program in 1996. A steering
committee with representation from all the major areas of the bank and executive
management was established to determine internal operational requirements to
make its systems Year 2000 compliant. A formal Year 2000 Project Plan was
drafted and approved by the board of directors in 1998. In this effort, Centura
has followed the five management phases recommended by the Federal Financial
Institutions Examination Council: (1) awareness, (2) assessment, (3) renovation,
(4) validation and (5) implementation. The project has been organized along
functional lines to ensure that information technology (mainframe and
distributed applications), non-information technology (third party suppliers and
embedded technology), and the customer base will receive adequate resource
attention.
IT Systems Progress
For its internal systems, Centura has completed the assessment phase with a
complete inventory of all hardware and software that could potentially be
impacted. A risk scoping analysis determined the schedule for remediation and
testing to ensure that mission critical systems would have ample time for
extensive validation. Through code enhancements, hardware and software upgrades,
and systems replacement, where needed, the renovation phase was substantially
completed during the summer. Initial system testing began in August, and the
program remains on schedule to have all mission critical and most other systems
ready to begin final validation by December 31, 1998.
<PAGE>
Management presently believes that with modifications to existing software and
conversions to new software, the Year 2000 matter will be mitigated without
causing a material adverse impact on the operations of Centura. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of Centura.
Non-IT Systems Progress
Centura's assessment phase included the identification of external vendors,
significant customers and borrowers, market partners, and fund providers whose
operations and state of Year 2000 readiness may have a potential impact on
Centura. Relations with third parties in which electronic data is exchanged
exposes Centura to some risk of loss in the event the other party makes a
mistake or is unable to perform. In the Year 2000 context, Centura is working to
identify where such exposure may exist and is in the process of developing
contingency plans in order to minimize risk of loss due to third parties' Year
2000 vulnerabilities.
Centura is exposed to credit risk due to the failure of its borrowers to
properly remediate its own systems as well as address their own customer's or
supplier's Year 2000 state of readiness. Centura has established a due diligence
process to identify all borrowers representing a material Year 2000 related
risk, evaluate their Year 2000 preparedness, assess the aggregate Year 2000
borrower risk to Centura, and develop appropriate risk controls to manage and
mitigate the Year 2000 customer risk. As part of this process, borrowers are
assigned a risk rating based on their Year 2000 compliance which is being used
to assess the need for additional specific loan loss reserves.
Contingency Plans
Management is in the process of developing contingency plans in the event that
validation efforts for remediated systems are not completed in accordance with
current expectations. The Year 2000 contingency plans are being designed to
address any failure to remediate Centura's internal systems and to address
failures of systems outside Centura. The plans incorporate the use of third
party service providers, alternate vendors, and other contingency service
providers. An outside service provider with expertise in the development of
business resumption contingency planning has been contracted to complete a
business impact analysis and further develop current business resumption plans.
Centura's Year 2000 contingency planning will complement this ongoing effort.
Costs
Monitoring and managing the Year 2000 project will result in additional costs.
Direct costs include potential charges by third party software vendors for
product enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. In addition to the
direct costs, indirect costs will also be incurred. These indirect costs will
consist principally of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. The Emerging Issues Task Force provided
guidance concerning the accounting for the costs related to Year 2000
modification. The costs of the modifications should be treated as regular
maintenance and repair and be charged to expense as incurred.
These direct and indirect costs are not expected to have a material effect on
results of operations. However, the distribution of Year 2000 expenses between
direct and indirect may change due to the allocation of internal resources.
Including direct and indirect expenditures, management currently estimates that
the total costs to become Year 2000 compliant will range between $6 and $8
million. In total, Centura has expensed approximately $4.5 million related to
Year 2000 compliance efforts of which $3.4 million was incurred during 1998.
