Exhibit 99.2
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
-------------- --------------
(thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................. $ 356,416 $ 365,854
Due from banks, interest-bearing ........................................................ 39,279 22,874
Federal funds sold ...................................................................... 28,686 17,646
Investment securities:
Available for sale (cost of $2,794,678 and $2,525,527, respectively) ................... 2,727,514 2,539,425
Held to maturity (fair value of $114,521 and $189,222, respectively) ................... 114,574 184,905
Loans, net of unearned income ........................................................... 7,528,770 7,216,807
Less allowance for loan losses ......................................................... 95,280 91,894
----------- -----------
Net loans ........................................................................... 7,433,490 7,124,913
Premises and equipment .................................................................. 159,300 164,830
Other assets ............................................................................ 527,423 498,197
----------- -----------
Total assets ............................................................................ $11,386,682 $10,918,644
=========== ===========
LIABILITIES
Deposits:
Demand, noninterest-bearing ............................................................ $ 1,136,119 $ 1,211,321
Interest-bearing ....................................................................... 5,882,744 5,764,408
Time deposits over $100 ................................................................ 878,189 726,061
----------- -----------
Total deposits ...................................................................... 7,897,052 7,701,790
Borrowed funds .......................................................................... 1,601,238 1,465,117
Long-term debt .......................................................................... 904,354 757,736
Other liabilities ....................................................................... 124,303 154,769
----------- -----------
Total liabilities ....................................................................... 10,526,947 10,079,412
----------- -----------
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 39,496,410 and 39,650,845, respectively ............................................. 278,689 291,786
Common stock acquired by ESOP ........................................................... (28) (107)
Retained earnings ....................................................................... 623,870 539,128
Accumulated other comprehensive (loss) income ........................................... (42,796) 8,425
----------- -----------
Total shareholders' equity .............................................................. 859,735 839,232
----------- -----------
Total liabilities and shareholders' equity .............................................. $11,386,682 $10,918,644
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
-------------- ------------- -------------
(thousands, except share and per share
data)
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees .............................................. $ 641,171 $ 613,660 $ 555,547
Investment securities:
Taxable ........................................................... 159,605 152,808 136,829
Tax-exempt ........................................................ 5,791 5,372 4,650
Short-term investments ............................................. 2,589 3,206 4,765
----------- ----------- -----------
Total interest income .............................................. 809,156 775,046 701,791
INTEREST EXPENSE
Deposits ........................................................... 268,864 281,967 265,028
Borrowed funds ..................................................... 69,671 61,610 51,679
Long-term debt ..................................................... 51,896 38,748 29,827
----------- ----------- -----------
Total interest expense ............................................. 390,431 382,325 346,534
----------- ----------- -----------
NET INTEREST INCOME ................................................ 418,725 392,721 355,257
Provision for loan losses .......................................... 40,828 20,759 18,764
----------- ----------- -----------
Net interest income after provision for loan losses ................ 377,897 371,962 336,493
NONINTEREST INCOME
Service charges on deposit accounts ................................ 63,761 57,490 48,562
Credit card and related fees ....................................... 9,008 6,992 5,502
Other service charges, commissions, and fees ....................... 37,924 33,725 24,413
Fees for trust services ............................................ 10,340 9,304 7,737
Mortgage income .................................................... 25,304 25,141 16,617
Other noninterest income ........................................... 25,160 22,587 23,784
Securities (losses) gains, net ..................................... (600) 2,357 1,540
----------- ----------- -----------
Total noninterest income ........................................... 170,897 157,596 128,155
NONINTEREST EXPENSE
Personnel .......................................................... 171,364 165,190 143,407
Occupancy .......................................................... 24,688 22,836 19,918
Equipment .......................................................... 25,227 26,925 26,242
Foreclosed real estate losses and related operating expense, net ... 1,697 1,425 1,534
Merger-related expenses ............................................ 6,858 4,373 2,651
Other operating expense ............................................ 122,489 123,163 108,694
----------- ----------- -----------
Total noninterest expense .......................................... 352,323 343,912 302,446
----------- ----------- -----------
Income before income taxes ......................................... 196,471 185,646 162,202
Income taxes ....................................................... 66,134 63,474 55,515
----------- ----------- -----------
NET INCOME ......................................................... $ 130,337 $ 122,172 $ 106,687
=========== =========== ===========
NET INCOME PER COMMON SHARE
Basic .............................................................. $ 3.28 $ 3.10 $ 2.76
Diluted ............................................................ 3.23 3.03 2.70
AVERAGE COMMON SHARES OUTSTANDING
Basic .............................................................. 39,729,900 39,416,319 38,585,655
Diluted ............................................................ 40,368,276 40,331,079 39,560,665
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------
Common
Stock
Acquired Retained
Shares Amount By ESOP Earnings
-------------- ------------ --------- ------------
(thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 ................. 38,425,641 $ 281,950 $ (395) $ 371,996
Comprehensive income:
Net income ................................ -- -- -- 106,687
Minimum pension liability adjustment ...... -- -- -- --
Unrealized gains on securities, net of
tax ...................................... -- -- -- --
Comprehensive income .....................
Common stock issued:
Stock option plans and stock awards ....... 519,868 7,904 -- --
Acquisitions .............................. 44,443 2,528 -- --
Repurchases of common stock ................ (256,270) (13,021) -- --
Cash dividends declared .................... -- -- -- (35,164)
Other ...................................... -- 2,475 144 (252)
---------- --------- ------ ---------
Balance, December 31, 1997 ................. 38,733,682 $ 281,836 $ (251) $ 443,267
Comprehensive income:
Net income ................................ -- -- -- 122,172
Minimum pension liability adjustment ...... -- -- -- --
Unrealized losses on securities, net of
tax ...................................... -- -- -- --
Comprehensive income .....................
Common stock issued:
Stock option plans and stock awards ....... 389,445 6,972 -- --
Acquisitions .............................. 625,984 6,179 -- 6,353
Repurchases of common stock ................ (97,813) (5,258) -- --
Cash dividends declared .................... -- -- -- (32,664)
Other ...................................... (453) 2,057 144 --
---------- --------- ------ ---------
Balance, December 31, 1998 ................. 39,650,845 $ 291,786 $ (107) $ 539,128
Comprehensive income:
Net income ................................ -- -- -- 130,337
Minimum pension liability adjustment ...... -- -- -- --
Unrealized losses on securities, net of
tax ...................................... -- -- -- --
Comprehensive income .....................
Common stock issued:
Stock option plans and stock awards ....... 486,905 10,203 -- --
Acquisitions .............................. 122,865 8,910 -- (301)
Repurchases of common stock ................ (764,205) (36,385) -- --
Cash dividends declared .................... -- -- -- (44,556)
Other ...................................... -- 4,175 79 (738)
---------- --------- ------ ---------
Balance, December 31, 1999 ................. 39,496,410 $ 278,689 $ (28) $ 623,870
========== ========= ====== =========
<CAPTION>
Accumulated Other
Comprehensive Income (Loss)
------------------------------------
Unrealized Gains/ Minimum Total
(Losses) on Securities Pension Shareholders'
Available for Sale Liability Equity
------------------------ ----------- --------------
(thousands, except share data)
<S> <C> <C> <C>
Balance, December 31, 1996 ................. $ 1,926 $ (77) $ 655,400
Comprehensive income:
Net income ................................ -- -- 106,687
Minimum pension liability adjustment ...... -- (203) (203)
Unrealized gains on securities, net of
tax ...................................... 8,459 -- 8,459
---------
Comprehensive income ..................... 114,943
Common stock issued:
Stock option plans and stock awards ....... -- -- 7,904
Acquisitions .............................. -- -- 2,528
Repurchases of common stock ................ -- -- (13,021)
Cash dividends declared .................... -- -- (35,164)
Other ...................................... -- -- 2,367
--------- ------ ---------
Balance, December 31, 1997 ................. $ 10,385 $ (280) $ 734,957
Comprehensive income:
Net income ................................ -- -- 122,172
Minimum pension liability adjustment ...... -- 198 198
Unrealized losses on securities, net of
tax ...................................... (1,878) -- (1,878)
---------
Comprehensive income ..................... 120,492
Common stock issued:
Stock option plans and stock awards ....... -- -- 6,972
Acquisitions .............................. -- -- 12,532
Repurchases of common stock ................ -- -- (5,258)
Cash dividends declared .................... -- -- (32,664)
Other ...................................... -- -- 2,201
--------- ------ ---------
Balance, December 31, 1998 ................. $ 8,507 $ (82) $ 839,232
Comprehensive income:
Net income ................................ -- -- 130,337
Minimum pension liability adjustment ...... -- 80 80
Unrealized losses on securities, net of
tax ...................................... (51,301) -- (51,301)
---------
Comprehensive income ..................... 79,116
Common stock issued:
Stock option plans and stock awards ....... -- -- 10,203
Acquisitions .............................. -- -- 8,609
Repurchases of common stock ................ -- -- (36,385)
Cash dividends declared .................... -- -- (44,556)
Other ...................................... -- -- 3,516
--------- ------ ---------
Balance, December 31, 1999 ................. $ (42,794) $ (2) $ 859,735
========= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
---------------
1999
---------------
(thousands)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................... $ 130,337
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................................ 40,828
Depreciation on assets under operating lease ............................................. 13,320
Depreciation and amortization, excluding depreciation on assets under operating lease .... 46,302
Deferred income taxes .................................................................... 5,510
Loan fees deferred, net .................................................................. 2,798
Bond premium amortization and discount accretion, net .................................... 4,872
Losses (gains) on sales of investment securities ......................................... 600
Loss on sales of foreclosed real estate .................................................. 442
Gain on sales of equipment under lease ................................................... (2,821)
Gain on sale of subsidiary ............................................................... (4,893)
Gain on sale of mortgage servicing rights ................................................ (3,392)
Gain on sale of deposits ................................................................. --
Proceeds from sales of mortgage loans held for sale ...................................... 845,602
Originations, net of principal repayments, of mortgage loans held for sale ............... (774,640)
Increase in accrued interest receivable .................................................. (2,704)
Increase in accrued interest payable ..................................................... 9,009
Net change in trading securities ......................................................... --
Net change in other assets and other liabilities ......................................... (67,711)
-------------
Net cash provided by operating activities ................................................ 243,459
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans .................................................................... (409,196)
Purchases of:
Securities available for sale ........................................................... (1,032,587)
Securities held to maturity ............................................................. (26,777)
Premises and equipment .................................................................. (20,770)
Other ................................................................................... (20,000)
Proceeds from:
Sales of securities available for sale .................................................. 206,765
Maturities and issuer calls of securities available for sale ............................ 581,581
Maturities and issuer calls of securities held to maturity .............................. 69,425
Sales of foreclosed real estate ......................................................... 10,197
Dispositions of premises and equipment .................................................. 7,409
Dispositions of equipment utilized in leasing activities ................................ 7,369
Sale of mortgage servicing rights ....................................................... 8,295
Net cash received in mergers, acquisitions, and divestitures ............................. 3,105
-------------
Net cash used by investing activities .................................................... (615,184)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................................................. 155,680
Net increase in borrowed funds ........................................................... 136,618
Proceeds from issuance of long-term debt ................................................. 253,637
Repayment of long-term debt .............................................................. (83,441)
Cash dividends paid ...................................................................... (44,556)
Proceeds from issuance of common stock, net .............................................. 8,340
Repurchase of common stock ............................................................... (36,385)
Other .................................................................................... (161)
-------------
Net cash provided by financing activities ................................................ 389,732
-------------
Increase (decrease) in cash and cash equivalents ......................................... 18,007
Cash and cash equivalents, beginning of year ............................................. 406,374
-------------
Cash and cash equivalents, end of year ................................................... $ 424,381
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................................................ $ 381,422
Income taxes ............................................................................ 71,408
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net ............................ 14,647
Unrealized securities (losses) gains, net ............................................... (81,062)
Dividends declared, but not yet paid .................................................... --
Loans transferred to foreclosed property ................................................ 9,029
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997
--------------- ---------------
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................... $ 122,172 $ 106,687
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................................ 20,759 18,764
Depreciation on assets under operating lease ............................................. 13,030 7,247
Depreciation and amortization, excluding depreciation on assets under operating lease .... 45,022 44,575
Deferred income taxes .................................................................... 9,164 15,105
Loan fees deferred, net .................................................................. 815 (583)
Bond premium amortization and discount accretion, net .................................... 5,081 1,905
Losses (gains) on sales of investment securities ......................................... (2,357) (1,540)
Loss on sales of foreclosed real estate .................................................. 66 594
Gain on sales of equipment under lease ................................................... (5,550) (3,534)
Gain on sale of subsidiary ............................................................... -- --
Gain on sale of mortgage servicing rights ................................................ -- --
Gain on sale of deposits ................................................................. -- (2,000)
Proceeds from sales of mortgage loans held for sale ...................................... 985,494 532,310
Originations, net of principal repayments, of mortgage loans held for sale ............... (1,088,439) (546,164)
Increase in accrued interest receivable .................................................. (2,643) (4,684)
Increase in accrued interest payable ..................................................... 4,502 19
Net change in trading securities ......................................................... -- 42,548
Net change in other assets and other liabilities ......................................... (92,213) (43,530)
------------- -------------
Net cash provided by operating activities ................................................ 14,903 167,719
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans .................................................................... (702,836) (476,832)
Purchases of:
Securities available for sale ........................................................... (1,294,537) (2,024,950)
Securities held to maturity ............................................................. (22,128) (89,731)
Premises and equipment .................................................................. (19,948) (26,904)
Other ................................................................................... (20,089) (50,136)
Proceeds from:
Sales of securities available for sale .................................................. 301,749 915,876
Maturities and issuer calls of securities available for sale ............................ 679,843 687,969
Maturities and issuer calls of securities held to maturity .............................. 139,523 144,304
Sales of foreclosed real estate ......................................................... 8,532 6,704
Dispositions of premises and equipment .................................................. 3,669 2,124
Dispositions of equipment utilized in leasing activities ................................ 22,570 4,016
Sale of mortgage servicing rights ....................................................... -- --
Net cash received in mergers, acquisitions, and divestitures ............................. 32,610 251,928
------------- -------------
Net cash used by investing activities .................................................... (871,042) (655,632)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................................................. 225,739 235,543
Net increase in borrowed funds ........................................................... 421,190 267,644
Proceeds from issuance of long-term debt ................................................. 347,482 168,916
Repayment of long-term debt .............................................................. (109,892) (107,364)
Cash dividends paid ...................................................................... (39,644) (34,598)
Proceeds from issuance of common stock, net .............................................. 6,037 6,735
Repurchase of common stock ............................................................... (5,258) (13,021)
Other .................................................................................... (596) (2,096)
------------- -------------
Net cash provided by financing activities ................................................ 845,058 521,759
------------- -------------
Increase (decrease) in cash and cash equivalents ......................................... (11,081) 33,846
Cash and cash equivalents, beginning of year ............................................. 417,455 383,609
------------- -------------
Cash and cash equivalents, end of year ................................................... $ 406,374 $ 417,455
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ................................................................................ $ 377,823 $ 346,515
Income taxes ............................................................................ 35,274 39,288
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net ............................ 14,281 3,982
Unrealized securities (losses) gains, net ............................................... (2,920) 13,940
Dividends declared, but not yet paid .................................................... -- 6,981
Loans transferred to foreclosed property ................................................ 8,627 8,885
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Centura Banks, Inc. ("Centura") and its wholly-owned subsidiaries, Centura
Capital Trust I ("CCTI"), Triangle Capital Trust ("TCT"), and Centura Bank (the
"Bank"). Centura also has a 49 percent ownership interest in First Greensboro
Home Equity, Inc. ("FGHE"), a home equity mortgage company. The Bank also has
various wholly-owned subsidiaries which in the aggregate represent approximately
thirteen percent of total assets. All significant intercompany transactions are
eliminated in consolidation.
On February 18, 2000, Triangle Bancorp, Inc. ("Triangle") merged with and
into Centura Banks, Inc. in a transaction accounted for as a
pooling-of-interests. Accordingly, the financial information included in the
accompanying consolidated financial statements and notes has been restated to
present the combined financial condition and results of operations of both
companies as if the merger had been in effect for all periods presented. See
Note 3 for further information regarding the merger.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheets
and income statements for the periods presented. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses ("AFLL"), the valuation of real estate acquired
in connection with foreclosure or in satisfaction of loans, and the valuation of
mortgage servicing rights ("MSRs").
Business
The Bank, either directly or through its subsidiaries, provides a wide
range of financial services, including: full-service commercial and consumer
banking services; retail securities brokerage services; insurance brokerage
services covering a full line of personal and commercial lines; mortgage
banking services; commercial and retail leasing; and asset management services.
The Bank principally offers its services through its branch and automated
teller network located throughout North Carolina, South Carolina, and the
Hampton Roads region of Virginia. Services are also provided through
alternative delivery channels that include a centralized telephone operation
offering a full line of financial services and home banking through a telephone
network operated by a third party and connected to the personal computers of
customers. The Bank is subject to competition from other depository
institutions and numerous other non-depository institutions offering financial
services products. The Bank is further subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
CCTI and TCT were established to facilitate the issuance of Capital
Securities as described in detail in Note 11 to the consolidated financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks,
interest-bearing balances due from other banks, and federal funds sold.
Investment Securities
Centura's investments are classified based on management's intention as
either held to maturity ("HTM"), available for sale ("AFS"), or trading at the
time of purchase. Debt securities that Centura has the positive intent and the
ability to hold to maturity are classified as HTM and reported at amortized
cost. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings. Debt and equity securities not classified as either HTM securities or
trading securities are classified as AFS securities and are reported at fair
value, with net unrealized gains or losses excluded from earnings and reported
as a separate component of shareholders' equity, net of applicable taxes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
HTM investment securities are stated at cost, net of the amortization of
premium and the accretion of discount. AFS investment securities are used as a
part of Centura's asset/liability and liquidity management strategy and may be
sold in response to changes in interest rates or prepayment risk, the need to
manage regulatory capital, and other factors.
Securities transactions are recognized on a trade-date basis. The cost of
securities sold is determined on a specific identification basis. Premiums and
discounts are amortized or accreted into income using the level-yield method
over the estimated lives of the assets.
Loans
Substantially all loans accrue interest using the level-yield method based
on the principal amount outstanding. Loan origination fees, net of certain
direct origination costs, are deferred and amortized as an adjustment to
interest income over the estimated life of the related loans using a method
that approximates a constant yield.
Centura originates certain residential mortgage loans with the intent to
sell. Such loans held for sale are included in loans in the accompanying
consolidated balance sheets and are carried at the lower of cost or fair value
on an aggregate loan basis as determined by outstanding commitments from
investors or current quoted market prices.
Allowance for Loan Losses
The AFLL represents management's estimate of the amount necessary to
absorb probable incurred losses in the loan portfolio and is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the AFLL, and subsequent recoveries, if any,
are credited to the AFLL. Management believes that the AFLL is adequate.
Management's periodic evaluation of the adequacy of the AFLL is based on
individual loan reviews, loan loss experience of prior years, economic
conditions in the Bank's market areas, the fair value and adequacy of
underlying collateral, and the growth and risk composition of the loan
portfolio. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change.
Thus, future additions to the AFLL may be necessary based on the impact of
changes in economic conditions on the Bank's borrowers. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's AFLL. Such agencies may require the Bank to
recognize additions to the AFLL based on their judgments about all relevant
information available to them at the time of their examination.
Impaired Loans, Nonaccrual Loans, and Other Real Estate Owned
A loan is considered to be impaired when, based on current information, it
is probable Centura will not receive all amounts due in accordance with the
contractual terms of a loan agreement. The discounted expected cash flow method
is used in determining the fair value of impaired loans, except in cases
involving collateral-dependent loans, in which case the fair value is
determined using the fair value of the collateral. When the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent any interest has been foregone, and then they
are recorded as recoveries of any amounts previously charged-off. When this
doubt does not exist, cash receipts are applied under the contractual terms of
the loan agreement. The accrual of interest is generally discontinued on all
loans when management has doubts that principal and interest will be collected
in a reasonable period of time. Generally, open-end credit lines that reach 180
days or more past due and substantially all other loans that reach 90 days or
more past due are placed on nonaccrual status unless the loan is adequately
secured and in the process of collection. Generally, all loans past due 180
days are placed on nonaccrual status regardless of security. Recorded accrued
interest is reversed or charged-off.
Interest received on nonaccrual loans is generally applied against
principal or may be reported as interest income depending on management's
judgment as to the collectibility of principal. A loan classified as nonaccrual
is returned to accrual status when the obligation has been brought current, has
performed in accordance with its contractual terms over an extended period of
time, and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Other real estate owned is included in other assets and is comprised of
property acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu of foreclosure. At December 31, 1999 and 1998, the net book value
of other real estate properties was $6.4 million and $7.9 million,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Mortgage Servicing Rights
The rights to service mortgage loans for others are included in other
assets on the consolidated balance sheet. Capitalization of the allocated cost
of MSRs occurs when the underlying loans are sold, securitized or purchased.
Capitalized MSRs are amortized in proportion to and over the period of
estimated net servicing income using a method that is designed to approximate a
level-yield method, taking into consideration the estimated prepayment of the
underlying loans. Capitalized MSRs are evaluated periodically for impairment
based on the excess of the carrying amount of such rights over their fair
value. To determine fair value, MSRs are stratified on the basis of numerous
financial characteristics including servicing fee, maturity, interest rate,
repricing index, etc. Expected cash flows are determined by applying prepayment
estimates to the contractual term of the serviced loans. The fair value is
estimated by discounting these cash flows through the serviced loan's expected
maturity date. The discount rate used is based on market yields and includes a
risk premium reflecting the credit and interest rate risk inherent in each
strata of servicing rights. Cash flows and fair values are calculated over a
broad range of possible interest rate paths that are based on market volatility
estimates, with the reported fair value representing the average value for
those interest rate paths.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation expense is
computed by the straight-line method based upon the estimated useful lives of
the assets. Useful lives range between three and forty years for buildings and
one and twenty years for furniture, fixtures and equipment. Leasehold
improvements and assets acquired under capital leases are amortized on a
straight-line basis over the shorter of the life of the leased asset or the
lease term. These assets have depreciable lives ranging between three and
thirty years. Expenditures for maintenance and repairs are charged to expense
as incurred and gains or losses on disposal of assets are reflected in current
operations.
Other Assets and Other Liabilities
Intangible assets are principally comprised of goodwill and are included
in other assets. Goodwill represents the excess of cost over the fair value of
net assets acquired in purchase acquisitions and is generally being amortized
over 15 years. At December 31, 1999 and 1998, goodwill, net of accumulated
amortization, was $135.8 million and $127.1 million, respectively.
Negative goodwill, included in other liabilities, represents the excess of
fair value of net assets acquired over cost after recording the liability for
recaptured tax bad debt reserve and reducing the basis in bank premises and
equipment and other noncurrent assets acquired to zero. Negative goodwill is
being accreted into earnings on a straight-line basis over a period of ten
years, the period estimated to be benefited. At December 31, 1999 and 1998,
negative goodwill, net of accumulated accretion, was $3.5 million and $4.8
million, respectively.
Centura has included as other assets equipment under operating lease
contracts. For the years ended December 31, 1999, 1998, and 1997, $6.2 million,
$7.5 million, and $4.6 million, respectively, of net operating lease rental
income was recorded in other noninterest income.
Also included in other assets is Centura's investment in FGHE, which is
accounted for using the equity method of accounting. At December 31, 1999 and
1998, the investment in FGHE, net of accumulated amortization, was $29.7
million and $33.3 million, respectively. Retained earnings at December 31, 1999
includes undistributed losses from FGHE totaling $1.8 million. Undistributed
earnings of $1.9 million were recognized in 1998.
Long-lived assets and certain intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. An impairment loss is recognized if the sum of the
undiscounted future cash flows is less than the carrying amount of the asset.
Those assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Income Taxes
Centura uses the asset and liability method to account for income taxes.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the income tax basis of Centura's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
Net Income Per Share
Basic earnings per common share is calculated by dividing net income by
the weighted-average number of common shares outstanding during each period.
Diluted earnings per common share is based on the weighted-average number of
common shares outstanding during each period plus the maximum dilutive effect
of common stock issuable upon exercise of stock options which totaled 638,376,
914,760, and 975,010 shares at December 31, 1999, 1998, and 1997 respectively.
Dilutive potential common shares are calculated using the treasury stock
method.
Stock-Based Employee Compensation
Most of Centura's stock-based employee compensation plans provide for the
deferral of compensation in exchange for stock options. As allowed under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), Centura accounts for its stock-based
employee compensation plans in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). See Note 13 for the required SFAS 123
pro-forma disclosures.
Off-Balance Sheet Derivative Financial Instruments
Off-balance sheet derivative financial instruments, such as interest rate
swaps ("swaps"), interest rate floor and cap arrangements ("floors" and "caps,"
respectively), and interest rate futures and options contracts, are available
to Centura to assist in managing its exposure to changes in interest rates.