<PAGE>
The Year 2000 project cost estimates include the estimated costs and time
associated with the assessment and monitoring of a third party's Year 2000 risk,
and are based on presently available information. However, there can be no
guarantee that the systems of other companies on which Centura's systems rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with Centura's systems, would not have a
material adverse effect on Centura in future periods. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
<PAGE>
TABLE 1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS
September 30, 1998 September 30, 1997 December 31, 1997
------------------ ------------------ -----------------
(Dollars in thousands) Balance % of Total Balance % of Total Balance % of Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 1,002,885 20.0 % $ 844,485 18.7 % $ 846,074 18.4 %
Commercial mortgage 988,466 19.7 882,383 19.6 894,014 19.5
Real estate construction 614,399 12.3 566,739 12.6 578,304 12.6
------------------------------------------------------------------------------------------
Commercial loan portfolio 2,605,750 52.0 2,293,607 50.9 2,318,392 50.5
Consumer 375,346 7.5 305,500 6.8 321,513 7.0
Residential mortgage 1,539,413 30.7 1,381,429 30.6 1,426,306 31.1
Leases 428,149 8.5 489,144 10.8 470,376 10.3
Other 64,100 1.3 41,394 0.9 49,995 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $ 5,012,758 100.0 % $ 4,511,074 100.0 % $ 4,586,582 100.0 %
====================================================================================================================================
Residential mortgage servicing
portfolio for others $ 2,750,000 $ 2,819,000 $ 2,812,000
====================================================================================================================================
</TABLE>
TABLE 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT MIX
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Dollars in thousands) Balance % of Total Balance % of Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand, noninterest-bearing $ 820,719 15.1 % $ 695,119 14.5 %
Interest checking 729,951 13.4 636,886 13.3
Money market 1,026,485 18.9 759,608 16.0
Savings 293,713 5.4 287,152 6.0
- --------------------------------------------------------------------------------------------------------------
Time deposits:
Time deposits (less than) $100 1,749,767 32.1 1,742,151 36.3
Time deposits (more than) $100 503,532 9.2 364,208 7.6
IRA 319,633 5.9 299,337 6.3
- --------------------------------------------------------------------------------------------------------------
Total time deposits 2,572,932 47.2 2,405,696 50.2
- --------------------------------------------------------------------------------------------------------------
Total average deposits $ 5,443,800 100.0 % $ 4,784,461 100.0 %
==============================================================================================================
</TABLE>
<PAGE>
TABLE 3
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
CENTURA BANKS, INC. AND SUBSIDIARIES
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $ 4,853,438 $ 338,143 9.24 % $ 4,223,754 $ 298,465 9.37 %
Taxable securities 1,844,266 91,782 6.64 1,633,860 81,184 6.63
Tax-exempt securities 36,528 2,433 8.88 42,833 2,855 8.89
Short-term investments 27,480 1,042 5.43 31,143 1,271 5.38
------------- ---------- ------------- -----------
Interest-earning assets, gross 6,761,712 433,400 8.51 5,931,590 383,775 8.59
Net unrealized gain on available
for sale securities 15,929 2,350
Other assets, net 668,201 527,200
------------- -------------
Total assets $ 7,445,842 $ 6,461,140
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking $ 729,951 $ 7,940 1.45 % $ 636,886 $ 8,154 1.71 %
Money market 1,026,485 33,573 4.37 759,608 23,807 4.19
Savings 293,713 3,919 1.78 287,152 4,135 1.93
Time 2,572,932 104,660 5.44 2,405,696 98,623 5.48
------------- ---------- ------------- -----------
Total interest-bearing deposits 4,623,081 150,092 4.34 4,089,342 134,719 4.40
Borrowed funds 858,170 34,231 5.26 756,583 29,824 5.20
Long-term debt 445,010 21,906 6.49 333,064 16,600 6.57
------------- ---------- ------------- -----------
Interest-bearing liabilities 5,926,261 206,229 4.64 5,178,989 181,143 4.66
Demand, noninterest-bearing 820,719 695,119
Other liabilities 115,152 83,983
Shareholders' equity 583,710 503,049
------------- -------------
Total liabilities and
shareholders' equity $ 7,445,842 $ 6,461,140
============= =============
Interest rate spread 3.87 % 3.93 %
Net interest income and net yield on
interest-earning assets $ 6,761,712 $ 227,171 4.45 % $ 5,931,590 $ 202,632 4.52 %
============= ========== ============= ===========
Taxable equivalent adjustment $ 5,468 $ 5,822
========== ===========
</TABLE>
<PAGE>
TABLE 3, continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS
CENTURA BANKS, INC. AND SUBSIDIARIES
Three months ended Three months ended
September 30, 1998 September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $ 4,991,800 $ 116,727 9.22 % $ 4,372,404 $ 104,037 9.38 %
Taxable securities 1,881,113 31,246 6.64 1,722,535 28,568 6.63
Tax-exempt securities 31,990 699 8.74 40,618 908 8.94