Centura has principally utilized swaps, floors and caps. The fair value of
these off-balance sheet derivative financial instruments are based on dealer
quotes, third party financial models, and internal pricing analytics. Interest
rate swaps, floors and caps are accounted for on an accrual basis, and the net
interest differential, including premiums paid, if any, is recognized as an
adjustment to interest income or interest expense of the related designated
asset or liability. Centura considers its interest rate swaps to be a synthetic
alteration of an asset or liability as long as (i) the swap is designated with
a specific asset or liability or a finite pool of assets or liabilities; (ii)
there is a high correlation, at inception and throughout the period of the
synthetic alteration, between changes in the interest income or expense
generated by the swap and changes in the interest income or expense generated
by the designated asset or liability; (iii) the notional amount of the swap is
less than or equal to the principal amount of the designated asset or liability
or pools of assets or liabilities; and (iv) the swap term is approximately
equal to the remaining term of the designated asset or liability or pools of
assets or liabilities. If these criteria are not met, then changes in the fair
value of the swap is no longer considered a synthetic alteration and changes in
their fair value are included in other income. The criteria for consideration
of a floor or cap as a synthetic alteration are generally the same as those for
a swap arrangement.
If the swap, floor, or cap arrangements are terminated before their
maturity, the net proceeds received or paid are deferred and amortized over the
shorter of the remaining contract life or the maturity of the designated asset
or liability as an adjustment to interest income or expense. If the designated
asset or liability is sold or matures, the swap agreement is marked to market
and the gain or loss is included with the gain or loss on the sale/maturity of
the designated asset or liability. Changes in the fair value of any
undesignated swaps, floors, and caps would be included in other income in the
consolidated statements of income.
Fair Value of Financial Instruments
The following describes the methods and assumptions used by Centura to
estimate the fair value of financial instruments.
Cash and Due From Banks (including those that are interest-bearing),
Federal Funds Sold, and Accrued Interest Receivable -- The fair value of these
instruments are considered to approximate their carrying amounts due to the
short-term nature of these financial instruments.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Investment Securities -- The fair value of investment securities is
estimated based on quoted market prices received from independent third
parties.
Loans -- For fair value calculations, loans are categorized by business
purpose and divided into fixed and variable classifications. These
classifications are further segmented into like groups based on financial
characteristics such as maturity, coupon, reprice index, etc. Final maturities
and expected cash flows are determined by applying prepayment estimates to the
contractual term of the loans. The fair values of loans are estimated by
discounting cash flows through the loan's expected maturity date. The discount
rate is based on market yields that include a risk premium reflecting the
credit and interest rate risk inherent in each class of loan. Cash flows and
fair values are calculated over a broad range of possible future interest rate
paths with the reported fair value representing the average value for those
interest rate paths.
Deposits -- The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, interest checking, money market and
savings accounts, are considered to approximate the amount payable on demand at
year-end. The fair value of time deposits is based on the discounted values of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowed Funds, Accrued Interest Payable, and Long-term Debt -- The fair
value of borrowed funds and accrued interest payable approximates its carrying
amount due to its short-term nature. The fair value of long-term debt is based
on the discounted value of contractual cash flows. The discount rates are based
on market rates for debt of the same remaining maturities.
Current Accounting Matters
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). The statement addresses accounting and reporting requirements for
derivative instruments and for hedging activities. SFAS 133 requires that all
derivatives be recognized as either assets or liabilities in the consolidated
balance sheet and that those instruments be measured at fair value. If certain
conditions are met, a derivative may be designated as a hedge of exposure to
changes in fair value of an asset or liability, exposure to variable cash flows
of a forecasted transaction or exposure of foreign currency denominated
forecasted transactions. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivatives and its resulting
designation. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB 133." This Statement defers the effective date of SFAS 133 for one
year. SFAS 133, as amended, is now effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Management is in the process of
evaluating the impact of adopting SFAS 133. Management anticipates adopting
this Statement on January 1, 2001.
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 exposure drafts and to proposed effective
dates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- OTHER COMPREHENSIVE INCOME OR LOSS
The components of other comprehensive income or loss are summarized below
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ------------------------------------
Tax Tax
Before-Tax (Expense) After-Tax Before-Tax (Expense) After-Tax
Amount Benefit Amount Amount Benefit Amount
------------ ----------- ------------- ------------ ----------- -----------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized (losses) gains arising
during period .............................. $(81,662) $30,054 $ (51,608) $ (563) $ 208 $ (355)
Less: Reclassification for realized
(losses) gains ............................. (600) 293 (307) 2,357 (834) 1,523
-------- ------- --------- -------- ------- --------
Unrealized (losses) gains, net of
reclassification ........................... (81,062) 29,761 (51,301) (2,920) 1,042 (1,878)
Minimum pension liability adjustment ......... 132 (52) 80 328 (130) 198
-------- ------- --------- -------- ------- --------
Other comprehensive (loss) income ............ $(80,930) $29,709 $ (51,221) $ (2,592) $ 912 $ (1,680)
======== ======= ========= ======== ======= ========
<CAPTION>
1997
-----------------------------------
Tax
Before-Tax (Expense) After-Tax
Amount Benefit Amount
------------ ----------- ----------
(thousands)
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized (losses) gains arising
during period .............................. $15,480 $ (6,027) $9,453
Less: Reclassification for realized
(losses) gains ............................. 1,540 (546) 994
------- -------- ------
Unrealized (losses) gains, net of
reclassification ........................... 13,940 (5,481) 8,459
Minimum pension liability adjustment ......... (338) 135 (203)
------- -------- ------
Other comprehensive (loss) income ............ $13,602 $ (5,346) $8,256
======= ======== ======
</TABLE>
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES
Centura consummated the following mergers and acquisitions during 1999,
1998, and 1997.
<TABLE>
<CAPTION>
Acquisition
Date Assets Loans Deposits Shares Issued
------------ -------- ------- ---------- --------------
(millions, except shares)
<S> <C> <C> <C> <C> <C>
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Capital Advisors .................................................. 1/07/99 $ 1 $ -- $ -- 122,865
Scotland Bancorp, Inc. ("Scotland"), Laurinburg, NC ............... 2/05/99 57 41 40 --
Moore & Johnson, Inc. ("M&J"), insurance agency ................... 1/30/98 $ 3 $ -- $ -- 48,950
NBC Bank, FSB ("NBC"), deposit assumption ......................... 7/24/98 17 4 17 --
Clyde Savings Bank, A Division of the Hometown Bank,
("Clyde"), deposit assumption ................................... 10/15/98 6 -- 6 --
Branch Banking and Trust Company and United Carolina Bank
("BB&T"), deposit assumption .................................... 8/15/97 $508 $232 $508 --
Betts & Company ("Betts"), insurance agency ....................... 11/03/97 1 -- -- 44,443
NationsBank, N.A. ("NationsBank"), deposit assumption ............. 11/13/97 86 52 86 --
First Union National Bank ("First Union"), deposit assumption ..... 12/05/97 16 -- 16 --
MERGERS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS:
First Coastal Bankshares, Inc. ("First Coastal"), Virginia Beach,
VA .............................................................. 3/26/99 $527 $433 $380 1,706,875
Pee Dee Bankshares, Inc. ("Pee Dee"), Timmonsville, SC ............ 3/27/98 $138 $ 93 $125 577,034
Guaranty State Bancorp ("Guaranty"), Durham, NC ................... 4/16/98 103 78 89 849,816
United Federal Savings Bank ("United"), Rocky Mount, NC ........... 9/17/98 302 248 266 1,625,552
Bank of Mecklenburg ("Mecklenburg"), Charlotte, NC ................ 10/02/97 $270 $140 $195 1,474,921
Coastal Leasing Company ("Coastal"), Greenville, NC ............... 10/31/97 13 13 -- 219,375
</TABLE>
For combinations accounted for under the pooling-of-interests method, all
financial data previously reported prior to the date of merger have been
restated as though the entities had been combined for the periods presented
except as indicated otherwise for the Pee Dee transaction discussed below. For
acquisitions accounted for under the purchase method, the financial position and
results of operations of each entity were not included in the consolidated
financial statements until the consummation date of the transaction.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES -- Continued
On February 18, 2000, Centura merged with Triangle, a Raleigh, North
Carolina based bank holding company in a transaction accounted for as a
pooling-of-interests. Centura issued approximately 11.4 million shares to effect
the combination and each Triangle shareholder received 0.45 shares of Centura
common stock in exchange for each Triangle share. Triangle had assets of
approximately $2.4 billion and operated 71 locations throughout North Carolina.
In connection with this combination, Centura expects to incur merger-related
expenses ranging between $35 million and $45 million. In addition anticipated
losses of approximately $15 million are expected to be incurred on sales of
certain investment securities as a result of restructuring Triangle's investment
portfolio. Historical financial information presented in these consolidated
financial statements has been restated to include the accounts and results of
operations of Triangle.
The following table presents the results of operations of the previously
separate companies and does not reflect intercompany eliminations or
reclassifications of certain revenue and expense items which were made to
conform the reporting policies for the combined entity:
<TABLE>
<CAPTION>
Centura
and Triangle
Centura Triangle Combined
------------- ------------ -------------
(in thousands, except share data)
<S> <C> <C> <C>
Year ended December 31, 1999
Net interest income, after provision ......... $ 306,489 $ 71,408 $ 377,897
Noninterest income ........................... 152,693 20,221 172,914
Noninterest expense .......................... 302,063 51,619 353,682
Net income ................................... 104,028 26,707 130,735
Net income per common share:
Basic ...................................... $ 3.66 $ 1.06 $ 3.28
Diluted .................................... 3.62 1.04 3.23
Year ended December 31, 1998
Net interest income, after provision ......... $ 302,447 $ 69,515 $ 371,962
Noninterest income ........................... 140,521 18,456 158,977
Noninterest expense .......................... 290,397 54,896 345,293
Net income ................................... 100,314 21,858 122,172
Net income per common share:
Basic ...................................... $ 3.57 $ 0.87 $ 3.10
Diluted .................................... 3.50 0.84 3.03
Year ended December 31, 1997
Net interest income, after provision ......... $ 273,224 $ 63,269 $ 336,493
Noninterest income ........................... 112,268 16,922 129,190
Noninterest expense .......................... 253,357 50,125 303,482
Net income ................................... 87,161 19,526 106,687
Net income per common share:
Basic ...................................... $ 3.17 $ 0.79 $ 2.76
Diluted .................................... 3.11 0.76 2.70
</TABLE>
On January 7, 1999, Centura acquired Capital Advisors of North Carolina,
LLC, Capital Advisors of South Carolina, Inc., Capital Advisors of Mississippi,
Inc., Selken, Inc., and Capital Advisors, Inc., collectively referred to as
Capital Advisors. With this transaction, Capital Advisors became a wholly-owned
subsidiary of Centura Bank. Capital Advisors, with offices in North Carolina,
South Carolina, Georgia, and Mississippi, is engaged in the business of
commercial real estate financing and consulting primarily through brokering and
servicing commercial mortgage loans. The acquisition was accounted for using
the purchase method of accounting, and approximately $14.8 million of goodwill
was recorded in other assets on the consolidated balance sheet.
On February 5, 1999, Centura completed the acquisition of Scotland, based
in Laurinburg, North Carolina. The acquisition was accounted for as a purchase.
Goodwill of approximately $6.6 million was recorded in other assets on the
consolidated balance sheet.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES -- Continued
On March 26, 1999, Centura merged with First Coastal, headquartered in
Virginia Beach, Virginia. Each share of First Coastal common stock was
exchanged for 0.34 shares of Centura common stock. The combination was
accounted for as a pooling-of-interests, and accordingly, historical financial
information for all periods presented has been restated to include First
Coastal's historical financial information. This combination increased
Centura's presence in the Hampton Roads region of Virginia by 18 financial
stores. In connection with the merger, Centura recorded non-recurring pre-tax
charges of $8.4 million, which includes $6.9 million in merger-related expenses
and $1.5 million in provision for loan losses recorded to align the allowance
for loan loss factors between the two entities. Included in these
merger-related expenses were severance and termination-related accruals, costs
of the transaction, and the write-off of certain assets deemed to have no
ongoing benefit to Centura. The severance costs include payments to be made in
connection with the involuntary termination of employees who were specifically
identified and notified of their termination and severance benefits in
December, 1998. The following table summarizes these merger-related charges as
well as any remaining liability at December 31, 1999:
<TABLE>
<CAPTION>
Utilized in Remaining Balance
Merger-Related Charges Pre-tax 1999 December 31, 1999
------------------------------------------ --------- ------------- ------------------
(in thousands)
<S> <C> <C> <C>
Severance costs .......................... $ 770 $ 770 $ --
Write-off of unrealizable assets ......... 1,259 1,059 200
Contract terminations .................... 2,071 1,337 734
Professional costs ....................... 1,683 1,683 --
Other merger-related expenses ............ 1,075 1,068 7
------ ------ ----
Total merger-related expenses ............ $6,858 $5,917 $941
====== ====== ====
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES -- Continued
On January 30, 1998, Centura consummated the acquisition of M&J, an
insurance agency with its principal operations in Raleigh, North Carolina. M&J
added approximately $3.0 million in assets and $3.2 million of goodwill.
On March 27, 1998, Centura completed its merger with Pee Dee. 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 April 16, 1998, Centura merged with Guaranty, a Durham, North Carolina
based bank with assets of approximately $103 million. The combination was
effected through the issuance of 849,816 shares of Centura common stock
representing an exchange of 0.95 shares of Centura common stock for each
outstanding share of Guaranty common stock. The combination was accounted for
as a pooling-of-interests.
On July 24, 1998, Centura assumed approximately $17.0 million of deposits
and $4.0 million of loans from NBC. The transaction added approximately $1.7
million to goodwill. Located in the Winston-Salem area of North Carolina, these
supermarket locations complement Centura's existing supermarket delivery
channel.
On September 17, 1998, Centura merged with United. United operated 13
offices in Rocky Mount, North Carolina. Each share of United common stock was
exchanged for 0.49 shares of Centura common stock. This pooling added $248.0
million and $266.0 million to Centura's loan and deposit portfolios,
respectively.
On October 15, 1998, Centura consummated a deposit assumption from Clyde.
In the transaction, Centura assumed approximately $6.0 million of deposits from
Clyde's branch office located in Franklin, North Carolina. Goodwill of $358,000
was recorded.
On August 15, 1997, Centura consummated its assumption of deposit
liabilities and acquisition of certain loans from BB&T. Centura acquired 23
offices located in several communities in eastern and southeastern North
Carolina. The purchase price exceeded the fair value of net assets acquired
which resulted in $51.7 million recorded as goodwill, included in other assets
on the consolidated balance sheet.
On October 2, 1997, Centura completed the acquisition of Mecklenburg
through the issuance of 0.45 shares of Centura's common stock for each share of
the outstanding stock of Mecklenburg, resulting in the issuance of 1,474,921
shares. Mecklenburg, with two offices in Charlotte, expanded Centura's presence
to western North Carolina. The transaction was accounted for as a
pooling-of-interests.
On October 31, 1997, Centura acquired Coastal Leasing through the issuance
of 219,375 shares of Centura's common stock, in a transaction accounted for as
a pooling-of-interests. Coastal Leasing specializes in the leasing of office
equipment to small businesses.
On November 3, 1997, Centura consummated its acquisition of Betts, an
independent insurance agency based in Rocky Mount, North Carolina. The merger
was consummated through the issuance of 44,443 shares of Centura common stock.
The purchase price exceeded the fair value of the net assets acquired and
accordingly, goodwill of $2.6 million was recorded. The activities of Betts
continue through Centura Insurance Services, Inc., a wholly-owned subsidiary of
Centura Bank.
On November 13, 1997, Centura consummated its assumption of deposit
liabilities and acquisition of certain loans from NationsBank. Centura acquired
five banking centers, all located in North Carolina. Goodwill of $7.8 million
was recorded as an other asset on the consolidated balance sheet.
In addition, on December 5, 1997 Centura acquired $16.0 million in deposits
from First Union's Bakersfield, North Carolina office and accordingly, goodwill
of approximately $921,000 was recorded.
On September 30, 1999, Centura sold its technology leasing subsidiary,
CLG, Inc. The pretax net gain recorded on this sale was $4.9 million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- INVESTMENT SECURITIES
A summary of investment securities by type at December 31 follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ ------------
(thousands)
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury .................... $ 24,900 $ 124 $ -- $ 25,024
U.S. government agencies
and corporations ................ 43,786 108 127 43,767
Mortgage-backed securities 16,827 -- 401 16,426
State and municipal .............. 26,686 317 46 26,957
Other securities ................. 2,375 6 34 2,347
---------- ------- ------- ----------
Total held to maturity ........... $ 114,574 $ 555 $ 608 $ 114,521
========== ======= ======= ==========
Available for sale:
U.S. Treasury .................... $ 125,514 $ 39 $ 420 $ 125,133
U.S. government agencies
and corporations ................ 294,072 4,072 5,864 292,280
Mortgage-backed securities 1,600,572 1,296 46,046 1,555,822
Asset-backed securities .......... 215,351 49 2,978 212,422
State and municipal .............. 87,924 36 5,598 82,362
Common stock ..................... 63,573 10,641 1,436 72,778
Other securities ................. 407,672 -- 20,955 386,717
---------- ------- ------- ----------
Total available for sale ......... $2,794,678 $16,133 $83,297 $2,727,514
========== ======= ======= ==========
<CAPTION>
1998 1997
---------------------------------------------------- ------------
Amortized Unrealized Unrealized Fair Amortized
Cost Gains Losses Value Cost
------------- ------------ ------------ ------------ ------------
(thousands)
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury .................... $ 36,849 $ 1,291 $ -- $ 38,140 $ 90,932
U.S. government agencies
and corporations ................ 83,144 1,325 3 84,466 140,444
Mortgage-backed securities 21,274 15 116 21,173 39,656
State and municipal .............. 42,158 1,778 9 43,927 51,462
Other securities ................. 1,480 36 -- 1,516 2,103
---------- ------- ------- ---------- ----------
Total held to maturity ........... $ 184,905 $ 4,445 $ 128 $ 189,222 $ 324,597
========== ======= ======= ========== ==========
Available for sale:
U.S. Treasury .................... $ 168,784 $ 4,984 $ -- $ 173,768 $ 300,776
U.S. government agencies
and corporations ................ 259,240 1,864 3,300 257,804 201,492
Mortgage-backed securities 1,492,355 15,903 11,806 1,496,452 1,315,389
Asset-backed securities .......... 178,258 2,965 223 181,000 93,875
State and municipal .............. 73,340 2,007 272 75,075 37,967
Common stock ..................... 54,359 -- 69 54,290 58,988
Other securities ................. 299,191 5,057 3,212 301,036 155,602
---------- ------- ------- ---------- ----------
Total available for sale ......... $2,525,527 $32,780 $18,882 $2,539,425 $2,164,089
========== ======= ======= ========== ==========
</TABLE>
The following is a summary of investment securities by contractual
maturity at December 31, 1999:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------- ------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
---------------- ------------ ---------------- -------------
(thousands)
<S> <C> <C> <C> <C>
Due in one year or less .................... $ 32,391 $ 32,413 $ 91,353 $ 95,060
Due after one year through five years ...... 53,385 53,683 344,732 338,864
Due after five years through ten years ..... 8,689 8,727 77,791 72,497
Due after ten years ........................ 3,282 3,272 406,307 383,872
Mortgage-backed and asset-backed securities 16,827 16,426 1,815,923 1,768,244
Common stock ............................... -- -- 58,572 68,977
-------- -------- ---------- ----------
Total ...................................... $114,574 $114,521 $2,794,678 $2,727,514
======== ======== ========== ==========
</TABLE>
At December 31, 1999 and 1998, investment securities with book values of
approximately $1.4 billion and $854.0 million, respectively, were pledged to
secure public funds on deposit and for other purposes required by law or
contractual arrangements. Securities collateralized in repurchase agreements as
set forth in Note 10 have been transferred to a third party or are maintained
in segregated accounts.
During 1999, gross realized gains and losses of $3.6 million and $4.2
million, respectively, were generated from sales of securities. Gross gains of
$3.0 million and $6.2 million and gross losses of $638,000 and $4.7 million
were realized during 1998 and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- LOANS
A summary of loans at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(thousands)
<S> <C> <C>
Commercial, financial, and agricultural .................. $1,759,546 $1,345,458
Consumer ................................................. 587,590 563,009
Real estate -- mortgage .................................. 3,855,288 3,824,429
Real estate -- construction and land development ......... 942,719 930,399
Leases ................................................... 292,672 462,154
Other .................................................... 90,955 91,358
---------- ----------
Total loans, net of unearned income ...................... $7,528,770 $7,216,807
========== ==========
Included in the above:
Nonaccrual loans ......................................... $ 29,415 $ 37,238
Accruing loans past due ninety days or more .............. 14,366 14,777
</TABLE>
Loans classified as real estate -- mortgage include mortgage loans held
for sale of $86.5 million and $160.7 million for 1999 and 1998, respectively.
Most of Centura's loan business is with customers located in North Carolina,
South Carolina and the Hampton Roads region of Virginia.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of these loans at
December 31, 1999, 1998 and 1997 amounted to $3.1 billion, $3.3 billion and
$3.5 billion, respectively.
For the years ended December 31, 1999, 1998 and 1997, the interest income
that would have been recorded on nonaccrual loans had they performed in
accordance with their original terms amounted to approximately $2.3 million,
$2.7 million and $2.1 million, respectively. Interest income on all such loans
included in the results of operations amounted to approximately $668,000,
$718,000, and $634,000 during 1999, 1998, and 1997, respectively.
In the normal course of business, Centura extends credit to FGHE at
prevailing interest rates and at terms similar to those granted in arms-length
transactions. At December 31, 1999 and 1998, total loans outstanding to FGHE
were $34.0 million and $55.9 million, respectively, and are included in the
consolidated balance sheets.
The Bank makes loans to executive officers and directors of Centura and
the Bank and to their associates. It is management's opinion that such loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(thousands)
<S> <C> <C> <C>
AFLL at beginning of year ............................ $ 91,894 $ 86,373 $ 77,917
AFLL related to loans sold and subsidiary sale ....... (556) -- --
Allowance for acquired loans ......................... 605 2,068 4,338
Provision for loan losses ............................ 40,828 20,759 18,764
Charge-offs .......................................... (41,044) (21,263) (19,397)
Recoveries on loans previously charged-off ........... 3,553 3,957 4,751
--------- --------- ---------
Net Charge-offs ...................................... (37,491) (17,306) (14,646)
--------- --------- ---------
AFLL at end of year .................................. $ 95,280 $ 91,894 $ 86,373
========= ========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES -- Continued
The following tables summarize impaired loan information as of December
31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
Impaired loans with related allowance ............ $11,802 $15,651
Impaired loans with no related allowance ......... 3,861 4,659
------- -------
Total impaired loans ............................. $15,663 $20,310
======= =======
Allowance on impaired loans ...................... $ 6,543 $ 6,487
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
Cash basis interest income ............ $ 141 $ 150 $ 207
Average impaired loan balance ......... 24,160 19,745 14,686
</TABLE>
NOTE 7 -- MORTGAGE SERVICING RIGHTS
A summary of capitalized MSRs follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
Balance at beginning of year ......... $ 36,334 $ 31,532
MSRs capitalized ..................... 13,203 13,440
MSRs amortized ....................... (9,285) (8,638)
Sale of MSRs ......................... (4,336) --
-------- --------
Balance at end of year ............... $ 35,916 $ 36,334
======== ========
</TABLE>
The fair value of capitalized MSRs at December 31, 1999 and 1998 was
approximately $62.9 million and $44.5 million, respectively. No valuation
allowance for capitalized MSRs was required during the years ended December 31,
1999 and 1998.
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
Land .................................................... $ 25,569 $ 26,317
Buildings ............................................... 103,011 103,377
Buildings and equipment under capital lease ............. 2,017 2,017
Leasehold improvements .................................. 21,904 21,344
Furniture, fixtures, and equipment ...................... 135,964 145,667
Construction in progress ................................ 3,310 1,418
-------- --------
Total ................................................... 291,775 300,140
Less: Accumulated depreciation and amortization ......... 132,475 135,310
-------- --------
Premises and equipment .................................. $159,300 $164,830
======== ========
</TABLE>
Depreciation and amortization on premises and equipment, included in
operating expenses, amounted to $20.9 million, $21.9 million, and $20.8 million
in 1999, 1998, and 1997, respectively.
Centura is obligated under a number of noncancelable operating leases for
banking premises with termination dates that extend up to seventeen years.