Short-term investments 26,237 348 5.86 34,177 457 5.23
------------- ----------- ----------- ----------
Interest-earning assets, gross 6,931,140 149,020 8.50 6,169,734 133,970 8.59
Net unrealized gain on available
for sale securities 19,991 7,941
Other assets, net 679,643 560,958
------------- -----------
Total assets $ 7,630,774 $ 6,738,633
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking $ 734,034 $ 2,555 1.38 % $ 647,316 $ 2,718 1.67 %
Money market 1,096,660 12,121 4.39 837,849 9,023 4.27
Savings 288,549 1,283 1.76 285,745 1,299 1.80
Time 2,585,374 35,368 5.43 2,454,163 33,864 5.47
------------- ----------- ----------- ----------
Total interest-bearing deposits 4,704,617 51,327 4.33 4,225,073 46,904 4.40
Borrowed funds 855,846 11,481 5.25 809,460 11,150 5.39
Long-term debt 484,445 7,698 6.22 356,546 6,331 6.95
------------- ----------- ----------- ----------
Interest-bearing liabilities 6,044,908 70,506 4.61 5,391,079 64,385 4.72
Demand, noninterest-bearing 856,126 741,991
Other liabilities 123,470 86,388
Shareholders' equity 606,270 519,175
------------- -----------
Total liabilities and
shareholders' equity $ 7,630,774 $ 6,738,633
============= ===========
Interest rate spread 3.89 % 3.87 %
Net interest income and net yield on
interest-earning assets $ 6,931,140 $ 78,514 4.48 % $ 6,169,734 $ 69,585 4.46 %
============= =========== =========== ==========
Taxable equivalent adjustment $ 1,852 $ 2,126
=========== ==========
</TABLE>
<PAGE>
TABLE 4
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
At and for the nine months At and for the year
ended September 30, ended December 31,
(Dollars in thousands) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at beginning of period $ 64,279 $ 58,715 $ 58,715
Allowance for acquired loans 2,068 2,410 3,133
Provision for loan losses 11,069 9,569 13,418
Loans charged off (13,034) (10,527) (14,425)
Recoveries on loans previously charged off 2,723 2,115 3,438
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (10,311) (8,412) (10,987)
- -------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 67,105 $ 62,282 $ 64,279
=========================================================================================================================
Loans at period-end $ 5,012,758 $ 4,511,074 $ 4,586,582
Average loans 4,853,438 4,223,754 4,309,064
Nonperforming loans 28,453 23,390 23,722
Allowance for loan losses to loans at period-end 1.34 % 1.38 % 1.40 %
Net charge-offs to average loans 0.28 % 0.27 % 0.25 %
Allowance for loan losses to nonperforming loans 2.36 x 2.66 x 2.71 x
=========================================================================================================================
TABLE 5
- -------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
September 30, December 31,
(Dollars in thousands) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 28,453 $ 23,390 $ 23,722
Foreclosed property 3,631 5,243 4,155
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 32,084 $ 28,633 $ 27,877
=========================================================================================================================
Nonperforming assets to:
Loans and foreclosed property 0.64 % 0.63 % 0.61 %
Total assets 0.41 % 0.42 % 0.39 %
=========================================================================================================================
Accruing loans past due ninety days or greater $ 10,061 $ 10,887 $ 6,985
=========================================================================================================================
</TABLE>
<PAGE>
TABLE 6
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier I Capital Total Capital Tier I Leverage
<S> <C> <C> <C>
September 30, 1998 10.38 % 10.96 % 7.85 %
December 31, 1997 10.60 11.19 7.51
September 30, 1997 11.11 11.71 7.85
Minimum requirement to be well capitalized 6.00 10.00 5.00
</TABLE>
TABLE 7
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements at September 30, 1998 are summarized below:
Weighted Average
Weighted Average Rate Remaining Estimated
Notional During the Quarter Contractual Fair Value
(Dollars in thousands) Amount Received Paid Term (Years) Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Corporation pays fixed/receives variable $ 399,872 5.68% 6.10% 2.7 $ (9,205)
Corporation pays variable/receives fixed 286,000 6.34% 5.62% 6.3 9,001
Corporation pays variable/receives variable 150,000 5.43% 5.78% 0.9 (443)
------------ ------------
Total interest rate swaps $ 835,872 $ (647)
============ ============
</TABLE>
Interest rate cap and floor agreements at September 30, 1998 are summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Notional Average Current Index Contractual Carrying Estimated
(Dollars in thousands) Amount Rate (1) Rate Term (Years) Value Fair Value
- ---------------------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Floors $ 230,000 5.57% 5.31% 2.8 $ 699 $ 3,913
============ ============ ===========
Interest Rate Caps $ 72,000 6.90% 5.31% 5.0 $ 489 $ (144)
============ ============ ===========
(1) Average rate represents the average of the strike rates above or below which
Centura will receive payments on the outstanding cap or floor agreements.
</TABLE>
<PAGE>
TABLE 8
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS - TAXABLE EQUIVALENT BASIS
Nine months ended September 30,
1998 vs 1997
- ------------------------------------------------------------------------------------------------------------
Income/ Variance
Expense Attributable To
(In thousands) Variance Volume Rate
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 39,678 $ 43,924 $ (4,246)
Taxable securities 10,598 10,471 127
Tax-exempt securities (422) (420) (2)
Short-term investments (229) (143) (86)
--------------- --------------- --------------
Total interest income 49,625 53,832 (4,207)
INTEREST EXPENSE Interest-bearing deposits:
Interest checking (214) 1,103 (1,317)
Money market 9,766 8,688 1,078
Savings (216) 93 (309)
Time 6,037 6,808 (771)
--------------- --------------- --------------
Total interest-bearing deposits 15,373 16,692 (1,319)
Borrowed funds 4,407 4,048 359
Long-term debt 5,306 5,513 (207)
--------------- --------------- --------------
Total interest expense 25,086 26,253 (1,167)
--------------- --------------- --------------
Net interest income $ 24,539 $ 27,579 $ (3,040)
=============== =============== ==============
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.
</TABLE>
<PAGE>
TABLE 8, continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE ANALYSIS - TAXABLE EQUIVALENT BASIS
Three months ended September 30,
1998 vs 1997
- ------------------------------------------------------------------------------------------------------------
Income/ Variance
Expense Attributable To
(In thousands) Variance Volume Rate
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 12,690 $ 14,511 $ (1,821)
Taxable securities 2,678 2,634 44
Tax-exempt securities (209) (189) (20)
Short-term investments (109) (105) (4)
--------------- --------------- --------------
Total interest income 15,050 16,851 (1,801)
INTEREST EXPENSE Interest-bearing deposits:
Interest checking (163) 337 (500)
Money market 3,098 2,855 243
Savings (16) 13 (29)
Time 1,504 1,797 (293)
--------------- --------------- --------------
Total interest-bearing deposits 4,423 5,002 (579)
Borrowed funds 331 627 (296)
Long-term debt 1,367 2,086 (719)
--------------- --------------- --------------
Total interest expense 6,121 7,715 (1,594)
--------------- --------------- --------------
Net interest income $ 8,929 $ 9,136 $ (207)
=============== =============== ==============
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.
</TABLE>
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. Centura's market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. Centura's objective is to
manage the mix of interest-sensitive assets and liabilities to moderate interest
rate risk and stabilize the net interest margin while enhancing profitability.
Centura does not maintain a trading account nor is the corporation subject to
currency exchange risk or commodity price risk.
The table below illustrates the scheduled maturity of selected
on-balance sheet financial instruments and their estimated fair values at
September 30, 1998. For loans, investment securities, and long-term debt
obligations, principal cashflows are presented by expected maturity date
including the weighted average interest rate by exposure category. Weighted
average variable rates are based on implied forward rates in the yield curve at
year-end. Prepayment assumptions are based on rates evolving along the implied
forward yield curve at year-end and reflect market conventional prepayment
behavior. For deposits without contractual maturities, including interest
checking, savings, and money market accounts, cashflows are separated into a
core and "non-core" component. The "non-core" cashflows are scheduled to mature
in 1999 while the core cashflows are presented based on management's assessment
of runoff.