Centura is also obligated under short-term equipment leases which are generally
cancelable upon thirty to ninety days written notice. Most of the leases for
bank premises provide that Centura pay taxes, maintenance,
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- PREMISES AND EQUIPMENT -- Continued
insurance, and other expenses. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by other leases.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
2000 ................................. $10,688
2001 ................................. 8,202
2002 ................................. 6,379
2003 ................................. 4,529
2004 ................................. 3,330
Thereafter ........................... 17,052
-------
Total minimum lease payments ......... $50,180
=======
</TABLE>
Rent expense charged to operations was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
Bank premises ......... $ 9,412 $ 8,636 $ 7,168
Equipment ............. 2,679 3,446 3,266
------- ------- -------
Rent expense .......... $12,091 $12,082 $10,434
======= ======= =======
</TABLE>
NOTE 9 -- DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows (in thousands):
<TABLE>
<S> <C>
2000 ........................ $3,060,810
2001 ........................ 309,863
2002 ........................ 273,434
2003 ........................ 35,917
2004 and thereafter ......... 145,559
----------
Total ....................... $3,825,583
==========
</TABLE>
NOTE 10 -- BORROWED FUNDS
At December 31, borrowed funds consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(thousands)
<S> <C> <C>
Federal funds purchased and securities sold under agreements to repurchase $1,149,038 $1,151,349
Master notes .............................................................. 315,829 291,126
Federal Home Loan Bank ("FHLB") Advances .................................. 100,000 6,800
U.S. Treasury demand note ................................................. 25,959 5,498
Other ..................................................................... 10,412 10,344
---------- ----------
Total borrowed funds ...................................................... $1,601,238 $1,465,117
========== ==========
</TABLE>
At December 31, 1999, the Bank had $2.2 billion in total federal funds
lines available. Federal funds purchased have maturities that range between
maturing overnight to nine months. Maturities for outstanding repurchase
agreements range from overnight to two months. Securities collateralizing
repurchase agreements have been transferred to a third party or are held in
segregated accounts. Master notes are issued by Centura under a master
agreement with a term not to exceed 270 days and mature on a daily basis. The
Bank's U.S. Treasury demand note is payable on demand and interest on
borrowings under this arrangement is payable at 0.25 percent below the weekly
federal funds rate as quoted by the Federal Reserve.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10 -- BORROWED FUNDS -- Continued
At December 31, 1999, $50.0 million of unused borrowings under an
unsecured line of credit from a nonaffiliated bank was available to Centura to
provide for general liquidity needs. The rate on this line was 6.07 percent at
year-end. This line is renewed on an annual basis.
The following table presents certain information for federal funds
purchased and securities sold under agreements to repurchase and master notes:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Federal funds purchased and securities sold under agreements to
repurchase:
Amount outstanding at December 31 ............................. $ 1,149,038 $ 1,151,349 $ 619,759
Average outstanding balance ................................... 1,028,347 815,676 618,582
Highest balance at any month-end .............................. 1,418,146 1,212,367 817,412
Interest expense .............................................. 51,781 43,891 34,473
Approximate weighted-average interest rate:
During the year ............................................... 5.04% 5.38% 5.57%
End of year ................................................... 5.09 5.14 5.39
Master notes:
Amount outstanding at December 31 ............................. $ 315,829 $ 291,126 $ 211,095
Average outstanding balance ................................... 306,107 242,562 176,099
Highest balance at any month-end .............................. 325,809 300,199 220,413
Interest expense .............................................. 12,752 11,195 8,441
Approximate weighted-average interest rate:
During the year ............................................... 4.17% 4.62% 4.79%
End of year ................................................... 4.57 4.03 4.82
</TABLE>
NOTE 11 -- LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(thousands)
<S> <C> <C>
Federal Home Loan Bank advances ................ $658,397 $601,053
Capital Securities ............................. 119,954 119,952
Bank notes ..................................... 125,000 --
Notes payable secured by lease rentals ......... -- 35,441
Obligations under capitalized leases ........... 908 1,102
Other .......................................... 95 188
-------- --------
Total long-term debt ........................... $904,354 $757,736
======== ========
</TABLE>
At December 31, 1999, Centura's maximum borrowing capacity with the FHLB
was $893.2 million, of which $758.4 million was advanced at year-end 1999. Of
the amount advanced at year-end, $658.4 million and $100.0 million are
classified as long-term debt and short-term borrowings, respectively. At
December 31, 1999, FHLB advances had maturities of up to 19 years with interest
rates ranging between 1.0 percent and 6.6 percent. At December 31, 1998, FHLB
advances had maturities of up to 13 years with interest rates ranging between
1.0 percent and 6.7 percent. Centura has a blanket collateral agreement with
the FHLB whereby Centura maintains, free of other encumbrances, qualifying
mortgages (as defined) with unpaid principal balances at least equal to, when
discounted at 75 percent of the unpaid principal balance, 100 percent of the
FHLB advances. Also, as a requirement for membership with the FHLB, Centura
must invest in FHLB stock in an amount equal to the greater of 1 percent of its
mortgage related assets or 5 percent of its outstanding FHLB advances. At
December 31, 1999 and 1998, Centura owned 387,241 shares and 309,387 shares,
respectively, of $100 par value FHLB stock. This stock is pledged as collateral
against any advances extended to Centura by the FHLB.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 -- LONG-TERM DEBT -- Continued
The Bank has the ability to issue debt up to a maximum of $1.0 billion
under an offering by the Bank to institutional investors of unsecured bank
notes that have maturities that can range from 30 days and beyond from the date
of issue. Each bank note would be a direct, unconditional, and unsecured
general obligation solely of the Bank and would not be an obligation of or
guaranteed by Centura. Interest rate and maturity terms would be negotiated
between the Bank and the purchaser, within certain parameters set forth in an
offering circular. As of December 31, 1999, there were $125.0 million of 6.5
percent 10 year subordinated bank notes outstanding. There were no bank notes
outstanding at year-end 1998.
In June 1997, CCTI, a wholly-owned statutory business trust of Centura,
issued $100.0 million of Capital Securities maturing June 2027 ("Capital
Securities") bearing an interest rate of 8.845 percent. CCTI also issued $3.1
million of common securities to Centura. CCTI invested the proceeds of $103.1
million, generated from the Capital Securities and common securities issuances,
in 8.845 percent Junior Subordinated Deferrable Interest Debentures ("junior
debentures") issued by Centura, which upon consolidation are eliminated. The
junior debentures, with a maturity of June 2027, are the primary assets of
CCTI. With respect to the Capital Securities, Centura has irrevocably and
unconditionally guaranteed CCTI's obligations.
Also in June 1997, TCT, a wholly-owned statutory business trust of
Centura, issued $20.0 million of 9.375 percent Capital Securities maturing in
June 2027. The proceeds from this issuance were used by TCT to purchase junior
debentures issued by Centura, which upon consolidation are eliminated. The
junior debentures are the sole assets of TCT. As with the Capital Securities
described above, Centura has irrevocably and unconditionally guaranteed the
obligations of TCT.
The Capital Securities discussed above are included in Tier I capital for
regulatory capital adequacy requirements.
Equipment under leases is partially funded through the use of fixed rate
debt secured by future lease rentals to be received under certain lease
contracts and first liens on the related equipment. Generally, the terms of
these obligations are equal to the terms of the underlying contracts. At
December 31, 1999, Centura had no outstanding debt secured by future lease
rentals. At December 31, 1998, the weighted-average interest rate and maturity
for the notes payable secured by lease rentals were 8.33 percent and 2.3 years,
respectively.
At December 31, 1999, maturities of long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
2000 ............... $185,613
2001 ............... 214,195
2002 ............... 244,664
2003 ............... 10,093
2004 ............... 107
Thereafter ......... 249,682
--------
Total .............. $904,354
========
</TABLE>
NOTE 12 -- BENEFIT PLANS
Centura sponsors a noncontributory, qualified defined benefit pension
plan, a postretirement benefit plan, and defined contribution plans (401(k))
for the benefit of its employees. Centura also has an Omnibus Supplemental
Executive Retirement Plan ("SERP") which provides various officers with certain
benefits in excess of Centura's standard pension plan.
The following table displays a reconciliation of the changes in the
benefit obligation and the changes in the fair value of plan assets as well as
a statement of the funded status of the plans as of December 31:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
Pension Plan Postretirement SERP
Benefits Benefits Benefits
----------------------- ------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ------------ ------------ ------------- -------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of Benefit Obligation
Net benefit obligation, January 1 .................. $ 43,329 $ 37,953 $ 5,507 $ 4,994 $ 12,801 $ 10,651
Service cost ....................................... 2,884 2,717 282 214 906 975
Interest cost ...................................... 3,061 2,723 420 354 909 829
Participant contributions .......................... -- -- 197 137 -- --
Plan amendments .................................... -- -- -- -- (491) (1,007)
Actuarial (gain)/loss .............................. (3,230) 1,904 420 250 (198) 2,017
Benefits paid ...................................... (4,474) (1,968) (535) (442) (720) (664)
-------- -------- -------- -------- --------- ---------
Net benefit obligation, December 31 ................ $ 41,570 $ 43,329 $ 6,291 $ 5,507 $ 13,207 $ 12,801
======== ======== ======== ======== ========= =========
Reconciliation of Fair Value of Plan Assets*
Fair value, January 1 .............................. $ 34,597 $ 30,006 $ -- $ -- $ -- $ --
Actual return on plan assets ....................... 4,061 2,398 -- -- -- --
Employer contributions ............................. 2,345 4,161 338 305 720 664
Participant contributions .......................... -- -- 197 137 -- --
Benefits paid ...................................... (4,474) (1,968) (535) (442) (720) (664)
-------- -------- -------- -------- --------- ---------
Fair value, December 31 ............................ $ 36,529 $ 34,597 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========= =========
Funded Status
Funded status, December 31 ......................... $ (5,041) $ (8,732) $ (6,291) $ (5,507) $ (13,207) $ (12,801)
Unrecognized net transition (asset)/obligation ..... (104) (211) 2,885 3,107 -- --
Unrecognized prior service cost .................... 2,406 2,645 159 175 348 935
Unrecognized actuarial loss/(gain) ................. 3,809 8,091 298 (122) 2,470 2,648
-------- -------- -------- -------- --------- ---------
Net amount recognized .............................. $ 1,070 $ 1,793 $ (2,949) $ (2,347) $ (10,389) $ (9,218)
======== ======== ======== ======== ========= =========
</TABLE>
---------
* The assets of the pension plan are invested primarily in mutual funds and
corporate bonds and debentures.
The following table sets forth amounts recognized in the consolidated
financial statements for the years ended December 31:
<TABLE>
<CAPTION>
Pension Plan Postretirement SERP
Benefits Benefits Benefits
------------------- ------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
-------- ---------- ------------ ------------ ------------- -------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Accrued benefit liability ......... $ -- $ (694) $ (2,949) $ (2,347) $ (10,774) $ (10,132)
Prepaid benefit cost .............. 1,070 -- -- -- -- --
Intangible asset .................. -- 2,487 -- -- 383 832
Accumulated OCI ................... -- -- -- -- 2 82
------ ------ -------- -------- --------- ---------
Net amount recognized ............. $1,070 $1,793 $ (2,949) $ (2,347) $ (10,389) $ (9,218)
====== ====== ======== ======== ========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- BENEFIT PLANS -- Continued
The components of net periodic pension cost for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
Pension Plan Postretirement SERP
Benefits Benefits Benefits
----------------------------------- ------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------ ------ ---------- ---------- --------- ---------
(thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost .................. $ 2,884 $ 2,717 $ 2,401 $282 $214 $189 $ 906 $ 975 $ 722
Interest cost ................. 3,061 2,723 2,552 420 354 337 909 829 720
Expected return on assets ..... (3,166) (2,714) (2,430) -- -- -- -- -- --
Amortization of:
Transition asset ............. (107) (106) (106) 222 222 222 -- -- --
Prior service cost ........... 239 238 181 15 16 16 95 236 571
Actuarial loss/(gain) ........ 158 111 142 -- -- (6) (19) 238 374
-------- -------- -------- ---- ---- ------ ------ ------ ------
Net periodic benefit cost ..... $ 3,069 $ 2,969 $ 2,740 $939 $806 $758 $1,891 $2,278 $2,387
======== ======== ======== ==== ==== ===== ====== ====== ======
</TABLE>
In accounting for the above plans, the following assumptions were used:
<TABLE>
<CAPTION>
Pension Plan Postretirement
Benefits Benefits
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average discount rate .......... 7.50% 7.00% 7.25% 7.50% 7.00% 7.25%
Expected return on plan assets .......... 8.50 8.50 8.50 -- -- --
Rate of compensation increase ........... 5.50 5.50 5.50 -- -- --
Assumed health care cost trend rate ..... -- -- -- 5.50 5.50 5.50
<CAPTION>
SERP
Benefits
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average discount rate .......... 7.50% 7.00% 7.25%
Expected return on plan assets .......... -- -- --
Rate of compensation increase ........... 5.50 5.50 5.50
Assumed health care cost trend rate ..... -- -- --
</TABLE>
The health care cost trend rate assumption may have a significant effect
on the amount reported. Increasing or decreasing the assumed health care cost
trend rate by one percentage point would have the following impact:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
------------- ------------
<S> <C> <C>
Effect on:
Service and interest cost components of net periodic postretirement benefit cost $ 376 $ 341
Accumulated postretirement benefit obligation ................................... 5,376 4,868
</TABLE>
In addition to the expense incurred with the above plans, Centura also
incurs expense for other employee benefit plans. The amounts expensed for these
plans for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
401(k) plans ............................. $ 2,958 $ 3,002 $ 2,786
Sales commissions ........................ 14,348 15,059 10,209
EVA-based incentive compensation ......... -- 4,756 6,840
------- ------- -------
Total .................................... $17,306 $22,817 $19,835
======= ======= =======
</TABLE>
Centura's sales incentive plan rewards all sales officers for the value of
products and services sold after covering the costs of their individual
salaries, benefits, and other direct costs of producing new business. The
Economic Value Added ("EVA") incentive program provides for a total EVA
incentive pool for all non-sales employees based upon meeting EVA targets.
Calculation of the target incorporates the ability of current net operating
profits after tax to cover the annual cost of capital utilized. The program
also incorporates the use of bonus banking of a defined percentage of
incentives earned that are then placed at risk dependent upon future
performance plus the granting of leveraged stock options to specific members of
management. Other miscellaneous bonus and incentive awards are made primarily
under individual contracts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- STOCK OPTIONS, STOCK AWARDS, AND SHAREHOLDERS' EQUITY
At December 31, 1999, 1998, and 1997 Centura had approximately 1.2
million, 1.8 million, and 2.3 million shares, respectively, of its authorized
but unissued common stock reserved for its two stock-based compensation plans:
the Omnibus Equity Compensation Plan ("Omnibus Plan") and the Directors'
Deferred Compensation Plan ("Directors' Plan"). Under the Omnibus Plan,
participants are granted options to purchase Centura common stock. These
options generally vest over a five to eight-year period and have a maximum term
of ten years. Under the Directors' Plan, participants are allowed to receive
compensation in the form of stock options rather than in cash. These options
have no vesting period and expire five years after the grantee ceases to be a
director of Centura.
Prior to Centura's acquisition of Triangle, Triangle maintained a
qualified incentive stock option plan for the benefit of certain of its key
officers and employees and a non-qualified stock option plan for directors and
certain officers (the "1988 Stock Option Plans"). The 1988 Stock Option Plans
expired on January 4, 1998, and as such, no new awards were made after that
date. In addition, Triangle had reserved 1.5 million shares for future grants
in the form of stock options, restricted stock awards and stock appreciation
rights, under the 1998 Omnibus Stock Plan. Incentive options under this plan
were granted at fair market value and have ten-year lives. Centura assumed the
existing stock option plans of Triangle and converted the Triangle outstanding
options to Centura options based on the exchange ratio. No new options will be
issued from the assumed plans.
A summary of stock option transactions under these plans follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 ......... 2,337,843 $ 31.74 2,106,185 $ 19.33 2,329,802 $ 15.95
Granted .......................... 833,116 60.96 686,539 60.49 326,711 35.02
Exercised ........................ 459,366 15.40 398,667 14.07 509,822 13.27
Forfeited ........................ 109,403 53.67 56,214 43.09 40,506 16.05
--------- --------- ---------
Outstanding at December 31 ....... 2,602,190 43.06 2,337,843 31.74 2,106,185 19.33
========= ========= =========
Exercisable at December 31 ....... 1,315,680 $ 25.99 1,448,542 $ 20.41 1,251,547 $ 19.06
</TABLE>
The following table summarizes information related to stock options
outstanding and exercisable on December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number of Average Average Number of Average
Range of Option Shares Remaining Exercise Option Shares Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
-------------------------- --------------- ------------------ ---------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Less than $21.50 ......... 711,472 4.13 years $ 12.91 693,943 $ 12.89
$21.50 to 37.00 .......... 585,624 5.25 31.78 364,745 31.16
$37.00 to $69.89 ......... 477,024 7.39 52.46 175,515 46.47
$69.94 to $71.13 ......... 314,707 8.13 70.07 59,779 70.00
$71.44 ................... 108,449 8.05 71.44 21,698 71.44
$72.69 ................... 404,914 9.05 72.69 -- --
------- -------
2,602,190 6.40 43.06 1,315,680 25.99
========= =========
</TABLE>
Prior to Centura's acquisition of Triangle, Triangle maintained an
Employee Stock Purchase Plan (the "ESPP") that allowed employees to purchase
stock of up to 10 percent of their compensation through payroll deduction. In
May 1997 this plan was amended to allow the purchase of the stock at a 15
percent discount. The discount taken was on the lower of the market price at
the beginning or end of each six month period, with shares being issued out of
authorized but unissued shares.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13 -- STOCK OPTIONS, STOCK AWARDS, AND SHAREHOLDERS' EQUITY -- Continued
Under APB 25, Centura expensed approximately $3.1 million in 1999, $2.2
million in 1998, and $1.6 million in 1997 for employee stock awards and stock
option grants. If Centura had elected to recognize compensation cost for its
stock-based compensation plans in accordance with the fair value based
accounting method of SFAS 123, net income and earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
Pro Forma As Reported Pro Forma As Reported Pro Forma As Reported
------------- ------------- ------------- ------------- ------------- ------------
(thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income .......... $ 129,184 $ 130,337 $ 121,349 $ 122,172 $ 105,351 $ 106,687
Basic EPS ........... 3.25 3.28 3.08 3.10 2.73 2.76
Diluted EPS ......... 3.20 3.23 3.01 3.03 2.66 2.70
</TABLE>
The weighted-average fair values of options granted during 1999, 1998, and
1997 were $17.67, $20.60, and $12.90 per share, respectively. In determining
the pro forma disclosures of net income and earnings per share, the fair value
of options granted was estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Directors/Employee EVA Leveraged
Deferred Options Other
-------------------- -------------- ----------
<S> <C> <C> <C>
1999
Risk free interest rates .......... 5.64% 5.68% 5.68%
Dividend yield .................... 1.99 1.99 1.99
Volatility ........................ 24.24 24.24 24.24
Expected lives (in years) ......... 3.09 5.46 5.46
1998
Risk free interest rates .......... 5.03% 4.95% 4.95%
Dividend yield .................... 1.52 1.52 1.52
Volatility ........................ 23.98 23.98 23.98
Expected lives (in years) ......... 3.00 5.30 5.30
1997
Risk free interest rates .......... 6.14% 6.02% 6.02%
Dividend yield .................... 1.70 1.70 1.70
Volatility ........................ 24.16 24.16 24.16
Expected lives (in years) ......... 3.30 6.01 2.20
</TABLE>
The effects of applying SFAS 123 in the pro forma disclosures are not
indicative of future amounts.
Centura has a Dividend Reinvestment Stock Purchase Plan which allows
shareholders to invest dividends and optional cash payments in additional
shares of common stock. Shareholders of record are automatically eligible to
participate in the plan.
Cash dividends paid were $1.13, $1.00, and $0.89 on a per share basis
during 1999, 1998, and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 14 -- OTHER OPERATING EXPENSE
Other operating expense consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
(thousands)
<S> <C> <C> <C>
Marketing, advertising, and public relations ... $ 7,827 $ 10,461 $ 11,425
Stationery, printing, and supplies ............. 7,890 9,008 8,060
Postage ........................................ 4,503 4,502 4,221
Telephone ...................................... 11,950 11,136 9,201
FDIC insurance ................................. 1,586 1,920 1,940
Fees for outsourced services ................... 16,963 15,259 10,083
Service and licensing fees ..................... 5,300 6,676 5,453
Legal and professional fees .................... 14,225 13,886 17,697
Other administrative ........................... 11,550 11,811 10,434
Intangible amortization ........................ 13,614 12,123 8,700
Other .......................................... 27,081 26,381 21,480
-------- -------- --------
Total other operating expense .................. $122,489 $123,163 $108,694
======== ======== ========
</TABLE>
NOTE 15 -- INCOME TAXES
The components of income tax expense for the years ended December 31 were:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(thousands)
<S> <C> <C> <C>
Current expense:
Federal ......................... $55,805 $50,472 $38,264
State ........................... 4,819 3,838 2,146
------- ------- -------
60,624 54,310 40,410
Deferred expense:
Federal ......................... 4,486 8,016 13,315
State ........................... 1,024 1,148 1,790
------- ------- -------
5,510 9,164 15,105
------- ------- -------
Total income tax expense ......... $66,134 $63,474 $55,515
======= ======= =======
</TABLE>
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate ........................... 35.00% 35.00% 35.00%
Non-taxable income ............................... (2.41) (2.71) (3.07)
Mergers & acquisitions amortization, net ......... 0.62 0.46 0.44
Acquisition adjustments .......................... 0.50 0.33 0.14
State income tax, net of federal benefit ......... 2.12 1.73 1.70
Other, net ....................................... (2.17) (0.62) 0.02
----- ----- -----
Effective tax rate ............................... 33.66% 34.19% 34.23%
===== ===== =====
</TABLE>
Included in the Other category for 1999 are adjustments reducing the
effective tax rate by approximately 1.7 percent resulting from adjustments from
expected recoverable amounts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 15 -- INCOME TAXES -- Continued
The tax effects of temporary differences which give rise to significant
portions of the net deferred tax assets and liabilities at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -------------
(thousands)
<S> <C> <C>
Deferred tax assets:
Loan loss reserve ............................... $35,665 $ 33,218
Other reserves .................................. 3,991 2,624
Deferred compensation ........................... 14,250 14,399
Unrealized investment securities losses ......... 24,370 --
Other assets .................................... 11,305 7,380
------- ---------
Gross deferred tax assets ....................... 89,581 57,621
Deferred tax liabilities:
Premises and equipment .......................... 2,527 2,192
Employee retirement plans ....................... 2,106 1,939
Investment securities ........................... 2,952 1,146
Leasing activities .............................. 55,227 43,890
Other liabilities ............................... 24,541 27,347
Unrealized investment securities gains .......... -- 5,391
------- ---------
Gross deferred tax liabilities .................. 87,353 81,905
------- ---------
Net deferred tax asset (liability) .............. $ 2,228 $ (24,284)
======= =========
</TABLE>
No valuation allowance for deferred tax assets was required at December
31, 1999 or 1998. Management has determined that it is more likely than not
that the deferred tax assets can be supported by carrybacks to federal taxable
income in the federal carryback period or offset against deferred tax
liabilities. During 1999, the net deferred tax liability decreased
approximately $29.8 million due to fair value adjustments required under SFAS
115 for investment securities available for sale and decreased due to other
adjustments totaling approximately $2.3 million.
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Commitments and Off-Balance Sheet Risk
In the normal course of business, Centura may participate in various
financial instruments with off-balance sheet risk in order to satisfy the
financing needs of its borrowers and to manage its exposure to interest rate
risk. These financial instruments include commitments to extend credit, letters
of credit, and off-balance sheet derivative financial instruments.
At December 31, 1999 and 1998, Centura had commitments to extend credit of
$2.7 billion and $2.6 billion, respectively, and standby letters of credit of
$192.4 million and $145.8 million, respectively. With the exception of
commitments to originate residential mortgage loans which are discussed below,
these financial instruments are exercisable at the market rate prevailing at
the date the underlying transaction will be completed, and thus are deemed to
have no current fair value.
Commitments to extend credit are agreements to lend to customers at
predetermined interest rates as long as there is no violation of any condition
established in the contracts. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. These
commitments are subject to Centura's standard credit approval and monitoring
process. Centura's exposure to credit risk is represented by the contractual
amount of the commitment to extend credit. In the opinion of management, there
are no material commitments to extend credit that represent unusual risks.
Standby letters of credit are conditional commitments issued by Centura to
guarantee the performance of a customer to a third party. The risks and credit
approval process involved in issuing standby letters of credit are essentially
the same as that involved in commitments to extend credit.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Centura evaluates the collateral required for each extension of credit on
a case-by-case basis following the same guidelines set forth in normal lending
policy. The majority of commitments to extend credit and letters of credit are
secured, primarily with liquid financial instruments such as certificates of
deposit or income producing assets. If these commitments are drawn, Centura
will obtain collateral if it is deemed necessary based on management's credit
evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, and commercial or residential real estate.
Management expects that these commitments can be funded through normal
operations.
Centura enters into forward commitments to sell securitized mortgages to
reduce the Bank's exposure to market risk resulting from changes in interest
rates which could alter the underlying fair value of mortgage loans held for
sale ("MLHFS") and unfunded residential mortgage loans for which the Bank has
committed to extend credit and ultimately sell to the secondary market. The
Bank had forward commitments totaling $32.6 million and $160.5 million
outstanding at December 31, 1999 and 1998, respectively. These forward
commitments are set at fixed prices and are scheduled to settle at specified
dates which generally do not exceed 90 days. MLHFS are carried at the lower of
cost or fair value. The fair value of MLHFS which are committed to be sold is
determined based on the fixed price of the forward commitment. The fair value
for uncommitted MLHFS is determined using quoted market prices based on
characteristics and interest rate levels appropriate at the time of valuation.