<TABLE>
<CAPTION>
Fair Value
Principal Maturing in: September
------------------------------------------------------------------ 30,
1999 2000 2001 2002 2003 Thereafter Total 1998
------------------------------------------------------------------------------- ------------
Rate Sensitive Assets: (in thousands)
Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ 972,772 $ 526,070 $ 340,307 $ 195,326 $ 187,995 $ 114,833 $ 2,337,303 $ 2,415,470
Average rate (%) 8.33 8.59 8.65 8.51 8.28 9.51 8.50
Variable rate 1,163,369 305,778 248,148 205,095 187,402 498,558 2,608,350 2,649,671
Average rate (%) 8.60 8.02 8.33 8.84 8.92 9.38 8.70
Investment securities
Fixed rate 240,331 129,305 169,995 208,756 117,910 232,561 1,098,858 1,275,609
Average rate (%) 6.61 6.66 6.37 6.35 5.89 6.46 6.40
Variable rate 125,923 196,546 154,999 121,625 74,229 322,289 995,611 839,029
Average rate (%) 6.07 5.89 5.99 6.10 6.09 6.37 6.13
Rate Sensitive
Liabilities:
Interest-bearing checking,
savings,money market $1,410,825 $ 121,714 $ 121,714 $ 121,714 $ 121,714 $ 243,428 $ 2,141,109 $ 2,141,109
Average rate (%) 3.77 1.12 1.12 1.12 1.12 1.12 2.86
Certificates of deposit 2,165,381 252,166 49,581 23,799 11,846 29,938 2,532,711 2,539,333
Average rate (%) 5.38 5.66 5.44 5.96 5.37 6.08 5.42
Borrowed funds 1,006,809 - - - - - 1,006,809 1,006,809
Average rate (%) 5.26 - - - - - 5.26
Long-term debt 49,101 189,016 12,955 81,405 50,332 100,000 482,809 545,653
Average rate (%) 5.48 4.69 7.74 5.09 6.14 8.56 5.87
</TABLE>
<PAGE>
The table below summarizes Centura's off-balance sheet derivative financial
instruments at September 30, 1998. Notional amounts represent the amount on
which calculations of interest payments to be exchanged are based.
<TABLE>
<CAPTION>
Weighted
Average
Fair Value Carrying Remaining
Notional Amounts Maturing In: September Value Contractual
----------------------------------------------------------- 30, 1998 September Term
1999 2000 2001 2002 2003 Thereafter Total Gain/(loss) 30, 1998 (Years)
---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporation pays fixed rates/
receives variable $ 80,000 $ 113,000 $ 135,000 $ 60,000 $ - $ 11,872 $ 399,872 $ (9,205) - 2.7
Average rate paid (%) 6.22 6.16 5.93 6.22 - 6.03 6.10
Average rate received(%) 5.66 5.74 5.64 5.69 - 5.56 5.68
Corporation pays variable
rates/receives fixed - 28,000 93,000 50,000 55,000 60,000 286,000 9,001 - 6.3
Average rate paid (%) - 5.99 5.57 5.57 5.53 5.66 5.62
Average rate received (%) - 6.13 6.29 6.38 5.97 6.85 6.34
Corporation pays variable/
receives variable 100,000 50,000 - - - - 150,000 (443) - 0.9
Average rate paid(%)
LIBOR 5.69 5.95 - - - - 5.78
Average rate received(%)
(US T-Bill) 5.35 5.69 - - - - 5.43
Interest rate floors 50,000 50,000 30,000 50,000 50,000 - 230,000 3,913 699 2.8
Average strike rate 5.50 6.00 6.00 5.50 5.00 - 5.57
Interest rate caps - - - 10,000 50,000 12,000 72,000 (144) 489 5.0
Average strike rate - - - 7.00 6.86 7.00 6.90
</TABLE>
<PAGE>
CENTURA BANKS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Registrant's subsidiary, Centura Bank ("Bank"), is a co-defendant in two
actions consolidated for discovery in the Superior Court of Forsyth County,
North Carolina, in which it is alleged that Bank breached its duties and
committed other violations of law (i) as depository of substantial sums of money
allegedly converted by the personal and financial advisors of the owners of such
money and (ii) in connection with the creation of charitable trusts established
with a portion of the funds. The cases consolidated into the subject case
(Philip A. R. Staton, Ingeborg Staton, Mercedes Staton, et. als. v. G. Thomas
Brame, Jerri Russell (formerly Jerri Brame), Centura Bank, et als.) were
originally brought in 1996; however, no claim for a specific monetary amount was
made until 1998, in connection with motion practice in the matter. The amount of
Plaintiffs' claims arematerial to Registrant and its subsidiaries taken as a
whole. Registrant and Bank believe that Bank has meritorious defenses to all
claims asserted in these cases and Bank is defending the cases vigorously.