The amount by which cost exceeds fair value on the MLHFS is recorded as a
valuation allowance. MLHFS at December 31, 1999 and 1998, which are included in
total loans on the consolidated balance sheet, were $86.5 million and $161.0
million reduced by valuation allowances of $174,000 and $201,000, respectively.
Pipeline loans, representing unfunded residential mortgage loans for which the
Bank has committed to extend credit that will either be sold or retained in the
portfolio, totaled $57.7 million and $121.2 million at December 31, 1999 and
1998, respectively.
In connection with its asset/liability management program, Centura has
entered into interest rate swap, cap, and floor arrangements with other
counterparties. Centura does not trade the instruments, and Centura's policy
governing the use of these instruments, as approved by Centura's Board of
Directors, does not contemplate speculation of any kind. It is not management's
intent to enter into any speculative transactions.
Interest rate swap agreements are used to reduce funding costs, allow
Centura to utilize diversified funding sources, and manage interest rate risk
with the objective of stabilizing Centura's net interest income over time.
These swaps are used to convert the fixed interest rates (or variable rates) on
designated investment securities, loans, and long-term debt to variable
interest rates (or fixed rates). Centura also enters into swaps in which both
interest rates are floating in order to reduce its basis risk with respect to a
given index.
Centura's interest rate swap agreements are summarized below:
<TABLE>
<CAPTION>
1999 1998
--------------------------- -----------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Corporation pays fixed/receives variable ... $ 482,219 $ 10,209 $399,812 $ (7,173)
Corporation pays variable/receives fixed ... 556,000 (12,788) 276,000 7,648
Corporation pays variable/receives variable 50,000 (8) 150,000 (203)
---------- ----------- -------- --------
Total interest rate swaps .................. $1,088,219 $ (2,587) $825,812 $ 272
========== ========== ======== ========
</TABLE>
At December 31, 1999 and 1998, Centura had interest rate floor agreements
and interest rate cap agreements. Floors and caps are used to protect certain
designated products from an adverse income or market valuation impact in the
event of a decreasing or increasing rate environment.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Interest rate cap and floor agreements are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Notional Carrying Fair Value
Amount Value Gain/(Loss)
---------- ---------- ------------
(thousands)
<S> <C> <C> <C>
December 31, 1999
Interest rate caps ........... $147,000 $374 $ (3,136)
Interest rate floors ......... 370,000 649 520
December 31, 1998
Interest rate caps ........... $147,000 $472 $ (892)
Interest rate floors ......... 320,000 650 4,318
</TABLE>
Centura, on a limited basis, also utilizes financial futures contracts and
exchange traded options on financial futures contracts to reduce interest rate
risk in the AFS portfolio. At December 31, 1999, Centura had no open financial
futures contracts or exchange traded options on financial futures contracts.
The risks generally associated with these derivative financial instruments
are the risk that the counterparty in the agreement may default ("credit
risk"), the risk that at the time of any such default, interest rates may have
moved unfavorably from the perspective of the nondefaulting party ("market
risk"), and the risk that amounts due to Centura previously reflected in the
consolidated balance sheets may not be received as a result of the default.
Centura's derivative financial instruments have been entered into with
nationally recognized commercial and investment banking firms. As such, Centura
does not currently anticipate nonperformance by the counterparties.
Additionally, to mitigate credit risks, Centura's derivative contracts are
generally governed by master netting agreements and, where appropriate, Centura
may obtain collateral in the form of rights to securities. The master netting
agreements provide for net settlement of covered contracts with the same
counterparty in the event of default by the other party.
Contingencies
Centura Bank is a co-defendant in two actions (the "Staton Cases") in the
Superior Court of Forsyth County, North Carolina which were filed in 1996 and
have been consolidated for discovery. The plaintiffs are Philip A.R. Staton,
Ingeborg Staton, Mercedes Staton, and trusts created by Ingeborg Staton and
Mercedes Staton. They allege that Centura Bank breached its duties and
committed other violations of law as depository of substantial sums of money
allegedly converted by the personal and financial advisors of the owners of
such money and in connection with the creation of charitable trusts established
with a portion of the funds. No claim for a specific amount of monetary damages
was made in the cases until 1999. Plaintiffs seek compensatory and treble
damages in amounts that are material to Centura and its subsidiaries taken as a
whole. Centura and Centura Bank believe that Centura Bank has meritorious
defenses to all claims asserted in these cases and Centura Bank is defending
the cases vigorously. In a separate and related case, also instituted in 1996
in the Superior Court of Forsyth County, North Carolina by Piedmont Institute
of Pain Management and three physicians associated with it (the "PIPM Case"),
which has been consolidated for discovery with the Staton Cases, Centura Bank
is alleged to have provided the plaintiffs with false information regarding the
establishment and funding of a medical clinic by failing to exercise reasonable
care or competence in obtaining such information, and to have committed other
violations of law. Plaintiffs seek specific performance or recovery of money
damages in an amount that is material to Centura and its subsidiaries taken as
a whole. Centura and Centura Bank believe Centura Bank has meritorious defenses
to all claims asserted in this case and Centura Bank is defending the case
vigorously. In 1999, Ingeborg Staton, Mercedes Staton and trusts created by
Ingeborg Staton and Mercedes Staton filed a motion to amend their complaint in
the Staton Cases to add allegations of fraudulent concealment, violation of the
Bank Bribery Act and negligent supervision of employees. Centura Bank filed a
response opposing the proposed amendments. The movants thereupon filed a new
action (the "1999 Case") in Forsyth County, North Carolina Superior Court
asserting those claims against Centura Bank, certain of its named current and
former officers and persons described as "one or more John Does and one or more
Jane Does" who are identified in the complaint as current or former directors
of the Bank. By consent of the parties, the 1999 Case has been consolidated
with the Staton Cases and the PIPM Case. Centura and Centura Bank believe that
Centura Bank has meritorious defenses to all claims asserted in this case and
Centura Bank intends to defend it vigorously. Management does not believe that
Centura or Centura Bank has liability with respect to these cases and
accordingly, is unable to estimate a range of loss.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 16 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Various legal proceedings against Centura and the Bank have arisen from
time to time in the normal course of business. Management believes liabilities
arising from these proceedings, if any, will have no material adverse effect on
the financial position or results of operations of Centura or the Bank.
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the market.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time Centura's entire holdings of a particular
financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Because no market exists for a
significant portion of Centura's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and/or the methodology used
could significantly affect the estimates disclosed. Similarly, the fair values
disclosed could vary significantly from amounts realized in actual
transactions.
Fair value estimates are based on existing on-balance sheet and
off-balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. For example, Centura has a
substantial asset management department that contributes net fee income
annually. The asset management department is not considered a financial
instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets and liabilities that are not considered
financial assets or liabilities include premises and equipment and intangibles.
In addition, tax ramifications related to the realization of the unrealized
gains and losses on securities could have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The following table presents the carrying values and estimated fair values
of Centura's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ -------------
(thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks, including interest-bearing $ 395,695 $ 395,695 $ 388,728 $ 388,728
Federal funds sold ................................. 28,686 28,686 17,646 17,646
Investment securities .............................. 2,842,088 2,842,035 2,724,330 2,728,647
Accrued interest receivable ........................ 71,822 71,822 69,117 69,117
Loans, net ......................................... 7,433,490 7,514,840 7,124,913 7,357,511
FINANCIAL LIABILITIES:
Deposits ........................................... $7,897,052 7,900,761 $7,701,790 $7,623,380
Accrued interest payable ........................... 40,131 40,131 31,122 31,122
Borrowed funds ..................................... 1,601,238 1,601,238 1,465,117 1,465,515
Long-term debt ..................................... 904,354 900,884 757,736 774,967
</TABLE>
See Note 16 for information regarding the fair value of Centura's
off-balance sheet financial instruments at December 31, 1999 and 1998 and Note
7 for information regarding the fair value of Centura's capitalized mortgage
servicing rights.
NOTE 18 -- SEGMENT INFORMATION
The Bank has two reportable segments: retail banking and treasury. These
reportable segments represent business units that are managed separately. Each
segment requires specific industry knowledge and the products and services
offered differ to meet the various financial needs of Centura's customers.
The retail banking segment includes commercial loans, retail loans, retail
lines of credit, credit cards, transaction deposits, time deposits, master
notes and repurchase agreements, and mortgage servicing and origination. The
retail bank offers
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 -- SEGMENT INFORMATION -- Continued
a wide array of products to individuals, small businesses, and commercial
customers. These products are primarily offered through Centura's 228 financial
stores and are also offered through the Centura Highway, a centralized
telephone operation that handles a broad range of financial services.
Treasury is responsible for Centura's asset/liability management including
managing Centura's investment portfolio.
"Other" includes the asset management division, leasing activities,
Centura Securities, Inc., Centura Insurance Services, Inc., and FGHE, none of
which individually exceed 10 percent of revenues, net income or total assets.
Centura's asset management division provides trust and fiduciary services as
well as retirement plan design and administration. Leasing activities include
Centura's technology leasing subsidiary CLG, Inc. ("CLG") as well as the
Centura Bank Leasing Division, both of which offer a broad range of lease
products including automobile, equipment, and recreational vehicle leases. CLG
was sold on September 30, 1999. Centura Securities, Inc. offers a competitive
line of brokerage services. Centura Insurance Services, Inc. offers various
insurance products to commercial and consumer customers. FGHE is a mortgage and
finance company specializing in alternative equity lending for homeowners whose
borrowing needs are generally not met by traditional financial institutions.
Centura has a 49 percent ownership interest in FGHE.
To assess the performance of its segments, management utilizes an internal
business unit profitability report whose data is derived from an internal
profitability measurement system. This report is compiled using information
that reflects the underlying economics for the business segments, therefore,
information reported may not be consistent with financial statements prepared
in accordance with generally accepted accounting principles ("GAAP"). The
accounting policies for the business unit profitability reports differ from
those described in the Summary of Significant Accounting Policies (see Note 1)
in that certain items are accounted for on a cash basis rather than an accrual
basis and certain management allocations have been made for overhead expenses,
transfer pricing and capital. Additionally, consideration is not given to
amortization of intangible assets. These adjustments have been eliminated to
arrive at the consolidated totals prepared in accordance with GAAP.
Financial information by segment as of December 31 follows.
<TABLE>
<CAPTION>
1999
-----------------------------------------
Retail Treasury Other
------------- -------------- ------------
(in thousands)
<S> <C> <C> <C>
Interest income ....................... $ 545,815 $ 204,414 $ 40,497
Interest expense ...................... 277,450 101,837 3,470
Funds transfer pricing allocation ..... 71,997 (64,138) (22,664)
---------- ---------- ---------
Net interest income ................... 340,362 38,439 14,363
Provision for loan losses ............. 35,492 -- 3,668
---------- ---------- ---------
Net interest income after provision
for loan losses ...................... 304,870 38,439 10,695
Noninterest income .................... 120,609 1,671 49,325
Noninterest expense ................... 265,970 20,479 34,975
---------- ---------- ---------
Income before income taxes ............ 159,509 19,631 25,045
Income tax expense .................... 44,256 3,576 4,712
---------- ---------- ---------
Net income ............................ $ 115,253 $ 16,055 $ 20,333
========== ========== =========
Period-end assets ..................... $6,677,039 $3,349,402 $ 397,548
<CAPTION>
1999
------------------------------------------------
Total Adjustments Consolidated
--------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C>
Interest income ....................... $ 790,726 $ 18,430(A) $ 809,156
Interest expense ...................... 382,757 7,674 (A) 390,431
Funds transfer pricing allocation ..... (14,805) 14,805 (B) --
----------- --------- -----------
Net interest income ................... 393,164 25,561 418,725
Provision for loan losses ............. 39,160 1,668 (C) 40,828
----------- --------- -----------
Net interest income after provision
for loan losses ...................... 354,004 23,893 377,897
Noninterest income .................... 171,605 (708)(A) 170,897
Noninterest expense ................... 321,424 30,899 (A) 352,323
----------- --------- -----------
Income before income taxes ............ 204,185 (7,714) 196,471
Income tax expense .................... 52,544 13,590 (C) 66,134
----------- --------- -----------
Net income ............................ $ 151,641 $ (21,304) $ 130,337
=========== ========= ===========
Period-end assets ..................... $10,423,989 $ 962,693(D) $11,386,682
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 -- SEGMENT INFORMATION -- Continued
<TABLE>
<CAPTION>
1998
-----------------------------------------
Retail Treasury Other
------------- -------------- ------------
(in thousands)
<S> <C> <C> <C>
Interest income ........................... $ 528,592 $ 193,064 $ 43,173
Interest expense .......................... 285,423 88,507 5,840
Funds transfer pricing allocation ......... 69,178 (77,967) (25,466)
---------- ---------- ---------
Net interest income ....................... 312,347 26,590 11,867
Provision for loan losses ................. 16,191 83 3,398
---------- ---------- ---------
Net interest income after provision for
loan losses .............................. 296,156 26,507 8,469
Noninterest income ........................ 124,006 4,784 46,323
Noninterest expense ....................... 271,825 21,421 36,732
---------- ---------- ---------
Income before income taxes................. 148,337 9,870 18,060
Income tax expense/(benefit) .............. 51,605 (3,134) 6,038
---------- ---------- ---------
Net income ................................ $ 96,732 $ 13,004 $ 12,022
========== ========== =========
Period-end assets ......................... $5,849,456 $3,470,526 $ 652,708
<CAPTION>
1998
----------------------------------------------
Total Adjustments Consolidated
------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C>
Interest income ........................... $ 764,829 $ 10,217(A) $ 775,046
Interest expense .......................... 379,770 2,555 (A) 382,325
Funds transfer pricing allocation ......... (34,255) 34,255 (B) --
---------- ---------- -----------
Net interest income ....................... 350,804 41,917 392,721
Provision for loan losses ................. 19,672 1,087 (C) 20,759
---------- ---------- -----------
Net interest income after provision for
loan losses .............................. 331,132 40,830 371,962
Noninterest income ........................ 175,113 (17,517)(A) 157,596
Noninterest expense ....................... 329,978 13,934 (A) 343,912
---------- ---------- -----------
Income before income taxes................. 176,267 9,379 185,646
Income tax expense/(benefit) .............. 54,509 8,965 (C) 63,474
---------- ---------- -----------
Net income ................................ $ 121,758 $ 414 $ 122,172
========== ========== ===========
Period-end assets ......................... $9,972,690 $ 945,954(D) $10,918,644
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------
Retail Treasury Other
------------- -------------- ------------
(in thousands)
<S> <C> <C> <C>
Interest income ........................... $ 470,200 $ 178,184 $ 50,137
Interest expense .......................... 267,899 73,728 7,267
Funds transfer pricing allocation ......... 97,935 (77,327) (26,845)
---------- ---------- ---------
Net interest income ....................... 300,236 27,129 16,025
Provision for loan losses ................. 14,063 91 2,149
---------- ---------- ---------
Net interest income after provision for
loan losses .............................. 286,173 27,038 13,876
Noninterest income ........................ 94,502 3,527 41,124
Noninterest expense ....................... 248,403 21,506 38,515
---------- ---------- ---------
Income before income taxes................. 132,272 9,059 16,485
Income tax expense ........................ 35,738 5,998 4,526
---------- ---------- ---------
Net income ................................ $ 96,534 $ 3,061 $ 11,959
========== ========== =========
Period-end assets ......................... $5,483,142 $2,896,449 $ 597,163
<CAPTION>
1997
----------------------------------------------
Total Adjustments Consolidated
-------------- ----------------- -------------
(in thousands)
<S> <C> <C> <C>
Interest income ........................... $ 698,521 $ 3,270(A) $ 701,791
Interest expense .......................... 348,894 (2,360)(A) 346,534
Funds transfer pricing allocation ......... (6,237) 6,237 (B) --
---------- ---------- ----------
Net interest income ....................... 343,390 11,867 355,257
Provision for loan losses ................. 16,303 2,461 (C) 18,764
---------- ---------- ----------
Net interest income after provision for
loan losses .............................. 327,087 9,406 336,493
Noninterest income ........................ 139,153 (10,998)(A) 128,155
Noninterest expense ....................... 308,424 (5,978)(A) 302,446
---------- ---------- ----------
Income before income taxes................. 157,816 4,386 162,202
Income tax expense ........................ 46,262 9,253 (C) 55,515
---------- ---------- ----------
Net income ................................ $ 111,554 $ (4,867) $ 106,687
========== ========== ==========
Period-end assets ......................... $8,976,754 $ 780,501(D) $9,757,255
</TABLE>
---------
(A) Reconciling item reflects adjustments that are necessary to reconcile to
consolidated totals.
(B) Reconciling item relates to the elimination of funds transfer pricing
credits and charges.
(C) Reconciling item adjusts balances from cash basis to accrual method of
accounting.
(D) Reconciling item relates to assets not allocated to segments including
premises and equipment, cash and due from banks, and other assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 19 -- PARENT COMPANY FINANCIAL DATA
Centura's principal asset is its investment in the Bank and its primary
sources of income are dividends and management fees from the Bank. Condensed
financial statements for the parent company are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------- -------------
(thousands)
<S> <C> <C>
Assets
Cash and deposits in banks ........................................................... $ 252,930 $ 196,061
Investment securities available for sale (cost of $31,233 and $44,716, respectively).. 40,131 44,964
Loans to affiliate ................................................................... 51,847 76,308
Investment in wholly-owned subsidiary, bank .......................................... 927,800 904,232
Investment in wholly-owned subsidiary, other ......................................... 7,644 6,917
Other assets ......................................................................... 38,639 44,359
---------- ----------
Total assets ......................................................................... $1,318,991 $1,272,841
========== ==========
Liabilities and Shareholders' Equity
Junior subordinated debentures with affiliate ........................................ $ 123,665 $ 123,663
Other liabilities .................................................................... 335,591 309,946
Shareholders' equity ................................................................. 859,735 839,232
---------- ----------
Total liabilities and shareholders' equity ........................................... $1,318,991 $1,272,841
========== ==========
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
------------ ------------ ----------
(thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries ...................................................... $ 91,541 $ 39,984 $ 55,350
Other ............................................................................ 29,688 36,897 34,430
-------- -------- --------
Total income ..................................................................... 121,229 76,881 89,780
Expense
Interest ......................................................................... 23,699 22,307 17,236
Other ............................................................................ 12,452 13,695 13,971
-------- -------- --------
Total expenses ................................................................... 36,151 36,002 31,207
-------- -------- --------
Income before income taxes and equity in undistributed net income of subsidiaries 85,078 40,879 58,573
Income tax (benefit) expense ..................................................... (2,753) (537) 589
-------- -------- --------
Income before equity in undistributed net income of subsidiaries ................. 87,831 41,416 57,984
Equity in undistributed net income of wholly-owned subsidiaries .................. 42,506 80,756 48,703
-------- -------- --------
Net income ....................................................................... $130,337 $122,172 $106,687
======== ======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 19 -- PARENT COMPANY FINANCIAL DATA -- Continued
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -------------
(thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income .......................................................................... $ 130,337 $ 122,172 $ 106,687
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 1,630 1,634 1,743
Losses (gains) on sales of investment securities ................................... 1,725 (78) (232)
Increase in equity in undistributed net income of subsidiary ....................... (42,506) (80,756) (48,703)
Net change in other assets and other liabilities ................................... (371) (3,671) (6,018)
--------- --------- ----------
Net cash provided by operating activities ........................................... 90,815 39,301 53,477
--------- --------- ----------
Cash flows from investing activities
Net increase in investment in non-bank subsidiary .................................. -- (242) (15,540)
Net decrease (increase) in loan with affiliate ..................................... 24,461 (55,935) (14,651)
Purchases of securities available for sale ......................................... -- (13,750) (107,381)
Sales, maturities and issuer calls of securities available for sale ................ 15,775 8,261 1,083
Net cash paid in mergers, acquisitions and divestitures ............................ (25,716) -- --
Investment in FGHE ................................................................. (490) -- --
Purchase of common securities ...................................................... -- -- (617)
--------- --------- ----------
Net cash provided (used) by investing activities .................................... 14,030 (61,666) (137,106)
--------- --------- ----------
Cash flows from financing activities
Net increase in borrowings ......................................................... 24,625 49,886 172,964
Issuance of common stock, net ...................................................... 8,340 6,018 6,735
Repurchase of common stock ......................................................... (36,385) (5,258) (13,021)
Cash dividends paid ................................................................ (44,556) (39,644) (34,598)
--------- --------- ----------
Net cash (used) provided by financing activities .................................... (47,976) 11,002 132,080
--------- --------- ----------
Increase (decrease) in cash ......................................................... 56,869 (11,363) 48,451
Cash, beginning of year ............................................................. 196,061 207,424 158,973
--------- --------- ----------
Cash, end of year ................................................................... $ 252,930 $ 196,061 $ 207,424
========= ========= ==========
Supplemental Disclosures of Cash Flow Information
Stock issued for acquisitions and other stock issuances, net ....................... $ 14,647 $ 14,281 $ 3,982
Unrealized securities (losses) gains, net of parent and subsidiary ................. (81,062) (2,920) 13,940
Available for sale securities contributed to subsidiary as capital ................. -- 52,494 14,763
Dividends declared, but not yet paid ............................................... -- -- 6,981
</TABLE>
NOTE 20 -- REGULATORY MATTERS
Centura and the Bank are subject to certain requirements imposed by state
and federal banking statutes and regulations. These regulations require the
maintenance of a noninterest-bearing reserve balance at the Federal Reserve
Bank of Richmond ("FRB"), restrict dividend payments, and establish guidelines
for minimum capital levels. At December 31, 1999, Centura was required to
maintain a minimum balance with the FRB in the amount of $115.1 million.
Subject to the regulatory restrictions, the Bank had $163.3 million available
from its retained earnings at December 31, 1999 for the payment of dividends
from the Bank to Centura without obtaining prior regulatory approval. The Bank
is prohibited by law from paying dividends from its capital stock account. The
Bank's capital account totaled $78.2 million at December 31, 1999.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, there are minimum ratios of capital to risk-weighted assets
to which Centura and the Bank are subject. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly discretionary
actions by regulators that, if undertaken, could have a material effect on
Centura's consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 20 -- REGULATORY MATTERS -- Continued
Regulatory capital amounts and ratios are set forth in the table below.
Tier I capital consists of common stock, retained earnings, and minority
interests in the equity accounts of consolidated subsidiaries less goodwill and
certain other intangible assets. For Centura, Tier I capital also consists of
Capital Securities as described in Note 11. The remainder of total capital is
Tier II capital and includes subordinated debt or other allowed equity
equivalents and a limited amount of allowance for loan losses. Balance sheet
assets and the credit equivalent amount of off-balance sheet items per
regulatory guidelines are assigned to broad risk categories and a category risk
weight is then applied.
Based on the most recent notification from its regulators, the Bank is
well capitalized under the regulatory framework for prompt corrective action.
Management believes that as of December 31, 1999, Centura and the Bank met all
capital adequacy requirements to which they are subject and was not aware of
any conditions or events that would affect its well capitalized status. To be
categorized as well capitalized, the Bank must meet minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table below
which presents the capital ratios for Centura and Triangle and their bank
subsidiaries on a historical basis:
<TABLE>
<CAPTION>
To Be Well
Capital Amount Ratio Capitalized Under
---------------------- ---------------------- For Capital Prompt Corrective
1999 1998 1999 1998 Adequacy Purpose Action Provisions
----------- ----------- ---------- ---------- ----------------- ------------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets)
Centura ................................... $874,136 $696,160 12.8% 10.8% (> or =) 8.00% Not Applicable
Centura Bank .............................. 907,372 687,438 13.5 10.8 (> or =) 8.00 (> or =)10.00%
Triangle .................................. $201,046 $182,343 11.7% 11.4% (> or =) 8.00% Not Applicable
Triangle Bank ............................. 155,030 148,461 10.3 10.6 (> or =) 8.00 (> or =)10.00%
Bank of Mecklenburg ....................... 21,291 23,363 11.2 13.1 (> or =) 8.00 (> or =)10.00%
Tier I Capital (to Risk-Weighted Assets)
Centura ................................... $703,696 $656,654 10.3% 10.2% (> or =) 4.00% Not Applicable
Centura Bank .............................. 708,854 614,658 10.5 9.7 (> or =) 4.00 (> or =)6.00%
Triangle .................................. $179,465 $162,759 10.4% 10.2% (> or =) 4.00% Not Applicable
Triangle Bank ............................. 136,140 131,258 9.0 9.4 (> or =) 4.00 (> or =)6.00%
Bank of Mecklenburg ....................... 19,096 21,416 10.0 12.1 (> or =) 4.00 (> or =)6.00%
Tier I Leverage (to Average Assets)
Centura ................................... $703,696 $656,654 7.9% 7.8% (> or =) 4.00% Not Applicable
Centura Bank .............................. 708,854 614,658 8.1 7.4 (> or =) 4.00 (> or =)5.00%
Triangle .................................. $179,465 $162,759 7.8% 7.9% (> or =) 4.00% Not Applicable
Triangle Bank ............................. 136,140 131,258 6.7 7.3 (> or =) 4.00 (> or =)5.00%
Bank of Mecklenburg ....................... 19,096 21,416 7.1 9.5 (> or =) 4.00 (> or =)5.00%
</TABLE>