In a separate and related case (Piedmont Institute of Pain Management; T. Stuart
Meloy, M.D.; Nancy J. Faller, D.O.; v. Poyner & Spruill, L.L.P. and Centura
Bank, consolidated for discovery with the Staton cases in the Superior Court of
Forsyth County, North Carolina, Bank is alleged to have provided plaintiffs with
false information regarding the establishment and funding of a medical clinic
failed to exercise reasonable care or competence in obtaining such information
and committed other violations of law. Plaintiffs allege that they were damaged
as a result and seek specific performance or recovery of money damages in an
amount that is material to Registrant and its subsidiaries taken as a whole.
Registrant and Bank believe Bank has meritorious defenses to all claims asserted
in this case and Bank is defending the case vigorously.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
Not applicable
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exhibit Exhibit
No. Description of Exhibit Reference
4.1 Excerpts from Centura's Articles of Incorporation and
Bylaws relating to rights of holders of Registrant's capital stock 4.1 (1)
4.2 Specimen certificate of Centura common stock 4.2 (2)
27.1 Financial Data Schedule - (Restated due to the adoption of SFAS No.
128) included in the electronically filed document as required.
27.2 Financial Data Schedule included in the electronically filed
document as required.
(1)Included as the identified exhibit in Centura Banks, Inc. Form S-4
dated March 8, 1990, as amended by amendment No. 1 dated May 14, 1990,
and incorporated herein by reference.
(2)Included as the identified exhibit in Centura Banks, Inc. Annual
Report on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
(b) Reports on Form 8-K -
(1)A report on Form 8-K dated July 6, 1998 was filed under Item 5, Other
Events, indicating the Registrant's announcement on July 6, 1998 of
earnings for the three and six months ended June 30, 1998.
</TABLE>
<PAGE>
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: November 16, 1998 By: /s/Steven J. Goldstein
----------------------
Steven J. Goldstein
Chief Financial Officer
<PAGE>
CENTURA BANKS, INC.
EXHIBIT INDEX
Sequential
Exhibit Description of Exhibit Page No.
- --------------------------------------------------------------------------------
4.1 Excerpts from Centura's Articles of Incorporation and Bylaws
relating to rights of holders of Registrant's capital stock *(1)
4.2 Specimen certificate of Centura common stock *(2)
27.1 Financial Data Schedule Restated **
27.2 Financial Data Schedule **
*Incorporated by reference from the following documents as noted:
(1)Included as the identified exhibit in Centura Banks, Inc. Form S-4
dated March 8, 1990, as amended by amendment No. 1 dated May 14, 1990,
and incorporated herein by reference.
(2)Included as the identified exhibit in Centura Banks, Inc. Annual
Report on Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
** Included in the electronically-filed document as required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN GOLDSTEIN, CHIEF
FINANCIAL OFFICER OF CENTURA BANKS, INC.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 303,724
<INT-BEARING-DEPOSITS> 15,114
<FED-FUNDS-SOLD> 7,774
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,460,930
<INVESTMENTS-CARRYING> 232,417
<INVESTMENTS-MARKET> 233,938
<LOANS> 4,511,074
<ALLOWANCE> 62,282
<TOTAL-ASSETS> 6,891,281
<DEPOSITS> 5,209,836
<SHORT-TERM> 732,013
<LIABILITIES-OTHER> 81,993
<LONG-TERM> 337,975
0
0
<COMMON> 190,083
<OTHER-SE> 339,381
<TOTAL-LIABILITIES-AND-EQUITY> 6,891,281
<INTEREST-LOAN> 298,163
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0
0
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